-----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, DiyTZgxtyagLX2XjQaEKv4BhmwNI/YCtNHz30FJ/hI+uMjxR5/qWGmlKfbk80Dvz PGj2SQYAkLVUs3h/pOVNvQ== 0000950131-99-001972.txt : 19990402 0000950131-99-001972.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950131-99-001972 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99581624 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 BORG-WARNER SECURITY CORPORATION 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, 1998 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 9-5/8% 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 5, 1999 was approximately $413.9 million. As of March 5, 1999, the registrant had 23,904,760 shares of 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, 1998 The Company's proxy statement for the 1999 Part III annual meeting of stockholders 1 BORG-WARNER SECURITY CORPORATION FORM 10-K YEAR ENDED DECEMBER 31, 1998 INDEX Item Number Page ----------- ----
PART I 1. Business 3 2. Properties 8 3. Legal Proceedings 8 4. Submission of Matters to a Vote of Security Holders 10 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters 11 6. Selected Financial Data 11 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 7A. Quantitative and Qualitative Disclosures About Market Risk 12 8. Financial Statements and Supplementary Data 12 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 12 PART III 10. Directors and Executive Officers of the Registrant 13 11. Executive Compensation 13 12. Security Ownership of Certain Beneficial Owners and Management 13 13. Certain Relationships and Related Transactions 13 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 14
2 PART I Item 1. Business The Company is North America's largest supplier of contract guard and related security services. As a result of its significant market presence, breadth of product offerings and strategic alliances, the Company is well positioned to service local, multi-location and national accounts and provide total security solutions to its customers. The Company provides guard services, as well as background screening, contract employment and investigative services, to approximately 14,000 clients in the United States, Canada, the United Kingdom and Colombia. The Company services these clients with approximately 73,000 employees in approximately 300 offices under the Wells Fargo, Burns, Globe and other service marks. The Company 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, background screening, investigative services and contract staffing services. The Company employs approximately 67,500 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. The Company markets guard services through approximately 150 sales representatives nationwide and in Canada, the United Kingdom and Colombia. Sales personnel operate out of local branch and sales offices. The Company also bids on contracts with governmental agencies. Physical security service 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. 3 Information concerning the revenues and identifiable assets of the Company is incorporated herein by reference to Note 11 of the Notes to Consolidated Financial Statements. Electronic Security Services On May 29, 1998, the Company sold its electronic security services business, Wells Fargo Alarm Services ("Alarm"), to ADT Security Services, a subsidiary of Tyco International, Ltd. ("ADT") for approximately $425 million plus the assumption of approximately $6 million of debt by the buyer. The Company recorded a net after-tax gain of $42.5 million for the transaction in the second quarter. As a result of the sale, the division's results have been restated and reflected as discontinued operations for all periods presented. Through Alarm, the Company provided integrated electronic security systems, including intrusion and fire detection, sprinkler and critical industrial process monitoring, closed circuit television and access control. Alarm designed, installed, monitored and serviced electronic security systems located on the premises of commercial and residential customers in the United States and Canada under the Wells Fargo and Pony Express service marks. Alarm also provided, under the Bel-Air Patrol trade name, an integrated guard, patrol and alarm service to customers in Bel Air, Beverly Hills and other Los Angeles communities. The unit had approximately 2,200 employees. The Company and ADT entered into a strategic alliance agreement for the furnishing of electronic and physical security services to their respective clients. 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 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 continued until December 31, 1998. Refer to the discussion of environmental proceedings on page 9. The Company also agreed to indemnify Loomis Fargo against certain other claims, including claims relating to cargo losses 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 the Loomis Fargo chief executive officer. The number of directors that may be designated pursuant to the stockholder agreement may be adjusted 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. 4 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 6,100 employees. The collective bargaining agreements expire at various dates from 1999 to 2001 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 of employees other than guards, an employer of guards can refuse to bargain with such union and such union cannot be certified as the representative of a unit of guards. As a result, the Company has in many instances refused to recognize or withdrawn recognition of labor organizations that admit as members employees other than guards. Competition The Company competes with major national and international 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. 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. 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. The Company believes that its operations are in substantial compliance with those laws, regulations and requirements. Federal legislation has been introduced relating to security 5 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. From time to time, in the ordinary course of business, the Company is subjected to penalties or fines as the result of licensing irregularities or the misconduct of one or more of its agents or employees. In addition, under principles of common law, the Company can generally be held liable for acts or omissions of its agents or employees performed in the course and scope of their employment. In addition, some states have statutes that expressly impose on the Company legal responsibility for the conduct of its employees. Risk Management The nature of the services provided by the Company potentially exposes it to greater risks of liability for employee acts, injuries (including workers' compensation claims) or omissions than may be posed by other service businesses. 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, customer profiles and employee screening, training, supervision and evaluation. Discontinued Operations On May 29, 1998, the Company sold its courier services business, Pony Express Delivery Services, Inc. In the first quarter of 1998, the Company recorded a $15.9 million after-tax charge to reduce its investment in this business and to provide for costs associated with its disposition. The Company did not record a gain or loss as a result of completing the sale. Since September 1996, the Company had treated its courier services unit as a discontinued operation. The unit transported 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 employed approximately 3,600 persons and used a fleet of approximately 3,000 vehicles, many of which were vehicles provided by the unit's employees. The courier services unit operated both as a common and contract carrier and used a combination of tariffs and shipping contracts to control the terms, conditions and rates applicable to the transportation of shipments. Rates were dependent upon many factors, including the weight 6 and type of the shipped item, the distance and urgency of the shipment and the geographical location. As previously mentioned, the May 29, 1998 sale of Alarm caused the Company's results to be restated and for Alarm to be reflected as a discontinued operation for all periods presented. Trademarks and Patents The Company maintains several service marks of importance 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. The Company entered into an agreement with Borg-Warner Automotive, Inc. ("Automotive") effective July 31, 1998 whereby the Company sold its rights to the "Borg-Warner" name and mark in the security field. Automotive granted the Company an exclusive, royalty-free license to use the "Borg Warner" name and mark in the security field for a four-year period. 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, 1999.
Name Age Position With Company J. Joe Adorjan 60 Chairman of the Board John A. Edwardson 49 Chief Executive Officer and President John D. O'Brien 56 Senior Vice President Timothy M. Wood 51 Vice President, Finance Robert E. T. Lackey 50 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 (from October 1995 to March 1999) and President (from April 1995 to March 1999). 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. Edwardson was appointed Chief Executive Officer and President of the Company in March 1999 and will be presented for election to the board of directors at the Company's Annual Meeting on April 20, 1999. Mr. Edwardson was President of United Airlines from July 1994 to September 1998 and Chief Operating Officer of United Airlines from April 1995 to September 7 1998. Mr. Edwardson was also Executive Vice-President and Chief Financial Officer of Ameritech Corp. from March 1991 to July 1994. Mr. Edwardson is a director of Household International and Focal Communications Corporation. 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 general offices in various cities in the United States, Canada, the United Kingdom and Colombia. At December 31, 1998, the Company occupied approximately 300 branch and satellite offices, all but one of which were leased. The Company leases approximately 57,000 square feet of office space in Chicago, Illinois for its executive offices. However, it currently subleases 23,000 square feet of such office space to third parties. 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). 8 Centaur Litigation 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 remaining reinsurance contracts. On August 10, 1998 the Mission Trust and the Company agreed to settle the suit against the Company, subject to court approval. The suit had alleged damages in excess of $100 million because of Centaur's failure to satisfy its reinsurance obligations. As a part of the settlement, the Company agreed to pay the Mission Trust $4 million and one-third of any dividend or other distribution that may be paid to the Company after rehabilitation of Centaur. Any future payments by the Company will not have an effect on Company earnings. Separately, the Mission Trust and Centaur agreed to an uncontested liquidated claim in the Centaur estate of $48 million, for which the Company is not liable. Additionally, the Illinois Director of Insurance, on behalf of the Centaur estate, and the Company agreed to exchange mutual releases of any remaining liability of the Company to the Centaur estate. The parties have finalized and executed the settlement and release agreements. The required court approvals of the settlement are being sought by the parties with final approval and dismissal of the lawsuit anticipated by the end of the first half of 1999. Environmental Proceedings The Company and certain of its current and former subsidiaries have been identified by the U.S. Environmental Protection Agency and certain state environmental agencies as potentially responsible parties ("PRPs") at a number of hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund") and equivalent state laws and, as such, may be liable for the cost of cleanup and other remedial activities at these sites. Responsibility for cleanup and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. 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 $5 million (relating to environmental matters with respect to discontinued operations of the 9 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. Loomis, Fargo Indemnification Claims In November and December, 1998, Loomis, Fargo made various claims against the Company for indemnification under the Contribution agreement dated November 28, 1996 for certain cargo losses and environmental losses. The Company has objected to the claims. If the parties are unable to resolve their dispute, it will be referred to arbitration as provided for under the Contribution Agreement. 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 1998. 10 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters As of March 5, 1999, there were approximately 150 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 1997 and 1998 were:
Quarter Ended High Low ------------- ---- --- 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 1998 March 31 $19 7/16 $15 5/16 June 30 24 3/4 17 7/8 September 30 23 1/16 13 1/4 December 31 20 1/16 13 1/16
Item 6. Selected Financial Data The selected financial data for the five years ended December 31, 1998, with respect to the following line items shown under the "Consolidated Statistical Review" on page 18 of the Annual Report, are 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 20 through 23) in the Annual Report are incorporated herein by reference and made a part of this Report. 11 Item 7A. Quantitative and Qualitative Disclosures about Market Risk Disclosures about market risk are contained within page 23 of the Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report, and are incorporated herein by reference and made a part of this report. Item 8. Financial Statements and Supplementary Data The consolidated financial statements (including the notes thereto) of the Company (set forth on pages 24 through 38) 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, 1998 and 1997 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. 12 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 through 4 of the Company's Proxy Statement for the 1999 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 8 of the Company's Proxy Statement for the 1999 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 8 and 9, and "Compensation of Directors" on pages 5 and 6, of the Company's Proxy Statement for the 1999 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 6 through 8 of the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. Item 13. Certain Relationships and Related Transactions Information with respect to certain relationships and related transactions is incorporated herein by reference to the information under the caption "Certain Relationships and Related Transactions" on page 18 of the Company's proxy statement for the 1999 Annual Meeting of Stockholders. 13 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 24 through 38 of the Annual Report, and the Independent Auditors' Report, set forth on page 39 of the Annual Report, are incorporated herein by reference: Consolidated Statement of Operations--three years ended December 31, 1998 Consolidated Balance Sheet--December 31, 1998 and 1997 Consolidated Statement of Cash Flows--three years ended December 31, 1998 Consolidated Statement of Shareholders' Equity--three years ended December 31, 1998 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, 1998. 14 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, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 2, 1999; such consolidated financial statements and report are included in your 1998 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 2, 1999 15 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, Additions --------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other Close of Description of Period Expenses Accounts Deductions Period ---------- ---------- ---------- ---------- ---------- 1996 Allowance for Doubtful Accounts $5.9 $2.9 $2.0 $5.4 $5.4 ========== ========== ========== ========== ========== 1997 Allowance for Doubtful Accounts $5.4 $3.1 $0.4 $4.9 $4.0 ========== ========== ========== ========== ========== 1998 Allowance for Doubtful Accounts $4.0 $5.1 $0.3 $2.4 $7.0 ========== ========== ========== ========== ==========
The above table sets forth the valuation and qualifying accounts for the previous three years. Previously reported amounts have been restated to reflect the discontinued operations related to the May 29, 1998 sales of the Company's electronic security division and the Company's courier services division. 16 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: February 2, 1999 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 February 2, 1999.
Signature Title - --------- ----- /s/ J. Joe Adorjan Chairman of the Board, Chief Executive - --------------------------------- Officer and President* and Director J. Joe Adorjan (Principal 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
* Effective 3/1/99, resigned as Chief Executive Officer and President 17 /s/ Dale W. Lang Director - ------------------------------- Dale W. Lang /s/ Robert A. McCabe Director - ------------------------------- Robert A. McCabe /s/ Andrew McNally, IV Director - ------------------------------- Andrew McNally IV /s/ Alexis P. Michas Director - ------------------------------- Alexis P. Michas /s/ H. Norman Schwarzkopf Director - ------------------------------- H. Norman Schwarzkopf /s/ Donald C. Trauscht Director - ------------------------------- Donald C. Trauscht /s/ John A. Edwardson* *Chief Executive Officer and President - ------------------------------- Effective 3/1/99 John A. Edwardson Signature date: March 16, 1999 18 [THIS PAGE INTENTIONALLY LEFT BLANK] 19 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 Amended and Restated Credit Agreement dated as of June 30, 1998 among the Company, the lenders party thereto and the agents named therein (incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). *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 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, 1988). +*10.2 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, 1992). +*10.3 Borg-Warner Security Corporation 1993 Stock Incentive Plan, conformed to include amendments thereto (incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 20 +*10.4 Borg-Warner Security Corporation Performance Share Plan, conformed to include amendments thereto (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). +*10.5 Borg-Warner Security Corporation Executive Officer Incentive Plan. (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). +*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 (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). +*10.8 Noncompetition Agreement dated as of September 5, 1997 by and between the Company and J.J. Adorjan. (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). +*10.9 Employment Agreement dated September 5, 1997 for J.D. O'Brien (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). +*10.10 Noncompetition Agreement dated as of September 5, 1997 by and between the Company and J.D. O'Brien (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) +*10.11 Employment Agreement dated September 5, 1997 for T.M. Wood (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). +*10.12 Noncompetition Agreement dated as of September 5, 1997 by and between the Company and T.M. Wood (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). +*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). 21 +*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 amended as of August 31, 1998 between the Company and H. Norman Schwarzkopf. *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). +10.17 Employment Agreement dated February 23, 1999 for J. A. Edwardson. +10.18 Employment Agreement dated August 31, 1998 for R. E. T. Lackey. 10.19 Stock Purchase Agreement, dated as of April 17, 1998, among ADT Security Services, Inc., Tyco International (US) Inc. and the Company relating to the purchase and sale of the common stock of Wells Fargo Alarm Services, Inc., BW-Canada Alarm (Wells Fargo) Corporation and Wells Fargo Pyro Technologies, Inc. 10.20 Stock Purchase Agreement, dated as of April 22, 1998, by and between the Company and Mustang Holdings, Inc. relating to the purchase and sale of the common stock of Pony Express Delivery Services, Inc. *10.21 Amended and Restated Credit Agreement dated as of June 30, 1998 among the Company, Lenders listed therein, Canadian Imperial Bank of Commerce, as Documentation Agent, NationsBank N.A., as Syndication Agent, and Bankers Trust Company, as Administrative Agent related to the Company's receivables facility (incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). +*10.22 Borg-Warner Security Corporation's 1999 Stock Incentive Plan (incorporated by reference to Appendix A of the Company's Proxy Statement dated March 19, 1999). 13 Portions of the 1998 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) 22 [THIS PAGE INTENTIONALLY LEFT BLANK] 23 EX-10.15 2 AMENDMENT TO CONSULTING AGREEMENT Exhibit 10.15 - ------------- AMENDMENT TO CONSULTING AGREEMENT --------------------------------- This Amendment effective August 31, 1998, to the Consulting Agreement between H. Norman Schwarzkopf of Tampa, Florida ("Consultant") and Borg-Warner Security Corporation, a Delaware corporation (the "Company"). WHEREAS, Consultant and the Company are parties to a Consulting Agreement dated as of September 1, 1993 and as amended August 31, 1997 ("Agreement") and such parties desire to further amend such Agreement; NOW, THEREFORE, Consultant and the Company agree that Item 5 of the Agreement is amended as follows: TERM - It is contemplated this Agreement will run until August 31, 1999 and to automatically renew for successive one (1) year terms thereafter. Provided however, this Agreement may be terminated for any reason by either party giving thirty (30) days written notice to the other party. In the event of the Consultant's death, the Agreement shall automatically terminate as of the Consultant's death. IN WITNESS WHEREOF, the parties have executed this Amendment to the Consulting Agreement as of the 31st day of August 1998. BORG-WARNER SECURITY CORPORATION /s/ H. Norman Schwarzkopf /s/ J. Joe Adorjan - ----------------------------- ---------------------------- H. Norman Schwarzkopf J. Joe Adorjan Chief Executive Officer and President EX-10.17 3 EMPLOYMENT AGREEMENT DATED FEBRUARY 23, 1999 EXHIBIT 10.17 ------------- AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDED AND RESTATED EMPLOYMENT AGREEMENT by and between Borg-Warner Security Corporation, a Delaware corporation (the "Company"), and John Edwardson (the "Executive"), dated as of the 26th day of March, 1999. WHEREAS, Executive and the Company are parties to an Employment Agreement dated February 23, 1999 (the "Original Agreement"), providing for the Company's employment of Executive pursuant to the terms therein stated; and WHEREAS, Executive and the Board of Directors of the Company (the "Board") deem it to be in Executive's and the Company's best interests to amend and restate the Original Agreement in its entirety by substituting for all terms thereof the terms set forth herein; NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Employment Period. The Company shall employ the Executive, and the Executive shall serve the Company, on the terms and conditions set forth in this Agreement, for the Employment Period. As used herein, the phrase "Employment Period" shall mean the period beginning with the Executive's commencement of employment with the Company on March 1, 1999 (the "Commencement Date"), and ending three years from the Commencement Date; provided, however, that on any anniversary of the Commencement Date at which time the then remaining Employment Period is two years, the Employment Period shall automatically be extended by an additional year so that as a result of such extension the then remaining Employment Period will be three (3) years. Notwithstanding the foregoing, the Employment Period shall terminate on the first to occur of any of the events described in Section 4 of this Agreement. 2. Position and Duties. (a) During the Employment Period , the Executive shall serve as President and Chief Executive Officer of the Company, reporting to the Board, with such duties and responsibilities as are customarily assigned to such positions, and such other duties and responsibilities not inconsistent therewith as may be assigned to him from time to time by the Board. (b) During the Employment Period, the Executive shall be nominated to serve as a member of the Board, subject to the Executive's election in accordance with the By-Laws of the Company. The Executive shall be elected to serve as Chairman of the Board not later than December 31, 1999. (c) During the Employment Period, and excluding any periods of vacation and sick leave 1 to which the Executive is entitled, the Executive shall devote his full-time efforts to the business and affairs of the Company and use his best efforts to carry out such responsibilities faithfully and efficiently. It shall not be considered a violation of the foregoing for the Executive to (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures or fulfill speaking engagements and (iii) manage personal investments, so long as such activities do not interfere with the performance of his responsibilities as an executive employee of the Company in accordance with this Agreement or violate the provisions of Section 8 of this Agreement. (d) The Executive's services shall be performed primarily at the Company's headquarters in Chicago, Illinois, and shall require business travel commensurate with Executive's responsibilities. 3. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary (the "Annual Base Salary") at the annual rate of $750,000. The Annual Base Salary shall be payable in accordance with the Company's payroll practices for key executives as in effect from time to time. During the Employment Period, the Annual Base Salary shall be reviewed for possible increase at least annually. Any increase in the Annual Base Salary shall not limit or reduce any other obligation of the Company under this Agreement. The Annual Base Salary shall not be reduced after any such increase, and the term "Annual Base Salary" shall thereafter refer to the Annual Base Salary as so increased. (b) Annual Bonus. (i) In addition to the Annual Base Salary, for each calendar year or portion of a calendar year during the Employment Period, the Executive shall be eligible to earn an annual cash bonus (the "Annual Bonus") pursuant to the Company's annual cash bonus program. The Annual Bonus for each calendar year during the Employment Period shall be based on achievement of performance goals established by the Compensation Committee of the Board for senior management, as reflected in the minutes of the Compensation Committee of the Board during 1998, such that (i) if the minimum performance goals are achieved, the Annual Bonus shall be a total ------- of $300,000, (ii) if the targeted performance goals are achieved, the -------- Annual Bonus shall be increased by $300,000, for an aggregate of $600,000, and (iii) if the maximum goals are achieved or exceeded, the Annual Bonus ------- shall be increased by an additional $200,000, for an aggregate of $800,000; provided that Executive's Annual Bonus for the calendar year 1999 shall in no event be less than $500,000. (ii) Each Annual Bonus shall be paid in a single cash lump sum no later than 60 days after the end of the period for which the Annual Bonus is awarded or the achievement of the performance goals is determined by the Compensation Committee of the Board, whichever is later. Except for any Annual Bonus payable with respect to calendar year 1999, the Annual Bonus, if any, payable to Executive for any period that is less than an entire calendar year shall be prorated to reflect the portion of such calendar 2 year in which Executive was employed by the Company. During the Employment Period, the Annual Bonus shall be reviewed for possible increase at least annually. Any increase in the Annual Bonus shall not limit or reduce any other obligation of the Company under this Agreement. The Annual Bonus shall not be reduced after any such increase, and the term "Annual Bonus" shall thereafter refer to the Annual Bonus as so increased. (iii) Notwithstanding Section 3(b)(ii) above, the Company shall have the right to defer all or a portion of the $500,000 minimum Annual Bonus payable to Executive under Section 3(b)(i) above with respect to calendar year 1999 (the "Guaranteed Bonus") in accordance with the terms and conditions set forth in this Section 3(b)(iii). If, after taking into account Executive's "applicable employee remuneration" (as defined in Internal Revenue Code Section 162(m)(4)) with respect to calendar year 1999 other than the Guaranteed Bonus, the Company shall determine that any portion of the Guaranteed Bonus would, if paid at the time prescribed in Section 3(b)(ii) above, not be deductible by the Company by reason of Internal Revenue Code (S)162(m), the Company shall have the right to defer payment of all or any part of such non-deductible portion (collectively the "Deferred Bonus") in accordance with this Section 3(b)(iii). The Deferred Bonus, together with interest thereon as prescribed by the last sentence of this Section 3(b)(iii) (the "Deferred Amount"), shall be paid in installments, commencing on December 31, 2001, and continuing on each December 31 thereafter until the Deferred Amount has been paid in full. Each installment payment of the Deferred Amount shall equal the positive excess, if any, of (i) the annual deduction limitation under Internal ------ Revenue Code (S)162(m) with respect to the calendar year within which such installment payment is to be made over (ii) Executive's "applicable ---- employee remuneration" (determined without regard to any payment under this Section 3(b)(iii)) with respect to such calendar year. Notwithstanding the above, the remaining unpaid balance of such Deferred Amount shall be paid in full to the Executive (or to his designated beneficiary in the event of his death) in a lump sum not later than sixty (60) days following the first to occur of (A) the date on which Executive is no longer a "covered employee" within the meaning of Internal Revenue Code (S)162(m); or (B) a Change in Control of the Company. For purposes of this Section 3(b)(iii), the Deferred Amount shall be credited with "interest" thereon during the period beginning March 1, 2000, and ending on the date of payment, at a rate equal to the Certificate Rate as defined in Section 4.1 of the Company's Series 1998-1 Supplement to Pooling and Servicing Agreement dated December 31, 1998, compounded quarterly; provided however that in the event ---------------- the Certificate Rate is no longer available, the Deferred Amount shall thereafter be credited with "interest" at LIBOR plus 30 basis points, or at such other rate of return as shall be agreed between the Executive and the Compensation Committee of the Board. The Company may, but shall not be required to, set aside funds in a grantor trust or otherwise to provide for such payment, but the Executive's rights to such deferred compensation shall at all times be as a general creditor of the Company, and he shall have no right to or other interest in any such funds set aside by the Company. 3 (c) Equity Compensation. (i) Stock Option. Upon the execution of this Agreement, the Executive shall be a granted a non-qualified stock option to purchase 400,000 shares of the Company's common stock. The exercise price for such option shall be based on the average of the opening and closing price of the Company's common stock on such date. Such option shall have a term of thirteen (13) years, and shall become exercisable in three equal annual installments on each of the first three anniversaries of the date of this Agreement, and shall include such other terms and conditions as are set forth in the written stock option agreement to be entered into between the Company and Executive. To the extent this option is granted other than pursuant to a shareholder approved incentive plan, the Executive agrees not to exercise such option, to the extent any such exercise would give rise to a deduction limitation for the Company under Internal Revenue Code (S)162(m), prior to the earliest to occur of (A) the Executive is no longer a "covered employee" within the meaning of Internal Revenue Code (S)162(m); (B) a Change in Control of the Company; or (C) the six (6) month period immediately prior to the expiration of the term of the option. The Company shall take such reasonable efforts as may be necessary to cause any shares to be issued in connection with such option to be registered under the Federal Securities Act of 1933, as amended, or under applicable state securities laws, or to secure an appropriate exemption from such registration. (ii) Performance Shares. Upon the Commencement Date, the Company shall award 100,000 Performance Shares to the Executive under the Company's 1999 Stock Incentive Plan (the "Plan"), which is subject to approval by the Company's shareholders. The Performance Shares shall entitle the Executive to a payment under the terms of the Plan upon the attainment of performance targets previously set by the Compensation Committee of the Board for senior management for the three-year period ending December 31, 2000, as reflected in the minutes of the Compensation Committee of the Board during 1998, and shall include such other terms and conditions as are set forth in the written Performance Share Award to be entered into between the Company and Executive on the date of grant thereof. The Company agrees to award to the Executive an additional 100,000 Performance Shares not later than the end of the first quarter, March 31, 2000. Such additional Performance Shares shall vest upon the attainment of the performance targets established by the Compensation Committee of the Board for senior management at the time of such award for the three-year period ending December 31, 2002. (iii) Restricted Shares. Upon the execution of this Agreement, the Company shall award 100,000 shares of restricted stock to the Executive. The restricted shares shall vest in five equal annual installments of 20,000 shares, commencing on the first anniversary of the date of this Agreement, and shall include such other terms and conditions as are set forth in the written Stock Award to be entered into between the Company and Executive. The Company shall take such reasonable efforts as may be necessary to cause any shares 4 to be issued in connection with such award to be registered under the Federal Securities Act of 1933, as amended, or under applicable state securities laws, or to secure an appropriate exemption from such registration. (iv) In the event that (1) Executive's employment is terminated by reason of his death or Disability, by the Company without Cause, or by Executive for Good Reason, or (2) upon a Change in Control of the Company, any unvested option shares, performance shares, or restricted shares awarded under this Section 3(c) shall vest in full at the time of such termination or Change in Control. In the event that Executive's employment is terminated by the Company with Cause, or by Executive without Good ---- ------- Reason, any unvested option shares, performance shares, or restricted shares awarded under this Section 3(c) shall be forfeited by Executive for no consideration. Following a termination of Executive's employment, Executive's option shall be exercisable for a period of (1) two-years from the date of termination in the event of a termination due to death, Disability, by the Company without Cause, or by Executive with Good Reason, and (2) 90-days from the date of termination in the event of a termination by Executive without Good Reason or a upon a termination of employment by the Company for Cause, in either case not beyond the original term of such option. (v) Executive shall be eligible to receive future grants under the Company's stock incentive programs consistent with, and in a manner appropriate to, awards made to other senior executives of the Company. (d) Supplemental Benefit Compensation. The Company will make contributions, at times consistent with normal Company practice, of not less than $165,000 annually, to a tax-deferred annuity for Executive of a type substantially equivalent to those currently provided to senior executive's of the Company. (e) Other Benefits. During the Employment Period: (i) the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs of the Company to the same extent as other senior management; and (ii) the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in, and shall receive all benefits under, all welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life insurance, group life insurance, accidental death and travel accident insurance plans and programs) to the same extent as other senior management. (f) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in carrying out the Executive's duties under this Agreement, provided that the Executive complies with the policies, practices and procedures of the Company for submission of expense reports, receipts, or similar 5 documentation of such expenses. (g) Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation, the use of a Company-provided car of the Executive's choice, tax and financial planning services, and payment of annual dues, assessments and expenses at one country club and one dinner club selected by the Executive, in each case on the terms and conditions as are in effect for other senior management of the Company from time to time or, if not made available to other senior management, on terms and conditions that are determined by the Compensation Committee of the Board to be fair and reasonable. (h) Deferred Compensation. Notwithstanding anything to the contrary herein, Executive may elect to defer the payment of all or any portion of his Annual Base Salary or Annual Bonus for any calendar year during the Employment Period, provided that before the first day of the calendar year with respect to which such Annual Base Salary or Annual Bonus relates, he notifies the Company in writing of his election to do so. Any compensation that is so deferred shall accrue "interest" at the rate described in Paragraph 3(b)(iii) hereof, or at such other rate of return as shall be agreed between the Executive and the Compensation Committee of the Board at the time the deferral election is made. Any such deferred compensation, together with the accrued interest or other deemed earnings thereon, shall be paid to the Executive in cash upon the termination of his employment with the Company in a single lump sum or, if so specified in the deferral election, in up to five equal annual installments. The Company may, but shall not be required to, set aside funds in a grantor trust or otherwise to provide for such payment, but the Executive's rights to such deferred compensation shall at all times be as a general creditor of the Company, and he shall have no right to or other interest in any such funds set aside by the Company. Notwithstanding the preceding sentence, in the event of a Change in Control of the Company (as defined below), the Company shall pay to Executive the aggregate amount of compensation deferred under this Paragraph 3(h) not later than thirty (30) days following the effective date of such Change in Control. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. The Company shall be entitled to terminate the Executive's employment because of the Executive's Disability during the Employment Period. "Disability" means that (i) the Executive has been unable, for a period of six months, or for a total of 180 days in any given period of twelve months, to perform the Executive's duties under this Agreement, as a result of physical or mental illness or injury, and (ii) a physician selected by the Company or its insurers, and acceptable to the Executive or the Executive's guardian or legal representative, has determined that the Executive's incapacity is total and permanent. A termination of the Executive's employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), unless the Executive is able to, and does, return to full-time performance of the Executive's duties before the Disability Effective Date. (b) By the Company. 6 (i) The Company may terminate the Executive's employment during the Employment Period for Cause or without Cause. "Cause" means Executive has (A) been convicted of, or pleaded guilty or nolo contendere to, a felony involving theft or moral turpitude, or (B) engaged in conduct that constitutes willful gross neglect or willful gross misconduct with respect to his employment duties, resulting, in either case, in material economic harm to the Company; provided, however, that an act or failure to act on the part of the Executive shall be considered "willful" if it is done, or omitted to be done, by the Executive in bad faith and without reasonable belief that Executive's action or omission was in the best interests of the Company and in accordance with the policies of the Board, and no act or omission will constitute Cause unless the Company has given reasonable written notice thereof to Executive and he then fails to promptly remedy the act or omission. (ii) A termination of employment by the Company for Cause shall be effectuated by giving the Executive written notice ("Notice of Termination for Cause") of the termination, setting forth the conduct of the Executive that constitutes Cause. Except as provided in clause A of Section 4(b)(i) above, a termination of employment by the Company for Cause shall be effective on the date when the Notice of Termination for Cause is given, unless the notice sets forth a later date (which date shall in no event be later than 30 days after the notice is given). (iii) A termination of the Executive's employment by the Company without Cause shall be effected by giving the Executive written notice of the termination. (c) By the Executive. (i) The Executive may terminate employment for Good Reason. "Good Reason" means: A. the assignment to the Executive of any duties inconsistent in any respect with Executive's position, including status, offices, titles and reporting relationships, authority, duties, or responsibilities as contemplated by this Agreement, or any other action by the Company which results in a significant diminution in such position, authority, duties, or responsibilities, excluding any isolated, immaterial, and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of a reasonable written notice thereof given by Executive; B. any failure by the Company to provide compensation and benefits to the Executive as described in this Agreement, other than isolated, immaterial, and inadvertent failure not taken in bad faith and which is remedied by the Company promptly after receipt of a reasonable written notice thereof given by Executive; C. receipt by the Executive of notice of non-renewal of the automatic 7 evergreen feature of the Employment Period; or D. failure by the Company to obtain the assumption in writing of its obligations under this Agreement by any successor to all or substantially all of the assets of the Company within 15 calendar days after a Change in Control of the Company; or E. failure of the Company to elect the Executive as a director of the Company at its annual shareholder meeting scheduled for April 20, 1999; or F. failure of the Board of Directors of the Company to elect the Executive Chairman of the Board on or before December 31, 1999; or G. the Executive being required to relocate to a principal place of employment more than thirty-five (35) miles from his current place of employment without his consent; or H. any other material breach by the Company of its obligations to Executive under this Agreement; or I. 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 (3) 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. For purposes of this Agreement, "Change in Control" means the happening of any of the following events: (1) 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 50% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) 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: (A) 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, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any Person pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (3) of this Section 4(c)(i); or 8 (2) A change in the composition of the Board such that the individuals who, as of the first day of the Employment Period, 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 4(c)(i), 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 two- thirds (2/3) 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 (3) 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 9 (4) The approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (ii) A termination of employment by the Executive for Good Reason shall be effectuated by giving the Company written notice ("Notice of Termination for Good Reason") of the termination, setting forth the conduct of the Company that constitutes Good Reason. A termination of employment by the Executive for Good Reason shall be effective on the fifth business day following the date when the Notice of Termination for Good Reason is given, unless the notice sets forth a later date (which date shall in no event be later than 30 days after the notice is given). (iii) Executive may, by at least 30 days prior written notice, voluntarily terminate this Agreement, without liability by virtue of such termination at any time without Good Reason. (d) No Waiver. The failure to set forth any fact or circumstance in a Notice of Termination for Cause or a Notice of Termination for Good Reason shall not constitute a waiver of the right to assert, and shall not preclude the party giving notice from asserting, such fact or circumstance in an attempt to enforce any right under or provision of this Agreement; provided, that the foregoing shall not mean that a notice purporting to be a Notice of Termination for Cause pursuant to clause A of Section 4(b)(i) that fails to comply with said clause A will be treated as a valid Notice of Termination for Cause. (e) Date of Termination. The "Date of Termination" means the date of the Executive's death, the Disability Effective Date, the date on which the termination of the Executive's employment by the Company for Cause or by the Executive for Good Reason is effective, or the date on which the Company gives the Executive notice of a termination of employment without Cause or the Executive gives the Company not less than thirty (30) days prior written notice of a termination of employment without Good Reason, as the case may be. 5. Obligations of the Company upon Termination and/or a Change in Control. (a) Termination by Company Other Than for Cause; Voluntary Termination for Good Reason. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause, death, 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 continuing 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: 10 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(d) of this Agreement through the Date of Termination that has not yet been paid; (2) an amount 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 targeted level (as such term is used in clause (ii) of --------- Section 3(b) above to calculate bonuses under the Company's annual bonus plan) multiplied by a fraction, the numerator of which is the number of days in the current calendar year through the Date of Termination and the denominator of which is 365; (3) any accrued but unpaid vacation pay; and (4) any accrued but unpaid Annual Bonus relating to the calendar year prior to the year in which such termination occurs; and B. Severance pay equal to the sum of (1) the Annual Base Salary, (2) the Annual Bonus and (3) the annual supplemental benefit compensation which, absent termination, that would have been payable to Executive pursuant to Sections 3(a), (b) and (d) of this Agreement as if Executive were still employed hereunder during the period commencing on the Date of Termination and ending on the last day of the then current Employment Period (as determined under Section 1 hereof without regard to any further automatic extensions occurring after the effective date of such termination (the "Severance Pay Period"). For purposes of this Section 5(a)(i)(B), the amounts payable under the preceding sentence shall be based on the amounts in effect as of the Date of Termination, prorated to reflect any partial years during the Severance Pay Period; provided that the Annual Bonus shall be based on the Annual Bonus that would otherwise have been paid to Executive under Section 3(b) for the year of termination if all goals had been achieved at the targeted level (as such term is used in --------- clause (ii) of Section 3(b) above). (ii) During the Severance Pay Period, Executive and/or the Executive's family shall be provided with benefits at least as favorable as those that would have been provided to them under clause (ii) of Section 3(e) of this Agreement if the Executive's employment had continued through the end of Severance Pay Period; 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. (b) Death or Disability. If the Executive's employment is terminated by reason of the Executive's death or Disability during the Employment Period , 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. (i) The amounts to be paid in a lump sum as described above are: 11 A. The Company shall pay the Accrued Obligations to the Executive or the Executive's estate or legal representative, as applicable; and B. Severance pay equal to the sum of (1) the Annual Base Salary, (2) the Annual Bonus and (3) the annual supplemental benefit compensation which, absent termination, that would have been payable to Executive pursuant to Sections 3(a), (b) and (d) of this Agreement as if Executive were still employed hereunder during the period commencing on the Date of Termination and ending on the first anniversary thereof. For purposes of this Section 5(b)(i)(B), the amounts payable under the preceding sentence shall be based on the amounts in effect as of the Date of Termination, prorated to reflect any partial years during the Severance Pay Period; provided that the Annual Bonus shall be based on the Annual Bonus that would otherwise have been paid to Executive under such Section 3(b) for the year of termination if all goals had been achieved at the targeted level (as --------- such term is used in clause (ii) of Section 3(b) above). (ii) During the one year period following the Executive's termination of employment due to death or Disability, Executive and/or the Executive's family, as the case may be, shall be provided with benefits at least as favorable as those that would have been provided to them under clause (ii) of Section 3(e) of this Agreement if the Executive's employment had continued through the end of such one year period; 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(b)(ii) may be made secondary to those provided under such other plan. (c) Cause; Other than for Good Reason. If the Executive's employment is terminated by the Company for Cause during the Employment Period, or if the Executive terminates his employment during the Employment Period other than for Good Reason, the Company shall pay the Executive the sum of (i) the Annual Base Salary through the Date of Termination, and (ii) any accrued but unpaid Annual Bonus relating to the calendar years prior to the year in which such termination occurs, in each case to the extent not yet paid, and the Company shall have no further obligations under this Agreement. (d) Change in Control. If, during the two (2) year period following a Change in Control of the Company, either the Company terminates the Executive's employment other than for Cause, death, or Disability, or the Executive terminates his employment for Good Reason, the Company shall pay the amounts and provide the benefits described in Sections 5(a)(i) and (ii) above to the Executive at the time and in the amounts determined under Section 5(a), provided -------- that the Severance Pay Period as used in subparagraphs 5(a)(i)(A) and 5(a)(ii) - ---- shall, for purposes of this Section 5(d), be a period of three (3) years. (e) In the event that the Executive becomes entitled to the payments and benefits provided under this Section 5 and/or any other payments or benefits in connection with a Change 12 in Control or termination of the Executive's 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 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 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 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 Payment attributable to the Excise Tax). 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 and penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. The Executive shall notify the Company of any audit or review by the Internal Revenue Service of the Executive's federal income tax return for the year in which a payment under this Agreement is made within ten (10) days of the Executive's receipt of notification of such audit or review. In addition, the Executive shall also notify the Company of the final resolution of such audit or review within ten (10) days of such resolution. 6. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies for which the Executive may qualify, nor shall 13 anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Company or any of its affiliated companies on or after the Date of Termination shall be payable in accordance with such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 7. No Mitigation. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as specifically provided in Section 5(a)(ii) and 5(b)(ii) of this Agreement, such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 8. Confidential Information; Noncompetition. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies and their respective businesses that the Executive obtains during the Executive's employment by the Company or any of its affiliated companies and that is not public knowledge (other than as a result of the Executive's violation of this Section 8(a)) ("Confidential Information"). The Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive's employment with the Company, except with the prior written consent of the Company or as otherwise required by law or legal process. (b) During the Noncompetition Period (as defined below), the Executive shall not, without the prior written consent of the Board, engage in or become associated with a Competitive Activity. For purposes of this Section 8(b): (i) the "Noncompetition Period" means the period beginning with the Commencement Date and ending on the last day of the Employment Period (as determined under Section 1 hereof without regard to any automatic extensions occurring after the effective date of the termination of Executive's employment), plus, if the Executive's employment is terminated by the Company for Cause or voluntarily by the Executive other than with Good Reason, plus two years after the end of the Employment Period; (ii) a "Competitive Activity" means any business or other endeavor whose primary business is to provide guard, alarm or armored transport protective services or courier services, or related security or staffing services; and (iii) 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 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 Employment 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. 14 9. Arbitration; Attorneys' Fees. 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. The Company agrees to pay, as incurred, to the fullest extent permitted by law, all legal fees and expenses that the Executive may reasonably incur as a result of any contest (regardless of the outcome) by the Company, the Executive or others of the validity or enforceability of or liability under, or otherwise involving, any provision of this Agreement; provided, that in the case of any contest in which the Executive seeks to obtain any relief from the Company pursuant to this Agreement, such fees and expenses shall be paid by the Company only if the Executive obtains a substantial portion of the relief he seeks; and provided, further, that in the case of any action brought by the Company to enforce any provision of Section 8 of this Agreement, such fees and expenses shall be paid by the Company only if it fails to obtain a substantial portion of the relief it seeks. The Company further agrees to reimburse Executive for reasonable professional fees and related expenses incurred in the negotiation and preparation of this Agreement, but not in excess of the amount of legal fees paid by the Company to its outside counsel in the preparation and negotiation of this Agreement. 10. 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. 11. 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 15 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 Edwardson 747 Sheridan Road Wilmette, IL 60091 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 11(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. (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 (including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 4(c) of 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) The Executive and the Company acknowledge that this Agreement supersedes any other agreement between them concerning the subject matter hereof, including but not limited to the Original Agreement. (g) 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. 16 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of its Board of Directors, 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. EXECUTIVE: /s/ John A. Edwardson --------------------------------------------- BORG-WARNER SECURITY CORPORATION By /s/ Robert E. T. Lackey ------------------------------------------- Name: Robert E. T. Lackey Title: Vice President and General Counsel 17 EX-10.18 4 EMPLOYMENT AGREEMENT DATED AUGUST 31, 1998 Exhibit 10.18 - ------------- August 31, 1998 Mr. Robert E. T. Lackey 1907 Buckingham Road Mundelein, IL 60060 Dear Bob: This will serve to formalize the commitment that Borg-Warner Security Corporation and/or its affiliates ("Company") agrees to provide you in the event that you are involuntarily terminated by the Company in the event of a Change- In-Control, or within eighteen (18) months after a Change-In-Control. The benefits to be either paid or provided to you ("Benefits") will be as follows: 1. Your full base salary (plus all other amounts being paid to you, or on your behalf, including, but not limited to, any compensation, retirement, or insurance plan(s) of the Company) through your date of termination ("Termination Date"); 2. Within ten (10) business days after your Termination Date: a. a lump sum payment equal to eighteen (18) months' full base salary, b. the amount equal to the prior year's annual bonus award, and c. the amount equal to eighteen (18) months' Company contribution (including any matching contributions) which would have been made by the Company to the retirement plan on account of your participation therein; d. The amount of your current year's annual bonus award prorated for the number of months, or portion thereof, actually completed in the year; 4. For a period ending the earlier of either eighteen (18) months from your Termination Date, or the date on which you and your family are covered by comparable benefits, the Company will provide you and your family with insurance coverages substantially similar to the insurance coverages in force on your Termination Date (subject to your continued payment of any premiums that you were paying prior to your Termination Date and your right to elect full COBRA coverage thereafter); and 5. Outplacement services by a qualified outplacement agency selected by you and agreed to by the Company for a period not to exceed the earlier of the date of your new employment, or eighteen (18) months after your Termination Date. Mr. Robert E. T. Lackey August 31, 1998 Page 2 You will not be required to mitigate the amount of any payment set forth herein, nor will any Benefit be reduced or offset (except as specifically stated herein) by any subsequent employment. As a condition of your receipt of the Benefits, you and the Company will execute a mutually satisfactory release agreement. Any payments made to you will be subject to appropriate taxes and withholdings. A "Change-in-Control" of the Corporation shall be defined as set forth on Exhibit A attached to and made a part of this agreement. Nothing herein is intended, or is to be construed, as a waiver by you of your right to receive any benefits or payments payable to you pursuant to any retirement or disability plan of the Company in which you are a participant. This Agreement will be binding upon the Company and any of its successors or assigns whether direct or indirect, by purchase, merger, consolidation or otherwise. Borg-Warner Security Corporation /s/ J. Joe Adorjan By________________________________ J. Joe Adorjan Agreed to and accepted this 31st day of August, 1998 in Chicago, Illinois /s/ Robert E. T. Lackey By________________________________ Robert E. T. Lackey EXHIBIT A --------- A Change-in-Control shall be deemed to have occurred if: A. there is an acquisition by an individual, entity or group of beneficial ownership of 25% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors; or 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 (whose election or nomination for election was duly 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 consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent at least 70% of the combined voting power of the voting securities of the Company or such surviving entity 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. EX-10.19 5 STOCK PURCHASE AGREEMENT DATED AUGUST 17, 1998 Exhibit 10.19 ------------- [CONFORMED] STOCK PURCHASE AGREEMENT dated as of April 17, 1998 among ADT SECURITY SERVICES, INC., TYCO INTERNATIONAL (US) INC. and BORG-WARNER SECURITY CORPORATION relating to the purchase and sale of the common stock of Wells Fargo Alarm Services, Inc., BW-Canada Alarm (Wells Fargo) Corporation and Wells Fargo Pyro Technologies, Inc. TABLE OF CONTENTS
Page ---- ARTICLE 1 --------- Definitions ----------- Section 1.01. Definitions.................................................. 1 - ARTICLE 2 --------- Purchase and Sale ----------------- Section 2.01. Purchase and Sale............................................ 6 - Section 2.02. Closing...................................................... 6 - Section 2.03. Closing Balance Sheet........................................ 6 - Section 2.04. Adjustment of Purchase Price................................. 8 - ARTICLE 3 --------- Representations and Warranties of Seller ---------------------------------------- Section 3.01. Corporate Existence and Power................................ 9 - Section 3.02. Corporate Authorization...................................... 9 - Section 3.03. Governmental Authorization................................... 9 - Section 3.04. Noncontravention............................................. 9 - Section 3.05. Capitalization............................................... 10 -- Section 3.06. Ownership of Shares.......................................... 10 -- Section 3.07. Subsidiaries................................................. 11 -- Section 3.08. Financial Statements......................................... 11 -- Section 3.09. Absence of Certain Changes................................... 11 -- Section 3.10. No Undisclosed Material Liabilities.......................... 13 -- Section 3.11. Material Contracts........................................... 14 -- Section 3.12. Litigation................................................... 15 -- Section 3.13. Compliance with Laws and Court Orders........................ 15 -- Section 3.14. Assets....................................................... 16 -- Section 3.15. Intellectual Property........................................ 16 -- Section 3.16. Insurance.................................................... 16 -- Section 3.17. Finders' Fees................................................ 17 -- Section 3.18. Employees.................................................... 17 -- Section 3.19. Employee Benefit Plans....................................... 17 -- Section 3.20. Environmental Matters........................................ 18 -- Section 3.21. Labor Matters................................................ 19 -- Section 3.22. Books and Records............................................ 19 -- Section 3.23. Customers and Suppliers...................................... 20 --
Page ---- Section 3.24. Product Liability............................................ 20 -- ARTICLE 4 --------- Representations and Warranties of Buyer ------------------------------------------------ Section 4.01. Corporate Existence and Power................................ 20 -- Section 4.02. Corporate Authorization...................................... 20 -- Section 4.03. Governmental Authorization................................... 21 -- Section 4.04. Noncontravention............................................. 21 -- Section 4.05. Financing.................................................... 21 -- Section 4.06. Purchase for Investment...................................... 21 -- Section 4.07. Litigation................................................... 21 -- Section 4.08. Finders' Fees................................................ 22 -- Section 4.09. Inspections; No Other Representations........................ 22 -- ARTICLE 5 --------- Covenants of Seller ------------------- Section 5.01. Conduct of the Companies..................................... 22 -- Section 5.02. Access to Information........................................ 23 -- Section 5.03. Notices of Certain Events.................................... 24 -- Section 5.04. Resignations................................................. 24 -- Section 5.05. Non-Competition.............................................. 25 -- Section 5.06. Non-Solicitation............................................. 26 -- Section 5.07. Intercompany Accounts........................................ 26 -- ARTICLE 6 --------- Covenants of Buyer ------------------ Section 6.01. Confidentiality.............................................. 26 -- Section 6.02. Access....................................................... 27 -- Section 6.03. Trademarks; Tradenames....................................... 27 -- Section 6.04. Notices of Certain Events.................................... 28 -- Section 6.05. Agreements Guaranteed by Seller.............................. 28 -- ARTICLE 7 --------- Covenants of Buyer and Seller ----------------------------- Section 7.01. Best Efforts; Further Assurances............................. 29 -- Section 7.02. Certain Filings.............................................. 31 -- Section 7.03. Public Announcements......................................... 31 --
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Page ---- ARTICLE 8 --------- Tax Matters ----------- Section 8.01. Tax Definitions............................................... 32 -- Section 8.02. Tax Representations.......................................... 32 -- Section 8.03. Tax Covenants................................................ 33 -- Section 8.04. Termination of Existing Tax Sharing Agreements............... 34 -- Section 8.05. Cooperation on Tax Matters................................... 35 -- Section 8.06. Indemnification by Seller and Buyer.......................... 35 -- ARTICLE 9 --------- Employee Benefits ----------------- Section 9.01. Employee Benefits............................................ 37 -- Section 9.02. Seller Welfare Plans......................................... 39 -- ARTICLE 10 ---------- Conditions to Closing --------------------- Section 10.01. Conditions to Obligations of Buyer and Seller............... 40 -- Section 10.02. Conditions to Obligation of Buyer........................... 40 -- Section 10.03. Conditions to Obligation of Seller.......................... 41 -- ARTICLE 11 ---------- Survival; Indemnification ------------------------- Section 11.01. Survival.................................................... 42 -- Section 11.02. Indemnification............................................. 42 -- Section 11.03. Procedures.................................................. 44 -- Section 11.04. Calculation of Damages...................................... 45 -- Section 11.05. Assignment of Claims........................................ 45 -- Section 11.06. Exclusivity................................................. 45 -- ARTICLE 12 ---------- Termination ----------- Section 12.01. Grounds for Termination..................................... 46 -- Section 12.02. Effect of Termination....................................... 46 --
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Page ---- ARTICLE 13 ---------- Miscellaneous ------------- Section 13.01. Notices..................................................... 47 -- Section 13.02. Entire Agreement............................................ 48 -- Section 13.03. Amendments and Waivers...................................... 48 -- Section 13.04. Expenses.................................................... 49 -- Section 13.05. Successors and Assigns...................................... 49 -- Section 13.06. Governing Law............................................... 49 -- Section 13.07. Jurisdiction................................................ 49 -- Section 13.08. WAIVER OF JURY TRIAL........................................ 49 -- Section 13.09. Counterparts; Effectiveness; Third Party Beneficiaries...... 49 -- Section 13.10. Interpretation.............................................. 50 -- Section 13.11. Severability................................................ 50 -- Section 13.12. Disclosure Schedules........................................ 50 -- Section 13.13. Tyco (US) Guarantee......................................... 50 --
Exhibit 9.02 Form of Transition Services Agreement Schedules iv STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT dated as of April 17, 1998 among ADT Security Services, Inc., a Delaware corporation ("Buyer"), Tyco International (US) Inc., a Massachusetts corporation ("Tyco (US)"), and Borg-Warner Security Corporation, a Delaware corporation ("Seller"). WHEREAS, Seller is the record and beneficial owner of the Shares and desires to sell the Shares to Buyer, and Buyer desires to purchase the Shares from Seller on the terms and conditions set forth herein; The parties hereto agree as follows: ARTICLE 1 Definitions Section 1.01. Definitions. (a) The following terms, as used herein, have the following meanings: "Accounting Principles" means generally accepted accounting principles consistently applied by Seller in the preparation of its audited consolidated financial statements, taking into account (i) the accounting policies within generally accepted accounting principles and (ii) the exceptions to generally accepted accounting principles, in each case, accompanying the Balance Sheet attached as part of Schedule 3.08. ---- "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person; provided that neither any Company nor any Subsidiary shall be considered an Affiliate of Seller. "Alarm" means Wells Fargo Alarm Services, Inc., a Delaware corporation. "Alarm Common Stock" means the common stock, par value $0.01 per share, of Alarm. "Balance Sheet" means the unaudited pro forma combined balance sheet of the Companies and the Subsidiaries as at December 31, 1997, a copy of which is attached as part of Schedule 3.08. ---- "Balance Sheet Date" means December 31, 1997. "Benefit Arrangement" means any employment, severance or similar contract or arrangement (whether or not written) or any plan, policy, fund, program or contract or arrangement (whether or not written) providing for compensation, bonus, profit-sharing, stock option, or other stock related rights or other forms of incentive or deferred compensation, vacation benefits, insurance coverage (including any self-insured arrangements), health or medical benefits, disability benefits, workers' compensation, supplemental unemployment benefits, severance benefits and post-employment or retirement benefits (including compensation, pension, health, medical or life insurance or other benefits) that (i) is not an Employee Plan, (ii) is entered into, maintained, administered or contributed to, as the case may be, by Seller, any of its Affiliates, any Company or any Subsidiary and (iii) covers any employee or former employee of any Company or any Subsidiary employed in the United States or Canada. "Canada Alarm" means BW-Canada Alarm (Wells Fargo) Corporation, a Delaware corporation. "Canada Alarm Common Stock" means the common stock, par value $0.01 per share, of Canada Alarm. "Closing Date" means the date of the Closing. "Code" means the United States Internal Revenue Code of 1986, as amended. "Companies" means, collectively, Alarm, Pyro and Canada Alarm (each, a "Company"). "Employee Plan" means any "employee benefit plan", as defined in Section 3(3) of ERISA, that (i) is subject to any provision of ERISA, (ii) is maintained, administered or contributed to by Seller, any of its Affiliates, any Company or any Subsidiary and (iii) covers any employee or former employee of any Company or any Subsidiary. "Environmental Laws" means any and all statutes, laws, regulations and rules, in each case as in effect on the date hereof, that have as their principal purpose the protection of the environment and includes, but is not limited to, the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"), 42 U.S.C. (S) 9601 et seq., the Hazardous Materials Transportation Act, 49 U.S.C. (S) 1801 et seq., the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. (S) 6901 et seq., the Clean Water Act, 33 U.S.C. (S) 1251 et 2 seq., the Clean Air Act, 33 U.S.C. (S) 2601 et seq., the Toxic Substance Control Act, 15 U.S.C. (S) 2601 et seq., and the Oil Pollution Act of 1990, 33 U.S.C. (S) 2701 et seq., as such laws have been amended or supplemented on or prior to the date hereof, and the regulations promulgated pursuant thereto, and all analogous state or local statutes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended and the rules and regulations promulgated thereunder. "ERISA Affiliate" of any entity means any other entity which, together with such entity, would be treated as a single employer under Section 414 of the Code. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "knowledge of Seller", "Seller's knowledge" or any other similar knowledge qualification in this Agreement means to the actual knowledge of the President, the Chief Financial Officer or the General Counsel of Seller or any Company. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance in respect of such asset. "Material Adverse Effect" means a material adverse effect on the business, assets, financial condition or revenues of the Companies and the Subsidiaries, taken as a whole, except any such effect resulting from or arising in connection with (i) this Agreement or the transactions contemplated hereby, (ii) changes or conditions affecting the physical and electronic security industries generally or (iii) changes in economic, regulatory or political conditions generally. "Multiemployer Plan" means each Employee Plan that is a multiemployer plan, as defined in Section 3(37) of ERISA. "1934 Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Person" means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Pyro" means Wells Fargo Pyro Technologies, Inc., a New Jersey corporation. 3 "Pyro Common Stock" means the common stock, par value $1.00 per share, of Pyro. "Shares" means, collectively, 100 shares of Alarm Common Stock, 1,000 shares of Pyro Common Stock and 100 shares of Canada Alarm Common Stock. "Subsidiary" means any corporation or other entity of which a majority of the securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are directly or indirectly owned by any Company; provided that, for purposes of this Agreement, BW-Chemicals Corporation shall not be considered a Subsidiary. "Title IV Plan" means an Employee Plan subject to Title IV of ERISA other than any Multiemployer Plan. (b) Each of the following terms is defined in the Section set forth opposite such term: Term Section Accounting Referee 8.01 ---- Alarm Preferred Stock 3.05 ---- Antitrust Law 7.01(b) ------- Applicable Tax Rate 8.06(b) ------- Base Net Tangible Assets 2.04 ---- Buyer 401(k) Plan 9.01(b) ------- Buyer Plan 9.01(b) ------- Canada Alarm Preferred Stock 3.05 ---- Claim 11.03 ----- Closing 2.02 ---- Closing Net Tangible Assets 2.03 ---- Closing Balance Sheet 2.03 ---- Combined Return 8.01 ---- Company Intellectual Property 3.15 ---- Company Securities 3.05 ---- Continuing Employees 9.01(b) ------- DOJ 7.01(b) ------- Damages 11.02 ----- Final Net Tangible Assets 2.04 ---- FTC 7.01(b) ------- Governmental Authority 7.01(b) ------- Indemnified Party 11.03 ----- Indemnifying Party 11.03 ----- 4 Term Section Licenses and Permits 3.13 ---- Loss 8.06(a) ------- Non-Compete Period 5.05(a) ------- Potential Contributor 11.05 ----- Pre-Closing Uninsured Claims 11.02(d) -------- Pre-Closing Tax Period 8.01 ---- Price Allocation Schedule 8.03(d) ------- Preferred Stock 3.05 ---- Purchase Price 2.01 ---- Retirement Plan 9.01(b) ------- Returns 8.02 ---- Section 338 Cost 8.06(g) ------- Section 338(h)(10) Election 8.03(d) ------- Seller Companies 5.05(a) ------- Seller 401(k) Plans 9.01(b) ------- Seller Group 8.01 ---- Seller Welfare Plans 9.02(a) ------- Seller Trademarks and Tradenames 6.03(a) ------- State Tax 8.01 ---- State Tax Benefit 8.06(b) ------- Subsidiary Securities 3.07(b) ------- Tax 8.01 ---- Tax Sharing Agreement 8.01 ---- Taxing Authority 8.01 ---- Third Party Claim 11.03 ----- Transition Period 6.03(a) ------- Transition Trademarks and Tradenames 6.03(a) ------- ARTICLE 2 Purchase and Sale Section 2.01. Purchase and Sale. Upon the terms and subject to the conditions of this Agreement, Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, the Shares at the Closing. The purchase price for the Shares (the "Purchase Price") is $425,000,000 in cash. The Purchase Price shall be paid as provided in Section 2.02 and shall be subject to adjustment as provided in Section 2.04. 5 Section 2.02. Closing. The closing (the "Closing") of the purchase and sale of the Shares hereunder shall take place at the offices of Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York, as soon as possible, but in no event later than five business days, after satisfaction of the conditions set forth in Article 10, or at such other time or place as Buyer and Seller may agree. At the Closing: (a) Buyer shall deliver to Seller the Purchase Price in immediately available funds by wire transfer to an account of Seller with a bank in New York City designated by Seller, by notice to Buyer, not later than two business days prior to the Closing Date (or if not so designated, then by certified or official bank check payable in immediately available funds to the order of Seller in such amount). (b) Seller shall deliver to Buyer certificates for the Shares duly endorsed or accompanied by stock powers duly endorsed in blank, with any required transfer stamps affixed thereto. Section 2.03. Closing Balance Sheet. (a) As promptly as practicable, but no later than 60 days, after the Closing Date, Buyer will cause to be prepared and delivered to Seller the Closing Balance Sheet and a certificate based on such Closing Balance Sheet setting forth Buyer's calculation of Closing Net Tangible Assets. The Closing Balance Sheet (the "Closing Balance Sheet") shall fairly present the combined financial position of the Companies and the Subsidiaries as at the close of business on the Closing Date in conformity and on a basis consistent with the Accounting Principles. "Closing Net Tangible Assets" means the combined stockholder's equity of the Companies and the Subsidiaries as shown on the Closing Balance Sheet, with the following adjustments: (i) less, to the extent included in the Closing Balance Sheet, all assets that in accordance with the Accounting Principles would be classified as intangible assets, including, without limitation, goodwill, patents, trademarks, deferred expenses and unamortized debt discount and (ii) excluding (A) the effect (including the Tax effect) of the purchase of the Shares and any act, event or transaction occurring after the Closing and not in the ordinary course of business of the Companies and the Subsidiaries, (B) any current or deferred income tax assets or liabilities, (C) any liabilities indemnified by Seller (whether or not Buyer is responsible for a portion thereof), (D) except as would be required of Seller by generally accepted accounting principles, any write up or write down of assets from their historic depreciated or amortized carrying cost to reflect any higher or lower market value and (E) the balance in single interest retention. (b) If Seller disagrees with Buyer's calculation of Closing Net Tangible Assets delivered pursuant to Section 2.03(a), Seller may, within 45 days after ------- 6 delivery of the documents referred to in Section 2.03(a), deliver a notice to Buyer disagreeing with such calculation and setting forth Seller's calculation of such amount. Any such notice of disagreement shall specify those items or amounts as to which Seller disagrees, and Seller shall be deemed to have agreed with all other items and amounts contained in the Closing Balance Sheet and the calculation of Closing Net Tangible Assets delivered pursuant to Section 2.03(a). (c) If a notice of disagreement shall be duly delivered pursuant to Section 2.03(b), Buyer and Seller shall, during the 15 days following such delivery, use their best efforts to reach agreement on the disputed items or amounts in order to determine, as may be required, the amount of Closing Net Tangible Assets, which amount shall not be less than the amount thereof shown in Buyer's calculations delivered pursuant to Section 2.03(a) nor more than the amount thereof shown in Seller's calculation delivered pursuant to Section 2.03(b). If, during such period, Buyer and Seller are unable to reach such agreement, they shall promptly thereafter cause independent accountants of nationally recognized standing reasonably satisfactory to Buyer and Seller (who shall not have any material relationship with Buyer or Seller), promptly to review this Agreement and the disputed items or amounts for the purpose of calculating Closing Net Tangible Assets. In making such calculation, such independent accountants shall consider only those items or amounts in the Closing Balance Sheet or Buyer's calculation of Closing Net Tangible Assets as to which Seller has disagreed and, in considering such items and amounts, shall apply the provisions of Section 2.03(a) and the Accounting Principles. Such independent accountants shall deliver to Buyer and Seller, as promptly as practicable, a report setting forth such calculation. Such report shall be final and binding upon Buyer and Seller. The cost of such review and report shall be borne equally by Buyer and Seller. (d) Buyer and Seller agree that they will, and agree to instruct their respective independent accountants and cause each Company and each Subsidiary to, cooperate and assist in the preparation of the Closing Balance Sheet and the calculation of Closing Net Tangible Assets and in the conduct of the reviews referred to in this Section 2.03, including without limitation, the making available to the extent necessary of books, records, work papers and personnel. Section 2.04. Adjustment of Purchase Price. (a) If Base Net Tangible Assets exceed Final Net Tangible Assets, Seller shall pay to Buyer, as an adjustment to the Purchase Price, in the manner and with interest as provided in Section 2.04(b), the amount of such excess. If Final Net Tangible Assets exceed Base Net Tangible Assets, Buyer shall pay to Seller, in the manner and with interest as provided in Section 2.04(b), the amount of such excess. "Base Net Tangible Assets" means $228,474,000. Schedule 2.04 shows the calculation of Base Net Tangible Assets based on the Balance Sheet and the provisions set forth 7 in Section 2.03 and excluding cash of the Companies and the Subsidiaries shown on the Balance Sheet. "Final Net Tangible Assets" means Closing Net Tangible Assets (i) as shown in Buyer's calculation delivered pursuant to Section 2.03(a), if no notice of disagreement with respect thereto is duly delivered pursuant to Section 2.03(b); or (ii) if such a notice of disagreement is delivered, (A) as agreed by Buyer and Seller pursuant to Section 2.03(c) or (B) in the absence of such agreement, as shown in the independent accountants' calculation delivered pursuant to Section 2.03(c); provided that in no event shall Final Net Tangible Assets be less than Buyer's calculation of Closing Net Tangible Assets delivered pursuant to Section 2.03(a) or more than Seller's calculation of Closing Net Tangible Assets delivered pursuant to Section 2.03(b). (b) Any payment pursuant to Section 2.04(a) shall be made at a mutually convenient time and place within 10 days after Final Net Tangible Assets have been determined by delivery by Buyer or Seller, as the case may be, of a certified or official bank check or by wire transfer payable in immediately available funds to the other party or by causing such payments to be credited to such account of such other party as may be designated by such other party. The amount of any payment to be made pursuant to this Section 2.04 shall bear interest from and including the Closing Date to but excluding the date of payment at a rate per annum equal to the Prime Rate as published in the Wall Street Journal, Eastern Edition, in effect from time to time during the period from the Closing Date to the date of payment. Such interest shall be payable at the same time as the payment to which it relates and shall be calculated daily on the basis of a year of 365 days and the actual number of days elapsed. ARTICLE 3 Representations and Warranties of Seller Seller represents and warrants to Buyer as of the date hereof that: Section 3.01. Corporate Existence and Power. Each of Seller and the Companies is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has the requisite corporate power and authority and governmental approvals to own, lease and operate its properties and to carry on its business as now conducted, except for such matters as would not have a Material Adverse Effect. Each Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where such qualification is necessary, except for such matters as would not have a Material Adverse Effect. Each Company has heretofore delivered or made 8 available to Buyer true and complete copies of its certificate of incorporation and bylaws as currently in effect. Section 3.02. Corporate Authorization. The execution, delivery and performance by Seller of this Agreement and the consummation by Seller of the transactions contemplated hereby are within Seller's corporate powers and have been duly authorized by all necessary corporate action. This Agreement constitutes a valid and binding agreement of Seller enforceable against Seller in accordance with its terms except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally. Section 3.03. Governmental Authorization. The execution, delivery and performance by Seller of this Agreement and the consummation by Seller of the transactions contemplated hereby require no action by or in respect of, or filing with, any governmental body, agency, official or authority, other than (a) compliance with any applicable requirements of the HSR Act; (b) compliance with any applicable requirements of the 1934 Act; (c) compliance with any other applicable securities laws; (d) compliance with any applicable Canadian laws; (e) any actions or filings which, if not taken or made, would not have a Material Adverse Effect and (f) any filings or notices not required to be made or given until after the Closing Date. Section 3.04. Noncontravention. Except as set forth in Schedule 3.04, the execution, delivery and performance by Seller of this Agreement do not and the consummation of the transactions by Seller contemplated hereby will not (a) contravene or conflict with the certificate of incorporation, bylaws or similar organizational documents of Seller or any Company, (b) assuming compliance with the matters referred to in Section 3.03, violate any applicable law, rule, regulation, judgment, injunction, order or decree, (c) constitute a default under or give rise to a right of termination, cancellation or acceleration of any right or obligation of Seller, any Company or any Subsidiary or to a loss of any benefit to which Seller, any Company or any Subsidiary is entitled under any provision of any agreement or other instrument binding upon Seller, any Company or any Subsidiary or (d) result in the creation or imposition of any Lien on any asset of any Company or any Subsidiary pursuant to any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which any Company or any Subsidiary is a party or by which any Company or any Subsidiary is bound or affected, except in the case of clause (b), (c) or (d), for such matters as would not have a Material Adverse Effect. Section 3.05. Capitalization. The authorized capital stock of Alarm consists of 9,000 shares of Alarm Common Stock and 1,000 shares of preferred 9 stock, par value $0.01 per share ("Alarm Preferred Stock"); the authorized capital stock of Pyro consists of 1,000 shares of Pyro Common Stock; and the authorized capital stock of Canada Alarm consists of 9,000 shares of Canada Alarm Common Stock and 1,000 shares of preferred stock, par value $0.01 per share ("Canada Alarm Preferred Stock"). As of the date hereof, (A) 100 shares of Alarm Common Stock and no shares of Alarm Preferred Stock were issued and outstanding, (B) 1,000 shares of Pyro Common Stock were issued and outstanding, and (C) 100 shares of Canada Alarm Common Stock and no shares of Canada Alarm Preferred Stock were issued and outstanding. All outstanding shares of capital stock of each Company have been duly authorized, validly issued, fully paid and non-assessable. Except as set forth in this Section 3.05, there are no outstanding (i) shares of capital stock or voting securities of any Company, (ii) securities of any Company convertible into or exchangeable for shares of capital stock or voting securities of any Company or (iii) options, warrants or other rights to acquire from any Company, or other obligation of any Company to issue, transfer or sell, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of any Company (the items in clauses (i), (ii) and (iii) being referred to collectively as the "Company Securities"). There are no contractual obligations of any Company or any Subsidiary to repurchase, redeem or otherwise acquire any Company Securities. Section 3.06. Ownership of Shares. Except as set forth in Schedule 3.06, Seller is the record and beneficial owner of the Shares, free and clear of any Lien, and will transfer and deliver to Buyer at the Closing valid title to the Shares free and clear of any Lien. Section 3.07. Subsidiaries. (a) Each Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has the requisite corporate power and authority and governmental approvals to own, lease and operate its properties and to carry on its business as now conducted, except for such matters as would not have a Material Adverse Effect. (b) All of the outstanding capital stock or other voting securities of each Subsidiary is owned by Canada Alarm, directly or indirectly, free and clear of any Lien. There are no outstanding (i) securities of any Company or any Subsidiary convertible into or exchangeable for shares of capital stock or voting securities of any Subsidiary or (ii) options, warrants or other rights to acquire from any Company or any Subsidiary, or other obligation of any Company or any Subsidiary to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of any Subsidiary (the items in clauses (i) and (ii) being referred to collectively as the "Subsidiary Securities"). 10 There are no contractual obligations of any Company or any Subsidiary to repurchase, redeem or otherwise acquire any outstanding Subsidiary Securities. (c) None of the Companies directly or indirectly owns any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity. Section 3.08. Financial Statements. Schedule 308 sets forth the unaudited pro forma combined balance sheet as of December 31, 1997 and the related unaudited pro forma combined statements of operating income and operating cash flows for the year ended December 31, 1997 of the Companies and the Subsidiaries. Such financial statements fairly present, in all material respects, in conformity with the Accounting Principles, the combined financial position of the Companies and the Subsidiaries as of the date thereof and their combined operating income and operating cash flows for the period then ended. Section 3.09. Absence of Certain Changes. Except as set forth in Schedule 3.09, since the Balance Sheet Date, the business of the Companies and the Subsidiaries has been conducted in the ordinary course consistent with past practices and there has not been: (a) any event, occurrence or development which has had a Material Adverse Effect; (b) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of any Company or any Subsidiary or any repurchase, redemption or other acquisition by any Company or any Subsidiary of any outstanding shares of capital stock or other equity securities of, or other ownership interests in, any Company or any Subsidiary; (c) any amendment of any term of any outstanding security of any Company or any Subsidiary that would materially increase the obligations of such Company or Subsidiary under such security; (d) (x) any incurrence or assumption by any Company or any Subsidiary of any indebtedness for borrowed money, other than under existing credit facilities (or any renewals, replacements or extensions that do not increase the aggregate commitments thereunder) (A) in the ordinary course of business consistent with past practices (it being understood that any indebtedness incurred prior to the date hereof in respect of capital expenditures shall be considered to have been in the ordinary course of 11 business consistent with past practices) or (B) in connection with any acquisition or capital expenditure permitted by Section 5.01 or (y) any guarantee, endorsement or other incurrence or assumption of liability (whether directly, contingently or otherwise) by any Company or any Subsidiary for the obligations of any other Person (other than any wholly- owned Subsidiary), other than in the ordinary course of business consistent with past practices; (e) any making of any loan, advance or capital contributions to or investment in any Person by any Company or any Subsidiary other than (i) any acquisition permitted by Section 5.01, (ii) loans, advances or capital contributions to or investments in wholly-owned Subsidiaries, (iii) loans or advances to employees of any Company or any Subsidiary made in the ordinary course of business consistent with past practices or (iv) loans, advances or capital contributions to or investments made in the ordinary course of business consistent with past practices; (f) (i) any contract or agreement entered into by any Company or any Subsidiary on or prior to the date hereof relating to any material acquisition or disposition of any assets or business or (ii) any modification, amendment, assignment, termination or relinquishment by any Company or any Subsidiary of any contract, license or other right (including any insurance policy naming it as a beneficiary or a loss payable payee) that would have a Material Adverse Effect, other than, in the case of (i) and (ii), transactions, commitments, contracts or agreements in the ordinary course of business consistent with past practices and those contemplated by this Agreement; (g) any material change in any method of accounting or accounting practice by any Company or any Subsidiary except for any such change required by reason of a change in generally accepted accounting principles; (h) any (i) employment, deferred compensation, severance, retirement or other similar agreement entered into with any director, officer or employee of any Company or any Subsidiary (or any amendment to any such existing agreement), (ii) grant of any severance or termination pay to any director, officer or employee of any Company or any Subsidiary or (iii) change in compensation or other benefits payable to any director, officer or employee of any Company or any Subsidiary pursuant to any severance or retirement plans or policies thereof, in each case, other than in the ordinary course of business consistent with past practices; 12 (i) any sale, lease, transfer, assignment, distribution or other disposition of any material assets (except for sales in the ordinary course of business) by any Company or any Subsidiary, or any disposal of any Company or any Subsidiary of any material assets for any amount to Seller or its Affiliates ; (j) any disposal or lapse of any rights in, to or for the use of any patent, trademark, trade name or copyright of any Company or any Subsidiary, or any disclosure to any person who is not an employee, or other disposition of, any customer lists of any Company or any Subsidiary, in each case, which would have a Material Adverse Effect; (k) any material damage, destruction or loss of any monitoring center; or (l) any material revaluation by any Company or any Subsidiary of any of its assets, including, without limitation, writing down the value of inventory or writing off notes or accounts receivable, other than in the ordinary course of business. Section 3.10. No Undisclosed Material Liabilities. There are no liabilities of any Company or any Subsidiary (absolute, accrued, contingent or otherwise), other than: (a) liabilities adequately provided for in the Balance Sheet or disclosed in the notes thereto; (b) liabilities set forth in Schedule 3.10; (c) liabilities disclosed in, related to or arising under any agreements, instruments or other matters disclosed in this Agreement or any Schedule hereto; (d) liabilities incurred in the ordinary course of business since the Balance Sheet Date; or (e) other undisclosed liabilities which, individually or in the aggregate, would not have a Material Adverse Effect. Section 3.11. Material Contracts. (a) Except as set forth in Schedule 3.11, as of the date hereof, neither any Company nor any Subsidiary is a party to or bound by: 13 (i) any lease (whether of real or personal property) providing for annual rentals of $100,000 or more; (ii) any agreement for the purchase of materials, supplies, goods, services, equipment or other assets providing for either (A) annual payments by the Companies and the Subsidiaries of $100,000 or more or (B) aggregate future payments by the Companies and the Subsidiaries of $100,000 or more; (iii) any sales, distribution or other similar agreement providing for the sale by any Company or any Subsidiary of materials, supplies, goods, services, equipment or other assets that provides for annual payments to the Companies and the Subsidiaries of $100,000 or more, other than customer and subscriber agreements; (iv) any material partnership, joint venture or other similar agreement or arrangement; (v) any agreement relating to the acquisition or disposition of any material business (whether by merger, sale of stock, sale of assets or otherwise); (vi) any agreement relating to indebtedness for borrowed money or the deferred purchase price of property (in either case, whether incurred, assumed, guaranteed or secured by any asset), except any such agreement with an aggregate outstanding principal amount not exceeding $100,000; (vii) any material agreement that limits the freedom of any Company or any Subsidiary to compete in any line of business or with any Person or in any area; (viii) any material agreement with Seller or any of its Affiliates or any director or officer of Seller or any of its Affiliates; or (ix) any other agreement, commitment, arrangement or plan not made in the ordinary course of business that is material to the Companies and the Subsidiaries, taken as a whole. (b) Each agreement, contract, plan, lease, arrangement or commitment required to be disclosed pursuant to this Section is a valid and binding agreement of a Company or a Subsidiary, as the case may be, and is in full force and effect, and none of any Company, any Subsidiary or, to the knowledge of Seller, any other party thereto is in default or breach in any respect under the terms of any 14 such agreement, contract, plan, lease, arrangement or commitment, except for any such matters which would not have a Material Adverse Effect. (c) The Companies have furnished or made available, or will furnish or make available, prior to the Closing Date, to Buyer true and correct copies of all material contracts disclosed pursuant to this Section. Section 3.12. Litigation. Except as set forth in Schedule 3.12, there is no action, suit, investigation or proceeding pending against, or to the knowledge of Seller, threatened against or affecting, Seller, any Company or any Subsidiary or any of their respective properties before any court or arbitrator or any governmental body, agency or official which is reasonably likely to have a Material Adverse Effect. There are no orders, writs, injunctions or decrees currently in force against any Company or any Subsidiary or the directors, officers, agents or employees of any Company or any Subsidiary with respect to the conduct of the business of the Companies and the Subsidiaries which are reasonably likely to have a Material Adverse Effect. Section 3.13. Compliance with Laws and Court Orders. Neither any Company nor any Subsidiary is in violation of any applicable law, rule, regulation, judgment, injunction, order or decree, except for violations that have not had and would not have a Material Adverse Effect. Except as set forth in Schedule 3.13, the Companies and the Subsidiaries own, hold or possess in their own respective name, all licenses, franchises, permits, approvals and other governmental authorization (collectively, "Licenses and Permits") necessary to entitle them to use their respective corporate name, to own or lease, operate and use their respective assets and properties and to carry on and conduct their respective businesses and operations as presently conducted, except for such matters as would not have a Material Adverse Effect. To the knowledge of Seller, the Companies and the Subsidiaries are not in violation of or default under any Licenses and Permits which are reasonably likely, individually or in the aggregate, to have a Material Adverse Effect. Schedule 3.13 sets forth a complete and correct list of all material Licenses and Permits of the Companies and the Subsidiaries with the Federal Communications Commission, all of which are in full force and effect as of the date hereof. Section 3.14. Assets. The assets, properties, rights and contracts, including (as applicable) title or leaseholds thereto, of the Companies and the Subsidiaries, taken as a whole, are sufficient to permit the Companies and the Subsidiaries to conduct their business as currently being conducted with only such exceptions as would not have a Material Adverse Effect. All material real property owned by the Companies and the Subsidiaries is owned free and clear of all Liens, except (A) those reflected or reserved against in the Balance Sheet, (B) taxes and 15 general and special assessments not in default and payable without penalty or interest, (C) Liens set forth in Schedule 3.14 and (D) Liens that do not materially adversely interfere with any present use of such property. Section 3.15. Intellectual Property. Schedule 3.15 sets forth an accurate and complete list of all material patents, trademarks, service marks, trade names, trade secrets and other intellectual property rights (collectively, the "Company Intellectual Property") owned or used by the Companies and the Subsidiaries in the operation of their businesses. Except as set forth in Schedule 3.15, the Companies and the Subsidiaries own or have a valid license to use, free and clear of any lien or other encumbrance, all of the Company Intellectual Property necessary to carry on their respective business as currently conducted, and neither any Company nor any Subsidiary has received any notice of infringements of or conflict with, and to the knowledge of the Companies, there are no infringements of or conflicts with, the rights of others with respect to the use of any of the Company Intellectual Property, except for such matters that, individually or in the aggregate, would not have a Material Adverse Effect. Section 3.16. Insurance. Except as set forth in Schedule 3.16, the Companies and the Subsidiaries are covered by insurance maintained by Seller with insurers, reasonably believed by Seller to be of recognized financial responsibility and solvency, against such losses and risks and in such amounts as are customary in the businesses in which they are engaged. Neither any Company nor any Subsidiary has been denied insurance or suffered the cancellation of any insurance with respect to it in the past five years that, in either case, has had a Material Adverse Effect. Section 3.17. Finders' Fees. Except for Merrill Lynch, Pierce, Fenner & Smith Incorporated, no investment banker, broker, finder or other intermediary entitled to any fee or commission from any Company or any Subsidiary upon consummation of the transactions contemplated by this Agreement. Section 3.18. Employees. Schedule 3.18 sets forth a true and complete list of (a) the names, titles, annual salaries and other compensation of all presidents and vice presidents of the Companies and the Subsidiaries and all other employees of the Companies and the Subsidiaries whose annual base salary exceeds $100,000, (b) all employment agreements with executive officers of each Company and each Subsidiary, (c) all agreements with consultants who are individuals obligating any Company or any Subsidiary to make annual cash payments, in each case, in an amount exceeding $100,000, (d) all material agreements with respect to the services of independent contractors or leased employees whether or not they participate in any of the Employee Plans, (e) all executive officers of each Company and each Subsidiary who have executed a non- competition agreement 16 with such Company or such Subsidiary, (f) all severance agreements of each Company and each Subsidiary with or relating to its employees, in each case, with outstanding commitments exceeding Seller's generally applicable severance policies, excluding programs and policies required to be maintained by law and (g) all plans, programs, agreements and other arrangements of each Company and each Subsidiary which contain change in control provisions. Section 3.19. Employee Benefit Plans. (a) Schedule 3.19 identifies each material Employee Plan. Seller has made available to Buyer copies of such Employee Plans (and, if applicable, related trust agreements) and all amendments thereto and written interpretations thereof together with the most recent annual report (Form 5500 including, if applicable, Schedule B thereto) and the most recent actuarial valuation report prepared in connection with any such Employee Plan. Schedule 3.19 identifies each such Employee Plan which is (i) a Multiemployer Plan, (ii) a Title IV Plan or (iii) maintained in connection with any trust described in Section 501(c)(9) of the Code. (b) Neither any Company or any Subsidiary nor any ERISA Affiliate of any Company or any Subsidiary has (i) engaged in, or is a successor or parent corporation to an entity that has engaged in, a transaction described in Sections 4069 or 4212(c) of ERISA or (ii) incurred, or reasonably expects to incur prior to the Closing Date, (A) any liability under Title IV of ERISA arising in connection with the termination of, or a complete or partial withdrawal from, any plan covered or previously covered by Title IV of ERISA or (B) any liability under Section 4971 of the Code that in either case could become a material liability of any Company or any Subsidiary or Buyer or any of its ERISA Affiliates after the Closing Date. (c) Except as set forth in Schedule 3.19, each Employee Plan that is intended to be qualified under Section 401(a) of the Code has been determined by the Internal Revenue Service to be so qualified and, to the knowledge of Seller, there has been no event since the date of such determination which would adversely affect such qualification; each trust created under any such Plan has been determined by the Internal Revenue Service to be exempt from tax under Section 501(a) of the Code and, to the knowledge of Seller, there has been no event since the date of such exemption which would adversely affect such exemption. Seller has provided Buyer with the most recent determination letter of the Internal Revenue Service relating to each such Employee Plan. Each Employee Plan has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all applicable statutes, orders, rules and regulations, including but not limited to ERISA and the Code, except for such matters as would not have a Material Adverse Effect. 17 (d) Schedule 3.19 identifies each material Benefit Arrangement. Seller has furnished or made available to Buyer copies or descriptions of each such Benefit Arrangement (and, if applicable, related trust agreements) and all amendments thereto and written interpretations thereof. Each such Benefit Arrangement has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all applicable statutes, orders, rules and regulations, except for such matters as would not have a Material Adverse Effect. (e) Except as set forth in Schedule 3.19, neither any Company nor any Subsidiary has any contractual obligation which would result in any material current or projected liability in respect of post-employment or post-retirement health or medical or life insurance benefits for retired, former or current employees of any Company or any Subsidiary, except as required to avoid excise tax under Section 4980B of the Code. Section 3.20. Environmental Matters. Except as set forth in Schedule 3.20 and except for such matters as would not have a Material Adverse Effect: (a) no written notice, request for information, order, complaint or penalty has been received relating to any Environmental Law, and there are no judicial, administrative or other actions, suits or proceedings pending or threatened which allege a violation of any Environmental Law, in each case relating to any Company or any Subsidiary; (b) each Company and each Subsidiary have all environmental permits necessary for their operations to comply with all applicable Environmental Laws and are in compliance with the terms of such permits and with all other applicable Environmental Laws; (c) there has been no written environmental audit conducted within the past five years by Seller, any Company or any Subsidiary of any property currently owned or leased by any Company or any Subsidiary which has not been delivered or made available to Buyer prior to the date hereof; and (d) to the knowledge of Seller, neither any Company nor any Subsidiary has been identified as a potentially responsible party at any federal or state national priority list ("Superfund") site. Section 3.21. Labor Matters. (a) Except as set forth in Schedule 3.21 and except for such matters as would not have a Material Adverse Effect, there are no (i) labor strikes, disputes, slowdowns, representation campaigns or work stoppages with respect to employees of any Company pending, or to the 18 knowledge of Seller, threatened against or affecting any Company or any Subsidiary, (ii) grievance or arbitration proceedings arising out of collective bargaining agreements to which any Company or any Subsidiary is a party (other than informal grievances), (iii) unfair labor practice complaints pending or, to the knowledge of Seller, threatened against any Company or any Subsidiary or (iv) collective bargaining agreements or other labor union contracts applicable to persons employed by any Company or any Subsidiary, and to the knowledge of Seller, there are no activities or proceedings of any labor union to organize any such employees. (b) Except to the extent set forth in Schedule 3.21 and except for such matters as would not have a Material Adverse Effect, the Companies and the Subsidiaries are in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours. Section 3.22. Books and Records. The books of account, minute books, stock record books and other records of the Companies and the Subsidiaries are complete and correct in all material respects and have been maintained in accordance with sound business practices. Section 3.23. Customers and Suppliers. Schedule 3.23 sets forth a list of the ten largest customers of the Companies and the Subsidiaries, by dollar amount of annual service in force as at December 31, 1997, and the ten largest suppliers of the Companies and the Subsidiaries, by dollar amount, over the twelve months ended December 31, 1997. All purchase and sale orders and other commitments for purchases and sales made by the Companies and the Subsidiaries have been made in the ordinary course of business in accordance with past practices, and no payments have been made to any supplier or customer or any of their respective representatives, other than payments to such suppliers or the payment of the invoiced price of supplies purchased or goods sold in the ordinary course of business. Section 3.24. Product Liability. (a) Except as set forth in Schedule 3.24, Seller is not aware of any claim, or the basis of any claim, against any Company or any Subsidiary for injury to person or property of employees or any third parties suffered as a result of the sale of any product or performance of any service by any Company or any Subsidiary, including claims arising out of the defective or unsafe nature of its products or services, which would have a Material Adverse Effect. (b) Except as set forth in Schedule 3.24, there is no pending, or to Seller's knowledge, threatened recall or investigation of any product sold by any Company or any Subsidiary which would have a Material Adverse Effect. 19 ARTICLE 4 Representations and Warranties of Buyer Buyer represents and warrants to Seller as of the date hereof that: Section 4.01. Corporate Existence and Power. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware and has the requisite corporate power and authority and governmental approvals to own, lease and operate its properties and to carry on its business as now conducted. Section 4.02. Corporate Authorization. The execution, delivery and performance by Buyer of this Agreement and the consummation by Buyer of the transactions contemplated hereby are within the corporate powers of Buyer and have been duly authorized by all necessary corporate action. This Agreement constitutes a valid and binding agreement of Buyer enforceable against Buyer in accordance with its terms except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally. Section 4.03. Governmental Authorization. The execution, delivery and performance by Buyer of this Agreement and the consummation by Buyer of the transactions contemplated hereby require no action by or in respect of, or filing with, any governmental body, agency, official or authority, other than (a) compliance with any applicable requirements of the HSR Act; (b) compliance with any applicable requirements of the 1934 Act; and (c) compliance with any applicable Canadian laws. Section 4.04. Noncontravention. The execution, delivery and performance by Buyer of this Agreement do not and the consummation of the transactions by Buyer contemplated hereby will not (i) contravene or conflict with the certificate of incorporation or bylaws of Buyer, (ii) assuming compliance with the matters referred to in Section 4.03, violate any applicable law, rule, regulation, judgment, injunction, order or decree, (iii) constitute a default under, or give rise to a right of termination, cancellation or acceleration of any right or obligation of Buyer or to a loss of any benefit to which Buyer is entitled under any provision of any agreement or other instrument binding upon Buyer or (iv) result in the creation or imposition of any material Lien on any asset of Buyer pursuant to any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Buyer is a party or by which Buyer is bound or affected. 20 Section 4.05. Financing. Buyer has sufficient cash, available lines of credit or other sources of immediately available funds to enable it to make payment of the Purchase Price and any other amounts to be paid by it hereunder. Section 4.06. Purchase for Investment. Buyer is purchasing the Shares for investment for its own account and not with a view to, or for sale in connection with, any distribution thereof. Buyer (either alone or together with its advisors) has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in the Shares and is capable of bearing the economic risks of such investment. Section 4.07. Litigation. There is no action, suit, investigation or proceeding pending against, or to the knowledge of Buyer threatened against or affecting, Buyer or any of its properties before any court or arbitrator or any governmental body, agency or official which in any manner challenges or seeks to prevent, enjoin, alter or materially delay the transactions contemplated by this Agreement. Section 4.08. Finders' Fees. No investment banker, broker, finder or other intermediary is entitled to any fee or commission from Buyer or any of its Affiliates upon consummation of the transactions contemplated by this Agreement. Section 4.09. Inspections; No Other Representations. Buyer agrees to accept the Shares and the Companies in the condition they are in on the Closing Date based upon its own inspection, examination and determination with respect thereto as to all matters, and without reliance upon any express or implied representations or warranties of any nature made by or on behalf of or imputed to Seller, except as expressly set forth in this Agreement. Without limiting the generality of the foregoing, Buyer acknowledges that Seller makes no representation or warranty with respect to (i) any projections, estimates or budgets delivered or made available to Buyer of future revenues, future results of operations (or any component thereof), future cash flows or future financial condition (or any component thereof) of the Companies and the Subsidiaries or the future business and operations of the Companies and the Subsidiaries or (ii) any other information or documents made available to Buyer or its counsel, accountants or advisors with respect to any Company or any Subsidiary or their respective businesses or operations, except as expressly set forth in this Agreement. 21 ARTICLE 5 Covenants of Seller Seller agrees that: Section 5.01. Conduct of the Companies. From the date hereof until the Closing Date, except as expressly provided otherwise in this Agreement, including Schedules 3.09 and 5.01 hereto, Seller shall cause each Company and each Subsidiary to conduct their businesses in the ordinary course consistent with past practices and to use their reasonable best efforts to preserve intact their business organizations and relationships with third parties and to keep available the services of their present officers and employees. Without limiting the generality of the foregoing, from the date hereof until the Closing Date, except as expressly provided otherwise in this Agreement, including Schedules 3.09 and 5.01 hereto, Seller will not permit any Company or any Subsidiary to: (a) adopt or propose any change in its certificate of incorporation or any material change in its bylaws; (b) adopt a plan or agreement of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other material reorganization of any Company or any Subsidiary (other than a liquidation or dissolution of any Subsidiary or a merger or consolidation between wholly-owned Subsidiaries); (c) make any equity investment in or acquisition of any business of any Person or any material amount of assets, except for any capital expenditure permitted by Section 5.01(h); (d) sell, lease, license or otherwise dispose of any assets in an amount that would be material to the Companies and the Subsidiaries, taken as a whole, except (i) pursuant to existing contracts or commitments or (ii) in the ordinary course of business consistent with past practices; (e) declare, set aside or pay any dividend or other distribution payable in cash, stock or property with respect to its capital stock other than dividends paid by any Subsidiary to any Company or any other Subsidiary; (f) issue, sell, transfer, pledge, dispose of or encumber any additional shares of, or securities convertible into or exchangeable for, or options, warrants, calls, commitments or rights of any kind to acquire, any shares of capital stock of any class or series of any Company or any Subsidiary; 22 (g) redeem, purchase or otherwise acquire directly or indirectly any of the capital stock of any Company or any Subsidiary; (h) make or commit to make any capital expenditure, except in the ordinary course of business and which is consistent with the 1998 budget plans made available to Buyer; or (i) agree or commit to do any of the foregoing. Seller will not take, and will not permit any Company or any Subsidiary to take, any action that would make any representation or warranty of Seller hereunder inaccurate in any material respect at or as of any time prior to the Closing Date. Section 5.02. Access to Information. (a) To the extent permitted by applicable law, from the date hereof until the Closing Date, Seller will (i) give, and will cause each Company and each Subsidiary to give, to Buyer, its counsel, financial advisors, auditors and other authorized representatives reasonable access during normal business hours to the offices, properties, books and records of the Companies and the Subsidiaries and to the books and records of Seller relating to the Companies and the Subsidiaries, (ii) furnish, and will cause each Company and each Subsidiary to furnish, to Buyer, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information as such Persons may reasonably request and (iii) instruct the employees, auditors, counsel and financial advisors of Seller, any Company or any Subsidiary to cooperate with Buyer in its investigation of the business of the Companies and the Subsidiaries. Any investigation pursuant to this Section shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of Seller or any of its subsidiaries. (b) On and after the Closing Date, Seller will afford promptly to Buyer and its agents reasonable access to its books of account, financial and other records (including, without limitation, accountant's work papers), information, employees and auditors to the extent necessary or useful for Buyer in connection with any audit, investigation, dispute or litigation or any other reasonable business purpose relating to any Company or any Subsidiary; provided that any such access by Buyer shall not unreasonably interfere with the conduct of the business of Seller. Buyer shall bear all of the out-of-pocket costs and expenses (including, without limitation, attorneys' fees, but excluding reimbursement for general overhead, salaries and employee benefits) reasonably incurred in connection with the foregoing. Section 5.03. Notices of Certain Events. Seller shall promptly notify Buyer of: 23 (a) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement; (b) any notice or other communication from any governmental or regulatory agency or authority in connection with the transactions contemplated by this Agreement; and (c) any actions, suits, claims, investigations or proceedings commenced or, to its knowledge threatened against, relating to or involving or otherwise affecting Seller or any Company or any Subsidiary which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 3.12. Section 5.04. Resignations. Seller will deliver to Buyer the resignations of all officers and directors of each Company and each Subsidiary who will be officers, directors or employees of Seller or any of its Affiliates after the Closing Date from their positions with any Company or any Subsidiary at or prior to the Closing Date. Section 5.05. Non-Competition. (a) Seller agrees that, for a period of five years from the Closing Date (the "Non-Compete Period"), neither Seller nor any of its subsidiaries (Seller and its subsidiaries, collectively, the "Seller Companies") shall engage in, or directly or indirectly acquire a controlling interest in any Person engaged in, the following businesses: (i) the installation, servicing and monitoring of electronic security systems in the United States or Canada for commercial or residential customers which utilize intrusion and fire detection systems, sprinklers and critical industrial processing monitoring, closed circuit television and access control systems; (ii) the furnishing of integrated guard, patrol and alarm service to residential customers in the Bel Air, Beverly Hills and adjacent Los Angeles communities; and (iii) the sale, distribution, installation and servicing in the United States of commercial fire suppression systems. Notwithstanding the foregoing, nothing in this Agreement shall restrict or otherwise limit the ability of the Seller Companies to engage, directly or indirectly, in the business of (A) marketing, designing, engineering or supplying integrated security solution, provided that the installation, servicing or monitoring of the electronic security systems are provided by another Person or Persons by contract or subcontract or pursuant to one or more partnerships, alliances or other arrangements, and (B) the research, design, development, manufacture, distribution or supply of electronic and physical security equipment and devices, including without limitation closed circuit television systems and components and access control systems and components, provided that any such equipment or devices is distributed or supplied only to 24 security companies or through conventional distribution channels for original equipment manufacturers. (b) Seller agrees that, during the Non-Compete Period, the Seller Companies shall not solicit integrated security solutions which include the installation, servicing and monitoring of electronic security systems for locations that, as of the Closing Date, have electronic security systems serviced or monitored by the Companies and the Subsidiaries, unless such solicitation is in accordance with the provisions of the Strategic Alliance Agreement dated as of April 17, 1998 between Seller and Buyer, as amended from time to time. (c) Seller acknowledges that it is the exclusive world-wide licensee for the tradename "Wells Fargo" for use in conjunction with the furnishing of electronic security services, as more fully set forth in that certain agreement dated September 20, 1979 with Wells Fargo & Company and Wells Fargo Bank, N.A. Seller agrees, for a period of 10 years from the Closing Date, that the Seller Companies shall not, and that Seller shall not grant or otherwise transfer to any other Person a license to, utilize the "Wells Fargo" tradename in conjunction with the installation, servicing and monitoring of electronic security systems in the United States or Canada. (d) If during the Non-Compete Period, Seller (or any successor) is merged or consolidated with or otherwise acquired by any other Person, this Section 5.05 shall in no way restrict or otherwise limit the business or operations of such other Person; provided that the Seller Companies shall remain subject to the provisions of Section 5.05(a), 5.05(a) and 5.05(c) for the periods specified therein. Section 5.06. Non-Solicitation. Seller agrees that it shall not for a period of one year from the Closing Date, directly or indirectly, solicit for employment or hire any non-clerical employee of any Company or any Subsidiary, except that Seller shall not be precluded from soliciting for employment or hiring any such employee who has been discharged by any Company or any Subsidiary from such employment. Section 5.07. Intercompany Accounts. Except as otherwise provided herein, Seller will reclassify to stockholder's equity all intercompany balances between Seller and its Affiliates, on the one hand, and the Companies and the Subsidiaries, on the other hand, at or prior to the Closing Date, and all intercompany arrangements between Seller and its Affiliates, on the one hand, and the Companies and the Subsidiaries, on the other hand, will be terminated as of the Closing Date. Seller agrees to indemnify and hold harmless Buyer from any costs 25 or expenses resulting from the reclassification to stockholder's equity of such balances. ARTICLE 6 Covenants of Buyer Buyer agrees that: Section 6.01. Confidentiality. Prior to the Closing Date and after any termination of this Agreement, Buyer and its Affiliates will hold, and will use their best efforts to cause their respective officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, unless compelled to disclose by judicial or administrative process or by other requirements of law, all confidential documents and information concerning Seller, any of its Affiliates, any Company or any Subsidiary furnished to Buyer or its Affiliates in connection with the transactions contemplated by this Agreement, except to the extent that such information can be shown to have been (i) previously known on a nonconfidential basis by Buyer, (ii) in the public domain through no fault of Buyer or (iii) later lawfully acquired by Buyer on a non-confidential basis from sources other than Seller, any of its Affiliates, any Company or any Subsidiary; provided that Buyer may disclose such information to its officers, directors, employees, accountants, counsel, consultants, advisors and agents in connection with the transactions contemplated by this Agreement so long as such Persons are informed by Buyer of the confidential nature of such information and are directed by Buyer to treat such information confidentially. Buyer shall be responsible for any failure to treat such information confidentially by such Persons. The obligation of Buyer and its Affiliates to hold any such information in confidence shall be satisfied if they exercise the same care with respect to such information as they would take to preserve the confidentiality of their own similar information. If this Agreement is terminated, Buyer and its Affiliates will, and will use their best efforts to cause their respective officers, directors, employees, accountants, counsel, consultants, advisors and agents to, destroy or deliver to Seller, upon request, all documents and other materials, and all copies thereof, obtained by Buyer or its Affiliates or on their behalf from Seller, any of its Affiliates, any Company or any Subsidiary in connection with this Agreement that are subject to such confidence. Section 6.02. Access. Buyer will cause each Company and each Subsidiary, on and after the Closing Date, to afford promptly to Seller and its agents reasonable access to their properties, books, records, employees and auditors to the extent necessary to permit Seller to determine any matter relating to its rights and obligations hereunder or to any period ending on or before the 26 Closing Date; provided that any such access by Seller shall not unreasonably interfere with the conduct of the business of Buyer, any Company or any Subsidiary. Seller will hold, and will use its best efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, unless compelled to disclose by judicial or administrative process or by other requirements of law, all confidential documents and information concerning any Company or any Subsidiary provided to it pursuant to this Section. Section 6.03. Trademarks; Tradenames. (a) After the Closing Date, Buyer shall not permit any Company or any Subsidiary to use any of the marks or names set forth in Schedule 6.03(a) (the "Seller Trademarks and Tradenames"). Notwithstanding the foregoing, the Companies and the Subsidiaries may phase out any existing use of the Seller Trademarks and Tradenames that are identified in Schedule 6.03 as "Transition Trademarks and Tradenames" (the "Transition Trademarks and Tradenames") to the extent any printed materials containing or bearing the Transition Trademarks and Tradenames may continue to be used for a transition period of up to nine months following the Closing Date (the "Transition Period"); provided that Buyer shall use its best efforts to phase out such use as promptly as practicable following the Closing Date in a commercially reasonable manner. It is understood between the parties that during the Transition Period, Buyer may (i) use the Transition Trademarks and Tradenames with the Buyer's trademarks and tradenames and (ii) make factual statements regarding the business which include use of the Transition Trademarks and Tradenames, e.g., "formerly known as Wells Fargo Alarm Services". Upon expiration of the Transition Period, any and all use of the Transition Trademarks and Tradenames by Buyer, any Company or any Subsidiary shall cease. (b) Promptly following the Closing Date, Buyer shall cause each of the Companies and the Subsidiaries, to the extent necessary, to file with the applicable governmental body, agency or official an amendment to its organizational documents to delete from its name any of the Seller Trademarks and Tradenames or any marks and names derived therefrom and to do or cause to be done all other acts, including the payment of any fees required in connection therewith, to cause such amendment to become effective. (c) At the Closing, Seller shall assign and transfer its right, title and interest in the trademarks which are identified in Schedule 6.03(c) to Alarm or Pyro, as the case may be, pursuant to trademark assignment agreements, in substantially the form attached to Schedule 6.03(c). Section 6.04. Notices of Certain Events. Buyer shall promptly notify Seller of: 27 (a) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement; (b) any notice or other communication from any governmental or regulatory agency or authority in connection with the transactions contemplated by this Agreement; and (c) any actions, suits, claims, investigations or proceedings commenced or, to its knowledge threatened against, relating to or involving or otherwise affecting Buyer which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 4.07. Section 6.05. Agreements Guaranteed by Seller. Prior to the Closing Date, Buyer agrees to use commercially reasonable efforts to assume, or otherwise ensure that Seller is released from, effective as of the Closing Date, all obligations of Seller relating to each of the agreements in which the performance of a Company or a Subsidiary of certain obligations is guaranteed by Seller. To Seller's knowledge, Schedule 6.05 sets forth a complete list of such agreements; however, this covenant shall apply to all such agreements regardless of whether they appear in such Schedule. If, as of the Closing Date, Buyer has been unable to assume or otherwise ensure that Seller is released from such obligations, Buyer agrees (i) to continue to use commercially reasonable efforts to assume or otherwise ensure that Seller is released from such obligations, (ii) to cause such Company or such Subsidiary to satisfy in a timely manner its respective obligations that are guaranteed by Seller and (iii) to indemnify and hold harmless Seller against any costs or expenses incurred by Seller in respect of such agreements. ARTICLE 7 Covenants of Buyer and Seller Buyer and Seller agree that: Section 7.01. Best Efforts; Further Assurances. (a) Subject to the terms and conditions of this Agreement, Buyer and Seller will use their best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate the transactions contemplated by this Agreement. In furtherance and not in limitation of the foregoing, each party hereto agrees to make an appropriate filing of a Notification and Report Form pursuant to the HSR Act with respect to 28 the transactions contemplated hereby as promptly as practicable and in any event within ten business days of the date hereof and to supply as promptly as practicable any additional information and documentary material that may be requested pursuant to the HSR Act and to take all other actions necessary to cause the expiration or termination of the applicable waiting periods under the HSR Act as soon as possible. (b) In connection with the efforts referenced in Section 7.01(a) to obtain all requisite approvals and authorizations for the transactions contemplated by this Agreement under the HSR Act or any other Antitrust Law, each of Buyer and Seller shall use its best efforts to (i) cooperate in all respects with each other in connection with any filing or submission and in connection with any investigation or other inquiry, including any proceeding initiated by a private party, (ii) keep the other party informed in all material respects of any material communication received by such party from, or given by such party to, the Federal Trade Commission (the "FTC"), the Antitrust Division of the Department of Justice (the "DOJ") or any other Governmental Authority and of any material communication received or given in connection with any proceeding by a private party, in each case, regarding any of the transactions contemplated hereby and (iii) permit the other party to review any material communication given by it to, and consult with each other in advance of any meeting or conference with, the FTC, the DOJ or any such other Governmental Authority or, in connection with any proceeding by a private party, with any other Person, and to the extent permitted by the FTC, the DOJ or such other applicable Governmental Authority or other Person, give the other party the opportunity to attend and participate in such meetings and conferences. For purposes of this Agreement, (A) "Antitrust Law" means the Sherman Act, as amended, the Clayton Act, as amended, the HSR Act, the Federal Trade Commission Act, as amended, and all other federal, state and foreign, if any, statutes, rules, regulations, orders, decrees, administrative and judicial doctrines and other laws that are designed or intended to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade or lessening of competition and (B) "Governmental Authority" means any federal, state, or local government or any court, administrative agency or commission or other governmental agency or authority. (c) In furtherance and not in limitation of the covenants of the parties contained in Sections 7.01(a) and (b), each of Buyer and Seller shall use its best efforts to resolve such objections, if any, as may be asserted with respect to the transactions contemplated hereby under any Antitrust Law. In connection with the foregoing, if any administrative or judicial action or proceeding, including any proceeding by a private party, is instituted (or threatened to be instituted) challenging any transaction contemplated by this Agreement as violative of any Antitrust Law, each of Buyer and Seller shall cooperate in all respects with each 29 other and use its respective best efforts to contest and resist any such action or proceeding and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order, whether temporary, preliminary or permanent, that is in effect and that prohibits, prevents or restricts consummation of the transactions contemplated by this Agreement. (d) If any objections are asserted with respect to the transactions contemplated hereby under any Antitrust Law or if any suit is instituted by any Governmental Authority or any private party challenging any of the transactions contemplated hereby as violative of any Antitrust Law, each of Buyer and Seller shall use its best efforts to resolve any such objections or challenge as such Governmental Authority or private party may have to such transactions under such Antitrust Law so as to permit consummation of the transactions contemplated by this Agreement. In furtherance and not in limitation of the foregoing, if it is necessary in order to terminate the waiting period under the HSR Act or otherwise to permit the Closing to take place, Buyer agrees to divest operations or assets, to hold separate pending such divestiture, or to enter into a consent decree requiring it to divest operations or assets, and to take such further action in connection therewith as may be necessary to enable the Closing to take place on or prior to October 31, 1998; provided that Buyer shall not be required to enter into any consent decree or other agreement that requires it to divest operations or assets that are material. (e) Seller and Buyer agree, and Seller, prior to the Closing, and Buyer, after the Closing, agree to cause each Company and each Subsidiary, to execute and deliver such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or advisable in order to consummate or implement expeditiously the transactions contemplated by this Agreement. Section 7.02. Certain Filings. Seller and Buyer shall cooperate with one another (i) in determining whether any action by or in respect of, or filing with, any governmental body, agency, official or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions contemplated by this Agreement and (ii) in taking such actions or making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such actions, consents, approvals or waivers. Section 7.03. Public Announcements. Prior to the Closing Date, the parties agree to consult with each other before issuing any press release or making any public statement with respect to this Agreement or the transactions contemplated hereby and, except as may be required by applicable law, court 30 process or any listing agreement with any national securities exchange, will not issue any such press release or make any such public statement prior to such consultation and providing the other party with a reasonable opportunity to comment thereon. ARTICLE 8 Tax Matters Section 8.01. Tax Definitions. The following terms, as used herein, have the following meanings: "Accounting Referee" means a nationally recognized accounting firm with no material relationship with Buyer, Seller or their Affiliates, mutually acceptable to both Buyer and Seller chosen within five days of the date on which the need to choose the Accounting Referee arises. "Combined Return" means any Return required to be filed on a consolidated, combined or unitary basis with a member of the Seller Group. "Pre-Closing Tax Period" means any Tax period ending on or before the Closing Date. "Seller Group" means, with respect to federal income Taxes, the affiliated group of corporations (as defined in Section 1504(a) of the Code) of which Seller is a member and, with respect to state income or franchise Taxes, the consolidated, combined or unitary group of which Seller or any of its Affiliates is a member. "State Tax" means state and local income or franchise Taxes payable in connection with separate Returns filed by any Company or any Subsidiary. "Tax" means (i) any income tax or franchise tax based on net income including any alternative or add-on minimum tax, or any payroll, sales or use, personal property, real property, withholding, excise, value-added or other tax, together with any interest, penalty, addition to tax or additional amount due from, or in respect of, any Company or any Subsidiary imposed by any governmental authority (domestic or foreign) responsible for the imposition of any such tax (a "Taxing Authority") and (ii) any liability for the payment of any amount of the type described in the immediately preceding clause (i) as a result of any Company or any Subsidiary being a member of an affiliated, consolidated or combined group with any other corporation at any time on or prior to the Closing Date. 31 Section 8.02. Tax Representations. Seller represents and warrants to Buyer as of the date hereof and as of the Closing Date that to the best of Seller's knowledge and except as set forth in the Balance Sheet (including the notes thereto) or in Schedule 8.02, (i) all Tax returns, statements, reports and forms (collectively, the "Returns") that are material and required to be filed with any Taxing Authority on or before the Closing Date with respect to any Pre- Closing Tax Period by, or with respect to, any Company or any Subsidiary have been filed or will be filed on or before the Closing Date in accordance with all applicable laws; (ii) the Companies and the Subsidiaries have timely paid all Taxes shown as due and payable on the Returns that have been filed; (iii) the Companies and the Subsidiaries have made or will on or before the Closing Date make provision for all material Taxes payable by the Companies and the Subsidiaries for any Pre-Closing Tax Period for which no Return has yet been filed; (iv) the charges, accruals and reserves for material Taxes with respect to the Companies and the Subsidiaries reflected on the Balance Sheet are adequate to cover the material Tax liabilities accruing through the date thereof; and (v) there is no action, suit, proceeding, investigation, audit or claim now proposed or pending against or with respect to any Company or any Subsidiary in respect of any material Tax. Section 8.03. Tax Covenants. (a) Buyer covenants that it will not, and will not cause or permit any Company, any Subsidiary or any Affiliate of Buyer to, (i) take any action on the Closing Date other than in the ordinary course of business, including but not limited to the distribution of any dividend or the effectuation of any redemption that could give rise to any tax liability of the Seller Group or reduce any tax asset of the Seller or the Seller Group or (ii) make or change any tax election, amend any tax return or take any tax position on any tax return, take any action, omit to take any action or enter into any transaction that results in any increased tax liability or reduction of any tax asset of Seller or the Seller Group in respect of any Pre-Closing Tax Period. Buyer agrees that Seller and its Affiliates are to have no liability for any tax resulting from any action referred to in the preceding sentence of any Company, any Subsidiary, Buyer or any Affiliate of Buyer and agrees to indemnify and hold harmless Seller and its Affiliates against any such tax (together with any interest, penalty, addition to tax or additional amount) and any liabilities, costs, expenses (including, without limitation, reasonable expenses of investigation and attorney's fees and expenses), losses, damages, assessments, settlements or judgments arising out of or incident to the imposition, assessment or assertion of any such tax. Seller agrees to give prompt notice to Buyer of the assertion of any claim, or the commencement of any action or proceeding, in respect of which indemnity may be sought under this Section 8.03(A). Buyer may participate in any such suit, action or proceeding at its own expense and the parties hereto shall cooperate in the defense or prosecution thereof. 32 (b) All Combined Returns required to be filed after the Closing Date with respect to any Company or any Subsidiary with respect to any Pre-Closing Tax Period will be filed by Seller when due (taking into account any extension of a required filing date). (c) Except to the extent recorded on the Closing Balance Sheet, Buyer shall promptly pay or shall cause prompt payment to be made to Seller of all refunds of taxes and interest thereon received by Buyer (net of any associated costs), any Affiliate of Buyer, any Company or any Subsidiary, attributable to taxes paid by Seller, any Company or any Subsidiary (or any predecessor or Affiliate of Seller) with respect to any Pre-Closing Tax Period. (d) Seller and Buyer agree to make a timely, effective and irrevocable election under Section 338(h)(10) of the Code and under any comparable statutes in any other jurisdiction with respect to any Company or any Subsidiary (the "Section 338(h)(10) Election"), and to file such election in accordance with applicable regulations. Within 90 days after the Closing Date, Seller shall prepare and deliver to Buyer a schedule (the "Price Allocation Schedule") allocating, with the consent of Buyer (which consent shall not be unreasonably withheld), the modified ADSP (as such term is defined in Treasury Regulations Section 1.338(h)(10)-1) among the assets of the relevant Company or Subsidiary in accordance with the Treasury regulations promulgated under Section 338(h)(10). Any objections by Buyer to the Price Allocation Schedule prepared by Seller (which shall be raised within 10 business days after the receipt by Buyer of such Schedule) unresolved within 30 business days shall be resolved by the Accounting Referee, and, if necessary, a revised Price Allocation Schedule consistent with the determination made by the Accounting Referee shall be prepared by Seller as soon as possible thereafter. The costs, fees and expenses of the Accounting Referee shall be borne by Buyer. The Price Allocation Schedule shall be binding on the parties hereto, and Seller and Buyer agree to act in accordance with such Schedule in the preparation, filing and audit of any tax return. (e) All transfer, documentary, sales, use, stamp, registration and other such taxes and fees (including any penalties and interest) incurred in connection with transactions contemplated by this Agreement (including any real property transfer tax and any similar tax) shall be borne and paid by Buyer, and Buyer will, at its own expense, file all necessary tax returns and other documentation with respect to all such taxes and fees, and, if required by applicable law, Seller will, and will cause its Affiliates to, join in the execution of any such tax returns and other documentation. Section 8.04. Termination of Existing Tax Sharing Agreements. Any and all existing Tax sharing agreements between any Company or any Subsidiary 33 and any member of the Seller Group shall be terminated as of the Closing Date. After such date neither any Company, any Subsidiary, Seller nor any Affiliate of Seller shall have any further rights or liabilities thereunder. Section 8.05. Cooperation on Tax Matters. (a) Buyer and Seller agree to furnish or cause to be furnished to each other, upon request, as promptly as practicable, such information (including access to books and records) and assistance relating to the Companies and the Subsidiaries as is reasonably necessary for the filing of any return, for the preparation for any audit, and for the prosecution or defense of any claim, suit or proceeding relating to any proposed adjustment. Buyer and Seller agree to retain or cause to be retained all books and records pertinent to the Companies and the Subsidiaries until the applicable period for assessment under applicable law (giving effect to any and all extensions or waivers) has expired, and to abide by or cause the abidance with all record retention agreements entered into with any Taxing Authority. Each Company and each Subsidiary agree to give Seller reasonable notice prior to transferring, discarding or destroying any such books and records relating to tax matters and, if Seller so requests, such Company or such Subsidiary shall allow Seller to take possession of such books and records. Buyer and Seller shall cooperate with each other in the conduct of any audit or other proceedings involving any Company or any Subsidiary for any tax purposes and each shall execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this subsection. (b) Buyer and Seller further agree, upon request, to provide the other party with all information that either party may be required to report pursuant to Section 6043 of the Code and all Treasury Department Regulations promulgated thereunder. Section 8.06. Indemnification by Seller and Buyer. (a) Except as provided in Section 8.06(g) hereof, Seller hereby indemnifies Buyer against and agrees to hold it harmless from any (i) Tax of any Company or any Subsidiary related to a Pre-Closing Tax Period and (ii) liabilities, costs, expenses (including, without limitation, reasonable expenses of investigation and attorneys' fees and expenses), arising out of or incident to the imposition, assessment or assertion of any Tax, including those incurred in the contest in good faith in appropriate proceedings relating to the imposition, assessment or assertion of any Tax, in each case incurred or suffered by Buyer, any of its Affiliates or, effective upon the Closing, any Company or any Subsidiary (the sum of 8.06(a)(i) and 8.06(a)(ii) being referred to as a "Loss"); provided, however, that Seller shall have no liability for the payment of any Loss attributable to or resulting from any action described in Section 8.03(a) hereof. 34 (b) If Seller's indemnification obligation under this Section 8.06 arises in respect of an adjustment which makes allowable to Buyer, any of its Affiliates or, effective upon the Closing, any Company or any Subsidiary any deduction, amortization, exclusion from income or other allowance with respect to State Taxes (a "State Tax Benefit") which would not, but for such adjustment, be allowable, then any payment by Seller to Buyer shall be an amount equal to (x) the amount otherwise due but for this subsection 8.06(b), minus (y) the State Tax Benefit multiplied (i) by the maximum state corporate tax rate in effect at the time such State Tax Benefit becomes allowable to Buyer, any of its Affiliates, any Company or any Subsidiary (as the case may be) or (ii) in the case of a credit, by 100 percent ("Applicable Tax Rate"). (c) If as a result of an adjustment Seller makes a payment to any state Taxing Authority in respect of a State Tax of any Company or any Subsidiary with respect to any Pre-Closing Tax Period, then Buyer shall promptly pay to Seller an amount equal to such payment made by Seller, provided, however, that any such payment by Buyer shall not exceed an amount equal to the State Tax Benefit, if any, attributable to the adjustment giving rise to such payment multiplied by the Applicable Tax Rate. (d) Any payment by Seller pursuant to this Section 8.06 shall be made not later than 30 days after receipt by Seller of written notice from Buyer stating that any Loss has been paid by Buyer, any of its Affiliates or, effective upon the Closing, any Company or any Subsidiary and the amount thereof and of the indemnity payment requested. (e) If any claim or demand for Taxes in respect of which indemnity may be sought pursuant to this Section 8.06 is asserted in writing against Buyer, any of its Affiliates or, effective upon the Closing, any Company or any Subsidiary, Buyer shall notify Seller of such claim or demand within 10 days of receipt thereof, or such earlier time that would allow Seller to timely respond to such claim or demand, and shall give Seller such information with respect thereto as Seller may reasonably request. Seller may discharge, at any time, its indemnification obligation under this Section 8.06 by paying to Buyer the amount of the applicable Loss, calculated on the date of such payment. Seller may, at its own expense, participate in and, upon notice to Buyer, assume the defense of any such claim, suit, action, litigation or proceeding (including any Tax audit). If Seller assumes such defense, Buyer shall have the right (but not the duty) to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by Seller. Whether or not Seller chooses to defend or prosecute any claim, all of the parties hereto shall cooperate in the defense or prosecution thereof. 35 (f) Seller shall not be liable under this Section 806 for (i) any Tax the payment of which was made without Seller's prior written consent or (ii) any settlements effected without the consent of Seller, or resulting from any claim, suit, action, litigation or proceeding in which Seller was not permitted an opportunity to participate as provided in Section 8.06(e) hereof. (g) Buyer agrees to indemnify Seller for the "Section 338 Cost". The Section 338 Cost shall be equal to the excess, if any, on an after-tax basis, of (a) the Tax in the case of Canada Alarm and the Subsidiaries, and the state and local tax in the case of the other Companies, in each case, payable by Seller taking into account any effects of the Section 338(h)(10) Election and giving effect to the price allocation contained in the Price Allocation Schedule over (b) the amount of Tax in the case of Canada Alarm and the Subsidiaries, and the amount of state and local tax in the case of the other Companies, in each case, that would be payable if Seller reported the sale of the Shares for the Purchase Price hereunder on the Closing Date, such state and local tax for purposes of (b) hereof being computed in each case using the maximum applicable statutory rate. The amount of the Section 338 Cost shall be calculated by Seller. Any objection by Buyer to the legal or factual basis for the calculation by Seller of the Section 338 Cost (which shall be raised within 10 business days after the receipt by Buyer of such calculation) unresolved within 30 business days shall be resolved by the Accounting Referee whose costs, fees and expenses shall be borne by Buyer. ARTICLE 9 EMPLOYEE BENEFITS Section 9.01. Employee Benefits. (a) Following the Closing, Buyer shall, or shall cause each Company and each Subsidiary to (i) honor all obligations under employment agreements of such Company or such Subsidiary and (ii) except as expressly provided herein, pay all benefits accrued through the Closing Date under employee benefit plans, programs, policies and arrangements of such Company or such Subsidiary (including any rabbi trust agreement) in accordance with the terms thereof. In furtherance and not in limitation of the foregoing, Buyer agrees to provide, or cause the Companies and the Subsidiaries to provide, employees of the Companies and the Subsidiaries who are employed by the Companies and the Subsidiaries immediately prior to the Closing Date other than any such employees who are in benefit payment status on the Closing Date under Seller's Long-Term Disability Plan ("Continuing Employees") for a period of not less than one year following the Closing Date with (A) annual compensation substantially similar in the aggregate to the annual compensation which they were receiving immediately prior to the Closing Date, and (B) benefits which, in the 36 aggregate, are substantially similar to the benefits provided to such employees immediately prior to the Closing Date. Following such one-year period, Continuing Employees shall be provided with compensation and benefits substantially similar in the aggregate to the compensation and benefits provided to similarly situated Buyer employees. In addition to the foregoing, for a period of one year following the Closing Date, Buyer shall, or shall cause each Company and each Subsidiary to, establish and maintain a plan to provide severance and termination benefits to all non-union employees of such Company or such Subsidiary which are substantially similar in the aggregate to the severance and termination benefits provided under such Company's or such Subsidiary's plans and arrangements in effect as of the date of this Agreement as described in Schedule 3.19. Notwithstanding the foregoing, after the Closing Date, Buyer shall have the right in the good faith exercise of its managerial discretion to terminate or cause the termination of the employment of any Continuing Employee; provided that Buyer shall not take, and shall cause the Company and the Subsidiaries to refrain from, any action that could result in any liability to Seller under the Worker Adjustment and Retraining Notification Act of 1988. Furthermore, with respect to medical benefits provided to Continuing Employees as of the Closing Date under Buyer's benefit plans, Buyer agrees that it will, or it will cause each Company and each Subsidiary to, waive waiting periods and pre-existing condition requirements under such plans, and will give Continuing Employees credit for any copayments and deductibles actually paid by such employees under such Company's or such Subsidiary's medical plans during the plan year in which the Closing occurs. In addition, service with the Companies and the Subsidiaries shall be recognized for purposes of eligibility under Buyer's welfare plans as well as for purposes of Buyer's programs or policies for vacation pay and sick pay. Without limiting the generality of the foregoing, the Buyer shall honor all vacation, personal and sick days accrued by Continuing Employees under any Company's or any Subsidiary's plans, policies, programs and arrangements immediately prior to the Closing. (b) (i) Seller shall retain all assets and liabilities in respect of current and former employees of the Companies and the Subsidiaries under the Borg-Warner Security Corporation Retirement Plan (the "Retirement Plan"). Buyer and its Affiliates shall have no liabilities arising out of or with respect to the Retirement Plan. (ii) Except as required by applicable law or any collective bargaining agreement to which a Company or a Subsidiary is a party, neither any Company nor any Subsidiary shall be obligated on or after the Closing Date to sponsor or otherwise make available a defined benefit plan (within the meaning of Section 3(35) of ERISA). (iii) As soon as practicable after the Closing Date, the account balances as of the Closing Date of employees of the Companies and the Subsidiaries held in the 37 Borg-Warner Security Corporation Investment Plan and the Borg-Warner Security Corporation 401(k) Plan (collectively, the "Seller 401(k) Plans"), as equitably adjusted for earnings or losses thereon, additional contributions thereto with respect to the period prior to the Closing Date and distributions therefrom through the date of transfer, shall be transferred to a tax-qualified defined contribution plan sponsored, maintained or contributed to by Buyer (the "Buyer 401(k) Plan"), which such Buyer 401(k) Plan shall recognize service of employees with Seller, any of its Affiliates, any Company or any Subsidiary for purposes of eligibility and vesting. Such transfer shall be effected in accordance with applicable law and regulations. Buyer shall make or cause to be made, and Seller shall make or cause to be made, any required filings in connection therewith. Buyer and Seller may each require, as a condition to the making of any such transfer, evidence reasonably satisfactory to it of the qualified status of the Seller 401(k) Plans and the Buyer 401(k) Plan, including, without limitation, a copy of a favorable determination letter from the Internal Revenue Service. In consideration of and effective upon such transfer, the Buyer 401(k) Plan shall assume all liabilities to employees of the Companies and the Subsidiaries under the Seller 401(k) Plans to the extent of the amount of assets transferred by the Seller 401(k) Plans to the Buyer 401(k) Plan. Each of the parties shall pay its own expenses in connection with such transfer. Section 9.02. Seller Welfare Plans. (a) Except as provided in Section 9.02(b), effective as of the Closing Date, the Companies and the Subsidiaries and each Continuing Employee shall cease participation in Seller's health and welfare benefit plans ("Seller Welfare Plans") and commence participation in the benefit plans established or otherwise made available to Continuing Employees by Buyer pursuant to Section 9.01(a). Seller agrees that each Seller Welfare Plan shall be responsible for claims incurred for Continuing Employees under such plans prior to the Closing Date. All claims for health and welfare benefits incurred for Continuing Employees after the Closing Date shall be the responsibility of Buyer. (b) Subject to Buyer's execution not later than 20 business days prior to the Closing Date of a Transition Services Agreement in substantially the form attached hereto as Exhibit 9.02, Seller shall for the period beginning on the Closing Date and ending not later than October 31, 1998 make available to Continuing Employees coverage under the Transition Welfare Plans (as identified as such in the Transition Services Agreement) on the terms and conditions set forth in such Transition Services Agreement. Buyer shall be responsible for, and shall reimburse Seller in respect of, all costs and Damages incurred by Seller as provided in such Transition Services Agreement. 38 ARTICLE 10 Conditions to Closing Section 10.01. Conditions to Obligations of Buyer and Seller. The obligations of Buyer and Seller to consummate the Closing are subject to the satisfaction of the following conditions: (a) Any applicable waiting period under the HSR Act relating to the transactions contemplated hereby shall have expired or been terminated. (b) No provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the Closing. (c) All actions by or in respect of or filings with any governmental body, agency, official or authority required to permit the consummation of the Closing shall have been taken, made or obtained, except for any such actions or filings the failure to take, make or obtain would not have a Material Adverse Effect. (d) All consents required to be obtained in connection with the consummation of the Closing set forth in Schedule 10.01(d) shall have been obtained. Section 10.02. Conditions to Obligation of Buyer. The obligation of Buyer to consummate the Closing is subject to the satisfaction of the following further conditions: (a) (i) Seller shall have performed in all material respects all of its obligations hereunder required to be performed by it on or prior to the Closing Date, (ii) the representations and warranties of Seller contained in this Agreement and in any certificate or other writing delivered by Seller pursuant hereto shall be true at and as of the Closing Date, as if made at and as of such date, with only such exceptions as would not in the aggregate have a Material Adverse Effect and (iii) Buyer shall have received a certificate signed by an executive officer of Seller to the foregoing effect. (b) Buyer shall have received an opinion of the General Counsel of Seller, dated the Closing Date to the effect specified in Sections 3.01, 3.02 and 3.03. In rendering such opinion, such counsel may rely upon certificates of public officers, as to matters governed by the laws of 39 jurisdictions other than New York law or the federal laws of the United States of America, upon opinions of counsel reasonably satisfactory to Buyer, and, as to matters of fact, upon certificates of officers of Seller or any Company, copies of which opinions and certificates shall be contemporaneously delivered to Buyer. (c) Buyer shall have received all documents it may reasonably request relating to the existence of Seller, the Companies and the Subsidiaries and the authority of Seller for this Agreement, all in form and substance reasonably satisfactory to Buyer. Section 10.03. Conditions to Obligation of Seller. The obligation of Seller to consummate the Closing is subject to the satisfaction of the following further conditions: (a) (i) Buyer shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Closing Date, (ii) the representations and warranties of Buyer contained in this Agreement and in any certificate or other writing delivered by Buyer pursuant hereto shall be true in all material respects at and as of the Closing Date, as if made at and as of such date and (iii) Seller shall have received a certificate signed by an executive officer of Buyer to the foregoing effect. (b) Seller shall have received an opinion of the General Counsel of Buyer, dated the Closing Date to the effect specified in Sections 4.01, 4.02 and 4.03. In rendering such opinion, such counsel may rely upon certificates of public officers, as to matters governed by the laws of jurisdictions other than New York law or the federal laws of the United States of America, upon opinions of counsel reasonably satisfactory to Seller, and, as to matters of fact, upon certificates of officers of Buyer, copies of which opinions and certificates shall be contemporaneously delivered to Seller. (c) Seller shall have received all documents it may reasonably request relating to the existence of Buyer and the authority of Buyer for this Agreement, all in form and substance reasonably satisfactory to Seller. 40 ARTICLE 11 SURVIVAL; INDEMNIFICATION Section 11.01. Survival. The covenants, agreements, representations and warranties of the parties hereto contained in this Agreement or in any certificate or other writing delivered pursuant hereto or in connection herewith shall not survive the Closing; provided that (i) the covenants, agreements, representations and warranties contained in Articles 2, 9, 11 (other than Section 11.02(c)) and 13 and Sections 3.06, 3.07(b) (but only as to the first sentence thereof), 4.09, 5.02(b), 5.07, 6.02, 6.03 and 6.05 shall survive indefinitely; (ii) the covenants, agreements, representations and warranties contained in Article 8 (other than Section 8.02) shall survive until expiration of the statute of limitations applicable to the matters covered thereby (giving effect to any waiver, mitigation or extension thereof), if later; (iii) the covenants and agreements set forth in Sections 5.05 and 5.06 shall survive for the period specified therein; and (iv) the covenants and agreements set forth in Section 11.02(c) shall survive until the third anniversary of the Closing Date. Notwithstanding the preceding sentence, any covenant, agreement, representation or warranty in respect of which indemnity may be sought under this Agreement shall survive the time at which it would otherwise terminate pursuant to the preceding sentence, if notice of the inaccuracy or breach thereof giving rise to such right of indemnity shall have been given to the party against whom such indemnity may be sought prior to such time. Section 11.02. Indemnification. (a) Seller hereby indemnifies Buyer and its Affiliates against and agrees to hold each of them harmless from any and all damage, loss, liability and expense (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses in connection with any action, suit or proceeding) ("Damages") incurred or suffered by Buyer or any of its Affiliates arising out of any misrepresentation or breach of warranty, covenant or agreement made or to be performed by Seller pursuant to this Agreement that survives the Closing in accordance with Section 11.01 (other than pursuant to Article 8 and Sections 11.02(c) and (d)); provided that Seller's maximum liability under this Section 11.02(a) shall not exceed 25% of the Purchase Price in the aggregate. 41 (b) Buyer hereby indemnifies Seller and its Affiliates against and agrees to hold each of them harmless from any and all Damages incurred or suffered by Seller or any of its Affiliates arising out of any misrepresentation or breach of warranty, covenant or agreement made or to be performed by Buyer pursuant to this Agreement that survives the Closing in accordance with Section 11.01 (other than pursuant to Article 8); provided that Buyer's maximum liability under this Section 11.02(b) shall not exceed 25% of the Purchase Price in the aggregate. (c) Seller hereby indemnifies Buyer and its Affiliates against and agrees to hold each of them harmless from any and all Damages incurred or suffered by Buyer or any of its Affiliates arising out of (i) an obligation under any Environmental Law to perform an investigation or remedial clean-up or post- remedial action at or near the Pyro site located at Boonton, New Jersey (the "Pyro Site") as a result of the disposal, release or emission of a hazardous or toxic substance (as each such term is defined in or regulated by any Environmental Law) by Pyro at the Pyro site prior to the Closing Date or (ii) injury to human health as a result of any such disposal, release or emission; provided that (x) Seller shall not be liable under this Section 11.02(c) unless the aggregate amount of Damages with respect to all matters referred to in this Section 11.02(c) exceeds $200,000 and then only to the extent of such excess and (y) Seller shall not be liable under this Section 11.02(c) unless (A) the Damages are required to be incurred under or are otherwise imposed by an Environmental Law and (B) Buyer has fully complied with the terms of the next paragraph. Buyer agrees that it shall not perform (or permit to be performed) any environmental audits at the Pyro Site and shall not initiate, encourage or aid any action (or permit the initiation, encouragement or aid of any such action) by any third party, including any governmental agency or authority, which audit or action is reasonably likely to lead to a claim by a third party with respect to the Pyro Site or to an obligation to take action at the Pyro Site under an Environmental Law, except if and to the extent an Environmental Law requires Buyer to perform such audit or take such action. Notwithstanding the foregoing, Buyer may conduct or permit to be conducted reasonable, non-intrusive environmental inspections and compliance audits and assessments of the Pyro Site in the ordinary course as part of a compliance program so long as any inspection or audit is performed in a manner consistent with the manner in which Buyer and its Affiliates generally conduct such inspection or audits for their other facilities. (d) Seller hereby indemnifies Buyer and its Affiliates against and agrees to hold each of them harmless from any and all Damages incurred or suffered by Buyer or any of its Affiliates arising out of any Pre-Closing Uninsured Claims; provided that Seller shall not be liable under this Section 11.02(d) unless the aggregate amount of Damages with respect to all matters referred to in this Section 11.02(d) exceeds $200,000 and then only to the extent of such excess. "Pre-Closing Uninsured Claims" means the claims listed on Schedule 11.02 and any other similar claim asserted against any of the Companies or the Subsidiaries with respect to acts or omissions prior to the Closing Date which is not covered by Seller's primary casualty insurance policies (i.e., workers compensation, employer's liability, automobile liability and general insurance policies) in effect as of the date hereof, it being understood that Pre-Closing Uninsured Claims do not include environmental claims. Section 11.03. Procedures. (a) The party seeking indemnification under Section 11.02 (the "Indemnified Party") agrees to give prompt notice to the party against whom indemnity is sought (the "Indemnifying Party") of the assertion of any claim, or the commencement of any suit, action or proceeding ("Claim") in respect of which indemnity may be sought under such Section and will provide the Indemnifying Party such information with respect thereto that the Indemnifying Party may reasonably request. The failure to so notify the Indemnifying Party shall not relieve the Indemnifying Party of its obligations hereunder, except to the extent such failure shall have adversely prejudiced the Indemnifying Party. (b) The Indemnifying Party shall be entitled to participate in the defense of any Claim asserted by any third party ("Third Party Claim") and, subject to the limitations set forth in this Section, shall be entitled to control and appoint lead counsel for such defense, in each case at its expense. (c) If the Indemnifying Party shall assume the control of the defense of any Third Party Claim in accordance with the provisions of this Section 11.03, (i) the Indemnifying Party shall obtain the prior written consent of the Indemnified Party (which shall not be unreasonably withheld) before entering into any settlement of such Third Party Claim, if the settlement does not release the Indemnified Party from all liabilities and obligations with respect to such Third Party Claim or the settlement imposes injunctive or other equitable relief against the Indemnified Party and (ii) the Indemnified Party shall be entitled to participate in the defense of such Third Party Claim and to employ separate counsel of its choice for such purpose. The fees and expenses of such separate counsel shall be paid by the Indemnified Party. (d) Each party shall cooperate, and cause their respective Affiliates to cooperate, in the defense or prosecution of any Third Party Claim and shall furnish or cause to be furnished such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials or appeals, as may be reasonably requested in connection therewith. Section 11.04. Calculation of Damages. (a) The amount of any Damages payable under Section 11.02 by the Indemnifying Party shall be net of 43 any (i) amounts recovered or recoverable by the Indemnified Party under applicable insurance policies, (ii) Tax cost incurred by the Indemnified Party arising from the receipt of indemnity payments and (iii) Tax benefit realized by the Indemnified Party arising from the incurrence or payment of any such Damages. In computing the amount of any such Tax cost or Tax benefit, the Indemnified Party shall be deemed to fully utilize, at the highest marginal tax rate then in effect, all Tax items arising from the receipt of any indemnity payment hereunder or the incurrence or payment of any indemnified Damages. (b) The Indemnifying Party shall not be liable under Section 11.02 for any (i) Damages relating to any matter to the extent that (A) there is included in the Closing Balance Sheet a specific liability or reserve relating to such matter or (B) the Indemnified Party had otherwise been compensated for such matter pursuant to the Purchase Price adjustment under Section 2.04, (ii) consequential or punitive Damages or (iii) Damages for lost profits. (c) Notwithstanding any other provision of this Agreement to the contrary, if on the Closing Date the Indemnified Party knows of any information that would cause one or more of the representations and warranties made by the Indemnifying Party to be inaccurate as of the date made, the Indemnified Party shall have no right or remedy after the Closing with respect to such inaccuracy and shall be deemed to have waived its rights to indemnification in respect thereof. Section 11.05. Assignment of Claims. If the Indemnified Party receives any payment from an Indemnifying Party in respect of any Damages pursuant to Section 11.02 and the Indemnified Party could have recovered all or a part of such Damages from a third party (a "Potential Contributor") based on the underlying Claim asserted against the Indemnified Party, the Indemnified Party shall assign such of its rights to proceed against the Potential Contributor as are necessary to permit the Indemnifying Party to recover from the Potential Contributor the amount of such payment. Section 11.06. Exclusivity. Except as specifically set forth in this Agreement, Buyer waives any rights and claims Buyer may have against Seller, whether in law or in equity, relating to any Company or any Subsidiary or the Shares or the transactions contemplated hereby. The rights and claims waived by Buyer include, without limitation, claims for contribution or other rights of recovery arising out of or relating to any Environmental Law, securities laws, claims for breach of contract, breach of representation or warranty, negligent misrepresentation and all other claims for breach of duty. After the Closing, Sections 8.06 and 11.02 will provide the exclusive remedy for any misrepresentation, breach of warranty, covenant or other agreement (other than those contained in Sections 2.04, 5.02(b), 6.02 and 6.03) or other claim arising out of this Agreement or the transactions contemplated hereby. 44 ARTICLE 12 TERMINATION Section 12.01. Grounds for Termination. This Agreement may be terminated at any time prior to the Closing: (a) by mutual written agreement of Seller and Buyer; (b) by either Seller or Buyer if the Closing shall not have been consummated on or before October 31, 1998, provided that either Seller or Buyer shall have the right by written notice to the other to extend such date to a date not later than November 30, 1998; or (c) by either Seller or Buyer (so long as such party has complied in all material respects with its obligations under Section 7.01), if consummation of the transactions contemplated hereby would violate or be prohibited by any law or regulation or if any injunction, judgment, order or decree enjoining Seller or Buyer from consummating such transactions is entered and such injunction, judgment, order or decree shall become final and nonappealable. The party desiring to terminate this Agreement pursuant to clauses 12.01(b) or 12.01(c) shall give notice of such termination to the other party. Section 12.02. Effect of Termination. If this Agreement is terminated as permitted by Section 12.01, such termination shall be without liability of either party (or any stockholder, director, officer, employee, agent, consultant or representative of such party) to the other party to this Agreement; provided that if such termination shall result from the willful (i) failure of either party to fulfill a condition to the performance of the obligations of the other party, (ii) failure to perform a covenant of this Agreement or (iii) breach by either party hereto of any representation or warranty or agreement contained herein, such party shall be fully liable for any and all Damages incurred or suffered by the other party as a result of such failure or breach. The provisions of Sections 6.01, 13.04, 13.06, 13.07 and 13.08 shall survive any termination hereof pursuant to Section 12.01. 45 ARTICLE 13 Miscellaneous Section 13.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including facsimile transmission) and shall be given, if to Buyer, to: ADT Security Services, Inc. 1750 Clint Moore Road Boca Raton, Florida 33431 Fax: 561-997-1375 Attention: President with a copy to: Tyco International (US) Inc. One Tyco Park Exeter, New Hampshire 03833 Fax: 603-778-7330 Attention: General Counsel if to Tyco (US), to: Tyco International (US) Inc. One Tyco Park Exeter, New Hampshire 03833 Fax: 603-778-7330 Attention: General Counsel if to Seller, to: Borg-Warner Security Corporation 200 South Michigan Avenue Chicago, Illinois 60604 Fax: (312) 322-8629 Attention: Chief Financial Officer 46 with a copy to: Borg-Warner Security Corporation 200 South Michigan Avenue Chicago, Illinois 60604 Fax: (312) 322-8509 Attention: General Counsel and Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Fax: (212) 450-4800 Attention: Christopher Mayer or such other address or facsimile number as such party may hereafter specify for the purpose by notice to the other parties hereto. All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5 p.m. in the place of receipt and such day is a business day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding business day in the place of receipt. Section 13.02. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all agreements, understandings and negotiations, both written and oral, prior to the date hereof between the parties with respect to such subject matter. Section 13.03. Amendments and Waivers. (a) Any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Agreement, or in the case of a waiver, by the party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 13.04. Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such cost or expense. 47 Section 13.05. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns; provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto, except that Buyer may assign its rights to purchase the Shares to one or more of its Affiliates so long as Buyer remains fully liable under this Agreement. Section 13.06. Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of New York, without regard to the conflicts of law rules of such state. Section 13.07. Jurisdiction. Except as otherwise expressly provided in this Agreement, the parties hereto agree that any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby may only be brought in the United States District Court for the Southern District of New York or any other New York State court sitting in New York City, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the generality of the foregoing, each party hereto agrees that service of process upon such party as provided in Section 1301 shall be deemed effective service of process on such party. Section 13.08. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 13.09. Counterparts; Effectiveness; Third Party Beneficiaries. This Agreement 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 Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other party hereto. No provision of this Agreement is intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. 48 Section 13.10. Interpretation. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When a reference is made in this Agreement to a Section or a Schedule, such reference shall be to a Section or a Schedule of this Agreement unless otherwise indicated. Whenever the words "include", "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation". Section 13.11. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void, unenforceable or against its regulatory policy, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Upon such determination that any term, provision, covenant or restriction of this Agreement is invalid, void, unenforceable or against regulatory policy, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. Section 13.12. Disclosure Schedules. The parties acknowledge and agree that (i) the Schedules to this Agreement may include certain items and information solely for informational purposes for the convenience of Buyer and (ii the disclosure by Seller of any matter in the Schedules shall not be deemed to constitute an acknowledgment by Seller that the matter is required to be disclosed by the terms of this Agreement or that the matter is material. If any Schedule discloses an item or information in such a way as to make its relevance to the disclosure required by another Schedule readily apparent, the matter shall be deemed to have been disclosed in such other Schedule, notwithstanding the omission of an appropriate cross-reference to such other Schedule. Section 13.13. Tyco (US) Guarantee. Tyco (US) hereby agrees to guarantee the prompt payment and performance of all of the obligations of Buyer in connection with this Agreement and the transactions contemplated hereby. 49 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. ADT SECURITY SERVICES, INC. By: /s/ Bernard J. Dougherty ------------------------ Name: Bernard J. Dougherty Title: Vice President TYCO INTERNATIONAL (US) INC. By: /s/ John J. Guarnieri ---------------------- Name: John J. Guarnieri Title: Vice President - Financial Operations BORG-WARNER SECURITY CORPORATION By: /s/ J. Joe Adorjan ------------------ Name: J. Joe Adorjan Title: Chairman and Chief Executive Officer EX-10.20 6 STOCK PURCHASE AGREEMENT DATED APRIL 22, 1998 Exhibit 10.20 ------------- STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of April 22, 1998 by and between Borg-Warner Security Corporation, a Delaware corporation ("Seller"), and Mustang Holdings, Inc., a Kansas corporation ("Buyer"). Seller wishes to sell the Shares, as defined herein, to Buyer, and Buyer wishes to purchase such Shares from Seller, on the terms and subject to the conditions set forth in this Agreement. Capitalized terms are generally defined in paragraph 8. The parties agree as follows: 1. BASIC TRANSACTION. On the terms and subject to the conditions set forth in ----------------- this Agreement: (a) SALE OF SHARES; ASSUMPTION OF CASUALTY CLAIMS. Seller agrees to sell, transfer and deliver to Buyer, and Buyer agrees to purchase, the Shares for the purchase price set forth in paragraph 1(b). Seller agrees to assume the liabilities and obligations of the Company for each Casualty Claim. (b) PURCHASE PRICE. Buyer agrees to deliver to Seller at Closing a note in the principal amount of $ 6.5 million substantially in the form of Exhibit A ("Buyer Note") and a note in the principal amount of $8.8 million substantially in the form of Exhibit B ("Convertible Note"). (c) CLOSING BALANCE SHEET. Within 30 days after the Closing, Seller will deliver to Buyer (i) a balance sheet of the Company as of the Closing Date (the "Closing Balance Sheet") prepared in accordance with GAAP consistent with the accounting policies and practices used in connection with the preparation of the Financial Statements and reflecting the assumption by Seller at Closing of each Casualty Claim and (ii) a certificate setting forth Seller's calculation of Net Working Capital as of the Closing Date as determined from the Closing Balance Sheet. If the amount of Net Working Capital shown on such certificate is greater than $6,488,000, then the Buyer will deliver to Seller a note with substantially the same terms as the Convertible Note (with a ratable adjustment in the conversion ratio) in a principal amount equal to such excess within three business days after the date such certificate is delivered to Buyer. If the amount of Net Working Capital shown on such certificate is less than $6,488,000, then the principal amount of the Convertible Note shall be reduced by an amount equal to such deficiency. Any payment made pursuant to this paragraph shall be treated for all purposes as an adjustment to the consideration paid or received with respect to the Shares. (d) CLOSING. The closing of the transaction contemplated by this Agreement (the "Closing") will take place at the offices of Seller at 10:00 a.m. on the second business day following satisfaction or waiver of all conditions to the parties' obligations to consummate such transaction, or at such other date and time and in such other place as mutually agreed upon by Seller and Buyer (the "Closing Date"). Subject to the provisions of paragraph 6, failure to consummate the purchase and sale provided for in this Agreement on the date and time and at the place determined pursuant to this paragraph 1(d) will not result in the termination of this Agreement and will not relieve any party of any obligation under this Agreement. 2. REPRESENTATIONS AND WARRANTIES OF SELLER. Except as set forth on the ---------------------------------------- Disclosure Schedule attached hereto (by reference to the applicable paragraph below), Seller represents and warrants to Buyer: (a) ORGANIZATION; GOOD STANDING; NO SUBSIDIARIES. Each of Seller and the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with all corporate power and authority to own, lease and operate its assets and to carry on its business as presently conducted. The Company is qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the conduct of its business requires it to be so qualified. The Company does not have any Subsidiaries. Seller has delivered to Buyer a complete copy of the Company's certificate of incorporation and by-laws and such certificate of incorporation and by-laws are in full force and effect as of the date hereof and as of the Closing. (b) AUTHORIZATION. Seller has corporate power and authority to enter into this Agreement and all other agreements, documents and instruments contemplated hereby and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and the other agreements, documents and instruments contemplated hereby and consummation of the transactions contemplated hereby and thereby have been approved by all necessary corporate action on the part of Seller. (c) ENFORCEABILITY. This Agreement constitutes, and each of the other agreements, documents and instruments contemplated hereby to be executed by Seller (when executed and delivered) will constitute, the legal, valid and binding agreement of Seller, enforceable in accordance with its terms. (d) NO CONTRAVENTION. Neither the execution and delivery of this Agreement and the other agreements, documents or instruments contemplated hereby, the performance by Seller of its obligations hereunder or thereunder, nor the consummation of the transactions contemplated hereby or thereby will directly or indirectly (with or without notice or lapse of time) (i) contravene, conflict with or result in a violation of any provision of Seller's or the Company's charter or bylaws, (ii) violate any law, statute, regulation, order, decree or other restriction of any government, governmental agency or court to which Seller or the Company or any of their respective assets is subject, (iii) result in the breach of, constitute a default under, accelerate or permit the acceleration of the performance required by, or create in any party the right to terminate any agreement, lease, license, instrument of indebtedness or other obligation to which the Company or any of its assets is subject or (iv) result in the creation of any Security Interest on any of the Company's assets. Neither Seller nor the Company needs to give any notice to, make any filing with, or obtain any authorization, consent or approval of any government or governmental agency in order for the parties to consummate the transactions contemplated hereby. -2- (e) CAPITALIZATION. The authorized capital stock of the Company consists of 100 shares of common stock, $.10 par value, all of which are issued and outstanding. All of the issued and outstanding shares of capital stock of the Company have been duly authorized, are validly issued, fully paid and nonassessable and are owned by Seller. There are no outstanding or authorized options, warrants, purchase rights, conversion or exchange rights or other contracts or commitments that could require the Company to issue, sell or otherwise cause to become outstanding any of its capital stock. There are no outstanding stock appreciation, phantom stock, profit participation or other similar rights with respect to the Company. There are no registration rights with respect to any shares of capital stock of the Company. There are no voting trusts, proxies or other agreements or understandings with respect to the voting of the capital stock of the Company. Seller owns beneficially and of record all of the Shares, free and clear of any Security Interest. (f) FINANCIAL STATEMENTS. Attached hereto as the "Financial Statements Schedule" is the unaudited balance sheet and statements of income and cash flow of the Company as of and for the year ended December 31, 1997 and the quarter ended March 31, 1998 (the "Financial Statements"). The Financial Statements have been prepared in accordance with GAAP applied on a consistent basis and present fairly in all material respects the financial condition and results of operation of the Company as of such date and for such periods, except that such Financial Statements lack footnotes and other presentation items. (g) ABSENCE OF CERTAIN DEVELOPMENTS. Since December 31, 1997, the Company has conducted its business in the ordinary and usual course, and there has not been (a) any Material Adverse Effect or any change or circumstance that is reasonably likely to have a Material Adverse Effect, (b) any transaction between the Company on the one hand and Seller or any of its Affiliates (other than the Company) on the other hand, other than intercompany loans and advances, (c) any acquisition or disposition of businesses or assets, other than in the ordinary course of business or as contemplated by this Agreement, (d) any creation, incurrence, assumption or guarantee of any indebtedness for borrowed money or capitalized lease obligations or (e) the incurrence of any material obligation by the Company, other than in the ordinary course of business. (h) TRANSACTIONS WITH AFFILIATES. Except with respect to the provision of security services to the Company in the ordinary course of business, neither Seller nor any of its Affiliates: (i) is a party to any contract, lease, agreement, arrangement or commitment with the Company; (ii) owes any material amount to, or is owed a material amount by, the Company; or (iii) has any interest in any property or right used in the conduct of the Company's business. (i) REAL PROPERTY. The Company has good and marketable title in fee simple to all real properties owned by it, free and clear of any Security Interest, and valid and enforceable leaseholds -3- in all real estate leased by it. The Disclosure Schedule lists the street address of each parcel of real property owned or leased by the Company and, in the case of leased property, identifies the lease term and base rent for each such parcel. (j) TANGIBLE ASSETS. The Company has good title to, or a valid leasehold interest in, the tangible assets it uses regularly in the conduct of its business, free and clear of all Security Interests. The Company's assets are in operating condition sufficient for operation of the Company's business. The Disclosure Schedule lists the identifying and serial number of vehicles leased by the Company. (k) ACCOUNTS RECEIVABLE. At the Closing, the Company will have good title to all of its accounts receivable free and clear of any Security Interests. All of the accounts receivable of the Company reflected on the Closing Balance Sheet will be valid and enforceable claims against customers for services rendered in the ordinary course of the Company's business and will be collectible in full within 180 days after the Closing Date, subject to no defenses, offsets or counterclaims, except to the extent of the bad debt reserve reflected on the Closing Balance Sheet. (l) INTELLECTUAL PROPERTY. The Disclosure Schedule lists all patents and registered trademarks, service marks and trade names or rights for the foregoing used in the conduct of the Company's business and identifies each such proprietary right that any third party owns and that the Company uses pursuant to license or agreement. The transactions contemplated by this Agreement will have no adverse effect on any of the proprietary rights so listed. The conduct of the Company's business has not infringed any proprietary rights of any other person. (m) CONTRACTS. The Disclosure Schedule lists all the contracts of the following types to which the Company is a party or to which any of its properties or assets are bound: (i) any collective bargaining agreement; (ii any indenture, credit agreement, loan agreement, note, mortgage, security agreement, loan commitment or other contract relating to the borrowing of funds or an extension of credit to the Company; (ii any contract providing for a partnership or joint venture of which the Company is a partner or joint venturer; (iv any guarantee in respect of indebtedness of any Person; (v) any employment, severance or consulting contract; (vi any technology license agreement (other than licenses implied by the sale of a product and perpetual, paid-up licenses for commonly available software programs under which any Company is the licensee); (vi any agreement that contains a change of control provision or provisions of similar effect relating to the Company; (vi any agreement that involves more than $25,000 (other than service agreements with customers that were not among the 25 customers from whom the Company derived the most revenue during 1997) that is not terminable without penalty or payment on 30 days' or less notice; or (ix any agreement that contains any restriction on the Company's ability to compete with any other business. Each such contract is in full force and effect, and there is no breach or default by the Company with respect to each such contract. The Company has not received from any customer listed on the Disclosure Schedule any notice that such customer intends to discontinue or substantially curtail purchasing services from the Company. -4- (n) COMPLIANCE WITH LAW. The Company is not in violation of any Law or any judgment, award, rule, regulation, order, decree or writ. The Company holds all licenses, franchises, permits and authorizations necessary for the lawful conduct of its business. (o) EMPLOYEE MATTERS AND BENEFIT PLANS. (i) There is no unfair labor practice complaint against the Company pending before the National Labor Relations Board or any state or local agency. There is no pending labor strike, dispute, grievance, request for representation, slowdown or stoppage. (ii) The Disclosure Schedule lists all Benefit Plans that the Company maintains or to which the Company contributes for the benefit of any current or former employee. The Benefit Plans comply in form and in operation with all requirements of law, including ERISA and the Code. No liability to the Pension Benefit Guaranty Corporation, Internal Revenue Service or United States Department of Labor exists or is expected to be incurred with respect to any Benefit Plan. The Company does not contribute and is not required to contribute to any "multiemployer plan" (as defined in Section 3(37) of ERISA). The Company has not completely or partially withdrawn from any multiemployer plan so as to result in any liability under Section 4201 of ERISA. (iii) There are no actions, suits or claims pending or, to Seller's Knowledge, threatened with respect to any Benefit Plan. There has been no reportable event (within the meaning of Section 4043 of ERISA) or any event or condition that represents a risk of termination of any Employee Pension Benefit Plan by the Pension Benefit Guaranty Corporation under circumstances that could reasonably result in a liability. (iv) The Company is not party to any (A) severance agreement, or any policy, program or guidelines obligating it to pay severance benefits, (B) employment contract or consulting agreement obligating it to pay benefits to individuals covered under such contract or agreement or (c) agreement, understanding or policy obligating it to pay any amount or provided benefits to any former employee. The transactions contemplated by this Agreement will not create or result in any liability of the Company for severance, bonus or other compensation. (p) TAXES. (i) All federal, state and local tax returns of the Company that are required to be filed have been duly filed, all such tax returns are true and correct and all amounts required to be paid with respect to such returns have been paid. All deficiencies asserted or assessments made as a result of any examinations of such tax returns have been paid in full, and no issues that have been raised in connection with any such examinations are currently pending. (ii) There are not now in force any waivers or agreements by the Company for the extension of time for the assessment of any tax, nor has any such waiver or agreement been requested by the Internal Revenue Service or any other taxing authority. -5- (iii) The federal income tax returns of the Company (including where appropriate consolidated returns of affiliated groups which include the Company) for the taxable periods ending December 31, 1993 and prior thereto have either been examined by the Internal Revenue Service or the applicable statute of limitations for the assessment of deficiencies with respect thereto has expired. (iv) The Company is not required to file any tax returns or to pay any Taxes in foreign countries. Seller is not a "foreign person" as that term is defined in Section 1445(f)(3) of the Code. (v) The Company's tax basis in its tangible assets is not less than the amount of tangible assets shown on the Financial Statements. (q) ENVIRONMENTAL MATTERS. (i) The Company's operations have been and are in compliance with all applicable Environmental Laws. There are no actions, suits, investigations or claims pending or, to Seller's Knowledge, threatened against the Company alleging the violation of or seeking to impose liability pursuant to any Environmental Law. There are no facts or circumstances that will result in the Company incurring liabilities arising under any Environmental Law. (ii) There has been no past or present spill, discharge, disposal or release of Hazardous Substances onto or from any facility owned, leased, operated or used by the Company (a "Facility"), nor are any Hazardous Substances presently deposited stored, or otherwise located on, under, in or about any Facility (except in compliance with applicable laws), nor have any Hazardous Substances migrated from any Facility upon or beneath other properties. (iii) The Company has not received any notice or other communication concerning any alleged violation of any applicable Environmental Law that has not been corrected to the satisfaction of the appropriate authority. (iv) The Company has not received any requests for information under 42 U.S.C. Section 9604(e) relating to any "Superfund" site, or any similar requests under authority of state law, and Company has not otherwise been identified as a "potentially responsible party" at any federal or state Superfund site. (v) There are no underground storage tanks for petroleum or any other substance, or underground piping or conduits associated with such tanks, located on any Facility. (vi) There are no Hazardous Substances installed, contained in the building material, contained in the transformers or other electrical equipment, or otherwise present on any Facility. (vii) Buyer has been provided with all environmental audits or assessments or occupational health studies undertaken by or on behalf of the Company or, to Seller's Knowledge, governmental agencies with respect to each Facility. -6- (r) LITIGATION. There are no lawsuits, arbitration proceedings, regulatory proceedings, actions, investigations or other litigation pending or, to Seller's Knowledge, threatened against the Company or relating to its assets. Neither the Company nor any of its assets is subject to any judgment, decree, injunction or other order of any Governmental Authority. (s) INSURANCE. The Disclosure Schedule sets forth a correct and complete list of all fire, theft, casualty, general liability, workers' compensation, business interruption, environmental impairment, product liability, automobile and other insurance policies maintained by the Company, specifying the type of coverage, the amount of coverage, the insurer and the expiration date of each such policy (the "Insurance Policies"), each of which is in full force and effect. (t) BANKING FACILITIES. The Disclosure Schedule sets forth a correct and complete list of each bank, savings and loan or similar financial institution in which the Company has an account or safety deposit box and the numbers of the accounts or safety deposit boxes maintained by the Company thereat; and the names of all persons authorized to draw on each such account or to have access to any such safety deposit box facility. (u) SOFTWARE. The Disclosure Schedule sets forth a correct and complete list and summary description of all computer software programs and information systems used by the Company (other than commonly available software programs under which the Company is licensee) ("Software") and identifies Software that is owned by the Company or licensed by the Company from third parties. The Company is not in violation of any license, sublicense or agreement with respect to the Software. All actions and modifications necessary for the continued effective use of the Software after December 31, 1999 have been taken or made. (v) BROKERS. Neither Buyer, any Affiliate of Buyer, nor the Company has or shall have any liability for any brokerage or finder's fee or other commission of any Person retained by Seller, the Company or any Affiliate of either of them in connection with any of the transactions contemplated by this Agreement. (w) PURCHASE FOR INVESTMENT. The Buyer Note and Convertible Note are being acquired by Seller solely for its own account, with no view to any distribution thereof in violation of the Securities Act or the applicable securities laws of any state. Seller understands that the Buyer Note and Convertible Note have not been registered under the Securities Act or the securities laws of any state and may not be sold or otherwise transferred unless they are registered under the Securities Act and any applicable state securities laws or unless an exemption from such registration is available. Seller acknowledges that, in connection with its acquisition of the Buyer Note and Convertible Note, it has been given the opportunity to make inquiries of officers of Buyer and to obtain such additional information from Buyer as Seller deemed relevant to its investment decision. -7- 3. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and warrants to --------------------------------------- Seller: (a) ORGANIZATION. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Kansas. Buyer has delivered to Seller a complete copy of its certificate of incorporation and by-laws, and such certificate of incorporation and by-laws are in full force and effect as of the date hereof and the Closing Date. (b) AUTHORIZATION. Buyer has corporate power and authority to enter into this Agreement and the other agreements, documents and instruments contemplated hereby and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. Buyer has taken all necessary corporate action to authorize and approve the execution, delivery and performance of this Agreement and the other agreements, documents and instruments contemplated hereby, and the consummation of the transactions contemplated hereby and thereby. (c) ENFORCEABILITY. This Agreement constitutes, and each of the other agreements, documents and instruments contemplated hereby to be executed by Buyer (when executed and delivered) will constitute, the legal, valid and binding agreement of Buyer enforceable in accordance with its terms. (d) NO CONTRAVENTION. Neither the execution and delivery of this Agreement and the other agreements, documents or instruments contemplated hereby, the performance by Buyer of its obligations hereunder or thereunder, nor the consummation of the transactions contemplated hereby or thereby will directly or indirectly (with or without notice or lapse of time) (i) contravene, conflict with or result in a violation of any provision of Buyer's charter or bylaws, (ii) violate any law, statute, regulation, order, decree or other restriction of any government, governmental agency or court to which Buyer or any of its assets is subject, (iii) result in the breach of, constitute a default under, accelerate or permit the acceleration of the performance required by, or create in any party the right to terminate any agreement, lease, license, instrument of indebtedness or other obligation to which Buyer or any of its assets is subject or (iv) result in the creation of any Security Interest on any of Buyer's assets. Buyer does not need to give any notice to, make any filing with, or obtain any authorization, consent or approval of any government or governmental agency in order for the parties to consummate the transactions contemplated hereby. (e) CAPITALIZATION. The authorized capital stock of Buyer consists of 10 million shares of Common Stock, par value $1 per share, 10 shares of which are issued and outstanding. All of the issued and outstanding shares of Buyer's capital stock have been duly authorized, are validly issued, fully paid and nonassessable. At or prior to Closing, Buyer will deliver to Seller an accurate and complete list of persons that own beneficially or of record shares of Buyer's capital stock. There are no outstanding or authorized options, warrants, purchase rights, conversion or exchange rights or other contracts or commitments that could require Buyer to issue, sell or otherwise cause to become outstanding any of its capital stock. There are no outstanding stock appreciation, phantom stock, profit participation or other similar rights with respect to Buyer. There are no registration rights with respect to any shares of Buyer's capital stock. There are no voting trusts, proxies or other agreements -8- or understandings with respect to the voting of Buyer's capital stock, except for a shareholder agreement that Buyer delivered to Seller at or prior to Closing. (f) PURCHASE FOR INVESTMENT. The Shares are being acquired by Buyer solely for its own account, with no view to any distribution thereof in violation of the Securities Act or the applicable securities laws of any state. Buyer understands that the Shares have not been registered under the Securities Act or the securities laws of any state and may not be sold or otherwise transferred unless they are registered under the Securities Act and any applicable state securities laws or unless an exemption from such registration is available. Buyer acknowledges that, in connection with its purchase of the Shares, it has been given the opportunity to make inquiries of officers of the Company and to obtain such additional information from the Company as Buyer deemed relevant to its investment decision. (g) BROKERS. Neither Seller, the Company nor any Affiliate of Seller has or shall have any liability for any brokerage or finder's fee or other commission of any Person retained by Buyer or any Affiliate of Buyer in connection with any of the transactions contemplated by this Agreement. 4. COVENANTS. --------- (a) GENERAL. Each of Buyer and Seller will use its best efforts to take all action and to do all things necessary or advisable to consummate the transactions contemplated by this Agreement. (b) NOTICES AND CONSENTS. Seller will cause the Company to give any notices to third parties, and the Company will use commercially reasonable efforts to obtain any third party consent that Buyer may reasonably request in connection with matters disclosed or required to be disclosed on the Disclosure Schedule. Buyer and Seller will promptly obtain all governmental consents and authorizations and promptly will make all filings with and give all notices to governmental agencies necessary or reasonably required to effect the transactions contemplated by this Agreement. (c) OPERATION OF BUSINESS. Seller will cause the Company to: operate its business in the ordinary course in accordance with all laws, rules and regulations applicable to the Company; collect all its accounts receivable in the ordinary course using the collection procedures customarily used by it in past practice; keep its business and properties intact; not sell or otherwise dispose of any assets or properties of the Company except through the use of supplies in the ordinary course of business; take all such actions and forebear from taking such actions as may be necessary in order that the representations and warranties contained herein shall continue to be true and accurate at all times between the date hereof and the Closing, except to the extent that any changes shall occur as a result of the conduct of business in the ordinary course. (d) ACCESS. The Company will give Buyer and its counsel, accountants and other representatives full access to all of its properties, books, tax returns, contracts, commitments and records relating to its business; and will furnish to Buyer all such financial, operating and other data, documents and information with respect to its affairs as Buyer may reasonably request. -9- (e) NOTICE OF DEVELOPMENTS. Prior to Closing, Seller will promptly notify Buyer of the occurrence of any event that would reasonably be expected to have a Material Adverse Effect. From the date of this Agreement until Closing, Seller may deliver to Buyer written modification to the Disclosure Schedule to reflect events or changes after the date of this Agreement, provided that delivery of any such modification shall not affect Buyer's rights pursuant to the provisions of paragraph 5(a)(v). (f) EXCLUSIVITY. Seller will not (and will not cause the Company to) solicit, initiate or encourage the submission of any proposal or offer from any Person relating to any (A) liquidation, dissolution or recapitalization, (B) merger or consolidation, (C) acquisition or purchase of securities or assets or (D) similar transaction or business combination involving the Company; provided that Seller, the Company and their directors and officers will remain free to participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in, or facilitate in any other manner any effort or attempt by any Person to do or seek any of the foregoing to the extent their fiduciary duties may require. (g) DIRECTOR AND OFFICER RESIGNATIONS. Seller will cause the Company's President and each of the directors and officers of the Company who will be officers, directors or employees of Seller or any of its Affiliates after Closing to submit their written resignation effective as of the Closing Date. (h) TAX MATTERS. (i) Seller will include the Company on Seller's consolidated federal income tax returns for the period through and including the Closing Date. The Company will furnish Tax information to Seller for inclusion in Seller's federal consolidated income tax return for the period that includes the Closing Date in accordance with the Company's past custom and practice. The Company's income will be apportioned to the period up to and including the Closing Date and the period after the Closing Date by closing the books of the Company as of the Closing Date, except that exemptions, allowances, deductions, property taxes or other items that are calculated on an annual basis shall be apportioned on a per diem basis. (ii) Seller shall be liable for and indemnify Buyer for all Taxes (including any obligation to contribute to the payment of a tax determined on a consolidated, combined or unitary basis with respect to a group of corporations that includes or included the Company) (i) imposed on Seller's Group (other than the Company) for any taxable year, or (ii) imposed on the Company or for which the Company may otherwise be liable for any pre-Closing period and any deemed short taxable year ending on and including the Closing Date. Seller shall be entitled to any refund of Taxes of the Company received for such periods. Buyer shall be liable for and shall indemnify Seller for any Taxes of the Company for any taxable year or period (including any deemed short taxable year) that begins after the Closing Date. (iii) Buyer agrees to give to Seller prompt written notice of any claim, demand, action, suit, proceeding, audit or assessment (a "Tax Claim") raised, brought, threatened, made or -10- commenced against the Company that relates to any matter to which the foregoing indemnity by Seller may apply and agrees further not to make any admission or effect any settlement with respect to any such Tax Claim without the prior written consent of Seller (which consent shall not be unreasonably withheld). Each party shall cooperate with the other in connection with any Tax investigation, audit or other proceeding. (iv) If any Tax Claim shall be made or commenced against Buyer or the Company in respect of any liability, obligation or claim to which the foregoing indemnity by Seller relates, Seller shall have the right, at its own expense, to undertake the defense of such Tax Claim by written notice given to Buyer at any time before the final determination thereof, and if Seller does undertake the defense of such Tax Claim, Seller shall have the authority to litigate, settle or compromise such Tax Claim; provided, however, that in the case of any Tax Claim relating to any deemed short taxable year ending on and including the Closing Date, or beginning after the Closing Date, Seller's rights herein shall be limited to that portion of the Tax Claim to which Seller's indemnification liability relates. Notwithstanding the foregoing, Seller shall not be entitled to settle, either administratively or after the commencement of litigation, any Tax Claim that would adversely affect the liability for Taxes of Buyer or the Company for any taxable year or period ending after the Closing Date (including any deemed short taxable year beginning after the Closing Date) to any extent (including the imposition of income tax deficiencies, the reduction of asset basis or cost adjustments, the lengthening of any amortization or depreciation periods, the denial of amortization or depreciation deductions, or the reduction of loss or credit carryforwards) without the prior written consent of Buyer. Such consent shall not be unreasonably withheld and shall not be necessary to the extent that Seller has indemnified Buyer against the effects of any such settlement. (v) Any Tax allocation or sharing agreement or arrangement, whether or not written, that may have been entered into by Seller or any member of Seller's Group and the Company is terminated as of the Closing Date, and will have no further effect for any taxable year. (vi) Seller will join with Buyer in making an election under Section 338(h)(10) of the Code (and any corresponding elections under state, local or foreign tax law) with respect to the purchase and sale of the Shares. (i) ALLOCATION OF PURCHASE PRICE. The purchase price for the Shares and the liabilities of the Company will be allocated to the Company's assets for all purposes (including tax and financial accounting purposes) in a manner consistent with the fair market values therefor agreed upon by Buyer and Seller after good faith discussions. Buyer, Seller and the Company will file all tax returns (including amended returns and claims for refund) and information reports in a manner consistent with such values. (j) INSURANCE. The Seller and Company will maintain insurance policies on the Company's properties and business consistent with past practice until the Closing Date, except as such policies may be acquired, canceled, amended or otherwise modified in the ordinary course of business. -11- (k) INTERCOMPANY ACCOUNTS; MANAGEMENT AGREEMENTS. All intercompany indebtedness between the Company, on the one hand, and Seller or any of its Affiliate (not including the Company), on the other hand, shall be settled in full on or prior to the Closing Date and any balance contributed to the equity of the Company. Effective as of the Closing, all management, services or advisory agreements between Seller and any of its Affiliates, on the one hand, and the Company, on the other hand, shall be terminated, except as otherwise provided in paragraph 4(o). (l) RETENTION OF CORPORATE RECORDS. Buyer shall cause the Company to retain the books, records and accounts of the Company for a period of not less than six years from the Closing Date. Seller and its Affiliates shall have reasonable access to, and the right to obtain copies of, such books, records and accounts at all reasonable times. (m) COOPERATION IN GENERAL. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, each of the parties will take such further action (including the execution and delivery of documents and instruments) as any other party may request. (n) PRESS RELEASES. No party shall issue any press release or make any public announcement relating to the subject matter of this Agreement without the prior approval of the other party; provided that any party may make any public disclosure it believes in good faith is required by applicable Law or any listing or trading agreement concerning its publicly-traded securities, in which case the disclosing party shall advise the other party prior to making the disclosure. (o) EMPLOYEE BENEFIT MATTERS. (i) Buyer, the Company and Seller shall each promptly and reasonably cooperate in good faith with each other to ensure that their respective obligations with respect to employee benefit plans are timely and properly satisfied, including sharing information regarding employees and coordinating communications with employees. (ii) Seller hereby notifies buyer of the existence of the collective bargaining agreements listed in section 2(m) of the Disclosure Schedule. To the extent required by law, Buyer shall assume such agreements as part of the transactions contemplated by this Agreement. Seller will notify the collective bargaining agents of the transactions contemplated hereby within two business days of the execution and delivery of this Agreement, and will provide such agents with Buyer's name and address and the provisions reflecting Buyer's assumption, to the extent required by law, of such agreements. Seller will cooperate with Buyer in establishing meetings with such agents. (iii) (A) Effective upon Closing, without objection from the collective bargaining units including the Company's employees ("CBUs"), the Company will have established a new pension plan for its employees covered by collective bargaining agreements ("CBA Employees"), providing "future service only" benefits on a basis substantially similar to those provided under the Seller Plan. All benefits accrued by employees and former employees of the Company before the Closing Date will -12- remain the responsibility of the Seller Plan. Seller and Buyer will use all reasonable efforts to obtain the consent of the CBUs to the plan contemplated by this subparagraph (A). (B) If one or more CBUs object to the Company's establishment of a new plan as described in paragraph 4(o)(iii)(A), the Company will establish such a new plan to cover only present and future employees of the Company who are not participants in the Seller Plan as of the Closing Date (a "New Employee Plan"). Seller will cause the Seller Plan to continue to accrue and provide benefits to CBA Employees who are participants in the Seller Plan as of the Closing Date and to recognize service to the Company after the Closing Date for all purposes until the earlier of (i) the CBA Employee's termination of employment with the Company, (ii) the CBA Employee is no longer eligible to participate in the Seller Plan or (iii) the expiration of the collective bargaining agreements listed on section 2(m) of the Disclosure Schedule relating to such CBA Employee (the "Expiration Date"). The Company will not become an adopting employer under the Seller Plan. Seller will not terminate or modify (other than as required by law) the Seller Plan with respect to CBA Employees prior to the Expiration Date. (C) If one or more CBUs object to the treatment described in paragraph 4(o)(iii)(B), the Seller will cause the Seller Plan to accrue service and provide benefits to CBA Employees and future employees of the Company who are members of the CBU and are eligible to participate in the Seller Plan and to recognize service to the Company after the Closing Date for all purposes until the earlier of (i) the termination of such employees employment with the Company, (ii) the ineligibility of such employee to participate in the Seller Plan or (iii) the Expiration Date. The Company will not become an adopting employer under the Seller Plan. Seller will not terminate the Seller Plan with respect to such employees prior to the Expiration Date. (D) All contributions required under the Seller Plan in the event that paragraph 4(o)(iii)(B) or (C) is applicable will be paid by the Seller. The Company will reimburse Seller annually for actuarially-determined costs of benefits accrued during such year for Company participants under the Seller Plan for periods after the Closing Date. In the case of (B) or (C) above, the Company will notify Seller from time to time of the employment status, or termination of employment, of its employees covered under the Seller Plan. The parties intend that the Company not be treated as an employer under a multiple employer pension plan or any other pension plan. To the extent that the Company is treated for any purpose as an adopting employer under the Seller Plan, then to the extent of any Loss incurred by the Company for such liability, Seller will indemnify the Company for any Loss from the operation, administration or termination of the Seller Plan, unless such Loss results from the Company's action or failure to act after the Closing Date. (p) FINANCING. As of the Closing Date, Buyer will have at least $2 million in common equity capital. (q) NONDISCLOSURE. After the Closing, except as required by Law or court order, Seller shall not disclose, or use directly or indirectly, to or for the benefit of any person or entity other than the -13- Company, and Seller will use all reasonable efforts to prevent any affiliate from disclosing, any confidential or proprietary information, data or materials of or related to the Company. (r) NONCOMPETITION. For a period of five years from and after the Closing Date, Seller will not (a) engage directly or indirectly in any business that the Company conducts as of the Closing Date, except that Seller may (i) own not more than five percent of the outstanding stock of any publicly-traded corporation, (ii) retain its interest in Loomis, Fargo & Co., and (iii) own and operate for a period not more than 12 months a business that derives less than 25 percent of its revenues from activities in competition with the business that the Company conducts as of the Closing Date other than any business owned or operated by Seller or any of its Affiliates (other than the Company) as of the Closing Date or for which Seller or any of its Affiliates (other than the Company) has entered into a definitive agreement to acquire as of the Closing Date or (b) solicit any employee of the Company to terminate such employment. (s) ACCOUNTS RECEIVABLE. After the Closing the Company will pursue the collection of accounts receivable existing at the Closing ("Closing Receivables") generally in the same manner and at the same level of diligence as the Company shall pursue the collection of its other accounts receivable. Not later than 200 days after the Closing Date, Buyer shall give notice, certified by its chief financial officer, to Seller setting forth the collection of Closing Receivables through the 180th day after Closing and Buyer's calculation of the excess, if any, of the uncollected Closing Receivables over the bad debt reserve reflected on the Closing Balance Sheet. Seller shall have 30 days following the date of such notice to object to such calculation. If Seller fails to deliver such notice of objection within such period, Seller shall be conclusively presumed to agree to the calculation delivered by Buyer. If Seller delivers such notice of objection, Buyer and Seller shall negotiate in good faith to resolve any dispute and if they are unable to resolve such dispute within 20 days after Seller's notice of objection, the dispute shall be settled by submitting such dispute to an accounting firm of national standing. The decision of such firm shall be final and binding on the parties. The expenses of such firm will be borne by the non-prevailing party. Any such excess will be satisfied through an offset by Buyer against the principal amount of the Convertible Note. (t) SUFFICIENCY OF OPERATIONS. If the sum of (i) EBITDA less (ii) not more than $3 million of Capital Expenditures for the 12-month period ending each March 31 (or such shorter period ending March 31, 1999) prior to April 30, 2000 ("Adjusted EBITDA") is less than Interest Expense for such 12 month (or shorter) period, then within five business days after the anniversary date of Closing, Seller shall pay Buyer an amount not to exceed the lesser of (i) the difference between Adjusted EBITDA and Interest Expense or (ii) the cash amount, if any, actually paid as interest to the holder(s) of the Convertible Note in the 30 days up to and including the date Seller is obligated to make payment hereunder. Prior to April 30 of each year, Buyer shall deliver to Seller a certificate setting forth in reasonable detail Buyer's calculation of EBITDA, Capital Expenditures, Interest Expense and the calculation of any payment due hereunder. -14- 5. CONDITIONS TO CLOSING. --------------------- (a) CONDITIONS TO BUYER'S OBLIGATION. The obligations of Buyer to consummate the transactions contemplated by this Agreement are subject to the following conditions precedent (any of which may be waived by Buyer, in whole or in part): (i) All of Seller's representations and warranties in this Agreement shall be true and correct in all material respects on and as of the Closing Date as if made on the Closing Date. (ii) Seller shall have performed in all material respects all of the covenants and agreements contained in this Agreement to be performed by it before or at Closing. (iii) No action or proceeding before any court or governmental body will be pending or threatened wherein an order, decree or judgment would prevent any of the transactions contemplated hereby or cause such transactions to be declared unlawful or rescinded. (iv) Seller shall have received from its lenders the consents and approvals required to consummate the transactions contemplated in this Agreement, to release any pledge of the Shares and to release any guarantees by the Company of Seller's indebtedness. Seller shall have tendered transfer of the Shares free and clear of any Security Interest. (v) Any modifications to the Disclosure Schedule delivered by Seller in accordance with paragraph 4(e) shall not reflect any Material Adverse Effect. (vi) Buyer shall have obtained on terms and conditions reasonably satisfactory to it financing for $10 million of working capital, of which at least $2 million shall be common equity capital; provided that this condition will be deemed satisfied as of May 11, 1998. (vi) Seller shall have delivered to Buyer the following documents: (1) certificates representing the Shares, duly endorsed (or accompanied by duly executed stock powers) for transfer to Buyer; (2) a certificate executed by an officer of Seller certifying that each of Seller's representations and warranties in this Agreement are true and correct as of the Closing Date (giving full effect to any supplement to the Disclosure Schedule delivered by Seller prior to the Closing Date in accordance with paragraph 4(e) hereof); (3) an assumption agreement dated the Closing Date in form and substance reasonably acceptable to Buyer and Seller providing for the assumption by Seller of the Casualty Claims; -15- (4) an assignment and coexistence agreement relating to certain trademarks dated the Closing Date substantially in the form of Exhibit C; and (5) a transition services agreement relating to assistance in the administration of certain Company medical insurance plans. (b) CONDITIONS TO SELLER'S OBLIGATION. The obligations of Seller to consummate the transactions contemplated by this Agreement are subject to the satisfaction of the following conditions precedent (any of which may be waived by Seller, in whole or in part): (i) All of Buyer's representations and warranties in this Agreement shall be true and correct in all material respects on and as of the Closing Date as if made on the Closing Date. (ii) Buyer shall have performed in all material respects all of the covenants and agreements contained in this Agreement to be performed by it before or at Closing. (ii) No action or proceeding before any court or governmental body will be pending or threatened wherein an order, decree or judgment would prevent any of the transactions contemplated hereby or cause such transactions to be declared unlawful or rescinded. (iv) Buyer shall have delivered to Seller (or subject to the satisfaction of the conditions set forth in paragraph 5(a) tendered delivery thereof) the Buyer Note and Convertible Note. (v) Buyer shall have delivered to Seller a certified copy of the resolutions of the board of directors of the Buyer, authorizing the execution, delivery and performance of this Agreement and all documents to be executed and payments to be delivered to Seller at Closing. (vi) Buyer shall have delivered to Seller evidence in such form reasonably satisfactory to Seller that Buyer has at least $10 million in working capital, of which at least $2 million shall be common equity capital, all of which has been funded at or before the Closing or supported by financial institutions reasonably acceptable to Seller. 6. TERMINATION. This Agreement may be terminated at any time prior to Closing ----------- as follows: (a) by mutual consent of Seller and Buyer; (b) by Buyer or Seller (A) in the event the other party has breached in any material respect any representation, warranty or covenant contained herein, the non-breaching party has notified the other of such breach and the breach has continued without cure for a period of 30 days after notice of breach or (B) if the Closing shall not have occurred on or before May 30, 1998 by reason of the failure of any condition precedent under paragraph 6 hereof (unless the failure results primarily from such party itself breaching any representation, warranty or covenant contained herein); -16- If this Agreement is terminated, all rights and obligations of the parties hereunder shall terminate without any liability of any party to any other party, other than any liability of any party then in breach, except that if Seller terminates this Agreement for any reason other than breach by Buyer, Seller shall pay to Buyer a fee of $300,000. 7. INDEMNIFICATION. --------------- (a) SURVIVAL OF REPRESENTATIONS AND WARRANTIES; COVENANTS. All representations and warranties set forth in this Agreement will survive the Closing (and any investigation by Buyer) and continue in full force and effect for a period of three years thereafter; provided, however, that the representations and warranties contained in paragraph 2(e) will survive the Closing and continue in full force and effect forever, the representations and warranties contained in paragraph 2(p) will survive the Closing and continue in full force and effect until the applicable statute of limitations shall have run and the representations and warranties contained in paragraph 2(q) will survive the Closing and continue in full force and effect for a period of five years thereafter. Such representations and warranties shall thereafter expire, in each case except with respect to breaches and violations specified in a written claim for indemnification under this paragraph 7 prior to such expiration date. All covenants set forth in this Agreement will survive the Closing and continue in full force and effect until the applicable statute of limitations shall have run. (b) CASUALTY CLAIM AND ASSUMED LIABILITY INDEMNIFICATION. Seller agrees to indemnify and hold Buyer harmless from and against, and to defend against any Loss resulting from, relating to or caused by any Casualty Claim or Assumed Liability. (c) ENVIRONMENTAL INDEMNIFICATION. Subject to the provisions of paragraph 7(g) and to the extent such representations and warranties survive as set forth in paragraph 7(a), Seller agrees to indemnify and hold Buyer harmless from and against, and to defend against any Loss resulting from, relating to or caused by (i) any breach of any representation or warranty contained in paragraph 2(q) other than representations or warranties relating to any underground storage tank (as defined in 42 U.S.C. Section 6991 et seq.) ("UST") and (ii) any investigation, monitoring, remediation or other clean up of Hazardous Substances released on or before the Closing from any UST located on any parcel of property owned, leased or used by the Company or under the ownership, operation or control of the Company or the removal, improvement, replacement or repair of any such UST; provided, however, that Seller shall have no obligation to make any payment pursuant to this paragraph 7(c) with respect to any individual UST unless and until the aggregate amount of all Losses relating to such UST exceeds $50,000 and then only for the amount of such excess. Any investigation, monitoring, remediation, clean up, removal, improvement, replacement or repair undertaken pursuant to this paragraph shall be performed in a reasonable and cost-effective manner, taking into account the current use of the site, and shall be limited to those actions reasonably necessary to comply with those federal and state requirements relating to USTs and, as applicable, to obtain a "no further action" letter from the Governmental Authority having jurisdiction over a UST or other reasonably satisfactory proof of closure of a UST under or pursuant to Environmental Laws. Buyer agrees to (and after the Closing to cause the Company to) use reasonable efforts to perform -17- any investigatory, remedial or other actions in a manner that will permit Buyer or the Company to recover the maximum available funds under any applicable state UST funds and any applicable insurance policies and apply for any reimbursements or payments from such funds or policies on a timely basis. (d) GENERAL INDEMNIFICATION BY SELLER. Subject to the provisions of paragraph 7(g), Seller agrees to indemnify and hold Buyer (and after the Closing the Company) harmless from and against, and to defend against, any Loss resulting from, relating to or caused by (i) the breach of any representation or warranty contained in paragraph 2 to the extent such representation and warranty survives as set forth in paragraph (a) above (except for paragraph 2(k), which will be governed exclusively by paragraph 4(s), paragraph 2(p), which will be governed exclusively by the provisions thereof and paragraph 2(q), which will be governed exclusively by paragraph 7(c)), (ii) any Indemnified Liability, (iii) the breach of any covenant or agreement of Seller contained herein, or (iv) any claim or cost incurred with respect to any obligations to pay any broker's or finder's fee or any other fee or commission incurred by Seller or any of its Affiliates. (e) GENERAL INDEMNIFICATION BY BUYER. Subject to the provisions of paragraph 7(g), Buyer agrees to indemnify and hold Seller and each of its Affiliates (excluding after the Closing the Company) harmless from and against, and to defend against, any Loss resulting from, relating to or caused by (i) the breach of any representation or warranty contained in paragraph 3 to the extent such representation and warranty survives as set forth in paragraph (a) above, (ii) the breach of any covenant or agreement of Buyer contained herein, (iii) any claim or cost incurred with respect to any obligations to pay any broker's or finder's fee or any other fee or commission incurred by Buyer or any of its Affiliates; or (iv) any claim made arising out of acts or omissions by the Company after the Closing. (f) EXCLUSIVE REMEDY. In the absence of fraud that has a Material Adverse Effect and notwithstanding any Law to the contrary and any rights that would otherwise be available thereunder, the indemnification provisions of this Agreement set forth the sole and exclusive remedy of Buyer and each of its Affiliates (including the Company) following the Closing against Seller and its Affiliates, and of Seller and each of its Affiliates following the Closing against Buyer and its Affiliates, with respect to any claim for relief based upon, arising out of or otherwise in respect of this Agreement and the transactions contemplated hereby. (g) LIMITATION OF LIABILITY. (i) No Person shall be liable under this paragraph 7 for (A) any Loss that is contingent, unless and until such Loss becomes an actual liability and is due and payable; provided, however, that this paragraph 7(g)(A) shall not operate to avoid a claim for indemnification with respect to which timely notice is given where the Loss is contingent at the time such claim is made; (B) any Loss if and to the extent a reserve or provision for such Loss was included on the Closing Balance Sheet; (C) any Loss if and to the extent such Loss would not have occurred but for any voluntary act or omission after the date hereof by Buyer or after Closing by any Affiliate of Buyer (including the Company); -18- (D) any Loss if and to the extent covered by a policy of insurance covering the Company and payment is due under such policy by the insurer or would have been due had the insurance policies coverage amounts maintained by the Company prior to the Closing been maintained by the Company after the Closing; (E) any Loss if and to the extent the Person seeking indemnification has already recovered such Loss pursuant to this Agreement or from any third party; or (F) any punitive, special, indirect, incidental or consequential damages or lost profits payable to Buyer. (ii) The liability of Seller under paragraph 7(c)(i), 7(d)(i) and 7(d)(ii) shall be further limited in that Seller shall have no liability under such paragraphs unless and until the aggregate amount of all Losses arising out of the matters set forth in such paragraphs in the aggregate exceed $200,000 and then only for the amount of such excess. Seller's liability for Losses under paragraph 7(d)(i) shall not exceed an aggregate of $4 million. Seller liability for Losses under paragraph 7(c) shall not exceed an aggregate of $10 million. (h) DEFENSE AND PAYMENT OF CLAIMS. (i) If any third party shall notify any party under this Agreement (the "Indemnified Party") with respect to any matter which may give rise to a claim for indemnification against the other party (the "Indemnifying Party") under this paragraph 7, then the Indemnified Party will give reasonably prompt notice to the Indemnifying Party; provided that no delay on the part of the Indemnified Party in notifying the Indemnifying Party shall relieve the Indemnifying Party from any obligation hereunder unless the Indemnifying Party is prejudiced. Such notice will describe the claim in reasonable detail, include copies of all material written evidence thereof and indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained as a result of such third party claim. The Indemnifying Party has the right to participate in, or by giving notice to the Indemnified Party, to assume and control the defense of such claim at such Indemnifying Party's own expense. If the Indemnifying Party does not assume the defense of such claim or shall not diligently defend such claim so assumed, the Indemnified Party may defend against the matter in any manner it reasonably may deem appropriate at the Indemnifying Party's expense and the Indemnifying Party will reimburse the Indemnified Party periodically for the reasonable costs of defending such matter, including attorneys' fees and expenses. At the Indemnifying Party's reasonable request, the Indemnified Party will cooperate with the Indemnifying Party in the preparation of any such defense, and the Indemnifying Party will reimburse the Indemnified Party for any expenses incurred in connection with such request. Within 30 days after any notice to the Indemnifying Party that a third party claim has been settled or final judgment in respect of such claim has been issued, the Indemnifying Party shall deliver cash payment to the Indemnified Party in the amount set forth in such notice. (ii) The Indemnified Party will give reasonably prompt notice to the Indemnifying Party of the incurrence of any Loss that does not result from a third party claim. Any such notice will describe the claim of Loss in reasonable detail, include copies of all material written evidence thereof and indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party as a result. Within 30 days of the notice of such claim, the Indemnifying Party shall deliver cash payment to the Indemnified Party in the amount set forth in such -19- notice, unless the procedures for arbitration set forth in paragraph 7(h)(iii) below are elected within such 30 day period. (iii) If the Indemnifying Party disagrees as to the amount of any Loss that arises out of a direct claim made pursuant to paragraph 7(h)(ii) above, at the request of the Indemnifying Party the matter shall be settled exclusively by arbitration held in such place as is determined by the arbitrators, pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be heard before one arbitrator, experienced in the matters at issue, to be selected by the Indemnified Party and the Indemnifying Party. The arbitrator shall apply the law of the State of Illinois applicable to contracts made and to be performed entirely in such state (without giving regard to the conflicts of law provisions thereof) in resolving such dispute. The arbitrator shall not have power or authority to alter, modify, amend, add to or subtract from any term or provision of this Agreement, nor to grant injunctive relief of any nature. In all other respects, the Commercial Arbitration Rules of the American Arbitration Association shall govern the arbitration. The parties agree that the decision of the arbitrator pursuant to this paragraph 7(h)(iii) shall be final and nonappealable and may be enforced by the Indemnifying Party or the Indemnified Party in any court of record having jurisdiction over the subject matter or over any of the parties to this Agreement. Any amount awarded by the arbitrator pursuant to this paragraph 7(h)(iii) shall be paid promptly to the appropriate party by wire transfer to an account designated by such party. The expenses of such arbitration will be borne by the non-prevailing party. 8. DEFINITIONS. The following terms shall have the following meanings for ----------- purposes of this Agreement: "Affiliate" of any particular person or entity means any other person or entity controlling, controlled by or under common control with such particular person or entity. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person or entity, whether through ownership of voting securities, by agreement or otherwise. "Assumed Liability" means any liability or obligation of the Company that relates to: (i) the lease for real estate located in Charlotte, N.C. constituting the Company's former headquarters on the terms existing as of the Closing Date; (ii) the lease for real estate located in Atlanta, GA constituting the Company's current headquarters on the terms existing as of the Closing Date beginning on the date that the Company vacates such real estate; (iii) the payment due in May 1998 to certain employees of the Company pursuant to the collective bargaining agreements listed in section 2(m) of the Disclosure Schedule; -20- (iv) an amount not to exceed $20,000 in any month under the agreements listed on section 2(m)(vi) of the Disclosure Schedule on the terms existing as of the Closing Date; and (v) any Loss associated with the termination by Seller of the employment of the Company's President. "Benefit Plans" means any (A) nonqualified deferred compensation or retirement plan or arrangement that is an Employee Pension Benefit Plan, (B) qualified defined contribution retirement plan or arrangement that is an Employee Pension Benefit Plan, (C) qualified defined benefit retirement plan or arrangement that is an Employee Pension Benefit Plan (including any multiemployer plan), or (D) Employee Welfare Benefit Plan. "Capital Expenditures" means the aggregate of all expenditures (whether in cash or accrued as liabilities) by Buyer and its consolidated subsidiaries that, in conformity with GAAP, are included or required to be included in the property, plant or equipment or capitalized software account reflected in the consolidated balance sheet of Buyer and its consolidated subsidiaries. "Casualty Claim" means any claim, action, suit or other proceeding asserted against the Company with respect to events, circumstances or activities occurring prior to the Closing Date (i) for worker's compensation, (ii) arising out of or relating to the use of motor vehicles in connection with or related to its business or operations, or (iii) arising out of or relating to acts or omissions of the Company's drivers, courier guards or their supervisors relating to their employment, in each case that is an act or omission that otherwise is of a type generally covered under typical general liability insurance policies. "Closing" has the meaning specified in paragraph 1(e). "Closing Balance Sheet" has the meaning specified in paragraph 1(c). "Closing Date" has the meaning specified in paragraph 1(e). "Closing Receivables" has the meaning specified in paragraph 4(s). "Code" means the Internal Revenue Code of 1986, as amended. "Company" means Pony Express Delivery Services, Inc., a Delaware corporation. "Debt" means, with respect to any Person, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, (ii) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, (iii) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, but excluding trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person under any capital lease of real or personal property that in accordance -21- with GAAP has been recorded as a capitalized lease obligation and (v) all indebtedness of another Person guaranteed directly or indirectly in any manner by such Person, provided that the term "guarantee" shall not include endorsements for collection or deposit, in either case in the ordinary course of business, or any obligation or liability of such Person in respect of leasehold interests assigned by such Person to any other Person. "EBITDA" means the sum, without duplication, of (i) the net income (or loss) of Buyer and its consolidated subsidiaries as determined in accordance with GAAP, (ii) provisions for taxes based on income, (iii) Interest Expense, (iv) to the extent that net income has been reduced thereby, amortization expense, depreciation expense and other non-cash expenses. "Employee Pension Benefit Plan" has the meaning set forth in ERISA Section 3(2). "Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section 3(1). "Environmental Law" means any federal, state or local law, legislation, ordinance, rule, code, common law, license, permit, authorization, judicial or administrative decision, order, injunction or agreement between the Company and any Governmental Authority, (a) relating to the protection, preservation or restoration of the environment (including air, water vapor, surface water, ground water, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety, or (b) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances. The term includes the Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) ("CERCLA"), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.) ("RCRA"). The Clean Water Act, (33 U.S.C. Section 1251 et seq.), the Clean Air Act (42 U.S.C. Section 7401 et seq.), the Toxic Substance Control Act (15 U.S.C. Section 2601 et seq.), Federal Insecticide Fungicide Rodenticide Act (7 U.S.C. Section 136 et seq.), Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.), and all applicable judicial, administrative, and regulatory decrees, judgments, orders and regulations. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Expiration Date" has the meaning specified in paragraph 4(o). "Financial Statement" has the meaning specified in paragraph 2(f). "GAAP" means generally accepted United States accounting principles, consistently applied. "Governmental Authority" means any federal, territorial, state or local governmental authority, supra-governmental authority, instrumentality, court, governmental or self-regulatory organization, commission or tribunal or any regulatory, administrative or other agency, or any political or other -22- subdivision, department or branch of any of the foregoing whether within or outside the United States. "Hazardous Substance" means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, under any Environmental Law applicable in the jurisdiction in which the substance is present. Hazardous Substance includes any toxic waste, "pollutant or contaminant," toxic substance, "hazardous waste," "solid waste," special waste, "hazardous substance" or petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos containing material, urea formaldehyde foam insulation, lead and polychlorinated biphenyl. "Indemnified Liability" means any liability or obligation of the Company that relates to any period prior to the Closing, whether known (including items listed on the Disclosure Schedule) or unknown, fixed or contingent, other than: (i) accounts payable and accrued expenses that were accrued as current liabilities on the Closing Balance Sheet; (ii) obligations to furnish services after the Closing under sales contracts and customer orders; (iii) obligations to pay for goods and services that will be furnished to the Company after the Closing that arose out of transactions in the ordinary course of business of the Company; and (iv) obligations to be performed after the Closing under leases, licenses and agreements existing as of the Closing arising from the operation of the business of the Company in the ordinary course. "Interest Expense" means for any period the total interest expense with respect to all Debt for such period on a consolidated basis determined in accordance with GAAP. "Knowledge" means actual knowledge after reasonable investigation of facts, circumstances, practices, actions or transactions of the executive officers of Seller and the Company. "Law" means any law, statute, regulation, ordinance, order, decree or judgment imposed by any Governmental Authority. "Loss" means any loss, liability, damage, claim or expense (including reasonable legal fees, expenses and costs). "Material Adverse Effect" means a material adverse effect on the assets, business, financial condition or results of operations of the Company, taken as a whole. -23- "Net Working Capital" means (i) the sum of cash, cash equivalents, accounts receivable, prepaid expenses and other current assets, less (ii) outstanding checks, accounts and notes payable, accrued expenses and accrued Taxes payable (other than for income Taxes). "Person" means any individual, corporation, partnership, limited partnership, trust, association or other entity. "Security Interest" means any mortgage, pledge, security interest, encumbrance, charge or other lien, other than (i) mechanic's and similar liens, (ii) liens for Taxes not yet due and payable, (iii) liens arising under worker's compensation, unemployment insurance, social security, retirement and similar legislation, (iv) liens on goods in transit incurred pursuant to documentary letters of credit, (v) purchase money liens and liens securing rental payments under capital lease arrangements and (vi) other liens arising in the ordinary course of business and not incurred in connection with the borrowing of money. "Seller's Group" means for the purposes only of matters relating to Taxes any "affiliated group" (as defined in Section 1504(a) of the Code without the limitations contained in Section 1504(b) of the Code) that includes the Seller or any predecessor of or successor to Seller (or another such predecessor or successor). "Seller Plan" means the Borg-Warner Security Corporation Retirement Plan. "Senior Debt" means the principal of (and premium, if any, on) and interest on and other amounts de on or in connection with any Debt of Buyer, whether outstanding on the date hereof or hereafter created, incurred or assumed unless, in the case of any particular Debt, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Debt shall not be senior in right of payment to the Convertible Note. Senior Debt shall not include (i) Debt evidenced by the Buyer Note or the Convertible Note, (ii) Debt of Buyer that by operation of law is subordinate to any general unsecured obligations of Buyer, (iii) Debt of Buyer to any of its subsidiaries, (iv) to the extent it might constitute Debt, any liability for federal, foreign, state or local taxes owed or owing by Buyer and (v) to the extent it might constitute Debt, trade account payables owed or owing by Buyer. "Shares" means all of the issued and outstanding shares of capital stock of the Company. "Subsidiary"means any corporation with respect to which another specified corporation has the power to vote or direct the voting of sufficient securities to elect a majority of the directors. "Tax Claim" has the meaning specified in paragraph 4(h)(iii). "Tax" means any tax, charge, fee, duty, levy or other assessment, including any income, gross receipts, net proceeds, ad valorem, turnover, stamp, lease, fuel, interest equalization, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs -24- duties, franchise, profits, withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated or other tax of any kind, including any interest, penalty or addition thereto, whether disputed or not, imposed by any government of the United States or any foreign country, or any state or political subdivision thereof, or any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government or quasi-governmental agencies. "Tax Return" means any return, declaration, report, claim for refund or information return or statement relating to Taxes, including any schedule or attachment thereto and any amendment thereof. 9. MISCELLANEOUS. ------------- (a) EXPENSES. Each party agrees that unless otherwise expressly provided herein, it shall be responsible for its own costs and expenses, including all legal, consulting, financial services and accounting costs and expenses; provided, however, that Buyer shall pay all sales, use, stamp, transfer, service, recording, real estate and like taxes or fees imposed by any Governmental Authority in connection with this Agreement. (b) NOTICES. All notices and other communications by either party will be in writing to the other party and will be deemed duly given when delivered by United States certified mail or by Airborne Express, Federal Express or other reliable courier service or by telecopy addressed as follows: if to Seller, to: if to Buyer, to: 200 South Michigan Avenue Mustang Holdings, Inc. Chicago, Illinois 60604 4200 Somerset, Suite 209 Attention: Chief Financial Officer Prairie Village, KS 66208 Facsimile No.: 312/322-8629 Facsimile No.: 913/385-5577 or to such other individual or address as a party hereto may designate for itself by notice given as herein provided. (c) ASSIGNMENT. Neither party shall assign this Agreement or any part hereof without the written consent of the other party. Except as otherwise provided, this Agreement will bind and inure to the benefit of the parties and their respective successors and assigns. (d) AMENDMENTS AND WAIVERS. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by Buyer and Seller. No waiver by any party of any default, misrepresentation or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. -25- (e) COUNTERPARTS. This Agreement may be executed in counterparts, and any number of counterparts signed in the aggregate by the parties will constitute a single, original instrument. (f) DISCLOSURE SCHEDULE. Neither the specification of any dollar amount in or relating to any representation or warranty contained in this Agreement nor the inclusion of any specific item in the Disclosure Schedule is intended to imply that such amount, or higher or lower amounts, or the item so included or other items, are or are not material, and no party shall use the fact of the setting forth of any such amount or the inclusion of any such item in any dispute or controversy between the parties as to whether any obligation, item or matter not described herein or included in the Disclosure Schedule is or is not material for purposes of this Agreement. Unless this Agreement specifically provides otherwise, neither the specification of any item or matter in any representation or warranty contained in this Agreement nor the inclusion of any specific item in the Disclosure Schedule is intended to imply that such item or matter, or other items or matters, are or are not in the ordinary course of business, and no party shall use the fact of the setting forth or the inclusion of any such item or matter in any dispute or controversy between the parties as to whether any obligation, item or matter not described herein or included in the Disclosure Schedule is or is not in the ordinary course of business for purposes of this Agreement. Disclosure of any fact or item in any part of the Disclosure Schedule shall, should the existence of the fact or item or its contents be relevant to any other part of the Disclosure Schedule, be deemed to be disclosed with respect to that other part of the Disclosure Schedule, whether or not an explicit reference appears. (g) ENTIRE AGREEMENT. Except for the Confidentiality Agreement, dated November 24, 1997 (the "Confidentiality Agreement"), between Seller and Buyer, which Confidentiality Agreement shall remain in full force and effect pursuant to the respective terms of such agreement, this Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings and agreements between the parties relating to its subject matter. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. This Agreement shall not confer any rights or remedies upon any Person other than the parties and their respective successors and permitted assigns. (h) CHOICE OF LAW. This Agreement will be governed by and construed in accordance with the internal law (and not the law of conflicts) of the State of Illinois. (i) CONSTRUCTION. No party or parties will be deemed the drafter of this Agreement and if this Agreement is construed by a court of law, such court will not construe this Agreement or any provision against any party as its drafter. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. The descriptive headings of the sections and paragraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. Where appropriate in the context the singular will be deemed to include the plural, the plural to include the singular, the masculine or neuter genders shall include all genders and the past, present and future tenses to include -26- the others. The word "including" shall mean including without limitation. The terms "material," "materiality" and like terms when used with respect to the Company shall be interpreted in the context of the assets, business, financial position or results of operations of the Company, taken as a whole. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above written. SELLER: BORG-WARNER SECURITY CORPORATION /s/ Brian S. Cooper By: _______________________________ Name Printed: Brian S. Cooper Title: Treasurer BUYER: MUSTANG HOLDINGS, INC. /s/ Terry Matlack By:_______________________________ Name Printed:Terry Matlack Title: President -27- EX-13 7 PORTIONS OF THE 1998 ANNUAL REPORT Consolidated Statistical Review The following table sets forth selected financial information for Borg-Warner Security Corporation ("the Company"). The information is derived from the audited consolidated financial statements of the Company. Previously reported results have been restated to reflect the May 29, 1998 sale of the Company's electronic security division and the Company's courier services division. As a result, Wells Fargo Alarm Services Company and Pony Express Delivery Services are reflected in discontinued operations for all years presented. In addition, the Company's armored security services unit entered into a business combination with Loomis Armored in January 1997. The combined company, known as Loomis, Fargo & Co., is accounted for under the equity method. The armored security services unit was included in the Company's results of operations for 23 days in 1997 and full years 1996, 1995 and 1994. The selected financial data should be read in connection with the 1998 Consolidated Financial Statements and accompanying notes.
STATEMENT OF OPERATIONS DATA Year Ended December 31, (millions of dollars, except per share) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- Net service revenues $ 1,323.4 $ 1,304.6 $ 1,470.1 $ 1,453.8 $ 1,420.6 Earnings before interest and taxes 40.4 57.6 61.0 55.4 44.5 Earnings before taxes 24.9 40.9 33.8 29.1 20.7 Provision for income taxes/(1)/ 9.8 15.1 13.6 13.1 0.4 Earnings from continuing operations 15.1 25.8 20.2 16.0 20.3 Earnings from continuing operations per share - basic $ 0.64 $ 1.10 $ 0.87 $ 0.69 $ 0.88 Earnings from continuing operations per share - diluted $ 0.64 $ 1.07 $ 0.86 $ 0.68 $ 0.87 Average common shares outstanding - basic (in thousands) 23,575 23,475 23,266 23,097 22,893 Average common shares and equivalents outstanding - diluted (in thousands) 23,958 24,075 23,517 23,399 23,170 BALANCE SHEET DATA (at end of year) - ----------------------------------------------------------------------------------------------------------- Total assets $ 431.9 $ 625.9 $ 728.9 $ 808.6 $ 780.2 Balance sheet debt 126.7 338.7 437.1 479.0 455.0 Cash and cash equivalents available (105.7) (8.0) (15.4) (17.3) (13.3) - ----------------------------------------------------------------------------------------------------------- Net balance sheet debt 21.0 330.7 421.7 461.7 441.7 Accounts receivable sold, net 82.4 102.4 110.2 88.9 112.0 Shareholders' equity 96.9 65.0 41.2 49.7 43.8 Net assets of discontinued operations -- $ 327.0 $ 327.5 $ 369.7 $ 360.4
STOCK PRICES FIRST Second Third Fourth - -------------------------------------------------------------------------------- 1998 Quarters High $ 19 7/16 $ 24 3/4 $ 23 1/16 $ 20 1/16 Low $ 15 5/16 $ 17 7/8 $ 13 1/4 $ 13 1/16 1997 Quarters High $ 15 1/8 $ 18 $ 19 9/16 $ 19 3/4 Low $ 10 1/8 $ 13 3/4 $ 16 1/8 $ 15 1/4
(/1)/ Income taxes for the year ended December 31, 1994 reflect certain adjustments related to changes in tax basis. 18 Management's Responsibility for Consolidated Financial Statements Borg-Warner Security Corporation The information in this report is the responsibility of management. Borg-Warner Security Corporation has in place reporting guidelines and policies designed to ensure that the statements and other information contained in this report present a fair and accurate financial picture of the Company. In fulfilling this management responsibility, we make informed judgments and estimates conforming with generally accepted accounting principles. The accompanying financial statements have been audited by Deloitte & Touche llp, independent auditors. Management has made available all of the Company's financial records and related information deemed necessary by Deloitte & Touche LLP. Furthermore, management believes that all representations made by it to Deloitte & Touche LLP during their audit were valid and appropriate. Management is responsible for maintaining a comprehensive system of internal control through its operations that provides reasonable assurance that assets are protected from improper use, that material errors are prevented or detected within a timely period and that records are sufficient to produce reliable financial reports. The system of internal control is supported by written policies and procedures that are updated by management as necessary. The system is reviewed and evaluated regularly by the Company's internal auditors, as well as by the independent auditors in connection with their annual audit of the financial statements. The independent auditors conduct their audit in accordance with generally accepted auditing standards and perform such tests of transactions and balances as they deem necessary. Management considers the recommendations of its internal auditors and independent auditors concerning the Company's system of internal control and takes the necessary actions that are cost effective in the circumstances. Management believes that, as of December 31, 1998, the Company's system of internal control was adequate to accomplish the objectives set forth in the previous paragraph. An audit committee composed entirely of directors of the Company, who are not employees, meets periodically with the Company's management and independent auditors to review financial results and procedures, internal financial controls, and internal and external audit plans and recommendations. To guarantee independence, the audit committee and the independent auditors have unrestricted access to each other with or without the presence of management representatives. /s/ J. Joe Adorjan /s/ Timothy M. Wood J. Joe Adorjan Timothy M. Wood Chairman, President and Vice President and Chief Chief Executive Officer Financial Officer 19 Management's Discussion and Analysis of Financial Condition and Results of Operations SIGNIFICANT EVENTS On January 24, 1997, the Company's armored services unit entered into a business combination with Loomis Armored, which is now known as Loomis, Fargo & Co. ("Loomis, Fargo"). The Company, which retains a 49% ownership interest in Loomis, Fargo, accounts for its investment under the equity method. The business combination impacts the comparison of the Company's 1998 results to prior periods because the armored unit was included in the Company's results of operations for 23 days in 1997 and full year 1996. On May 29, 1998, the Company sold its electronic security services business to ADT Security Services, a subsidiary of Tyco International, Ltd., for approximately $425 million plus the assumption of $6 million of debt by the buyer. As a result of this transaction, the Company recorded a net after-tax gain of $42.5 million. On May 29, 1998, the Company sold its courier services unit. The Company recorded a $15.9 million after-tax charge in the first quarter of 1998 to reduce the Company's investment in this business and to provide for costs associated with its disposition. The Company did not record a gain or loss as a result of completing the sale of the unit. On June 3, 1998, the Company irrevocably called for redemption its $150 million principal amount of 9 1/8% senior subordinated notes due 2003. The notes were fully redeemed on July 3, 1998. This resulted in an extraordinary charge of $6.3 million in the second quarter. The Company entered into an agreement with Borg-Warner Automotive, Inc. ("Automotive") effective July 31, 1998 whereby the Company sold its rights to the "Borg-Warner" name and mark in the security field for $3.6 million. Automotive granted the Company an exclusive, royalty-free license to use the "Borg-Warner" name and mark in the security field for a four-year period. On August 10, 1998, the Company, the California Insurance Commissioner as trustee of the Mission Insurance Companies Trust ("Mission Trust") and the Illinois Director of Insurance as rehabilitator of Centaur Insurance Company agreed to settle the pending lawsuit between the Mission Trust and the Company, subject to court approval. As part of such settlement, the Company agreed to pay the Mission Trust $4 million and one-third of any dividend or other distribution that may be paid to the Company after rehabilitation of Centaur. The payments will not have an effect on Company earnings. Separately, the Mission Trust and Centaur agreed to an uncontested liquidated claim in the Centaur estate of $48 million, for which the Company is not liable. Additionally, the Illinois Director of Insurance, on behalf of the Centaur estate, and the Company agreed to exchange mutual releases of any remaining liability of the Company to the Centaur estate. The parties have finalized and executed the settlement and release agreements. The required court approvals of the settlement are being sought by the parties with final approval and dismissal of the lawsuit anticipated by the end of the first half of 1999. BUSINESS DESCRIPTION The Company is North America's largest provider of contract security personnel and related services with approximately 73,000 employees serving 14,000 customers in the United States, Canada, the United Kingdom and Colombia. RESULTS OF OPERATIONS
REVENUES 1998 vs. 1997 Percent (millions of dollars) 1998 1997 1996 Change - -------------------------------------------------------------------------------- Physical Security Services $ 1,323.4 $ 1,289.3 $ 1,223.8 2.6% Armored Security Services -- 15.3 246.3 NM - -------------------------------------------------------------------------------- Total Revenues $ 1,323.4 $ 1,304.6 $ 1,470.1 1.4%
Revenue increased in 1998 and 1997 principally due to new business growth, acquisitions, higher billing rates and improved customer retention which offset the impact of withdrawal from certain low-margin businesses. Excluding the effect of acquisitions, 1998 revenue was $1,310.9 million. INTERNATIONAL OPERATIONS Revenues for 1998 were $121.1 million compared with $116.9 million in 1997 and $110.3 million in 1996. Operations are primarily in Canada, the United Kingdom and Colombia. COSTS AND EXPENSES Cost of services, as a percentage of revenues, were 84.4%, 84.4% and 83.8% in 1998, 1997, and 1996 respectively. Gross profit margins were 15.6%, 15.6% and 16.2% over the same three year period. Gross margins in 1998 remained stable despite higher labor costs resulting from continued tight labor markets. Wage increases have principally been offset by better pricing and improved employee retention which results in generally lower recruiting and training expenses. The decreased 1997 gross margins are primarily a result of the Loomis, Fargo combination. Selling, general and administrative expenses, as a percentage of revenues, were 11.8%, 10.3%, and 10.5% for the years 1998, 1997, and 1996, respectively. The 1998 increase reflects a $14.4 million pretax provision recorded in the second quarter 1998. The 1998 provision was comprised of the following: . Severance and lease termination costs totaling $2.1 million resulting from the reorganization of administrative operations subsequent to the sale of the electronic security services business and the closure and consolidation of certain offices; . $5.5 million resulting from a review of the recoverability of certain intangible assets; . $2.3 million related to the final settlement of matters resulting from prior dispositions; and . $4.5 million related to certain other asset valuation allowances and provisions. 20 Borg-Warner Security Corporation Excluding this charge, selling, general and administrative expenses were 10.7% for 1998 versus 10.3% in 1997. The remaining increase is primarily related to increased investment to strengthen the Company's marketing capabilities and addressing Year 2000 issues. Depreciation expense was $4.2 million, $5.0 million, and $12.8 million for the years 1998, 1997, and 1996 respectively. The 1998 and 1997 decreases are primarily due to the Loomis, Fargo combination. Other net expense includes the results from the Company's share of the Loomis, Fargo joint venture. The Company recorded $0.1 million of earnings for its share of Loomis, Fargo in 1998 compared with net earnings of $1.1 million in 1997 (which included an after-tax gain of $2.2 million relating to the business combination). Excluding Loomis, Fargo, other expense was $6.5 million, $8.1 million, and $10.5 million in 1998, 1997, and 1996 respectively. The 1998 and 1997 decrease is principally a result of reduced amortization expenses in connection with the Loomis, Fargo combination in 1997 and the revaluation of certain intangible assets in 1998. NET INTEREST EXPENSE AND FINANCE CHARGES Interest expense attributed to continuing operations, including the amortization of financing costs, decreased to $15.5 million in 1998 from $16.7 million in 1997 and $27.2 million in 1996. The 1998 decrease is primarily related to lower average debt levels and decreased borrowing costs on the Company's variable rate debt. The 1997 decrease is principally due to proceeds received from the Loomis, Fargo combination and improved terms under the subsequent refinancing of bank borrowings. EARNINGS FROM DISCONTINUED OPERATIONS Refer to footnote 4 for a detailed explanation. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS The following Pro Forma Statements of Operations give effect to the armored services business combination in 1997, the sale of the courier services and electronic security services businesses, the related debt reduction, as well as certain related actions taken in 1998 as if they had been consummated on January 1, 1997. They also assume the aforementioned $14.4 million pretax provision had been recorded as of that date. The Pro Forma Statements of Operations are intended for informational purposes only and are not necessarily indicative of the future results of operations of the Company had the transactions occurred on the indicated dates or been in effect for the periods presented. The Pro Forma Statements of Operations should be read in conjunction with the historical Consolidated Financial Statements of the Company, including the related notes. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For Year Ended December 31, 1998
Pro Forma (millions of dollars, except per share) Historical Adjustments Pro Forma - ---------------------------------------------------------------------------------------------------------------- Net service revenues $ 1,323.4 $ 1,323.4 Cost of services 1,116.7 1,116.7 Selling, general and administrative expenses 155.7 $ (15.4)/(a)//(b)/ 140.3 Depreciation 4.2 4.2 Other expense, net 6.4 (1.4)/(b)//(c)/ 5.0 Interest expense and finance charges 15.5 (3.5)/(d)/ 12.0 - ---------------------------------------------------------------------------------------------------------------- Earnings before income taxes 24.9 20.3 45.2 Provision for income taxes 9.8 8.3/(h)/ 18.1 - ---------------------------------------------------------------------------------------------------------------- Earnings from continuing operations $ 15.1 $ 12.0 $ 27.1 - ---------------------------------------------------------------------------------------------------------------- Earnings per common share (fully diluted): Continuing operations $ 0.64 $ 0.49 $ 1.13 Average fully diluted shares outstanding (in thousands) 23,958 23,958
21 Management's Discussion and Analysis of Financial Condition and Results of Operations, continued PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For Year Ended December 31, 1997
Pro Forma (millions of dollars, except per share) Historical Adjustments Pro Forma - -------------------------------------------------------------------------------------------------------------------- Net service revenues $1,304.6 $ (15.3)/(e)/ $ 1,289.3 Cost of services 1,100.7 (12.9)/(e)/ 1,087.8 Selling, general and administrative expenses 134.3 0.1/(b)//(e)//(f)/ 134.4 Depreciation 5.0 (0.5)/(e)/ 4.5 Other expense, net 7.0 (0.6)/(c)//(g)/ 6.4 Interest expense and finance charges 16.7 (3.8)/(d)/ 12.9 - -------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 40.9 2.4 43.3 Provision for income taxes 15.1 2.3/(h)/ 17.4 - -------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations $ 25.8 $ 0.1 $ 25.9 - -------------------------------------------------------------------------------------------------------------------- Earnings per common share (fully diluted): Continuing operations $ 1.07 -- $ 1.07 Average fully diluted shares outstanding (in thousands) 24,075 24,075
Notes to Pro Forma Consolidated Statement of Operations: (a) Eliminates the $14,4 million ($8.6 million net of tax) charge in the 1998 second quarter resulting from the reorganization of administrative support operations following the sale of the electronic security services business, the reduction of certain intangible assets and other provisions. (b) Eliminates expenses relating to restructuring activities and other provisions. (c) Reflects reduction in the carrying value of certain intangible assets. (d) Reflects the interest expense reduction as if the sale of Wells Fargo Alarm had occurred on January 1,1997 with the proceeds applied to eliminate $150 million principal amount of 9 1/8% notes, borrowings under the Company's bank credit line and the remainder used to reduce usage of the accounts receivable facility. (e) Elimination of revenues and expenses associated with the armored security services operation. (f) Eliminates a $1.9 million ($1.1 million net of tax) pension curtailment gain recorded in the third quarter of 1997. (g) Eliminates the $2.2 million gain recorded in the first quarter of 1997 for the sale of the armored security services operation. (h) Reflects the tax effect of pro forma adjustments by applying an estimated federal, state and foreign tax rate of 40% for all periods presented. EXTRAORDINARY ITEM The Company recorded a $6.3 million extraordinary charge (net of $4.1 million tax benefit) in the second quarter of 1998 associated with early redemption of $150 million principal amount of 9 1/8% senior subordinated notes due 2003 and the write-off of certain deferred financing fees. CASH FLOW The Company reduced its balance sheet debt by $212.0 million and the balance of its receivables sold by $20.0 million, while increasing cash and short-term investments by $97.7 million in 1998. The principle underlying source was the sale of Wells Fargo Alarm Services Company to ADT for $425.0 million plus assumptions of $6.0 million debt by the buyer. After taxes this transaction generated approximately $369 million. 1998 cash provided from continuing operations was $30.7 million, reflecting earnings of $15.1 million and $16.6 million in non-cash charges. Offsetting this were outlays aggregating approximately $30 million for corporate insurance, escheat and other commitments. Further, discontinued operations required approximately $24 million prior to their sale. In 1997, balance sheet debt declined $98.4 million, and accounts receivable sold declined $7.8 million, while cash and short-term investments declined $7.4 million. The combination of Wells Fargo Armored with Loomis Armored generated approximately $92.9 million inflow. Cash flow from continuing operations was $13.0 million while $7.1 million was absorbed by discontinued operations. LIQUIDITY The Company maintained a $225 million bank line of credit at December 31, 1998 which matures on March 31, 2002. Of this, a maximum of $125 million is available for issuance of letters of credit. At December 31, 1998, there were no borrowings under the bank facility. Letters of credit totaled $93.2 million. The Company maintained an accounts receivable facility allowing for aggregate sales of $120 million at December 31, 1998. Net sales at that date were $82.4 million. In January 1999, this facility was replaced by a new $120 million facility which concludes on December 31, 2003. Cash and equivalents were $105.7 million at December 31, 1998. Of this, $50 million was restricted under the terms of the bank credit line. The Company believes that cash flow from operations, together with existing cash and borrowing capacity, is adequate to meet its capital needs. 22 Borg-Warner Security Corporation DISCLOSURES ABOUT MARKET RISK The Company has minimal market risk exposures which are primarily related to changes in interest rates. The Company's policy is to manage interest rate exposures with a blend of fixed and floating rate borrowings and, from time to time, with interest rate swap agreements that hedge outstanding borrowings. The Company entered into no interest rate swap agreements during 1998. As of December 31, 1998, the Company's long-term indebtedness consists of fixed rate debt of $124.4 million. The Company also maintains a revolving bank credit facility with a total commitment of $225 million, which carries variable interest rates (based on LIBOR or the prime rate). At December 31,1998, there were no borrowings under the bank facility. In addition, the Company sells up to $120 million of accounts receivable on a revolving basis under an accounts receivable securitization arrangement. The funding costs associated with proceeds received from sales of receivables under this arrangement, which is accounted for under SFAS No. 125, are based on a mix of fixed and floating rates. As of December 31,1998, the Company has arranged a replacement facility, and future sales will be based on short-term commercial paper rates. Currently, the Company does not use foreign currency forward contracts and does not have any material foreign currency exposure. YEAR 2000 GENERAL Since the inception of computers, software applications were programmed to identify a year as a two-digit data field. In the new millennium, computer applications and software may recognize the year 2000 as two zeros (00) or 1900. This incorrect date recognition could cause systems and software malfunctions that could have a material effect on business operations. COMPANY'S READINESS To ensure minimal business interruption due to computer failure, the Company has performed a review of all software and computer applications for the Year 2000 entry. Both "IT systems" and "non-IT systems" were reviewed. IT systems refer to all purchased and internally developed software applications and programs. Non-IT systems refer to various business machines that have "embedded" computer language, examples of which are computer integrated circuits ("chips") and telephone switches. The review was completed using company technologists as well as external consulting firms. System date remediation is being conducted in phases. First, all relevant computer systems were assessed as to functionality and to determine the Year 2000 impact. Second, for those systems and software found to be non-compliant or in need of upgrading, corrective steps have been, and will be taken, such as the reprogramming or purchasing of replacement system software. Finally, all systems and software modifications will be tested and then implemented at all necessary levels. The Company has completed the initial corrective phase and approximately 80% of all systems are deemed to be Year 2000 compliant. Systems are in the process of being installed and production tested . COMPANY RISKS AND CONTINGENCY PLANS Systems crucial to the operations of the Company such as payroll and client billing and logistical security guard scheduling are Year 2000 compliant. The remaining systems identified as non- compliant are being upgraded or replaced. The Company expects that all upgrades, replacements and installments will be completed in all material aspects by December 1, 1999. Operationally, the worst case scenario, the failure of the payroll, client billing or guard scheduling systems is backed up by an on-line, time-entry system that will prevent any material business interruption. The likely financial and non-financial impact of non-compliant third party computer systems on the Company has not been quantified, as the Company cannot predict other businesses' Year 2000 efforts. However, no single customer or third party vendor of the Company could likely generate a material adverse impact on Company operations. The Company will continue to assess its exposure to any potential risks. COSTS OF COMPLIANCE To date, the Company has spent approximately $0.5 million toward remediation of its Year 2000 problems, which includes computer consultant costs. Estimates of the remaining cost of compliance are deemed not material by the Company. Independent of the Year 2000 issue, the Company has been in the process of both upgrading and replacing certain systems and obsolete hardware to enhance their functionality. The Company's Year 2000 analysis and disclosure contains "forward looking" statements about matters that are inherently difficult to predict. Such statements include statements regarding the intent, opinion and current expectations of the Company and its management. Such "forward looking" statements involve risks and uncertainties that may affect future developments, such as, the inability to deal with a Year 2000 issue due to a problem arising on the part of a third party or vendor. While the Company believes that it has implemented methodologies to address the Year 2000 issue so that it should not materially affect its financial position, future operating results or cash flows, no assurance can be given with respect to the ultimate outcome. 23 Consolidated Statement of Operations and Comprehensive Income
Year Ended December 31, (millions of dollars, except per share) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------- Net service revenues $ 1,323.4 $ 1,304.6 $ 1,470.1 Cost of services 1,116.7 1,100.7 1,231.4 Selling, general and administrative expenses 155.7 134.3 154.4 Depreciation 4.2 5.0 12.8 Other expense, net 6.4 7.0 10.5 Interest expense and finance charges 15.5 16.7 27.2 - --------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 24.9 40.9 33.8 Provision for income taxes -- Note 12 9.8 15.1 13.6 - --------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 15.1 25.8 20.2 Gain (loss) from discontinued operations, net of income taxes -- Note 4 20.3 (6.8) (34.8) - --------------------------------------------------------------------------------------------------------------------- Earnings (loss) before extraordinary item 35.4 19.0 (14.6) Extraordinary item: Loss from early extinguishment of debt, net of $4.1 tax benefit (6.3) -- -- - --------------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ 29.1 $ 19.0 $ (14.6) ===================================================================================================================== Earnings (loss) per common share -- basic: Continuing operations $ 0.64 $ 1.10 $ 0.87 Discontinued operations 0.87 (0.29) (1.50) Extraordinary item (0.27) -- -- - --------------------------------------------------------------------------------------------------------------------- Net earnings (loss) per share $ 1.24 $ 0.81 $ (0.63) ===================================================================================================================== Earnings (loss) per common share -- diluted: Continuing operations $ 0.64 $ 1.07 $ 0.86 Discontinued operations 0.83 (0.28) (1.48) Extraordinary item (0.26) -- -- - --------------------------------------------------------------------------------------------------------------------- Net earnings (loss) per share $ 1.21 $ 0.79 $ (0.62) ===================================================================================================================== Comprehensive income: Net earnings (loss) $ 29.1 $ 19.0 $ (14.6) Other comprehensive income (loss): Currency translation adjustment, net of tax ($1.0 benefit in 1998, $0.3 benefit in 1997, $0.5 expense in 1996) (1.5) (0.5) 0.8 Minimum pension liability adjustment, net of tax ($1.0 benefit in 1997, $2.7 benefit in 1996) -- 2.1 4.0 - --------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss) $ 27.6 $ 20.6 $ (9.8) =====================================================================================================================
(See accompanying notes to consolidated financial statements) 24 Consolidated Balance Sheet Borg-Warner Security Corporation
December 31, (millions of dollars, except share data) 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 105.7 $ 8.0 Receivables, net 55.9 18.5 Other current assets 68.9 67.3 - --------------------------------------------------------------------------------------------------------------------- Total current assets 230.5 93.8 Property, plant and equipment Land and buildings 18.5 18.0 Machinery and equipment 25.2 20.2 - --------------------------------------------------------------------------------------------------------------------- 43.7 38.2 Less accumulated depreciation 25.6 23.1 - --------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 18.1 15.1 Net excess purchase price over net assets acquired 111.1 114.6 Deferred tax asset, net 42.4 40.5 Net assets of discontinued operations -- 327.0 Other assets 29.8 34.9 - --------------------------------------------------------------------------------------------------------------------- Total other assets 183.3 517.0 - --------------------------------------------------------------------------------------------------------------------- $ 431.9 $ 625.9 ===================================================================================================================== Liabilities and Shareholders' Equity Notes payable $ 2.3 $ 1.2 Accounts payable and accrued expenses 130.5 119.6 - --------------------------------------------------------------------------------------------------------------------- Total current liabilities 132.8 120.8 Long-term debt 124.4 337.5 Other long-term liabilities 77.8 102.6 Capital stock: Common stock, issued 23,879,092 shares in 1998 and 23,362,806 shares in 1997 0.2 0.2 Series I non-voting common stock, issued 2,720,000 shares in 1998 and 1997 -- -- Capital in excess of par value 35.2 30.8 Retained earnings 70.8 41.7 Accumulated other comprehensive income: Currency translation adjustment (1.5) -- - --------------------------------------------------------------------------------------------------------------------- 104.7 72.7 Treasury common stock, at cost, 2,768,339 shares in 1998 and 2,506,400 shares in 1997 (7.8) (7.7) - --------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 96.9 65.0 - --------------------------------------------------------------------------------------------------------------------- $ 431.9 $ 625.9 =====================================================================================================================
(See accompanying notes to consolidated financial statements) 25 Consolidated Statement of Cash Flows
Year ended December 31, (millions of dollars) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Operating: Continuing operations: Earnings from continuing operations $ 15.1 $ 25.8 $ 20.2 Adjustments to reconcile net earnings to net cash provided by continuing operations: Non-cash charges to earnings: Depreciation and amortization 10.7 13.1 23.3 Provision for losses on receivables 5.1 3.1 2.9 Deferred income taxes (5.5) 77 6.3 Adjustment to excess purchase price 5.5 -- -- Amortization of debt discount 0.8 -- 0.6 Changes in assets and liabilities: Increase in receivables (32.0) (17.0) (5.0) Decrease (increase) in other current assets 18.4 6.5 (3.5) Increase (decrease) in accounts payable and accrued expenses 42.6 (23.1) (12.3) Net change in other long-term assets and liabilities (30.0) (0.9) (13.3) Gain on sale of assets of armored services unit -- (2.2) -- - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operations 30.7 13.0 19.2 Discontinued operations: Net loss, excluding gain on alarm sale (22.2) (6.8) (34.8) Other cash related to discontinued operations (17.5) (0.3) 42.2 - --------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by discontinued operations (39.7) (7.1) 7.4 - --------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities (9.0) 5.9 26.6 Investing: Capital expenditures (6.9) (4.3) (11.2) Proceeds from sale of subsidiaries, net of tax paid ($58.5 million in 1998) 362.9 92.9 -- Proceeds from land sale 6.7 -- -- Net cash paid for acquisitions (11.5) -- -- Other, net 0.2 0.1 1.8 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 351.4 88.7 (9.4) Financing: Increase (decrease) in notes payable 1.1 (1.5) 0.7 Decrease in debt outstanding under revolving credit facility (63.9) (22.9) (37.8) (Decrease) increase in receivables sold (20.0) (7.8) 21.3 Issuance of long-term debt -- 125.0 100.0 Retirement of long-term debt (150.0) (197.8) (103.7) Treasury shares (acquired) sold (0.1) 1.1 0.3 Repurchase of old BW Corporation shares (7.9) -- -- Premium on extinguishment of debt (6.8) -- -- Other, net 2.9 1.9 0.1 - --------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (244.7) (102.0) (19.1) - --------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 97.7 (7.4) (1.9) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8.0 15.4 17.3 - --------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 105.7 $ 8.0 $ 15.4 =========================================================================================================================== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 34.6 $ 40.8 $ 57.7 Income taxes paid 60.4 9.4 2.8
(See accompanying notes to consolidated financial statements) 26
Consolidated Statement of Shareholders' Equity Borg-Warner Security Corporation Year Ended December 31, 1998 1997 1996 (millions of dollars, except per share) SHARES AMOUNT Shares Amount Shares Amount - ------------------------------------------------------------------------------------------------------------------------------ Common Stock Issued Beginning balance 26,082,806 $ 0.2 25,166,100 $ 0.2 25,166,100 $ 0.2 Shares issued under stock option and related plans 266,686 -- 16,706 -- -- -- Conversion of Series I non-voting shares to common shares 249,600 -- 900,000 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 31 26,599,092 0.2 26,082,806 0.2 25,166,100 0.2 - ------------------------------------------------------------------------------------------------------------------------------ Capital in Excess of Par Value Beginning balance 30.8 29.0 28.1 Shares issued under stock option and related plans 3.2 1.0 0.4 Tax benefit from trust distribution and exercise of stock options 1.2 0.8 0.5 - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 31 35.2 30.8 29.0 - ------------------------------------------------------------------------------------------------------------------------------ Retained Earnings Beginning balance 41.7 20.6 31.2 Net earnings (loss) 29.1 19.0 (14.6) Adjustment for deferred pension experience loss -- 2.1 4.0 - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 31 70.8 41.7 20.6 - ------------------------------------------------------------------------------------------------------------------------------ Notes Receivable - Management Stock Purchase Beginning balance -- (0.3) (0.3) Net activity -- 0.3 -- - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 31 -- -- (0.3) - ------------------------------------------------------------------------------------------------------------------------------ Accumulated Other Comprehensive Income - Currency Translation Adjustment Beginning balance -- 0.5 (0.4) Current year adjustment (1.5) (0.5) 0.9 - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 31 (1.5) -- 0.5 - ------------------------------------------------------------------------------------------------------------------------------ Treasury Stock Beginning balance 2,506,400 (7.7) 1,862,311 (8.8) 1,928,861 (9.1) Shares issued under stock option and related plans -- -- (255,911) 1.1 (66,550) 0.3 Shares acquired 12,339 (0.1) -- -- -- -- Conversion of Series I non-voting shares to common shares 249,600 -- 900,000 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 31 2,768,339 (7.8) 2,506,400 (7.7) 1,862,311 (8.8) - ------------------------------------------------------------------------------------------------------------------------------ Total Shareholder's Equity $ 96.9 $ 65.0 $ 41.2 - ------------------------------------------------------------------------------------------------------------------------------
(See accompanying notes to consolidated financial statements) 27 Notes to Consolidated Financial Statements NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following paragraphs briefly describe significant accounting policies. Certain 1997 and 1996 amounts have been reclassified to conform with the 1998 presentation. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include all significant subsidiaries. Due to the May 29, 1998 sale of the electronic security and courier services units, the assets, liabilities, results of operations and cash flows of such units have been segregated and reported as discontinued operations for all periods presented. Previously reported results have been restated (see Note 4). The Company's 49% investment in Loomis, Fargo is accounted for under the equity method (see Note 3). USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results may differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents consists primarily of cash and short-term money market funds. PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION Property, plant and equipment is carried at cost less accumulated depreciation. Expenditures for maintenance, repairs and renewals of relatively minor items are generally charged to expense as incurred. Renewals of significant items are capitalized. Depreciation is computed generally on the straight-line method over the following estimated useful lives: Buildings and improvements 40 years Machinery and equipment 3 to 5 years Capitalized software 5 years AMORTIZATION OF EXCESS PURCHASE PRICE OVER NET ASSETS ACQUIRED Excess of purchase price over net assets acquired is being amortized on a straight-line basis over 5 to 40 years, with the majority being amortized over 40 years. The Company periodically reviews its operations to determine whether there has been a diminution in value of its excess purchase price over net assets acquired. As a result of such a review, based on anticipated future cash flows in 1998 the Company adjusted the carrying value of such excess purchase price related to certain security services acquisitions by $5.5 million. The charge is included in selling, general and administrative expenses in the Consolidated Statement of Operations and Comprehensive Income. DERIVATIVE FINANCIAL INSTRUMENTS Prior to 1998, the Company used interest rate swap agreements to manage exposure to interest rate fluctuations. The Company does not use derivative instruments for speculative purposes. The differential paid or received on interest rate swap agreements is recognized as an adjustment to interest expense in the period incurred or earned. At December 31, 1998 and 1997, there were no interest rate swaps outstanding. CASUALTY INSURANCE LIABILITIES The Company has accrued a discounted liability for the retained portion of insurance costs related to its various deductible policies. This insurance liability is determined by the Company based on claims filed and an estimate of claims incurred but not yet reported (see Note 2). REVENUE RECOGNITION Revenue is recognized at the time services are provided. In certain circumstances this can result in revenue recognition prior to customer billing. TRANSACTIONS WITH BORG-WARNER AUTOMOTIVE Under a tax-sharing agreement with the Company, for periods prior to January 1993, Borg-Warner Automotive is required to pay the Company for any operating loss carry forward apportioned to it at such time as the benefits related to such carry-forward are realized by Borg-Warner Automotive. Also, certain costs incurred at corporate headquarters are charged to Borg-Warner Automotive based on a service agreement with the Company. RETIREMENT BENEFIT PLANS A number of eligible salaried and hourly employees participate in contributory or noncontributory defined benefit or defined contribution plans. Funding policy is based upon independent actuarial valuations and is within the limits required by ERISA for U.S. defined benefit plans. The benefits provided to certain salaried employees covered under various defined benefit plans are based on years of service and final average pay and utilize the projected unit credit method for cost allocation. The benefits provided to certain hourly employees under various defined benefit plans are based on years of service and utilize the unit credit method for cost allocation. Under the defined contribution plans, contributions by the Company or its subsidiaries sponsoring the plans are based on the employees' salary, age, years of service, and/or a fixed schedule. These contributions are charged to earnings as they are made to the various plans (see Note 9). STOCK OPTIONS The Company uses the intrinsic value method for expense recognition for stock options and discloses additional information, including the impact under the fair value method, in the notes to the financial statements (see Note 10). 28 Borg-Warner Security Corporation INCOME TAXES Income taxes are determined using the liability method, under which deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax basis of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the currently enacted tax rate expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be settled or realized (see Note 12). EARNINGS PER COMMON SHARE (EPS) Earnings per share is presented on a basic and a fully diluted basis in the financial statements. Basic EPS is based on average outstanding common shares. Diluted EPS is based on average outstanding common shares and common share equivalents. Common share equivalents recognize the dilutive effects of common shares which may be issued in the future upon exercise of certain stock options (see Note 14). NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income." The Company's comprehensive earnings included adjustments for foreign currency translation and minimum pension liability costs. In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131). This statement modifies segment disclosure requirements and has no impact upon the consolidated financial position, results of operations or cash flows of the Company (see Note 11). In February 1998, Statement of Financial Accounting Standards No. 132 "Employer's Disclosures about Pensions and Other Retirement Benefits" was issued. This statement revises disclosures on retirement benefit plans but does not change their measurement or timing of recognition (see Note 9). In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which is effective for the year ending December 31, 2000. SFAS 133 will require the Company, to the extent that it makes use of derivative financial instruments, to record them on the balance sheet at fair value. Given the Company's current and anticipated usage of derivative financial instruments, the impact of adopting this standard will not be material to its financial position or results of operations. In 1998, the Company adopted AICPA SOP No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires the cost of purchased software and certain costs incurred in developing computer software for internal use to be capitalized and amortized over future periods, During the year ended December 31, 1998, the Company capitalized $1.6 million of such costs that would have been charged to expense under its previous accounting policy. NOTE 2 -- BALANCE SHEET INFORMATION Detailed balance sheet data are as follows:
DECEMBER 31, (millions of dollars) 1998 1997 - -------------------------------------------------------------------------------- Receivables Customers $ 53.5 $ 21.2 Other 9.4 1.3 - -------------------------------------------------------------------------------- 62.9 22.5 Less allowance for losses 7.0 4.0 - -------------------------------------------------------------------------------- Net receivables $ 55.9 $ 18.5 - -------------------------------------------------------------------------------- Other current assets Retained interest in receivables $ 15.7 $ 30.8 Restricted interest-bearing cash deposits 37.6 17.6 Uniforms 6.4 6.2 Other 9.2 12.7 - -------------------------------------------------------------------------------- Total other current assets $ 68.9 $ 67.3 - -------------------------------------------------------------------------------- Other assets Debt issuance costs $ 3.5 $ 8.0 Deferred pension asset 15.9 12.1 Other 10.4 14.8 - -------------------------------------------------------------------------------- Total other assets $ 29.8 $ 34.9 - -------------------------------------------------------------------------------- Accounts payable and accrued expenses Trade payables $ 21.8 $ 24.9 Payroll and related 36.4 36.1 Casualty insurance and claims 36.2 28.5 Interest 3.5 6.7 Liabilities to former shareholders 0.1 7.4 Other 32.5 16.0 - -------------------------------------------------------------------------------- Total accounts payable and accrued expenses $130.5 $119.6 - --------------------------------------------------------------------------------
The Company has an agreement under which it sells a revolving pool of trade accounts receivable to a special purpose subsidiary of the Company. At December 31,1998 and 1997, the subsidiary had purchased $135.7 million and $150.8 million of such accounts receivable, respectively. The subsidiary sells up to $120 million of undivided interests in such accounts receivable. The difference represents the interest retained by the Company which is considered as an interest in a security and has been included in "Other current assets." The fair value of the retained interest approximates its carrying value due to the short-term nature of the receivables. Also included in "Other current assets" is $37.6 million and $17.6 million at December 31, 1998 and 1997 respectively, representing interest-bearing cash 29 Notes to Consolidated Financial Statements, continued deposits held in trust under the terms of the agreement. These deposits represent proceeds of collections held back based on the amount of eligible receivables in the pool. The Company's retained interest in the receivables and cash deposits is generally restricted. Selling, general and administrative expenses include provisions for losses on receivables of $5.1 million, $3.1 million and $2.9 million in 1998, 1997 and 1996, respectively. Accumulated amortization related to excess purchase price over net assets acquired amounted to $53.7 million and $48.9 million at December 31, 1998 and 1997, respectively. Trade payables include checks outstanding in excess of bank deposits in the Company's central disbursement accounts, since arrangements with the banks do not call for reimbursement until checks are presented for payment. Such amounts were $21.1 million and $24.1 million at December 31, 1998 and 1997, respectively. The non-current portion of the casualty insurance liability, included in other long-term liabilities, was $47.9 million and $58.6 million at December 31, 1998 and 1997, respectively. The total discounted insurance accrual, including the portion reflected in accounts payable and accrued liabilities, was $79.1 million and $86.2 million at December 31, 1998 and 1997, respectively. The estimated aggregate undiscounted insurance liability was $85.4 million and $101.1 million at December 31, 1998 and 1997, respectively. The discount rate used to value the future obligation at December 31, 1998 and 1997 was 4.5 percent and 6.0 percent, respectively. NOTE 3 -- INVESTMENT IN AFFILIATES On January 24, 1997, the Company's armored security services unit entered into a business combination with Loomis Armored. The combined company, known as Loomis, Fargo & Co., is owned 51 percent by the former Loomis shareholders and 49 percent by the Company. The Company's armored services unit contributed substantially all of its assets and assigned certain of its liabilities to Loomis, Fargo in exchange for (i) 4,900,000 shares of Loomis, Fargo common stock and (ii) a cash payment of approximately $105 million which includes amounts paid to satisfy intercompany indebtedness assumed by Loomis, Fargo. The cash proceeds received were net of transaction costs and subject to certain adjustments. The business combination impacts the comparison of the Company's 1998 results to prior periods because the armored services unit was included in the Company's results of consolidated operations for only 23 days in 1997 and the full year 1996. Armored security revenues were $15.3 million and $246.3 million in 1997 and 1996, respectively. Armored security operating profit was $0.9 million in 1997, compared with $12.1 million in 1996. The Company accounts for its interest in Loomis, Fargo as an equity investment. The Company recorded net income related to Loomis, Fargo of $0.1 million in 1998 and $1.1 million in 1997, including a $2.2 million gain recognized in the combination. The Company does not guarantee the indebtedness of Loomis, Fargo nor is it required to fund Loomis, Fargo's future operations. 30 Borg-Warner Security Corporation NOTE 4 - DISCONTINUED OPERATIONS On May 29, 1998, the Company sold its electronic security services business to ADT Security Services, a subsidiary of Tyco International, Ltd. for approximately $425 million plus the assumption of approximately $6 million of debt by the buyer. The Company recorded a net after-tax gain of $42.5 million in the second quarter. On May 29, 1998, the Company sold its courier services business. In the first quarter of 1998, the Company recorded a $15.9 million after-tax charge (net of $11.0 million tax benefit) to reduce its investment in this business, to provide for costs associated with its disposition, and for anticipated further losses prior to sale. The Company did not record a gain or loss as a result of completing the sale. The courier services operation has been carried as a discontinued operation since September 1996. The assets, liabilities, results of operations and cash flows have been segregated and reported as discontinued operations for all periods presented. Previously reported discontinued operations have been restated to reflect the discontinued presentation of both businesses.
Year ended December 31, (millions of dollars, except per share) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- Net service revenues: Electronic security services business $ 81.2 $ 243.4 $ 241.1 Courier services business 56.0 142.2 140.0 - ----------------------------------------------------------------------------------------------------------------- Total net service revenue $ 137.2 $ 385.6 $ 381.1 - ----------------------------------------------------------------------------------------------------------------- Loss from operations before income taxes: Electronic security services business $ (10.3) $ (10.8) $ (10.6) Courier services business -- -- (5.4) - ----------------------------------------------------------------------------------------------------------------- Total loss from operations before income taxes (10.3) (10.8) (16.0) Income tax benefit 4.0 4.0 6.2 - ----------------------------------------------------------------------------------------------------------------- Loss from operations (6.3) (6.8) (9.8) Adjustment of courier assets to realizable value and provision for future losses (net of $11.0 million tax benefit in 1998 and $2.0 million tax benefit in 1996) (15.9) -- (25.0) Gain on sale of electronic security services business (net of $59.8 million tax expense) 42.5 -- -- - ----------------------------------------------------------------------------------------------------------------- Net income (loss) from discontinued operations $ 20.3 $ (6.8) $ (34.8) - ----------------------------------------------------------------------------------------------------------------- Income (loss) per common share (fully diluted): Loss from operations $ (0.27) $ (0.28) $ (0.42) Gain (loss) on sale and net asset adjustment 1.10 -- (1.06) - ----------------------------------------------------------------------------------------------------------------- Income (loss) per common share $ 0.83 $ (0.28) $ (1.48) - -----------------------------------------------------------------------------------------------------------------
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT The following is a summary of notes payable and long-term debt which reflects all borrowings of the Company and its consolidated subsidiaries:
December 31, 1998 December 31, 1997 - ----------------------------------------------------------------------------------------------------------------- (millions of dollars) CURRENT LONG-TERM Current Long-Term - ----------------------------------------------------------------------------------------------------------------- 9 1/8% senior subordinated notes (face amount $150 million due 2003) $ -- $ -- $ -- $ 149.2 9 5/8% senior subordinated notes (face amount $125 million due 2007) -- 124.4 -- 124.2 Bank revolving credit loan due through 1999 (at an average rate of 7.9% in 1997) -- -- -- 63.9 Unsecured notes (at an average rate of 8.8% in 1998 and 7.6% in 1997) 2.3 -- 1.2 0.2 - ----------------------------------------------------------------------------------------------------------------- Total notes payable and long-term debt $ 2.3 $ 124.4 $ 1.2 $ 337.5 - -----------------------------------------------------------------------------------------------------------------
31 Notes to Consolidated Financial Statements, continued Included in long-term debt at December 31, 1998 and 1997 were obligations of $124.4 million and $273.6 million, respectively, with fixed interest rates. At December 31, 1997 there was $63.9 million of long-term debt with variable interest rates (generally based on LIBOR or prime rate). In 1998, the Company amended its bank facility and called the entire $150 million principal amount of its 9 1/8% senior subordinated notes for early redemption. The Company recorded a $6.3 million extraordinary charge (net of $4.1 million tax benefit) in the second quarter of 1998 associated with its early redemption and the write-off of certain deferred financing fees. The bank facility was reduced from $285 million to $225 million to reflect lower requirements after the disposal of the courier and electronic segments. Up to $125 million of the bank facility is available for letters of credit. The revolving credit commitment is reduced by the total dollar amount of letters of credit issued and outstanding, $93.2 million at December 31, 1998. The entire bank facility is available through March 31, 2002. The credit facilities contain numerous financial and operating covenants including, among others, covenants requiring the Company to maintain certain financial ratios and restricting its ability to incur additional indebtedness, to create or permit to exist certain liens, to pay dividends or to make certain other restricted payments. To secure its obligations under these facilities, the Company pledged the stock of certain of its subsidiaries. NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS The methods and assumptions used to estimate the fair value of each class of financial instrument are as follows: CASH AND CASH EQUIVALENTS, RECEIVABLES, NOTES PAYABLE AND ACCOUNTS PAYABLE The carrying amounts approximate fair value because of the short maturity of these instruments. LONG-TERM DEBT The fair values of the Company's long-term debt are estimated based on quoted market prices of the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying amounts and fair values of long-term debt at December 31, 1998 and 1997 were as follows:
December 31, (millions of dollars) 1998 1997 - -------------------------------------------------------------------------------- Carrying amount $ 124.4 $337.5 Fair value 134.0 342.1
INTEREST RATE SWAPS The Company uses interest rate swap agreements from time to time to manage exposure to interest rate fluctuations. The Company does not use derivative instruments for speculative purposes. The differential paid or received on interest rate swap agreements is recognized as an adjustment to interest expense in the period incurred or earned. There were no interest rate swap agreements outstanding at December 31, 1998 or 1997. LETTERS OF CREDIT The Company utilizes third-party letters of credit to guarantee certain casualty insurance activities. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined in the marketplace. The contract value/fair value of the letters of credit at December 31, 1998 and 1997 was $93.2 million and $110.8 million, respectively. To assure the counter parties' ability to perform, these letters of credit are only executed with major financial institutions. NOTE 7 - COMMITMENTS The Company is committed to pay rents on non-cancelable operating leases with terms exceeding one year. Rental amounts committed in future years are summarized at December 31, 1998 as follows:
Fiscal year (millions of dollars) - -------------------------------------------------------------------------------- 1999 $10.9 2000 8.2 2001 5.1 2002 2.6 2003 1.7 2004 and after 5.4 - -------------------------------------------------------------------------------- Total $33.9 - --------------------------------------------------------------------------------
Total rental expense amounted to $14.3 million, $12.3 million and $21.0 million in 1998, 1997 and 1996, respectively. 32 Borg-Warner Security Corporation NOTE 8 - CONTINGENT LIABILITIES The Company's discontinued property and casualty insurance subsidiary ("Centaur") ceased writing insurance in 1984 and has been operating under rehabilitation since September 1987. Rehabilitation is a process supervised by the Illinois Director of Insurance to attempt to compromise claim liabilities at an aggregate level that is not in excess of Centaur's assets. In rehabilitation, Centaur's assets are being used to satisfy claim liabilities under direct insurance policies written by Centaur. Any remaining assets will be applied to Centaur's obligations to other insurance companies under reinsurance contracts. The foregoing has resulted in a pending lawsuit against the Company for recovery of alleged damages incurred in excess of $100 million as a result of the failure of Centaur to satisfy its reinsurance obligations. On August 10, 1998 the Company, the California Insurance Commissioner as trustee of the Mission Insurance Companies Trust ("Mission Trust") and the Illinois Director of Insurance as rehabilitator of Centaur agreed to settle such lawsuit, subject to court approval. As part of such settlement, the Company agreed to pay the Mission Trust $4 million and one-third of any dividend or other distribution that may be paid to the Company after rehabilitation of Centaur. The payments will not have an effect on Company earnings. Separately, the Mission Trust and Centaur agreed to an uncontested liquidated claim in the Centaur estate of $48 million, for which the Company is not liable. Additionally, the Illinois Director of Insurance, on behalf of the Centaur estate, and the Company agreed to exchange mutual releases of any remaining liability of the Company to the Centaur estate. The parties have finalized and executed the settlement and release agreements. The required court approvals of the settlement are being sought by the parties with final approval and dismissal of the lawsuit anticipated in the first half of 1999. The Company and certain of its current and former subsidiaries have been identified by the U.S. Environmental Protection Agency and certain state environmental agencies as potentially responsible parties ("PRPs") at several hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund") and equivalent state laws and, as such, may be liable for the cost of cleanup and other remedial activities at these sites. Responsibility for cleanup and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. The Company believes that none of these mailers individually or in the aggregate will have a material adverse effect on its financial position or future operating results, generally either because the maximum potential liability at a site is not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such liability. Based on its estimate of allocations of liability among PRPs, the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the costs allocated to them, currently available information concerning the scope of contamination at such sites, estimated remediation costs at such sites, indemnification obligations in favor of the Company from the current owners of certain sold or discontinued operations, estimated legal fees and other factors, the Company has made provisions for indicated environmental liabilities in the aggregate amount of approximately $5 million. Additionally, the Company will be indemnified by its former subsidiary, Borg-Warner Automotive, against certain future costs relating to environmental liabilities associated with certain former automotive operations. In November and December, 1998, Loomis, Fargo & Company made various claims against the Company for indemnification under the Contribution Agreement dated November 28, 1996 for certain cargo losses and environmental losses. The Company has objected to the claims. If the parties are unable to resolve their dispute, it will be referred to arbitration as provided for under the Contribution Agreement. The Company believes that the various asserted claims and litigation in which it is involved will not materially affect its financial position, future operating results or cash flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation. 33 Notes to Consolidated Financial Statements, continued NOTE 9 - RETIREMENT BENEFITS The Company provides various defined benefit and contribution plans as well as other postretirement benefit plans to employees. The following provides a reconciliation of benefit obligations, plan assets, and funded status of plans.
(millions of dollars) Pension Benefits Other Postretirement Benefits - ----------------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at January 1 $ 106.6 $ 94.0 $ 10.8 $ 8.8 Service cost 1.4 2.4 -- -- Interest cost 7.5 7.6 0.3 0.3 Actuarial loss 3.3 12.6 1.2 2.7 Curtailment gain (0.9) (3.6) -- -- Benefits paid from plan assets (9.3) (6.4) (1.1) (1.1) - ----------------------------------------------------------------------------------------------------------------------- Benefit obligation at December 31 $ 108.6 $ 106.6 $ 11.2 $ 10.7 - ----------------------------------------------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS Fair value of plan assets at January 1 $ 124.4 $ 101.8 Actual return on plan assets 24.3 26.4 Company contributions -- 2.6 Benefits paid from plan assets (9.3) (6.4) - ------------------------------------------------------------------------------------- Fair value of plan assets at December 31 $ 139.4 $ 124.4 - -------------------------------------------------------------------------------------- Funded status of the plans $ 30.8 $ 17.8 $ (11.2) $ (10.7) Unrecognized actuarial gain (15.2) (6.5) (0.3) -- Unrecognized prior service cost 0.2 0.8 -- -- - ----------------------------------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 15.8 $ 12.1 $ (11.5) $ (10.7) - ----------------------------------------------------------------------------------------------------------------------- ASSUMPTIONS AS OF DECEMBER 31 Discount rate 7.00% 7.50% 7.00% 750% Expected return on plan assets 10.00% 10.00% N/A N/A Rate of compensation increase 4.00% 4.00% N/A N/A Medical trend-valuation year N/A N/A 7.00% 6.25% Medical trend-ultimate N/A N/A 5.25% 5.25%
Net periodic pension and other postretirement benefit costs include the following components:
Pension Benefits Other Postretirement Benefits - ----------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Service cost $ 1.4 $ 2.4 $ 3.3 -- -- -- Interest cost 7.5 7.6 7.0 $ 0.3 $ 0.3 $ 0.3 Return on plan assets (expected) (10.8) (9.4) (8.4) -- -- -- Amortization and deferrals 0.1 0.5 0.8 -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Subtotal (1.8) 1.1 2.7 0.3 0.3 0.3 Curtailment Gain (0.5) (3.7) -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Net periodic (benefit) cost $ (2.3) $ (2.6) $ 2.7 $ 0.3 $ 0.3 $ 0.3 - -----------------------------------------------------------------------------------------------------------------------
Defined contribution plan expenses were $1.2 million, $1.5 million, and $1.5 million in 1998,1997, and 1996, respectively. Also, under the provisions of SFAS No. 88, "Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," benefit freezes resulted in the recognition of gains in 1998 and 1997. These gains resulted from the net decrease in the Company's benefit obligation for employees affected by the armored unit combination with Loomis Armored Inc. and other benefit freezes. Assets held in trust for the defined benefit plans are comprised primarily of marketable equity and fixed income securities. 34 Borg-Warner Security Corporation NOTE 10 - STOCK OPTIONS The Company has stock incentive plans that authorize the grant of options to purchase shares of the Company's common stock. Outstanding options carry exercise prices ranging from $8.43 to $21.59 per share. These prices correspond to the fair market value (as defined in the plans) of the Company's common stock at the time of grant with a graded vesting schedule between two to three years. Common shares under option for the years ended December 31, 1998, 1997, and 1996 are summarized as follows:
Number of Shares (thousands of shares) Weighted-Average Exercise Price - ---------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Shares under option at January 1 1,972 1,545 1,810 $ 12.38 $ 12.20 $ 13.34 Granted 39 843 159 18.90 11.30 10.98 Exercised (267) (273) (66) 11.04 6.12 5.00 Cancelled (104) -- -- 14.83 -- -- Forfeited (93) (143) (358) 14.29 16.03 18.76 - ----------------------------------------------------------------------------------------------------------------------------------- Shares under option at end of year 1,547 1,972 1,545 $ 12.49 $ 12.38 $ 12.20 ================================================================================================================================== Options exercisable 820 917 985 ======================================================================== Shares available for future grant 713 664 1,177 ======================================================================== Weighted-average fair value of options granted during the year $ 7.12 $ 4.39 $ 4.00 ========================================================================
Additional information regarding options outstanding as of December 31, 1998 is as follows (thousands of shares):
Options Outstanding Options Exercisable ------------------------------------------------------------------ -------------------------------------- Weighted-Average Range of Remaining Weighted-Average Weighted-Average Exercise Prices Number Outstanding Contractual Life (yrs) Exercise Price Number Exercisable Exercise Price - --------------------------------------------------------------------------------------------------------------------------------- $ 8.43 - 8.75 300 6.4 $ 8.49 300 $ 8.49 10.56 - 15.94 958 7.6 11.94 263 13.72 16.03 - 18.83 219 3.1 17.89 203 17.89 19.06 - 21.59 70 6.3 20.31 54 19.89 - ---------------------------------------------------------------------------------------------------------------------------------- $ 8.43 - 21.59 1,547 6.6 $ 12.49 820 $ 13.24 ==================================================================================================================================
The 727,000 options outstanding at December 31, 1998 that are not presently exercisable will vest according to various schedules between two to three years. The Company has retained the "intrinsic value" method of accounting for stock-based compensation expense under APB 25. Had compensation cost been determined based on the "fair value" method under SFAS 123, the Company's proforma net income and earnings per share would have been as follows:
Year Ended December 31, (millions of dollars, except per share) 1998 1997 - ---------------------------------------------------------------------------------- Net income As reported $ 29.1 $ 19.0 Pro forma 28.5 18.2 Earnings per share-basic As reported $ 1.24 $ 0.81 Pro forma 1.21 0.78 Earnings per share-diluted As reported $ 1.21 $ 0.79 Pro forma 1.18 0.76
The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998 and 1997, respectively: expected volatility of 40% and 41%; risk-free interest rates of 4.54-4.72% and 5.28-5.30%; and expected lives of four years. 35 Notes to Consolidated Financial Statements, continued NOTE 11 - BUSINESS SEGMENT INFORMATION GENERAL INFORMATION Due to the similarity of their services and economic characteristics, the Company's four service-based and three geographic-based operating segments have been aggregated for reporting purposes as allowed by SFAS 131. Segment operating performance as reviewed by the Company's Chief operating decision maker is measured on a basis consistent with the information presented in the financial statements. Such performance measurement consists of earnings from continuing operations before interest expense and finance charges and the provision for income taxes. The Company does not allocate assets to the individual operating segments for purposes of measuring operating performance. ENTERPRISE-WIDE DISCLOSURES: INFORMATION ABOUT SERVICES The Company derives its revenues from various security services offered to clients. The Company provides security officers to deter crime, monitor electronic security systems, control public and private access to facilities, perform general investigative services and background screening of potential employees. GEOGRAPHIC INFORMATION The Company operates in the United States, Canada, Europe and South America. No revenues attributed to an individual foreign country represents ten percent or more of consolidated revenues. The following revenues are disclosed by geographical area:
(millions of dollars) 1998 1997 1996 - -------------------------------------------------------------------------------- United States $ 1,202.3 $ 1,187.7 $ 1,359.8 Foreign 121.1 116.9 110.3 - -------------------------------------------------------------------------------- Total Revenue $ 1,323.4 $ 1,304.6 $ 1,470.1 ================================================================================
INFORMATION ABOUT MAJOR CUSTOMERS The Company has no individual customer from whom it derives ten percent or more of its revenues. INFORMATION ON LONG-LIVED ASSETS The long-lived assets listed below include plant, property and equipment, capital leases and intangibles. No assets attributed to an individual foreign country exceeds ten percent or more of consolidated assets.
(millions of dollars) 1998 1997 - -------------------------------------------------------------------------------- United States $ 119.0 $ 126.9 Foreign 10.2 2.8 - -------------------------------------------------------------------------------- Total long lived assets $ 129.2 $ 129.7 ================================================================================
NOTE 12 - INCOME TAXES Earnings before income taxes from continuing operations and provision for income taxes consist of:
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- (millions of dollars) U.S. NON-U.S. TOTAL U.S. Non-U.S. Total U.S. Non-U.S. Total - ------------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes $ 22.6 $ 2.3 $ 24.9 $ 37.5 $ 3.4 $ 40.9 $ 29.2 $ 4.6 $ 33.8 =============================================================================================================================== Income taxes: Current: Federal/Foreign $ 9.0 $ 1.2 $ 10.2 $ 4.9 $ 1.0 $ 5.9 $ 4.1 $ 2.0 $ 6.1 State 1.5 -- 1.5 1.5 -- 1.5 1.5 -- 1.5 - ------------------------------------------------------------------------------------------------------------------------------- 10.5 1.2 11.7 6.4 1.0 7.4 5.6 2.0 7.6 Deferred (1.9) -- (1.9) 7.7 -- 7.7 6.0 -- 6.0 - ------------------------------------------------------------------------------------------------------------------------------- Provision for income taxes $ 8.6 $ 1.2 $ 9.8 $ 14.1 $ 1.0 $ 15.1 $ 11.6 $ 2.0 $ 13.6 ===============================================================================================================================
The analysis of the variance of income taxes as reported from income taxes computed at the U.S. statutory federal income tax rate for continuing operations is as follows:
(millions of dollars) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Income taxes at U.S. statutory rate of 35% $ 8.7 $ 14.3 $ 11.9 Increases (decreases) resulting from: State income taxes 1.0 1.0 0.8 Non-temporary differences 0.2 0.1 0.7 Other, net (0.1) (0.3) 0.2 - --------------------------------------------------------------------------------------------------------------------------------- Income taxes reported $ 9.8 $ 15.1 $ 13.6 =================================================================================================================================
36 Borg-Warner Security Corporation Following are the components of the deferred tax asset as of December 31, 1998 and 1997:
(millions of dollars) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ Deferred tax assets: Liabilities for casualty insurance $ 32.0 $ 35.9 Liabilities related to discontinued operations 5.1 7.9 Liabilities for other postretirement benefits 5.1 4.2 Other, net 3.4 1.1 General business credit 5.5 24.8 Minimum tax credit -- 26.6 Foreign tax credit -- 0.4 - ------------------------------------------------------------------------------------------------------------------------ Subtotal deferred tax assets 51.1 100.9 Valuation allowance -- (5.3) - ------------------------------------------------------------------------------------------------------------------------ 51.1 95.6 Deferred tax liabilities: Fixed assets -- (36.3) Investments (7.0) (13.1) Net excess purchase price over net assets acquired (1.7) (5.7) - ------------------------------------------------------------------------------------------------------------------------ Subtotal deferred tax liabilities (8.7) (55.1) - ------------------------------------------------------------------------------------------------------------------------ Net deferred tax asset $ 42.4 $ 40.5 ========================================================================================================================
NOTE 13 - CAPITAL STOCK The following table summarizes the Company's capital stock at December 31, 1998 and 1997:
December 31, (thousands of shares) 1998 1997 ------------------------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value: Authorized 50,000.0 50,000.0 Issued 23,879.1 23,362.8 Outstanding 23,830.8 23,326.8 Series 1 non-voting common stock, $.01 par value: Authorized 25,000.0 25,000.o Issued 2,720.0 2,720.0 Outstanding - 249.6 Preferred stock, $.01 par value Authorized 5,000.0 5,000.0 Issued and Outstanding - -
NOTE 14- EARNINGS PER SHARE:
1998 1997 1996 PER SHARE Per Share Per Share (millions of dollars, except per share) EARNINGS SHARES AMOUNT Earnings Shares Amount Earnings Shares Amount - ----------------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations $ 15.1 $ 25.8 $20.2 BASIC EPS Earnings available to commom shareholders 15.1 23.6 $ 0.64 25.8 23.5 $ 1.10 20.2 23.3 $0.87 ================================================================================================================================== EFFECT OF DILUTIVE SECURITIES Outstanding stock options - 0.4 - 0.6 - 0.2 DILUTED EPS Earnings available to common shareholders +assumed conversions $15.1 24.0 $ 0.64 $ 25.8 24.1 $ 1.07 $20.2 23.5 $0.86 ==================================================================================================================================
37 Notes to Consolidated Financial Statements, continued NOTE 15-INTERIM FINANCIAL INFORMATION (UNAUDITED)
1998 Quarter Ended 1997 Quarter Ended --------------------------------------------- ------------------------------------------ (millions of dollars, except per share) MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR 1998 Mar. 31 June 30 Sept. 30 Dec. 31 Year 1997 Net service revenues $318.6 $323.9 $336.6 $344.3 $1,323.4 $326.4 $317.1 $330.5 $330.6 $1,304.6 Cost of services 269.1 273.0 284.2 290.4 1,116.7 275.0 267.0 279.9 278.8 1,100.7 Selling, general and administrative expenses 35.7 50.0 35.5 34.5 155.7 37.2 33.7 32.6 30.8 134.3 Depreciation 1.0 1.0 1.0 1.2 4.2 1.6 1.2 1.1 1.1 5.0 Other expense (income), net 2.4 2.1 1.2 0.7 6.4 (0.1) 1.8 2.6 2.7 7.0 Interest expense and finance charges 4.2 4.2 3.4 3.7 15.5 5.3 3.7 3.7 4.0 16.7 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) before income taxes 6.2 (6.4) 11.3 13.8 24.9 7.4 9.7 10.6 13.2 40.9 Provision (benefit) for income taxes 2.3 (2.4) 4.5 5.4 9.8 1.7 4.0 3.9 5.5 15.1 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations 3.9 (4.0) 6.8 8.4 15.1 5.7 5.7 6.7 7.7 25.8 Gain (loss) from discontinued operations, net of income taxes (19.1) 39.4 -- -- 20.3 (1.7) (1.6) (2.0) (1.5) (6.8) Extraordinary loss, early extinguishment of debt -- (6.3) -- -- (6.3) -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) $(15.2) $ 29.1 $ 6.8 $ 8.4 $ 29.1 $ 4.0 $ 4.1 $ 4.7 $ 6.2 $ 19.0 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per common share - basic: Continuing operations $ 0.17 $(0.17) $ 0.29 $ 0.35 $ 0.64 $ 0.24 $ 0.24 $ 0.29 $ 0.33 $ 1.10 Discontinued operations (0.81) 1.68 -- -- 0.87 (0.07) (0.07) (0.09) (0.06) (0.29) Extraordinary loss, early extinguishment of debt -- (0.27) -- -- (0.27) -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) per share $(0.64) $ 1.24 $ 0.29 $ 0.35 $ 1.24 $ 0.17 $ 0.17 $ 0.20 $ 0.27 $ 0.81 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per common share - diluted: Continuing operations $ 0.16 $(0.16) $ 0.29 $ 0.35 $ 0.64 $ 0.24 $ 0.24 $ 0.28 $ 0.31 $ 1.07 Discontinued operations (0.79) 1.62 -- -- 0.83 (0.07) (0.07) (0.09) (0.05) (0.28) Extraordinary loss, early extinguishment of debt -- (0.26) -- -- (0.26) -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) per share $(0.63) $ 1.20 $ 0.29 $ 0.35 $ 1.21 $ 0.17 $ 0.17 $ 0.19 $ 0.26 $ 0.79 - -----------------------------------------------------------------------------------------------------------------------------------
NOTE 16-ACQUISITION OF BUSINESSES During 1998, the Company purchased three security service businesses, two in the United States and one with operations in the United Kingdom and Ireland for an aggregate purchase price of $11.5 million. The results of operations of these acquired businesses are included as of the date of acquisition. The acquisitions were accounted for under the purchase method. Substantially all of the purchase price represents excess of purchase price over net assets acquired which is being amortized on a straight-line basis over 5 to 10 years. None of the acquisitions individually, or in aggregate, had a significant effect on revenues or the results of operations in 1998. 38 Independent Auditors' Report Borg-Warner Security Corporation TO THE BOARD OF DIRECTORS AND SHAREHOLDERS, BORG-WARNER SECURITY CORPORATION: We have audited the consolidated balance sheets of Borg-Warner Security Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations and comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Borg-Warner Security Corporation and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Deloitte & Touche LLP Chicago, Illinois February 2, 1999 39 Directors, Officers and Shareholder Information Borg-Warner Security Corporation
Officers - --------------------------------------------------------------------------------------------------------------------------------- J. Joe Adorjan Robert E.T. Lackey John D. O'Brien Timothy M. Wood Chairman, President Vice President, General Counsel Senior Vice President Vice President and Chief Executive Officer and Corporate Secretary and Chief Financial Officer Craig J. Bollinger Brian S. Cooper Nancy E. Kittle Vice President, Risk Treasurer Vice President, Management Human Resources Directors - --------------------------------------------------------------------------------------------------------------------------------- J. Joe Adorjan James J. Burke, Jr. Albert J. Fitzgibbons, III Arthur F. Golden Chairman, President Partner Partner Partner and Chief Executive Officer Stonington Partners Inc. Stonington Partners Inc. Davis Polk & Wardwell Borg-Warner Security Corporation Dale W. Lang Robert A. McCabe Andrew McNally IV Alexis P. Michas President Chairman Retired Chairman Managing Partner KX Acquisition Corporation Pilot Capital Corporation and Chief Executive Officer Stonington Partners Inc. Rand McNally & Company H. Norman Schwarzkopf Donald C. Trauscht General Retired Chairman U.S. Army, Retired and Chief Executive Officer Borg-Warner Security Corporation Committees of the Board - --------------------------------------------------------------------------------------------------------------------------------- EXECUTIVE COMMITTEE FINANCE AND AUDIT COMMITTEE COMPENSATION COMMITTEE NOMINATING COMMITTEE J. Joe Adorjan, Chairman Alexis P. Michas, Chairman Robert A. McCabe, Chairman H. Norman Schwarzkopf, Arthur F. Golden James J. Burke, Jr. Albert J. Fitzgibbons, III Chairman Alexis P. Michas Arthur F. Golden Dale W. Lang Albert J. Fitzgibbons, III Donald C. Trauscht H. Norman Schwarzkopf Andrew McNally IV Dale W. Lang Donald C. Trauscht Alexis P. Michas Robert A. McCabe Andrew McNally IV - --------------------------------------------------------------------------------------------------------------------------------- Company Headquarters Investor Contact Securities Information Shareholder inquiries to: Borg-Warner Jeffrey S. Cartwright The common stock of Shareholder Relations Security Corporation Director of Investor Relations Borg-Warner Security Department - 11E 200 South Michigan Avenue 312-322-8836 Corporation is listed on the P.O. Box 11258 Chicago, IL 60604 New York Stock Exchange. Church Street Station Form 10-K Report The ticker symbol is BOR. New York, NY 10286-1258 www.Borg-WarnerSecurity.com A copy of the Company's Annual Report on Form 10-K is available Independent Accountants Send certificates for transfer Shareholder Information to shareholders without charge Deloitte & Touche LLP and address changes to: The 1999 annual meeting of upon request to the Investor 180 North Stetson Receive and Deliver shareholders will be held on Relations Department Chicago, IL 60601 Department - 11W Tuesday, April 20, at 10 a.m. P.O. Box 11002 at the Company headquarters, Transfer Agent Church Street Station 200 South Michigan Avenue, The Bank of New York New York, NY 10286-1002 Chicago, IL. 1-800-524-4458
40 EX-21 8 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 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% Hall Security Services, Inc. Maine 100% Oak Ridge Security Associates, LLC Delaware 51% Wells Fargo Guard Services, Inc. Delaware 100% Wells Fargo Guard Services, Inc. of Florida Florida 100% Wells Fargo Special Services, Inc. Delaware 100% Burns International Liability Management Company Delaware 100% BPS Financial Services, Inc. Delaware 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% BW-Chemicals Corporation Delaware 100% Wells Fargo Armored Service Corporation Delaware 100%
EX-23 9 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23 ---------- INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Borg-Warner Security Corporation's 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 2, 1999 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, 1998. DELOITTE & TOUCHE LLP Chicago, Illinois March 30, 1999 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 106 0 63 7 0 231 44 26 432 133 124 0 0 0 97 432 0 1,323 0 1,117 11 5 16 25 10 15 20 (6) 0 29 1.24 1.21
EX-99 11 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 is affected by the availability of qualified personnel and the cost of labor. United States labor market contractions caused by high economic growth or 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, the Company's customer agreements typically allow for billing rate adjustments based on law changes, rulings or collective bargaining agreements that increase the Company's wage rates. However, competitive pricing conditions in the industry may constrain the Company's ability to increase its billing rates to cover such increased costs. 2. The Company continues to remain responsible for certain liabilities of businesses that the Company has discontinued or disposed of in prior years. These liabilities consist primarily of environmental liabilities and indemnity obligations under contracts for sale of businesses. Although the Company believes that any liabilities with respect to the 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. 3. 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. 4. The nature of the Company's services potentially exposes it to greater risks of liability for employee acts, injuries (including worker's compensation claims) or omissions that may be imposed by other service businesses. The Company carries insurance of various types, including worker's 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 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 at acceptable costs. A successful claim brought against the Company for which the 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. 5. 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 fully 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 the business. 6. The protective services industry generally is highly fragmented and very competitive. The Company competes in a business environment with low barriers to entry. Consequently, the Company's business is subject to additional competition. Some of the Company's competitors are materially larger than the Company and have greater financial and other resources available to them. 7. The Company's Year 2000 analysis and disclosure contains "forward looking" statements about matters that are inherently difficult to predict. Such statements include statements regarding the intent, opinion and current expectations of the Company and its management. Such "forward looking" statements involve risks and uncertainties that may affect future developments, such as, the inability to deal with a Year 2000 issue due to a problem arising on the part of a third party or vendor. While the Company believes it has implemented methodologies to address the Year 2000 issue so that it should not materially affect its financial position, future operating results or cash flows, no assurance can be given with respect to the ultimate outcome. -----END PRIVACY-ENHANCED MESSAGE-----