Pittston BAX Group
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SELECTED FINANCIAL DATA
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The following Selected Financial Data reflects the results of operations and
financial position of the businesses which comprise Pittston BAX Group ("BAX
Group") and should be read in connection with the BAX Group's financial
statements. The financial information of the BAX Group, Pittston Brink's Group
("Brink's Group") and Pittston Minerals Group ("Minerals Group") supplements the
consolidated financial information of The Pittston Company and Subsidiaries (the
"Company") and, taken together, includes all accounts which comprise the
corresponding consolidated financial information of the Company.
FIVE YEARS IN REVIEW
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994
======================================================================================================================
SALES AND INCOME (a):
Operating revenues $1,776,980 1,662,338 1,484,869 1,403,195 1,215,284
Net income (loss) (13,091) 32,348 33,801 32,855 38,356
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FINANCIAL POSITION (a):
Net property, plant and equipment $ 205,371 128,632 113,283 72,171 44,442
Total assets 775,298 701,443 635,398 572,077 521,516
Long-term debt, less current maturities 98,191 37,016 28,723 26,697 41,906
Shareholder's equity 300,270 323,710 304,989 271,853 240,880
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AVERAGE PITTSTON BAX GROUP
COMMON SHARES OUTSTANDING (b), (c):
Basic 19,333 19,448 19,223 18,966 18,892
Diluted 19,333 19,993 19,681 19,596 19,436
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PITTSTON BAX GROUP COMMON
SHARES OUTSTANDING (b): 20,825 20,378 20,711 20,787 20,798
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Per Pittston BAX Group Common
Share (b), (c):
Net income (loss):
Basic $ (0.68) 1.66 1.76 1.73 2.03
Diluted (0.68) 1.62 1.72 1.68 1.97
Cash dividends 0.24 .24 .24 .22 .22
Book value (d) 15.83 16.59 15.70 14.30 12.74
=====================================================================================================================
(a) See Management's Discussion and Analysis for discussion of additional
expenses and special consulting costs.
(b) All share and per share data presented reflects the completion of the
Brink's Stock Proposal which occurred on January 18, 1996. Shares outstanding at
the end of the period include shares outstanding under the Company's Employee
Benefits Trust of 1,858 shares, 868 shares, 1,280 shares, 1,777 shares and 1,890
shares at December 31, 1998, 1997, 1996, 1995 and 1994, respectively. Average
shares outstanding do not include these shares. The initial dividends of BAX
Stock were paid on March 1, 1996. Dividends paid by the Company on Services
Stock have been attributed to the BAX Group in relation to the initial dividends
paid on the BAX and Brink's Stocks.
(c) The net income per share amounts prior to 1997 have been restated, as
required, to comply with Statement of Financial Accounting Standards, No. 128,
"Earnings Per Share." For further discussion of net income per share, see Note
10 to the BAX Group Financial Statements.
(d) Calculated based on the number of shares outstanding at the end of the
period excluding shares outstanding under the Company's Employee Benefits
Trust.
7
Pittston BAX Group
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
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The financial statements of the Pittston BAX Group (the "BAX Group") include the
balance sheets, results of operations and cash flows of the BAX Global Inc.
("BAX Global") operations of The Pittston Company (the "Company") and a portion
of the Company's corporate assets and liabilities and related transactions which
are not specifically identified with operations of a particular segment. The BAX
Group's financial statements are prepared using the amounts included in the
Company's consolidated financial statements. Corporate amounts reflected in
these financial statements are determined based upon methods which management
believes to provide a reasonable and equitable estimate of costs, assets and
liabilities attributable to the BAX Group.
The Company provides holders of the Pittston BAX Group Common Stock ("BAX
Stock") separate financial statements, financial reviews, descriptions of
business and other relevant information for the BAX Group in addition to
consolidated financial information of the Company. Holders of BAX Stock are
shareholders of the Company, which continues to be responsible for all its
liabilities. Therefore, financial developments affecting the BAX Group, the
Pittston Brink's Group (the "Brink's Group") or the Pittston Minerals Group (the
"Minerals Group") that affect the Company's financial condition could therefore
affect the results of operations and financial condition of each of the Groups.
Accordingly, the Company's consolidated financial statements must be read in
connection with the BAX Group's financial statements.
Effective May 4, 1998, the designation of Pittston Burlington Group Common Stock
and the name of the Pittston Burlington Group were changed to Pittston BAX Group
Common Stock and Pittston BAX Group, respectively. All rights and privileges of
the holders of such Stock are otherwise unaffected by such changes. The stock
continues to trade on the New York Stock Exchange under the symbol "PZX".
The following discussion is a summary of the key factors management considers
necessary in reviewing the BAX Group's results of operations, liquidity and
capital resources. This discussion must be read in conjunction with the
financial statements and related notes of the BAX Group and the Company.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31
(IN THOUSANDS) 1998 1997 1996
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BAX Global:
Operating revenues:
Americas $1,181,274 1,142,495 1,027,950
Atlantic 325,975 305,598 282,299
Pacific 314,104 250,584 216,170
Eliminations/other (44,373) (36,339) (41,550)
-----------------------------------------------
Total operating revenues $1,776,980 1,662,338 1,484,869
===============================================
BAX Global:
Operating profit (loss):
Americas $ 55,936 69,124 60,505
Atlantic 5,564 7,333 4,571
Pacific 12,787 11,553 9,679
Other (74,915) (24,746) (10,151)
-----------------------------------------------
Segment operating profit (loss) $ (628) 63,264 64,604
General corporate expense (10,363) (6,859) (7,433)
-----------------------------------------------
Total operating profit (loss) (10,991) 56,405 57,171
===============================================
Depreciation and amortization
BAX Global $ 35,287 29,667 23,254
General corporate 240 238 173
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Total depreciation and amortization $ 35,527 29,905 23,427
===============================================
Cash capital expenditures
BAX Global $ 75,648 30,955 59,238
General corporate 166 109 2,083
-----------------------------------------------
Total cash capital expenditures $ 75,814 31,064 61,321
===============================================
BAX Global operates in three geographic regions: the Americas, which includes
the domestic and export business of the United States ("USA"), Latin America and
Canada; the Atlantic which includes Europe and Africa; and the Pacific which
includes Asia and Australia. Each region provides both expedited and
non-expedited freight services. Revenues and profits on expedited freight
services are shared among the origin and destination countries on all export
volumes. Accordingly, the USA, as the largest exporter, significantly impacts
the trend of results in worldwide expedited freight services. Non-expedited
freight services primarily includes supply chain management and ocean freight
services. In addition, BAX Global operates a federally certificated airline, Air
Transport International ("ATI"). ATI's results, net of intercompany
eliminations, are included in the Americas region. Eliminations/other revenues
primarily include intercompany revenue eliminations on shared services. Other
operating loss primarily consists of global support costs including global IT
costs and goodwill amortization. In 1998, other operating loss also includes
additional expenses of approximately $36 million (discussed below). In 1997,
other operating loss also includes special consulting expenses of $12.5 million.
8
The BAX Group reported a net loss of $13.1 million ($0.68 per share) in 1998 as
compared to net income of $32.3 million ($1.62 per share) in 1997. Total
revenues during 1998 increased $114.6 million (7%) as compared to 1997. The BAX
Group reported an operating loss of $11.0 million in 1998 as compared to an
operating profit of $56.4 million in 1997. Results for 1998 were adversely
affected by additional expenses of approximately $36 million, discussed below,
combined with a decrease in the effective tax rate which resulted in a lower tax
benefit. Results in 1997 included special consulting expenses of $12.5 million
related to the redesign of BAX Global's business processes and new information
systems architecture, partially offset by benefits from additional volumes of
freight during a Teamsters' strike against United Parcel Service (the "UPS
Strike") during the year.
In 1997, the BAX Group reported net income of $32.3 million ($1.62 per share) as
compared to net income of $33.8 million ($1.72 per share) in 1996. While
revenues during 1997 increased $177.5 million (12%) as compared to 1996,
operating profit decreased $0.8 million in 1997 to $56.4 million from $57.2
million reported in 1996. Results for 1997 were adversely impacted by the charge
of $12.5 million for special consulting expenses, offset, in part, by benefits
from the UPS Strike.
The following is a discussion of the $36 million of additional expenses incurred
by BAX Global in 1998:
During early 1997, BAX Global began an extensive review of the company's
information technology ("IT") strategy. Through this review, senior management
from around the world developed a new global strategy to improve business
processes with an emphasis on new information systems intended to enhance
productivity and improve the company's competitive position, as well as address
and remediate the company's Year 2000 compliance issues. The company ultimately
committed up to $120 million to be spent from 1997 to early 2000 to improve
information systems and complete Year 2000 initiatives.
However, in conjunction with priorities established by BAX Global's new
president and chief executive officer, who joined the company in June 1998,
senior management re-examined this global IT strategy. It was determined that
the critical IT objectives needed to be accomplished by the end of 1999 were
Year 2000 compliance and the consolidation and integration of certain key
operating and financial systems, supplemented by process improvement initiatives
to enhance these efforts. As a result of this re-examination, senior management
determined that certain non-critical, in-process IT software development
projects that were begun in late 1997 under the BAX Process Innovation
("BPI") project would be terminated. Therefore, costs relating to these
projects, which had previously been capitalized, were written off during the
third quarter of 1998. Also as a result of this re-examination, certain existing
software applications were found to have no future service potential or value.
The combined carrying amount of these assets, which were written off,
approximated $16 million. It is management's belief at this time that the
current ongoing information technology initiatives that originated from the
previously mentioned BPI project are necessary and will be successfully
completed and implemented. Such costs are included in selling, general and
administrative expenses in the statement of operations for the year ended
December 31, 1998.
The Company's BAX Global operations recorded provisions aggregating
approximately $13 million related to accounts receivable in the third quarter of
1998. These provisions were needed primarily as the result of the deterioration
of the economic and operating environments in certain international markets,
primarily Asia/Pacific and Latin America. As a result of a comprehensive review
of accounts receivables, undertaken in response to that deterioration, such
accounts receivable were not considered cost effective to pursue further and/or
improbable of collection. The majority of the additional provisions were
included in selling, general and administrative expenses in the statement of
operations for the year ended December 31, 1998.
During the third quarter of 1998, BAX Global recorded severance and other
expenses of approximately $7 million. The majority of these expenses related to
an organizational realignment proposed by newly elected senior management which
included a resource streamlining initiative that required the elimination,
consolidation or restructuring of approximately 180 employee positions. The
positions reside primarily in the USA and in BAX Global's Atlantic region and
include administrative and management-level positions. The estimated costs of
severance benefits for terminated employees are expected to be paid through
early to mid-1999. At this time management has no plans to institute further
organizational changes which would require significant costs related to
involuntary terminations. The related charge has been included in selling,
general and administrative expenses in the statement of operations for the year
ended December 31, 1998.
The recent deterioration of economic conditions primarily in Latin America and
Asia/Pacific have impacted the financial results of BAX Global through the
accrual of additional provisions for receivables in those regions in the second,
third and fourth quarters of 1998. The potential for further deterioration of
the economies in those regions could again negatively impact the company's
results of operations in the future.
9
BAX GLOBAL
The following is a table of selected financial data for BAX Global on a
comparative basis:
(Dollars in thousands-except per Years Ended December 31
pound/shipment amounts) 1998 1997 1996
=======================================================================
Worldwide expedited freight services:
Weight growth rate (a) 3.8% 8.9% 2.9%
Shipment growth rate (a) (9.7%) 12.0% 1.3%
Weight (million pounds) 1,615.5 1,556.6 1,430.0
Shipments (thousands) 5,238 5,798 5,179
=======================================================================
Expedited freight services average:
Yield (revenue per pound) (b) $0.941 0.957 0.935
Revenue per shipment (b) $ 290 257 258
Weight per shipment (pounds) 308 268 276
=======================================================================
(a) Compared to the same period in the prior year.
(b) Prior years' international expedited freight revenues have been reclassified
to conform to the current year's classification.
BAX Global's worldwide operating revenues increased 7% to $1.8 billion in 1998
as compared to $1.7 billion in 1997, with increases in all geographic regions.
BAX Global reported an operating loss of $0.6 million, including the additional
expenses of $36 million, as compared to an operating profit of $63.3 million
reported in 1997, which included the previously mentioned special consulting
expenses of $12.5 million.
Revenues in the Americas increased $38.8 million (3%) in 1998 as compared to
1997, while operating profit decreased from $69.1 million to $55.9 million for
the same period. The increase in revenue was primarily due to the inclusion of
revenues from the recently acquired ATI. Expedited freight services revenues
decreased due to lower volumes and lower average yield. The yield in 1998 was
negatively impacted by economic conditions in Asia, resulting in less traffic
traveling to the higher yielding Asian markets. In addition, 1997 reflects
higher average pricing, which benefited from the UPS Strike, as well as shipment
surcharges which were phased out in early 1998. The decrease in operating profit
in the Americas region, is due to higher levels of transportation and operating
costs, as a percentage of revenues, in the USA incurred in anticipation of
higher volumes along with higher initial ATI operating costs. Operating profit
in 1997 included a benefit from the previously mentioned UPS Strike.
In 1998, Atlantic revenues increased $20.4 million (7%), while operating profit
decreased $1.8 million, as compared to 1997. The increase in revenue was due to
the full year effect of the 1997 Cleton & Co. ("Cleton") acquisition (discussed
below), along with similar effects from the acquisition in late 1997 of an air
freight agent in South Africa. Operating profit in the Atlantic decreased due
largely to lower operating profits in the United Kingdom which reflected higher
recurring IT costs in 1998. Revenues and operating profit in the Pacific
increased $63.5 million (25%) and $1.2 million (11%), respectively, in 1998 as
compared to a year earlier. The increase in revenue is due to the formation in
early 1998 of a joint venture partnership with an air freight agent in South
Korea, combined with higher revenues in Singapore resulting from the award of
several new supply chain management services contracts during the year. The
favorable impacts of these events increased operating profits, which were
partially offset by lower operating results in India resulting from increased
provisions for bad debts.
Eliminations/other revenue increased during 1998 primarily due to increases in
eliminations as a result of increases in revenues. Other operating loss
increased $50.2 million primarily due to the inclusion in 1998 of the $36
million aforementioned additional expenses. In addition, higher global IT costs
including Year 2000 initiatives significantly impacted other operating loss.
Other operating loss in 1997 was negatively impacted by special consulting
expenses of $12.5 million.
BAX Global's worldwide operating revenues increased 12% to $1.7 billion in 1997
as compared to $1.5 billion in 1996, with growth across all geographic regions.
BAX Global reported operating profit of $63.3 million in 1997, including the
aforementioned $12.5 million of consulting expenses, as compared to an operating
profit of $64.6 million reported in 1996.
Revenues in the Americas increased $114.5 million (11%) in 1997 as compared to
1996, while operating profit increased from $60.5 million to $69.1 million for
the same period. The increase in revenue is primarily due to an increase in
expedited freight services which experienced a 9% growth in weight shipped
combined with a higher average yield on this volume. The yield in 1997 was
higher due to the effects of the UPS Strike coupled with shipment surcharges
which were initiated in late 1996. Operating profit in 1997 also benefited from
the effects of the UPS Strike, as well as improved margins on USA exports. These
benefits were only partially offset by higher transportation expenses associated
with additional capacity to improve customer service and by the inclusion in
1996 of Federal excise tax liabilities reductions.
In 1997, Atlantic revenues increased $23.3 million (8%) and operating profit
increased $2.8 million, as compared to 1996. The increase in both revenue and
profit is due primarily to the expansion of supply chain management services
through the Cleton acquisition which is discussed below, and higher results in
the United Kingdom, due to an increase in new business.
Revenues and operating profit in the Pacific increased $34.4 million (16%) and
$1.9 million (19%), respectively, in 1997 as compared to a year earlier. The
increase in both revenue and profit is due to growth in the majority of
countries within the region.
10
Other revenue eliminations decreased $5.2 million in 1997 while the other
operating loss increased $14.6 million. The higher level of other operating loss
in 1997 is primarily due to the inclusion of the $12.5 million special
consulting expenses.
On April 30, 1998, BAX Global acquired the privately held ATI for approximately
$29 million in a transaction accounted for as a purchase. ATI is a US-based
freight and passenger airline which operates a certificated fleet of DC-8
aircraft providing services to BAX Global and other customers. The ATI
acquisition is part of BAX Global's strategy to improve the quality of its
service offerings for its customers by increasing its control over flight
operations. As a result of this transaction, BAX Global suspended its efforts to
start up its own federally certificated airline carrier operations.
In June 1997, BAX Global completed its acquisition of Cleton, a leading
logistics provider in the Netherlands. BAX Global acquired Cleton for the
equivalent of US $10.7 million in cash and the assumption of the equivalent of
US $10.0 million of debt. Additional contingent payments ranging from the
current equivalent of US $0 to US $1.6 million will be paid in 1999 based on
certain performance criteria of Cleton.
FOREIGN OPERATIONS
A portion of the BAX Group's financial results is derived from activities in a
number of foreign countries located in Europe, Asia and Latin America, each with
a local currency other than the US dollar. Because the financial results of the
BAX Group are reported in US dollars, they are affected by changes in the value
of the various foreign currencies in relation to the US dollar. Changes in
exchange rates may also adversely affect transactions which are denominated in
currencies other than the functional currency. BAX Global periodically enters
into such transactions in the course of its business. The diversity of foreign
operations helps to mitigate a portion of the impact that foreign currency
fluctuations may have in any one country on the translated results. BAX Global,
from time to time, uses foreign currency forward contracts to hedge
transactional risks associated with foreign currencies. (See "Market Risk
Exposures" below.) Translation adjustments of net monetary assets and
liabilities denominated in the local currency relating to operations in
countries with highly inflationary economies are included in net income, along
with all transaction gains or losses for the period. A subsidiary in Mexico
operates in such a highly inflationary economy. Prior to January 1, 1998, the
economy in Brazil, in which the BAX Group has a subsidiary, was also considered
highly inflationary. As of January 1, 1999, the economy of Mexico will no longer
be considered hyperinflationary.
The BAX Group is also subject to other risks customarily associated with doing
business in foreign countries, including labor and economic conditions,
political instability, controls on repatriation of earnings and capital,
nationalization, expropriation and other forms of restrictive action by local
governments. The future effects, if any, of such risks on the BAX Group cannot
be predicted.
CORPORATE EXPENSES
A portion of the Company's corporate general and administrative expenses and
other shared services has been allocated to the BAX Group based upon utilization
and other methods and criteria which management believes to provide an equitable
and reasonable estimate of the costs attributable to the BAX Group. These
attributions were $10.4 million, $6.9 million and $7.4 million in 1998, 1997 and
1996, respectively.
Corporate expenses in 1998 include additional expenses of approximately $5.8
million related to a retirement agreement between the Company and its former
Chairman and CEO. Approximately $2.0 million of this $5.8 million of expenses
have been attributed to the BAX Group. Corporate expenses in the 1998 period
also include costs associated with a severance agreement with a former member of
the Company's senior management.
Higher 1996 corporate expenses were primarily due to the relocation of the
Company's corporate headquarters to Richmond, Virginia, during September 1996,
which amounted to $2.9 million. Approximately $1 million of these costs were
attributed to the BAX Group.
OTHER OPERATING INCOME/EXPENSE, NET
Other net operating expense was $0.3 million in 1998 as compared to net
operating income of $2.5 million and $1.5 million in 1997 and 1996,
respectively. Other operating income/expense principally includes foreign
exchange transaction gains and losses, and the changes for the comparable
periods are due to normal fluctuations in such gains and losses.
INTEREST EXPENSE, NET
Net interest expense for 1998 increased $2.8 million to $7.2 million and
increased $2.8 million in 1997 to $4.4 million from $1.6 million in 1996. The
increase in both years is primarily due to the higher levels of debt associated
with acquisitions and increased IT expenditures, including those associated with
Year 2000 compliance efforts.
OTHER INCOME/EXPENSE, NET
In 1998, other net income was $1.8 million, as compared to a net expense of $0.7
million and $2.0 million in 1997 and 1996, respectively. The increased income in
1998 is due to a gain on the sale of surplus aircraft in 1998, while other net
expense in 1996 includes a loss for the termination of an overseas sublease
agreement.
11
INCOME TAXES
In 1998, the credit for income taxes was impacted by significantly higher
additional expenses which caused non-deductible items (principally goodwill
amortization) to be a more significant factor in calculating the effective tax
rate. Accordingly, the calculation of tax benefits on the pre-tax loss for 1998
has been determined using an effective tax rate of 20% which is less than the
statutory rate of 35% and less than the 37% rate used in previous years. It is
anticipated that the effective tax rate will return to more historic levels in
1999.
The rate used to calculate the provision for income taxes was 37% in 1997 and
1996. These rates exceeded the statutory federal income tax rate of 35%
primarily due to provisions for state income taxes and goodwill amortization,
partially offset by lower taxes on foreign income.
FINANCIAL CONDITION
A portion of the Company's corporate assets and liabilities has been attributed
to the BAX Group based upon utilization of the shared services from which assets
and liabilities are generated. Management believes this attribution to provide
an equitable and reasonable estimate of the assets and liabilities attributable
to the BAX Group.
Corporate assets, which were allocated to the BAX Group consisted primarily of
pension assets and deferred income taxes and amounted to $10.1 million at
December 31, 1998 and $11.3 million at December 31, 1997.
CASH FLOW REQUIREMENTS
Cash provided by operating activities totaled $97.0 million in 1998, an increase
of $25.5 million from $71.5 million in 1997. Although net income decreased $45.4
million, lower funding requirements for working capital and higher non-cash
charges more than offset this decrease. Cash generated from operating activities
was not sufficient to fund investing (primarily acquisitions, aircraft heavy
maintenance and capital expenditures) and share activities. As a result, net
cash borrowings approximated $61.1 million.
CAPITAL EXPENDITURES
Cash capital expenditures for 1998 totaled $75.8 million compared to cash
capital expenditures in 1997 of $31.1 million. Capital expenditures made during
1998 included expenditures related to the maintenance of ongoing operations and
the investment in new information systems.
Cash capital expenditures in 1999 are currently expected to approximate $50
million. The 1999 estimated expenditures are approximately $25 million lower
than the 1998 level due to the reduced IT expenditures. In addition to these
capital expenditures, BAX Global anticipates spending approximately $50 million
on aircraft heavy maintenance in 1999 versus $40.5 million in 1998. The
foregoing amounts exclude expenditures that have been or are expected to be
financed through capital and operating leases and any acquisition expenditures.
FINANCING
The BAX Group intends to fund capital expenditures through cash flow from
operating activities or through operating leases if the latter are financially
attractive. Shortfalls, if any, will be financed through the Company's revolving
credit agreements and other borrowing arrangements.
Total debt outstanding at December 31, 1998 was $140.9 million an increase of
$69.6 million from the $71.3 million reported at December 31, 1997. The net
increase in debt primarily reflects additional borrowings related to IT
investments and the ATI acquisition in mid-1998.
The Company has a $350.0 million credit agreement with a syndicate of banks (the
"Facility"). The Facility includes a $100.0 million term loan and permits
additional borrowings, repayments and reborrowings of up to an aggregate of
$250.0 million. The maturity date of both the term loan and the revolving credit
portion of the Facility is May 2001. Interest on borrowings under the Facility
is payable at rates based on prime, certificate of deposit, Eurodollar or money
market rates. At December 31, 1998 and 1997, borrowings of $100.0 million were
outstanding under the term loan portion of the Facility and $91.6 million and
$25.9 million, respectively, of additional borrowings were outstanding under the
remainder of the Facility. Of the total outstanding amount under the Facility at
December 31, 1998 and 1997, $60.9 million and $10.9 million was attributed to
the BAX Group respectively.
In July 1997, the Company repaid the $14.3 million 4% subordinated debentures
attributed to the BAX Group, which were outstanding at December 31, 1996.
Borrowings under the Facility were used to make this payment.
Under the terms of the Facility, the Company has agreed to maintain at least
$400.0 million of Consolidated Net Worth, as defined, and can incur additional
indebtedness of approximately $398 million at December 31, 1998.
RELATED PARTY TRANSACTIONS
At December 31, 1997, under an interest bearing borrowing arrangement, the
Minerals Group had no borrowings from the BAX Group at December 31,1998 or 1997.
At December 31, 1998 and 1997, the BAX Group owed the Minerals Group $20.4
million and $18.2 million, respectively, for tax payments representing Minerals
Group's tax benefits utilized by the BAX Group in accordance with the Company's
tax sharing policy. Approximately $7.0 million of the amount owed at December
31, 1998 is expected to be paid within one year. The BAX Group paid the Minerals
Group $3.3 million for the utilization of such tax benefits during 1998.
12
MARKET RISK EXPOSURES
The BAX Group has activities in a number of foreign countries located in Europe,
Asia and Latin America, which expose it to a variety of market risks, including
the effects of changes in foreign currency exchange rates, interest rates, and
commodity prices. These financial exposures are monitored and managed by the BAX
Group as an integral part of its overall risk management program. The diversity
of foreign operations helps to mitigate a portion of the impact that foreign
currency rate fluctuations may have in any one country on the translated
results. The BAX Group's risk management program considers this favorable
diversification effect as it measures the BAX Group's exposure to financial
markets and as appropriate, seeks to reduce the potentially adverse effects that
the volatility of certain markets may have on its operating results.
BAX Global enters into various derivative and non-derivative hedging
instruments, as discussed below, to hedge its foreign currency, interest rate,
and commodity exposures. The risk that counterparties to such instruments may be
unable to perform is minimized by limiting the counterparties to major financial
institutions. Management of BAX Global does not expect any losses due to such
counterparty default.
The BAX Group assesses interest rate, foreign currency, and commodity risks by
continually identifying and monitoring changes in interest rate, foreign
currency and commodity exposures that may adversely impact expected future cash
flows and by evaluating hedging opportunities. The BAX Group maintains risk
management control systems to monitor these risks attributable to both BAX
Global's outstanding and forecasted transactions as well as offsetting hedge
positions. The risk management control systems involve the use of analytical
techniques to estimate the expected impact of changes in interest rates, foreign
currency rates and commodity prices on BAX Global's future cash flows. BAX
Global does not use derivative instruments for purposes other than hedging.
The sensitivity analyses discussed below for the market risk exposures were
based on several assumptions. The disclosures with respect to foreign exchange,
interest rate, and commodity risks do not take into account forecasted foreign
exchange, interest rate, or commodity transactions. Actual results will be
determined by a number of factors that are not under management's control and
could vary significantly from those disclosed.
Interest Rate Risk
BAX Global primarily uses variable-rate debt denominated in US dollars and
foreign currencies, including Singapore dollars and Dutch guilders, to finance
its foreign operations. These debt obligations expose BAX Global to variability
in interest expense due to changes in the general level of interest rates in
these countries.
Based on the overall interest rate level of both US dollar and foreign currency
denominated variable rate debt outstanding at December 31, 1998, a hypothetical
10% change (as a percentage of interest rates on outstanding debt) in BAX
Global's effective interest rate from year-end 1998 levels would increase or
decrease interest expense by approximately $0.8 million. The effect on the fair
value of foreign currency denominated fixed rate debt for a hypothetical 10%
uniform shift (as a percentage of market interest rates) in the yield curves for
interest rates in various countries from year-end 1998 levels would be
immaterial.
Foreign Currency Risk
BAX Global has certain exposures to the effects of foreign exchange rate
fluctuations on reported results in US dollars of foreign operations. Due in
part to the favorable diversification effects resulting from operations in
various countries located in Europe, Asia and Latin America, including Canada,
Australia, the United Kingdom, France, Holland, South Africa, Mexico, Brazil,
Singapore, Japan, and India, BAX Global does not generally enter into foreign
exchange hedges to mitigate these exposures. BAX Global is exposed periodically
to the foreign currency rate fluctuations that affect transactions not
denominated in the functional currency of domestic and foreign operations. To
mitigate these exposures, BAX Global, from time to time, enters into foreign
currency forward contracts. The currency contracts outstanding during the period
were immaterial to the results of the BAX Group.
In addition, BAX Global has investments in a number of foreign subsidiaries
whose assets and liabilities are translated at exchange rates at the balance
sheet date. Resulting cumulative translation adjustments are recorded as a
separate component of shareholder's equity and expose BAX Global to adjustments
resulting from foreign exchange rate volatility.
The effects of a hypothetical simultaneous 10% appreciation in the US dollar
from year end 1998 levels against all other currencies of countries in which the
BAX Group operates were measured for their potential impact on: 1) translation
of earnings into US dollars based on 1998 results, 2) transactional exposures,
and 3) translation of balance sheet equity accounts. The hypothetical effects
would be approximately $0.9 million unfavorable for the translation of earnings
into US dollars, approximately $1.6 million unfavorable earnings effect for
transactional exposures, and approximately $7.9 million unfavorable for the
translation of balance sheet equity accounts.
Commodities Price Risk
BAX Global consumes jet fuel in the normal course of its business and utilizes
derivative instruments to minimize the variability in forecasted cash flows due
to adverse price movements in jet fuel. BAX Global enters into forward swap
contracts for the purchase of jet fuel to fix a certain portion of BAX Global's
forecasted fuel costs at specific price levels. BAX Global also utilizes option
strategies to hedge a portion of the remaining risk associated with changes in
the price of jet fuel.
13
The following table represents BAX Global's outstanding commodity hedge
contracts as of December 31, 1998:
Notional Average Estimated
(In thousands, except Amount Contract Fair
average contract rates) (gallons) Rate Value
- ----------------------------------------------------------------
Forward swap contracts:
Jet fuel purchases (fixed pay) 16,000 $0.4923 $(2,133)
=================================================================
READINESS FOR YEAR 2000: SUMMARY
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. If not corrected, many
date-sensitive applications could fail or create erroneous results by or in the
year 2000. The BAX Group understands the importance of having systems and
equipment operational through the year 2000 and beyond and is committed to
addressing these challenges while continuing to fulfill its business obligations
to its customers and business partners. BAX has established a year 2000 Project
Team intended to make its information technology assets, including embedded
microprocessors ("IT assets"), non-IT assets, products, services and
infrastructure Year 2000 compliant.
READINESS FOR YEAR 2000: STATE OF READINESS
The BAX Global Year 2000 Project Team has divided its Year 2000 readiness
program into five phases: (i) inventory (ii) assess and test, (iii) renovate,
(iv) test and verify and (v) implement. At December 31, 1998, on a global basis,
the inventory phase has been completed in the US and Europe and is substantially
complete in Asia. During the first quarter of 1999, the inventory phase was
completed on a global basis. Assessment of major systems in the Americas and
Europe has been completed, with readiness testing now underway. Assessment is
currently underway in Asia. Renovation activities for major systems are in
process as are replacement activities for non-compliant components and systems
that are not scheduled for renovation. Testing has also begun for systems that
have been renovated. The BAX Group plans to have completed all phases of its
Year 2000 readiness program on a timely basis prior to Year 2000. As of December
31, 1998, more than 30% of the BAX Group's IT and non-IT assets systems have
been tested and verified as Year 2000 ready.
As part of its Year 2000 project, the BAX Group has sent comprehensive
questionnaires to significant suppliers and others with whom it does business,
regarding their Year 2000 readiness and is in the process of identifying any
problem areas with respect to these business partners. The BAX Group is relying
on such third parties representations regarding their own readiness for Year
2000. The extent to which any of these potential problems may have a material
adverse impact on the BAX Group's operations is being assessed and will continue
to be assessed throughout 1999.
Further, the BAX Group relies upon government agencies (particularly the Federal
Aviation Administration and customs agencies worldwide), utility companies,
telecommunication service companies and other service providers outside of its
control. According to a recent General Accounting Office report to Congress,
some airports will not be prepared for the Year 2000 and the problems these
airports experience could impede traffic flow throughout the nation. As with
most companies, the BAX Group is vulnerable to significant suppliers' and other
third parties inability to remedy their own Year 2000 issues. As the BAX Group
cannot control the conduct of its customers, suppliers and other third parties,
there can be no guarantee that Year 2000 problems originating with a supplier or
another third party will not occur.
READINESS FOR YEAR 2000: COSTS TO ADDRESS
The BAX Group anticipates incurring remediation and acceleration costs for its
Year 2000 readiness program. Remediation includes the identification,
assessment, remediation and testing phases of the Year 2000 readiness program.
Remediation costs include both the costs of modifying existing software and
hardware as well as purchases that replace existing hardware and software that
is not Year 2000 ready. Acceleration costs include costs to purchase and/or
develop and implement certain information technology systems whose
implementation have been accelerated as a result of the Year 2000 readiness
issue.
Total anticipated remediation and acceleration costs are detailed in the table
below:
Acceleration
(In millions) Capitalized Expensed Total
- -------------------------------------------------------------------
Total anticipated Year 2000 costs $ 18.3 4.8 23.1
Incurred through December 31, 1998 11.5 1.3 12.8
- -------------------------------------------------------------------
Remainder $ 6.8 3.5 10.3
===================================================================
Remediation
Capitalized Expensed Total
- -------------------------------------------------------------------
Total anticipated Year 2000 costs $ 5.0 14.0 19.0
Incurred through December 31, 1998 1.3 8.5 9.8
- -------------------------------------------------------------------
Remainder $ 3.7 5.5 9.2
===================================================================
Total
Capitalized Expensed Total
- -------------------------------------------------------------------
Total anticipated Year 2000 costs $ 23.3 18.8 42.1
Incurred through December 31, 1998 12.8 9.8 22.6
- -------------------------------------------------------------------
Remainder $ 10.5 9.0 19.5
====================================================================
READINESS FOR YEAR 2000: THE RISKS OF THE YEAR 2000 ISSUE
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect results of
operations, liquidity and financial
14
condition of the BAX Group. The extent to which such a failure may adversely
affect operations is being assessed. The BAX Group believes its most reasonably
likely worst case scenario is that it will experience a number of minor system
malfunctions and errors in the early days and weeks of the Year 2000 that were
not detected during its renovation and testing efforts. The BAX Group currently
believes that these problems will not be overwhelming and are not likely to have
a material effect on the company's operations or financial results. As noted
above, the BAX Group is vulnerable to significant suppliers', customers' and
other third parties' (particularly government agencies such as the Federal
Aviation Administration and customs agencies worldwide) inability to remedy
their own Year 2000 issues. As the BAX Group cannot control the conduct of its
suppliers or other third parties, there can be no guarantee that Year 2000
problems originating with a supplier, customer or other third party will not
occur. However, the BAX Group's program of communication with and assessments of
major third parties with whom they do business is intended to minimize any
potential risks related to third party failures.
READINESS FOR YEAR 2000: CONTINGENCY PLAN
During the first quarter of 1999, the BAX Group began developing a contingency
plan for dealing with its most reasonably likely worst case scenario. The
foundation for the BAX Group's Year 2000 readiness program is to ensure that all
mission-critical systems are renovated/replaced and tested at least six months
prior to when a Year 2000 failure might occur if the program were not
undertaken. Year 2000 is the number one priority within the BAX Group's IT
organization with full support of the Group's Chief Executive Officer.
READINESS FOR YEAR 2000: FORWARD LOOKING INFORMATION
This discussion of the BAX Group's readiness for Year 2000, including statements
regarding anticipated completion dates for various phases of the BAX Group's
Year 2000 project, estimated costs for Year 2000 readiness, the determination of
likely worst case scenarios, actions to be taken in the event of such worst case
scenarios and the impact on the BAX Group's of any delays or problems in the
implementation of Year 2000 initiatives by the BAX Group and/or any public or
private sector suppliers and service providers and customers involve forward
looking information which is subject to known and unknown risks, uncertainties,
and contingencies which could cause actual results, performance or achievements,
to differ materially from those which are anticipated. Such risks, uncertainties
and contingencies, many of which are beyond the control of the BAX Group,
include, but are not limited to, government regulations and/or legislative
initiatives, variation in costs or expenses relating to the implementation of
Year 2000 initiatives, changes in the scope of improvements to Year 2000
initiatives and delays or problems in the implementation of Year 2000
initiatives by the BAX Group and/or any public or private sector suppliers and
service providers and customers.
EURO CONVERSION
As part of the European Economic and Monetary Union, a single currency (the
"Euro") will replace the national currencies of most of the European countries
in which the Company conducts business. The conversion rates between the Euro
and the participating nations' currencies were fixed irrevocably as of January
1, 1999, with the participating national currencies being removed from
circulation between January 1 and June 30, 2002 and replaced by Euro notes and
coinage. The Company is able to receive Euro denominated payments and invoice in
Euro as requested by vendors and suppliers as of January 1, 1999 in the affected
countries. Full conversion of all affected country operations to the Euro is
expected to be completed by the time national currencies are removed from
circulation. The effects of the conversion to the Euro on revenues, costs and
various business strategies is not expected to be material.
CONTINGENT LIABILITIES
Under the Coal Industry Retiree Health Benefit Act of 1992 (the "Health Benefit
Act"), the Company and its majority-owned subsidiaries at July 20, 1992,
including certain companies of the BAX Group are jointly and severally liable
with certain companies of the Minerals Group and of the Brink's Group for the
costs of health care coverage provided for by that Act. For a description of the
Health Benefit Act and certain such costs, see Note 14 to the Company's
consolidated financial statements. At this time, the Company expects the
Minerals Group to discharge its obligations under the Act.
In April 1990, the Company entered into a settlement agreement to resolve
certain environmental claims against the Company arising from hydrocarbon
contamination at a petroleum terminal facility ("Tankport") in Jersey City, New
Jersey, which operations were sold in 1983. Under the settlement agreement, the
Company is obligated to pay 80% of the remediation costs. Based on data
available to the Company and its environmental consultants, the Company
estimates its portion of the cleanup costs on an undiscounted basis using
existing technologies to be between $6.6 million and $11.2 million and to be
incurred over a period of up to five years. Management is unable to determine
that any amount within that range is a better estimate due to a variety of
uncertainties, which include the extent of the contamination at the site, the
permitted technologies for remediation and the regulatory standards by which the
cleanup will be conducted. The estimate of costs and the timing of payments
could change as a result of changes to the remediation plan required, changes in
the technology available to treat the site, unforeseen circumstances existing at
the site and additional cost inflation.
The Company commenced insurance coverage litigation in 1990, in the United
States District Court for the District of New Jersey, seeking a declaratory
judgment that all amounts payable by the Company pursuant to the Tankport
obligation were reimbursable under comprehensive general liability and pollution
liability policies maintained by the Company. In August 1995, the District Court
ruled on various Motions for Summary Judgment. In its
15
decision, the Court found favorably for the Company on several matters relating
to the comprehensive general liability policies but concluded that the pollution
liability policies did not contain pollution coverage for the types of claims
associated with the Tankport site. On appeal, the Third Circuit reversed the
District Court and held that the insurers could not deny coverage for the
reasons stated by the District Court, and the case was remanded to the District
Court for trial. In the latter part of 1998, the Company concluded a settlement
with its comprehensive general liability insurer and has settlements with three
other groups of insurers. If these settlements are consummated, only one group
of insurers will be remaining in this coverage action. In the event the parties
are unable to settle the dispute with this group of insurers, the case is
scheduled to be tried in June 1999. Management and its outside legal counsel
continue to believe that recovery of a substantial portion of the cleanup costs
will ultimately be probable of realization. Accordingly, based on estimates of
potential liability, probable realization of insurance recoveries, related
developments of New Jersey law and the Third Circuit's decision, it is the
Company's belief that the ultimate amount that it would be liable for related to
the remediation at the Tankport site will not significantly adversely impact the
BAX Group's results of operations or financial position.
CAPITALIZATION
The Company has three classes of common stock: BAX Stock, Pittston Brink's Group
Common Stock ("Brink's Stock") and Pittston Minerals Group Common Stock
("Minerals Stock") which were designed to provide shareholders with separate
securities reflecting the performance of the BAX Group, Brink's Group and
Minerals Group, respectively, without diminishing the benefits of remaining a
single corporation or precluding future transactions affecting any of the
Groups. The BAX Group consists of the BAX Global operations of the Company. The
Brink's Group consists of the Brink's, Incorporated ("Brink's") and Brink's Home
Security, Inc. ("BHS") operations of the Company. The Minerals Group consists of
the Pittston Coal Company ("Pittston Coal") and Pittston Mineral Ventures
("Mineral Ventures") operations of the Company. The Company prepares separate
financial statements for the BAX, Brink's and Minerals Groups in addition to
consolidated financial information of the Company.
The Company has the authority to issue up to 2,000,000 shares of preferred
stock, par value $10 per share. In January 1994, the Company issued $80.5
million (161,000 shares) of Series C Cumulative Convertible Preferred Stock (the
"Convertible Preferred Stock"), convertible into Minerals Stock. The Convertible
Preferred Stock, which is attributable to the Minerals Group, pays an annual
cumulative dividend of $31.25 per share payable quarterly, in cash, in arrears,
out of all funds of the Company legally available; therefore, when, as and if
declared by the Board and bears a liquidation preference of $500 per share, plus
an attributed amount equal to accrued and unpaid dividends thereon.
Under the share repurchase programs authorized by the Board of Directors of the
Company (the "Board"), the Company purchased shares in the periods presented as
follows:
(Shares in thousands, Years Ended December 31
- --------------------------------------------------------------------
dollars in millions) 1998 1997
- --------------------------------------------------------------------
BAX Stock:
Shares 1,047 332
Cost $ 12.7 7.4
Convertible Preferred Stock:
Shares 0.4 1.5
Cost $ 0.1 0.6
Excess carrying amount (a) $ 0.0 0.1
======================================================================
(a) The excess of the carrying amount of the Convertible Preferred Stock over
the cash paid to holders for repurchases made during the years which is deducted
from preferred dividends in the Company's Statement of Operations.
The Company had the remaining authority to repurchase an additional $24.2
million of the Convertible Preferred stock as of December 31, 1998. As of
December 31, 1998 the Company had remaining authority to purchase over time 1.5
million shares of BAX Stock. The aggregate purchase price limitation for all
common stock was $24.7 million at December 31, 1998. The authority to repurchase
shares remains in effect in 1999.
DIVIDENDS
The Board intends to declare and pay dividends, if any, on BAX Stock based on
the earnings, financial condition, cash flow and business requirements of the
BAX Group. Since the Company remains subject to Virginia law limitations on
dividends, losses by the Minerals Group or the Brink's Group could affect the
Company's ability to pay dividends in respect of stock relating to the BAX
Group.
During 1998 and 1997, the Board declared and the Company paid dividends on BAX
Stock amounting to $0.24 per share.
In 1998 and 1997, dividends paid on the Convertible Preferred Stock were $3.5
million and $3.6 million, respectively.
ACCOUNTING CHANGES
The BAX Group adopted SFAS No. 130, "Reporting Comprehensive Income," in the
first quarter of 1998. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in shareholders' equity
except those resulting from investments by or distributions to shareholders.
Effective January 1, 1998, the BAX Group implemented AICPA Statement of Position
("SOP") No. 98-1 "Accounting for the Costs of Computer Software Developed for
Internal Use." SOP No. 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and
16
amortized over the estimated useful life of the software. As a result of the
implementation of SOP No. 98-1, net loss for the year ended December 31, 1998,
included a benefit of approximately $2.1 million ($0.11 per share) for costs
capitalized during those periods which would have been expensed prior to the
implementation of SOP No. 98-1.
The BAX Group implemented SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the financial statements for the year
ended December 31, 1998. SFAS No. 131 superseded FASB Statement No. 14,
"Financial Reporting for Segments of Business Enterprise." SFAS No. 131 requires
publicly-held companies to report financial and descriptive information about
operating segments in financial statements issued to shareholders for interim
and annual periods. The SFAS also requires additional disclosures with respect
to products and services, geographic areas of operation, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information. See Note 16.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999; the BAX Group has elected to adopt SFAS No. 133 as of October 1, 1998.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Changes in the fair value of derivatives are
recorded each period currently in earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. In accordance with
the transition provisions of SFAS No. 133, the BAX Group recorded a net
transition adjustment resulting in a gain of $0.2 million (net of related income
taxes of $0.1 million) in accumulated other comprehensive income at October 1,
1998 in order to recognize at fair value derivatives that are designated as
cash-flow hedging instruments.
PENDING ACCOUNTING CHANGES
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5, which provides guidance on the reporting of
start-up costs and organization costs, requires that such costs be expensed as
incurred. This SOP is effective for the BAX Group for the year beginning January
1, 1999. Initial application of the SOP is required to be reported as a
cumulative effect of a change in accounting principle as of the beginning of the
year of adoption. Management does not expect that the implementation of the new
statement will have a material impact on the BAX Group's results of operations
and/or financial position.
FORWARD LOOKING INFORMATION
Certain of the matters discussed herein, including statements regarding
severance benefits, the economies of Latin America and Asia/Pacific, projections
about market risks, effective tax rates, the Minerals Group's ability to
discharge its Health Benefit Act obligations, environmental clean-up estimates,
the readiness for Year 2000 and the conversion to the Euro, projected capital
spending and the continuation of information technology initiatives, involve
forward looking information which is subject to known and unknown risks,
uncertainties and contingencies, which could cause actual results, performance
or achievements to differ materially from those which are anticipated. Such
risks, uncertainties and contingencies, many of which are beyond the control of
the BAX Group and the Company, include, but are not limited to, overall economic
and business conditions, the demand for BAX Global's services, pricing and other
competitive factors in the industry, new government regulations and/or
legislative initiatives, insufficient cash flow of the Minerals Group,
variations in costs or expenses, changes in the scope of improvements to
information systems and Year 2000 and/or Euro initiatives, delays or problems in
the implementation of Year 2000 and/or Euro initiatives by BAX Global and/or any
public or private sector suppliers, service providers and customers and delays
or problems in the design and implementation of improvements to information
systems.
17
Pittston BAX Group
- -------------------------------------------------------------------------------
STATEMENT OF MANAGEMENT RESPONSIBILITY
- -------------------------------------------------------------------------------
The management of The Pittston Company (the "Company") is responsible for
preparing the accompanying Pittston BAX Group (the "BAX Group") financial
statements and for their integrity and objectivity. The statements were prepared
in accordance with generally accepted accounting principles. Management has also
prepared the other information in the annual report and is responsible for its
accuracy.
In meeting our responsibility for the integrity of the financial statements, we
maintain a system of internal controls designed to provide reasonable assurance
that assets are safeguarded, that transactions are executed in accordance with
management's authorization and that the accounting records provide a reliable
basis for the preparation of the financial statements. Qualified personnel
throughout the organization maintain and monitor these internal controls on an
ongoing basis. In addition, the Company maintains an internal audit department
that systematically reviews and reports on the adequacy and effectiveness of the
controls, with management follow-up as appropriate.
Management has also established a formal Business Code of Ethics which is
distributed throughout the Company. We acknowledge our responsibility to
establish and preserve an environment in which all employees properly understand
the fundamental importance of high ethical standards in the conduct of our
business.
The accompanying financial statements have been audited by KPMG LLP, independent
auditors. During the audit they review and make appropriate tests of accounting
records and internal controls to the extent they consider necessary to express
an opinion on the BAX Group's financial statements.
The Company's Board of Directors pursues its oversight role with respect to the
BAX Group's financial statements through the Audit and Ethics Committee, which
is composed solely of outside directors. The Committee meets periodically with
the independent auditors, internal auditors and management to review the
Company's control system and to ensure compliance with applicable laws and the
Company's Business Code of Ethics.
We believe that the policies and procedures described above are appropriate and
effective and do enable us to meet our responsibility for the integrity of the
BAX Group's financial statements.
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
The Board of Directors and Shareholders
The Pittston Company
We have audited the accompanying balance sheets of Pittston BAX Group (as
described in Note 1) as of December 31, 1998 and 1997, and the related
statements of operations, shareholder's equity and cash flows for each of the
years in the three-year period ended December 31, 1998. These financial
statements are the responsibility of The Pittston 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, the financial statements of Pittston BAX Group present fairly,
in all material respects, the financial position of Pittston BAX Group as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
As more fully discussed in Note 1, the financial statements of Pittston BAX
Group should be read in connection with the audited consolidated financial
statements of The Pittston Company and subsidiaries.
As more fully discussed in Note 1 to the financial statements, Pittston BAX
Group changed its method of accounting for costs of computer software developed
for internal use and derivative instruments and hedging activities in 1998.
KPMG LLP
KPMG LLP
Richmond, Virginia
January 27, 1999
18
Pittston BAX Group
- -------------------------------------------------------------------------------
BALANCE SHEETS
- -------------------------------------------------------------------------------
December 31
(In thousands) 1998 1997
====================================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 30,676 28,790
Accounts receivable:
Trade 290,613 302,860
Other 10,497 14,056
- ----------------------------------------------------------------------------------------------------
301,110 316,916
Less estimated uncollectible amounts 15,625 10,110
- ----------------------------------------------------------------------------------------------------
285,485 306,806
Inventories 4,560 1,359
Prepaid expenses and other current assets 7,789 11,050
Deferred income taxes (Note 8) 9,090 7,159
- ----------------------------------------------------------------------------------------------------
Total current assets 337,600 355,164
Property, plant and equipment, at cost (Note 5) 300,780 207,447
Less accumulated depreciation and amortization 95,409 78,815
- ----------------------------------------------------------------------------------------------------
205,371 128,632
Intangibles, net of accumulated amortization (Note 6) 177,969 174,791
Deferred pension assets (Note 14) 3,785 7,600
Deferred income taxes (Note 8) 33,377 19,814
Other assets 17,196 15,442
- ----------------------------------------------------------------------------------------------------
Total assets $775,298 701,443
====================================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term borrowings (Note 9) $ 38,749 31,071
Current maturities of long-term debt (Note 9) 3,965 3,176
Accounts payable 190,746 194,489
Payable--Pittston Minerals Group (Note 2) 7,000 4,966
Accrued liabilities:
Taxes 13,475 14,958
Heavy maintenance reserve 29,382 21,242
Payroll and vacation 20,416 18,380
Miscellaneous (Note 14) 42,208 23,783
- ----------------------------------------------------------------------------------------------------
105,481 78,363
- ----------------------------------------------------------------------------------------------------
Total current liabilities 345,941 312,065
Long-term debt, less current maturities (Note 9) 98,191 37,016
Postretirement benefits other than pensions (Note 14) 3,954 3,518
Deferred income taxes (Note 8) 1,624 1,447
Payable--Pittston Minerals Group (Note 2) 13,355 13,239
Other liabilities 11,963 10,448
Commitments and contingent liabilities (Notes 9, 13 and 17)
Shareholder's equity (Notes 3, 11 and 12) 300,270 323,710
- ----------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $775,298 701,443
====================================================================================================
See accompanying notes to financial statements.
19
Pittston BAX Group
- -------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
Years Ended December 31
(In thousands, except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Operating revenues $ 1,776,980 1,662,338 1,484,869
- ----------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Operating expenses 1,571,663 1,455,336 1,301,974
Selling, general and administrative expenses (including a $15,723
write-off of long-lived assets in 1998) 215,997 153,104 127,254
- ----------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,787,660 1,608,440 1,429,228
Other operating income (expense), net (311) 2,507 1,530
- ----------------------------------------------------------------------------------------------------------------------
Operating profit (loss) (10,991) 56,405 57,171
Interest income (Note 2) 1,012 820 2,463
Interest expense (Note 2) (8,162) (5,211) (4,097)
Other income (expense), net 1,778 (679) (2,028)
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (16,363) 51,335 53,509
Provision (credit) for income taxes (Note 8) (3,272) 18,987 19,708
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (13,091) 32,348 33,801
======================================================================================================================
Net income (loss) per common share (Note 10):
Basic $ (0.68) 1.66 1.76
Diluted (0.68) 1.62 1.72
======================================================================================================================
Weighted average common shares outstanding (Note 10):
Basic 19,333 19,448 19,223
Diluted 19,333 19,993 19,681
======================================================================================================================
See accompanying notes to financial statements.
20
Pittston BAX Group
- -------------------------------------------------------------------------------
STATEMENTS OF SHAREHOLDER'S EQUITY
- -------------------------------------------------------------------------------
Years Ended December 31
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 323,710 304,989 271,853
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss):
Net income (loss) (13,091) 32,348 33,801
Other comprehensive income, net of tax:
Foreign currency translation adjustments, net of tax effect
of $492, ($197) and $23 1,131 (8,315) (171)
Cash flow hedges:
Transition adjustment, net of tax of ($132) 223 -- --
Net cash flow hedge losses, net of tax of $1,422 (2,421) -- --
Reclassification adjustment, net of tax effect of ($534) 909 -- --
Other, net of tax of ($64) 109 -- --
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) (13,140) 24,033 33,630
- -------------------------------------------------------------------------------------------------------------------
BAX stock options exercised (Note 11) 1,868 2,389 2,970
BAX shares released from employee benefits trust
to employee benefits plan (Note 12) 4,067 3,604 3,017
Retirement of BAX stock under share repurchase programs (Note 12) (12,674) (7,405) (1,407)
Common dividends declared (Note 12) (4,642) (4,805) (4,707)
Cost of Brink's stock proposal (Note 11) -- -- (1,237)
Tax benefit of BAX stock options exercised (Note 8) 1,106 905 870
Other (25) -- --
- --------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 300,270 323,710 304,989
====================================================================================================================
See accompanying notes to financial statements.
21
Pittston BAX Group
- -------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
Years Ended December 31
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) income $ (13,091) 32,348 33,801
Adjustments to reconcile net income to net cash
provided by operating activities:
Noncash charges and other write-offs 20,124 -- --
Depreciation and amortization 35,527 29,905 23,427
Provision for aircraft heavy maintenance 39,821 34,057 32,057
Credit for deferred income taxes (11,383) (1,429) (2,830)
Provision for pensions, noncurrent 3,411 1,606 1,461
Provision for uncollectible accounts receivable 12,933 4,461 3,009
(Gain) loss on sales of property, plant and equipment (2,952) 69 130
Other operating, net 6,158 2,522 1,786
Change in operating assets and liabilities, net of
effects of acquisitions and dispositions:
Decrease (increase) in accounts receivable 16,689 (43,012) (33,875)
(Increase) decrease in inventories (2,066) 893 (569)
Decrease in prepaid expenses 2,190 1,638 1,249
(Decrease) increase in accounts payable and
accrued liabilities (9,690) 13,534 5,300
Increase in other assets (145) (9,479) (272)
Increase (decrease) in other liabilities 3,895 2,819 (824)
Other, net (4,402) 1,576 (761)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 97,019 71,508 63,089
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (75,814) (31,064) (61,321)
Proceeds from disposal of property, plant and equipment 7,139 75 3,898
Aircraft heavy maintenance expenditures (40,466) (29,748) (23,373)
Acquisitions, net of cash acquired, and related
contingency payments (28,835) (9,131) (2,944)
Other, net (2,933) 4,857 4,757
- ------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (140,909) (65,011) (78,983)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Additions to debt 96,714 39,009 3,584
Reductions of debt (35,636) (32,663) (3,948)
Payments from Minerals Group, net -- 7,696 12,179
Repurchase of common stock (12,783) (7,407) (1,406)
Proceeds from exercise of stock options and employee
stock purchase plan 1,868 2,389 3,207
Dividends paid (4,387) (4,549) (4,514)
Cost of stock proposal -- -- (1,237)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 45,776 4,475 7,865
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,886 10,972 (8,029)
Cash and cash equivalents at beginning of period 28,790 17,818 25,847
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 30,676 28,790 17,818
==================================================================================================================
See accompanying notes to consolidated financial statements.
22
Pittston BAX Group
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(In thousands, except per share amount)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
As used herein, the "Company" includes The Pittston Company except as otherwise
indicated by the context. The Company is comprised of three separate groups -
Pittston Brink's Group, Pittston BAX Group, and Pittston Minerals Group. The
financial statements of the BAX Group include the balance sheets, the results of
operations and cash flows of the BAX Inc. ("BAX") operations of the Company, and
a portion of the Company's corporate assets and liabilities and related
transactions which are not specifically identified with operations of a
particular segment. The BAX Group's financial statements are prepared using the
amounts included in the Company's consolidated financial statements. Corporate
allocations reflected in these financial statements are determined based upon
methods which management believes to provide a reasonable and equitable
allocation of such items (Note 2).
Effective May 4, 1998, the designation of Pittston Burlington Group Common Stock
and the name of the Pittston Burlington Group were changed to Pittston BAX Group
Common Stock and Pittston BAX Group, respectively. All rights and privileges of
the holders of such Stock are otherwise unaffected by such changes. The stock
continues to trade on the New York Stock Exchange under the symbol "PZX".
The Company provides to holders of Pittston BAX Group Common Stock ("BAX Stock")
separate financial statements, financial review, descriptions of business and
other relevant information for the BAX Group in addition to the consolidated
financial information of the Company. Notwithstanding the attribution of assets
and liabilities (including contingent liabilities) among the Minerals Group, the
Brink's Group and the BAX Group for the purpose of preparing their respective
financial statements, this attribution and the change in the capital structure
of the Company as a result of the approval of the Brink's Stock Proposal did not
affect legal title to such assets or responsibility for such liabilities for the
Company or any of its subsidiaries. Holders of BAX Stock are common shareholders
of the Company, which continues to be responsible for all its liabilities.
Financial impacts arising from one group that affect the Company's financial
condition could affect the results of operations and financial condition of each
of the groups. Since financial developments within one group could therefore
affect other groups, all shareholders of the Company could be adversely affected
by an event directly impacting only one group. Accordingly, the Company's
consolidated financial statements must be read in connection with the BAX
Group's financial statements.
PRINCIPLES OF COMBINATION
The accompanying financial statements reflect the combined accounts of the
business comprising the BAX Group and their majority-owned subsidiaries. The BAX
Group's interests in 20% to 50% owned companies are carried on the equity method
unless control exists, in which case, consolidation accounting is used. All
material intercompany items and transactions have been eliminated in
combination. Certain prior year amounts have been reclassified to conform to the
current year's financial statement presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits and investments
with original maturities of three months or less.
INVENTORIES
Inventories are stated at cost (determined under the first-in, first-out or
average cost method) or market, whichever is lower.
PROPERTY, PLANT AND EQUIPMENT
Expenditures for maintenance and repairs are charged to expense, and the costs
of renewals and betterments are capitalized. Depreciation is provided
principally on the straight-line method at varying rates depending upon
estimated useful lives.
INTANGIBLES
The excess of cost over fair value of net assets of businesses acquired is
amortized on a straight-line basis over the estimated periods benefited.
The BAX Group evaluates the carrying value of intangibles and the periods of
amortization to determine whether events and circumstances warrant revised
estimates of asset value or useful lives. The BAX Group annually assesses the
recoverability of the excess of cost over net assets acquired by determining
whether the amortization of the asset balance over its remaining life can be
recovered through projected undiscounted future operating cash flows. Evaluation
of asset value as well as periods of amortization are performed on a
disaggregated basis.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference
23
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which these items are expected to
reverse.
See Note 2 for allocation of the Company's US federal income taxes to the BAX
Group.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Postretirement benefits other than pensions are accounted for in accordance with
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions", which requires employers to accrue the cost of such retirement
benefits during the employees' service with the Company.
STOCK BASED COMPENSATION
The BAX Group has implemented the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation" (Note 11). The BAX Group continues to
measure compensation expense for its stock-based compensation plans using the
intrinsic value based methods of accounting prescribed by Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees."
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign operations have been translated at rates of
exchange at the balance sheet date and related revenues and expenses have been
translated at average rates of exchange in effect during the year. Resulting
cumulative translation adjustments have been included in shareholder's equity.
Translation adjustments relating to operations in counties with highly
inflationary economies are included in net income, along with all transaction
gains and losses for the period.
A portion of the BAX Group's financial results is derived from activities a
number of foreign countries in Europe, Asia and Latin America, each with a local
currency other than the US dollar. Because the financial results of the BAX
Group are reported in US dollars, they are affected by changes in the value of
various foreign currencies in relation to the US dollar. The diversity of
foreign operations helps to mitigate a portion of the foreign currency risks
associated with market fluctuations in any one country and the impact on
translated results.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
All derivative instruments are recognized on the balance sheet at their fair
value. On the date the derivative contract is entered into, the BAX Group
designates the derivative as (1) a hedge of the fair value of a recognized asset
or liability or of an unrecognized firm commitment ("fair value" hedge), (2) a
hedge of a forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability ("cash flow" hedge),
(3) a foreign-currency fair value or cash flow hedge ("foreign currency" hedge),
or (4) a hedge of a net investment in a foreign operation. The BAX Group does
not enter into derivative contracts for the purpose of "trading" such
instruments and thus has no derivative designation as "held for trading".
Changes in the fair value of a derivative that is highly effective as and that
is designated and qualifies as a fair value hedge, along with the loss or gain
on the hedged asset or liability that is attributable to the hedged risk
(including losses or gains on firm commitments), are recorded currently in
earnings. Changes in the fair value of a derivative that is highly effective as
and that is designated and qualifies as a cash flow hedge are recorded in other
comprehensive income, until the forecasted transaction affects earnings. Changes
in the fair value of derivatives that are highly effective as and that are
designated and qualify as foreign currency hedges are recorded either currently
in earnings or other comprehensive income, depending on whether the hedge
transaction is a fair value hedge or a cash flow hedge. If, however, a
derivative is used as a hedge of a net investment in a foreign operation, its
changes in fair value, to the extent effective as a hedge, are recorded in the
cumulative translation adjustments account within equity. Any amounts excluded
from the assessment of hedge effectiveness as well as the ineffective portion of
the gain or loss is reported in earnings immediately.
Management documents the relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for undertaking
various hedge transactions. This process includes linking derivatives that are
designated as fair value, cash flow, or foreign currency hedges to specific
assets and liabilities on the balance sheet or to specific firm commitments or
forecasted transactions. Management also assesses, both at the hedge's inception
and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash
flows of hedged items. When it is determined that a derivative is not highly
effective as a hedge or that it has ceased to be a highly effective hedge, hedge
accounting is discontinued prospectively, as discussed below.
The BAX Group discontinues hedge accounting prospectively when and if (1) it is
determined that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of a hedged item (including firm commitments or
forecasted transactions); (2) the derivative expires or is sold, terminated, or
exercised; (3) the derivative is de-designated as a hedge instrument, because it
is no longer probable that a forecasted transaction will occur; (4) because a
hedged firm commitment no longer meets the definition of a firm commitment; or
(5) management determines that designation of the derivative as a hedge
instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the derivative
will continue to be carried on the balance sheet at its fair value, changes will
be reported currently in earnings, and the hedged asset or liability will no
longer be adjusted for changes in fair value. When hedge accounting is
discontinued because the hedged item no
24
longer meets the definition of a firm commitment, the derivative will continue
to be carried on the balance sheet at its fair value, changes will be reported
currently in earnings, and any asset or liability that was recorded pursuant to
recognition of the firm commitment will be removed from the balance sheet and
recognized as a gain or loss currently in earnings. When hedge accounting is
discontinued because it is probable that a forecasted transaction will not
occur, the derivative will continue to be carried on the balance sheet at its
fair value, changes will be reported currently in earnings, and gains and losses
that were accumulated in other comprehensive income will be recognized
immediately in earnings. In all other situations in which hedge accounting is
discontinued, the derivative will be carried at its fair value on the balance
sheet, with changes in its fair value recognized currently in earnings.
REVENUE RECOGNITION
Revenues related to transportation services are recognized, together with
related transportation costs, on the date shipments physically depart from
facilities en route to destination locations. Revenues and operating results
determined under existing recognition policies do not materially differ from
those which would result from an allocation between reporting periods based on
relative transit times in each reporting period with expenses recognized as
incurred.
NET INCOME PER SHARE
Basic and diluted net income per share for the BAX Group are computed by
dividing net income by the basic weighted-average common shares outstanding and
the diluted weighted-average common shares outstanding, respectively. Diluted
weighted-average common shares outstanding includes additional shares assuming
the exercise of stock options. However, when the exercise of stock options is
antidilutive, they are excluded from the calculation. The shares of BAX Stock
held in The Pittston Company Employee Benefits Trust (the "Trust" - See Note 12)
are subject to the treasury stock method and are not included in the basic and
diluted net income per share calculations.
USE OF ESTIMATES
In accordance with generally accepted accounting principles, management of the
Company has made a number of estimates and assumptions relating to the reporting
of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements. Actual results could differ
from those estimates.
ACCOUNTING CHANGES
The BAX Group adopted SFAS No. 130, "Reporting Comprehensive Income," in the
first quarter of 1998. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in shareholders' equity
except those resulting from investments by or distributions to shareholders.
Effective January 1, 1998, the BAX Group implemented AICPA Statement of Position
("SOP") No. 98-1 "Accounting for the Costs of Computer Software Developed for
Internal Use." SOP No. 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. As a result of the
implementation of SOP No. 98-1, net loss for the year ended December 31, 1998,
included a benefit of approximately $2.1 million ($0.11 per share) for costs
capitalized during those periods which would have been expensed prior to the
implementation of SOP No. 98-1.
The BAX Group implemented SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the financial statements for the year
ended December 31, 1998. SFAS No. 131 superseded FASB Statement No. 14,
"Financial Reporting for Segments of Business Enterprise." SFAS No. 131 requires
publicly-held companies to report financial and descriptive information about
operating segments in financial statements issued to shareholders for interim
and annual periods. The SFAS also requires additional disclosures with respect
to products and services, geographic areas of operation, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information. See Note 16.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999; the BAX Group elected to adopt SFAS No. 133 as of October 1, 1998. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Changes in the fair value of derivatives are
recorded each period currently in earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. In accordance with
the transition provisions of SFAS No. 133, the BAX Group recorded a net
transition adjustment resulting in a gain of $223 (net of related income tax of
$131) in accumulated other comprehensive income at October 1, 1998 in order to
recognize at fair value derivatives that are designated as cash-flow hedging
instruments.
2. RELATED PARTY TRANSACTIONS
The following policies may be modified or rescinded by action of the Company's
Board of Directors (the "Board"), or the Board may adopt additional policies,
without approval of the shareholders of the Company, although the Board has no
present intention to do so. The Company allocated certain corporate general and
administrative expenses, net interest
25
expense and related assets and liabilities in accordance with the policies
described below. Corporate assets and liabilities are primarily deferred pension
assets and liabilities, income taxes and accrued liabilities. See Note 12 for
Board policies related to disposition of properties and assets.
FINANCIAL
As a matter of policy, the Company manages most financial activities of the BAX
Group, Brink's Group and Minerals Group on a centralized, consolidated basis.
Such financial activities include the investment of surplus cash; the issuance,
repayment and repurchase of short-term and long-term debt; the issuance and
repurchase of common stock and the payment of dividends. In preparing these
financial statements, transactions primarily related to invested cash,
short-term and long-term debt (including convertible debt), related net interest
and other financial costs have been attributed to the BAX Group based upon its
cash flows for the periods presented after giving consideration to the debt and
equity structure of the Company. The Company attributes long-term debt to the
BAX Group based upon the purpose for the debt in addition to the cash
requirements of the BAX Group. See Note 9 for details and amounts of long-term
debt. The portion of the Company's interest expense, net of amounts capitalized,
allocated to the BAX Group for 1998, 1997 and 1996 was $3,073, $924 and $663,
respectively. Management believes such method of allocation to provide a
reasonable and equitable estimate of the costs attributable to the BAX Group.
To the extent borrowings are deemed to occur between the BAX Group, the Brink's
Group and the Minerals Group, intergroup accounts are established bearing
interest at the rate in effect from time to time under the Company's unsecured
credit lines or, if no such credit lines exist, at the prime rate charged by
Chase Manhattan Bank from time to time. At December 31, 1998 and 1997, the
Minerals Group had no such borrowings from the BAX Group.
INCOME TAXES
The BAX Group and its domestic subsidiaries are included in the consolidated US
federal income tax return filed by the Company.
The Company's consolidated provision and actual cash payments for US federal
income taxes are allocated between the BAX Group, Brink's Group and Minerals
Group in accordance with the Company's tax allocation policy and reflected in
the financial statements for each Group. In general, the consolidated tax
provision and related tax payments or refunds are allocated among the Groups,
for financial statement purposes, based principally upon the financial income,
taxable income, credits and other amounts directly related to the respective
Group. Tax benefits that cannot be used by the Group generating such attributes,
but can be utilized on a consolidated basis, are allocated to the Group that
generated such benefits and an intergroup account is established for the benefit
of the Group generating the attributes. As a result, the allocated Group amounts
of taxes payable or refundable are not necessarily comparable to those that
would have resulted if the Groups had filed separate tax returns. In accordance
with the policy, at December 31, 1998 and 1997, the BAX Group owed the Minerals
Group $20,355 and $18,239, respectively, for such tax benefits, of which $13,355
and $13,239, respectively, were not expected to be paid within one year from
such dates. The BAX Group paid the Minerals Group $3,333 in 1998 and $10,278 in
1997 for the utilization of such tax benefits.
SHARED SERVICES
A portion of the Company's corporate general and administrative expenses and
other shared services has been allocated to the BAX Group based upon utilization
and other methods and criteria which management believes to provide a reasonable
and equitable estimate of the costs attributable to the BAX Group. These
allocations were $10,363, $6,859 and $7,433 in 1998, 1997 and 1996,
respectively.
PENSION
The BAX Group's pension cost related to its participation in the Company's
noncontributory defined benefit pension plan is actuarially determined based on
its respective employees and an allocable share of the pension plan liabilities
and calculated in accordance with SFAS No. 87, "Employers' Accounting for
Pensions". Pension plan liabilities have been allocated to the BAX Group based
on the percentage of its projected benefit obligation to the plan's total
projected benefit obligation. Management believes such method of allocation to
provide a reasonable and equitable estimate of the liabilities and costs
attributable to the BAX Group.
3. SHAREHOLDER'S EQUITY
The cumulative foreign currency translation adjustment deducted from
shareholder's equity was $8,076, $9,207 and $892 at December 31, 1998, 1997 and
1996, respectively.
The cumulative cash flow hedges deducted from shareholder's equity was $1,289,
$0 and $0 at December 31, 1998, 1997 and 1996, respectively.
4. ACQUISITIONS
All acquisitions discussed below have been accounted for as purchases.
Accordingly, the costs of the acquisitions were allocated to the assets acquired
and liabilities assumed based on their respective values. The results of
operations of the businesses acquired have been included in the accompanying
financial statements of the BAX Group from their respective dates of
acquisition. The excess of the purchase price over fair value of the net assets
acquired is generally included in goodwill. Some purchase agreements provide for
contingent payments based on specified criteria. Any such future payments are
generally capitalized as goodwill when paid. Unless otherwise indicated,
goodwill is amortized on a straight-
26
line basis over forty years.
On April 30, 1998, the BAX Group acquired the privately held Air Transport
International LLC ("ATI") for approximately $29,000. The acquisition was funded
through the revolving credit portion of the Company's bank credit agreement.
Based on a preliminary evaluation of the fair value of assets acquired and
liabilities assumed, which is subject to additional review, the acquisition
resulted in goodwill of approximately $1,600. If this acquisition had occurred
on either January 1, 1997 or 1998, the pro forma impact on the BAX Group's
revenues, net income or net income per share in 1997 and 1998 would not have
been material.
In June 1997, the BAX Group acquired Cleton & Co. ("Cleton"), a leading
logistics provider in the Netherlands, for the equivalent of US $10,700 in cash
and the assumption of the equivalent of US $10,000 in debt. If this acquisition
had occurred on January 1, 1996 or 1997, the pro forma impact on the BAX Group's
revenues, net income or net income per share in 1996 and 1997 would not have
been material. Based on an estimate of fair values of assets acquired and
liabilities assumed, the acquisition resulted in goodwill of approximately
$3,800.
Additional contingent payments of approximately US $1,500 and US $1,600 were
made in 1997 and 1998, respectively. An additional contingent payment may be
made in 1999, based on certain performance requirements of Cleton.
In addition, in 1997, the BAX Group acquired the remaining interest in South
Africa. If this acquisition had occurred on January 1, 1996 or 1997, the pro
forma impact on the BAX Group's revenues, net income or net income per share in
1996 and 1997 would not have been material.
There were no material acquisitions in 1996.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following:
As of December 31
1998 1997
- ---------------------------------------------------------------------
Land $ 1,979 1,777
Buildings 64,896 47,248
Machinery and equipment 233,905 158,422
- ---------------------------------------------------------------------
Total $300,780 207,447
=====================================================================
The estimated useful lives for property, plant and equipment are as follows:
Years
- --------------------------------------------------------------------
Buildings 15 to 40
Machinery and equipment 3 to 15
====================================================================
Depreciation of property, plant and equipment aggregated $28,008 in 1998,
$23,285 in 1997 and $16,887 in 1996.
During the third quarter of 1998, the BAX Group recorded write-offs for software
costs included in property, plant and equipment in accordance with SFAS No. 121
of approximately $16,000. These write-offs consisted of the costs associated
with certain in-process software development projects that were canceled during
the quarter and unamortized costs of existing software applications which were
determined by the management to have no future service potential or value. It is
management's belief at this time that the current ongoing information technology
initiatives that originated from the previously mentioned projects are necessary
and will be successfully completed and implemented. Such write-offs were
recorded in selling, general and administrative expenses in the BAX Group's
results of operation.
6. INTANGIBLES
Intangibles consist entirely of the excess of cost over fair value of net assets
of businesses acquired and are net of accumulated amortization of $92,835 and
$85,150 at December 31, 1998 and 1997, respectively. The estimated useful life
of intangibles is generally forty years. Amortization of intangibles aggregated
$7,515 in 1998, $6,528 in 1997 and $6,465 in 1996.
7. DERIVATIVE AND NON-DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
NON-DERIVATIVE FINANCIAL INSTRUMENTS
Non-derivative financial instruments, which potentially subject the BAX Group to
concentrations of credit risk, consist principally of cash and cash equivalents
and trade receivables. The BAX Group places its cash and cash equivalents and
short-term investments with high credit quality financial institutions. Also, by
policy, BAX Global limits the amount of credit exposure to any one financial
institution. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising BAX Global's customer
base, and their dispersion across many different industries and geographic
areas. Credit limits, ongoing credit evaluation and account-monitoring
procedures are utilized to minimize the risk of loss from nonperformance on
trade receivables.
The following details the fair values of non-derivative financial instruments
for which it is practicable to estimate the value:
Cash and cash equivalents
The carrying amounts approximate fair value because of the short maturity of
these instruments.
Accounts receivable, accounts payable and accrued liabilities
The carrying amounts approximate fair value because of the short-term nature of
these instruments.
27
Debt
The aggregate fair value of long-term debt obligations, which is based upon
quoted market prices and rates currently available to BAX Group for debt with
similar terms and maturities, approximates the carrying amount.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The BAX Group has activities in a number of foreign countries in Europe, Asia,
and Latin America, which expose it to a variety of market risks, including the
effects of changes in foreign currency exchange rates, interest rates, and
commodity prices. These financial exposures are monitored and managed by the BAX
Group as an integral part of its overall risk management program. The diversity
of foreign operations helps to mitigate a portion of the foreign currency risks
associated with market fluctuations in any one country and the impact on
translated results. The BAX Group's risk management program considers this
favorable diversification effect as it measures the BAX Group's exposure to
financial markets and as appropriate, seeks to reduce the potentially adverse
effects that the volatility of swap certain markets may have on its operating
results.
BAX Global utilizes various derivative and non-derivative hedging instruments,
as discussed below, to hedge its commodity exposures. The risk that
counterparties to such instruments may be unable to perform is minimized by
limiting the counterparties to major financial institutions. Management of BAX
Global does not expect any losses due to such counterparty default.
The BAX Group assesses interest rate, foreign currency, and commodity risks by
continually identifying and monitoring changes in interest rate, foreign
currency and commodity exposures that may adversely impact expected future cash
flows and by evaluating hedging opportunities. The BAX Group maintains risk
management control systems to monitor these risks attributable to both BAX
Global's outstanding and forecasted transactions as well as offsetting hedge
positions. The risk management control systems involve the use of analytical
techniques to estimate the expected impact of changes in interest rates, foreign
currency rates and commodity prices on BAX Global's future cash flows. BAX
Global does not use derivative instruments for purposes other than hedging.
As of October 1, 1998 BAX Global adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 which establishes
accounting and reporting standards for derivative instruments and hedging
activities, requires that an entity recognize all derivatives as either assets
or liabilities in the balance sheet and measure those instruments at fair value.
Changes in fair value of derivatives are recorded each period currently in
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, depending on the type
of hedge transaction. Prior to the adoption of SFAS No. 133 (prior to October 1,
1998), gains and losses on derivative contracts, designated as effective hedges,
were deferred and recognized as part of the transaction hedged. Since they were
accounted for as hedges, the fair value of these contracts were not recognized
in BAX Global's financial statements. Gains and losses resulting from the early
termination of such contracts were deferred and amortized as an adjustment to
the specific item being hedged over the remaining period originally covered by
the terminated contracts. In addition, if the underlying items being hedged were
retired prior to maturity, the unamortized gain or loss resulting from the early
termination of the related interest rate swap would be included in the gain or
loss on the extinguishment of the obligation.
Cash-flow hedges
Commodities Risk Management
BAX Global consumes jet fuel in the normal course of its business and utilizes
derivative instruments to minimize the variability in forecasted cash flows due
to adverse price movements in these commodities. The contracts are entered into
in accordance with guidelines set forth in the BAX Group's hedging policies. BAX
Global does not use derivative instruments for purposes other than hedging.
BAX Global utilizes forward swap contracts for the purchase of jet fuel to fix a
portion of forecasted jet fuel costs at specific price levels. Under the forward
swap contracts BAX Global receives (pays) the difference between the contract
rate and the higher (lower) average market rate over the related contract
period. BAX Global also periodically utilizes option strategies to hedge a
portion of the remaining forecasted risk associated with changes in the price of
jet fuel. The option contracts, which involve either purchasing call options and
simultaneously selling put options (collar strategy) or purchasing call options,
are designed to provide protection against sharp increases in the price of jet
fuel. For purchased call options, BAX Global pays a premium up front and
receives an amount over the contract period equal to the difference by which the
average market price of jet fuel during the period exceeds the option strike
price. For collar strategies, the premiums on the purchased option and sold
option net to zero. BAX Global receives an amount equal to the difference by
which the average market price of jet fuel during the period exceeds the call
option's strike price and pays an amount equal to the difference by which the
average market price of jet fuel during the period is below the put option's
strike price. At December 31, 1998, the outstanding notional amount of forward
swap hedge contracts for jet fuel totaled 16.0 million gallons.
No material amounts related to hedge ineffectiveness were recognized in earnings
during the period for the jet fuel forward swap contracts. Changes in the fair
value of the commodity contracts designated and qualifying as cash flow hedges
of forecasted commodity purchases are reported in accumulated other
comprehensive income. For jet fuel, the gains and losses are reclassified into
earnings, as a component of costs of sales,
28
in the same period as the commodity purchased affects earnings. During the year
ending December 31, 1999, losses of approximately $2,100 (pre-tax) related to
jet fuel purchases are expected to be reclassified from accumulated other
comprehensive income into cost of sales.
As of December 31, 1998, the maximum length of time over which the BAX Global is
hedging its exposure to the variability in future cash flows associated with jet
fuel is six months.
8. INCOME TAXES
The provision (credit) for income taxes consists of the following:
US
Federal Foreign State Total
- ---------------------------------------------------------------------
1998:
Current $ 2,498 5,313 300 8,111
Deferred (4,664) (5,657) (1,062) (11,383)
- ---------------------------------------------------------------------
Total $ (2,166) (344) (762) (3,272)
=====================================================================
1997:
Current $ 16,646 2,570 1,200 20,416
Deferred 1,774 (3,461) 258 (1,429)
- ---------------------------------------------------------------------
Total $ 18,420 (891) 1,458 18,987
======================================================================
1996:
Current $ 18,967 2,371 1,200 22,538
Deferred 351 (3,166) (15) (2,830)
- ----------------------------------------------------------------------
Total $ 19,318 (795) 1,185 19,708
======================================================================
The significant components of the deferred tax benefit were as follows:
Years Ended December 31
1998 1997 1996
- ------------------------------------------------------------------
Deferred tax benefit, exclusive
of the components listed below $ (6,320) (1,528) (372)
Net operating loss carryforwards (3,711) (3,382) (2,887)
Alternative minimum tax credits (1,352) 3,481 429
- ------------------------------------------------------------------
Total $(11,383) (1,429) (2,830)
==================================================================
The tax benefit for compensation expense related to the exercise of certain
employee stock options for tax purposes in excess of compensation expense for
financial reporting purposes is recognized as an adjustment to shareholder's
equity.
The components of the net deferred tax asset as of December 31, 1998 and
December 31, 1997 were as follows:
1998 1997
- --------------------------------------------------------------------
DEFERRED TAX ASSETS:
Accounts receivable $ 7,986 2,679
Postretirement benefits other than pensions 1,856 1,493
Workers' compensation and other claims 1,119 869
Other liabilities and reserves 18,848 14,436
Miscellaneous 2,738 1,716
Net operating loss carryforwards 15,320 11,609
Alternative minimum tax credits 10,187 8,505
- --------------------------------------------------------------------
Total deferred tax assets 58,054 41,307
- --------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Property, plant and equipment 1,126 3,254
Pension assets 670 (726)
Other assets 893 636
Investments in foreign affiliates 1,500 --
Miscellaneous 13,022 12,617
- --------------------------------------------------------------------
Total deferred tax liabilities 17,211 15,781
- --------------------------------------------------------------------
Net deferred tax asset $ 40,843 25,526
====================================================================
The recording of deferred federal tax assets is based upon their expected
utilization in the Company's consolidated federal income tax return and the
benefit that would accrue to the BAX Group under the Company's tax allocation
policy.
The following table accounts for the difference between the actual tax provision
and the amounts obtained by applying the statutory US federal income tax rate of
35% in 1998, 1997 and 1996 to the income before income taxes.
Years Ended December 31
1998 1997 1996
- ----------------------------------------------------------------------------
Income (loss) before income taxes:
United States $(28,071) 34,164 37,794
Foreign 11,708 17,171 15,715
- ----------------------------------------------------------------------------
Total $(16,363) 51,335 53,509
============================================================================
Tax provision (credit) computed
at statutory rate $ (5,727) 17,967 18,730
Increases (reductions) in taxes due to:
State income taxes (net of federal tax
benefit) (495) 948 771
Goodwill amortization 2,086 2,067 2,086
Difference between total taxes on foreign
income and the US federal
statutory rate 66 (2,291) (2,392)
Miscellaneous 798 296 513
- ----------------------------------------------------------------------------
Actual tax provision (credit) $ (3,272) 18,987 19,708
============================================================================
29
It is the policy of the BAX Group to accrue deferred income taxes on temporary
differences related to the financial statement carrying amounts and tax bases of
investments in foreign subsidiaries and affiliates which are expected to reverse
in the foreseeable future. As of December 31, 1998 and December 31, 1997, the
unrecognized deferred tax liability for temporary differences of approximately
$11,766 and $12,206, respectively, related to investments in foreign
subsidiaries and affiliates that are essentially permanent in nature and not
expected to reverse in the foreseeable future was approximately $4,118 and
$4,272, respectively.
The BAX Group and its domestic subsidiaries are included in the Company's
consolidated US federal income tax return.
As of December 31, 1998, the BAX Group had $10,187 of alternative minimum tax
credits allocated to it under the Company's tax allocation policy. Such credits
are available to offset future US federal income taxes and, under current tax
law, the carryforward period for such credits is unlimited.
The tax benefits of net operating loss carryforwards of the BAX Group as of
December 31, 1998 were $15,320 and related to various state and foreign taxing
jurisdictions. The expiration periods primarily range from 5 to 15 years.
9. LONG-TERM DEBT
A portion of the outstanding debt under the Company's credit agreement have been
attributed to the BAX Group. Total long-term debt of the BAX Group consists of
the following:
As of December 31
1998 1997
- --------------------------------------------------------------------
Senior obligations and capital leases:
Netherlands guilder term loan due 2000
(year-end rate 3.95% in 1998 and 4.29% $ 11,166 10,700
in 1997)
Singapore dollar term loan due 2003
(year-end rate 3.31% in 1998) 10,897 --
All other 15,224 15,438
- --------------------------------------------------------------------
37,287 26,138
Attributed portion of the Company's debt:
Revolving credit notes due 2001 (year-end
rate 5.83% in 1998 and 5.92% in 1997) 60,904 10,878
- --------------------------------------------------------------------
Total long-term debt, less current maturities 98,191 37,016
Current maturities of long-term debt 3,965 3,176
- --------------------------------------------------------------------
Total long-term debt including current $102,156 40,192
maturities
====================================================================
For the four years through December 31, 2003, minimum repayments of long-term
debt outstanding are as follows:
2000 $ 14,687
2001 63,093
2002 1,698
2003 12,025
The Company has a $350,000 credit agreement with a syndicate of banks (the
"Facility"). The Facility includes a $100,000 term loan and permits additional
borrowings, repayments and reborrowings of up to an aggregate of $250,000. The
maturity date of both the term loan and revolving credit portion of the Facility
is May 2001. Interest on borrowings under the Facility is payable at rates based
on prime, certificate of deposit, Eurodollar or money market rates plus
applicable margin. A term loan of $100,000 was outstanding at December 31, 1998
and 1997. Additional borrowings of $91,600 and $25,900 were outstanding at
December 31, 1998 and 1997, respectively under the revolving credit portion of
the Facility. The Company pays commitment fees (.125% per annum at December 31,
1998) on the unused portion of the Facility. At December 31, 1998 and 1997,
$60,904 and $10,878, respectively, of these additionally borrowings were
attributed to the BAX Group.
Under the terms of the Facility, the Company has agreed to maintain at least
$400,000 of Consolidated Net Worth, as defined, and can incur additional
indebtedness of approximately $398,000 at December 31, 1998.
In 1998, BAX Global entered into a credit agreement with a major US bank related
to its Singapore operating unit to finance warehouse facilities. The credit
agreement has a revolving period extending through April 1999 at which time
amounts outstanding will be converted to a term loan maturing in April 2003. The
amount available for borrowing will not exceed the lesser of Singapore $32,500
and US $50,000. At December 31, 1998, the amount outstanding in Singapore
dollars was the equivalent of US $10,897 which bears an interest rate of 3.31%
and was included in the noncurrent portion of long-term debt. Interest on the
borrowings under the agreement is payable at rates based on Alternate Base Rate,
LIBOR (London Inter-Bank Offered Rate) US$ Rate, SIBOR (Singapore Inter-Bank
Offered Rate) US$ Rate and Adjusted SIBOR-S$ plus the applicable margin.
In 1997, BAX Global entered into a borrowing agreement in connection with its
acquisition of Cleton. In April 1998, BAX refinanced the 1997 acquisition
borrowings with a term credit facility denominated in Netherlands guilders and
maturing in April 2000. The amount outstanding under the facility at December
31, 1998, was the Netherlands guilders equivalent of US $11,166 and bore an
interest rate of 3.95%. Interest on borrowings under the agreement is payable at
rates based on AIBOR (Amsterdam Inter-Bank Offered Rate) plus the applicable
margin.
30
Various international operations maintain lines of credit and overdraft
facilities aggregating approximately $88,000 with a number of banks on either a
secured or unsecured basis. At December 31, 1998, $38,749 was outstanding under
such agreements and was included in short-term borrowings. Average interest
rates on the lines of credit and overdraft facilities at December 31, 1998
approximated 9.1%. Commitment fees paid on the lines of credit and overdraft
facilities are not significant.
At December 31, 1998, the Company's portion of outstanding unsecured letters of
credit allocated to the BAX Group was $27,626, primarily supporting the BAX
Group's obligations under aircraft lease obligations and its various
self-insurance programs.
10. NET INCOME PER SHARE
The following is a reconciliation between the calculation of basic and diluted
net income (loss) per share:
Years Ended December 31
1998 1997 1996
- -------------------------------------------------------------------------------
NUMERATOR:
Net income (loss)-Basic and diluted net
income (loss) per share numerator $ (13,091) 32,348 33,801
DENOMINATOR:
Basic weighted average common
shares outstanding 19,333 19,448 19,223
Effect of dilutive securities:
Stock options -- 545 458
- -------------------------------------------------------------------------------
Diluted weighted average common
shares outstanding 19,333 19,993 19,681
===============================================================================
Options to purchase 2,588 shares of BAX Stock, at prices between $7.85 and
$27.91 per share, were outstanding during 1998 but were not included in the
computation of diluted net loss per share because the effect of all options
would be antidilutive.
Options to purchase 7 and 30 shares of BAX Stock at $27.91 per share and at
prices between $20.19 and $21.13 per share, were outstanding in 1997 and 1996,
respectively, but were not included in the computation of diluted net income per
share because the options' exercise price was greater than the average market
price of the common shares and, therefore, the effect would be antidilutive.
11. STOCK OPTIONS
The Company has various stock-based compensation plans as described below.
STOCK OPTION PLANS
The Company grants options under its 1988 Stock Option Plan (the "1988 Plan") to
executives and key employees and under its Non-Employee Directors' Stock Option
Plan (the "Non-Employee Plan") to outside directors, to purchase common stock at
a price not less than 100% of quoted market value at the date of grant. The 1988
Plan options can be granted with a maximum term of ten years and can vest within
six months from the date of grant. The majority of grants made in 1998, 1997 and
1996 have a maximum term of six years and vest 100% at the end of the third
year. The Non-Employee Plan options can be granted with a maximum term of ten
years and can vest within six months from the date of grant. The majority of
grants made in 1998, 1997 and 1996 have a maximum term of six years and vest
ratably over the first three years. The total number of shares underlying
options authorized for grant, but not yet granted, under the 1988 Plan is 2,517.
Under the Non-Employee Plan, the total number of shares underlying options for
grant, but not yet granted is 100.
The Company's 1979 Stock Option Plan (the "1979 Plan") and the 1985 Stock Option
Plan (the "1985 Plan") terminated in 1985 and 1988, respectively.
As part of the Brink's Stock Proposal (described in the Company's Proxy
Statement dated December 31, 1995 resulting in the modification of the capital
structure of the Company to include an additional class of common stock), the
1988 and Non-Employee Plans were amended to permit option grants to be made to
optionees with respect to Brink's Stock or BAX Stock in addition to Minerals
Stock. At the time of the approval of the Brink's Stock Proposal, a total of
2,383 shares of Services Stock were subject to options outstanding under the
1988 Plan, the Non-Employee Plan, the 1979 Plan and the 1985 Plan. Pursuant to
antidilution provisions in the option agreements covering such plans, the
Company converted these options into options for shares of Brink's Stock or BAX
Stock, or both, depending on the employment status and responsibilities of the
particular optionee. In the case of optionees having Company-wide
responsibilities, each outstanding Services Stock option was converted into
options for both Brink's Stock and BAX Stock. In the case of other optionees,
each outstanding option was converted into a new option only for Brink's Stock
or BAX Stock, as the case may be. As a result, upon approval of the Brink's
Stock Proposal, 1,750 shares of Brink's Stock and 1,989 shares of BAX Stock were
subject to options.
31
The table below summarizes the related plan activity.
Aggregate
Exercise
Shares Price
- -------------------------------------------------------------------
Outstanding at December 31, 1995 -- $ --
Converted in Brink's Stock Proposal 1,989 23,474
Granted 440 7,972
Exercised (318) (2,905)
Forfeited or expired (64) (952)
- -------------------------------------------------------------------
Outstanding at December 31, 1996 2,047 $ 27,589
Granted 526 12,693
Exercised (246) (2,389)
Forfeited or expired (71) (1,223)
- -------------------------------------------------------------------
Outstanding at December 31, 1997 2,256 $ 36,670
Granted 334 4,683
Exercised (236) (1,868)
Forfeited or expired (166) (3,393)
- -------------------------------------------------------------------
Outstanding at December 31, 1998 2,188 $ 36,092
===================================================================
Options exercisable at the end of 1998, 1997 and 1996, respectively, on an
equivalent basis, for BAX Stock, were 1,081, 827 and 1,034.
The following table summarizes information about stock options outstanding as of
December 31, 1998.
--------------------- ----------------
Stock Options Stock Options
Outstanding Exercisable
- ---------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Life Exercise Exercise
Exercise Prices Shares (Years) Price Shares Price
- ---------------------------------------------------------------------
$ 7.85 to 11.70 374 2.79 $ 9.28 266 $ 9.58
13.41 to 16.32 851 2.74 14.78 728 14.72
17.06 to 21.13 534 3.46 18.07 83 17.29
23.88 to 27.91 429 4.38 24.25 4 27.91
- ---------------------------------------------------------------------
Total 2,188 1,081
=====================================================================
EMPLOYEE STOCK PURCHASE PLAN
Under the 1994 Employee Stock Purchase Plan (the "Plan"), the Company is
authorized to issue up to 375 shares of BAX Stock to its employees who have six
months of service and who complete minimum annual work requirements. Under the
terms of the Plan, employees may elect each six-month period (beginning January
1 and July 1), to have up to 10 percent of their annual earnings withheld to
purchase the Company's stock. Employees may purchase shares of any or all of the
three classes of Company common stocks. The purchase price of the stock is 85%
of the lower of its beginning-of-the-period or end-of-the-period market price.
Under the Plan, the Company sold 48, 29 and 32 shares of BAX Stock to employees
during 1998, 1997 and 1996, respectively. The share amounts for BAX Stock
include the restatement for the Services Stock conversion under the Brink's
Stock Proposal.
ACCOUNTING FOR PLANS
The Company has adopted the disclosure - only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", but applies APB Opinion No. 25 and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized in the accompanying financial statements.
Had compensation costs for the Company's plans been determined based on the fair
value of awards at the grant dates, consistent with SFAS No. 123, the BAX
Group's net income and net income per share would approximate the pro forma
amounts indicated below:
1998 1997 1996
- -------------------------------------------------------------------------
NET INCOME (LOSS) ATTRIBUTED TO COMMON
SHARES
BAX Group
As Reported $(13,091) 32,348 33,801
Pro Forma (15,017) 30,170 32,528
NET INCOME (LOSS) PER COMMON SHARE
BAX Group
Basic, As Reported $ (0.68) 1.66 1.76
Basic, Pro Forma (0.78) 1.55 1.69
Diluted, As Reported (0.68) 1.62 1.72
Diluted, Pro Forma (0.78) 1.51 1.65
==========================================================================
Note: The pro forma disclosures shown may not be representative of the effects
on reported net income in future years.
The fair value of each stock option grant used to compute pro forma net income
and net income per share disclosures is estimated at the time of the grant using
the Black-Scholes option-pricing model. The weighted-average assumptions used in
the model are as follows:
1998 1997 1996
- --------------------------------------------------------------------
Expected dividend yield 1.7% 1.0% 1.2%
Expected volatility 50% 29% 32%
Risk-Free interest rate 5.3% 6.2% 6.3%
Expected term (in years) 5.1 4.8 4.7
=====================================================================
Using these assumptions in the Black-Scholes model, the weighted-average fair
value of options granted during 1998, 1997 and 1996 is $1,928, $4,182 and
$2,679, respectively.
Under SFAS No. 123, compensation cost is also recognized for the fair value of
employee stock purchase rights. Because the Company settles its employee stock
purchase rights under the Plan at the end of each six-month offering period, the
fair value of these purchase rights was calculated using actual market
settlement data. The weighted-average fair value of the stock
32
purchase rights granted in 1998, 1997 and 1996 was $128, $321 and $231,
respectively, for the BAX Group.
12. CAPITAL STOCK
Effective May 4, 1998, the designation of Pittston Burlington Group Common Stock
and the name of Pittston Burlington Group were changed to Pittston BAX Group
Common Stock and Pittston BAX Group, respectively. All rights and privileges of
the holders of such Stock are otherwise unaffected by such changes.
The Company, at any time, has the right to exchange each outstanding share of
BAX Stock for shares of Brink's Stock (or, if no Brink's Stock is then
outstanding, Minerals Stock) having a fair market value equal to 115% of the
fair market value of one share of BAX Stock. Upon the disposition of all or
substantially all of the properties and assets of the BAX Group to any person
(with certain exceptions), the Company is required to exchange each outstanding
share of BAX Stock for shares of Brink's Stock (or, if no Brink's Stock is then
outstanding, Minerals Stock) having a fair market value equal to 115% of the
fair market value of one share of BAX Stock.
The Company, at any time, has the right to exchange each outstanding share of
Minerals Stock for shares of Brink's Stock (or, if no Brink's Stock is then
outstanding, BAX Stock) having a fair market value equal to 115% of the fair
market value of one share of Minerals Stock. In addition, upon the disposition
of all or substantially all of the properties and assets of the Minerals Group
to any person (with certain exceptions), the Company is required to exchange
each outstanding share of Minerals Stock for shares of Brink's Stock (or, if no
Brink's Stock is then outstanding, BAX Stock) having a fair market value equal
to 115% of the fair market value of one share of Minerals Stock. If any shares
of the Company's Preferred Stock are converted after an exchange of Minerals
Stock for Brink's Stock (or BAX Stock), the holder of such Preferred Stock
would, upon conversion, receive shares of Brink's Stock (or BAX Stock) in lieu
of shares of Minerals Stock otherwise issuable upon such conversion.
Shares of Brink's Stock are not subject to either optional or mandatory
exchange. The net proceeds of any disposition of properties and assets of the
Brink's Group will be attributed to the Brink's Group. In the case of a
disposition of all or substantially all the properties and assets of any other
group, the net proceeds will be attributed to the group the shares of which have
been issued in exchange for shares of the selling group.
Holders of Brink's Stock at all times have one vote per share. Holders of BAX
Stock and Minerals Stock have .739 and .244 vote per share, respectively,
subject to adjustment on January 1, 2000, and on January 1 every two years
thereafter in such a manner that each class' share of the aggregate voting power
at such time will be equal to that class' share of the aggregate market
capitalization of the Company's common stock at such time. Accordingly, on each
adjustment date, each share of BAX Stock and Minerals Stock may have more than,
less than or continue to have the number of votes per share as they have.
Holders of Brink's Stock, BAX Stock and Minerals Stock vote together as a single
voting group on all matters as to which all common shareholders are entitled to
vote. In addition, as prescribed by Virginia law, certain amendments to the
Articles of Incorporation affecting, among other things, the designation,
rights, preferences or limitations of one class of common stock, or certain
mergers or statutory share exchanges, must be approved by the holders of such
class of common stock, voting as a group, and, in certain circumstances, may
also have to be approved by the holders of the other classes of common stock,
voting as separate voting groups.
In the event of a dissolution, liquidation or winding up of the Company, the
holders of Brink's Stock, BAX Stock and Minerals Stock, effective January 1,
1999, share on a per share basis an aggregate amount equal to 54%, 28% and 18%,
respectively, of the funds, if any, remaining for distribution to the common
shareholders. In the case of Minerals Stock, such percentage has been set, using
a nominal number of shares of Minerals Stock of 4,203 (the "Nominal Shares") in
excess of the actual number of shares of Minerals Stock outstanding. These
liquidation percentages are subject to adjustment in proportion to the relative
change in the total number of shares of Brink's Stock, BAX Stock and Minerals
Stock, as the case may be, then outstanding to the total number of shares of all
other classes of common stock then outstanding (which totals, in the case of
Minerals Stock, shall include the Nominal Shares).
Dividends paid to holders of BAX Stock are limited to funds of the Company
legally available for the payment of dividends. See the Company's consolidated
financial statements and related footnotes. Subject to these limitations, the
Company's Board, although there is no requirement to do so, intends to declare
and pay dividends on the BAX Stock based primarily on the earnings, financial
condition, cash flow and business requirements of the BAX Group.
The Company has the authority to issue up to 2,000 shares of preferred stock,
par value $10 per share. In January, 1994, the Company issued $80,500 or 161
shares of Series C Cumulative Convertible Preferred Stock (the "Convertible
Preferred Stock"). The Convertible Preferred Stock, which is convertible into
Minerals Stock and which has been attributed to the Minerals Group, pays an
annual dividend of $31.25 per share payable quarterly, in cash, in arrears, out
of all funds of the Company legally available therefore, when as and if,
declared by the Board. Such stock also bears a liquidation preference of $500
per share, plus an amount equal to accrued and unpaid dividends thereon.
In November 1998, under the Company's common share repurchase program, the
Company's Board of Directors (the
33
"Board") authorized the purchase, from time to time, of up to 1,500 shares of
BAX Stock, not to exceed an aggregate purchase cost of $25,000 for all common
stock of the Company. Such shares to be purchased from time to time in the open
market or in private transactions, as conditions warrant. In May 1997, the Board
authorized additional authority which allows for the purchase, from time to
time, of the Convertible Preferred Stock, not to exceed an aggregate purchase
cost of $25,000.
Under the share repurchase program, the Company purchased shares in the periods
presented as follows:
Years Ended December 31
(In thousands) 1998 1997
- --------------------------------------------------------------------
BAX Stock:
Shares 1,047 332
Cost $12,674 7,405
Convertible Preferred Stock:
Shares 0.4 1.5
Cost $ 146 617
Excess carrying amount(a) $ 23 108
====================================================================
(a) The excess of the carrying amount of the Convertible Preferred Stock over
the cash paid to holders for repurchases made during the years is deducted from
preferred dividends in the Company's Statement of Operations.
As of December 31, 1998, the Company had remaining authority to purchase over
time 1,465 shares of Pittston BAX Group Common Stock and an additional $24,236
of its Convertible Preferred Stock. The remaining aggregate purchase cost
limitation for all common stock was $24,698 at December 31, 1998. The authority
to acquire shares remains in effect in 1999.
In 1998, 1997 and 1996, dividends paid on the Convertible Preferred Stock
amounted to $3,547, $3,589 and $3,795, respectively. During 1998 and 1997, the
Board declared and the Company paid dividends of $4,642 and $4,805 on BAX stock.
In December 1992, the Company formed The Pittston Company Employee Benefits
Trust (the "Trust") to hold shares of its common stock (initially 4,000 shares)
to fund obligations under certain employee benefits programs not including stock
option plans. The trust first began funding obligations under the Company's
various stock option plans in September 1995. In November 1998, the Company sold
for a promissory note of the Trust, 1,500 new shares of BAX Stock at a price
equal to the closing value of the stock on the date prior to issuance. As of
December 31, 1998, 1,858 shares of BAX Stock (868 in 1997) remained in the
Trust, valued at market. These shares will be voted by the Trustee in the same
proportion as those voted by the Company's employees participating in the
Company's Savings Investment Plan. The fair market value of the shares is
included in common stock and capital in excess of par.
13. LEASES
The BAX Group leases aircraft, facilities, vehicles, computers and other
equipment under long-term operating and capital leases with varying terms. Most
of the operating leases contain renewal and/or purchase options.
As of December 31, 1998, aggregate future minimum lease payments under
noncancellable operating leases were as follows:
Equipment
Aircraft Facilities & Other Total
- -------------------------------------------------------------------
1999 $ 39,888 30,140 8,728 78,756
2000 32,731 21,482 7,156 61,369
2001 28,645 16,883 2,790 48,318
2002 12,698 14,587 1,109 28,394
2003 3,720 12,124 327 16,171
2004 -- 10,913 47 10,960
2005 -- 7,963 27 7,990
2006 -- 7,124 27 7,151
Later Years -- 64,047 11 64,058
- -------------------------------------------------------------------
Total $117,682 185,263 20,222 323,167
===================================================================
These amounts are net of aggregate future minimum noncancellable sublease
rentals of $1,534.
Net rent expense amounted to $73,637 in 1998, $61,650 in 1997 and $61,827 in
1996.
The BAX Group incurred capital lease obligations of $676 in 1998, $352 in 1997,
and $231 in 1996. As of December 31, 1998, the BAX Group's obligations under
capital leases were not significant.
BAX Global is in the process of negotiating certain facilities leasing
agreements with terms of ten years. Aggregate future minimum lease payments
under these agreements are expected to approximate $43,000.
34
At December 31, 1998, the BAX Group had contractual commitments with a third
party to provide aircraft usage and services to the BAX Group. The fixed and
determinable portion of the obligations under these agreements aggregate
approximately $153,240 and expire from 1999 to 2003 as follows:
1999 $ 42,720
2000 42,720
2001 37,680
2002 27,240
2003 2,880
Spending under these agreements, including any variable component, was $60,846
in 1998, $39,204 in 1997 and $18,740 in 1996.
14. EMPLOYEE BENEFIT PLANS
The BAX Group's businesses participate in the Company's noncontributory defined
benefit pension plan covering substantially all nonunion employees who meet
certain minimum requirements, in addition to sponsoring certain other defined
benefit plans. Benefits under most of the plans are based on salary (including
commissions, bonuses, overtime and premium pay) and years of service. The BAX
Group's pension cost is actuarially determined based on its employees and an
allocable share of the pension plan assets. The Company's policy is to fund the
actuarially determined amounts necessary to provide assets sufficient to meet
the benefits to be paid to plan participants in accordance with applicable
regulations. The net pension expense for 1998, 1997 and 1996 for all plans is as
follows:
Years Ended December 31
1998 1997 1996
- -----------------------------------------------------------------------
Service cost-benefits earned during
year $ 5,644 4,110 4,067
Interest cost on projected benefit
obligation 5,665 4,653 4,010
Return on assets-expected (7,389) (6,453) (5,876)
Other amortization, net 238 (372) (339)
- -----------------------------------------------------------------------
Net pension expense $ 4,158 1,938 1,862
=======================================================================
The assumptions used in determining the net pension expense for the Company's
primary pension plan were as follows:
1998 1997 1996
- -----------------------------------------------------------------------------
Interest cost on projected benefit
obligation 7.5% 8.0% 7.5%
Expected long-term rate of return on assets 10.0% 10.0% 10.0%
Rate of increase in compensation levels 4.0% 4.0% 4.0%
=============================================================================
Reconciliations of the projected benefit obligations, plan assets, funded status
and prepaid pension expense at December 31, 1998 and 1997 are as follows:
Years Ended December 31
1998 1997
- --------------------------------------------------------------------------------------------
Projected benefit obligation at beginning of year $ 73,559 58,318
Service cost-benefits earned during the year 5,644 4,110
Interest cost on projected benefit obligation 5,665 4,653
Plan participants' contributions 496 253
Acquisitions 1,842 --
Benefits paid (1,646) (1,325)
Actuarial loss 13,243 7,728
Foreign currency exchange rate changes (106) (178)
- --------------------------------------------------------------------------------------------
Projected benefit obligation at end of year $ 98,697 73,559
- --------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 79,111 68,016
Return on assets - actual 11,070 12,453
Acquisitions 1,440 --
Plan participants' contributions 496 253
Employer contributions 346 35
Benefits paid (1,646) (1,325)
Foreign currency exchange rate changes (170) (321)
- --------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 90,647 79,111
- --------------------------------------------------------------------------------------------
Funded status $ (8,050) 5,552
Unamortized initial net asset 63 (22)
Unrecognized experience loss 10,832 1,495
Unrecognized prior service cost 553 172
- --------------------------------------------------------------------------------------------
Net pension assets $ 3,398 7,197
- --------------------------------------------------------------------------------------------
Current pension liabilities 387 403
Deferred pension assets per the balance sheet $ 3,785 7,600
============================================================================================
For the valuation of the Company's primary pension obligations and the
calculation of the funded status, the discount rate was 7.0% in 1998 and 7.5% in
1997. The expected long-term rate of return on assets was 10% in both years. The
rate of increase in compensation levels used was 4% in 1998 and 1997.
The unrecognized initial net asset at January 1, 1986 (January 1, 1989, for
certain foreign pension plans), the date of adoption of SFAS No. 87, has been
amortized over the estimated remaining average service life of the employees.
Expense recognized in 1998, 1997 and 1996 for multi-employer plans was $594,
$401 and $480, respectively.
The BAX Group also provides certain postretirement health care and life
insurance benefits for eligible active and retired employees in the United
States and Canada.
35
For the years 1998, 1997 and 1996, the components of periodic expense for these
postretirement benefits were as follows:
Years Ended December 31
1998 1997 1996
- -------------------------------------------------------------------
Service cost--benefits earned during year $ 187 166 167
Interest cost on accumulated postretirement
benefit obligation 245 226 213
- -------------------------------------------------------------------
Total expense $ 432 392 380
===================================================================
The actuarially determined and recorded liabilities for the following
postretirement benefits have not been funded. Reconciliations of the accumulated
postretirement benefit obligations, funded status and accrued postretirement
benefit cost at December 31, 1998 and 1997 are as follows:
Years Ended December 31
1998 1997
- -----------------------------------------------------------------
Accumulated postretirement benefit
obligation at beginning of year $ 3,391 3,070
Service cost-benefits earned during the year 187 166
Interest cost on accumulated postretirement
benefit obligation 245 226
Benefits paid (81) (28)
Actuarial (gain) loss 495 (43)
- ------------------------------------------------------------------
Other 85 --
- ------------------------------------------------------------------
Total accumulated postretirement benefit
obligation at end of year $ 4,322 3,391
- ------------------------------------------------------------------
Accumulated postretirement benefit
obligation at end of year-retirees $ 536 465
Accumulated postretirement benefit
obligation at end of year-active
participants 3,786 2,926
- ------------------------------------------------------------------
Total accumulated postretirement benefits
obligation at end of year $ 4,322 3,391
- ------------------------------------------------------------------
Funded status $(4,322) (3,391)
Unrecognized experience (gain) loss 317 (178)
- ------------------------------------------------------------------
Accrued postretirement benefit cost at
end of year $(4,005) (3,569)
==================================================================
The accumulated postretirement benefit obligation was determined using the unit
credit method and an assumed discount rate of 7.0% in 1998 and 7.5% in 1997. The
postretirement benefit obligation for US salaried employees does not provide for
changes in health care costs since the employer's contribution to the plan is a
fixed amount.
The BAX Group also participates in the Company's Savings-Investment Plan to
assist eligible employees in providing for retirement or other future financial
needs. Employee contributions are matched at rates of 75% up to 5% of
compensation (subject to certain limitations imposed by the Internal Revenue
Code of 1986, as amended). Contribution expense under the plan aggregated $2,355
in 1998, $2,239 in 1997 and $2,259 in 1996.
The BAX Group sponsors several other defined contribution benefit plans based on
hours worked or other measurable factors. Contributions under all of these plans
aggregated $819 in 1998, $206 in 1997 and $643 in 1996.
15. OTHER OPERATING INCOME
Other operating income generally includes foreign exchange transaction gains and
losses.
16. SEGMENT INFORMATION
The BAX Group implemented SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the financial statements for the year
ended December 31, 1998. SFAS No. 131 superseded SFAS No. 14, "Financial
Reporting Segments of a Business Enterprise". SFAS No. 131 requires
publicly-held companies to report financial and descriptive information about
operating segments in financial statements issued to shareholders for interim
and annual periods.
The SFAS also requires additional disclosures with respect to products and
services, geographic areas of operation and major customers. The adoption of
SFAS No. 131 did not affect results of operations or financial position, but did
affect the disclosure of segment information.
The BAX Group has one business unit, BAX Global and three reportable operating
segments: the Americas, the Atlantic and the Pacific. Management has determined
those reportable segments based on how resources are allocated and how
operational decisions are made. The Americas segment includes operations in the
United States including ATI and the US domestic and import/export businesses,
Latin America and Canada. The Atlantic and Pacific segments include operations
in Europe and Africa and in Asia and Australia, respectively. The
eliminations/other category includes amounts that are not specifically allocated
to the individual segments for evaluation of specific segment performance such
as intercompany revenue eliminations, global support costs including global
information technology costs and goodwill amortization. Segment performance also
excludes corporate allocations from the Company. See Note 2 for a description of
such allocations.
Geographic revenues are primarily attributed based on the entity providing the
service. However, revenues and profits on expedited freight services are shared
among the origin and destination countries on all export volumes. Long-lived
assets are attributed based on the location of the asset.
BAX Global primarily provides global expedited freight transportation services.
In addition, BAX Global also provides
36
global non-expedited freight services including supply chain management
services, customs clearance and ocean freight services.
BAX Global's revenues by line of business are as follows:
Years Ended December 31
1998 1997 1996
- --------------------------------------------------------------------
Expedited freight services $ 1,519,991 1,490,161 1,337,277
Non-expedited freight
services 256,989 172,177 147,592
- --------------------------------------------------------------------
$ 1,776,980 1,662,338 1,484,869
====================================================================
Operating revenues by operating segment are as follows:
Years Ended December 31
1998 1997 1996
- --------------------------------------------------------------------
Americas(a) $ 1,181,274 1,142,495 1,027,950
Atlantic 325,975 305,598 282,299
Pacific 314,104 250,584 216,170
Eliminations/other ` (44,373) (36,339) (41,550)
- --------------------------------------------------------------------
Total operating revenues $ 1,776,980 1,662,338 1,484,869
====================================================================
(a) Includes US revenues of $1,102,323, $1,070,920 and $968,864 in 1998, 1997
and 1996, respectively, primarily representing the intra-US and export/import
freight revenues and ATI revenues.
The BAX Group's portion of the Company's operating profit is as follows:
Years Ended December 31
1998 1997 1996
- --------------------------------------------------------------------
Americas $ 55,936 69,124 60,505
Atlantic 5,564 7,333 4,571
Pacific 12,787 11,553 9,679
Other(a) (74,915) (24,746) (10,151)
- --------------------------------------------------------------------
BAX Group's segment operating
profit (loss) (628) 63,264 64,604
Corporate expenses allocated to
the BAX Group (10,363) (6,859) (7,433)
- --------------------------------------------------------------------
Total operating profit (loss) $ (10,991) 56,405 57,171
====================================================================
(a) 1998 includes additional expenses of approximately $36,000 related to the
termination or rescoping of certain information technology projects
(approximately $16,000), increased provisions on existing accounts receivable
(approximately $13,000) and approximately $7,000 primarily related to severance
expenses associated with BAX Global's redesign of its organizational structure.
1997 includes $12,500 of consulting expenses related to the redesign of BAX
Global's business processes and information systems architecture.
The BAX Group's portion of the Company's assets at year end is as follows:
As of December 31
1998 1997 1996
- --------------------------------------------------------------------
Americas(a) $ 315,469 267,272 238,048
Atlantic 165,413 148,168 116,322
Pacific 92,094 80,409 77,673
Other(b) 192,209 194,295 185,741
- --------------------------------------------------------------------
BAX Group's portion of
company's assets 765,185 690,144 617,784
BAX Group's portion of
corporate assets 10,113 11,299 17,614
- --------------------------------------------------------------------
Total assets $ 775,298 701,443 635,398
====================================================================
(a) Includes long-lived assets (property, plant and equipment) located in the US
of $70,094, $74,251 and $76,674 as of December 31, 1998, 1997 and 1996,
respectively. (b) Primarily includes goodwill and global IT assets currently
under development.
Other segment information is as follows:
As of December 31
1998 1997 1996
- --------------------------------------------------------------------
CAPITAL EXPENDITURES:
Americas $19,695 18,688 49,357
Atlantic 7,944 8,049 5,931
Pacific 22,057 4,570 4,182
Other(a) 26,419 -- --
Allocated general corporate 204 215 2,082
- --------------------------------------------------------------------
Total capital expenditures $ 76,319 31,522 61,552
====================================================================
DEPRECIATION AND AMORTIZATION:
Americas $ 18,653 15,419 10,307
Atlantic 7,277 5,120 3,686
Pacific 3,406 3,091 2,916
Other 5,951 6,037 6,345
Allocated general corporate
expense 240 238 173
- --------------------------------------------------------------------
Total depreciation and
amortization $35,527 29,905 23,427
====================================================================
(a) Includes investment in BAX Process Innovation Project.
17. CONTINGENT LIABILITIES
Under the Coal Industry Retiree Health Benefit Act of 1992 (the "Act"), the
Company and its majority-owned subsidiaries at July 20, 1992, including certain
companies of the BAX Group included in these financial statements, are jointly
and severally liable with certain companies of the Brink's Group and of the
Minerals Group for the costs of health care coverage provided for by that Act.
For a description of the Act and an estimate of certain of such costs, see Note
14 to the Company's
37
consolidated financial statements. At this time, the Company expects the
Minerals Group to discharge its obligations under the Act.
In April 1990, the Company entered into a settlement agreement to resolve
certain environmental claims against the Company arising from hydrocarbon
contamination at a petroleum terminal facility ("Tankport") in Jersey City, New
Jersey, which operations were sold in 1983. Under the settlement agreement, the
Company is obligated to pay 80% of the remediation costs. Based on data
available to the Company and its environmental consultants, the Company
estimates its portion of the cleanup costs on an undiscounted basis using
existing technologies to be between $6,600 and $11,200 and to be incurred over a
period of up to five years. Management is unable to determine that any amount
within that range is a better estimate due to a variety of uncertainties, which
include the extent of the contamination at the site, the permitted technologies
for remediation and the regulatory standards by which the clean-up will be
conducted. The estimate of costs and the timing of payments could change as a
result of changes to the remediation plan required, changes in the technology
available to treat the site, unforeseen circumstances existing at the site and
additional cost inflation.
The Company commenced insurance coverage litigation in 1990, in the United
States District Court for the District of New Jersey, seeking a declaratory
judgement that all amounts payable by the Company pursuant to the Tankport
obligation were reimbursable under comprehensive general liability and pollution
liability policies maintained by the Company. In August 1995, the District Court
ruled on various Motions for Summary Judgment. In its decision, the Court found
favorably for the Company on several matters relating to the comprehensive
general liability policies but concluded that the pollution liability policies
did not contain pollution coverage for the types of claims associated with the
Tankport site. On appeal, the Third Circuit reversed the District Court and held
that the insurers could not deny coverage for the reasons stated by the District
Court, and the case was remanded to the District Court for trial. In the latter
part of 1998, the Company concluded a settlement with its comprehensive general
liability insurer and has settlements with three other groups of insurers. If
these settlements are consummated, only one group of insurers will be remaining
in this coverage action. In the event the parties are unable to settle the
dispute with this group of insurers, the case is scheduled to be tried in June
1999. Management and its outside legal counsel continue to believe that recovery
of a substantial portion of the cleanup costs will ultimately be probable of
realization. Accordingly, based on estimates of potential liability, probable
realization of insurance recoveries, related developments of New Jersey law and
the Third Circuit's decision, it is the Company's belief that the ultimate
amount that it would be liable for related to the remediation at the Tankport
site will not significantly adversely impact the BAX Group's results of
operations or financial position.
18. SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended December 31, 1998, 1997 and 1996, cash payments for income
taxes, net of refunds received, were $9,534, $17,092 and $22,018, respectively.
For the years ended December 31, 1998, 1997 and 1996, cash payments for interest
were $8,324, $5,347 and $4,646, respectively.
In connection with the June 1997 acquisition of Cleton & Co. ("Cleton"), the BAX
Group assumed the equivalent of US $10,000 of Cleton debt of which the
equivalent of approximately US $6,000 was outstanding at December 31, 1997.
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Tabulated below are certain data for each quarter of 1998 and 1997. The first
three quarters of 1997 net income per share amounts have been restated to comply
with SFAS No. 128, "Earnings Per Share." Third quarter 1997 amounts have been
reclassified to include $3,948 of revenues and transportation expenses from
Cleton, which was acquired in June 1997.
1st 2nd 3rd 4th
- ----------------------------------------------------------------------
1998 QUARTERS:
Operating revenues $ 402,433 432,884 460,868 480,795
Gross profit 40,094 47,727 56,240 61,256
Net income (loss)(a) (2,966) 989 (21,835) 10,721
Net income (loss) per
Pittston BAX Group
Common share:
Basic(a) $ (.15) .05 (1.13) .56
Diluted (.15) .05 (1.13) .56
- ----------------------------------------------------------------------
1997 QUARTERS:
Operating revenues $ 371,409 399,567 443,376 447,986
Gross profit 40,498 43,874 64,283 58,347
Net income (loss)(b) 5,088 (1,913) 15,993 13,180
Net income (loss) per
Pittston BAX Group
common share:
Basic(b) $ .26 (.10) .82 .68
Diluted .26 (.10) .80 .66
====================================================================
(a) The third quarter of 1998 includes additional expenses of approximately
$36,000 ($22,680 after-tax; $1.17 per share) related to the termination or
rescoping of certain information technology projects (approximately $16,000
pre-tax), increased provisions on existing accounts receivable (approximately
$13,000 pre-tax), and approximately $7,000 (pre-tax) primarily related to
severance expenses associated with BAX Global's redesign of its organizational
structure.
(b) The second quarter of 1997 includes $12,500 pre-tax ($7,900 after-tax; $0.40
per share) of consulting expenses related to the redesign of BAX Global's
business processes and new information systems architecture.
38
The Pittston Company and Subsidiaries
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
FIVE YEARS IN REVIEW
(In thousands, except per share amounts) 1998 1997 1996 1995 1994
==================================================================================================================================
SALES AND INCOME (a):
Net sales and operating revenues $3,746,882 3,394,398 3,091,195 2,914,441 2,667,275
Net income (b) 66,056 110,198 104,154 97,972 26,897
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION (a):
Net property, plant and equipment $ 849,883 647,642 540,851 486,168 445,834
Total assets 2,331,137 1,995,944 1,832,603 1,807,372 1,737,778
Long-term debt, less current maturities 323,308 191,812 158,837 133,283 138,071
Shareholders' equity 736,028 685,618 606,707 521,979 447,815
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING (c), (d):
Pittston Brink's Group basic 38,713 38,273 38,200 37,931 37,784
Pittston Brink's Group diluted 39,155 38,791 38,682 38,367 38,192
Pittston BAX Group basic 19,333 19,448 19,223 18,966 18,892
Pittston BAX Group diluted 19,333 19,993 19,681 19,596 19,436
Pittston Minerals Group basic 8,324 8,076 7,897 7,786 7,594
Pittston Minerals Group diluted 8,324 8,102 9,884 10,001 7,594
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING (c):
Pittston Brink's Group 40,961 41,130 41,296 41,574 41,595
Pittston BAX Group 20,825 20,378 20,711 20,787 20,798
Pittston Minerals Group 9,186 8,406 8,406 8,406 8,390
- ---------------------------------------------------------------------------------------------------------------------------------
PER PITTSTON BRINK'S GROUP COMMON SHARE (c), (d):
Basic net income (b) $ 2.04 1.92 1.56 1.35 1.10
Diluted net income (b) 2.02 1.90 1.54 1.33 1.09
Cash dividends .10 .10 .10 .09 .09
Book value (f) 11.87 9.91 8.21 6.81 5.70
- ---------------------------------------------------------------------------------------------------------------------------------
PER PITTSTON BAX GROUP COMMON SHARE (c), (d):
Basic net income (loss) (0.68) 1.66 1.76 1.73 2.03
Diluted net income (loss) (0.68) 1.62 1.72 1.68 1.97
Cash dividends .24 .24 .24 .22 .22
Book value (f) 15.83 16.59 15.70 14.30 12.74
- ---------------------------------------------------------------------------------------------------------------------------------
PER PITTSTON MINERALS GROUP COMMON SHARE (c), (d):
Basic net income (loss) (e) $ (0.42) 0.09 1.14 1.45 (7.50)
Diluted net income (loss) (e) (0.42) 0.09 1.08 1.40 (7.50)
Cash dividends (g) .24 .65 .65 .65 .65
Book value (f) (9.50) (8.94) (8.38) (9.46) (10.74)
==================================================================================================================================
(a) See Management's Discussion and Analysis for a discussion of Brink's
acquisitions, BAX Global's additional expenses and special consulting costs and
Pittston Coal's disposition of assets.
(b) As of January 1, 1992, Brink's Home Security, Inc. ("BHS") elected to
capitalize categories of costs not previously capitalized for home security
installations to more accurately reflect subscriber installation costs. The
effect of this change in accounting principle was to increase income before
cumulative effect of accounting changes and net income of the Company and the
Brink's Group by $3,852 or $0.10 per basic and diluted share of Brink's Stock in
1998, $3,213 in 1997, $2,723 in 1996, $2,720 in 1995 and $2,486 in 1994. The net
income per basic and diluted share impact for 1994 through 1996 was $0.07 and
for 1997 was $0.08.
(c) All share and per share data presented reflects the completion of the
Brink's Stock Proposal which occurred on January 18, 1996. Shares outstanding at
the end of the period include shares outstanding under the Company's Employee
Benefits Trust. For the Pittston Brink's Group (the "Brink's Group"), such
shares totaled 2,076 shares, 2,734 shares, 3,141 shares, 3,553 shares and 3,779
shares at December 31, 1998, 1997, 1996, 1995 and 1994, respectively. For the
Pittston BAX Group (the "BAX Group"), such shares totaled 1,858 shares, 868
shares, 1,280 shares, 1,777 shares and 1,890 shares at December 31, 1998, 1997,
1996, 1995 and 1994, respectively. For the Pittston Minerals Group (the
"Minerals Group"), such shares totaled 766 shares, 232 shares, 424 shares, 594
shares and 723 shares at December 31, 1998, 1997, 1996, 1995 and 1994,
respectively. Average shares outstanding do not include these shares. The
initial dividends on Brink's Stock and BAX Stock were paid on March 1, 1996.
Dividends paid by the Company on Services Stock have been attributed to the
Brink's Group and the BAX Group in relation to the initial dividends paid on the
Brink's and BAX Stocks.
(d) The net income per share amounts prior to 1997 have been restated, as
required, to comply with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." For further discussion of net income per share, see Note 8
to the Financial Statements.
(e) For the year ended December 31, 1994, diluted net income per share is
considered to be the same as basic since the effect of stock options and the
assumed conversion of preferred stock was antidilutive.
(f) Calculated based on shareholder's equity, excluding amounts attributable to
preferred stock, and on the number of shares outstanding at the end of the
period excluding shares outstanding under the Company's Employee Benefits Trust.
(g) Cash dividends per share reflect a per share dividend of $.1625 declared in
the first quarter of 1998 (based on an annual rate of $.65 per share) and three
per share dividends of $.025 declared in each of the following 1998 quarters
(based on an annual rate of $.10 per share).
41
The Pittston Company and Subsidiaries
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Years Ended December 31
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------
Net sales and operating
revenues:
Brink's $1,247,681 921,851 754,011
BHS 203,586 179,583 155,802
BAX Global 1,776,980 1,662,338 1,484,869
Pittston Coal 503,302 612,907 677,393
Mineral Ventures 15,333 17,719 19,120
- -----------------------------------------------------------------
Net sales and operating
revenues $3,746,882 3,394,398 3,091,195
=================================================================
Operating profit (loss):
Brink's $ 98,420 81,591 56,823
BHS 53,032 52,844 44,872
BAX Global (628) 63,264 64,604
Pittston Coal 3,207 12,217 20,034
Mineral Ventures (1,031) (2,070) 1,619
- -----------------------------------------------------------------
Segment operating profit 153,000 207,846 187,952
General corporate expense (27,857) (19,718) (21,445)
- -----------------------------------------------------------------
Operating profit $ 125,143 188,128 166,507
=================================================================
The Pittston Company (the "Company") reported net income of $66.1 million in
1998 compared with net income of $110.2 million in 1997. Revenues in 1998
increased $352.5 million (10%) compared to 1997. Operating profit totaled $125.1
million in 1998, a decrease of $63.0 million over the prior year. Operating
profit in 1998 included approximately $36 million of additional expenses at BAX
Global which related to the termination or rescoping of certain information
technology projects, increased provisions on existing accounts receivable and
other costs primarily related to severance expenses associated with BAX Global's
redesign of its organizational structure. Net income in 1998 benefited from
increased operating results at the Company's Brink's, Incorporated ("Brink's"),
Brink's Home Security, Inc. ("BHS") and Pittston Mineral Ventures ("Mineral
Ventures") businesses. These increases were more than offset by lower operating
results at the Company's BAX Global Inc. ("BAX Global") and Pittston Coal
Company ("Pittston Coal") businesses, and by higher corporate expenses.
Net income for the Company for 1997 was $110.2 million compared with $104.2
million for 1996. Revenues in 1997 increased $303.2 million (10%) compared to
1996. Operating profit totaled $188.1 million for 1997, compared with $166.5
million for 1996. Net income and operating profit for 1996 included three
significant items which impacted Pittston Coal: a benefit from the settlement of
the Evergreen case at an amount lower than previously accrued ($35.7 million or
$23.2 million after-tax), a charge related to a new accounting standard
regarding the impairment of long-lived assets ($29.9 million or $19.5 million
after-tax) and the reversal of excess restructuring liabilities ($11.7 million
or $7.6 million after-tax). Net income in 1997 benefited from increased
operating profits at Brink's and BHS, partially offset by lower operating
results at BAX Global, Pittston Coal and Mineral Ventures.
The following is a discussion of the operating results for Pittston's five
segments: Brink's, BHS, BAX Global, Pittston Coal and Mineral Ventures.
BRINK'S
Brink's worldwide consolidated revenues totaled $1.2 billion in 1998 compared to
$921.9 million in 1997, a 35% increase. Brink's 1998 operating profit of $98.4
million represented a 21% increase over the $81.6 million of operating profit
reported in 1997.
The increase in Brink's worldwide revenues and operating profits in 1998 as
compared to 1997 primarily reflects growth in North America and Europe. North
America experienced continued strong performance of its armored car business,
which includes ATM services. The increase in European revenue was primarily due
to the acquisition of substantially all of the remaining shares (62%) of the
Brink's affiliate in France in the first quarter of 1998 (discussed below) and
its subsidiary in Germany (50%) in the second quarter of 1998. The increase in
European operating profits primarily reflects improved results from operations
in France, as well as the increased ownership. Operating results during 1998
were negatively impacted by lower profits from Latin America primarily due to an
equity loss from Brink's affiliate in Mexico and costs associated with start-up
operations in Argentina.
Brink's worldwide consolidated revenues totaled $921.9 million in 1997 compared
to $754.0 million in 1996, a 22% increase. Brink's 1997 operating profit of
$81.6 million represented a 44% increase over the $56.8 million of operating
profit reported in 1996.
The increase in Brink's worldwide revenues in 1997 over 1996 reflects growth
across all geographic regions while operating profit increases in 1997 reflect
improved results in all regions except Asia/Pacific. Increases in revenues and
operating profits in North America were due to strong performance in most
product lines. The improvement in European revenues and operating profits in
1997 was due to strong results in most European countries, partially offset by
lower results from the then 38% owned affiliate in France. Increases in revenues
and operating profit in Latin America were primarily due to the consolidation of
the results of Brink's Venezuelan subsidiary,
42
Custodia y Traslado de Valores, C.A. ("Custravalca"), where Brink's increased
its ownership from 15% to 61% in January 1997.
BHS
Revenues for BHS increased by $24.0 million (13%) to $203.6 million in 1998 from
$179.6 million in 1997. Revenues in 1997 were $23.8 million (15%) higher than
the $155.8 million earned in 1996. The increase in revenues in both years was
predominantly the result of higher ongoing monitoring and service revenues
caused by growth of the subscriber base (14% in 1998 and 15% in 1997), as well
as higher average monitoring fees. As a result of such growth, monthly recurring
revenues grew 17% and 21%, in the 1998 and 1997 periods, respectively.
Installation revenue for 1998 and 1997 decreased 4% and 3%, respectively, over
the earlier year. While the number of new security system installations
increased, the revenue per installation decreased in response to continuing
competitive pricing pressures.
Operating profit increased $0.2 million and $8.0 in 1998 and 1997, respectively,
as compared to a year earlier. The increase in 1997 operating profit over that
of 1996 includes an $8.9 million reduction in depreciation expense resulting
from a change in estimate (discussed below.) Operating profit in both 1998 and
1997 was favorably impacted by the monitoring and servicing revenue increases
mentioned above. However, this benefit was largely offset by upfront marketing
and sales costs incurred and expensed in connection with obtaining new
subscribers, combined with lower levels of installation revenue. Both of these
factors are a consequence of the continuing competitive environment in the
residential security market. Management expects to slow the relative increase of
these upfront costs during 1999 through intensified focus on marketing and sales
efficiencies.
It is BHS' policy to depreciate capitalized subscriber installation expenditures
over the estimated life of the security system based on subscriber retention
percentages. BHS initially developed its annual depreciation rate based on
information about subscriber retention which was available at the time. However,
accumulated historical data about actual subscriber retention has indicated that
subscribers remained active for longer periods of time than originally
estimated. Therefore, in order to reflect the higher demonstrated retention of
subscribers, and to more accurately match depreciation expense with monthly
recurring revenue generated from active subscribers, beginning in the first
quarter of 1997, BHS prospectively adjusted its annual depreciation rate from 10
to 15 years for capitalized subscriber installation costs. BHS will continue its
practice of charging the remaining net book value of all capitalized subscriber
installation expenditures to depreciation expense as soon as a system is
identified for disconnection. This change in estimate reduced depreciation
expense for capitalized installation costs in 1997 by $8.9 million. As of
January 1, 1992, BHS elected to capitalize categories of costs not previously
capitalized for home security installations. The additional costs not previously
capitalized consisted of costs for installation labor and related benefits for
supervisory, installation scheduling, equipment testing and other support
personnel and costs incurred in maintaining facilities and vehicles dedicated to
the installation process. The effect of this change in accounting principle was
to increase operating profit for the Brink's Group and the BHS segment for 1998,
1997 and 1996 by $6.1 million, $4.9 million and $4.5 million, respectively. The
effect of this change increased diluted net income per common share of the
Brink's Stock by $0.10 in 1998, $0.08 in 1997 and $0.07 in 1996.
BAX GLOBAL INC.
Operating revenues in 1998 increased by 7% to $1.8 billion from $1.7 billion in
1997. BAX Global's operating loss of $0.6 million in 1998 represented a decrease
of $63.9 million from the operating profit of $63.3 million reported in 1997.
Operating profit in 1998 was negatively impacted by the aforementioned
additional expenses of approximately $36 million, which are discussed in more
detail below. Operating profit in 1997 included $12.5 million related to
consulting expenses for the redesign of BAX Global's business processes and new
information systems architecture.
Operating revenues during 1998 increased across all geographic regions.
Operating revenues in 1998 benefited from increases in non-expedited freight
services revenue which was due to the growth of supply chain management services
(formerly "logistics") abroad, along with revenues from a recently acquired
airline company discussed below. In addition, expedited freight services
revenues increased due to a 4% increase in pounds shipped, partially offset by a
2% decrease in yield on this volume in 1998 as compared to 1997. Lower average
yields in 1998 were a function of the higher average pricing in 1997, as well as
the negative impact of economic conditions in Asia resulting in less export
traffic in 1998 to the higher yielding Asian markets. Pricing in 1997 was
favorably impacted by shipment surcharges, as well as higher average pricing in
the USA due, in part, to the effects of a strike at United Parcel Service (the
"UPS Strike".)
In addition to the aforementioned additional expense of approximately $36
million, the operating loss in 1998 was negatively impacted by higher levels of
transportation and operating costs in the USA associated with additional
capacity in anticipation of higher volumes, coupled with higher global
information technology ("IT") costs including expenditures for Year 2000
initiatives. In addition, operating profit in 1997 included benefits from the
UPS Strike.
Total operating revenues in 1997 increased by 12% to $1.7 billion from $1.5
billion in 1996. BAX Global's operating profit of $63.3 million in 1997
represented a decrease of $1.3 million from the operating profit of $64.6
million reported in 1996. Operating profit in 1997 included the previously
mentioned $12.5 million of special consulting expenses.
43
Operating revenues in 1997 increased across all geographic regions due primarily
to increases in worldwide expedited freight services pounds shipped (9%),
combined with an overall increase (2%) in yield on this volume. Higher average
yields were impacted by shipment surcharges, as well as higher average pricing
in the USA from the effects of the UPS Strike. Increases in volumes were
impacted by the UPS Strike and by increases in USA exports. In addition,
revenues during 1997 reflect increases in supply chain management services,
primarily the result of the acquisition of an international supply chain
management provider, discussed below.
Operating profit in 1997 was favorably impacted by the UPS Strike and by
improved margins on USA exports, while 1996 operating profit benefited from the
reduction in US Federal excise tax liabilities. These benefits in 1997 were
partially offset by higher transportation expenses in the USA associated with
additional capacity designed to improve on-time customer service and $12.5
million of special consulting expenses.
During early 1997, BAX Global began an extensive review of the company's IT
strategy. Through this review, senior management from around the world developed
a new global strategy to improve business processes with an emphasis on new
information systems intended to enhance productivity and improve the company's
competitive position, as well as address and remediate the company's Year 2000
compliance issues. The company ultimately committed up to $120 million to be
spent from 1997 to early 2000 to improve information systems and complete Year
2000 initiatives.
However, in conjunction with priorities established by BAX Global's new
president and chief executive officer, who joined the company in June 1998,
senior management re-examined its global IT strategy. It was determined that the
critical IT objectives to be accomplished by the end of 1999 were Year 2000
compliance and the consolidation and integration of certain key operating and
financial systems, supplemented by process improvement initiatives to enhance
these efforts. As a result of this re-examination, senior management determined
that certain non-critical, in-process IT software development projects that were
begun in late 1997 under the BAX Process Innovation ("BPI") project would be
terminated. Therefore, costs relating to these projects, which had previously
been capitalized, were written off during the third quarter of 1998. Also as a
result of this re-examination, certain existing software applications were found
to have no future service potential or value. The combined carrying amount of
these assets, which were written off, approximated $16 million. It is
management's belief at this time that the current ongoing information technology
initiatives that originated from the previously mentioned BPI project are
necessary and will be successfully completed and implemented. Such costs are
included in selling, general and administrative expenses in the statement of
operations for the year ended December 31, 1998.
BAX Global recorded additional provisions aggregating approximately $13 million
in the third quarter of 1998 related to existing accounts receivable. These
provisions were needed primarily as the result of the deterioration of the
economic and operating environments in certain international markets, primarily
Asia/Pacific and Latin America. As a result of a comprehensive review of
accounts receivables, undertaken in response to that deterioration, such
accounts receivable were not considered cost effective to pursue further and/or
improbable of collection. The majority of the additional provisions were
included in selling, general and administrative expenses in the statement of
operations.
During the third quarter of 1998, BAX Global recorded severance and other
expenses of approximately $7 million. The majority of these expenses related to
an organizational realignment proposed by newly elected senior management which
included a resource streamlining initiative that required the elimination,
consolidation or restructuring of approximately 180 employee positions. The
positions reside primarily in the USA and in BAX Global's Atlantic region and
include administrative and management-level positions. The estimated costs of
severance benefits for terminated employees are expected to be paid through
mid-1999. At this time management has no plans to institute further
organizational changes which would require significant costs related to
involuntary terminations. The related charge has been included in selling,
general and administrative expenses in the statement of operations for the year
ended December 31, 1998.
The recent deterioration of economic conditions primarily in Latin America and
Asia/Pacific have impacted the financial results of BAX Global through the
accrual of additional provisions for receivables in those regions in the second,
third and fourth quarters of 1998. The potential for further deterioration of
the economies in those regions could negatively impact the company's results of
operations in the future.
On April 30, 1998, BAX Global acquired the privately held Air Transport
International LLC ("ATI") for approximately $29 million in a transaction
accounted for as a purchase. ATI is a US-based freight and passenger airline
which operates a certificated fleet of DC-8 aircraft providing services to BAX
Global and other customers. The ATI acquisition is part of BAX Global's strategy
to improve the quality of its service offerings for its customers by increasing
its control over flight operations. As a result of this transaction, BAX Global
suspended its efforts to start up its own certificated airline carrier
operations.
44
In June 1997, BAX Global completed its acquisition of Cleton & Co. ("Cleton"), a
leading logistics provider in the Netherlands. BAX Global acquired Cleton for
the equivalent of US $10.7 million in cash and the assumption of the equivalent
of US $10.0 million of debt. Additional contingent payments ranging from the
current equivalent of US $0 to US $3.0 million will be paid over the next two
years based on certain performance criteria of Cleton.
PITTSTON COAL
Net sales for 1998 amounted to $503.3 million compared to $612.9 million in
1997, a decrease of $109.6 million (18%). Operating profit of $3.2 million in
1998 represented a $9.0 million decrease (74%) from the $12.2 million operating
profit reported in 1997. Operating loss in 1998 included the benefit of $1.5
million from the reversal of excess restructuring liabilities.
Net sales in 1998 were negatively impacted by a decrease of 3.7 million tons of
coal sold (18%), primarily resulting from lower production levels caused by the
disposition of certain steam coal producing assets discussed below. The
disposition of these assets also created a change in the overall sales mix with
steam coal sales representing 58% of total volume in 1998 as compared to 63% in
1997. This favorably impacted overall realization per ton as a higher percentage
of sales were from metallurgical coal which generally has a higher realization
per ton than steam coal. However, overall coal margin per ton decreased 6% from
$2.23 per ton to $2.09 per ton due to the corresponding changes in the
production mix which resulted in a greater proportion of deep mine production
which is generally more costly, combined with a decrease in metallurgical coal
margins. Metallurgical coal margins were negatively impacted by lower
realizations per ton resulting from lower negotiated pricing with metallurgical
contract customers caused by softened market conditions. Management does not
anticipate a significant recovery of this market during 1999.
The change in operating profit during 1998 was primarily due to the negative
impact of lower overall coal margin per ton. This was partially offset, however,
by favorable impacts resulting from higher gains on sales of assets ($3.2
million, discussed below) and a gain on a litigation settlement ($2.6 million)
recorded in 1998. Coal Operations anticipates that certain long-term benefit
obligation costs will significantly increase in 1999.
Net sales for 1997 amounted to $612.9 million compared to $677.4 million in
1996, a decrease of $64.5 million (10%). Operating profit in 1997 of $12.2
million represented a $7.8 million decrease from the $20.0 million reported in
1996.
Net sales during 1997 decreased due to an 11% (2.5 million tons) decrease in the
tons of coal sold, slightly offset by higher average realizations per ton. The
reduction in tonnage was due to the expiration of certain long-term steam coal
contracts coupled with reduced spot sales. Steam coal sales represented 63% and
65% of total volume in 1997 and 1996, respectively. Average steam realization
per ton increased during 1998 due to price escalation provisions in existing
long-term contracts, while the metallurgical coal realization per ton decreased
due to lower average price settlements with metallurgical customers.
Operating profit in 1997 included a benefit of $3.1 million from the reversal of
excess restructuring liabilities. Operating results in 1996 included a benefit
of $35.7 million from the settlement of the Evergreen case at an amount lower
than previously accrued in 1993 and a benefit from the reversal of excess
restructuring liabilities of $11.7 million. These 1996 benefits were offset, in
part, by a $29.9 million charge related to the adoption of a new accounting
standard regarding the impairment of long-lived assets. The charge is included
in cost of sales ($26.3 million) and selling, general and administrative
expenses ($3.6 million). All three of these items are discussed in greater
detail below.
After considering the above items, operating profit increased $6.4 million in
1997 primarily due to the higher level of coal margin per ton, which increased
to $2.23 per ton in 1997 from $1.54 per ton in 1996. This was due to a
combination of the increase in realization per ton discussed above and a
decrease in the current production cost per ton of coal sold. Production costs
in 1997 were favorably impacted by lower surface mine costs and decreases in
employee benefit and reclamation liabilities. Offsetting the increase in coal
margin was a decrease in other operating income which is due to the inclusion in
1996 of a one-time benefit of $3.0 million from a litigation settlement.
During 1998, Pittston Coal continued its program of disposing of idle and
under-performing assets in order to improve overall returns, generate cash and
reduce its reclamation activities. In connection with this, Pittston Coal
disposed of certain assets and properties during 1998 that resulted in a net
pre-tax gain of $3.2 million. In the second quarter of 1998, Pittston Coal sold
a surface steam mine, coal supply contracts and limited coal reserves of its
Elkay mining operation in West Virginia. The referenced mine produced
approximately one million tons of steam coal in 1998 prior to cessation of
operations in April 1998. Total cash proceeds from the sale approximated $18
million, resulting in a pre-tax loss of approximately $2.2 million. This loss
includes approximately $2.0 million of inventory write-downs (included in cost
of sales) related to coal which can no longer be blended with other coals
produced from these disposed assets. In addition, during the third quarter of
1998, Pittston Coal sold two idle coal properties in West Virginia and a loading
dock in Kentucky for a pre-tax gain totaling $5.4 million.
As earlier reported, Pittston Coal had begun to develop a major underground
metallurgical coal mine on company-owned reserves
45
in Virginia. Due to the previously discussed uncertainty in the metallurgical
export market, the development of this mine has been delayed.
A controversy related to a method of mining called "mountaintop removal" that
began in mid-1998 in West Virginia involving an unrelated party has resulted
in a suspension in the issuance of several mining permits. Due to the broadness
of the suspension, there has been a delay in Vandalia Resources,
Inc., a wholly-owned subsidiary of the Company, being issued in a timely fashion
a mine permit necessary for its uninterrupted mining. Vandalia Resources is
actively pursuing the issuance of the permit, but the time frame of when, or if,
the permit will be issued is currently unknown. In light of the inability to
determine when, and if a permit will be issued, the effect of the delay in
obtaining this permit cannot be predicted. During the year ended December 31,
1998, mining operations which are pursuing this permit produced approximately
2.7 million tons of coal resulting in revenues of approximately $81.8 million.
At December 31, 1998, Pittston Coal had a liability of $25.2 million for various
restructuring costs which was recorded as restructuring and other charges in the
Statement of Operations in years prior to 1995. Although coal production has
ceased at the mines remaining in the accrual, Pittston Coal will incur
reclamation and environmental costs for several years to bring these properties
into compliance with federal and state environmental laws. However, management
believes that the reserve, as adjusted, at December 31, 1998, should be
sufficient to provide for these future costs. Management does not anticipate
material additional future charges for these facilities, although continual cash
funding will be required over the next several years.
The initiation, in 1996, of a state tax credit for coal produced in Virginia,
along with favorable labor negotiations and improved metallurgical market
conditions for medium volatile coal, led management to continue operating an
underground mine and a related coal preparation and loading facility previously
included in the restructuring reserve. As a result of these decisions, Pittston
Coal reversed $11.7 million of the reserve in 1996. The 1996 reversal included
$4.8 million related to estimated mine and plant closures, primarily
reclamation, and $6.9 million in employee severance and other benefit costs. As
a result of favorable workers' compensation claim development, Pittston Coal
reversed $1.5 million and $3.1 million in 1998 and 1997, respectively.
The following table analyzes the changes in liabilities during the last three
years for restructuring and other charges:
Employee
Mine Termination,
Leased and Medical
Machinery Plant and
and Closure Severance
(In thousands) Equipment Costs Costs Total
- ----------------------------------------------------------------------------
Balance December 31, 1995 $1,218 28,983 36,077 66,278
Reversals -- 4,778 6,871 11,649
Payments (a) 842 5,499 3,921 10,262
Other reductions (b) -- 6,267 -- 6,267
- ----------------------------------------------------------------------------
Balance December 31, 1996 376 12,439 25,285 38,100
Reversals -- -- 3,104 3,104
Payments (c) 376 1,764 2,010 4,150
Other -- 468 (468) --
- ----------------------------------------------------------------------------
Balance December 31, 1997 -- 11,143 19,703 30,846
Reversals -- -- 1,479 1,479
Payments (d) -- 1,238 1,917 3,155
Other reductions (b) -- 999 -- 999
- ----------------------------------------------------------------------------
Balance December 31, 1998 $ -- 8,906 16,307 25,213
=============================================================================
(a) Of the total payments made in 1996, $5,119 was for liabilities recorded in
years prior to 1993, $485 was for liabilities recorded in 1993 and $4,658 was
for liabilities recorded in 1994.
(b) These amounts represent the assumption of liabilities by third parties as
a result of sales transactions.
(c) Of the total payments made in 1997, $3,053 was for liabilities recorded in
years prior to 1993, $125 was for liabilities recorded in 1993 and $972 was
for liabilities recorded in 1994.
(d) Of the total payments made in 1998, $2,491 was for liabilities recorded in
years prior to 1993, $10 was for liabilities recorded in 1993 and $654 was for
liabilities recorded in 1994.
During the next twelve months, expected cash funding of these charges will be
approximately $3.0 million to $5.0 million. The liability for mine and plant
closure costs is expected to be satisfied over the next eight years, of which
approximately 34% is expected to be paid over the next two years. The liability
for workers' compensation is estimated to be 42% settled over the next four
years with the balance paid during the following five to eight years.
In October 1992, the Coal Industry Retiree Health Benefit Act of 1992 (the
"Health Benefit Act") was enacted as part of the Energy Policy Act of 1992. The
Health Benefit Act established rules for the payment of future health care
benefits for thousands of retired union mine workers and their dependents. The
Health Benefit Act established a trust fund to which "signatory operators" and
"related persons", including the Company and certain of its subsidiaries
(collectively, the "Pittston Companies"),
46
are jointly and severally liable for annual premiums for assigned beneficiaries,
together with a pro rata share for certain beneficiaries who never worked for
such employers ("unassigned beneficiaries"), in amounts determined on the basis
set forth in the Health Benefit Act. For 1998, 1997 and 1996, these amounts, on
a pretax basis, were approximately $9.6 million, $9.3 million and $10.4 million,
respectively. The Company currently estimates that the annual cash funding under
the Health Benefit Act for the Pittston Companies' assigned beneficiaries will
continue at approximately $10 million per year for the next several years and
should begin to decline thereafter as the number of such assigned beneficiaries
decreases.
As a result of legal developments in 1998 involving the Health Benefit Act, the
Company experienced an increase in its assessments under the Health Benefit Act
for the twelve month period beginning October 1, 1998, approximating $1.7
million, $1.1 million of which relates to retroactive assessments for years
prior to 1998. This increase consists of charges for death benefits which are
provided for by the Health Benefit Act, but which previously have been covered
by other funding sources. As with all the Company's Health Benefit Act
assessments, this amount is to be paid in 12 equal monthly installments over the
plan year beginning October 1, 1998. The Company is unable to determine at this
time whether any other additional amounts will apply in future plan years.
Based on the number of beneficiaries actually assigned by the Social Security
Administration, the Company estimates the aggregate pretax liability relating to
the Pittston Companies' beneficiaries remaining at December 31, 1998 at
approximately $216 million, which when discounted at 7.0% provides a present
value estimate of approximately $99 million. The Company accounts for its
obligations under the Health Benefit Act as a participant in a multi-employer
plan and the annual cost is recognized on a pay-as-you-go basis.
In addition, under the Health Benefit Act, the Pittston Companies are jointly
and severally liable for certain post-retirement health benefits for thousands
of retired union mine workers and their dependents. Substantially all of the
Company's accumulated post-retirement benefit obligation as of December 31, 1998
for retirees of $282.7 million relates to such retired workers and their
beneficiaries.
The ultimate obligation that will be incurred by the Company could be
significantly affected by, among other things, increased medical costs,
decreased number of beneficiaries, governmental funding arrangements and such
federal health benefit legislation of general application as may be enacted. In
addition, the Health Benefit Act requires the Pittston Companies to fund, pro
rata according to the total number of assigned beneficiaries, a portion of
health benefits for unassigned beneficiaries. At this time, the funding for such
health benefits is being provided from another source and for this and other
reasons the Pittston Companies' ultimate obligation for the unassigned
beneficiaries cannot be determined.
In 1988, the trustees of the 1950 Benefit Trust Fund and the 1974 Pension
Benefit Trust Funds (the "Trust Funds") established under collective bargaining
agreements with the UMWA brought an action (the "Evergreen Case") against the
Company and a number of its coal subsidiaries in the United States District
Court for the District of Columbia, claiming that the defendants are obligated
to contribute to such Trust Funds in accordance with the provisions of the 1988
and subsequent National Bituminous Coal Wage Agreements, to which neither the
Company nor any of its subsidiaries is a signatory. In 1993, the Minerals Group
recognized in their financial statements the potential liability that might have
resulted from an ultimate adverse judgment in the Evergreen Case.
In late March 1996, a settlement was reached in the Evergreen Case. Under the
terms of the settlement the coal subsidiaries which had been signatories to
earlier National Bituminous Coal Wage Agreements agreed to make various lump sum
payments in full satisfaction of all amounts allegedly due to the Trust Funds
through January 31, 1996, to be paid over time as follows: approximately $25.8
million upon dismissal of the Evergreen Case and the remainder of $24.0 million
in installments of $7.0 million in 1996 and $8.5 million in each of 1997 and
1998. The first payment was entirely funded through an escrow account previously
established by the Company. The second, third and fourth (last) payments were
paid according to schedule and were funded from cash provided by operating
activities. In addition, the coal subsidiaries agreed to future participation in
the UMWA 1974 Pension Plan. As a result of the settlement of the Evergreen Case
at an amount lower than those previously accrued, the Minerals Group recorded a
benefit of approximately $35.7 million ($23.2 million after-tax) in the first
quarter of 1996 in its financial statements.
In 1996, the Minerals Group adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". SFAS No. 121 requires companies to review
assets for impairment whenever circumstances indicate that the carrying amount
for an asset may not be recoverable. SFAS No. 121 resulted in a pre-tax charge
to 1996 earnings for Pittston Coal of $29.9 million ($19.5 million after-tax),
of which $26.3 million was included in cost of sales and $3.6 million was
included in selling, general and administrative expenses. Assets for which the
impairment loss was recognized consisted of property, plant and equipment,
advanced royalties and goodwill. These assets primarily related to mines
scheduled for closure in the near term and idled facilities and related
equipment. No material charges were incurred in 1998 or 1997.
The coal operating companies included within Pittston Coal are generally liable
under federal laws requiring payment of benefits to coal miners with
pneumoconiosis ("black lung"). The Black
47
Lung Benefits Revenue Act of 1977 and the Black Lung Benefits Reform Act of 1977
(the "1977 Act"), as amended by the Black Lung Benefits and Revenue Amendments
Act of 1981 (the "1981 Act"), expanded the benefits for black lung disease and
levied a tax on coal production of $1.10 per ton for deep-mined coal and $0.55
per ton for surface-mined coal, but not to exceed 4.4% of the sales price. In
addition, the 1981 Act provides that certain claims for which coal operations
had previously been responsible will be obligations of the government trust
funded by the tax. The 1981 Act also tightened standards set by the 1977 Act for
establishing and maintaining eligibility for benefits. The Revenue Act of 1987
extended the termination date of the tax from January 1, 1996 to the earlier of
January 1, 2014 or the date on which the government trust becomes solvent. The
Company cannot predict whether any future legislation effecting changes in the
tax will be enacted. A number of the subsidiaries of the Company filed a civil
action in the United States District court for the Eastern District of Virginia
asking the Court to find that the assessment of the black lung tax on coal the
Company subsidiaries sold to foreign customers for the first quarter of 1997 was
unconstitutional. On December 28, 1998, the District court found the black lung
tax, as assessed against foreign coal sales, to be unconstitutional and entered
judgment for the Company's subsidiaries in an amount in excess of $0.7 million.
The Company will seek a refund of the black lung tax it paid on any of its
foreign coal sales for periods as far back as applicable statute of limitations
will permit. The ultimate amounts and timing of such refunds, if any, cannot be
determined at the present time.
MINERAL VENTURES
Net sales during 1998 were $15.3 million, a decrease of $2.4 million (13%) from
the $17.7 million reported in 1997. The operating loss of $1.0 million in 1998
represents a $1.1 million improvement from the $2.1 million operating loss of
1997.
The decrease in net sales during 1998 was due to lower gold sales resulting from
declining gold prices in the market, partially offset by higher levels of gold
ounces sold. Operating profit during the same period was negatively impacted by
lower sales levels, but benefited from reduced production costs. Production
costs were lower in 1998 primarily due to a weaker Australian dollar, while
costs in 1997 were negatively impacted by unfavorable ground conditions and mine
repair costs. In addition, operating results in 1998 benefited from increased
equity earnings in its Australian affiliate resulting from a gain on the sale of
certain nickel operations.
Net sales during 1997 were $17.7 million, a decrease of $1.4 million (7%) from
the $19.1 million reported in 1996. The operating loss of $2.1 million in 1997
represents a $3.7 million decrease from the $1.6 million operating profit earned
in 1996.
The decrease in net sales during 1997 was due to lower gold sales. While gold
prices improved from 1996 to 1997, the lower level of gold ounces sold more than
offset the higher pricing. The reduction in operating profit during 1997 was due
to these lower sales levels combined with increases in production and other
operating costs. As mentioned above, production costs in 1997 were higher due to
unfavorable ground conditions and mine repair costs, while other operating costs
were higher due to increased gold exploration costs.
FOREIGN OPERATIONS
A portion of the Company's financial results is derived from activities in a
number of foreign countries located in Europe, Asia and Latin America each with
a local currency other than the US dollar. Because the financial results of the
Company are reported in US dollars, they are affected by changes in the value of
the various foreign currencies in relation to the US dollar. Changes in exchange
rates may also adversely affect transactions which are denominated in currencies
other than the functional currency. The Company periodically enters into such
transactions in the course of its business. The diversity of foreign operations
helps to mitigate a portion of the impact that foreign currency fluctuations may
have in any one country on the translated results. The Company, from time to
time, uses foreign currency forward contracts to hedge transactional risks
associated with foreign currencies. (See "Market Risk Exposures" below.)
Translation adjustments of net monetary assets and liabilities denominated in
the local currency relating to operations in countries with highly inflationary
economies are included in net income, along with all transaction gains or losses
for the period. Subsidiaries in Venezuela and an affiliate and a subsidiary in
Mexico operate in such highly inflationary economies. Prior to January 1, 1998,
the economy in Brazil, in which the Company has subsidiaries, was also
considered highly inflationary. As of January 1, 1999, the economy of Mexico
will no longer be considered hyperinflationary.
The Company is also subject to other risks customarily associated with doing
business in foreign countries, including labor and economic conditions,
political instability, controls on repatriation of earnings and capital,
nationalization, expropriation and other forms of restrictive action by local
governments. The future effects, if any, of such risks on the Company cannot be
predicted.
CORPORATE EXPENSES
In 1998, general corporate expenses totaled $27.9 million compared with $19.7
million and $21.4 million in 1997 and 1996, respectively. Corporate expenses in
1998 included costs associated with a severance agreement with a former member
of the Company's senior management and $5.8 million of additional expenses
relating to a retirement agreement between the Company and its former Chairman
and CEO. Corporate expenses in 1996 reflect the costs associated with the
relocation of the Company's corporate headquarters to Richmond, Virginia, which
approximated $2.9 million.
OTHER OPERATING INCOME, NET
48
Other net operating income principally includes the Company's share of net
income of unconsolidated foreign affiliates, royalty income, foreign currency
exchange gains and losses, and gains and losses from sales of coal assets. Other
net operating income for 1998 increased $7.1 million to $21.1 million and
decreased $3.4 million in 1997 from the $17.4 million recorded in 1996. The
higher level of other net operating income in 1998 primarily relates to higher
levels of gains on the sale of coal assets, a gain on a litigation settlement by
Pittston Coal and higher levels of net income of Minerals Ventures
unconsolidated Australian foreign affiliate. Partially offsetting these amounts
are lower foreign currency exchange gains. The lower level of other net
operating income in 1997 was primarily due to a $3.0 million one-time benefit
related to a Pittston Coal litigation settlement in 1996.
INTEREST EXPENSE, NET
Net interest expense totaled $33.7 million in 1998 compared with $22.7 million
in 1997 and $10.6 million in 1996. The increase in 1998 was primarily due to
unusually high interest rates in Venezuela associated with local currency
borrowings in that country, and to a lesser extent was due to borrowings
resulting from capital expenditures and from acquisitions by both Brink's and
BAX to expand their operations. The increase in 1997 over 1996 is predominantly
due to borrowings resulting from capital expenditures and from acquisitions by
both Brink's and BAX Global to expand their operations.
OTHER INCOME/EXPENSE, NET
Other net income in 1998 of $3.8 million represented an $11.0 million increase
from the $7.1 million net expense reported in 1997 which was $2.1 million lower
than the net expense of $9.2 million in 1996. Other net income in 1998 reflects
higher foreign translation gains, lower minority interest expense for Brink's
consolidated affiliates and a gain on the sale of surplus aircraft by BAX
Global. The higher level of other net operating expense in 1996 was due
primarily to an increase in minority interest expense for Brink's consolidated
affiliates, offset in part by lower foreign translation losses.
INCOME TAXES
In 1998, 1997 and 1996, the provision for income taxes was less than the
statutory federal income tax rate of 35% primarily due to the tax benefits of
percentage depletion and lower taxes on foreign income, partially offset by
provisions for goodwill amortization and state income taxes.
Based on the Company's historical and expected taxable earnings, management
believes it is more likely than not that the Company will realize the benefit of
the existing deferred tax asset at December 31, 1998.
FINANCIAL CONDITION
CASH FLOW REQUIREMENTS
Cash provided by operating activities totaled $231.8 million, a decrease of
$36.3 million from the $268.1 million generated during 1997. Lower levels of net
income combined with higher funding requirements for operating assets and
liabilities were partially offset by higher levels of non-cash charges. Net cash
provided by operating activities did not fully fund investing activities
(primarily capital expenditures, acquisitions and aircraft heavy maintenance)
and share activities, resulting in a net increase in debt of $107.9 million.
CAPITAL EXPENDITURES
Cash capital expenditures for 1998 totaled $256.6 million, $82.8 million higher
than 1997. Of the amount of cash capital expenditures, $81.7 million (32%) was
spent by BHS, $75.6 million (29%) was spent by BAX Global, $74.7 million (29%)
was spent by Brink's, $20.6 million (8%) was spent by Pittston Coal and $3.4
million (1%) was spent by Mineral Ventures. Expenditures were primarily for new
BHS customer installations, replacement and maintenance of assets used in
current ongoing business operations and the development of new information
systems. Cash capital expenditures in 1999 are currently expected to approximate
$245 million.
The foregoing amounts exclude expenditures that have been or are expected to be
financed through capital and operating leases and any acquisition expenditures.
FINANCING
The Company intends to fund capital expenditures through cash flow from
operating activities or through operating leases if the latter are financially
attractive. Shortfalls, if any, will be financed through the Company's revolving
credit agreements or other borrowing arrangements.
Total debt outstanding at December 31, 1998 was $448.1 million, an increase of
$204.8 million from the $243.3 million outstanding at December 31, 1997. The net
increase in debt primarily relates to acquisitions by Brink's and BAX Global
during the year, as well as additional cash required to fund capital
expenditures. As a result of changes in certain recourse provisions during 1998,
as of December 31, 1998, certain receivable financing transactions were
accounted for as transfers of the receivables, resulting in the uncollected
receivables balances remaining on the balance sheet with a corresponding
short-term obligation of $29.7 million recognized. During 1997, these
transactions were accounted for as sales of receivables, resulting in the
removal of the receivables from the balance sheet.
The Company has a $350.0 million credit agreement with a syndicate of banks (the
"Facility"). The Facility includes a $100.0 million term loan and also permits
additional borrowings, repayments and reborrowings of up to an aggregate of
$250.0 million. The maturity date of both the term loan and revolving credit
portion of the Facility is May 2001. Interest on borrowings under the Facility
is payable at rates based on prime, certificate of deposit, Eurodollar or money
market rates. At December 31, 1998 and 1997, borrowings of $100.0 million were
outstanding under the term loan portion of the Facility and $91.6 million and
49
$25.9 million, respectively, of additional borrowings were outstanding under the
remainder of the Facility.
Under the terms of the Facility, the Company has agreed to maintain at least
$400.0 million of Consolidated Net Worth, as defined, and can incur additional
indebtedness of approximately $398 million at December 31, 1998.
In the first quarter of 1998, in connection with its acquisition of
substantially all of the remaining shares (62%) of its Brink's France affiliate
("Brink's S.A."), the Company made a note to the seller for a principal amount
of US $27.5 million payable in annual installments plus interest through 2001.
In addition, borrowings of approximately US $19 million and capital leases of
approximately US $30 million were assumed.
In connection with its acquisition of Custravalca, the Company entered into a
borrowing arrangement with a syndicate of local Venezuelan banks. The borrowings
consisted of a long-term loan denominated in the local currency equivalent to US
$40.0 million and a $10.0 million short-term loan denominated in US dollars
which was repaid during 1997. The long-term loan bears interest based on the
Venezuelan prime rate and is payable in installments through the year 2000. As
of December 31, 1998, total borrowings under this arrangement were equivalent to
US $27.2 million.
MARKET RISK EXPOSURES
The Company has activities in a number of foreign countries located in Europe,
Asia and Latin America, which expose it to a variety of market risks, including
the effects of changes in foreign currency exchange rates, interest rates, and
commodity prices. These financial exposures are monitored and managed by the
Company as an integral part of its overall risk management program. The
diversity of foreign operations helps to mitigate a portion of the impact that
foreign currency rate fluctuations may have in any one country on the translated
results. The Company's risk management program considers this favorable
diversification effect as it measures the Company's exposure to financial
markets and as appropriate, seeks to reduce the potentially adverse effects that
the volatility of certain markets may have on its operating results.
The Company enters into various derivative and non-derivative hedging
instruments, as discussed below, to hedge its foreign currency, interest rate,
and commodity exposures. The risk that counterparties to such instruments may be
unable to perform is minimized by limiting the counterparties to major financial
institutions. Management of the Company does not expect any losses due to such
counterparty default.
The Company assesses interest rate, foreign currency, and commodity risks by
continually identifying and monitoring changes in interest rate, foreign
currency and commodity exposures that may adversely impact expected future cash
flows and by evaluating hedging opportunities. The Company maintains risk
management control systems to monitor these risks attributable to both the
Company's outstanding and forecasted transactions as well as offsetting hedge
positions. The risk management control systems involve the use of analytical
techniques to estimate the expected impact of changes in interest rates, foreign
currency rates and commodity prices on the Company's future cash flows. The
Company does not use derivative instruments for purposes other than hedging.
The sensitivity analyses discussed below for the market risk exposures were
based on several assumptions. The disclosures with respect to foreign exchange,
interest rate and commodity risks do not take into account forecasted foreign
exchange, interest rate or commodity transactions. Actual results will be
determined by a number of factors that are not under management's control and
could vary significantly from those disclosed.
Interest Rate Risk
The Company primarily uses variable-rate debt denominated in US dollars and
foreign currencies, including Venezuelan bolivars, French francs, Singapore
dollars, and Dutch guilders, to finance its operations. These debt obligations
expose the Company to variability in interest expense due to changes in the
general level of interest rates in these countries. Venezuela is considered a
highly inflationary economy, and therefore, the effects of increases or
decreases in that country's interest rates may be partially offset by
corresponding decreases or increases in the currency exchange rates which will
affect the US dollar value of the underlying debt. In order to limit the
variability of the interest expense on its debt denominated in US currency, the
Company converts the variable-rate cash flows on a portion of its $100 million
term-loan, which is part of the Facility (see Note 7), to fixed-rate cash flows
by entering into interest rate swaps which involve the exchange of floating
interest payments for fixed interest payments.
In addition, to the US dollar denominated fixed interest rate swaps, the Company
also has fixed-rate debt denominated in US dollars and foreign currencies
(primarily French francs). The fixed rate debt and interest rate swaps are
subject to fluctuations in their fair values as a result of changes in interest
rates.
50
Based on the overall interest rate level of both US dollar and foreign currency
denominated variable rate debt outstanding at December 31, 1998, a hypothetical
10% change (as a percentage of interest rates on outstanding debt) in the
Company's effective interest rate from year-end 1998 levels would change
interest expense by approximately $3.5 million over a twelve month period. Debt
designated as hedged by the interest rate swaps has been excluded from this
amount. The effect on the fair value of US and foreign currency denominated
fixed rate debt (including US dollar fixed interest rate swaps) for a
hypothetical 10% uniform shift (as a percentage of market interest rates) in the
yield curves for interest rates in various countries from year-end 1998 levels
would be immaterial.
Foreign Currency Risk
The Company has certain exposures to the effects of foreign exchange rate
fluctuations on reported results in US dollars of foreign operations. Due in
part to the favorable diversification effects resulting from operations in
various countries located in Europe, Asia and Latin America, including Canada,
Australia, the United Kingdom, France, Holland, South Africa, Germany, Mexico,
Brazil, Venezuela, Colombia, Singapore, Japan, and India, the Company does not
generally enter into foreign exchange hedges to mitigate these exposures.
The Company is exposed periodically to the foreign currency rate fluctuations
that affect transactions not denominated in the functional currency of domestic
and foreign operations. To mitigate these exposures, the Company, from time to
time, enters into foreign currency forward contracts.
Mineral Ventures has operations which are exposed to currency risk arising from
gold sales denominated in US dollars while its local operating costs are
denominated in Australian dollars. Mineral Ventures utilizes foreign currency
forward contracts to hedge the variability in cash flows resulting from these
exposures for up to two years into the future.
In addition, the Company has net investments in a number of foreign subsidiaries
which are translated at exchange rates at the balance sheet date. Resulting
cumulative translation adjustments are recorded as a separate component of
shareholders' equity and exposes the Company to adjustments resulting from
foreign exchange rate volatility. The Company, at times, uses non-derivative
financial instruments to hedge this exposure. Currency exposure related to the
net assets of the Brink's subsidiary in France are managed, in part, through a
foreign currency denominated debt agreement (seller financing) entered into as
part of the acquisition by the Company. Gains and losses in the net investment
in subsidiaries are offset by losses and gains in the debt obligations. All
other hedges of net investments in foreign subsidiaries were immaterial to the
Company. The translation adjustments for hyperinflationary economies in which
the Company operates (currently Mexico and Venezuela) are recorded as a
component of net income and exposes the Company to adjustments resulting from
foreign exchange rate volatility.
The effects of a hypothetical simultaneous 10% appreciation in the US dollar
from year end 1998 levels against all other currencies of countries in which the
Company operates were measured for their potential impact on, 1) translation of
earnings into US dollars based on 1998 results, 2) transactional exposures, and
3) translation of balance sheet equity accounts. The hypothetical effects would
be approximately $3.0 million unfavorable for the translation of earnings into
US dollars, approximately $1.4 million unfavorable earnings effect for
transactional exposures, and approximately $22.1 million unfavorable for the
translation of balance sheet equity accounts.
COMMODITIES PRICE RISK
The Company consumes or sells various commodities in the normal course of its
business and utilizes derivative instruments to minimize the variability in
forecasted cash flows due to adverse price movements in these commodities. The
contracts are entered into in accordance with guidelines set forth in the
Company's hedging policies. The Company does not use derivative instruments for
purposes other than hedging.
The Company utilizes forward swap contracts for the purchase of jet fuel to fix
a portion of forecasted jet fuel costs at specific price levels and it utilizes
option strategies to hedge a portion of the remaining risk associated with
changes in the price of jet fuel. The Company utilizes forward gold sales
contracts to fix the selling price on a certain portion of its forecasted gold
sales from the Stawell gold mine. The Company utilizes forward swap contracts
for the purchase of diesel fuel to fix a portion of its forecasted diesel fuel
costs at specific price levels and it utilizes option strategies to hedge a
portion of the remaining risk associated with changes in the price of diesel
fuel.
The following table represents the Company's outstanding commodity hedge
contracts as of December 31, 1998:
Average Estimated
(In thousands, except Notional Contract Fair
average contract rates) Amount Rate Value
- ------------------------------------------------------------------------
Forward gold sale contracts (a) $ 41 $ 292 $18
Forward swap contracts:
Jet fuel purchases (pay fixed) (b) 16,000 0.4923 (2,133)
Diesel fuel purchases (pay fixed) (b) 1,600 0.4180 (137)
Commodity options:
Diesel Fuel - purchased
call contracts (pay fixed) (b) 1,600 0.4180 7
========================================================================
(a) Ounces of gold.
(b) Gallons of fuel.
51
READINESS FOR YEAR 2000: SUMMARY
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. If not corrected, many
date-sensitive applications could fail or create erroneous results by or in the
year 2000. The Company understands the importance of having systems and
equipment operational through the year 2000 and beyond and is committed to
addressing these challenges while continuing to fulfill its business obligations
to its customers and business partners. Year 2000 project teams have been
established which are intended to make information technology assets, including
embedded microprocessors ("IT assets"), non-IT assets, products, services and
infrastructure Year 2000 ready.
READINESS FOR YEAR 2000: STATE OF READINESS
The following is a description of the Company's state of readiness for each of
its operating units.
Brink's
The Brink's Year 2000 Project Team has divided its Year 2000 readiness program
into six phases: (i) inventory, (ii) assessment, (iii) renovation, (iv)
validation/testing, (v) implementation and (vi) integration. Worldwide, Brink's
is largely in the renovation, validation/testing and implementation phases of
its Year 2000 readiness program.
Brink's North America
With respect to Brink's North American operations, all core IT systems have been
identified, renovation has taken place and the Year 2000 project is currently in
both the implementation and integration phases. The implementation phase of the
core operational systems is expected to be completed by the second quarter of
1999. Non-IT systems, including armored vehicles, closed circuit televisions,
videocassette recorders and certain currency processing equipment, are in the
assessment phase and certain renovation/replacement has been done. The
renovation and validation phases for non-IT systems are expected to continue
through the second quarter of 1999. As of December 31, 1998, most of Brink's
North America IT systems have been tested and validated as Year 2000 ready.
Brink's believes that all its IT and non-IT systems will be Year 2000 compliant
or that there will be no material adverse effect on operations or financial
results due to non-compliance.
Brink's International
All international affiliates have been provided with an implementation plan,
prepared by the Global Year 2000 Project Team. In addition, there is senior
management sponsorship in all international countries. The implementation plan
requires semi-monthly reports as to the status of each category in each country.
The categories include core systems, non-core systems, hardware, facilities,
special equipment, voice/data systems, etc. Countries in Europe, Latin America
and Asia/Pacific are in varying phases of the Year 2000 readiness program. In
Europe, core systems have been identified, some are in the remediation and
validation/testing phase, with others currently in the implementation and
integration phases. In both Latin America and Asia/Pacific, most countries are
currently in active renovation with several completing testing and
implementation on core systems. Brink's plans to have completed all phases of
its Year 2000 readiness program on a timely basis prior to Year 2000.
BHS
The BHS Year 2000 Project Team has divided its Year 2000 readiness program into
four phases: (i) assessment, (ii) remediation/replacement, (iii) testing and
(iv) integration. As of December 31, 1998, BHS has completed the assessment and
remediation/replacement phases. BHS is currently in both the testing and
integration phases. BHS plans to have completed all phases of its Year 2000
readiness program on a timely basis prior to Year 2000. As of December 31, 1998,
at least 90% of BHS' IT and non-IT assets systems have been tested and verified
as Year 2000 ready.
BAX Global
The BAX Global Year 2000 Project Team has divided its Year 2000 readiness
program into five phases: (i) inventory, (ii) assess and test, (iii) renovate,
(iv) test and verify and (v) implement. At December 31, 1998, on a global basis,
the inventory phase has been completed in the US and Europe and is substantially
complete in Asia. During the first quarter of 1999, the inventory phase was on a
global basis completed. Assessment of major systems in the Americas and Europe
has been completed, with readiness testing now underway. Assessment is currently
underway in Asia. Renovation activities for major systems are in process as are
replacement activities for non-compliant components and systems that are not
scheduled for renovation. Testing has also begun for systems that have been
renovated. BAX Global plans to have completed all phases of its Year 2000
readiness program on a timely basis prior to Year 2000. As of December 31, 1998,
more than 30% of the BAX Global's IT and non-IT assets systems have been tested
and verified as Year 2000 ready.
Pittston Coal and Mineral Ventures
The Pittston Coal and Mineral Ventures Year 2000 Project Teams have divided
their Year 2000 readiness programs into four phases: (i) assessment, (ii)
remediation/replacement, (iii) testing, and (iv) integration. At December 31,
1998, the majority of the core IT assets are either already Year 2000 ready or
in the testing or integration phases. Those assets that are not yet Year 2000
ready are scheduled to be remediated or replaced by the second quarter of 1999,
with testing and integration to begin concurrently. Pittston Coal and Mineral
Ventures plan to have completed all phases of their Year 2000 readiness programs
on a timely basis prior to Year 2000. As of December 31, 1998, approximately 80%
of hardware systems and embedded systems have been tested and verified as Year
2000 ready.
The Company
As part of its Year 2000 projects, the Company has sent comprehensive
questionnaires to significant suppliers, and others with which it does business,
regarding their Year 2000
52
compliance and is in the process of identifying significant problem areas with
respect to these business partners. The Company is relying on such third
parties' representations regarding their own readiness for Year 2000. This
process will be ongoing and efforts with respect to specific problems identified
will depend in part upon its assessment of the risk that any such problems may
have a material adverse impact on its operations.
Further, the Company relies upon government agencies (particularly the Federal
Aviation Administration and customs agencies worldwide), utility companies,
telecommunication service companies and other service providers outside of its
control. According to a recent General Accounting Office report to Congress,
some airports will not be prepared for the Year 2000 and the problems these
airports experience could impede traffic flow throughout the nation. As with
most companies, the Company is vulnerable to significant suppliers', customers',
and other third parties' inability to remedy their own Year 2000 issues. As the
Company cannot control the conduct of its customers, suppliers or other third
parties, there can be no guarantee that Year 2000 problems originating with a
supplier or other third party will not occur.
READINESS FOR YEAR 2000: COSTS TO ADDRESS
The Company anticipates incurring remediation and acceleration costs for its
Year 2000 readiness programs. Remediation includes the identification,
assessment, remediation and testing phases of its Year 2000 readiness programs.
Remediation costs include both the costs of modifying existing software and
hardware as well as purchases that replace existing hardware and software that
is not Year 2000 ready. Most of these costs will be incurred by Brink's Inc. and
BAX Global. Acceleration costs include costs to purchase and/or develop and
implement certain information technology systems whose implementation have been
accelerated as a result of the Year 2000 readiness issue. Again most of these
costs will be incurred by Brink's Inc. and BAX Global.
Total anticipated remediation and acceleration costs are detailed in the table
below:
Acceleration
(Dollars in millions) Capitalized Expensed Total
- --------------------------------------------------------------------
Total anticipated Year 2000 costs $23.7 5.8 29.5
Incurred through December 31, 1998 13.9 1.8 15.7
- --------------------------------------------------------------------
Remainder $ 9.8 4.0 13.8
====================================================================
Remediation
Capitalized Expensed Total
- --------------------------------------------------------------------
Total anticipated Year 2000 costs $15.0 17.9 32.9
Incurred through December 31, 1998 6.5 9.8 16.3
- --------------------------------------------------------------------
Remainder $ 8.5 8.1 16.6
====================================================================
Total
Capitalized Expensed Total
- --------------------------------------------------------------------
Total anticipated Year 2000 costs $38.7 23.7 62.4
Incurred through December 31, 1998 20.4 11.6 32.0
- --------------------------------------------------------------------
Remainder $18.3 12.1 30.4
====================================================================
READINESS FOR YEAR 2000: THE RISKS OF THE YEAR 2000 ISSUE
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect results of
operations, liquidity and financial condition of the Company.
The following is a description of the Company's risks of the Year 2000 issue for
each of its operating units:
Brink's
Brink's believes its most reasonably likely worst case scenario is that it will
experience a number of minor system malfunctions and errors in the early days
and weeks of the Year 2000 that were not detected during its renovation and
testing efforts. Brink's currently believes that these problems will not be
overwhelming and are not likely to have a material effect on the Company's
operations or financial results. Brink's may experience some additional
personnel expenses related to Year 2000 failures, but such expenses are not
expected to be material. As noted above, Brink's is vulnerable to significant
suppliers', customers' and other third parties' inability to remedy their own
Year 2000 issues. As Brink's cannot control the conduct of its suppliers or
other third parties, there can be no guarantee that Year 2000 problems
originating with a supplier, customer or other third party will not occur.
However, Brink's program of communication with major third parties with whom
they do business is intended to minimize any potential risks related to third
party failures.
BHS
BHS has begun an analysis of the operational problems and costs that would be
reasonably likely to result from the failure by BHS and certain third parties to
complete efforts necessary to achieve Year 2000 readiness on a timely basis. BHS
believes its most reasonably likely worst case scenario is that its ability to
receive alarm signals from some or all of its customers may be disrupted due to
temporary regional service outages sustained by third party electric utilities,
local telephone companies, and/or long distance telephone service providers.
Such outages could occur regionally, affecting clusters of customers, or could
occur at BHS's principal monitoring facility, possibly affecting the ability to
provide service to all customers. BHS currently believes that these problems
will not be overwhelming and are not likely to have a material effect on the
Company's operations or financial condition.
53
BAX Global
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect results of
operations, liquidity and financial condition of BAX Global. The extent to which
such a failure may adversely affect operations is being assessed. BAX Global
believes its most reasonably likely worst case scenario is that it will
experience a number of minor system malfunctions and errors in the early days
and weeks of the Year 2000 that were not detected during its renovation and
testing efforts. BAX Global currently believes that these problems will not be
overwhelming and are not likely to have a material effect on the company's
operations or financial results. As noted above, BAX Global is vulnerable to
significant suppliers', customers' and other third parties' (particularly
government agencies such as the Federal Aviation Administration and customs
agencies worldwide) inability to remedy their own Year 2000 issues. As BAX
Global cannot control the conduct of third parties, there can be no guarantee
that Year 2000 problems originating with a supplier, customer or other third
party will not occur. However, BAX Global's program of communication and
assessments of major third parties with whom they do business is intended to
minimize any potential risks related to third party failures.
Pittston Coal and Mineral Ventures
Pittston Coal and Mineral Ventures believe that their internal information
technology systems will be renovated successfully prior to year 2000. All
"Mission Critical" systems have been identified that would cause the greatest
disruption to the organizations. The failure to correct a material Year 2000
problem could result in an interruption in, or a failure of, certain normal
business activities or operations. Such failures should have no material or
significant adverse effect on the results of operations or financial condition
of the Company. Pittston Coal and Mineral Ventures believe they have identified
their likely worst case scenarios. The likely worst case scenarios, assuming no
external failures such as power outages or delays in railroad transportation
services, could be delays in invoicing customers and payment of vendors. These
likely worst case scenarios, should they occur, are not expected to result in a
material impact on the Company's financial statements. The production of coal
and gold is not heavily dependent on computer technology and would continue with
limited impact.
READINESS FOR YEAR 2000: CONTINGENCY PLAN
The following is a description of the Company's contingency plans for each of
its operating units:
Brink's
A contingency planning document, which was developed with the assistance of an
external facilitator, is being finalized for Brink's North American operations.
Brink's provides a number of different services to its customers and each type
of service line was reviewed during the contingency planning sessions. This
contingency planning document addresses the issue of what Brink's response would
be should a system/device fail, as well as what preparations and actions are
required beforehand to ensure continuity of services if those identified systems
failed. This includes, in some cases, reverting to paper processes to track and
handle packages, additional staff if required and increased supervisory
presence. Brink's may experience some additional personnel expenses related to
any Year 2000 failures, but they are not expected to be material. This
contingency planning document is being made available to Brink's International
operations to use as a guidance in developing appropriate contingency plans at
each of their locations and for the specific services they provide to their
customers.
BHS
BHS has begun to develop a contingency plan, which is expected to be completed
in the first half of 1999, for dealing with the most reasonably likely worst
case scenario. This contingency planning document will address the issue of what
BHS's response would be should it sustain a service outage encountered by the
third party electric utility, local telephone company, and/or primary long
distance telephone service provider at its principal monitoring facility. This
includes, among other things, the testing of redundant system connectivity
routed through multiple switching stations of the local telephone company, and
testing of backup electric generators at both BHS's principal and backup
monitoring facilities.
BAX Global
During the first quarter of 1999, BAX Global began developing a contingency plan
for dealing with its most reasonably likely worst case scenario. The foundation
for BAX Global's Year 2000 readiness program is to ensure that all
mission-critical systems are renovated/replaced and tested at least six months
prior to when a Year 2000 failure might occur if the program were not
undertaken.
Pittston Coal and Mineral Ventures
Pittston Coal and Mineral Ventures have not yet developed contingency plans for
dealing with their most likely worst case scenarios. Pittston Coal and Mineral
Ventures are expected to develop contingency plans. The foundation for their
Year 2000 Programs is to ensure that all mission-critical systems are
renovated/replaced and tested at least three months prior to when a Year 2000
failure might occur if the programs were not undertaken. As of December 31,
1998, all mission-critical systems, with the exception of human
resources-related systems, have been tested and verified as Year 2000 ready.
These human resources-related systems are not Year 2000 ready and are scheduled
to be replaced by mid-1999. In addition, as a normal course of business,
Pittston Coal and Mineral
54
Ventures maintain and deploy contingency plans designed to address various other
potential business interruptions. These plans may be applicable to address the
interruption of support provided by third parties resulting from their failure
to be Year 2000 ready.
READINESS FOR YEAR 2000: FORWARD LOOKING INFORMATION
This discussion of the Company's readiness for Year 2000, including statements
regarding anticipated completion dates for various phases of the Company's Year
2000 project, estimated costs for Year 2000 readiness, the determination of
likely worst case scenarios, actions to be taken in the event of such worst case
scenarios and the impact on the Company of any delays or problems in the
implementation of Year 2000 initiatives by the Company and/or any public or
private sector suppliers and service providers and customers involve forward
looking information which is subject to known and unknown risks, uncertainties,
and contingencies which could cause actual results, performance or achievements,
to differ materially from those which are anticipated. Such risks, uncertainties
and contingencies, many of which are beyond the control of the Company, include,
but are not limited to, government regulations and/or legislative initiatives,
variations in costs or expenses relating to the implementation of Year 2000
initiatives, changes in the scope of improvements to Year 2000 initiatives and
delays or problems in the implementation of Year 2000 initiatives by the Company
and/or any public or private sector suppliers and service providers and
customers.
EURO CONVERSION
As part of the European Economic and Monetary Union, a single currency (the
"Euro") will replace the national currencies of most of the European countries
in which the Company conducts business. The conversion rates between the Euro
and the participating nations' currencies were fixed irrevocably as of January
1, 1999, and the participating national currencies will be removed from
circulation between January 1 and June 30, 2002 and replaced by Euro notes and
coinage. The Company is able to receive Euro denominated payments and invoice in
Euro as requested by vendors and suppliers as of January 1, 1999 in the affected
countries. Full conversion of all affected country operations to the Euro is
expected to be completed by the time national currencies are removed from
circulation. The effects of the conversion to the Euro on revenues, costs and
business strategies is not expected to be material.
CONTINGENT LIABILITIES
In April 1990, the Company entered into a settlement agreement to resolve
certain environmental claims against the Company arising from hydrocarbon
contamination at a petroleum terminal facility ("Tankport") in Jersey City, New
Jersey, which operations were sold in 1983. Under the settlement agreement, the
Company is obligated to pay 80% of the remediation costs. Based on data
available to the Company and its environmental consultants, the Company
estimates its portion of the cleanup costs on an undiscounted basis using
existing technologies to be between $6.6 million and $11.2 million and to be
incurred over a period of up to five years. Management is unable to determine
that any amount within that range is a better estimate due to a variety of
uncertainties, which include the extent of the contamination at the site, the
permitted technologies for remediation and the regulatory standards by which the
cleanup will be conducted. The estimate of costs and the timing of payments
could change as a result of changes to the remediation plan required, changes in
the technology available to treat the site, unforeseen circumstances existing at
the site and additional cost inflation.
The Company commenced insurance coverage litigation in 1990, in the United
States District Court for the District of New Jersey, seeking a declaratory
judgement that all amounts payable by the Company pursuant to the Tankport
obligation were reimbursable under comprehensive general liability and pollution
liability policies maintained by the Company. In August 1995, the District Court
ruled on various Motions for Summary Judgement. In its decision, the Court found
favorably for the Company on several matters relating to the comprehensive
general liability policies but concluded that the pollution liability policies
did not contain pollution coverage for the types of claims associated with the
Tankport site. On appeal, the Third Circuit reversed the District Court and held
that the insurers could not deny coverage for the reasons stated by the District
Court, and the case was remanded to the District Court for trial. In the latter
part of 1998, the Company concluded a settlement with its comprehensive general
liability insurer and has settlements with three other groups of insurers. If
these settlements are consummated, only one group of insurers will be remaining
in this coverage action. In the event the parties are unable to settle the
dispute with this group of insurers, the case is scheduled to be tried in June
1999. Management and its outside legal counsel continue to believe
55
that recovery of a substantial portion of the cleanup costs will ultimately be
probable of realization. Accordingly, based on estimates of potential liability,
probable realization of insurance recoveries, related developments of New Jersey
law and the Third Circuit's decision, it is the Company's belief that the
ultimate amount that it would be liable for related to the remediation of the
Tankport site will not significantly adversely impact the Company's results of
operations or financial position.
CAPITALIZATION
The Company has three classes of common stock: Pittston Brink's Group Common
Stock ("Brink's Stock"), Pittston BAX Group Common Stock ("BAX Stock") and
Pittston Minerals Group Common Stock ("Minerals Stock") which were designed to
provide shareholders with separate securities reflecting the performance of the
Brink's Group, BAX Group and Minerals Group, respectively, without diminishing
the benefits of remaining a single corporation or precluding future transactions
affecting any of the Groups. The Brink's Group consists of the Brink's and BHS
operations of the Company. The BAX Group consists of the BAX Global operations
of the Company. The Minerals Group consists of the Pittston Coal and Mineral
Ventures operations of the Company. The Company prepares separate financial
statements for the Brink's, BAX and Minerals Groups, in addition to consolidated
financial information of the Company.
Effective May 4, 1998, the designation of Pittston Burlington Group Common Stock
and the name of the Pittston Burlington Group were changed to Pittston BAX Group
Common Stock and Pittston BAX Group, respectively. All rights and privileges of
the holders of such Stock are otherwise unaffected by such changes. The stock
continues to trade on the New York Stock Exchange under the symbol "PZX".
The Company has the authority to issue up to 2,000,000 shares of preferred
stock, par value $10 per share. In January 1994 the Company issued $80.5 million
(161,000 shares) of Series C Cumulative Convertible Preferred Stock (the
"Convertible Preferred Stock"), convertible into Minerals Stock. The Convertible
Preferred Stock pays an annual cumulative dividend of $31.25 per share payable
quarterly, in cash, in arrears, out of all funds of the Company legally
available; therefore, when, as and if declared by the Board and bears a
liquidation preference of $500 per share, plus an attributed amount equal to
accrued and unpaid dividends thereon.
Under the share repurchase programs authorized by the Board of Directors (the
"Board"), the Company purchased shares in the periods presented as follows:
Years Ended December 31
(Dollars in millions, shares in thousands) 1998 1997
- --------------------------------------------------------------------------
Brink's Stock:
Shares 150 166
Cost $ 5.6 4.3
BAX Stock:
Shares 1,047 332
Cost $ 12.7 7.4
Convertible Preferred Stock
Shares 0.4 1.5
Cost $ 0.1 0.6
Excess carrying amount (a) $ 0.0 0.1
===========================================================================
(a) The excess of the carrying amount of the Convertible Preferred Stock over
the cash paid to holders for repurchases made during the years. This amount is
deducted from preferred dividends in the Company's Statement of Operations.
As of December 31, 1998, the Company had the remaining repurchase authority with
respect to the Convertible Preferred Stock of $24.2 million. As of December 31,
1998, the Company had remaining authority to purchase over time 1.0 million
shares of Pittston Minerals Group Common Stock; 1.0 million shares of Pittston
Brink's Common Stock; and 1.5 million shares of Pittston BAX Group Common Stock.
The aggregate purchase price limitation for all common stock was $24.7 million
at December 31, 1998. The authority to repurchase shares remains in effect in
1999.
As of December 31, 1998, debt as a percent of capitalization (total debt and
shareholders' equity) was 38%, compared with 26% at December 31, 1997. The
increase in the debt ratio since December 1997 was due to the 7% increase in
shareholders' equity compared to the 84% increase in total debt (primarily the
result of acquisitions as previously discussed).
DIVIDENDS
The Board intends to declare and pay dividends, if any, on Brink's Stock, BAX
Stock and Minerals Stock based on the earnings, financial condition, cash flow
and business requirements of the Brink's Group, BAX Group and the Minerals
Group, respectively. Since the Company remains subject to Virginia law
limitations on dividends, losses by one Group could
56
affect the Company's ability to pay dividends in respect of stock relating to
the other Group. Dividends on Minerals Stock are also limited by the Available
Minerals Dividend Amount as defined in the Company's Articles of Incorporation.
The Available Minerals Dividend Amount may be reduced by activity that reduces
shareholder's equity or the fair value of net assets of the Minerals Group. Such
activity includes net losses by the Minerals Group, dividends paid on the
Minerals Stock and the Convertible Preferred Stock, repurchases of Minerals
Stock and the Convertible Preferred Stock, and foreign currency translation
losses. At December 31, 1998, 1997 and 1996 the Available Minerals Dividend
Amount was at least $8.1 million, $15.2 million and $22.1 million, respectively.
Since its distribution of Minerals Stock in 1993 and through March 31, 1998, the
Company has paid a cash dividend to its Minerals Stock shareholders at an annual
rate of $0.65 per share. In May 1998, the Company reduced the annual dividend
rate on Minerals Stock to $0.10 per share for shareholders as of the May 15,
1998 record date.
The Company continues its focus on the financial and capital needs of the
Minerals Group companies and, as always, is considering all strategic uses of
available cash, including dividend payments, with a view towards maximizing
long-term shareholder value.
During 1998 and 1997, the Board declared and the Company paid dividends
amounting to $0.10 per share and $0.24 per share of Brink's Stock and BAX Stock,
respectively. At present, the annual dividend rate for Brink's Stock is $0.10
per share, for Minerals Stock is $0.10 per share and for BAX Stock is $0.24 per
share.
In 1998 and 1997, dividends paid on the Convertible Preferred Stock amounted to
$3.5 million and $3.6 million, respectively.
ACCOUNTING CHANGES
The Company adopted Statement of Financing Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" in the first quarter of 1998. SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components in financial statements. Comprehensive income generally
represents all changes in shareholders' equity except those resulting from
investments by or distributions to shareholders.
Effective January 1, 1998, the Company implemented AICPA Statement of Position
("SOP") No. 98-1 "Accounting for the Costs of Computer Software Developed for
Internal Use." SOP No. 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. The adoption of SOP No. 98-1 had
no material impact on the Company.
The Company implemented SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the financial statements for the year
ended December 31, 1998. SFAS No. 131 superseded FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise". SFAS No. 131
requires publicly-held companies to report financial and descriptive information
about operating segments in financial statements issued to shareholders for
interim and annual periods. The SFAS also requires additional disclosures with
respect to products and services, geographic areas of operation, and major
customers. The adoption of SFAS No. 131 did not affect results of operations or
financial position, but did affect the disclosure of segment information. See
Note 17 to the Consolidated Financial Statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999; the Company has elected to adopt SFAS No. 133 as of October 1, 1998. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Changes in the fair value of derivatives are
recorded each period currently in earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. In accordance with
the transition provisions of SFAS No. 133, the Company recorded a net transition
adjustment resulting in a loss of $3.7 million (net of related income taxes of
$2.0 million) in accumulated other comprehensive income at October 1, 1998 in
order to recognize at fair value all derivatives that are designated as
cash-flow hedging instruments.
57
PENDING ACCOUNTING CHANGES
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5, which provides guidance on the reporting of
start-up costs and organization costs, requires that such costs be expensed as
incurred. This SOP is effective for the Company for the year beginning January
1, 1999. Initial application of the SOP is required to be reported as a
cumulative effect of a change in accounting principle as of the beginning of the
year of adoption. Due to the complexity of the mining industry, the Company is
still in the process of determining how this SOP will impact its results of
operations for the period ending March 31, 1999. Current indications are that
the implementation of the SOP could negatively impact results of operations up
to $6 million.
SUBSEQUENT EVENT
Effective March 15, 1999, under the Company's preferred share purchase program,
the Company purchased 0.08 million shares of the Convertible Preferred Stock at
$250 per share for a total cost approximating $21 million. The excess of the
carrying amount over the cash paid for the repurchase was approximately $19.2
million. In addition, on March 12, 1999, the Board authorized an increase in the
remaining authority to repurchase Convertible Preferred Stock by $4.3 million.
As previously discussed, the Available Minerals Dividend Amount is impacted by
activity that affects shareholders' equity or the fair value of net assets of
the Minerals Group. The purchase amount noted above reduces the Available
Minerals Dividend Amount as currently calculated. Accordingly, the purchase of
the Convertible Preferred Stock plus recent financial performance of the
Minerals Group is expected to significantly reduce or eliminate the ability to
pay dividends on the Minerals Group Common Stock.
FORWARD LOOKING INFORMATION
Certain of the matters discussed herein, including statements regarding the
ability to slow cost increases in the home security business, severance
benefits, costs of long-term benefit obligations, effective tax rates, the
continuation of information technology initiatives, projections about market
risk, the economies of Latin America and Asia/Pacific, projected capital
spending, environmental clean-up estimates, metallurgical market conditions,
Health Benefit Act expenses, the impact of SOP 98-5 on results of operations,
coal sales and the readiness for Year 2000 and the conversion to the Euro,
involve forward looking information which is subject to known and unknown risks,
uncertainties, and contingencies which could cause actual results, performance
or achievements, to differ materially from those which are anticipated. Such
risks, uncertainties and contingencies, many of which are beyond the control of
the Company, include, but are not limited to, overall economic and business
conditions, the demand for the Company's products and services, pricing and
other competitive factors in the industry, geological conditions, new government
regulations and/or legislative initiatives, variations in costs or expenses,
variations in the spot prices of coal, the ability of counterparties to perform,
changes in the scope of improvements to information systems and Year 2000
and/or Euro initiatives, delays or problems in the implementation of Year 2000
and/or Euro initiatives by the Company and/or any public or private sector
suppliers and service providers and customers, and delays or problems in the
design and implementation of improvements to information systems.
58
The Pittston Company and Subsidiaries
- -------------------------------------------------------------------------------
STATEMENT OF MANAGEMENT RESPONSIBILITY
- -------------------------------------------------------------------------------
The management of The Pittston Company (the "Company") is responsible for
preparing the accompanying consolidated financial statements and for their
integrity and objectivity. The statements were prepared in accordance with
generally accepted accounting principles. Management has also prepared the other
information in the annual report and is responsible for its accuracy.
In meeting our responsibility for the integrity of the consolidated financial
statements, we maintain a system of internal controls designed to provide
reasonable assurance that assets are safe-guarded, that transactions are
executed in accordance with management's authorization and that the accounting
records provide a reliable basis for the preparation of the financial
statements. Qualified personnel throughout the organization maintain and monitor
these internal controls on an ongoing basis. In addition, the Company maintains
an internal audit department that systematically reviews and reports on the
adequacy and effectiveness of the controls, with management follow-up as
appropriate.
Management has also established a formal Business Code of Ethics which is
distributed throughout the Company. We acknowledge our responsibility to
establish and preserve an environment in which all employees properly understand
the fundamental importance of high ethical standards in the conduct of our
business.
The Company's consolidated financial statements have been audited by KPMG LLP,
independent auditors. During the audit they review and make appropriate tests of
accounting records and internal controls to the extent they consider necessary
to express an opinion on the Company's consolidated financial statements.
The Company's Board of Directors pursues its oversight role with respect to the
Company's consolidated financial statements through the Audit and Ethics
Committee, which is composed solely of outside directors. The Committee meets
periodically with the independent auditors, internal auditors and management to
review the Company's control system and to ensure compliance with applicable
laws and the Company's Business Code of Ethics.
We believe that the policies and procedures described above are appropriate and
effective and do enable us to meet our responsibility for the integrity of the
Company's consolidated financial statements.
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
The Board of Directors and Shareholders
The Pittston Company
We have audited the accompanying consolidated balance sheets of The Pittston
Company and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Pittston Company
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
As more fully discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for costs of computer software
developed for internal use and derivative instruments and hedging activities
in 1998 and impairment of long-lived assets in 1996.
KPMG LLP
KPMG LLP
Richmond, Virginia
January 27, 1999, except as to Note 22, which is as of March 15, 1999
59
The Pittston Company and Subsidiaries
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
December 31
(Dollars in thousands, except per share amounts) 1998 1997
==============================================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 83,894 69,878
Short-term investments 1,767 2,227
Accounts receivable:
Trade (Note 3) 599,550 520,817
Other 38,916 32,485
- --------------------------------------------------------------------------------------------------------------
638,466 553,302
Less estimated uncollectible amounts 32,122 21,985
- --------------------------------------------------------------------------------------------------------------
606,344 531,317
Coal inventory 24,567 31,644
Other inventory 18,203 8,530
- --------------------------------------------------------------------------------------------------------------
42,770 40,174
Prepaid expenses and other current assets 33,374 32,767
Deferred income taxes (Note 6) 52,494 50,442
- --------------------------------------------------------------------------------------------------------------
Total current assets 820,643 726,805
- --------------------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost (Notes 1 and 4) 1,423,133 1,167,300
Less accumulated depreciation, depletion and amortization 573,250 519,658
- --------------------------------------------------------------------------------------------------------------
849,883 647,642
Intangibles, net of accumulated amortization (Notes 1, 5 and 11) 345,600 301,395
Deferred pension assets (Note 14) 119,500 123,138
Deferred income taxes (Note 6) 63,489 47,826
Other assets 132,022 149,138
- --------------------------------------------------------------------------------------------------------------
Total assets $2,331,137 1,995,944
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings (Note 7) $ 88,283 40,144
Current maturities of long-term debt (Note 7) 36,509 11,299
Accounts payable 284,341 281,411
Accrued liabilities:
Taxes 69,921 45,785
Workers' compensation and other claims 33,140 32,048
Payroll and vacation 78,919 62,029
Miscellaneous (Note 14) 206,320 170,957
- --------------------------------------------------------------------------------------------------------------
388,300 310,819
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 797,433 643,673
- --------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities (Note 7) 323,308 191,812
Postretirement benefits other than pensions (Note 14) 239,550 231,451
Workers' compensation and other claims 93,324 106,378
Deferred income taxes (Note 6) 20,615 17,157
Other liabilities 120,879 119,855
Commitments and contingent liabilities (Notes 7, 12, 13, 14, 18 and 19)
Shareholders' equity (Notes 9 and 10):
Preferred stock, par value $10 per share,
Authorized: 2,000,000 shares $31.25 Series C Cumulative Convertible
Preferred Stock,
Issued: 1998 - 113,490 shares; 1997 - 113,845 shares 1,134 1,138
Pittston Brink's Group common stock, par value $1 per share:
Authorized: 100,000,000 shares
Issued: 1998 - 40,961,415 shares; 1997 - 41,129,679 shares 40,961 41,130
Pittston BAX Group common stock, par value $1 per share:
Authorized: 50,000,000 shares
Issued: 1998 - 20,824,910 shares; 1997 - 20,378,000 shares 20,825 20,378
Pittston Minerals Group common stock, par value $1 per share:
Authorized: 20,000,000 shares
Issued: 1998 - 9,186,434 shares; 1997 - 8,405,908 shares 9,186 8,406
Capital in excess of par value 403,148 430,970
Retained earnings 401,186 359,940
Accumulated other comprehensive income (51,865) (41,762)
Employee benefits trust, at market value (Note 10) (88,547) (134,582)
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity 736,028 685,618
- --------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,331,137 1,995,944
==============================================================================================================
See accompanying notes to consolidated financial statements.
60
The Pittston Company and Subsidiaries
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
Years Ended December 31
(In thousands, except per share amounts) 1998 1997 1996
===============================================================================================================
Net sales $ 518,635 630,626 696,513
Operating revenues 3,228,247 2,763,772 2,394,682
- ---------------------------------------------------------------------------------------------------------------
Net sales and operating revenues 3,746,882 3,394,398 3,091,195
- ---------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 513,794 609,025 707,497
Operating expenses 2,675,537 2,270,341 1,989,149
Selling, general and administrative expenses
(including a $15,723 write-off of
long-lived assets in 1998) 454,993 344,008 292,718
Restructuring and other credits, including
litigation accrual (Notes 15 and 18) (1,479) (3,104) (47,299)
- ---------------------------------------------------------------------------------------------------------------
Total costs and expenses 3,642,845 3,220,270 2,942,065
Other operating income, net (Note 16) 21,106 14,000 17,377
- ---------------------------------------------------------------------------------------------------------------
Operating profit 125,143 188,128 166,507
Interest income 5,359 4,394 3,487
Interest expense (39,103) (27,119) (14,074)
Other income (expense), net 3,811 (7,148) (9,224)
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 95,210 158,255 146,696
Provision for income taxes (Note 6) 29,154 48,057 42,542
- ---------------------------------------------------------------------------------------------------------------
Net income 66,056 110,198 104,154
Preferred stock dividends, net (Notes 8 and 10) (3,524) (3,481) (1,675)
- ---------------------------------------------------------------------------------------------------------------
Net income attributed to common shares $ 62,532 106,717 102,479
===============================================================================================================
Pittston Brink's Group (Note 1):
Net income $ 79,104 73,622 59,695
- ---------------------------------------------------------------------------------------------------------------
Net income per common share (Note 8):
Basic $ 2.04 1.92 1.56
Diluted 2.02 1.90 1.54
- ---------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding (Note 8):
Basic 38,713 38,273 38,200
Diluted 39,155 38,791 38,682
===============================================================================================================
Pittston BAX Group (Note 1):
Net income (loss) $ (13,091) 32,348 33,801
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) per common share (Note 8):
Basic $ (0.68) 1.66 1.76
Diluted (0.68) 1.62 1.72
- ---------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding (Note 8):
Basic 19,333 19,448 19,223
Diluted 19,333 19,993 19,681
===============================================================================================================
Pittston Minerals Group (Note 1):
Net income (loss) attributed to common shares $ (3,481) 747 8,983
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) per common share (Note 8):
Basic $ (0.42) 0.09 1.14
Diluted (0.42) 0.09 1.08
- ---------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding (Note 8):
Basic 8,324 8,076 7,897
Diluted 8,324 8,102 9,884
================================================================================================================
See accompanying notes to consolidated financial statements.
61
The Pittston Company and Subsidiaries
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------
Years Ended December 31
(In thousands, except per share data) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
SERIES C PREFERRED STOCK, $31.25 PER SHARE (NOTE 10)
Balance, beginning of year $ 1,138 1,154 1,362
Retirement of stock under share repurchase program (Note 10) (4) (16) (208)
- -----------------------------------------------------------------------------------------------------------------
Balance, end of year 1,134 1,138 1,154
=================================================================================================================
BRINK'S GROUP COMMON STOCK
Balance, beginning of year 41,130 41,296 41,574
Retirement of stock under share repurchase program (Note 10) (150) (166) (278)
Other (19) -- --
- -----------------------------------------------------------------------------------------------------------------
Balance, at end of year 40,961 41,130 41,296
=================================================================================================================
BAX GROUP COMMON STOCK
Balance, beginning of year 20,378 20,711 20,787
Retirement of stock under share repurchase program (Note 10) (1,047) (333) (76)
Employee benefits trust/other (Note 9) 1,494 -- --
- -----------------------------------------------------------------------------------------------------------------
Balance, at end of year 20,825 20,378 20,711
=================================================================================================================
MINERALS GROUP COMMON STOCK
Balance, beginning of year 8,406 8,406 8,406
Employee benefits trust/other (Note 9) 780 -- --
- -----------------------------------------------------------------------------------------------------------------
Balance, at end of year 9,186 8,406 8,406
=================================================================================================================
CAPITAL IN EXCESS OF PAR VALUE
Balance, beginning of year 430,970 400,135 401,633
Tax benefit of stock options exercised (Note 6) 4,766 2,045 1,734
Cost of Brink's Stock Proposal (Note 9) -- -- (2,475)
Remeasurement of employee benefits trust (25,993) 42,118 20,481
Employee benefits trust (Note 9) 12,781 -- --
Shares released from employee benefits trust (Notes 9 and 10) (13,675) (7,522) (7,659)
Retirement of stock under share repurchase programs (Note 10) (7,024) (5,806) (13,579)
Other 1,323 -- --
- -----------------------------------------------------------------------------------------------------------------
Balance, at end of year 403,148 430,970 400,135
=================================================================================================================
RETAINED EARNINGS
Balance, beginning of year 359,940 273,118 188,728
Net income 66,056 110,198 104,154
Retirement of stock under share repurchase programs (Note 10) (10,212) (6,052) (2,096)
Cash dividends declared- Brink's Group $.10 per share,
BAX Group $.24 per share, Minerals Group $.2375 per share
and Series C Preferred Stock $31.25 per share (Note 10) (14,032) (17,324) (17,668)
Other (566) -- --
- -----------------------------------------------------------------------------------------------------------------
Balance, at end of year 401,186 359,940 273,118
=================================================================================================================
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of year (41,762) (21,188) (20,705)
Foreign currency translation adjustment (7,125) (20,574) (483)
Cash flow hedges (3,309) -- --
Other 331 -- --
- -----------------------------------------------------------------------------------------------------------------
Balance, at end of year (51,865) (41,762) (21,188)
=================================================================================================================
EMPLOYEE BENEFITS TRUST
Balance, beginning of year (134,582) (116,925) (119,806)
Remeasurement of employee benefits trust 25,993 (42,118) (20,481)
Employee benefits trust (Note 9) (15,081) -- --
Shares released from employee benefits trust (Notes 9 and 10) 35,123 24,461 23,362
- -----------------------------------------------------------------------------------------------------------------
Balance, at end of year (88,547) (134,582) (116,925)
=================================================================================================================
Total shareholders' equity - end of year $736,028 685,618 606,707
=================================================================================================================
COMPREHENSIVE INCOME
Net income attributed to common shares $ 62,532 106,717 102,479
Other comprehensive income, net of tax:
Foreign currency translation adjustments, net of tax effect
of $787, ($785) and $365 (7,125) (20,574) (483)
Cash flow hedges:
Transition adjustment, net of tax effect of $1,960 (3,663) -- --
Net cash flow hedge losses, net of tax effect of $501 (710) -- --
Reclassification adjustment, net of tax effect of ($617) 1,064 -- --
Other, net of tax effect of ($189) 331 -- --
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income $ 52,429 86,143 101,996
=================================================================================================================
See accompanying notes to consolidated financial statements.
62
The Pittston Company and Subsidiaries
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
Years Ended December 31
(In thousands) 1998 1997 1996
==================================================================================================================================
Cash flows from operating activities:
Net income $ 66,056 110,198 104,154
Adjustments to reconcile net income to net cash provided by operating activities:
Noncash charges and other write-offs 20,124 -- 29,948
Depreciation, depletion and amortization 154,353 128,751 114,618
Provision for aircraft heavy maintenance 39,821 34,057 32,057
(Credit) provision for deferred income taxes (6,165) 10,611 19,320
Provision for pensions, noncurrent 4,022 243 935
Provision for uncollectible accounts receivable 21,426 10,664 7,687
Equity in (earnings) losses of unconsolidated affiliates, net of dividends received (880) 2,927 (2,183)
Minority interest expense 1,742 5,467 3,896
Gains on sales of property, plant and equipment and other assets and investments (9,809) (2,432) (2,835)
Other operating, net 13,262 8,646 6,105
Change in operating assets and liabilities, net of effects of acquisitions and
dispositions:
Increase in accounts receivable (29,690) (39,697) (53,885)
(Increase) decrease in inventories (871) (2,963) 9,271
Decrease (increase) in prepaid expenses 2,225 325 (1,869)
(Decrease) increase in accounts payable and accrued liabilities (26,906) 32,562 382
Increase in other assets (7,058) (11,084) (7,907)
Decrease in workers' compensation and other claims, noncurrent (10,886) (11,109) (9,002)
Increase (decrease) in other liabilities 11,122 (5,859) (53,522)
Other, net (10,080) (3,198) (499)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 231,808 268,109 196,671
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (256,567) (173,768) (180,651)
Proceeds from disposal of property, plant and equipment 30,489 4,064 11,310
Aircraft heavy maintenance expenditures (40,466) (29,748) (23,373)
Acquisitions, net of cash acquired, and related contingency payments (34,521) (65,494) (4,078)
Dispositions of other assets and investments 8,482 -- --
Other, net (8,397) 7,589 5,181
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (300,980) (257,357) (191,611)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Additions to debt 218,403 158,021 28,642
Reductions of debt (110,474) (116,030) (14,642)
Repurchase of stock of the Company (19,437) (12,373) (16,237)
Proceeds from exercise of stock options and employee stock purchase plan 8,098 4,708 5,487
Dividends paid (13,402) (16,417) (17,441)
Cost of stock proposal -- -- (2,475)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 83,188 17,909 (16,666)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 14,016 28,661 (11,606)
Cash and cash equivalents at beginning of year 69,878 41,217 52,823
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 83,894 69,878 41,217
==================================================================================================================================
See accompanying notes to consolidated financial statements.
63
The Pittston Company and Subsidiaries
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(In thousands, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
As used herein, the "Company" includes The Pittston Company except as otherwise
indicated by the context. The Company is comprised of three separate groups -
Pittston Brink's Group, Pittston BAX Group, and Pittston Minerals Group. The
Pittston Brink's Group consists of Brink's, Incorporated ("Brink's") and Brink's
Home Security, Inc. ("BHS") operations of the Company. The Pittston BAX Group
consists of the BAX Global Inc. ("BAX Global") operations of the Company. The
Pittston Minerals Group consists of the Pittston Coal Company ("Coal
Operations") and Pittston Mineral Ventures ("Mineral Ventures") operations of
the Company. The Company prepares separate financial information including
separate financial statements for the Brink's, BAX and Minerals Groups in
addition to consolidated financial information of the Company.
Effective May 4, 1998, the designation of Pittston Burlington Group Common Stock
and the name of the Pittston Burlington Group were changed to Pittston BAX Group
Common Stock and Pittston BAX Group, respectively. All rights and privileges of
the holders of such Stock are otherwise unaffected by such changes. The stock
continues to trade on the New York Stock Exchange under the symbol "PZX".
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements reflect the accounts of the
Company and its majority-owned subsidiaries. The Company's interest in 20% to
50% owned companies are carried on the equity method unless control exists, in
which case, consolidation accounting is used. All material intercompany items
and transactions have been eliminated in consolidation. Certain prior year
amounts have been reclassified to conform to the current year's financial
statement presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits and investments
with original maturities of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments are those with original maturities in excess of three
months, but not exceeding one year, and are carried at cost which approximates
market.
INVENTORIES
Inventories are stated at cost (determined under the first-in, first-out or
average cost method) or market, whichever is lower.
PROPERTY, PLANT AND EQUIPMENT
Expenditures for maintenance and repairs are charged to expense, and the costs
of renewals and betterments are capitalized. Depreciation is provided
principally on the straight-line method at varying rates depending upon
estimated useful lives. Depletion of bituminous coal lands is provided on the
basis of tonnage mined in relation to the estimated total of recoverable tonnage
in the ground.
Mine development costs, primarily included in bituminous coal lands, are
capitalized and amortized over the estimated useful life of the mine. These
costs include expenses incurred for site preparation and development as well as
operating deficits incurred at the mines during a development stage. A mine is
considered under development until all planned production units have been placed
in operation.
Valuation of coal properties is based primarily on mining plans and conditions
assumed at the time of the evaluation. These valuations could be impacted by
actual economic conditions which differ from those assumed at the time of the
evaluation.
Subscriber installation costs for home security systems provided by BHS are
capitalized and depreciated over the estimated life of the assets and are
included in machinery and equipment. The security system that is installed
remains the property of BHS and is capitalized at the cost to bring the revenue
producing asset to its intended use. When an installation is identified for
disconnection, the remaining net book value of the installation is fully
reserved and charged to depreciation expense.
INTANGIBLES
The excess of cost over fair value of net assets of businesses acquired is
amortized on a straight-line basis over the estimated periods benefited.
The Company evaluates the carrying value of intangibles and the periods of
amortization to determine whether events and circumstances warrant revised
estimates of asset value or useful lives. The Company annually assesses the
recoverability of the excess of cost over net assets acquired by determining
whether the amortization of the asset balance over its remaining life can be
recovered through projected undiscounted future operating cash flows. Evaluation
of asset value as well as periods of amortization are performed on a
disaggregated basis.
Goodwill allocated to a potentially impaired asset will be identified with that
asset in performing an impairment test in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121. If such tests indicate that an impairment
exists, the carrying amount of the identified goodwill would be
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eliminated before making any reduction of the carrying amounts of impaired
long-lived assets.
COAL SUPPLY CONTRACTS
Coal supply contracts consist of contracts to supply coal to customers at
certain negotiated prices over a period of time, which have been acquired from
other coal companies, and are stated at cost at the time of acquisition, which
approximates fair market value. The capitalized cost of such contracts is
amortized over the term of the contract on the basis of tons of coal sold under
the contract.
STOCK BASED COMPENSATION
The Company has implemented the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation" (Note 9). The Company continues to
measure compensation expense for its stock-based compensation plans using the
intrinsic value based methods of accounting prescribed by Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees."
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries have been translated at rates of
exchange at the balance sheet date and related revenues and expenses have been
translated at average rates of exchange in effect during the year. Resulting
cumulative translation adjustments have been recorded as a separate component of
shareholders' equity. Translation adjustments relating to subsidiaries in
countries with highly inflationary economies are included in net income, along
with all transaction gains and losses for the period.
A portion of the Company's financial results is derived from activities in a
number of foreign countries in Europe, Asia and Latin America, each with a local
currency other than the US dollar. Because the financial results of the Company
are reported in US dollars, they are affected by changes in the value of various
foreign currencies in relation to the US dollar. The diversity of foreign
operations helps to mitigate a portion of the foreign currency risks associated
with market fluctuations in any one country and the impact on translated
results.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Postretirement benefits other than pensions are accounted for in accordance with
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions", which requires employers to accrue the cost of such retirement
benefits during the employees' service with the Company.
INCOME TAXES
Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for
Income Taxes", which requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which these items are expected to reverse.
PNEUMOCONIOSIS (BLACK LUNG) EXPENSE
The Company acts as self-insurer with respect to almost all black lung benefits.
Provision is made for estimated benefits based on annual actuarial reports
prepared by outside actuaries. The excess of the present value of expected
future benefits over the accumulated book reserves is recognized over the
amortization period as a level percentage of payroll. Cumulative actuarial gains
or losses are calculated periodically and amortized on a straight-line basis.
Assumptions used in the calculation of the actuarial present value of black lung
benefits are based on actual retirement experience of the Company's coal
employees, black lung claims incidence for active miners, actual dependent
information, industry turnover rates, actual medical and legal cost experience
and projected inflation rates. As of December 31, 1998 and 1997, the actuarially
determined value of estimated future black lung benefits discounted at 6% was
approximately $51,000 and $55,000, respectively, and is included in workers'
compensation and other claims in the Company's consolidated balance sheet. Based
on actuarial data, the amount credited to operations was $2,257 in 1998, $2,451
in 1997 and $2,216 in 1996. In addition, the Company accrued additional expenses
for black lung benefits related to federal and state assessments, legal and
administration expenses and other self insurance costs. These costs and expenses
amounted to $1,659 in 1998, $1,936 in 1997 and $1,849 in 1996.
RECLAMATION COSTS
Expenditures relating to environmental regulatory requirements and reclamation
costs undertaken during mine operations are charged against earnings as
incurred. Estimated site restoration and post closure reclamation costs are
charged against earnings using the units of production method over the expected
economic life of each mine. Accrued reclamation costs are subject to review by
management on a regular basis and are revised when appropriate for changes in
future estimated costs and/or regulatory requirements.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires a
review of assets for impairment whenever circumstances indicate that the
carrying amount of an asset may not be recoverable. When such events or changes
in circumstances indicate an asset may not be recoverable, the Company estimates
the future cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of such expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized in an amount by which the asset's
net book value exceeds its fair
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market value. For purposes of assessing impairment, assets are required to be
grouped at the lowest level for which there are separately identifiable cash
flows.
During the third quarter of 1998, the Company recorded write-offs for software
costs included in property, plant and equipment in accordance with SFAS No. 121
of approximately $16,000. These write-offs consisted of the costs associated
with certain in-process software development projects that were canceled during
the quarter and unamortized costs of existing software applications which were
determined by management to have no future service potential or value. It is
management's belief at this time that the current ongoing information technology
initiatives that originated from the previously mentioned projects are necessary
and will be successfully completed and implemented. Such write-offs are included
in selling, general and administrative expenses in the Company's results of
operations.
In 1996, the Company adopted SFAS No. 121, resulting in a pretax charge to
earnings in 1996 for the Company's Coal Operations of $29,948 ($19,466
after-tax), of which $26,312 was included in cost of sales and $3,636 was
included in selling, general and administrative expenses. Assets for which the
impairment loss was recognized consisted of property, plant and equipment,
advance royalties and goodwill. These assets primarily related to mines
scheduled for closure in the near term and idled facilities and related
equipment.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
All derivative instruments are recognized on the balance sheet at their fair
value. On the date the derivative contract is entered into, the Company
designates the derivative as (1) a hedge of the fair value of a recognized asset
or liability or of an unrecognized firm commitment ("fair value" hedge), (2) a
hedge of a forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability ("cash flow" hedge),
(3) a foreign currency fair value or cash flow hedge ("foreign currency" hedge),
or (4) a hedge of a net investment in a foreign operation. The Company does not
enter into derivative contracts for the purpose of "trading" such instruments
and thus has no derivative designation as "held for trading".
Changes in the fair value of a derivative that is highly effective as and that
is designated and qualifies as a fair value hedge, along with the loss or gain
on the hedged asset or liability that is attributable to the hedged risk
(including losses or gains on firm commitments), are recorded currently in
earnings. Changes in the fair value of a derivative that is highly effective as
and that is designated and qualifies as a cash flow hedge are recorded in other
comprehensive income, until the forecasted transaction affects earnings. Changes
in the fair value of derivatives that are highly effective as and that are
designated and qualify as foreign currency hedges are recorded either currently
in earnings or other comprehensive income, depending on whether the hedge
transaction is a fair value hedge or a cash flow hedge. If, however, a
derivative is used as a hedge of a net investment in a foreign operation, its
changes in fair value, to the extent effective as a hedge, are recorded in the
cumulative translation adjustments account within equity. Any amounts excluded
from the assessment of hedge effectiveness as well as the ineffective portion of
the gain or loss is reported in earnings immediately.
Management documents the relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for undertaking
various hedge transactions. This process includes linking derivatives that are
designated as fair value, cash flow, or foreign currency hedges to specific
assets and liabilities on the balance sheet or to specific firm commitments or
forecasted transactions. Management also assesses, both at the hedge's inception
and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash
flows of hedged items. When it is determined that a derivative is not highly
effective as a hedge or that it has ceased to be a highly effective hedge, hedge
accounting is discontinued prospectively, as discussed below.
The Company discontinues hedge accounting prospectively when and if (1) it is
determined that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of a hedged item (including firm commitments or
forecasted transactions); (2) the derivative expires or is sold, terminated, or
exercised; (3) the derivative is de-designated as a hedge instrument, because it
is no longer probable that a forecasted transaction will occur; (4) because a
hedged firm commitment no longer meets the definition of a firm commitment; or
(5) management determines that designation of the derivative as a hedge
instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the derivative
will continue to be carried on the balance sheet at its fair value, changes are
reported currently in earnings, and the hedged asset or liability will no longer
be adjusted for changes in fair value. When hedge accounting is discontinued
because the hedged item no longer meets the definition of a firm commitment, the
derivative will continue to be carried on the balance sheet at its fair value
and changes are reported currently on earnings, and any asset or liability that
was recorded pursuant to recognition of the firm commitment will be removed from
the balance sheet and recognized as a gain or loss currently in earnings. When
hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, the derivative will continue to be carried on the
balance sheet at its fair value, changes are reported currently on earnings, and
gains and losses that were accumulated in other comprehensive income will be
recognized immediately in earnings. In all other situations in which hedge
accounting is discontinued, the derivative will be carried at its fair value on
the
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balance sheet, with changes in its fair value recognized currently in earnings.
REVENUE RECOGNITION
Brink's--Revenues are recognized when services are performed.
BHS--Monitoring revenues are recognized when earned and amounts paid in advance
are deferred and recognized as income over the applicable monitoring period,
which is generally one year or less.
BAX Global--Revenues related to transportation services are recognized, together
with related transportation costs, on the date shipments physically depart from
facilities en route to destination locations. Revenues and operating results
determined under existing recognition policies do not materially differ from
those which would result from an allocation of revenue between reporting periods
based on relative transit times in each reporting period with expenses
recognized as incurred.
Coal Operations--Coal sales are generally recognized when coal is loaded onto
transportation vehicles for shipment to customers. For domestic sales, this
generally occurs when coal is loaded onto railcars at mine locations. For export
sales, this generally occurs when coal is loaded onto marine vessels at terminal
facilities.
Mineral Ventures--Gold sales are recognized when products are shipped to a
refinery. Settlement adjustments arising from final determination of weights and
assays are reflected in sales when received.
NET INCOME PER SHARE
Basic and diluted net income per share for the Brink's Group and the BAX Group
are computed by dividing net income for each Group by the basic weighted average
common shares outstanding and the diluted weighted average common shares
outstanding, respectively. Diluted weighted average common shares outstanding
includes additional shares assuming the exercise of stock options. However, when
the exercise of stock options is antidilutive, they are excluded from the
calculation.
Basic net income per share for the Minerals Group is computed by dividing net
income attributed to common shares (net income less preferred stock dividends)
by the basic weighted average common shares outstanding. Diluted net income per
share for the Minerals Group is computed by dividing net income by the diluted
weighted average common shares outstanding. Diluted weighted average common
shares outstanding includes additional shares assuming the exercise of stock
options and the conversion of the Company's $31.25 Series C Cumulative
Convertible Preferred Stock (the "Convertible Preferred Stock"). However, when
the exercise of stock options or the conversion of Convertible Preferred Stock
is antidilutive, they are excluded from the calculation. The shares of Brink's
Stock, BAX Stock and Minerals Stock held in the Pittston Company Employee
Benefits Trust ("the Trust" - See Note 10) are subject to the treasury stock
method and effectively are not included in the basic and diluted net income per
share calculations.
USE OF ESTIMATES
In accordance with generally accepted accounting principles, management of the
Company has made a number of estimates and assumptions relating to the reporting
of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements. Actual results could differ
from those estimates.
Accounting Changes
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in the first
quarter of 1998. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in shareholders' equity
except those resulting from investments by or distributions to shareholders.
Effective January 1, 1998, the Company implemented AICPA Statement of Position
("SOP") No. 98-1 "Accounting for the Costs of Computer Software Developed for
Internal Use." SOP No. 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. The adoption of SOP No. 98-1 had
no material impact on the Company.
The Company implemented SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the financial statements for the year
ended December 31, 1998. SFAS No. 131 superseded FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise". SFAS No. 131
requires publicly-held companies to report financial and descriptive
information about operating segments in financial statements issued to
shareholders for interim and annual periods. The SFAS also requires additional
disclosures with respect to products and services, geographic areas of
operation, and major customers. The adoption of SFAS No. 131 did not affect
results of operations or financial position, but did affect the disclosure
of segment information. See Note 17.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999; the Company elected to adopt SFAS No. 133 as of October 1, 1998. SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that
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an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. Changes in the fair
value of derivatives are recorded each period currently in earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, depending on the type of hedge transaction.
In accordance with the transition provisions of SFAS No. 133, the Company
recorded a net transition adjustment resulting in a loss of $3,663 (net of
related income taxes of $1,961) in accumulated other comprehensive income at
October 1, 1998 in order to recognize at fair value all derivatives that are
designated as cash-flow hedging instruments.
2. DERIVATIVE AND NON-DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
NON-DERIVATIVE FINANCIAL INSTRUMENTS
Non-derivative financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments and trade receivables. The Company places its cash and
cash equivalents and short-term investments with high credit quality financial
institutions. Also, by policy, the Company limits the amount of credit exposure
to any one financial institution. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Company's customer base, and their dispersion across many different
industries and geographic areas. Credit limits, ongoing credit evaluation and
account-monitoring procedures are utilized to minimize the risk of loss from
nonperformance on trade receivables.
The following details the fair values of non-derivative financial instruments
for which it is practicable to estimate the value:
Cash and cash equivalents and short-term investments
The carrying amounts approximate fair value because of the short maturity of
these instruments.
Accounts receivable, accounts payable and accrued liabilities
The carrying amounts approximate fair value because of the short-term nature of
these instruments.
Debt
The aggregate fair value of the Company's long-term debt obligations, which is
based upon quoted market prices and rates currently available to the Company for
debt with similar terms and maturities, approximates the carrying amount.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company has activities in a number of foreign countries in Europe, Asia, and
Latin America, which expose it to a variety of market risks, including the
effects of changes in foreign currency exchange rates, interest rates, and
commodity prices. These financial exposures are monitored and managed by the
Company as an integral part of its overall risk management program. The
diversity of foreign operations helps to mitigate a portion of the foreign
currency risks associated with market fluctuations in any one country and the
impact on translated results. The Company's risk management program considers
this favorable diversification effect as it measures the Company's exposure to
financial markets and as appropriate, seeks to reduce the potentially adverse
effects that the volatility of certain markets may have on its operating
results.
The Company utilizes various derivative and non-derivative hedging instruments,
as discussed below, to hedge its foreign currency, interest rate, and commodity
exposures. The risk that counterparties to such instruments may be unable to
perform is minimized by limiting the counterparties to major financial
institutions. Management does not expect any losses due to such counterparty
default.
The Company assesses interest rate, foreign currency, and commodity risks by
continually identifying and monitoring changes in interest rate, foreign
currency and commodity exposures that may adversely impact expected future cash
flows and by evaluating hedging opportunities. The Company maintains risk
management control systems to monitor these risks attributable to both the
Company's outstanding and forecasted transactions as well as offsetting hedge
positions. The risk management control systems involve the use of analytical
techniques to estimate the expected impact of changes in interest rates, foreign
currency rates and commodity prices on the Company's future cash flows. The
Company does not use derivative instruments for purposes other than hedging.
As of October 1, 1998 the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 which establishes
accounting and reporting standards for derivative instruments and hedging
activities, requires that an entity recognize all derivatives as either assets
or liabilities in the balance sheet and measure those instruments at fair value.
Changes in fair value of derivatives are recorded each period currently in
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, depending on the type
of hedge transaction.
Prior to the adoption of SFAS No. 133 (prior to October 1, 1998), gains and
losses on derivative contracts, designated as effective hedges, were deferred
and recognized as part of the transaction hedged. Since they were accounted for
as hedges, the fair value of these contracts were not recognized in the
Company's financial statements. Gains and losses resulting from the early
termination of such contracts were deferred and amortized as an adjustment to
the specific item being hedged over the remaining period originally covered by
the terminated contracts. In addition, if the underlying items being hedged were
retired prior to maturity, the unamortized gain or loss resulting from the early
termination of the related interest rate swap would be included in the gain or
loss on the extinguishment of the obligation.
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Cash-flow hedges
Interest Rate Risk Management
The Company uses variable-rate debt to finance its operations. In particular, it
has variable-rate long-term debt under the $350 million credit facility (the
"Facility" -- See Note 7). This debt obligation exposes the Company to
variability in interest expense due to changes in interest rates. If interest
rates increase, interest expense increases. Conversely, if interest rates
decrease, interest expense also decreases. Management believes it is prudent to
limit the variability of a portion of its interest expense. The Company attempts
to maintain a reasonable balance between fixed and floating rate debt and uses
interest rate swaps to accomplish this objective. The contracts are entered into
in accordance with guidelines set forth in the Company's hedging policies. The
Company does not use derivative instruments for purposes other than hedging.
To meet this objective, the Company enters into interest rate swaps to manage
fluctuations in interest expense resulting from interest rate risk. The Company
has entered into interest rate swaps with a total notional value of $60,000.
These swaps change the variable-rate cash flows on a portion of its $100,000
term-loan, which is part of the Facility, to fixed-rate cash flows by entering
into interest rate swaps which involve the exchange of floating interest
payments for fixed interest payments.
Changes in the fair value, to the extent effective, of interest rate swaps
designated as hedging instruments of the variability of cash flows associated
with floating-rate, long-term debt obligations are reported in accumulated other
comprehensive income. These amounts are subsequently reclassified into interest
expense as a yield adjustment in the same period in which the interest on the
floating-rate debt obligations affects earnings. During the year ending December
31, 1999, losses of approximately $460 (pre-tax) related to the interest rate
swaps are expected to be reclassified from accumulated other comprehensive
income into interest expense as a yield adjustment of the hedged debt
obligation.
Of the three swaps outstanding at December 31, 1998, the first fixes the
interest rate at 5.80% on $20,000 in face amount of debt and matures in May
2000, the second and third fix the interest rate at 5.84% and 5.86%,
respectively each on $20,000 in face amount of debt and mature in May 2001.
Foreign Currency Risk Management
The Company utilizes foreign currency forward contracts to minimize the
variability in cash flows due to foreign currency risks associated with foreign
operations. These items are denominated in various foreign currencies, including
the Australian dollar. The contracts are entered into in accordance with
guidelines set forth in the Company's hedging policies. The Company does not use
derivative instruments for purposes other than hedging.
Mineral Ventures has a subsidiary which is exposed to currency risk arising from
gold sales denominated in US dollars and local Australian costs denominated in
Australian dollars. Mineral Ventures utilizes foreign currency forward contracts
to hedge the variability in cash flows resulting from these exposures for up to
two years into the future. All other currency contracts outstanding during the
period were immaterial to the results of the Company.
The foreign currency forward contracts' effectiveness is assessed based on the
forward rate of the contract. No material amounts related to hedge
ineffectiveness were recognized in earnings during the period. Changes in the
fair value of Australian dollar foreign currency forward contracts designated
and qualifying as cash flow hedges of forecasted US dollar sales of gold are
reported in accumulated other comprehensive income. The gains and losses are
reclassified into earnings, as a component of revenue, in the same period as the
forecasted transaction affects earnings.
During the year ending December 31, 1999, losses of approximately $1,000
(pre-tax) related to Australian dollar foreign currency forward contracts are
expected to be reclassified from accumulated other comprehensive income into
revenue. As of December 31, 1998, the maximum length of time over which the
Company is hedging its exposure to the variability in future cash flows
associated with foreign currency forecasted transactions is eighteen months.
All other currency contracts outstanding during the period were immaterial to
the results of the Company.
Commodities Risk Management
The Company consumes or sells various commodities in the normal course of its
business and utilizes derivative instruments to minimize the variability in
forecasted cash flows due to adverse price movements in these commodities. The
contracts are entered into in accordance with guidelines set forth in the
Company's hedging policies. The Company does not use derivative instruments for
purposes other than hedging.
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The Company utilizes forward swap contracts for the purchase of jet fuel to fix
a portion of forecasted jet fuel costs at specific price levels. Under the swap
contracts the Company receives (pays) the difference between the contract rate
and the higher (lower) average market rate over the related contract period. The
Company also periodically utilizes option strategies to hedge a portion of the
remaining forecasted risk associated with changes in the price of jet fuel. The
option contracts, which involve either purchasing call options and
simultaneously selling put options (collar strategy) or purchasing call options,
are designed to provide protection against sharp increases in the price of jet
fuel. For purchased call options the Company pays a premium up front and
receives an amount over the contract period equal to the difference by which the
average market price during the period exceeds the option strike price. For
collar strategies, the premiums on the purchased option and sold option net to
zero. The Company receives an amount equal to the difference by which the
average market price of jet fuel during the period exceeds the call option's
strike price and pays an amount equal to the difference by which the average
market price during the period is below the put option's strike price of jet
fuel. At December 31, 1998, the outstanding notional amount of forward swap
hedge contracts for jet fuel totaled 16.0 million gallons.
The Company utilizes a combination of forward gold sales contracts and currency
contracts to fix in Australian dollars the selling price on a certain portion of
its forecasted gold sales from the Stawell gold mine. At December 31, 1998,
41,000 ounces of gold, representing approximately 20% of the Company's share of
Stawell's proven and probable reserves, were sold forward under forward gold
contracts. The Company also sells call options on gold periodically and receives
a premium which enhances the selling price of unhedged gold sales, the fair
value of which is recognized immediately into earnings as the contracts do not
qualify for special hedge accounting under SFAS No. 133.
The Company utilizes forward swap contracts for diesel fuel to fix a portion of
the Company's forecasted diesel fuel costs at specific price levels. The Company
also periodically utilizes option strategies to hedge a portion of the remaining
risk associated with changes in the price of diesel fuel. The option contracts,
which involve purchasing call options, are designed to provide protection
against sharp increases in the price of diesel fuel. For purchased options, the
Company pays a premium up front and receives an amount over the contract period
equal to the difference by which the average market price of diesel fuel during
the period exceeds the option strike price. At December 31, 1998, the
outstanding notional amount of forward purchase contracts for diesel fuel
totaled approximately 3.2 million gallons.
No material amounts related to hedge ineffectiveness were recognized in earnings
during the period for the jet fuel and diesel fuel swap contracts, the jet fuel
collar strategy option contracts and forward gold contracts. Changes in fair
value related to the difference between changes in the spot and forward gold
contract rates were not material.
Changes in the fair value of the commodity contracts designated and qualifying
as cash flow hedges of forecasted commodity purchases and sales are reported in
accumulated other comprehensive income. For jet fuel and diesel fuel, the gains
and losses are reclassified into earnings, as a component of costs of sales, in
the same period as the commodity purchased affects earnings. For gold contracts,
the gains and losses are reclassified into earnings, as a component of revenue,
in the same period as the gold sale affects earnings. During the year ending
December 31, 1999, losses of approximately $2,100 (pre-tax) and $150 (pre-tax)
related to jet fuel purchase contracts and diesel fuel purchase contracts,
respectively, are expected to be reclassified from accumulated other
comprehensive income into cost of sales. During the year ending December 31,
1999, losses of approximately $100 (pre-tax) related to gold sales contracts are
expected to be reclassified from accumulated other comprehensive income into
revenue.
As of December 31, 1998, the maximum length of time over which the Company is
hedging its exposure to the variability in future cash flows associated with jet
fuel and diesel fuel purchases is six months. As of December 31, 1998, the
maximum length of time over which the Company is hedging its exposure to the
variability in future cash flows associated with gold sales is two years.
All other commodity contracts outstanding during the period were immaterial to
the results of the Company.
Hedges of Net Investments in Foreign Operations
The Company holds investments in a number of foreign subsidiaries, and the net
assets of these subsidiaries are exposed to foreign exchange rate volatility.
The Company uses non-derivative financial instruments to hedge this exposure.
Currency exposure related to the net assets of the Brink's subsidiary in France
are managed in part through a foreign currency denominated debt agreement
(seller financing) entered into as part of the acquisition by the Company. Gains
and losses in the net investment in subsidiaries are offset by losses and gains
in the debt obligations.
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For the year ended December 31, 1998, approximately $2,800 of net losses related
to the foreign currency denominated debt agreements were included in the
cumulative foreign currency translation adjustment in the balance sheet.
All other hedges of net investments in foreign operations during the period were
immaterial to the results of the Company.
3. ACCOUNTS RECEIVABLE--TRADE
For each of the years in the three-year period ended December 31, 1998, the
Company maintained agreements with financial institutions whereby it had the
right to sell certain coal receivables to those institutions. Certain agreements
contained provisions for sales with recourse. In 1998 and 1997, total coal
receivables of $38,373 and $23,844, respectively, were sold under such
agreements. As of December 31, 1998 and 1997, receivables sold which remained to
be collected totaled $29,734 and $23,844, respectively.
As a result of changes in certain recourse provisions during 1998, as of
December 31, 1998, these transactions were accounted for as transfers of the
receivables, resulting in the uncollected receivables balances remaining on the
balance sheet with a corresponding short-term obligation of $29,734 recognized.
The fair value of this short-term obligation approximates the carrying value.
During 1997, these transactions were accounted for as sales of receivables,
resulting in the removal of the receivables from the balance sheet.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consists of the following:
As of December 31
1998 1997
- ------------------------------------------------------------------
Bituminous coal lands $ 100,968 107,212
Land, other than coal lands 44,923 37,908
Buildings 221,640 159,726
Machinery and equipment 1,055,602 862,454
- ------------------------------------------------------------------
Total $1,423,133 1,167,300
==================================================================
The estimated useful lives for property, plant and equipment are as follows:
Years
- -----------------------------------------------------------------
Buildings 10 to 40
Machinery and equipment 2 to 30
=================================================================
Depreciation and depletion of property, plant and equipment aggregated $130,932
in 1998, $106,584 in 1997 and $92,805 in 1996.
Capitalized mine development costs totaled $7,093 in 1998, $9,756 in 1997 and
$8,144 in 1996.
Changes in capitalized subscriber installation costs for home security systems
included in machinery and equipment were as follows:
Years Ended December 31
1998 1997 1996
- --------------------------------------------------------------------------------
Capitalized subscriber installation costs--
beginning of year $172,792 134,850 105,336
Capitalized cost of security system
installations 77,460 64,993 57,194
Depreciation, including amounts recognized
to fully depreciate capitalized costs for
installations disconnected during the
year (32,657) (27,051) (27,680)
- --------------------------------------------------------------------------------
Capitalized subscriber installation costs--
end of year $217,595 172,792 134,850
================================================================================
Based on demonstrated retention of customers, beginning in the first quarter of
1997, BHS prospectively adjusted its annual depreciation rate from 10 to 15
years for capitalized subscribers' installation costs. This change more
accurately matches depreciation expense with monthly recurring revenue generated
from customers. This change in accounting estimate reduced depreciation expense
for capitalized installation costs in 1997 for the Brink's Group and the BHS
segment by $8,915. The effect of this change increased net income of the Brink's
Group in 1997 by $5,794 ($0.15 per share of Brink's Stock).
New subscribers were approximately 113,500 in 1998, 105,600 in 1997 and 98,500
in 1996.
As of January 1, 1992, BHS elected to capitalize categories of costs not
previously capitalized for home security system installations. This change in
accounting principle is preferable because it more accurately reflects
subscriber installation costs. The additional costs not previously capitalized
consisted of costs for installation labor and related benefits for supervisory,
installation scheduling, equipment testing and other support personnel (in the
amount of $2,949 in 1998, $2,600 in 1997 and $2,517 in 1996) and costs incurred
for maintaining facilities and vehicles dedicated to the installation process
(in the amount of $3,165 in 1998, $2,343 in 1997 and $2,022 in 1996). The effect
of this change in accounting principle was to increase operating
71
profit of the Brink's Group in 1998, 1997 and 1996 by $6,114, $4,943 and $4,539,
respectively, and net income of the Brink's Group in 1998, 1997 and 1996 by
$3,852, $3,213 and $2,723, respectively, or by $0.10 per basic and diluted share
in 1998, $0.08 per basic and diluted common share in 1997 and $0.07 per basic
and diluted common share in 1996. Prior to January 1, 1992, the records needed
to identify such costs were not available. Thus, it was impossible to accurately
calculate the effect on retained earnings as of January 1, 1992. However, the
Company believes the effect on retained earnings as of January 1, 1992, was
immaterial.
Because capitalized subscriber installation costs for prior periods were not
adjusted for the change in accounting principle, installation costs for
subscribers in those years will continue to be depreciated based on the lesser
amounts capitalized in prior periods. Consequently, depreciation of capitalized
subscriber installation costs in the current year and until such capitalized
costs prior to January 1, 1992 are fully depreciated will be less than if such
prior periods' capitalized costs had been adjusted for the change in accounting.
However, the Company believes the effect on net income in 1998, 1997 and 1996
was immaterial.
5. INTANGIBLES
Intangibles consist entirely of the excess of cost over fair value of net assets
of businesses acquired and are net of accumulated amortization of $118,656 and
$106,174 at December 31, 1998 and 1997, respectively. The estimated useful life
of intangibles is generally forty years. Amortization of intangibles aggregated
$12,119 in 1998, $10,518 in 1997 and $10,560 in 1996.
In the first quarter of 1998, the Company purchased 62% (representing nearly all
the remaining shares) of its Brink's affiliate in France ("Brink's S.A.") for
payments aggregating US $39,000 over three years and the assumption of estimated
liabilities of US $125,700. Based on an estimate of fair values of assets
acquired and liabilities assumed, the acquisition of the remaining 62% interest
resulted in goodwill of approximately $35,000. See Note 11.
In 1997, the Company acquired the remaining 35% interest in Brink's subsidiary
in the Netherlands ("Nedlloyd") for approximately $2,000 with additional
contingent payments aggregating $1,100 based on certain performance criteria of
Brink's-Nedlloyd, of which approximately $800 was paid in 1998 with the
remainder to be paid in 1999. The original 65% acquisition in the Nedlloyd
partnership resulted in goodwill of approximately $13,200. The acquisition of
the remaining 35% interest resulted in a credit to goodwill of approximately
$6,600 as the remaining interest was purchased for less than the book value.
6. INCOME TAXES
The provision (credit) for income taxes consists of the following:
US
Federal Foreign State Total
- --------------------------------------------------------------
1998:
Current $11,194 20,625 3,500 35,319
Deferred 2,088 (8,278) 25 (6,165)
- --------------------------------------------------------------
Total $13,282 12,347 3,525 29,154
==============================================================
1997:
Current $18,707 14,390 4,349 37,446
Deferred 13,506 (3,172) 277 10,611
- --------------------------------------------------------------
Total $32,213 11,218 4,626 48,057
==============================================================
1996:
Current $ 7,721 11,201 4,300 23,222
Deferred 22,878 (3,731) 173 19,320
- --------------------------------------------------------------
Total $30,599 7,470 4,473 42,542
==============================================================
The significant components of the deferred tax expense (benefit) were as
follows:
Years Ended December 31
1998 1997 1996
- ---------------------------------------------------------------------------
Deferred tax expense, exclusive
of the components listed below $ 7,681 6,950 19,171
Net operating loss carryforwards (6,651) (4,345) (5,065)
Alternative minimum tax credits (7,626) 7,613 4,200
Change in the valuation allowance for
deferred tax assets 431 393 1,014
- ---------------------------------------------------------------------------
Total $(6,165) 10,611 19,320
===========================================================================
72
The tax benefit for compensation expense related to the exercise of certain
employee stock options for tax purposes in excess of compensation expense for
financial reporting purposes is recognized as an adjustment to shareholders'
equity.
The components of the net deferred tax asset as of December 31, 1998 and
December 31, 1997 were as follows:
1998 1997
- ----------------------------------------------------------------
DEFERRED TAX ASSETS:
Accounts receivable $ 13,314 6,448
Postretirement benefits other than pensions 104,322 101,617
Workers' compensation and other claims 43,033 50,139
Other liabilities and reserves 76,909 81,084
Miscellaneous 8,288 16,062
Net operating loss carryforwards 27,664 21,013
Alternative minimum tax credits 33,153 23,631
Valuation allowance (10,284) (9,853)
- ----------------------------------------------------------------
Total deferred tax assets 296,399 290,141
- ----------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Property, plant and equipment 66,307 59,787
Pension assets 44,077 49,431
Other assets 14,690 15,538
Investments in foreign affiliates 11,382 9,331
Miscellaneous 64,575 74,943
- ----------------------------------------------------------------
Total deferred tax liabilities 201,031 209,030
- ----------------------------------------------------------------
Net deferred tax asset $ 95,368 81,111
================================================================
The valuation allowance relates to deferred tax assets in certain foreign and
state jurisdictions.
Based on the Company's historical and expected future taxable earnings,
management believes it is more likely than not that the Company will realize the
benefit of the existing deferred tax asset at December 31, 1998.
The following table accounts for the difference between the actual tax provision
and the amounts obtained by applying the statutory US federal income tax rate of
35% in 1998, 1997 and 1996 to the income before income taxes.
Years Ended December 31
1998 1997 1996
- -------------------------------------------------------------------------
Income before income taxes:
United States $47,976 110,070 101,463
Foreign 47,234 48,185 45,233
- -------------------------------------------------------------------------
Total $95,210 158,255 146,696
=========================================================================
Tax provision computed at statutory
rate $33,323 55,389 51,344
Increases (reductions) in taxes due to:
Percentage depletion (6,869) (7,407) (7,644)
State income taxes (net of federal
tax benefit) 1,861 2,614 1,894
Goodwill amortization 2,369 2,289 2,404
Difference between total taxes on
foreign income and the US
federal statutory rate (1,084) (4,642) (6,384)
Change in the valuation allowance for
deferred tax assets 431 393 1,014
Miscellaneous (877) (579) (86)
- -------------------------------------------------------------------------
Actual tax provision $ 9,154 48,057 42,542
=========================================================================
It is the policy of the Company to accrue deferred income taxes on temporary
differences related to the financial statement carrying amounts and tax bases of
investments in foreign subsidiaries and affiliates which are expected to reverse
in the foreseeable future. As of December 31, 1998 and December 31, 1997 the
unrecognized deferred tax liability for temporary differences of approximately
$61,040 and $29,986, respectively, related to investments in foreign
subsidiaries and affiliates that are essentially permanent in nature and not
expected to reverse in the foreseeable future was approximately $21,364 and
$10,495, respectively.
73
The Company and its domestic subsidiaries file a consolidated US federal income
tax return.
As of December 31, 1998, the Company had $33,153 of alternative minimum tax
credits available to offset future US federal income taxes and, under current
tax law, the carryforward period for such credits is unlimited.
The tax benefit of net operating loss carryforwards as of December 31, 1998 was
$27,664 and related to various state and foreign taxing jurisdictions. The
expiration periods primarily range from 5 to 15 years.
7. LONG-TERM DEBT
Total long-term debt consists of the following:
As of December 31
1998 1997
- --------------------------------------------------------------------------
Senior obligations:
US dollar term loan due 2001 (year-end
rate 5.68% in 1998 and 6.24% in 1997) $100,000 100,000
Revolving credit notes due 2001 (year-end
rate 5.83% in 1998 and 5.92% in 1997) 91,600 25,900
5% amortizing French franc seller's
note maturing in 2001 19,646 --
Venezuelan bolivar term loan due 2000
(year-end rate 50.40% in 1998
and 26.40% in 1997) 18,723 31,072
French franc term notes maturing in 2002
(year-end average rate 5.38% in 1998) 12,523 --
Netherlands guilder term loan due 2000 (year-
end rate 3.95% in 1998 and 4.29% in 1997) 11,166 10,700
Singapore dollar term loan due 2003
(year-end rate 3.31% in 1998) 10,897 --
All other 27,755 18,859
- --------------------------------------------------------------------------
292,310 186,531
- --------------------------------------------------------------------------
Obligations under capital leases (average rate
9.14% in 1998 and 10.43% in 1997) 30,998 5,281
- --------------------------------------------------------------------------
Total long-term debt, less current maturities 323,308 191,812
Current maturities of long-term debt:
Senior obligations 27,123 8,617
Obligations under capital leases 9,386 2,682
- --------------------------------------------------------------------------
Total current maturities of long-term debt 36,509 11,299
- --------------------------------------------------------------------------
Total long-term debt including current maturities $359,817 203,111
==========================================================================
For the four years through December 31, 2003, minimum repayments of long-term
debt outstanding are as follows:
2000 $ 60,943
2001 219,324
2002 12,159
2003 15,134
The Company has a $350,000 credit agreement with a syndicate of banks (the
"Facility"). The Facility includes a $100,000 term loan and permits additional
borrowings, repayments and reborrowings of up to an aggregate of $250,000. The
maturity date of both the term loan and the revolving credit portion of the
Facility is May 2001. Interest on borrowings under the Facility is payable at
rates based on prime, certificate of deposit, Eurodollar or money market rates
plus applicable margin. A term loan of $100,000 was outstanding at December 31,
1998 and 1997. Additional borrowings of $91,600 and $25,900 were outstanding at
December 31, 1998 and 1997, respectively under the revolving credit portion of
the Facility. The Company pays commitment fees (.125% per annum at December 31,
1998) on the unused portions of the Facility.
Under the terms of the Facility, the Company has agreed to maintain at least
$400,000 of Consolidated Net Worth, as defined, and can incur additional
indebtedness of approximately $398,000 at December 31, 1998.
The Company has three interest rate swap agreements that effectively convert a
portion of the interest on its $100,000 variable rate term loan to fixed rates
(See Note 2).
In 1998, the Company purchased 62% (representing substantially all the remaining
shares) of its Brink's affiliate in France. As part of the acquisition, the
Company assumed a note to the seller denominated in French francs of
approximately the equivalent of US $27,500 payable in annual installments plus
interest through 2001. In addition, the Company assumed previously existing debt
approximating US $49,000, which included borrowings of US $19,000 and capital
leases of US $30,000. At December 31, 1998, the long-term portion of the note to
the seller was the equivalent of US $19,646 and bore a fixed interest rate of
5.00%. The equivalent of US $ 9,823 is payable in 1999 and included in current
maturities. At December 31, 1998, the long-term portion of borrowings and
capital leases of Brink's affiliate in France were the equivalent of US $ 12,523
and US $23,709, respectively. The equivalent of US $4,349 and US $5,805,
respectively, are payable in 1999 and included in current maturities. At
December 31, 1998, the average interest rates for the borrowings and capital
leases were 5.38% and 4.90%, respectively.
74
In 1998, the Company entered into a credit agreement with a major US bank
related to BAX Global's Singapore operating unit to finance warehouse
facilities. The credit agreement has a revolving period extending through April
1999 at which time amounts outstanding will be converted to a term loan maturing
in April 2003. The amount available for borrowing will not exceed the lesser of
Singapore $32,500 and US $50,000. At December 31, 1998, the amount outstanding
in Singapore dollars was the equivalent of US $10,897 which bore an interest
rate of 3.31% and was included in the noncurrent portion of long-term debt.
Interest on the borrowings under the agreement is payable at rates based on
Alternate Base Rate, LIBOR (London Inter-Bank Offered Rate) US$ Rate, SIBOR
(Singapore Inter-Bank Offered Rate) US$ Rate and Adjusted SIBOR-S$ plus the
applicable margin.
In 1997, the Company entered into a borrowing agreement in connection with its
acquisition of Cleton. In April 1998, the Company refinanced the 1997
acquisition borrowings with a term credit facility denominated in Netherlands
guilders and maturing in April 2000. The amount outstanding under the facility
at December 31, 1998, was the Netherlands guilders equivalent of US $11,166 and
bore an interest rate of 3.95%. Interest on borrowings under the agreement is
payable at rates based on AIBOR (Amsterdam Inter-Bank Offered Rate) plus the
applicable margin.
In 1997, the Company entered into a borrowing arrangement with a syndicate of
local Venezuelan banks in connection with the acquisition of Custodia y Traslado
de Valores, C.A. ("Custravalca"). The borrowings consisted of a long-term loan
denominated in Venezuelan bolivars equivalent to US $40,000 and a $10,000
short-term loan denominated in US dollars which was repaid during 1997. The
long-term loan bears interest based on the Venezuelan prime rate and is payable
in installments through the year 2000. At December 31, 1998, the long-term
portion of the Venezuelan debt was the equivalent of US $18,723. The equivalent
of US $8,470 is payable in 1999 and is included in current maturities of
long-term debt.
Various international subsidiaries maintain lines of credit and overdraft
facilities aggregating approximately $111,000 with a number of banks on either a
secured or unsecured basis. At December 31, 1998, $58,549 was outstanding under
such agreements and was included in short-term borrowings. Average interest
rates on the lines of credit and overdraft facilities at December 31, 1998
approximated 12.0%. Commitment fees paid on the lines of credit and overdraft
facilities are not significant.
At December 31, 1998, the Company had outstanding unsecured letters of credit
totaling $86,301 primarily supporting the Company's obligations under its
various self-insurance programs and aircraft lease obligations.
The Company maintains agreements with financial institutions under which it
sells certain coal receivables to those institutions. Some of these agreements
contained provisions for sales with recourse. As of December 31, 1998, these
transactions were accounted for as secured financings, resulting in the
recognition of short-term obligations of $29,734. The fair value of these
short-term obligations approximated the carrying value and bore an interest rate
of 5.72%.
8. NET INCOME PER SHARE
The following is a reconciliation between the calculations of basic and diluted
net income per share:
Years Ended December 31
BRINK'S GROUP 1998 1997 1996
- -----------------------------------------------------------------
NUMERATOR:
Net income - Basic and diluted net
income per share numerator $79,104 73,622 59,695
DENOMINATOR:
Basic weighted average common
shares outstanding 38,713 38,273 38,200
Effect of dilutive securities:
Stock options 442 518 482
- ----------------------------------------------------------------
Diluted weighted average common
shares outstanding 39,155 38,791 38,682
================================================================
Options to purchase 356, 19 and 23 shares of Brink's Stock, at prices between
$37.06 and $39.56 per share, $37.06 and $38.16 per share, and $28.63 and $29.50
per share, were outstanding during 1998, 1997 and 1996, respectively, but were
not included in the computation of diluted net income per share because the
options' exercise price was greater than the average market price of the common
shares and, therefore, the effect would be antidilutive.
Years Ended December 31
BAX GROUP 1998 1997 1996
- ----------------------------------------------------------------------------
NUMERATOR:
Net income (loss)-Basic and diluted net
income (loss) per share numerator $(13,091) 32,348 33,801
DENOMINATOR:
Basic weighted average common
shares outstanding 19,333 19,448 19,223
Effect of dilutive securities:
Stock options -- 545 458
- -----------------------------------------------------------------------------
Diluted weighted average common
shares outstanding 19,333 19,993 19,681
==============================================================================
75
Options to purchase 2,588 shares of BAX Stock, at prices between $7.85 and
$27.91 per share, were outstanding during 1998 but were not included in the
computation of diluted net loss per share because the effect of all options
would be antidilutive.
Options to purchase 7 and 30 shares of BAX Stock at $27.91 per share and at
prices between $20.19 and $21.13 per share, were outstanding in 1997 and 1996,
respectively, but were not included in the computation of diluted net income per
share because the options' exercise price was greater than the average market
price of the common shares and, therefore, the effect would be antidilutive.
Years Ended December 31
MINERALS GROUP 1998 1997 1996
- ------------------------------------------------------------------------------
NUMERATOR:
Net income $ 43 4,228 10,658
Convertible Preferred Stock
- ------------------------------------------------------------------------------
dividends, net (3,524) (3,481) (1,675)
- ------------------------------------------------------------------------------
Basic net income (loss) per share numerator (3,481) 747 8,983
Effect of dilutive securities:
Convertible Preferred Stock
dividends, net -- -- 1,675
- ------------------------------------------------------------------------------
Diluted net income (loss) per
share numerator $(3,481) 747 10,658
DENOMINATOR:
Basic weighted average common
shares outstanding 8,324 8,076 7,897
Effect of dilutive securities:
Convertible Preferred Stock -- -- 1,945
Stock options -- 26 42
- ------------------------------------------------------------------------------
Diluted weighted average common
shares outstanding 8,324 8,102 9,884
===============================================================================
Options to purchase 789 shares of Minerals Stock, at prices between $2.50 and
$25.74 per share, were outstanding during 1998 but were not included in the
computation of diluted net loss per share because the effect of all options
would be antidilutive.
Options to purchase 446 and 300 shares of Minerals Stock, at prices between
$12.18 and $25.74 and $13.43 and $25.74 per share, were outstanding during 1997
and 1996, respectively, but were not included in the computation of diluted net
income per share because the options' exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive.
The conversion of preferred stock to 1,764 and 1,785 shares of Minerals Stock
has been excluded in the computation of diluted net income (loss) per share in
1998 and 1997, respectively, because the effect of the assumed conversion would
be antidilutive.
9. STOCK OPTIONS
The Company has various stock-based compensation plans as described below.
STOCK OPTION PLANS
The Company grants options under its 1988 Stock Option Plan (the "1988 Plan") to
executives and key employees and under its Non-Employee Directors' Stock Option
Plan (the "Non-Employee Plan") to outside directors, to purchase common stock at
a price not less than 100% of quoted market value at the date of grant. The 1988
Plan options can be granted with a maximum term of ten years and can vest within
six months from the date of grant. The majority of grants made in 1998, 1997 and
1996 have a maximum term of six years and vest 100% at the end of the third
year. The Non-Employee Plan options can be granted with a maximum term of ten
years and can vest within six months from the date of grant. The majority of
grants made in 1998, 1997 and 1996 have a maximum term of six years and vest
ratably over the first three years. The total number of shares underlying
options authorized for grant, but not yet granted, under the 1988 Plan is 2,228,
2,517 and 789 in Brink's Stock, BAX Stock and Minerals Stock, respectively.
Under the Non-Employee Plan, the total number of shares underlying options
authorized for grant, but not yet granted, in Brink's Stock, BAX Stock and
Minerals Stock is 144, 100 and 47, respectively.
The Company's 1979 Stock Option Plan (the "1979 Plan") and the 1985 Stock Option
Plan (the "1985 Plan") terminated in 1985 and 1988, respectively.
As part of the Brink's Stock Proposal (described in the Company's Proxy
Statement dated December 31, 1995 resulting in the modification of the capital
structure of the Company to include an additional class of common stock), the
1988 and Non-Employee Plans were amended to permit option grants to be made to
optionees with respect to Brink's Stock or BAX Stock, in addition to Minerals
Stock. At the time of the approval of the Brink's Stock Proposal, a total of
2,383 shares of Services Stock were subject to options outstanding under the
1988 Plan, the Non-Employee Plan, the 1979 Plan and the 1985 Plan. Pursuant to
antidilution provisions in the option agreements covering such
76
plans, the Company converted these options into options for shares of Brink's
Stock or BAX Stock, or both, depending on the employment status and
responsibilities of the particular optionee. In the case of optionees having
Company-wide responsibilities, each outstanding Services Stock option was
converted into options for both Brink's Stock and BAX Stock. In the case of
other optionees, each outstanding option was converted into a new option only
for Brink's Stock or BAX Stock, as the case may be. As a result, upon approval
of the Brink's Stock Proposal, 1,750 shares of Brink's Stock and 1,989 shares of
BAX Stock were subject to options.
The table below summarizes the activity in all plans from December 31, 1995 to
December 31, 1998.
Aggregate
Exercise
Shares Price
- -----------------------------------------------------------------
SERVICES GROUP COMMON STOCK OPTIONS:
Outstanding at December 31, 1995 2,399 $ 50,528
Exercised (15) (206)
Converted in Brink's Stock Proposal (2,384) (50,322)
- -----------------------------------------------------------------
Outstanding at December 31, 1996 -- $ --
=================================================================
BRINK'S GROUP COMMON STOCK OPTIONS
Outstanding at December 31, 1995 -- $ --
Converted in Brink's Stock Proposal 1,750 26,865
Granted 369 9,527
Exercised (166) (1,800)
Forfeited or expired (37) (734)
- -----------------------------------------------------------------
Outstanding at December 31, 1996 1,916 $ 33,858
Granted 428 13,618
Exercised (190) (2,296)
Forfeited or expired (104) (2,497)
- -----------------------------------------------------------------
Outstanding at December 31, 1997 2,050 $ 42,683
Granted 365 13,748
Exercised (439) (6,230)
Forfeited or expired (35) (985)
- -----------------------------------------------------------------
Outstanding at December 31, 1998 1,941 $ 49,216
=================================================================
BAX GROUP COMMON STOCK OPTIONS:
Outstanding at December 31, 1995 -- $ --
Converted in Brink's Stock Proposal 1,989 23,474
Granted 440 7,972
Exercised (318) (2,905)
Forfeited or expired (64) (952)
- -----------------------------------------------------------------
Outstanding at December 31, 1996 2,047 $ 27,589
Granted 526 12,693
Exercised (246) (2,389)
Forfeited or expired (71) (1,223)
- -----------------------------------------------------------------
Outstanding at December 31, 1997 2,256 $ 36,670
Granted 334 4,683
Exercised (236) (1,868)
Forfeited or expired (166) (3,393)
- -----------------------------------------------------------------
Outstanding at December 31, 1998 2,188 $ 36,092
=================================================================
MINERALS GROUP COMMON STOCK OPTIONS:
Outstanding at December 31, 1995 598 $ 9,359
Granted 4 47
Exercised (3) (45)
Forfeited or expired (16) (229)
- -----------------------------------------------------------------
Outstanding at December 31, 1996 583 $ 9,132
Granted 138 1,746
Exercised (2) (22)
Forfeited or expired (67) (921)
- -----------------------------------------------------------------
Outstanding at December 31, 1997 652 $ 9,935
Granted 138 721
Exercised 0 0
Forfeited or expired (128) (1,668)
- -----------------------------------------------------------------
Outstanding at December 31, 1998 662 $ 8,988
=================================================================
Options exercisable at the end of 1998, 1997 and 1996, on an equivalent basis,
for Brink's Stock were 922, 905 and 1,099, respectively; for BAX Stock were
1,081, 827 and 1,034, respectively; and for Minerals Stock were 491, 253 and
292, respectively.
The following table summarizes information about stock options outstanding as of
December 31, 1998.
---------------------------- ----------------
Stock Options Stock Options
Outstanding Exercisable
- ------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Life Exercise Exercise
Exercise Prices Shares (Years) Price Shares Price
- ------------------------------------------------------------------
BRINK'S STOCK
$ 9.82 to 13.79 189 1.66 $10.68 189 $10.68
16.77 to 21.34 711 2.06 19.38 711 19.38
25.57 to 31.94 686 4.06 28.94 19 29.74
37.06 to 39.56 355 5.68 38.22 3 39.56
- ------------------------------------------------------------------
Total 1,941 922
- ------------------------------------------------------------------
BAX STOCK
$ 7.85 to 11.70 374 2.79 $ 9.28 266 $ 9.58
13.41 to 16.32 851 2.74 14.78 728 14.72
17.06 to 21.13 534 3.46 18.07 83 17.29
23.88 to 27.91 429 4.38 24.25 4 27.91
- ------------------------------------------------------------------
Total 2,188 1,081
- ------------------------------------------------------------------
MINERALS STOCK
$ 2.50 to 6.53 101 5.76 $ 4.23 31 $ 4.20
9.50 to 11.88 243 2.91 10.24 216 10.32
12.69 to 16.63 148 3.66 13.29 74 13.88
18.63 to 25.74 170 1.71 24.18 170 24.18
- ------------------------------------------------------------------
Total 662 491
==================================================================
EMPLOYEE STOCK PURCHASE PLAN
77
Under the 1994 Employee Stock Purchase Plan (the "Plan"), the Company is
authorized to issue up to 750 shares of Brink's Stock, 375 shares of BAX Stock
and 250 shares of Minerals Stock, to its employees who have six months of
service and who complete minimum annual work requirements. Under the terms of
the Plan, employees may elect each six-month period (beginning January 1 and
July 1), to have up to 10 percent of their annual earnings withheld to purchase
the Company's stock. Employees may purchase shares of any or all of the three
classes of Company common stocks. The purchase price of the stock is 85% of the
lower of its beginning-of-the-period or end-of-the-period market price. Under
the Plan, the Company sold 41, 43 and 45 shares of Brink's Stock; 48, 29 and 32
shares of BAX Stock; and 118, 46 and 30 shares of Minerals Stock, to employees
during 1998, 1997 and 1996, respectively. The share amounts for Brink's Stock
and BAX Stock include the restatement for the Services Stock conversion under
the Brink's Stock Proposal.
In January 1999, the maximum number of Minerals shares had been issued pursuant
to the Plan. At a meeting held subsequent to year end, the Company's Board of
Directors adopted an amendment to increase the maximum number of shares of
common stock which may be issued pursuant to the Plan to 750 shares of Brink's
Stock, 375 shares of BAX Stock and 650 shares of Minerals Stock. This amendment
to the Plan is subject to shareholder approval on May 7, 1999.
ACCOUNTING FOR PLANS
The Company has adopted the disclosure - only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", but applies APB Opinion No. 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized in the accompanying financial statements.
Had compensation costs for the Company's plans been determined based on the fair
value of awards at the grant dates, consistent with SFAS No. 123, the Company's
net income and net income per share would approximate the pro forma amounts
indicated below:
1998 1997 1996
- -----------------------------------------------------------------
NET INCOME (LOSS) ATTRIBUTED TO
COMMON SHARES
The Company
As Reported $ 62,532 106,717 102,479
Pro Forma 57,550 101,746 99,628
Brink's Group
As Reported 79,104 73,622 59,695
Pro Forma 76,251 71,240 58,389
BAX Group
As Reported (13,091) 32,348 33,801
Pro Forma (15,017) 30,170 32,528
Minerals Group
As Reported (3,481) 747 8,983
Pro Forma (3,684) 336 8,711
- -----------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE
Brink's Group
Basic, As Reported $ 2.04 1.92 1.56
Basic, Pro Forma 1.97 1.86 1.53
Diluted, As Reported 2.02 1.90 1.54
Diluted, Pro Forma 1.95 1.84 1.51
BAX Group
Basic, As Reported (0.68) 1.66 1.76
Basic, Pro Forma (0.78) 1.55 1.69
Diluted, As Reported (0.68) 1.62 1.72
Diluted, Pro Forma (0.78) 1.51 1.65
Minerals Group
Basic, As Reported (0.42) 0.09 1.14
Basic, Pro Forma (0.44) 0.04 1.10
Diluted, As Reported (0.42) 0.09 1.08
Diluted, Pro Forma (0.44) 0.04 1.05
=================================================================
Note: The pro forma disclosures shown may not be representative of the effects
on reported net income in future years.
The fair value of each stock option grant used to compute pro forma net income
and net income per share disclosures is estimated at the time of the grant
using the Black-Scholes option-pricing model.
The weighted-average assumptions used in the model are as follows:
1998 1997 1996
- ------------------------------------------------------------------
Expected dividend yield:
Brink's Stock 0.3% 0.3% 0.4%
BAX Stock 1.7% 1.0% 1.2%
Minerals Stock 1.8% 5.4% 4.8%
Expected volatility:
Brink's Stock 31% 32% 30%
BAX Stock 50% 29% 32%
Minerals Stock 45% 43% 37%
Risk-Free interest rate:
Brink's Stock 5.3% 6.2% 6.3%
BAX Stock 5.3% 6.2% 6.3%
Minerals Stock 5.3% 6.2% 6.1%
Expected term (in years):
Brink's Stock 5.1 4.9 4.7
BAX Stock 5.1 4.8 4.7
Minerals Stock 5.1 4.2 3.7
=================================================================
Using these assumptions in the Black-Scholes model, the weighted-average fair
value of options granted during 1998, 1997 and 1996 for the Brink's Stock is
$4,593, $5,155 and $3,341, for the BAX Stock is $1,928, $4,182 and $2,679 and
for the Minerals Stock is $250, $487 and $10, respectively.
Under SFAS No. 123, compensation cost is also recognized for the fair value of
employee stock purchase rights. Because the Company settles its employee stock
purchase rights under the
78
Plan at the end of each six-month offering period, the fair value of these
purchase rights was calculated using actual market settlement data. The
weighted-average fair value of the stock purchase rights granted in 1998, 1997
and 1996 was $205, $455 and $365 for Brink's Stock, $93, $222 and $138 for BAX
Stock, and $58, $247 and $95 for Minerals Stock, respectively.
10. CAPITAL STOCK
Effective May 4, 1998, the designation of Pittston Burlington Group Common Stock
and the name of Pittston Burlington Group were changed to Pittston BAX Group
Common Stock and Pittston BAX Group, respectively. All rights and privileges of
the holders of such Stock are otherwise unaffected by such changes.
The Company, at any time, has the right to exchange each outstanding share of
BAX Stock for shares of Brink's Stock (or, if no Brink's Stock is then
outstanding, Minerals Stock) having a fair market value equal to 115% of the
fair market value of one share of BAX Stock. In addition, upon the disposition
of all or substantially all of the properties and assets of the BAX Group to any
person (with certain exceptions), the Company is required to exchange each
outstanding share of BAX Stock for shares of Brink's Stock (or, if no Brink's
Stock is then outstanding, Minerals Stock) having a fair market value equal to
115% of the fair market value of one share of BAX Stock.
The Company, at any time, has the right to exchange each outstanding share of
Minerals Stock, for shares of Brink's Stock (or, if no Brink's Stock is then
outstanding, BAX Stock) having a fair market value equal to 115% of the fair
market value of one share of Minerals Stock. In addition, upon the disposition
of all or substantially all of the properties and assets of the Minerals Group
to any person (with certain exceptions), the Company is required to exchange
each outstanding share of Minerals Stock for shares of Brink's Stock (or, if no
Brink's Stock is then outstanding, BAX Stock) having a fair market value equal
to 115% of the fair market value of one share of Minerals Stock. If any shares
of the Company's Preferred Stock are converted after an exchange of Minerals
Stock for Brink's Stock (or BAX Stock), the holder of such Preferred Stock
would, upon conversion, receive shares of Brink's Stock (or BAX Stock) in lieu
of shares of Minerals Stock otherwise issuable upon such conversion.
Holders of Brink's Stock at all times have one vote per share. Holders of BAX
Stock and Minerals Stock have .739 and .244 vote per share, respectively,
subject to adjustment on January 1, 2000, and on January 1 every two years
thereafter in such a manner so that each class' share of the aggregate voting
power at such time will be equal to that class' share of the aggregate market
capitalization of the Company's common stock at such time. Accordingly, on each
adjustment date, each share of BAX Stock and Minerals Stock may have more than,
less than or continue to have the number of votes per share as they have.
Holders of Brink's Stock, BAX Stock and Minerals Stock vote together as a single
voting group on all matters as to which all common shareholders are entitled to
vote. In addition, as prescribed by Virginia law, certain amendments to the
Articles of Incorporation affecting, among other things, the designation,
rights, preferences or limitations of one class of common stock, or certain
mergers or statutory share exchanges, must be approved by the holders of such
class of common stock, voting as a group, and, in certain circumstances, may
also have to be approved by the holders of the other classes of common stock,
voting as separate voting groups.
In the event of a dissolution, liquidation or winding up of the Company, the
holders of Brink's Stock, BAX Stock and Minerals Stock, effective January 1,
1999, share on a per share basis an aggregate amount equal to 54%, 28% and 18%,
respectively, of the funds, if any, remaining for distribution to the common
shareholders. In the case of Minerals Stock, such percentage has been set, using
a nominal number of shares of Minerals Stock of 4,203 (the "Nominal Shares") in
excess of the actual number of shares of Minerals Stock outstanding. These
liquidation percentages are subject to adjustment in proportion to the relative
change in the total number of shares of Brink's Stock, BAX Stock and Minerals
Stock, as the case may be, then outstanding to the total number of shares of all
other classes of common stock then outstanding (which totals, in the case of
Minerals Stock, shall include the Nominal Shares).
The Company has authority to issue up to 2,000 shares of preferred stock, par
value $10 per share. In January 1994, the Company issued $80,500 or 161 shares
of its $31.25 Series C Cumulative Convertible Preferred Stock (the "Convertible
Preferred Stock"). The Convertible Preferred Stock pays an annual cumulative
dividend of $31.25 per share payable quarterly, in cash, in arrears, out of all
funds of the Company legally available; therefore, when, as and if declared by
the Board, and bears a liquidation preference of $500 per share, plus an amount
equal to accrued and unpaid dividends thereon. Each share of the Convertible
Preferred Stock is convertible at the option of the holder at any time, unless
previously redeemed or, under certain circumstances, called for redemption, into
shares of Minerals Stock at a conversion price of $32.175 per share of Minerals
Stock, subject to adjustment in certain circumstances. The Company may at its
option, redeem the Convertible Preferred Stock, in whole or in part, for cash at
a price of $515.625 per share, effective February 1, 1999, and thereafter at
prices declining ratably annually on each February 1 to an amount equal to
$500.00 per share on and after February 1, 2004, plus in each case an amount
equal to accrued and unpaid dividends on the date of redemption. Except under
certain circumstances or as prescribed by Virginia law, shares of the
Convertible Preferred Stock are nonvoting. Other than the Convertible Preferred
Stock, no shares of preferred stock are presently issued or outstanding.
79
In November 1998, under the Company's common share repurchase program, the
Company's Board of Directors (the "Board") authorized the purchase, from time to
time, of up to 1,000 shares of Brink's Stock, up to 1,500 shares of BAX Stock
and up to 1,000 shares of Minerals Stock, not to exceed an aggregate purchase
cost of $25,000. Such shares are to be purchased from time to time in the open
market or in private transactions, as conditions warrant. In May 1997, the Board
authorized additional authority which allows for the purchase, from time to
time, of the Convertible Preferred Stock, not to exceed an aggregate purchase
cost of $25,000.
Under the share repurchase program, the Company purchased shares in the periods
presented as follows:
Years Ended December 31
(In thousands) 1998 1997
- -----------------------------------------------------------------
Brink's Stock:
Shares 150 166
Cost $ 5,617 4,349
BAX Stock:
Shares 1,047 332
Cost $12,674 7,405
Convertible Preferred Stock:
Shares 0.4 1.5
Cost $ 146 617
Excess carrying amount (a) $ 23 108
=================================================================
(a) The excess of the carrying amount of the Convertible Preferred Stock over
the cash paid to holders for repurchases made during the years is deducted from
preferred dividends in the Company's Statement of Operations.
As of December 31, 1998, the Company had remaining authority to purchase over
time 1,000 shares of Pittston Minerals Group Common Stock; 1,000 shares of
Pittston Brink's Common Stock; 1,465 shares of Pittston BAX Group Common Stock
and an additional $24,236 of its Convertible Preferred Stock. The remaining
aggregate purchase cost limitation for all common stock was $24,698 at December
31, 1998. The authority to acquire shares remains in effect in 1999.
In 1998, 1997 and 1996, dividends paid on the Convertible Preferred Stock
amounted to $3,547, $3,589, and $3,795, respectively. During 1998 and 1997, the
Board declared and the Company paid dividends of $3,874 and $3,755 on Brink's
Stock, $4,642 and $4,805 on BAX Stock, and $1,969 and $5,176 on Minerals Stock,
respectively.
Under a Shareholder Rights Plan adopted by the Board in 1987 and as amended,
rights to purchase a new Series A Participating Cumulative Preferred Stock (the
"Series A Preferred Stock") of the Company were distributed as a dividend at the
rate of one right for each share of the Company's common stock. Each Brink's
Right, if and when it becomes exercisable, will entitle the holder to purchase
one-thousandth of a share of Series A Preferred Stock at a purchase price of
$26.67, subject to adjustment. Each BAX Right, if and when it becomes
exercisable, will entitle the holder to purchase one-thousandth of a share of
Series D Preferred Stock at a purchase price of $26.67, subject to adjustment.
Each Minerals Right, if and when it becomes exercisable, will entitle the holder
to purchase one-thousandth of a share of Series B Participating Cumulative
Preferred Stock (the "Series B Preferred Stock") at a purchase price of $40,
subject to adjustment.
Each fractional share of Series A Preferred Stock and Series B Preferred Stock
will be entitled to participate in dividends and to vote on an equivalent basis
with one whole share of Brink's Stock, BAX Stock and Minerals Stock,
respectively. Each right will not be exercisable until after a third party
acquires 15% or more of the total voting rights of all outstanding Brink's
Stock, BAX Stock and Minerals Stock or on such date as may be designated by the
Board after commencement of a tender offer or exchange offer by a third party
for 15% or more of the total voting rights of all outstanding Brink's Stock, BAX
Stock and Minerals Stock.
If after the rights become exercisable, the Company is acquired in a merger or
other business combination, each right will entitle the holder to purchase, for
the purchase price, common stock of the surviving or acquiring company having a
market value of twice the purchase price. In the event a third party acquires
15% or more of all outstanding Brink's Stock, BAX Stock and Minerals Stock, the
rights will entitle each holder to purchase, at the purchase price, that number
of fractional shares of Series A Preferred Stock, Series D Preferred Stock and
Series B Preferred Stock equivalent to the number of shares of common stock
which at the time of the triggering event would have a market value of twice the
purchase price. As an alternative to the purchase described in the previous
sentence, the Board may elect to exchange the rights for other forms of
consideration, including that number of shares of common stock obtained by
dividing the purchase price by the market price of the common stock at the time
of the exchange or for cash equal to the purchase price. The rights may be
redeemed by the Company at a price of $0.01 per right and expire on September
25, 2007.
The Company's Articles of Incorporation limits dividends on Minerals Stock to
the lesser of (i) all funds of the Company legally available therefore (as
prescribed by Virginia law) and (ii) the Available Minerals Dividend Amount (as
defined in the Articles of Incorporation). The Available Minerals Dividend
Amount may be reduced by activity that reduces shareholder's equity or the fair
value of net assets of the Minerals Group. Such activity includes net losses by
the Minerals Group, dividends paid on the Minerals Stock and the Convertible
Preferred Stock, repurchases of Minerals Stock and the Convertible Preferred
Stock, and foreign currency translation losses. At December 31,
80
1998, the Available Minerals Dividend Amount was at least $8,123. See Note 22.
In December 1992, the Company formed The Pittston Company Employee Benefits
Trust (the "Trust") to hold shares of its common stock (initially 4,000 shares)
to fund obligations under certain employee benefit programs not including stock
option plans. The trust first began funding obligations under the Company's
various stock option plans in September 1995. In November 1998, the Company sold
for a promissory note of the Trust, 1,500 new shares of BAX Stock and 800 new
shares of Minerals Stock at a price equal to the closing value of each stock,
respectively, on the date prior to issuance. As of December 31, 1998, 2,076
shares of Brink's Stock (2,734 in 1997), 1,858 shares of BAX Stock (868 in 1997)
and 766 shares of Minerals Stock (232 in 1997) remained in the Trust, valued at
market. These shares will be voted by the trustee in the same proportion as
those voted by the Company's employees participating in the Company's Savings
Investment Plan. The fair market value of the shares is included in each issue
of common stock and capital in excess of par.
11. ACQUISITIONS
All acquisitions discussed below have been accounted for as purchases.
Accordingly, the costs of the acquisitions were allocated to the assets acquired
and liabilities assumed based on their respective fair values. The results of
operations of the businesses acquired have been included in the accompanying
consolidated financial statements of the Company from their respective dates of
acquisition. The excess of the purchase price over fair value of the net assets
acquired is included in goodwill. Some purchase agreements provide for
contingent payments based on specified criteria. Any such future payments are
capitalized as goodwill when paid. Unless otherwise indicated, goodwill is
amortized on a straight-line basis over forty years.
In the first quarter of 1998, the Company purchased 62% (representing
substantially all of the remaining shares) of its Brink's affiliate in France
("Brink's S.A.") for payments aggregating US $39,000, including interest, over
three years. In addition, estimated liabilities assumed approximated US
$125,700. The acquisition was funded primarily through a note to the seller (See
Note 7.) The fair value of assets acquired approximated US $127,000 (including
US $9,200 in cash). Based on an estimate of fair values of assets acquired and
liabilities assumed, the acquisition resulted in goodwill of approximately US
$35,000. Brink's S.A. had annual revenues of approximately US $220,000 in 1997.
If this acquisition had occurred on January 1, 1997, the pro forma impact on the
Company's net income or net income per share would not have been material.
On April 30, 1998, the Company acquired the privately held Air Transport
International LLC ("ATI") for approximately $29,000. The acquisition was funded
through the revolving credit portion of the Company's bank credit agreement.
Based on a preliminary evaluation of the fair value of assets acquired and
liabilities assumed, which is subject to additional review, the acquisition
resulted in goodwill of approximately $1,600. If this acquisition had occurred
on either January 1, 1997 or 1998, the pro forma impact on the Company's
revenues, net income or net income per share in 1997 and 1998 would not have
been material.
In addition, during 1998, the Company acquired additional interests in its
Brink's subsidiaries in Bolivia and Colombia and purchased the remaining 50%
interest in its Brink's affiliate in Germany. A 10% interest in its Brink's Hong
Kong subsidiary was sold in 1998 for an amount approximating book value. If
these acquisitions and disposition had occurred on either January 1, 1997 or
1998, the pro forma impact on the Company's revenues, net income or net income
per share in 1997 and 1998 would not have been material.
In the first quarter of 1997, the Company increased its ownership position in
its Brink's Venezuelan affiliate, Custodia y Traslado de Valores, C.A.
("Custralvalca"), from 15% to 61%. The acquisition was financed through a
syndicate of local Venezuelan banks (See Note 7.) In conjunction with this
transaction, Brink's acquired an additional 31% interest in Brink's Peru S.A.
bringing its total interest to 36%. If these acquisitions had occurred on
January 1, 1996, the pro forma impact on the Company's revenues, net income or
net income per share in 1996 would not have been material.
In June 1997, the Company acquired Cleton & Co. ("Cleton"), a leading logistics
provider in the Netherlands, for the equivalent of US $10,700 in cash and the
assumption of the equivalent of US $10,000 of debt. Based on an estimate of fair
values of assets acquired and liabilities assumed, the acquisition resulted in
initial goodwill of approximately US $3,800. Additional contingent payments of
approximately US $1,500 and US $1,600 were made in 1997 and 1998, respectively,
increasing total goodwill associated with this acquisition to US $6,900. An
additional contingent payment may be made in 1999, based on certain performance
requirements of Cleton.
In addition, throughout 1997, the Company acquired additional interests in
several subsidiaries and affiliates. Remaining interests were acquired in the
Netherlands, Hong Kong, Taiwan and South Africa while ownership positions were
increased in Bolivia and Chile. If these acquisitions had occurred on January 1,
1996 or 1997, the pro forma impact on the Company's revenues, net income or net
income per share in 1996 and 1997 would not have been material.
There were no material acquisitions in 1996.
81
12. COAL JOINT VENTURE
The Company, through a wholly owned indirect subsidiary, has a partnership
agreement, Dominion Terminal Associates ("DTA"), with three other coal companies
to operate coal port facilities in Newport News, Virginia, in the Port of
Hampton Roads (the "Facilities"). The Facilities, in which the Company's wholly
owned indirect subsidiary has a 32.5% interest, have an annual throughput
capacity of 22 million tons, with a ground storage capacity of approximately 2
million tons. The Facilities are financed by a series of coal terminal revenue
refunding bonds issued by the Peninsula Ports Authority of Virginia (the
"Authority"), a political subdivision of the Commonwealth of Virginia, in the
aggregate principal amount of $132,800, of which $43,160 are attributable to the
Company. These bonds bear a fixed interest rate of 7.375%. The Authority owns
the Facilities and leases them to DTA for the life of the bonds, which mature on
June 1, 2020. DTA may purchase the Facilities for one dollar at the end of the
lease term. The obligations of the partners are several, and not joint.
Under loan agreements with the Authority, DTA is obligated to make payments
sufficient to provide for the timely payment of the principal and interest on
the bonds. Under a throughput and handling agreement, the Company has agreed to
make payments to DTA that in the aggregate will provide DTA with sufficient
funds to make the payments due under the loan agreements and to pay the
Company's share of the operating costs of the Facilities. The Company has also
unconditionally guaranteed the payment of the principal of and premium, if any,
and the interest on the bonds. Payments for operating costs aggregated $3,168 in
1998, $4,691 in 1997 and $5,208 in 1996. The Company has the right to use 32.5%
of the throughput and storage capacity of the Facilities subject to user rights
of third parties which pay the Company a fee. The Company pays throughput and
storage charges based on actual usage at per ton rates determined by DTA.
13. LEASES
The Company and its subsidiaries lease aircraft, facilities, vehicles, computers
and coal mining and other equipment under long-term operating and capital leases
with varying terms. Most of the operating leases contain renewal and/or purchase
options.
As of December 31, 1998, aggregate future minimum lease payments under
noncancellable operating leases were as follows:
Equipment
Aircraft Facilities & Other Total
- ------------------------------------------------------------------
1999 $ 39,888 53,278 33,680 126,846
2000 32,731 42,005 26,610 101,346
2001 28,645 34,083 17,357 80,085
2002 12,698 29,826 11,541 54,065
2003 3,720 24,772 6,231 34,723
2004 -- 22,037 1,077 23,114
2005 -- 18,471 908 19,379
2006 -- 16,977 817 17,794
Later Years -- 97,409 1,780 99,189
- ------------------------------------------------------------------
Total $117,682 338,858 100,001 556,541
==================================================================
These amounts are net of aggregate future minimum noncancellable sublease
rentals of $3,064.
Net rent expense amounted to $126,300 in 1998, $109,976 in 1997 and $111,562 in
1996.
The Company incurred capital lease obligations of $13,307 in 1998, $4,874 in
1997 and $3,185 in 1996. In addition, in conjunction with the 1998 acquisition
of the Brink's affiliate in France (see Note 11), capital lease obligations of
US $30,000 were assumed.
Minimum future lease payments under capital leases as of December 31, 1998, for
each of the next five years and in the aggregate are:
- -----------------------------------------------------------------
1999 $12,271
2000 9,943
2001 6,792
2002 3,931
2003 3,015
Subsequent to 2003 8,987
- ----------------------------------------------------------------
Total minimum lease payments 44,939
Less: Executory costs 38
- ----------------------------------------------------------------
Net minimum lease payments 44,901
Less: Amount representing interest 4,517
- ----------------------------------------------------------------
Present value of net minimum lease payment $40,384
================================================================
82
Interest rates on capitalized leases vary from 5.7% to 23.5% and are imputed
based on the lower of the Company's incremental borrowing rate at the inception
of each lease or the lessor's implicit rate of return.
There were no non-cancellable subleases and no contingent rental payments in
1998 or 1997.
The Company is in the process of negotiating certain facilities leasing
agreements with terms of ten years. Aggregate future minimum lease payments
under these agreements are expected to approximate $43,000.
At December 31, 1998, the Company had contractual commitments with a third party
to provide aircraft usage and services to the Company. The fixed and
determinable portion of the obligations under these agreements aggregate
approximately $153,240 and expire from 1999 to 2003 as follows:
1999 $42,720
2000 42,720
2001 37,680
2002 27,240
2003 2,880
Spending under these agreements, including any variable component, was $60,846
in 1998, $39,204 in 1997 and $18,740 in 1996.
14. EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries maintain several noncontributory defined
benefit pension plans covering substantially all nonunion employees who meet
certain minimum requirements, in addition to sponsoring certain other defined
benefit plans. Benefits under most of the plans are based on salary (including
commissions, bonuses, overtime and premium pay) and years of service. The
Company's policy is to fund the actuarially determined amounts necessary to
provide assets sufficient to meet the benefits to be paid to plan participants
in accordance with applicable regulations.
The net pension expense for 1998, 1997 and 1996 for all plans is as follows:
Years Ended December 31
1998 1997 1996
- ----------------------------------------------------------------
Service cost-benefits earned
during year $ 19,932 15,283 14,753
Interest cost on projected benefit
obligation 30,181 26,978 23,719
Return on assets-expected (45,115) (40,894) (37,648)
Other amortization, net 2,156 564 1,741
- ----------------------------------------------------------------
Net pension expense $ 7,154 1,931 2,565
================================================================
The assumptions used in determining the net pension expense for the Company's
primary pension plan were as follows:
1998 1997 1996
- ----------------------------------------------------------------------
Interest cost on projected benefit
obligation 7.5% 8.0% 7.5%
Expected long-term rate of return on assets 10.0% 10.0% 10.0%
Rate of increase in compensation levels 4.0% 4.0% 4.0%
======================================================================
Reconciliations of the projected benefit obligation, plan assets, funded status
and prepaid pension expense at December 31, 1998 and 1997 are as follows:
Years Ended December 31
1998 1997
- ------------------------------------------------------------------------------------------------
Projected benefit obligation at beginning of year $402,252 339,260
Service cost-benefits earned during the year 19,932 15,283
Interest cost on projected benefit obligation 30,181 26,978
Plan participants' contributions 1,070 800
Acquisitions 8,128 --
Benefits paid (18,485) (16,619)
Actuarial loss 54,520 40,734
Foreign currency exchange rate changes 468 (4,184)
- ------------------------------------------------------------------------------------------------
Projected benefit obligation at end of year $498,066 402,252
- ------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $511,245 450,430
Return on assets - actual 69,803 81,195
Acquisitions 1,440 --
Plan participants' contributions 1,070 800
Employer contributions 1,744 1,075
Benefits paid (18,485) (16,619)
Foreign currency exchange rate changes (645) (5,636)
- ------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $566,172 511,245
- ------------------------------------------------------------------------------------------------
Funded status $ 68,106 108,993
Unamortized initial net asset (756) (1,450)
Unrecognized experience loss 38,061 10,548
Unrecognized prior service cost 1,383 1,209
- ------------------------------------------------------------------------------------------------
Net pension assets 106,794 119,300
- ------------------------------------------------------------------------------------------------
Current pension liabilities 6,078 3,838
Noncurrent pension liabilities 6,628 --
- ------------------------------------------------------------------------------------------------
Deferred pension assets per balance sheet $119,500 123,138
================================================================================================
83
For the valuation of the Company's primary pension obligations and the
calculation of the funded status, the discount rate was 7.0% in 1998 and 7.5% in
1997. The expected long-term rate of return on assets was 10% in both years. The
rate of increase in compensation levels used was 4% in 1998 and 1997.
The unrecognized initial net asset at January 1, 1986 (January 1, 1989 for
certain foreign pension plans), the date of adoption of Statement of Financial
Accounting Standards No. 87, has been amortized over the estimated remaining
average service life of the employees.
Under the 1990 collective bargaining agreement with the United Mine Workers of
America ("UMWA"), the Company agreed to make payments at specified contribution
rates for the benefit of the UMWA employees. The trustees of the UMWA pension
fund contested the agreement and brought action against the Company. While the
case was in litigation, Minerals Group's benefit payments were made into an
escrow account for the benefit of union employees. During 1996, the case was
settled and the escrow funds were released (Note 18). As a result of the
settlement, the Coal subsidiaries agreed to continue their participation in the
UMWA 1974 pension plan at defined contribution rates. Under this plan, expense
recognized in 1998, 1997 and 1996 was $574, $1,128 and $1,204, respectively.
Expense recognized in 1998, 1997 and 1996 for other multi-employer plans was
$765, $640 and $843, respectively.
The Company and its subsidiaries also provide certain postretirement health care
and life insurance benefits for eligible active and retired employees in the
United States and Canada.
For the years 1998, 1997 and 1996, the components of periodic expense for these
postretirement benefits were as follows:
Years Ended December 31
1998 1997 1996
- ----------------------------------------------------------------------------------
Service cost--benefits earned during the year $ 1,167 1,610 2,069
Interest cost on accumulated postretirement
benefit obligation 22,412 22,112 20,213
Amortization of losses 2,929 1,389 1,128
- ----------------------------------------------------------------------------------
Total expense $26,508 25,111 23,410
===================================================================================
The actuarially determined and recorded liabilities for the following
postretirement benefits have not been funded.
Reconciliations of the accumulated postretirement benefit obligation, funded
status and accrued postretirement benefit cost at December 31, 1998 and 1997
are as follows:
Years Ended December 31
1998 1997
- ---------------------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation at beginning of year $ 313,921 287,522
Service cost-benefits earned during the year 1,167 1,610
Interest cost on accumulated postretirement
benefit obligation 22,412 22,112
Benefits paid (18,463) (18,927)
Actuarial loss 17,855 21,614
Foreign currency exchange rate changes (61) (10)
- ---------------------------------------------------------------------------------------------
Total accumulated postretirement benefit
obligation at end of year $ 336,831 313,921
- ---------------------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation at end of year-retirees $ 282,687 255,190
Accumulated postretirement benefit
obligation at end of year-active participants 54,144 58,731
- ---------------------------------------------------------------------------------------------
Total accumulated postretirement benefits
obligation at end of year $ 336,831 313,921
- ---------------------------------------------------------------------------------------------
Funded status $(336,831) (313,921)
Unrecognized experience loss 78,173 63,247
- ---------------------------------------------------------------------------------------------
Accrued postretirement benefit cost at
end of year $(258,658) (250,674)
=============================================================================================
The accumulated postretirement benefit obligation was determined using the unit
credit method and an assumed discount rate of 7.0% in 1998 and 7.5% in 1997. The
assumed health care cost trend rate used in 1998 was 6.62% for pre-65 retirees,
grading down to 5% in the year 2001. For post-65 retirees, the assumed trend
rate in 1998 was 5.95%, grading down to 5% in the year 2001. The assumed
Medicare cost trend rate used in 1998 was 5.73%, grading down to 5% in the year
2001.
A percentage point increase each year in the assumed health care cost trend rate
used would have resulted in an increase of approximately $3,300 in the aggregate
service and interest components of expense for the year 1998, and an increase of
approximately $37,900 in the accumulated postretirement benefit obligation at
December 31, 1998.
84
A percentage point decrease each year in the assumed health care cost trend rate
would have resulted in a decrease of approximately $3,100 in the aggregate
service and interest components of expense for the year 1998 and a decrease of
approximately $35,700 in the accumulated postretirement benefit obligation at
December 31, 1998.
The Company also sponsors a Savings-Investment Plan to assist eligible employees
in providing for retirement or other future financial needs. Employee
contributions are matched at rates of 50% to 125% up to 5% of compensation
(subject to certain limitations imposed by the Internal Revenue Code of 1986, as
amended). Contribution expense under the plan aggregated $7,745 in 1998, $7,362
in 1997 and $6,875 in 1996.
The Company sponsors other defined contribution benefit plans based on hours
worked, tons produced or other measurable factors. Contributions under all of
these plans aggregated $986 in 1998, $206 in 1997 and $643 in 1996.
In October 1992, the Coal Industry Retiree Health Benefit Act of 1992 (the
"Health Benefit Act") was enacted as part of the Energy Policy Act of 1992. The
Health Benefit Act established rules for the payment of future health care
benefits for thousands of retired union mine workers and their dependents. The
Health Benefit Act established a trust fund to which the Company and certain of
its subsidiaries (the "Pittston Companies") are jointly and severally liable for
annual premiums for assigned beneficiaries, together with a pro rata share or
certain beneficiaries who never worked for such employers ("unassigned
beneficiaries"), in amounts determined on the basis set forth in the Health
Benefit Act. For 1998, 1997 and 1996, these amounts, on a pretax basis, were
approximately $9,600, $9,300 and $10,400, respectively. The Company currently
estimates that the annual liability under the Health Benefit Act for the
Pittston Companies' assigned beneficiaries will continue at approximately
$10,000 per year for the next several years and should begin to decline
thereafter as the number of such assigned beneficiaries decreases. As a result
of legal developments in 1998 involving the Health Benefit Act, the Company
experienced an increase in its assessments under the Health Benefit Act for the
twelve month period beginning October 1, 1998, approximating $1,700, $1,100 of
which relates to retroactive assessments for years prior to 1998. This increase
consists of charges for death benefits which are provided for by the Health
Benefit Act, but which previously have been covered by other funding sources. As
with all the Company's Health Benefit Act assessments, this amount is to be paid
in 12 equal monthly installments over the plan year beginning October 1, 1998.
The Company is unable to determine at this time whether any other additional
amounts will apply in future plan years.
Based on the number of beneficiaries actually assigned by the Social Security
Administration, the Company estimates the aggregate pretax liability relating to
the Pittston Companies' remaining beneficiaries at approximately $216,000, which
when discounted at 7.0% provides a present value estimate of approximately
$99,000. The Company accounts for its obligations under the Health Benefit Act
as a participant in a multi-employer plan and the annual cost is recognized on a
pay-as-you-go basis.
In addition, under the Health Benefit Act, the Pittston Companies are jointly
and severally liable for certain post-retirement health benefits for thousands
of retired union mine workers and their dependents. Substantially all of the
Company's accumulated postretirement benefit obligation as of December 31, 1998
for retirees of $282,687 relates to such retired workers and their
beneficiaries.
The ultimate obligation that will be incurred by the Company could be
significantly affected by, among other things, increased medical costs,
decreased number of beneficiaries, governmental funding arrangements and such
federal health benefit legislation of general application as may be enacted. In
addition, the Health Benefit Act requires the Pittston Companies to fund, pro
rata according to the total number of assigned beneficiaries, a portion of the
health benefits for unassigned beneficiaries. At this time, the funding for such
health benefits is being provided from another source and for this and other
reasons the Pittston Companies' ultimate obligation for the unassigned
beneficiaries cannot be determined.
15. RESTRUCTURING AND OTHER (CREDITS) CHARGES, INCLUDING LITIGATION ACCRUAL
Refer to Note 18 for a discussion of the benefit of the reversal of a litigation
accrual related to the Evergreen case of $35,650 in 1996.
At December 31, 1998, Pittston Coal had a liability of $25,213 for various
restructuring costs which was recorded as restructuring and other charges in the
Statement of Operations in years prior to 1995. Although coal production has
ceased at the mines remaining in the accrual, Pittston Coal will incur
reclamation and environmental costs for several years to bring these properties
into compliance with federal and state environmental laws. However, management
believes that the reserve, as adjusted at December 31, 1998 should be sufficient
to provide for these future costs. Management does not anticipate material
additional future charges to operating earnings for these facilities, although
continual cash funding will be required over the next several years.
85
The initiation, in 1996, of a state tax credit for coal produced in Virginia,
along with favorable labor negotiations and improved metallurgical market
conditions for medium volatile coal, led management to continue operating an
underground mine and a related coal preparation and loading facility previously
included in the restructuring reserve. As a result of these decisions, Pittston
Coal reversed $11,649 of the reserve in 1996. The 1996 reversal included $4,778
related to estimated mine and plant closures, primarily reclamation, and $6,871
in employee severance and other benefit costs. As a result of favorable workers'
compensation claim development, Pittston Coal reversed $1,479 and $3,104 in 1998
and 1997, respectively.
The following table analyzes the changes in liabilities during the last three
years for facility closure costs recorded as restructuring and other charges:
Employee
Mine Termination,
Leased and Medical
Machinery Plant and
and Closure Severance
(In thousands) Equipment Costs Costs Total
========================================================================
Balance December 31, 1995 $1,218 28,983 36,077 66,278
Reversals -- 4,778 6,871 11,649
Payments (a) 842 5,499 3,921 10,262
Other reductions (b) -- 6,267 -- 6,267
- ------------------------------------------------------------------------
Balance December 31, 1996 376 12,439 25,285 38,100
Reversals -- -- 3,104 3,104
Payments (c) 376 1,764 2,010 4,150
Other -- 468 (468) --
- ------------------------------------------------------------------------
Balance December 31, 1997 $ -- 11,143 19,703 30,846
Reversals -- -- 1,479 1,479
Payments (d) -- 1,238 1,917 3,155
Other reductions (b) -- 999 -- 999
- ------------------------------------------------------------------------
Balance December 31, 1998 $ -- 8,906 16,307 25,213
========================================================================
(a) Of the total payments made in 1996, $5,119 was for liabilities recorded in
years prior to 1993, $485 was for liabilities recorded in 1993 and $4,658 was
for liabilities recorded in 1994.
(b) These amounts represent the assumption of liabilities by third parties as a
result of sales transactions.
(c) Of the total payments made in 1997, $3,053 was for liabilities recorded in
years prior to 1993, $125 was for liabilities recorded in 1993 and $972 was for
liabilities recorded in 1994.
(d) Of the total payments made in 1998, $2,491 was for liabilities recorded in
years prior to 1993, $10 was for payments recorded in 1993 and $654 was for
liabilities recorded in 1994.
During the next twelve months, expected cash funding of these charges will be
approximately $3,000 to $5,000. The liability for mine and plant closure costs
is expected to be satisfied over the next eight years, of which approximately
34% is expected to be paid over the next two years. The liability for workers'
compensation is estimated to be 42% settled over the next four years with the
balance paid during the following five to eight years.
16. OTHER OPERATING INCOME
Other operating income generally includes royalty income, gains on sales of
assets and foreign exchange transactions gains and losses. Other operating
income also includes the Company's share of net income of unconsolidated
affiliated companies carried on the equity method of $1,602, $539 and $2,103 for
1998, 1997 and 1996, respectively.
Summarized financial information presented includes the accounts of the
following equity affiliates (a):
Ownership
At December 31, 1998
- --------------------------------------------------------------------
Servicio Pan Americano De Protection, S.A. (Mexico) 20%
Brink's Panama, S.A. 49%
Brink's Peru, S.A. 36%
Security Services (Brink's Jordan), W.L.L. 45%
Brink's-Allied Limited (Ireland) 50%
Brink's Arya India Private Limited 40%
Brink's Pakistan (Pvt.) Limited 49%
Brink's (Thailand) Ltd. 40%
BAX International Forwarding Ltd. (Taiwan) 33.3%
Mining Project Investors Limited (Australia) (b) 51.5%
MPI Gold (USA) (b) 51.5%
===================================================================
1998 1997 1996
- --------------------------------------------------------------------
Revenues $415,216 638,624 728,815
Gross profit 56,471 97,976 78,900
Net income (loss) (204) 4,427 11,160
Current assets 82,771 131,160 209,089
Noncurrent assets 113,167 215,531 217,445
Current liabilities 76,990 153,247 192,679
Noncurrent liabilities 43,138 84,170 117,952
Net equity 75,810 109,274 115,903
====================================================================
(a) Also includes amounts related to equity affiliates who were either sold
prior to December 31, 1998, became consolidated affiliates through increased
ownership prior to December 31, 1998 (most notably Brink's S.A. France and
Brink's Schenker Germany) or converted to cost investment. All amounts for such
affiliates are presented pro-rata, where applicable.
(b) 45% ownership on a fully diluted basis.
Undistributed earnings of such companies included in consolidated retained
earnings approximated $14,600 at December 31, 1998.
86
17. SEGMENT INFORMATION
The Company implemented SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the financial statements for the year
ended December 31, 1998. SFAS No. 131 superseded SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise". SFAS No. 131 requires
publicly-held companies to report financial and descriptive information about
operating segments in financial statements issued to shareholders for interim
and annual periods.
The SFAS also requires additional disclosures with respect to products and
services, geographic areas of operation and major customers. The adoption of
SFAS No. 131 did not affect results of operations or financial position, but did
affect the disclosure of segment information.
The Company has five reportable segments: Brink's, BHS, BAX Global, Pittston
Coal and Mineral Ventures. Management has determined these reportable segments
based on how resources are allocated and how operational decisions are made. The
Company's reportable segments are business units that offer different types of
products and services. Management evaluates performance and allocates resources
based on operating profit or loss excluding corporate allocations.
Brink's is a worldwide security transportation and services company and BHS
installs and monitors residential security systems in the United States and
Canada. BAX Global provides global expedited freight transportation services.
BAX Global also provides global non-expedited freight services including supply
chain management services. Pittston Coal produces and markets low sulphur steam
coal used for the generation of electricity. It also mines and markets high
quality metallurgical coal for steel production worldwide. Mineral Ventures is a
gold production and exploration company which has interests in a gold mine in
Australia and explores for gold and base metals in Australia and Nevada.
Operating segment information is as follows:
Years Ended December 31
1998 1997 1996
- -------------------------------------------------------------------
NET SALES AND OPERATING
REVENUES:
BAX Global $1,776,980 1,662,338 1,484,869
Brink's 1,247,681 921,851 754,011
BHS 203,586 179,583 155,802
Pittston Coal 503,302 612,907 677,393
Mineral Ventures 15,333 17,719 19,120
- -------------------------------------------------------------------
Consolidated net sales and
operating revenues (a) $3,746,882 3,394,398 3,091,195
===================================================================
OPERATING PROFIT (LOSS)
BAX Global (b) $ (628) 63,264 64,604
Brink's (c) 98,420 81,591 56,823
BHS (d) 53,032 52,844 44,872
Pittston Coal (e) 3,207 12,217 20,034
Mineral Ventures (f) (1,031) (2,070) 1,619
- -------------------------------------------------------------------
Segment operating profit 153,000 207,846 187,952
General Corporate expense (27,857) (19,718) (21,445)
- -------------------------------------------------------------------
Consolidated operating
profit $ 125,143 188,128 166,507
===================================================================
(a) Includes US revenues of $2,256,955, $2,246,575 and $2,128,573 in 1998, 1997
and 1996, respectively.
(b) The 1998 amounts include additional expenses of approximately $36,000
related to the termination or rescoping of certain information technology
projects (approximately $16,000), increased provisions on existing accounts
receivable (approximately $13,000) and approximately $7,000 primarily related to
severance expenses associated with BAX Global's redesign of its organizational
structure. 1997 amounts include $12,500 of consulting expenses related to the
redesign of BAX Global's business processes and information systems
architecture.
(c) Includes equity in net income of unconsolidated affiliates of $1,235 in
1998, $1,471 in 1997 and $1,941 in 1996.
(d) As of January 1, 1992, BHS elected to capitalize categories of costs not
previously capitalized for home security installations to more accurately
reflect subscriber installation costs. The effect of this change in accounting
principle was to increase operating profit by $6,114 in 1998, $4,943 in 1997 and
$4,539 in 1996 (Note 4). BHS changed its annual depreciation rate in 1997
resulting in a reduction of depreciation expense for capitalized installation
costs of $8,915 (Note 4).
(e) Operating profit includes a benefit from restructuring and other credits,
including litigation accrual aggregating $1,479, $3,104 and $47,299 in 1998,
1997 and 1996, respectively (Note 15). Operating profit in 1996 also includes a
charge of $29,948 related to the adoption of FAS 121 (Note 1).
(f) Includes equity in net income (loss) of unconsolidated affiliates of $438 in
1998, ($671) in 1997 and $302 in 1996.
87
Years Ended December 31
1998 1997 1996
- ---------------------------------------------------------------------
CAPITAL EXPENDITURES:
BAX Global $ 76,115 31,307 59,470
Brink's 74,716 49,132 34,072
BHS 81,420 70,927 61,522
Pittston Coal 21,221 22,285 18,881
Mineral Ventures 4,282 4,544 3,714
General Corporate 583 613 5,950
- ---------------------------------------------------------------------
Consolidated capital expenditures $ 258,337 178,808 183,609
=====================================================================
DEPRECIATION, DEPLETION AND
AMORTIZATION:
BAX Global $ 35,287 29,667 23,254
Brink's 45,742 30,758 24,293
BHS 36,630 30,344 30,115
Pittston Coal 33,275 35,351 34,632
Mineral Ventures 2,735 1,968 1,856
General Corporate 684 663 468
- ---------------------------------------------------------------------
Consolidated depreciation,
depletion and amortization $ 154,353 128,751 114,618
=====================================================================
As of December 31
1998 1997 1996
- ---------------------------------------------------------------------
ASSETS:
BAX Global $ 765,185 690,144 617,784
Brink's (a) 679,718 441,138 340,922
BHS 230,357 193,027 149,992
Pittston Coal 528,468 549,576 594,772
Mineral Ventures (b) 18,733 20,432 22,826
- ---------------------------------------------------------------------
Identifiable assets $2,222,461 1,894,317 1,726,296
General Corporate (primarily
cash, investments, advances
and deferred pension assets) 108,676 101,627 106,307
- ---------------------------------------------------------------------
Consolidated assets (c) $2,331,137 1,995,944 1,832,603
=====================================================================
(a) Includes investments in unconsolidated equity affiliates of $14,994, $27,241
and $26,497 in 1998, 1997 and 1996, respectively.
(b) Includes investments in unconsolidated equity affiliates of $5,034, $6,349
and $8,408 in 1998, 1997 and 1996, respectively.
(c) Includes long-lived assets (property, plant and equipment) located in the US
of $509,349, $476,991 and $433,955 as of December 31, 1998, 1997 and 1996,
respectively.
18. LITIGATION
In April 1990, the Company entered into a settlement agreement to resolve
certain environmental claims against the Company arising from hydrocarbon
contamination at a petroleum terminal facility ("Tankport") in Jersey City, New
Jersey, which operations were sold in 1983. Under the settlement agreement, the
Company is obligated to pay 80% of the remediation costs. Based on data
available to the Company and its environmental consultants, the Company
estimates its portion of the cleanup costs on an undiscounted basis using
existing technologies to be between $6,600 and $11,200 and to be incurred over a
period of up to five years. Management is unable to determine that any amount
within that range is a better estimate due to a variety of uncertainties, which
include the extent of the contamination at the site, the permitted technologies
for remediation and the regulatory standards by which the clean-up will be
conducted. The estimate of costs and the timing of payments could change as a
result of changes to the remediation plan required, changes in the technology
available to treat the site, unforeseen circumstances existing at the site and
additional cost inflation.
The Company commenced insurance coverage litigation in 1990, in the United
States District Court for the District of New Jersey, seeking a declaratory
judgment that all amounts payable by the Company pursuant to the Tankport
obligation were reimbursable under comprehensive general liability and pollution
liability policies maintained by the Company. In August 1995, the District Court
ruled on various Motions for Summary Judgement. In its decision, the Court found
favorably for the Company on several matters relating to the comprehensive
general liability policies but concluded that the pollution liability policies
did not contain pollution coverage for the types of claims associated with the
Tankport site. On appeal, the Third Circuit reversed the District Court and held
that the insurers could not deny coverage for the reasons stated by the District
Court, and the case was remanded to the District Court for trial. In the latter
part of 1998, the Company concluded a settlement with its comprehensive general
liability insurer and has settlements with three other groups of insurers. If
these settlements are consummated, only one group of insurers will be remaining
in this coverage action. In the event the parties are unable to settle the
dispute with this group of insurers, the case is scheduled to be tried in June
1999. Management and its outside legal counsel continue to believe that recovery
of a substantial portion of the cleanup costs will
88
ultimately be probable of realization. Accordingly, based on estimates of
potential liability, probable realization of insurance recoveries, related
developments of New Jersey law, and the Third Circuit's decision, it is the
Company's belief that the ultimate amount that it would be liable for related to
the remediation of the Tankport site will not significantly adversely impact the
Company's results of operations or financial position.
In 1988, the trustees of the 1950 Benefit Trust Fund and the 1974 Pension
Benefit Trust Funds (the "Trust Funds") established under collective bargaining
agreements with the UMWA brought an action (the "Evergreen Case") against the
Company and a number of its coal subsidiaries claiming that the defendants are
obligated to contribute to such Trust Funds in accordance with the provisions of
the 1988 and subsequent National Bituminous Coal Wage Agreements, to which
neither the Company nor any of its subsidiaries is a signatory. In 1993, the
Company recognized in its consolidated financial statements the potential
liability that might have resulted from an ultimate adverse judgment in the
Evergreen Case (Notes 14 and 15).
In late March 1996, a settlement was reached in the Evergreen Case. Under the
terms of the settlement, the coal subsidiaries which had been signatories to
earlier National Bituminous Coal Wage Agreements agreed to make various lump sum
payments in full satisfaction of all amounts allegedly due to the Trust Funds
through January 31, 1996, to be paid over time as follows: approximately $25,800
upon dismissal of the Evergreen Case and the remainder of $24,000 in
installments of $7,000 in 1996 and $8,500 in each of 1997 and 1998. The first
payment was entirely funded through an escrow account previously established by
the Company. The second, third and fourth (last) payments were paid according to
schedule and were funded from cash provided by operating activities. In
addition, the coal subsidiaries agreed to future participation in the UMWA 1974
Pension Plan.
As a result of the settlement of the Evergreen Case at an amount lower than
those previously accrued, the Company recorded a pretax gain of $35,650 ($23,173
after-tax) in the first quarter of 1996 in its consolidated financial
statements.
19. COMMITMENTS
At December 31, 1998, the Company had contractual commitments for third parties
to contract mine or provide coal to the Company. Based on the contract
provisions these commitments are currently estimated to aggregate approximately
$202,033 and expire from 1999 through 2005 as follows:
1999 $60,563
2000 38,186
2001 38,036
2002 38,036
2003 13,814
2004 7,656
2005 5,742
Spending under the contracts was $72,086 in 1998, $91,119 in 1997 and $99,161 in
1996.
20. SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended December 31, 1998, 1997 and 1996, cash payments for income
taxes, net of refunds received, were $27,745, $30,677 and $26,412, respectively.
For the years ended December 31, 1998, 1997 and 1996, cash payments for interest
were $38,126, $26,808 and $14,659, respectively.
In connection with the June 1997 acquisition of Cleton & Co. ("Cleton"), the
Company assumed the equivalent of US $10,000 of Cleton debt, of which the
equivalent of approximately US $6,000 was outstanding at December 31, 1997.
During 1998, the Company recorded the following noncash investing and financing
activities in connection with the acquisition of substantially all of the
remaining shares of its Brink's affiliate in France: seller financing of the
equivalent of US $27,500 and the assumption of borrowings of approximately US
$19,000 and capital leases of approximately US $30,000.
21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Tabulated below are certain data for each quarter of 1998 and 1997. The first
three quarters of 1997 net income per share amounts have been restated to comply
with SFAS No. 128,
89
"Earnings Per Share." Third quarter 1997 amounts have been reclassified to
include $3,948 of revenues and transportation expenses from Cleton, which was
acquired in June 1997.
1st 2nd 3rd 4th
- ---------------------------------------------------------------------------------------------------
1998 QUARTERS:
Net sales and operating
revenues $862,664 927,104 968,932 988,182
Gross profit 122,729 135,146 149,278 150,398
Net income (a), (b) 12,828 20,762 211 32,255
Net income per Brink's
Group common share:
Basic $ .44 .53 .52 .55
Diluted .44 .52 .51 .55
Net income (loss) per
BAX Group common share:
Basic (a) $ (.15) .05 (1.13) .56
Diluted (.15) .05 (1.13) .56
Net income (loss) per
Minerals Group common
share:
Basic (b) $ (.26) (.20) .14 (.10)
Diluted (.26) (.20) .14 (.10)
- ---------------------------------------------------------------------------------------------------
1997 QUARTERS:
Net sales and operating
revenues $781,676 826,154 874,449 912,119
Gross profit 109,445 118,884 143,136 143,567
Net income (b) (c) 21,341 14,663 36,337 37,857
Net income per Brink's
Group common share:
Basic $ .40 .46 .51 .55
Diluted .40 .46 .50 .54
Net income (loss) per
BAX Group common share:
Basic (c) $ .26 (.10) .82 .68
Diluted .26 (.10) .80 .66
Net income (loss) per
Minerals Group common share:
Basic (b) $ .01 (.26) .02 .32
Diluted .01 (.26) .02 .32
===================================================================================================
(a) The third quarter of 1998 includes additional expenses of approximately
$36,000 ($22,680 after-tax; $1.17 per share) related to the termination or
rescoping of certain information technology projects (approximately $16,000
pre-tax), increased provisions on existing accounts receivable (approximately
$13,000 pre-tax), and approximately $7,000 (pre-tax) primarily related to
severance expenses associated with BAX Global's redesign of its organizational
structure.
(b) The fourth quarters of 1998 and 1997 include the reversal of excess
restructuring liabilities of $1,479 ($961 after-tax; $0.11 per share) and $3,104
($2,108 after-tax; $0.25 per share), respectively.
(c) The second quarter of 1997 includes $12,500 pre-tax ($7,900 after-tax; $0.40
per share) of consulting expenses related to the redesign of BAX Global's
business processes and new information systems architecture.
22. SUBSEQUENT EVENT
Effective March 15, 1999, under the Company's preferred share purchase program,
the Company purchased 84 shares of the Convertible Preferred Stock at $250 per
share for a total cost approximating $21,000. The excess of the carrying amount
over the cash paid for the repurchase was approximately $19,000. In addition, on
March 12, 1999, the Board authorized an increase in the remaining authority to
repurchase Convertible Preferred Stock by $4,300.
As discussed in Note 10, the Available Minerals Dividend is impacted by activity
that affects shareholders' equity or the fair value of the net assets of the
Minerals Group. The purchase amount noted above reduces the Available Minerals
Dividend Amount as currently calculated. Accordingly, the purchase of the
Convertible Preferred Stock plus recent financial performance of the Minerals
Group is expected to significantly reduce or eliminate the ability to pay
dividends on the Minerals Group Common Stock.
90
Common Stock
==================================================================
Market Price Declared
High Low Dividends
- ------------------------------------------------------------------
1998
BRINK'S GROUP
1st Quarter $42.88 37.25 $ .025
2nd Quarter 41.44 35.56 .025
3rd Quarter 39.13 31.31 .025
4th Quarter 37.13 28.00 .025
BAX GROUP (a)
1st Quarter $25.88 15.00 $ .06
2nd Quarter 19.13 14.75 .06
3rd Quarter 15.69 6.44 .06
4th Quarter 11.25 5.31 .06
MINERALS GROUP (b)
1st Quarter $9.75 7.63 $.1625
2nd Quarter 8.88 4.81 .025
3rd Quarter 5.75 2.75 .025
4th Quarter 3.50 1.94 .025
- -----------------------------------------------------------------
1997
BRINK'S GROUP
1st Quarter $29.75 25.25 $ .025
2nd Quarter 32.88 25.38 .025
3rd Quarter 41.94 29.63 .025
4th Quarter 42.13 33.44 .025
BAX GROUP (a)
1st Quarter $21.13 18.50 $ .06
2nd Quarter 29.00 20.50 .06
3rd Quarter 30.81 23.25 .06
4th Quarter 31.00 24.31 .06
MINERALS GROUP (b)
1st Quarter $16.88 12.88 $.1625
2nd Quarter 14.63 11.00 .1625
3rd Quarter 12.25 10.06 .1625
4th Quarter 11.38 6.63 .1625
=================================================================
(a) Effective May 4, 1998, the designation of Pittston Burlington Group Common
Stock and the name of the Pittston Burlington Group were changed to Pittston BAX
Group Common Stock and Pittston BAX Group, respectively. All rights and
privileges of the holders of such Stock are otherwise unaffected by such
changes. The stock continues to trade on the New York Stock Exchange under the
symbol "PZX".
(b) Dividends on Minerals Stock are limited by the Available Minerals Dividend
Amount. See Notes 10 and 22 and Management's Discussion and Analysis.
During 1998 and 1997, Pittston Brink's Group Common Stock ("Brink's Stock"),
Pittston BAX Group Common Stock ("BAX Stock") and Pittston Minerals Group Common
Stock ("Minerals Stock") traded on the New York Stock Exchange under the ticker
symbols "PZB", "PZX", and "PZM", respectively.
As of March 2, 1999, there were approximately 4,800 shareholders of record of
Brink's Stock, approximately 4,300 shareholders of record of BAX Stock and
approximately 3,900 shareholders of record of Minerals Stock.
91