SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended March 31, 2000
Commission file number: 1-5529
BURNS INTERNATIONAL SERVICES CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3408028
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 South Michigan Avenue, Chicago, Illinois 60604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 322-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO________
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On April 30, 2000 the registrant had 19,910,642 shares of Common Stock
outstanding.
1
BURNS INTERNATIONAL SERVICES CORPORATION AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
MARCH 31, 2000
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Statement of Operations for
the Three Months Ended March 31, 2000 and 1999..................................... 2
Condensed Consolidated Balance Sheet
at March 31, 2000 and December 31, 1999............................................ 3
Condensed Consolidated Statement of Cash Flows for
the Three Months Ended March 31, 2000 and 1999 .................................... 4
Notes to the Consolidated Financial Statements ...................................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................... 15
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings ................................................................... 17
Item 2. Changes in Securities ............................................................... 17
Item 3. Defaults Upon Senior Securities ..................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders ................................. 17
Item 5. Other Information ................................................................... 17
Item 6. Exhibits and Reports on Form 8-K..................................................... 17
SIGNATURES....................................................................................... 18
2
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
BURNS INTERNATIONAL SERVICES CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(Millions of dollars, except per share)
Three Months Ended
March 31,
----------------------------
2000 1999
------------ ------------
Net service revenues $ 357.2 $ 330.5
Cost of services 300.3 277.4
Selling, general and administrative expenses 41.7 36.2
Depreciation 1.8 1.2
Other expense, net 0.4 1.3
Interest expense and finance charges, net 5.0 3.8
------- -------
Earnings before income taxes 8.0 10.6
Provision for income taxes 3.2 4.1
------- -------
Net earnings $ 4.8 $ 6.5
======= =======
Earnings per common share - basic $ 0.24 $ 0.27
======= =======
Earnings per common share - diluted $ 0.24 $ 0.27
======= =======
Comprehensive earnings:
Net earnings $ 4.8 $ 6.5
Other comprehensive earnings:
Currency translation adjustment, net of $0.1
tax benefit in 2000 (0.2) 0.1
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Comprehensive earnings $ 4.6 $ 6.6
======= =======
(The accompanying notes are an integral part of these financial statements)
3
BURNS INTERNATIONAL SERVICES CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Millions of dollars)
March 31, December 31,
ASSETS 2000 1999
- ------------------------------------ ---------- ------------
Cash and cash equivalents $ 7.7 $ 10.4
Receivables, net 27.2 59.9
Income tax receivable, net 29.6 32.1
Other current assets 102.2 71.9
-------- --------
Total current assets 166.7 174.3
Property, plant and equipment, at cost 43.6 43.3
Less accumulated depreciation 20.6 19.7
-------- --------
Net property, plant and equipment 23.0 23.6
Net excess purchase price over net assets acquired 105.5 107.1
Deferred tax asset, net 5.7 5.7
Other assets 35.4 33.0
-------- --------
Total assets $ 336.3 $ 343.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Notes payable $ 2.2 $ 3.6
Accounts payable and accrued expenses 118.5 125.1
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Total current liabilities 120.7 128.7
Long-term debt 128.8 133.6
Other long-term liabilities 51.3 50.7
Common stock 0.2 0.2
Other shareholders' equity 35.3 30.5
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Total shareholders' equity 35.5 30.7
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Total liabilities and shareholders' equity $ 336.3 $ 343.7
======== ========
(The accompanying notes are an integral part of these financial statements)
4
BURNS INTERNATIONAL SERVICES CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Millions of dollars)
Three Months Ended
March 31,
-----------------------
OPERATING: 2000 1999
---------- ----------
Continuing Operations:
Earnings from continuing operations $ 4.8 $ 6.5
Adjustments to reconcile net earnings to net cash
provided by continuing operations:
Non-cash charges to earnings:
Depreciation and amortization 2.7 2.7
Other, net 1.6 (0.2)
Changes in assets and liabilities:
(Increase) decrease in receivables (1.3) 5.1
Decrease (increase) in other current assets 0.4 (0.1)
Net change in accounts payable and accrued expenses (3.6) 10.5
Net change in other long-term assets and liabilities (2.0) (4.3)
------- -------
Net cash provided by continuing operations 2.6 20.2
Net cash used in discontinued operations (3.0) (2.2)
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Net cash (used in) provided by operating activities (0.4) 18.0
INVESTING:
Capital expenditures (1.4) (2.3)
Net cash paid for acquisitions -- (2.0)
Other, net 0.3 0.1
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Net cash used in investing activities (1.1) (4.2)
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FINANCING:
(Decrease) increase in notes payable (1.4) 1.0
Decrease in debt outstanding under revolving credit facility (4.8) --
Increase (decrease) in receivables sold 5.0 (47.4)
Other, net -- 1.8
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Net cash used in financing activities (1.2) (44.6)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (2.7) (30.8)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10.4 105.7
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7.7 $ 74.9
======= =======
(The accompanying notes are an integral part of these financial statements)
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The financial statements of Burns International Services Corporation and
consolidated subsidiaries ("the Company") have been prepared in accordance with
the instructions to Form 10-Q. The statements are unaudited, but include all
adjustments, consisting of normal recurring items, which the Company considers
necessary for a fair presentation of the information set forth herein. The
results of operations for the three month periods ended March 31, 2000 and March
31, 1999 are not necessarily indicative of the results to be expected for the
entire year. Certain previously reported 1999 amounts have been reclassified to
conform to the current 2000 presentation.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and related disclosures. Actual
results may differ from those estimates.
(2) The Company owns 49% of the common stock of Loomis, Fargo & Co ("Loomis,
Fargo"). This investment is accounted for under the equity method.
The Company recorded $0.5 million equity income for the three months ended March
31, 2000 for its share of Loomis, Fargo income, compared to $0.2 million for the
same period of 1999. The Company does not guarantee the indebtedness of Loomis,
Fargo nor is it required to fund Loomis, Fargo's future operations.
(3) On May 29, 1998, the Company sold its electronic security services
business to ADT Security Services, a subsidiary of Tyco International, Ltd. On
May 29, 1998, the Company also sold its courier services business. Both
businesses were carried as discontinued operations prior to their disposals. The
Company remains liable on certain retained liabilities from both businesses.
(4) The Company's provision for income taxes for the three month periods
ended March 31, 2000 and 1999 reflect estimated annual tax rates for the year
applied to federal, state and foreign income.
(5) Other expense, net is comprised of the following (millions of dollars):
Three Months Ended
March 31,
--------------------
2000 1999
------- -------
Loomis, Fargo income $ (0.5) $ (0.2)
Excess purchase price amortization 0.9 1.5
------ ------
Total other expense, net $ 0.4 $ 1.3
====== ======
(6) As part of a brand unification strategy (announced May 4, 1999), the
Company entered into an agreement on March 30, 1999 (the "Agreement") with Wells
Fargo & Company ("Wells Fargo") to
6
relinquish its royalty-free license to the "Wells Fargo" name in the security
field. In addition, Wells Fargo granted the Company a royalty-free license to
use the "Wells Fargo" name for a two-year period commencing on the date of the
Agreement. Under the Agreement, Wells Fargo has reimbursed the Company for
incurred and anticipated costs associated with converting operations to the
"Burns International" name. This includes, among other things, consulting
services and uniform, trademark, service mark, tradename and signage changes.
The Company earns the reimbursement as certain milestones are achieved, as set
forth in the Agreement. The Company has accounted for the payment as a deposit
that will be offset against brand unification and trademark repositioning costs.
(7) Earnings per common share are based on average common shares outstanding
and common share equivalents. Common share equivalents recognize the dilutive
effects of common shares which may be issued in the future upon exercise of
certain stock options. The number of shares used in the computation of earnings
per share were as follows (in thousands of shares):
Three Months Ended
March 31,
--------------------
2000 1999
------- -------
Basic EPS
Average common shares outstanding 19,790 23,900
Diluted EPS
Common share equivalents 149 338
------- -------
Average common shares outstanding
and common share equivalents 19,939 24,238
======= =======
On October 26, 1999, the Board of Directors approved a Stockholder Rights Plan
(the "Plan") for the Company. If a distribution were to occur under the Plan,
then earnings per share would be affected by the resultant increase in the
number of common share equivalents.
(8) The allowance for doubtful accounts was $8.4 million at March 31, 2000
and $8.0 million at December 31, 1999, respectively. The accumulated
amortization of excess purchase price over net assets acquired was $17.7 million
at March 31, 2000 and $17.9 million at December 31, 1999.
Burns International Services Corporation and selected subsidiaries have an
agreement to sell a revolving pool of trade accounts receivable to a special
purpose subsidiary. Under the facility, the subsidiary can sell to third parties
up to a $120 million undivided interest in such accounts receivable. At March
31, 2000, the subsidiary had purchased $205.1 million of accounts receivable and
sold a $120.0 million undivided interest in such receivables. At December 31,
1999, the subsidiary had purchased $171.9 million of accounts receivable and had
sold an undivided interest therein equal to $120.0 million. The subsidiary's
unsold interest in such receivables is considered an interest in a security and
is included in "Other current assets." The fair value of the retained interest
approximates
7
its carrying value due to the short-term nature of the receivables. Also
included in "Other current assets" is $5.0 million at December 31, 1999,
representing interest-bearing cash deposits held in trust under the terms of the
agreement. The deposits represent proceeds of collections held back based on the
amount of eligible receivables in the pool. No such cash deposits were required
at March 31, 2000. The Company's retained interests in the receivables and cash
deposits are generally restricted.
Supplemental Cash Flow Information:
Net cash payments for interest and income taxes were as follows (millions of
dollars):
Three Months Ended
March 31,
---------------------
2000 1999
-------- --------
Interest paid $ 4.5 $ 6.7
Income taxes (refunded) paid (1.6) 0.7
(9) The following tables summarize the capitalization of the Company at
March 31, 2000 and December 31, 1999:
March 31, 2000 December 31, 1999
----------------------- -----------------------
DEBT Long- Long-
(millions of dollars) Current Term Current Term
----------- --------- ----------- ---------
9-5/8% senior subordinated notes due 2007 $ -- $ 0.2 $ -- $ 0.2
Senior credit facility (at an average rate
of 8.2% in 2000 and 7.7% in 1999) -- 128.6 -- 133.4
Overdraft facility (at an average rate of
7.5% in 2000 and 6.9% in 1999) 2.2 -- 3.6 --
------ ------- ----- -------
Total short-term and long-term debt $ 2.2 $ 128.8 $ 3.6 $ 133.6
====== ======= ===== =======
The Company's senior credit facility, which carries a $225 million maximum
commitment from a group of financial institutions, provides for revolving
borrowings and bank letters of credit. Up to $125 million of the facility is
available for letters of credit. Borrowing availability under the facility
commitment is reduced by the total dollar amount of letters of credit issued and
outstanding under the facility, which totaled $46.2 million and $47.1 million at
March 31, 2000 and December 31, 1999, respectively. Borrowing capacity under the
facility may also be limited by various covenants. The entire bank facility is
available through March 31, 2002.
Due to the fact that the Company experienced delays in customer invoicing and
collection of receivables during implementation of its new financial and
invoicing software, the Company arranged an amendment, effective March 15, 2000,
to certain financial covenants in its senior credit facility.
8
SHAREHOLDERS' EQUITY March 31, December 31
(millions of dollars) 2000 1999
----------- ------------
Common stock $ 0.2 $ 0.2
Capital in excess of par value 37.8 37.6
Retained earnings 88.7 83.9
Accumulated comprehensive loss (1.5) (1.3)
------ ------
125.2 120.4
Less treasury common stock, 7,148,207 shares in
2000 and 1999, at cost (89.7) (89.7)
------ ------
Total shareholders' equity $ 35.5 $ 30.7
====== ======
The accumulated comprehensive loss balances for both periods consist solely of
currency translation adjustments, net of tax.
CAPITAL STOCK - NUMBER OF SHARES
(thousands of shares) March 31, December 31,
2000 1999
----------- --------------
Common stock, $.01 par value:
Authorized 50,000.0 50,000.0
Issued 24,338.8 24,096.8
Outstanding 19,910.6 19,668.6
Series I non-voting common stock, $.01 par value:
Authorized 25,000.0 25,000.0
Issued 2,720.0 2,720.0
Outstanding -- --
Preferred stock, $.01 par value:
Authorized 5,000.0 5,000.0
Issued and Outstanding -- --
(10) The Company and certain of its current and former subsidiaries have
been identified by the U.S. Environmental Protection Agency and certain state
environmental agencies as potentially responsible parties ("PRPs") at several
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") and equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
The Company believes that none of these matters individually or in the aggregate
will have a material adverse effect on its financial position or future
operating results, generally either because the maximum potential liability at a
site is not large or because liability will be shared with other PRPs, although
no assurance can be given with respect to the ultimate outcome of any such
liability. Based on its estimate of allocations of liability among PRPs, the
probability that other PRPs, many of whom
9
are large, solvent public companies, will fully pay the costs allocated to them,
currently available information concerning the scope of contamination at such
sites, estimated remediation costs at such sites, indemnification obligations in
favor of the Company from the current owners of certain sold or discontinued
operations, estimated legal fees and other factors, the Company has made
provisions for indicated environmental liabilities in the aggregate amount of
approximately $2 million. Additionally, the Company will be indemnified by its
former subsidiary, BorgWarner Inc., against certain future costs relating to
environmental liabilities associated with certain former automotive operations.
The Company believes that the various asserted claims and litigation in which it
is involved will not materially affect its financial position, future operating
results or cash flows, although no assurance can be given with respect to the
ultimate outcome of any such claim or litigation.
(11) The Company provides security officers to deter crime, monitor
electronic security systems and control public and private access to facilities,
and it performs general investigative services and background screening of
individuals, primarily upon their consideration for employment by a client. The
Company also offers non-security related services to customers through its
temporary employee leasing operation, Burns International Staffing ("Staffing").
The Company's largest segment, Domestic Industrial, provides security services
to clients in a wide variety of industries across the United States. Industrial
security segments in Canada, Europe and Colombia serve similar industries abroad
and are aggregated into the Foreign Industrial segment. The unique security
needs of the aviation industry, and the regulated and governmental sectors of
the economy are serviced by the Company's Globe Aviation and Energy/Government
segments. These two segments, along with the Investigative Services,
SafeToHire.com (background screening) and Staffing segments, are grouped
together and reported as "Other Segments".
The Company has changed the format under which it reviews segment operating
performance. The segments are currently evaluated based primarily on operating
income before corporate administrative expenses, interest expense, finance
charges and taxes. Prior period disclosures have been changed to conform to the
current presentation. The Company does not allocate assets to individual
segments because asset deployment is not material for management of the
business. Information concerning the segments is set forth below:
Domestic Foreign Other
(millions of dollars) Industrial Industrial Segments Consolidated
--------------------------------------------------------
Three Months Ended March 31, 2000:
Revenue $ 269.5 $ 35.5 $ 52.2 $ 357.2
Operating Income (Loss) 19.2 (0.2) 1.8 20.8
Three Months Ended March 31, 1999:
Revenue $ 245.0 $ 33.1 $ 52.4 $ 330.5
Operating Income 16.2 0.7 1.5 18.4
10
The following reconciles consolidated segment operating income to consolidated
earnings before income taxes:
Three Months Ended
March 31,
------------------------
(millions of dollars) 2000 1999
---------- ----------
Consolidated segment operating income $ 20.8 $ 18.4
Unallocated items, net (8.3) (4.2)
Equity income in joint venture 0.5 0.2
Interest expense (5.0) (3.8)
------- -------
Consolidated earnings before income taxes $ 8.0 $ 10.6
======= =======
Unallocated items include corporate administrative expense and operating charges
not used in evaluating segment performance.
11
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT EVENTS
- ------------------
On April 25, 2000, the Company announced its background screening services
company, Burns International Information Services, had changed its name to Burns
International SafeToHire.com, Inc. The name was changed to more accurately
reflect the technological advancements in its business, which offers web-based
pre-employment screening solutions to its 1,700 clients.
On April 19, 2000, the Company announced that S. Jay Stewart was elected to the
Board of Directors.
On March 21, 2000, the Company named James F. McNulty III Vice President, Sales
and Marketing. Mr. McNulty continues as President of the Company's Total
Security Solutions group, with responsibility for the National Accounts program
and the Company's strategic business alliances.
On February 22, 2000, the Company and Cap Index, Inc. announced a new
value-added relationship that will make CAP Index's site-specific crime risk
data readily available to the Company's clients throughout the United States and
Canada. Under the terms of the agreement, the Company will have access to CAP's
Crime risk database studies to help its clients develop strategic security
solutions and make security investment decisions based on the specific threat
levels in the areas where client facilities are located. The two companies will
also work together on major, multi-site security outsourcing opportunities. CAP
Index is the only source of precise, site-specific, objective crime risk
forecasts for the entire United States and Canada.
RESULTS OF OPERATIONS
- ---------------------
Revenues
Net service revenues for the three months ended March 31, 2000, increased $26.7
million, or 8.1% over the comparable 1999 period. Revenues for the Domestic
Industrial segment increased 10.0% over the prior year quarter, due to higher
average billing rates, increased permanent guard hours, increased client
retention and new business sales. Revenues for the Foreign Industrial segment
increased 7.3%, primarily due to a business acquisition in Canada completed late
in 1999. Other Segments revenue was flat, as a revenue increase at the Globe
Aviation segment from contract repricings was offset by a decline at the
Energy/Government segment due to a major contract lost in 1999.
Operating Income
Operating income for the three months ended March 31, 2000, increased $2.4
million, or 13.0%, over the comparable 1999 period. This was driven by increased
sales and improvements in risk management and other expenses, which helped to
contain rising labor costs in the segments. Domestic Industrial segment
operating income increased $3.0 million, largely for similar reasons. Foreign
Industrial segment operating income declined $0.9 million, primarily due to
United Kingdom operations. The
12
United Kingdom operations operated at a loss for the quarter, but revised
pricing and cost controls began to take effect late in the quarter, helping to
narrow losses. Operating income in the Other segments group increased $0.3
million, as an increased operating profit in the Staffing segment offset a
reduction in the Energy/Government segment due to contracts lost in 1999.
Costs and Expenses
Cost of services, expressed as a percentage of revenues, increased from 83.9% in
1999 to 84.1% in 2000, primarily as a result of increased labor costs from tight
labor markets. Improved experience under Company insurance programs helped to
offset labor cost increases. Lower security officer turnover also helped contain
costs. Gross margins declined slightly from 16.1% in 1999 to 15.9% in 2000.
Selling, general and administrative expenses ("SG&A"), expressed as a percentage
of revenues, were 11.7% and 11.0% for the three months ended March 31, 2000 and
1999, respectively. Excluding a $1.5 million non-recurring favorable insurance
settlement in March 1999, SG&A expenses were 11.4% of 1999 revenues. The 2000
increase partially reflects investments made in training programs and in
marketing and sales programs.
Depreciation expense for the three months ended March 31, 2000, increased $0.6
million over the comparable 1999 period. The planned increase reflects
investments in payroll and scheduling systems, invoicing and financial systems
and software, as well as hardware and software investments in SafeToHire.com.
Included in other net expense is the Company's share of Loomis, Fargo net
earnings. The Company recorded $0.5 million equity income for the three months
ended March 31, 2000 for its share of Loomis, Fargo income, compared to $0.2
million for the same period of 1999. Also included in other expense is
amortization of excess purchase price. The $0.6 million decline in three month
amortization reflects the full amortization of previous business acquisitions.
Net Interest Expense and Finance Charges
First quarter interest expense increased $1.2 million over 1999, due to higher
net funding levels and higher short-term interest rates. Following the
implementation of new financial and invoicing systems and software, the Company
experienced difficulties in invoicing its customers accurately and on time
during late 1999 and early in the first quarter of 2000. These difficulties
increased accounts receivable balances and net funding requirements. The Company
has corrected the accuracy of invoices and is working to return accounts
receivable balances to normal levels.
On March 24, 2000, the Company voluntarily cancelled one of its two outstanding
interest rate swap agreements. Proceeds of $0.4 million were received from the
cancellation and were credited to interest expense during the quarter.
Liquidity
The Company's liquidity is provided by its operations and financial resources,
including the facility for sale of receivables. Net funding, which includes
accounts receivable sold through this facility, was as follows (millions of
dollars):
13
March 31, December 31,
2000 1999
---------- ------------
Short-term borrowings $ 2.2 $ 3.6
Long-term debt 128.8 133.6
Securitized accounts receivable sold 120.0 115.0
Less: Cash and cash equivalents (7.7) (10.4)
---------- ------------
Total net funding $ 243.3 $ 241.8
========== ============
The Company's net funding requirements increased $1.5 million from its December
31, 1999 level. Borrowings under the senior credit facility decreased $5.0
million and funding from the accounts receivable facility increased $5.0
million.
The Company has access to a number of financing sources, including a $120
million accounts receivable securitization facility and a $225 million senior
credit facility. As of March 31, 2000, the Company had sold $120.0 million of
securitized accounts receivable and had borrowed $128.6 million under the senior
credit facility.
The Company's senior credit facility, which carries a $225 million maximum
commitment from a group of financial institutions, provides for revolving
borrowings and bank letters of credit. Up to $125 million of the facility is
available for letters of credit. Borrowing availability under the facility
commitment is reduced by the total dollar amount of letters of credit issued and
outstanding under the facility, which totaled $46.2 million and $47.1 million at
March 31, 2000 and December 31, 1999, respectively. Borrowing capacity under the
facility may also be limited by various covenants. The entire bank facility is
available through March 31, 2002.
The Company established an additional $12.5 million letter of credit in the
fourth quarter of 1999 that was issued outside of the senior credit facility and
does not utilize the facility's borrowing capacity. The Company also arranged a
temporary additional line of credit in an amount up to $15 million for potential
working capital requirements during the transition to new financial and
invoicing systems and software. The additional credit facility was not utilized
and was cancelled by the Company on February 14, 2000.
Due to the fact that the Company experienced delays in customer invoicing and
collection of receivables during implementation of its new financial and
invoicing software, the Company arranged an amendment, effective March 15, 2000,
to certain financial covenants in its senior credit facility.
Substantially all of the Company's borrowings carry variable or short-term
interest rates. To balance the inherent interest rate exposure, the Company
utilized two interest rate swap agreements during the first quarter of 2000. See
Item 3, Quantitative and Qualitative Disclosures about Market Risk for more
information.
14
Cash Flow
Cash and cash equivalents decreased $2.7 million for the three months ended
March 31, 2000. Operating activities absorbed $0.4 million, as working capital
needs increased $4.5 million and payments against the retained liabilities of
discontinued operations required $3.0 million. Investing activities used $1.1
million, primarily for capital expenditures.
Cash and cash equivalents decreased $30.8 million for the three months ended
March 31, 1999, primarily from reduced utilization of the Company's accounts
receivable facility.
The Company believes that cash flow from operations, together with existing cash
and current borrowing capacity, is adequate to meet its capital needs.
Year 2000
As a direct result of the Company's Year 2000 preparation, the date change from
1999 to 2000 had no material impact on the Company's IT systems and non-IT
systems. No system or software failure related to Year 2000 issues was noted
within the Company and no material problems were encountered with third-party
vendor systems. The Company also expects no future business interruption due to
the Year 2000 issue. However, the Company did experience some difficulties which
were unrelated to the Year 2000 in the implementation of its new financial and
invoicing systems and software. The impact of such implementation difficulties
is discussed above under the Net Interest Expense and Finance Charges section.
The Company's Year 2000 analysis and disclosure contains "forward looking"
statements about matters that are inherently difficult to predict. Such
statements include statements regarding the intent, opinion and current
expectations of the Company and its management. Such "forward looking"
statements involve risks and uncertainties that may affect future developments,
such as, the inability to deal with a Year 2000 issue due to a problem arising
on the part of a third party or vendor. While the Company believes that it has
implemented methodologies to address the Year 2000 issue so that it should not
materially affect its financial position, future operating results or cash
flows, no assurance can be given with respect to the ultimate outcome.
15
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Interest Rate Risk
The Company has limited financial markets risk exposures that are primarily
related to changes in interest rates. The Company's policy is to balance its
interest rate exposure, which it may manage with interest rate swap agreements.
Following the repurchase of the Company's fixed-rate senior subordinated notes
in June 1999, substantially all of the Company's funding carries variable rates
of interest. As of March 31, 2000, approximately $129 million was financed
through the senior credit facility, which carries interest rates based on LIBOR
and the prime rate. Approximately $120 million was funded from the accounts
receivable securitization facility, which is discounted at rates based on
short-term commercial paper.
Under current and expected market conditions, the Company believes near-term
interest rate movements will not have a material negative impact on its results
of operations. To reduce exposure to market interest rate volatility, the
Company utilized two interest rate swap agreements during the three months ended
March 31, 2000. The agreements helped protect the Company from rising market
interest rates. Both swap agreements provide that the Company receive variable
rate payments based on 3-month LIBOR and pay fixed rate payments based on the
terms of each swap. The differential paid or received on the swap agreements was
recognized as an adjustment to interest expense in the period earned or
incurred. Both swaps call for settlement payments on a quarterly basis. The
contract terms are as follows:
Termination Notional Fixed Payment Floating
Date Amount Rate Rate
------------- -------------- ------------- -------------
Swap I June 15, 2000 US $25,000,000 5.638% 3-Month LIBOR
Swap II June 15, 2001 US $50,000,000 6.015% 3-Month LIBOR
On March 24, 2000, the Company voluntarily cancelled the Swap II agreement.
Proceeds of $0.4 million were received from the early termination and were
credited to interest expense during the quarter. Swap I was not terminated.
The Company does not use derivative instruments for speculative purposes.
Foreign Currency Risk
Currently, the Company does not use foreign currency forward contracts and
believes it does not have any material foreign currency exposures.
Labor Market Risk
The Company's business is labor intensive and is exposed to the availability of
qualified personnel and the cost of labor. United States labor market
contractions caused by high economic growth or other factors may increase the
Company's direct costs through higher wages and increased amounts of
16
unbilled overtime. To help manage labor market fluctuations, the Company's
customer agreements typically allow for billing rate adjustments based on law
changes, rulings or collective bargaining agreements that increase the Company's
wage rates. However, competitive pricing conditions in the industry may
constrain the Company's ability to increase its billing rates to cover such
increased costs.
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PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
Inapplicable.
Item 2. Changes in Securities
---------------------
Inapplicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Inapplicable.
Item 5. Other Information
-----------------
Inapplicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
27- Financial Data Schedule.
(b) Reports on Form 8-K:
The Company filed a Form 8-K on January 10, 2000, under Item 5,
Other Events, that reported a Third Amendment, dated December 16,
1999, to the Amended and Restated Credit Agreement dated as of June
30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Burns International Services Corporation
--------------------------------------------
(Registrant)
By /s/ James F. Froisland
--------------------------------------------
(Signature)
James F. Froisland
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 12, 2000