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 June 30, 1999
Commission file number: 1-5529
BURNS INTERNATIONAL SERVICES CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3408028
- -------------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
200 South Michigan Avenue, Chicago, Illinois 60604
- -------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 322-8500
Former name if changed since last report: Borg-Warner Security Corporation
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
On July 31, 1999 the registrant had 19,665,042 shares of Common Stock
outstanding.
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BURNS INTERNATIONAL SERVICES CORPORATION AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
JUNE 30, 1999
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statement of Operations for the
Three Months Ended June 30, 1999 and 1998.................... 2
Consolidated Statement of Operations for the
Six Months Ended June 30, 1999 and 1998...................... 3
Condensed Consolidated Balance Sheet at
June 30, 1999 and December 31, 1998.......................... 4
Condensed Consolidated Statement of Cash Flows for
the Six Months Ended June 30, 1999 and 1998.................. 5
Notes to the Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 16
PART II. OTHER INFORMATION
-----------------
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............................................. 18
Item 6. Exhibits and Reports on Form 8-K.............................. 18
SIGNATURES................................................................ 19
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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 June 30,
---------------------------
1999 1998
---- ----
Net service revenues $ 338.6 $ 323.9
Cost of services 284.9 273.0
Selling, general and administrative expenses 36.4 50.0
Depreciation 1.3 1.0
Other expense, net 1.0 2.1
Interest expense and finance charges, net 3.9 4.2
------- -------
Earnings (loss) before income taxes 11.1 (6.4)
Provision (benefit) for income taxes 4.3 (2.4)
------- -------
Earnings (loss) from continuing operations 6.8 (4.0)
Earnings from discontinued operations, net
of income taxes -- 39.4
------- -------
Earnings before extraordinary item 6.8 35.4
Extraordinary item:
Loss from early extinguishment of debt (12.1) (6.3)
------- -------
Net (loss) earnings $ (5.3) $ 29.1
======= =======
Earnings (loss) per common share -- basic:
Continuing operations $ 0.30 $ (0.17)
Discontinued operations -- 1.68
Extraordinary item (0.53) (0.27)
------- -------
Net earnings (loss) per share $ (0.23) $ 1.24
======= =======
Earnings (loss) per common share -- diluted:
Continuing operations $ 0.29 $ (0.16)
Discontinued operations -- 1.62
Extraordinary item (0.52) (0.26)
------- -------
Net earnings (loss) per share $ (0.23) $ 1.20
======= =======
Comprehensive earnings:
Net (loss) earnings $ (5.3) $ 29.1
Other comprehensive earnings:
Currency translation adjustment, net of $0.1
tax expense in 1999 and $0.6 tax benefit in 1998 0.1 (1.4)
------- -------
Comprehensive (loss) earnings $ (5.2) $ 27.7
======= =======
(The accompanying notes are an integral part of these financial statements)
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BURNS INTERNATIONAL SERVICES CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(Millions of dollars, except per share)
Six Months Ended June 30,
---------------------------------------
1999 1998
----------------- ----------------
Net service revenues $669.1 $642.5
Cost of services 562.3 542.1
Selling, general and administrative expenses 72.6 85.7
Depreciation 2.5 2.0
Other expense, net 2.3 4.5
Interest expense and finance charges, net 7.7 8.4
----------------- ----------------
Earnings (loss) before income taxes 21.7 (0.2)
Provision (benefit) for income taxes 8.4 (0.1)
----------------- ----------------
Earnings (loss) from continuing operations 13.3 (0.1)
Earnings from discontinued operations, net
of income taxes -- 20.3
----------------- ----------------
Earnings before extraordinary item 13.3 20.2
Extraordinary item:
Loss from early extinguishment of debt (12.1) (6.3)
----------------- ----------------
Net earnings $ 1.2 $ 13.9
================= ================
Earnings (loss) per common share -- basic:
Continuing operations $ 0.57 $ --
Discontinued operations -- 0.87
Extraordinary item (0.52) (0.27)
----------------- ----------------
Net earnings per share $ 0.05 $ 0.60
================= ================
Earnings (loss) per common share -- diluted:
Continuing operations $ 0.56 $ --
Discontinued operations -- 0.83
Extraordinary item (0.51) (0.26)
----------------- ----------------
Net earnings per share $ 0.05 $ 0.57
================= ================
Comprehensive earnings:
Net earnings $ 1.2 $ 13.9
Other comprehensive earnings:
Currency translation adjustment, net of $0.1
tax expense in 1999 and $0.3 tax benefit in 1998 0.2 (0.8)
----------------- ----------------
Comprehensive earnings $ 1.4 $ 13.1
================= ================
(The accompanying notes are an integral part of these financial statements)
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BURNS INTERNATIONAL SERVICES CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Millions of dollars)
ASSETS June 30, December 31,
1999 1998
- ------------------------------------------------------ ----------------------- ------------------------
Cash and cash equivalents $ 26.9 $ 105.7
Receivables, net 46.3 55.9
Other current assets 55.7 68.9
----------------------- ------------------------
Total current assets 128.9 230.5
Property, plant and equipment, at cost 47.4 43.7
Less accumulated depreciation 26.0 25.6
----------------------- ------------------------
Net property, plant and equipment 21.4 18.1
Net excess purchase price over net assets acquired 110.3 111.1
Deferred tax asset, net 42.4 42.4
Other assets 28.6 29.8
------------------------ ------------------------
Total assets $ 331.6 $ 431.9
======================= =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------
Notes payable $ 2.9 $ 2.3
Accounts payable and accrued expenses 132.8 130.5
----------------------- -----------------------
Total current liabilities 135.7 132.8
Long-term debt 108.3 124.4
Other long-term liabilities 69.0 77.8
Common stock 0.2 0.2
Other shareholders' equity 18.4 96.7
----------------------- -----------------------
Total shareholders' equity 18.6 96.9
----------------------- -----------------------
Total liabilities and shareholders' equity $331.6 $431.9
======================= =======================
(The accompanying notes are an integral part of these financial statements)
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BURNS INTERNATIONAL SERVICES CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In millions of dollars)
Six Months Ended
June 30,
-----------------------------------------------
OPERATING: 1999 1998
-------------------- -------------------
Continuing Operations:
Earnings (loss) from continuing operations $ 13.3 $ (0.1)
Adjustments to reconcile net earnings (loss) to net cash
provided by continuing operations:
Non-cash charges to earnings:
Depreciation and amortization 5.4 6.0
Other, net 0.4 14.6
Changes in assets and liabilities:
Decrease (increase) in receivables 3.8 (2.3)
Decrease in other current assets 1.0 1.6
Net change in accounts payable and accrued expenses 14.1 (5.5)
Net change in other long-term assets and liabilities (11.0) (1.9)
-------------------- -------------------
Net cash provided by continuing operations 27.0 12.4
Discontinued Operations:
Gain from discontinued operations -- 20.3
Other cash related to discontinued operations (5.4) 384.6
-------------------- -------------------
Net cash (used in) provided by discontinued operations (5.4) 404.9
-------------------- -------------------
Net cash provided by operating activities 21.6 417.3
-------------------- -------------------
INVESTING:
Capital expenditures (5.5) (3.0)
Net cash paid for acquisitions (2.0) --
Other, net 0.2 (3.1)
-------------------- -------------------
Net cash used in investing activities (7.3) (6.1)
-------------------- -------------------
FINANCING:
Increase in notes payable 0.6 --
Increase (decrease) in debt outstanding under revolving credit facility 108.0 (63.9)
Increase (decrease) in receivables sold 18.6 (8.0)
Retirement of long-term debt (140.9) (0.2)
Treasury shares acquired (81.7) --
Other, net 2.3 1.6
-------------------- -------------------
Net cash used in financing activities (93.1) (70.5)
-------------------- -------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (78.8) 340.7
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 105.7 8.0
-------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26.9 $348.7
==================== ===================
(The accompanying notes are an integral part of these financial statements)
-6-
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The financial statements of Burns International Services Corporation and
consolidated subsidiaries ("Company") have been prepared in accordance with the
instructions to Form 10-Q. The statements are unaudited, but include all
adjustments, consisting of normal recurring items, which the Company considers
necessary for a fair presentation of the information set forth herein. The
results of operations for the three and six month periods ended June 30, 1999
and June 30, 1998 are not necessarily indicative of the results to be expected
for the entire year. Certain previously reported 1999 and 1998 amounts have been
reclassified to conform to the current 1999 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 $0.4 million equity income in the second quarter of 1999
for its share of Loomis, Fargo income compared to a net loss of $0.1 million for
the same period of 1998. Equity income for the six months ended June 30, 1999 is
$0.6 million versus a loss of $0.5 million in the same period of 1998. 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., for
approximately $425 million plus the assumption of approximately $6 million of
debt by the buyer. As a result of this transaction, the Company recorded a net
after-tax gain of $42.5 million in the second quarter of 1998.
On May 29, 1998, the Company also sold its courier services business. In the
first quarter of 1998, the Company recorded a $15.9 million after-tax charge to
reduce its investment in this business, to provide for costs associated with its
disposition and for further anticipated losses prior to the sale. The courier
services operation has been carried as a discontinued operation since September
1996.
As a result of the two sales, the assets, liabilities, results of operations and
cash flows of both businesses have been segregated and reported as discontinued
operations for the three and six month periods ended June 30, 1998.
Revenues from discontinued operations were $137.2 million for the six-month
period ended June 30, 1998. The $20.3 million net after-tax gain from
discontinued operations consists of a $42.5 million after-tax gain from the sale
of the alarm services business, a $6.3 million after-tax alarm services
operating loss and a $15.9 million after-tax charge to adjust courier assets to
realizable value and to provide for losses prior to its sale.
(4) The Company's provisions for income taxes for the three and six month
periods ended June 30, 1999 and 1998 reflect estimated annual tax rates for the
year applied to federal, state and foreign income.
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(5) Other expense, net is comprised of the following:
S
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -------------------------------
1999 1998 1999 1998
---------------- --------------- ------------- -------------
Loomis, Fargo (income) loss $(0.4) $ 0.1 $(0.6) $ 0.5
Excess purchase price amortization 1.4 2.0 2.9 4.0
---------------- --------------- ------------- -------------
Total other expense, net $ 1.0 $ 2.1 $ 2.3 $ 4.5
================ =============== ============= =============
(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 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 used in the future upon exercise of
certain stock options. The number of shares used in the computation of earnings
per share were as follows (thousands of shares):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ----------- ------------ ------------
Basic EPS
Average common shares outstanding 22,914 23,486 23,319 23,532
Diluted EPS
Common share equivalents 505 784 504 808
------------ ----------- ------------ ------------
Average common shares outstanding 23,419 24,270 23,823 24,340
and common share equivalents ============ =========== ============ ============
Extraordinary item earnings per diluted share were a $0.52 loss for the second
quarter of 1999 and a $0.51 loss for the six months ended June 30, 1999. The
$0.01 per share difference results from the dilutive effect of the 4,350,000
share repurchase on average shares outstanding in these periods.
-8-
(8) The allowance for doubtful accounts was $5.7 million at June 30, 1999 and
$7.0 million at December 31, 1998, respectively. The accumulated amortization on
excess purchase price over net assets acquired was $49.6 million at June 30,
1999 and $53.7 million at December 31, 1998.
The Company has an agreement to sell a revolving pool of trade accounts
receivable to a special purpose subsidiary of the Company. Under the current
facility, which supplemented a prior facility until April 26, 1999, and replaced
it thereafter, the subsidiary can sell up to a $120 million undivided interest
in such accounts receivable. At June 30, 1999, the subsidiary had purchased
$142.1 million of the Company's accounts receivable and elected to sell a $101.0
million undivided interest in such receivables, $19.0 million less than the
permitted maximum. At December 31, 1998, the subsidiary had purchased $135.7
million of the Company's 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." Also included in "Other current assets" at December 31, 1998 is
$37.6 million of interest-bearing cash deposits held in trust under the terms of
the maturing facility. 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 June 30, 1999, under the new facility. 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):
Six Months Ended
June 30,
---------------------
1999 1998
------ ------
Interest paid $10.4 $20.8
Income taxes paid $ 2.8 $(2.3)
(refunded)
(9) The following tables summarize the capitalization of the Company at June
30, 1999 and December 31, 1998 (millions of dollars):
June 30, 1999 December 31, 1998
----------------------------- --------------------------------
DEBT Current Long-Term Current Long-Term
----------- ------------- ------------- -------------
9-5/8% senior subordinated notes (face
amount of $125 million due 2007) $ -- $ 0.2 $ -- $124.4
Bank revolving credit loan (at an average rate
of 6.0% in 1999) -- 108.0 -- --
Unsecured notes (at an average rate of 6.7% in
1999 and 8.8% in 1998) 2.9 0.1 2.3 --
----- ------- ----- ------
Total notes payable and long-term debt $ 2.9 $108.3 $2.3 $124.4
===== ====== ==== ======
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SHAREHOLDERS' EQUITY June 30, December 31,
(millions of dollars) 1999 1998
-------- ------------
Common stock $ 0.2 $ 0.2
Capital in excess of par value 37.2 35.2
Retained earnings 72.0 70.8
Accumulated comprehensive loss (1.3) (1.5)
------ ------
108.1 104.7
Less treasury common stock, 7,163,157 shares in
1999 and 2,768,339 shares in 1998, at cost (89.5) (7.8)
------ ------
Total shareholders' equity $ 18.6 $ 96.9
====== ======
CAPITAL STOCK -- NUMBER OF SHARES
(thousands of shares) June 30, December 31,
1999 1998
-------- ------------
Common stock, $.01 par value:
Authorized 50,000.0 50,000.0
Issued 24,096.8 23,879.1
Outstanding 19,653.7 23,830.8
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's discontinued property and casualty insurance subsidiary
("Centaur") ceased writing insurance in 1984 and has been operating under
rehabilitation since September 1987. Rehabilitation is a process supervised by
the Illinois Director of Insurance to attempt to compromise claim liabilities at
an aggregate level that is not in excess of Centaur's assets. In
rehabilitation, Centaur's assets are being used to satisfy claim liabilities
under direct insurance policies written by Centaur. Any remaining assets will
be applied to Centaur's obligations to other insurance companies under
reinsurance contracts.
On August 10, 1998 the Mission Trust and the Company agreed to settle the
pending suit against the Company, subject to court approval. The suit had
alleged damages in excess of $100 million because of Centaur's failure to
satisfy its reinsurance obligations. As part of the settlement, the Company
agreed to pay the Mission Trust $4 million and one-third of any dividend or
other distribution that may be paid to the Company after rehabilitation of
Centaur. Separately, the Mission Trust and Centaur agreed to an uncontested
liquidated
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claim in the Centaur estate of $48 million, for which the Company is not liable.
The parties have finalized and executed settlement and release agreements and
the case was dismissed with prejudice on April 28, 1999.
The Company and certain of its current and former subsidiaries have been
identified by the U.S. Environmental Protection Agency and certain state
environmental agencies as potentially responsible parties ("PRPs") at several
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") and equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
The Company believes that none of these matters individually or in the aggregate
will have a material adverse effect on its financial position or future
operating results, generally either because the maximum potential liability at a
site is not large or because liability will be shared with other PRPs, although
no assurance can be given with respect to the ultimate outcome of any such
liability. Based on its estimate of allocations of liability among PRPs, the
probability that other PRPs, many of whom are large, solvent public companies,
will fully pay the costs allocated to them, currently available information
concerning the scope of contamination at such sites, estimated remediation costs
at such sites, indemnification obligations in favor of the Company from the
current owners of certain sold or discontinued operations, estimated legal fees
and other factors, the Company has allowances for indicated environmental
liabilities in the aggregate amount of approximately $2 million (relating to
environmental matters with respect to disposed operations of the Company).
Additionally, the Company will be indemnified by its former subsidiary, Borg-
Warner Automotive, against certain future costs relating to environmental
liabilities associated with certain former automotive operations.
In November and December, 1998, Loomis, Fargo made various claims against the
Company for indemnification under the Contribution Agreement dated November 28,
1996 for certain environmental, cargo losses and other matters. The Company and
Loomis, Fargo have resolved all such matters without a material adverse effect
on the Company.
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) In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income." The accumulated comprehensive loss
balances as of June 30, 1999 and December 31, 1998 were $1.3 million and $1.5
million, respectively, and are included in shareholders' equity. The accumulated
comprehensive loss balances for both periods consist solely of currency
translation adjustments.
-11-
ITEM 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT EVENTS
- ------------------
On July 8,1999, the Company announced the formation of a strategic alliance with
Grupo Multisistemas de Seguridad Industrial, the largest provider of private
security services based in Mexico. The alliance will provide security services
to commercial and industrial customers of both companies.
On July 2, 1999, shareholder approval was received to change the Company's
corporate name to Burns International Services Corporation. The change is part
of an overall strategy to unify under one brand name the broad range of services
offered by the Company. The NYSE ticker symbol will remain as BOR.
On June 14, 1999, the Company repurchased 4,350,000 shares of its common stock
from a group of Merrill Lynch affiliated entities (the "ML Group"). The $18.375
per share purchase price, or approximately $80 million, represented a $0.50 per
share discount to the closing market price on April 19, 1999. The shares
repurchased represented approximately 43% of ML Group's stock ownership in the
Company.
On June 11, 1999, the Company announced that the ML Group intended to sell up to
4,760,136 shares of their remaining interest in the Company. A preliminary
prospectus was filed outlining the offering. The offering was subsequently
postponed upon the Company's receipt of an unsolicited expression of a
preliminary interest in a business combination from another company. On August
3, 1999, the Company announced that discussions with that party had been
terminated.
On June 10, 1999, the Company repurchased $124.8 million principal amount of 9
5/8% senior subordinated notes due 2007 at a premium of 12.35%. Total
consideration paid plus related fees were $140.9 million, including a $3.1
million consent payment. Associated with the repurchase, the Company recorded a
$12.1 million extraordinary loss (net of $7.8 million tax benefit) to capture
the call premium paid, cash fees paid on the transaction and the associated
write-off of unamortized finance charges.
On June 1, 1999, John Edwardson was named to the additional post of chairman,
succeeding previous chairman, Joe Adorjan. John Edwardson also serves as
president and chief executive officer of the Company.
RESULTS OF OPERATIONS
- ---------------------
Revenues
Net service revenues for the three and six months ended June 30, 1999 increased
4.5% and 4.1%, respectively, over the comparable 1998 periods. After removing
businesses affected by low-margin contract cancellations, year-to-date revenue
grew $37.4 million, including $19.6 million achieved through the Company's
acquisition program. Improved customer retention rates continued to contribute
to the growth.
-12-
Costs and Expenses
Cost of services declined from 84.3% to 84.1% of revenues for the three months
ended June 30, 1999 from the same period of 1998. Year-to-date cost of services
decreased to 84.0% from a 1998 level of 84.4%. The quarterly and year-to-date
declines were attributable to price-cost management and improved experience
under the Company's self-insurance program, which more than offset increases in
guard labor rates. Gross profit margins were 15.9% and 15.7%, respectively, for
the three months ended June 30, 1999 and 1998. Year-to-date gross profit margins
improved similarly, from 15.6% to 16.0%.
Selling, general and administrative expenses included a $14.4 million provision
recorded in the second quarter of 1998. Excluding the $14.4 million provision,
selling, general and administrative expenses for the three months ended June 30,
1999 increased $0.8 million, or 2.2% over the same period of 1998. Year-to-date
selling, general and administrative expenses increased $1.3 million, or 1.8%
after excluding the provision.
All pending issues related to the Centaur insurance matter were finalized and
settled in the second quarter of 1999. This, together with other non-recurring
items of income and expense, resulted in $0.02 per share for the three months
ended June 30, 1999.
During the second quarter, the Company combined efforts with a major insurance
consultant to continue improvements in its risk management program. Under the
program, the consultant will assist the Company in managing its insurance losses
and reducing its liability exposure.
During the second quarter and first half of 1999, depreciation increased $0.3
million and $0.5 million, respectively, over 1998, reflecting planned and
ongoing investments in computer technology and software.
Included in other net expense is the Company's share of Loomis, Fargo net
earnings. The Company recorded $0.6 million equity income in the first six
months of 1999 compared to a net loss of $0.5 million for the same period of
1998. Also included in other net expense is amortization of excess purchase
price. Reduced amortization expenses are due to the revaluation of certain
intangible assets in 1998.
Net Interest Expense and Finance Charges
Interest expense for the six months ended June 30, 1999 was $7.7 million, an
8.3% decrease from the comparable 1998 period. Lower debt levels maintained
before the stock repurchase and debt tender helped in containing interest
expense.
Discontinued Operations
The 1998 gain from discontinued operations reflects:
. A $42.5 million gain on the sale of the electronic security services
business (net of $59.8 million tax expense).
. A $6.3 million electronic security services loss from operations prior to
its sale.
-13-
. A $15.9 million charge to adjust courier services assets to realizable
value and to provide for future losses prior to its sale.
Extraordinary Item
On June 10, 1999, the Company repurchased $124.8 million principal amount of
9 5/8% senior subordinated notes due 2007 at a premium of 12.35%. Associated
with the repurchase, the Company recorded a $12.1 million extraordinary loss
(net of $7.8 million tax benefit) to capture the call premium paid, cash fees
paid on the transaction and the associated write-off of unamortized finance
charges.
On July 3, 1998, all outstanding 9 1/8% senior subordinated notes due 2003 were
redeemed. A $6.3 million extraordinary loss (net of $4.2 million tax benefit)
was recorded for the associated call premium and for the write-off of
unamortized finance charges.
Liquidity
The Company's liquidity is provided by its operations and financial resources,
including the facility for sale of receivables. Net funding, which includes
accounts receivable sold through this facility, was as follows:
June 30, December 31,
($millions) 1999 1998
- ----------- -------- ------------
Short-term borrowings $ 2.9 $ 2.3
Long-term debt 108.3 124.4
Securitized accounts receivables sold 101.0 82.4
Less: Cash and cash equivalents (26.9) (105.7)
------- -------
Total net funding $185.3 $ 103.4
====== =======
During the second quarter, the Company repurchased $124.8 million principal
amount of 9 5/8% senior subordinated notes and purchased 4.4 million shares of
common stock for $81.7 million. These transactions were financed through
borrowings under the bank facility of $108 million, a $19 million increase in
accounts receivable funding, and a $79 million reduction in cash and cash
equivalents.
The Company accesses a number of financing sources, including a $120 million
revolving accounts receivable facility and a $225 million revolving bank line of
credit. The revolving bank facility is reduced by the total dollar amount of
letters of credit issued and outstanding. Letters of credit issued and
outstanding were $80.4 million and $93.2 million at June 30, 1999 and December
31, 1998, respectively.
Following the repurchase of the subordinated fixed rate debt, substantially all
of the Company's borrowings carry variable rates. To manage the inherent
interest rate risk, the Company entered into two interest rate swap agreements
in June 1999. See Item 3, Quantitative and Qualitative Disclosures about Market
Risk for more information.
-14-
Cash Flow
Cash and cash equivalents decreased $78.8 million in 1999 versus a $340.7
million increase in 1998. Cash from continuing operations improved to $27.0
million from $12.4 million due to higher earnings and reduced working capital.
Proceeds from the Wells Fargo name transaction were largely offset by cash
required for the Centaur and certain indemnity settlements.
Discontinued operations required $5.4 million in 1999, which reflects payments
under retained insurance obligations. The $404.9 million inflow in 1998 reflects
proceeds from the Wells Fargo Alarm sale.
Net cash devoted to financing activities of $93.1 million in 1999 was
principally due to common stock repurchases. The $70.5 million in 1998
represents debt repayments and reduced receivables financing.
The Company believes that cash flow from operations, together with existing cash
and borrowing capacity, is adequate to meet its capital needs.
Year 2000
General
Since the inception of computers, software applications were programmed to
identify a year as a two-digit data field. In the new Millennium, computer
applications and software may recognize the year 2000 as two zeros (00) or 1900.
This incorrect date recognition could cause systems and software malfunctions
that could have a material effect on business operations.
Company's Readiness
To ensure minimal business interruption due to computer failure, the Company has
performed a review of all software and computer applications for the Year 2000
entry. Both "IT systems" and "non-IT systems" were reviewed. IT systems refer to
all pre-packaged and internally developed software applications and programs.
Non-IT systems refer to various business machines that have "embedded" computer
language, examples of which are computer integrated circuits ("chips") and
telephone switches. The review was completed using company internal technicians,
as well as outside consulting firms.
System date remediation is conducted in phases. First, all relevant computer
systems were assessed as to functionality and to determine Year 2000 impact.
Second, for those systems and software found to be non-compliant or in need of
upgrading, corrective steps have been, and will be taken, such as the
reprogramming or purchasing of replacement system software. Finally, all systems
and software modifications will be tested and then implemented at all necessary
levels. The Company has completed the assessment and corrective phases for all
operationally crucial systems. The Company is currently implementing and testing
the systems.
The Company's crucial computer systems are its source-to-gross payroll,
gross-to-net payroll, general ledger, accounts payable, accounts receivable and
invoicing systems. Specifically, the proprietary source-to-gross payroll system
has been remediated, installed and in production since November 1997.
-15-
A compliant version of the gross-to net payroll system was purchased and
installed in the second quarter and is in final testing. The general ledger,
accounts payable, accounts receivable and invoicing systems will be replaced
with new purchased, compliant software by the end of the third quarter of 1999.
The upgraded proprietary logistical security guard scheduling system is Year
2000 compliant and has been installed and tested in approximately 55% of all
sites. Overall, the Company expects that all system upgrades, replacements,
installations and testing will be completed in all material aspects by December
1, 1999.
Company Risks and Contingency Plans
Operationally, the worst case scenario would be the failure of the central
payroll or local office guard scheduling systems. In that event, the payroll
system would be backed up by a manual/automated system for the processing of
paychecks and the scheduling systems would be backed up by a central scheduling
center and/or an on-line, time-entry system that would prevent any material
business interruption.
The likely financial and non-financial impact of non-compliant third party
computer systems on the Company has not been quantified, as the Company cannot
predict other businesses' Year 2000 efforts. However, no single customer or
third party vendor of the Company could likely generate a material adverse
impact on Company operations. As part of the effort to assess its exposure to
risk, the Company mailed compliance questionnaires to its crucial and non-
crucial vendors. The Company currently is receiving and evaluating the
responses.
Costs of Compliance
To date, the Company has spent approximately $1.0 million toward remediation of
its Year 2000 problems, which includes computer consultant costs. Estimates of
the remaining cost of compliance are deemed not material by the Company.
Independent of the Year 2000 issue, the Company has had in process both
upgrading and replacement of certain systems and obsolete hardware to enhance
their functionality.
The Company's Year 2000 analysis and disclosure contains "forward looking"
statements about matters that are inherently difficult to predict. Such
statements include statements regarding the intent, opinion and current
expectations of the Company and its management. Such "forward looking"
statements involve risks and uncertainties that may affect future developments,
such as, the inability to deal with a Year 2000 issue due to a problem arising
on the part of a third party or vendor. While the Company believes that it has
implemented methodologies to address the Year 2000 issue so that it should not
materially affect its financial position, future operating results or cash
flows, no assurance can be given with respect to the ultimate outcome.
-16-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company has limited market risk exposures, which 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 that hedge
outstanding borrowings. Following the repurchase of the Company's fixed rate
subordinated debt in June 1999, substantially all of the Company's borrowings
carry variable rates. As of June 30, 1999, approximately $108 million was
financed through the revolving bank credit facility, which carries interest
rates based on LIBOR and the prime rate. Approximately $101 million was funded
from the accounts receivable securitization facility, which uses rates based on
short-term commercial paper.
To reduce exposure to market interest rate volatility, the Company entered into
two interest rate swap agreements effective June 15, 1999. The agreements
protect the Company from rising market interest rates by effectively fixing
payment rates on a total of $75.0 million of its long-term debt. In both swap
agreements, the Company receives variable rate payments based on 3-month LIBOR
and pays fixed rate payments based on the terms of each swap. The differential
paid or received on the swap agreements is 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
The Company believes near-term interest rate movements will not have a material
negative impact on its results of operations. Currently, the Company does not
use foreign currency forward contracts, does not have any material foreign
currency exposure and does not use derivative instruments for speculative
purposes.
-17-
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
On August 10, 1998, the Mission Trust and the Company agreed to settle the
pending suit against the Company, subject to court approval. The suit had
alleged damages in excess of $100 million because of Centaur's failure to
satisfy its reinsurance obligations. As part of the settlement, the Company
agreed to pay the Mission Trust $4 million and one-third of any dividend or
other distribution that may be paid to the Company after rehabilitation of
Centaur. Separately, the Mission Trust and Centaur agreed to an uncontested
liquidated claim in the Centaur estate of $48 million, for which the Company is
not liable. The parties have finalized and executed settlement and release
agreements and the case was dismissed with prejudice on April 28, 1999.
Item 2. Changes in Securities
---------------------
Inapplicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On April 20, 1999, the Company held its annual meeting of stockholders. At
such meeting, John A. Edwardson, Robert A. McCabe, Alexis P. Michas and Donald
C. Trauscht were elected as directors to serve for a term expiring in 2002. Each
of J. Joe Adorjan, James J. Burke, Jr., Albert J. Fitzgibbons, III, Arthur F.
Golden, Dale W. Lang, Andrew McNally IV and H. Norman Schwarzkopf continued to
serve as directors following the meeting. At such meeting, the following votes
were cast in the election of directors:
For Withheld
------------------ ------------------
John A. Edwardson 21,502,761 116,541
Robert A. McCabe 21,513,483 105,839
Alexis P. Michas 21,500,280 119,022
Donald C. Trauscht 21,500,627 118,675
At such meeting, the proposal to adopt the Company's 1999 Stock Incentive Plan
was approved by the following votes:
For Against Abstain
- --------------- ------------------ ------------------
17,020,021 4,591,403 7,878
At such meeting, the selection of Deloitte & Touche, LLP as auditors was
approved by the following votes:
For Against Abstain
- --------------- ------------------ ------------------
21,566,953 15,840 36,509
-18-
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
27- Financial Data Schedule.
(b) Reports on Form 8-K:
None.
-19-
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/ Timothy M. Wood
---------------------------------------
(Signature)
Timothy M. Wood
Vice President, Finance
(Principal Financial and Accounting Officer)
Date: August 13, 1999