UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 1-9148 THE PITTSTON COMPANY --------------------- (Exact name of registrant as specified in its charter) VIRGINIA 54-1317776 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1801 BAYBERRY COURT, RICHMOND, VIRGINIA 23226-8100 -------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (804) 289-9600 -------------- 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ As of October 31, 2000, 51,777,782 shares of $1 par value Pittston Brink's Group Common Stock were outstanding. 1
<TABLE> <CAPTION> PART I - FINANCIAL INFORMATION THE PITTSTON COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) September 30 December 31 2000 1999 - ------------------------------------------------------------------------------ (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 100,305 131,159 Accounts receivable (net of estimated uncollectible amounts: 2000 - $36,972; 1999 - $36,238) 629,944 638,754 Inventories 35,791 43,979 Prepaid expenses and other current assets 49,415 37,756 Deferred income taxes 56,784 50,255 - ------------------------------------------------------------------------------ Total current assets 872,239 901,903 Property, plant and equipment, (net of accumulated depreciation, depletion and amortization: 2000 - $700,423; 1999 - $649,607) 928,894 930,476 Intangibles, net of accumulated amortization 290,499 298,501 Deferred pension assets 116,912 122,476 Deferred income taxes 83,193 79,569 Other assets 135,372 135,659 - ------------------------------------------------------------------------------ Total assets $2,427,109 2,468,584 - ------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 111,562 90,085 Current maturities of long-term debt 127,347 32,166 Accounts payable 286,265 301,194 Accrued liabilities 385,645 409,616 - ------------------------------------------------------------------------------ Total current liabilities 910,819 833,061 Long-term debt, less current maturities 271,940 395,078 Postretirement benefits other than pensions 244,079 240,770 Workers' compensation and other claims 86,257 87,083 Deferred income taxes 16,583 16,272 Other liabilities 148,553 146,679 Commitments and contingent liabilities Shareholders' equity: Preferred stock, par value $10 per share: Authorized: 2,000 shares $31.25 Series C Cumulative Convertible Preferred Stock; Issued and outstanding: 2000 - 21 shares; 1999 - 30 shares 214 296 Pittston Brink's Group Common Stock, par value $1 per share: Authorized: 100,000 shares; Issued and outstanding: 2000 - 51,778 shares; 1999 - 40,861 shares - (Note 1) 51,778 40,861 Pittston BAX Group Common Stock, par value $1 per share: Authorized: 50,000 shares - (Note 1) Issued and outstanding: 1999 - 20,825 shares - 20,825 Pittston Minerals Group Common Stock, par value $1 per share: Authorized: 20,000 shares - (Note 1) Issued and outstanding: 1999 - 10,086 shares - 10,086 Capital in excess of par value 343,096 341,011 Retained earnings 457,550 443,349 Accumulated other comprehensive income (81,383) (56,528) Employee benefits trust, at market value (22,377) (50,259) - ------------------------------------------------------------------------------ Total shareholders' equity 748,878 749,641 - ------------------------------------------------------------------------------ Total liabilities and shareholders' equity $2,427,109 2,468,584 - ------------------------------------------------------------------------------ </TABLE> SEE ACCOMPANYING UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2
<TABLE> <CAPTION> THE PITTSTON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (Unaudited) Three Months Nine Months Ended September 30 Ended September 30 2000 1999 2000 1999 - ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Net sales $ 101,704 105,510 290,118 305,219 Operating revenues 953,598 938,598 2,817,447 2,666,059 - ------------------------------------------------------------------------------ Net sales and operating revenues 1,055,302 1,044,108 3,107,565 2,971,278 Costs and expenses: Cost of sales 105,333 113,283 307,607 324,698 Operating expenses 808,863 771,345 2,393,576 2,216,602 Selling, general and administrative expenses 123,051 121,891 366,461 346,846 Restructuring and other credits - (851) - (851) - ------------------------------------------------------------------------------ Total costs and expenses 1,037,247 1,005,668 3,067,644 2,887,295 Other operating income, net 5,428 4,953 13,430 14,270 - ------------------------------------------------------------------------------ Operating profit 23,483 43,393 53,351 98,253 Interest income 1,676 1,520 5,202 4,106 Interest expense (12,100) (9,240) (32,690) (28,747) Other income (expense), net (1,484) 111 (560) (164) - ------------------------------------------------------------------------------ Income before income taxes 11,575 35,784 25,303 73,448 Provision for income taxes 3,820 11,760 8,350 20,842 - ------------------------------------------------------------------------------ Net income 7,755 24,024 16,953 52,606 Preferred stock dividends, net (Note 6) 1,503 (231) 1,041 17,852 - ------------------------------------------------------------------------------ Net income attributed to common shares $ 9,258 23,793 17,994 70,458 - ------------------------------------------------------------------------------ Net income per common share: Basic $ 0.18 N/A 0.36 N/A Diluted 0.15 N/A 0.34 N/A - ------------------------------------------------------------------------------ Pittston Brink's Group (Notes 1 and 2): Net income per common share: Basic $ N/A 0.56 N/A 1.50 Diluted N/A 0.56 N/A 1.49 - ------------------------------------------------------------------------------ Pittston BAX Group (Notes 1 and 2): Net income per common share: Basic $ N/A 0.45 N/A 0.63 Diluted N/A 0.45 N/A 0.63 - ------------------------------------------------------------------------------ Pittston Minerals Group (Notes 1 and 2): Net loss per common share: Basic $ N/A (0.77) N/A (0.01) Diluted N/A (0.77) N/A (1.87) - ------------------------------------------------------------------------------ Pro forma net income per common share (Notes 1 and 2): Basic N/A 0.48 N/A 1.44 Diluted N/A 0.48 N/A 1.07 - ------------------------------------------------------------------------------ Comprehensive income (loss) $ (2,484) 22,845 (6,861) 63,811 - ------------------------------------------------------------------------------ </TABLE> SEE ACCOMPANYING UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3
<TABLE> <CAPTION> THE PITTSTON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (Unaudited) Nine Months Ended September 30 2000 1999 - ------------------------------------------------------------------------------ <S> <C> <C> Cash flows from operating activities: Net income $ 16,953 52,606 Adjustments to reconcile net income to net cash provided by operating activities: Noncash charges and other write-offs 442 362 Depreciation, depletion and amortization 150,257 133,449 Aircraft heavy maintenance expense 29,312 36,664 Provision for deferred income taxes (6,015) 746 Provision for pensions, noncurrent 2,068 7,732 Provision for uncollectible accounts receivable 15,885 12,475 Minority interest expense 1,942 681 Equity in earnings of unconsolidated affiliates, net of dividends received (2,892) (2,633) Other operating, net 8,629 7,172 Change in operating assets and liabilities, net of effects of acquisitions and dispositions: Increase in accounts receivable (2,158) (14,444) (Increase) decrease in inventories 8,412 (4,166) Increase in prepaid expenses and other current assets (5,318) (2,001) Increase in other assets (11,144) (7,828) Decrease in accounts payable and accrued liabilities (32,961) (2,382) (Decrease) increase in other liabilities 2,107 (256) Decrease in workers' compensation and other claims, noncurrent (1,359) (5,478) Other, net 4,172 64 - ------------------------------------------------------------------------------ Net cash provided by operating activities 178,332 212,763 - ------------------------------------------------------------------------------ Cash flows from investing activities: Additions to property, plant and equipment (164,005) (196,951) Aircraft heavy maintenance expenditures (41,808) (51,490) Acquisitions, net of cash acquired and related contingency payments (3,880) (429) Proceeds from disposal of property, plant and equipment 4,371 8,177 Proceeds from disposition of investments 2,275 1,143 Other, net 1,245 5,932 - ------------------------------------------------------------------------------ Net cash used by investing activities (201,802) (233,618) - ------------------------------------------------------------------------------ Cash flows from financing activities: Increase (decrease) in short-term borrowings 21,376 (6,502) Additions to long-term debt 96,635 125,524 Reductions of long-term debt (119,491) (74,168) Repurchase of stock of the Company (2,162) (23,494) Proceeds from exercise of stock options 482 2,156 Dividends paid (4,224) (7,670) - ------------------------------------------------------------------------------ Net cash provided (used) by financing activities (7,384) 15,846 - ------------------------------------------------------------------------------ Net decrease in cash and cash equivalents (30,854) (5,009) Cash and cash equivalents at beginning of period 131,159 83,894 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 100,305 78,885 - ------------------------------------------------------------------------------ </TABLE> SEE ACCOMPANYING UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4
THE PITTSTON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (Unaudited) (1) The Pittston Company (the "Company") has five operating segments - Brink's, Incorporated ("Brink's"), Brink's Home Security, Inc. ("BHS"), BAX Global Inc. ("BAX Global"), Pittston Coal Operations ("Coal Operations") and Other Operations which consists of Pittston Mineral Ventures ("Mineral Ventures") and the Company's timber, gas and equipment rebuild operations (collectively, "Allied Operations"). On December 6, 1999, the Company announced its intention to exit the coal business through the sale of coal mining operations and reserves. Until the Company meets the measurement date criteria under Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", Coal Operations will continue to be reported as an operating segment. Losses may be recorded upon the future disposition of the coal assets, including additional accruals primarily related to certain postretirement medical and multi-employer plans, as well as the net losses expected to occur from the measurement date to the closing date of the sale. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and with applicable quarterly reporting regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior period amounts have been reclassified to conform to the current period's financial statement presentation. Operating results for the interim periods of 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the consolidated financial statements and related notes included in the Company's annual report on Form 10-K for the year ended December 31, 1999. As previously reported, prior to January 14, 2000, the Company had 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 securities reflecting the performance of the Brink's Group, the BAX Group and the Minerals Group, respectively. On December 6, 1999, the Company announced that its Board of Directors (the "Board") had approved the elimination of the tracking stock capital structure by an exchange of all outstanding shares of Minerals Stock and BAX Stock for shares of Brink's Stock (the "Exchange"). The Exchange took place on January 14, 2000 (the "Exchange Date"), on which date, holders of Minerals Stock received 0.0817 share of Brink's Stock for each share of their Minerals Stock; and holders of BAX Stock received 0.4848 share of Brink's Stock for each share of their BAX Stock based on the shareholder approved formula and calculated as follows: <TABLE> <CAPTION> (PER SHARE PRICES) Brink's Stock BAX Stock Minerals Stock -------------------------------------------------------------------------- <S> <C> <C> <C> Ten day average price* $ 18.92 $ 7.98 $ 1.34 Exchange factor 1.00 1.15 1.15 -------------------------------------------------------------------------- Fair Market Value, as defined* $ 18.92 $ 9.17 $ 1.54 Exchange ratio N/A 0.4848 0.0817 -------------------------------------------------------------------------- </TABLE> 5
<TABLE> <CAPTION> (PER SHARE PRICES) Brink's Stock BAX Stock Minerals Stock -------------------------------------------------------------------------- <S> <C> <C> <C> Closing prices: December 3, 1999 $ 18.375 $ 10.0625 $ 1.125 December 6, 1999 21.500 10.1250 1.625 -------------------------------------------------------------------------- </TABLE> *The "Fair Market Value" of each class of common stock was determined by taking the average closing price of that class of common stock for the 10 trading days beginning 30 business days prior to the first public announcement of the exchange proposal. Since the first public announcement was made on December 6, 1999, the average closing price was calculated during the 10 trading days beginning October 22, 1999 and ending November 4, 1999. From and after the Exchange Date, Brink's Stock is the only outstanding class of common stock of the Company and continues to trade on the New York Stock Exchange under the symbol "PZB". Prior to the Exchange Date, Brink's Stock reflected the performance of the Brink's Group only; after the Exchange Date, Brink's Stock reflects the performance of the Company as a whole. Shares of Brink's Stock after the Exchange are hereinafter referred to as "Pittston Common Stock". As a result of the Exchange on January 14, 2000, the Company issued 10,916 shares of Pittston Common Stock, which consists of 9,490 shares of Pittston Common Stock equal to 100% of the Fair Market Value, as defined, of all BAX Stock and Minerals Stock and 1,426 shares of Pittston Common Stock equal to the additional 15% of the Fair Market Value of BAX Stock and Minerals Stock exchanged pursuant to the above-described formula. Of the 10,916 shares issued, 10,196 shares were issued to holders of BAX Stock and Minerals Stock and 720 shares were issued to The Pittston Company Employee Benefits Trust (the "Trust"). Shares issued to holders of BAX Stock and Minerals Stock (excluding those shares issued to the Trust) were distributed as follows: <TABLE> <CAPTION> Holders of Holders of (IN THOUSANDS EXCEPT PER SHARE PRICES) BAX Stock Minerals Stock -------------------------------------------------------------------------- <S> <C> <C> Shares outstanding on January 13, 2000 19,475 9,273 Brink's Stock issued pursuant to the Exchange: Based on 100% of Fair Market Value 8,207 657 Based on 15% of Fair Market Value 1,233 99 -------------------------------------------------------------------------- Total shares issued on January 14, 2000 9,440 756 Brink's Stock closing price per share - December 3, 1999 $ 18.375 18.375 -------------------------------------------------------------------------- Value as of December 3, 1999 of Brink's Stock issued pursuant to the Exchange $ 173,460 13,892 -------------------------------------------------------------------------- </TABLE> As set forth in the Company's Articles of Incorporation approved by the shareholders, in the event of a dissolution, liquidation or winding up of the Company, holders of Brink's Stock, BAX Stock and Minerals Stock would have shared on a per share basis, the funds, if any, remaining for distribution to the common shareholders. In the case of Minerals Stock, such percentage had 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. The liquidation percentages were 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). As of December 3, 1999, such liquidation percentages would have been approximately 54%, 27% and 19% for holders of Brink's Stock, BAX Stock and Minerals Stock, respectively. Including the additional shares issued pursuant to the Exchange, the liquidation percentages for former holders of Brink's Stock, BAX Stock and Minerals Stock, respectively, as of January 14, 2000 would have been approximately 79%, 19% and 2%. 6
Upon completion of the Exchange on January 14, 2000, there were 49,484 issued and outstanding shares of Pittston Common Stock for use in the calculation of net income per common share. (2) The following are reconciliations between the calculations of basic and diluted net income per share for the three and nine months ended September 30, 2000 and the pro forma basic and diluted net income per share for the three and nine months ended September 30, 1999. <TABLE> <CAPTION> Three Months Nine Months Ended September 30 Ended September 30 The Company 2000 1999 2000 1999 ------------------------------------------------------------------------------ (Pro forma) (Pro forma) <S> <C> <C> <C> <C> Numerator: Net income - Basic $ 7,755 24,024 16,953 52,606 Convertible Preferred Stock dividends, net 1,503 (231) 1,041 17,852 ------------------------------------------------------------------------------ Basic net income per share numerator 9,258 23,793 17,994 70,458 Effect of dilutive securities: Convertible Preferred Stock dividends, net (1,503) - (1,041) (17,852) ------------------------------------------------------------------------------ Diluted net income per share numerator $ 7,755 23,793 16,953 52,606 Denominator: Basic weighted average common shares outstanding 50,235 49,223 49,939 49,017 Effect of dilutive securities: Stock options 35 161 43 194 Assumed conversion of the Convertible Preferred Stock 36 - 37 66 ------------------------------------------------------------------------------ Diluted weighted average common shares outstanding 50,306 49,384 50,019 49,277 ------------------------------------------------------------------------------ </TABLE> Options to purchase 2,767 shares of Pittston Common Stock, at prices between $15.91 and $315.06 per share and options to purchase 2,970 shares of Pittston Common Stock, at prices between $16.19 and $315.06 per share were outstanding during the three and nine months ended September 30, 2000, respectively, but were not included in the computation of diluted net income per share because the options' exercise prices were greater than the average market price of the common shares, and therefore, the effect would be antidilutive. For purposes of calculating the September 30, 1999 pro forma basic weighted average common shares outstanding and the basic weighted average common shares outstanding for the period from January 1, 2000 to January 13, 2000, the Company's basic weighted average common shares outstanding for BAX Stock and Minerals Stock were converted into shares of Pittston Common Stock by multiplying such average shares outstanding by the respective exchange ratios referred to in Note 1. Included in the Company's 1999 pro forma diluted weighted average common shares outstanding and 2000 diluted weighted average common shares outstanding are converted weighted average stock options and converted weighted average Series C Cumulative Preferred Stock (the "Convertible Preferred Stock") to the extent that such conversions are dilutive. Pro forma converted weighted options for 1999 and equivalent Pittston Common Stock options outstanding, on BAX Stock and Minerals Stock, from January 1, 2000 to January 13, 2000 are calculated by multiplying those weighted average options having an exercise price less than the average fair market value for Brink's Stock, BAX Stock and Minerals Stock by the respective exchange ratios. Pro forma converted 7
weighted average Convertible Preferred Stock is calculated by multiplying the weighted average Convertible Preferred Stock by the Minerals exchange ratio referred to in Note 1. Excluded from the Company's 1999 pro forma diluted net income per share calculations are converted options to the extent that such conversions are antidilutive. Converted options are calculated by multiplying those options having an exercise price greater than the average fair market value for Brink's Stock, BAX Stock and Minerals Stock by the respective exchange ratios. Converted exercise prices related to these converted options are calculated by dividing the exercise price of Brink's Stock, BAX Stock and Minerals Stock by the respective exchange ratios. Pro forma options to purchase 2,447 shares of Pittston Common Stock, at prices between $19.09 and $315.06 per share and pro forma options to purchase 2,318 shares of Pittston Common Stock, at prices between $19.41 and $315.06 per share were outstanding during the three and nine months ended September 30, 1999, respectively, but were not included in the computation of diluted net income per share because the options' exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. The conversion of the Convertible Preferred Stock to 38 shares of Pittston Common Stock has been excluded in the computation of diluted net income per share for the three months ended September 30, 1999 because the effect of the assumed conversion would be antidilutive. The shares of Pittston Common Stock held in the Trust are subject to the treasury stock method and effectively are not included in the basic and diluted net income per share calculations. As of September 30, 2000 and 1999, 1,444 and 2,407 pro forma shares, respectively, of Pittston Common Stock remained in the Trust. The following are reconciliations between the Group calculations of basic and diluted net income (loss) per share by Group: <TABLE> <CAPTION> Three Months Ended September 30, 1999 Brink's BAX Minerals Group Group Group -------------------------------------------------------------------------- <S> <C> <C> <C> Numerator: Net income (loss) $ 22,031 8,672 (6,679) Convertible Preferred Stock dividends, net - - (231) -------------------------------------------------------------------------- Basic net income (loss) per share numerator 22,031 8,672 (6,910) Effect of dilutive securities: Convertible Preferred Stock dividends, net - - - -------------------------------------------------------------------------- Diluted net income (loss) per share numerator $ 22,031 8,672 (6,910) Denominator: Basic weighted average common shares outstanding 39,122 19,316 9,014 Effect of dilutive securities: Stock options 147 29 - Assumed conversion of the Convertible Preferred Stock - - - -------------------------------------------------------------------------- Diluted weighted average common shares outstanding 39,269 19,345 9,014 -------------------------------------------------------------------------- </TABLE> 8
<TABLE> <CAPTION> Nine Months Ended September 30, 1999 Brink's BAX Minerals Group Group Group -------------------------------------------------------------------------- <S> <C> <C> <C> Numerator: Net income (loss) $ 58,434 12,144 (17,972) Convertible Preferred Stock dividends, net - - 17,852 -------------------------------------------------------------------------- Basic net income (loss) per share numerator 58,434 12,144 (120) Effect of dilutive securities: Convertible Preferred Stock dividends, net - - (17,852) -------------------------------------------------------------------------- Diluted net income (loss) per share numerator $ 58,434 12,144 (17,972) Denominator: Basic weighted average common shares outstanding 39,001 19,180 8,786 Effect of dilutive securities: Stock options 181 26 1 Assumed conversion of the Convertible Preferred Stock - - 813 -------------------------------------------------------------------------- Diluted weighted average common shares outstanding 39,182 19,206 9,600 -------------------------------------------------------------------------- </TABLE> Options to purchase 1,410 shares of Brink's Stock, at prices between $25.57 and $39.56 per share and options to purchase 1,164 shares of Brink's Stock, at prices between $26.69 and $39.56 per share, were outstanding during the three and nine months ended September 30, 1999, respectively, but were not included in the computation of diluted net income per share because the options' exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. Options to purchase 2,017 and 2,263 shares of BAX Stock, at prices between $9.41 and $27.91 per share, were outstanding during the three and nine months ended September 30, 1999, respectively, but were not included in the computation of diluted net income per share because the options' exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. Options to purchase 722 shares of Minerals Stock, at prices between $1.56 and $25.74 per share, were outstanding during the three months ended September 30, 1999 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 698 shares of Minerals Stock, at prices between $1.81 and $25.74 per share, were outstanding during the nine months ended September 30, 1999, but were not included in the computation of diluted net loss per share because the options' exercise prices were greater than the average market price of the common shares, and therefore, the effect would be antidilutive. The conversion of the Convertible Preferred Stock to 460 shares of Minerals Stock has been excluded in the computation of diluted net loss per share in the three months ended September 30, 1999 because the effect of the assumed conversion would be antidilutive. The shares of Brink's Stock, BAX Stock and Minerals Stock held in the Trust are subject to the treasury stock method and effectively are not included in the basic and diluted net income (loss) per share calculations. As of September 30, 1999, 1,691 shares of Brink's Stock, 1,466 shares of BAX Stock and 69 shares of Minerals Stock remained in the Trust. 9
(3) Depreciation, depletion and amortization of property, plant and equipment totaled $45,788 and $138,015 in the third quarter and first nine months of 2000, respectively, compared to $39,671 and $115,236 in the third quarter and first nine months of 1999, respectively. (4) Cash payments made for interest and income taxes, net of refunds received, were as follows: <TABLE> <CAPTION> Three Months Nine Months Ended September 30 Ended September 30 2000 1999 2000 1999 -------------------------------------------------------------------------- <S> <C> <C> <C> <C> Interest $ 12,653 9,969 35,131 29,335 Income taxes $ 6,228 9,052 25,030 31,483 -------------------------------------------------------------------------- </TABLE> (5) The cumulative impact of foreign currency translation deducted from shareholders' equity was $77,956 and $59,623 at September 30, 2000 and December 31, 1999, respectively. The cumulative impact of cash flow hedges deducted from and added to shareholders' equity was $4,118 and $2,540 at September 30, 2000 and December 31, 1999, respectively. (6) Under the share repurchase programs authorized by the Board, the Company purchased shares in the periods presented as follows: <TABLE> <CAPTION> Three Months Nine Months Ended September 30 Ended September 30 (IN THOUSANDS) 2000 1999 2000 1999 -------------------------------------------------------------------------- <S> <C> <C> <C> <C> Pittston Common Stock: Shares - N/A - N/A Cost $ - N/A - N/A Brink's Stock: Shares N/A - N/A 100.0 Cost $ N/A - N/A 2,514 Convertible Preferred Stock: Shares 8.1 - 8.1 83.9 Cost $ 2,162 - 2,162 20,980 Excess carrying amount (a) $ 1,734 - 1,734 19,201 -------------------------------------------------------------------------- </TABLE> (a) The excess of the carrying amount of the Convertible Preferred Stock over the cash paid to holders for repurchases made during the periods. This amount is deducted from preferred dividends in the Company's Consolidated Statement of Operations. In March 1999, the Company purchased 83.9 shares (or 839 depositary shares) of its Convertible Preferred Stock for $20,980 and in September 2000, the Company purchased 8.1 shares (or 81 depositary shares) of its Convertible Preferred Stock for $2,162. The Convertible Preferred Stock is convertible into Pittston Common Stock and has an annual dividend rate of $31.25 per share. Preferred dividends included on the Company's Consolidated Statement of Operations for the three and nine months ended September 30, 2000 and the nine months ended September 30, 1999 are net of the $1,734 and $19,201, which is the excess of the carrying amount over the cash paid to the holders of the Convertible Preferred Stock. At September 30, 2000, the Company had the remaining authority to purchase over time 900 shares of Pittston Common Stock and an additional $5,394 of its Convertible Preferred Stock. The remaining aggregate purchase cost limitation for all common stock was $22,184 at September 30, 2000. 10
(7) On October 3, 2000, the Company entered into a $370 million credit agreement with a syndicate of banks to replace the existing $350 million credit agreement that was due to expire in May 2001. The new credit agreement includes a $185 million three year revolving credit facility and a $185 million short-term revolving credit facility, both of which permit additional borrowings, repayments and reborrowings up to the maximum. Among the covenants in the new credit agreement are covenants that limit the Company's maximum allowable indebtedness and provide for minimum coverage of interest costs. The maturity dates of the short-term and long-term portions of the credit agreement are October 2, 2001 and October 3, 2003, respectively. (8) Staff Accounting Bulletin ("SAB") No. 101, which provides interpretive guidance on applying generally accepted accounting principles to revenue recognition in financial statements will be implemented by the Company in the fourth quarter of 2000. The Company is currently assessing SAB No. 101 as well as written guidance regarding its implementation which was issued in late October 2000. As such, no final determination has been made whether the SAB will materially impact (positively or negatively) the reported results of the Company. It is anticipated that the impact, if any, related to the implementation of SAB No. 101 would only affect BHS and would be recorded as a change in accounting principle as of January 1, 2000, as is called for in the SAB. Emerging Issues Task Force ("EITF") No. 00-10 "Accounting for Shipping and Handling Fees and Costs" will be implemented by the Company in the fourth quarter of 2000. EITF No. 00-10 will require the Company's Coal Operations to begin reporting fees charged for certain shipping and handling activity on a disaggregated basis (i.e. separately report the associated revenues and costs) whereas such fees are currently being netted against gross sales to arrive at reported net sales. The implementation of this EITF will not impact the operating profit or net income of the Company as it will increase sales and costs of sales by equivalent amounts. 11
THE PITTSTON COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion is a summary of the key factors management considers necessary or useful in reviewing the Company's results of operations, liquidity and capital resources. <TABLE> <CAPTION> RESULTS OF OPERATIONS Three Months Nine Months Ended September 30 Ended September 30 (IN THOUSANDS) 2000 1999 2000 1999 - ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Net sales and operating revenues: Business and security services: Brink's $ 370,803 347,930 1,088,962 1,013,279 BHS 61,783 58,124 181,988 170,261 BAX Global 521,012 532,544 1,546,497 1,482,519 - ------------------------------------------------------------------------------ Total business and security services 953,598 938,598 2,817,447 2,666,059 - ------------------------------------------------------------------------------ Natural resources: Coal Operations 91,294 99,417 259,673 288,540 Other Operations 10,410 6,093 30,445 16,679 - ------------------------------------------------------------------------------ Total natural resources 101,704 105,510 290,118 305,219 - ------------------------------------------------------------------------------ Net sales and operating revenues $ 1,055,302 1,044,108 3,107,565 2,971,278 - ------------------------------------------------------------------------------ Operating profit (loss): Business and security services: Brink's $ 32,251 27,320 77,754 69,820 BHS 13,957 12,663 43,826 41,000 BAX Global (12,651) 18,177 (29,058) 31,365 - ------------------------------------------------------------------------------ Total business and security services 33,557 58,160 92,522 142,185 - ------------------------------------------------------------------------------ Natural resources: Coal Operations (7,430) (8,816) (29,581) (27,847) Other Operations 2,149 (466) 5,877 219 - ------------------------------------------------------------------------------ Total natural resources (5,281) (9,282) (23,704) (27,628) - ------------------------------------------------------------------------------ Segment operating profit 28,276 48,878 68,818 114,557 General corporate expense (4,793) (5,485) (15,467) (16,304) - ------------------------------------------------------------------------------ Operating profit $ 23,483 43,393 53,351 98,253 - ------------------------------------------------------------------------------ </TABLE> The Pittston Company (the "Company") has five operating segments - Brink's, Incorporated ("Brink's"), Brink's Home Security, Inc. ("BHS"), BAX Global Inc. ("BAX Global"), Pittston Coal Operations ("Coal Operations") and Other Operations which consists of Pittston Mineral Ventures ("Mineral Ventures") and the Company's timber, gas and equipment rebuild operations (collectively, "Allied Operations"). On January 14, 2000, the Company completed an exchange of its Pittston BAX Group Common Stock ("BAX Stock") and Pittston Minerals Group Common Stock ("Minerals Stock") into Pittston Brink's Group Common Stock ("Brink's Stock"), at exchange ratios of 0.4848 share of Brink's Stock for each share of BAX Stock and 0.0817 share of Brink's Stock for each share of Minerals Stock. Brink's Stock, hereinafter referred to as Pittston Common Stock, now constitutes the Company's only class of common stock and continues to trade on the New York Stock Exchange under the symbol "PZB". See the "Capitalization" section for further discussion. 12
On December 6, 1999, the Company announced its intention to exit the coal business through the sale of coal mining operations and reserves. Until the Company meets the measurement date criteria under Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", Coal Operations will continue to be reported as an operating segment. Losses may be recorded upon the future disposition of the coal assets, including additional accruals primarily related to certain postretirement medical and multi-employer plans, as well as the net losses expected to occur from the measurement date to the closing date of the sale. The process of finding a buyer or buyers for the coal assets is continuing, but the disposal is not likely to be concluded before the end of 2000. In the third quarter of 2000, the Company reported net income of $7.8 million compared with net income of $24.0 million in the third quarter of 1999. Operating profit totaled $23.5 million in the 2000 third quarter, a shortfall of $19.9 million, as compared with $43.4 million in the same period of 1999. Lower operating results for BAX Global ($30.8 million) were partially offset by increases in operating results for Brink's ($4.9 million), Other Operations ($2.6 million), Coal Operations ($1.4 million) and BHS ($1.3 million) as well as lower corporate expenses ($0.7 million). See further discussion of operating segments' financial results below. In the first nine months of 2000, the Company reported net income of $17.0 million compared with $52.6 million in the first nine months of 1999. Operating profit totaled $53.4 million in the first nine months of 2000 compared with $98.3 million in the prior year's comparable period, a reduction of $44.9 million. Lower operating results at BAX Global ($60.4 million) and Coal Operations ($1.7 million) were partially offset by increases in operating profit for Brink's ($7.9 million), Other Operations ($5.7 million) and BHS ($2.8 million) as well as lower corporate expenses ($0.8 million). See further discussion of operating segments' financial results below. Preferred dividends included on the Company's Statement of Operations for the three and nine months ended September 30, 2000 and the nine months ended September 30, 1999 were net of $1.7 million and $19.2 million, respectively, which represents the excess of the carrying amount of the Convertible Preferred Stock over the cash paid to the holders of the Convertible Preferred Stock for repurchases made during the period. BRINK'S The following is a table of selected financial data for Brink's on a comparative basis: <TABLE> <CAPTION> Three Months Nine Months Ended September 30 Ended September 30 (IN THOUSANDS) 2000 1999 2000 1999 - ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Operating revenues: North America (a) $ 160,424 146,807 475,099 426,531 International 210,379 201,123 613,863 586,748 - ------------------------------------------------------------------------------ Total operating revenues $ 370,803 347,930 1,088,962 1,013,279 - ------------------------------------------------------------------------------ Operating profit: North America (a) $ 16,327 12,038 41,370 32,087 International 15,924 15,282 36,384 37,733 - ------------------------------------------------------------------------------ Total segment profit $ 32,251 27,320 77,754 69,820 - ------------------------------------------------------------------------------ Depreciation and amortization $ 13,820 13,619 44,431 38,877 Cash capital expenditures 16,714 19,771 53,980 63,686 - ------------------------------------------------------------------------------ </TABLE> (a) Comprises USA and Canada. Brink's worldwide consolidated revenues totaled $370.8 million in the third quarter of 2000, a 7% increase over third quarter 1999 revenues of $347.9 million. Brink's operating profit of $32.3 million in the third quarter of 2000 represented an 18% increase from the $27.3 million reported in the prior year's quarter. The increase in operating profit is due to a $4.9 million settlement associated with an insurance recoverable related to a prior year's robbery loss in North America. 13
The increase in Brink's revenues was attributable to both North American and International operations. Increased revenues in North America primarily related to new business from armored car operations. International revenue increases were primarily attributable to Latin American operations, partially offset by lower revenue from European operations. The revenue decreases in Europe were primarily due to the impact of a weaker Euro partially offset by improvements in the French operations. In the same comparative periods, foreign translation effects, primarily the impact of the US dollar versus the European currencies, reduced reported revenues by approximately $15 million. Brink's operating profit increased $4.9 million in the third quarter of 2000 versus the same quarter of 1999. Operating profit in both North American and International operations increased over the prior year. The North American operating profits of $16.3 million included the aforementioned $4.9 million insurance settlement. While revenue growth in North America remained strong, lower operating profits (excluding the settlement) resulted from increased labor costs in expanding markets for armored car operations (including ATM services), increased workers' compensation costs and lower results from air courier operations. Increased operating profit for International operations was attributable to improved results in Asia/Pacific and Latin America, partially offset by lower results in Europe, primarily due to the effects of the lower Euro. The improved results in Asia/Pacific were largely due to a decrease in the losses in Australia. Latin America reported increased operating profits primarily due to improvements in operating performance in Argentina and Chile. Brink's worldwide consolidated revenues totaled $1.1 billion in the first nine months of 2000, a $75.7 million (7%) increase over the same period of 1999. Brink's operating profit of $77.8 million in the first nine months of 2000 represented an 11% increase over the $69.8 million reported in the prior year period. The increase in Brink's revenues for the first nine months of 2000 compared to the same period of 1999 was attributable to both North American ($48.6 million) and International operations ($27.1 million). Increased revenues in North America primarily related to growth in the armored car business. International revenue increases were attributable to operations in Latin America (primarily Brazil) and Asia/Pacific, partially offset by decreases in Europe, due to the effects of the lower Euro partially offset by improvements in France. Improvements in Asia/Pacific stemmed from Australia and Hong Kong. International revenues (primarily Europe) for the nine month period were negatively impacted by the strong US dollar (approximately $45 million). During the first nine months of 2000, as compared to 1999, the acceleration of reporting to current month reporting for Brink's subsidiary in France increased revenue by $22 million. This increase was partially offset by the effects of an industry-wide strike in France in May, estimated at approximately $8 million. The Brink's operating profit of $77.8 million, an increase of $7.9 million in the first nine months of 2000 compared to the same period of 1999, was attributable to operations in North America as International operating profit decreased slightly. North American operating profit for the nine months of 2000 included the aforementioned $4.9 million insurance settlement. In addition, higher North American operating profits also reflected improved profitability of armored car operations largely due to increased volumes, and to a lesser extent, improved results in currency and coin processing services, partially offset by lower air courier results. International operating profits reflect improvements in the Asia/Pacific region primarily due to a decrease in the losses in Australia and improved results in Hong Kong. Latin America reported lower operating profits primarily due to overall weaker business conditions in Venezuela, which was partially offset by improvements in operating performance in Brazil and Argentina. Operating profit in Europe was negatively impacted by the weaker Euro ($2.3 million) and the previously-mentioned two week nationwide strike of security personnel in France during the second quarter, which reduced operating profit by an estimated $5 million. This reduction was partially offset by the acceleration of reporting in France discussed above, which added approximately $2 million to operating profit for the first nine months of 2000. 14
BRINK'S HOME SECURITY The following is a table of selected financial data for BHS on a comparative basis: <TABLE> <CAPTION> Three Months Nine Months Ended September 30 Ended September 30 (DOLLARS IN THOUSANDS) 2000 1999 2000 1999 - ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Operating profit: Monitoring and service $ 20,612 19,355 62,299 57,797 Net marketing, sales and installation (6,655) (6,692) (18,473) (16,797) - ------------------------------------------------------------------------------ Total segment profit $ 13,957 12,663 43,826 41,000 - ------------------------------------------------------------------------------ Monthly recurring revenues (a) 17,739 16,545 - ------------------------------------------------------------------------------ Annualized disconnect rate, net of moves 7.5% 8.4% 7.8% 8.1% - ------------------------------------------------------------------------------ Number of subscribers: Beginning of period 659,879 614,380 643,277 585,565 Installations 20,193 26,917 62,448 79,592 Disconnects, net (12,524) (13,100) (38,177) (36,960) - ------------------------------------------------------------------------------ End of period 667,548 628,197 667,548 628,197 - ------------------------------------------------------------------------------ Depreciation and amortization (b)$ 13,693 12,624 40,982 37,319 Cash capital expenditures 19,186 21,610 54,586 60,848 - ------------------------------------------------------------------------------ </TABLE> (a) Monthly recurring revenues are calculated based on the number of subscribers at period end multiplied by the average fee per subscriber received in the last month of the period for monitoring, maintenance and related services. (b) Includes the write-off of capitalized subscriber installation costs related to disconnects. Revenues for BHS increased by $3.7 million (6%) to $61.8 million in the third quarter of 2000 compared to the same period of 1999. In the first nine months of 2000, revenues for BHS increased $11.7 million (7%) to $182.0 million compared to the first nine months of 1999. This increase in revenues for the three and nine month periods was due to higher ongoing monitoring and service revenues, reflecting a 6% increase in the subscriber base as well as slightly higher average monitoring fees. As a result of such growth, monthly recurring revenues at September 30, 2000 of $17.7 million grew 7% versus September 30, 1999. Operating profit in the third quarter and first nine months of 2000 increased $1.3 million (10%) and $2.8 million (7%), respectively, compared to the same periods of 1999. Operating profit was favorably impacted by increases generated from monitoring and service activities of $1.3 million (6%) and $4.5 million (8%) for the third quarter and first nine months of 2000, respectively, as compared to the prior year periods. These improvements were due primarily to the contribution associated with the growth in the subscriber base, slightly higher average monitoring fees and a lower net disconnect rate, partially offset by an increase in service costs. Growth in operating profit in the third quarter and first nine months of 2000 as compared to the same periods of 1999 reflected increased costs (including some start-up expenses) associated with the growth in new distribution channels (including new construction, multi-family and dealer programs) as BHS moves to expand its methods of acquiring new customers. These costs were partially offset by the impact of fewer system installations and higher average connection fees associated with the traditional distribution channels. In addition, operating profit during the quarter benefited from a decrease in the growth rate of installation losses per subscriber. Net cost of marketing, sales and installation activities on a per install and overall basis during the final quarter of 2000 may continue to be impacted by the growth in new distribution channels and several initiatives implemented in the fourth quarter of 1999, including increasing the connection fee per installation and a tightening of the company's credit policy. While these initiatives have improved BHS' profitability through September 30, 2000, their effects may be less pronounced in the future. 15
BAX GLOBAL The following is a table of selected financial data for BAX Global on a comparative basis: <TABLE> <CAPTION> Three Months Nine Months Ended September 30 Ended September 30 (IN THOUSANDS) 2000 1999 2000 1999 - ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Operating revenues: Americas (a) $ 305,960 318,851 924,788 889,737 International 228,865 224,537 663,086 629,947 Eliminations/other (13,813) (10,844) (41,377) (37,165) - ------------------------------------------------------------------------------ Total operating revenues $ 521,012 532,544 1,546,497 1,482,519 - ------------------------------------------------------------------------------ Operating profit (loss): Americas (b) $ (12,130) 21,460 (24,368) 42,107 International (b) 8,209 7,612 24,469 21,676 Other (b) (8,730) (10,895) (29,159) (32,418) - ------------------------------------------------------------------------------ Total segment profit (loss) $ (12,651) 18,177 (29,058) 31,365 - ------------------------------------------------------------------------------ Depreciation and amortization $ 15,328 10,134 43,806 29,420 Cash capital expenditures 15,941 23,646 41,505 56,711 - ------------------------------------------------------------------------------ Worldwide expedited freight services: Revenues $ 435,156 447,942 1,272,439 1,242,613 Weight (million pounds) 439 459 1,312 1,298 - ------------------------------------------------------------------------------ </TABLE> (a) Includes Intra-US revenue of $153.5 million and $168.1 million for the quarters ended September 30, 2000 and 1999, respectively and $460.2 million and $461.6 million for the nine months ended September 30, 2000 and 1999, respectively. (b) Expenses associated with major information technology projects and certain overhead costs have been reallocated in 1999 from Other to the Americas and International, respectively. Worldwide revenues for the 2000 third quarter decreased 2% over the 1999 third quarter to $521.0 million. The operating loss in the third quarter of 2000 was $12.7 million, compared to a profit of $18.2 million in the third quarter of 1999. Operating revenues in the third quarter of 2000 decreased $11.5 million compared to the same period of 1999, mainly due to a decrease in Americas revenues of $12.9 million (4%) which was partially offset by an increase in international revenues of $4.3 million (2%). The decrease in Americas revenues was primarily due to a decrease in domestic expedited volume partially offset by small increases in the domestic expedited yield. The International revenue increase reflects growth in the Atlantic region due to increased export volumes, and the Pacific region which continues to experience revenue increases related to supply chain management. However, the rate of revenue growth in this region is slowing as export volumes related to the high technology industry soften. Operating results for the third quarter of 2000 declined $30.8 million compared to the same period of 1999, reflecting significantly lower performance in the Americas region partially offset by an improvement in International results. The operating loss in the Americas region was primarily the result of higher service costs for the fleet of aircraft, lower domestic expedited volume, higher administrative expenses and higher fuel costs (for both air and ground transportation) which were not covered in their entirety by fuel surcharges and hedging activities. Operating results in the Americas were also impacted by higher depreciation and amortization expense, reflecting the depreciation associated with higher expenditures on aircraft modifications in 1999 and information systems placed in service in late 1999. Additionally, the operating results in the Americas included a bad debt provision of approximately $4.5 million related to the bankruptcy filing during the quarter of a customer of the Americas operations and approximately $1.5 million associated with staff reductions related to the partial realignment of BAX Global's organizational structure, primarily at its corporate headquarters. International operating profits increased slightly due to higher yields in supply chain management and transportation services in the Pacific region, partially offset by lower results in the Atlantic region due to lower volumes and higher operating costs. Cost control efforts have been initiated in the Atlantic region during the fourth quarter of 2000. 16
Over the course of 2000, the operating performance of BAX Global's Americas region has been negatively impacted by soft demand and higher transportation, operating and administrative costs relative to that demand. In addition, conditions indicate that demand in the fourth quarter of 2000 will not reach 1999 levels. As such, BAX Global is continuing to evaluate alternatives directed at returning its Americas operations to profitability. Among such alternatives are ways to improve sales performance and to reduce transportation, operating and administrative expenses. Through actions taken in the third quarter, employee-related costs have already been reduced by approximately $8 million on an annualized basis. The alternatives for further cost reductions, which are still being evaluated, could affect future earnings as well as the carrying value of BAX Global's assets. At this time, and until such alternatives are finalized, it is not practicable to estimate, with certainty, the overall outcome of the alternatives or their impact, if any, on the financial position and/or results of operations of the Company. However, management currently anticipates that, at a minimum, transportation costs will be reduced by $20 million to $25 million on an annualized basis. A supplier, which formerly provided the majority of BAX Global's 727 lift capacity and which also operates controlled lift for the freight forwarding community, filed for Chapter 11 bankruptcy protection in early May of 2000. Since that time, BAX Global has lessened its dependency on this supplier, through a negotiated reduction in lift capacity, which resulted in a decrease in total cost but an increase in the unit cost of its existing lift commitment with this supplier. BAX Global's airline subsidiary, Air Transport International ("ATI"), reached a tentative agreement during the third quarter with the local union for the International Brotherhood of Teamsters, representing ATI's cockpit crewmembers. The Company anticipates a resolution by mid-November 2000. Worldwide revenues for the first nine months of 2000 increased 4% over the same period of 1999 to $1.5 billion. The operating loss in the first nine months of 2000 was $29.1 million, compared to a profit of $31.4 million in the first nine months of 1999. Operating revenues in the first nine months of 2000 increased as a result of increases in both International and Americas revenues. The increase in International revenues of $33.1 million (5%) was primarily due to continued growth in the Pacific region from increased supply chain management and transportation services in the high technology industry, as well as in the Atlantic region due to an increase in export volumes. Americas revenues increased $35.1 million (4%) primarily as a result of increased export volumes. Domestic and international fuel surcharges have resulted in a small increase in yields for the first nine months of 2000. The increase in domestic expedited freight yield was partially offset by a decrease in volume. Operating results for the first nine months of 2000 declined $60.4 million compared to the same period of 1999, reflecting significantly lower performance in the Americas region partially offset by improved International results. The operating loss in the Americas region was primarily the result of lower volumes, higher service costs for its fleet of aircraft, higher administrative costs and increases in fuel costs which were not covered in their entirety by fuel surcharges and hedging activities. Operating results in the Americas region were also impacted by higher depreciation and amortization expense, reflecting the depreciation associated with higher expenditures on aircraft modifications in 1999 and information systems placed in service in late 1999. Americas operating results also include a bad debt provision of approximately $4.5 million related to the current period bankruptcy of a customer of the America's Operations and approximately $1.5 million associated with staff reductions related to the partial realignment of BAX Global's organizational structure. International profits increased primarily due to higher yielding supply chain management and transportation services in the Pacific region. In the first nine months of 1999, the International results included a benefit of approximately $1.3 million from the reversal of excess incentive accruals. In addition, Other operating results for the first nine months of 2000 include expenses of approximately $1.3 million associated with an employment agreement with a former executive. 17
COAL OPERATIONS The following is a table of selected financial data for Coal Operations on a comparative basis: <TABLE> <CAPTION> Three Months Nine Months Ended September 30 Ended September 30 (IN THOUSANDS) 2000 1999 2000 1999 - ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Coal margin $ 2,591 4,161 2,732 14,556 Other operating income 934 2,692 3,013 5,963 Restructuring and other credits - 851 - 851 - ------------------------------------------------------------------------------ Margin and other income 3,525 7,704 5,745 21,370 - ------------------------------------------------------------------------------ Idle equipment and closed mines 882 2,346 2,289 6,426 Inactive employee costs 7,206 9,435 22,801 27,728 Selling, general and administrative (a) 2,867 4,739 10,236 15,063 - ------------------------------------------------------------------------------ Total other costs and expenses (a) 10,955 16,520 35,326 49,217 - ------------------------------------------------------------------------------ Total segment loss (a) $ (7,430) (8,816) (29,581) (27,847) - ------------------------------------------------------------------------------ Depreciation and amortization $ 5,176 8,343 16,947 23,791 Cash capital expenditures 3,843 3,178 10,030 9,704 - ------------------------------------------------------------------------------ Coal sales (tons): Metallurgical 1,179 1,267 3,152 3,760 Steam 2,037 2,138 5,772 6,049 - ------------------------------------------------------------------------------ Total coal sales 3,216 3,405 8,924 9,809 - ------------------------------------------------------------------------------ Production/purchased (tons): Production 2,551 2,616 7,447 8,025 Purchased 442 464 1,090 1,908 - ------------------------------------------------------------------------------ Total 2,993 3,080 8,537 9,933 - ------------------------------------------------------------------------------ Coal margin per ton $ 0.81 1.22 0.31 1.48 - ------------------------------------------------------------------------------ </TABLE> (a) Prior year selling, general and administrative costs included in operating profit for Coal Operations and Other Operations have been reclassified to conform to the current year's segment presentation. Net sales for the third quarter of 2000 were $91.3 million, a decrease of 8% from the 1999 third quarter. Operating loss was $7.4 million in the current year's quarter compared to $8.8 million in the prior year's quarter. Coal Operations' net sales for the third quarter of 2000 decreased by $8.1 million over the prior year's quarter, largely as a result of reduced sales volume which declined by 0.2 million tons from the 3.4 million tons sold in the third quarter of 1999. Metallurgical sales volumes declined slightly as increases in domestic metallurgical coal sales volume were partially offset by a decline in export metallurgical coal sales volume reflecting the continued softness in the export market. Steam coal sales in the third quarter of 2000 decreased by 0.1 million tons (5%) to 2.0 million tons and steam realizations declined as an above-market contract reset to market in early 2000. The operating loss in the third quarter of 2000 compared to the same period in 1999 reflects a $1.6 million decline in total coal margin and a $1.8 million decrease in other operating income offset by decreases in idle and closed mine costs ($1.5 million), inactive employee costs ($2.2 million) and selling, general and administrative costs ($1.9 million). Operating results in the third quarter of 2000 benefited from lower pension and postretirement benefit expenses as well as lower amortization expense, primarily the result of an impairment charge recorded in the fourth quarter of 1999. Operating results for the third quarter of 1999 included a $2.4 million benefit of litigation settlements and favorable workers' compensation claim experience. In addition, operating results for the third quarter of 1999 included $0.8 million of costs associated with a salaried staff reduction. 18
Total coal margin for the third quarter of 2000 declined by $0.41 per ton compared to the same period of 1999. Virginia margins were negatively impacted by higher production costs due to temporary adverse mining conditions at some of the Company's mines, as well as continued softness in export markets. West Virginia steam margins improved from the same period of 1999 due to lower production costs. All operations have been impacted by higher diesel fuel prices during 2000. Other operating income decreased $1.8 million in the third quarter of 2000 from the comparable 1999 quarter, primarily due to a favorable litigation settlement and a Federal Black Lung Excise Tax refund, all recorded during 1999. Idle equipment and closed mine costs decreased $1.5 million in the 2000 third quarter from the comparable 1999 quarter primarily due to the idlement of the Meadow River mine in West Virginia during 1999. This mine was subsequently closed during the fourth quarter of 1999. Inactive employee costs, which represent long-term employee liabilities for pension and retiree medical costs for inactive employees, decreased 24% over the prior year's quarter as a result of lower premiums related to the Coal Industry Retiree Benefit Act of 1992 and lower pension and postretirement benefit expense. Full year pension and postretirement benefit expense for 2000 is expected to be lower than 1999 primarily due to favorable demographic changes and an increase in the discount rate from 7.0% to 7.5%. Coal Operations net sales for the first nine months of 2000 decreased over the prior year by $28.9 million due almost entirely to reduced sales volume which declined 0.9 million tons from the 9.8 million tons sold in the first nine months of 1999. Through September 30, 2000, metallurgical coal sales volume decreased 16% or 0.6 million tons as compared to the first nine months of 1999. This volume decrease represented an increase in domestic metallurgical coal sales which was more than offset by a decrease in export metallurgical coal sales due to continued softness in export markets. Steam coal sales in the first nine months of 2000 decreased by 0.3 million tons (5%) to 5.8 million tons. In addition, steam realizations also declined as an above-market contract reset to market in early 2000. Coal Operations generated an operating loss of $29.6 million in the first nine months of 2000 as compared to $27.8 million for the same period of 1999. This decrease in results reflects an $11.8 million decline in total coal margin and a $2.9 million decline in other operating income (as 1999 included a benefit of $2.5 million from the settlement of litigation), partially offset by decreases in idle and closed mine costs ($4.1 million), inactive employee costs ($4.9 million) and selling, general and administrative costs ($4.8 million). As noted above, operating results benefited from lower pension and postretirement benefit expenses as well as lower amortization expense in the first nine months of 2000. Total coal margin declined by $1.17 per ton for the first nine months of 2000 compared to the same period of 1999. Virginia margins were negatively impacted by higher production costs due to temporary adverse mining conditions at some of the Company's mines as well as continued softness in export markets. West Virginia steam margins were negatively impacted by higher production costs resulting from the "mountaintop removal" controversy discussed below. All operations have been impacted by higher diesel fuel prices during 2000. Other operating income decreased $2.9 million for the first nine months of 2000 from the comparable 1999 period primarily due to favorable litigation settlements and a Federal Black Lung Excise Tax refund all recorded during 1999. Idle equipment and closed mine costs decreased $4.1 million in the first nine months of 2000 from the comparable 1999 period primarily due to the idlement of the Meadow River mine in West Virginia during 1999. This mine was subsequently closed during the fourth quarter of 1999. Of the $3.3 million liability recorded in the fourth quarter of 1999 for other closure costs of the Meadow River mine, approximately $2.2 million has been paid as of September 30, 2000. It is anticipated that substantially all of the remaining liability will be paid 19
by the end of 2000. Inactive employee costs, which represent long-term employee liabilities for pension and retiree medical costs for inactive employees, decreased 18% over the same period last year as a result of slightly lower premiums related to the Coal Industry Retiree Benefit Act of 1992, lower medical benefit expense for workers on temporary lay-off primarily related to the first quarter 1999 idlement of Meadow River mine and lower pension and postretirement benefit expense. A controversy related to a method of mining called "mountaintop removal" that began in mid-1998 in West Virginia involving an unrelated party resulted in delays in the issuance of all mining permits in West Virginia. These delays have prevented the timely issuance of several mine permits necessary for the uninterrupted mining of Vandalia Resources, Inc. ("Vandalia"), a wholly-owned subsidiary of Pittston Coal. Vandalia is actively pursuing the issuance of these permits, but when, or if, these permits will be issued is currently unknown. During the first nine months of 2000, the delay in obtaining these permits did not result in a significant number of jobs lost but did impact production efficiencies and costs by requiring mining in less productive areas. Failure to obtain approval of these permits will ultimately result in the depletion of permitted reserves. Such depletion would force the cessation of mining and the corresponding loss of jobs. Vandalia and other affected parties in West Virginia are currently exploring all legal and legislative remedies that may be available to resolve this matter. On February 10, 1999, the US District Court for the Eastern District of Virginia entered a final judgment in favor of certain of the Company's subsidiaries, ruling that the Federal Black Lung Excise Tax ("FBLET") imposed under Section 4121 of the Internal Revenue Code is unconstitutional as applied to export coal sales and ordering a refund to the subsidiaries. A total of $0.8 million (including interest) was refunded in 1999 for the FBLET that those companies paid for the quarter ended March 31, 1997. The Company has sought refunds of the FBLET it paid on export coal sales for all open statutory periods and expects to receive such refunds for some or all of that tax paid (plus interest) pursuant to a review of claim documentation by the Internal Revenue Service. Currently, the Company expects FBLET refunds of between $12 million and $20 million (pre-tax) most of which is expected to be received before mid-2001. Due to the uncertainty of the ultimate amounts and timing of the FBLET refunds, the Company has not currently recorded a receivable for such amounts. The Company is also pursuing additional claims pending a decision by the US Supreme Court related to another Company. The ultimate amounts and timing of such additional refunds, if any, cannot be determined at this time. Coal Operations continues cash funding for charges recorded in prior years for facility closure costs recorded as restructuring and other charges in the Statement of Operations. The following table analyzes the changes in liabilities during the first nine months of 2000 for such costs: <TABLE> <CAPTION> Employee Mine Termination, and Medical Plant and Closure Severance (IN THOUSANDS) Costs Costs Total - ------------------------------------------------------------------------------ <S> <C> <C> <C> Balance as of December 31, 1999 $ 6,596 13,622 20,218 Payments 783 1,223 2,006 - ------------------------------------------------------------------------------ Balance as of September 30, 2000 $ 5,813 12,399 18,212 - ------------------------------------------------------------------------------ </TABLE> 20
OTHER OPERATIONS The following is a table of selected financial data for Other Operations on a comparative basis: <TABLE> <CAPTION> Three Months Nine Months Ended September 30 Ended September 30 (IN THOUSANDS) 2000 1999 2000 1999 - ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Net sales: Mineral Ventures $ 4,446 3,047 12,863 9,711 Allied Operations (a) 5,964 3,046 17,582 6,968 - ------------------------------------------------------------------------------ Total net sales $ 10,410 6,093 30,445 16,679 - ------------------------------------------------------------------------------ Operating profit (loss): Mineral Ventures $ 26 (2,002) 204 (4,030) Allied Operations (a) (b) 2,123 1,536 5,673 4,249 - ------------------------------------------------------------------------------ Total segment profit (loss) $ 2,149 (466) 5,877 219 - ------------------------------------------------------------------------------ Depreciation and amortization: Mineral Ventures $ 888 700 2,693 2,353 Allied Operations 360 365 1,086 1,044 - ------------------------------------------------------------------------------ Total depreciation and amortization $ 1,248 1,065 3,779 3,396 - ------------------------------------------------------------------------------ </TABLE> Certain 1999 amounts have been restated to conform to the current year classifications. (a) Includes timber, natural gas and equipment rebuild operations. (b) Prior year selling, general and administrative costs included in operating profit for Coal Operations and Other Operations have been reclassified to conform to the current year's segment presentation. Mineral Ventures generated net sales during the third quarter of 2000 of $4.5 million, a 46% increase from the $3.0 million reported in the third quarter of 1999. The increase in net sales was the result of an increase in ounces of gold sold and higher gold realizations. Ounces of gold sold increased from 10.6 thousand ounces in the third quarter of 1999 to 15.2 thousand ounces in the same period of 2000. Breakeven results were achieved in the third quarter of 2000 compared to a $2.0 million loss in the same period of 1999 reflecting an $89 per ounce (32%) decrease in the cash cost of gold sold, in addition to a $4 per ounce (1%) increase in average realization. Cash cost per ounce, in US dollar terms, was lower in the third quarter of 2000 due to the impact on unit costs of the greater production volume and, to a lesser extent, a weaker Australian dollar. Mineral Ventures generated net sales during the first nine months of 2000 of $12.9 million, a 32% increase from the $9.7 million reported in the first nine months of 1999. The increase in net sales was the result of an increase in ounces of gold sold and higher gold realizations. Ounces of gold sold increased from 33.8 thousand ounces in the first nine months of 1999 to 42.8 thousand ounces in the same period of 2000. Operating profit for the first nine months of 2000 was $0.2 million compared to an operating loss of $4.0 million in the same period of 1999, reflecting a $50 per ounce (19%) decrease in the cash cost of gold sold, in addition to a $13 per ounce (5%) increase in average realization. Cash cost per ounce in US dollar terms was lower in the first nine months of 2000 due to increased production volume, and, to a lesser extent, a weaker Australian dollar. Net sales from the gas, timber and equipment rebuild businesses amounted to $6.0 million and $3.0 million in the third quarter of 2000 and 1999, respectively. The improvement was primarily due to higher natural gas prices and increased revenues from timber (reflecting the start-up of the hard wood chip mill during the third quarter of 1999) and continued growth in equipment rebuilds. Operating profit from the gas, timber and equipment rebuild businesses amounted to $2.1 million and $1.5 million in the third quarters of 2000 and 1999, respectively. The increase was primarily due to increased natural gas prices, offset by lower operating profits from the timber business, reflecting start-up costs associated with the tie mill. 21
Net sales from the gas, timber and equipment rebuild businesses amounted to $17.6 million and $7.0 million in the first nine months of 2000 and 1999, respectively. The improvement was primarily due to the previously mentioned higher natural gas prices and increased revenues from timber and equipment rebuilds. Operating profit from the gas, timber and equipment rebuild businesses amounted to $5.7 million and $4.2 million in the first nine months of 2000 and 1999, respectively. The increase was mainly due to higher natural gas prices and related royalties as well as additional equipment rebuild business partially offset by lower operating profit from the timber business, reflecting start-up costs associated with the tie mill. FOREIGN OPERATIONS A portion of the Company's financial results is derived from activities in over 100 countries 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 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. 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 Venezuela operates in such a highly inflationary economy. 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. OTHER OPERATING INCOME, NET Other operating income, net, which is a component of each operating segment's previously discussed operating profit, generally includes the Company's share of net earnings or losses of unconsolidated foreign affiliates, royalty income, gains and losses from foreign currency exchange and from sales of coal operating assets. Other operating income, net for the three and nine months ended September 30, 2000 was $5.4 million and $13.4 million, respectively, compared to $5.0 million and $14.3 million, respectively, in the three and nine months ended September 30, 1999. The increase in other operating income for the third quarter of 2000 as compared to the same period of 1999 was primarily due to higher net gains from foreign currency exchange and increased earnings of unconsolidated foreign affiliates partially offset by lower gains from litigation settlements at the Company's Coal Operations. Other operating income for the first nine months of 1999 includes approximately $3.5 million of gains from the settlement of litigation at Coal Operations. These gains more than offset higher royalty income, increased earnings of unconsolidated foreign affiliates and higher net gains from foreign currency exchange in the first nine months of 2000, as compared to the same period of 1999. INTEREST EXPENSE, NET Net interest expense increased $2.7 million (35%) and $2.8 million (12%) in the third quarter and first nine months of 2000 as compared to the same periods of 1999. This increase was predominantly due to higher average borrowings and higher US interest rates. Interest costs on borrowings under the new credit agreement are expected to increase due to an increase in the average borrowing costs of approximately 80 to 90 basis points on an annualized basis. OTHER INCOME/EXPENSE, NET Other income/expense, net for the three and nine months ended September 30, 2000 was expense of $1.5 million and $0.6 million, respectively, compared to income of $0.1 million and expense of $0.2 million, respectively, for the three and nine months ended September 30, 1999. The $1.6 million additional expense for the three-month period was primarily due to an increase in minority interest expense (due to improved results of consolidated subsidiaries), lower net gains on the sale of assets and lower foreign currency net translation gains. The $0.4 million additional expense for the nine month period includes a $1.9 million gain on an investment held by Coal Operations recorded in the first quarter of 2000, which was more than offset 22
by an increase in minority interest expense (due to improved results of consolidated affiliates), lower gains on the sale of assets and lower foreign currency net translation gains. INCOME TAXES In both the 2000 and 1999 periods presented, 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. The difference in the effective tax rate for the nine month periods ended September 30, 2000 and 1999 is primarily a result of the change in the Company's reporting entities due to the elimination of the tracking stock capital structure. Under the prior reporting structure, a separate effective tax rate was estimated for each Group and was applied to each Group's year-to-date pretax earnings. The quarterly tax provision reflected in the consolidated financial statements of the Company was a combination of the three Group's tax provisions. This resulted in quarterly (not annual) fluctuations in the consolidated tax rate. However, with the elimination of the tracking stock capital structure, the Company reports its results of operations as one entity and a consolidated effective tax rate is computed. As a result, the effective tax rate is expected to be relatively consistent from quarter to quarter, exclusive of the impact of the potential coal sale or other extraordinary or currently unanticipated items. FINANCIAL CONDITION CASH FLOW REQUIREMENTS Net cash provided by operating activities during the first nine months of 2000 totaled $178.3 million compared with $212.8 million in the first nine months of 1999. This decrease resulted primarily from lower earnings combined with a small increase in the cash required to fund working capital, partially offset by slightly higher non-cash charges. The small increase in cash required to fund working capital was primarily due to additional working capital requirements at BAX Global, offset by a reduction in working capital requirements at Brink's and a decrease in coal inventories at Coal Operations. Non-cash charges were impacted by higher depreciation (primarily at BAX Global), lower heavy maintenance expense and lower pension expense which primarily reflects a decrease in service cost due to favorable demographic changes and an increase in the discount rate from 7.0% to 7.5%. Both pension and postretirement medical expenses are expected to continue at levels lower than last year, through the end of 2000. INVESTING ACTIVITIES Cash capital expenditures for the first nine months of 2000 were $164.0 million, down from $197.0 million in the comparable period of 1999. Of the 2000 cash capital expenditures, $54.0 million was spent by Brink's, $54.6 million was spent by BHS, $41.5 million was spent by BAX Global, and $13.2 million was spent by Natural Resource Operations. Lower cash capital expenditures in the first nine months of 2000 versus the same period of 1999 were primarily due to lower levels of spending at BHS for customer installations, at BAX Global for aircraft modifications and at Brink's for IT expenditures. For the full year of 2000, company-wide cash capital expenditures are projected to range between $215 and $225 million. The foregoing amounts exclude expenditures that have been or are expected to be financed through capital leases and any acquisition expenditures. Net cash used in investing activities for the first nine months of 2000 also includes approximately $2.2 million of cash proceeds relating to the sale of an investment held by the Company's Coal Operations and $3.8 million of cash used to fund other acquisitions (primarily at Brink's). During the first nine months of 2000, heavy maintenance expenditures of $41.8 million decreased $9.7 million over the same period in 1999. This decrease was primarily due to increased efforts to control spending and a reduced number of planes in the fleet. 23
FINANCING The Company intends to fund cash capital expenditures through cash flow from operating activities or through operating leases if the latter are financially attractive. Any additional funding that may be required will be financed through the Company's revolving credit agreements or other borrowing arrangements. Net cash used by financing activities was $7.4 million for the first nine months of 2000, compared with net cash provided of $15.8 million for the same period in 1999. Activities in 1999 included higher net borrowings used primarily to finance the purchase of the Company's Preferred Stock. The 2000 levels reflected repayments under the Facility (described below) due primarily to excess borrowings at December 31, 1999 as well as repayments of a portion of the debt of Brink's France and Venezuela. On October 3, 2000, the Company entered into a $370 million credit agreement with a syndicate of banks to replace the then existing $350 million credit agreement that was due to expire in May 2001. The new credit agreement includes a $185 million three year revolving credit facility and a $185 million short-term revolving credit facility, both of which permit additional borrowings, repayments and reborrowings up to the maximum. Interest costs under the new credit agreement are expected to increase primarily due to an increase in the average borrowing costs of approximately 80 to 90 basis points on an annualized basis. Among the covenants in the new credit agreement are covenants that limit the Company's maximum allowable indebtedness and provide for minimum coverage of interest costs. The maturity dates of the short-term and long-term portions of the credit agreement are October 2, 2001 and October 3, 2003, respectively. Prior to entering into the new credit agreement and through September 30, 2000, the Company had a $350 million credit agreement with a syndicate of banks (the "Facility"). The Facility included a $100 million term loan and also permitted additional borrowings, repayments and reborrowings of up to an aggregate of $250 million. As of September 30, 2000 and December 31, 1999, borrowings of $100 million were outstanding under the term loan portion of the Facility and $181.1 million and $185 million, respectively, of additional borrowings were outstanding under the remainder of the Facility. MARKET RISKS AND HEDGING AND DERIVATIVE ACTIVITIES The Company has activities in well over 100 countries and a number of different industries. These operations expose the Company to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates. In addition, the Company consumes and sells certain commodities in its businesses, exposing it to the effects of changes in the prices of such commodities. These financial and commodity 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. In addition, the Company, in some cases, is able to adjust its pricing to cover a portion of the increase in the cost of certain commodities (primarily jet fuel). The Company has not had any material change in its market risk exposures since December 31, 1999. CAPITALIZATION As previously discussed, prior to January 14, 2000, the Company had three classes of common stock: Brink's Stock, BAX Stock and Minerals Stock, which were designed to provide shareholders with securities reflecting the performance of the Brink's Group, the BAX Group and the Minerals Group, respectively. On December 6, 1999, the Company announced that its Board of Directors (the "Board") had approved the elimination of the tracking stock capital structure by an exchange of all outstanding shares of Minerals Stock and BAX Stock for shares of Brink's Stock (the "Exchange"). The Exchange took place on January 14, 2000 24
(the "Exchange Date"), on which date, holders of Minerals Stock received 0.0817 share of Brink's Stock for each share of their Minerals Stock; and holders of BAX Stock received 0.4848 share of Brink's Stock for each share of their BAX Stock based on the shareholder approved formula and calculated as follows: <TABLE> <CAPTION> (PER SHARE PRICES) Brink's Stock BAX Stock Minerals Stock - ------------------------------------------------------------------------------ <S> <C> <C> <C> Ten day average price* $ 18.92 $ 7.98 $ 1.34 Exchange factor 1.00 1.15 1.15 - ------------------------------------------------------------------------------ Fair Market Value, as defined* $ 18.92 $ 9.17 $ 1.54 Exchange ratio N/A 0.4848 0.0817 - ------------------------------------------------------------------------------ Closing prices: December 3, 1999 $ 18.375 $ 10.0625 $ 1.125 December 6, 1999 21.500 10.1250 1.625 - ------------------------------------------------------------------------------ </TABLE> *The "Fair Market Value" of each class of common stock was determined by taking the average closing price of that class of common stock for the 10 trading days beginning 30 business days prior to the first public announcement of the exchange proposal. Since the first public announcement was made on December 6, 1999, the average closing price was calculated during the 10 trading days beginning October 22, 1999 and ending November 4, 1999. From and after the Exchange Date, Brink's Stock is the only outstanding class of common stock of the Company and continues to trade on the New York Stock Exchange under the symbol "PZB". Prior to the Exchange Date, Brink's Stock reflected the performance of the Brink's Group only; after the Exchange Date, Brink's Stock reflects the performance of The Pittston Company as a whole. Shares of Brink's Stock after the Exchange are hereinafter referred to as "Pittston Common Stock". As a result of the Exchange on January 14, 2000, the Company issued 10,916,367 shares of Pittston Common Stock, which consists of 9,490,227 shares of Pittston Common Stock equal to 100% of the Fair Market Value, as defined, of all BAX Stock and Minerals Stock and 1,426,140 shares of Pittston Common Stock equal to the additional 15% of the Fair Market Value of BAX Stock and Minerals Stock exchanged pursuant to the above-described formula. Of the 10,916,367 shares issued, 10,195,630 shares were issued to holders of BAX Stock and Minerals Stock and 720,737 shares were issued to The Pittston Company Employee Benefits Trust (the "Trust"). Shares issued to holders of BAX Stock and Minerals Stock (excluding those shares issued to the Trust) were distributed as follows: <TABLE> <CAPTION> Holders of Holders of (IN MILLIONS EXCEPT PER SHARE PRICES) BAX Stock Minerals Stock - -------------------------------------------------------------------------------- <S> <C> <C> Shares outstanding on January 13, 2000 19.5 9.3 Brink's Stock issued pursuant to the Exchange: Based on 100% of Fair Market Value 8.2 0.7 Based on 15% of Fair Market Value 1.2 0.1 - -------------------------------------------------------------------------------- Total shares issued on January 14, 2000 9.4 0.8 Brink's Stock closing price per share - December 3, 1999 $ 18.375 18.375 - -------------------------------------------------------------------------------- Value as of December 3, 1999 of Brink's Stock issued pursuant to the Exchange $ 173.5 13.9 - -------------------------------------------------------------------------------- </TABLE> As set forth in the Company's Articles of Incorporation approved by the shareholders, in the event of a dissolution, liquidation or winding up of the Company, holders of Brink's Stock, BAX Stock and Minerals Stock would have shared on a per share basis, the funds, if any, remaining for distribution to the common shareholders. In the case of Minerals Stock, such percentage had been set, using a nominal number of shares of Minerals Stock of 4.2 million (the "Nominal Shares") in excess of the actual number of shares of Minerals Stock outstanding. The liquidation percentages were 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 25
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). As of December 3, 1999, such liquidation percentages would have been approximately 54%, 27% and 19% for holders of Brink's Stock, BAX Stock and Minerals Stock, respectively. Including the additional shares issued pursuant to the Exchange the liquidation percentages for former holders of Brink's Stock, BAX Stock and Minerals Stock, respectively, as of January 14, 2000 would have been approximately 79%, 19% and 2%. Upon completion of the Exchange on January 14, 2000, there were a total of 49.5 million issued and outstanding shares of Pittston Common Stock for use in the calculation of net income per common share. Under the share repurchase programs authorized by the Board, the Company purchased shares in the periods presented: <TABLE> <CAPTION> Three Months Nine Months (DOLLARS IN MILLIONS, Ended September 30 Ended September 30 SHARES IN THOUSANDS) 2000 1999 2000 1999 - ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Pittston Common Stock: Shares - N/A - N/A Cost $ - N/A - N/A Brink's Stock: Shares N/A - N/A 100.0 Cost $ N/A - N/A 2.5 Convertible Preferred Stock: Shares 8.2 - 8.2 83.9 Cost $ 2.2 - 2.2 21.0 Excess carrying amount (a) $ 1.7 - 1.7 19.2 - ------------------------------------------------------------------------------ </TABLE> (a) The excess of the carrying amount of the Series C Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock") over the cash paid to holders for repurchases made during the periods. This amount is deducted from preferred dividends in the Company's Consolidated Statement of Operations. In March 1999, the Company purchased 0.08 million shares (or 0.8 million depositary shares) of its Convertible Preferred Stock for $21.0 million and in September 2000, the Company purchased .008 million shares (or .08 million depositary shares) of its Convertible Preferred Stock for $2.2 million. The Convertible Preferred Stock is convertible into Pittston Common Stock and has an annual dividend rate of $31.25 per share. Preferred dividends included on the Company's Consolidated Statement of Operations for the three and nine months ended September 30, 2000 and the three months ended March 31, 1999 are net of $1.7 million and $19.2 million, respectively, which is the excess of the carrying amount of the Convertible Preferred Stock over the cash paid to the holders of the Convertible Preferred Stock. As of September 30, 2000, the Company had the remaining authority to purchase over time 0.9 million shares of Pittston Common Stock and an additional $5.4 million of its Convertible Preferred Stock. The remaining aggregate purchase cost limitation for all common stock was $22.2 million as of September 30, 2000. DIVIDENDS The Board intends to declare and pay dividends, if any, on Pittston Common Stock based on the earnings, financial condition, cash flow and business requirements of the Company. During the first nine months of 2000, the Board declared and the Company paid cash dividends of 7.50 cents per share of Pittston Common Stock. During the first nine months of 1999, the Board declared and the Company paid cash dividends of 7.50 cents per share of Brink's Stock, 18.00 cents per share of BAX Stock and 2.50 cents per share of Minerals Stock. Dividends paid on the Convertible Preferred Stock in the first nine months of 2000 and 1999 were $0.7 million and $1.3 million, respectively. 26
PENDING ACCOUNTING CHANGES Staff Accounting Bulletin ("SAB") No. 101, which provides interpretive guidance on applying generally accepted accounting principles to revenue recognition in financial statements will be implemented by the Company in the fourth quarter of 2000. The Company is currently assessing SAB No. 101 as well as written guidance regarding its implementation which was issued in late October 2000. As such, no final determination has been made whether the SAB will materially impact (positively or negatively) the reported results of the Company. It is anticipated that the impact, if any, related to the implementation of SAB No. 101 would only affect BHS and would be recorded as a change in accounting principle as of January 1, 2000, as is called for in the SAB. Emerging Issues Task Force ("EITF") No. 00-10 "Accounting for Shipping and Handling Fees and Costs" will be implemented by the Company in the fourth quarter of 2000. EITF no. 00-10 will require the Company's Coal Operations to begin reporting fees charged for certain shipping and handling activity on a disaggregated basis (i.e. separately report the associated revenues and costs) whereas such fees are currently being netted against gross sales to arrive at reported net sales. The implementation of this EITF will not impact the operating profit or net income of the Company as it will increase sales and costs of sales by equivalent amounts. FORWARD LOOKING INFORMATION Certain of the matters discussed herein, including statements regarding the impact at BHS of growth in new distribution channels and certain initiatives on the net cost of marketing, sales and installation costs and their impact on profitability in the future, the potential impact of SAB No. 101 on BHS' operations, BAX Global's evaluation of alternatives to further reduce costs and the effect on future earnings and the carrying value of BAX Global's assets or on the financial position and/or the results of operations of the Company, reductions in transportation costs at BAX Global, fourth quarter demand for BAX Global's services, financing alternatives, the anticipated resolution of BAX Global's ATI's negotiations with the local Teamsters Union, benefits expense, issuance of mining permit approvals, payment of liabilities associated with the closure of the Meadow River mine, changes in foreign exchange rates, projections about effective tax rates, the amount and timing of anticipated FBLET refunds, market risk and capital spending, expectations that EITF No. 00-10 will not impact the operating profit or net income of the Company, increased borrowing costs of the Company, the sale of coal assets (including the likely date of the sale) and the recording of losses relating thereto 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 in the United States and other countries, the demand for the Company's products and services, the success of new distribution channels at BHS, the effective implementation of BHS initiatives related to the net cost of marketing, sales and installation, the ultimate outcome of the Company's analysis of SAB No. 101 and EITF No. 00-10, the results of BAX Global's evaluation of alternatives to further reduce costs, the effective implementation of BAX Global's initiatives to reduce overall operating costs, the vote on the tentative agreement between ATI and the local Teamsters Union, 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 prices of coal, the timing and outcome of the Internal Revenue Service administrative process dealing with FBLET as well as decisions to be made by the Supreme Court, the timing and ultimate outcome of selling coal assets, the amount of Company borrowings, demographic changes and increases or decreases in discount rates related to benefits expense, delays in the issuance of mining permits and the ability of counterparties to perform. 27
PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ------ -------------------------------- (a) Exhibits: Exhibit Number ------- 10 $370,000,000 Credit Agreement, dated as of October 3, 2000, among the Registrant, as Borrower, Certain of Its Subsidiaries, as Guarantors, Various Lenders and Fleet National Bank and Chase Manhattan Bank as Co-Syndication Agents and Bank of America, N.A., as Administrative Agent 27 Financial Data Schedule (b) There were no reports on Form 8-K filed during the third quarter of 2000. 28
SIGNATURE 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. THE PITTSTON COMPANY November 7, 2000 By /S/ ROBERT T. RITTER ------------------------------------- Robert T. Ritter (Vice President - Chief Financial Officer) 29