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 June 30, 1996 [ ] 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.) P.O. Box 120070, 100 First Stamford Place, Stamford, Connecticut 06912-0070 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (203) 978-5200 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 ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 41,573,743 shares of $1 par value Pittston Brink's Group Common Stock 20,781,872 shares of Pittston Burlington Group Common Stock and 8,405,908 shares of $1 par value Pittston Minerals Group Common Stock as of July 31, 1996. <TABLE> PART I - FINANCIAL INFORMATION THE PITTSTON COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) <CAPTION> June 30, December 31, 1996 1995 ========================================================================== <S> <C> <C> ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 44,588 52,823 Short-term investments, at lower of cost or market 3,071 29,334 Accounts receivable (net of estimated amount uncollectible: 1996 - $15,987; 1995 - $16,075) 429,274 421,246 Inventories, at lower of cost or market 48,764 46,399 Prepaid expenses 34,654 31,556 Deferred income taxes 51,526 55,335 - -------------------------------------------------------------------------- Total current assets 611,877 636,693 Property, plant and equipment, at cost (net of depreciation, depletion and amortization: 1996 - $451,036; 1995 - $437,346) 490,858 486,168 Intangibles, net of amortization 318,259 327,183 Deferred pension assets 124,222 123,743 Deferred income taxes 66,569 72,343 Other assets 157,530 161,242 - -------------------------------------------------------------------------- Total assets $ 1,769,315 1,807,372 ========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 34,519 37,063 Current maturities of long-term debt 5,573 7,280 Accounts payable 242,543 263,444 Accrued liabilities 275,163 286,701 - -------------------------------------------------------------------------- Total current liabilities 557,798 594,488 Long-term debt, less current maturities 151,083 133,283 Postretirement benefits other than pensions 223,177 219,895 Workers' compensation and other claims 120,298 125,894 Deferred income taxes 16,595 17,213 Other liabilities 142,751 194,620 Shareholders' equity: Preferred stock, par value $10 per share: Authorized: 2,000 shares $31.25 Series C Cumulative Convertible Preferred Stock: Issued: 1996 - 126 shares; 1995 - 136 shares 1,256 1,362 Pittston Brink's Group common stock, par value $1 per share: Authorized: 100,000 shares; Issued: 1996 - 41,574 shares; 1995 - 41,574 shares 41,574 41,574 Pittston Burlington Group common stock, par value $1 per share: Authorized: 50,000 shares; Issued: 1996 - 20,782 shares; 1995 - 20,787 shares 20,782 20,787 Pittston Minerals Group common stock, par value $1 per share: Authorized: 20,000 shares; Issued: 1996 - 8,406 shares; 1995 - 8,406 shares 8,406 8,406 Capital in excess of par value 419,706 401,633 Retained earnings 225,018 188,728 Equity adjustment from foreign currency translation (22,086) (20,705) Employee benefits trust, at market value (137,043) (119,806) - -------------------------------------------------------------------------- Total shareholders' equity 557,613 521,979 - -------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,769,315 1,807,372 ========================================================================== See accompanying notes to consolidated financial statements. </TABLE>
<TABLE> THE PITTSTON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) <CAPTION> Three Months Ended June 30 Six Months Ended June 30 1996 1995 1996 1995 =============================================================================== <S> <C> <C> <C> <C> Net sales $ 175,268 184,211 345,520 379,951 Operating revenues 585,466 527,556 1,149,976 1,030,900 - ------------------------------------------------------------------------------- Net sales and operating revenues 760,734 711,767 1,495,496 1,410,851 - ------------------------------------------------------------------------------- Costs and expenses: Cost of sales 169,444 180,860 363,221 374,800 Operating expenses 486,597 441,009 963,518 870,125 Restructuring and other charges, including litigation accrual - - (35,650) - Selling, general and administrative expenses 71,026 65,063 143,322 126,621 - ------------------------------------------------------------------------------- Total costs and expenses 727,067 686,932 1,434,411 1,371,546 =============================================================================== Other operating income 7,243 11,150 10,058 19,282 - ------------------------------------------------------------------------------- Operating profit 40,910 35,985 71,143 58,587 Interest income 811 842 1,336 1,652 Interest expense (3,379) (3,710) (7,124) (6,744) Other income (expense), net (2,009) (1,455) (4,406) (2,196) - ------------------------------------------------------------------------------- Income before income taxes 36,333 31,662 60,949 51,299 Provision for income taxes 10,908 7,054 16,904 12,626 - ------------------------------------------------------------------------------- Net income 25,425 24,608 44,045 38,673 Preferred stock dividends, net 146 (1,093) (919) (1,176) - ------------------------------------------------------------------------------- Net income attributed to common shares $ 25,571 23,515 43,126 37,497 =============================================================================== Pittston Brink's Group: Net income attributed to common shares $ 14,035 11,965 25,874 21,511 - ------------------------------------------------------------------------------- Net income per common share $ .37 .32 .68 .57 - ------------------------------------------------------------------------------- Cash dividend per common share $ .025 .023 .05 .046 - ------------------------------------------------------------------------------- Pittston Burlington Group: Net income attributed to common shares $ 8,746 8,009 12,507 12,058 - ------------------------------------------------------------------------------- Net income per common share $ .46 .42 .65 .64 - ------------------------------------------------------------------------------- Cash dividends per common share $ .06 .054 .12 .108 - ------------------------------------------------------------------------------- Pittston Minerals Group: Net income attributed to common shares $ 2,790 3,541 4,745 3,928 - ------------------------------------------------------------------------------- Net income per common share: Primary $ .35 .45 .60 .51 Fully diluted $ .27 .45 .57 .51 - ------------------------------------------------------------------------------- Cash dividends per common share $ .1625 .1625 .3250 .3250 =============================================================================== See accompanying notes to consolidated financial statements. </TABLE>
<TABLE> THE PITTSTON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <CAPTION> Six Months Ended June 30 1996 1995 ============================================================================== <S> <C> <C> Cash flows from operating activities: Net income $ 44,045 38,673 Adjustments to reconcile net income to net cash provided by operating activities: Noncash charges and other write-offs 24,259 - Depreciation, depletion and amortization 54,600 51,893 Provision for aircraft heavy maintenance 16,067 12,412 Provision (credit) for deferred income taxes 9,362 6,543 Provision (credit) for pensions, noncurrent 98 (1,730) Provision for uncollectible accounts receivable 3,557 1,999 Equity in earnings of unconsolidated affiliates, net of dividends received (193) (8) Other operating, net 3,066 (1,427) Change in operating assets and liabilities, net of effects of acquisitions: Decrease (increase) in accounts receivable (14,173) (8,678) Decrease (increase) in inventories (2,365) (13,432) Decrease (increase) in prepaid expenses (2,738) (9,371) Increase (decrease) in accounts payable and accrued liabilities (21,176) (16,532) Decrease (increase) in other assets (4,375) 704 Increase (decrease) in other liabilities (37,397) (14,532) Increase (decrease) in workers' compensation and other claims, noncurrent (5,596) (7,903) Other, net 22 (1,120) - ----------------------------------------------------------------------------- Net cash provided by operating activities 67,063 37,491 - ----------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment (78,004) (55,353) Property, plant and equipment pending lease financing (1,092) (50) Aircraft heavy maintenance (9,713) (7,217) Proceeds from disposal of property, plant and equipment 9,026 10,481 Acquisitions, net of cash acquired, and related contingent payments (971) (2,410) Other, net 5,273 1,825 - ----------------------------------------------------------------------------- Net cash used by investing activities (75,481) (52,724) - ----------------------------------------------------------------------------- Cash flows from financing activities: Additions to debt 21,643 33,940 Reductions of debt (8,550) (7,911) Repurchase of stock of the Company (4,068) (7,808) Proceeds from exercise of stock options 1,862 2,490 Proceeds from stock purchased by benefit plans 175 - Dividends paid (8,733) (8,875) Cost of Brink's Stock Proposal (2,146) - - ----------------------------------------------------------------------------- Net cash provided by financing activities 183 11,836 - ----------------------------------------------------------------------------- Net decrease in cash and cash equivalents (8,235) (3,397) Cash and cash equivalents at beginning of period 52,823 42,318 - ----------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 44,588 38,921 ============================================================================= See accompanying notes to consolidated financial statements. </TABLE>
THE PITTSTON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts) (1) The Pittston Company (the "Company") prepares consolidated financial statements in addition to separate financial statements for the Pittston Brink's Group (the "Brink's Group"), the Pittston Burlington Group (the "Burlington Group") and the Pittston Minerals Group (the "Minerals Group"). The Brink's Group consists of the Brink's, Incorporated ("Brink's") and Brink's Home Security, Inc. ("BHS") operations of the Company. The Burlington Group consists of the Burlington Air Express Inc. ("Burlington") operations of the Company. The Minerals Group consists of the Coal and Mineral Ventures operations of the Company. The Company's capital structure includes three issues of common stock, Pittston Brink's Group Common Stock ("Brink's Stock"), Pittston Burlington Common Stock ("Burlington Stock") and Pittston Minerals Group Common Stock ("Minerals Stock"), which are designed to provide shareholders with separate securities reflecting the performance of the Brink's Group, Burlington Group and Minerals Group, respectively, without diminishing the benefits of remaining a single corporation or precluding future transactions affecting any Group or the Company as a whole. Holders of Brink's Stock, Burlington Stock and Minerals Stock are shareholders of the Company, which is responsible for all its liabilities. Financial developments affecting the Brink's Group, Burlington Group or the Minerals Group that affect the Company's financial condition could affect the results of operations and financial condition of all three Groups. (2) The average number of shares outstanding used in the earnings per share computations were as follows: Second Quarter Six Months 1996 1995 1996 1995 -------------------------------------------------------------------- Brink's Stock 38,152 37,916 38,105 37,912 Burlington Stock 19,161 18,958 19,100 18,956 Minerals Stock: Primary 7,866 7,811 7,844 7,764 Fully diluted 9,947 9,988 9,969 10,038 The average number of shares outstanding used in the earnings per share computations do not include the shares of Brink's Stock, Burlington Stock and Minerals Stock held in the Company's Employee Benefits Trust which totaled 3,340 (3,684 in 1995), 1,540 (1,842 in 1995) and 491 (659 in 1995), respectively, at June 30, 1996. (3) The amounts of depreciation, depletion and amortization of property, plant and equipment in the second quarter and six month periods of 1996 totaled $22,222 ($19,955 in 1995) and $43,814 ($39,334 in 1995), respectively. (4) Cash payments made for interest and income taxes (net of refunds received) were as follows: Second Quarter Six Months 1996 1995 1996 1995 ---------------------------------------------------------------- Interest $ 3,677 4,049 8,021 7,082 ================================================================= Income taxes $ 3,128 6,647 8,182 16,474 ================================================================= During the six months ended June 30, 1996 and 1995, capital lease obligations of $493 and $2,886, respectively, were incurred for leases of property, plant and equipment. In June 1995, the Company sold its rights under certain coal reserve leases and the related equipment for $2,800 in cash and notes totaling $2,882. The cash proceeds have been included in the Consolidated Statements of Cash Flows as "Cash flows from investing activities: Proceeds from disposal of property, plant and equipment". In March 1995, the Company sold surplus coal reserves for cash of $2,878 and a note receivable of $2,317. The cash proceeds have been included in the Consolidated Statements of Cash Flows as "Cash flows from investing activities: Proceeds from disposal of property, plant and equipment". (5) In 1988, the trustees of certain pension and benefit trust funds (the "Trust Funds") established under collective bargaining agreements with the United Mine Workers of America ("UMWA") brought an action (the "Evergreen Case") against the Company and a number of its coal subsidiaries, claiming that the defendants were obligated to contribute to such Trust Funds in accordance with the provisions of the 1988 and subsequent National Bituminous Coal Wage Agreements, to which neither the Company nor any of its subsidiaries were a signatory. In late March 1996, a settlement was reached in the Evergreen Case. Under the terms of the settlement, the coal subsidiaries which had been signatories to earlier National Bituminous Coal Wage Agreements agreed to make various lump sum payments in full satisfaction of all amounts allegedly due to the Trust Funds through January 31, 1996, to be paid over time as follows: $25,845 upon dismissal of the Evergreen Case in March 1996 and the remainder of $24,000 in installments of $7,000 in August 1996 and $8,500 in each of 1997 and 1998. The first payment was entirely funded through an escrow account previously established by the Company. The amount previously escrowed and accrued was included in "Short-term investments" and "Accrued liabilities" on the Company's balance sheet. In addition, the coal subsidiaries agreed to future participation in the UMWA 1974 Pension Plan. Separate lawsuits against each of the UMWA and the Bituminous Coal Operators Association, previously reported, have also been dismissed. As a result of the settlement of these cases at an amount lower than previously accrued in 1993, the Company recorded a pretax benefit of $35,650 ($23,173 after tax) in the first six months of 1996 in its consolidated financial statements. (6) As of January 1, 1996, the Company implemented a new accounting standard, Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 requires companies to review long-lived assets and certain identifiable intangibles to be held and used by an entity for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. In accordance with SFAS No. 121, the Company grouped its long-lived assets at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets, and determined the recoverability of such assets by comparing the sum of the expected undiscounted future cash flows with the carrying amount of the assets. The impact of adopting SFAS No. 121 resulted in a pretax charge to earnings as of January 1, 1996 for the Company's Coal operations of $27,839 ($18,095 after tax), of which $24,203 was included in cost of sales and $3,636 was included in selling, general and administrative expenses. Assets for which the impairment loss was recognized consisted of property, plant and equipment, advanced royalties and goodwill. These assets primarily related to mines scheduled for closure in the near term and idled facilities and related equipment. Based on current mining plans, geological conditions, and current assumptions related to future realization and costs, the sum of the expected undiscounted future cash flows was less than the carrying amount of the assets, and accordingly, an impairment loss was recognized. The loss was calculated based on the excess of the carrying value of the assets over the present value of estimated expected future cash flows, using a discount rate commensurate with the risks involved. (7) As of January 1, 1992, BHS elected to capitalize categories of costs not previously capitalized for home security installations. The additional costs not previously capitalized consisted of costs for installation labor and related benefits for supervisory, installation scheduling, equipment testing and other support personnel and costs incurred in maintaining facilities and vehicles dedicated to the installation process. The effect of this change in accounting principle was to increase operating profit for the Company and the BHS segment for the first six months of 1996 and 1995 by $2,176 and $1,949, respectively and for the second quarter of 1996 and 1995 by $1,129 and $825, respectively. The effect of this change increased net income per common share of the Brink's Group for the first six months of 1996 and 1995 $.03 in each period and for the second quarter of 1996 and 1995 by $.02 and $.01, respectively. (8) During the quarter and six months ended June 30, 1996, the Company purchased 10,600 shares of its Series C Cumulative Convertible Preferred Stock. Preferred dividends included on the statement of operations for the quarter and six months ended June 30, 1996, are net of $1,100, which is the excess of the carrying amount of the preferred stock over the cash paid to holders of the preferred stock. During the six months ended June 30, 1995, the Company purchased 12,670 shares of its preferred stock, no portion of which occurred in the second quarter of 1995. Preferred dividends for the first six months of 1995 are net of $1,045 which was the excess of the carrying amount of the preferred stock over the cash paid to holders of the preferred stock. (9) Certain prior period amounts have been reclassified to conform to current period financial statement presentation. (10) All adjustments have been made which are, in the opinion of management, necessary to a fair presentation of results of operations for the periods reported herein. All such adjustments are of a normal recurring nature. <TABLE> THE PITTSTON COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION <CAPTION> Three Months Ended June 30 Six Months Ended June 30 (In thousands) 1996 1995 1996 1995 =========================================================================== <S> <C> <C> <C> <C> Revenues: Burlington $ 363,411 341,950 715,361 665,894 Brink's 183,411 154,543 359,265 303,634 BHS 38,644 31,063 75,350 61,372 Coal 169,896 179,987 335,364 371,270 Mineral Ventures 5,372 4,224 10,156 8,681 - --------------------------------------------------------------------------- Consolidated revenues $ 760,734 711,767 1,495,496 1,410,851 =========================================================================== Operating profit: Burlington $ 16,327 14,406 25,013 22,464 Brink's 12,524 10,236 21,902 17,619 BHS 11,401 9,411 22,503 18,316 Coal 5,190 5,810 9,567 7,121 Mineral Ventures 575 576 1,749 1,491 - --------------------------------------------------------------------------- Segment operating profit 46,017 40,439 80,734 67,011 General corporate expense (5,107) (4,454) (9,591) (8,424) - --------------------------------------------------------------------------- Consolidated operating profit $ 40,910 35,985 71,143 58,587 =========================================================================== </TABLE> RESULTS OF OPERATIONS In the second quarter of 1996, The Pittston Company (the "Company") reported net income of $25.4 million compared with $24.6 million in the second quarter of 1995. Operating profit totaled $40.9 million in the 1996 second quarter compared with $36.0 million in the prior year second quarter. Increased operating profits at Brink's Home Security, Inc. ("BHS") ($2.0 million), Brink's, Incorporated ("Brink's") ($2.3 million) and Burlington Air Express Inc. ("Burlington") ($1.9 million) were only partially offset by lower operating profits at Coal operations ($0.6 million) and higher general corporate expenses ($0.7 million). Results at Pittston Mineral Ventures ("Mineral Ventures") were unchanged from the prior year quarter. In the first six months of 1996, the Company reported net income of $44.0 million compared with $38.7 million in the first six months of 1995. Operating profit totaled $71.1 million in the first six months of 1996 compared with $58.6 million in the prior year period. Net income and operating profit in the first six months of 1996 included two non-recurring items which impacted the Company's Coal operations: a benefit from the settlement of the Evergreen lawsuit at an amount lower than previously accrued ($35.7 million or $23.2 million after tax) and a charge related to the implementation of a new accounting standard regarding the impairment of long-lived assets ($27.8 million or $18.1 million after tax). Increased operating profits in the first six months of 1996 were also achieved at BHS ($4.2 million), Brink's ($4.3 million), Burlington ($2.5 million) and Mineral Ventures ($0.3 million) and were partially offset by higher general corporate expenses ($1.2 million).
Burlington - ---------- The following is a table of selected financial data for Burlington on a comparative basis: <TABLE> <CAPTION> (Dollars in thousands - Three Months Ended June 30 Six Months Ended June 30 except per pound/shipment amounts) 1996 1995 1996 1995 ==================================================================================== <S> <C> <C> <C> <C> Revenues: Expedited freight service Domestic U.S. $ 133,952 127,085 262,732 256,282 International 172,462 169,033 342,177 330,245 - ------------------------------------------------------------------------------------ Total expedited freight service $ 306,414 296,118 604,909 586,527 Customs clearance 33,708 27,133 65,976 48,284 Ocean and other (a) 23,289 18,699 44,476 31,083 - ------------------------------------------------------------------------------------ Total revenues $ 363,411 341,950 715,361 665,894 Operating expenses 317,154 299,645 631,509 589,237 Selling, general and administrative 30,448 28,744 59,580 55,562 - ------------------------------------------------------------------------------------ Total costs and expenses 347,602 328,389 691,089 644,799 - ------------------------------------------------------------------------------------ Other operating income 518 845 741 1,369 - ------------------------------------------------------------------------------------ Operating profit: Domestic U.S. $ 10,029 6,793 13,737 11,480 International 6,298 7,613 11,276 10,984 - ------------------------------------------------------------------------------------ Total operating profit $ 16,327 14,406 25,013 22,464 ==================================================================================== Depreciation and amortization $ 5,414 4,907 10,814 9,702 ==================================================================================== Cash capital expenditures $ 10,343 6,185 15,114 13,500 ==================================================================================== Expedited freight service shipment growth rate (b) 3.4% 2.6% 4.5% 4.7% Expedited freight service weight growth rate (b): Domestic U.S. 5.3% (12.5%) 4.1% (4.1%) International 6.5% 28.8% 7.9% 29.9% Worldwide 5.9% 5.4% 6.1% 11.2% Expedited freight service weight (million pounds) 352.6 332.8 697.2 657.3 ==================================================================================== Expedited freight service shipments (thousands) 1,322 1,278 2,620 2,508 ==================================================================================== Expedited freight service: Yield (revenue per pound) $ .869 .890 .868 .892 Revenue per shipment $ 232 232 231 234 Weight per shipment (pounds) 267 260 266 262 ==================================================================================== </TABLE> (a) Primarily international ocean freight and import services. (b) Compared to the same period in the prior year. Burlington's second quarter operating profit amounted to $16.3 million, an increase of $1.9 million (13%) from the level reported in the second quarter of 1995. Worldwide revenues increased by 6% to $363.4 million from $342.0 million in the 1995 quarter. The $21.4 million growth in revenues principally reflects a 6% increase in worldwide expedited freight service pounds shipped, which reached 352.6 million pounds in the second quarter of 1996, and higher other revenues (primarily import related services and ocean freight), partially offset by a 2% decline in the worldwide average yield. Worldwide expenses amounted to $347.6 million, $19.2 million (6%) higher than in the second quarter of 1995. Domestic expedited freight service revenues of $134.0 million were $6.9 million (5%) higher than the prior year quarter. Domestic operating profit increased to $10.0 million in the second quarter of 1996 from $6.8 million in the prior year quarter. Operating profit benefited from 5% higher volume, with somewhat higher growth in second day business, and slightly lower transportation costs per pound. Domestic average yields improved during the second quarter of 1996 from the levels of late 1995 and early 1996 and were essentially equal to that of the prior year quarter. Domestic operating profit also benefited from reduced Federal excise tax liabilities on transportation of freight by air, partially offset by higher jet fuel costs. However, Congress recently passed a bill which proposes to reinstate this Federal excise tax from the date of enactment through December 31, 1996. Although it is anticipated that the President will sign the legislation into law, management cannot predict when the tax will become effective and thus cannot determine the impact the tax, if enacted, will have on the results of the Burlington Group for the balance this year. International expedited freight service revenues of $172.5 million in the second quarter represented a $3.4 million (2%) increase over the $169.0 million reported in the comparable quarter in 1995. Revenues from other activities, primarily international, which include transactions such as customs clearance and import related services, as well as ocean freight services, increased 24% or $11.2 million to $57.0 million. The growth in revenues from these other activities was mainly due to an increase in international shipment volume and the continued expansion of ocean freight services. International operating profit amounted to $6.3 million in the second quarter of 1996, $1.3 million lower than the 1995 quarter, as lower European results were only partially offset by improved U.S. exports. International expedited freight service pricing declined from the second quarter of 1995 as overseas price weakness was only partially offset by continuing improvement in U.S. export pricing. International expedited freight service volume increased 7% compared to the prior year quarter reflecting higher overseas volumes. Burlington's operating profit amounted to $25.0 million in the first six months of 1996, an increase of $2.5 million (11%) from the level reported in the first six months of 1995. Worldwide revenues increased by 7% to $715.4 million from $665.9 million in the 1995 six months. The $49.5 million growth in revenues principally reflects a 6% increase in worldwide expedited freight service pounds shipped, reaching 697.2 million pounds in the first half of 1996, and higher other revenues, partially offset by a 3% decline in the worldwide average yield. Worldwide expenses amounted to $691.1 million, $46.3 million (7%) higher than in the first half of 1995. Domestic expedited freight service revenues of $262.7 million in the first six months of 1996 were $6.5 million (3%) higher than the prior year period. Domestic operating profit increased to $13.7 million in the first six months of 1996 from $11.5 million in the prior year period. The higher operating profit reflected higher volume, lower average transportation costs and the benefit from reduced Federal excise tax liabilities, partially offset by lower average yields. The decline in the average yield for the first six months of 1996 compared to the same period of 1995 was due to lower average pricing for Burlington's overnight service as well as a reduction in the proportion of overnight freight in the sales mix. On average, Burlington achieved lower operating costs compared to the prior year six months as a result of its ability to adjust its fleet, station and labor cost structure to its changing volume requirements. International expedited freight service revenues of $342.2 million in the first six months of 1996 represented an $11.9 million (4%) increase over the $330.2 million reported in the comparable period in 1995. Revenues from other activities increased 39% or $31.1 million to $110.5 million. International operating profit amounted to $11.3 million in the first six months of 1996, 3% higher than the first six months of 1995, principally due to an 8% favorable change in international expedited freight service weight shipped, increased margin from import services and ocean freight and lower average transportation costs, partially offset by 4% lower average yields. Increased volume reflects growth in the worldwide flow of international airfreight and the expansion of company-owned operations. Brink's - ------- The following is a table of selected financial data for Brink's on a comparative basis: <TABLE> <CAPTION> Three Months Ended June 30Six Months Ended June 30 (In thousands) 1996 1995 1996 1995 ==================================================================================== <S> <C> <C> <C> <C> Revenues: North America (United States and Canada) $ 103,935 92,551 202,115 180,981 International subsidiaries 79,476 61,992 157,150 122,653 - ------------------------------------------------------------------------------------ Total revenues $ 183,411 154,543 359,265 303,634 Operating expenses 149,143 125,014 292,651 248,224 Selling, general and administrative 22,069 19,981 44,543 38,964 - ------------------------------------------------------------------------------------ Total costs and expenses 171,212 144,995 337,194 287,188 - ------------------------------------------------------------------------------------ Other operating income (expense) 325 688 (169) 1,173 - ------------------------------------------------------------------------------------ Operating profit: North America (United States and Canada) $ 8,161 7,010 14,091 12,526 International operations 4,363 3,226 7,811 5,093 - ------------------------------------------------------------------------------------ Total operating profit $ 12,524 10,236 21,902 17,619 ==================================================================================== Depreciation and amortization $ 5,708 5,340 11,737 10,496 ==================================================================================== Cash capital expenditures $ 9,198 5,685 16,004 11,476 ==================================================================================== </TABLE> Brink's consolidated revenues totaled $183.4 million in the second quarter of 1996 compared with $154.5 million in the second quarter of 1995. Brink's operating profit of $12.5 million in the second quarter of 1996 represented a $2.3 million or 22% increase over the $10.2 million operating profit reported in the prior year quarter. The revenue increase of $28.9 million, or 19%, in the 1996 second quarter was offset in part by an increase in operating expenses and selling, general and administrative expenses of $26.2 million and a decrease in other operating income of $0.4 million. Revenues from North American operations (United States and Canada) increased $11.4 million, or 12%, to $103.9 million in the 1996 second quarter from $92.6 million in the prior year quarter. North American operating profit increased $1.2 million, or 16%, to $8.2 million in the current year quarter from $7.0 million in the second quarter of 1995. The operating profit improvement primarily resulted from improved armored car operations, which includes ATM servicing. Revenues from international subsidiaries increased $17.5 million to $79.5 million in the 1996 second quarter from $62.0 million in the 1995 quarter. Approximately 45% of the increase in international revenues was due to the consolidation of the results of Brink's Colombia, in which Brink's increased its ownership from 47% to 51% during the third quarter of 1995. Operating profits from international subsidiaries and minority-owned affiliates amounted to $4.4 million in the current year quarter compared to $3.2 million in the prior year second quarter. The earnings increase for the second quarter of 1996 continued to reflect higher operating profits in Latin America which more than offset lower results in Europe, primarily in France and Holland. On a comparable basis, 1996 versus 1995, current year's operating profit reflects a $1.1 million benefit from the consolidation of Colombia's operating profits. Brazil (100% owned) continued to achieve improved results due to strong volume growth and effective controls over operating and administrative costs, as operating profits amounted to $1.6 million compared to break-even results in the prior year quarter. The $0.7 million in equity earnings generated by Brink's Mexican affiliate (20% owned) was a significant improvement over the $0.6 million loss recorded in the second quarter of 1995, as the benefits of workforce reductions, cost controls and operational improvements continue to be realized. Brink's consolidated revenues totaled $359.3 million in the first six months of 1996 compared with $303.6 million in the first six months of 1995. Brink's operating profit of $21.9 million in the first six months of 1996 represented a $4.3 million or 24% increase over the $17.6 million operating profit reported in the prior year period. The revenue increase of $55.6 million, or 18%, in the first half of 1996 was offset in part by an increase in operating expenses and selling, general and administrative expenses of $50.0 million and a decrease in other operating income of $1.3 million. Revenues from North American operations increased $21.1 million, or 12%, to $202.1 million in the first six months of 1996 from $181.0 million in the same period of 1995. North American operating profit increased $1.6 million, or 12%, to $14.1 million in the current year period from $12.5 million in the same period of 1995. The operating profit improvement for the six months of 1996 primarily resulted from improved armored car operations, which includes ATM servicing. Revenues from international subsidiaries increased $34.5 million to $157.2 million in the first six months of 1996 from $122.7 million in the first six months of 1995. Consolidation of the results of Brink's Colombia accounted for approximately 46% of the increase in international revenues. Operating profits from international subsidiaries and minority-owned affiliates amounted to $7.8 million in the current year period compared to $5.1 million in the prior year period. Higher operating profits in Latin America more than offset lower results in Europe. On a comparable basis, 1996 versus 1995, current year's operating profit includes a $2.0 million benefit from the consolidation of Colombia. Brazil's operating profits amounted to $3.0 million in the first six months of 1996 compared to $0.9 million in the first six months of 1995. Equity in earnings from Brink's Mexican affiliate amounted to $1.0 million compared with a $1.0 million loss recorded in the first six months of 1995. BHS - --- The following is a table of selected financial data for BHS on a comparative basis: <TABLE> <CAPTION> Three Months Ended June 30 Six Months Ended June 30 (Dollars in thousands) 1996 1995 1996 1995 ================================================================================ <S> <C> <C> <C> <C> Revenues $ 38,644 31,063 75,350 61,372 Operating expenses 20,300 16,350 39,358 32,664 Selling, general and administrative 6,943 5,302 13,489 10,392 - -------------------------------------------------------------------------------- Total costs and expenses 27,243 21,652 52,847 43,056 - -------------------------------------------------------------------------------- Operating profit $ 11,401 9,411 22,503 18,316 ================================================================================ Depreciation and amortization $ 7,276 5,331 13,809 10,420 ================================================================================ Cash capital expenditures $ 15,151 9,214 30,049 19,141 ================================================================================ Annualized service revenues (a) $ 116,509 95,810 ================================================================================ Number of subscribers: Beginning of period 395,676 332,434 378,659 318,029 Installations 24,447 19,290 48,703 38,362 Disconnects (7,532) (5,184) (14,771) (9,851) - -------------------------------------------------------------------------------- End of period 412,591 346,540 412,591 346,540 ================================================================================ </TABLE> (a) Annualized service revenue is 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. Revenues for BHS increased by $7.5 million (24%) to $38.6 million in the second quarter of 1996 from $31.1 million in the 1995 quarter. In the first six months of 1996, revenues for BHS increased by $14.0 million (23%) to $75.4 million from $61.4 million in the first six months of 1995. The increase in revenues was predominantly from higher ongoing monitoring and service revenues, caused by a 19% growth in the subscriber base. As a result of such growth, annualized service revenues in force at the end of the second quarter of 1996 grew 22% over the amount in effect at the end of the second quarter of 1995. The total amount of installation revenue in the second quarter and first six months of 1996 also grew by 34% and 28%, respectively, over the amount recorded in the same periods of 1995, as a result of the increased volume of installations. Operating profit of $11.4 million in the second quarter of 1996 represented an increase of $2.0 million (21%) compared to the $9.4 million earned in the 1995 second quarter. In the first six months of 1996, operating profit increased $4.2 million (23%) to $22.5 million from $18.3 million earned in the first six months of 1995. The increase in operating profit largely stemmed from the growth in the subscriber base and higher average monitoring and services revenues, partially offset by higher depreciation and increased account servicing and administrative expenses, which are a consequence of the larger subscriber base. The favorable change in operating profit for the second quarter and first six months of 1996 also reflects a reduction in the amount of net installation and marketing costs incurred during the quarter and six months of 1996 of $0.4 million and $1.1 million, respectively, compared to the prior year periods. Operating profit as a percentage of revenue remained at approximately 30% in the second quarter and first six months of 1996 as compared to the prior year periods. The subscriber base on June 30, 1996, totaled 412,591 customers, 19% higher than the balance at the end of the second quarter of 1995. Annualized service revenues amounted to $116.5 million in June 1996, 22% higher than in the comparable period in 1995. The favorable change reflects the increased subscriber base as well as higher average monthly revenues, principally generated by customer service contracts. Coal - ---- The following is a table of selected financial data for the Coal operations on a comparative basis: <TABLE> <CAPTION> Three Months Ended June 30 Six Months Ended June 30 (In thousands) 1996 1995 1996 1995 =================================================================================== <S> <C> <C> <C> <C> Net sales $ 169,896 179,987 335,364 371,270 Cost of sales 165,306 177,978 356,116 368,945 Selling, general and administrative 5,509 5,622 14,381 11,702 Restructuring and other charges, including litigation accrual - - (35,650) - - ----------------------------------------------------------------------------------- Total costs and expenses 170,815 183,600 334,847 380,647 - ----------------------------------------------------------------------------------- Other operating income 6,109 9,423 9,050 16,498 - ----------------------------------------------------------------------------------- Operating profit (loss) $ 5,190 5,810 9,567 7,121 =================================================================================== Coal sales (tons): Metallurgical 1,954 2,284 3,999 4,717 Utility and industrial 3,831 3,985 7,403 8,444 - ----------------------------------------------------------------------------------- Total coal sales 5,785 6,269 11,402 13,161 =================================================================================== Production/purchased (tons): Deep 991 984 2,053 2,041 Surface 2,870 3,276 5,586 7,129 Contract 459 508 854 1,041 - ----------------------------------------------------------------------------------- 4,320 4,768 8,493 10,211 Purchased 1,376 1,765 2,984 3,502 - ----------------------------------------------------------------------------------- Total 5,696 6,533 11,477 13,713 =================================================================================== </TABLE> Coal operations generated an operating profit of $5.2 million in the second quarter of 1996, compared to $5.8 million recorded in the 1995 second quarter. Included in the current quarter's results are pretax benefits of $3.0 million from settlements of outstanding litigation and $1.7 million reduction in expenses resulting from the recently enacted Commonwealth of Virginia law providing refundable credits for coal produced in Virginia (discussed further below). The second quarter of 1995 included a pretax gain of $5.3 million for the disposition of coal reserves and a $2.5 million benefit from a favorable litigation decision which reduced previously expensed employee benefit costs. Coal operations had an operating profit of $9.6 million in the first six months of 1996 compared to an operating profit of $7.1 million in the prior year. Operating profit in the first six months of 1996 included, in addition to the second quarter benefits outlined above, a benefit of $35.7 million from the settlement of the Evergreen lawsuit at an amount lower than previously accrued in 1993 and a $27.8 million charge related to the implementation of a new accounting standard (discussed further below). The charge is included in cost of sales ($24.2 million) and selling, general and administrative expenses ($3.6 million). Operating profit in the first half of 1995 included $8.3 million in gains from the sale of coal reserves. The operating profit of Coal operations, excluding the effects of the Evergreen settlement and the implementation of SFAS No. 121, is analyzed as follows: <TABLE> <CAPTION> (In thousands, Three Months Ended June 30 Six Months Ended June 30 except per ton amounts) 1996 1995 1996 1995 ============================================================================== <S> <C> <C> <C> <C> Net coal sales $168,551 179,495 332,459 370,233 Current production cost of coal sold 157,052 170,560 315,023 353,178 - ------------------------------------------------------------------------------ Coal margin 11,499 8,935 17,436 17,055 Non-coal margin 249 139 856 306 Other operating income (net) 5,963 9,423 8,904 16,498 - ------------------------------------------------------------------------------ Margin and other income 17,711 18,497 27,196 33,859 - ------------------------------------------------------------------------------ Other costs and expenses: Idle equipment and closed mines 200 3,175 459 4,560 Inactive employee cost 7,063 3,889 14,487 10,476 General and administrative 5,258 5,623 10,494 11,702 - ------------------------------------------------------------------------------ Total other costs and expenses 12,521 12,687 25,440 26,738 - ------------------------------------------------------------------------------ Operating profit (adjusted as stated above) $ 5,190 5,810 1,756 7,121 - ------------------------------------------------------------------------------ Coal margin per ton: Realization $ 29.14 28.63 29.16 28.13 Current production cost of coal sold 27.15 27.21 27.63 26.83 - ------------------------------------------------------------------------------ Coal margin $ 1.99 1.42 1.53 1.30 ============================================================================== </TABLE> Total coal margin of $11.5 million for the second quarter of 1996 represented an increase of $2.6 million from the comparable period in 1995. The improvement in coal margin reflects a $.57 per ton (40.1%) increase in average coal margin, partially offset by a decrease in sales volume. Sales volume of 5.8 million tons in the 1996 second quarter was 0.5 million tons less than the 6.3 million tons sold in the prior year quarter. Steam coal sales decreased by 0.2 million tons, to 3.8 million tons, and metallurgical coal sales declined by 0.3 million tons, to 2.0 million tons. Steam coal sales represented 66% of total volume in the 1996 second quarter and 64% in the 1995 second quarter. Coal margin per ton increased to $1.99 per ton in the current quarter from $1.42 per ton for the comparable period in 1995 as a $0.51 per ton (1.8%) increase in realization was augmented by a $0.06 per ton decrease in the current production cost of coal sold. The average realization improvement was largely due to an increase in metallurgical coal pricing as the effect of the increase in pricing for the coal contract year that began April 1, 1995 was not fully realized until periods beginning after the second quarter 1995. The weighted average price for expected metallurgical coal shipments for the contract year which began on April 1, 1996 is approximately equal to the prior year level. While steam coal spot pricing remains at exceptionally low levels, the majority of Coal operations' steam coal sales were, and continue to be sold under long term contracts. The current production cost of coal sold decreased $0.06 per ton to $27.15 per ton in the second quarter 1996 as compared to the prior year period as lower cost from company deep and surface mines, including the previously mentioned Virginia coal credit, offset higher contract and purchased coal costs. Production in the 1996 second quarter totaled 4.3 million tons, a 9.4% decrease compared to the 4.8 million tons produced in the 1995 second quarter. The decline reflected lower surface mine production, which was caused by exhaustion of reserves at certain mines, idling of a mine subsequent to the second quarter of 1995 and the sale of Coal operations' Ohio operations at the end of 1995. Second quarter surface production accounted for 66% and 69% of total production in 1996 and 1995, respectively. Productivity of 38 tons per man day represented a 6.4% increase from the 1995 level. Non-coal margin in the second quarter of 1996 amounted to $0.2 million, $0.1 million higher than in the second quarter of 1995. The increase largely reflects the impact of a favorable change in natural gas prices. Other operating income, reflecting the litigation settlements, sales of properties and equipment and third party royalties, amounted to $6.0 million in the second quarter of 1996, $3.5 million less than in the comparable period of 1995. The higher level of income recorded in the 1995 period largely reflects $5.3 million of income generated from the sale of coal reserves. Idle equipment and closed mine costs decreased by $3.0 million in the 1996 second quarter. Idle equipment expenses were reduced from the prior year level as a result of Coal operations' improved equipment management program. Inactive employee costs, which primarily represent long term employee liabilities for pension and retiree medical costs, increased by $3.2 million to $7.1 million in the 1996 second quarter. The 1995 quarter reflects a benefit of $2.5 million from a litigation decision and the use of higher long- term interest rates to calculate the present value of the long-term liabilities. For the first six months of 1996, coal margin was $17.4 million, an increase of $0.4 million over the 1995 period. The increase reflects a $0.23 per ton improvement in coal margin (17.7%), mostly offset by a sales volume decrease of 1.8 million tons (13.4%). Sales volume of 11.4 million tons in the first half of 1996 was 1.8 million tons less than the 13.2 million tons sold in the 1995 period. Metallurgical coal sales declined by 0.7 million tons (15.2%) to 4.0 million tons and steam coal sales decreased by 1.0 million tons (12.3%) to 7.4 million tons compared to the prior year. Steam coal sales represented 65% of the total 1996 sales volume, a 1% increase when compared to 1995. Coal margin per ton increased to $1.53 per ton in the first six months of 1996 from $1.30 per ton for the same period of 1995, as a $1.03 (3.7%) per ton increase in realization was only partially offset by a $0.80 (3.0%) per ton increase in the current production cost of coal sold. The increase in realization was mostly due to the timing of the improved metallurgical pricing for the contract year that began April 1, 1995, the full effect of which was not realized until after the first half of 1995. The current production cost of coal sold for the first half of 1996 was $27.63 per ton as compared to $26.83 per ton for the first half of 1995, reflecting overall higher cost of production. Production for the year-to-date 1996 period totaled 8.5 million tons, a decrease of 16.8% from the 1995 prior period reflecting the decreased number of producing mines due to idlement, reserve exhaustion or sale. Surface production accounted for 66% and 70% of the total volume in the 1996 and 1995 periods, respectively. Productivity of 37 tons per man day represents a 1.9% increase over the 1995 period. The non-coal margin was $0.9 million for the first half of 1996, an increase of $0.6 million due to improved natural gas prices over the 1995 period. Other operating income, including the litigation settlements, sales of properties and equipment and third party royalties, was $8.9 million for the 1996 period, a decrease of $7.6 million from 1995. The 1995 period reflected a gain of $8.3 million from the sale of coal reserves. Idle equipment and closed mines costs decreased by $4.1 million in the first half of 1996 compared to the prior year due to the improved equipment management program. Inactive employee costs of $14.5 million represented an increase of $4.0 million as compared to 1995. The 1995 period reflected a reduction of previously expensed employee benefit costs totaling $2.5 million and the use of a higher long term interest rate to determine the present value of the long term employee benefit liabilities. In 1988, the trustees of certain pension and benefit trust funds (the "Trust Funds") established under collective bargaining agreements with the United Mine Workers of America ("UMWA") brought an action (the "Evergreen Case") against the Company and a number of its coal subsidiaries, claiming that the defendants were obligated to contribute to such Trust Funds in accordance with the provisions of the 1988 and subsequent National Bituminous Coal Wage Agreements, to which neither the Company nor any of its subsidiaries were a signatory. In late March 1996, a settlement was reached in the Evergreen Case. Under the terms of the settlement, the coal subsidiaries which had been signatories to earlier National Bituminous Coal Wage Agreements agreed to make various lump sum payments in full satisfaction of all amounts allegedly due to the Trust Funds through January 31, 1996, to be paid over time as follows: $25.8 million upon dismissal of the Evergreen Case in March 1996 and the remainder of $24.0 million in installments of $7.0 million in August 1996 and $8.5 million in each of 1997 and 1998. The first payment was entirely funded through an escrow account previously established by the Coal operations. In addition, the coal subsidiaries agreed to future participation in the UMWA 1974 Pension Plan. Separate lawsuits against each of the UMWA and the Bituminous Coal Operators Association, previously reported, have also been dismissed. As a result of the settlement of these cases at an amount lower than previously accrued in 1993, the Company recorded a pretax benefit of $35.7 million ($23.2 million after tax) in the first quarter of 1996 in its consolidated financial statements. As of January 1, 1996, the Company implemented a new accounting standard, Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 requires companies to review long-lived assets and certain identifiable intangibles to be held and used by an entity for impairment whenever circumstances indicate that the carrying amount for an asset may not be recoverable. In accordance with SFAS No. 121, the Company grouped its long-lived assets at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets, and determined the recoverability of such assets by comparing the sum of the expected undiscounted future cash flows with the carrying amount of the assets. The impact of adopting SFAS No. 121 resulted in a pretax charge to earnings as of January 1, 1996 for the Company's Coal operations of $27,839 ($18,095 after tax), of which $24,203 was included in cost of sales and $3,636 was included in selling, general and administrative expenses. Assets for which the impairment loss was recognized consisted of property, plant and equipment, advanced royalties and goodwill. These assets primarily related to mines scheduled for closure in the near term and idled facilities and related equipment. Based on current mining plans, geological conditions, and current assumptions related to future realization and costs, the sum of the expected undiscounted future cash flows was less than the carrying amount of the assets, and accordingly, an impairment loss was recognized. The loss was calculated based on the excess of the carrying value of the assets over the present value of estimated expected future cash flows, using a discount rate commensurate with the risks involved. Coal operations continued cash funding for charges recorded in prior years for facility closure costs recorded as restructuring and other charges. The following table analyzes the changes in liabilities during the first six months of 1996 for such costs: Employee Mine Termination, Leased and Medical Machinery Plant and and Closure Severance Equipment Costs Costs Total ---------------------------------------------------------------------- Balance as of December 31, 1995 $ 1,218 28,983 36,077 66,278 Payments 462 2,862 3,137 6,461 ---------------------------------------------------------------------- Balance as of June 30, 1996 $ 756 26,121 32,940 59,817 ====================================================================== In April 1996, the Commonwealth of Virginia enacted into law the "Coalfield Employment Enhancement Tax Credit." The new law, which is effective from January 1, 1996 through December 31, 2001, provides Virginia coal producers with a refundable credit for coal produced in Virginia. The credit ranges from $.40 per ton for surface coal to $1 to $2 per ton of underground coal mined, depending upon seam thickness, with certain modifications to the surface and deep mined credit rates based on employment levels. The credits generated can be utilized under a predetermined schedule beginning with the year 1999 through the year 2008. At current production levels, Coal operations estimates it will generate approximately $4.0 million in credits in 1996 to be realized in future years according to the law. Mineral Ventures - ---------------- The following is a table of selected financial data for Mineral Ventures on a comparative basis: <TABLE> <CAPTION> (Dollars in thousands, Three Months Ended June 30 Six Months Ended June 30 except ounce data) 1996 1995 1996 1995 ================================================================================== <S> <C> <C> <C> <C> Net sales $ 5,372 4,224 10,156 8,681 Cost of sales 4,138 2,882 7,105 5,855 Selling, general and administrative 950 960 1,738 1,577 - ---------------------------------------------------------------------------------- Total costs and expenses 5,088 3,842 8,843 7,432 Other operating income 291 194 436 242 - ---------------------------------------------------------------------------------- Operating profit $ 575 576 1,749 1,491 ================================================================================== Stawell Gold Mine: Mineral Ventures's 50% direct share: Ounces sold 12,841 10,646 24,600 21,492 Ounces produced 11,868 10,690 23,982 21,288 ================================================================================== Average realized gold price per ounce (US$): Realization $ 421 394 411 397 Cash cost $ 287 267 273 265 ================================================================================== </TABLE> Operating profit of Mineral Ventures operations amounted to $0.6 million in the 1996 second quarter, which equaled operating profit in the second quarter of 1995. In the first six months of 1996, operating profit increased $.2 million to $1.7 million from an operating profit of $1.5 million in the first six months of 1995. Operating profit for the second quarter and first six months of 1996 continued to reflect strong results achieved by the Stawell gold mine in western Victoria, Australia, in which Mineral Ventures has a 67% direct and indirect interest. The Stawell mine's earnings reflect the benefit from processing a higher grade of ore. During the latter part of the second quarter of 1996, however, results were negatively impacted by two lost time accidents as well as some equipment problems, which resulted in production shortfalls and higher costs. During the second quarter, the Australian joint venture in which Mineral Ventures owns a 34% direct interest, formally announced that the Silver Swan nickel deposit in Australia will be developed as an underground mine with production expected to commence in mid-1997. The indicated resource between 200 and 550 meters below surface of 440,000 tons at 14% nickel has been adjusted for dilution and mining recovery to give a probable ore reserve of 640,000 tons at 9.5% nickel. According to the announcement, this estimate of tonnage is regarded as +/- 30% in accuracy prior to underground inspection. Additional high-grade mineralization has been encountered in drilling to the 735 meter level; however, at this time, there has been insufficient drill density to permit assessment of a resource over the vertical interval 550-735 meters. In addition, a disseminated nickel sulphide mineralization adjacent to Silver Swan, named Cygnet, has been estimated to contain a total indicated and inferred resource of 3.5 million tons at 1.4% nickel. After completion of test work, a feasibility study for bringing Cygnet into production will be undertaken later in 1996. Foreign Operations - ------------------ A portion of the Company's financial results is derived from activities in several foreign countries, each with a local currency other than the U.S. dollar. Since the financial results of the Company are reported in U.S. dollars, they are affected by the changes in the value of the various foreign currencies in relation to the U.S. dollar. The Company's international activity is not concentrated in any single currency, which limits the risks of foreign rate fluctuations. In addition, foreign currency rate fluctuations may adversely affect transactions which are denominated in currencies other than the functional currency. The Company routinely enters into such transactions in the normal course of its business. Although the diversity of its foreign operations limits the risks associated with such transactions, the Company uses foreign exchange forward contracts to hedge the risks associated with certain transactions denominated in currencies other than the functional currency. Realized and unrealized gains and losses on these contracts are deferred and recognized as part of the specific transaction hedged. In addition, cumulative translation adjustments relating to operations in countries with highly inflationary economies are included in net income, along with all transaction gains or losses for the period. Subsidiaries in Brazil operate in such a highly inflationary economy. Additionally, the Company is subject to other risks customarily associated with doing business in foreign countries, including economic conditions, 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 - ---------------------- Other operating income includes the Company's share of net income of unconsolidated affiliates, primarily equity affiliates of Brink's, royalty income and gains and losses from sales of coal assets. Other operating income in the second quarter of 1996 decreased $4.0 million to $7.2 million from $11.2 million in the second quarter of 1995, and in the first six months of 1996 decreased $9.2 million to $10.0 million from $19.3 million in the first six months of 1995. The decrease in the quarter and first six months of 1996 from the comparable periods of 1995 is largely due to lower gain from the sales of coal assets and a decrease in Brink's share of the reported results of its equity affiliates. Results in the second quarter and first six months of 1995 included $5.3 million and $8.3 million in gains from the sale of coal reserves, respectively. Brink's share of the reported results of its equity affiliates for the second quarter and first six months of 1996 decreased $0.2 million and $1.2 million, respectively, compared with the same periods for the prior year. The results of Brink's equity affiliates in the second quarter and first six months of 1995 included $0.4 million and $1.0 million, respectively, in equity income from Colombia which became a consolidated subsidiary during the latter half of 1995, subsequent to an additional investment bringing Brink's ownership to a majority interest in the operation. The Company's corporate office headquarters will be relocating to Richmond, Virginia, during September 1996. The costs of this move, which includes moving expense, employee relocation, severance pay and temporary employee costs, is estimated to be $3.0 million, and will be expensed in the third quarter. Interest Expense - ---------------- Interest expense decreased $0.3 million to $3.4 million in the second quarter of 1996 from $3.7 million in the prior year quarter, and in the first six months of 1996 increased $0.4 million to $7.1 million from $6.7 million in the first six months of 1995. Other Income (Expense), Net - --------------------------- Other net expense for the second quarter of 1996 increased $0.5 million to a net expense of $2.0 million from a net expense of $1.5 million in the second quarter of 1995, and in the first six months of 1996 increased $2.2 million to $4.4 million from $2.2 million in the same period a year earlier. Higher minority interest expense at Brink's contributed to the increased expense for the current year quarter and six month periods. In addition, other net expense in the first six months of 1996 includes a loss for the termination of an overseas sublease agreement at Burlington. FINANCIAL CONDITION Cash Provided by Operations - --------------------------- Cash provided by operating activities during the first six months of 1996 totaled $67.1 million compared with $37.5 million in the first six months of 1995. Net income, noncash charges and changes in operating assets and liabilities in the first six months of 1996 were significantly affected by two non-recurring items, a benefit from the settlement of the Evergreen case at an amount less than originally accrued and a charge related to the implementation of SFAS No. 121; these items had no effect on cash generated by operations. The initial payment of $25.8 million related to the Evergreen case settlement was entirely funded by an escrow account previously established by the Company. The amount previously escrowed and accrued was included in "Short-term investments" and "Accrued liabilities" on the Company's balance sheet. Capital Expenditures - -------------------- Cash capital expenditures for the first six months of 1996 totaled $78.0 million, $22.7 million higher than in the comparable period in 1995. Of the 1996 amount, $15.1 million was spent by Burlington, $16.0 million was spent by Brink's, $30.0 million was spent by BHS, $11.3 million was spent by Coal, $1.5 million was spent by Mineral Ventures and $4.1 million was spent to acquire the Company's new corporate office headquarters located in Richmond, Virginia. Expenditures incurred by BHS in the first six months of 1996 were primarily for customer installations, reflecting expansion of the subscriber base. For the full year 1996, company-wide capital expenditures are projected to approximate $175 million. The foregoing amounts exclude equipment expenditures that have been or are expected to be financed through capital and operating leases. Increased full-year expenditures in 1996 compared to 1995 are largely attributable to BHS for continued expansion of the subscriber base and Brink's in support of business expansion. Other Investing Activities - -------------------------- All other investing activities in the first six months of 1996 provided net cash of $2.5 million, primarily from the disposal of property, plant and equipment and other investing assets, net of expenditures for aircraft heavy maintenance. Financing - --------- The Company intends to fund its capital expenditure requirements during the remainder of 1996 with anticipated cash flows from operating activities and through operating leases if the latter are financially attractive. Shortfalls, if any, will be financed through the Company's revolving credit agreements or other borrowing arrangements. The Company has a $350 million revolving credit agreement with a syndicate of banks (the "Facility"). The Facility includes a $100 million term loan and also permits additional borrowings, repayments, and reborrowings of up to an aggregate of $250 million. During the second quarter of 1996, the maturity date of both the term loan and revolving credit portion of the Facility was extended to May 31, 2001. As of June 30, 1996, borrowings of $100 million were outstanding under the term loan portion of the Facility and $18.4 million of additional borrowings were outstanding under the remainder of the facility. The Company also maintains agreements with financial institutions whereby it has the right to sell certain coal receivables, with recourse, to those institutions. As of June 30, 1996, coal receivables of approximately $5.0 million sold under these agreements were outstanding. Debt - ---- Outstanding debt, including borrowings under revolving credit agreements, aggregated $191.2 million at June 30, 1996, up from $177.6 million at year-end 1995. Cash provided from operating activities, a reduction in cash balances, other investing activities and the exercise of stock options were not sufficient to fund capital expenditures, dividend payments, repurchases of Company stock and the cost of the Brink's Stock proposal, resulting in additional borrowings. Capitalization - -------------- On January 18, 1996, the shareholders of the Company approved the Brink's Stock Proposal, resulting in the modification of the capital structure of the Company to include an additional class of common stock. The outstanding shares of Pittston Services Group Common Stock ("Services Stock") were redesignated as Pittston Brink's Group Common Stock ("Brink's Stock") on a share-for-share basis, and a new class of common stock, designated as Pittston Burlington Group Common Stock ("Burlington Stock"), was distributed on the basis of one- half share of Burlington Stock for each share of Services Stock previously held by shareholders of record on January 19, 1996. The Pittston Brink's Group (the "Brink's Group") consists of the Brink's and BHS operations of the Company. The Pittston Burlington Group (the "Burlington Group") consists of the Burlington operations of the Company. The Pittston Minerals Group (the "Minerals Group") consists of the Coal and Mineral Ventures operations of the Company. The approval of the Brink's Stock Proposal did not result in any transfer of assets and liabilities of the Company or any of its subsidiaries. The Company prepares separate financial statements for the Minerals, Brink's and Burlington Groups in addition to consolidated financial information of the Company. Brink's Stock, Burlington Stock and Pittston Minerals Group Common Stock ("Minerals Stock") were designed to provide shareholders with separate securities reflecting the performance of the Brink's Group, Burlington Group and Minerals Group, respectively, without diminishing the benefits of remaining a single corporation or precluding future transactions affecting any of the Groups. The redesignation of the Company's Services Stock as Brink's Stock and the distribution of Burlington Stock as a result of the approval of the Brink's Stock Proposal and the distribution of Minerals Stock in July 1993 did not result in any transfer of assets and liabilities of the Company or any of its subsidiaries. Holders of all three classes of stock are shareholders of the Company, which continues to be responsible for all its liabilities. Therefore, financial developments affecting the Brink's Group, the Burlington Group or the Minerals Group that affect the Company's financial condition could affect the results of operations and financial condition of all three Groups. The changes in the capital structure of the Company had no effect on the Company's total capital, except as to expenses incurred in the execution of the Brink's Stock Proposal. Since the approval of the Brink's Stock Proposal, capitalization of the Company has been affected by the share activity related to each of the classes of common stock. In November 1995, the Board authorized a revised share repurchase program which allows for the purchase, from time to time, of up to 1,500,000 shares of Brink's Stock, 1,500,000 shares of Burlington Stock and 1,000,000 shares of Minerals stock, not to exceed an aggregate purchase price of $45.0 million. As of June 30, 1996, 5,000 shares of Burlington Stock at a total cost of $0.1 million were repurchased under the program, all of which were repurchased in the second quarter of 1996. In 1994, the Board authorized the repurchase from time to time of up to $15 million of the Company's cumulative convertible preferred stock. In November 1995, the Board authorized an increase in the remaining authority to $15 million. No share repurchases were made in 1995 subsequent to the increased authorization. During the quarter and six months ended June 30, 1996, the Company purchased 10,600 shares of its cumulative convertible preferred stock at a total cost of $4.0 million. In July 1996, the Company purchased an additional 10,300 of these shares for $3.9 million. Dividends - --------- The Board intends to declare and pay dividends on Brink's Stock, Burlington Stock and Minerals Stock based on the earnings, financial condition, cash flow and business requirements of the Brink's Group, Burlington Group and the Minerals Group, respectively. Since the Company remains subject to Virginia law limitations on dividends and to dividend restrictions in its public debt and bank credit agreements, losses by one Group could affect the Company's ability to pay dividends in respect of stock relating to the other Group. Dividends on Minerals Stock are also limited by the Available Minerals Dividend Amount as defined in the Company's Articles of Incorporation. At June 30, 1996, the Available Minerals Dividend Amount was at least $24.4 million. During the first six months of 1996 and 1995, the Board declared and the Company paid cash dividends of 32.5 cents per share of Minerals Stock. During the first six months of 1996, the Board declared and the Company paid dividends of 5 cents per share of Brink's Stock and 12 cents per share of Burlington Stock. In the first six months of 1995, the Board declared and the Company paid dividends of 10 cents per share of Services Stock which has been attributed: 4.6 cents for each share of Brink's Stock and 10.8 cents for each share of Burlington Stock, which reflects the distribution of one-half share of Burlington Stock for each share of Services Stock. Dividends paid on the cumulative convertible preferred stock in the first six months of 1996 and 1995 were $2.0 million and $2.3 million, respectively. Preferred dividends included on the Company's Statement of Operations for the six months ended June 30, 1996 and 1995, are net of $1.1 million and $1.0 million, respectively, which was the excess of the carrying amount of the preferred stock over the cash paid to holders of the preferred stock for preferred stock repurchases. <TABLE> PITTSTON BRINK'S GROUP BALANCE SHEETS (In thousands) <CAPTION> June 30,December 31, 1996 1995 =========================================================================== <S> <C> <C> ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 19,617 21,977 Short-term investments, at lower of cost or market 2,244 3,288 Accounts receivable (net of estimated amount uncollectible: 1996 - $4,407; 1995 - $3,756) 116,260 113,790 Receivable - Pittston Minerals Group 1,276 3,945 Inventories, at lower of cost or market 2,576 2,795 Prepaid expenses 13,960 10,380 Deferred income taxes 13,178 13,146 - -------------------------------------------------------------------------- Total current assets 169,111 169,321 Property, plant and equipment, at cost (net of accumulated depreciation and amortization: 1996 - $230,401; 1995 - $214,424) 235,613 214,653 Intangibles, net of amortization 27,950 28,893 Investment in and advances to unconsolidated affiliates 27,416 28,406 Deferred pension assets 34,278 33,923 Deferred income taxes 1,312 1,081 Other assets 9,693 8,449 - -------------------------------------------------------------------------- Total assets $ 505,373 484,726 ========================================================================== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Short-term borrowings $ 4,237 4,858 Current maturities of long-term debt 2,167 4,117 Accounts payable 33,244 35,460 Accrued liabilities 89,960 86,006 - -------------------------------------------------------------------------- Total current liabilities 129,608 130,441 Long-term debt, less current maturities 3,766 5,795 Postretirement benefits other than pensions 3,707 3,475 Workers' compensation and other claims 11,358 11,292 Deferred income taxes 36,313 37,529 Payable - Pittston Minerals Group 6,778 7,844 Minority interests 21,362 21,361 Other liabilities 8,640 8,184 Shareholder's equity 283,841 258,805 - -------------------------------------------------------------------------- Total liabilities and shareholder's equity $ 505,373 484,726 ========================================================================== See accompanying notes to financial statements. </TABLE>
<TABLE> PITTSTON BRINK'S GROUP STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) <CAPTION> Three Months Ended June 30 Six Months Ended June 30 1996 1995 1996 1995 ========================================================================== <S> <C> <C> <C> <C> Operating revenues $ 222,055 185,606 434,615 365,006 Operating expenses 169,443 141,364 332,009 280,888 Selling, general and administrative expenses 30,784 26,548 61,359 51,748 - -------------------------------------------------------------------------- Total costs and expenses 200,227 167,912 393,368 332,636 - -------------------------------------------------------------------------- Other operating income (expense), net 325 688 (169) 1,173 - -------------------------------------------------------------------------- Operating profit 22,153 18,382 41,078 33,543 Interest income 755 455 989 985 Interest expense (518) (501) (985) (951) Other income (expense), net (1,155) (890) (2,172) (1,242) - -------------------------------------------------------------------------- Income before income taxes 21,235 17,446 38,910 32,335 Provision for income taxes 7,200 5,481 13,036 10,824 - -------------------------------------------------------------------------- Net income $ 14,035 11,965 25,874 21,511 ========================================================================== Per common share: Net income $ .37 .32 .68 .57 ========================================================================== Cash dividends $ .025 .023 .05 .046 ========================================================================== Average shares outstanding 38,152 37,916 38,105 37,912 ========================================================================== See accompanying notes to financial statements. </TABLE>
<TABLE> PITTSTON BRINK'S GROUP STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <CAPTION> Six Months Ended June 30 1996 1995 ========================================================================== <S> <C> <C> Cash flows from operating activities: Net income $ 25,874 21,511 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 25,616 20,969 Provision (credit) for deferred income taxes (1,234) 875 Provision (credit) for pensions, noncurrent 245 (57) Provision for uncollectible accounts receivable 1,974 1,032 Equity in earnings of unconsolidated affiliates, net of dividends received 355 291 Other operating, net 2,845 954 Change in operating assets and liabilities: Decrease (increase) in accounts receivable (3,852) (6,120) Decrease (increase) in inventories 219 (311) Decrease (increase) in prepaid expenses (3,579) (5,227) Increase (decrease) in accounts payable and accrued liabilities 1,295 (4,579) Decrease (increase) in other assets (2,496) 371 Increase (decrease) in other liabilities (209) 1,357 Other, net 564 (1,009) - --------------------------------------------------------------------------- Net cash provided by operating activities 47,617 30,057 - --------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment (47,472) (30,724) Proceeds from disposal of property, plant and equipment 910 1,655 Other, net 1,180 (59) - --------------------------------------------------------------------------- Net cash used by investing activities (45,382) (29,128) - --------------------------------------------------------------------------- Cash flows from financing activities: Additions to debt 296 3,142 Reductions of debt (5,327) (2,195) Payments (to) from - Minerals Group 2,670 (2,063) Proceeds from exercise of stock options 678 863 Proceeds from stock purchased by benefit plans 44 - Dividends paid (1,883) (1,781) Repurchase of common stock - (1,867) Cost of Brink's Stock Proposal (1,073) - - --------------------------------------------------------------------------- Net cash used by financing activities (4,595) (3,901) - --------------------------------------------------------------------------- Net decrease in cash and cash equivalents (2,360) (2,972) Cash and cash equivalents at beginning of period 21,977 20,226 - --------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 19,617 17,254 =========================================================================== See accompanying notes to financial statements. </TABLE>
PITTSTON BRINK'S GROUP NOTES TO FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts) (1) The financial statements of the Pittston Brink's Group (the "Brink's Group") include the balance sheets, results of operations and cash flows of the Brink's, Incorporated ("Brink's") and Brink's Home Security, Inc. ("BHS") operations of The Pittston Company (the "Company"), and a portion of the Company's corporate assets and liabilities and related transactions which are not separately identified with operations of a specific segment. The Brink's Group's financial statements are prepared using the amounts included in the Company's consolidated financial statements. Corporate allocations reflected in these financial statements are determined based upon methods which management believes to be a reasonable and equitable allocation of such expenses and credits. The Company provides holders of Pittston Brink's Group Common Stock ("Brink's Stock") separate financial statements, financial reviews, descriptions of business and other relevant information for the Brink's Group in addition to consolidated financial information of the Company. Holders of Brink's Stock are shareholders of the Company, which is responsible for all its liabilities. Therefore, financial developments affecting the Pittston Burlington Group (the "Burlington Group"), Pittston Minerals Group (the "Minerals Group") or the Brink's Group that affect the Company's financial condition could affect the results of operations and financial condition of all three Groups. Accordingly, the Company's consolidated financial statements must be read in connection with the Brink's Group's financial statements. (2) As of January 1, 1992, BHS elected to capitalize categories of costs not previously capitalized for home security installations. The additional costs not previously capitalized consisted of costs for installation labor and related benefits for supervisory, installation scheduling, equipment testing and other support personnel and costs incurred in maintaining facilities and vehicles dedicated to the installation process. The effect of this change in accounting principle was to increase operating profit for the Brink's Group and the BHS segment for the first six months of 1996 and 1995 by $2,176 and $1,949, respectively and for the second quarter of 1996 and 1995 by $1,129 and $825, respectively. The effect of this change increased net income per common share of the Brink's Group for the first six months of 1996 and 1995 by $.03 each, and for the second quarter of 1996 and 1995 by $.02 and $.01, respectively. (3) The amounts of depreciation and amortization of property, plant and equipment in the second quarter and six month period of 1996 totaled $12,700 ($10,331 in 1995) and $24,976 ($20,251 in 1995), respectively. (4) Cash payments made for interest and income taxes (net of refunds received) were as follows: Second Quarter Six Months 1996 1995 1996 1995 ---------------------------------------------------------------- Interest $ 493 492 1,002 958 ================================================================ Income taxes $ 12,071 6,100 15,545 10,501 ================================================================ During the six month period ended June 30, 1996, capital lease obligations of $275 were incurred for leases of property, plant and equipment. There were no capital lease obligations incurred for the six month period ended June 30, 1995. (5) As of January 1, 1996, the Brink's Group implemented a new accounting standard, Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 requires companies to review long-lived assets and certain identifiable intangibles to be held and used by an entity for impairment whenever circumstances indicate that the carrying amount for an asset may not be recoverable. SFAS No. 121 requires companies to utilize a two-step approach to determining whether impairment of such assets has occurred and, if so, the amount of such impairment. The adoption of SFAS No. 121 had no impact on the Brink's Group's financial statements as of January 1, 1996. (6) Certain prior period amounts have been reclassified to conform to current period financial statement presentation. (7) All adjustments have been made which are, in the opinion of management, necessary to a fair presentation of results of operations for the periods reported herein. All such adjustments are of a normal recurring nature. PITTSTON BRINK'S GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The financial statements of the Pittston Brink's Group (the "Brink's Group") include the balance sheets, results of operations and cash flows of Brink's, Incorporated ("Brink's") and Brink's Home Security, Inc. ("BHS"), and a portion of The Pittston Company's (the "Company") corporate assets and liabilities and related transactions which are not separately identified with operations of a specific segment. The Brink's Group's financial statements are prepared using the amounts included in the Company's consolidated financial statements. Corporate allocations reflected in these financial statements are determined based upon methods which management believes to be an equitable allocation of such expenses and credits. The accounting policies applicable to the preparation of the Brink's Group's financial statements may be modified or rescinded at the sole discretion of the Company's Board of Directors (the "Board") without the approval of the shareholders, although there is no intention to do so. The Company provides holders of Pittston Brink's Group Common Stock ("Brink's Stock") separate financial statements, financial reviews, descriptions of business and other relevant information for the Brink's Group in addition to consolidated financial information of the Company. Holders of Brink's Stock are shareholders of the Company, which continues to be responsible for all its liabilities. Therefore, financial developments affecting the Pittston Minerals Group (the "Minerals Group"), the Pittston Burlington Group (the "Burlington Group") or the Brink's Group that affect the Company's financial condition could affect the results of operations and financial condition of any of the Groups. Accordingly, the Company's consolidated financial statements must be read in connection with the Brink's Group's financial statements. The following discussion is a summary of the key factors management considers necessary in reviewing the Brink's Group's results of operations, liquidity and capital resources. This discussion should be read in conjunction with the financial statements and related notes of the Company. SEGMENT INFORMATION Three Months Ended June 30 Six Months Ended June 30 (In thousands) 1996 1995 1996 1995 ============================================================================== Revenues: Brink's $ 183,411 154,543 359,265 303,634 BHS 38,644 31,063 75,350 61,372 - ------------------------------------------------------------------------------ Revenues $ 222,055 185,606 434,615 365,006 ============================================================================== Operating profit: Brink's $ 12,524 10,236 21,902 17,619 BHS 11,401 9,411 22,503 18,316 - ------------------------------------------------------------------------------ Segment operating profit 23,925 19,647 44,405 35,935 General corporate expense (1,772) (1,265) (3,327) (2,392) - ------------------------------------------------------------------------------ Operating profit $ 22,153 18,382 41,078 33,543 ============================================================================== RESULTS OF OPERATIONS Net income totaled $14.0 million in the second quarter of 1996 compared with $12.0 million in the second quarter of 1995. Operating profit for the 1996 second quarter increased to $22.2 million from $18.4 million in the second quarter of 1995. The increase in net income and operating profit for the 1996 second quarter compared with the same period of 1995 was attributable to improved operating earnings for both Brink's and BHS businesses, only partially offset by increased general corporate expenses. Revenues for the 1996 second quarter increased $36.5 million or 20% compared with the 1995 second quarter, of which $28.9 million was from Brink's and $7.5 million was from BHS. Operating expenses and selling general and administrative expenses for the 1996 second quarter increased $32.3 million or 19% compared with the same period last year, of which $26.2 million was from Brink's and $5.6 million was from BHS. Other net operating income of $0.3 million amounted to a $0.4 million decline from $0.7 million of such income recorded in the second quarter of 1995. In the first six months of 1996, net income totaled $25.9 million compared with $21.5 million in the first six months of 1995. Operating profit for the first six months of 1996 increased to $41.1 million from $33.5 million in the same period of 1995. The increase in net income and operating profit for the first six months of 1996 compared with the same period of 1995 was attributable to improved operating earnings for both Brink's and BHS businesses, only partially offset by increased general corporate expenses. Revenues for the first six months of 1996 increased $69.6 million or 19% compared with the first six months of 1995, of which $55.6 million was from Brink's and $14.0 million was from BHS. Operating expenses and selling general and administrative expenses for the first six months of 1996 increased $60.7 million or 18% compared with the same period last year, of which $50.0 million was from Brink's and $9.8 million was from BHS. Other net operating expense of $0.2 million amounted to a $1.4 million decline from $1.2 million of such income recorded in the first six months of 1995. Brink's - ------- The following is a table of selected financial data for Brink's on a comparative basis: <TABLE> <CAPTION> Three Months Ended June 30Six Months Ended June 30 (In thousands) 1996 1995 1996 1995 ================================================================================ <S> <C> <C> <C> <C> Revenues: North America (United State and Canada) $103,935 92,551 202,115 180,981 International subsidiaries 79,476 61,992 157,150 122,653 - -------------------------------------------------------------------------------- Total revenues $183,411 154,543 359,265 303,634 Operating expenses 149,143 125,014 292,651 248,224 Selling, general and administrative 22,069 19,981 44,543 38,964 - -------------------------------------------------------------------------------- Total costs and expenses 171,212 144,995 337,194 287,188 - -------------------------------------------------------------------------------- Other operating income (expense) 325 688 (169) 1,173 - -------------------------------------------------------------------------------- Operating profit: North America (United States and Canada) $ 8,161 7,010 14,091 12,526 International operations 4,363 3,226 7,811 5,093 - -------------------------------------------------------------------------------- Total operating profit $ 12,524 10,236 21,902 17,619 ================================================================================ Depreciation and amortization $ 5,708 5,340 11,737 10,496 ================================================================================ Cash capital expenditures $ 9,198 5,685 16,004 11,476 ================================================================================ </TABLE> Brink's consolidated revenues totaled $183.4 million in the second quarter of 1996 compared with $154.5 million in the second quarter of 1995. Brink's operating profit of $12.5 million in the second quarter of 1996 represented a $2.3 million or 22% increase over the $10.2 million operating profit reported in the prior year quarter. The revenue increase of $28.9 million, or 19%, in the 1996 second quarter was offset in part by an increase in operating expenses and selling, general and administrative expenses of $26.2 million and a decrease in other operating income of $0.4 million. Revenues from North American operations (United States and Canada) increased $11.4 million, or 12%, to $103.9 million in the 1996 second quarter from $92.6 million in the prior year quarter. North American operating profit increased $1.2 million, or 16%, to $8.2 million in the current year quarter from $7.0 million in the second quarter of 1995. The operating profit improvement primarily resulted from improved armored car operations, which includes ATM servicing. Revenues from international subsidiaries increased $17.5 million to $79.5 million in the 1996 second quarter from $62.0 million in the 1995 quarter. Approximately 45% of the increase in international revenues was due to the consolidation of the results of Brink's Colombia, in which Brink's increased its ownership from 47% to 51% during the third quarter of 1995. Operating profits from international subsidiaries and minority-owned affiliates amounted to $4.4 million in the current year quarter compared to $3.2 million in the prior year second quarter. The earnings increase for the second quarter of 1996 continued to reflect higher operating profits in Latin America which more than offset lower results in Europe, primarily in France and Holland. On a comparable basis, 1996 versus 1995, current year's operating profit reflects a $1.1 million benefit from the consolidation of Colombia's operating profits. Brazil (100% owned) continued to achieve improved results due to strong volume growth and effective controls over operating and administrative costs, as operating profits amounted to $1.6 million compared to break-even results in the prior year quarter. The $0.7 million in equity earnings generated by Brink's Mexican affiliate (20% owned) was a significant improvement over the $0.6 million loss recorded in the second quarter of 1995, as the benefits of workforce reductions, cost controls and operational improvements continue to be realized. Brink's consolidated revenues totaled $359.3 million in the first six months of 1996 compared with $303.6 million in the first six months of 1995. Brink's operating profit of $21.9 million in the first six months of 1996 represented a $4.3 million or 24% increase over the $17.6 million operating profit reported in the prior year period. The revenue increase of $55.6 million, or 18%, in the first half of 1996 was offset in part by an increase in operating expenses and selling, general and administrative expenses of $50.0 million and a decrease in other operating income of $1.3 million. Revenues from North American operations increased $21.1 million, or 12%, to $202.1 million in the first six months of 1996 from $181.0 million in the same period of 1995. North American operating profit increased $1.6 million, or 12%, to $14.1 million in the current year period from $12.5 million in the same period of 1995. The operating profit improvement for the six months of 1996 primarily resulted from improved armored car operations, which includes ATM servicing. Revenues from international subsidiaries increased $34.5 million to $157.2 million in the first six months of 1996 from $122.7 million in the first six months of 1995. Consolidation of the results of Brink's Colombia accounted for approximately 46% of the increase in international revenues. Operating profits from international subsidiaries and minority-owned affiliates amounted to $7.8 million in the current year period compared to $5.1 million in the prior year period. Higher operating profits in Latin America more than offset lower results in Europe. On a comparable basis, 1996 versus 1995, current year's operating profit includes a $2.0 million benefit from the consolidation of Colombia. Brazil's operating profits amounted to $3.0 million in the first six months of 1996 compared to $0.9 million in the first six months of 1995. Equity in earnings from Brink's Mexican affiliate amounted to $1.0 million compared with a $1.0 million loss recorded in the first six months of 1995. BHS - --- The following is a table of selected financial data for BHS on a comparative basis: <TABLE> <CAPTION> Three Months Ended June 30 Six Months Ended June 30 (Dollars in thousands) 1996 1995 1996 1995 ================================================================================= <S> <C> <C> <C> <C> Revenues $ 38,644 31,063 75,350 61,372 Operating expenses 20,300 16,350 39,358 32,664 Selling, general and administrative 6,943 5,302 13,489 10,392 - --------------------------------------------------------------------------------- Total costs and expenses 27,243 21,652 52,847 43,056 - --------------------------------------------------------------------------------- Operating profit $ 11,401 9,411 22,503 18,316 ================================================================================= Depreciation and amortization $ 7,276 5,331 13,809 10,420 ================================================================================= Cash capital expenditures $ 15,151 9,214 30,049 19,141 ================================================================================= Annualized service revenues (a) $ 116,509 95,810 ================================================================================= Number of subscribers: Beginning of period 395,676 332,434 378,659 318,029 Installations 24,447 19,290 48,703 38,362 Disconnects (7,532) (5,184) (14,771) (9,851) - --------------------------------------------------------------------------------- End of period 412,591 346,540 412,591 346,540 ================================================================================= </TABLE> (a) Annualized service revenue is 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. Revenues for BHS increased by $7.5 million (24%) to $38.6 million in the second quarter of 1996 from $31.1 million in the 1995 quarter. In the first six months of 1996, revenues for BHS increased by $14.0 million (23%) to $75.4 million from $61.4 million in the first six months of 1995. The increase in revenues was predominantly from higher ongoing monitoring and service revenues, caused by a 19% growth in the subscriber base. As a result of such growth, annualized service revenues in force at the end of the second quarter of 1996 grew 22% over the amount in effect at the end of the second quarter of 1995. The total amount of installation revenue in the second quarter and first six months of 1996 also grew by 34% and 28%, respectively, over the amount recorded in the same periods of 1995, as a result of the increased volume of installations. Operating profit of $11.4 million in the second quarter of 1996 represented an increase of $2.0 million (21%) compared to the $9.4 million earned in the 1995 second quarter. In the first six months of 1996, operating profit increased $4.2 million (23%) to $22.5 million from $18.3 million earned in the first six months of 1995. The increase in operating profit largely stemmed from the growth in the subscriber base and higher average monitoring and services revenues, partially offset by higher depreciation and increased account servicing and administrative expenses, which are a consequence of the larger subscriber base. The favorable change in operating profit for the second quarter and first six months of 1996 also reflects a reduction in the amount of net installation and marketing costs incurred during the quarter and six months of 1996 of $0.4 million and $1.1 million, respectively, compared to the prior year periods. Operating profit as a percentage of revenue remained at approximately 30% in the second quarter and first six months of 1996 as compared to the prior year periods. The subscriber base on June 30, 1996, totaled 412,591 customers, 19% higher than the balance at the end of the second quarter of 1995. Annualized service revenues amounted to $116.5 million in June 1996, 22% higher than in the comparable period in 1995. The favorable change reflects the increased subscriber base as well as higher average monthly revenues, principally generated by customer service contracts. Foreign Operations - ------------------ A portion of the Brink's Group's financial results is derived from activities in several foreign countries, each with a local currency other than the U.S. dollar. Because the financial results of the Brink's Group are reported in U.S. dollars, they are affected by the changes in the value of the various foreign currencies in relation to the U.S. dollar. The Brink's Group's international activity is not concentrated in any single currency, which limits the risks of foreign rate fluctuations. In addition, foreign currency rate fluctuations may adversely affect transactions which are denominated in currencies other than the functional currency. The Brink's Group routinely enters into such transactions in the normal course of its business. Although the diversity of its foreign operations limits the risks associated with such transactions, the Company, on behalf of the Brink's Group, uses foreign exchange forward contracts to hedge the risks associated with certain transactions denominated in currencies other than the functional currency. Realized and unrealized gains and losses on these contracts are deferred and recognized as part of the specific transaction hedged. In addition, cumulative translation adjustments relating to operations in countries with highly inflationary economies are included in net income, along with all transaction gains or losses for the period. Subsidiaries in Brazil operate in such highly inflationary economies. Additionally, the Brink's Group is subject to other risks customarily associated with doing business in foreign countries, including economic conditions, 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 Brink's Group cannot be predicted. Corporate Expenses - ------------------ A portion of the Company's corporate general and administrative expenses and other shared services has been allocated to the Brink's Group based on utilization and other methods and criteria which management believes to be a reasonable and equitable estimate of the costs attributable to the Brink's Group. These allocations were $1.8 million and $1.3 million for the second quarter of 1996 and 1995, respectively and $3.3 million and $2.4 million for the first six months of 1996 and 1995, respectively. The Company's corporate office headquarters will be relocating to Richmond, Virginia, during September 1996. The costs of this move, which includes moving expense, employee relocation, severance pay and temporary employee costs, is estimated to be $3.0 million. It is anticipated that approximately $1.0 million of these costs will be attributed to the Brink's Group and will be expensed during the third quarter. Other Operating Income (Expense), Net - ------------------------------------- Other net operating income decreased $0.4 million to income of $0.3 million in the 1996 second quarter from income of $0.7 million in the 1995 second quarter. In the first six months of 1996, other net operating expense amounted to $0.2 million, decreasing $1.4 million from other net operating income of $1.2 million in the first six months of 1995. Other operating income consists primarily of equity earnings of foreign affiliates. These earnings, which are primarily attributable to equity affiliates of Brink's, amounted to income of $0.2 and $0.4 million for the second quarter of 1996 and 1995, respectively, and an expense of $0.4 million in the first six months of 1996 and $0.8 million of equity earnings in the comparable period of 1995. The results of Brink's equity affiliates in the second quarter and first six months of 1995 included $0.4 million and $1.0 million, respectively, in equity income from Colombia which became a consolidated subsidiary during the latter half of 1995, subsequent to an additional investment bringing Brink's ownership to a majority interest in the operation. Other Income (Expense), Net - --------------------------- Other net expense for the second quarter of 1996 increased by $0.3 million to a net expense of $1.2 million from $0.9 million in the second quarter of 1995 and for the first six months of 1996 increased by $1.0 million to a net expense of $2.2 million from $1.2 million for the first six months of 1995. The higher level of other expense for the second quarter and first six months of 1996 primarily reflects increased charges for minority interest, mainly as a result of the consolidation of Brink's Colombia. FINANCIAL CONDITION A portion of the Company's corporate assets and liabilities has been attributed to the Brink's Group based upon utilization of the shared services from which assets and liabilities are generated, which management believes to be equitable and a reasonable estimate. Cash Provided by Operating Activities - ------------------------------------- Cash provided by operating activities amounted to $47.6 million in the first six months of 1996, representing a $17.6 million favorable change from the prior year period. The increase in cash flow reflects higher net income and noncash charges as well as a reduction in funding requirements for net operating assets. Capital Expenditures - -------------------- Cash capital expenditures for the first six months of 1996 totaled $47.5 million, excluding equipment expenditures that have been or are expected to be financed through capital and operating leases. The comparable amount in the 1995 period was $30.7 million. In 1996, $30.0 million was spent by BHS and $16.0 million was spent by Brink's. Expenditures incurred by BHS in the first six months of 1996 were primarily for customer installations, representing the expansion in the subscriber base. For the remainder of 1996, capital expenditures excluding expenditures that have been or are expected to be financed through capital and operating leases are estimated to approximate $57 million. Increased expenditures in 1996 are expected at BHS resulting from continued expansion of the subscriber base, and at Brink's in support of business expansion. Financing - --------- The Brink's Group intends to fund its capital expenditure requirements during the remainder of 1996 primarily with anticipated cash flows from operating activities and through operating and capital leases if the latter are financially attractive. Shortfalls, if any, will be financed through the Company's revolving credit agreements or short-term borrowing arrangements or borrowings from the Minerals Group. The Company has a $350 million revolving credit agreement with a syndicate of banks (the "Facility"). The Facility includes a $100 million term loan and also permits additional borrowings, repayments, and reborrowings of up to an aggregate of $250 million. During the second quarter of 1996, the maturity date of both the term loan and revolving credit portion of the Facility was extended to May 31, 2001. Of the total amount outstanding under the Facility at June 30, 1996, none was attributed to the Brink's Group. Debt - ---- Outstanding debt at quarter end totaled $10.2 million, $4.6 million lower than the $14.8 million reported at December 31, 1995. Cash flow from operating activities and a reduction in cash balances and borrowings from the Minerals Group were more than sufficient to fund investing activities, dividend payments and the cost of the Brink's Stock proposal, enabling the Brink's Group to reduce debt. Related Party Transactions - -------------------------- At June 30, 1996, the Minerals Group owed the Brink's Group $15.3 million, a decrease of $2.6 million from the $17.9 million owed at December 31, 1995. These intergroup receivables are interest bearing. At June 30, 1996, the Brink's Group owed the Minerals Group $20.8 million for tax benefits, a decrease of $1.0 million from the $21.8 million owed at December 31, 1995. Of the total amount of tax benefits owned the Minerals Group at June 30, 1996, $14.0 million is expected to be paid within one year. Capitalization - -------------- On January 18, 1996, the shareholders of the Company approved the Brink's Stock Proposal, resulting in the modification of the capital structure of the Company to include an additional class of common stock. The outstanding shares of Pittston Services Group Common Stock ("Services Stock") were redesignated as Pittston Brink's Stock on a share-for-share basis, and a new class of common stock, designated as Pittston Burlington Group Common Stock ("Burlington Stock"), was distributed on the basis of one-half share of Burlington Stock for each share of Services Stock previously held by shareholders of record on January 19, 1996. The Brink's Group consists of the Brink's and BHS operations of the Company. The Burlington Group consists of the Burlington operations of the Company. The Minerals Group consists of the Coal and Mineral Ventures operations of the Company. The approval of the Brink's Stock Proposal did not result in any transfer of assets and liabilities of the Company or any of its subsidiaries. The Company prepares separate financial statements for the Minerals, Brink's and Burlington Groups in addition to consolidated financial information of the Company. Brink's Stock, Burlington Stock and Pittston Minerals Group Common Stock ("Minerals Stock") were designed to provide shareholders with separate securities reflecting the performance of the Brink's Group, Burlington Group and Minerals Group, respectively, without diminishing the benefits of remaining a single corporation or precluding future transactions affecting any of the Groups. The redesignation of the Company's Services Stock as Brink's Stock and the distribution of Burlington Stock as a result of the approval of the Brink's Stock Proposal and the distribution of Minerals Stock in July 1993 did not result in any transfer of assets and liabilities of the Company or any of its subsidiaries. Holders of all three classes of stock are shareholders of the Company, which continues to be responsible for all its liabilities. Therefore, financial developments affecting the Brink's Group, the Burlington Group or the Minerals Group that affect the Company's financial condition could affect the results of operations and financial condition of all three Groups. The changes in the capital structure of the Company had no effect on the Company's total capital, except as to expenses incurred in the execution of the Brink's Stock Proposal. Since the approval of the Brink's Stock Proposal, capitalization of the Company has been affected by the share activity related to each of the classes of common stock. In November 1995, the Board authorized a revised share repurchase program which allows for the purchase, from time to time, of up to 1,500,000 shares of Brink's Stock, 1,500,000 shares of Burlington Stock and 1,000,000 shares of Minerals Stock, not to exceed an aggregate purchase price of $45.0 million. As of June 30, 1996, no shares of Brink's Stock were repurchased under the program. In 1994, the Board authorized the repurchase from time to time of up to $15 million of the Company's cumulative convertible preferred stock. In November 1995, the Board authorized an increase in the remaining authority to $15 million. No share repurchases were made in 1995 subsequent to the increased authorization. During the quarter and six months ended June 30, 1996, the Company purchased 10,600 shares of its cumulative convertible preferred stock a total cost of $4.0 million. In July 1996, the Company purchased an additional 10,300 of these shares at a cost of $3.9 million. Dividends - --------- The Board intends to declare and pay dividends on Brink's Stock based on earnings, financial condition, cash flow and business requirements of the Brink's Group. Since the Company remains subject to Virginia law limitations on dividends and to dividend restrictions in its public debt and bank credit agreements, financial developments of the Minerals Group or the Burlington Group could affect the Company's ability to pay dividends in respect of stock relating to the Brink's Group. During the first six months of 1996, the Board declared and the Company paid cash dividends of 5 cents per share of Brink's Stock. During the first six months of 1995, the Board declared and the Company paid cash dividends of 10 cents per share of Services Stock of which 4.6 cents per share was attributed to Brink's Stock. The Company pays an annual cumulative dividend on its Series C Cumulative Convertible Preferred Stock of $31.25 per share payable quarterly, in cash, in arrears, out of all funds of the Company legally available therefor, when, and if declared by the Board of Directors of the Company. Such stock also bears a liquidation preference of $500 per share, plus an amount equal to accrued and unpaid dividends thereon. In the first six months of 1996 and 1995, dividends paid on the cumulative convertible preferred stock were $2.0 million and $2.3 million, respectively. <TABLE> PITTSTON BURLINGTON GROUP BALANCE SHEETS (In thousands) <CAPTION> June 30, December 31, 1996 1995 ====================================================================== <S> <C> <C> ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 20,213 25,847 Accounts receivable (net of estimated amount uncollectible: 1996 - $10,082; 1995 - $10,373) 209,988 219,681 Receivable - Pittston Minerals Group 17,329 5,910 Inventories, at lower of cost or market 1,719 1,684 Prepaid expenses 13,808 13,603 Deferred income taxes 8,891 11,512 - ---------------------------------------------------------------------- Total current assets 271,948 278,237 Property, plant and equipment, at cost (net of accumulated depreciation and amortization: 1996 - $61,286; 1995 - $56,269) 75,870 72,171 Intangibles, net of amortization 177,703 180,739 Deferred pension assets 10,348 10,427 Deferred income taxes 16,168 12,875 Other assets 16,355 17,628 - ---------------------------------------------------------------------- Total assets $ 568,392 572,077 ====================================================================== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Short-term borrowings $ 30,266 32,181 Current maturities of long-term debt 2,803 1,964 Accounts payable 142,927 157,770 Accrued liabilities 63,188 62,311 - ---------------------------------------------------------------------- Total current liabilities 239,184 254,226 Long-term debt, less current maturities 28,080 26,697 Postretirement benefits other than pensions 2,927 2,713 Deferred income taxes 2,182 1,996 Payable - Pittston Minerals Group 7,693 8,029 Other liabilities 5,321 6,563 Shareholder's equity 283,005 271,853 - ---------------------------------------------------------------------- Total liabilities and shareholder's equity $ 568,392 572,077 ====================================================================== See accompanying notes to financial statements. </TABLE>
<TABLE> PITTSTON BURLINGTON GROUP STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) <CAPTION> Three Months Ended June 30 Six Months Ended June 30 1996 1995 1996 1995 =============================================================================== <S> <C> <C> <C> <C> Operating revenues $ 363,411 341,950 715,361 665,894 Operating expenses 317,154 299,645 631,509 589,237 Selling, general and administrative expenses 32,219 30,009 62,906 57,953 - ------------------------------------------------------------------------------- Total costs and expenses 349,373 329,654 694,415 647,190 - ------------------------------------------------------------------------------- Other operating income 518 845 741 1,369 - ------------------------------------------------------------------------------- Operating profit 14,556 13,141 21,687 20,073 Interest income 657 1,001 1,549 1,988 Interest expense (988) (1,173) (2,040) (2,223) Other income (expense), net (337) (346) (1,344) (524) - ------------------------------------------------------------------------------- Income before income taxes 13,888 12,623 19,852 19,314 Provision for income taxes 5,142 4,614 7,345 7,256 - ------------------------------------------------------------------------------- Net income $ 8,746 8,009 12,507 12,058 =============================================================================== Per common share: Net income $ .46 .42 .65 .64 =============================================================================== Cash dividends $ .06 .054 .12 .108 =============================================================================== Average shares outstanding 19,161 18,958 19,100 18,956 =============================================================================== See accompanying notes to financial statements. </TABLE>
<TABLE> PITTSTON BURLINGTON GROUP STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <CAPTION> Six Months Ended June 30 1996 1995 =========================================================================== <S> <C> <C> Cash flows from operating activities: Net income $ 12,507 12,058 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,891 9,754 Provision for aircraft heavy maintenance 16,067 12,412 Provision (credit) for deferred income taxes (524) (1,917) Provision (credit) for pensions, noncurrent 57 80 Provision for uncollectible accounts receivable 1,332 867 Equity in earnings of unconsolidated affiliates, net of dividends received (112) (57) Other operating, net 1,005 369 Change in operating assets and liabilities, net of effects of acquisitions: Decrease (increase) in accounts receivable 8,361 (22,443) Decrease (increase) in inventories (35) 74 Decrease (increase) in prepaid expenses (193) (5,586) Increase (decrease) in accounts payable and accrued liabilities (20,680) (1,651) Decrease (increase) in other assets 364 (648) Increase (decrease) in other liabilities (496) 331 Other, net (715) (110) - --------------------------------------------------------------------------- Net cash provided by operating activities 27,829 3,533 - --------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment (16,533) (13,607) Proceeds from disposal of property, plant and equipment 5,265 (124) Aircraft heavy maintenance (9,713) (7,217) Acquisitions, net of cash acquired, and related contingent payments (225) (1,688) Other, net 963 2,075 - --------------------------------------------------------------------------- Net cash used by investing activities (20,243) (20,561) - --------------------------------------------------------------------------- Cash flows from financing activities: Additions to debt 2,947 11,598 Reductions of debt (2,554) (1,376) Payments from (to) - Minerals Group (11,419) 7,909 Proceeds from exercise of stock options 1,175 425 Proceeds from stock purchased by benefit plans 54 - Dividends paid (2,257) (2,182) Repurchase of common stock (93) (919) Cost of Brink's Stock Proposal (1,073) - - --------------------------------------------------------------------------- Net cash provided (used) by financing activities (13,220) 15,455 - --------------------------------------------------------------------------- Net decrease in cash and cash equivalents (5,634) (1,573) Cash and cash equivalents at beginning of period 25,847 18,384 - --------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 20,213 16,811 =========================================================================== See accompanying notes to financial statements. </TABLE>
PITTSTON BURLINGTON GROUP NOTES TO FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts) (1) The financial statements of the Pittston Burlington Group (the "Burlington Group") include the balance sheets, results of operations and cash flows of the Burlington Air Express Inc. ("Burlington") operations of The Pittston Company (the "Company"), and a portion of the Company's corporate assets and liabilities and related transactions which are not separately identified with operations of a specific segment. The Burlington Group's financial statements are prepared using the amounts included in the Company's consolidated financial statements. Corporate allocations reflected in these financial statements are determined based upon methods which management believes to be a reasonable and equitable allocation of such expenses and credits. The Company provides holders of Pittston Burlington Group Common Stock ("Burlington Stock") separate financial statements, financial reviews, descriptions of business and other relevant information for the Burlington Group in addition to consolidated financial information of the Company. Holders of Burlington Stock are shareholders of the Company, which is responsible for all its liabilities. Therefore, financial developments affecting the Pittston Minerals Group (the "Minerals Group"), the Pittston Brink's Group (the "Brink's Group") or the Burlington Group that affect the Company's financial condition could affect the results of operations and financial condition of all three Groups. Accordingly, the Company's consolidated financial statements must be read in connection with the Burlington Group's financial statements. (2) The amounts of depreciation and amortization of property, plant and equipment in the second quarter and six months periods of 1996 and 1995 totaled $3,823 ($3,242 in 1995) and $7,653 ($6,436 in 1995), respectively. (3) Cash payments made for interest and income taxes (net of refunds received) were as follows: Second Quarter Six Months 1996 1995 1996 1995 ---------------------------------------------------------------- Interest $ 826 1,240 2,554 2,467 ================================================================ Income taxes $ 7,036 13,505 8,561 18,220 ================================================================ During the six month periods ended June 30, 1996 and 1995, capital lease obligations of $131 and $2,886, respectively, were incurred for leases of property, plant and equipment. (4) As of January 1, 1996, the Burlington Group implemented a new accounting standard, Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 requires companies to review long-lived assets and certain identifiable intangibles to be held and used by an entity for impairment whenever circumstances indicate that the carrying amount for an asset may not be recoverable. SFAS No. 121 requires companies to utilize a two-step approach to determining whether impairment of such assets has occurred and, if so, the amount of such impairment. The adoption of SFAS No. 121 had no impact on the Burlington Group's financial statements as of January 1, 1996. (5) Certain prior period amounts have been reclassified to conform to current period financial statement presentation. (6) All adjustments have been made which are, in the opinion of management, necessary to a fair presentation of results of operations for the periods reported herein. All such adjustments are of a normal recurring nature. PITTSTON BURLINGTON GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The financial statements of the Pittston Burlington Group (the "Burlington Group") include the balance sheets, results of operations and cash flows of Burlington Air Express Inc. ("Burlington") and a portion of The Pittston Company's (the "Company") corporate assets and liabilities and related transactions which are not separately identified with operations of a specific segment. The Burlington Group's financial statements are prepared using the amounts included in the Company's consolidated financial statements. Corporate allocations reflected in these financial statements are determined based upon methods which management believes to be an equitable allocation of such expenses and credits. The accounting policies applicable to the preparation of the Burlington Group's financial statements may be modified or rescinded at the sole discretion of the Company's Board of Directors (the "Board") without the approval of the shareholders, although there is no intention to do so. The Company provides holders of Pittston Burlington Group Common Stock ("Burlington Stock") separate financial statements, financial reviews, descriptions of business and other relevant information for the Burlington Group in addition to consolidated financial information of the Company. Holders of Burlington Stock are shareholders of the Company, which continues to be responsible for all its liabilities. Therefore, financial developments affecting the Pittston Minerals Group (the "Minerals Group"), the Pittston Brink's Group (the "Brink's Group") or the Burlington Group that affect the Company's financial condition could affect the results of operations and financial condition of each Groups. Accordingly, the Company's consolidated financial statements must be read in connection with the Burlington Group's financial statements. The following discussion is a summary of the key factors management considers necessary in reviewing the Burlington Group's results of operations, liquidity and capital resources. This discussion should be read in conjunction with the financial statements and related notes of the Company. SEGMENT INFORMATION Three Months Ended June 30 Six Months Ended June 30 (In thousands) 1996 1995 1996 1995 ============================================================================= Revenues: Burlington $ 363,411 341,950 715,361 665,894 - ----------------------------------------------------------------------------- Operating profit: Burlington $ 16,327 14,406 25,013 22,464 General corporate expense (1,771) (1,265) (3,326) (2,391) - ----------------------------------------------------------------------------- Operating profit $ 14,556 13,141 21,687 20,073 ============================================================================= RESULTS OF OPERATIONS In the second quarter of 1996, the Burlington Group reported net income of $8.7 million, or $.46 per share, compared with $8.0 million, or $.42 per share, in the second quarter of 1995. Operating profit totaled $14.6 million in the 1996 second quarter compared with $13.1 million in the prior year second quarter. Revenues increased $21.5 million or 6%, compared with the 1995 second quarter. Operating expenses and selling, general and administrative expenses for the 1996 period increased $19.7 million, or 6%, compared with the same period last year. In the first six months of 1996, the Burlington Group reported net income of $12.5 million, or $.65 per share, compared with $12.1 million, or $.64 per share, in the first six months of 1995. Operating profit totaled $21.7 million in the first six months of 1996 compared with $20.1 million in the prior year six month period. Revenues increased $49.5 million or 7%, compared with the first half of 1995. Operating expenses and selling, general and administrative expenses for the 1996 period increased $47.2 million, or 7%, compared with the same period last year. Burlington - ---------- The following is a table of selected financial data for Burlington on a comparative basis: <TABLE> <CAPTION> (Dollars in thousands - Three Months Ended June 30 Six Months Ended June 30 except per pound/shipment amounts) 1996 1995 1996 1995 ====================================================================================== <S> <C> <C> <C> <C> Revenues: Expedited freight service Domestic U.S. $ 133,952 127,085 262,732 256,282 International 172,462 169,033 342,177 330,245 - -------------------------------------------------------------------------------------- Total expedited freight service $ 306,414 296,118 604,909 586,527 Customs clearances 33,708 27,133 65,976 48,284 Ocean and other (a) 23,289 18,699 44,476 31,083 - -------------------------------------------------------------------------------------- Total revenues $ 363,411 341,950 715,361 665,894 Operating expenses 317,154 299,645 631,509 589,237 Selling, general and administrative 30,448 28,744 59,580 55,562 - -------------------------------------------------------------------------------------- Total costs and expenses 347,602 328,389 691,089 644,799 - -------------------------------------------------------------------------------------- Other operating income 518 845 741 1,369 - -------------------------------------------------------------------------------------- Operating profit: Domestic U.S. $ 10,029 6,793 13,737 11,480 International 6,298 7,613 11,276 10,984 - -------------------------------------------------------------------------------------- Total operating profit $ 16,327 14,406 25,013 22,464 ====================================================================================== Depreciation and amortization $ 5,414 4,907 10,814 9,702 ====================================================================================== Cash capital expenditures $ 10,343 6,185 15,114 13,500 ====================================================================================== Expedited freight service shipment growth rate (b) 3.4% 2.6% 4.5% 4.7% Expedited freight service weight growth rate (b): Domestic U.S. 5.3% (12.5%) 4.1% (4.1%) International 6.5% 28.8% 7.9% 29.9% Worldwide 5.9% 5.4% 6.1% 11.2% Expedited freight service weight (million pounds) 352.6 332.8 697.2 657.3 ====================================================================================== Expedited freight service shipments (thousands) 1,322 1,278 2,620 2,508 ====================================================================================== Expedited freight service: Yield (revenue per pound) $ .869 .890 .868 .892 Revenue per shipment $ 232 232 231 234 Weight per shipment (pounds) 267 260 266 262 ====================================================================================== </TABLE> (a) Primarily international ocean freight and import services. (b) Compared to the same period in the prior year. Burlington's second quarter operating profit amounted to $16.3 million, an increase of $1.9 million (13%) from the level reported in the second quarter of 1995. Worldwide revenues increased by 6% to $363.4 million from $342.0 million in the 1995 quarter. The $21.4 million growth in revenues principally reflects a 6% increase in worldwide expedited freight service pounds shipped, which reached 352.6 million pounds in the second quarter of 1996, and higher other revenues (primarily import related services and ocean freight), partially offset by a 2% decline in the worldwide average yield. Worldwide expenses amounted to $347.6 million, $19.2 million (6%) higher than in the second quarter of 1995. Domestic expedited freight service revenues of $134.0 million were $6.9 million (5%) higher than the prior year quarter. Domestic operating profit increased to $10.0 million in the second quarter of 1996 from $6.8 million in the prior year quarter. Operating profit benefited from 5% higher volume, with somewhat higher growth in second day business, and slightly lower transportation costs per pound. Domestic average yields improved during the second quarter of 1996 from the levels of late 1995 and early 1996 and were essentially equal to that of the prior year quarter. Domestic operating profit also benefited from reduced Federal excise tax liabilities on transportation of freight by air, partially offset by higher jet fuel costs. However, Congress recently passed a bill which proposes to reinstate this Federal excise tax from the date of enactment through December 31, 1996. Although it is anticipated that the President will sign the legislation into law, management cannot predict when the tax will become effective and thus cannot determine the impact the tax, if enacted, will have on the results of the Burlington Group for the balance this year. International expedited freight service revenues of $172.5 million in the second quarter represented a $3.4 million (2%) increase over the $169.0 million reported in the comparable quarter in 1995. Revenues from other activities, primarily international, which include transactions such as customs clearance and import related services, as well as ocean freight services, increased 24% or $11.2 million to $57.0 million. The growth in revenues from these other activities was mainly due to an increase in international shipment volume and the continued expansion of ocean freight services. International operating profit amounted to $6.3 million in the second quarter of 1996, $1.3 million lower than the 1995 quarter, as lower European results were only partially offset by improved U.S. exports. International expedited freight service pricing declined from the second quarter of 1995 as overseas price weakness was only partially offset by continuing improvement in U.S. export pricing. International expedited freight service volume increased 7% compared to the prior year quarter reflecting higher overseas volumes. Burlington's operating profit amounted to $25.0 million in the first six months of 1996, an increase of $2.5 million (11%) from the level reported in the first six months of 1995. Worldwide revenues increased by 7% to $715.4 million from $665.9 million in the 1995 six months. The $49.5 million growth in revenues principally reflects a 6% increase in worldwide expedited freight service pounds shipped, reaching 697.2 million pounds in the first half of 1996, and higher other revenues, partially offset by a 3% decline in the worldwide average yield. Worldwide expenses amounted to $691.1 million, $46.3 million (7%) higher than in the first half of 1995. Domestic expedited freight service revenues of $262.7 million in the first six months of 1996 were $6.5 million (3%) higher than the prior year period. Domestic operating profit increased to $13.7 million in the first six months of 1996 from $11.5 million in the prior year period. The higher operating profit reflected higher volume, lower average transportation costs and the benefit from reduced Federal excise tax liabilities, partially offset by lower average yields. The decline in the average yield for the first six months of 1996 compared to the same period of 1995 was due to lower average pricing for Burlington's overnight as well as a reduction in the proportion of overnight freight in the sales mix. On average, Burlington achieved lower operating costs compared to the prior year six months, as a result of its ability to adjust its fleet, station and labor cost structure to its changing volume requirements. International expedited freight service revenues of $342.2 million in the first six months of 1996 represented an $11.9 million (4%) increase over the $330.2 million reported in the comparable period in 1995. Revenues from other activities increased 39% or $31.1 million to $110.5 million. International operating profit amounted to $11.3 million in the first six months of 1996, 3% higher than the first six months of 1995, principally due to an 8% favorable change in international expedited freight service weight shipped, increased margin from import services and ocean freight and lower average transportation costs, partially offset by 4% lower average yields. Increased volume reflects growth in the worldwide flow of international airfreight and the expansion of company-owned operations. Foreign Operations - ------------------ A portion of the Burlington Group's financial results is derived from activities in several foreign countries, each with a local currency other than the U.S. dollar. Since the financial results of the Burlington Group are reported in U.S. dollars, they are affected by the changes in the value of the various foreign currencies in relation to the U.S. dollar. The Burlington Group's international activity is not concentrated in any single currency, which limits the risks of foreign rate fluctuations. In addition, foreign currency rate fluctuations may adversely affect transactions which are denominated in currencies other than the functional currency. The Burlington Group routinely enters into such transactions in the normal course of its business. Although the diversity of its foreign operations limits the risks associated with such transactions, the Burlington Group uses foreign exchange forward contracts to hedge the risks associated with certain transactions denominated in currencies other than the functional currency. Realized and unrealized gains and losses on these contracts are deferred and recognized as part of the specific transaction hedged. In addition, cumulative translation adjustments 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 Brazil operates in such a highly inflationary economy. Additionally, the Burlington Group is subject to other risks customarily associated with doing business in foreign countries, including economic conditions, 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 Burlington Group cannot be predicted. Corporate Expenses - ------------------ A portion of the Company's corporate general and administrative expenses and other shared services has been allocated to the Burlington Group based on utilization and other methods and criteria which management believes to be a reasonable and equitable estimate of the costs attributable to the Burlington Group. These allocations were $1.8 million and $1.3 million for the second quarter of 1996 and 1995, respectively, and $3.3 million and $2.4 million for the first six months of 1996 and 1995, respectively. The Company's corporate office headquarters will be relocating to Richmond, Virginia, during September 1996. The costs of this move, which includes moving expense, employee relocation, severance pay and temporary employee costs, is estimated to be $3.0 million. It is anticipated that approximately $1.0 million of these costs will be attributed to the Burlington Group and will be expensed in the third quarter. Other Income (Expense), Net - --------------------------- Other net expense for the second quarter of 1996 remained essentially equal to the $0.3 million expense reported in the second quarter of 1995. For the first six months of 1996 other net expense increased by $0.8 million to a net expense of $1.3 million from $0.5 million for the first six months of 1995. Other net expense in the first six months of 1996 includes a loss for the termination of an overseas sublease agreement at Burlington. FINANCIAL CONDITION A portion of the Company's corporate assets and liabilities has been attributed to the Burlington Group based upon utilization of the shared services from which assets and liabilities are generated, which management believes to be equitable and a reasonable estimate. Cash Provided by Operations - --------------------------- Cash provided by operating activities during the first six months of 1996 totaled $27.8 million compared with $3.5 million in the first six months of 1995. The increase in cash generated occurred principally as a result of higher noncash charges and a reduction in funding requirements for operating assets and liabilities. Capital Expenditures - -------------------- Cash capital expenditures for the first six months of 1996 totaled $16.5 million. For the full year 1996, capital expenditures are projected to approximate $36 million. The foregoing amounts exclude equipment expenditures that have been or are expected to be financed through capital and operating leases, and any acquisition expenditures. These expenditures will be for maintenance and replacement, when necessary, of current business operations, including implementation of new information systems and for business expansion. Other Investing Activities - -------------------------- In the first half of 1996, other investing activities required $3.7 million of cash compared to cash requirements of $7.0 million in the 1995 period. Aircraft heavy maintenance outlays were $9.7 million and $7.2 million in the first six months of 1996 and 1995, respectively. Cash proceeds from the disposal of assets increased by $5.4 million compared to the prior year period. Financing - --------- The Burlington Group intends to fund its capital expenditure requirements during the remainder of 1996 with anticipated cash flows from operating activities and through operating leases if the latter are financially attractive. Shortfalls, if any, will be financed through the Company's revolving credit agreements or other borrowing arrangements. The Company has a $350 million revolving credit agreement with a syndicate of banks (the "Facility"). The Facility includes a $100 million term loan and also permits additional borrowings, repayments, and reborrowings of up to an aggregate of $250 million. During the second quarter of 1996, the maturity date of both the term loan and revolving credit portion of the Facility was extended to May 31, 2001. Of the total outstanding under the Facility at June 30, 1996, none was attributed to the Burlington Group. Debt - ---- Outstanding debt totaled $61.1 million at June 30, 1996, an increase of $0.3 million from the $60.8 million reported at December 31, 1995. Cash flow from operating activities and a reduction in cash balances were insufficient to fund payments to the Minerals Group, net investing activities, stock repurchases, dividend payments and the cost of the Brink's Stock proposal, resulting in an increase in the Burlington Group's debt. Related Party Transactions - -------------------------- At June 30, 1996, the Minerals Group owed the Burlington Group $31.3 million, an increase of $11.4 million from the $19.9 million owed at December 31, 1995. The intergroup receivables are interest bearing. At June 30, 1996, the Burlington Group owed the Minerals Group $21.7 million for tax benefits, an decrease of $0.3 million from the $22.0 million owed at December 31, 1995. Of the total amount of tax benefits owed the Minerals Group at June 30, 1996, $14.0 million is expected to be paid within one year. Capitalization - -------------- On January 18, 1996, the shareholders of the Company approved the Brink's Stock Proposal, resulting in the modification of the capital structure of the Company to include an additional class of common stock. The outstanding shares of Pittston Services Group Common Stock ("Services Stock") were redesignated as Pittston Brink's Group Common Stock ("Brink's Stock") on a share-for-share basis, and a new class of common stock, designated as Burlington Stock, was distributed on the basis of one-half share of Burlington Stock for each share of Services Stock previously held by shareholders of record on January 19, 1996. The Brink's Group consists of the Brink's and BHS operations of the Company. The Burlington Group consists of the Burlington operations of the Company. The Minerals Group consists of the Coal and Mineral Ventures operations of the Company. The approval of the Brink's Stock Proposal did not result in any transfer of assets and liabilities of the Company or any of its subsidiaries. The Company prepares separate financial statements for the Minerals, Brink's and Burlington Groups in addition to consolidated financial information of the Company. Brink's Stock, Burlington Stock and the Pittston Minerals Group Common Stock ("Minerals Stock") were designed to provide shareholders with separate securities reflecting the performance of the Brink's Group, Burlington Group and Minerals Group, respectively, without diminishing the benefits of remaining a single corporation or precluding future transactions affecting any of the Groups. The redesignation of the Company's Services Stock as Brink's Stock and the distribution of Burlington Stock as a result of the approval of the Brink's Stock Proposal and the distribution of Minerals Stock in July 1993 did not result in any transfer of assets and liabilities of the Company or any of its subsidiaries. Holders of all three classes of stock are shareholders of the Company, which continues to be responsible for all its liabilities. Therefore, financial developments affecting the Brink's Group, the Burlington Group or the Minerals Group that affect the Company's financial condition could affect the results of operations and financial condition of all three Groups. The changes in the capital structure of the Company had no effect on the Company's total capital, except as to expenses incurred in the execution of the Brink's Stock Proposal. Since the approval of the Brink's Stock Proposal, capitalization of the Company has been affected by the share activity related to each of the classes of common stock. In November 1995, the Board authorized a revised share repurchase program which allows for the purchase, from time to time, of up to 1,500,000 shares of Brink's Stock, 1,500,000 shares of Burlington Stock and 1,000,000 shares of Minerals stock, not to exceed an aggregate purchase price of $45.0 million. As of June 30, 1996, 5,000 shares of Burlington Stock at a total cost of $0.1 million were repurchased under the program, all of which were repurchased in the second quarter of 1996. In 1994, the Board authorized the repurchase from time to time of up to $15 million of the Company's cumulative convertible preferred stock. In November 1995, the Board authorized an increase in the remaining authority to $15 million. No share repurchases were made in 1995 subsequent to the increased authorization. During the quarter and six months ended June 30, 1996, the Company purchased 10,600 shares of its cumulative convertible preferred stock a total cost of $4.0 million. In July 1996, the Company purchased an additional 10,300 of these shares at a cost of $3.9 million. Dividends - --------- The Board intends to declare and pay dividends on Burlington Stock based on earnings, financial condition, cash flow and business requirements of the Burlington Group. Since the Company remains subject to Virginia law limitations on dividends and to dividend restrictions in its public debt and bank credit agreements, financial developments of the Minerals Group or the Brink's Group could affect the Company's ability to pay dividends in respect of stock relating to the Burlington Group. During the first six months of 1996 the Board declared and paid cash dividends of 12 cents per share of Burlington Stock. In the first six months of 1995, the Board declared and the Company paid cash dividends of 10 cents per share of Services Stock of which 5.4 cents per share was attributed to the Burlington Stock, and is equivalent to 10.8 cents per share of Burlington Stock after taking into account the one-half share distribution of Burlington Stock for each Services Stock share. The Company pays an annual cumulative dividend on its Series C Cumulative Convertible Preferred Stock of $31.25 per share payable quarterly, in cash, in arrears, out of all funds of the Company legally available therefor, when, and if declared by the Board of Directors of the Company. Such stock also bears a liquidation preference of $500 per share, plus an amount equal to accrued and unpaid dividends thereon. In the first six months of 1996 and 1995, dividends paid on the cumulative convertible preferred stock were $2.0 million and $2.3 million, respectively.
<TABLE> PITTSTON MINERALS GROUP BALANCE SHEETS (In thousands) <CAPTION> June 30, December 31, 1996 1995 ============================================================================ <S> <C> <C> ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 4,758 4,999 Short-term investments, at lower of cost or market 827 26,046 Accounts receivable (net of estimated amount uncollectible: 1996 - $1,498; 1995 - $1,946) 103,026 87,775 Inventories, at lower of cost or market: Coal 40,282 37,329 Other 4,187 4,591 - ---------------------------------------------------------------------------- 44,469 41,920 Prepaid expenses 6,886 7,573 Deferred income taxes 29,457 30,677 - ---------------------------------------------------------------------------- Total current assets 189,423 198,990 Property, plant and equipment, at cost (net of accumulated depreciation, depletion and amortization: 1996 - $159,349; 1995 - $166,653) 179,375 199,344 Deferred pension assets 79,596 79,393 Deferred income taxes 70,989 80,699 Coal supply contracts 58,164 63,455 Intangibles, net of amortization 112,606 117,551 Receivable - Pittston Brink's Group 6,778 7,844 Receivable - Pittston Burlington Group 7,693 8,029 Other assets 45,902 43,304 - ---------------------------------------------------------------------------- Total assets $ 750,526 798,609 ============================================================================ LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Short-term bank borrowings $ 16 24 Current maturities of long-term debt 603 1,199 Accounts payable 66,372 70,214 Payable - Pittston Brink's Group 1,276 3,945 Payable - Pittston Burlington Group 17,329 5,910 Accrued liabilities 122,015 138,384 - ---------------------------------------------------------------------------- Total current liabilities 207,611 219,676 Long-term debt, less current maturities 119,237 100,791 Postretirement benefits other than pensions 216,543 213,707 Workers' compensation and other claims 108,940 114,602 Reclamation 46,379 47,126 Other liabilities 61,049 111,386 Shareholder's equity (9,233) (8,679) - ---------------------------------------------------------------------------- Total liabilities and shareholder's equity $ 750,526 798,609 ============================================================================ See accompanying notes to financial statements. </TABLE>
<TABLE> PITTSTON MINERALS GROUP STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) <CAPTION> Three Months Ended June 30 Six Months Ended June 30 1996 1995 1996 1995 ================================================================================ <S> <C> <C> <C> <C> Net sales $ 175,268 184,211 345,520 379,951 - -------------------------------------------------------------------------------- Cost and expenses: Cost of sales 169,444 180,860 363,221 374,800 Restructuring and other charges, including litigation accrual - - (35,650) - Selling, general and administrative expenses 8,023 8,506 19,057 16,920 - -------------------------------------------------------------------------------- Total costs and expenses 177,467 189,366 346,628 391,720 - -------------------------------------------------------------------------------- Other operating income 6,400 9,617 9,486 16,740 - -------------------------------------------------------------------------------- Operating profit 4,201 4,462 8,378 4,971 Interest income 197 154 322 194 Interest expense (2,671) (2,804) (5,623) (5,085) Other income (expense), net (517) (219) (890) (430) - -------------------------------------------------------------------------------- Income before income taxes 1,210 1,593 2,187 (350) Provision (credit) for income taxes (1,434) (3,041) (3,477) (5,454) - -------------------------------------------------------------------------------- Net income 2,644 4,634 5,664 5,104 Preferred stock dividends, net 146 (1,093) (919) (1,176) - -------------------------------------------------------------------------------- Net income attributed to common shares $ 2,790 3,541 4,745 3,928 ================================================================================ Per common share: Net income Primary $ .35 .45 .60 .51 Fully diluted $ .27 .45 .57 .51 ================================================================================ Cash dividends $ .1625 .1625 .3250 .3250 ================================================================================ Average shares outstanding Primary 7,866 7,811 7,844 7,764 Fully diluted 9,947 9,988 9,969 10,038 ================================================================================ See accompanying notes to financial statements. </TABLE>
<TABLE> PITTSTON MINERALS GROUP STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <CAPTION> Six Months Ended June 30 1996 1995 ======================================================================= <S> <C> <C> Cash flows from operating activities: Net income $ 5,664 5,104 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Noncash charges and other write-offs 24,259 - Depreciation, depletion and amortization 18,093 21,170 Provision (credit) for deferred income taxes 11,120 7,585 Credit for pensions, noncurrent (204) (1,753) Provision for uncollectible accounts receivable 251 100 Equity in (earnings) loss of unconsolidated affiliates, net of dividends received (436) (242) Other operating, net (784) (2,750) Change in operating assets and liabilities net of effects of acquisitions and dispositions: Decrease (increase) in accounts receivable (18,682) 19,885 Decrease (increase) in inventories (2,549) (13,195) Decrease (increase) in prepaid expenses 1,034 1,442 Increase (decrease) in accounts payable and accrued liabilities (1,791) (10,302) Decrease (increase) in other assets (2,243) 981 Increase (decrease) in other liabilities (36,626) (15,637) Increase (decrease) in workers' compensation and other claims, noncurrent (5,662) (8,486) Other, net 173 (1) - ------------------------------------------------------------------------ Net cash provided (used) by operating activities (8,383) 3,901 - ------------------------------------------------------------------------ Cash flows from investing activities: Additions to property, plant and equipment (13,999) (11,022) Proceeds from disposal of property, plant and equipment 2,851 8,950 Acquisitions, net of cash acquired, and related contingent payments (746) (722) Other, net 2,038 (241) - ------------------------------------------------------------------------ Net cash used by investing activities (9,856) (3,035) - ------------------------------------------------------------------------ Cash flows from financing activities: Additions to debt 18,400 19,200 Reductions of debt (669) (4,340) Payments from (to) - Brink's Group (2,670) 2,063 Payments from (to) - Burlington Group 11,419 (7,909) Repurchase of stock (3,975) (5,022) Proceeds from exercise of stock options 9 1,202 Proceeds from stock purchased by benefit plans 77 - Dividends paid (4,593) (4,912) - ------------------------------------------------------------------------ Net cash provided by financing activities 17,998 282 - ------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (241) 1,148 Cash and cash equivalents at beginning of period 4,999 3,708 - ------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 4,758 4,856 ======================================================================== See accompanying notes to financial statements. </TABLE>
PITTSTON MINERALS GROUP NOTES TO FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share amounts) (1) The financial statements of the Pittston Minerals Group (the "Minerals up") include the balance sheets, results of operations and cash flows of the Coal and Mineral Ventures operations of The Pittston Company (the "Company"), and a portion of the Company's corporate assets and liabilities and related transactions which are not separately identified with operations of a specific segment. The Minerals Group's financial statements are prepared using the amounts included in the Company's consolidated financial statements. Corporate allocations reflected in these financial statements are determined based upon methods which management believes to be a reasonable and equitable allocation of such expenses and credits. The Company provides holders of Pittston Minerals Group Common Stock ("Minerals Stock") separate financial statements, financial reviews, descriptions of business and other relevant information for the Minerals Group in addition to consolidated financial information of the Company. Holders of Minerals Stock are shareholders of the Company, which continues to be responsible for all its liabilities. Therefore, financial developments affecting the Minerals Group, the Pittston Brink's Group (the "Brink's Group") or the Pittston Burlington Group (the "Burlington Group") that affect the Company's financial condition could affect the results of operations and financial condition of all three Groups. Accordingly, the Company's consolidated financial statements must be read in connection with the Minerals Group's financial statements. (2) The amounts of depreciation, depletion and amortization of property, plant and equipment in the second quarter and six month periods of 1996 and 1995 totaled $5,699 ($6,382 in 1995) and $11,185 ($12,647 in 1995), respectively. (3) Cash payments made for interest and income taxes (net of refunds received) were as follows: Second Quarter Six Months 1996 1995 1996 1995 ----------------------------------------------------------------- Interest $ 3,156 3,085 5,989 5,172 ================================================================= Income taxes $(15,979) (12,958) (15,924) (12,247) ================================================================= In June 1995, the Company sold its rights under certain coal reserve leases and the related equipment for $2,800 in cash and notes totaling $2,882. The cash proceeds have been included in the Consolidated Statements of Cash Flows as "Cash flow from investing activities: Proceeds from disposal of property, plant and equipment". In March 1995, the Minerals Group sold surplus coal reserves for cash of $2,878 and a note receivable of $2,317. The cash proceeds have been included in the Statements of Cash Flows as "Cash flow from investing activities: Proceeds from disposal of property, plant and equipment". (4) In 1988, the trustees of certain pension and benefit trust funds (the "Trust Funds") established under collective bargaining agreements with the United Mine Workers of America ("UMWA") brought an action (the "Evergreen Case") against the Company and a number of its coal subsidiaries, claiming that the defendants were obligated to contribute to such Trust Funds in accordance with the provisions of the 1988 and subsequent National Bituminous Coal Wage Agreements, to which neither the Company nor any of its subsidiaries were a signatory. In late March 1996, a settlement was reached in the Evergreen Case. Under the terms of the settlement, the coal subsidiaries which had been signatories to earlier National Bituminous Coal Wage Agreements agreed to make various lump sum payments in full satisfaction of all amounts allegedly due to the Trust Funds through January 31, 1996, to be paid over time as follows: $25,845 upon dismissal of the Evergreen Case in March 1996 and the remainder of $24,000 in installments of $7,000 in August 1996 and $8,500 in each of 1997 and 1998. The first payment was entirely funded through an escrow account previously established by the Minerals Group. The amount previously escrowed and accrued was included in "Short-term investments" and "Accrued liabilities" on the Minerals Group's balance sheet. In addition, the coal subsidiaries agreed to future participation in the UMWA 1974 Pension Plan. Separate lawsuits against each of the UMWA and the Bituminous Coal Operators Association, previously reported, have also been dismissed. As a result of the settlement of these cases at an amount lower than previously accrued in 1993, the Minerals Group recorded a pretax benefit of $35,650 ($23,173 after tax) in the first quarter of 1996 in its financial statements. (5) As of January 1, 1996, the Minerals Group implemented a new accounting standard, Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 requires companies to review long-lived assets and certain identifiable intangibles to be held and used by an entity for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. In accordance with SFAS No. 121, the Minerals Group grouped its long-lived assets at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets, and determined the recoverability of such assets by comparing the sum of the expected undiscounted future cash flows with the carrying amount of the assets. The impact of adopting SFAS No. 121 resulted in a pretax charge to earnings as of January 1, 1996 for the Minerals Group's Coal operations of $27,839 ($18,095 after tax), of which $24,203 was included in cost of sales and $3,636 was included in selling, general and administrative expenses. Assets for which the impairment loss was recognized consisted of property, plant and equipment, advanced royalties and goodwill. These assets primarily related to mines scheduled for closure in the near term and idled facilities and related equipment. Based on current mining plans, geological conditions, and current assumptions related to future realization and costs, the sum of the expected undiscounted future cash flows was less than the carrying amount of the assets, and accordingly, an impairment loss was recognized. The loss was calculated based on the excess of the carrying value of the assets over the present value of estimated expected future cash flows, using a discount rate commensurate with the risks involved. (6) During the six months ended June 30, 1996, the Company purchased 10,600 shares of its Series C Cumulative Convertible Preferred Stock. Preferred dividends included on the statement of operations for the quarter and six months ended June 30, 1996, are net of $1,100, which is the excess of the carrying amount of the preferred stock over the cash paid to holders of the preferred stock. During the six months ended June 30, 1995, the Company purchased 12,670 shares of its preferred stock, no portion of which occurred in the second quarter of 1995. Preferred dividends for the first six months of 1995 are net of $1,045 which was the excess of the carrying amount of the preferred stock over the cash paid to holders of the preferred stock. (7) Certain prior period amounts have been reclassified to conform to current period financial statement presentation. (8) All adjustments have been made which are, in the opinion of management, necessary to a fair presentation of results of operations for the periods reported herein. All such adjustments are of a normal recurring nature. PITTSTON MINERALS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The financial statements of the Pittston Minerals Group (the "Minerals Group") include the balance sheets, results of operations and cash flows of the Coal and Mineral Ventures operations of The Pittston Company (the "Company"), and a portion of the Company's corporate assets and liabilities and related transactions which are not separately identified with operations of a specific segment. The Minerals Group's financial statements are prepared using the amounts included in the Company's consolidated financial statements. Corporate allocations reflected in these financial statements are determined based upon methods which management believes to be an equitable allocation of such expenses and credits. The accounting policies applicable to the preparation of the Minerals Group's financial statements may be modified or rescinded at the sole discretion of the Company's Board of Directors (the "Board") without the approval of the shareholders, although there is no intention to do so. The Company provides to holders of the Pittston Minerals Group Common Stock ("Minerals Stock") separate financial statements, financial reviews, descriptions of business and other relevant information for the Minerals Group in addition to consolidated financial information of the Company. Holders of Minerals Stock are shareholders of the Company, which continues to be responsible for all its liabilities. Therefore, financial developments affecting the Minerals Group, the Pittston Brink's Group (the "Brink's Group") or the Pittston Burlington Group (the "Burlington Group") that affect the Company's financial condition could affect the results of operations and financial condition of each Group. Accordingly, the Company's consolidated financial statements must be read in connection with the Minerals Group's financial statements. The following discussion is a summary of the key factors management considers necessary in reviewing the Minerals Group's results of operations, liquidity and capital resources. This discussion should be read in conjunction with the financial statements and related notes of the Company. SEGMENT INFORMATION Three Months Ended June 30 Six Months Ended June 30 (In thousands of dollars) 1996 1995 1996 1995 ============================================================================ Revenues: Coal $169,896 179,987 335,364 371,270 Mineral Ventures 5,372 4,224 10,156 8,681 - ---------------------------------------------------------------------------- Consolidated revenues $175,268 184,211 345,520 379,951 ============================================================================ Operating profit: Coal $ 5,190 5,810 9,567 7,121 Mineral Ventures 575 576 1,749 1,491 - ---------------------------------------------------------------------------- Segment operating profit 5,765 6,386 11,316 8,612 General corporate expense (1,564) (1,924) (2,938) (3,641) - ---------------------------------------------------------------------------- Operating profit $ 4,201 4,462 8,378 4,971 ============================================================================
RESULTS OF OPERATIONS In the second quarter of 1996, the Minerals Group reported net income of $2.6 million or $.35 per common share ($.27 on a fully diluted basis) compared to $4.6 million or $.45 per share in the second quarter of 1995. Operating profit totaled $4.2 million in the 1996 second quarter compared with $4.5 million in the prior year second quarter. Net sales decreased $8.9 million or 5%, compared with the 1995 second quarter. Cost of sales and selling, general and administrative expenses for the 1996 period decreased $11.9 million, or 6%, compared with the same period last year. In the first six months of 1996, the Minerals Group reported net income of $5.7 million or $.60 per share ($.57 on a fully diluted basis) compared to $5.1 million or $.51 per share in the first six months of 1995. Operating profit totaled $8.4 million in the first six months of 1996 compared with $5.0 million in the first six months of the prior year. Net sales decreased $34.4 million or 9% compared with the first half of 1995. In the first six months of 1996, Coal operations' results included two non-recurring items: a $35.7 million benefit from the settlement of the Evergreen lawsuit at an amount lower than previously accrued ($23.2 million after tax) and a $27.8 million charge related to with the implementation of a new accounting standard regarding the impairment of long-lived assets ($18.1 million after tax). Coal - ---- The following is a table of selected financial data for the Coal operations on a comparative basis: <TABLE> <CAPTION> Three Months Ended June 30 Six Months Ended June 30 (In thousands) 1996 1995 1996 1995 =================================================================================== <S> <C> <C> <C> <C> Net sales $169,896 179,987 335,364 371,270 Cost of sales 165,306 177,978 356,116 368,945 Selling, general and administrative 5,509 5,622 14,381 11,702 Restructuring and other charges, including litigation accrual - - (35,650) - - ----------------------------------------------------------------------------------- Total costs and expenses 170,815 183,600 334,847 380,647 - ----------------------------------------------------------------------------------- Other operating income 6,109 9,423 9,050 16,498 - ----------------------------------------------------------------------------------- Operating profit (loss) $ 5,190 5,810 9,567 7,121 =================================================================================== Coal sales (tons): Metallurgical 1,954 2,284 3,999 4,717 Utility and industrial 3,831 3,985 7,403 8,444 - ----------------------------------------------------------------------------------- Total coal sales 5,785 6,269 11,402 13,161 =================================================================================== Production/purchased (tons): Deep 991 984 2,053 2,041 Surface 2,870 3,276 5,586 7,129 Contract 459 508 854 1,041 - ----------------------------------------------------------------------------------- 4,320 4,768 8,493 10,211 Purchased 1,376 1,765 2,984 3,502 - ----------------------------------------------------------------------------------- Total 5,696 6,533 11,477 13,713 =================================================================================== </TABLE> Coal operations generated an operating profit of $5.2 million in the second quarter of 1996, compared to $5.8 million recorded in the 1995 second quarter. Included in the current quarter's results are pretax benefits of $3.0 million from settlements of outstanding litigation and $1.7 million reduction in expenses resulting from the recently enacted Commonwealth of Virginia law providing refundable credits for coal produced in Virginia (discussed further below). The second quarter of 1995 included a pretax gain of $5.3 million for the disposition of coal reserves and a $2.5 million benefit from a favorable litigation decision which reduced previously expensed employee benefit costs. Coal operations had an operating profit of $9.6 million in the first six months of 1996 compared to an operating profit of $7.1 million in the prior year. Operating profit in the first six months of 1996 included, in addition to the second quarter benefits outlined above, a benefit of $35.7 million from the settlement of the Evergreen lawsuit at an amount lower than previously accrued in 1993 and a $27.8 million charge related to the implementation of a new accounting standard (discussed further below). The charge is included in cost of sales ($24.2 million) and selling, general and administrative expenses ($3.6 million). Operating profit in the first half of 1995 also included $8.3 million in gains from the sale of coal reserves. The operating profit of Coal operations, excluding the effects of the Evergreen settlement and the implementation of SFAS 121, is analyzed as follows: <TABLE> <CAPTION> (In thousands, Three Months Ended June 30 Six Months Ended June 30 except per ton amounts) 1996 1995 1996 1995 =================================================================================== <S> <C> <C> <C> <C> Net coal sales $168,551 179,495 332,459 370,233 Current production cost of coal sold 157,052 170,560 315,023 353,178 - ----------------------------------------------------------------------------------- Coal margin 11,499 8,935 17,436 17,055 Non-coal margin 249 139 856 306 Other operating income (net) 5,963 9,423 8,904 16,498 - ----------------------------------------------------------------------------------- Margin and other income 17,711 18,497 27,196 33,859 - ----------------------------------------------------------------------------------- Other costs and expenses: Idle equipment and closed mines 200 3,175 459 4,560 Inactive employee cost 7,063 3,889 14,487 10,476 General and administrative 5,258 5,623 10,494 11,702 - ----------------------------------------------------------------------------------- Total other costs and expenses 12,521 12,687 25,440 26,738 - ----------------------------------------------------------------------------------- Operating profit (adjusted as stated above) $ 5,190 5,810 1,756 7,121 =================================================================================== Coal margin per ton: Realization $ 29.14 28.63 29.16 28.13 Current production cost of coal sold 27.15 27.21 27.63 26.83 - ----------------------------------------------------------------------------------- Coal margin $ 1.99 1.42 1.53 1.30 =================================================================================== </TABLE> Total coal margin of $11.5 million for the second quarter of 1996 represented an increase of $2.6 million from the comparable period in 1995. The improvement in coal margin reflects a $.57 per ton (40.1%) increase in average coal margin, partially offset by a decrease in sales volume. Sales volume of 5.8 million tons in the 1996 second quarter was 0.5 million tons less than the 6.3 million tons sold in the prior year quarter. Steam coal sales decreased by 0.2 million tons, to 3.8 million tons, and metallurgical coal sales declined by 0.3 million tons, to 2.0 million tons. Steam coal sales represented 66% of total volume in the 1996 second quarter and 64% in the 1995 second quarter. Coal margin per ton increased to $1.99 per ton in the current quarter from $1.42 per ton for the comparable period in 1995 as a $0.51 per ton (1.8%) increase in realization was augmented by a $0.06 per ton decrease in the current production cost of coal sold. The average realization improvement was largely due to an increase in metallurgical coal pricing as the effect of the increase in pricing for the coal contract year that began April 1, 1995 was not fully realized until periods beginning after the second quarter 1995. The weighted average price for expected metallurgical coal shipments for the contract year which began on April 1, 1996 is approximately equal to the prior year level. While steam coal spot pricing remains at exceptionally low levels, the majority of Coal operations' steam coal sales were, and continue to be sold under long term contracts. The current production cost of coal sold decreased $0.06 per ton to $27.15 per ton in the second quarter 1996 as compared to the prior year period as lower cost from company deep and surface mines, including the previously mentioned Virginia coal credit, offset higher contract and purchased coal costs. Production in the 1996 second quarter totaled 4.3 million tons, a 9.4% decrease compared to the 4.8 million tons produced in the 1995 second quarter. The decline reflected lower surface mine production, which was caused by exhaustion of reserves at certain mines, idling of a mine subsequent to the second quarter of 1995 and the sale of Coal operations' Ohio operations at the end of 1995. Second quarter surface production accounted for 66% and 69% of total production in 1996 and 1995, respectively. Productivity of 38 tons per man day represented a 6.4% increase from the 1995 level. Non-coal margin in the second quarter of 1996 amounted to $0.2 million, $0.1 million higher than in the second quarter of 1995. The increase largely reflects the impact of a favorable change in natural gas prices. Other operating income, reflecting the litigation settlements, sales of properties and equipment and third party royalties, amounted to $6.0 million in the second quarter of 1996, $3.5 million less than in the comparable period of 1995. The higher level of income recorded in the 1995 period largely reflects $5.3 million of income generated from the sale of coal reserves. Idle equipment and closed mine costs decreased by $3.0 million in the 1996 second quarter. Idle equipment expenses were reduced from the prior year level as a result of Coal operations' improved equipment management program. Inactive employee costs, which primarily represent long term employee liabilities for pension and retiree medical costs, increased by $3.2 million to $7.1 million in the 1996 second quarter. The 1995 quarter reflects a benefit of $2.5 million from a litigation decision and the use of higher long term interest rates to calculate the present value of the long term liabilities. For the first six months of 1996, coal margin was $17.4 million, an increase of $0.4 million over the 1995 period. The increase reflects a $0.23 per ton improvement in coal margin (17.7%), mostly offset by a sales volume decrease of 1.8 million tons (13.4%). Sales volume of 11.4 million tons in the first half of 1996 was 1.8 million tons less than the 13.2 million tons sold in the 1995 period. Metallurgical coal sales declined by 0.7 million tons (15.2%) to 4.0 million tons and steam coal sales decreased by 1.0 million tons (12.3%) to 7.4 million tons compared to the prior year. Steam coal sales represented 65% of the total 1996 sales volume, a 1% increase when compared to 1995. Coal margin per ton increased to $1.53 per ton in the first six months of 1996 from $1.30 per ton for the same period of 1995, as a $1.03 (3.7%) per ton increase in realization was only partially offset by a $0.80 (3.0%) per ton increase in the current production cost of coal sold. The increase in realization was mostly due to the timing of the improved metallurgical pricing for the contract year that began April 1, 1995, the full effect of which was not realized until after the first half of 1995. The current production cost of coal sold for the first half of 1996 was $27.63 per ton as compared to $26.83 per ton for the first half of 1995, reflecting overall higher cost of production. Production for the year-to-date 1996 period totaled 8.5 million tons, a decrease of 16.8% from the 1995 prior period reflecting the decreased number of producing mines due to idlement, reserve exhaustion or sale. Surface production accounted for 66% and 70% of the total volume in the 1996 and 1995 periods, respectively. Productivity of 37 tons per man day represents a 1.9% increase over the 1995 period. The non-coal margin was $0.9 million for the first half of 1996, an increase of $0.6 million due to improved natural gas prices over the 1995 period. Other operating income, including the litigation settlements, sales of properties and equipment and third party royalties, was $8.9 million for the 1996 period, a decrease of $7.6 million from 1995. The 1995 period reflected a gain of $8.3 million from the sale of coal reserves. Idle equipment and closed mines costs decreased by $4.1 million in the first half of 1996 compared to the prior year due to the improved equipment management program. Inactive employee costs of $14.5 million represented an increase of $4.0 million as compared to 1995. The 1995 period reflected a reduction of previously expensed employee benefit costs totaling $2.5 million and the use of a higher long-term interest rate to determine the present value of the long-term employee benefit liabilities. In 1988, the trustees of certain pension and benefit trust funds (the "Trust Funds") established under collective bargaining agreements with the United Mine Workers of America ("UMWA") brought an action (the "Evergreen Case") against the Company and a number of its coal subsidiaries, claiming that the defendants were obligated to contribute to such Trust Funds in accordance with the provisions of the 1988 and subsequent National Bituminous Coal Wage Agreements, to which neither the Company nor any of its subsidiaries were a signatory. In late March 1996, a settlement was reached in the Evergreen Case. Under the terms of the settlement, the coal subsidiaries which had been signatories to earlier National Bituminous Coal Wage Agreements agreed to make various lump sum payments in full satisfaction of all amounts allegedly due to the Trust Funds through January 31, 1996, to be paid over time as follows: $25.8 million upon dismissal of the Evergreen Case in March 1996 and the remainder of $24.0 million in installments of $7.0 million in August 1996 and $8.5 million in each of 1997 and 1998. The first payment was entirely funded through an escrow account previously established by the Coal operations. In addition, the coal subsidiaries agreed to future participation in the UMWA 1974 Pension Plan. Separate lawsuits against each of the UMWA and the Bituminous Coal Operators Association, previously reported, have also been dismissed. As a result of the settlement of these cases at an amount lower than previously accrued in 1993, the Company recorded a pretax benefit of $35.7 million ($23.2 million after tax) in the first quarter of 1996 in its consolidated financial statements. As of January 1, 1996, the Company implemented a new accounting standard, Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 requires companies to review long-lived assets and certain identifiable intangibles to be held and used by an entity for impairment whenever circumstances indicate that the carrying amount for an asset may not be recoverable. In accordance with SFAS No. 121, the Company grouped its long-lived assets at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets, and determined the recoverability of such assets by comparing the sum of the expected undiscounted future cash flows with the carrying amount of the assets. The impact of adopting SFAS No. 121 resulted in a pretax charge to earnings as of January 1, 1996 for the Company's Coal operations of $27,839 ($18,095 after tax), of which $24,203 was included in cost of sales and $3,636 was included in selling, general and administrative expenses. Assets for which the impairment loss was recognized consisted of property, plant and equipment, advanced royalties and goodwill. These assets primarily related to mines scheduled for closure in the near term and idled facilities and related equipment. Based on current mining plans, geological conditions, and current assumptions related to future realization and costs, the sum of the expected undiscounted future cash flows was less than the carrying amount of the assets, and accordingly, an impairment loss was recognized. The loss was calculated based on the excess of the carrying value of the assets over the present value of estimated expected future cash flows, using a discount rate commensurate with the risks involved. Coal operations continued cash funding for charges recorded in prior years for facility closure costs recorded as restructuring and other charges. The following table analyzes the changes in liabilities during the first six months of 1996 for such costs: Employee Mine Termination, Leased and Medical Machinery Plant and and Closure Severance Equipment Costs Costs Total ------------------------------------------------------------------------ Balance as of December 31, 1995 $ 1,218 28,983 36,077 66,278 Payments 462 2,862 3,137 6,461 ------------------------------------------------------------------------ Balance as of June 30, 1996 $ 756 26,121 32,940 59,817 ======================================================================== In April 1996, the Commonwealth of Virginia enacted into law the "Coalfield Employment Enhancement Tax Credit." The new law, which is effective from January 1, 1996 through December 31, 2001, provides Virginia coal producers with a refundable credit for coal produced in Virginia. The credit ranges from $.40 per ton for surface coal to $1 to $2 per ton of underground coal mined, depending upon seam thickness, with certain modifications to the surface and deep mined credit rates based on employment levels. The credits generated can be utilized under a predetermined schedule beginning with the year 1999 through the year 2008. At current production levels, Coal operations estimates it will generate approximately $4.0 million in credits in 1996 to be realized in future years according to the law. Mineral Ventures - ---------------- The following is a table of selected financial data for Mineral Ventures on a comparative basis: <TABLE> <CAPTION> (Dollars in thousands, Three Months Ended June 30 Six Months Ended June 30 except per ounce data) 1996 1995 1996 1995 =================================================================================== <S> <C> <C> <C> <C> Net sales $ 5,372 4,224 10,156 8,681 Cost of sales 4,138 2,882 7,105 5,855 Selling, general and administrative 950 960 1,738 1,577 - ----------------------------------------------------------------------------------- Total costs and expenses 5,088 3,842 8,843 7,432 Other operating income 291 194 436 242 - ----------------------------------------------------------------------------------- Operating profit $ 575 576 1,749 1,491 =================================================================================== Stawell Gold Mine: Mineral Ventures's 50% direct share: Ounces sold 12,841 10,646 24,600 21,492 Ounces produced 11,868 10,690 23,982 21,288 =================================================================================== Average realized gold price per ounce (US$): Realization $ 421 394 411 397 Cash cost $ 287 267 273 265 =================================================================================== </TABLE> Operating profit of Mineral Ventures operations amounted to $0.6 million in the 1996 second quarter, which equaled operating profit in the second quarter of 1995. In the first six months of 1996, operating profit increased $.2 million to $1.7 million from an operating profit of $1.5 million in the first six months of 1995. Operating profit for the second quarter and first six months of 1996 continued to reflect strong results achieved by the Stawell gold mine in western Victoria, Australia, in which Mineral Ventures has a 67% direct and indirect interest. The Stawell mine's earnings reflect the benefit from processing a higher grade of ore. During the latter part of the second quarter of 1996, however, results were negatively impacted by two lost time accidents as well as some equipment problems, which resulted in production shortfalls and higher costs. During the second quarter, the Australian joint venture in which Mineral Ventures owns a 34% direct interest, formally announced that resource Silver Swan nickel deposit in Australia will be developed as an underground mine with production expected to commence in mid-1997. The indicated resource between 200 and 550 meters below surface of 440,000 tons at 14% nickel has been adjusted for dilution and mining recovery to give a probable ore reserve of 640,000 tons at 9.5% nickel. According to the announcement, this estimate of tonnage is regarded as +/- 30% in accuracy prior to underground inspection. Additional high-grade mineralization has been encountered in drilling to the 735 meter level; however, at this time, there has been insufficient drill density to permit assessment of a recourse over the vertical interval 550-735 meters. In addition, a disseminated nickel sulphide mineralization adjacent to Silver Swan, named Cygnet, has been estimated to contain a total indicated and inferred resource of 3.5 million tons at 1.4% nickel. After completion of test work, a feasibility study for bringing Cygnet into production will be undertaken later in 1996. Other Operating Income - ---------------------- Other operating income for the second quarter of 1996 decreased $3.2 million to $6.4 million from $9.6 million recognized in the year earlier quarter and in the first six months of 1996 decreased $7.2 million to $9.5 million from $16.7 million in the first six months of 1995. Other operating income principally includes royalty income and gains and losses from sales of coal assets. The second quarter 1996 includes $3.0 million from settlements of outstanding litigation. Results in the second quarter and first six months of 1995 included $5.3 million and $8.3 million in gains from the sale of coal reserves, respectively. Corporate Expenses - ------------------ A portion of the Company's corporate general and administrative expenses and other shared services has been allocated to the Minerals Group based on utilization and other methods and criteria which management believes to be a reasonable and equitable estimate of the costs attributable to the Minerals Group. These allocations were $1.6 million and $1.9 million for the second quarter of 1996 and 1995, respectively, and $2.9 million and $3.6 million for the first six months of 1996 and 1995, respectively. The Company's corporate office headquarters will be relocating to Richmond, Virginia, during September 1996. The costs of this move, which includes moving expense, employee relocation, severance pay and temporary employee costs, is estimated to be $3.0 million. It is anticipated that approximately $1.0 million of these costs will be attributed to the Minerals Group and will be expensed during the third quarter. Interest Expense - ---------------- Interest expense for the second quarter of 1996 decreased by $0.1 million to $2.7 million from $2.8 million in the second quarter of 1995 and increased $0.5 million in the first six months of 1996 to $5.6 million from $5.1 million in the first six months of 1995. The increase in interest expense in the first six months of 1996 is the result of higher average debt balances. Income Taxes - ------------ Net income in the second quarter of 1996 and 1995 and the first six months of 1996 and 1995 includes a tax credit primarily as a result of the tax benefits of percentage depletion. FINANCIAL CONDITION A portion of the Company's corporate assets and liabilities has been attributed to the Minerals Group based upon utilization of the shared services from which assets and liabilities are generated, which management believes to be equitable and a reasonable estimate. Cash Provided by Operating Activities - ------------------------------------- Operating activities for the first six months of 1996 used cash of $8.4 million, while operations in the first six months of 1995 provided cash of $3.9 million. In the first six months of 1996, more operating cash was required to finance working capital. Net income, noncash charges and changes in operating assets and liabilities in the first six months of 1996 were significantly affected by two nonrecurring items, a benefit from the settlement of the Evergreen case at an amount less than originally accrued and a charge related to the implementation of SFAS 121; these items had no effect on cash generated by operations. The initial payment of $25.8 million related to the Evergreen case settlement was entirely funded by an escrow account previously established by the Company. The amount previously escrowed and accrued was included in "Short-term investments" and "Accrued liabilities" on the Minerals Group's balance sheet. Capital Expenditures - -------------------- Cash capital expenditures for the first six months of 1996 totaled $14.0 million, excluding equipment expenditures that have been or are expected to be financed through capital and operating leases. For the remainder of 1996, capital expenditures, excluding expenditures that have been or are expected to be financed through capital and operating leases, are estimated to approximate $20 million. Other Investing Activities - -------------------------- All other investing activities in the first six months of 1996 provided net cash of $4.1 million, largely as a result of proceeds from the disposal of property, plant and equipment. Financing - --------- The Minerals Group intends to fund its capital expenditure requirements during the remainder of 1996 primarily with anticipated cash flows from operating activities and through operating and capital leases if the latter are financially attractive. Shortfalls, if any, will be financed through the Company's revolving credit agreements or other borrowing arrangements or borrowings from the Brink's Group or the Burlington Group. The Company has a $350 million revolving credit agreement with a syndicate of banks (the "Facility"). The Facility includes a $100 million term loan and also permits additional borrowings, repayments, and reborrowings of up to an aggregate of $250 million. During the second quarter of 1996, the maturity date of both the term loan and revolving credit portion of the Facility was extended to May 31, 2001. As of June 30, 1996, borrowings of $100 million were outstanding under the term loan portion of the Facility and $18.4 million of additional borrowings were outstanding under the remainder of the facility. Of the total amount outstanding under the Facility, all $118.4 million was attributed to the Minerals Group. Debt - ---- Total debt outstanding at June 30, 1996 was $119.9 million. At June 30, 1996, $118.4 million of the Company's long-term debt was attributed to the Minerals Group, an increase of $18.4 million from the year-end 1995 amount. Borrowings to fund current operating activities, capital expenditures and net costs related to share activity during the first six months of 1996 were made under the Company's revolving credit agreements and from the Burlington Group. Related Party Transactions - -------------------------- At June 30, 1996, the Minerals Group owed the Brink's Group $15.3 million, a decrease of $2.6 million from the $17.9 million owed at December 31, 1995. The Minerals Group also owed the Burlington Group $31.3 million at the end of the second quarter of 1996, $11.4 million higher than the $19.9 million owed at year-end 1995. These intergroup payables are interest bearing. At June 30, 1996, the Brink's Group owed the Minerals Group $20.8 million and the Burlington Group owed the Minerals Group $21.7 million for tax benefits, of which payments of $14.0 million from each Group are expected to be made within one year. Capitalization - -------------- On January 18, 1996, the shareholders of the Company approved the Brink's Stock Proposal, resulting in the modification of the capital structure of the Company to include an additional class of common stock. The outstanding shares of Pittston Services Group Common Stock ("Services Stock") were redesignated as Pittston Brink's Group Common Stock ("Brink's Stock") on a share-for-share basis, and a new class of common stock, designated as Pittston Burlington Group Common Stock ("Burlington Stock"), was distributed on the basis of one- half share of Burlington Stock for each share of Services Stock previously held by shareholders of record on January 19, 1996. The Brink's Group consists of the Brink's and BHS operations of the Company. The Burlington Group consists of the Burlington operations of the Company. The Minerals Group consists of the Coal and Mineral Ventures operations of the Company. The approval of the Brink's Stock Proposal did not result in any transfer of assets and liabilities of the Company or any of its subsidiaries. The Company prepares separate financial statements for the Minerals, Brink's and Burlington Groups in addition to consolidated financial information of the Company. Brink's Stock, Burlington Stock and Minerals Stock were designed to provide shareholders with separate securities reflecting the performance of the Brink's Group, Burlington Group and Minerals Group, respectively, without diminishing the benefits of remaining a single corporation or precluding future transactions affecting any of the Groups. The redesignation of the Company's Services Stock as Brink's Stock and the distribution of Burlington Stock as a result of the approval of the Brink's Stock Proposal and the distribution of Minerals Stock in July 1993 did not result in any transfer of assets and liabilities of the Company or any of its subsidiaries. Holders of all three classes of stock are shareholders of the Company, which continues to be responsible for all its liabilities. Therefore, financial developments affecting the Brink's Group, the Burlington Group or the Minerals Group that affect the Company's financial condition could affect the results of operations and financial condition of all three Groups. The changes in the capital structure of the Company had no effect on the Company's total capital, except as to expenses incurred in the execution of the Brink's Stock Proposal. Since the approval of the Brink's Stock Proposal, capitalization of the Company has been affected by the share activity related to each of the classes of common stock. In November 1995, the Board authorized a revised share repurchase program which allows for the purchase, from time to time, of up to 1,500,000 shares of Brink's Stock, 1,500,000 shares of Burlington Stock and 1,000,000 shares of Minerals Stock, not to exceed an aggregate purchase price of $45.0 million. As of June 30, 1996, no shares of Minerals Stock were repurchased under the program. In 1994, the Board authorized the repurchase from time to time of up to $15 million of the Company's cumulative convertible preferred stock. In November 1995, the Board authorized an increase in the remaining authority to $15 million. No share repurchases were made in 1995 subsequent to the increased authorization. During the quarter and six months ended June 30, 1996, the Company purchased 10,600 shares of its cumulative convertible preferred stock a total cost of $4.0 million. In July 1996, the Company purchased an additional 10,300 of these shares at a cost of $3.9 million. Dividends - --------- The Board intends to declare and pay dividends on Brink's Stock, Burlington Stock and Minerals Stock based on earnings, financial condition, cash flow and business requirements of the each of the Groups, respectively. Since the Company remains subject to Virginia law limitations on dividends and to dividend restrictions in its public debt and bank credit agreements, financial developments of one Group could affect the Company's ability to pay dividends in respect of stock relating to the other Group. Dividends on Minerals Stock are also limited by the Available Minerals Dividend Amount, which is adjusted by net income or losses and other equity transactions, as defined in the Company's Articles of Incorporation. At June 30, 1996 the Available Minerals Dividend Amount was at least $24.4 million. During the first six months of 1996 and 1995, the Board declared and the Company paid cash dividends of 32.5 cents per share of Minerals Stock. Dividends paid on the cumulative convertible preferred stock in the first six months of 1996 and 1995 totaled $2.0 million and $2.3 million, respectively. Preferred dividends included on the Minerals Group's Statement of Operations for the six months ended June 30, 1996 and 1995, are net of $1.1 million and $1.0 million, respectively, which was the excess of the carrying amount of the preferred stock over the cash paid to holders of the preferred stock for preferred stock repurchases. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K - ------- --------------------------------- (a) Exhibits: Exhibit Number 3 (i) The Registrant's Restated Articles of Incorporation. 11 Statement re Computation of Per Shares Earnings. (b) No reports on Form 8-K were filed during the second quarter of 1996. 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 August 12, 1996 By G. R. Rogliano ------------------------- (G. R. Rogliano) Senior Vice President (Duly Authorized Officer and Chief Accounting Officer)