UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 [ ] 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 4229, 1000 Virginia Center Parkway, Glen Allen, Virginia 23058-4229 ---------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (804) 553-3600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of May 8, 1998, 41,111,230 shares of $1 par value Pittston Brink's Group Common Stock, 20,163,468 shares of $1 par value Pittston BAX Group Common Stock and 8,392,403 shares of $1 par value Pittston Minerals Group Common Stock were outstanding.
PART I - FINANCIAL INFORMATION THE PITTSTON COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> March 31 December 31 1998 1997 =================================================================================================== (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 72,615 69,878 Short-term investments, at lower of cost or market 2,277 2,227 Accounts receivable (net of estimated amount uncollectible: 1998 - $25,307; 1997 - $21,985) 617,433 531,317 Inventories, at lower of cost or market 37,698 40,174 Prepaid expenses 43,943 32,767 Deferred income taxes 50,302 50,442 - --------------------------------------------------------------------------------------------------- Total current assets 824,268 726,805 Property, plant and equipment, at cost (net of accumulated depreciation, depletion and amortization: 1998 - $539,253; 1997 - $519,658) 718,673 647,642 Intangibles, net of amortization 328,443 301,395 Deferred pension assets 119,172 123,138 Deferred income taxes 46,199 47,826 Other assets 141,600 149,138 - --------------------------------------------------------------------------------------------------- Total assets $ 2,178,355 1,995,944 =================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 57,480 40,144 Current maturities of long-term debt 21,593 11,299 Accounts payable 293,476 281,411 Accrued liabilities 343,738 310,819 - --------------------------------------------------------------------------------------------------- Total current liabilities 716,287 643,673 Long-term debt, less current maturities 299,476 191,812 Postretirement benefits other than pensions 233,399 231,451 Workers' compensation and other claims 101,979 106,378 Deferred income taxes 17,015 17,157 Other liabilities 113,682 119,855 Shareholders' equity: Preferred stock, par value $10 per share: Authorized: 2,000 shares $31.25 Series C Cumulative Convertible Preferred Stock; Issued and outstanding: 1998 - 113 shares; 1997 - 114 shares 1,134 1,138 Pittston Brink's Group Common Stock, par value $1 per share: Authorized: 100,000 shares; Issued and outstanding: 1998 - 41,112 shares; 1997 - 41,130 shares 41,112 41,130 Pittston BAX Group Common Stock, par value $1 per share: Authorized: 50,000 shares; Issued and outstanding: 1998 - 20,200 shares; 1997 - 20,378 shares 20,200 20,378 Pittston Minerals Group Common Stock, par value $1 per share: Authorized: 20,000 shares; Issued and outstanding: 1998 - 8,393 shares; 1997 - 8,406 shares 8,393 8,406 Capital in excess of par value 410,556 430,970 Retained earnings 365,966 359,940 Accumulated other comprehensive income - foreign currency translation (42,808) (41,762) Employee benefits trust, at market value (108,036) (134,582) - --------------------------------------------------------------------------------------------------- Total shareholders' equity 696,517 685,618 - --------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 2,178,355 1,995,944 =================================================================================================== </TABLE> See accompanying notes to consolidated financial statements. 2
THE PITTSTON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (Unaudited) <TABLE> <CAPTION> Quarter Ended March 31 1998 1997 ================================================================================ <S> <C> <C> Net sales $ 149,898 158,883 Operating revenues 712,766 622,793 - -------------------------------------------------------------------------------- Net sales and operating revenues 862,664 781,676 Costs and expenses: Cost of sales 144,164 153,412 Operating expenses 595,771 518,819 Selling, general and administrative expenses 99,256 75,643 - -------------------------------------------------------------------------------- Total costs and expenses 839,191 747,874 Other operating income, net 3,027 3,576 - -------------------------------------------------------------------------------- Operating profit 26,500 37,378 Interest income 1,181 1,019 Interest expense (7,384) (5,564) Other expense, net (1,435) (2,389) - -------------------------------------------------------------------------------- Income before income taxes 18,862 30,444 Provision for income taxes 6,034 9,103 - -------------------------------------------------------------------------------- Net income 12,828 21,341 Preferred stock dividends, net (864) (901) - -------------------------------------------------------------------------------- Net income attributed to common shares $ 11,964 20,440 ================================================================================ Pittston Brink's Group: Net income attributed to common shares $ 17,037 15,306 - -------------------------------------------------------------------------------- Net income per common share: Basic $ .44 .40 Diluted .44 .40 - -------------------------------------------------------------------------------- Cash dividends per common share $ .025 .025 ================================================================================ Pittston BAX Group: Net (loss) income attributed to common shares $ (2,966) 5,088 - -------------------------------------------------------------------------------- Net (loss) income per common share: Basic $ (.15) .26 Diluted (.15) .26 - -------------------------------------------------------------------------------- Cash dividends per common share $ .06 .06 ================================================================================ Pittston Minerals Group: Net (loss) income $ (2,107) 46 - -------------------------------------------------------------------------------- Net (loss) income per common share: Basic $ (.26) .01 Diuted (.26) .01 - -------------------------------------------------------------------------------- Cash dividends per common share $ .1625 .1625 ================================================================================ </TABLE> See accompanying notes to consolidated financial statements. 3
THE PITTSTON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (Unaudited) <TABLE> <CAPTION> Quarter Ended March 31 1998 1997 ============================================================================================ <S> <C> <C> Cash flows from operating activities: Net income $ 12,828 21,341 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 33,878 30,139 Provision for aircraft heavy maintenance 8,733 8,186 Provision for deferred income taxes 2,115 2,328 (Credit) provision for pensions, noncurrent (441) 141 Provision for uncollectible accounts receivable 2,647 1,768 Minority interest expense 1,821 1,576 Equity in (earnings) losses of unconsolidated affiliates, net of dividends received (747) 861 Other operating, net 4,239 963 Change in operating assets and liabilities, net of effects of acquisitions and dispositions: Increase in accounts receivable (12,381) (10,471) Decrease (increase) in inventories 2,564 (7,314) Increase in prepaid expenses (5,362) (9,793) Decrease in accounts payable and accrued liabilities (17,399) (7,897) Increase in other assets (1,008) (3,292) Decrease in other liabilities (4,604) (2,852) Decrease in workers' compensation and other claims, noncurrent (1,718) (2,256) Other, net (3,459) 366 - -------------------------------------------------------------------------------------------- Net cash provided by operating activities 21,706 23,794 - -------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment (60,705) (40,031) Aircraft heavy maintenance expenditures (9,659) (9,473) Proceeds from disposal of property, plant and equipment 421 3,939 Acquisitions, net of cash acquired, and related contingency payments 224 (54,094) Other, net (4,182) 13,901 - -------------------------------------------------------------------------------------------- Net cash used by investing activities (73,901) (85,758) - -------------------------------------------------------------------------------------------- Cash flows from financing activities: Additions to debt 70,905 87,685 Reductions of debt (9,640) (6,851) Repurchase of stock of the Company (4,499) (6,514) Proceeds from exercise of stock options 2,288 1,303 Dividends paid (4,122) (4,049) - -------------------------------------------------------------------------------------------- Net cash provided by financing activities 54,932 71,574 - -------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 2,737 9,610 Cash and cash equivalents at beginning of period 69,878 41,217 - -------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 72,615 50,827 ============================================================================================ </TABLE> See accompanying notes to consolidated financial statements. 4
THE PITTSTON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (Unaudited) (1) The Pittston Company (the "Company") prepares consolidated financial statements in addition to separate financial statements for the Pittston Brink's Group (the "Brink's Group"), the Pittston BAX Group (the "BAX 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 BAX Group consists of the BAX Global Inc. ("BAX Global") operations of the Company. The Minerals Group consists of the Pittston Coal Company ("Coal Operations") and Pittston Mineral Ventures ("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 BAX Group Common Stock ("BAX Stock") and Pittston Minerals Group Common Stock ("Minerals Stock") which were designed to provide shareholders with separate securities reflecting the performance of the Brink's Group, BAX Group and Minerals Group, respectively, without diminishing the benefits of remaining a single corporation or precluding future transactions affecting any Group or the Company as a whole. Holders of Brink's Stock, BAX Stock and Minerals Stock are shareholders of the Company, which is responsible for all liabilities. Financial developments affecting the Brink's Group, the BAX Group or the Minerals Group that affect the Company's financial condition could affect the results of operations and financial condition of each of the Groups. Effective May 4, 1998, the designation of Pittston Burlington Group Common Stock and the name of the Pittston Burlington Group were changed to Pittston BAX Group Common Stock and Pittston BAX Group, respectively. All rights and privileges of the holders of such Stock are otherwise unaffected by such changes. The stock continues to trade on the New York Stock Exchange under the symbol "PZX". (2) The following is a reconciliation between the calculation of basic and diluted net income per share: <TABLE> <CAPTION> Quarter Ended March 31 Brink's Group 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> Numerator: Net income - Basic and diluted net income per share numerator $17,037 15,306 Denominator: Basic weighted average common shares outstanding 38,477 38,189 Effect of dilutive securities: Employee stock options 604 419 - -------------------------------------------------------------------------------- Diluted weighted average common shares outstanding 39,081 38,608 ================================================================================ </TABLE> Options to purchase 23 shares of common stock at prices between $28.63 and $29.50 per share were outstanding for the quarter ended March 31, 1997 but were not included in the computation of diluted net income per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. 5
<TABLE> <CAPTION> Quarter Ended March 31 BAX Group 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> Numerator: Net (loss) income - Basic and diluted net income per share numerator $ (2,966) 5,088 Denominator: Basic weighted average common shares outstanding 19,477 19,406 Effect of dilutive securities: Employee stock options -- 414 - -------------------------------------------------------------------------------- Diluted weighted average common shares outstanding 19,477 19,820 ================================================================================ </TABLE> Options to purchase 2,366 shares of common stock, at prices between $5.78 and $27.91 per share, were outstanding for the quarter ended March 31, 1998 but were not included in the computation of diluted net loss per share because the effect of all options would be antidilutive. Options to purchase 42 shares of common stock, at prices between $19.81 and $21.13 per share, were outstanding for the quarter ended March 31, 1997 but were not included in the computation of diluted net income per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. <TABLE> <CAPTION> Quarter Ended March 31 Minerals Group 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> Numerator: Net (loss) income $ (1,243) 947 Convertible Preferred Stock dividends (864) (901) - -------------------------------------------------------------------------------- Net (loss) income - Basic and diluted net income per share numerator (2,107) 46 Denominator: Basic weighted average common shares outstanding 8,225 8,002 Effect of dilutive securities: Employee stock options -- 57 - -------------------------------------------------------------------------------- Diluted weighted average common shares outstanding 8,225 8,059 ================================================================================ </TABLE> Options to purchase 677 shares of common stock, at prices between $9.50 and $25.74 per share, were outstanding for the quarter ended March 31, 1998 but were not included in the computation of diluted net loss per share because the effect of all options would be antidilutive. Options to purchase 230 shares of common stock, at prices between $14.86 and $25.74 per share were outstanding for the quarter ended March 31, 1997 but were not included in the computation of diluted net income per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. The conversion of preferred stock to 1,765 and 1,793 shares of common stock has been excluded in the computation of diluted net (loss) income per share in 1998 and 1997, respectively, because the effect of the assumed conversion would be antidilutive. (3) Depreciation, depletion and amortization of property, plant and equipment in the first quarter of 1998 totaled $28,686 and $24,740 in the first quarter of 1997. 6
(4) Cash payments made for interest and income taxes, net of refunds received, were as follows: <TABLE> <CAPTION> Quarter Ended March 31 1998 1997 -------------------------------------------------------------- <S> <C> <C> Interest $7,528 5,439 ============================================================== Income taxes $5,003 4,530 ============================================================== </TABLE> During the quarter ended March 31, 1998, Brink's recorded the following noncash items in connection with the acquisition of substantially all of the remaining shares of its affiliate in France; seller financing of the equivalent of US $27,500 and the assumption of $41,400 of existing Brink's France debt. See further discussion below. (5) In the first quarter of 1998, the Brink's Group purchased 62% (representing nearly all the remaining shares) of its French affiliate ("Brink's S.A.") for payments aggregating US $39,000 over three years. The acquisition was funded through an initial payment made at closing of $8,789 and a note to the seller for a principal amount of approximately the equivalent of US $27,500 payable in annual installments plus interest through 2001. The acquisition has been accounted for as a purchase, and accordingly, the purchase price is being allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. Based on a preliminary evaluation which is subject to additional review, the estimated fair value of the additional assets recorded, including goodwill, approximated $134,100 and included $9,200 in cash. Estimated liabilities assumed of $97,800 included previously existing debt of approximately $41,400. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is being amortized over forty years. Brink's S.A. had annual 1997 revenues approximating the equivalent of US $220,000. (6) In two independent transactions in April and May, 1998, Coal Operations sold one of its surface mines representing 1.6 million tons of the anticipated 1998 production, along with the coal supply agreements associated with this mine, and other limited reserves to major US coal companies. Cash proceeds from these sales approximate $18.7 million. (7) On April 30, 1998, BAX Global acquired the privately held Air Transport International LLC ("ATI") for a purchase price of approximately $29,000. The acquisition was funded through the revolving credit portion of the Company's credit agreement with a syndicate of banks and will be accounted for as a purchase. (8) 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 quarter ended March 31, 1998 and 1997 by $1,416 and $1,178, respectively. The effect of this change increased basic and diluted net income per common share of the Brink's Group by $.02 in the first three months of 1998 and 1997. 7
(9) Under the share repurchase programs authorized by the Board of Directors, the Company purchased shares in the periods presented as follows: <TABLE> <CAPTION> Quarter Ended March 31 (Dollars in millions) 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> Brink's Stock: Shares -- 153,000 Cost $ -- 4.0 BAX Stock: Shares 177,532 132,100 Cost $ 3.5 2.6 Convertible Preferred Stock: Shares 355 -- Cost $ 0.1 -- Excess carrying amount (a) $ 0.02 -- ================================================================================ </TABLE> (a) The excess of the carrying amount of the Series C Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock") over the cash paid to holders for repurchases made during the periods. This amount is deducted from preferred dividends in the Company's Statement of Operations. At March 31, 1998, the Company had the remaining authority to purchase over time 1,000 shares of Minerals Stock; 1,056 shares of Brink's Stock; 915 shares of BAX Stock and an additional $24,236 of its Convertible Preferred Stock. The aggregate purchase price limitation for all common stock was $21,398 at March 31, 1998. (10) The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," in the first quarter of 1998. SFAS No. 130 established standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income generally represents all changes in shareholders' equity except those resulting from investments by or distributions to shareholders. Total comprehensive income, which is composed of net income attributable to common shares and foreign currency translation adjustments, for the quarters ended March 31, 1998 and 1997 was $10,918 and $14,683, respectively. Effective January 1, 1998, the Company implemented a new AICPA Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of Computer Software Developed for Internal Use". SOP No. 98-1 requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. (11) The Company will adopt a new accounting standard, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," in the financial statements for the year ended December 31, 1998. SFAS No. 131 requires publicly-held companies to report financial and descriptive information about operating segments in financial statements issued to shareholders for interim and annual periods. SFAS No. 131 also requires additional disclosures with respect to products and services, geographic areas of operation, and major customers. The adoption of this SFAS is not expected to have a material impact on the financial statements of the Company. (12) Certain prior period amounts have been reclassified to conform to the current period's financial statement presentation. (13) In the opinion of management, all adjustments have been made which are necessary for a fair presentation of results of operations and financial condition for the periods reported herein. All such adjustments are of a normal recurring nature. 8
THE PITTSTON COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The financial statements of The Pittston Company (the "Company") include balance sheets, results of operations and cash flows of the Brink's, Incorporated ("Brink's"), Brink's Home Security, Inc. ("BHS"), BAX Global Inc. ("BAX Global"), Pittston Coal Company ("Coal Operations") and Pittston Mineral Ventures ("Mineral Ventures") operations of the Company as well as the Company's corporate assets and liabilities and related transactions which are not separately identified with operations of a specific segment. The following discussion is a summary of the key factors management considers necessary in reviewing the Company's results of operations, liquidity and capital resources. RESULTS OF OPERATIONS <TABLE> <CAPTION> Quarter Ended March 31 (In thousands) 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> Net sales and operating revenues: Brink's $ 261,923 209,199 BHS 48,410 42,185 BAX Global 402,433 371,409 Coal Operations 145,920 154,593 Mineral Ventures 3,978 4,290 - -------------------------------------------------------------------------------- Net sales and operating revenues $ 862,664 781,676 ================================================================================ Operating profit (loss): Brink's $ 21,919 15,801 BHS 13,502 12,779 BAX Global 430 10,756 Coal Operations 2,502 3,623 Mineral Ventures (47) (455) - -------------------------------------------------------------------------------- Segment operating profit 38,306 42,504 General corporate expense (11,806) (5,126) - -------------------------------------------------------------------------------- Total operating profit $ 26,500 37,378 ================================================================================ </TABLE> In the first quarter of 1998, the Company reported net income of $12.8 million compared with $21.3 million in the first quarter of 1997. Operating profit totaled $26.5 million in the 1998 first quarter compared with $37.4 million in the prior year first quarter. Increased operating results at Brink's ($6.1 million), BHS ($0.7 million), and Mineral Ventures ($0.4 million) were offset by lower operating profits at BAX Global ($10.3 million) and Coal Operations ($1.1 million) combined with higher general corporate expenses ($6.7 million). Corporate expenses in the first quarter of 1998 included a $5.8 million pre-tax charge related to a retirement agreement between the Company and its former Chairman and CEO. 9
BRINK'S The following is a table of selected financial data for Brink's on a comparative basis: <TABLE> <CAPTION> Quarter Ended March 31 (In thousands) 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> Operating revenues: North America (United States and Canada) $129,367 110,772 Latin America 76,492 59,696 Europe 49,813 32,628 Asia/Pacific 6,251 6,103 - -------------------------------------------------------------------------------- Total operating revenues 261,923 209,199 Operating expenses 209,386 167,056 Selling, general and administrative expenses 31,604 25,721 - -------------------------------------------------------------------------------- Total costs and expenses 240,990 192,777 - -------------------------------------------------------------------------------- Other operating income (expense), net 986 (621) - -------------------------------------------------------------------------------- Operating profit: North America (United States and Canada) 10,067 7,754 Latin America 10,677 7,437 Europe 825 376 Asia/Pacific 350 234 - -------------------------------------------------------------------------------- Total operating profit $ 21,919 15,801 - -------------------------------------------------------------------------------- Depreciation and amortization $ 8,419 7,547 ================================================================================ Cash capital expenditures $ 13,303 9,814 ================================================================================ </TABLE> Brink's consolidated revenues totaled $261.9 million in the first quarter of 1998 compared with $209.2 million in the first quarter of 1997. Brink's operating profit of $21.9 million in the first quarter of 1998 represented a $6.1 million (39%) increase over the $15.8 million operating profit reported in the prior year quarter reflecting increases in all geographic regions. The revenue increase of $52.7 million (25%) was offset, in part, by increases in operating expenses and selling, general and administrative expenses of $48.2 million. Revenues from North American operations (United States and Canada) increased $18.6 million (17%) to $129.4 million in the 1998 first quarter from $110.8 million in the prior year quarter. North American operating profit increased $2.3 million (30%) to $10.1 million in the current year quarter. The revenue and operating profit improvements for 1998 primarily resulted from improved armored car operations, which include ATM services. In Latin America, revenues and operating profit increased 28% to $76.5 million and 44% to $10.7 million, respectively, from the first quarter of 1997 to the first quarter of 1998. The increase in revenues and operating profits includes the impact of three months of consolidated results from the acquired operation in Venezuela versus only two months of consolidated results in the 1997 quarter, as well as strong results in Venezuela and Colombia which were offset, in part, by costs associated with start-up operations in Argentina. Revenues and operating profit from European operations amounted to $49.8 million and $0.8 million, respectively, in the first quarter of 1998. These amounts represented increases of $17.2 million (53%) and $0.4 million (119%) from the comparable quarter of 1997. The increase in revenues was primarily due to the the acquisition of nearly all of the remaining shares of the affiliate in France in the first quarter of 1998 (discussed in more detail below). The increase in operating profits reflects improved results from operations in France, as well as the increased ownership. This improvement was partially offset by lower results in Belgium caused by six weeks of industry-wide labor unrest in the armored car industry in that country which was resolved in the quarter. 10
Revenues and operating profit from Asia/Pacific operations in the first quarter of 1998 were $6.3 million and $0.4 million, respectively, compared to $6.1 million and $0.2 million, respectively, in the 1997 quarter. BHS The following is a table of selected financial data for BHS on a comparative basis: <TABLE> <CAPTION> Quarter Ended March 31 (Dollars in thousands) 1998 1997 ================================================================================ <S> <C> <C> Operating revenues $ 48,410 42,185 Operating expenses 24,046 20,852 Selling, general and administrative expenses 10,862 8,554 - -------------------------------------------------------------------------------- Total costs and expenses 34,908 29,406 - -------------------------------------------------------------------------------- Operating profit: Monitoring and service 17,182 14,590 Net marketing, sales and installation (3,680) (1,811) - -------------------------------------------------------------------------------- Total operating profit $ 13,502 12,779 ================================================================================ Depreciation and amortization $ 8,802 6,666 ================================================================================ Cash capital expenditures $ 18,459 16,520 ================================================================================ Annualized recurring revenues (a) $ 160,422 132,598 ================================================================================ Number of subscribers: Beginning of period 511,532 446,505 Installations 26,750 25,590 Disconnects (9,675) (8,088) - -------------------------------------------------------------------------------- End of period 528,607 464,007 ================================================================================ </TABLE> (a) Annualized recurring revenues are calculated based on the number of subscribers at period end multiplied by the average fee per subscriber received in the last month of the period for monitoring, maintenance and related services. Revenues for BHS increased by $6.2 million (15%) to $48.4 million in the first quarter of 1998 from $42.2 million in the 1997 quarter. The increase in revenues was due to higher ongoing monitoring and service revenues, reflecting a 14% increase in the subscriber base as well as higher average monitoring fees. As a result of such growth, annualized recurring revenues at the end of the first quarter of 1998 grew 21% over the amount in effect at the end of the first quarter of 1997. Installation revenue for the first quarter of 1998 decreased 6% over the same 1997 period. While the number of new security system installations increased, the revenue per installation decreased as compared to the 1997 period, in response to continuing aggressive installation marketing and pricing by competitors. Operating profit of $13.5 million in the first quarter of 1998 represented an increase of $0.7 million (5%) compared to the $12.8 million earned in the 1997 first quarter. Operating profit generated from monitoring and service activities increased $2.6 million (18%) and was favorably impacted by the 14% growth in the subscriber base combined with the higher average monitoring fees. Cash margins per subscriber resulting from this portion of the business increased slightly from the first quarter of 1997. Operating losses from marketing, sales and installation activities increased $1.9 million in the first quarter of 1998 as compared to 1997. This increase is due to higher levels of sales and marketing costs incurred and expensed combined with lower levels of installation revenue. Both of these factors are a consequence of the competitive environment in the residential security market. 11
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 quarter ended March 31, 1998 and 1997 by $1.4 million and $1.2 million, respectively. The effect of this change increased basic and diluted net income per common share of the Brink's Group by $.02 in the first three months of 1998 and 1997. 12
BAX GLOBAL The following is a table of selected financial data for BAX Global on a comparative basis: <TABLE> <CAPTION> (In thousands - except per Quarter Ended March 31 pound/shipment amounts) 1998 1997 ================================================================================ <S> <C> <C> Operating revenues: Intra-U.S.: Expedited freight services $ 147,398 136,672 Other (a) 945 1,721 - -------------------------------------------------------------------------------- Total Intra-U.S 148,343 138,393 International: Expedited freight services (a) 206,452 198,129 Other (a) 47,638 34,887 - -------------------------------------------------------------------------------- Total International 254,090 233,016 - -------------------------------------------------------------------------------- Total operating revenues 402,433 371,409 Operating expenses 362,339 330,911 Selling, general and administrative expenses 39,531 30,391 - -------------------------------------------------------------------------------- Total costs and expenses 401,870 361,302 Other operating (expense) income, net (133) 649 - -------------------------------------------------------------------------------- Operating profit (loss): Intra-U.S (4,977) 4,117 International 5,407 6,639 - -------------------------------------------------------------------------------- Total operating profit $ 430 10,756 ================================================================================ Depreciation and amortization $ 7,609 6,908 - -------------------------------------------------------------------------------- Cash capital expenditures $ 24,275 6,175 - -------------------------------------------------------------------------------- Expedited freight services shipment growth rate (b) 1.2% (1.8%) Expedited freight services weight growth rate (b): Intra-U.S 8.9% 0.8% International 8.8% 2.5% Worldwide 8.8% 1.7% ================================================================================ Expedited freight services weight (millions of pounds) 381.5 350.5 Expedited freight services shipments (thousands) 1,290 1,275 ================================================================================ Worldwide expedited freight services: Yield (revenue per pound) (a) $ .928 .955 Revenue per shipment (a) $ 274 263 Weight per shipment (pounds) 296 275 ================================================================================ </TABLE> (a) Prior period's international expedited freight revenues have been reclassified to conform to the current period classification. (b) Compared to the same period in the prior year. 13
BAX Global's first quarter 1998 operating profit amounted to $0.4 million, a decrease of $10.4 million from the $10.8 million reported in the first quarter of 1997. The first quarter included a net pre-tax charge of approximately $3.5 million ($1.9 million international and $1.6 million intra-U.S.) related to incremental information technology expenditures including Year 2000 expenses, partially offset by several non-recurring items. Worldwide revenues increased 8% to $402.4 million from $371.4 million in the 1997 quarter. The $31.0 million growth in revenues principally reflects a 9% increase in worldwide expedited freight services pounds shipped, which reached 381.5 million pounds in the first quarter of 1998, offset by a 3% decrease in average yield on this volume. In addition, non-expedited freight services revenues, increased $12.0 million (33%) during the first quarter of 1998 as compared to the same quarter in 1997 reflecting increases in ocean freight services and logistics revenues. Worldwide expenses amounted to $401.9 million, $40.6 million (11%) higher than in the first quarter of 1997. In the first quarter of 1998, BAX Global's intra-U.S. revenues increased from $138.4 million to $148.3 million. This $9.9 million (7%) increase was primarily due to an increase of $10.7 million in intra-U.S. expedited freight services revenues. The higher level of intra-U.S. expedited freight services revenues in 1998 was due to a 9% increase in weight shipped. Intra-U.S. operating results during the first quarter of 1998, excluding the previously mentioned net charge of $1.6 million, decreased $7.5 million from the $4.1 million of operating profit earned in the first quarter of 1997. The decrease was primarily due to the lower than expected volume combined with higher transportation costs. Intra-U.S. transportation costs in the quarter were higher than 1997 first quarter levels, due in part, to efforts to enhance service levels. Transportation costs were also unfavorably impacted by service disruptions caused mainly by equipment problems which were resolved during the quarter. International revenues in the first quarter of 1998 increased $21.1 million (9%) to $254.1 million from the $233.0 million recorded in the first quarter of 1997. International expedited freight services revenue increased $8.3 million (4%) due to a 9% increase in weight shipped offset by a 4% decrease in average yield. The decrease in yield reflects a change in mix with less higher yielding export traffic to Asian markets combined with the absence of third party carrier surcharges which existed in the first quarter of 1997. In addition, international non-expedited freight services revenue increased $12.8 million (37%) in the first quarter of 1998 as compared to the same period in 1997 due to growth in both the logistics and ocean freight businesses. International operating profit in the first quarter of 1998, excluding the previously mentioned net charge of $1.9 million, increased $0.7 million (11%) from the $6.6 million recorded in the first quarter of 1997. Operating profit during the first quarter of 1998 benefited from improved U.S. export margins. On April 30, 1998, BAX Global acquired the privately held Air Transport International LLC ("ATI") for a purchase price of approximately $29 million. The acquisition will be accounted for as a purchase. ATI is a U.S.-based freight and passenger airline which operates a certificated fleet of aircraft providing services to BAX Global and other customers. The ATI acquisition is part of BAX Global's strategy to improve the quality of its service offerings for its customers by increasing its control over flight operations. As a result of this acquisition, BAX Global suspended its efforts to start up its own certificated airline carrier operations. During 1997, BAX Global began a BAX Process Innovation ("BPI") Program which was comprised of an extensive review of all aspects of the company's operations. Senior management from around the world, working with a major consulting firm, reviewed all areas of the business including sales, operations, finance, logistics and information technology. In 1998, as a result of integrating BPI into BAX Global's continuous improvement program, the overall cost for information technology systems, business improvements and employee training was reduced from previous estimates of up to $200 million over the next two to three years. BAX Global's information technology expenditures, which will include substantial improvements to information systems, annual recurring capital costs, process improvement initiatives and spending for Year 2000 compliance initiatives, are now currently estimated at approximately $60 million per year for 1998 and 1999, approximately two-thirds of which may be capitalized. Additional details of the information technology and Year 2000 compliance initiatives are being further developed which may have an impact on future reported results. 14
COAL OPERATIONS The following are tables of selected financial data for Coal Operations on a comparative basis: <TABLE> <CAPTION> Quarter Ended March 31 (In thousands) 1998 1997 ================================================================================ <S> <C> <C> Net sales $145,920 154,593 - -------------------------------------------------------------------------------- Cost of sales 141,493 149,739 Selling, general and administrative expenses 4,254 4,936 - -------------------------------------------------------------------------------- Total costs and expenses 145,747 154,675 Other operating income, net 2,329 3,705 - -------------------------------------------------------------------------------- Operating profit $ 2,502 3,623 ================================================================================ Coal sales (tons): Metallurgical 1,931 1,891 Utility and industrial 2,923 3,229 - -------------------------------------------------------------------------------- Total coal sales 4,854 5,120 ================================================================================ Production/purchased (tons): Deep 1,389 1,102 Surface 1,969 2,659 Contract 242 363 - -------------------------------------------------------------------------------- 3,600 4,124 Purchased 965 1,340 - -------------------------------------------------------------------------------- Total 4,565 5,464 ================================================================================ <CAPTION> (In thousands, Quarter Ended March 31 except per ton amounts) 1998 1997 ================================================================================ <S> <C> <C> Net coal sales (a) $143,976 152,698 Current production costs of coal sold (a) 132,507 141,572 - -------------------------------------------------------------------------------- Coal margin 11,469 11,126 Non-coal margin 616 717 Other operating income, net 2,329 3,705 - -------------------------------------------------------------------------------- Margin and other income 14,414 15,548 - -------------------------------------------------------------------------------- Other costs and expenses: Idle equipment and closed mines 703 307 Inactive employee cost 6,955 6,682 Selling, general and administrative expenses 4,254 4,936 - -------------------------------------------------------------------------------- Total other costs and expenses 11,912 11,925 - -------------------------------------------------------------------------------- Operating profit $ 2,502 3,623 ================================================================================ Coal margin per ton: Realization $ 29.66 29.82 Current production costs 27.29 27.65 - -------------------------------------------------------------------------------- Coal margin $ 2.37 2.17 ================================================================================ </TABLE> (a) Excludes non-coal components. 15
Coal Operations generated an operating profit of $2.5 million in the first quarter of 1998, compared to $3.6 million recorded in the 1997 first quarter. Sales volume of 4.9 million tons in the first quarter of 1998 was 5% less than the 5.1 million tons sold in the prior year quarter. Compared to the first quarter of 1997, steam coal sales in 1998 decreased by 0.3 million tons (9%), to 2.9 million tons, while metallurgical coal sales remained consistent at 1.9 million tons. The steam sales reduction was due to the expiration of a long-term contract, railroad service disruption and reduced spot sales. Steam coal sales represented 60% of total volume in 1998 and 63% in 1997. Total coal margin of $11.5 million for the first quarter of 1998 represented an increase of $0.3 million from the comparable 1997 period. The increase in total coal margin reflects a decrease of $9.1 million ($0.36 per ton) in the current production costs of coal sold offset, in large part, by a decrease of $8.7 million ($0.16 per ton) in coal realization. The decrease in realization was due mostly to a decrease in realization on metallurgical coal caused by lower price settlements with metallurgical customers for the contract year which began on April 1, 1997. Realizations on metallurgical coal sales for the contract year beginning April 1, 1998 will be slightly lower than those in the contract year that began April 1, 1997. The current production cost of coal sold decreased $0.36 per ton to $27.29 in the first quarter of 1998 from the first quarter of 1997. Production costs in the 1998 quarter include a $1.3 million ($0.27 per ton) benefit related to a favorable ruling issued by the U.S. Supreme Court in March 1998 on the unconstitutionality of the Harbor Maintenance Tax. The $1.3 million credit represents the effect of past payments and, as a result of the ruling, Coal Operations anticipates lower export coal costs in the future. In addition, the first quarter of 1997 included higher production costs at certain deep mines due to temporary adverse geological conditions. Production in the 1998 first quarter decreased 0.5 million tons over the 1997 first quarter to 3.6 million tons and purchased coal decreased 0.4 million tons to 1.0 million tons. Surface production accounted for 56% and 66% of the total volume in the 1998 and 1997 first quarters, respectively. Productivity of 34.9 tons per man day in the 1998 first quarter decreased from the 36.6 tons per man day in the 1997 first quarter primarily attributable to an increased percentage of deep mine production. Non-coal margin, which reflects earnings from the oil, gas and timber businesses, amounted to $0.6 million in the first quarter of 1998, which was $0.1 million lower than in the first quarter of 1997, reflecting the impact of changes in natural gas prices. Other operating income, which primarily includes gains on sales of property and equipment and third party royalties, amounted to $2.3 million in the first quarter of 1998 as compared to $3.7 million in the comparable period of 1997. This decrease of $1.4 million was principally due to the inclusion in 1997 of a favorable insurance settlement along with higher gains on asset sales during that period. Idle equipment and closed mine costs increased $0.4 million to $0.7 million in the 1998 first quarter due to costs associated with mines which went idle during the third quarter of 1997. Inactive employee costs, which represent long-term employee liabilities for pension and retiree medical costs, increased from $6.7 million to $7.0 million for the first quarter of 1998 resulting from the use of a lower long-term discount rate to calculate the present value of the obligations. Selling, general and administrative expenses decreased $0.7 million (14%) in the first quarter of 1998 from 1997 due to reductions in support and administrative staff and related costs. In two independent transactions in April and May, 1998, Coal Operations sold one of its surface mines representing 1.6 million tons of the anticipated 1998 production, along with the coal supply agreements associated with this mine, and other limited reserves to major US coal companies. Cash proceeds from these sales approximate $18.7 million. In a related transaction, Coal Operations acquired additional tons of coal reserves that are contiguous to an existing operation. 16
Coal Operations continues cash funding for charges recorded in prior years for facility closure costs recorded as restructuring and other charges in the Statement of Operations. The following table analyzes the changes in liabilities during the first three months of 1998 for such costs: <TABLE> <CAPTION> Employee Mine Termination, and Medical Plant and Closure Severance (In thousands) Costs Costs Total - -------------------------------------------------------------------------------- <S> <C> <C> <C> Balance as of December 31, 1997 $ 11,143 19,703 30,846 Payments 272 459 731 - -------------------------------------------------------------------------------- Balance as of March 31, 1998 $ 10,871 19,244 30,115 ================================================================================ </TABLE> Mineral Ventures The following is a table of selected financial data for Mineral Ventures on a comparative basis: <TABLE> <CAPTION> (Dollars in thousands, except Quarter Ended March 31 per ounce data) 1998 1997 ================================================================================ <S> <C> <C> Stawell Gold Mine: Gold sales $ 3,956 4,281 Other revenue 22 9 - ------------------------------------------------------------------------------- Net sales 3,978 4,290 Cost of sales (a) 2,671 3,631 Selling, general and administrative expenses (a) 291 298 - ------------------------------------------------------------------------------- Total costs and expenses 2,962 3,929 - ------------------------------------------------------------------------------- Operating profit - Stawell Gold Mine 1,016 361 Other operating expense, net (1,063) (816) - ------------------------------------------------------------------------------- Operating loss $ (47) (455) ================================================================================ Stawell Gold Mine: Mineral Ventures' 50% direct share: Ounces sold 11,146 10,576 Ounces produced 11,156 10,951 Average per ounce sold (US$): Realization $ 355 405 Cash cost 206 327 ================================================================================ </TABLE> (a) Excludes $908 of non-Stawell related selling, general and administrative expenses for the quarter ended March 31, 1998. Excludes $42 and $617 of non-Stawell related cost of sales and selling, general and administrative expenses, respectively, for the quarter ended March 31, 1997. Such costs are reclassified to cost of sales and selling, general and administrative expenses in the Minerals Group Statement of Operations. Mineral Ventures, which primarily consists of a 50% direct and a 17% indirect interest in the Stawell gold mine ("Stawell") in western Victoria, Australia, generated a small operating loss in the first quarter of 1998, an improvement of $0.4 million as compared to the loss of $0.5 million in the first quarter of 1997. Mineral Ventures' 50% direct interest in Stawell's operations generated net sales of $4.0 million in the first quarter of 1998 compared to $4.3 million in the 1997 period due to an increase in ounces of gold sold from 10.6 thousand ounces to 11.1 thousand ounces, offset by lower gold realizations. The operating profit at Stawell 17
of $1.0 million increased $0.7 million over the prior year amount, reflecting a $121 per ounce decrease (37%) in the cash cost of gold sold partially offset by a $50 per ounce decrease (12%) in average realization. Production costs were lower in the 1998 quarter due to a weaker Australian dollar as well as more favorable ground conditions than those experienced in the first quarter of 1997. As of March 31, 1998, approximately 16% of Mineral Ventures' proven and probable reserves had been sold forward under forward sales contracts that mature periodically through mid-1999. Based on contracts in place and current market conditions, full year 1998 average realizations are expected to be between $325 and $330 per ounce of gold sold. At March 31, 1998, remaining proven and probable gold reserves at the Stawell mine were estimated at 415.7 thousand ounces. The joint venture also has exploration rights in the highly prospective district around the mine. Other operating expense, net, includes equity earnings from joint ventures, primarily consisting of Mineral Ventures' 17% indirect interest in Stawell's operations and gold exploration costs for all operations excluding Stawell. In addition to its interest in Stawell, Mineral Ventures has a 17% indirect interest in the Silver Swan base metals property in Western Australia. Operating results at Silver Swan have been below expectations due to the impact of depressed nickel prices, though production volumes and costs at the mine are in line with expectations. FOREIGN OPERATIONS A portion of the Company's financial results is derived from activities in foreign countries, each with a local currency other than the U.S. dollar. Because 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 currency rate fluctuation. In addition, these 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 currency forward contracts to hedge the risks associated with such transactions. Realized and unrealized gains and losses on these contracts are deferred and recognized as part of the specific transaction hedged. In addition, 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 Venezuela and affiliates in Mexico operate in such highly inflationary economies. Prior to January 1, 1998, the economy in Brazil, in which the Company has subsidiaries, was considered highly inflationary. The Company is also subject to other risks customarily associated with doing business in foreign countries, including labor and economic conditions, controls on repatriation of earnings and capital, nationalization, political instability, expropriation and other forms of restrictive action by local governments. The future effects, if any, of such risks on the Company cannot be predicted. CORPORATE EXPENSES In the first quarter of 1998, corporate expenses totaled $11.8 million compared with $5.1 million in the 1997 first quarter. Corporate expenses in the first quarter of 1998 included a $5.8 million pre-tax charge relating to a retirement agreement between the Company and its former Chairman and CEO. OTHER OPERATING INCOME, NET Other operating income, net includes the Company's share of net earnings of unconsolidated affiliates, primarily Brink's equity affiliates, royalty income from Coal Operations and gains and losses from sales of coal assets. Other operating income, net decreased $0.5 million in the first quarter of 1998, as compared to the same period in 1997. The decline in the quarter is the result of lower asset sales and foreign currency exchange gains offset by increased equity in earnings of unconsolidated affiliates. 18
NET INTEREST EXPENSE Net interest expense increased $1.7 million to $6.2 million in the first quarter of 1998 from $4.5 million in the prior year quarter. This increase is predominantly due to higher average borrowings related to capital expenditures and acquisitions, as well as higher average interest rates largely attributed to foreign borrowings. OTHER EXPENSE, NET Other expense, net for the first quarter of 1998 decreased $1.0 million to $1.4 million. The lower level of other expense, net is due to higher foreign translation gains offset in part by an increase in minority interest expense for Brink's consolidated affiliates. INCOME TAXES In both the 1998 and 1997 periods presented, the provision for income taxes was less than the statutory federal income tax rate of 35% due to the tax benefits of percentage depletion on Coal Operations and lower taxes on foreign income, partially offset by provisions for goodwill amortization and state income taxes. FINANCIAL CONDITION CASH FLOW REQUIREMENTS Cash provided by operating activities during the first three months of 1998 totaled $21.7 million compared with $23.8 million in the first three months of 1997. This decrease resulted from lower net income partially offset by higher noncash charges in the first three months of 1998. Cash generated from operations was not sufficient to fund investing activities, primarily capital expenditures and aircraft heavy maintenance. As a result of these items and funds used for share activities, the Company required net borrowings of $61.3 million, resulting in an increase in cash and cash equivalents of $2.7 million. In the first quarter of 1998, Brink's purchased 62% (representing nearly all the remaining shares) of its French affiliate ("Brink's S.A.") for payments aggregating US $39 million over three years. The acquisition was funded through an initial payment made at closing of $8.8 million and a note to the seller for a principal amount of $27.5 million payable in annual installments plus interest through 2001. The acquisition has been accounted for as a purchase, and accordingly, the purchase price is being allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. Based on a preliminary evaluation which is subject to additional review, the estimated fair value of the additional assets recorded, including goodwill, approximated $134.1 million and included $9.2 million in cash. Estimated liabilities assumed of $97.8 million, included previously existing debt of approximately $41.4 million. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is being amortized over forty years. Brink's S.A. had annual 1997 revenues approximating the equivalent of US $220 million. CAPITAL EXPENDITURES Cash capital expenditures for the first three months of 1998 totaled $60.7 million, $20.7 million higher than in the comparable period in 1997. Of the 1998 amount of cash capital expenditures, $13.3 million was spent by Brink's, $18.5 million was spent by BHS, $24.3 million was spent by BAX Global, $3.7 million was spent by Coal Operations and $0.7 million was spent by Mineral Ventures. For the remainder of 1998, company-wide capital expenditures are expected to range between $170 and $180 million, excluding BPI expenditures. The foregoing amounts exclude expenditures that have been or are expected to be financed through capital and operating leases, and any acquisition expenditures. FINANCING The Company intends to fund cash capital expenditures through cash flow from operating activities or through operating leases if the latter are financially attractive. Shortfalls, if any, will be financed through the Company's revolving credit agreements or other borrowing arrangements. 19
Total outstanding debt amounted to $378.5 million at March 31, 1998, up from $243.3 million at year-end 1997. The $135.2 million increase reflects debt associated with the Brink's France acquisition (as previously discussed) as well as additional cash required to fund capital expenditures. The Company has a $350.0 million credit agreement with a syndicate of banks (the "Facility"). The Facility includes a $100.0 million term loan and also permits additional borrowings, repayments and reborrowings of up to an aggregate of $250.0 million. As of March 31, 1998 and December 31, 1997 borrowings of $100.0 million were outstanding under the term loan portion of the Facility and $80.8 million and $25.9 million, respectively, of additional borrowings were outstanding under the remainder of the Facility. OFF-BALANCE SHEET INSTRUMENTS In the first quarter of 1998, the Company, on behalf of the BAX Group, entered into additional commodity option transactions that are intended to protect against significant increases in jet fuel prices. These transactions aggregated 47.6 million gallons and mature periodically throughout 1998. The fair value of these fuel hedge transactions may fluctuate over the course of the contract period due to changes in the supply and demand for oil and refined products. Thus, the economic gain or loss, if any, upon settlement of the contracts may differ from the fair value of the contracts at an interim date. At March 31, 1998, the fair value of all outstanding contracts to hedge jet fuel requirements was ($1.4) million. READINESS FOR YEAR 2000 The Company has taken actions to understand the nature and extent of work required to make its systems, products, services and infrastructure Year 2000 compliant. The Company is currently preparing its financial, information and other computer-based systems for the Year 2000, including replacing and/or updating existing systems. The Company continues to evaluate the additional estimated costs associated with these efforts, which it currently estimates to be between $40-$45 million over the next two years. Based on actual experience and available information, the Company believes that it will be able to manage its Year 2000 transition without any material adverse effect on its business operations, services or financial condition. However, if the applicable modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 issue could have a material adverse impact on the operations of the Company. Further, management is currently evaluating the extent to which the Company's interface systems are vulnerable to its suppliers' and customers' failure to remediate their own Year 2000 issues as there is no guarantee that the systems of other companies on which the Company's systems rely will be timely and adequately converted. CAPITALIZATION The Company has three classes of common stock: Pittston Brink's Group Common Stock ("Brink's Stock"), Pittston BAX Group Common Stock ("BAX Stock") and Pittston Minerals Group Common Stock ("Minerals Stock") which were designed to provide shareholders with separate securities reflecting the performance of the Pittston Brink's Group ("Brink's Group"), the Pittston BAX Group ("BAX Group") and the Pittston Minerals Group ("Minerals Group"), respectively, without diminishing the benefits of remaining a single corporation or precluding future transactions affecting any of the Groups. The Brink's Group consists of the Brink's and BHS operations of the Company. The BAX Group consists of the BAX Global operations of the Company. The Minerals Group consists of the Coal Operations and Mineral Ventures operations of the Company. The Company prepares separate financial statements for the Brink's, BAX and Minerals Groups in addition to consolidated financial information of the Company. Effective May 4, 1998, the designation of Pittston Burlington Group Common Stock and the name of the Pittston Burlington Group were changed to Pittston BAX Group Common Stock and Pittston BAX Group, respectively. All rights and privileges of the holders of such Stock are otherwise unaffected by such changes. The stock continues to trade on the New York Stock Exchange under the symbol "PZX". 20
Under the share repurchase programs authorized by the Board of Directors (the "Board"), the Company purchased shares in the periods presented as follows: <TABLE> <CAPTION> Quarter Ended March 31 (Dollars in millions) 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> Brink's Stock: Shares -- 153,000 Cost $ -- 4.0 BAX Stock: Shares 177,532 132,100 Cost $ 3.5 2.6 Convertible Preferred Stock: Shares 355 -- Cost $ 0.1 -- Excess carrying amount (a) $ 0.02 -- ================================================================================ </TABLE> (a) The excess of the carrying amount of the Series C Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock") over the cash paid to holders for repurchases made during the periods. This amount is deducted from preferred dividends in the Company's Statement of Operations. The Company's remaining repurchase authority with respect to the Convertible Preferred Stock as of March 31, 1998 was $24.2 million. As of March 31, 1998, the Company had remaining authority to purchase over time 1.1 million shares of Brink's Stock; 0.9 million shares of BAX Stock; and 1.0 million shares of Minerals Stock. The aggregate purchase price limitation for all common stock was $21.4 million as of March 31, 1998. DIVIDENDS The Board intends to declare and pay dividends, if any, on Brink's Stock, BAX Stock and Minerals Stock based on the earnings, financial condition, cash flow and business requirements of the Brink's Group, BAX Group and the Minerals Group, respectively. Since the Company remains subject to Virginia law limitations on dividends, losses by one Group could affect the Company's ability to pay dividends in respect of stock relating to the other Group. Dividends on Minerals Stock are also limited by the Available Minerals Dividend Amount as defined in the Company's Articles of Incorporation. The Available Minerals Dividend Amount may be reduced by activity that reduces shareholder's equity or the fair value of net assets of the Minerals Group. Such activity includes net losses by the Minerals Group, dividends paid on the Minerals Stock and the Convertible Preferred Stock, repurchases of Minerals Stock and the Convertible Preferred Stock, and foreign currency translation losses. At March 31, 1998, the Available Minerals Dividend Amount was at least $12.9 million. During the first three months of 1998 and 1997, the Board declared and the Company paid cash dividends of 2.5 cents per share of Brink's Stock, 6 cents per share of BAX Stock, and 16.25 cents per share of Minerals Stock. Dividends paid on the Convertible Preferred Stock in each of the first three months of 1998 and 1997 were $0.9 million. In May 1998, the Company reduced the annual dividend rate on Minerals Stock to $0.10 per share for shareholders as of the May 15, 1998 record date. Cash made available from this lower dividend rate will be used to either reinvest, as suitable opportunities arise, in the Minerals Group companies or to pay down debt, with a view towards maximizing long-term shareholder value. ACCOUNTING CHANGES The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", in the first quarter of 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income generally represents all changes in shareholders' equity except those resulting from investments by or distributions to shareholders. Total comprehensive income, which is composed of net income attributable to common shares and foreign currency translation adjustments, for the quarters ended March 31, 1998 and 1997 was $10.9 million and $14.7 million, respectively. 21
Effective January 1, 1998, the Company implemented a new AICPA Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of Computer Software Developed for Internal Use". SOP No. 98-1 requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. PENDING ACCOUNTING CHANGES The Company will implement SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", in the financial statements for the year ended December 31, 1998. SFAS No. 131 requires publicly-held companies to report financial and descriptive information about operating segments in financial statements issued to shareholders for interim and annual periods. The SFAS also requires additional disclosures with respect to products and services, geographic areas of operation, and major customers. The adoption of this SFAS is not expected to have a material impact on the financial statements of the Company. FORWARD LOOKING INFORMATION Certain of the matters discussed herein, including statements regarding BPI and information technology and related outlay projections, the expected benefits from the ATI acquisition and from BAX Global's continuous improvement program on financial results, expectations with regard to future realizations on metallurgical coal and gold sales and the readiness for Year 2000, involve forward looking information which is subject to known and unknown risks, uncertainties, and contingencies which could cause actual results, performance or achievements, to differ materially from those which are anticipated. Such risks, uncertainties and contingencies, many of which are beyond the control of the Company, include, but are not limited to, overall economic and business conditions, the demand for the Company's products and services, pricing and other competitive factors in the industry, geological conditions, new government regulations and/or legislative initiatives, variations in costs or expenses, variations in the spot prices of coal and gold, the successful integration of the ATI acquisition, the ability of counterparties to perform, changes in the scope of improvements to information systems and Year 2000 initiatives, delays or problems in the implementation of Year 2000 initiatives by the Company and/or its suppliers and customers, and delays or problems in the design and implementation of improvements to information systems. 22
PITTSTON BRINK'S GROUP BALANCE SHEETS (IN THOUSANDS) <TABLE> <CAPTION> March 31 December 31 1998 1997 =============================================================================================== (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 42,862 37,694 Short-term investments, at lower of cost or market 2,277 2,227 Accounts receivable (net of estimated amount uncollectible: 1998 - $12,190; 1997 - $9,660) 235,162 160,912 Receivable - Pittston Minerals Group -- 8,003 Inventories, at lower of cost or market 6,599 3,469 Prepaid expenses 21,474 16,672 Deferred income taxes 18,382 18,147 - ----------------------------------------------------------------------------------------------- Total current assets 326,756 247,124 Property, plant and equipment, at cost (net of accumulated depreciation and amortization: 1998 - $286,653; 1997 - $276,457) 400,212 346,672 Intangibles, net of accumulated amortization 45,434 18,510 Investment in and advances to unconsolidated affiliates 19,601 28,169 Deferred pension assets 27,349 31,713 Deferred income taxes 3,769 3,612 Other assets 18,508 16,530 - ----------------------------------------------------------------------------------------------- Total assets $ 841,629 692,330 =============================================================================================== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Short-term borrowings $ 15,275 9,073 Current maturities of long-term debt 17,914 7,576 Accounts payable 52,576 36,337 Accrued liabilities 164,529 125,362 Payable - Pittston Minerals Group 3,233 -- - ----------------------------------------------------------------------------------------------- Total current liabilities 253,527 178,348 Long-term debt, less current maturities 92,412 38,682 Postretirement benefits other than pensions 4,169 4,097 Workers' compensation and other claims 11,228 11,277 Deferred income taxes 46,410 45,324 Payable - Pittston Minerals Group 2,907 391 Other liabilities 6,497 8,929 Minority interests 26,078 24,802 Shareholder's equity 398,401 380,480 - ----------------------------------------------------------------------------------------------- Total liabilities and shareholder's equity $ 841,629 692,330 =============================================================================================== </TABLE> See accompanying notes to financial statements. 23
PITTSTON BRINK'S GROUP STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (Unaudited) <TABLE> <CAPTION> Quarter Ended March 31 1998 1997 ================================================================================ <S> <C> <C> Operating revenues $ 310,333 251,384 Costs and expenses: Operating expenses 233,432 187,908 Selling, general and administrative expenses 46,555 36,063 - -------------------------------------------------------------------------------- Total costs and expenses 279,987 223,971 Other operating income (expense), net 986 (621) - -------------------------------------------------------------------------------- Operating profit 31,332 26,792 Interest income 864 653 Interest expense (3,815) (2,239) Other expense, net (1,337) (1,658) - -------------------------------------------------------------------------------- Income before income taxes 27,044 23,548 Provision for income taxes 10,007 8,242 - -------------------------------------------------------------------------------- Net income $ 17,037 15,306 ================================================================================ Net income per common share: Basic $ .44 .40 Diluted .44 .40 ================================================================================ Cash dividends per common share $ .025 .025 ================================================================================ Weighted average common shares outstanding: Basic 38,477 38,189 Diluted 39,081 38,608 ================================================================================ </TABLE> See accompanying notes to financial statements. 24
PITTSTON BRINK'S GROUP STATEMENTS OF CASH FLOWS (IN THOUSANDS) (Unaudited) <TABLE> <CAPTION> Quarter Ended March 31 1998 1997 ================================================================================================= <S> <C> <C> Cash flows from operating activities: Net income $ 17,037 15,306 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 17,278 14,260 Provision for deferred income taxes 966 517 Provision for pensions, noncurrent 385 422 Provision for uncollectible accounts receivable 1,525 1,018 Minority interest expense 1,777 1,584 Equity in (earnings) loss of unconsolidated affiliates, net of dividends received (902) (880) Other operating, net 2,345 2,375 Change in operating assets and liabilities, net of the effects of acquisitions and dispositions: (Increase) decrease in accounts receivable (11,792) 2,572 (Increase) decrease in inventories (3,058) 539 Increase in prepaid expenses (982) (4,427) Increase (decrease) in accounts payable and accrued liabilities 3,333 (6,015) Increase in other assets (1,369) (3,366) Decrease in other liabilities (2,281) (794) Other, net (1,383) (301) - ------------------------------------------------------------------------------------------------- Net cash provided by operating activities 22,879 22,810 - ------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment (31,866) (26,367) Proceeds from disposal of property, plant and equipment 77 2,291 Acquisitions, net of cash acquired 224 (53,303) Other, net 163 10,558 - ------------------------------------------------------------------------------------------------- Net cash used by investing activities (31,402) (66,821) - ------------------------------------------------------------------------------------------------- Cash flows from financing activities: Additions to debt 5,220 50,580 Reductions of debt (2,518) (5,500) Payments from Minerals Group 11,238 11,685 Proceeds from exercise of stock options 1,383 1,035 Dividends paid (916) (880) Repurchase of common stock (716) (3,964) - ------------------------------------------------------------------------------------------------- Net cash provided by financing activities 13,691 52,956 - ------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 5,168 8,945 Cash and cash equivalents at beginning of period 37,694 20,012 - ------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 42,862 28,957 ================================================================================================= </TABLE> See accompanying notes to financial statements. 25
PITTSTON BRINK'S GROUP NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (Unaudited) (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 amounts reflected in these financial statements are determined based upon methods which management believes to be a reasonable and an equitable estimate of the cost attributable to the Brink's Group. 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 liabilities. Therefore, financial developments affecting the Brink's Group, the Pittston BAX Group (the "BAX Group" formerly the Pittston Burlington Group) or the Pittston Minerals Group (the "Minerals Group") that affect the Company's financial condition could affect the results of operations and financial condition of each of the Groups. Accordingly, the Company's consolidated financial statements must be read in connection with the Brink's Group's financial statements. (2) The following is a reconciliation between the calculation of basic and diluted net income per share: <TABLE> <CAPTION> Quarter Ended March 31 Brink's Group 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> Numerator: Net income - Basic and diluted net income per share numerator $ 17,037 15,306 Denominator: Basic weighted average common shares outstanding 38,477 38,189 Effect of dilutive securities: Employee stock options 604 419 - -------------------------------------------------------------------------------- Diluted weighted average common shares outstanding 39,081 38,608 ================================================================================ </TABLE> Options to purchase 23 shares of common stock, at prices between $28.63 and $29.50 per share were outstanding for the quarter ended March 31, 1997, but were not included in the computation of diluted net income per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. (3) 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 three months of 1998 and 1997 by $1,416 and $1,178, respectively. The effect of this change increased basic and diluted net income per common share of the Brink's Group by $.02 in the first three months of 1998 and 1997. 26
(4) Depreciation and amortization of property, plant and equipment in the first quarter of 1998 totaled $16,941 and $13,976 in 1997. (5) Cash payments made for interest and income taxes, net of refunds received, were as follows: <TABLE> <CAPTION> Quarter Ended March 31 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> Interest $ 3,478 2,216 ================================================================================ Income taxes $ 1,279 3,650 ================================================================================ </TABLE> During the quarter ended March 31, 1998, Brink's recorded the following noncash items in connection with the acquisition of substantially all of the remaining shares of its affiliate in France; the seller financing of the equivalent of US $27,500 and the assumption of $41,400 of existing Brink's France debt. See further discussion below. (6) In the first quarter of 1998, the Brink's Group purchased 62% (representing nearly all the remaining shares) of its French affiliate ("Brink's S.A.") for payments aggregating US $39,000 over three years. The acquisition was funded through an initial payment made at closing of $8,789 and a note to the seller for a principal amount of approximately the equivalent of US $27,500 payable in annual installments plus interest through 2001. The acquisition has been accounted for as a purchase, and accordingly, the purchase price is being allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. Based on a preliminary evaluation which is subject to additional review, the estimated fair value of the additional assets recorded, including goodwill, approximated $134,100 and included $9,200 in cash. Estimated liabilities assumed of $97,800 included previously existing debt of approximately $41,400. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is being amortized over forty years. Brink's S.A. had annual 1997 revenues approximating the equivalent of U.S. $220,000. (7) Under the share repurchase programs authorized by the Board of Directors, the Company purchased shares in the periods presented as follows: <TABLE> <CAPTION> Quarter Ended March 31 (Dollars in millions) 1998 1997 ------------------------------------------------------------------------ <S> <C> <C> Brink's Stock: Shares -- 153,000 Cost $ -- 4.0 Convertible Preferred Stock: Shares 355 -- Cost $ 0.1 -- Excess carrying amount (a) $ 0.02 -- ------------------------------------------------------------------------ </TABLE> (a) The excess of the carrying amount of the Series C Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock") over the cash paid to holders for repurchases made during the periods. This amount is deducted from preferred dividends in the Company's Statement of Operations. At March 31, 1998, the Company had the remaining authority to purchase over time 1,056 shares of Brink's Stock and an additional $24,236 of its Convertible Preferred Stock. The aggregate purchase price limitation for all common stock was $21,398 at March 31, 1998. (8) The Brink's Group adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," in the first quarter of 1998. SFAS No. 130 established standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income generally represents all changes in shareholders' equity except those 27
resulting from investments by or distributions to shareholders. Total comprehensive income, which is composed of net income and foreign currency translation adjustments, for the quarters ended March 31, 1998 and 1997 was $15,262 and $11,202, respectively. Effective January 1, 1998, the Brink's Group implemented a new AICPA Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of Computer Software Developed for Internal Use". SOP No. 98-1 requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. (9) The Brink's Group will adopt a new accounting standard, SFAS No. 131, "Disclosures and Segments of an Enterprise and Related Information," in the financial statements for the year ended December 31, 1998. SFAS No. 131 requires publicly-held companies to report financial and descriptive information about operating segments in financial statements issued to shareholders for interim and annual periods. SFAS No. 131 also requires additional disclosures with respect to products and services, geographic areas of operation, and major customers. The adoption of this SFAS is not expected to have a material impact on the financial statements of the Brink's Group. (10) Certain prior period amounts have been reclassified to conform to the current period's financial statement presentation. (11) In the opinion of management, all adjustments have been made which are necessary for a fair presentation of results of operations and financial condition for the periods reported herein. All such adjustments are of a normal recurring nature. 28
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 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 amounts reflected in these financial statements are determined based upon methods which management believes to be a reasonable and an equitable estimate of the cost attributable to the Brink's Group. 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 liabilities. Therefore, financial developments affecting the Brink's Group, the Pittston BAX Group (the "BAX Group" formerly the Pittston Burlington Group) or the Pittston Minerals Group (the "Minerals Group") that affect the Company's financial condition could affect the results of operations and financial condition of each of the Groups. Accordingly, the Company's consolidated financial statements must be read in connection with the 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 must be read in conjunction with the financial statements and related notes of the Brink's Group and the Company. RESULTS OF OPERATIONS <TABLE> <CAPTION> Quarter Ended March 31 (In thousands) 1998 1997 ================================================================================ <S> <C> <C> Operating revenues: Brink's $ 261,923 209,199 BHS 48,410 42,185 - ------------------------------------------------------------------------------- Total operating revenues $ 310,333 251,384 ================================================================================ Operating profit: Brink's $ 21,919 15,801 BHS 13,502 12,779 - ------------------------------------------------------------------------------- Segment operating profit 35,421 28,580 General corporate expense (4,089) (1,788) - ------------------------------------------------------------------------------- Total operating profit $ 31,332 26,792 ================================================================================ </TABLE> 29
The Brink's Group net income totaled $17.0 million ($0.44 per share) in the first quarter of 1998 compared with $15.3 million ($0.40 per share) in the first quarter of 1997. Operating profit for the 1998 first quarter increased to $31.3 million from $26.8 million in the first quarter of 1997. Included in the 1998 quarter's operating results was a pre-tax charge of $2.0 million ($0.03 per share) for the Brink's Group's share of expenses relating to a retirement agreement between the Company and its former Chairman and CEO. The increase in net income and operating profit for the 1998 first quarter compared with the same period of 1997 was attributable to improved operating earnings for the Brink's and BHS businesses. Revenues for the 1998 first quarter increased $58.9 million or 23% compared with the 1997 first quarter, of which $52.7 million was from Brink's and $6.2 million was from BHS. Operating expenses and selling, general and administrative expenses for the 1998 first quarter increased $56.0 million or 25% compared with the same period last year, of which $48.2 million was from Brink's and $5.5 million was from BHS. Net interest expense during the first quarter of 1998 increased $1.4 million due largely to higher average interest rates and borrowings used to fund the acquisitions of Brink's affiliates in Venezuela and France in early 1997 and 1998, respectively. BRINK'S The following is a table of selected financial data for Brink's on a comparative basis: <TABLE> <CAPTION> Quarter Ended March 31 (In thousands) 1998 1997 ================================================================================ <S> <C> <C> Operating revenues: North America (United States and Canada) $ 129,367 110,772 Latin America 76,492 59,696 Europe 49,813 32,628 Asia/Pacific 6,251 6,103 - -------------------------------------------------------------------------------- Total operating revenues 261,923 209,199 Operating expenses 209,386 167,056 Selling, general and administrative expenses 31,604 25,721 - -------------------------------------------------------------------------------- Total costs and expenses 240,990 192,777 - -------------------------------------------------------------------------------- Other operating income (expense), net 986 (621) - -------------------------------------------------------------------------------- Operating profit: North America (United States and Canada) 10,067 7,754 Latin America 10,677 7,437 Europe 825 376 Asia/Pacific 350 234 - -------------------------------------------------------------------------------- Total operating profit $ 21,919 15,801 ================================================================================ Depreciation and amortization $ 8,419 7,547 ================================================================================ Cash capital expenditures $ 13,303 9,814 ================================================================================ </TABLE> Brink's consolidated revenues totaled $261.9 million in the first quarter of 1998 compared with $209.2 million in the first quarter of 1997. Brink's operating profit of $21.9 million in the first quarter of 1998 represented a $6.1 million (39%) increase over the $15.8 million operating profit reported in the prior year quarter reflecting increases in all geographic regions. The revenue increase of $52.7 million (25%) was offset, in part, by increases in operating expenses and selling, general and administrative expenses of $48.2 million. Revenues from North American operations (United States and Canada) increased $18.6 million (17%) to $129.4 million in the 1998 first quarter from $110.8 million in the prior year quarter. North American operating profit increased $2.3 million (30%) to $10.1 million in the current year quarter. The revenue and operating profit improvements for 1998 primarily resulted from improved armored car operations, which include ATM services. 30
In Latin America, revenues and operating profit increased 28% to $76.5 million and 44% to $10.7 million, respectively, from the first quarter of 1997 to the first quarter of 1998. The increase in revenues and operating profits includes the impact of three months of consolidated results from the acquired operation in Venezuela versus only two months of consolidated results in the 1997 quarter, as well as strong results in Venezuela and Colombia which were offset, in part, by costs associated with start-up operations in Argentina. Revenues and operating profit from European operations amounted to $49.8 million and $0.8 million, respectively, in the first quarter of 1998. These amounts represented increases of $17.2 million (53%) and $0.4 million (119%) from the comparable quarter of 1997. The increase in revenues was primarily due to the the acquisition of nearly all of the remaining shares of the affiliate in France in the first quarter of 1998 (discussed in more detail below). The increase in operating profits reflects improved results from operations in France, as well as the increased ownership. This improvement was partially offset by lower results in Belgium caused by six weeks of industry-wide labor unrest in the armored car industry in that country which was resolved in the quarter. Revenues and operating profit from Asia/Pacific operations in the first quarter of 1998 were $6.3 million and $0.4 million, respectively, compared to $6.1 million and $0.2 million, respectively, in the 1997 quarter. 31
BHS The following is a table of selected financial data for BHS on a comparative basis: <TABLE> <CAPTION> Quarter Ended March 31 (Dollars in thousands) 1998 1997 ================================================================================ <S> <C> <C> Operating revenues $ 48,410 42,185 Operating expenses 24,046 20,852 Selling, general and administrative expenses 10,862 8,554 - -------------------------------------------------------------------------------- Total costs and expenses 34,908 29,406 - -------------------------------------------------------------------------------- Operating profit: Monitoring and service 17,182 14,590 Net marketing, sales and installation (3,680) (1,811) - -------------------------------------------------------------------------------- Total operating profit $ 13,502 12,779 ================================================================================ Depreciation and amortization $ 8,802 6,666 ================================================================================ Cash capital expenditures $ 18,459 16,520 ================================================================================ Annualized recurring revenues (a) $ 160,422 132,598 ================================================================================ Number of subscribers: Beginning of period 511,532 446,505 Installations 26,750 25,590 Disconnects (9,675) (8,088) - -------------------------------------------------------------------------------- End of period 528,607 464,007 ================================================================================ </TABLE> (a) Annualized recurring revenues are calculated based on the number of subscribers at period end multiplied by the average fee per subscriber received in the last month of the period for monitoring, maintenance and related services. Revenues for BHS increased by $6.2 million (15%) to $48.4 million in the first quarter of 1998 from $42.2 million in the 1997 quarter. The increase in revenues was due to higher ongoing monitoring and service revenues, reflecting a 14% increase in the subscriber base as well as higher average monitoring fees. As a result of such growth, annualized recurring revenues at the end of the first quarter of 1998 grew 21% over the amount in effect at the end of the first quarter of 1997. Installation revenue for the first quarter of 1998 decreased 6% over the same 1997 period. While the number of new security system installations increased, the revenue per installation decreased as compared to the 1997 period, in response to continuing aggressive installation marketing and pricing by competitors. Operating profit of $13.5 million in the first quarter of 1998 represented an increase of $0.7 million (5%) compared to the $12.8 million earned in the 1997 first quarter. Operating profit generated from monitoring and service activities increased $2.6 million (18%) and was favorably impacted by the 14% growth in the subscriber base combined with the higher average monitoring fees. Cash margins per subscriber resulting from this portion of the business increased slightly from the first quarter of 1997. Operating losses from marketing, sales and installation activities increased $1.9 million in the first quarter of 1998 as compared to 1997. This increase is due to higher levels of sales and marketing costs incurred and expensed combined with lower levels of installation revenue. Both of these factors are a consequence of the competitive environment in the residential security market. 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 32
change in accounting principle was to increase operating profit for the Brink's Group and the BHS segment for the quarter ended March 31, 1998 and 1997 by $1.4 million and $1.2 million, respectively. The effect of this change increased basic and diluted net income per common share of the Brink's Group by $.02 in the first three months of 1998 and 1997. FOREIGN OPERATIONS A portion of the Brink's Group's financial results is derived from activities in 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 currency rate fluctuations. In addition, these 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, from time to time, uses foreign currency forward contracts to hedge the risks associated with such transactions. Realized and unrealized gains and losses on these contracts are deferred and recognized as part of the specific transaction hedged. In addition, 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 Venezuela and an affiliate in Mexico operate in such highly inflationary economies. Prior to January 1, 1998, the economy in Brazil, in which the Brink's Group has a subsidiary, was considered highly inflationary. The Brink's Group is also subject to other risks customarily associated with doing business in foreign countries, including labor and economic conditions, controls on repatriation of earnings and capital, nationalization, political instability, 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 an equitable and a reasonable estimate of the costs attributable to the Brink's Group. These attributions were $4.1 million and $1.8 million for the first quarter of 1998 and 1997, respectively. The increase in the 1998 quarter is mainly due to a pre-tax charge of approximately $5.8 million related to a retirement agreement between the Company and its former Chairman and CEO. Approximately $2.0 million of these expenses have been attributed to the Brink's Group. 33
OTHER OPERATING INCOME AND EXPENSE, NET Other operating income and expense, net consists primarily of net equity earnings of Brink's foreign affiliates. These net equity earnings amounted to income of $0.9 million and expense of $0.7 million for the first quarters of 1998 and 1997, respectively. The favorable change is primarily due to improvement in the earnings of Brink's former equity affiliate in France. This formerly 38% owned affiliate became a consolidated subsidiary in the first quarter of 1998 as discussed in more detail below. NET INTEREST EXPENSE Net interest expense increased from $1.6 million in the first quarter of 1997 to $3.0 million in the first quarter of 1998. This increase is predominantly due to higher average borrowings related to acquisitions, as well as higher average interest rates largely attributed to foreign borrowings. OTHER EXPENSE, NET Other expense, net which principally includes foreign translation gains and losses and minority interest earnings or losses of Brink's subsidiaries, decreased for the first quarter of 1998 by $0.3 million. The lower level of expense during the 1998 period reflects an increase in foreign translation gains partially offset by higher minority ownership expense associated with Venezuela. INCOME TAXES The effective tax rate in the first quarter of 1998 was 37%. This is an increase from the comparable period in 1997 which had an effective tax rate of 35%. The 1997 rate was lower due to lower taxes on foreign income. 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. Management believes this attribution to be an equitable and a reasonable estimate of the cost attributable to the Brink's Group. CASH FLOW REQUIREMENTS Cash provided by operating activities amounted to $22.9 million in the first three months of 1998, which is essentially unchanged from the 1997 level. Significant sources of cash flow primarily include net income and noncash charges offset by funds used to finance working capital. Cash generated from operating activities was not sufficient to fund investing activities, primarily capital expenditures. However, additional borrowings and repayments from the Minerals Group resulted in an increase of $5.2 million in cash and cash equivalents in the first three months of 1998. In the first quarter of 1998, Brink's purchased 62% (representing nearly all the remaining shares) of its French affiliate ("Brink's S.A.") for payments aggregating US $39 million over three years. The acquisition was funded through an initial payment made at closing of $8.8 million and a note to the seller for a principal amount of $27.5 million payable in annual installments plus interest through 2001. The acquisition has been accounted for as a purchase, and accordingly, the purchase price is being allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. Based on a preliminary evaluation which is subject to additional review, the estimated fair value of the additional assets recorded, including goodwill, approximated $134.1 million and included $9.2 million in cash. Estimated liabilities assumed of $97.8 million included previously existing debt of approximately $41.4 million. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is being amortized over forty years. Brink's S.A. had annual 1997 revenues approximating the equivalent of US $220 million. CAPITAL EXPENDITURES Cash capital expenditures for the first quarter of 1998 totaled $31.9 million, of which $18.5 million was spent by BHS and $13.3 million was spent by Brink's. Cash capital expenditures totaled $26.4 million in the 1997 quarter. Expenditures incurred by BHS in the first quarter of 1998 were primarily for customer installations, representing the expansion in the subscriber base, while expenditures incurred by Brink's were primarily for expansion, replacement or maintenance of ongoing business operations. For the remainder of 1998, cash capital expenditures are expected to range between $105 million and $110 million. 34
FINANCING The Brink's Group intends to fund cash capital expenditures through cash flow from operating activities or through operating leases if the latter are financially attractive. Shortfalls, if any, will be financed through the Company's revolving credit agreements or other borrowing arrangements or repayments from the Minerals Group. Total outstanding debt at March 31, 1998 was $125.6 million, $70.3 million higher than the $55.3 million reported at December 31, 1997. The increase in debt is attributable to debt associated with the acquisition of Brink's affiliate in France as previously discussed. The Company has a $350.0 million credit agreement with a syndicate of banks (the "Facility"). The Facility includes a $100.0 million term loan and permits additional borrowings, repayments and reborrowings of up to an aggregate of $250.0 million. As of March 31, 1998 and December 31, 1997, borrowings of $100.0 million were outstanding under the term loan portion of the Facility and $80.8 million and $25.9 million, respectively, of additional borrowings were outstanding under the remainder of the Facility. No portion of the total amount outstanding under the Facility at March 31, 1998 or December 31, 1997, was attributable to the Brink's Group. RELATED PARTY TRANSACTIONS At March 31, 1998, under an interest bearing borrowing arrangement, the Minerals Group owed the Brink's Group $15.8 million, a decrease of $11.2 million from the $27.0 million owed at December 31, 1997. At March 31, 1998, the Brink's Group owed the Minerals Group $21.9 million compared to the $19.4 million owed at December 31, 1997 for tax payments representing the Minerals Group's tax benefits utilized by the Brink's Group in accordance with the Company's tax sharing policy. Of the total tax benefits owed to the Minerals Group at March 31, 1998, $19.0 million is expected to be paid within one year. READINESS FOR YEAR 2000 The Brink's Group has taken actions to understand the nature and extent of work required to make its systems, services and infrastructure Year 2000 compliant. The Brink's Group is currently preparing its financial, information and other computer-based systems for the Year 2000, including replacing and/or updating existing systems. As these efforts progress, the Brink's Group continues to evaluate the associated costs. Based upon its most recent estimates and its anticipated capital spending, the Brink's Group does not anticipate that it will incur any material costs in preparing for the Year 2000. The Brink's Group believes, based on available information, that it will be able to manage its Year 2000 transition without material adverse effect on its business operations, services or financial condition. However, if the applicable modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 issue could have a material adverse impact on the operations of the Brink's Group. Further, management is currently evaluating the extent to which the Brink's Group's interface systems are vulnerable to its suppliers' and customers' failure to remediate their own Year 2000 issues as there is no guarantee that the systems of other companies on which the Brink's Group's systems rely will be timely and adequately converted. CAPITALIZATION The Company has three classes of common stock: Brink's Stock, Pittston BAX Group Common Stock ("BAX Stock") and Pittston Minerals Group Common Stock ("Minerals Stock") which were designed to provide shareholders with separate securities reflecting the performance of the Brink's Group, BAX Group and Minerals Group, respectively, without diminishing the benefits of remaining a single corporation or precluding future transactions affecting any of the Groups. The Brink's Group consists of the Brink's and BHS operations of the Company. The BAX Group consists of the BAX Global Inc. ("BAX Global") operations of the Company. The Minerals Group consists of the Pittston Coal Company ("Coal Operations") and Pittston Mineral Ventures ("Mineral Ventures") operations of the Company. The Company prepares separate financial statements for the Brink's, BAX and Minerals Groups, in addition to consolidated financial information of the Company. Effective May 4, 1998, the designation of Pittston Burlington Group Common Stock and the name of the Pittston Burlington Group were changed to Pittston BAX Group Common Stock and Pittston BAX Group, respectively. All rights and privileges of the holders of such Stock are otherwise unaffected by such changes. The stock continues to trade on the New York Stock Exchange under the symbol "PZX". 35
Under the share repurchase programs authorized by the Board of Directors (the "Board"), the Company purchased shares in the periods presented as follows: <TABLE> <CAPTION> Quarter Ended March 31 (Dollars in millions) 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> Brink's Stock: Shares -- 153,000 Cost $ -- 4.0 Convertible Preferred Stock: Shares 355 -- Cost $ 0.1 -- Excess carrying amount (a) $ 0.02 -- ================================================================================ </TABLE> (a) The excess of the carrying amount of the Series C Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock") over the cash paid to holders for repurchases made during the periods. This amount is deducted from preferred dividends in the Company's Statement of Operations. The Company's remaining repurchase authority with respect to the Convertible Preferred Stock as of March 31, 1998 was $24.2 million. As of March 31, 1998, the Company had remaining authority to purchase over time 1.1 million shares of Brink's Stock. The aggregate purchase price limitation for all common stock was $21.4 million as of March 31, 1998. DIVIDENDS The Board intends to declare and pay dividends, if any, on Brink's Stock based on the earnings, financial condition, cash flow and business requirements of the Brink's Group. Since the Company remains subject to Virginia law limitations on dividends, losses by the Minerals Group or the BAX Group could affect the Company's ability to pay dividends in respect of stock relating to the Brink's Group. During the first three months of 1998 and 1997, the Board declared and the Company paid cash dividends of 2.5 cents per share of Brink's Stock. Dividends paid on the Convertible Preferred Stock in each of the first quarters of 1998 and 1997 were $0.9 million. ACCOUNTING CHANGES The Brink's Group adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", in the first quarter of 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income generally represents all changes in shareholders' equity except those resulting from investments by or distributions to shareholders. Total comprehensive income, which is composed of net income and foreign currency translation adjustments, for the quarters ended March 31, 1998 and 1997 was $15.3 million and $11.2 million, respectively. Effective January 1, 1998, the Brink's Group implemented a new AICPA Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of Computer Software Developed for Internal Use". SOP No. 98-1 requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. PENDING ACCOUNTING CHANGES The Brink's Group will implement SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", in the financial statements for the year ended December 31, 1998. SFAS No. 131 requires publicly-held companies to report financial and descriptive information about operating segments in financial statements issued to shareholders for interim and annual periods. The SFAS also requires additional disclosures with respect to products and services, geographic areas of operation, and major customers. The adoption of this SFAS is not expected to have a material impact on the financial statements of the Brink's Group. 36
FORWARD LOOKING INFORMATION Certain of the matters discussed herein, including statements regarding the readiness for Year 2000, involve forward looking information which is subject to known and unknown risks, uncertainties, and contingencies which could cause actual results, performance or achievements to differ materially from those which are anticipated. Such risks, uncertainties and contingencies, many of which are beyond the control of the Brink's Group and the Company, include, but are not limited to, overall economic and business conditions, the demand for the Brink's Group's services, pricing and other competitive factors in the industry, new government regulations and/or legislative initiatives, variations in costs or expenses, changes in the scope of Year 2000 initiatives, and delays or problems in the implementation of Year 2000 initiatives by the Brink's Group and/or its suppliers and customers. 37
PITTSTON BAX GROUP BALANCE SHEETS (IN THOUSANDS) <TABLE> <CAPTION> March 31 December 31 1998 1997 ========================================================================================== (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 27,570 28,790 Accounts receivable (net of estimated amount uncollectible: 1998 - $10,889; 1997 -$10,110) 302,168 306,806 Inventories, at lower of cost or market 1,501 1,359 Prepaid expenses 12,416 11,050 Deferred income taxes 6,860 7,159 - ------------------------------------------------------------------------------------------ Total current assets 350,515 355,164 Property, plant and equipment, at cost (net of accumulated depreciation and amortization: 1998 - $83,385; 1997 - $78,815) 147,303 128,632 Intangibles, net of accumulated amortization 175,667 174,791 Deferred pension assets 7,192 7,600 Deferred income taxes 20,710 19,814 Other assets 19,111 15,442 ========================================================================================== Total assets $ 720,498 701,443 ========================================================================================== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Short-term borrowings $ 42,205 31,071 Current maturities of long-term debt 3,214 3,176 Accounts payable 195,014 194,489 Payable - Pittston Minerals Group 5,000 4,966 Accrued liabilities 74,721 78,363 - ------------------------------------------------------------------------------------------ Total current liabilities 320,154 312,065 Long-term debt, less current maturities 53,629 37,016 Postretirement benefits other than pensions 3,629 3,518 Deferred income taxes 1,411 1,447 Payable - Pittston Minerals Group 14,564 13,239 Other liabilities 8,117 10,448 Shareholder's equity 318,994 323,710 - ------------------------------------------------------------------------------------------ Total liabilities and shareholder's equity $ 720,498 701,443 ========================================================================================== </TABLE> See accompanying notes to financial statements. 38
PITTSTON BAX GROUP STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (Unaudited) <TABLE> <CAPTION> Quarter Ended March 31 1998 1997 ================================================================================ <S> <C> <C> Operating revenues $ 402,433 371,409 Costs and expenses: Operating expenses 362,339 330,911 Selling, general and administrative expenses 43,614 32,171 - -------------------------------------------------------------------------------- Total costs and expenses 405,953 363,082 - -------------------------------------------------------------------------------- Other operating (expense) income, net (133) 649 - -------------------------------------------------------------------------------- Operating (loss) profit (3,653) 8,976 Interest income 259 330 Interest expense (1,218) (946) Other expense, net (98) (281) - -------------------------------------------------------------------------------- (Loss) income before income taxes (4,710) 8,079 (Credit) provision for income taxes (1,744) 2,991 - -------------------------------------------------------------------------------- Net (loss) income $ (2,966) 5,088 ================================================================================ Net (loss) income per common share: Basic $ (.15) .26 Diluted (.15) .26 - -------------------------------------------------------------------------------- Cash dividends per common share $ .06 .06 - -------------------------------------------------------------------------------- Weighted average common shares outstanding: Basic 19,477 19,406 Diluted 19,477 19,820 ================================================================================ </TABLE> See accompanying notes to financial statements. 39
PITTSTON BAX GROUP STATEMENTS OF CASH FLOWS (IN THOUSANDS) (Unaudited) <TABLE> <CAPTION> Quarter Ended March 31 1998 1997 ==================================================================================================== <S> <C> <C> Cash flows from operating activities: Net (loss) income $ (2,966) 5,088 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,667 6,959 Provision for aircraft heavy maintenance 8,733 8,186 Credit for deferred income taxes (463) (190) (Credit) provision for pensions, noncurrent (24) 567 Provision for uncollectible accounts receivable 1,110 699 Other operating, net 1,317 556 Change in operating assets and liabilities, net of effects of acquisitions and dispositions: Decrease (increase) in accounts receivable 15,903 (12,629) (Increase) decrease in inventories (142) 78 Increase in prepaid expenses (1,928) (1,941) (Decrease) increase in accounts payable and accrued liabilities (9,795) 6,245 Decrease (increase) in other assets 583 (150) Decrease in other liabilities (1,108) (444) Other, net (1,444) 776 - ---------------------------------------------------------------------------------------------------- Net cash provided by operating activities 17,443 13,800 - ---------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment (24,379) (6,207) Proceeds from disposal of property, plant and equipment 115 115 Aircraft heavy maintenance (9,659) (9,473) Other, net (2,406) 2,106 - ---------------------------------------------------------------------------------------------------- Net cash used by investing activities (36,329) (13,459) - ---------------------------------------------------------------------------------------------------- Cash flows from financing activities: Additions to debt 25,341 622 Reductions of debt (3,960) (1,225) Payments from Minerals Group -- 6,002 Proceeds from exercise of stock options 905 263 Dividends paid (1,106) (1,080) Repurchase of common stock (3,514) (2,550) - ---------------------------------------------------------------------------------------------------- Net cash provided by financing activities 17,666 2,032 - ---------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (1,220) 2,373 Cash and cash equivalents at beginning of period 28,790 17,818 - ---------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 27,570 20,191 ==================================================================================================== </TABLE> See accompanying notes to financial statements. 40
PITTSTON BAX GROUP NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (Unaudited) (1) The financial statements of the Pittston BAX Group (the "BAX Group") include the balance sheets, results of operations and cash flows of the BAX Global Inc. ("BAX Global") operations of The Pittston Company (the "Company"), and a portion of the Company's corporate assets and liabilities and related transactions which are not separately identified with operations of a specific segment. The BAX Group's financial statements are prepared using the amounts included in the Company's consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be a reasonable and an equitable estimate of the cost attributable to the BAX Group. The Company provides holders of Pittston BAX Group Common Stock ("BAX Stock") separate financial statements, financial reviews, descriptions of business and other relevant information for the BAX Group, in addition to consolidated financial information of the Company. Holders of BAX Stock are shareholders of the Company, which is responsible for all liabilities. Therefore, financial developments affecting the BAX Group, the Pittston Brink's Group (the "Brink's Group") and the Pittston Minerals Group (the "Minerals Group") that affect the Company's financial condition could affect the results of operations and financial condition of each of the Groups. Accordingly, the Company's consolidated financial statements must be read in connection with the BAX Group's financial statements. Effective May 4, 1998, the designation of Pittston Burlington Group Common Stock and the name of the Pittston Burlington Group were changed to Pittston BAX Group Common Stock and Pittston BAX Group, respectively. All rights and privileges of the holders of such Stock are otherwise unaffected by such changes. The stock continues to trade on the New York Stock Exchange under the symbol "PZX". (2) The following is a reconciliation between the calculation of basic and diluted net income per share: <TABLE> <CAPTION> Quarter Ended March 31 BAX Group 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> Numerator: Net (loss) income - Basic and diluted net income per share numerator $ (2,966) 5,088 Denominator: Basic weighted average common shares outstanding 19,477 19,406 Effect of dilutive securities: Employee stock options -- 414 - -------------------------------------------------------------------------------- Diluted weighted average common shares outstanding 19,477 19,820 ================================================================================ </TABLE> Options to purchase 2,366 shares of common stock, at prices between $5.78 and $27.91 per share, were outstanding as of March 31, 1998 but were not included in the computation of diluted net loss per share because the effect of all options would be antidilutive. Options to purchase 42 shares of common stock, at prices between $19.81 and $21.13 per share, were outstanding as of March 31, 1997 but were not included in the computation of diluted net income per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. 41
(3) Depreciation and amortization of property, plant and equipment in the first quarters of 1998 and 1997 totaled $6,006 and $5,315, respectively. (4) Cash payments made for interest and income taxes, net of refunds received, were as follows: <TABLE> <CAPTION> Quarter Ended March 31 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> Interest $ 826 829 ================================================================================ Income taxes $ 3,746 867 ================================================================================ </TABLE> (5) On April 30, 1998, BAX Global acquired the privately held Air Transport International LLC ("ATI") for a purchase price of approximately $29,000. The acquisition was funded through the revolving credit portion of the Company's credit agreement with a syndicate of banks and will be accounted for as a purchase. (6) Under the share repurchase programs authorized by the Board of Directors, the Company purchased shares in the periods presented as follows: <TABLE> <CAPTION> Quarter Ended March 31 (Dollars in millions) 1998 1997 ----------------------------------------------------------------------- <S> <C> <C> BAX Stock: Shares 177,532 132,100 Cost $ 3.5 2.6 Convertible Preferred Stock: Shares 355 -- Cost $ 0.1 -- Excess carrying amount (a) $ 0.02 -- ======================================================================= </TABLE> (a) The excess of the carrying amount of the Series C Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock") over the cash paid to holders for repurchases made during the periods. This amount is deducted from preferred dividends in the Company's Statement of Operations. At March 31, 1998, the Company had the remaining authority to purchase over time 915 shares of BAX Stock and an additional $24,236 of its Convertible Preferred Stock. The aggregate purchase price limitation for all common stock was $21,398 at March 31, 1998. (7) The BAX Group adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", in the first quarter of 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income generally represents all changes in shareholders' equity except those resulting from investments by or distributions to shareholders. Total comprehensive (loss) income, which is composed of net (loss) income and foreign currency translation adjustments, for the quarters ended March 31, 1998 and 1997 was $2,566 and $3,653, respectively. Effective January 1, 1998, the BAX Group implemented a new AICPA Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of Computer Software Developed for Internal Use". SOP No. 98-1 requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. As a result of the implementation of SOP No. 98-1, net loss for the quarter ended March 31, 1998, included a benefit of approximately $792 or $.04 per share for costs capitalized during the quarter which would have been expensed prior to the implementation of SOP No. 98-1. 42
(8) The BAX Group will adopt a new accounting standard, SFAS No. 131, "Disclosures and Segments of an Enterprise and Related Information," in the financial statements for the year ended December 31, 1998. SFAS No. 131 requires publicly-held companies to report financial and descriptive information about operating segments in financial statements issued to shareholders for interim and annual periods. SFAS No. 131 also requires additional disclosures with respect to products and services, geographic areas of operation, and major customers. The adoption of this SFAS is not expected to have a material impact on the financial statements of the BAX Group. (9) Certain prior period amounts have been reclassified to conform to the current period's financial statement presentation. (10) In the opinion of management, all adjustments have been made which are necessary for a fair presentation of results of operations and financial condition for the periods reported herein. All such adjustments are of a normal recurring nature. 43
PITTSTON BAX GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The financial statements of the Pittston BAX Group (the "BAX Group") include the balance sheets, results of operations and cash flows of BAX Global Inc. ("BAX Global") operations of The Pittston Company (the "Company") and a portion of the Company's corporate assets and liabilities and related transactions which are not separately identified with operations of a specific segment. The BAX Group's financial statements are prepared using the amounts included in the Company's consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be a reasonable and an equitable estimate of the cost attributable to the BAX Group. Effective May 4, 1998, the designation of Pittston Burlington Group Common Stock and the name of the Pittston Burlington Group were changed to Pittston BAX Group Common Stock and Pittston BAX Group, respectively. All rights and privileges of the holders of such Stock are otherwise unaffected by such changes. The stock continues to trade on the New York Stock Exchange under the symbol "PZX". The Company provides holders of Pittston BAX Group Common Stock ("BAX Stock") separate financial statements, financial reviews, descriptions of business and other relevant information for the BAX Group in addition to consolidated financial information of the Company. Holders of BAX Stock are shareholders of the Company, which continues to be responsible for all liabilities. Therefore, financial developments affecting the BAX Group, the Pittston Brink's Group (the "Brink's Group") or the Pittston Minerals Group (the "Minerals Group") that affect the Company's financial condition could affect the results of operations and financial condition of each of the Groups. Accordingly, the Company's consolidated financial statements must be read in connection with the BAX Group's financial statements. The following discussion is a summary of the key factors management considers necessary in reviewing the BAX Group's results of operations, liquidity and capital resources. This discussion must be read in conjunction with the financial statements and related notes of the BAX Group and the Company. BAX Global's freight business has tended to be seasonal, with a significantly higher volume of shipments generally experienced during March, June and the period August through November than during the other periods of the year. The lowest volume of shipments has generally occurred in January and February. RESULTS OF OPERATIONS <TABLE> <CAPTION> Quarter Ended March 31 (In thousands) 1998 1997 ================================================================================ <S> <C> <C> Operating revenues: BAX Global $ 402,433 371,409 ================================================================================ Operating profit (loss): BAX Global $ 430 10,756 General corporate expense (4,083) (1,780) - -------------------------------------------------------------------------------- Operating (loss) profit $ (3,653) 8,976 ================================================================================ </TABLE> In the first quarter of 1998, the BAX Group reported a net loss of $3.0 million ($0.15 per share) as compared to net income of $5.1 million ($0.26 per share) in the first quarter of 1997. Revenues increased $31.0 million or 8% compared with the 1997 first quarter. Operating expenses and selling, general and administrative expenses for the 1998 first period increased $42.9 million (12%) compared with the same quarter last year. Operating losses in the first quarter 1998 totaled $3.7 million compared to operating profit of $9.0 million in the prior year quarter. Included in the current quarter was a pre-tax charge of $2.0 million ($0.06 per share) for the BAX Group's share of expenses related to a retirement agreement between the Company and its former Chairman and CEO. The first quarter also includes a net pre-tax charge of approximately $3.5 million 44
($1.9 million international and $1.6 million intra-U.S.) related to incremental information technology expenditures including Year 2000 expenses, partially offset by several non-recurring items. BAX GLOBAL The following is a table of selected financial data for BAX Global on a comparative basis: <TABLE> <CAPTION> (In thousands - except per Quarter Ended March 31 pound/shipment amounts) 1998 1997 =================================================================================== <S> <C> <C> Operating revenues: Intra-U.S.: Expedited freight services $ 147,398 136,672 Other (a) 945 1,721 - ------------------------------------------------------------------------------------ Total Intra-U.S. 148,343 138,393 International: Expedited freight services (a) 206,452 198,129 Other (a) 47,638 34,887 - ------------------------------------------------------------------------------------ Total International 254,090 233,016 - ------------------------------------------------------------------------------------ Total operating revenues 402,433 371,409 Operating expenses 362,339 330,911 Selling, general and administrative expenses 39,531 30,391 - ------------------------------------------------------------------------------------ Total costs and expenses 401,870 361,302 Other operating (expense) income, net (133) 649 - ------------------------------------------------------------------------------------ Operating profit (loss): Intra-U.S. (4,977) 4,117 International 5,407 6,639 - ------------------------------------------------------------------------------------ Total operating profit $ 430 10,756 =================================================================================== Depreciation and amortization $ 7,609 6,908 - ------------------------------------------------------------------------------------ Cash capital expenditures $ 24,275 6,175 - ------------------------------------------------------------------------------------ Expedited freight services shipment growth rate (b) 1.2% (1.8%) Expedited freight services weight growth rate (b): Intra-U.S. 8.9% 0.8% International 8.8% 2.5% Worldwide 8.8% 1.7% =================================================================================== Expedited freight services weight (millions of pounds) 381.5 350.5 Expedited freight services shipments (thousands) 1,290 1,275 =================================================================================== Worldwide expedited freight services: Yield (revenue per pound) (a) $ .928 .955 Revenue per shipment (a) $ 274 263 Weight per shipment (pounds) 296 275 =================================================================================== </TABLE> (a) Prior period's international expedited freight revenues have been reclassified to conform to the current period classification. (b) Compared to the same period in the prior year. 45
BAX Global's first quarter 1998 operating profit amounted to $0.4 million, a decrease of $10.4 million from the $10.8 million reported in the first quarter of 1997. The first quarter included a net pre-tax charge of approximately $3.5 million ($1.9 million international and $1.6 million intra-U.S.) related to incremental information technology expenditures including Year 2000 expenses, partially offset by several non-recurring items. Worldwide revenues increased 8% to $402.4 million from $371.4 million in the 1997 quarter. The $31.0 million growth in revenues principally reflects a 9% increase in worldwide expedited freight services pounds shipped, which reached 381.5 million pounds in the first quarter of 1998, offset by a 3% decrease in average yield on this volume. In addition, non-expedited freight services revenues, increased $12.0 million (33%) during the first quarter of 1998 as compared to the same quarter in 1997 reflecting increases in ocean freight services and logistics revenues. Worldwide expenses amounted to $401.9 million, $40.6 million (11%) higher than in the first quarter of 1997. In the first quarter of 1998, BAX Global's intra-U.S. revenues increased from $138.4 million to $148.3 million. This $9.9 million (7%) increase was primarily due to an increase of $10.7 million in intra-U.S. expedited freight services revenues. The higher level of intra-U.S. expedited freight services revenues in 1998 was due to a 9% increase in weight shipped. Intra-U.S. operating results during the first quarter of 1998, excluding the previously mentioned net charge of $1.6 million, decreased $7.5 million from the $4.1 million of operating profit earned in the first quarter of 1997. The decrease was primarily due to the lower than expected volume combined with higher transportation costs. Intra-U.S. transportation costs in the quarter were higher than 1997 first quarter levels, due in part, to efforts to enhance service levels. Transportation costs were also unfavorably impacted by service disruptions caused mainly by equipment problems which were resolved during the quarter. International revenues in the first quarter of 1998 increased $21.1 million (9%) to $254.1 million from the $233.0 million recorded in the first quarter of 1997. International expedited freight services revenue increased $8.3 million (4%) due to a 9% increase in weight shipped offset by a 4% decrease in average yield. The decrease in yield reflects a change in mix with less higher yielding export traffic to Asian markets combined with the absence of third party carrier surcharges which existed in the first quarter of 1997. In addition, international non-expedited freight services revenue increased $12.8 million (37%) in the first quarter of 1998 as compared to the same period in 1997 due to growth in both the logistics and ocean freight businesses. International operating profit in the first quarter of 1998, excluding the previously mentioned net charge of $1.9 million, increased $0.7 million (11%) from the $6.6 million recorded in the first quarter of 1997. Operating profit during the first quarter of 1998 benefited from improved U.S. export margins. On April 30, 1998, BAX Global acquired the privately held Air Transport International LLC ("ATI") for a purchase price of approximately $29 million. The acquisition will be accounted for as a purchase. ATI is a U.S.-based freight and passenger airline which operates a certificated fleet of aircraft providing services to BAX Global and other customers. The ATI acquisition is part of BAX Global's strategy to improve the quality of its service offerings for its customers by increasing its control over flight operations. As a result of this acquisition, BAX Global suspended its efforts to start up its own certificated airline carrier operations. During 1997, BAX Global began a BAX Process Innovation ("BPI") Program which was comprised of an extensive review of all aspects of the company's operations. Senior management from around the world, working with a major consulting firm, reviewed all areas of the business including sales, operations, finance, logistics and information technology. In 1998, as a result of integrating BPI into BAX Global's continuous improvement program, the overall cost for information technology systems, business improvements and employee training was reduced from previous estimates of up to $200 million over the next two to three years. BAX Global's information technology expenditures, which will include substantial improvements to information systems, annual recurring capital costs, process improvement initiatives and spending for Year 2000 compliance initiatives, are now currently estimated at approximately $60 million per year for 1998 and 1999, approximately two-thirds of which may be capitalized. Additional details of the information technology and Year 2000 compliance initiatives are being further developed which may have an impact on future reported results. 46
FOREIGN OPERATIONS A portion of the BAX Group's financial results is derived from activities in foreign countries, each with a local currency other than the U.S. dollar. Because the financial results of the BAX 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 BAX Group's international activity is not concentrated in any single currency, which limits the risks of foreign currency rate fluctuations. In addition, these rate fluctuations may adversely affect transactions which are denominated in currencies other than the functional currency. The BAX 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 BAX Group, uses foreign currency forward contracts to hedge the risks associated with such transactions. Realized and unrealized gains and losses on these contracts are deferred and recognized as part of the specific transaction hedged. In addition, 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 Mexico operates in such a highly inflationary economy. Prior to January 1, 1998, the economy in Brazil, in which the BAX Group has a subsidiary, was considered highly inflationary. The BAX Group is also subject to other risks customarily associated with doing business in foreign countries, including labor and economic conditions, controls on repatriation of earnings and capital, nationalization, political instability, expropriation and other forms of restrictive action by local governments. The future effects, if any, of such risks on the BAX Group cannot be predicted. CORPORATE EXPENSES A portion of the Company's corporate general and administrative expenses and other shared services has been allocated to the BAX Group based on utilization and other methods and criteria which management believes to be an equitable and a reasonable estimate of the costs attributable to the BAX Group. These attributions were $4.1 million and $1.8 million for the first quarters of 1998 and 1997, respectively. The increase in the 1998 period is mainly due to a pre-tax charge of approximately $5.8 million related to a retirement agreement between the Company and its former Chairman and CEO. Approximately $2.0 million of these expenses have been attributed to the BAX Group. OTHER OPERATING INCOME AND EXPENSE, NET Other operating income and expense, net decreased $0.8 million to an expense of $0.1 million in the first quarter of 1998, as compared to the same period in 1997. Other operating income and expense, net principally includes foreign exchange transaction gains and losses, and the changes for the comparable periods are due to normal fluctuations in such gains and losses. INTEREST EXPENSE, NET Net interest expense increased $0.3 million in the three month period ended March 31, 1998 as compared to the same period in 1997. The increase is due to higher levels of debt associated with investments in information technology. INCOME TAXES In both the 1998 and 1997 periods presented, the provision for income taxes exceeded the statutory federal income tax rate of 35% primarily due to provisions for state income taxes and goodwill amortization, partially offset by lower taxes on foreign income. FINANCIAL CONDITION A portion of the Company's corporate assets and liabilities has been attributed to the BAX Group based upon utilization of the shared services from which assets and liabilities are generated. Management believes this attribution to be an equitable and a reasonable estimate of the cost attributable to the BAX Group. 47
CASH FLOW REQUIREMENTS Cash provided by operating activities during the first three months of 1998 totaled $17.4 million as compared to the $13.8 million generated in the first three months of 1997. The higher level of cash generated from operating activities was due to a decrease in the funding requirements for net operating assets and liabilities partially offset by lower earnings in the 1998 period. Cash generated from operating activities was not sufficient to fund net investing and share activities, resulting in an increase in net borrowings of $21.4 million. CAPITAL EXPENDITURES Cash capital expenditures for the first three months of 1998 and 1997 totaled $24.4 million and $6.2 million, respectively reflecting higher levels of investment in information technology systems. For the remainder of 1998, cash capital expenditures are expected to range between $45.0 million and $50.0 million, excluding any expenditures relating to the BPI program and other information technology systems. These expenditures will primarily relate to planned expansion for new facilities. FINANCING The BAX Group intends to fund its cash capital expenditure requirements through anticipated cash flows from operating activities or through operating leases if the latter are financially attractive. Shortfalls, if any, will be financed through the Company's revolving credit agreements, other borrowing arrangements or repayments from the Minerals Group. Total outstanding debt was $99.0 million at March 31, 1998, an increase of $27.7 million from the $71.3 million reported at December 31, 1997. The net increase in debt primarily reflects borrowings to fund incremental information technology expenditures, including those relating to Year 2000 compliance. The Company has a $350.0 million credit agreement with a syndicate of banks (the "Facility"). The Facility includes a $100.0 million term loan and also permits additional borrowings, repayments and reborrowings of up to an aggregate of $250.0 million. As of March 31, 1998 and 1997, borrowings of $100.0 million were outstanding under the term loan portion of the Facility and $80.8 million and $25.9 million, respectively, of additional borrowings were outstanding under the remainder of the Facility. Of the total outstanding amount under the Facility at March 31, 1998 and December 31, 1997, $28.4 million and $10.9 million, respectively, was attributed to the BAX Group. RELATED PARTY TRANSACTIONS At March 31, 1998 and December 31, 1997, the Minerals Group had no borrowings from the BAX Group. At March 31, 1998, the BAX Group owed the Minerals Group $19.6 million versus $18.2 million at December 31, 1997 for tax payments representing Minerals Group's tax benefits utilized by the BAX Group in accordance with the Company's tax sharing policy. Of the total tax benefits owed to the Minerals Group at March 31, 1998, $5.0 million is expected to be paid within one year. OFF-BALANCE SHEET INSTRUMENTS In the first quarter of 1998, the Company, on behalf of the BAX Group, entered into additional commodity option transactions that are intended to protect against significant increases in jet fuel prices. These transactions aggregated 47.6 million gallons and mature periodically throughout 1998. The fair value of these fuel hedge transactions may fluctuate over the course of the contract period due to changes in the supply and demand for oil and refined products. Thus, the economic gain or loss, if any, upon settlement of the contracts may differ from the fair value of the contracts at an interim date. At March 31, 1998, the fair value of all outstanding contracts to hedge jet fuel requirements was ($1.4) million. READINESS FOR YEAR 2000 The BAX Group has taken actions to understand the nature and extent of the work required to make its systems, services and infrastructure Year 2000 compliant. The BAX Group is currently preparing its financial, information and other computer-based systems for the Year 2000, including replacing and/or updating existing systems. The BAX Group continues to evaluate the additional estimated costs associated with these efforts, which it currently estimates to be between $30-$35 million over the next two years. Based on actual experience and available information, the BAX Group believes that it will be able to manage its Year 2000 48
transition without any material adverse effect on its business operations, services or financial condition. However, if the applicable modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 issue could have a material adverse impact on the operations of the BAX Group. Further, management is currently evaluating the extent to which the BAX Group's interface systems are vulnerable to its suppliers' and customers' failure to remediate their own Year 2000 issues as there is no guarantee that the systems of other companies on which the BAX Group's systems rely will be timely and adequately converted. CAPITALIZATION The Company has three classes of common stock: BAX Stock, Pittston Brink's Group Common Stock ("Brink's Stock"), and Pittston Minerals Group Common Stock ("Minerals Stock") which were designed to provide shareholders with separate securities reflecting the performance of the BAX Group, Brink's Group and Minerals Group, respectively, without diminishing the benefits of remaining a single corporation or precluding future transactions affecting any of the Groups. The BAX Group consists of the BAX Global operations of the Company. The Brink's Group consists of the Brink's, Incorporated ("Brink's") and Brink's Home Security, Inc. ("BHS") operations of the Company. The Minerals Group consists of the Pittston Coal Company ("Coal Operations") and Pittston Mineral Ventures ("Mineral Ventures") operations of the Company. The Company prepares separate financial statements for the BAX, Brink's and Minerals Groups in addition to consolidated financial information of the Company. As previously mentioned, effective May 4, 1998, the designation of Pittston Burlington Group Common Stock and the name of the Pittston Burlington Group were changed to Pittston BAX Group Common Stock and Pittston BAX Group, respectively. All rights and privileges of the holders of such Stock are otherwise unaffected by such changes. The stock continues to trade on the New York Stock Exchange under the symbol "PZX". Under the share repurchase programs authorized by the Board of Directors (the "Board"), the Company purchased shares in the periods presented as follows: <TABLE> <CAPTION> Quarter Ended March 31 (Dollars in millions) 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> BAX Stock: Shares 177,532 132,100 Cost $ 3.5 2.6 Convertible Preferred Stock: Shares 355 -- Cost $ 0.1 -- Excess carrying amount (a) $ 0.02 -- ================================================================================ </TABLE> (a) The excess of the carrying amount of the Series C Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock") over the cash paid to holders for repurchases made during the periods. This amount is deducted from preferred dividends in the Company's Statement of Operations. The Company's remaining repurchase authority with respect to the Convertible Preferred Stock as of March 31, 1998 was $24.2 million. As of March 31, 1998, the Company had remaining authority to purchase over time 0.9 million shares of BAX Stock. The aggregate purchase price limitation for all common stock was $21.4 million as of March 31, 1998. DIVIDENDS The Board intends to declare and pay dividends, if any, on BAX Stock based on earnings, financial condition, cash flow and business requirements of the BAX Group. Since the Company remains subject to Virginia law limitations on dividends, losses by the Minerals Group and/or the Brink's Group could affect the Company's ability to pay dividends in respect to stock relating to the BAX Group. 49
During the first quarter of 1998 and 1997, the Board declared and the Company paid cash dividends of 6 cents per share of BAX Stock. Dividends paid on the Convertible Preferred Stock in each of the first quarters of 1998 and 1997 were $0.9 million. ACCOUNTING CHANGES The BAX Group adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", in the first quarter of 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income generally represents all changes in shareholders' equity except those resulting from investments by or distributions to shareholders. Total comprehensive (loss) income which is composed of net (loss) income and foreign currency translation adjustments, for the quarters ended March 31, 1998 and 1997 was ($2.6) million and $3.7 million, respectively. Effective January 1, 1998, the BAX Group implemented a new AICPA Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of Computer Software Developed for Internal Use". SOP No. 98-1 requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. As a result of the implementation of SOP No. 98-1, net loss for the quarter ended March 31, 1998, included a benefit of approximately $0.8 million or $.04 per share for costs capitalized during the quarter which would have been expensed prior to the implementation of SOP No. 98-1. PENDING ACCOUNTING CHANGES The Company will implement SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", in the financial statements for the year ended December 31, 1998. SFAS No. 131 requires publicly-held companies to report financial and descriptive information about operating segments in financial statements issued to shareholders for interim and annual periods. The SFAS also requires additional disclosures with respect to products and services, geographic areas of operation, and major customers. The adoption of this SFAS is not expected to have a material impact on the financial statements of the Company. FORWARD LOOKING INFORMATION Certain of the matters discussed herein, including statements regarding BPI and information technology and related outlay projections, the expected benefits from the ATI acquisition and from BAX Global's continuous improvement program on financial results and the readiness for Year 2000, involve forward looking information which is subject to known and unknown risks, uncertainties and contingencies, which could cause actual results, performance or achievements to differ materially from those which are anticipated. Such risks, uncertainties and contingencies, many of which are beyond the control of the BAX Group and the Company, include, but are not limited to, overall economic and business conditions, the demand for BAX Global's services, pricing and other competitive factors in the industry, new government regulations and/or legislative initiatives, variations in costs or expenses, the successful integration of the ATI acquisition, changes in the scope of improvements to information systems and Year 2000 initiatives, delays or problems in the implementation of Year 2000 initiatives by the BAX Group and/or its suppliers and customers, and delays or problems in the design and implementation of improvements to information systems. 50
PITTSTON MINERALS GROUP BALANCE SHEETS (IN THOUSANDS) <TABLE> <CAPTION> March 31 December 31 1998 1997 ========================================================================================== (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 2,183 3,394 Accounts receivable (net of estimated amount uncollectible: 1998 - $2,228; 1997 - $2,215) 80,103 63,599 Inventories, at lower of cost or market: Coal inventory 25,872 31,644 Other inventory 3,726 3,702 - ------------------------------------------------------------------------------------------ 29,598 35,346 Receivable - Pittston Brink's Group/BAX Group, net 8,233 -- Prepaid expenses 10,053 5,045 Deferred income taxes 25,060 25,136 - ------------------------------------------------------------------------------------------ Total current assets 155,230 132,520 Property, plant and equipment, at cost (net of accumulated depreciation, depletion and amortization: 1998 - $169,215; 1997 - $164,386) 171,158 172,338 Deferred pension assets 84,631 83,825 Deferred income taxes 53,258 54,778 Coal supply contracts, net of amortization 36,590 41,703 Intangibles, net of amortization 107,342 108,094 Receivable - Pittston Brink's Group/BAX Group, net 17,471 13,630 Other assets 47,790 47,294 - ------------------------------------------------------------------------------------------ Total assets $ 673,470 654,182 ========================================================================================== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Current maturities of long-term debt 465 547 Accounts payable 45,886 50,585 Payable - Pittston Brink's Group/BAX Group, net -- 3,038 Accrued liabilities 104,488 107,094 - ------------------------------------------------------------------------------------------ Total current liabilities 150,839 161,264 Long-term debt, less current maturities 153,435 116,114 Postretirement benefits other than pensions 225,601 223,836 Workers' compensation and other claims 87,784 92,857 Mine closing and reclamation 46,253 47,546 Other liabilities 30,436 31,137 Shareholder's equity (20,878) (18,572) - ------------------------------------------------------------------------------------------ Total liabilities and shareholder's equity $ 673,470 654,182 ========================================================================================== </TABLE> See accompanying notes to financial statements. 51
PITTSTON MINERALS GROUP STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) <TABLE> <CAPTION> Quarter Ended March 31 1998 1997 ================================================================================ <S> <C> <C> Net sales $ 149,898 158,883 Cost and expenses: Cost of sales 144,164 153,412 Selling, general and administrative expenses 9,087 7,409 - -------------------------------------------------------------------------------- Total costs and expenses 153,251 160,821 Other operating income, net 2,174 3,548 - -------------------------------------------------------------------------------- Operating (loss) profit (1,179) 1,610 Interest income 301 282 Interest expense (2,594) (2,625) Other expense, net -- (450) - -------------------------------------------------------------------------------- Loss before income taxes (3,472) (1,183) Credit for income taxes (2,229) (2,130) - -------------------------------------------------------------------------------- Net (loss) income (1,243) 947 Preferred stock dividends, net (864) (901) - -------------------------------------------------------------------------------- Net (loss) income attributed to common shares $ (2,107) 46 ================================================================================ Net (loss) income per common share: Basic $ (.26) .01 Diluted (.26) .01 ================================================================================ Cash dividends per common share $ .1625 .1625 ================================================================================ Weighted average common shares outstanding: Basic 8,225 8,002 Diluted 8,225 8,059 ================================================================================ </TABLE> See accompanying notes to financial statements. 52
PITTSTON MINERALS GROUP STATEMENTS OF CASH FLOWS (IN THOUSANDS) (Unaudited) <TABLE> <CAPTION> Quarter Ended March 31 1998 1997 ==================================================================================================== <S> <C> <C> Cash flows from operating activities: Net (loss) income $ (1,243) 947 Adjustments to reconcile net (loss) income to net cash used by operating activities: Depreciation, depletion and amortization 8,933 8,920 Provision for deferred income taxes 1,612 2,001 Credit for pensions, noncurrent (802) (847) Other operating, net 788 (185) Change in operating assets and liabilities, net of effects of acquisitions and dispositions: Increase in accounts receivable (16,492) (414) Decrease (increase) in inventories 5,764 (7,931) Increase in prepaid expenses (2,452) (3,425) Decrease in accounts payable and accrued liabilities (10,937) (8,127) (Increase) decrease in other assets (222) 223 Decrease in other liabilities (1,215) (1,614) Decrease in workers' compensation and other claims, noncurrent (2,394) (2,257) Other, net 44 (106) - ---------------------------------------------------------------------------------------------------- Net cash used by operating activities (18,616) (12,815) - ---------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment (4,460) (7,458) Proceeds from disposal of property, plant and equipment 229 1,534 Acquisitions, net of cash acquired, and related contingency payments -- (791) Other, net (1,939) 1,237 - ---------------------------------------------------------------------------------------------------- Net cash used by investing activities (6,170) (5,478) - ---------------------------------------------------------------------------------------------------- Cash flows from financing activities: Additions to debt 40,344 36,483 Reductions of debt (3,162) (126) Payments to Brink's Group (11,238) (11,685) Payments to BAX Group -- (6,002) Repurchase of stock (269) -- Proceeds from exercise of stock options -- 4 Dividends paid (2,100) (2,089) - ---------------------------------------------------------------------------------------------------- Net cash provided by financing activities 23,575 16,585 - ---------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (1,211) (1,708) Cash and cash equivalents at beginning of period 3,394 3,387 - ---------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 2,183 1,679 ==================================================================================================== </TABLE> See accompanying notes to financial statements. 53
PITTSTON MINERALS GROUP NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (Unaudited) (1) The financial statements of the Pittston Minerals Group (the "Minerals Group") include the balance sheets, results of operations and cash flows of the Pittston Coal Company ("Coal Operations") and Pittston Mineral Ventures ("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 amounts reflected in these financial statements are determined based upon methods which management believes to be a reasonable and an equitable estimate of the cost attributable to the Minerals Group. 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 is responsible for all liabilities. Therefore, financial developments affecting the Minerals Group, the Pittston Brink's Group (the "Brink's Group") or the Pittston BAX Group (the "BAX Group" formerly the Pittston Burlington Group) that affect the Company's financial condition could affect the results of operations and financial condition of each of the Groups. Accordingly, the Company's consolidated financial statements must be read in connection with the Minerals Group's financial statements. (2) The following is a reconciliation between the calculation of basic and diluted net income per share: <TABLE> <CAPTION> Quarter Ended March 31 Minerals Group 1998 1997 ------------------------------------------------------------------------ <S> <C> <C> Numerator: Net (loss) income $ (1,243) 947 Convertible Preferred Stock dividends (864) (901) ------------------------------------------------------------------------ Net (loss) income - Basic and diluted net income per share numerator (2,107) 46 Denominator: Basic weighted average common shares outstanding 8,225 8,002 Effect of dilutive securities: Employee stock options -- 57 ------------------------------------------------------------------------ Diluted weighted average common shares outstanding 8,225 8,059 ======================================================================== </TABLE> Options to purchase 677 shares of common stock, at prices between $9.50 and $25.74 per share, were outstanding as of March 31, 1998 but were not included in the computation of diluted net loss per share because the effect of all options would be antidilutive. Options to purchase 230 shares of common stock, at prices between $14.86 and $25.74 per share were outstanding as of March 31, 1997 but were not included in the computation of diluted net income per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. The conversion of preferred stock to 1,765 and 1,793 shares of common stock has been excluded in the computation of diluted net (loss) income per share in 1998 and 1997, respectively, because the effect of the assumed conversion would be antidilutive. 54
(3) Depreciation, depletion and amortization of property, plant and equipment in the first quarter of 1998 and 1997 totaled $5,739 and $5,449, respectively. (4) Cash payments made for interest and income taxes, net of refunds received, were as follows: <TABLE> <CAPTION> Quarter Ended March 31 1998 1997 - ---------------------------------------------------------------------------- <S> <C> <C> Interest $ 3,466 2,641 ============================================================================ Income taxes $ (22) 13 ============================================================================ </TABLE> (5) In two independent transactions in April and May, 1998, Coal Operations sold one of its surface mines representing 1.6 million tons of the anticipated 1998 production, along with the coal supply agreements associated with this mine, and other limited reserves to major US coal companies. Cash proceeds from these sales approximate $18.7 million. (6) Under the share repurchase programs authorized by the Board of Directors, the Company purchased shares in the periods presented as follows: <TABLE> <CAPTION> Quarter Ended March 31 (Dollars in millions) 1998 1997 -------------------------------------------------------------------------- <S> <C> <C> Convertible Preferred Stock: Shares 355 -- Cost $ 0.1 -- Excess carrying amount (a) $ 0.02 -- -------------------------------------------------------------------------- </TABLE> (a) The excess of the carrying amount of the Series C Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock") over the cash paid to holders for repurchases made during the periods. This amount is deducted from preferred dividends in the Minerals Group and the Company's Statement of Operations. At March 31, 1998, the Company had the remaining authority to purchase over time 1,000 shares of Minerals Stock and an additional $24,236 of its Convertible Preferred Stock. The aggregate purchase price limitation for all common stock was $21,398 at March 31, 1998. (7) The Minerals Group adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", in the first quarter of 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income generally represents all changes in shareholders' equity except those resulting from investments by or distributions to shareholders. Total comprehensive loss which is composed of net (loss) income attributable to common shares and foreign currency translation adjustments, for the quarters ended March 31, 1998 and 1997 was $1,778 and $172, respectively. Effective January 1, 1998, the Company implemented a new AICPA Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of Computer Software Developed for Internal Use". SOP No. 98-1 requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. (8) The Minerals Group will adopt a new accounting standard, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", in the financial statements for the year ended December 31, 1998. SFAS No. 131 requires publicly-held companies to report financial and descriptive information about operating segments in financial statements issued to shareholders for interim and annual periods. SFAS No. 131 also requires additional disclosures with respect to products and services, geographic areas of operation, and major customers. The adoption of this SFAS is not expected to have a material impact on the financial statements of the Minerals Group. 55
(9) Certain prior period amounts have been reclassified to conform to the current period's financial statement presentation. (10) In the opinion of management, all adjustments have been made which are necessary for a fair presentation of results of operations and financial condition for the periods reported herein. All such adjustments are of a normal recurring nature. 56
PITTSTON MINERALS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The financial statements of the Pittston Minerals Group ("Minerals Group") include the balance sheets, results of operations and cash flows of the Pittston Coal Company ("Coal Operations") and Pittston Mineral Ventures ("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 amounts reflected in these financial statements are determined based upon methods which management believes to be a reasonable and an equitable estimate of the cost attributable to the Minerals Group. 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 is responsible for all liabilities. Therefore, financial developments affecting the Minerals Group, the Pittston Brink's Group (the "Brink's Group") or the Pittston BAX Group (the "BAX Group" formerly the Pittston Burlington Group) that affect the Company's financial condition could affect the results of operations and financial condition of each of the Groups. Accordingly, the Company's consolidated financial statements must be read in connection with the 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 must be read in conjunction with the financial statements and related notes of the Minerals Group and the Company. RESULTS OF OPERATIONS <TABLE> <CAPTION> Quarter Ended March 31 (In thousands) 1998 1997 ================================================================================ <S> <C> <C> Net Sales: Coal Operations $ 145,920 154,593 Mineral Ventures 3,978 4,290 - ------------------------------------------------------------------------------- Net sales $ 149,898 158,883 ================================================================================ Operating profit (loss): Coal Operations $ 2,502 3,623 Mineral Ventures (47) (455) - ------------------------------------------------------------------------------- Segment operating profit 2,455 3,168 General corporate expense (3,634) (1,558) - ------------------------------------------------------------------------------- Operating (loss) profit $ (1,179) 1,610 ================================================================================ </TABLE> In the first quarter of 1998, the Minerals Group reported a net loss of $1.2 million, $0.26 per share, compared to net income of $0.9 million, $0.01 per share, in the first quarter of 1997. The operating loss in the first quarter of 1998 totaled $1.2 million as compared to an operating profit of $1.6 million in the 1997 quarter. Included in the 1998 quarter's results was a pre-tax charge of $1.8 million ($0.14 per share) for the Minerals Group's share of expenses related to a retirement agreement between the Company and its former Chairman and CEO. Net sales during the first quarter of 1998 decreased $9.0 million (6%) compared to the corresponding period in 1997. 57
COAL OPERATIONS The following are tables of selected financial data for Coal Operations on a comparative basis: <TABLE> <CAPTION> Quarter Ended March 31 (In thousands) 1998 1997 ============================================================================== <S> <C> <C> Net sales $ 145,920 154,593 - ------------------------------------------------------------------------------ Cost of sales 141,493 149,739 Selling, general and administrative expenses 4,254 4,936 - ------------------------------------------------------------------------------ Total costs and expenses 145,747 154,675 Other operating income, net 2,329 3,705 - ------------------------------------------------------------------------------ Operating profit $ 2,502 3,623 ============================================================================== Coal sales (tons): Metallurgical 1,931 1,891 Utility and industrial 2,923 3,229 - ------------------------------------------------------------------------------ Total coal sales 4,854 5,120 ============================================================================== Production/purchased (tons): Deep 1,389 1,102 Surface 1,969 2,659 Contract 242 363 - ------------------------------------------------------------------------------ 3,600 4,124 Purchased 965 1,340 - ------------------------------------------------------------------------------ Total 4,565 5,464 ============================================================================== <CAPTION> (In thousands, Quarter Ended March 31 except per ton amounts) 1998 1997 ============================================================================== <S> <C> <C> Net coal sales (a) $ 143,976 152,698 Current production costs of coal sold (a) 132,507 141,572 - ------------------------------------------------------------------------------ Coal margin 11,469 11,126 Non-coal margin 616 717 Other operating income, net 2,329 3,705 - ------------------------------------------------------------------------------ Margin and other income 14,414 15,548 - ------------------------------------------------------------------------------ Other costs and expenses: Idle equipment and closed mines 703 307 Inactive employee cost 6,955 6,682 Selling, general and administrative expenses 4,254 4,936 - ------------------------------------------------------------------------------ Total other costs and expenses 11,912 11,925 - ------------------------------------------------------------------------------ Operating profit $ 2,502 3,623 ============================================================================== Coal margin per ton: Realization $ 29.66 29.82 Current production costs 27.29 27.65 - ------------------------------------------------------------------------------ Coal margin $ 2.37 2.17 ============================================================================== </TABLE> (a) Excludes non-coal components. 58
Coal Operations generated an operating profit of $2.5 million in the first quarter of 1998, compared to $3.6 million recorded in the 1997 first quarter. Sales volume of 4.9 million tons in the first quarter of 1998 was 5% less than the 5.1 million tons sold in the prior year quarter. Compared to the first quarter of 1997, steam coal sales in 1998 decreased by 0.3 million tons (9%), to 2.9 million tons, while metallurgical coal sales remained consistent at 1.9 million tons. The steam sales reduction was due to the expiration of a long-term contract, railroad service disruption and reduced spot sales. Steam coal sales represented 60% of total volume in 1998 and 63% in 1997. Total coal margin of $11.5 million for the first quarter of 1998 represented an increase of $0.3 million from the comparable 1997 period. The increase in total coal margin reflects a decrease of $9.1 million ($0.36 per ton) in the current production costs of coal sold offset, in large part, by a decrease of $8.7 million ($0.16 per ton) in coal realization. The decrease in realization was due mostly to a decrease in realization on metallurgical coal caused by lower price settlements with metallurgical customers for the contract year which began on April 1, 1997. Realizations on metallurgical coal sales for the contract year beginning April 1, 1998 will be slightly lower than those in the contract year that began April 1, 1997. The current production cost of coal sold decreased $0.36 per ton to $27.29 in the first quarter of 1998 from the first quarter of 1997. Production costs in the 1998 quarter include a $1.3 million ($0.27 per ton) benefit related to a favorable ruling issued by the U.S. Supreme Court in March 1998 on the unconstitutionality of the Harbor Maintenance Tax. The $1.3 million credit represents the effect of past payments and, as a result of the ruling, Coal Operations anticipates lower export coal costs in the future. In addition, the first quarter of 1997 included higher production costs at certain deep mines due to temporary adverse geological conditions. Production in the 1998 first quarter decreased 0.5 million tons over the 1997 first quarter to 3.6 million tons and purchased coal decreased 0.4 million tons to 1.0 million tons. Surface production accounted for 56% and 66% of the total volume in the 1998 and 1997 first quarters, respectively. Productivity of 34.9 tons per man day in the 1998 first quarter decreased from the 36.6 tons per man day in the 1997 first quarter primarily attributable to an increased percentage of deep mine production. Non-coal margin, which reflects earnings from the oil, gas and timber businesses, amounted to $0.6 million in the first quarter of 1998, which was $0.1 million lower than in the first quarter of 1997, reflecting the impact of changes in natural gas prices. Other operating income, which primarily includes gains on sales of property and equipment and third party royalties, amounted to $2.3 million in the first quarter of 1998 as compared to $3.7 million in the comparable period of 1997. This decrease of $1.4 million was principally due to the inclusion in 1997 of a favorable insurance settlement along with higher gains on asset sales during that period. Idle equipment and closed mine costs increased $0.4 million to $0.7 million in the 1998 first quarter due to costs associated with mines which went idle during the third quarter of 1997. Inactive employee costs, which represent long-term employee liabilities for pension and retiree medical costs, increased from $6.7 million to $7.0 million for the first quarter of 1998 resulting from the use of a lower long-term discount rate to calculate the present value of the obligations. Selling, general and administrative expenses decreased $0.7 million (14%) in the first quarter of 1998 from 1997 due to reductions in support and administrative staff and related costs. In two independent transactions in April and May, 1998, Coal Operations sold one of its surface mines representing 1.6 million tons of the anticipated 1998 production, along with the coal supply agreements associated with this mine, and other limited reserves to major US coal companies. Cash proceeds from these sales approximate $18.7 million. In a related transaction, Coal operations acquired additional tons of coal reserves that are contiguous to an existing operation. 59
Coal Operations continues cash funding for charges recorded in prior years for facility closure costs recorded as restructuring and other charges in the Statement of Operations. The following table analyzes the changes in liabilities during the first three months of 1998 for such costs: <TABLE> <CAPTION> Employee Mine Termination, and Medical Plant and Closure Severance (In thousands) Costs Costs Total - -------------------------------------------------------------------------------- <S> <C> <C> <C> Balance as of December 31, 1997 $ 11,143 19,703 30,846 Payments 272 459 731 - -------------------------------------------------------------------------------- Balance as of March 31, 1998 $ 10,871 19,244 30,115 ================================================================================ </TABLE> MINERAL VENTURES The following is a table of selected financial data for Mineral Ventures on a comparative basis: <TABLE> <CAPTION> (Dollars in thousands, except Quarter Ended March 31 per ounce data) 1998 1997 ================================================================================ <S> <C> <C> Stawell Gold Mine: Gold sales $ 3,956 4,281 Other revenue 22 9 - -------------------------------------------------------------------------------- Net sales 3,978 4,290 Cost of sales (a) 2,671 3,631 Selling, general and administrative expenses (a) 291 298 - -------------------------------------------------------------------------------- Total costs and expenses 2,962 3,929 - -------------------------------------------------------------------------------- Operating profit - Stawell Gold Mine 1,016 361 Other operating expense, net (1,063) (816) - -------------------------------------------------------------------------------- Operating loss $ (47) (455) ================================================================================ Stawell Gold Mine: Mineral Ventures' 50% direct share: Ounces sold 11,146 10,576 Ounces produced 11,156 10,951 Average per ounce sold (US$): Realization $ 355 405 Cash cost 206 327 ================================================================================ </TABLE> (a) Excludes $908 of non-Stawell related selling, general and administrative expenses for the quarter ended March 31, 1998. Excludes $42 and $617 of non-Stawell related cost of sales and selling, general and administrative expenses, respectively, for the quarter ended March 31, 1997. Such costs are reclassified to cost of sales and selling, general and administrative expenses in the Minerals Group Statement of Operations. Mineral Ventures, which primarily consists of a 50% direct and a 17% indirect interest in the Stawell gold mine ("Stawell") in western Victoria, Australia, generated a small operating loss in the first quarter of 1998, an improvement of $0.4 million as compared to the loss of $0.5 million in the first quarter of 1997. Mineral Ventures' 50% direct interest in Stawell's operations generated net sales of $4.0 million in the first quarter of 1998 compared to $4.3 million in the 1997 period due to an increase in ounces of gold sold from 10.6 thousand ounces to 11.1 thousand ounces, offset by lower gold realizations. The operating profit at Stawell 60
of $1.0 million increased $0.7 million over the prior year amount, reflecting a $121 per ounce decrease (37%) in the cash cost of gold sold partially offset by a $50 per ounce decrease (12%) in average realization. Production costs were lower in the 1998 quarter due to a weaker Australian dollar as well as more favorable ground conditions than those experienced in the first quarter of 1997. As of March 31, 1998, approximately 16% of Mineral Ventures' proven and probable reserves had been sold forward under forward sales contracts that mature periodically through mid-1999. Based on contracts in place and current market conditions, full year 1998 average realizations are expected to be between $325 and $330 per ounce of gold sold. At March 31, 1998, remaining proven and probable gold reserves at the Stawell mine were estimated at 415.7 thousand ounces. The joint venture also has exploration rights in the highly prospective district around the mine. Other operating expense, net, includes equity earnings from joint ventures, primarily consisting of Mineral Ventures' 17% indirect interest in Stawell's operations and gold exploration costs for all operations excluding Stawell. In addition to its interest in Stawell, Mineral Ventures has a 17% indirect interest in the Silver Swan base metals property in Western Australia. Operating results at Silver Swan have been below expectations due to the impact of depressed nickel prices, though production volumes and costs at the mine are in line with expectations. FOREIGN OPERATIONS A portion of the Minerals Group's financial results is derived from activities in Australia, which has a local currency other than the U.S. dollar. Because the financial results of the Minerals Group are reported in U.S. dollars, they are affected by the changes in the value of the foreign currency in relation to the U.S. dollar. Rate fluctuations may adversely affect transactions which are denominated in the Australian dollar. The Minerals Group routinely enters into such transactions in the normal course of its business. The Company, on behalf of the Minerals Group, from time to time, uses foreign currency exchange forward contracts to hedge the risks associated with certain transactions denominated in the Australian dollar. Realized and unrealized gains and losses on these contracts are deferred and recognized as part of the specific transaction hedged. The Minerals Group is also subject to other risks customarily associated with doing business in foreign countries, including labor and economic conditions. 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 an equitable and a reasonable estimate of the cost attributable to the Minerals Group. These attributions were $3.6 million and $1.6 million for the first quarters of 1998 and 1997, respectively. The increase in the 1998 period is mainly due to a pre-tax charge of approximately $5.8 million related to a retirement agreement between the Company and its former Chairman and CEO. Approximately $1.8 million of these expenses have been attributed to the Minerals Group. OTHER OPERATING INCOME, NET Other operating income, net for the first quarter of 1998 decreased to $2.2 million from $3.5 million recognized in the 1997 quarter. Other operating income, net principally includes equity in earnings of unconsolidated affiliates, royalty income and gains and losses from sales of coal property and equipment. The decrease in 1998 relates to the inclusion in 1997 of a favorable insurance settlement along with higher gains on asset sales during that period. 61
INTEREST EXPENSE, NET Net interest expense in each of first quarters of 1998 and 1997 was $2.3 million. INCOME TAXES In both the 1998 and 1997 periods presented, a credit for income taxes was recorded, due to pre-tax losses as well as tax benefits of percentage depletion which can be used by the Company. 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. Management believes this attribution to be an equitable and a reasonable estimate of the cost attributable to the Minerals Group. CASH FLOW REQUIREMENTS Operating activities for the first three months of 1998 used cash of $18.6 million, compared to $12.8 million used in 1997. In the 1998 period, cash flow from operations declined due to lower earnings combined with an increase in the amount required to fund operating assets and liabilities. Cash used by operating activities, capital expenditures and other investing activities, repayments to the Brink's Group and net costs of share activity more than offset additional net borrowings, resulting in a decrease in cash and cash equivalents of $1.2 million. CAPITAL EXPENDITURES Cash capital expenditures for the first three months of 1998 and 1997 totaled $4.5 million and $7.5 million, respectively. During the 1998 period, Coal Operations and Mineral Ventures spent $3.7 million and $0.7 million, respectively. For the remainder of 1998, the Minerals Group's cash capital expenditures are expected to approximate $20 million. FINANCING The Minerals Group intends to fund cash capital expenditures through anticipated cash flow from operating activities or through operating leases if the latter are financially attractive. Shortfalls, if any, will be financed through the Company's revolving credit agreements, other borrowing arrangements or borrowings from the Brink's and BAX Groups. Total debt outstanding at March 31, 1998 was $153.9 million, an increase of $37.2 million from the $116.7 million outstanding at December 31, 1997. These increased borrowings, which funded cash flow requirements including repayment of amounts owed to the Brink's Group, were made primarily under the credit agreement discussed below. The Company has a $350.0 million credit agreement with a syndicate of banks (the "Facility"). The Facility includes a $100.0 million term loan and also permits additional borrowings, repayments and reborrowings of up to an aggregate of $250.0 million. As of March 31, 1998 and December 31, 1997, borrowings of $100.0 million were outstanding under the term loan portion of the Facility and $80.8 million and $25.9 million, respectively, of additional borrowings were outstanding under the remainder of the Facility. Of the outstanding amounts under the Facility at March 31, 1998, and December 31, 1997, $52.4 million and $15.0 million, respectively, was attributed to the Minerals Group. 62
RELATED PARTY TRANSACTIONS At March 31, 1998, under interest bearing borrowing arrangements, the Minerals Group owed the Brink's Group $15.8 million, a decrease of $11.2 million from the $27.0 million owed at December 31, 1997. The Minerals Group did not owe any amounts to the BAX Group at March 31, 1998 or December 31, 1997. At March 31, 1998, the Brink's Group owed the Minerals Group $21.9 million versus $19.4 million at December 31, 1997 for tax benefits. Approximately $19.0 million is expected to be paid within one year. Also at March 31, 1998, the BAX Group owed the Minerals Group $19.6 million versus $18.2 million at December 31, 1997 for tax benefits, of which $5.0 million is expected to be paid within one year. READINESS FOR YEAR 2000 The Minerals Group has taken actions to understand the nature and extent of the work required to make its systems, products and infrastructures Year 2000 compliant. As these efforts progress, the Minerals Group continues to evaluate the estimated costs associated with these efforts. Based upon its most recent estimates and its anticipated capital spending, the Minerals Group does not anticipate that it will incur any material costs in preparing for the Year 2000. The Minerals Group believes, based on available information, that it will be able to manage its total Year 2000 transition without any material adverse effect on its business operations, products or financial condition. However, if the applicable modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 issue could have a material adverse impact on the operations of the Minerals Group. Further, management is currently evaluating the extent to which the Minerals Group's interface systems are vulnerable to its suppliers' and customers' failure to remediate their own Year 2000 issues as there is no guarantee that the systems of other companies on which the Minerals Group's systems rely will be timely and adequately converted. CAPITALIZATION The Company has three classes of common stock: Minerals Stock; Pittston Brink's Group Common Stock ("Brink's Stock") and Pittston BAX Group Common Stock ("BAX Stock") which were designed to provide shareholders with separate securities reflecting the performance of the Minerals Group, Brink's Group and BAX Group, respectively, without diminishing the benefits of remaining a single corporation or precluding future transactions affecting any of the Groups. The Minerals Group consists of the Coal Operations and Mineral Ventures operations of the Company. The Brink's Group consists of the Brink's, Incorporated ("Brink's") and the Brink's Home Security, Inc. ("BHS") operations of the Company. The BAX Group consists of the BAX Global Inc. ("BAX Global") operations of the Company. The Company prepares separate financial statements for the Minerals, Brink's and BAX Groups in addition to consolidated financial information of the Company. As previously mentioned, effective May 4, 1998, the designation of Pittston Burlington Group Common Stock and the name of the Pittston Burlington Group were changed to Pittston BAX Group Common Stock and Pittston BAX Group, respectively. All rights and privileges of the holders of such Stock are otherwise unaffected by such changes. The stock continues to trade on the New York Stock Exchange under the symbol "PZX". Under the share repurchase programs authorized by the Board of Directors (the "Board"), the Company purchased shares in the periods presented as follows: <TABLE> <CAPTION> Quarter Ended March 31 (Dollars in millions) 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> Convertible Preferred Stock: Shares 355 -- Cost $ 0.1 -- Excess carrying amount (a) $ 0.02 -- ================================================================================ </TABLE> (a) The excess of the carrying amount of the Series C Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock") over the cash paid to holders for repurchases made during the periods. This amount is deducted from preferred dividends in the Minerals Group and the Company's Statement of Operations. 63
The Company's remaining repurchase authority with respect to the Convertible Preferred Stock as of March 31, 1998 was $24.2 million. As of March 31, 1998, the Company had remaining authority to purchase over time 1.0 million shares of Minerals Stock. The aggregate purchase price limitation for all common stock was $21.4 million as of March 31, 1998. DIVIDENDS The Board intends to declare and pay dividends, if any, on Minerals Stock based on the earnings, financial condition, cash flow and business requirements of the Minerals Group. Since the Company remains subject to Virginia law limitations on dividends, losses by the Brink's or the BAX Group could affect the Company's ability to pay dividends in respect of stock relating to the Minerals Group. Dividends on Minerals Stock are also limited by the Available Minerals Dividend Amount as defined in the Company's Articles of Incorporation. The Available Minerals Dividend Amount may be reduced by activity that reduces shareholder's equity or the fair value of net assets of the Minerals Group. Such activity includes net losses by the Minerals Group, dividends paid on the Minerals Stock and the Convertible Preferred Stock, repurchases of Minerals Stock and the Convertible Preferred Stock, and foreign currency translation losses. At March 31, 1998, the Available Minerals Dividend Amount was at least $12.9 million. During the first three months of 1998 and 1997, the Board declared and the Company paid cash dividends of 16.25 cents per share of Minerals Stock. Dividends paid on the Convertible Preferred Stock in each of the 1998 and 1997 first quarters totaled $0.9 million. In May 1998, the Company reduced the annual dividend rate on Minerals Stock to $0.10 per share for shareholders as of the May 15, 1998 record date. Cash made available from this lower dividend rate will be used to either reinvest, as suitable opportunities arise, in the Minerals Group companies or to pay down debt, with a view towards maximizing long-term shareholder value. ACCOUNTING CHANGES The Minerals Group adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", in the first quarter of 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income generally represents all changes in shareholders' equity except those resulting from investments by or distributions to shareholders. Total comprehensive loss, which is composed of net (loss) income attributable to common shares and foreign currency translation adjustments, for the quarters ended March 31, 1998 and 1997 was ($1.8) million and ($0.2) million, respectively. Effective January 1, 1998, the Minerals Group implemented a new AICPA Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of Computer Software Developed for Internal Use". SOP No. 98-1 requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. PENDING ACCOUNTING CHANGES The Minerals Group will adopt a new accounting standard, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", in the financial statements for the year ended December 31, 1998. SFAS No. 131 requires publicly-held companies to report financial and descriptive information about operating segments in financial statements issued to shareholders for interim and annual periods. SFAS No. 131 also requires additional disclosures with respect to products and services, geographic areas of operation, and major customers. The adoption of this SFAS is not expected to have a material impact on the financial statements of the Minerals Group. FORWARD LOOKING INFORMATION Certain of the matters discussed herein, including statements regarding readiness for Year 2000 and expectations with regard to future realizations on metallurgical coal and gold sales involve forward looking information which is subject to known and unknown risks, uncertainties and contingencies which could cause actual results, performance and achievements, to differ materially from those which are anticipated. Such risks, uncertainties and contingencies, many of which are beyond the control of the Minerals Group and the Company, include, but are not limited to, overall economic and business conditions, the demand for the Minerals Group's products, geological conditions, pricing, and other competitive factors in the industry, new 64
government regulations and/or legislative initiatives, variations in the spot prices of coal and gold, the ability of counterparties to perform, changes in the scope of Year 2000 initiatives and delays or problems in the implementation of Year 2000 initiatives by the Minerals Group and/or its suppliers and customers. 65
PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The Registrant's annual meeting of shareholders was held on May 1, 1998. (b) Not required. (c) The following persons were elected for terms expiring in 2001, by the following votes: <TABLE> <CAPTION> For Withheld --- -------- <S> <C> <C> J. R. Barker 50,823,524.7316 1,617,341.6572 J. L. Broadhead 50,827,110.6781 1,622,755.7107 M. T. Dan 50,837,043.1463 1,612,823.2425 R. M. Gross 50,832,974.9386 1,616,891.4502 </TABLE> The following person was elected for a term expiring in 2000, by the following votes: <TABLE> <CAPTION> For Withheld --- -------- <S> <C> <C> C. S. Sloane 50,827,003.1203 1,622,863.2685 </TABLE> The selection of KPMG Peat Marwick LLP as independent certified public accountants to audit the accounts of the Registrant and its subsidiaries for the year 1998 was approved by the following vote: <TABLE> <CAPTION> Broker For Against Abstentions Non-votes --- ------- ----------- --------- <S> <C> <C> <C> 51,303,833.4541 367,445.1592 194,641.3123 583,896.4630 </TABLE> Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: <TABLE> <CAPTION> Exhibit Number ------ <C> <S> 2 Membership Interest Acquisition Agreement Among Air Transport International LLC and BAX Global Inc., dated February 3, 1998. Incorporated by reference to the Registrant's Current Report on Form 8-K filed May 14, 1998. 3(I) Articles of Correction for the Registrant, dated March 16, 1998. 10(a)* Retirement Agreement, dated as of May 4, 1998, between the Registrant and David L. Marshall. 27 Financial Data Schedule. (b) The following reports on Form 8-K were filed during the first quarter of 1998: (i) Report on Form 8-K filed on January 28, 1998, with respect to fourth quarter 1997 earnings for each of Pittston Brink's Group Common Stock, Pittston Burlington Group Common Stock and Pittston Minerals Group Common Stock; </TABLE> 66
(ii) Report on Form 8-K filed on February 4, 1998, with respect to BAX Global Inc.'s agreement to acquire, subject to certain conditions, Air Transport International LLC; (iii) Report on Form 8-K filed on February 6, 1998, with respect to the retirement of Joseph C. Farrell, the Registrant's Chairman of the Board, Chief Executive Officer and President and the election by the Board of Directors of Michael T. Dan as President and Chief Executive Officer; (iv) Report on Form 8-K filed on February 10, 1998, with respect to the election of Michael T. Dan as a director of the Registrant, in addition to his election as President and Chief Executive Officer; (v) Report on Form 8-K filed on March 19, 1998, with respect to Articles of Restatement and Articles of Correction filed by the Registrant with the Virginia State Corporation Commission; and (vi) Report on Form 8-K filed on March 30, 1998, with respect to anticipated first quarter 1998 results for Pittston Burlington Group Common Stock. - ---------- * Management contract or compensatory plan or arrangement. 67
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 May 15, 1998 By /s/ Amanda N. Aghdami --------------------------------- Amanda N. Aghdami (Controller and Principal Accounting Officer) 68