SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K/A (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ______________ to _____________ Commission file number 1-9148 THE PITTSTON COMPANY (Exact name of registrant as specified in its charter) Virginia 54-1317776 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) P.O. Box 120070, 100 First Stamford Place, Stamford, Connecticut 06912-0070 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (203) 978-5200 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ Pittston Brink's Group Common Stock, Par Value $1 New York Stock Exchange Pittston Burlington Group Common Stock, Par Value $1 New York Stock Exchange Pittston Minerals Group Common Stock, Par Value $1 New York Stock Exchange 4% Subordinated Debentures Due July 1, 1997 New York Stock Exchange Rights to Purchase Series A Participating Cumulative Preferred Stock New York Stock Exchange Rights to Purchase Series B Participating Cumulative Preferred Stock New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 1, 1996, there were issued and outstanding 41,573,743 shares of Pittston Brink's Group common stock, 20,786,872 shares of Pittston Burlington Group common stock and 8,405,908 shares of Pittston Minerals Group common stock. The aggregate market value of such stocks held by nonaffiliates, as of that date, was $923,075,741, $342,959,562 and $121,194,593, respectively. Documents incorporated by reference: Portions of the Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A(Part III).
EXPLANATORY NOTE This Amendment to the Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Form 10-K") of The Pittston Company ("Pittston" or the "Company") is being filed by Pittston in order to amend the following item in the Form 10-K: PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Pittston Company and Subsidiaries STATEMENT OF MANAGEMENT RESPONSIBILITY The management of The Pittston Company (the "Company") is responsible for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles. Management has also prepared the other information in the annual report and is responsible for its accuracy. In meeting our responsibility for the integrity of the consolidated financial statements, we maintain a system of internal controls designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and that the accounting records provide a reliable basis for the preparation of the financial statements. Qualified personnel throughout the organization maintain and monitor these internal controls on an ongoing basis. In addition, the Company maintains an internal audit department that systematically reviews and reports on the adequacy and effectiveness of the controls, with management follow-up as appropriate. Management has also established a formal Business Code of Ethics which is distributed throughout the Company. We acknowledge our responsibility to establish and preserve an environment in which all employees properly understand the fundamental importance of high ethical standards in the conduct of our business. The Company's consolidated financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. During the audit they review and make appropriate tests of accounting records and internal controls to the extent they consider necessary to express an opinion on the Company's consolidated financial statements. The Company's Board of Directors pursues its oversight role with respect to the Company's consolidated financial statements through the Audit and Ethics Committee, which is composed solely of outside directors. The Committee meets periodically with the independent auditors, internal auditors and management to review the Company's control system and to ensure compliance with applicable laws and the Company's Business Code of Ethics. We believe that the policies and procedures described above are appropriate and effective and do enable us to meet our responsibility for the integrity of the Company's consolidated financial statements.
INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders The Pittston Company We have audited the accompanying consolidated balance sheets of The Pittston Company and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Pittston Company and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Stamford, Connecticut January 25, 1996 64
The Pittston Company and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31 (Dollars in thousands, except per share amounts) 1995 1994 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 52,823 42,318 Short-term investments 29,334 25,162 Accounts receivable: Trade (Note 3) 397,043 361,361 Other 40,278 31,165 - ------------------------------------------------------------------------------------------------------ 437,321 392,526 Less estimated amount uncollectible 16,075 15,734 - ------------------------------------------------------------------------------------------------------ 421,246 376,792 Coal inventory 37,329 25,518 Other inventory 9,070 8,635 - ------------------------------------------------------------------------------------------------------ 46,399 34,153 Prepaid expenses 31,556 27,700 Deferred income taxes (Note 6) 55,335 55,850 - ------------------------------------------------------------------------------------------------------ Total current assets 636,693 561,975 Property, plant and equipment, at cost (Note 4) 923,514 840,494 Less accumulated depreciation, depletion and amortization 437,346 394,660 - ------------------------------------------------------------------------------------------------------ 486,168 445,834 Intangibles, net of amortization (Notes 5 and 10) 327,183 329,441 Deferred pension assets (Note 13) 123,743 118,953 Deferred income taxes (Note 6) 72,343 84,214 Other assets 161,242 197,361 - ------------------------------------------------------------------------------------------------------ Total assets $1,807,372 1,737,778 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 37,063 13,323 Current maturities of long-term debt (Note 7) 7,280 13,748 Accounts payable 263,444 252,615 Accrued liabilities: Taxes 44,050 44,654 Workers' compensation and other claims 33,255 41,771 Miscellaneous 209,396 208,359 - ------------------------------------------------------------------------------------------------------ 286,701 294,784 - ------------------------------------------------------------------------------------------------------ Total current liabilities 594,488 574,470 Long-term debt, less current maturities (Note 7) 133,283 138,071 Postretirement benefits other than pensions (Note 13) 219,895 218,738 Workers' compensation and other claims 125,894 138,793 Deferred income taxes (Note 6) 17,213 19,036 Other liabilities 194,620 200,855 Commitments and contingent liabilities (Notes 7, 11, 12, 13, 17 and 18) Shareholders' equity (Notes 1, 7, 8 and 9): Preferred stock, par value $10 per share, Authorized: 2,000,000 shares $31.25 Series C Cumulative Preferred Stock, Issued: 1995--136,280 shares; 1994--152,650 shares 1,362 1,526 Pittston Brink's Group common stock, par value $1 per share: Authorized: 100,000,000 shares Issued: 1995--41,573,743 shares; 1994--41,594,845 shares 41,574 41,595 Pittston Burlington Group common stock, par value $1 per share: Authorized: 50,000,000 shares Issued: 1995--20,786,872; 1994--20,797,423 20,787 20,798 Pittston Minerals Group common stock, par value $1 per share: Authorized: 20,000,000 shares Issued: 1995--8,405,908 shares; 1994--8,389,622 shares 8,406 8,390 Capital in excess of par value 401,633 399,672 Retained earnings 188,728 107,739 Equity adjustment from foreign currency translation (20,705) (14,276) Employee benefits trust, at market value (Note 9) (119,806) (117,629) - ------------------------------------------------------------------------------------------------------ Total shareholders' equity 521,979 447,815 - ------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $1,807,372 1,737,778 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements. 65
The Pittston Company and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31 (In thousands, except per share amounts) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ Net sales $ 722,851 794,998 687,089 Operating revenues 2,203,216 1,872,277 1,569,032 - ------------------------------------------------------------------------------------------------------------ Net sales and operating revenues 2,926,067 2,667,275 2,256,121 - ------------------------------------------------------------------------------------------------------------ Costs and expenses: Cost of sales 696,295 771,586 645,679 Operating expenses 1,845,404 1,542,080 1,299,541 Selling, general and administrative expenses 263,365 244,330 226,125 Restructuring and other charges, including litigation accrual (Note 14) -- 90,806 78,633 - ------------------------------------------------------------------------------------------------------------ Total costs and expenses 2,805,064 2,648,802 2,249,978 - ------------------------------------------------------------------------------------------------------------ Other operating income (Note 15) 26,496 24,400 19,956 - ------------------------------------------------------------------------------------------------------------ Operating profit 147,499 42,873 26,099 Interest income 3,395 2,513 2,839 Interest expense (14,253) (11,489) (10,173) Other income (expense), net (Note 15) (6,305) (5,572) (4,611) - ------------------------------------------------------------------------------------------------------------ Income before income taxes 130,336 28,325 14,154 Provision for income taxes (Note 6) 32,364 1,428 8 - ------------------------------------------------------------------------------------------------------------ Net income 97,972 26,897 14,146 Preferred stock dividends, net (Note 9) (2,762) (3,998) -- - ------------------------------------------------------------------------------------------------------------ Net income attributed to common shares $ 95,210 22,899 14,146 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ Pittston Brink's Group (Note 1): Net income attributed to common shares $ 51,093 41,489 31,650 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ Net income per common share $ 1.35 1.10 .86 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ Average common shares outstanding 37,931 37,784 36,907 Pittston Burlington Group (Note 1): Net income attributed to common shares $ 32,855 38,356 15,476 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ Net income per common share $ 1.73 2.03 .84 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ Average common shares outstanding 18,966 18,892 18,454 Pittston Minerals Group (Note 1): Net income (loss) attributed to common shares $ 11,262 (56,946) (32,980) - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ Net income (loss) per common share: Primary $ 1.45 (7.50) (4.47) Fully diluted $ 1.40 (7.50) (4.47) - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ Average common shares outstanding: Primary 7,786 7,594 7,381 Fully diluted 9,999 10,000 7,620 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements. 66
The Pittston Company and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended December 31, 1995, 1994 and 1993 Pittston Pittston Pittston $31.25 Brink's Burlington Minerals Equity Series C Group Group Group Capital in Adjustment Cumulative Common Common Common Excess of from Foreign Employee Preferred Stock Stock Stock Par Value Retained Currency Benefits (In thousands, except per share amounts) Stock (Note 1) (Note 1) (Note 1) (Note 1) Earnings Translation Trust - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1992 $ -- 40,533 20,267 8,107 249,147 96,240 (14,062) (58,772) Net income -- -- -- -- -- 14,146 -- -- Stock options exercised (Note 8) -- 971 486 208 13,092 -- -- -- Tax benefit of stock options exercised (Note 6) -- -- -- -- 2,121 -- -- -- Foreign currency translation adjustment -- -- -- -- -- -- (4,319) -- Remeasurement of employee benefits trust -- -- -- -- 73,907 -- -- (73,907) Shares released from employee benefits trust to employee benefit plan (Note 9) -- -- -- -- (2) -- -- 1,661 Retirement of stock under share repurchase programs (Note 9) -- (75) (38) (34) (906) (458) -- -- Costs of Services Stock Proposal (Note 9) -- -- -- -- (3,163) -- -- -- Cash dividends declared--Pittston Brink's Group $.09 per share, Pittston Burlington Group $.21 per share and Pittston Minerals Group $.6204 per share (Note 1) -- -- -- -- -- (11,638) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1993 -- 41,429 20,715 8,281 334,196 98,290 (18,381) (131,018) Net income -- -- -- -- -- 26,897 -- -- Issuance of $31.25 Series C Cumulative Preferred Stock, net of cash expenses (Note 9) 1,610 -- -- -- 75,472 -- -- -- Stock options exercised (Note 8) -- 422 211 129 6,570 -- -- -- Tax benefit of stock options exercised (Note 6) -- -- -- -- 2,936 -- -- -- Foreign currency translation adjustment -- -- -- -- -- -- 4,105 -- Remeasurement of employee benefits trust -- -- -- -- (10,449) -- -- 10,449 Shares released from employee benefits trust to employee benefit plan (Note 9) -- -- -- -- (309) -- -- 2,940 Retirement of stock under share repurchase programs (Note 9) (84) (256) (128) (20) (8,749) (718) -- -- Costs of Services Stock Proposal (Note 9) -- -- -- -- (4) -- -- -- Conversion of 9.2% debentures -- -- -- -- 9 -- -- -- Cash dividends declared--Pittston Brink's Group $.09 per share, Pittston Burlington Group $.22 per share and Pittston Minerals Group $.65 per share and Series C Preferred Stock $27.09 per share (Note 1) -- -- -- -- -- (16,730) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1994 1,526 41,595 20,798 8,390 399,672 107,739 (14,276) (117,629) Net income -- -- -- -- -- 97,972 -- -- Stock options exercised (Note 8) -- 125 62 95 2,581 -- -- -- Tax benefit of stock options exercised (Note 6) -- -- -- -- 720 -- -- -- Foreign currency translation adjustment -- -- -- -- -- (6,429) -- Remeasurement of employee benefits trust -- -- -- -- 9,947 -- -- (9,947) Shares released from employee benefits trust to employee benefit plan (Note 9) -- -- -- -- (993) -- -- 7,770 Retirement of stock under share repurchase programs (Note 9) (164) (146) (73) (79) (10,294) 148 -- -- Cash dividends declared--Pittston Brink's Group $.09 per share, Pittston Burlington Group $.22 per share and Pittston Minerals Group $.65 per share and Series C Preferred Stock $31.25 per share (Note 1) -- -- -- -- -- (17,131) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1995 $1,362 41,574 20,787 8,406 401,633 188,728 (20,705) (119,806) - ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements. 67
The Pittston Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (In thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 97,972 26,897 14,146 Adjustments to reconcile net income to net cash provided by operating activities: Noncash charges and other write-offs -- 46,793 10,857 Depreciation, depletion and amortization 104,989 101,856 77,565 Provision for aircraft heavy maintenance 26,317 26,598 20,962 Provision (credit) for deferred income taxes 11,115 (17,777) (29,435) Credit for pensions, noncurrent (3,762) (1,128) (2,596) Provision for uncollectible accounts receivable 5,762 4,532 6,880 Equity in earnings of unconsolidated affiliates, net of dividends received 2,306 (1,432) (4,205) Gain on sale of property, plant and equipment (5,162) (3,569) (5,472) Other operating, net 4,916 3,491 3,904 Change in operating assets and liabilities, net of effects of acquisitions and dispositions: Increase in accounts receivable (38,628) (85,734) (20,715) Decrease (increase) in inventories (12,026) (4,184) 6,507 Increase in prepaid expenses (2,157) (2,849) (2,795) Increase in accounts payable and accrued liabilities 4,491 69,033 20,458 Decrease (increase) in other assets 326 991 (5,783) Increase (decrease) in workers' compensation and other claims, noncurrent (15,212) 6,605 (17,213) Increase (decrease) in other liabilities (22,458) (15,283) 66,339 Other, net (2,254) (178) (342) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 156,535 154,662 139,062 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment (124,465) (106,312) (97,779) Proceeds from disposal of property, plant and equipment 22,539 7,622 4,620 Aircraft heavy maintenance expenditures (22,356) (15,333) (19,148) Acquisitions, net of cash acquired, and related contingency payments (3,372) (163,262) (1,435) Other, net 1,182 5,431 8,569 - ----------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (126,472) (271,854) (105,173) - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Additions to debt 29,866 117,332 4,136 Reductions of debt (25,891) (48,257) (34,385) Repurchase of stock of the Company (10,608) (9,955) (1,511) Proceeds from exercise of stock options 3,494 7,332 14,757 Proceeds from employee stock purchase plan 767 -- -- Dividends paid (17,186) (16,709) (11,638) Proceeds from sale of stock to Savings Investment Plan -- -- 264 Costs of Services Stock Proposal -- (4) (3,163) Preferred stock issuance, net of cash expenses -- 77,359 (277) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (19,558) 127,098 (31,817) - ----------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 10,505 9,906 2,072 Cash and cash equivalents at beginning of year 42,318 32,412 30,340 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 52,823 42,318 32,412 - ----------------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 68
The Pittston Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION On January 18, 1996, the shareholders of The Pittston Company (the "Company") approved the Brink's Stock Proposal, as described in Note 9, resulting in the modification, effective as of January 19, 1996, of the capital structure of the Company to include an additional class of common stock. The outstanding shares of Pittston Services Group Common Stock ("Services Stock") were redesignated as Pittston Brink's Group Common Stock ("Brink's Stock") on a share-for-share basis, and a new class of common stock, designated as Pittston Burlington Group Common Stock ("Burlington Stock"), was distributed on the basis of one-half share of Burlington Stock for each share of Services Stock previously held by shareholders of record on January 19, 1996. The Pittston Brink's Group (the "Brink's Group") consists of the Brink's, Incorporated ("Brink's") and Brink's Home Security, Inc. ("BHS") operations of the Company. The Pittston Burlington Group (the Burlington Group") consists of the Burlington Air Express Inc. ("Burlington") operations of the Company. The Pittston Minerals Group (the "Minerals Group") consists of the Coal and Mineral Ventures operations of the Company. The approval of the Brink's Stock Proposal did not result in any transfer of assets and liabilities of the Company or any of its subsidiaries. The Company prepares separate financial statements for the Minerals, Brink's and Burlington Groups in addition to consolidated financial information of the Company. All stock and per share data in the accompanying financial statements have been restated to reflect the modification of the Company's capital structure. The primary impacts of this restatement are as follows: Net income per common share has been restated in the Consolidated Statements of Operations to reflect the two new classes of stock, Brink's Stock and Burlington Stock, as if they were outstanding for all periods presented. For the purposes of computing net income per common share of Brink's Stock and Burlington Stock, the number of shares of Brink's Stock are assumed to be the same as the total corresponding number of shares of the Company's previous Services Stock. The number of shares of Burlington Stock are assumed to be one-half of the shares of the Company's previous Services Stock. All financial impacts of purchases and issuances of the Company's Services Stock prior to the effective date of the Brink's Stock Proposal have been attributed to each Group in relation of their respective common equity to the Company's Services Stock. Dividends paid by the Company for Services
Stock were attributed to the Brink's and Burlington Groups in relation to the initial dividends paid on the Brink's Stock and the Burlington Stock. Accordingly, the Consolidated Statements of Shareholders' Equity have been restated to reflect these changes. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements reflect the accounts of the Company and its majority-owned subsidiaries. The Company's interests in 20% to 50% owned companies are carried on the equity method. All material intercompany items and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year's financial statement presentation. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, demand deposits and investments with original maturities of three months or less. SHORT-TERM INVESTMENTS Short-term investments primarily include funds set aside by the Company for certain obligations and are carried at cost which approximates market. INVENTORIES Inventories are stated at cost (determined under the first-in, first-out or average cost method) or market, whichever is lower. PROPERTY, PLANT AND EQUIPMENT Expenditures for maintenance and repairs are charged to expense and the costs of renewals and betterments are capitalized. Depreciation is provided principally on the straight-line method at varying rates depending upon estimated useful lives. Depletion of bituminous coal lands is provided on the basis of tonnage mined in relation to the estimated total of recoverable tonnage in the ground. Mine development costs, primarily included in bituminous coal lands, are capitalized and amortized over the estimated useful life of the mine. These costs include expenses incurred for site preparation and development as well as operating deficits incurred at the mines during a development stage. A mine is considered under development until all planned production units have been placed in operation. Valuation of coal properties is based primarily on mining plans and conditions assumed at the time of the evaluation. These valuations could be impacted by actual economic conditions which differ from those assumed at the time of the evaluation. 69
Subscriber installation costs for home security systems provided by BHS are capitalized and depreciated over the estimated life of the assets and are included in machinery and equipment. The security system that is installed, remains the property of BHS and is capitalized at the cost to bring the revenue producing asset to its intended use. When an installation is identified for disconnection, the remaining net book value of the installation is fully written-off and charged to depreciation expense. INTANGIBLES The excess of cost over fair value of net assets of businesses acquired is amortized on a straight-line basis over the estimated periods benefited. The Company evaluates the carrying value of intangibles and the periods of amortization to determine whether events and circumstances warrant revised estimates of asset value or useful lives. The Company annually assesses the recoverability of the excess of cost over net assets acquired by determining whether the amortization of the asset balance over its remaining life can be recovered through projected undiscounted future operating cash flows. Evaluation of asset value as well as periods of amortization are performed on a disaggregated basis at each of the Company's operating units. COAL SUPPLY CONTRACTS Coal supply contracts consist of contracts to supply coal to customers at certain negotiated prices over a period of time, which have been acquired from other coal companies, and are stated at cost at the time of acquisition, which approximates fair market value. The capitalized cost of such contracts is amortized over the term of the contract on the basis of tons of coal sold under the contract. INCOME TAXES Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes , which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. PNEUMOCONIOSIS (BLACK LUNG) EXPENSE The Company acts as self-insurer with respect to almost all black lung benefits. Provision is made for estimated benefits in accordance with annual actuarial reports prepared by outside actuaries. The excess of the present value of expected future benefits over the accumulated book reserves is recognized over the amortization period as a level percentage of payroll. Cumulative actuarial
gains or losses are calculated periodically and amortized on a straight-line basis. Assumptions used in the calculation of the actuarial present value of black lung benefits are based on actual retirement experience of the Company's coal employees, black lung claims incidence for active miners, actual dependent information, industry turnover rates, actual medical and legal cost experience and projected inflation rates. As of December 31, 1995 and 1994, the accrued value of estimated future black lung benefits discounted at 6% was approximately $60,500 and $62,824, respectively, and are included in workers' compensation and other claims. Based on actuarial data, the Company charged (credited) to operations ($1,402) in 1995, $201 in 1994 and $438 in 1993. In addition, the Company accrued additional expenses for black lung benefits related to federal and state assessments, legal and administration expenses and other self insurance costs. These amounted to $2,569 in 1995, $2,472 in 1994 and $2,887 in 1993. RECLAMATION COSTS Expenditures relating to environmental regulatory requirements and reclamation costs undertaken during mine operations are charged against earnings as incurred. Estimated site restoration and post closure reclamation costs are charged against earnings using the units of production method over the expected economic life of each mine. Accrued reclamation costs are subject to review by management on a regular basis and are revised when appropriate for changes in future estimated costs and/or regulatory requirements. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Postretirement benefits other than pensions are accounted for in accordance with Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", which requires employers to accrue the cost of such retirement benefits during the employees' service with the Company. FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign subsidiaries have been translated at current exchange rates, and related revenues and expenses have been translated at average rates of exchange in effect during the year. Resulting cumulative translation adjustments have been recorded as a separate component of shareholders' equity. Translation adjustments relating to subsidiaries in countries with highly inflationary economies are included in net income, along with all transaction gains and losses for the period. A portion of the Company's financial results is derived from activities in several foreign countries, each with a local currency other than the U.S. dollar. 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. However, the Company's international activity is not concentrated in any single currency, which reduces the risks of foreign currency rate fluctuations. 70
FINANCIAL INSTRUMENTS The Company uses foreign currency forward contracts to hedge risk of changes in foreign currency rates associated with certain transactions denominated in various currencies. Realized and unrealized gains and losses on these contracts, designated and effective as hedges, are deferred and recognized as part of the specific transaction hedged. The Company also utilizes other financial instruments to protect against adverse price movements in gold, which the Company produces, and jet fuel products, which the Company consumes as well as interest rate changes on certain variable rate obligations. Gains and losses on these contracts, designated and effective as hedges, are deferred and recognized as part of the transaction hedged. REVENUE RECOGNITION Coal--Coal sales are generally recognized when coal is loaded onto transportation vehicles for shipment to customers. For domestic sales, this generally occurs when coal is loaded onto railcars at mine locations. For export sales, this generally occurs when coal is loaded onto marine vessels at terminal facilities. Mineral Ventures-- Gold sales are recognized when products are shipped to a refinery. Settlement adjustments arising from final determination of weights and assays are reflected in sales when received. Burlington-- Revenues related to transportation services are recognized, together with related transportation costs, on the date shipments physically depart from facilities en route to destination locations. Financial statements resulting from existing recognition policies do not materially differ from the allocation of revenue between reporting periods based on relative transit times in each reporting period with expenses recognized as incurred. Brink's-- Revenues are recognized when services are performed. BHS-- Monitoring revenues are recognized when earned and amounts paid in advance are deferred and recognized as income over the applicable monitoring period, which is generally one year or less. Revenues from the sale of equipment are recognized, together with related costs, upon completion of the installation. Connection fee revenues are recognized to the extent of direct selling costs incurred and expensed. Connection fee revenues in excess of direct selling costs are deferred and recognized as income on a straight-line basis over ten years. NET INCOME PER COMMON SHARE Net income per common share for Brink's Stock and Burlington Stock is computed by dividing the net income for each Group by the weighted average number of shares outstanding during the period. The potential dilution from the exercise of stock options is not material. The assumed conversion of the 9.2% convertible subordinated debentures in 1993 was not included since its effect was antidilutive.
The computation of primary earnings per share for Minerals Stock is based on the weighted average number of outstanding common shares divided into net income for the Minerals Group less preferred stock dividends. The computation of fully diluted earnings per common share for Minerals Stock assumes the conversion of the $31.25 Series C Cumulative Preferred Stock (issued in 1994) and additional shares assuming the exercise of stock options (antidilutive in the primary calculation) divided into net income for the Minerals Group. For 1994 and 1993, the loss per share, assuming full dilution, is considered to be the same as primary since the effect of common stock equivalents and the preferred stock conversion would be antidilutive. The shares of Brink's Stock, Burlington Stock and Minerals Stock held in The Pittston Company Employee Benefits Trust (Note 9) are evaluated for inclusion in the calculations of net income per common share under the treasury stock method and had no dilutive effect. USE OF ESTIMATES In accordance with generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements. Actual results could differ from those estimates. PENDING ACCOUNTING CHANGES The Company is required to implement a new accounting standard, Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", in 1996. SFAS No. 121 requires companies to review long-lived assets and certain identifiable intangibles to be held and used by an entity for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 121 requires companies to utilize a two-step approach to determining whether impairment of such assets has occurred and, if so, the amount of such impairment. Although the Company is still reviewing the impact of adopting SFAS No. 121, it is estimated that the Company's Coal operations will incur a pretax charge to earnings of $25,000 to $30,000 as of January 1, 1996. The Company is required to implement a new accounting standard, SFAS No. 123, "Accounting for Stock Based Compensation", in 1996. SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. Although SFAS No. 123 encourages adoption of a fair value based method of accounting for all employee stock compensation plans, it allows entities to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by 71
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" with disclosure of net income and earnings per share as if the fair value based method of accounting is applied. The Company expects to continue to account for its stock compensation plans according to APB No. 25 with the disclosure of the impact on net income and earnings per share as if the fair value based method of accounting is applied. 2. FINANCIAL INSTRUMENTS Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and trade receivables. The Company places its cash and cash equivalents and short-term investments with high credit qualified financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, and their dispersion across many different industries and geographic areas. The following details the fair values of financial instruments for which it is practicable to estimate the value: CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The carrying amounts approximate fair value because of the short maturity of these instruments. DEBT The aggregate fair value of the Company's long-term debt obligations, which is based upon quoted market prices and rates currently available to the Company for debt with similar terms and maturities, approximates the carrying amount. OFF-BALANCE SHEET INSTRUMENTS The Company enters into various off-balance sheet financial instruments, as discussed below, to hedge its foreign currency and other market exposures. The risk that counterparties to such instruments may be unable to perform is minimized by limiting the counterparties to major financial institutions. The Company does not expect any losses due to such counterparty default. Foreign currency forward contracts -- The Company enters into foreign currency forward contracts with a duration of up to 360 days as a hedge against liabilities denominated in various currencies. These contracts do not subject the Company to risk due to exchange rate movements because gains and losses on these contracts offset losses and gains on the liabilities being hedged. At December 31, 1995, the total notional value of foreign currency forward
contracts outstanding was $10,536. As of such date, the fair value of foreign currency forward contracts was not significant. Gold contracts --In order to protect itself against downward movements in gold prices, the Company hedges a portion of its recoverable proved and probable reserves primarily through forward sales contracts. At December 31, 1995, 51,865 ounces of gold, representing approximately 25% of the Company's recoverable proved and probable reserves, were sold forward under forward sales contracts that mature periodically through mid-1998, with a total notional value of $22,947. Because only a portion of its future production is currently sold forward, the Company can take advantage of increases, if any, in the spot price of gold. At December 31, 1995, the fair value of the Company's forward sales contracts amounted to $1,336. Fuel contracts--The Company has hedged a portion of its jet fuel requirements through a swap contract. At December 31, 1995, the notional value of the jet fuel swap, aggregating 11.2 million gallons, through mid-1996, was $5,767. In addition, the Company has entered into several commodity options transactions that are intended to protect against significant increases in jet fuel prices. These transactions, aggregate 10.8 million gallons with a notional value of $6,480 and are applicable throughout the first half of 1996. The Company has also entered into a collar transaction, applicable to 6.0 million gallons that provides for a minimum and maximum per gallon price. This transaction is settled monthly based upon the average of the high and low prices during each period. 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 December 31, 1995, the fair value of these contracts was not significant. Interest rate contracts--In connection with the aircraft leasing by Burlington, the Company has entered into an interest rate swap agreement. This variable to fixed interest rate swap agreement had a notional value of $30,000 and fixes the Company's interest rate at 7.05% through January 2, 1998. Given the decline in the base variable rate subsequent to when the agreement was entered into, the cost to the Company to terminate the agreement, would have been $1,195 on December 31, 1995. As further discussed in Note 7, in 1994 and 1995, the Company entered into variable to fixed interest rate swap agreements with a notional amount at December 31, 1995 aggregating $55,000. At December 31, 1995, the fair value of these contracts was not significant. 72
3. ACCOUNTS RECEIVABLE TRADE For each of the years in the three-year period ended December 31, 1995, the Company maintained agreements with financial institutions whereby it had the right to sell certain coal receivables to those institutions. Certain agreements contained provisions for sales with recourse and other agreements had limited recourse. In 1995 and 1993 total coal receivables of approximately $25,092 and $16,143, respectively, were sold under such agreements. No receivables were sold in 1994. As of December 31, 1995 receivables sold which remained to be collected totaled $5,222. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at cost consists of the following: December 31 1995 1994 - ---------------------------------------------------- Bituminous coal lands $109,400 102,392 Land, other than coal lands 27,605 29,914 Buildings 98,441 77,287 Machinery and equipment 688,068 630,901 - ---------------------------------------------------- Total $923,514 840,494 ==================================================== The estimated useful lives for property, plant and equipment are as follows: Years - ------------------------------------------------------- Buildings 10 to 40 Machinery and equipment 2 to 30 Depreciation and depletion of property, plant and equipment aggregated $80,087 in 1995, $74,270 in 1994 and $63,953 in 1993. Capitalized mine development costs totaled $10,118 in 1995, $11,908 in 1994 and $2,181 in 1993. Changes in capitalized subscriber installation costs for home security systems were as follows: Year Ended December 31 1995 1994 1993 - ----------------------------------------------------------------------- Capitalized subscriber installation costs-- beginning of year $81,445 65,785 54,668 Capitalized cost of security system installations 44,488 32,309 23,972 Depreciation, including amounts recognized to fully depreciate capitalized costs for installations disconnected during the year (20,597) (16,649) (12,855) - ------------------------------------------------------------------------ Capitalized subscriber installation costs-- end of year $105,336 81,445 65,785 ========================================================================
New subscribers were 82,600 in 1995, 75,200 in 1994 and 59,700 in 1993. As of January 1, 1992, BHS elected to capitalize categories of costs not previously capitalized for home security system installations. This change in accounting principle is preferable because it more accurately reflects subscriber installation costs. 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 (in the amount of $3,122 in 1995, $2,645 in 1994 and $2,567 in 1993) and costs incurred in maintaining facilities and vehicles dedicated to the installation process (in the amount of $2,074 in 1995, $1,492 in 1994 and $1,484 in 1993). The effect of this change in accounting principle was to increase operating profit of the consolidated group and the BHS segment in 1995, 1994 and 1993 by $5,196, $4,137 and $4,051, respectively, and net income of the Company and the Brink's Group in 1995, 1994 and 1993 by $3,123, $2,486 and $2,435, respectively, or by $0.08 per share in 1995 and $0.07 per share in 1994 and 1993. Prior to January 1, 1992, the records needed to identify such costs were not available. Thus, it was impossible to accurately calculate the effect on retained earnings as of January 1, 1992. However, the Company believes the effect on retained earnings as of January 1, 1992, was immaterial. Because capitalized subscriber installation costs for prior periods were not adjusted for the change in accounting principle, installation costs for subscribers in those years will continue to be depreciated based on the lesser amounts capitalized in prior periods. Consequently, depreciation of capitalized subscriber installation costs in the current year and until such capitalized costs prior to January 1, 1992, are fully depreciated will be less than if such prior periods' capitalized costs had been adjusted for the change in accounting. However, the Company believes the effect on net income in 1995, 1994 and 1993 was immaterial. 5. INTANGIBLES Intangibles consist entirely of the excess of cost over fair value of net assets of companies acquired and are net of accumulated amortization of $86,420 at December 31, 1995 and $75,649 at December 31, 1994. The estimated useful life of intangibles is generally forty years. Amortization of intangibles aggregated $10,352 in 1995, $9,686 in 1994 and $7,126 in 1993. 73
6. INCOME TAXES The provision (credit) for income taxes consists of the following: U.S. Federal Foreign State Total - ------------------------------------------------------- 1995: Current $ 10,717 6,039 4,493 21,249 Deferred 13,797 (1,866) (816) 11,115 - ------------------------------------------------------- Total $ 24,514 4,173 3,677 32,364 - ------------------------------------------------------- 1994: Current $ 7,563 5,956 5,686 19,205 Deferred (20,238) 2,696 (235) (17,777) - ------------------------------------------------------- Total $(12,675) 8,652 5,451 1,428 - ------------------------------------------------------- 1993: Current $ 16,385 9,705 3,353 29,443 Deferred (20,719) (7,939) (777) (29,435) - ------------------------------------------------------- Total $ (4,334) 1,766 2,576 8 - ------------------------------------------------------- The significant components of the deferred tax expense (benefit) were as follows: 1995 1994 1993 - --------------------------------------------------------------------------- Deferred tax expense (benefit),exclusive of the components listed below $16,376 (16,869) (33,157) Net operating loss carryforwards (2,911) (393) 1,793 Alternative minimum tax credits (2,603) 1,147 4,826 Change in the valuation allowance for deferred tax assets 253 (1,662) (1,397) Adjustment to deferred tax assets and liabilities for the change in the U.S. federal tax rate -- -- (1,500) - ---------------------------------------------------------------------------- Total $11,115 (17,777) (29,435) - ---------------------------------------------------------------------------- The tax benefit for compensation expense related to the exercise of certain employee stock options for tax purposes in excess of compensation expense for financial reporting purposes is recognized as an adjustment to shareholders' equity. The components of the net deferred tax asset as of December 31, 1995 and December 31, 1994 were as follows: 1995 1994 - -------------------------------------------------------------------------------- Deferred tax assets: Accounts receivable $ 5,344 5,522 Postretirement benefits other than pensions 95,777 94,430 Workers' compensation and other claims 56,694 58,285 Other liabilities and reserves 104,226 104,382 Miscellaneous 11,162 9,975 Net operating loss carryforwards 11,603 8,692 Alternative minimum tax credits 33,793 30,884 Valuation allowance (8,446) (8,193) - -------------------------------------------------------------------------------- Total deferred tax asset 310,153 303,977 - -------------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment 52,598 55,095 Pension assets 48,669 47,159 Other assets 12,934 4,217 Investments in foreign affiliates 11,478 11,965 Miscellaneous 74,009 64,513 - -------------------------------------------------------------------------------- Total deferred tax liability 199,688 182,949 - -------------------------------------------------------------------------------- Net deferred tax asset $110,465 121,028 - --------------------------------------------------------------------------------
The valuation allowance relates to deferred tax assets in certain foreign and state jurisdictions. Based on the Company's historical and expected taxable earnings, management believes it is more likely than not that the Company will realize the benefit of the existing deferred tax asset at December 31, 1995. The following table accounts for the difference between the actual tax provision and the amounts obtained by applying the statutory U.S. federal income tax rate of 35% in 1995, 1994 and 1993 to the income (loss) before income taxes. Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- Income (loss) before income taxes: United States $ 97,989 (16,517) (7,329) Foreign 32,347 44,842 21,483 - -------------------------------------------------------------------------------- Total $ 130,336 28,325 14,154 - -------------------------------------------------------------------------------- Tax provision computed at statutory rate $ 45,618 9,914 4,954 Increases (reductions) in taxes due to: Percentage depletion (9,861) (9,313) (7,598) State income taxes (net of federal tax benefit) 1,664 5,043 1,924 Goodwill amortization 2,825 2,437 3,055 Difference between total taxes on foreign income and the U.S. federal statutory rate (6,261) (6,111) (118) Change in the valuation allowance for deferred tax assets 253 (1,662) (1,397) Adjustment to deferred tax assets and liabilities for the change in the U.S. federal tax rate -- -- (1,500) Miscellaneous (1,874) 1,120 688 - -------------------------------------------------------------------------------- Actual tax provision $ 32,364 1,428 8 - -------------------------------------------------------------------------------- It is the policy of the Company to accrue deferred income taxes on temporary differences related to the financial statement carrying amounts and tax bases of investments in foreign subsidiaries and affiliates which are expected to reverse in the foreseeable future. As of December 31, 1995 and December 31, 1994 the unrecognized deferred tax liability for temporary differences of approximately $38,871 and $56,697, respectively, related to investments in foreign subsidiaries and affiliates that are essentially permanent in nature and not expected to reverse in the foreseeable future was approximately $13,605 and $19,844, respectively. The Company and its domestic subsidiaries file a consolidated U.S. federal income tax return. As of December 31, 1995, the Company had $33,793 of alternative minimum tax credits available to offset future U.S. federal income taxes and, under current tax law, the carryforward period for such credits is unlimited. The tax benefit of net operating loss carryforwards as at December 31, 1995 was $11,603 and related to various state and foreign taxing jurisdictions. The expiration periods primarily range from 5 to 15 years. 74
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 7. LONG-TERM DEBT Consists of the following: As of December 31 1995 1994 - -------------------------------------------------------------------------------- Senior obligations: U.S. dollar term loan due 2000 (year-end rate 6.56% in 1995 and 6.48% in 1994) $100,000 100,000 Revolving credit notes due 2000 (5.75% in 1994) -- 9,400 U.S. dollar term loan due 1996 to 1997 (6.44% in 1995 and 6.50% in 1994) 1,582 3,451 Canadian dollar term loan due 1999 (7.50% in 1995 and 6.19% in 1994) 2,932 2,852 All other 10,335 2,562 - -------------------------------------------------------------------------------- 114,849 118,265 - -------------------------------------------------------------------------------- Subordinated obligations: 4% subordinated debentures due 1997 14,348 14,648 Obligations under capital leases (average rates 10.10% in 1995 and 9.08% in 1994) 4,086 5,158 - -------------------------------------------------------------------------------- Total long-term debt, less current maturities $133,283 138,071 - -------------------------------------------------------------------------------- For the four years through December 31, 2000, minimum repayments of long-term debt outstanding are as follows: 1997 $19,846 1998 6,049 1999 2,094 2000 101,161 In March 1994, the Company entered into a $350,000 credit agreement with a syndicate of banks (the "Facility"). The Facility included a $100,000 five-year term loan, which originally matured in March 1999. The Facility also permitted additional borrowings, repayments and reborrowings of up to an aggregate of $250,000 initially until March 1999. In March 1995, the Facility was amended to extend the maturity of the term loan to May 2000 and to permit the additional borrowings, repayments and reborrowings until May 2000. Interest on borrowings under the Facility is payable at rates based on prime, certificate of deposit, Eurodollar or money market rates. In 1994, the Company entered into a standard three year variable to fixed interest rate swap agreement on a portion of the Company's U.S. dollar term loan. This agreement fixed the Company's interest rate at 5% on initial borrowings of $40,000 in principal. The principal amount to which the 5% interest rate applies declines periodically throughout the term of the agreement, and at December 31, 1995, this rate applied to borrowings of $25,000 in principal. In addition, during 1995, the Company entered into two other variable to fixed interest rate swap agreements. One agreement fixes the Company's interest rate at 5.80% on $20,000 in principal for a term of three years. The other agreement fixes the Company's interest rate at 5.66% for a term of 21 months on $10,000 in principal, which increases to $20,000 during the term. The U.S. dollar term loan due 1996 to 1997 bears interest based on the Eurodollar rate.
The Canadian dollar term loan to a wholly-owned indirect subsidiary of Burlington bears interest based on Canadian prime or Bankers' Acceptance rates or, if converted to a U.S. dollar loan, based on Eurodollar or Federal Funds rates. The loan is guaranteed by the Company. The 4% subordinated debentures due July 1, 1997, are exchangeable only for cash, at the rate of $157.80 per $1,000 debenture. The debentures are redeemable at the Company's option, in whole or in part, at any time prior to maturity, at redemption prices equal to 100% of principal amount. In 1995, the Company redeemed $300 in principal of its 4% subordinated debentures. On April 15, 1994, the Company redeemed all of the 9.2% convertible subordinated debentures due July 1, 2004, at a premium of $767. The premium has been included in the 1994 Consolidated Statement of Operations in "Other income (expense), net". Various international subsidiaries maintain lines of credit and overdraft facilities aggregating approximately $110,000 with a number of banks on either a secured or unsecured basis. Under the terms of some of its debt instruments, the Company has agreed to various restrictions relating to the payment of dividends, the repurchase of capital stock, the maintenance of consolidated net worth, and the amount of additional funded debt which may be incurred. Allowable restricted payments for dividends and stock repurchases aggregated $251,915 at December 31, 1995. Under the terms of the Facility, the Company has agreed to maintain at least $300,000 of Consolidated Net Worth, as defined, and can incur additional indebtedness of approximately $450,000. At December 31, 1995, the Company had outstanding unsecured letters of credit totaling $87,980 primarily supporting the Company's obligations under its various self-insurance programs. 8. STOCK OPTIONS The Company grants options under its 1988 Stock Option Plan (the "1988 Plan") to executives and key employees and under its Non-Employee Directors' Stock Option Plan (the "Non-Employee Plan") to outside directors to purchase common stock at a price not less than 100% of quoted market value at date of grant. As part of the Services Stock Proposal (Note 9), the 1988 and Non-Employee Plans were amended to permit option grants to be made to optionees with respect to either Services Stock or Minerals Stock, or both. 75
The Company's 1979 Stock Option Plan (the 1979 Plan") and 1985 Stock Option Plan (the "1985 Plan") terminated in 1985 and 1988, respectively, except as to options still outstanding. Upon approval of the Services Stock Proposal in 1993 a total of 2,228,225 shares of common stock were subject to options outstanding under the 1988 Plan, the Non-Employee Plan, the 1979 Plan and the 1985 Plan. Pursuant to antidilution provisions in the option agreements covering such options, the Company converted these options into options for shares of Services Stock or Minerals Stock, or both, depending primarily on the employment status and responsibilities of the particular optionee. In the case of optionees having Company-wide responsibilities, each outstanding option was converted into options for both Services Stock and Minerals Stock. In the case of other optionees, each outstanding option was converted into a new option for only Services Stock or Minerals Stock, as the case may be. As a result, 2,167,247 shares of Services Stock and 507,698 shares of Minerals Stock were subject to options outstanding as of the effective date of the Services Stock Proposal. The table below summarizes the activity in all plans. Aggregate No. of Option Shares Price - -------------------------------------------------------------------- THE PITTSTON COMPANY COMMON STOCK OPTIONS: Granted: 1993 17,500 $ 294 Became exercisable: 1993 468,250 7,749 Exercised: 1993 377,191 5,379 PITTSTON SERVICES GROUP COMMON STOCK OPTIONS: Outstanding: 12/31/95 2,398,422 50,528 12/31/94 1,990,197 38,401 Granted: 1995 586,500 14,595 1994 73,000 2,018 Became exercisable: 1995 337,063 6,790 1994 421,030 7,593 Exercised: 1995 170,982 2,289 1994 421,302 5,567 PITTSTON MINERALS GROUP COMMON STOCK OPTIONS: Outstanding: 12/31/95 597,797 9,359 12/31/94 507,323 9,571 Granted: 1995 258,300 2,665 1994 23,000 431 Became exercisable: 1995 53,617 1,160 1994 108,259 1,978 Exercised: 1995 95,129 1,203 1994 128,667 1,765 At December 31, 1995, a total of 1,285,931 shares of Services Stock and 214,163 shares of Minerals Stock were exercisable. In addition, there were 3,463,094
shares of Services Stock and 629,279 shares of Minerals Stock reserved for issuance under the plans, including 1,064,672 shares of Services Stock and 31,482 shares of Minerals Stock reserved for future grant. As part of the Brink's Stock Proposal (Note 9), the 1988 and Non-Employee Plans were amended to permit option grants to be made to optionees with respect to Brink's Stock or Burlington Stock in addition to Minerals Stock. Upon approval of the Brink's Stock Proposal, a total of 2,383,422 shares of Services Stock were subject to options outstanding under the 1988 Plan, the Non-Employee Plan, the 1979 Plan and the 1985 Plan. Pursuant to antidilution provisions in the option agreements covering such plans, the Company converted these options into options for shares of Brink's Stock or Burlington Stock, or both, depending on the employment status and responsibilities of the particular optionee. In the case of optionees having Company-wide responsibilities, each outstanding Services Stock option was converted into options for both Brink's Stock and Burlington Stock. In the case of other optionees, each outstanding option was converted into a new option only for Brink's Stock or Burlington Stock, as the case may be. As a result, upon approval of the Brink's Stock Proposal, 1,749,822 shares of Brink's Stock and 1,989,466 shares of Burlington Stock were subject to options. 9. CAPITAL STOCK On July 26, 1993, the shareholders of the Company approved the Services Stock Proposal, as described in the Company's proxy statement dated June 24, 1993, resulting in the reclassification of the Company's common stock. The outstanding shares of Company common stock were redesignated as Services Stock on a share-for-share basis and a second class of common stock, designated as Minerals Stock, was distributed on the basis of one-fifth of one share of Minerals Stock for each share of the Company's previous common stock held by shareholders of record on July 26, 1993. On January 18, 1996, the shareholders of Company approved the Brink's Stock Proposal, as described in the Company's proxy statement dated December 15, 1995, resulting in the modification, effective as of January 19, 1996, of the capital structure of the Company to include an additional class of common stock. The outstanding shares of Services Stock were redesignated as Brink's Stock on a share-for-share basis, and a new class of common stock, designated as Burlington Stock, was distributed on the basis of one-half share of Burlington Stock for each share of Services Stock previously held by shareholders of record on January 19, 1996. Minerals Stock, Brink's Stock and Burlington Stock are designed to provide shareholders with separate securities reflecting the performance of the Minerals Group, Brink's Group and the Burlington Group, respectively, without diminishing the benefits of remaining a single corporation or precluding future transactions affecting any Group. 76
The Company, at any time, has the right to exchange each outstanding share of Burlington Stock for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Minerals Stock) having a fair market value equal to 115% of the fair market value of one share of Burlington Stock. In addition, upon the disposition of all or substantially all of the properties and assets of the Burlington Group to any person (with certain exceptions), the Company is required to exchange each outstanding share of Burlington Stock for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Minerals Stock) having a fair market value equal to 115% of the fair market value of one share of Burlington Stock. The Company, at any time, has the right to exchange each outstanding share of Minerals Stock, which was previously subject to exchange for shares of Services Stock, for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Burlington Stock) having a fair market value equal to 115% of the fair market value of one share of Minerals Stock. In addition, upon the disposition of all or substantially all of the properties and assets of the Minerals Group to any person (with certain exceptions), the Company is required to exchange each outstanding share of Minerals Stock for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Burlington Stock) having a fair market value equal to 115% of the fair market value of one share of Minerals Stock. If any shares of the Company's Preferred Stock are converted after an exchange of Minerals Stock for Brink's Stock (or Burlington Stock), the holder of such Preferred Stock would, upon conversion, receive shares of Brink's Stock (or Burlington Stock) in lieu of shares of Minerals Stock otherwise issuable upon such conversion. Holders of Brink's Stock at all times have one vote per share. Holders of Burlington Stock and Minerals Stock have one and 0.626 votes per share, respectively, subject to adjustment on January 1, 1998, and on each January 1 every two years thereafter in such a manner so that each class' share of the aggregate voting power at such time will be equal to that class' share of the aggregate market capitalization of the Company's common stock at such time. Accordingly, on each adjustment date, each share of Burlington Stock and Minerals Stock may have more than, less than or continue to have the number of votes per share as they have. Holders of Brink's Stock, Burlington Stock and Minerals Stock vote together as a single voting group on all matters as to which all common shareholders are entitled to vote. In addition, as prescribed by Virginia law, certain amendments to the Articles of Incorporation affecting, among other things, the designation, rights, preferences or limitations of one class of common stock, or certain mergers or statutory share exchanges, must be approved by the holders of such class of common stock, voting as a group, and, in certain circumstances, may also have to be approved by the holders of the other classes of common stock, voting as separate voting groups.
In the event of a dissolution, liquidation or winding up of the Company, the holders of Brink's Stock, Burlington Stock and Minerals Stock, effective January 19, 1996, share on a per share basis an aggregate amount equal to 55%, 28% and 17%, respectively, of the funds, if any, remaining for distribution to the common shareholders. In the case of Minerals Stock, such percentage has been set, using a nominal number of shares of Minerals Stock of 4,202,954 (the "Nominal Shares") in excess of the actual number of shares of Minerals Stock outstanding, to ensure that the holders of Minerals Stock are entitled to the same share of any such funds immediately following the consummation of the transactions as they were prior thereto. These liquidation percentages are subject to adjustment in proportion to the relative change in the total number of shares of Brink's Stock, Burlington Stock and Minerals Stock, as the case may be, then outstanding to the total number of shares of all other classes of common stock then outstanding (which totals, in the case of Minerals Stock, shall include the Nominal Shares). In 1993, the Board of Directors (the "Board") authorized the repurchase of up to 1,250,000 shares of Services Stock and 250,000 shares of Minerals Stock from time to time in the open market or in private transactions, as conditions warrant, not to exceed an aggregate purchase price of $43,000. In November 1995, the Board authorized an increase in the remaining purchase authority for Minerals Stock to 1,000,000 shares and the purchase, subject to shareholder approval of the Brink's Stock Proposal, of up to 1,500,000 shares of Brink's Stock and up to 1,500,000 shares of Burlington Stock, not to exceed an aggregate purchases price of $45,000 for all common shares of the Company. Prior to this increased authorization, 117,300 shares of Minerals Stock at an aggregate cost of $1,720 were repurchased, of which 78,800 shares at a total cost of $912 were purchased in 1995, 19,700 shares at a total cost of $401 were purchased in 1994 and 18,800 shares at a total cost of $407 were purchased in 1993. Under the share repurchase program in effect prior to the revised program, 401,900 shares of Services Stock at an aggregate cost of $9,624 were repurchased, of which 145,800 shares at a total cost of $3,436 were purchased in 1995 and 256,100 shares at a total cost of $6,188 were purchased in 1994. No additional repurchases were made during the remainder of 1995 subsequent to the implementation of the revised program. The program to acquire shares in the open market remains in effect in 1996. The Company has authority to issue up to 2,000,000 shares of preferred stock, par value $10 per share. In January 1994, the Company issued 161,000 shares of its $31.25 Series C Cumulative Convertible Preferred Stock, par value $10 per share (the "Convertible Preferred Stock"). The Convertible Preferred Stock pays an annual cumulative dividend of $31.25 per share payable quarterly, in cash, in arrears, out of all funds of the Company legally available therefore, when, as and if declared by 77
the Board of Directors of the Company, and bears a liquidation preference of $500 per share, plus an amount equal to accrued and unpaid dividends thereon. Each share of the Convertible Preferred Stock is convertible at the option of the holder at any time, unless previously redeemed or, under certain circumstances, called for redemption, into shares of Minerals Stock at a conversion price of $32.175 per share of Minerals Stock, subject to adjustment in certain circumstances. Except under certain circumstances, the Convertible Preferred Stock is not redeemable prior to February 1, 1997. On and after such date, the Company may at its option, redeem the Convertible Preferred Stock, in whole or in part, for cash initially at a price of $521.875 per share, and thereafter at prices declining ratably annually on each February 1 to an amount equal to $500.00 per share on and after February 1, 2004, plus in each case an amount equal to accrued and unpaid dividends on the date of redemption. Except under certain circumstances or as prescribed by Virginia law, shares of the Convertible Preferred Stock are nonvoting. The voting rights of the Preferred Stock were not affected by the Brink's Stock Proposal. Other than the Convertible Preferred Stock, no shares of preferred stock are presently issued or outstanding. In 1994, the Board authorized the repurchase from time to time of up to $15,000 of Convertible Preferred Stock. In November 1995, the Board authorized an increase in the remaining authority to $15,000. Prior to the increased authorization, 24,720 shares at a total cost of $9,624 had been repurchased, of which 16,370 shares at a total cost of $6,258 were purchased in 1995. No additional share repurchases were made during the remainder of 1995 subsequent to the increased authorization. The program to acquire shares remains in effect in 1996. Dividends paid on the Company's Convertible Preferred Stock commenced on March 1, 1994. In 1995 and 1994, dividends paid on such stock amounted to $4,397 and $4,230, respectively. Preferred dividends included on the Company's Statements of Operations for the years ended December 31, 1995 and 1994, are net of $1,593 and $632, respectively, which was the excess of the carrying amount of the Convertible Preferred Stock over the cash paid to holders of the stock for repurchases made during the year. Under a Shareholder Rights Plan adopted by the Company's Board of Directors in 1987 and amended in December 1988, rights to purchase a new Series A Participating Cumulative Preferred Stock (the "Series A Preferred Stock") of the Company were distributed as a dividend at the rate of one right for each share of the Company's common stock. Pursuant to both the Services Stock Proposal and the Brink's Stock Proposal, the Shareholders Rights Plan was amended and restated to reflect the change in the capital structure of the Company. Upon approval of the Services Stock Proposal, each existing right was
amended to become a Pittston Services Group right (a "Services Right") and holders of Minerals Stock received one Pittston Minerals Group right (a "Minerals Right") for each outstanding share of Minerals Stock. Upon approval of the Brink's Stock Proposal, each existing Services Right was amended to become a Pittston Brink's Group Right (a "Brink's Right") and each holder of Burlington Stock received one Pittston Burlington Group Right (a Burlington Right") for each outstanding share of Burlington Stock. Each Brink's Right, if and when it becomes exercisable, will entitle the holder to purchase one-thousandth of a share of Series A Preferred Stock at a purchase price of $26.67, subject to adjustment. Each Burlington Right, if and when it becomes exercisable, will entitle the holder to purchase one-thousandth of a share of Series D Preferred Stock at a purchase price of $26.67, subject to adjustment. Each Minerals Right, if and when it becomes exercisable, will entitle the holder to purchase one-thousandth of a share of Series B Participating Cumulative Preferred Stock (the "Series B Preferred Stock") at a purchase price of $40, subject to adjustment. Each fractional share of Series A Preferred Stock and Series B Preferred Stock will be entitled to participate in dividends and to vote on an equivalent basis with one whole share of Brink's Stock, Burlington Stock and Minerals Stock, respectively. Each right will not be exercisable until ten days after a third party acquires 20% or more of the total voting rights of all outstanding Brink's Stock, Burlington Stock and Minerals Stock or ten days after commencement of a tender offer or exchange offer by a third party for 30% or more of the total voting rights of all outstanding Brink's Stock, Burlington Stock and Minerals Stock. If after the rights become exercisable, the Company is acquired in a merger or other business combination, each right will entitle the holder to purchase, for the purchase price, common stock of the surviving or acquiring company having a market value of twice the purchase price. In the event a third party acquires 30% or more of all outstanding Brink's Stock, Burlington Stock and Minerals Stock or engages in one or more "self dealing" transactions with the Company, the rights will entitle each holder to purchase, at the purchase price, that number of fractional shares of Series A Preferred Stock, Series D Preferred Stock and Series B Preferred Stock equivalent to the number of shares of common stock which at the time of the triggering event would have a market value of twice the purchase price. The rights may be redeemed by the Company at a price of $0.01 per right and expire on September 25, 1997. The Company's Articles of Incorporation limits dividends on Minerals Stock to the lesser of (i) all funds of the Company legally available therefore (as prescribed by Virginia law) and (ii) the Available Minerals Dividend Amount (as defined in the Articles of Incorporation). At December 31, 1995, the Available Minerals Dividend Amount was at least $24,870. Dividends on Minerals Stock are also restricted by covenants in the Company's public indentures and bank credit agreements (Note 7). 78
In December 1992, the Company formed The Pittston Company Employee Benefits Trust (the "Trust") to hold shares of its common stock to fund obligations under certain employee benefit programs. Upon formation of the Trust, the Company sold for a promissory note of the Trust, 4,000,000 new shares of its common stock to the Trust at a price equal to the fair value of the stock on the date of sale. Upon approval of the Brink's Stock Proposal, 3,537,811 shares in the Trust were redesignated as Brink's Stock and 1,768,906 shares of Burlington Stock were distributed to the Trust. At December 31, 1995, 3,552,906 shares of Brink's Stock (3,778,565 in 1994), 1,776,453 shares of Burlington Stock (1,889,283 in 1994) and 594,461 shares of Minerals Stock (723,218 in 1994) remained in the Trust, valued at market. These shares will be voted by the trustee in the same proportion as those voted by the Company's employees participating in the Company's Savings Investment Plan. The fair market value of the shares is included in each issue of common stock and capital in excess of par and, in total, as a reduction to common shareholders' equity in the Company's consolidated balance sheet. 10. ACQUISITIONS During 1995, the Company acquired two small businesses, increased its investment in an equity affiliate to a controlling interest and completed the integration of its investments in certain businesses acquired on December 31, 1994, for an aggregate purchase price of $2,157, including debt of $200. The acquisitions have been accounted for as purchases; accordingly, the purchase price was allocated to the underlying assets and liabilities based on their respective estimated fair value at the date of acquisition. The fair value of the assets acquired was $17,217 and liabilities assumed was $20,421. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was $5,361 and is being amortized over a period of forty years. In addition, during 1995, the Company made cash payments of $1,415 in the aggregate for installment and contingency payments for acquisitions made in prior years. During 1994, a wholly owned indirect subsidiary of the Company completed the acquisition of substantially all of the coal mining operations and coal sales contracts of Addington Resources, Inc. for $157,324. The acquisition has been accounted for as a purchase; accordingly, the purchase price has been allocated to the underlying assets and liabilities based on their respective estimated fair value at the date of acquisition. The fair value of assets acquired was $173,959 and liabilities assumed was $138,518. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was $121,883 and is being amortized over a period of forty years.
The acquisition was financed by the issuance of $80,500 of Convertible Preferred Stock (Note 9) and additional borrowing under existing credit facilities. In March 1994, the additional debt incurred for this acquisition was refinanced with a portion of the proceeds from the five-year term loan (Note 7). In addition, during 1994, the Company acquired several small businesses and made a contingent payment related to an acquisition made in a prior year. Total consideration paid was $5,938. During 1993, the Company acquired one small business and made installment and contingency payments related to other acquisitions made in prior years. The total consideration paid was $1,435. The acquisition in 1993 has been accounted for as a purchase and the purchase price was essentially equal to the fair value of net assets acquired. The results of operations of the companies acquired in 1995, 1994 and 1993 have been included in the Company's results of operations from their date of acquisition. 11. COAL JOINT VENTURE The Company, through a wholly owned indirect subsidiary, entered into a partnership agreement in 1982 with four other coal companies to construct and operate coal port facilities in Newport News, Virginia, in the Port of Hampton Roads (the "Facilities"). The Facilities commenced operations in 1984, and now have an annual throughput capacity of 22 million tons, with a ground storage capacity of approximately 2 million tons. The Company initially had an indirect 25% interest in the partnership, DTA. Initial financing of the Facilities was accomplished through the issuance of $135,000 principal amount of revenue bonds by the Peninsula Ports Authority of Virginia (the "Authority"), which is a political subdivision of the Commonwealth of Virginia. In 1987, the original revenue bonds were refinanced by the issuance of $132,800 of coal terminal revenue refunding bonds of which two series of these bonds in the aggregate principal amount of $33,200 were attributable to the Company. In 1990, the Company acquired an additional indirect 7 1/2% interest in the DTA partnership, increasing its ownership to 32 1/2%. With the increase in ownership, $9,960 of the remaining four additional series of the revenue refunding bonds of $99,600 became attributable to the Company. In November 1992, all bonds attributable to the Company were refinanced with the issuance of a new series of coal terminal revenue refunding bonds in the aggregate principal amount of $43,160. The new series of bonds bear a fixed interest rate of 7 3/8%. The Authority owns the Facilities and leases them to DTA for the life of the bonds, which mature on June 1, 2020. DTA may purchase the Facilities for $1 at the end of the lease term. The obligations of the partners are several, and not joint. 79
Under loan agreements with the Authority, DTA is obligated to make payments sufficient to provide for the timely payment of the principal of and interest on the bonds of the new series. Under a throughput and handling agreement, the Company has agreed to make payments to DTA that in the aggregate will provide DTA with sufficient funds to make the payments due under the loan agreements and to pay the Company's share of the operating costs of the Facilities. The Company has also unconditionally guaranteed the payment of the principal of and premium, if any, and the interest on the new series of bonds. Payments for operating costs aggregated $6,841 in 1995, $7,173 in 1994 and $7,949 in 1993. The Company has the right to use 32 1/2% of the throughput and storage capacity of the Facilities subject to user rights of third parties which pay the Company a fee. The Company pays throughput and storage charges based on actual usage at per ton rates determined by DTA. 12. LEASES The Company and its subsidiaries lease aircraft, facilities, vehicles, computers and coal mining and other equipment under long-term operating leases with varying terms, and most of the leases contain renewal and/or purchase options. As of December 31, 1995, aggregate future minimum lease payments under noncancellable operating leases were as follows: Equipment Aircraft Facilities & Other Total - -------------------------------------------------------- 1996 $27,585 35,345 29,325 92,255 1997 27,727 30,176 20,996 78,899 1998 11,559 24,866 13,793 50,218 1999 6,744 21,244 5,936 33,924 20000 -- 18,154 2,656 20,810 2001 -- 15,415 1,240 16,655 2002 -- 12,216 622 12,838 2003 -- 11,402 425 11,827 2004 -- 10,885 4,138 15,023 2005 -- 8,699 6 8,705 Later Years -- 57,118 6 57,124 - -------------------------------------------------------- Total $73,615 245,520 79,143 398,278 - -------------------------------------------------------- These amounts are net of aggregate future minimum noncancellable sublease rentals of $466. A wholly-owned subsidiary of the Company entered into a transaction covering various leases which provided for the replacement of four B707 aircraft with four DC8-71 aircraft and completed an evaluation of other fleet related costs. The net effect of this transaction, which was reflected in the 1993 financial statements, did not have a material impact on operating profit. Rent expense amounted to $120,583 in 1995, $110,414 in 1994 and $91,439 in 1993 and is net of sublease rentals of $539, $800 and $862, respectively.
The Company incurred capital lease obligations of $2,948 in 1995, $3,152 in 1994 and $1,601 in 1993. In addition, in 1994 the Company assumed capital lease obligations of $16,210 as part of the acquisition of the coal operations of Addington Resources, Inc. (Note 10). As of December 31, 1995, the Company's obligations under capital leases were not significant. 13. EMPLOYEE BENEFIT PLANS The Company and its subsidiaries maintain several noncontributory defined benefit pension plans covering substantially all nonunion employees who meet certain minimum requirements. Benefits of most of the plans are based on salary and years of service. The Company's policy is to fund the actuarially determined amounts necessary to provide assets sufficient to meet the benefits to be paid to plan participants in accordance with applicable regulations. The net pension expense (credit) for 1995, 1994 and 1993 for all plans is as follows: Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- Accumulated postretirement benefits earned during year $ 11,193 12,169 9,680 Interest cost on projected benefit obligation 21,429 19,781 19,098 Loss (return) on assets--actual (77,368) 576 (46,089) (Loss) return on assets--deferred 43,139 (33,601) 16,154 Other amortization, net (803) 1,441 (440) - -------------------------------------------------------------------------------- Net pension expense (credit) $ (2,410) 366 (1,597) - -------------------------------------------------------------------------------- The assumptions used in determining the net pension expense (credit) for the Company's major pension plan were as follows: 1995 1994 1993 - -------------------------------------------------------------------------------- Interest cost on projected benefit obligation 8.75% 7.5% 9.0% Expected long-term rate of return on assets 10.0% 10.0% 10.0% Rate of increase in compensation levels 4.0% 4.0% 5.0% The funded status and prepaid pension expense at December 31, 1995 and 1994 for all plans are as follows: 1995 1994 - -------------------------------------------------------------------------------- Actuarial present value of accumulated benefit obligation: Vested $ 263,992 198,510 Nonvested 14,644 12,652 - -------------------------------------------------------------------------------- 278,636 211,162 Benefits attributable to projected salaries 40,854 33,777 - -------------------------------------------------------------------------------- Projected benefit obligation 319,490 244,939 Plan assets at fair value 406,923 339,973 - -------------------------------------------------------------------------------- Excess of plan assets over projected benefit obligation 87,433 95,034 Unamortized initial net asset (3,642) (4,499) Unrecognized experience loss 35,820 24,247 Unrecognized prior service cost 1,764 1,963 - -------------------------------------------------------------------------------- Net pension assets 121,375 116,745 Current pension liability 2,368 2,208 - -------------------------------------------------------------------------------- Deferred pension asset per balance sheet $ 123,743 118,953 - -------------------------------------------------------------------------------- 80
For the valuation of pension obligations and the calculation of the funded status, the discount rate was 7.5% in 1995 and 8.75% in 1994. The expected long-term rate of return on assets was 10% in both years. The rate of increase in compensation levels used was 4% in 1995 and 1994. The unrecognized initial net asset at January 1, 1986 (January 1, 1989 for certain foreign pension plans), the date of adoption of Statement of Financial Accounting Standards No. 87, has been amortized over the estimated remaining average service life of the employees. As of December 31, 1995, approximately 69% of plan assets were invested in equity securities and 31% in fixed income securities. Under the 1990 collective bargaining agreement with the United Mine Workers of America ("UMWA"), the Company has made payments, based on hours worked, into an escrow account established for the benefit of union employees (Note 17). The total amount accrued and escrowed by the Company's coal operations under this agreement as at December 31, 1995 and 1994, was $26,046 and $23,120, respectively. The amount escrowed and accrued is included in "Short-term investments" and "Miscellaneous accrued liabilities". The Company and its subsidiaries also provide certain postretirement health care and life insurance benefits for eligible active and retired employees in the United States and Canada. For the years 1995, 1994 and 1993, the components of periodic expense for these postretirement benefits were as follows: Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- Service cost--benefits earned during year $ 1,720 2,446 2,695 Interest cost on accumulated postretirement benefit obligation 19,957 21,429 21,485 Amortization of (gains) losses (15) 2,804 393 - -------------------------------------------------------------------------------- Total expense $ 21,662 26,679 24,573 - -------------------------------------------------------------------------------- Interest costs on the accumulated postretirement benefit obligation were based upon rates of 8.75% in 1995, 7.5% in 1994 and 9% in 1993. At December 31, 1995 and 1994, the actuarial and recorded liabilities for these postretirement benefits, none of which have been funded, were as follows: Year Ended December 31 1995 1994 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 232,418 217,307 Fully eligible active plan participants 25,211 22,203 Other active plan participants 29,417 19,449 - -------------------------------------------------------------------------------- 287,046 258,959 Unrecognized experience loss (48,113) (22,928) - -------------------------------------------------------------------------------- Liability included on the balance sheet 238,933 236,031 Less current portion 19,038 17,293 - -------------------------------------------------------------------------------- Noncurrent liability for postretirement health care and life insurance benefits $ 219,895 218,738 - --------------------------------------------------------------------------------
The accumulated postretirement benefit obligation was determined using the unit credit method and an assumed discount rate of 7.5% in 1995 and 8.75% in 1994. The assumed health care cost trend rate used in 1995 was 9% for pre-65 retirees, grading down to 5% in the year 2001. For post-65 retirees, the assumed trend rate in 1995 was 7%, grading down to 5% in the year 2001. The assumed Medicare cost trend rate used in 1995 was 7%, grading down to 5% in the year 2001. A percentage point increase each year in the assumed health care cost trend rate used would have resulted in a $2,641 increase in the aggregate service and interest components of expense for the year 1995, and a $36,411 increase in the accumulated postretirement benefit obligation at December 31, 1995. The Company also sponsors a Savings-Investment Plan to assist eligible employees in providing for retirement or other future financial needs. Employee contributions are matched at rates of 50% to 125% up to 5% of compensation (subject to certain limitations imposed by the Internal Revenue Code of 1986, as amended). Contribution expense under the plan aggregated $6,324 in 1995, $5,848 in 1994 and $5,381 in 1993. In 1994, the Company's shareholders approved the Employee Stock Purchase Plan, whereby eligible employees could elect to purchase shares of Minerals Stock and Services Stock, or both, at the lower of 85% of the fair market value as of specified dates. Under this plan employees purchased 44,006 shares of Minerals Stock for $374 and 57,002 shares of Services Stock for $1,152 in 1995 and 11,843 shares of Minerals Stock for $187 and 26,444 shares of Services Stock for $590 in 1994. Upon approval of the Brink's Stock Proposal, the Employee Stock Purchase Plan was amended so as to permit eligible employees to purchase Brink's Stock, Burlington Stock, Minerals Stock, or a combination, as they elect. The Company sponsors other defined contribution benefit plans based on hours worked, tons produced or other measurable factors. Contributions under all of these plans aggregated $1,030 in 1995, $1,026 in 1994 and $918 in 1993. In October 1992, the Coal Industry Retiree Health Benefit Act of 1992 (the "Health Benefit Act") was enacted as part of the Energy Policy Act of 1992. The Health Benefit Act established rules for the payment of future health care benefits for thousands of retired union mine workers and their dependents. Part of the burden for these payments was shifted by the Health Benefit Act from certain coal producers, which had a contractual obligation to fund such payments, to producers such as the Company which have collective bargaining agreements with the UMWA that do not require such payments and to numerous other companies which are no longer in the coal business. The Health Benefit Act established a trust fund to which "signatory operators" and "related persons," including the Company and 81
certain of its coal subsidiaries (the "Pittston Companies") are obligated to pay annual premiums for assigned beneficiaries, together with a pro rata share for certain beneficiaries who never worked for such employers ("unassigned beneficiaries"), in amounts determined by the Secretary of Health and Human Services on the basis set forth in the Health Benefit Act. For 1995, 1994 and 1993, these amounts, on a pretax basis, were approximately $10,800, $11,000 and $9,100, respectively. The Company believes that the annual liability under the Health Benefit Act for the Pittston Companies' assigned beneficiaries will continue at approximately $10,000 per year for the next several years and should begin to decline thereafter as the number of such assigned beneficiaries decreases. Based on the number of beneficiaries actually assigned by the Social Security Administration, the Company estimates the aggregate pretax liability relating to the Pittston Companies' assigned beneficiaries remaining at approximately $220,000, which when discounted at 7.5% provides a present value estimate of approximately $95,000. The ultimate obligation that will be incurred by the Company could be significantly affected by, among other things, increased medical costs, decreased number of beneficiaries, governmental funding arrangements and such federal health benefit legislation of general application as may be enacted. In addition, the Health Benefit Act requires the Pittston Companies to fund, pro rata according to the total number of assigned beneficiaries, a portion of the health benefits for unassigned beneficiaries. At this time, the funding for such health benefits is being provided from another source and for this and other reasons the Pittston Companies' ultimate obligation for the unassigned beneficiaries cannot be determined. The Company accounts for its obligations under the Health Benefit Act as a participant in a multi-employer plan and recognizes the annual cost on a pay-as-you-go basis. 14. RESTRUCTURING AND OTHER CHARGES, INCLUDING LITIGATION ACCRUAL The market for metallurgical coal, for most of the past fifteen years, has been characterized by weak demand from primary steel producers and intense competition from foreign coal producers, especially those in Australia and Canada. Metallurgical coal sales contracts typically are subject to annual price negotiations, which increase the risk of market forces. As a result of the continuing long-term decline in the metallurgical coal markets, which was further evidenced by significant price reductions in early 1994, Coal operations accelerated its strategy of decreasing its exposure to these markets. After a review of the economic viability of the remaining metallurgical coal assets in early 1994, management determined that four underground mines were no longer
economically viable and should be closed resulting in significant economic impairment to three related preparation plants. In addition, it was determined that one surface steam coal mine, the Heartland mine, which provided coal to Alabama Power Company under a long-term sales agreement, would be closed due to rising costs caused by unfavorable geological conditions. As a result of these decisions, the Company incurred a pretax charge of $90,806 in 1994 ($58,116 after tax) which included a reduction in the carrying value of these assets and related accruals for mine closure costs. These charges included asset writedowns of $46,487 which reduced the book carrying value of such assets to what management believes to be their net realizable value based on either estimated sales or leasing of such property to unrelated third parties. In addition, the charges included $3,836 for required lease payments owed to lessors for machinery and equipment that would be idled as a result of the mine and facility closures. The charges also included $19,290 for mine and plant closure costs which represented estimates for reclamation and other environmental costs to be incurred to bring the properties in compliance with federal and state mining and environmental laws. This accrual was required due to the premature closing of the mines. The accrual also included $21,193 in contractually or statutorily required employee severance and other benefit costs associated with termination of employees at these facilities and costs associated with inactive employees at these facilities. Such employee benefits included severance payments, medical insurance, workers' compensation and other benefits and have been calculated in accordance with contractually (collective bargaining agreements signed by certain coal subsidiaries included in the Company) and legally required employee severance and other benefits. Of the four underground mines, two ceased coal production in 1994. In 1994 the Company reached agreement with Alabama Power Company to transfer the coal sales contract serviced by the Heartland mine to another location in West Virginia. The Heartland mine ceased coal production during 1994 and final reclamation and environmental work is substantially complete. At the beginning of 1994, there were approximately 750 employees involved in operations at these facilities and other administrative support. Employment at these facilities was reduced by 52% to approximately 360 employees at December 31, 1994 and by 81% to approximately 140 employees at December 31, 1995. Although coal production has or will cease at the mines contemplated in the accrual, the Company will incur reclamation and environmental costs for several years to bring these properties into compliance with federal and state environmental laws. In addition, employee termination and medical costs will continue to be incurred for several years after the facilities have been closed. The significant portion of these employee liabilities is for statutorily provided workers' compensation costs for 82
inactive employees. Such benefits include indemnity and medical payments as required under state workers' compensation laws. The long payment periods are based on continued, and in some cases, lifetime indemnity and medical payments to injured former employees and their surviving spouses. Management believes that the charges incurred in 1994 should be sufficient to provide for these future costs and does not anticipate material additional future charges to operating earnings for these facilities, although continual cash funding will be required over the next several years. In 1993 the Company incurred a pretax charge of $78,633 ($48,897 after tax) relating to mine closing costs including employee benefit costs and certain other noncash charges, together with previously reported litigation (the "Evergreen Case") brought against the Company and a number of its coal subsidiaries by the trustees of certain pension and benefit trust funds established under collective bargaining agreements with the UMWA (Note 17). These charges impacted Coal and Mineral Ventures' operating profit in the amounts of $70,713 and $7,920, respectively. The charge in the Mineral Ventures segment in 1993, related to the writedown of the Company's investment in the Uley graphite mine in Australia. Although reserve drilling of the Uley property indicates substantial graphite deposits, processing difficulties, depressed graphite prices which remained significantly below the level prevailing at the start of the project and an analysis of various technical and marketing conditions affecting the project resulted in the determination that the assets had been impaired and that loss recognition was appropriate. The charge included asset writedowns of $7,496, which reduced the carrying value of such assets to zero. The following table analyzes the changes in liabilities during the last three years for facility closure costs recorded as restructuring and other charges: Employee Mine Termination, Leased and Medical Machinery Plant and and Closure Severance Equipment Costs Costs Total - -------------------------------------------------------------------------------- Balance January 1, 1993 (a) $1,146 35,499 35,413 72,058 Additions 2,782 1,598 6,267 10,647 Payments (b) 836 8,663 7,463 16,962 - -------------------------------------------------------------------------------- Balance December 31, 1993 3,092 28,434 34,217 65,743 Additions 3,836 19,290 21,193 44,319 Payments (c) 3,141 9,468 12,038 24,647 - -------------------------------------------------------------------------------- Balance December 31, 1994 3,787 38,256 43,372 85,415 Payments (d) 1,993 7,765 7,295 17,053 Other reductions (e) 576 1,508 -- 2,084 - -------------------------------------------------------------------------------- Balance December 31, 1995 $1,218 28,983 36,077 66,278 - --------------------------------------------------------------------------------
(a) These amounts represent the remaining liabilities for facility closure costs recorded as restructuring and other charges in prior years. The original charges included $2,312 for leased machinery and equipment, $50,645 principally for incremental facility closing costs, including reclamation and $47,841 for employee benefit costs, primarily workers' compensation, which will continue to be paid for several years. (b) These amounts represent total cash payments made during the year for liabilities recorded in prior years. (c) Of the total payments made in 1994, $8,672 was for liabilities recorded in years prior to 1993, $5,822 was for liabilities recorded in 1993 and $10,153 was for liabilities recorded in 1994. (d) Of the total payments made in 1995, $6,424 was for liabilities recorded in years prior to 1993, $2,486 was for liabilities recorded in 1993 and $8,143 was for liabilities recorded in 1994. (e) These amounts represent the assumption of liabilities by third parties as a result of sales transactions. During the next twelve months, expected cash funding of these charges is approximately $15,000 to $20,000. Management estimates that the remaining liability for leased machinery and equipment will be fully paid over the next year. The liability for mine and plant closure costs is expected to be satisfied over the next ten years of which approximately 50% is expected to be paid over the next two years. The liability for employee related costs, which is primarily workers' compensation, is estimated to be 50% settled over the next four years with the balance paid during the following five to ten years. 15. OTHER INCOME AND EXPENSE Other operating income includes the Company's share of net income of unconsolidated affiliated companies which are carried on the equity method, royalty income and gains on sales of assets. Amounts presented include the accounts of the following equity affiliates: Ownership At December 31, 1995 - ---------------------------------------------------------- Servicio Pan Americano De Protecion, S.A. (Mexico) 20.0% Brink's Panama, S.A. 49.0% Brink's S.A. (France) 38.0% Brink's Schenker, GmbH (Germany) 50.0% Brink's Securmark S.p.A. (Italy) 24.5% Security Services (Brink's Jordan), W.L.L. 45.0% Brink's-Allied Limited (Ireland) 50.0% Brink's Arya India Private Limited 40.0% Brink's Pakistan (Pvt.) Limited 49.0% Brink's Taiwan Limited 50.0% Brink's (Thailand) Ltd. 40.0% Burlington International Forwarding Ltd. (Taiwan) 33.3% Mining Project Investors Limited (Australia) 34.2% MPI Gold (USA) 34.2% 83
The following table presents summarized financial information of these companies. 1995 1994 1993 - --------------------------------------------------------------------- Revenues $762,250 833,056 727,697 Gross profit 60,712 154,608 147,778 Net income (loss) (5,873) 23,503 26,530 The Company's share of net income (loss) $ 182 6,336 7,503 ===================================================================== Current assets $186,039 180,868 Noncurrent assets 227,229 299,338 Current liabilities 219,253 145,549 Noncurrent liabilities 85,057 160,876 Net equity $108,958 173,781 Undistributed earnings of such companies included in consolidated retained earnings approximated $38,300 at December 31, 1995. 16. SEGMENT INFORMATION Net sales and operating revenues by geographic area are as follows: Year Ended December 31 1995 1994 1993 - --------------------------------------------------------------- United States: Domestic customers $1,449,684 1,477,450 1,172,880 Export customers 256,396 274,695 315,664 - --------------------------------------------------------------- 1,706,080 1,752,145 1,488,544 International operations 1,219,987 915,130 767,577 - --------------------------------------------------------------- Total $2,926,067 2,667,275 2,256,121 =============================================================== Segment operating profit by geographic area is as follows: Year Ended December 31 1995 1994 1993 - ---------------------------------------------------------------- United States $115,530 11,770 5,139 International operations 48,775 47,279 37,692 - --------------------------------------------------------------- Total $164,305 59,049 42,831 =============================================================== Identifiable assets by geographic area are as follows: As of December 31 1995 1994 1993 - --------------------------------------------------------------- United States $1,245,122 1,252,057 945,122 International operations 453,451 389,074 329,574 - --------------------------------------------------------------- Total $1,698,573 1,641,131 1,274,696 =============================================================== Segment operating profit includes restructuring and other charges, including litigation accrual aggregating $90,806 in 1994, all of which is included in the United States and $78,633 in 1993, of which $70,713 is included in the United States and $7,920 is included in other foreign (Note 14).
Industry segment information is as follows: Year Ended December 31 1995 1994 1993 - ------------------------------------------------------------------------- NET SALES AND OPERATING REVENUES: Burlington $ 1,414,821 1,215,284 998,079 Brink's 659,459 547,046 481,904 BHS 128,936 109,947 89,049 Coal 706,251 779,504 672,244 Mineral Ventures 16,600 15,494 14,845 - ------------------------------------------------------------------------- Consolidated net sales and operating revenues $ 2,926,067 2,667,275 2,256,121 ======================================================================== OPERATING PROFIT (LOSS): Burlington $ 58,723 69,224 37,971 Brink's (a) 42,738 39,710 35,008 BHS (b) 39,506 32,432 26,400 Coal (c) 23,131 (83,451) (48,246) Mineral Ventures (c) 207 1,134 (8,302) - ------------------------------------------------------------------------- Segment operating profit 164,305 59,049 42,831 General Corporate expense (16,806) (16,176) (16,732) - ------------------------------------------------------------------------- Consolidated operating profit $ 147,499 42,873 26,099 ======================================================================== (a) Includes equity in net income of unconsolidated foreign affiliates of $136 in 1995, $6,048 in 1994 and $6,895 in 1993 (Note 15). (b) As of January 1, 1992, BHS elected to capitalize categories of costs not previously capitalized for home security installations to more accurately reflect subscriber installation costs. The effect of this change in accounting principle was to increase operating profit by $5,196 in 1995, $4,137 in 1994 and $4,051 in 1993 (Note 4). (c) Operating profit (loss) of the Coal segment included restructuring and other charges, including litigation accrual of $90,806 in 1994 and $70,713 in 1993 (Note 14). Operating loss of the Mineral Ventures segment included restructuring and other charges of $7,920 in 1993 (Note 14). CAPITAL EXPENDITURES: Burlington $ 34,576 24,701 21,544 Brink's 23,063 23,963 22,209 BHS 47,256 34,071 26,409 Coal 17,811 25,016 15,499 Mineral Ventures 2,332 2,514 2,690 General Corporate 391 209 110 - -------------------------------------------------------------------- Consolidated capital expenditures $125,429 110,474 88,461 ==================================================================== DEPRECIATION, DEPLETION AND AMORTIZATION: Burlington $19,856 17,209 15,250 Brink's 21,844 20,553 20,150 BHS 21,028 17,817 14,357 Coal 40,285 44,731 25,679 Mineral Ventures 1,597 1,202 1,779 General Corporate 379 344 350 - -------------------------------------------------------------------- Consolidated depreciation, depletion and amortization $104,989 101,856 77,565 ==================================================================== As of December 31 1995 1994 1993 - ------------------------------------------------------------------------- ASSETS: Burlington $ 539,719 472,440 418,694 Brink's 321,022 297,816 267,229 BHS 116,701 87,372 72,609 Coal 699,049 761,827 499,494 Mineral Ventures 22,082 21,676 16,670 - ------------------------------------------------------------------------- Identifiable assets 1,698,573 1,641,131 1,274,696 General Corporate (primarily cash, investments, advances and deferred pension assets) 108,799 96,647 86,805 - ------------------------------------------------------------------------- Consolidated assets $1,807,372 1,737,778 1,361,501 ========================================================================= 84
17. LITIGATION In April 1990, the Company entered into a settlement agreement to resolve certain environmental claims against the Company arising from hydrocarbon contamination at a petroleum terminal facility ("Tankport") in Jersey City, New Jersey, which operations were sold in 1983. Under the settlement agreement, the Company is obligated to pay 80% of the remediation costs. Based on data available to the Company and its environmental consultants, the Company estimates its portion of the cleanup costs on an undiscounted basis using existing technologies to be between $6,700 and $16,400 over a period of up to five years. Management is unable to determine that any amount within that range is a better estimate due to a variety of uncertainties, which include the extent of the contamination at the site, the permitted technologies for remediation and the regulatory standards by which the clean-up will be conducted. The clean-up estimates have been modified from prior years' in light of cost inflation. The estimate of costs and the timing of payments could change as a result of changes to the remediation plan required, changes in the technology available to treat the site, unforseen circumstances existing at the site and additional cost inflation. The Company commenced insurance coverage litigation in 1990, in the United States District Court for the District of New Jersey, seeking a declaratory judgment that all amounts payable by the Company pursuant to the Tankport obligation were reimbursable under comprehensive general liability and pollution liability policies maintained by the Company. In August 1995, the District Court ruled on various Motions for Summary Judgement. In its decision, the Court found favorably for the Company on several matters relating to the comprehensive general liability policies but concluded that the pollution liability policies did not contain pollution coverage for the types of claims associated with the Tankport site. The Company has filed a notice of its intent to appeal the District Court's decision to the Third Circuit. Management and its outside legal counsel continue to believe, however, that recovery of a substantial portion of the cleanup costs will ultimately be probable of realization. Accordingly, management is revising its earlier belief that there is no net liability for the Tankport obligation, and it is the Company's belief that, based on estimates of potential liability and probable realization of insurance recoveries, the Company would be liable for approximately $1,400 based on the Court's decision and related developments of New Jersey law. In 1988, the trustees of certain pension and benefit trust funds (the "Trust Funds") established under collective bargaining agreements with the UMWA brought an action (the "Evergreen Case") against the Company and a number of its coal subsidiaries in the United States District Court for the District of Columbia, claiming that the defendants are obligated to contribute to such Trust Funds in accordance with the provisions of the 1988 and subsequent National Bituminous Coal Wage Agreements, to which neither the Company nor any of its
subsidiaries is a signatory. In January 1992, the Court issued an order granting summary judgment in favor of the trustees on the issue of liability, which was thereafter affirmed by the Court of Appeals. In June 1993, the United States Supreme Court denied a petition for a writ of certiorari. The case was remanded to District Court where damage and other issues were to be decided. In September 1993, the Company filed a motion seeking relief from the District Court's grant of summary judgment based on, among other things, the Company's allegation that plaintiffs improperly withheld evidence that directly refutes plaintiffs' representations to the District Court and the Court of Appeals in this case. In December 1993, that motion was denied. The Company, following the District Court's ruling in December 1993, recognized in 1993 in its consolidated financial statements the potential liability that might have resulted from an adverse judgment in the Evergreen Case (Notes 13 and 14). On May 23, 1994, the trustees filed a Motion for Entry of Final Judgment seeking approximately $71,100 in delinquent contributions, interest and liquidated damages through May 31, 1994, plus approximately $17 additional interest and liquidated damages for each day between May 31, 1994 and the date of entry of final judgment, plus on-going contributions to the 1974 Pension Plan. The Company opposed this motion. No decision on this motion of final judgment was entered. In furtherance of its ongoing effort to identify other available legal options for seeking relief from what it believes to be an erroneous finding of liability in the Evergreen Case, the Company filed suit against the Bituminous Coal Operators Association ("BCOA") and others to hold them responsible for any damages sustained by the Company as a result of the Evergreen Case. In December 1994, the District Court ordered the Evergreen Case as well as related cases filed against other coal companies, and the BCOA case, be submitted to mediation before a federal judge in an effort to obtain a settlement. SUBSEQUENT EVENT (UNAUDITED) In late March 1996 a settlement was reached in these cases, including the Evergreen Case. Under the terms of the settlement, the coal subsidiaries which had been signatories to earlier National Bituminous Coal Wage Agreements agreed to make various lump sum payments in full satisfaction of all amounts allegedly due to the Trust Funds through January 31, 1996, to be paid over time as follows: approximately $25,800 upon dismissal of the Evergreen Case and the remainder of $24,000 in installments of $7,000 in 1996 and $8,500 in each of 1997 and 1998. The first payment was entirely funded through an escrow account previously established by the Company. In addition, the coal subsidiaries agreed to future participation in the UMWA 1974 Pension Plan. The BCOA case and a separate case against the UMWA have also been dismissed. As a result of the settlement of these cases, the Company expects to record a pretax gain of approximately $35,000 in the first quarter of 1996 in its consolidated financial statements. 85
18. COMMITMENTS At December 31, 1994, the Company had contractual commitments to purchase coal which is primarily used to blend with Company mined coal. Based on the contract provisions these commitments are currently estimated to aggregate approximately $161,743 and expire from 1996 through 1998 as follows: 1996 $76,761 1997 57,929 1998 27,053 Purchases under the contracts were $83,532 in 1995, $53,097 in 1994 and $81,069 in 1993. 19. SUPPLEMENTAL CASH FLOW INFORMATION For the years ended December 31, 1995, 1994 and 1993, cash payments for income taxes, net of refunds received, were $21,967, $23,406 and $30,237, respectively. For the years ended December 31, 1995, 1994 and 1993, cash payments for interest were $13,575, $12,104 and $10,207, respectively. In 1995, the Company sold mining operations in Ohio together with a related coal supply contract for notes and royalties receivable totaling $6,949. In December 1993, the Company sold the majority of the assets of its captive mine supply company. Cash proceeds of $8,400 from the sale were received on January 2, 1994, and have been included in "Cash flow from investing activities: Other, net" in 1994. During 1993, the Company sold a coal preparation plant and related interest in land, equipment and facilities for mineral reserves with a fair market value of $13,300 and cash of $10,700. The cash proceeds of $10,700 less $1,001 in expenses related to the transaction were included in "Cash flow from investing activities: Other, net".
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Tabulated below are certain data for each quarter of 1995 and 1994. 1st 2nd 3rd 4th - -------------------------------------------------------------------------------------- 1995 QUARTERS: Net sales and operating revenues $ 699,084 711,767 752,453 762,763 Gross profit 76,028 89,898 108,578 109,864 Net income $ 14,065 24,608 29,599 29,700 Per Pittston Brink's Group Common Share: Net income $ .25 .32 .39 .39 Per Pittston Burlington Group Common Share: Net income $ .21 .42 .56 .54 Per Pittston Minerals Group Common Share: Net income Primary $ .05 .45 .51 .43 Fully diluted $ .05 .45 .45 .43 1994 QUARTERS: Net sales and operating revenues $ 587,795 659,500 693,854 726,126 Gross profit 51,770 100,521 98,823 102,495 Net income (loss) $ (63,568) 28,038 31,210 31,217 Per Pittston Brink's Group Common Share: Net income $ .19 .26 .31 .34 Per Pittston Burlington Group Common Share: Net income $ .18 .61 .71 .53 Per Pittston Minerals Group Common Share: Net income (loss) Primary $ (9.96) .72 .74 .91 Fully diluted $ (9.96) .67 .61 .81 Net loss in the first quarter of 1994 included restructuring and other charges of $58,116 (Note 14). 86
Pittston Brink's Group STATEMENT OF MANAGEMENT RESPONSIBILITY The management of The Pittston Company (the "Company") is responsible for preparing the accompanying Pittston Brink's Group (the "Brink's Group") financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles. Management has also prepared the other information in the annual report and is responsible for its accuracy. In meeting our responsibility for the integrity of the financial statements, we maintain a system of internal controls designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and that the accounting records provide a reliable basis for the preparation of the financial statements. Qualified personnel throughout the organization maintain and monitor these internal controls on an ongoing basis. In addition, the Company maintains an internal audit department that systematically reviews and reports on the adequacy and effectiveness of the controls, with management follow-up as appropriate. Management has also established a formal Business Code of Ethics which is distributed throughout the Company. We acknowledge our responsibility to establish and preserve an environment in which all employees properly understand the fundamental importance of high ethical standards in the conduct of our business. The accompanying financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. During the audit they review and make appropriate tests of accounting records and internal controls to the extent they consider necessary to express an opinion on the Brink's Group's financial statements. The Company's Board of Directors pursues its oversight role with respect to the Brink's Group's financial statements through the Audit and Ethics Committee, which is composed solely of outside directors. The Committee meets periodically with the independent auditors, internal auditors and management to review the Company's control system and to ensure compliance with applicable laws and the Company's Business Code of Ethics. We believe that the policies and procedures described above are appropriate and effective and do enable us to meet our responsibility for the integrity of the Brink's Group's financial statements.
INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders The Pittston Company We have audited the accompanying balance sheets of Pittston Brink's Group (as described in Note 1) as of December 31, 1995 and 1994, and the related statements of operations and cash flows for each of the years in the three-year period ended December 31, 1995. These financial statements are the responsibility of The Pittston Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements of Pittston Brink's Group present fairly, in all material respects, the financial position of Pittston Brink's Group as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As more fully discussed in Note 1, the financial statements of Pittston Brink's Group should be read in connection with the audited consolidated financial statements of The Pittston Company and subsidiaries. KPMG Peat Marwick LLP Stamford, Connecticut January 25, 1996 87
Pittston Brink's Group BALANCE SHEETS December 31 (Dollars in thousands) 1995 1994 =================================================================================== ASSETS Current assets: Cash and cash equivalents $ 21,977 20,226 Short-term investments 3,288 2,041 Accounts receivable: Trade 112,705 88,347 Other 4,841 4,561 - ---------------------------------------------------------------------------------- 117,546 92,908 Less estimated amount uncollectible 3,756 3,379 - ---------------------------------------------------------------------------------- 113,790 89,529 Receivable Pittston Minerals Group (Note 2) 3,945 705 Inventories 2,795 1,971 Prepaid expenses 10,380 7,021 Deferred income taxes (Note 7) 13,146 13,670 - ---------------------------------------------------------------------------------- Total current assets 169,321 135,163 Property, plant and equipment, at cost (Note 4) 429,077 365,041 Less accumulated depreciation and amortization 214,424 184,111 - ---------------------------------------------------------------------------------- 214,653 180,930 Intangibles, net of amortization (Notes 5 and 11) 28,893 28,106 Investment in and advances to unconsolidated affiliates 28,406 43,171 Deferred pension assets (Note 13) 33,923 32,495 Deferred income taxes (Note 7) 1,081 -- Other assets 8,449 7,022 - ---------------------------------------------------------------------------------- Total assets $484,726 426,887 ================================================================================== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Short-term borrowings $ 4,858 4,544 Current maturities of long-term debt (Note 8) 4,117 5,256 Accounts payable 35,460 26,554 Accrued liabilities: Taxes 13,690 13,007 Workers' compensation and other claims 17,613 14,939 Payrolls 12,559 9,750 Deferred monitoring revenues 12,134 11,750 Miscellaneous 30,010 28,591 - ---------------------------------------------------------------------------------- 86,006 78,037 - ---------------------------------------------------------------------------------- Total current liabilities 130,441 114,391 Long-term debt, less current maturities (Note 8) 5,795 7,990 Postretirement benefits other than pensions (Note 13) 3,475 3,280 Workers' compensation and other claims 11,292 9,929 Deferred income taxes (Note 7) 37,529 40,245 Payable Pittston Minerals Group (Note 2) 7,844 12,750 Minority interests 21,361 14,471 Other liabilities 8,184 8,300 Commitments and contingent liabilities (Notes 8, 12, and 16) Shareholder's equity (Note 3) 258,805 215,531 - ---------------------------------------------------------------------------------- Total liabilities and shareholder's equity $484,726 426,887 ================================================================================== See accompanying notes to financial statements 88
Pittston Brink's Group STATEMENTS OF OPERATIONS Year Ended December 31 (In thousands, except per share amounts) 1995 1994 1993 ===================================================================================== Operating revenue $ 788,395 656,993 570,953 - ------------------------------------------------------------------------------------- Costs and expenses: Operating expenses 599,683 498,185 433,954 Selling, general and administrative expenses 112,133 97,245 87,247 - ------------------------------------------------------------------------------------- Total costs and expenses 711,816 595,430 521,201 - ------------------------------------------------------------------------------------- Other operating income (Note 14) 895 5,913 6,899 - ------------------------------------------------------------------------------------- Operating profit 77,474 67,476 56,651 Interest income 1,840 1,503 1,304 Interest expense (Note 2) (2,050) (2,450) (2,734) Other income (expense), net (3,505) (3,068) (3,970) - ------------------------------------------------------------------------------------- Income before income taxes 73,759 63,461 51,251 Provision for income taxes (Note 7) 22,666 21,972 19,601 - ------------------------------------------------------------------------------------- Net income $ 51,093 41,489 31,650 ===================================================================================== Net income per common share (Note 1) $ 1.35 1.10 .86 ===================================================================================== Average common shares outstanding 37,931 37,784 36,907 See accompanying notes to financial statements 89
Pittston Brink's Group STATEMENTS OF CASH FLOWS Year Ended December 31 (In thousands) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 51,093 41,489 31,650 Adjustments to reconcile net income to net cash provided by operating activities: Noncash charges and other write-offs -- -- 11 Depreciation and amortization 42,977 38,463 34,596 Provision (credit) for deferred income taxes (952) 4,328 (2,998) Provision (credit) for pensions, noncurrent (466) (169) (240) Provision for uncollectible accounts receivable 3,265 1,346 3,403 Equity in earnings of unconsolidated affiliates, net of dividends received 2,352 (1,144) (3,596) Gain on sale of property, plant and equipment (377) (186) (174) Other operating, net 3,104 2,380 2,763 Change in operating assets and liabilities, net of effects of acquisitions and dispositions: Increase in accounts receivable (22,352) (15,620) (8,275) Increase in inventories (812) (529) (190) Increase in prepaid expenses (1,858) (675) (793) Increase in accounts payable and accrued liabilities 15,822 15,645 9,958 Increase in other assets (1,597) (982) (758) Increase in workers' compensation and other claims, noncurrent 1,363 886 744 Increase (decrease) in other liabilities 337 (956) (1,492) Other, net (1,119) (820) 623 - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 90,780 83,456 65,232 - --------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment (69,783) (56,443) (47,668) Proceeds from disposal of property, plant and equipment 3,178 515 979 Acquisitions, net of cash acquired, and related contingency payments (956) -- -- Other, net (1,313) (4,884) (1,454) - --------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (68,874) (60,812) (48,143) - --------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Additions to debt 1,782 -- 4,232 Reductions of debt (5,893) (10,129) (10,587) Payments to Minerals Group (12,240) (5,705) -- Repurchase of common stock (2,303) (4,146) (616) Proceeds from exercise of stock options 1,536 3,730 8,123 Proceeds from employee stock purchase plan 395 -- -- Proceeds from sale of stock to Savings Investment Plan -- -- 147 Proceeds from sale of stock to Minerals Group -- 216 86 Dividends paid (3,432) (3,399) (3,175) Cost of Services Stock Proposal -- (1) (782) Net cash to the Company -- -- (6,041) - --------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (20,155) (19,434) (8,613) - --------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 1,751 3,210 8,476 Cash and cash equivalents at beginning of period 20,226 17,016 8,540 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 21,977 20,226 17,016 =============================================================================================================== See accompanying notes to financial statements. 90
Pittston Brink's Group NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION On January 18, 1996, the shareholders of The Pittston Company, (the "Company") approved the Brink's Stock Proposal, as described in the Company's proxy statement dated December 15, 1995, resulting in the modification, effective as of January 19, 1996, of the capital structure of the Company to include an additional class of common stock. The outstanding shares of Pittston Services Group Common Stock ("Services Stock") have been redesignated as Pittston Brink's Group Common Stock, par value $1.00 per share ("Brink's Stock"), and one-half of one share of a new class of common stock identified as Pittston Burlington Group Common Stock, par value $1.00 per share, ("Burlington Stock") has been distributed for each outstanding share of Services Stock. Holders of Pittston Minerals Group Common Stock ("Minerals Stock") continue to be holders of such stock, which continues to reflect the performance of the Pittston Minerals Group (the "Minerals Group"). Brink's Stock is intended to reflect the performance of the Pittston Brink's Group (the "Brink's Group") and Burlington Stock is intended to reflect the performance of the Pittston Burlington Group (the "Burlington Group"). The financial statements of the Brink's Group include the balance sheets, the results of operations and cash flows of the Brink's, Incorporated ("Brink's") and Brink's Home Security, Inc. ("BHS") operations of the Company, and a portion of the Company's corporate assets and liabilities and related transactions which are not separately identified with operations of a specific segment. The Brink's Group's financial statements are prepared using the amounts included in the Company's consolidated financial statements. Corporate allocations reflected in these financial statements are determined based upon methods which management believes to be a reasonable and equitable allocation of such items (see Note 2). All stock and per share data in the accompanying financial statements have been restated to reflect the modification of the Company's capital structure. The primary impacts of this restatement are as follows: For the purpose of computing net income per common share of Brink's Stock, the number of shares of Brink's Stock are assumed to be the same as the total number of shares of Services Stock. Net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. The potential dilution from the exercise of stock options is not material. The shares of Brink's Stock assumed to be held in The Pittston Company Employee Benefits Trust are evaluated for inclusion in the calculation of net income per share under the treasury stock method and had no dilutive effect.
All financial impacts of purchases and issuances of Services Stock have been attributed to each Group in relation of their respective common equity to the Services Group common stock. Dividends paid by the Company were attributed to the Brink's and Burlington Groups in relation to the initial dividends to be paid on the Brink's Stock and the Burlington Stock. The Company provides to holders of Brink's Stock separate financial statements, financial review, descriptions of business and other relevant information for the Brink's Group in addition to the consolidated financial information of the Company. Notwithstanding the attribution of assets and liabilities (including contingent liabilities) among the Minerals Group, the Brink's Group and the Burlington Group for the purpose of preparing their respective financial statements, this attribution and the change in the capital structure of the Company as a result of the Brink's Stock Proposal did not affect legal title to such assets or responsibility for such liabilities for the Company or any of its subsidiaries. Holders of Brink's Stock are common shareholders of the Company, which continues to be responsible for all of its liabilities. Financial impacts arising from one group that affect the Company's financial condition could affect the results of operations and financial condition of each of the groups. Since financial developments within one group could affect other groups, all shareholders of the Company could be adversely affected by an event directly impacting only one group. Accordingly, the Company's consolidated financial statements must be read in connection with the Brink's Group's financial statements. The accounting policies applicable to the preparation of the financial statements of the Brink's Group may be modified or rescinded at the sole discretion of the Board without approval of shareholders, although there is no intention to do so. PRINCIPLES OF COMBINATION The accompanying financial statements reflect the combined accounts of the businesses comprising the Brink's Group and their majority-owned subsidiaries. The Brink's Group interests in 20% to 50% owned companies are carried on the equity method. All material intercompany items and transactions have been eliminated in combination. Certain prior year amounts have been reclassified to conform to the current year's financial statement presentation. 91
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, demand deposits and investments with original maturities of three months or less. SHORT-TERM INVESTMENTS Short-term investments are those with original maturities in excess of three months and are carried at cost which approximates market. INVENTORIES Inventories are stated at cost (determined under the first-in, first-out or average cost method) or market, whichever is lower. PROPERTY, PLANT AND EQUIPMENT Expenditures for maintenance and repairs are charged to expense, and the costs of renewals and betterments are capitalized. Depreciation is provided principally on the straight-line method at varying rates depending upon estimated useful lives. Subscriber installation costs for home security systems provided by BHS are capitalized and depreciated over the estimated life of the assets and are included in machinery and equipment. The security system that is installed remains the property of BHS and is capitalized at the cost to bring the revenue producing asset to its intended use. When an installation is identified for disconnection, the remaining net book value of the installation is written-off and charged to depreciation. INTANGIBLES The excess of cost over fair value of net assets of companies acquired is amortized on a straight-line basis over the estimated periods benefited. The Brink's Group evaluates the carrying value of intangibles and the periods of amortization to determine whether events and circumstances warrant revised estimates of asset value or useful lives. The Brink's Group annually assesses the recoverability of the excess of cost over net assets acquired by determining whether the amortization of the asset balance over its remaining life can be recovered through projected undiscounted future operating cash flows. Evaluation of asset value as well as periods of amortization are performed on a disaggregated basis at each of the Brink's Group's operating units. INCOME TAXES Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
See Note 2 for allocation of the Company's U.S. federal income taxes to the Brink's Group. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Postretirement benefits other than pensions are accounted for in accordance with Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", which requires employers to accrue the cost of such retirement benefits during the employees' service with the Company. FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign operations have been translated at current exchange rates, and related revenues and expenses have been translated at average rates of exchange in effect during the year. Resulting cumulative translation adjustments have been included in shareholder's equity. Translation adjustments relating to operations in countries with highly inflationary economies are included in net income, along with all transaction gains and losses for the period. A portion of the Brink's Group's financial results is derived from activities in several foreign countries, each with a local currency other than the U.S. dollar. Because the financial results of the Brink's Group are reported in U.S. dollars, they are affected by the changes in the value of the various foreign currencies in relation to the U.S. dollar. However, the Brink's Group's international activity is not concentrated in any single currency, which reduces the risks of foreign currency rate fluctuations. REVENUE RECOGNITION Brink's--Revenues are recognized when services are performed. BHS--Monitoring revenues are recognized when earned and amounts paid in advance are deferred and recognized as income over the applicable monitoring period, which is generally one year or less. Revenues from the sale of equipment, are recognized, together with related costs, upon completion of the installation. Connection fee revenues are recognized to the extent of direct selling costs incurred and expensed. Connection fee revenues in excess of direct selling costs are deferred and recognized as income on a straight-line basis over ten years. USE OF ESTIMATES In accordance with generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements. Actual results could differ from those estimates. 92
PENDING ACCOUNTING CHANGES The Brink's Group is required to implement a new accounting standard, Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", in 1996. SFAS No. 121 requires companies to review long-lived assets and certain identifiable intangibles to be held and used by an entity for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 121 requires companies to utilize a two-step approach to determining whether impairment of such assets has occurred and, if so, the amount of such impairment. Although the Brink's Group is still reviewing the impact of adopting SFAS No. 121, it is estimated that its adoption will not have any impact on the Brink's Group's financial statements as of January 1, 1996. The Brink's Group is required to implement a new accounting standard SFAS No. 123, "Accounting for Stock Based Compensation", in 1996. SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. Although SFAS No. 123 encourages adoption of a fair value based method of accounting for all employee stock compensation plans, it allows entities to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock issued to Employees with disclosure of net income and earnings per share as if the fair value based method of accounting is applied. The Brink's Group expects to continue to account for its stock compensation plans according to APB No. 25 with the disclosure of the impact on net income and earnings per share as if the fair value based method of accounting is applied. 2. RELATED PARTY TRANSACTIONS The following policies may be modified or rescinded by action of the Board, or the Board may adopt additional policies, without approval of the shareholders of the Company, although the Board has no present intention to do so. The Company allocated certain corporate general and administrative expenses, net interest expense and related assets and liabilities in accordance with the policies described below. Corporate assets and liabilities are primarily cash, deferred pension assets, income taxes and accrued liabilities.
FINANCIAL As a matter of policy, the Company manages most financial activities of the Brink's Group, Burlington Group and Minerals Group on a centralized, consolidated basis. Such financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt; the issuance and repurchase of common stock and the payment of dividends. In preparing these financial statements, transactions primarily related to invested cash, short-term and long-term debt (including convertible debt), related net interest and other financial costs have been attributed to the Brink's Group based upon its cash flows for the periods presented after giving consideration to the debt and equity structure of the Company. The Company attributes long-term debt to the Brink's Group based upon the purpose for the debt in addition to the cash requirements of the Brink's Group. At December 31, 1995 and 1994, none of the long-term debt of the Company was attributed to the Brink's Group. The portion of the Company's interest expense allocated to the Brink's Group for 1995 and 1994 was $120 and $176, respectively. There was no interest expense allocated to the Brink's Group in 1992. Management believes such method of allocation to be equitable and a reasonable estimate of the cost attributable to the Brink's Group. To the extent borrowings are deemed to occur between the Brink's Group, the Burlington Group and the Minerals Group, intergroup accounts are established bearing interest at the rate in effect from time to time under the Company's unsecured credit lines or, if no such credit lines exist, at the prime rate charged by Chemical Bank from time to time. At December 31, 1995 and 1994, the Minerals Group owed the Brink's Group $17,945 and $5,705, respectively, as the result of borrowings. INCOME TAXES The Brink's Group is included in the consolidated U.S. federal income tax return filed by the Company. The Company's consolidated provision and actual cash payments for U.S. federal income taxes are allocated between the Brink's Group, Burlington Group and Minerals Group in accordance with the Company's tax allocation policy and reflected in the financial statements for each Group. In general, the consolidated tax provision and related tax payments or refunds are allocated among the Groups, for financial statement purposes, based principally upon the financial income, taxable income, credits and other amounts directly related to the respective Group. Tax benefits that cannot be used by the Group generating such attributes, but can be utilized on a consolidated basis, are allocated to the Group that generated such benefits and an intergroup account is established for the benefit of the Group generating the attributes. As a result, the allocated Group amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if the Groups had filed separate tax returns. At December 31, 1995 and 1994, the Brink's Group owed the Minerals Group $21,844 and $17,750, respectively, for such tax benefits, of which $7,844 and $12,750, respectively, were not expected to be paid within one year from such dates in accordance with the policy. 93
SHARED SERVICES A portion of the Company's corporate general and administrative expenses and other shared services has been allocated to the Brink's Group based upon utilization and other methods and criteria which management believes to be equitable and a reasonable estimate of the cost attributable to the Brink's Group. These allocations were $4,770, $4,666 and $4,757 in 1995, 1994 and 1993, respectively. PENSION The Brink's Group's pension cost related to its participation in the Company's noncontributory defined benefit pension plan is actuarially determined based on its respective employees and an allocable share of the pension plan assets and calculated in accordance with Statement of Financial Accounting Standards No. 87 ("SFAS 87"). Pension plan assets have been allocated to the Brink's Group based on the percentage of its projected benefit obligation to the plan's total projected benefit obligation. Management believes such method of allocation to be equitable and a reasonable estimate of the cost attributable to the Brink's Group. 3. SHAREHOLDER'S EQUITY The following presents shareholder's equity of the Brink's Group assuming completion of the Brink's Stock Proposal transaction: Year Ended December 31 1995 1994 1993 - ----------------------------------------------------------------------------- Balance at beginning of period $ 215,531 175,219 147,582 Net income 51,093 41,489 31,650 Foreign currency translation adjustment (6,808) (25) (3,336) Stock options exercised 1,114 3,730 8,123 Stock released from employee benefits trust to employee benefits plan 3,371 899 563 Stock sold from employee benefits trust to employee benefits plan -- -- 147 Stock sold to Minerals Group -- 216 86 Stock repurchases (2,303) (4,146) (616) Dividends declared (3,437) (3,404) (3,175) Cost of Services Stock Proposal -- (1) (782) Tax benefit of options exercised 244 1,554 1,018 Net cash to the Company -- -- (6,041) - ----------------------------------------------------------------------------- Balance at end of period $ 258,805 215,531 175,219 ============================================================================= Included in shareholder's equity is the cumulative foreign currency translation adjustment of $20,044, $13,236 and $13,211 at December 31, 1995, 1994 and 1993, respectively.
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at cost, consist of the following: December 31 1995 1994 - --------------------------------------------- Land $ 4,461 4,162 Buildings 69,135 59,696 Machinery and equipment 355,481 301,183 - --------------------------------------------- Total $429,077 365,041 ============================================= The estimated useful lives for property, plant and equipment are as follows: Years - -------------------------------------------- Buildings 10 to 40 Machinery and equipment 2 to 20 Depreciation of property, plant and equipment aggregated $41,474 in 1995, $35,992 in 1994 and $31,973 in 1993. Changes in capitalized subscriber installation costs for home security systems included in machinery and equipment were as follows: Year Ended December 31 1995 1994 1993 - --------------------------------------------------------------------------------------- Capitalized subscriber installation costs beginning of year $ 81,445 65,785 54,668 Capitalized cost of security system installations 44,488 32,309 23,972 Depreciation, including amounts recognized to fully depreciate capitalized costs for installations disconnected during the year (20,597) (16,649) (12,855) - --------------------------------------------------------------------------------------- Capitalized subscriber installation costs end of period $ 105,336 81,445 65,785 ======================================================================================= New subscribers were 82,600 in 1995, 75,200 in 1994 and 59,700 in 1993. As of January 1, 1992, BHS elected to capitalize categories of costs not previously capitalized for home security system installations. This change in accounting principle is preferable because it more accurately reflects subscriber installation costs. 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 (in the amount of $3,122 in 1995, $2,645 in 1994 and $2,567 in 1993) and costs incurred in maintaining facilities and 94
vehicles dedicated to the installation process (in the amount of $2,074 in 1995, $1,492 in 1994 and $1,484 in 1993). The effect of this change in accounting principle was to increase operating profit of the Brink's Group and the BHS segment in 1995, 1994 and 1993 by $5,196, $4,137 and $4,051, respectively, and net income of the Brink's Group in 1995, 1994 and 1993 by $3,123, $2,486 and $2,435, respectively, or by $0.08 per share in 1995 and $0.07 per share in1994 and 1993. Prior to January 1, 1992, the records needed to identify such costs were not available. Thus, it was impossible to accurately calculate the effect on retained earnings as of January 1, 1992. However, the Brink's Group believes the effect on retained earnings as of January 1, 1992, was immaterial. Because capitalized subscriber installation costs for prior periods were not adjusted for the change in accounting principle, installation costs for subscribers in those years will continue to be depreciated based on the lesser amounts capitalized in prior periods. Consequently, depreciation of capitalized subscriber installation costs in the current year and until such capitalized costs prior to January 1, 1992, are fully depreciated will be less than if such prior periods' capitalized costs had been adjusted for the change in accounting. However, the Brink's Group believes the effect on net income in 1995, 1994 and 1993 was immaterial. 5. INTANGIBLES Intangibles consist entirely of the excess of cost over fair value of net assets of companies acquired and are net of accumulated amortization of $7,793 at December 31, 1995, and $6,703 at December 31, 1994. The estimated useful life of intangibles is generally forty years. Amortization of intangibles aggregated $958 in 1995, $882 in 1994 and $865 in 1993. 6. FINANCIAL INSTRUMENTS Financial instruments which potentially subject the Brink's Group to concentrations of credit risk consist principally of cash and cash equivalents, short-term cash investments and trade receivables. The Brink's Group's cash and cash equivalents and short-term investments are placed with high credit quality financial institutions. Also, by policy, the amount of credit exposure to any one financial institution is limited. Concentration of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Brink's Group's customer base, and their dispersion across many geographic areas. The following details the fair values of financial instruments for which it is practicable to estimate the value: CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The carrying amounts approximate fair value because of the short maturity of these instruments.
DEBT The aggregate fair value of the Brink's Group's long-term debt obligations, which is based upon quoted market prices and rates currently available to the Brink's Group for debt with similar terms and maturities, approximates the carrying amount. OFF-BALANCE SHEET INSTRUMENTS The Brink's Group utilizes off-balance sheet financial instruments from time to time to hedge its foreign currency and exposures. The risk that counterparties to such instruments may be unable to perform is minimized by limiting the counterparties to major financial institutions. The Brink's Group does not expect any losses due to such counterparty default. 7. INCOME TAXES The provision (credit) for income taxes consists of the following: U.S. Federal Foreign State Total - --------------------------------------------------- 1995: Current $16,010 4,615 2,993 23,618 Deferred 972 (1,550) (374) (952) - --------------------------------------------------- Total $16,982 3,065 2,619 22,666 =================================================== 1994: Current $12,085 2,873 2,686 17,644 Deferred 2,188 1,608 532 4,328 - --------------------------------------------------- Total $14,273 4,481 3,218 21,972 =================================================== 1993: Current $13,118 7,797 1,684 22,599 Deferred 159 (4,537) 1,380 (2,998) - --------------------------------------------------- Total $13,277 3,260 3,064 19,601 =================================================== The significant components of the deferred tax provision (benefit) were as follows: 1995 1994 1993 - ------------------------------------------------------------------------------- Deferred tax expense (benefit), exclusive of the components listed below $ 1,550 2,892 (5,548) Net operating loss carryforwards (790) 449 1,860 Alternative minimum tax credits (1,712) 1,084 648 Change in the valuation allowance for deferred tax assets -- (97) 42 - ------------------------------------------------------------------------------- Total $ (952) 4,328 (2,998) =============================================================================== The tax benefit for compensation expense related to the exercise of certain employee stock options for tax purposes in excess of compensation expense for financial reporting purposes is recognized as an adjustment to shareholder's equity. 95
The components of the net deferred tax liability as of December 31, 1995 and December 31, 1994 were as follows: 1995 1994 - --------------------------------------------------------------- Deferred tax assets: Accounts receivable $ 1,417 1,310 Postretirement benefits other than pensions 2,028 1,741 Workers' compensation and other claims 5,180 4,974 Other liabilities and reserves 13,561 11,355 Miscellaneous 1,015 727 Net operating loss carryforwards 3,355 2,565 Alternative minimum tax credits 11,245 9,435 - --------------------------------------------------------------- Total deferred tax asset 37,801 32,107 - --------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment 22,063 22,125 Pension assets 15,031 14,724 Other assets 2,929 2,844 Investments in foreign affiliates 11,478 11,965 Miscellaneous 9,602 7,024 - --------------------------------------------------------------- Total deferred tax liability 61,103 58,682 - --------------------------------------------------------------- Net deferred tax liability $23,302 26,575 =============================================================== The recording of deferred federal tax assets is based upon their expected utilization in the Company's consolidated federal income tax return and the benefit that would accrue to the Brink's Group under the Company's tax allocation policy. The following table accounts for the difference between the actual tax provision and the amounts obtained by applying the statutory U.S. federal income tax rate of 35% in 1995, 1994 and 1993 to the income before income taxes. Year Ended December 31 1995 1994 1993 - ---------------------------------------------------------------------------------- Income (loss) before income taxes: United States $ 59,507 47,419 39,187 Foreign 14,252 16,042 12,064 - ---------------------------------------------------------------------------------- Total $ 73,759 63,461 51,251 ================================================================================== Tax provision computed at statutory rate $ 25,816 22,211 17,938 Increases (reductions) in taxes due to: State income taxes (net of federal tax benefit) 1,702 2,092 1,992 Difference between total taxes on foreign income and the U.S. federal statutory rate (5,528) (3,259) (633) Miscellaneous 676 928 304 - ---------------------------------------------------------------------------------- Actual tax provision $ 22,666 21,972 19,601 ================================================================================== It is the policy of the Brink's Group to accrue deferred income taxes on temporary differences related to the financial statement carrying amounts and tax bases of investments in foreign subsidiaries and affiliates which are expected to reverse in the foreseeable future. As of December 31, 1995 and December 31, 1994, the unrecognized deferred tax liability for temporary differences of approximately $29,531, and $36,460, respectively, related to investments in foreign subsidiaries and affiliates that are essentially permanent in nature and not expected to reverse in the foreseeable future was approximately $10,336 and $12,761, respectively.
The Brink's Group is included in the Company's consolidated U.S. federal income tax return. As of December 31, 1995, the Brink's Group had $11,245 of alternative minimum tax credits allocated to it under the Company's tax allocation policy. Such credits are available to offset future U.S. federal income taxes and, under current tax law, the carryforward period for such credits is unlimited. The tax benefits of net operating loss carryforwards of the Brink's Group as at December 31, 1995 were $3,355 and related to various state and foreign taxing jurisdictions. The expiration periods primarily range from 5 to 15 years. 8. LONG-TERM DEBT Total long-term debt of the Brink's Group consists of the following: As of December 31 1995 1994 - ------------------------------------------------------------------- Senior obligations: U.S. dollar term loan due 1996 to 1997 (6.44% in 1995 and 6.50% in 1994) $1,582 3,451 All other 2,150 1,882 - ------------------------------------------------------------------- 3,732 5,333 Obligations under capital leases (average rates 13.55% in 1995 and 16.80% in 1994) 2,063 2,657 - ------------------------------------------------------------------- Total long-term debt, less current maturities $5,795 7,990 =================================================================== For the four years through December 31, 2000, minimum repayments of long-term debt outstanding are as follows: 1997 $3,225 1998 1,044 1999 543 2000 253 The U.S. dollar term loan due 1996 to 1997 bears interest based on the Eurodollar rate. In March 1994, the Company entered into a $350,000 credit agreement with a syndicate of banks (the "Facility"). The Facility included a $100,000 five-year term loan, which originally matured in March 1999. The Facility also permitted additional borrowings, repayments and reborrowings of up to an aggregate of $250,000 initially until March 1999. In March 1995, the Facility was amended to extend the maturity of the term loan to May 2000 and to permit the additional borrowings, repayments and reborrowings until May 2000. Interest on borrowings under the Facility is payable at rates based on prime, certificate of deposit, Eurodollar or money market rates. At December 31, 1995, no borrowings under the Facility were attributed to the Brink's Group. Various international operations maintain lines of credit and overdraft facilities aggregating approximately $14,000 with a number of banks on either a secured or unsecured basis. 96
Under the terms of some of its debt instruments, the Company has agreed to various restrictions relating to the payment of dividends, the repurchase of capital stock, the maintenance of consolidated net worth, and the amount of additional funded debt which may be incurred. See the Company's consolidated financial statements and related footnotes. At December 31, 1995, the Company's portion of outstanding unsecured letters of credit allocated to the Brink's Group was $14,402, primarily supporting the Brink's Group's obligations under its various self-insurance programs. 9. STOCK OPTIONS The Company grants options under its 1988 Stock Option Plan (the "1988 Plan") to executives and key employees and under its Non-Employee Directors' Stock Option Plan (the "Non-Employee Plan") to outside directors to purchase common stock at a price not less than 100% of quoted market value at date of grant. The Company's 1979 Stock Option Plan (the "1979 Plan") and 1985 Stock Option Plan (the "1985 Plan") terminated in 1985 and 1988, respectively, except as to options still outstanding. As part of the Brink's Stock Proposal (Note 1), the 1988 and Non-Employee Plans were amended to permit option grants to be made to optionees with respect to Brink's Stock or Burlington Stock in addition to Minerals Stock. Upon approval of the Brink's Stock Proposal, a total of 2,383,422 shares of Services Stock were subject to options outstanding under the 1988 Plan, the Non-Employee Plan, the 1979 Plan and the 1985 Plan. Pursuant to antidilution provisions in the option agreements covering such plans, the Company converted these options into options for shares of Brink's Stock or Burlington Stock, or both, depending on the employment status and responsibilities of the particular optionee. In the case of optionees having Company-wide responsibilities, each outstanding Services Stock option was converted into options for both Brink's Stock and Burlington Stock. In the case of other optionees, each outstanding option was converted into a new option only for Brink's Stock or Burlington Stock, as the case may be. As a result, upon approval of the Brink's Stock Proposal, 1,749,822 shares of Brink's Stock and 1,989,466 shares of Burlington Stock were subject to options.
10. CAPITAL STOCK The Company, at any time, has the right to exchange each outstanding share of Burlington Stock for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Minerals Stock) having a fair market value equal to 115% of the fair market value of one share of Burlington Stock. In addition, upon the disposition of all or substantially all of the properties and assets of the Burlington Group to any person (with certain exceptions), the Company is required to exchange each outstanding share of Burlington Stock for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Minerals Stock) having a fair market value equal to 115% of the fair market value of one share of Burlington Stock. The Company, at any time has the right, to exchange each outstanding share of Minerals Stock, which was previously subject to exchange for shares of Services Stock, for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Burlington Stock) having a fair market value equal to 115% of the fair market value of one share of Minerals Stock. In addition, upon the disposition of all or substantially all of the properties and assets of the Minerals Group to any person (with certain exceptions), the Company is required to exchange each outstanding share of Minerals Stock for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Burlington Stock) having a fair market value equal to 115% of the fair market value of one share of Minerals Stock. If any shares of the Company's Preferred Stock are converted after an exchange of Minerals Stock for Brink's Stock (or Burlington Stock), the holder of such Preferred Stock would, upon conversion, receive shares of Brink's Stock (or Burlington Stock) in lieu of shares of Minerals Stock otherwise issuable upon such conversion. Shares of Brink's Stock are not subject to either optional or mandatory exchange. The net proceeds of any disposition of properties and assets of the Brink's Group will be attributed to the Brink's Group. In the case of a disposition of all or substantially all the properties and assets of any other group, the net proceeds will be attributed to the group the shares of which have been issued in exchange for shares of the selling group. Holders of Brink's Stock at all times have one vote per share. Holders of Burlington Stock and Minerals Stock have one and 0.626 votes per share, respectively, subject to adjustment on January 1, 1998, and on each January 1 every two years thereafter in such a manner that each class' share of the aggregate voting power at such time will be equal to that class' share of the aggregate market capitalization of the Company's common stock at such time. Accordingly, on each adjustment date, each share of Burlington Stock and Minerals Stock may have more than, less than or continue to have the number of votes per share as they have. Holders of Brink's Stock, Burlington Stock and Minerals Stock vote together as a single voting group on all matters as to which all common shareholders are entitled to vote. In addition, as prescribed by Virginia law, certain amendments to the Articles of Incorporation affecting, among other things, the designation, rights, preferences or limitations of one class of common stock, or certain mergers or statutory share exchanges, must be approved by the holders of such class of common stock, voting as a group, and, in certain circumstances, may also have to be approved by the holders of the other classes of common stock, voting as separate voting groups. 97
In the event of a dissolution, liquidation or winding up of the Company, the holders of Brink's Stock, Burlington Stock and Minerals Stock, effective January 19, 1996, share on a per share basis an aggregate amount equal to 55%, 28% and 17%, respectively, of the funds, if any, remaining for distribution to the common shareholders. In the case of Minerals Stock, such percentage has been set, using a nominal number of shares of Minerals Stock of 4,202,954 (the "Nominal Shares") in excess of the actual number of shares of Minerals Stock outstanding, to ensure that the holders of Minerals Stock are entitled to the same share of any such funds immediately following the consummation of the transaction as they were prior thereto. These liquidation percentages are subject to adjustment in proportion to the relative change in the total number of shares of Brink's Stock, Burlington Stock and Minerals Stock, as the case may be, then outstanding to the total number of shares of all other classes of common stock then outstanding (which totals, in the case of Minerals Stock, shall include the Nominal Shares). In November 1995, the Board of Directors (the "Board") authorized the repurchase, subject to shareholder approval of the Brink's Stock Proposal, of up to 1,500,000 shares of Brink's Stock from time to time in the open market or in private transactions, as conditions warrant, not to exceed an aggregate purchase price of $45,000 for all common stock of the Company. Dividends paid to holders of Brink's Stock are limited to funds of the Company legally available for the payment of dividends. Amounts available for dividends may be further limited by covenants in the Company's public debt indentures and bank credit agreements. See the Company's consolidated financial statements and related footnotes. Subject to these limitations, the Company's Board, although there is no requirement to do so, intends to declare and pay dividends on the Brink's Stock based primarily on the earnings, financial condition, cash flow and business requirements of the Brink's Group. In January 1994, the Company issued 161,000 shares of its $31.25 Series C Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock"). The Convertible Preferred Stock, which is convertible into Minerals Stock and which has been attributed to the Minerals Group, pays an annual dividend of $31.25 per share payable quarterly, in cash, in arrears, out of all funds of the Company legally available therefore, when as and if, declared by the Board. Payment of dividends commenced on March 1, 1994. Such stock also bears a liquidation preference of $500 per share, plus an amount equal to accrued and unpaid dividends thereon.
In December 1992, the Company formed the Pittston Company Employee Benefits Trust (the "Trust") to hold shares of its common stock to fund obligations under certain employee benefits programs. Upon formation of the Trust, the Company sold for a promissory note of the Trust, 4,000,000 shares of its common stock to the Trust at a price equal to the fair value of the stock on the date of sale. Upon approval of the Brink's Stock Proposal, 3,537,811 shares in the Trust were redesignated as Brink's Stock. At December 31, 1995, 3,552,906 shares of Brink's Stock (3,778,565 in 1994) remained in the Trust, valued at market. The value of these shares has no impact on shareholder's equity. 11. ACQUISITIONS During 1995, the Brink's Group increased its investment in an equity affiliate to a controlling interest for a purchase price of $956. The acquisition was accounted for as a purchase; accordingly, the purchase price was allocated to the underlying assets and liabilities based on the estimated fair value at the date of acquisition. The fair value of the assets acquired was $9,493 and liabilities assumed was $9,456. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was $919 and is being amortized over a period of forty years. The results of operations of the acquired company have been included in the Brink's Group's results of operations from the date of acquisition. 12. LEASES The Brink's Group's businesses lease facilities, vehicles, computers and other equipment under long-term operating leases with varying terms, and most of the leases contain renewal and/or purchase options. As of December 31, 1995, aggregate future minimum lease payments under noncancellable operating leases were as follows: Equipment Facilities & Other Total - ---------------------------------------------------- 1996 $13,069 2,879 15,948 1997 11,637 1,657 13,294 1998 8,627 1,140 9,767 1999 7,573 370 7,943 2000 6,430 274 6,704 2001 5,804 98 5,902 2002 5,180 21 5,201 2003 4,842 8 4,850 2004 4,652 6 4,658 2005 3,589 6 3,595 Later Years 7,493 6 7,499 - ---------------------------------------------------- Total $78,896 6,465 85,361 ==================================================== 98
These amounts are net of aggregate future minimum non-cancellable sublease rentals of $302. Rent expense amounted to $23,469 in 1995, $17,419 in 1994 and $14,908 in 1993. The Brink's Group incurred capital lease obligations of $648 in 1995, $1,651 in 1994 and $1,059 in 1993. As of December 31, 1995, the Brink's Group's obligations under capital leases were not significant. 13. EMPLOYEE BENEFIT PLANS The Brink's Group's businesses participate in the Company's noncontributory defined benefit pension plan covering substantially all nonunion employees who meet certain minimum requirements in addition to sponsoring certain other defined benefit plans. Benefits of most of the plans are based on salary and years of service. The Brink's Group's pension cost relating to its participation in the Company's defined benefit pension plan is actuarially determined based on its respective employees and an allocable share of the pension plan assets. The Company's policy is to fund the actuarially determined amounts necessary to provide assets sufficient to meet the benefits to be paid to plan participants in accordance with applicable regulations. The net pension expense (credit) for 1995, 1994 and 1993 for all plans is as follows: Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- Service cost benefits earned during year $ 5,031 5,551 4,558 Interest cost on projected benefit obligation 8,719 7,838 7,765 Return on assets actual (28,019) (1,750) (18,726) (Loss) return on assets deferred 14,717 (10,910) 7,011 Other amortization, net (505) (472) (274) - -------------------------------------------------------------------------------- Net pension expense (credit) $ (57) 257 334 ================================================================================ The assumptions used in determining the net pension expense (credit) for the Company's major pension plan were as follows: 1995 1994 1993 - ------------------------------------------------------------------------ Interest cost on projected benefit obligation 8.75% 7.5% 9.0% Expected long-term rate of return on assets 10.0% 10.0% 10.0% Rate of increase in compensation levels 4.0% 4.0% 5.0%
The funded status and prepaid pension expense at December 31, 1995 and 1994 are as follows: 1995 1994 - --------------------------------------------------------------------------------------------------------- Actuarial present value of accumulated benefit obligation: Vested $ 104,120 78,344 Nonvested 8,282 6,559 - --------------------------------------------------------------------------------------------------------- 112,402 84,903 Benefits attributable to projected salaries 18,966 14,965 - --------------------------------------------------------------------------------------------------------- Projected benefit obligation 131,368 99,868 Plan assets at fair value 159,555 132,736 - --------------------------------------------------------------------------------------------------------- Excess of plan assets over projected benefit obligation 28,187 32,868 Unamortized initial net asset (2,918) (3,418) Unrecognized experience loss 6,781 604 Unrecognized prior service cost 1,385 1,608 - --------------------------------------------------------------------------------------------------------- Net pension assets 33,435 31,662 Current pension liability 488 833 - --------------------------------------------------------------------------------------------------------- Deferred pension asset per balance sheet $ 33,923 32,495 ========================================================================================================= For the valuation of pension obligations and the calculation of the funded status, the discount rate was 7.5% in 1995 and 8.75% in 1994. The expected long-term rate of return on assets was 10% in both years. The rate of increase in compensation levels used was 4% in 1995 and 1994. The unrecognized initial net asset at January 1, 1986 (January 1, 1989, for certain foreign pension plans), the date of adoption of SFAS 87, has been amortized over the estimated remaining average service life of the employees. As of December 31, 1995, approximately 65% of plan assets were invested in equity securities and 35% in fixed income securities. The Brink's Group also provides certain postretirement health care and life insurance benefits for eligible active and retired employees in the United States and Canada. For the years 1995, 1994 and 1993, the components of periodic expense for these postretirement benefits were as follows: Year Ended December 31 1995 1994 1993 - ------------------------------------------------------------------- Service cost benefits earned during year $ 68 86 70 Interest cost on accumulated postretirement benefit obligation 240 232 256 - ----------------------------------------------------------------- Total expense $308 318 326 ================================================================= 99
Interest costs on the accumulated postretirement benefit obligation were based upon rates of 8.75% in 1995, 7.5% in 1994 and 9% in 1993. At December 31, 1995 and 1994, the actuarial and recorded liabilities for these postretirement benefits, none of which have been funded, were as follows: 1995 1994 - ---------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $1,632 1,675 Fully eligible active plan participants 777 654 Other active plan participants 1,195 766 - ---------------------------------------------------------------- 3,604 3,095 Unrecognized experience gain 155 477 - ---------------------------------------------------------------- Liability included on the balance sheet 3,759 3,572 Less current portion 284 292 - ---------------------------------------------------------------- Noncurrent liability for postretirement health care and life insurance benefits $3,475 3,280 ================================================================ The accumulated postretirement benefit obligation was determined using the unit credit method and an assumed discount rate of 7.5% in 1995 and 8.75% in 1994. The postretirement benefit obligation for U.S. salaried employees does not provide for changes in health care costs since the employer's contribution to the plan is a fixed amount. The assumed health care cost trend rate used in 1995 for employees under a foreign plan was 9% grading down to 5% in the year 2001. A percentage point increase each year in the assumed health care cost trend rate used would have resulted in a $11 increase in the aggregate service and interest components of expense for the year 1995, and a $60 increase in the accumulated postretirement benefit obligation at December 31, 1995. The Brink's Group also participates in the Company's Savings-Investment Plan to assist eligible employees in providing for retirement or other future financial needs. Employee contributions are matched at rates of 75% to 125% up to 5% of compensation (subject to certain limitations imposed by the Internal Revenue Code of 1986, as amended). Contribution expense under the plan aggregated $2,794 in 1995, $2,706 in 1994 and $2,153 in 1993. In May 1994, the Company's shareholders approved the Employee Stock Purchase Plan effective July 1, 1994. See the Company's consolidated financial statements and related footnotes for information regarding the Company's Employee Stock Purchase Plan.
14. OTHER OPERATING INCOME Other operating income includes the Brink's Group's share of net income in unconsolidated affiliated companies which are carried on the equity method. Amounts presented include the accounts of the following equity affiliates: Ownership At December 31, 1995 - ------------------------------------------------------------ Servicio Pan Americano De Protecion, S.A. (Mexico) 20.0% Brink's Panama, S.A 49.0% Brink's S.A. (France) 38.0% Brink's Schenker, GmbH (Germany) 50.0% Brink's Securmark S.p.A. (Italy) 24.5% Security Services (Brink's Jordan), W.L.L 45.0% Brink's-Allied Limited (Ireland) 50.0% Brink's Arya India Private Limited 40.0% Brink's Pakistan (Pvt.) Limited 49.0% Brink's Taiwan Limited 50.0% Brink's (Thailand) Ltd. 40.0% The following table presents summarized financial information of these companies. 1995 1994 1993 - ------------------------------------------------------------------------------ Revenues $ 715,423 784,699 688,637 Gross profit 58,661 147,468 140,402 Net income (loss) (6,048) 22,661 24,739 The Company's share of net income (loss) $ 136 6,048 6,895 ============================================================================= Current assets $155,687 149,367 Noncurrent assets 218,019 291,085 Current liabilities 209,016 135,824 Noncurrent liabilities 80,860 156,375 Net equity $ 83,830 148,253 Undistributed earnings of such companies approximated $37,321 at December 31, 1995. 15. SEGMENT INFORMATION Operating revenues by geographic area are as follows: Year Ended December 31 1995 1994 1993 - ---------------------------------------------------- United States $464,738 406,828 356,869 Brazil 106,678 70,492 43,974 Other foreign 216,979 179,673 170,110 - ---------------------------------------------------- Total operating revenues $788,395 656,993 570,953 ==================================================== The following is derived from the business segment information in the Company's consolidated financial statements as it relates to the Brink's Group. See Note 2, Related Party Transactions, for a description of the Company's policy for corporate allocations. 100
The Brink's Group's portion of the Company's operating profit is as follows: Year Ended December 31 1995 1994 1993 - ---------------------------------------------------- United States $ 63,362 51,343 43,707 Brazil 5,329 3,162 1,413 Other foreign 13,553 17,637 16,288 - ---------------------------------------------------- Brink's Group's portion of the Company's segment operating profit 82,244 72,142 61,408 Allocated general corporate expense (4,770) (4,666) (4,757) - ---------------------------------------------------- Total operating profit $ 77,474 67,476 56,651 ==================================================== The Brink's Group's portion of the Company's assets at year end is as follows: Year Ended December 31 1995 1994 1993 - --------------------------------------------------------------- United States $240,397 203,364 173,416 Brazil 29,492 25,843 20,780 Other foreign 167,834 155,981 145,642 - --------------------------------------------------------------- Brink's Group's portion of the Company's assets 437,723 385,188 339,838 Brink's Group's portion of corporate assets 24,697 24,503 23,208 Deferred tax reclass 22,306 17,196 14,877 - --------------------------------------------------------------- Total assets $484,726 426,887 377,923 =============================================================== Industry segment information is as follows: Year Ended December 31 1995 1994 1993 - ------------------------------------------------------------------------ REVENUES: Brink's $ 659,459 547,046 481,904 BHS 128,936 109,947 89,049 - ------------------------------------------------------------------------ Total revenues $ 788,395 656,993 570,953 ======================================================================== OPERATING PROFIT: Brink's (a) $ 42,738 39,710 35,008 BHS (b) 39,506 32,432 26,400 - ------------------------------------------------------------------------ Segment operating profit 82,244 72,142 61,408 Allocated general corporate expense (4,770) (4,666) (4,757) - ------------------------------------------------------------------------ Total operating profit $ 77,474 67,476 56,651 ======================================================================== (a) Includes equity in net income of unconsolidated foreign affiliates of $136 in 1995, $6,048 in 1994 and $6,895 in 1993. (b) As of January 1, 1992, BHS elected to capitalize categories of costs not previously capitalized for home security installations to more accurately reflect subscriber installation costs. The effect of this change in accounting principle was to increase operating profit $5,196 in 1995, $4,137 in 1994 and $4,051 in 1993 (Note 4).
Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------- CAPITAL EXPENDITURES: Brink's $ 23,063 23,963 22,209 BHS 47,256 34,071 26,409 Allocated general corporate 111 60 32 - -------------------------------------------------------------------- Total capital expenditures $ 70,430 58,094 48,650 ==================================================================== DEPRECIATION AND AMORTIZATION: Brink's $ 21,844 20,553 20,150 BHS 21,028 17,817 14,357 Allocated general corporate expense 105 93 89 - -------------------------------------------------------------------- Total depreciation and amortization $ 42,977 38,463 34,596 ==================================================================== ASSETS AT DECEMBER 31: Brink's 321,022 297,816 267,229 BHS 116,701 87,372 72,609 - -------------------------------------------------------------------- Identifiable assets 437,723 385,188 339,838 Allocated portion of the Company's corporate assets 24,697 24,503 23,208 Deferred tax reclass 22,306 17,196 14,877 - -------------------------------------------------------------------- Total assets $484,726 426,887 377,923 ==================================================================== 16. CONTINGENT LIABILITIES Under the Coal Industry Retiree Health Benefit Act of 1992 (the "Act"), the Company and its majority-owned subsidiaries at July 20, 1992, including the Brink's Group included in these financial statements, are jointly and severally liable with the Burlington Group and the Minerals Group for the costs of health care coverage provided for by that Act. For a description of the Act and an estimate of certain of such costs, see Note 13 to the Company's consolidated financial statements. At this time, the Company expects the Minerals Group to generate sufficient cash flow to discharge its obligations under the Act. In April 1990, the Company entered into a settlement agreement to resolve certain environmental claims against the Company arising from hydrocarbon contamination at a petroleum terminal facility ("Tankport") in Jersey City, New Jersey, which operations were sold in 1983. Under the settlement agreement, the Company is obligated to pay 80% of the remediation costs. Based on data available to the Company and its environmental consultants, the Company estimates its portion of the cleanup costs on an undiscounted basis using existing technologies to be between $6,700 and $16,400 over a period of up to five years. Management is unable to determine that any amount within that range is a better 101
estimate due to a variety of uncertainties, which include the extent of the contamination at the site, the permitted technologies for remediation and the regulatory standards by which the clean-up will be conducted. The clean-up estimates have been modified from prior years' in light of cost inflation. The estimate of costs and the timing of payments could change as a result of changes to the remediation plan required, changes in the technology available to treat the site, unforseen circumstances existing at the site and additional cost inflation. The Company commenced insurance coverage litigation in 1990, in the United States District Court for the District of New Jersey, seeking a declaratory judgment that all amounts payable by the Company pursuant to the Tankport obligation were reimbursable under comprehensive general liability and pollution liability policies maintained by the Company. In August 1995, the District Court ruled on various Motions for Summary Judgement. In its decision, the Court found favorably for the Company on several matters relating to the comprehensive general liability policies but concluded that the pollution liability policies did not contain pollution coverage for the types of claims associated with the Tankport site. The Company has filed a notice of its intent to appeal the District Court's decision to the Third Circuit. Management and its outside legal counsel continue to believe, however, that recovery of a substantial portion of the cleanup costs will ultimately be probable of realization. Accordingly, management is revising its earlier belief that there is no net liability for the Tankport obligation, and it is the Company's belief that, based on estimates of potential liability and probable realization of insurance recoveries, the Company would be liable for approximately $1,400 based on the Court's decision and related developments of New Jersey law. 17. SUPPLEMENTAL CASH FLOW INFORMATION For the years ended December 31, 1995, 1994 and 1993, cash payments for income taxes, net of refunds received, were $22,352, $19,277 and $15,595, respectively. For the years ended December 31, 1995, 1994 and 1993, cash payments for interest were $1,663, $2,502 and $2,722, respectively. 18. SELECTED QUARTERLY FINANCIAL DATA Tabulated below are certain data for each quarter of 1995 and 1994. 1st 2nd 3rd 4th - ---------------------------------------------------------------------- 1995 QUARTERS: Operating revenues $179,400 185,606 208,958 214,431 Gross profit 39,876 44,242 50,803 53,791 Net income $ 9,546 11,965 14,613 14,969 Per Pittston Brink's Group Common Share: Net income $ .25 .32 .39 .39 1994 QUARTERS: Operating revenues $149,569 155,085 171,787 180,552 Gross profit 32,850 38,567 43,043 44,348 Net income $ 7,172 9,779 11,576 12,962 Per Pittston Brink's Group Common Share: Net income $ .19 .26 .31 .34 102
Pittston Burlington Group STATEMENT OF MANAGEMENT RESPONSIBILITY The management of The Pittston Company (the "Company") is responsible for preparing the accompanying Pittston Burlington Group (the "Burlington Group") financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles. Management has also prepared the other information in the annual report and is responsible for its accuracy. In meeting our responsibility for the integrity of the financial statements, we maintain a system of internal controls designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and that the accounting records provide a reliable basis for the preparation of the financial statements. Qualified personnel throughout the organization maintain and monitor these internal controls on an ongoing basis. In addition, the Company maintains an internal audit department that systematically reviews and reports on the adequacy and effectiveness of the controls, with management follow-up as appropriate. Management has also established a formal Business Code of Ethics which is distributed throughout the Company. We acknowledge our responsibility to establish and preserve an environment in which all employees properly understand the fundamental importance of high ethical standards in the conduct of our business. The accompanying financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. During the audit they review and make appropriate tests of accounting records and internal controls to the extent they consider necessary to express an opinion on the Burlington Group's financial statements. The Company's Board of Directors pursues its oversight role with respect to the Burlington Group's financial statements through the Audit and Ethics Committee, which is composed solely of outside directors. The Committee meets periodically with the independent auditors, internal auditors and management to review the Company's control system and to ensure compliance with applicable laws and the Company's Business Code of Ethics. We believe that the policies and procedures described above are appropriate and effective and do enable us to meet our responsibility for the integrity of the Burlington Group's financial statements.
INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders The Pittston Company We have audited the accompanying balance sheets of Pittston Burlington Group (as described in Note 1) as of December 31, 1995 and 1994, and the related statements of operations and cash flows for each of the years in the three-year period ended December 31, 1995. These financial statements are the responsibility of The Pittston Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements of Pittston Burlington Group present fairly, in all material respects, the financial position of Pittston Burlington Group as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As more fully discussed in Note 1, the financial statements of Pittston Burlington Group should be read in connection with the audited consolidated financial statements of The Pittston Company and subsidiaries. KPMG Peat Marwick LLP Stamford, Connecticut January 25, 1996 103
Pittston Burlington Group BALANCE SHEETS December 31 (Dollars in thousands) 1995 1994 - --------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 25,847 18,384 Accounts receivable: Trade 218,081 180,024 Other 11,973 8,791 - --------------------------------------------------------------------------------------------------------------- 230,054 188,815 Less estimated amount uncollectible 10,373 10,475 - --------------------------------------------------------------------------------------------------------------- 219,681 178,340 Receivable -- Pittston Minerals Group (Note 2) 5,910 31,465 Inventories 1,684 2,035 Prepaid expenses 13,603 9,290 Deferred income taxes (Note 7) 11,512 11,655 - --------------------------------------------------------------------------------------------------------------- Total current assets 278,237 251,169 Property, plant and equipment, at cost (Note 4) 128,440 95,053 Less accumulated depreciation and amortization 56,269 50,611 - --------------------------------------------------------------------------------------------------------------- 72,171 44,442 Intangibles, net of amortization (Notes 5 and 11) 180,739 180,686 Deferred pension assets (Note 13) 10,427 10,655 Deferred income taxes (Note 7) 12,875 9,050 Other assets 17,628 25,514 - --------------------------------------------------------------------------------------------------------------- Total assets $ 572,077 521,516 - --------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Short-term borrowings $ 32,181 8,779 Current maturities of long-term debt (Note 8) 1,964 938 Accounts payable 157,770 149,290 Accrued liabilities: Taxes 13,760 10,389 Workers' compensation and other claims 3,459 4,185 Miscellaneous 45,092 44,944 - --------------------------------------------------------------------------------------------------------------- 62,311 59,518 - --------------------------------------------------------------------------------------------------------------- Total current liabilities 254,226 218,525 Long-term debt, less current maturities (Note 8) 26,697 41,906 Postretirement benefits other than pensions (Note 13) 2,713 2,481 Deferred income taxes (Note 7) 1,996 1,572 Payable Pittston Minerals Group (Note 2) 8,029 10,436 Other liabilities 6,563 5,716 Commitments and contingent liabilities (Notes 8, 12, and 15) Shareholder's equity (Note 3) 271,853 240,880 - --------------------------------------------------------------------------------------------------------------- Total liabilities and shareholder's equity $ 572,077 521,516 - --------------------------------------------------------------------------------------------------------------- See accompanying notes to financial statements. 104
Pittston Burlington Group STATEMENTS OF OPERATIONS Year Ended December 31 (In thousands, except per share amounts) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- Operating revenue $1,414,821 1,215,284 998,079 - --------------------------------------------------------------------------------------------------------------- Costs and expenses: Operating expenses 1,245,721 1,043,895 865,587 Selling, general and administrative expenses 117,980 110,036 102,089 - --------------------------------------------------------------------------------------------------------------- Total costs and expenses 1,363,701 1,153,931 967,676 - --------------------------------------------------------------------------------------------------------------- Other operating income 2,833 3,206 2,811 - --------------------------------------------------------------------------------------------------------------- Operating profit 53,953 64,559 33,214 Interest income 4,430 2,127 901 Interest expense (Note 2) (5,108) (3,847) (6,103) Other income (expense), net (1,702) (1,629) (97) - --------------------------------------------------------------------------------------------------------------- Income before income taxes 51,573 61,210 27,915 Provision for income taxes (Note 7) 18,718 22,854 12,439 - --------------------------------------------------------------------------------------------------------------- Net income $ 32,855 38,356 15,476 - --------------------------------------------------------------------------------------------------------------- Net income per common share (Note 1) $ 1.73 2.03 .84 - --------------------------------------------------------------------------------------------------------------- Average common shares outstanding 18,966 18,892 18,454 See accompanying notes to financial statements. 105
Pittston Burlington Group STATEMENTS OF CASH FLOWS Year Ended December 31 (In thousands) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $32,855 38,356 15,476 Adjustments to reconcile net income to net cash provided by operating activities: Noncash charges and other write-offs -- 306 -- Depreciation and amortization 19,972 17,319 15,378 Provision for aircraft heavy maintenance 26,317 26,598 20,962 Credit for deferred income taxes (4,345) (5,256) (1,337) Provision for pensions, noncurrent 218 203 290 Provision for uncollectible accounts receivable 2,336 3,054 2,949 Equity in earnings of unconsolidated affiliates, net of dividends received (194) (118) (115) Loss (gain) on sale of property, plant and equipment 209 39 (234) Other operating, net 828 343 278 Change in operating assets and liabilities, net of effects of acquisitions and dispositions: Increase in accounts receivable (38,946) (45,084) (9,986) (Increase) decrease in inventories 351 (242) (361) (Increase) decrease in prepaid expenses (4,127) 1,575 (2,610) Increase in accounts payable and accrued liabilities 5,193 64,615 10,104 Decrease (increase) in other assets (551) 272 (4,921) Increase (decrease) in other liabilities 642 1,000 (75) Other, net (1,270) 860 (515) - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 39,488 103,840 45,283 - --------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment (32,399) (24,005) (28,362) Proceeds from disposal of property, plant and equipment 422 1,467 972 Aircraft heavy maintenance expenditures (22,356) (15,333) (19,148) Acquisitions, net of cash acquired, and related contingency payments (1,338) (5,938) (736) Other, net 3,683 3,775 (23) - --------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (51,988) (40,034) (47,297) - --------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Additions to debt 28,060 31,790 -- Reductions of debt (2,834) (30,482) (23,894) Payments (to) from Minerals Group (878) (55,731) 13,266 Repurchase of common stock (1,132) (2,042) (304) Proceeds from exercise of stock options 756 1,837 4,001 Proceeds from employee stock purchase plan 195 -- -- Proceeds from sale of stock to Savings Investment Plan -- -- 73 Proceeds from sale of stock to Minerals Group -- 106 42 Dividends paid (4,204) (4,154) (3,880) Cost of Services Stock Proposal -- (1) (782) Net cash from the Company -- -- 6,937 - --------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 19,963 (58,677) (4,541) - --------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 7,463 5,129 (6,555) Cash and cash equivalents at beginning of period 18,384 13,255 19,810 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $25,847 18,384 13,255 - --------------------------------------------------------------------------------------------------------------- See accompanying notes to financial statements. 106
Pittston Burlington Group NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION On January 18, 1996, the shareholders of The Pittston Company (the "Company") approved the Brink's Stock Proposal, as described in the Company's proxy statement dated December 15, 1995, resulting in the modification, effective as of January 19, 1996, of the capital structure of the Company to include an additional class of common stock. The outstanding shares of Pittston Services Group Common Stock ("Services Stock") have been redesignated as Pittston Brink's Group Common Stock, par value $1.00 per share ("Brink's Stock"), and one-half of one share of a new class of common stock identified as Pittston Burlington Group Common Stock, par value $1.00 per share, ("Burlington Stock") has been distributed for each outstanding share of Services Stock. Holders of Pittston Minerals Group Common Stock ("Minerals Stock") continue to be holders of such stock, which continues to reflect the performance of the Pittston Minerals Group (the "Minerals Group"). Brink's Stock is intended to reflect the performance of the Pittston Brink's Group (the "Brink's Group") and Burlington Stock is intended to reflect the performance of the Pittston Burlington Group (the "Burlington Group"). The financial statements of the Burlington Group include the balance sheets, the results of operations and cash flows of the Burlington Air Express Inc. ("Burlington") operations of the Company, and a portion of the Company's corporate assets and liabilities and related transactions which are not separately identified with operations of a specific segment. The Burlington Group's financial statements are prepared using the amounts included in the Company's consolidated financial statements. Corporate allocations reflected in these financial statements are determined based upon methods which management believes to be a reasonable and equitable allocation of such items (see Note 2). All stock and per share data in the accompanying financial statements have been restated to reflect the modification of the Company's capital structure. The primary impacts of this restatement are as follows: For the purpose of computing net income per common share of Burlington Stock, the number of shares of Burlington Stock are assumed to be one-half of the total number of shares of Services Stock. Net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. The potential dilution from the exercise of stock options is not material. The potential dilution from the assumed conversion of the 9.20% convertible subordinated debentures in 1993 was not included since its effect was antidilutive. The shares of Burlington Stock assumed to be held in The Pittston Company Employee Benefits Trust are evaluated for inclusion in the calculation of net income per share under the treasury stock method and had no dilutive effect.
All financial impacts of purchases and issuances of Services Stock have been attributed to each Group in relation of their respective common equity to the Services Group common stock. Dividends paid by the Company were attributed to the Brink's and Burlington Groups in relation to the initial dividends to be paid on the Brink's Stock and the Burlington Stock. The Company provides to holders of Burlington Stock separate financial statements, financial review, descriptions of business and other relevant information for the Burlington Group in addition to the consolidated financial information of the Company. Notwithstanding the attribution of assets and liabilities (including contingent liabilities) among the Minerals Group, the Brink's Group and the Burlington Group for the purpose of preparing their respective financial statements, this attribution and the change in the capital structure of the Company contemplated by the Brink's Stock Proposal did not affect legal title to such assets or responsibility for such liabilities for the Company or any of its subsidiaries. Holders of Burlington Stock are common shareholders of the Company, which continues to be responsible for all of its liabilities. Financial impacts arising from one group that affect the Company's financial condition could affect the results of operations and financial condition of each of the groups. Since financial developments within one group could affect other groups, all shareholders of the Company could be adversely affected by an event directly impacting only one group. Accordingly, the Company's consolidated financial statements must be read in connection with the Burlington Group's financial statements. The accounting policies applicable to the preparation of the financial statements of the Burlington Group may be modified or rescinded at the sole discretion of the Board without approval of shareholders, although there is no intention to do so. 107
PRINCIPLES OF COMBINATION The accompanying financial statements reflect the combined accounts of the businesses comprising the Burlington Group and their majority-owned subsidiaries. The Burlington Group interests in 20% to 50% owned companies are carried on the equity method. All material intercompany items and transactions have been eliminated in combination. Certain prior year amounts have been reclassified to conform to the current year's financial statement presentation. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, demand deposits and investments with original maturities of three months or less. INVENTORIES Inventories are stated at cost (determined under the first-in, first-out or average cost method) or market, whichever is lower. PROPERTY, PLANT AND EQUIPMENT Expenditures for maintenance and repairs are charged to expense, and the costs of renewals and betterments are capitalized. Depreciation is provided principally on the straight-line method at varying rates depending upon estimated useful lives. INTANGIBLES The excess of cost over fair value of net assets of companies acquired is amortized on a straight-line basis over the estimated periods benefited. The Burlington Group evaluates the carrying value of intangibles and the periods of amortization to determine whether events and circumstances warrant revised estimates of asset value or useful lives. The Burlington Group annually assesses the recoverability of the excess of cost over net assets acquired by determining whether the amortization of the asset balance over its remaining life can be recovered through projected undiscounted future operating cash flows. Evaluation of asset value as well as periods of amortization are performed on a disaggregated basis at each of the Burlington Group's operating units. INCOME TAXES Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
See Note 2 for allocation of the Company's U.S. federal income taxes to the Burlington Group. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Postretirement benefits other than pensions are accounted for in accordance with Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", which requires employers to accrue the cost of such retirement benefits during the employees' service with the Company. FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign operations have been translated at current exchange rates, and related revenues and expenses have been translated at average rates of exchange in effect during the year. Resulting cumulative translation adjustments have been included in shareholder's equity. Translation adjustments relating to operations in countries with highly inflationary economies are included in net income, along with all transaction gains and losses for the period. A portion of the Burlington Group's financial results is derived from activities in several foreign countries, each with a local currency other than the U.S. dollar. Because the financial results of the Burlington Group are reported in U.S. dollars, they are affected by the changes in the value of the various foreign currencies in relation to the U.S. dollar. However, the Burlington Group's international activity is not concentrated in any single currency, which reduces the risks of foreign currency rate fluctuations. FINANCIAL INSTRUMENTS The Burlington Group uses foreign currency forward contracts to hedge risk of changes in foreign currency rates associated with certain transactions denominated in various currencies. Realized and unrealized gains and losses on these contracts, designated and effective as hedges, are deferred and recognized as part of the specific transaction hedged. The Burlington Group also utilizes financial instruments to protect against price increases in jet fuel as well as interest rate changes on certain variable rate lease obligations. Gains and losses on such financial instruments, designated and effective as hedges, are recognized as part of the specific transaction hedged. REVENUE RECOGNITION Revenues related to transportation services are recognized, together with related transportation costs, on the date shipments physically depart from facilities en route to destination locations. Financial statements resulting from existing recognition policies do not materially differ from the allocation of revenue between reporting periods based on relative transit times in each reporting period with expenses recognized as incurred. 108
USE OF ESTIMATES In accordance with generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements. Actual results could differ from those estimates. PENDING ACCOUNTING CHANGES The Burlington Group is required to implement a new accounting standard, Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", in 1996. SFAS No. 121 requires companies to review long-lived assets and certain identifiable intangibles to be held and used by an entity for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 121 requires companies to utilize a two-step approach to determining whether impairment of such assets has occurred and, if so, the amount of such impairment. Although the Burlington Group is still reviewing the impact of adopting SFAS No. 121, it is estimated that its adoption will not have any impact on the Burlington Group's financial statements as of January 1, 1996. The Burlington Group is required to implement a new accounting standard SFAS No. 123, "Accounting for Stock Based Compensation", in 1996. SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. Although SFAS No. 123 encourages adoption of a fair value based method of accounting for all employee stock compensation plans, it allows entities to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock issued to Employees" with disclosure of net income and earnings per share as if the fair value based method of accounting is applied. The Burlington Group expects to continue to account for its stock compensation plans according to APB No. 25 with the disclosure of the impact on net income and earnings per share as if the fair value based method of accounting is applied. 2. RELATED PARTY TRANSACTIONS The following policies may be modified or rescinded by action of the Board, or the Board may adopt additional policies, without approval of the shareholders of the Company, although the Board has no present intention to do so. The Company allocated certain corporate general and administrative expenses, net interest expense and related assets and liabilities in accordance with the policies described below. Corporate assets and liabilities are primarily cash, deferred pension assets, income taxes and accrued liabilities.
FINANCIAL As a matter of policy, the Company manages most financial activities of the Burlington Group, Brink's Group and Minerals Group on a centralized, consolidated basis. Such financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt; the issuance and repurchase of common stock and the payment of dividends. In preparing these financial statements, transactions primarily related to invested cash, short-term and long-term debt (including convertible debt), related net interest and other financial costs have been attributed to the Burlington Group based upon its cash flows for the periods presented after giving consideration to the debt and equity structure of the Company. The Company attributes long-term debt to the Burlington Group based upon the purpose for the debt in addition to the cash requirements of the Burlington Group. See Note 8 for details and amounts of long-term debt. The portion of the Company's interest expense allocated to the Burlington Group for 1995, 1994 and 1993 was $2,327, $2,629 and $5,063, respectively. Management believes such method of allocation to be equitable and a reasonable estimate of the cost attributable to the Burlington Group. To the extent borrowings are deemed to occur between the Burlington Group, the Brink's Group and the Minerals Group, intergroup accounts are established bearing interest at the rate in effect from time to time under the Company's unsecured credit lines or, if no such credit lines exist, at the prime rate charged by Chemical Bank from time to time. At December 31, 1995 and 1994, the Minerals Group owed the Burlington Group $19,910 and $42,465, respectively, as the result of borrowings. INCOME TAXES The Burlington Group is included in the consolidated U.S. federal income tax return filed by the Company. The Company's consolidated provision and actual cash payments for U.S. federal income taxes are allocated between the Burlington Group, Brink's Group and Minerals Group in accordance with the Company's tax allocation policy and reflected in the financial statements for each Group. In general, the consolidated tax provision and related tax payments or refunds are allocated among the Groups, for financial statement purposes, based principally upon the financial income, taxable income, credits and other amounts directly related to the respective Group. Tax benefits that cannot be used by the Group generating such attributes, but can be utilized on a consolidated basis, are allocated to the Group that generated such benefits and an intergroup account is established for the benefit of the 109
Group generating the attributes. As a result, the allocated Group amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if the Groups had filed separate tax returns. At December 31, 1995 and 1994, the Burlington Group owed the Minerals Group $22,029 and $21,436, respectively, for such tax benefits, of which $8,029 and $10,436, respectively, were not expected to be paid within one year from such dates in accordance with the policy. SHARED SERVICES A portion of the Company's corporate general and administrative expenses and other shared services has been allocated to the Burlington Group based upon utilization and other methods and criteria which management believes to be equitable and a reasonable estimate of the cost attributable to the Burlington Group. These allocations were $4,770, $4,665 and $4,757 in 1995, 1994 and 1993, respectively. PENSION The Burlington Group's pension cost related to its participation in the Company's noncontributory defined benefit pension plan is actuarially determined based on its respective employees and an allocable share of the pension plan assets and calculated in accordance with Statement of Financial Accounting Standards No. 87 ("SFAS 87"). Pension plan assets have been allocated to the Burlington Group based on the percentage of its projected benefit obligation to the plan's total projected benefit obligation. Management believes such method of allocation to be equitable and a reasonable estimate of the cost attributable to the Burlington Group. 3. SHAREHOLDER'S EQUITY The following presents shareholder's equity of the Burlington Group assuming completion of the Brink's Stock Proposal transaction: Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- Balance at beginning of period $ 240,880 203,150 181,576 Net income 32,855 38,356 15,476 Foreign currency translation adjustment 945 2,418 (768) Stock options exercised 548 1,837 4,001 Stock released from employee benefits trust to employee benefits plan 1,661 443 278 Stock sold from employee benefits trust to employee benefits plan -- -- 73 Stock sold to Minerals Group -- 107 42 Stock repurchases (1,134) (2,042) (304) Dividends declared (4,201) (4,161) (3,880) Cost of Services Stock Proposal -- (1) (782) Tax benefit of options exercised 299 765 501 Conversion of debt -- 8 -- Net cash (to) from the Company -- -- 6,937 - -------------------------------------------------------------------------------- Balance at end of period $271,853 240,880 203,150 - --------------------------------------------------------------------------------
Included in shareholder's equity is the cumulative foreign currency translation adjustment of $721, $1,666 and $4,084 at December 31, 1995, 1994 and 1993, respectively. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at cost, consist of the following: December 31 1995 1994 - --------------------------------------------------- Land $ 1,495 197 Buildings 20,102 9,147 Machinery and equipment 106,843 85,709 - --------------------------------------------------- Total $128,440 95,053 =================================================== The estimated useful lives for property, plant and equipment are as follows: Years - --------------------------------------------------- Buildings 10 to 25 Machinery and equipment 4 to 10 Depreciation of property, plant and equipment aggregated $13,449 in 1995, $10,797 in 1994 and $8,735 in 1993. 5. INTANGIBLES Intangibles consist entirely of the excess of cost over fair value of net assets of companies acquired and are net of accumulated amortization of $72,721 at December 31, 1995 and $66,140 at December 31, 1994. The estimated useful life of intangibles is generally forty years. Amortization of intangibles aggregated $6,295 in 1995, $6,162 in 1994 and $6,218 in 1993. 6. FINANCIAL INSTRUMENTS Financial instruments which potentially subject the Burlington Group to concentrations of credit risk consist principally of cash and cash equivalents, and trade receivables. The Burlington Group's cash and cash equivalents are placed with high credit quality financial institutions. Also, by policy, the amount of credit exposure to any one financial institution is limited. Concentration of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Burlington Group's customer base, and their dispersion across many different industries and geographic areas. 110
The following details the fair values of financial instruments for which it is practicable to estimate the value: CASH AND CASH EQUIVALENTS The carrying amounts approximate fair value because of the short maturity of these instruments. DEBT The aggregate fair value of the Burlington Group's long-term debt obligations, which is based upon quoted market prices and rates currently available to the Burlington Group for debt with similar terms and maturities, approximates the carrying amount. OFF-BALANCE SHEET INSTRUMENTS The Burlington Group utilizes various off-balance sheet financial instruments, as discussed below, to hedge its foreign currency and other market exposures. The risk that counterparties to such instruments may be unable to perform is minimized by limiting the counterparties to major financial institutions. The Burlington Group does not expect any losses due to such counterparty default. Foreign currency forward contracts -- The Company enters into foreign currency forward contracts with a duration of 30 days as a hedge against accounts payable denominated in various currencies. These contracts do not subject the Company to risk due to exchange rate movements because gains and losses on these contracts offset losses and gains on the payables being hedged. At December 31, 1995, the total contract value of foreign currency forward contracts outstanding was $6,189. As of such date, the fair value of the foreign currency forward contracts was not significant. Fuel contracts -- The Burlington Group has hedged a portion of its jet fuel requirements through a swap contract. At December 31, 1995, the notional value of the jet fuel swap, aggregating 11.2 million gallons, through mid-1996, was $5,767. In addition, the Company has entered into several commodity option transactions that are intended to protect against significant increases in jet fuel prices. These transactions, aggregate 10.8 million gallons with a notional value of $6,480 and are applicable throughout the first half of 1996. The Company has also entered into a collar transaction applicable to 6.0 million gallons that provides a minimum and maximum per gallon price. This transaction is settled monthly based upon the average of the high and low prices during each period. 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 December 31, 1995, the fair value of these contracts was not significant.
Interest rate contracts -- In connection with the aircraft leasing by Burlington, the Company has entered into an interest rate swap agreement. This variable to fixed interest rate swap agreement had a notional value of $30,000 that fixes the Company's interest rate at 7.05% through January 2, 1998. Given the decline in the base variable rate subsequent to when the agreement was entered into, the cost to the Company to terminate the agreement would have been $1,195 at December 31, 1995. 7. INCOME TAXES The provision (credit) for income taxes consists of the following: U.S. Federal Foreign State Total - ---------------------------------------------------- 1995: Current $20,139 1,424 1,500 23,063 Deferred (2,839) (1,064) (442) (4,345) - ---------------------------------------------------- Total $17,300 360 1,058 18,718 ==================================================== 1994: Current $22,077 3,033 3,000 28,110 Deferred (4,472) 80 (864) (5,256) - ---------------------------------------------------- Total $17,605 3,113 2,136 22,854 ==================================================== 1993: Current $10,806 1,870 1,100 13,776 Deferred (520) (302) (515) (1,337) - ---------------------------------------------------- Total $10,286 1,568 585 12,439 ==================================================== The significant components of the deferred tax benefit were as follows: 1995 1994 1993 - -------------------------------------------------------------------------------- Deferred tax expense (benefit), exclusive of the components listed below $(2,212) (6,028) (2,118) Net operating loss carryforwards (1,490) (247) 205 Alternative minimum tax credits (565) 1,084 647 Change in the valuation allowance for deferred tax assets (78) (65) (71) - -------------------------------------------------------------------------------- Total $(4,345) (5,256) (1,337) ================================================================================ The tax benefit for compensation expense related to the exercise of certain employee stock options for tax purposes in excess of compensation expense for financial reporting purposes is recognized as an adjustment to shareholder's equity. 111
The components of the net deferred tax asset as of December 31, 1995 and December 31, 1994 were as follows: 1995 1994 - --------------------------------------------------------------------------------- Deferred tax assets: Accounts receivable $ 3,149 3,368 Postretirement benefits other than pensions 1,100 985 Workers' compensation and other claims 1,357 1,819 Other liabilities and reserves 13,275 11,194 Miscellaneous 1,642 612 Net operating loss carryforwards 5,340 3,850 Alternative minimum tax credits 11,653 10,963 Valuation allowance -- (78) - --------------------------------------------------------------------------------- Total deferred tax asset 37,516 32,713 - --------------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment 576 725 Pension assets 1,486 1,608 Other assets 684 383 Miscellaneous 12,379 10,864 - --------------------------------------------------------------------------------- Total deferred tax liability 15,125 13,580 - --------------------------------------------------------------------------------- Net deferred tax asset $ 22,391 19,133 ================================================================================= The recording of deferred federal tax assets is based upon their expected utilization in the Company's consolidated federal income tax return and the benefit that would accrue to the Burlington Group under the Company's tax allocation policy. The valuation allowance relates to deferred tax assets in certain foreign jurisdictions. The following table accounts for the difference between the actual tax provision and the amounts obtained by applying the statutory U.S. federal income tax rate of 35% in 1995, 1994 and 1993 to the income before income taxes. Year Ended December 31 1995 1994 1993 - ---------------------------------------------------------------------------------- Income (loss) before income taxes: United States $ 34,943 35,464 11,633 Foreign 16,630 25,746 16,282 - ---------------------------------------------------------------------------------- Total $ 51,573 61,210 27,915 ================================================================================== Tax provision computed at statutory rate $ 18,051 21,424 9,770 Increases (reductions) in taxes due to: State income taxes (net of federal tax benefit) 688 1,388 380 Goodwill amortization 2,079 1,891 2,065 Difference between total taxes on foreign income and the U.S. federal statutory rate (1,430) (2,790) 107 Miscellaneous (670) 941 117 - ---------------------------------------------------------------------------------- Actual tax provision $18,718 22,854 12,439 ==================================================================================
It is the policy of the Burlington Group to accrue deferred income taxes on temporary differences related to the financial statement carrying amounts and tax bases of investments in foreign subsidiaries and affiliates which are expected to reverse in the foreseeable future. As of December 31, 1995 and December 31, 1994, the unrecognized deferred tax liability for temporary differences of approximately $9,340 and $20,237, respectively, related to investments in foreign subsidiaries and affiliates that are essentially permanent in nature and not expected to reverse in the foreseeable future was approximately $3,269 and $7,083, respectively. The Burlington Group is included in the Company's consolidated U.S. federal income tax return. As of December 31, 1995, the Burlington Group had $11,653 of alternative minimum tax credits allocated to it under the Company's tax allocation policy. Such credits are available to offset future U.S. federal income taxes and, under current tax law, the carryforward period for such credits is unlimited. The tax benefits of net operating loss carryforwards of the Burlington Group as at December 31, 1995 were $5,340 and related to various state and foreign taxing jurisdictions. The expiration periods primarily range from 5 to 15 years. 8. LONG-TERM DEBT A portion of the outstanding debt under the Company's credit agreement and the Company's subordinated obligations have been attributed to the Burlington Group. Total long-term debt of the Burlington Group consists of the following: As of December 31 1995 1994 - ---------------------------------------------------------------------- Senior obligations: Canadian dollar term loan due 1999 (7.50% in 1995 and 6.19% in 1994) $ 2,932 2,852 All other 7,772 353 - ---------------------------------------------------------------------- 10,704 3,205 Obligations under capital leases (average rates 13.00% in 1995 and 12.04% in 1994) 1,645 619 - ---------------------------------------------------------------------- 12,349 3,824 - ---------------------------------------------------------------------- Attributed portion of the Company's debt: U.S. dollar term loan due 2000 (year-end rate 6.48% in 1994) -- 23,434 4% subordinated debentures due 1997 14,348 14,648 - ---------------------------------------------------------------------- 14,348 38,082 - ---------------------------------------------------------------------- Total long-term debt, less current maturities $26,697 41,906 ====================================================================== For the four years through December 31, 2000, minimum repayments of long-term debt outstanding are as follows: 1997 $16,446 1998 4,685 1999 1,490 2000 859 112
The Canadian dollar term loan to a wholly-owned indirect subsidiary of the Burlington Group, bears interest based on Canadian prime or Bankers' Acceptance rates or, if converted to a U.S. dollar loan, based on Eurodollar or Federal Funds rates. The Canadian dollar term loan is guaranteed by the Company. In March 1994, the Company entered into a $350,000 credit agreement with a syndicate of banks (the "Facility"). The Facility included a $100,000 five-year term loan, which originally matured in March 1999. The Facility also permitted additional borrowings, repayments and reborrowings of up to an aggregate of $250,000 initially until March 1999. In March 1995, the Facility was amended to extend the maturity of the term loan to May 2000 and to permit the additional borrowings, repayments and reborrowings until May 2000. Interest on borrowings under the Facility is payable at rates based on prime, certificate of deposit, Eurodollar or money market rates. At December 31, 1995, no borrowings under the Facility were attributed to the Burlington Group. The 4% subordinated debentures due July 1, 1997, are exchangeable for cash, at the rate of $157.80 per $1,000 debenture. The debentures are redeemable at the Company's option, in whole or in part, at any time prior to maturity, at redemption prices equal to 100% of principal amount. In 1995, the Company redeemed $300 in principal of its 4% subordinated debentures. On April 15, 1994, the Company redeemed all of the 9.2% convertible subordinated debentures due July 1, 2004, at a premium of $767. The premium has been included in the Statement of Operations in "Other income (expense), net". Various international operations maintain lines of credit and overdraft facilities aggregating approximately $96,000 with a number of banks on either a secured or unsecured basis. Under the terms of some of its debt instruments, the Company has agreed to various restrictions relating to the payment of dividends, the repurchase of capital stock, the maintenance of consolidated net worth, and the amount of additional funded debt which may be incurred. See the Company's consolidated financial statements and related footnotes. At December 31, 1995, the Company's portion of outstanding unsecured letters of credit allocated to the Burlington Group was $39,924, primarily supporting the Burlington Group's obligations under aircraft leases and its various self-insurance programs.
9. STOCK OPTIONS The Company grants options under its 1988 Stock Option Plan (the "1988 Plan") to executives and key employees and under its Non-Employee Directors' Stock Option Plan (the "Non-Employee Plan") to outside directors to purchase common stock at a price not less than 100% of quoted market value at date of grant. The Company's 1979 Stock Option Plan (the "1979 Plan") and 1985 Stock Option Plan (the "1985 Plan") terminated in 1985 and 1988, respectively, except as to options still outstanding. As part of the Brink's Stock Proposal (Note 1), the 1988 and Non-Employee Plans were amended to permit option grants to be made to optionees with respect to Brink's Stock or Burlington Stock in addition to Minerals Stock. Upon approval of the Brink's Stock Proposal, a total of 2,383,422 shares of Services Stock were subject to options outstanding under the 1988 Plan, the Non-Employee Plan, the 1979 Plan and the 1985 Plan. Pursuant to antidilution provisions in the option agreements covering such plans, the Company converted these options into options for shares of Brink's Stock or Burlington Stock, or both, depending on the employment status and responsibilities of the particular optionee. In the case of optionees having Company-wide responsibilities, each outstanding Services Stock option was converted into options for both Brink's Stock and Burlington Stock. In the case of other optionees, each outstanding option was converted into a new option only for Brink's Stock or Burlington Stock, as the case may be. As a result, upon approval of the Brink's Stock Proposal, 1,749,822 shares of Brink's Stock and 1,989,466 shares of Burlington Stock were subject to options. 10. CAPITAL STOCK The Company, at any time, has the right to exchange each outstanding share of Burlington Stock for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Minerals Stock) having a fair market value equal to 115% of the fair market value of one share of Burlington Stock. In addition, upon the disposition of all or substantially all of the properties and assets of the Burlington Group to any person (with certain exceptions), the Company is required to exchange each outstanding share of Burlington Stock for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Minerals Stock) having a fair market value equal to 115% of the fair market value of one share of Burlington Stock. 113
The Company, at any time, has the right to exchange each outstanding share of Minerals Stock, which was previously subject to exchange for shares of Services Stock, for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Burlington Stock) having a fair market value equal to 115% of the fair market value of one share of Minerals Stock. In addition, upon the disposition of all or substantially all of the properties and assets of the Minerals Group to any person (with certain exceptions), the Company is required to exchange each outstanding share of Minerals Stock for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Burlington Stock) having a fair market value equal to 115% of the fair market value of one share of Minerals Stock. If any shares of the Company's Preferred Stock are converted after an exchange of Minerals Stock for Brink's Stock (or Burlington Stock), the holder of such Preferred Stock would, upon conversion, receive shares of Brink's Stock (or Burlington Stock) in lieu of shares of Minerals Stock otherwise issuable upon such conversion. Shares of Brink's Stock are not subject to either optional or mandatory exchange. The net proceeds of any disposition of properties and assets of the Brink's Group will be attributed to the Brink's Group. In the case of a disposition of all or substantially all the properties and assets of any other group, the net proceeds will be attributed to the group the shares of which have been issued in exchange for shares of the selling group. Holders of Brink's Stock at all times have one vote per share. Holders of Burlington Stock and Minerals Stock have one and 0.626 votes per share, respectively, subject to adjustment on January 1, 1998, and on each January 1 every two years thereafter in such a manner so that each class' share of the aggregate voting power at such time will be equal to that class' share of the aggregate market capitalization of the Company's common stock at such time. Accordingly, on each adjustment date, each share of Burlington Stock and Minerals Stock may have more than, less than or continue to have the number of votes per share as they have. Holders of Brink's Stock, Burlington Stock and Minerals Stock vote together as a single voting group on all matters as to which all common shareholders are entitled to vote. In addition, as prescribed by Virginia law, certain amendments to the Articles of Incorporation affecting, among other things, the designation, rights, preferences or limitations of one class of common stock, or certain mergers or statutory share exchanges, must be approved by the holders of such class of common stock, voting as a group, and, in certain circumstances, may also have to be approved by the holders of the other classes of common stock, voting as separate voting groups.
In the event of a dissolution, liquidation or winding up of the Company, the holders of Brink's Stock, Burlington Stock and Minerals Stock, effective as of January 19, 1996, share on a per share basis an aggregate amount equal to 55%, 28% and 17%, respectively, of the funds, if any, remaining for distribution to the common shareholders. In the case of Minerals Stock, such percentage has been set, using a nominal number of shares of Minerals Stock of 4,202,954 (the "Nominal Shares") in excess of the actual number of shares of Minerals Stock outstanding, to ensure that the holders of Minerals Stock are entitled to the same share of any such funds immediately following the consummation of the transactions as they were prior thereto. These liquidation percentages are subject to adjustment in proportion to the relative change in the total number of shares of Brink's Stock, Burlington Stock and Minerals Stock, as the case may be, then outstanding to the total number of shares of all other classes of common stock then outstanding (which totals, in the case of Minerals Stock, shall include the Nominal Shares). In November 1995, the Board of Directors (the "Board"), authorized the repurchase, subject to shareholder approval of the Brink's Stock Proposal, of up to 1,500,000 shares of Burlington Stock from time to time in the open market or in private transactions, as conditions warrant, not to exceed an aggregate purchase price of $45,000 for all common stock of the Company. Dividends paid to holders of Burlington Stock are limited to funds of the Company legally available for the payment of dividends. Amounts available for dividends may be further limited by covenants in the Company's public debt indentures and bank credit agreements. See the Company's consolidated financial statements and related footnotes. Subject to these limitations, the Company's Board, although there is no requirement to do so, intends to declare and pay dividends on the Burlington Stock based primarily on the earnings, financial condition, cash flow and business requirements of the Burlington Group. In January 1994, the Company issued 161,000 shares of its $31.25 Series C Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock"). The Convertible Preferred Stock, which is convertible into Minerals Stock and which has been attributed to the Minerals Group, pays an annual dividend of $31.25 per share payable quarterly, in cash, in arrears, out of all funds of the Company legally available therefore, when as and if, declared by the Board. Payment of dividends commenced on March 1, 1994. Such stock also bears a liquidation preference of $500 per share, plus an amount equal to accrued and unpaid dividends thereon. 114
In December 1992, the Company formed the Pittston Company Employee Benefits Trust (the "Trust") to hold shares of its common stock to fund obligations under certain employee benefits programs. Upon formation of the Trust, the Company sold for a promissory note of the Trust, 4,000,000 shares of its common stock to the Trust at a price equal to the fair value of the stock on the date of sale. Upon approval of the Brink's Stock Proposal, 1,768,906 shares of Burlington Stock were distributed to the Trust. At December 31, 1995, 1,776,453 shares of Burlington Stock (1,889,283 in 1994) remained in the Trust, valued at market. The value of these shares has no impact on shareholder's equity. 11. ACQUISITIONS During 1995, the Burlington Group acquired one small business and completed the integration of its investments in certain businesses acquired on December 31, 1994, for an aggregate purchase price of $645. The acquisitions were accounted for as purchases; accordingly, the purchase price was allocated to the underlying assets and liabilities based on the respective estimated fair value at the date of acquisition. The fair value of the assets acquired was $6,602 and liabilities assumed was $10,399. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was $4,442 and is being amortized over a period of forty years. In addition, during 1995, the Burlington Group made a contingent payment of $693 for an acquisition made in prior years. During 1994, the Burlington Group acquired several small businesses and made a contingent payment related to an acquisition made in a prior year. Total consideration paid was $5,938. During 1993, the Burlington Group acquired one small business and made a contingency payment related to an acquisition consummated in a prior year. The total consideration paid was $736. The acquisition has been accounted for as a purchase and the purchase price for the acquisitions was essentially equal to the fair value of assets acquired.
The results of operations of the companies acquired in 1995, 1994 and 1993 have been included in the Burlington Group's results of operations from their date of acquisition. 12. LEASES The Burlington Group leases aircraft, facilities, vehicles, computers and other equipment under long-term operating leases with varying terms, and most of the leases contain renewal and/or purchase options. As of December 31, 1995, aggregate future minimum lease payments under noncancellable operating leases were as follows: Equipment Aircraft Facilities & Other Total - ------------------------------------------------------ 1996 $27,585 21,503 4,768 53,856 1997 27,727 17,741 3,690 49,158 1998 11,559 15,443 2,788 29,790 1999 6,744 12,893 1,881 21,518 2000 -- 10,979 1,591 12,570 2001 -- 9,156 1,067 10,223 2002 -- 7,034 601 7,635 2003 -- 6,558 417 6,975 2004 -- 6,231 4,132 10,363 2005 -- 5,108 -- 5,108 Later Years -- 49,623 -- 49,623 - ------------------------------------------------------ Total $73,615 162,269 20,935 256,819 ====================================================== These amounts are net of aggregate future minimum noncancellable sublease rentals of $164. Rent expense amounted to $62,751 in 1995, $57,412 in 1994 and $51,677 in 1993 and is net of sublease rentals of $490, $695 and $781, respectively. Burlington entered into a transaction covering various leases which provided for the replacement of four B707 aircraft with four DC8-71 aircraft and completed an evaluation of other fleet related costs. The net effect of this transaction, which was reflected in the 1993 financial statements, did not have a material impact on operating profit. The Burlington Group incurred capital lease obligations of $2,288 in 1995, $755 in 1994 and $542 in 1993. As of December 31, 1994, the Burlington Group's obligations under capital leases were not significant. 115
13. EMPLOYEE BENEFIT PLANS The Burlington Group's businesses participate in the Company's noncontributory defined benefit pension plan covering substantially all nonunion employees who meet certain minimum requirements, in addition to sponsoring certain other defined benefit plans. Benefits of most of the plans are based on salary and years of service. The Burlington Group's pension cost relating to its participation in the Company's defined benefit pension plan is actuarially determined based on its respective employees and an allocable share of the pension plan assets. The Company's policy is to fund the actuarially determined amounts necessary to provide assets sufficient to meet the benefits to be paid to plan participants in accordance with applicable regulations. The net pension expense for 1995, 1994 and 1993 for all plans is as follows: Year Ended December 31 1995 1994 1993 - --------------------------------------------------------------------------------- Service cost benefits earned during year $ 2,856 3,009 2,350 Interest cost on projected benefit obligation 3,162 2,919 2,460 Loss (return) on assets actual (11,344) 662 (7,016) (Loss) return on assets deferred 6,223 (5,713) 2,915 Other amortization, net (305) (357) (255) - --------------------------------------------------------------------------------- Net pension expense $ 592 520 454 ================================================================================= The assumptions used in determining the net pension expense for the Company's major pension plan were as follows: 1995 1994 1993 - ------------------------------------------------------------------------------- Interest cost on projected benefit obligation 8.75% 7.5% 9.0% Expected long-term rate of return on assets 10.0% 10.0% 10.0% Rate of increase in compensation levels 4.0% 4.0% 5.0% The funded status and prepaid pension expense at December 31, 1995 and 1994 are as follows: 1995 1994 - ---------------------------------------------------------------------------------- Actuarial present value of accumulated benefit obligation: Vested $ 38,240 25,929 Nonvested 2,524 2,081 - ---------------------------------------------------------------------------------- 40,764 28,010 Benefits attributable to projected salaries 10,376 7,313 - ---------------------------------------------------------------------------------- Projected benefit obligation 51,140 35,323 Plan assets at fair value 59,831 49,390 - ---------------------------------------------------------------------------------- Excess of plan assets over projected benefit obligation 8,691 14,067 Unamortized initial net asset (724) (1,082) Unrecognized experience gain 1,732 (2,873) Unrecognized prior service cost 106 84 - ---------------------------------------------------------------------------------- Net pension assets 9,805 10,196 Current pension liability 622 459 - ---------------------------------------------------------------------------------- Deferred pension asset per balance sheet $ 10,427 10,655 ==================================================================================
For the valuation of pension obligations and the calculation of the funded status, the discount rate was 7.5% in 1995 and 8.75% in 1994. The expected long-term rate of return on assets was 10% in both years. The rate of increase in compensation levels used was 4% in 1995 and 1994. The unrecognized initial net asset at January 1, 1986 (January 1, 1989, for certain foreign pension plans), the date of adoption of SFAS 87, has been amortized over the estimated remaining average service life of the employees. As of December 31, 1995, approximately 75% of plan assets were invested in equity securities and 25% in fixed income securities. The Burlington Group also provides certain postretirement health care and life insurance benefits for eligible active and retired employees in the United States and Canada. For the years 1995, 1994 and 1993, the components of periodic expense for these postretirement benefits were as follows: Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------- Service cost benefits earned during year $129 219 112 Interest cost on accumulated postretirement benefit obligation 192 247 160 - -------------------------------------------------------------------------- Total expense $321 466 272 ========================================================================== Interest costs on the accumulated postretirement benefit obligation were based upon rates of 8.75% in 1995, 7.5% in 1994 and 9% in 1993. At December 31, 1995 and 1994, the actuarial and recorded liabilities for these postretirement benefits, none of which have been funded, were as follows: 1995 1994 - -------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 569 589 Fully eligible active plan participants 403 379 Other active plan participants 1,919 1,349 - -------------------------------------------------------------------------- 2,891 2,317 Unrecognized experience gain (loss) (71) 214 - -------------------------------------------------------------------------- Liability included on the balance sheet 2,820 2,531 Less current portion 107 50 - -------------------------------------------------------------------------- Noncurrent liability for postretirement health care and life insurance benefits $ 2,713 2,481 ========================================================================== The accumulated postretirement benefit obligation was deter-mined using the unit credit method and an assumed discount rate of 7.5% in 1995 and 8.75% in 1994. The postretirement benefit obligation for U.S. salaried employees does not provide for changes in health care costs since the employer's contribution to the plan is a fixed amount. 116
A percentage point increase each year in the assumed health care cost trend rate used would not have resulted in any increase in the aggregate service and interest components of expense for the year 1995 or in the accumulated postretirement benefit obligation at December 31, 1995. The Burlington Group also participates in the Company's Savings-Investment Plan to assist eligible employees in providing for retirement or other future financial needs. Employee contributions are matched at rates of 75% up to 5% of compensation (subject to certain limitations imposed by the Internal Revenue Code of 1986, as amended). Contribution expense under the plan aggregated $2,326 in 1995, $1,656 in 1994 and $1,207 in 1993. In May 1994, the Company's shareholders approved the Employee Stock Purchase Plan effective July 1, 1994. See the Company's consolidated financial statements and related footnotes for information regarding the Company's Employee Stock Purchase Plan. The Burlington Group sponsors several other defined contribution benefit plans based on hours worked or other measurable factors. Contributions under all of these plans aggregated $662 in 1995, $556 in 1994 and $443 in 1993. 14. SEGMENT INFORMATION Operating revenues by geographic area are as follows: Year Ended December 31 1995 1994 1993 - ----------------------------------------------------------------- United States $ 535,091 565,813 459,431 International operations 879,730 649,471 538,648 - ----------------------------------------------------------------- Total operating revenues $1,414,821 1,215,284 998,079 ================================================================= The following is derived from the business segment information in the Company's consolidated financial statements as it relates to the Burlington Group. See Note 2, Related Party Transactions, for a description of the Company's policy for corporate allocations. The Burlington Group's portion of the Company's operating profit is as follows: Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- United States $ 30,416 45,732 19,290 International operations 28,307 23,492 18,681 - -------------------------------------------------------------------------------- Burlington Group's portion of the Company's segment operating profit 58,723 69,224 37,971 Corporate expenses allocated to the Burlington Group (4,770) (4,665) (4,757) - -------------------------------------------------------------------------------- Total operating profit $ 53,953 64,559 33,214 ================================================================================
The Burlington Group's portion of the Company's assets at year end is as follows: Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------- United States $302,593 284,294 268,705 International operations 237,126 188,146 149,989 - -------------------------------------------------------------------- Burlington Group's portion of the Company's assets 539,719 472,440 418,694 Burlington Group's portion of corporate assets 32,358 49,076 13,542 - -------------------------------------------------------------------- Total assets $572,077 521,516 432,236 ==================================================================== 15. CONTINGENT LIABILITIES Under the Coal Industry Retiree Health Benefit Act of 1992 (the "Act"), the Company and its majority-owned subsidiaries at July 20, 1992, including the Burlington Group included in these financial statements, are jointly and severally liable with the Brink's Group and the Minerals Group for the costs of health care coverage provided for by that Act. For a description of the Act and an estimate of certain of such costs, see Note 13 to the Company's consolidated financial statements. At this time, the Company expects the Minerals Group to generate sufficient cash flow to discharge its obligations under the Act. In April 1990, the Company entered into a settlement agreement to resolve certain environmental claims against the Company arising from hydrocarbon contamination at a petroleum terminal facility ("Tankport") in Jersey City, New Jersey, which operations were sold in 1983. Under the settlement agreement, the Company is obligated to pay 80% of the remediation costs. Based on data available to the Company and its environmental consultants, the Company estimates its portion of the cleanup costs on an undiscounted basis using existing technologies to be between $6,700 and $16,400 over a period of up to five years. Management is unable to determine that any amount within that range is a better estimate due to a variety of uncertainties, which include the extent of the contamination at the site, the permitted technologies for remediation and the regulatory standards by which the clean-up will be conducted. The clean-up estimates have been modified from prior years' in light of cost inflation. The estimate of costs and the timing of payments could change as a result of changes to the remediation plan required, changes in the technology available to treat the site, unforseen circumstances existing at the site and additional cost inflation. The Company commenced insurance coverage litigation in 1990, in the United States District Court for the District of New Jersey, seeking a declaratory judgment that all amounts payable by the Company pursuant to the Tankport obligation were reimbursable under comprehensive general liability and pollution liability policies maintained by the Company. In August 1995, the District Court ruled on various Motions for Summary Judgement. In its 117
decision, the Court found favorably for the Company on several matters relating to the comprehensive general liability policies but concluded that the pollution liability policies did not contain pollution coverage for the types of claims associated with the Tankport site. The Company has filed a notice of its intent to appeal the District Court's decision to the Third Circuit. Management and its outside legal counsel continue to believe, however, that recovery of a substantial portion of the cleanup costs will ultimately be probable of realization. Accordingly, management is revising its earlier belief that there is no net liability for the Tankport obligation, and it is the Company's belief that, based on estimates of potential liability and probable realization of insurance recoveries, the Company would be liable for approximately $1,400 based on the Court's decision and related developments of New Jersey law. 16. SUPPLEMENTAL CASH FLOW INFORMATION For the years ended December 31, 1995, 1994 and 1993, cash payments for income taxes, net of refunds received, were $20,346, $16,980 and $12,181, respectively. For the years ended December 31, 1995, 1994 and 1993, cash payments for interest were $5,055, $4,926 and $5,359, respectively. On December 31, 1995, the Minerals Group assumed the portion of the Company's term loan in the amount of $23,434, which had been attributed to the Burlington Group, as partial settlement of the intercompany payable due to the Burlington Group. This transfer of debt as partial settlement of the intercompany between the Groups has been recognized as a noncash transaction and is not included in the Burlington Group's 1995 Statement of Cash Flows. 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Tabulated below are certain data for each quarter of 1995 and 1994. 1st 2nd 3rd 4th - -------------------------------------------------------------------------- 1995 QUARTERS: Operating revenues $323,944 341,950 365,793 383,134 Gross profit 34,352 42,305 47,334 45,109 Net income $ 4,049 8,009 10,524 10,273 Per Pittston Burlington Group Common Share: Net income $ .21 .42 .56 .54 1994 QUARTERS: Operating revenues $261,484 302,266 311,925 339,609 Gross profit 31,959 48,849 45,010 45,571 Net income $ 3,339 11,509 13,438 10,070 Per Pittston Burlington Group Common Share: Net income $ .18 .61 .71 .53 118
Pittston Minerals Group STATEMENT OF MANAGEMENT RESPONSIBILITY The management of The Pittston Company (the "Company") is responsible for preparing the accompanying Pittston Minerals Group (the "Mineral Group') financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles. Management has also prepared the other information in the annual report and is responsible for its accuracy. In meeting our responsibility for the integrity of the financial statements, we maintain a system of internal controls designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and that the accounting records provide a reliable basis for the preparation of the financial statements. Qualified personnel throughout the organization maintain and monitor these internal controls on an ongoing basis. In addition, the Company maintains an internal audit department that systematically reviews and reports on the adequacy and effectiveness of the controls, with management follow-up as appropriate. Management has also established a formal Business Code of Ethics which is distributed throughout the Company. We acknowledge our responsibility to establish and preserve an environment in which all employees properly understand the fundamental importance of high ethical standards in the conduct of our business. The accompanying financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. During the audit they review and make appropriate tests of accounting records and internal controls to the extent they consider necessary to express an opinion on the Minerals Group's financial statements. The Company's Board of Directors pursues its oversight role with respect to the Minerals Group's financial statements through the Audit and Ethics Committee, which is composed solely of outside directors. The Committee meets periodically with the independent auditors, internal auditors and management to review the Company's control system and to ensure compliance with applicable laws and the Company's Business Code of Ethics. We believe that the policies and procedures described above are appropriate and effective and do enable us to meet our responsibility for the integrity of the Minerals Group's financial statements.
INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders The Pittston Company We have audited the accompanying balance sheets of Pittston Minerals Group (as described in Note 1) as of December 31, 1995 and 1994, and the related statements of operations and cash flows for each of the years in the three-year period ended December 31, 1995. These financial statements are the responsibility of The Pittston Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements of Pittston Minerals Group present fairly, in all material respects, the financial position of Pittston Minerals Group as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As more fully discussed in Note 1, the financial statements of Pittston Minerals Group should be read in connection with the audited consolidated financial statements of The Pittston Company and subsidiaries. KPMG Peat Marwick LLP Stamford, Connecticut January 25, 1996 119
Pittston Minerals Group BALANCE SHEETS December 31 (In thousands) 1995 1994 ================================================================================================================================== ASSETS Current assets: Cash and cash equivalents $ 4,999 3,708 Short-term investments 26,046 23,121 Accounts receivable: Trade (Note 5) 66,257 92,990 Other 23,464 17,813 - ---------------------------------------------------------------------------------------------------------------------------------- 89,721 110,803 Less estimated amount uncollectible 1,946 1,880 - ---------------------------------------------------------------------------------------------------------------------------------- 87,775 108,923 Coal inventory 37,329 25,518 Other inventory 4,591 4,629 - ---------------------------------------------------------------------------------------------------------------------------------- 41,920 30,147 Prepaid expenses 7,573 11,389 Deferred income taxes (Note 8) 30,677 30,525 - ---------------------------------------------------------------------------------------------------------------------------------- Total current assets 198,990 207,813 Property, plant and equipment, at cost (Note 4) 365,997 380,400 Less accumulated depreciation, depletion and amortization 166,653 159,938 - ---------------------------------------------------------------------------------------------------------------------------------- 199,344 220,462 Deferred pension assets (Note 15) 79,393 75,803 Deferred income taxes (Note 8) 80,699 97,945 Intangibles, net of amortization (Notes 6 and 12) 117,551 120,649 Coal supply contracts (Note 12) 63,455 82,240 Receivable Pittston Brink's Group/Burlington Group (Note 2) 15,873 23,186 Other assets 43,304 39,414 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 798,609 867,512 ================================================================================================================================== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Short-term bank borrowings $ 24 -- Current maturities of long-term debt (Note 9) 1,199 7,554 Accounts payable 70,214 76,771 Payable Pittston Brink's Group (Note 2) 3,945 705 Payable Pittston Burlington Group (Note 2) 5,910 31,465 Accrued liabilities: Taxes 16,600 21,259 Workers' compensation and other claims 20,334 22,647 Postretirement benefits other than pensions (Note 15) 18,647 16,951 Reclamation 12,450 19,323 Miscellaneous (Note 15) 70,353 77,049 - ---------------------------------------------------------------------------------------------------------------------------------- 138,384 157,229 - ---------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 219,676 273,724 Long-term debt, less current maturities (Note 9) 100,791 88,175 Postretirement benefits other than pensions (Note 15) 213,707 212,977 Workers' compensation and other claims 114,602 128,864 Reclamation 47,126 49,198 Other liabilities 111,386 123,170 Commitments and contingent liabilities (Notes 9, 13, 14, 15, 19 and 20) Shareholder's equity (Note 3) (8,679) (8,596) - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholder's equity $ 798,609 867,512 ================================================================================================================================== See accompanying notes to financial statements. 120
Pittston Minerals Group STATEMENTS OF OPERATIONS Year Ended December 31 (In thousands, except per share amounts) 1995 1994 1993 ============================================================================================================== Net sales $722,851 794,998 687,089 - -------------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales 696,295 771,586 645,679 Selling, general and administrative expenses 33,252 37,049 36,789 Restructuring and other charges, including litigation accrual (Note 16) -- 90,806 78,633 - -------------------------------------------------------------------------------------------------------------- Total costs and expenses 729,547 899,441 761,101 - -------------------------------------------------------------------------------------------------------------- Other operating income (Note 17) 22,768 15,281 10,246 - -------------------------------------------------------------------------------------------------------------- Operating profit (loss) 16,072 (89,162) (63,766) Interest income 564 192 634 Interest expense (Note 2) (10,534) (6,501) (1,336) Other income (expense), net (Note 17) (1,098) (875) (544) - -------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 5,004 (96,346) (65,012) Provision (credit) for income taxes (Note 8) (9,020) (43,398) (32,032) - -------------------------------------------------------------------------------------------------------------- Net income (loss) 14,024 (52,948) (32,980) Preferred stock dividends, net (Note 11) (2,762) (3,998) -- - -------------------------------------------------------------------------------------------------------------- Net income (loss) attributed to common shares $ 11,262 (56,946) (32,980) ============================================================================================================== Net income (loss) per common share (Note 1): Primary $ 1.45 (7.50) (4.47) Fully diluted $ 1.40 (7.50) (4.47) ============================================================================================================== Average common shares outstanding (Note 1): Primary 7,786 7,594 7,381 Fully diluted 9,999 10,000 7,620 See accompanying notes to financial statements. 121
Pittston Minerals Group STATEMENTS OF CASH FLOWS Year Ended December 31 (In thousands) 1995 1994 1993 ============================================================================================================== Cash flows from operating activities: Net income (loss) $14,024 (52,948) (32,980) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Noncash charges and other write-offs -- 46,487 10,846 Depreciation, depletion and amortization 42,040 46,074 27,591 Provision (credit) for deferred income taxes 16,412 (16,849) (25,100) Credit for pensions, noncurrent (3,514) (1,162) (2,646) Provision for uncollectible accounts receivable 161 132 528 Gain on sale of property, plant and equipment (4,994) (3,422) (5,064) Other operating, net 1,132 407 193 Change in operating assets and liabilities, net of effects of acquisitions and dispositions: Decrease (increase) in accounts receivable 22,670 (25,030) (2,454) Decrease (increase) in inventories (11,565) (3,413) 7,058 Decrease (increase) in prepaid expenses 3,828 (3,749) 608 Increase (decrease) in accounts payable and accrued liabilities (16,524) (11,227) 396 Decrease (increase) in other assets 2,474 1,701 (104) Increase (decrease) in workers' compensation and other claims, noncurrent (16,575) 5,719 (17,957) Increase (decrease) in other liabilities (23,437) (15,711) 67,906 Other, net 135 (218) (450) - -------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 26,267 (33,209) 28,371 - -------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment (22,283) (25,864) (21,749) Proceeds from disposal of property, plant and equipment 18,939 5,640 2,669 Acquisitions, net of cash acquired, and related contingency payments (1,078) (157,324) (699) Other, net (1,188) 6,540 10,046 - -------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (5,610) (171,008) (9,733) - -------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Additions to debt 24 86,045 -- Reductions of debt (17,164) (8,149) -- Payments (to) from Brink's Group 12,240 5,705 -- Payments (to) from Burlington Group 878 55,731 (13,266) Repurchase of stock (7,173) (3,767) (591) Proceeds from exercise of stock options 1,202 1,765 2,633 Proceeds from employee stock purchase plan 177 -- -- Proceeds from sale of stock to SIP -- -- 44 Proceeds from sale of stock to Brink's Group/Burlington Group -- 253 48 Dividends paid (9,550) (9,156) (4,583) Cost of Services Stock Proposal -- (2) (1,599) Preferred stock issuance, net of cash expenses -- 77,359 (277) Net cash to the Company -- -- (896) - -------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (19,366) 205,784 (18,487) - -------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 1,291 1,567 151 Cash and cash equivalents at beginning of year 3,708 2,141 1,990 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 4,999 3,708 2,141 ============================================================================================================== See accompanying notes to financial statements. 122
Pittston Minerals Group NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION On July 26, 1993, the shareholders of The Pittston Company (the "Company") approved the Services Stock Proposal, as described in the Company's proxy statement dated June 24, 1993, resulting in the reclassification of the Company's common stock. The outstanding shares of Company common stock were redesignated as Pittston Services Group Common Stock ("Services Stock") on a share-for-share basis and a second class of common stock, designated as Pittston Minerals Group Common Stock ("Minerals Stock"), was distributed on the basis of one-fifth of one share of Minerals Stock for each share of the Company's previous common stock held by shareholders of record on July 26, 1993. On January 18, 1996, the shareholders of The Pittston Company (the "Company") approved the Brink's Stock Proposal, as described in the Company's proxy statement dated December 15, 1995, resulting in the modification, effective as of January 19, 1996, of the capital structure of the Company to include an additional class of common stock. The outstanding shares of Pittston Services Group Common Stock ("Services Stock") have been redesignated as Pittston Brink's Group Common Stock, par value $1.00 per share ("Brink's Stock"), and one-half of one share of a new class of common stock identified as Pittston Burlington Group Common Stock, par value $1.00 per share, ("Burlington Stock") has been distributed for each outstanding share of Services Stock. Holders of Pittston Minerals Group Common Stock ("Minerals Stock") continue to be holders of such stock, which continues to reflect the performance of the Pittston Minerals Group (the "Minerals Group"). Brink's Stock is intended to reflect the performance of the Pittston Brink's Group (the "Brink's Group") and Burlington Stock is intended to reflect the performance of the Pittston Burlington Group (the "Burlington Group"). The financial statements of the Minerals Group include the balance sheets, results of operations and cash flows of the Coal and Mineral Ventures operations of the Company, and a portion of the Company's corporate assets and liabilities and related transactions which are not separately identified with operations of a specific segment. The Minerals Group's financial statements are prepared using the amounts included in the Company's consolidated financial statements. Corporate allocations reflected in these financial statements are determined based upon methods which management believes to be a reasonable and equitable allocation of such items (Note 2).
The Company provides holders of Minerals Stock separate financial statements, financial review, descriptions of business and other relevant information for the Minerals Group in addition to consolidated financial information of the Company. Notwithstanding the attribution of assets and liabilities (including contingent liabilities) among the Minerals Group, the Brink's Group and the Burlington Group for the purpose of preparing their respective financial statements, this attribution and the change in the capital structure of the Company as a result of the approval of the Brink's Stock Proposal and the Services Stock Proposal did not affect legal title to such assets or responsibility for such liabilities of the Company which will continue to be responsible for all of its liabilities. Holders of Minerals Stock are shareholders of the Company, which continues to be responsible for all its liabilities. Financial impacts arising from one group that affect the Company's financial condition could affect the results of operations and financial condition of each of the groups. Since financial developments within one group could affect other groups, all shareholders of the Company could be adversely affected by an event directly impacting only one group. Accordingly, the Company's consolidated financial statements must be read in connection with the Minerals Group's financial statements. The accounting policies applicable to the preparation of the financial statements of the Minerals Group may be modified or rescinded at the sole discretion of the Board without approval of shareholders, although there is no intention to do so. PRINCIPLES OF COMBINATION The accompanying financial statements reflect the accounts of the businesses comprising the Minerals Group. The Minerals Group's interests in 20% to 50% owned companies are carried on the equity method. All material intercompany items and transactions have been eliminated in combination. Certain prior year amounts have been reclassified to conform to the current year's financial statement presentation. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, demand deposits and investments with original maturities of three months or less. SHORT-TERM INVESTMENTS Short-term investments primarily include funds set aside by the Minerals Group for certain obligations and are carried at cost which approximates market. 123
INVENTORIES Inventories are stated at cost (determined under the average cost method) or market, whichever is lower. PROPERTY, PLANT AND EQUIPMENT Expenditures for maintenance and repairs are charged to expense, and the costs of renewals and betterments are capitalized. Depreciation is provided principally on the straight-line method at varying rates depending upon estimated useful lives. Depletion of bituminous coal lands is provided on the basis of tonnage mined in relation to the estimated total of recoverable tonnage in the ground. Mine development costs, primarily included in bituminous coal lands, are capitalized and amortized over the estimated useful life of the mine. These costs include expenses incurred for site preparation and development as well as operating deficits incurred at the mines during a development stage. A mine is considered under development until all planned production units have been placed in operation. Valuation of coal properties is based primarily on mining plans and conditions assumed at the time of the evaluation. These valuations could be impacted by actual economic conditions which differ from those assumed at the time of the evaluation. INTANGIBLES The excess of cost over fair value of net assets of companies acquired is amortized on a straight-line basis over the estimated periods benefited. The Minerals Group evaluates the carrying value of intangibles and the periods of amortization to determine whether events and circumstances warrant revised estimates of assets value or useful lives. The Minerals Group annually assesses the recoverability of the excess of cost over net assets acquired by determining whether the amortization of the assets balance over its remaining life can be recovered through projected undiscounted future operating cash flows. Evaluation of asset value as well as periods of amortization are performed on a disaggregated basis. COAL SUPPLY CONTRACTS Coal supply contracts consist of contracts to supply coal to customers at certain negotiated prices over a period of time, which have been acquired from other coal companies, and are stated at cost at the time of acquisition, which approximates fair market value. The capitalized cost of such contracts is amortized over the term of the contract on the basis of tons of coal sold under the contract.
INCOME TAXES Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. See Note 2 for allocation of the Company's U.S. federal income taxes to the Minerals Group. PNEUMOCONIOSIS (BLACK LUNG) EXPENSE The Minerals Group acts as self-insurer with respect to almost all black lung benefits. Provision is made for estimated benefits in accordance with annual actuarial reports prepared by outside actuaries. The excess of the present value of expected future benefits over the accumulated book reserves is recognized over the amortization period as a level percentage of payroll. Cumulative actuarial gains or losses are calculated periodically and amortized on a straight-line basis. Assumptions used in the calculation of the actuarial present value of black lung benefits are based on actual retirement experience of the Company's coal employees, black lung claims incidence for active miners, actual dependent information, industry turnover rates, actual medical and legal cost experience and projected inflation rates. As of December 31, 1995 and 1994, the accrued value of estimated future black lung benefits discounted at 6% approximately $60,500 and $62,824, respectively, and are included in workers' compensation and other claims. Based on actuarial data, the amount charged (credited) to operations was ($1,402) in 1995, $201 in 1994 and $438 in 1993. In addition, the Company accrued additional expenses for black lung benefits related to federal and state assessments, legal and administrative expenses and other self insurance. These amounted to $2,569 in 1995, $2,472 in 1994 and $2,887 in 1993. RECLAMATION COSTS Expenditures relating to environmental regulatory requirements and reclamation costs undertaken during mine operations are charged against earnings as incurred. Estimated site restoration and post closure reclamation costs are charged against earnings using the units of production method over the expected economic life of each mine. Accrued reclamation costs are subject to review by management on a regular basis and are revised when appropriate for changes in future estimated costs and/or regulatory requirements. 124
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Postretirement benefits other than pensions are accounted for in accordance with Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", which requires employers to accrue the cost of such retirement benefits during the employees' service with the Company. FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign operations have been translated at current exchange rates, and related revenues and expenses have been translated at average rates of exchange in effect during the year. Resulting cumulative translation adjustments have been included in shareholder's equity. FINANCIAL INSTRUMENTS The Minerals Group uses foreign currency forward contracts to hedge risk of changes in foreign currency rates associated with certain transactions denominated in Australian dollars. Realized and unrealized gains and losses on these contracts, designated and effective as hedges are deferred and recognized as part of the specific transaction hedged. The Minerals Group hedges against downward movements in gold prices principally through the use of forward sales contracts as well as interest rate changes on certain variable rate debt. Gains and losses on these contracts, designated and effective as hedges, are deferred and recognized as part of the transaction hedged. REVENUE RECOGNITION Coal sales are generally recognized when coal is loaded onto transportation vehicles for shipment to customers. For domestic sales, this generally occurs when coal is loaded onto railcars at mine locations. For export sales, this generally occurs when coal is loaded onto marine vessels at terminal facilities. Gold sales are recognized when products are shipped to a refinery. Settlement adjustments arising from final determination of weights and assays are reflected in sales when received. NET INCOME PER COMMON SHARE The computation of primary earnings per share is based on the weighted average number of outstanding common shares divided into net income less preferred stock dividends. The computation of fully diluted earnings per common share assumes the conversion of the $31.25 Series C Cumulative Preferred Stock (issued in 1994) and additional shares assuming the exercise of stock options (antidilutive in the primary calculation) divided into net income. For 1994 and 1993, the loss per share, assuming full dilution, is considered to be the same as primary since the effect of common stock equivalents and the preferred stock conversion would be antidilutive. The shares of Minerals Stock held in The Pittston Company Employee Benefits Trust are evaluated for inclusion in the calculation of net income per share under the treasury stock method and had no dilutive effect.
USE OF ESTIMATES In accordance with generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements. Actual results could differ from those estimates. PENDING ACCOUNTING CHANGES The Minerals Group is required to implement a new accounting standard, Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", in 1996. SFAS No. 121 requires companies to review long-lived assets and certain identifiable intangibles to be held and used by an entity for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 121 requires companies to utilize a two-step approach to determining whether impairment of such assets has occurred and, if so, the amount of such impairment. Although the Minerals Group is still reviewing the impact of adopting SFAS No. 121, it is estimated that the Minerals Group will incur a pretax charge to earnings of $25,000 to $30,000 as of January 1, 1996. The Minerals Group is required to implement a new accounting standard, SFAS No. 123, "Accounting for Stock Based Compensation", in 1996. SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. Although SFAS No. 123 encourages adoption of a fair value based method of accounting for all employee stock compensation plans, it allows entities to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees with disclosure of net income and earnings per share as if the fair value based method of accounting is applied. The Minerals Group expects to continue to account for its stock compensation plans according to APB No. 25 with the disclosure of the impact on net income and earnings per share as if the fair value based method of accounting is applied. 125
2. RELATED PARTY TRANSACTIONS The following policies may be modified or rescinded by action of the Company's Board of Directors (the Board"), or the Board may adopt additional policies, without approval of the shareholders of the Company, although the Board has no present intention to do so. The Company allocated certain corporate general and administrative expenses, net interest expense and related assets and liabilities in accordance with the policies described below. Corporate assets and liabilities are primarily cash, deferred pension assets, income taxes and accrued liabilities. FINANCIAL As a matter of policy, the Company manages most financial activities of the Minerals Group, the Brink's Group and the Burlington Group on a centralized, consolidated basis. Such financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt; the issuance and repurchase of common stock and the payment of dividends. In preparing these financial statements, transactions primarily related to invested cash, short-term and long-term debt (including convertible debt), related net interest and other financial costs have been attributed to the Minerals Group based upon its cash flows for the periods presented after giving consideration to the debt and equity structure of the Company. At December 31, 1995 and 1994, the Company attributed long-term debt to the Minerals Group based upon the purpose for the debt in addition to the cash flow requirements of the Minerals Group. See Note 9 for details and amount of long-term debt. The portion of the Company's interest expense allocated to the Minerals Group for 1995, 1994 and 1993 was $6,335, $4,448 and $359, respectively. Management believes such method of allocation to be equitable and a reasonable estimate of the cost attributable to the Minerals Group. To the extent borrowings are deemed to occur between the Brink's Group, Burlington Group and the Minerals Group, intergroup accounts have been established bearing interest at the rate in effect from time to time under the Company's unsecured credit lines or, if no such credit lines exist, at the prime rate charged by Chemical Bank from time to time. At December 31, 1995, the Minerals Group owed the Brink's Group and Burlington Group $17,945 and $19,910, respectively, and at December 31, 1994, the Minerals Group owed the Brink's Group and Burlington Group $5,705 and $42,465, respectively, as a result of borrowings.
INCOME TAXES The Minerals Group is included in the consolidated U.S. federal income tax return filed by the Company. The Company's consolidated provision and actual cash payments for U.S. federal income taxes are allocated between the Minerals Group, the Brink's Group and the Burlington Group in accordance with the Company's tax allocation policy and reflected in the financial statements for each Group. In general, the consolidated tax provision and related tax payments or refunds are allocated between the Groups, for financial statement purposes, based principally upon the financial income, taxable income, credits and other amounts directly related to the respective Group. Tax benefits that cannot be used by the Group generating such attributes, but can be utilized on a consolidated basis, are allocated to the Group that generated such benefits and an intergroup account is established for the benefit of the Group generating the attributes. As a result, the allocated Group amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if the Groups had filed separate tax returns. At December 31, 1995, the Minerals Group was owed $21,844 and $22,029 from the Brink's Group and the Burlington Group, respectively for such tax benefits, of which $7,844 and $8,029, respectively, were not expected to be received within one year from such dates in accordance with the policy. At December 31, 1994, the Minerals Group was owed $17,750 and $21,436 from the Brink's Group and the Burlington Group, respectively, for such tax benefits, of which $12,750 and $10,436, respectively, were not expected to be received within one year from such date. SHARED SERVICES A portion of the Company's corporate general and administrative expenses and other shared services has been allocated to the Minerals Group based upon utilization and other methods and criteria which management believes to be equitable and a reasonable estimate of the cost attributable to the Minerals Group. These allocations were $7,266, $6,845 and $7,218 in 1995, 1994 and 1993, respectively. PENSION The Minerals Group's pension cost related to its participation in the Company's noncontributory defined benefit pension plan is actuarially determined based on its respective employees and an allocable share of the pension plan assets and calculated in accordance with Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions ("SFAS 87"). Pension plan assets have been allocated to the Minerals Group 126
based on the percentage of its projected benefit obligation to the plan's total projected benefit obligation. Management believes such method of allocation to be equitable and a reasonable estimate of the cost attributable to the Minerals Group. 3. SHAREHOLDER'S EQUITY The following analyzes shareholder's equity of the Minerals Group for the periods presented: 1995 1994 1993 - ---------------------------------------------------------------------------- Balance at beginning of period $ (8,596) (24,857) 12,302 Net income (loss) 14,024 (52,948) (32,980) Stock options exercised 1,202 1,765 2,633 Stock released from employee benefits trust to employee benefits plan 1,744 713 378 Stock sold from employee benefits trust to employee benefits plan -- -- 44 Issuance of $31.25 Series C Cumulative Preferred Stock, net of cash expenses -- 77,082 -- Stock sold to Brink's/Burlington Groups -- 253 48 Stock repurchases (7,171) (3,767) (591) Dividends declared (9,493) (9,165) (4,583) Costs of Services Stock Proposal -- (2) (1,599) Foreign currency translation adjustment (566) 1,712 (215) Tax benefit of options exercised 177 617 602 Conversion of debt -- 1 -- Net cash (to) from the Company -- -- (896) - ---------------------------------------------------------------------------- Balance at end of period $ (8,679) (8,596) (24,857) ============================================================================= Included in shareholder's equity is the cumulative foreign currency translation adjustment of $60, $626 and ($1,086) at December 31, 1995, 1994 and 1993, respectively. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at cost consist of the following: December 31 1995 1994 - --------------------------------------------------------- Bituminous coal lands $109,400 102,392 Land, other than coal lands 21,649 25,555 Buildings 9,204 8,444 Machinery and equipment 225,744 244,009 - --------------------------------------------------------- Total $365,997 380,400 ========================================================= The estimated useful lives for property, plant and equipment are as follows: Years - --------------------------------------------------- Buildings 10 to 40 Machinery and equipment 3 to 30
Depreciation and depletion of property, plant and equipment aggregated $25,164 in 1995, $27,481 in 1994 and $23,245 in 1993. Mine development costs which were capitalized totaled $10,118 in 1995, $11,908 in 1994 and $2,181 in 1993. 5. ACCOUNTS RECEIVABLE -- TRADE For each of the years in the three-year period ended December 31, 1995, the Company, on behalf of the Minerals Group maintained agreements with financial institutions whereby it had the right to sell certain coal receivables to those institutions. Certain agreements contained provisions for sales with recourse and other agreements had limited recourse. In 1995 and 1993 total coal receivables of approximately $25,092 and $16,143, respectively, were sold under such agreements. No receivables were sold in 1994. As of December 31, 1995, receivables sold which remained to be collected totaled $5,222. 6. INTANGIBLES Intangibles consist entirely of the excess of cost over fair value of net assets of companies acquired and are net of accumulated amortization of $5,906 at December 31, 1995 and $2,806 at December 31, 1994. The estimated useful life of intangibles is generally forty years. Amortization of intangibles aggregated $3,099 in 1995, $2,642 in 1994 and $43 in 1993. 7. FINANCIAL INSTRUMENTS Financial instruments which potentially subject the Minerals Group to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and trade receivables. The Minerals Group's cash and cash equivalents and short-term investments are placed with high credit quality financial institutions. Also, by policy, the amount of credit exposure to any one financial institution is limited. The Minerals Group makes substantial sales to relatively few large customers. Credit limits, ongoing credit evaluation and account monitoring procedures are utilized to minimize the risk of loss from nonperformance on trade receivables. 127
The following details the fair values of financial instruments for which it is practicable to estimate the value: CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The carrying amounts approximate fair value because of the short maturity of these instruments. DEBT The aggregate fair value of the Minerals Group's long term debt obligations, which is based upon quoted market prices and rates currently available to the Company for debt with similar terms and maturities, approximates the carrying amount. OFF-BALANCE SHEET INSTRUMENTS The Minerals Group utilizes off-balance sheet financial instruments, as discussed below, to hedge its market exposures. The risk that counterparties to these contracts may be unable to perform is minimized by limiting the counterparties to major financial institutions. The Minerals Group does not expect any losses due to such counterparty default. Foreign currency forward contracts -- The Minerals Group enters into foreign currency forward contracts with a duration of up to 360 days as a hedge against liabilities denominated in various currencies. These contracts do not subject the Minerals Group to risk due to exchange rate movements because gains and losses on these contracts offset losses and gains on the liabilities being hedged. At December 31, 1995, the total notional value of foreign currency forward contracts outstanding was $4,347. As of such date, the fair value of foreign currency forward contracts was not significant. Gold contracts -- In order to protect itself against downward movements in gold prices, the Minerals Group hedges a portion of its recoverable proved and probable reserves primarily through forward sales contracts. At December 31, 1995, 51,865 ounces of gold, representing approximately 25% of the Minerals Group's recoverable proved and probable reserves, were sold forward under forward sales contracts that mature periodically through mid-1998, with a notional value of $22,947. Because only a portion of its future production is currently sold forward, the Minerals Group can take advantage of increases, if any, in the spot price of gold. At December 31, 1995, the fair value of the Minerals Group's forward sales contracts amounted to $1,336.
Interest rate contracts -- As discussed further in Note 9, in 1994 and 1995, the Company entered into variable to fixed interest rate swap agreements with a notional amount at December 31, 1995, aggregating $55,000. Fair value at December 31, 1995 was insignificant. These contracts have been attributed to the Minerals Group. 8. INCOME TAXES The provision (credit) for income taxes consists of the following: U.S. Federal Foreign State Total - --------------------------------------------------------------------------------- 1995: Current $(25,432) -- -- (25,432) Deferred 15,664 748 -- 16,412 - --------------------------------------------------------------------------------- Total $ (9,768) 748 -- (9,020) ================================================================================= 1994: Current $(26,599) 50 -- (26,549) Deferred (17,954) 1,008 97 (16,849) - --------------------------------------------------------------------------------- Total $(44,553) 1,058 97 (43,398) ================================================================================= 1993: Current $ (7,539) 38 569 (6,932) Deferred (20,358) (3,100) (1,642) (25,100) - --------------------------------------------------------------------------------- Total $(27,897) (3,062) (1,073) (32,032) ================================================================================= The significant components of the deferred tax expense (benefit) were as follows: 1995 1994 1993 - --------------------------------------------------------------------------------------- Deferred tax expense (benefit), exclusive of the components listed below $ 17,038 (13,733) (25,490) Net operating loss carryforwards (631) (595) (273) Alternative minimum tax credit (326) (1,021) 3,531 Change in the valuation allowance for deferred tax assets 331 (1,500) (1,368) Adjustment to deferred tax assets and liabilities for the change in the U.S. federal tax rate -- -- (1,500) - --------------------------------------------------------------------------------------- Total $ 16,412 (16,849) (25,100) ======================================================================================= The tax benefit for compensation expense related to the exercise of certain employee stock options for tax purposes in excess of compensation expense for financial reporting purposes is recognized as an adjustment to shareholder's equity. 128
The components of the net deferred tax asset as of December 31, 1995, and December 31, 1994, were as follows: 1995 1994 - ---------------------------------------------------------------------------------- Deferred tax assets: Accounts receivable $ 778 844 Postretirement benefits other than pensions 92,649 91,704 Workers' compensation and other claims 50,157 51,492 Other liabilities and reserves 77,390 81,833 Miscellaneous 8,505 8,636 Net operating loss carryforwards 2,908 2,277 Alternative minimum tax credits 10,895 10,486 Valuation allowance (8,446) (8,115) - ---------------------------------------------------------------------------------- Total deferred tax asset 234,836 239,157 - ---------------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment 29,959 32,245 Pension assets 32,152 30,827 Other assets 9,321 990 Miscellaneous 52,028 46,625 - ---------------------------------------------------------------------------------- Total deferred tax liability 123,460 110,687 - ---------------------------------------------------------------------------------- Net deferred tax asset $ 111,376 128,470 ================================================================================== The recording of net deferred federal tax assets is based upon their expected utilization in the Company's consolidated federal income tax return and the benefit that would accrue to the Minerals Group under the Company's tax allocation policy. The valuation allowance relates to deferred tax assets in certain foreign and state jurisdictions. The following table accounts for the difference between the actual tax provision and the amounts obtained by applying the statutory U.S. federal income tax rate of 35% in 1995, 1994 and 1993 to the income (loss) before income taxes. Year Ended December 31 1995 1994 1993 - ----------------------------------------------------------------------------------- Income (loss) before income taxes: United States $ 3,539 (99,400) (58,149) Foreign 1,465 3,054 (6,863) - ----------------------------------------------------------------------------------- Total $ 5,004 (96,346) (65,012) =================================================================================== Tax provision computed at statutory rate $ 1,751 (33,721) (22,754) Increases (reductions) in taxes due to: Percentage depletion (9,861) (9,313) (7,598) State income taxes (net of federal tax benefit) (726) 1,563 (448) Change in the valuation allowance for deferred tax assets 331 (1,500) (1,368) Adjustment to deferred tax assets and liabilities for the change in the U.S. federal tax rate -- -- (1,500) Miscellaneous (515) (427) 1,636 - ----------------------------------------------------------------------------------- Actual tax provision (credit) $(9,020) (43,398) (32,032) ==================================================================================== It is the policy of the Minerals Group to accrue deferred income taxes on temporary differences related to the financial statement carrying amounts and tax bases of investments in foreign subsidiaries and affiliates which are expected to reverse in the foreseeable future. As of December 31, 1995 and December 31, 1994, there was no unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries and affiliates.
The Minerals Group is included in the Company's consolidated U.S. federal income tax return. As of December 31, 1995, the Minerals Group had $10,895 of alternative minimum tax credits allocated to it under the Company's tax allocation policy. Such credits are available to offset future U.S. federal income taxes and, under current tax law, the carryforward period for such credits is unlimited. The tax benefit of net operating loss carryforwards for the Minerals Group as at December 31, 1995 was $2,908 and related to various state and foreign taxing jurisdictions. The expiration periods primarily range from 5 to 15 years. 9. LONG-TERM DEBT A portion of the outstanding debt under the Company's credit agreement has been attributed to the Minerals Group. Total long-term debt of the Minerals Group consists of the following: As of December 31 1995 1994 - ----------------------------------------------------------------------------------- Senior obligations $ 413 327 Obligations under capital leases (average rates 6.22% in 1995 and 6.27% in 1994) 378 1,882 - ----------------------------------------------------------------------------------- 791 2,209 - ----------------------------------------------------------------------------------- Attributed portion of Company's debt U.S. dollar term loan due 2000 (year end rate 6.56% in 1995 and 6.49% in 1994) 100,000 76,566 Revolving credit notes due 2000 (year end rate 5.75% in 1994) -- 9,400 - ----------------------------------------------------------------------------------- Total long-term debt, less current maturities $100,791 88,175 ==================================================================================== For the four years through December 31, 2000, minimum repayments of long-term debt outstanding are as follows: 1997 $ 175 1998 320 1999 61 2000 100,049 In March 1994, the Company entered into a $350,000 credit agreement with a syndicate of banks (the "Facility"). The Facility included a $100,000 five-year term loan, which originally matured in March 1999. The Facility also permitted additional borrowings, repayments and reborrowings of up to $250,000 until March 1999. In March 1995, the Facility was amended to extend the maturity of the term loan to May 2000 and to permit the additional borrowings, repayments and reborrowings until May 2000. Interest on borrowings under the Facility is payable at rates based on prime, certificate of deposit, Eurodollar or money market rates. At December 31, 1995, the $100,000 term loan under the Facility was attributed to the Minerals Group. At December 31, 1995, there were no additional borrowings outstanding under the remainder of the Facility. 129
In 1994, the Company entered into a standard three year variable to fixed interest rate swap agreement on a portion of the Company's U.S. dollar term loan. This agreement fixed the Company's interest rate at 5% on initial borrowings of $40,000 in principal. The principal amount to which the 5% interest rate applies declines periodically throughout the term of the agreement and at December 31, 1995, this rate applied to borrowings of $25,000 in principal. In addition, during 1995, the Company entered into two other variable to fixed interest rate swap agreements. One agreement fixes the Company's interest rate at 5.80% on $20,000 in principal for a term of three years. The other agreement fixes the Company's interest rate at 5.66% for a term of 21 months on $10,000 in principal, which increases to $20,000 during the term. These agreements have been attributed to the Minerals Group. Under the terms of some of its debt instruments, the Company has agreed to various restrictions relating to the payment of dividends, the repurchase of capital stock, the maintenance of consolidated net worth, and the amount of additional funded debt which may be incurred. See the Company's consolidated financial statements and related footnotes. At December 31, 1995, the Company's portion of outstanding unsecured letters of credit allocated to the Minerals Group was $33,654, primarily supporting its obligations under its various self-insurance programs. 10. STOCK OPTIONS The Company grants options under its 1988 Stock Option Plan (the "1988 Plan") to executives and key employees and under its Non-Employee Directors' Stock Option Plan (the "Non-Employee Plan") to outside directors to purchase common stock at a price not less than 100% of quoted market value at date of grant. As part of the Services Stock Proposal (Note 1), the 1988 and the Non-Employee Plans were amended to permit option grants to be made to optionees with respect to either Services Stock or Minerals Stock, or both. The Company's 1979 Stock Option Plan (the "1979 Plan") and 1985 Stock Option Plan (the "1985 Plan") terminated in 1985 and 1988, respectively, except as to options still outstanding. Upon approval of the Services Stock Proposal in 1993, a total of 2,228,225 shares of common stock were subject to options outstanding under the 1988 Plan, the Non-Employee Plan, the 1979 Plan and the 1985 Plan. Pursuant to antidilution provisions in the option agreements covering such options, the Company converted these options into options for shares of Services Stock or Minerals Stock, or both, depending primarily on the employment status and responsibilities of the particular optionee. In the case of optionees having Company-wide responsibilities, each outstanding option was converted into an options for both Services Stock and Minerals Stock. In the case of other optionees, each outstanding option was converted into a new option for only Services Stock or Minerals Stock, as the case may be. As a result, 2,167,247 shares of Services Stock and 507,698 shares of Minerals Stock were subject to options outstanding as of the effective date of the Services Stock Proposal.
The table below summarizes the related plan activity. Aggregate No. of Option Shares Price - ---------------------------------------------------------------------- THE PITTSTON COMPANY COMMON STOCK OPTIONS: Granted: 1993 17,500 $ 294 Became exercisable: 1993 468,250 7,749 Exercised: 1993 377,191 5,379 PITTSTON MINERALS GROUP COMMON STOCK OPTIONS: Outstanding: 12/31/95 597,797 9,359 12/31/94 507,323 9,571 12/31/93 623,498 11,023 Granted: 1995 258,300 2,665 1994 23,000 431 1993 252,000 6,094 Became exercisable: 1995 53,617 1,160 1994 108,259 1,978 1993 3,575 50 Exercised: 1995 95,129 1,203 1994 128,667 1,765 1993 134,528 1,738 At December 31, 1995, total of 214,163 shares of Minerals Stock were exercisable. In addition, there were 629,279 shares of Minerals Stock reserved for issuance under the plans, including 31,482 shares of Minerals Stock reserved for future grant. The approval of the Brink's Stock Proposal had no affect on options for Minerals Stock. 11. CAPITAL STOCK The Company, at any time, has the right to exchange each outstanding share of Burlington Stock for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Minerals Stock) having a fair market value equal to 115% of the fair market value of one share of Burlington Stock. In addition, upon the disposition of all or substantially all of the properties and assets of the Burlington Group to any person (with certain exceptions), the Company is required to exchange each outstanding share 130
of Burlington Stock for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Minerals Stock) having a fair market value equal to 115% of the fair market value of one share of Burlington Stock. The Company, at any time, has the right to exchange each outstanding share of Minerals Stock, which was previously subject to exchange for shares of Services Stock, for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Burlington Stock) having a fair market value equal to 115% of the fair market value of one share of Minerals Stock. In addition, upon the disposition of all or substantially all of the properties and assets of the Minerals Group to any person (with certain exceptions), the Company is required to exchange each outstanding share of Minerals Stock for shares of Brink's Stock (or, if no Brink's Stock is then outstanding, Burlington Stock) having a fair market value equal to 115% of the fair market value of one share of Minerals Stock. If any shares of the Company's Preferred Stock are converted after an exchange of Minerals Stock for Brink's Stock (or Burlington Stock), the holder of such Preferred Stock would, upon conversion, receive shares of Brink's Stock (or Burlington Stock) in lieu of shares of Minerals Stock otherwise issuable upon such conversion. Holders of Brink's Stock at all times have one vote per share. Holders of Burlington Stock and Minerals Stock have one and 0.626 votes per share, respectively, subject to adjustment on January 1, 1998, and on each January 1 every two years thereafter in such a manner so that each class' share of the aggregate voting power at such time will be equal to that class' share of the aggregate market capitalization of the Company's common stock at such time. Accordingly, on each adjustment date, each share of Burlington Stock and Minerals Stock may have more than, less than or continue to have the number of votes per share as they have. Holders of Brink's Stock, Burlington Stock and Minerals Stock vote together as a single voting group on all matters as to which all common shareholders are entitled to vote. In addition, as prescribed by Virginia law, certain amendments to the Articles of Incorporation affecting, among other things, the designation, rights, preferences or limitations of one class of common stock, or certain mergers or statutory share exchanges, must be approved by the holders of such class of common stock, voting as a group, and, in certain circumstances, may also have to be approved by the holders of the other classes of common stock, voting as separate voting groups.
In the event of a dissolution, liquidation or winding up of the Company, the holders of Brink's Stock, Burlington Stock and Minerals Stock, effective January 19, 1996, share on a per share basis an aggregate amount equal to 55%, 28% and 17%, respectively, of the funds, if any, remaining for distribution to the common shareholders. In the case of Minerals Stock, such percentage has been set, using a nominal number of shares of Minerals Stock of 4,202,954 (the "Nominal Shares") in excess of the actual number of shares of Minerals Stock outstanding, to ensure that the holders of Minerals Stock are entitled to the same share of any such funds immediately following the consummation of the transactions as they were prior thereto. These liquidation percentages are subject to adjustment in proportion to the relative change in the total number of shares of Brink's Stock, Burlington Stock and Minerals Stock, as the case may be, then outstanding to the total number of shares of all other classes of common stock then outstanding (which totals, in the case of Minerals Stock, shall include the Nominal Shares). In conjunction with the Services Stock Proposal, the Board of Directors (the "Board") authorized the repurchase of up to 1,250,000 shares of Services Stock and 250,000 shares of Minerals Stock from time to time in the open market or in private transactions, as conditions warrant, not to exceed an aggregate purchase price of $43,000. In November 1995, the Board authorized an increase in the remaining purchase authority for Minerals Stock to 1,000,000 shares and the purchase, subject to shareholder approval of the Brink's Stock Proposal, of up to 1,500,000 shares of Brink's Stock and up to 1,500,000 shares of Burlington Stock, no to exceed an aggregate purchase price of $45,000 for all common shares of the Company. Prior to this increased authorization, 117,300 shares of Minerals Stock at an aggregate cost of $1,720 were repurchased, of which 78,800 shares at a total cost of $912 were purchased in 1995, 19,700 shares at a total cost of $401 were purchased in 1994 and 18,800 shares at a total cost of $407 were purchased in 1993. No additional repurchases of Minerals Stock were made during the remainder of 1995 subsequent to the increased authorization. The program to acquire shares remains in effect in 1996. In January 1994, the Company issued 161,000 shares of its $31.25 Series C Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock"). The proceeds of the Convertible Preferred Stock offering have been attributed to the Minerals Group. The Convertible Preferred Stock pays an annual cumulative dividend of $31.25 per share payable quarterly, in 131
cash, in arrears, out of all funds of the Company legally available therefore, when as and if declared by the Board, and bears a liquidation preference of $500 per share, plus an amount equal to accrued and unpaid dividends thereon. Each share of the Convertible Preferred Stock is convertible at the option of the holder unless previously redeemed or, under certain circumstances, called for redemption, into shares of Minerals Stock at a conversion price of $32.175 per share of Minerals Stock, subject to adjustment in certain circumstances. Except under certain circumstances, the Convertible Preferred Stock is not redeemable prior to February 1, 1997. On and after such date, the Company may, at its option, redeem the Convertible Preferred Stock, in whole or in part, for cash initially at a price of $521.875 per share, and thereafter at prices declining ratable annually on each February 1 to an amount equal to $500 per share on and after February 1, 2004, plus in each case and amount equal to accrued and unpaid dividends on the date of redemption. Except under certain circumstances or as prescribed by Virginia law, shares of the Convertible Preferred Stock are nonvoting. The voting rights of the Preferred Stock were not affected by the Brink's Stock Proposal. Prior to an increase in November 1995 in the remaining authorization to repurchase from time to time up to $15,000 of its Convertible Preferred Stock, under a repurchase program, 24,720 shares at a total cost of $9,624 had been repurchased, of which 16,370 shares at a total cost of $6,258 were purchased in 1995. No additional share repurchases were made during the remainder of 1995 subsequent to the increased authorization. See Note 9 to the Company's consolidated financial statements. Dividends paid on the Company's Convertible Preferred Stock commenced on March 1, 1994. In 1995 and 1994, dividends paid on such stock were $4,397 and $4,230, respectively. Preferred dividends included on the Minerals Group's Statements of Operations for the years ended December 31, 1995 and 1994 are net of $1,593 and $632, respectively, which was the excess of the carrying amount of the Convertible Preferred Stock over the cash paid to holders of the stock for repurchases made during each year. The Company's Articles of Incorporation limits dividends on Minerals Stock to the lesser of (i) all funds of the Company legally available therefore (as prescribed by Virginia law) and (ii) the Available Minerals Dividend Amount (as defined in the Articles of Incorporation). At December 31, 1995, the Available Minerals Dividend Amount was at least $24,870. Dividends on Minerals Stock are also restricted by covenants in the Company's public indentures and bank credit agreements. See the Company's consolidated financial statements and related footnotes. Subject to these limitations, the Company's Board, although there is no requirement to do so, intends to declare and pay dividends on the Minerals Stock based primarily on the earnings, financial condition, cash flow and business requirements of the Minerals Group.
In December 1992, the Company formed The Pittston Company Employee Benefits Trust (the 'Trust") to hold shares of its common stock to fund obligations under certain employee benefits programs. Upon formation of the Trust, the Company sold for a promissory note of the Trust, 4,000,000 new shares of its common stock to the Trust at a price equal to the fair value of the stock on the date of sale. Upon approval of the Services Stock Proposal, 3,871,826 shares in the Trust were redesignated as Services Stock and 774,365 shares of Minerals Stock were distributed to the Trust. At December 31, 1995, 594,461 shares of Minerals Stock (723,218 in 1994) remained in the Trust, valued at market. The value of these shares has no impact on shareholder's equity. 12. ACQUISITIONS During 1995, the Minerals Group acquired one small business for a purchase price of $556, including debt of $200. The acquisition was accounted for as a purchase; accordingly, the purchase price was allocated to the underlying assets and liabilities based on the estimated fair value at the date of acquisition. The fair value of the assets acquired was $1,122 and liabilities assumed was $566. The purchase price was equal to the fair value of net assets acquired. In addition, during 1995, the Minerals Group made an installment payment of $722 for an acquisition made in prior years. During 1994, a wholly owned indirect subsidiary of the Minerals Group completed the acquisition of substantially all of the coal mining operations and coal supply contracts of Addington Resources, Inc. for $157,324. The acquisition has been accounted for as a purchase; accordingly, the purchase price has been allocated to the underlying assets and liabilities based on their respective estimated fair values at the date of acquisition. The fair value of assets acquired was $173,959 and liabilities assumed was $138,518. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was $121,883 and is being amortized over a period of forty years. The acquisition was financed by the issuance of $80,500 of Convertible Preferred Stock (Note 1) and additional borrowings under existing credit facilities. In March 1994, the additional debt incurred for this acquisition was refinanced with a portion of the proceeds from the five-year term loan (Note 9). 132
During 1993, the Minerals Group made installment and contingency payments related to acquisitions consummated in prior years. Total consideration paid was $699. The results of operations of the companies acquired in 1995 and 1994 have been included in the Minerals Group's results of operations from their date of acquisition. 13. COAL JOINT VENTURE The Minerals Group, through a wholly owned indirect subsidiary of the Company, entered into a partnership agreement in 1982 with four other coal companies to construct and operate coal port facilities in Newport News, Virginia, in the Port of Hampton Roads (the "Facilities"). The Facilities commenced operations in 1984, and now have an annual throughput capacity of 22 million tons, with a ground storage capacity of approximately 2 million tons. The Minerals Group initially had an indirect 25% interest in the partnership, Dominion Terminal Associates ("DTA"). Initial financing of the Facilities was accomplished through the issuance of $135,000 principal amount of revenue bonds by the Peninsula Ports Authority of Virginia (the "Authority"), which is a political subdivision of the Commonwealth of Virginia. In 1987, the original revenue bonds were refinanced by the issuance of $132,800 of coal terminal revenue refunding bonds of which two series of these bonds in the aggregate principal amount of $33,200 were attributable to the Minerals Group. In 1990, the Minerals Group acquired an additional indirect 7 1/2% interest in DTA for cash of $3,055 plus the assumption of bond indebtedness, increasing its ownership to 32 1/2%. With the increase in ownership, $9,960 of the remaining four additional series of the revenue refunding bonds of $99,600 became attributable to the Minerals Group. In November 1992, all bonds attributable to the Minerals Group were refinanced with the issuance of a new series of coal terminal revenue refunding bonds in the aggregate principal amount of $43,160. The new series of bonds bear a fixed interest rate of 7 3/8%. The Authority owns the Facilities and leases them to DTA for the life of the bonds, which mature on June 1, 2020. DTA may purchase the facilities for $1 at the end of the lease term. The obligations of the partners are several, and not joint. Under loan agreements with the Authority, DTA is obligated to make payments sufficient to provide for the timely payment of the principal of and interest on the bonds of the new series. Under a throughput and handling agreement, the Minerals Group has agreed to make payments to DTA that in the aggregate will provide DTA with sufficient funds to make the payments due under the loan agreements and to pay the Minerals Group's share of the operating costs of the Facilities. The Company has also unconditionally guaranteed the payment of the principal of and premium, if any, and the interest on the new series of bonds. Payments for operating costs aggregated $6,841 in 1995, $7,173 in 1994 and $7,949 in 1993. The Minerals Group has the right to use 32 1/2% of the throughput and storage capacity of the Facilities subject to user rights of third parties which pay the Minerals Group a fee. The Minerals Group pays throughput and storage charges based on actual usage at per ton rates determined by DTA.
14. LEASES The Minerals Group's businesses lease coal mining and other equipment under long-term operating leases with varying terms, and most of the leases contain renewal and/or purchase options. As of December 31, 1995, aggregate future minimum lease payments under noncancellable operating leases were as follows: Equipment Facilities & Other Total - ----------------------------------------------------- 1996 $ 773 21,678 22,451 1997 798 15,649 16,447 1998 796 9,865 10,661 1999 778 3,685 4,463 2000 745 791 1,536 2001 455 75 530 2002 2 -- 2 2003 2 -- 2 2004 2 -- 2 2005 2 -- 2 Later Years 2 -- 2 - ----------------------------------------------------- Total $4,355 51,743 56,098 ===================================================== There are no noncancellable sublease rentals. Almost all of the above amounts related to equipment are guaranteed by the Company. Rent expense amounted to $34,363 in 1995, $35,583 in 1994 and $24,854 in 1993 and is net of sublease rentals of $12 in 1995 and $69 in 1994 and 1993. In 1995, the Minerals Group incurred capital lease obligations of $12. In 1994, the Minerals Group incurred capital lease obligations of $746 and assumed capital lease obligations of $16,210 as part of the acquisition of the coal operations of Addington Resources, Inc., (Note 12). As of December 31, 1995, the Minerals Group's obligations under capital leases were not significant. 15. EMPLOYEE BENEFIT PLANS The Minerals Group's businesses participate in the Company's noncontributory defined benefit pension plan covering substantially all nonunion employees who meet certain minimum requirements. Benefits under the plan are based on salary and years of service. The Minerals Group's pension cost is actuarially determined based on its employees and an allocable 133
share of the pension plan assets. The Company's policy is to fund the actuarially determined amounts necessary to provide assets sufficient to meet the benefits to be paid to plan participants in accordance with applicable regulations. The net pension credit for 1995, 1994 and 1993 for the Minerals Group is as follows: Year Ended December 31 1995 1994 1993 - ----------------------------------------------------------------------------------- Service cost benefits earned during year $ 3,306 3,609 2,772 Interest cost on projected benefit obligation 9,548 9,024 8,873 Loss (return) on assets actual (38,005) 1,664 (20,347) (Loss) return on assets deferred 22,199 (16,978) 6,317 Other amortization, net 7 2,270 -- - ----------------------------------------------------------------------------------- Net pension credit $ (2,945) (411) (2,385) =================================================================================== The assumptions used in determining the net pension credit for the Company's major pension plan were as follows: 1995 1994 1993 - --------------------------------------------------------------------------------- Interest cost on projected benefit obligation 8.75% 7.5% 9.0% Expected long-term rate of return on assets 10.0% 10.0% 10.0% Rae of increase in compensation levels 4.0% 4.0% 5.0% The Minerals Group's allocated funded status and deferred pension assets at December 31, 1995 and 1994 are as follows: 1995 1994 - ----------------------------------------------------------------------------------- Actuarial present value of accumulated benefit obligation: Vested $121,632 94,237 Nonvested 3,838 4,012 - ----------------------------------------------------------------------------------- 125,470 98,249 Benefits attributable to projected salaries 11,512 11,499 - ----------------------------------------------------------------------------------- Projected benefit obligation 136,982 109,748 Plan assets at fair value 187,537 157,847 - ----------------------------------------------------------------------------------- Excess of plan assets over projected benefit obligation 50,555 48,099 Unrecognized experience loss 27,307 26,517 Unrecognized prior service cost 273 271 - ----------------------------------------------------------------------------------- Net pension assets 78,135 74,887 Current pension liability 1,258 916 - ----------------------------------------------------------------------------------- Deferred pension asset per balance sheet $ 79,393 75,803 =================================================================================== For the valuation of pension obligations and the calculation of the funded status, the discount rate was 7.5% in 1995 and 8.75% in 1994. The expected long-term rate of return on assets was 10% in both years. The rate of increase in compensation levels used was 4% in 1995 and 1994. The unrecognized initial net asset at January 1, 1986, the date of adoption of SFAS 87, has been amortized over the estimated remaining average service life of the employees, which period ended at December 31, 1992. As of December 31, 1995, approximately 70% of plan assets were invested in equity securities and 30% in fixed income securities.
Under the 1990 collective bargaining agreement with the United Mine Workers of America ("UMWA"), the Minerals Group has made payments, based on hours worked, into escrow accounts established for the benefit of union employees (Note 19). The total amount accrued and escrowed by the Minerals Group's coal operations under this agreement as at December 31, 1995 and December 31, 1994, was $26,046 and $23,120, respectively. The amount escrowed and accrued is included in "Short-term investments" and "Miscellaneous accrued liabilities". The Minerals Group also provides certain postretirement health care and life insurance benefits for eligible active and retired employees in the United States. For the years 1995, 1994 and 1993, the components of periodic expense for these postretirement benefits were as follows: Year Ended December 31 1995 1994 1993 - ----------------------------------------------------------------------------------- Service cost benefits earned during year $ 1,523 2,141 2,513 Interest cost on accumulated post- retirement benefit obligation 19,510 20,948 21,060 Amortization of (gains) losses -- 2,806 402 - ----------------------------------------------------------------------------------- Total expense $21,033 25,895 23,975 =================================================================================== The interest costs on the accumulated postretirement benefit obligation were based upon rates of 8.75% in 1995, 7.5% in 1994 and 9% in 1993. At December 31, 1995 and 1994, the actuarial and recorded liabilities for these postretirement benefits, none of which have been funded, were as follows: 1995 1994 - ----------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 230,217 215,043 Fully eligible active plan participants 24,031 21,170 Other active plan participants 26,303 17,334 - ----------------------------------------------------------------------------------- 280,551 253,547 Unrecognized experience loss (48,197) (23,619) - ----------------------------------------------------------------------------------- Liability included on the balance sheet 232,354 229,928 Less current portion 18,647 16,951 - ----------------------------------------------------------------------------------- Noncurrent liability for postretirement health care and life insurance benefits $ 213,707 212,977 =================================================================================== The accumulated postretirement benefit obligation was determined using the unit credit method and an assumed discount rate of 7.5% in 1995 and 8.75% in 1994. The assumed health care cost trend rate used in 1995 was 9% for pre-65 retirees, grading down to 5% in the year 2001. For post-65 retirees, the assumed trend rate in 1995 was 7%, grading down to 5% in the year 2001. The assumed medicare cost trend rate used in 1995 was 7%, grading down to 5% in the year 2001. 134
A percentage point increase each year in the assumed health care cost trend rate used would have resulted in a $2,630 increase in the aggregate service and interest components of expense for the year 1995, and a $36,351 increase in the accumulated postretirement benefit obligation at December 31, 1995. The Minerals Group also participates in the Company's Savings-Investment Plan to assist eligible employees in providing for retirement or other future financial needs. Employee contributions are matched at rates of 50% and 100% up to 5% of compensation (subject to certain limitations imposed by the Internal Revenue Code of 1986, as amended). Contribution expense under the plan aggregated $1,204 in 1995, $1,468 in 1994 and $2,021 in 1993. In May 1994, the Company's shareholders approved the Employee Stock Purchase Plan effective July 1, 1994. As amended, upon approval of the Brink's Stock Proposal, eligible employees may elect to purchase shares of Brink's Stock, Burlington Stock and Minerals Stock at the lower of 85% of the fair market value as of specified dates. Under this plan, for the years ended December 31, 1995 and 1994, employees of the Company purchased 44,006 shares of Minerals Stock for $374 and 11,843 shares of Minerals Stock for $187, respectively. The Minerals Group sponsors other defined contribution plans and contributions under these plans aggregated $368 in 1995, $470 in 1994 and $475 in 1993. In October 1992, the Coal Industry Retiree Health Benefit Act of 1992 (the "Health Benefit Act") was enacted as part of the Energy Policy Act of 1992. The Health Benefit Act established rules for the payment of future health care benefits for thousands of retired union mine workers and their dependents. Part of the burden for these payments was shifted by the Health Benefit Act from certain coal producers, which had a contractual obligation to fund such payments, to producers such as the Company which have collective bargaining agreements with the UMWA that do not require such payments and to numerous other companies which are no longer in the coal business. The Health Benefit Act established a trust fund to which "signatory operators" and "related persons", including the Company and certain of its coal subsidiaries (the "Pittston Companies") are obligated to pay annual premiums for assigned beneficiaries, together with a pro rata share for certain beneficiaries who never worked for such employers ("unassigned beneficiaries"), in amounts determined by the Secretary of Health and Human Services on the basis set forth in the Health Benefit Act. For 1995, 1994 and 1993, these amounts, on a pretax basis, were approximately $10,800, $11,000 and $9,100, respectively. The Company believes that the annual liability under the Health Benefit Act for the Pittston Companies' assigned beneficiaries will continue at approximately $10,000 per year for the next several years and should begin to decline thereafter as the number of such assigned beneficiaries decreases.
Based on the number of beneficiaries actually assigned by the Social Security Administration, the Company estimates the aggregate pretax liability relating to the Pittston Companies' assigned beneficiaries at approximately $220,000, which when discounted at 7.5% provides a present value estimate of approximately $95,000. The ultimate obligation that will be incurred by the Company could be significantly affected by, among other things, increased medical costs, decreased number of beneficiaries, governmental funding arrangements and such federal health benefit legislation of general application as may be enacted. In addition, the Health Benefit Act requires the Pittston Companies to fund, pro rata according to the total number of assigned beneficiaries, a portion of the health benefits for unassigned beneficiaries. At this time, the funding for such health benefits is being provided from another source and for this and other reasons the Pittston Companies' ultimate obligation for the unassigned beneficiaries cannot be determined. The Company accounts for its obligations under the Health Benefit Act as a participant in a multi-employer plan and recognizes the annual cost on a pay-as-you-go basis. 16. RESTRUCTURING AND OTHER CHARGES, INCLUDING LITIGATION ACCRUAL The market for metallurgical coal, for most of the past fifteen years, has been characterized by weak demand from primary steel producers and intense competition from foreign coal producers, especially those in Australia and Canada. Metallurgical coal sales contracts typically are subject to annual price negotiations, which increase the risk of market forces. As a result of the continuing long-term decline in the metallurgical coal markets, which was further evidenced by significant price reductions in early 1994, Coal operations accelerated its strategy of decreasing its exposure to these markets. After a review of the economic viability of the remaining metallurgical coal assets in early 1994, management determined that four underground mines were no longer economically viable and should be closed resulting in significant economic impairment to three related preparation plants. In addition, it was determined that one surface steam coal mine, the Heartland mine, which provided coal to Alabama Power Company under a long-term sales agreement, would be closed due to rising costs caused by unfavorable geological conditions. 135
As a result of these decisions, the Minerals Group incurred a pretax charge of $90,806 ($58,116 after tax) in 1994 which included a reduction in the carrying value of these assets and related accruals for mine closure costs. These charges included assets writedowns of $46,487 which reduced the book carrying value of such assets to what management believes to be their net realizable value based on either estimated sales or leasing of such property to unrelated third parties. In addition, the charges included $3,836 for required lease payments owed to lessors for machinery and equipment that would be idled as a result of the mine and facility closures. The charges also included $19,290 for mine and plant closure costs which represented estimates for reclamation and other environmental costs to be incurred to bring the properties in compliance with federal and state mining and environmental laws. This accrual was required due to the premature closing of the mines. The accrual also included $21,193 in contractually or statutorily required employee severance and other benefit costs associated with termination of employees at these facilities and costs associated with inactive employees at these facilities. Such employee benefits included severance payments, medical insurance, workers' compensation and other benefits and have been calculated in accordance with contractually (collective bargaining agreements signed by certain coal subsidiaries included in the Company) and legally required employee severance and other benefits. Of the four underground mines, two ceased coal production in 1994. In 1994 the Company reached agreement with Alabama Power Company to transfer the coal sales contract serviced by the Heartland mine to another location in West Virginia. The Heartland mine ceased coal production during 1994 and final reclamation and environmental work is substantially complete. At the beginning of 1994, there were approximately 750 employees involved in operations at these facilities and other administrative support. Employment at these facilities has been reduced by 52% to approximately 360 employees at December 31, 1994 and by 81% to approximately 140 employees at December 31, 1995. Although coal production has or will cease at the mines contemplated in the accrual, the Minerals Group will incur reclamation and environmental costs for several years to bring these properties into compliance with federal and state environmental laws. In addition, employee termination and medical costs will continue to be incurred for several years after the facilities have been closed. The significant portion of these employee liabilities is for statutorily provided workers' compensation costs for inactive employees. Such benefits include indemnity and medical payments as required under state workers' compensation laws. The long payment periods are based on continued, and in some cases, lifetime indemnity and medical payments to injured former employees and their surviving spouses. Management believes that the charges incurred in 1994 should be sufficient to provide for these future costs and does not anticipate material additional future charges to operating earnings for these facilities, although continual cash funding will be required over the next several years.
In 1993 the Minerals Group incurred a pretax charge of $78,633 ($48,897 after tax) relating to mine closing costs including employee benefit costs and certain other noncash charges, together with previously reported litigation (the "Evergreen Case") brought against the Company and a number of its coal subsidiaries by the trustees of certain pension and benefit trust fund established under collective bargaining agreements with the UMWA (Note 18). These charges impacted Coal and Mineral Ventures' operating profit in the amounts of $70,713 and $7,920, respectively. The charge in the Mineral Ventures segment in 1993, related to the writedown of the Mineral Group's investment in the Uley graphite mine in Australia. Although reserve drilling of the Uley property indicates substantial graphite deposits, processing difficulties, depressed graphite prices which remained significantly below the level prevailing at the start of the project and an analysis of various technical and marketing conditions affecting the project resulted in the determination that the assets had been impaired and that loss recognition was appropriate. The charge included asset writedowns of $7,496 which reduced the carrying value of such assets to zero. The following table analyzes the changes in liabilities during the last three years for facility closure costs recorded as restructuring and other charges: Employee Mine Termination, Leased and Medical Machinery Plant and and Closure Severance Equipment Costs Costs Total - -------------------------------------------------------------------------------------------------- Balance January 1, 1993 (a) $1,146 35,499 35,413 72,058 Additions 2,782 1,598 6,267 10,647 Payments (b) 836 8,663 7,463 16,962 - -------------------------------------------------------------------------------------------------- Balance December 31, 1993 3,092 28,434 34,217 65,743 Additions 3,836 19,290 21,193 44,319 Payments (c) 3,141 9,468 12,038 24,647 - -------------------------------------------------------------------------------------------------- Balance December 31, 1994 3,787 38,256 43,372 85,415 Payments (d) 1,993 7,765 7,295 17,053 Other reductions (e) 576 1,508 -- 2,084 - -------------------------------------------------------------------------------------------------- Balance December 31, 1995 $1,218 28,983 36,077 66,278 ================================================================================================== (a) These amounts represent the remaining liabilities for facility closure costs recorded as restructuring and other charges in prior years. The original charges included $2,312 for leased machinery and equipment, $50,645 principally for incremental facility closing costs, including reclamation and $47,841 for employee benefit costs, primarily workers' compensation, which will continue to be paid for several years. (b) These amounts represent total cash payments made during the year for liabilities recorded in prior years. (c) Of the total payments made, in 1994, $8,672 was for liabilities recorded in years prior to 1993, $5,822 was for liabilities recorded in 1993 and $10,153 was for liabilities recorded in 1994. (d) Of the total payments made in 1995, $6,424 was for liabilities recorded in years prior to 1993, $2,486 was for liabilities recorded in 1993 and $8,143 was for liabilities recorded in 1994. (e) These amounts represent the assumption of liabilities by third parties as a result of sales transactions. 136
During the next twelve months, expected cash funding of these charges is approximately $15,000 to $20,000. Management estimates that the remaining liability for leased machinery and equipment will be fully paid over the next year. The liability for mine and plant closure costs is expected to be satisfied over the next ten years of which approximately 50% is expected to be paid over the next two years. The liability for employee related costs, which is primarily workers' compensation, is estimated to be 50% settled over the next four years with the balance paid during the following five to ten years. 17. OTHER INCOME AND EXPENSE Other operating income primarily includes royalty income and gains on sales of assets. 18. SEGMENT INFORMATION Net sales by geographic area are as follows: Year Ended December 31 1995 1994 1993 - ---------------------------------------------------------------------------------- United States: Domestic customers $467,479 512,875 359,748 Export customers in Europe 108,111 131,447 132,753 Export customers in Japan 67,145 71,937 84,195 Other export customers 63,516 63,245 95,548 - ---------------------------------------------------------------------------------- 706,251 779,504 672,244 Australia 16,600 15,494 14,845 - ---------------------------------------------------------------------------------- Total net sales $722,851 794,998 687,089 ================================================================================== The following is derived from the business segment information in the Company's consolidated financial statements as it relates to the Minerals Group. See Note 2, Related Party Transactions, for a description of the Company's policy for corporate allocations. The Minerals Group's portion of the Company's operating profit is as follows: Year Ended December 31 1995 1994 1993 - --------------------------------------------------------------------------------- United States * $ 21,752 (85,305) (49,157) Australia * 1,586 2,988 (7,391) - --------------------------------------------------------------------------------- Minerals Group's portion of the Company's segment operating profit 23,338 (82,317) (56,548) Corporate expenses allocated to the Minerals Group (7,266) (6,845) (7,218) - --------------------------------------------------------------------------------- Total operating profit (loss) $ 16,072 (89,162) (63,766) ================================================================================= * Operating profit (loss) includes restructuring and other charges, including litigation accrual aggregating $90,806 in 1994 all of which is included in the United States and $78,633 in 1993, of which $70,713 is included in the United States and $7,920 is included in Australia (Note 16).
The Minerals Group's portion of the Company's assets at year end is as follows: As of December 31 1995 1994 1993 - --------------------------------------------------------------------------------- United States $702,132 764,399 503,002 Australia 18,999 19,104 13,162 - --------------------------------------------------------------------------------- Minerals Group's portion of the Company's assets 721,131 783,503 516,164 Minerals Group's portion of corporate assets 77,478 84,009 90,083 - --------------------------------------------------------------------------------- Total assets $798,609 867,512 606,247 ================================================================================= Industry segment information is as follows: Year Ended December 31 1995 1994 1993 - --------------------------------------------------------------------------------- REVENUES: Coal $ 706,251 779,504 672,244 Mineral Ventures 16,600 15,494 14,845 - --------------------------------------------------------------------------------- Total revenues $ 722,851 794,998 687,089 ================================================================================= OPERATING PROFIT (LOSS): Coal * $ 23,131 (83,451) (48,246) Mineral Ventures * 207 1,134 (8,302) - --------------------------------------------------------------------------------- Segment operating profit (loss) 23,338 (82,317) (56,548) Allocated general corporate expense (7,266) (6,845) (7,218) - --------------------------------------------------------------------------------- Total operating profit (loss) $ 16,072 (89,162) (63,766) ================================================================================= * Operating profit (loss) of the Coal segment included restructuring and other charges, including litigation accrual of $90,806 in 1994 and $70,713 in 1993 (Note 16). Operating loss of the Mineral Ventures segment included restructuring and other charges of $7,920 in 1993 (Note 16). CAPITAL EXPENDITURES: Coal $ 17,811 25,016 15,499 Mineral Ventures 2,332 2,514 2,690 Allocated general corporate 168 90 47 - --------------------------------------------------------------------------------- Total capital expenditures $ 20,311 27,620 18,236 ================================================================================= DEPRECIATION, DEPLETION AND AMORTIZATION: Coal $ 40,285 44,731 25,679 Mineral Ventures 1,597 1,202 1,779 Allocated general corporate 158 141 133 - --------------------------------------------------------------------------------- Total depreciation, depletion and amortization $ 42,040 46,074 27,591 ================================================================================= ASSETS AT DECEMBER 31: Coal $699,049 761,827 499,494 Mineral Ventures 22,082 21,676 16,670 - --------------------------------------------------------------------------------- Identifiable assets 721,131 783,503 516,164 Allocated portion of the Company's corporate assets 77,478 84,009 90,083 - --------------------------------------------------------------------------------- Total assets $798,609 867,512 606,247 ================================================================================= In 1995, 1994 and 1993, net sales to one customer of the Coal segment amounted to $125,730, $111,830 and $106,253, respectively. 137
19. LITIGATION In April 1990, the Company entered into a settlement agreement to resolve certain environmental claims against the Company arising from hydrocarbon contamination at a petroleum terminal facility ("Tankport") in Jersey City, New Jersey, which operations were sold in 1983. Under the settlement agreement, the Company is obligated to pay 80% of the remediation costs. Based on data available to the Company and its environmental consultants, the Company estimates its portion of the cleanup costs on an undiscounted basis using existing technologies to be between $6,700 and $16,400 over a period of up to five years. Management is unable to determine that any amount within that range is a better estimate due to a variety of uncertainties, which include the extent of the contamination at the site, the permitted technologies for remediation and the regulatory standards by which the clean-up will be conducted. The clean-up estimates have been modified from prior years' in light of cost inflation. The estimate of costs and the timing of payments could change as a result of changes to the remediation plan required, changes in the technology available to treat the site, unforseen circumstances existing at the site and additional cost inflation. The Company commenced insurance coverage litigation in 1990, in the United States District Court for the District of New Jersey, seeking a declaratory judgment that all amounts payable by the Company pursuant to the Tankport obligation were reimbursable under comprehensive general liability and pollution liability policies maintained by the Company. In August 1995, the District Court ruled on various Motions for Summary Judgement. In its decision, the Court found favorably for the Company on several matters relating to the comprehensive general liability policies but concluded that the pollution liability policies did not contain pollution coverage for the types of claims associated with the Tankport site. The Company has filed a notice of its intent to appeal the District Court's decision to the Third Circuit. Management and its outside legal counsel continue to believe, however, that recovery of a substantial portion of the cleanup costs will ultimately be probable of realization. Accordingly, management is revising its earlier belief that there is no net liability for the Tankport obligation, and it is the Company's belief that, based on estimates of potential liability and probable realization of insurance recoveries, the Company would be liable for approximately $1,400 based on the Courts decision and related developments of New Jersey law.
In 1988, the trustees of certain pension and benefit trust funds (the "Trust Funds") established under collective bargaining agreements with the UMWA brought an action (the "Evergreen Case") against the Company and a number of its coal subsidiaries in the United States District Court for the District of Columbia, claiming that the defendants are obligated to contribute to such Trust Funds in accordance with the provisions of the 1988 and subsequent National Bituminous Coal Wage Agreements, to which neither the Company nor any of its subsidiaries is a signatory. In January 1992, the Court issued an order granting summary judgment in favor of the trustees on the issue of liability, which was thereafter affirmed by the Court of Appeals. In June 1993, the United States Supreme Court denied a petition for a writ of certiorari. The case was remanded to District Court, where damage and other issues were to be decided. In September 1993, the Company filed a motion seeking relief from the District Court's grant of summary judgment based on, among other things, the Company's allegations that plaintiffs improperly withheld evidence that directly refutes plaintiffs' representations to the District Court and the Court of Appeals in this case. In December 1993, that motion was denied. The Company, following the District Court's ruling in December 1993, recognized in 1993 in its financial statements for the Minerals Group the potential liability that might have resulted from an adverse judgment in the Evergreen Case (Notes 15 and 16). On May 23, 1994, the trustees filed a Motion for Entry of Final Judgment seeking approximately $71,100 in delinquent contributions, interest and liquidated damages through May 31, 1994, plus approximately $17 additional interest and liquidated damages for each day between May 31, 1994 and the date of entry of final judgment, plus on-going contributions to the 1974 Pension Plan. The Company opposed this motion. No decision on this motion of final judgment was entered. In furtherance of its ongoing effort to identify other available legal options for seeking relief from what it believes to be an erroneous finding of liability in the Evergreen Case, the Company filed suit against the Bituminous Coal Operators Association ("BCOA") and others to hold them responsible for any damages sustained by the Company as a result of the Evergreen Case. In December 1994, the District Court ordered the Evergreen Case as well as related cases filed against other coal companies, and the BCOA case, be submitted to mediation before a federal judge in an effort to obtain a settlement. SUBSEQUENT EVENT (UNAUDITED) In late March 1996 a settlement was reached in these cases, including the Evergreen Case. Under the terms of the settlement, the coal subsidiaries which had been signatories to earlier National Bituminous Coal Wage Agreements agreed to make various lump sum payments in full satisfaction of all amounts allegedly due to the Trust Funds through January 31, 1996, to be paid over time as follows: approximately $25,800 upon dismissal of the Evergreen Case and the remainder of $24,000 in installments of $7,000 in 1996 and $8,500 in each of 1997 and 1998. The first payment was entirely funded through an escrow account previously established by the Company. In addition, the coal subsidiaries agreed to future participation in the UMWA 1974 Pension Plan. The BCOA case and a separate case against the UMWA have also been dismissed. 138
As a result of the settlement of these cases, the Company expects to record a pretax gain of approximately $35,000 in the first quarter of 1996 in its financial statements for the Minerals Group. 20. COMMITMENTS At December 31, 1995, the Minerals Group had contractual commitments to purchase coal which is primarily used to blend with company mined coal. Based on the contract provisions these commitments are currently estimated to aggregate approximately $161,743 and expire from 1996 through 1998 as follows: 1996 $76,761 1997 57,929 1998 27,053 Purchases under the contracts were $83,532 in 1995, $53,097 in 1994 and $81,069 in 1993. 21. SUPPLEMENTAL CASH FLOW INFORMATION For the years ended December 31, 1995 and 1994, there were net cash tax refunds of $20,731 and $12,851, respectively. For the year ended December 31, 1993, cash payments for income taxes, net of refunds received was $2,461. For the years ended December 31, 1995, 1994 and 1993, cash payments for interest were $10,296, $5,985 and $2,126, respectively. On December 31, 1995, the Minerals Group assumed the portion of the Company's term loan in the amount of $23,434, which had been attributed to the Burlington Group, as partial settlement of the intercompany payable due to the Burlington Group. This transfer of debt as partial settlement of the intercompany between the Groups has been recognized as a noncash transaction and is not included in the Minerals Group's 1995 Statement of Cash Flows. In 1995, the Minerals Group sold mining operations in Ohio together with a related coal supply contract for notes and royalties receivable totaling $6,949.
In December 1993, the Minerals Group sold the majority of the assets of its captive mine supply company. Cash proceeds of $8,400 from the sale were received on January 2, 1994, and have been included in "Cash flow from investing activities: Other, net" in 1994. During 1993, the Minerals Group sold a coal preparation plant and related interest in land, equipment and facilities for mineral reserves with a fair market value of $13,300 and cash of $10,700. The cash proceeds of $10,700 less $1,001 in expenses related to the transaction were included in "Cash flow from investing activities: Other, net". 22. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Tabulated below are certain data for each quarter of 1995 and 1994. 1st 2nd 3rd 4th - --------------------------------------------------------------------------------- 1995 QUARTERS: Net sales $ 195,740 184,211 177,702 165,198 Gross profit 1,800 3,351 10,441 10,964 Net income $ 470 4,634 4,462 4,458 Per Pittston Minerals Group Common Share: Net income Primary $ .05 .45 .51 .43 Fully diluted $ .05 .45 .45 .43 1994 QUARTERS: Net sales $ 176,742 202,149 210,142 205,965 Gross profit (loss) (13,039) 13,105 10,770 12,576 Net income (loss) $ (74,079) 6,750 6,196 8,185 Per Pittston Minerals Group Common Share: Net income (loss) Primary $ (9.96) .72 .74 .91 Fully diluted $ (9.96) .67 .61 .81 Net income (loss) in the first quarter of 1994, included restructuring and other charges of $58,116 (Note 16). 139
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, on April 5, 1996. The Pittston Company (Registrant) By G.R. ROGLIANO --------------------------- (G. R. Rogliano, Senior Vice President)
Exhibit Index Exhibit Number Description - ------- ------------- 23 Consent of independent auditors.
Exhibit 23 Consent of Independent Auditors The Board of Directors The Pittston Company We consent to incorporation by reference in the Registration Statements (Nos. 2-64258, 33-2039, 33-21393, 33-23333, 33-69040, 33-53565 and 333-02219) on Form S-8 of The Pittston Company of our reports dated January 25, 1996, as listed in the accompanying Index to Financial Statements and Schedules as listed in Items 14(a)1 and 14(a)2 included in the 1995 Annual Report on Form 10-K/A of The Pittston Company which reports appear herein. Our reports for Pittston Brink's Group, Pittston Burlington Group and Pittston Minerals Group contain an explanatory paragraph that states that the financial statements of Pittston Brink's Group, Pittston Burlington Group and Pittston Minerals Group should be read in connection with the audited consolidated financial statements of The Pittston Company and subsidiaries. KPMG Peat Marwick LLP Stamford, Connecticut April 5, 1996