<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- - - - - - - - - - - - - - - -
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
LOOMIS, FARGO & CO.
(Exact name of registrant as specified in its charter)
Delaware 333-24689 76-0521092
(State or other (Commission File Number) (IRS Employer
jurisdiction) Identification No.)
<TABLE>
<CAPTION>
File No. 333-24689-01 File No. 333-24689-02 File No. 333-24689-04
LFC Holding Corporation Loomis, Fargo & Co Loomis, Fargo & Co. of Puerto Rico
(Exact Name of Registrant (Exact Name of Registrant (Exact Name of Registrant
as Specified in its Charter) as Specified in its Charter) as Specified in its Charter)
<S> <C> <C>
Delaware Texas Tennessee
(State or other jurisdiction of (State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization) incorporation or organization)
75-2371825 75-0117200 66-0215016
(I.R.S. Employer (I.R.S. Employer (I.R.S. Employer
Identification No.) Identification No.) Identification No.)
</TABLE>
2500 CityWest Blvd., Suite 900
Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (713) 435-6700
Indicate by check mark whether the registrants: (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 11, 1998, 10,000,000 shares of the Common Stock, $0.01 par
value, of Loomis, Fargo & Co.; 2,652,705 shares of the Class A Common Stock,
$0.01 par value, of LFC Holding Corporation; 1,000 shares of the Common Stock,
$10.00 par value, of Loomis, Fargo & Co. (a Texas corporation); and 250 shares
of Common Stock, no par value, of Loomis, Fargo & Co. of Puerto Rico, were
outstanding.
<PAGE>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
LOOMIS, FARGO & CO.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,659 $ 5,621
Accounts receivable, net 52,185 30,411
Prepaid expenses and other current assets 4,684 5,001
-------- --------
Total current assets 60,528 41,033
Property and equipment, net 41,657 40,065
Intangible assets, net 112,421 110,237
Other assets, net 4,829 4,215
-------- --------
Total Assets $219,435 $195,550
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 20,499 $ 15,254
Accrued expenses and other current liabilities 44,754 31,861
Current portion, capital lease obligations 669 465
-------- --------
Total current liabilities 65,922 47,580
Long-term liabilities:
Long-term debt 154,796 147,940
Capital lease obligations 511 384
Other long-term liabilities 5,474 8,527
-------- --------
Total long-term liabilities 160,781 156,851
Stockholders' deficit:
Common stock 100 100
Additional paid-in capital 24,755 24,755
Accumulated deficit (32,123) (33,736)
-------- --------
Total stockholders' deficit (7,268) (8,881)
-------- --------
Total liabilities and stockholders' deficit $219,435 $195,550
======== ========
</TABLE>
See accompanying notes.
1
<PAGE>
LOOMIS, FARGO & CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
-------------------- ---------------------
<S> <C> <C> <C> <C>
REVENUES $96,541 $95,455 $269,555 $288,813
COST OF OPERATIONS:
Payroll and related expense 60,266 57,276 166,269 174,582
Vehicle expense 13,677 12,288 37,257 37,040
Facilities expense 4,309 4,085 11,547 12,225
Other operating expenses 15,004 17,894 44,477 54,655
Expenses relating to the business combination 842 - 3,213 -
------- ------- -------- --------
94,098 91,453 262,763 278,502
------- ------- -------- --------
OPERATING INCOME 2,443 3,912 6,792 10,311
INTEREST EXPENSE 4,399 3,783 11,686 11,644
------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (1,956) 129 (4,894) (1,333)
INCOME TAXES - 70 - 280
------- ------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (1,956) 59 (4,894) (1,613)
EXTRAORDINARY ITEM, NET OF TAX - - 124 -
------- ------- -------- --------
NET INCOME (LOSS) $(1,956) $ 59 $ (5,018) $ (1,613)
======= ======= ======== ========
</TABLE>
See accompanying notes.
2
<PAGE>
LOOMIS, FARGO & CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1998
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,018) $(1,613)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization expense 12,706 10,675
Amortization of financing costs 702 718
Accretion of discount on NOL note 368 144
Gain on disposal of property and equipment (10) (65)
Change in restricted cash 1,536 -
Provision for doubtful accounts 714 490
Accrued management fees 23 -
Changes in current assets and liabilities (net of effect
of the acquisition):
Accounts receivable (12,623) 21,284
Prepaid expenses and other current assets (2,511) (317)
Accounts payable 2,089 (5,245)
Accrued expenses and other liabilities 5,667 (9,840)
--------- -------
Net cash provided by operating activities 3,643 16,231
--------- -------
INVESTING ACTIVITIES
Purchase of Wells Fargo Armored (105,116) -
Acquisition of property and equipment (5,236) (6,956)
Proceeds from sale of property and equipment 40 221
--------- -------
Net cash used in investing activities (110,312) (6,735)
--------- -------
FINANCING ACTIVITIES
Issuance of senior subordinated notes 85,000 -
Net borrowings (repayments) of debt 45,028 (7,000)
Repayments of capital lease obligations (774) (430)
Payment of accrued management fees (1,598) -
Financing costs related to debt (5,324) (104)
Redemption of preferred stock (3,500) -
Exercise of common stock warrants 96 -
Distributions to stockholders (8,737) -
--------- -------
Net cash provided by (used in) financing activities 110,191 (7,534)
--------- -------
Net increase in cash and cash equivalents 3,522 1,962
Cash and cash equivalents at beginning of period * 933 3,659
--------- -------
Cash and cash equivalents at end of period $ 4,455 $ 5,621
========= =======
</TABLE>
* Excludes restricted cash and cash equivalents of $1,536 at December 31, 1996.
See accompanying notes.
3
<PAGE>
LOOMIS, FARGO & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The information included in this Form 10-Q should be read
in conjunction with the audited consolidated financial statements of Loomis,
Fargo & Co. (the "Company") as of December 31, 1997 included in Amendment No. 1
to the Form 10-K filed with the Securities and Exchange Commission on April 13,
1998. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine-month and three-month periods ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the full year.
Certain prior period amounts have been reclassified to conform with the 1998
presentation.
NOTE 2 RECENT PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, (SFAS 130) requires the reporting of total comprehensive income in all
financial statement periods beginning after December 15, 1997. The Company has
adopted SFAS 130 and has no items of other comprehensive income. Therefore,
comprehensive income or loss is the same as the Company's net income or loss for
the nine months and quarters ended September 30, 1997 and 1998.
In June 1998, Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS 133) was issued. SFAS
133 establishes a new model for accounting for derivatives and hedging
activities and is effective for fiscal years beginning after June 15, 1999.
Management believes the adoption will not have a material impact on the
Company's financial statements.
NOTE 3 SIGNIFICANT CUSTOMER
Two of the Company's customers merged during the quarter ended September 30,
1998. Together they represent approximately eleven percent of the Company's
consolidated revenue.
4
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Loomis, Fargo & Co. (the "Company") provides armored car transport services to a
variety of financial, commercial, industrial and retail establishments within
the United States and Puerto Rico. It offers secure, expedited transportation
and protection for valuable commodities, provides extensive automatic teller
machine ("ATM") services, including cash replenishment, deposit pick-up and
maintenance, and provides ancillary services such as secured storage of
valuables, deposit processing and consolidation, change order preparation, coin
wrapping and food stamp processing. The Company also provides contract security
officers to patrol and control access to customer facilities in Puerto Rico.
Certain of the matters discussed in this discussion and analysis may constitute
forward-looking statements for purposes of the Securities Exchange Act of 1934
and as such may involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, risks
and uncertainties relating to leverage and debt service, changes in interest
rates, risks inherent in the armored transport industry, general marketplace
conditions, restrictions imposed by the bank credit facility, the ability to
attract and retain qualified employees, timely identification and resolution of
all year 2000 issues, environmental and other regulatory matters and future
legal proceedings.
ACQUISITION AND RESULTS OF OPERATIONS
The Company acquired certain assets and liabilities of Wells Fargo Armored
Service Corporation ("Wells Fargo Armored") on January 24, 1997. This
acquisition has been accounted for under the purchase method and the results of
operations for Wells Fargo Armored have been included in the consolidated
financial statements since January 24, 1997. Therefore, the results for the nine
months ended September 30, 1998 include the combined operations of the Company
for the entire period while the 1997 amounts for the respective period include
23 days of Loomis Holding Corporation ("Loomis", the predecessor to the Company)
alone and 250 days of the combined operations. This acquisition has a
significant impact on the comparability of the nine-month periods as Wells Fargo
Armored's annual revenue base and property and equipment were almost twice as
large as those of Loomis.
The net loss was $1.6 million for the nine months ended September 30, 1998 as
compared to a net loss of $5.0 million for the same period in 1997. The Company
reported net income of $59,000 for the quarter ended September 30, 1998 which
compares to a net loss of $2.0 million for the comparable period last year.
Management believes that the improvement reflects the successful implementation
of its merger integration strategy. In addition to realizing certain
administrative cost savings anticipated in the combination, this strategy has
focused on investing in improved compensation for front-line employees and
enhanced crew complements to reduce the Company's cost of risk (cargo and
casualty losses). Since the completion of the integration, employee turnover
has declined and the cost of risk has improved. The Company's management also
commenced a quality of revenue improvement initiative in the third quarter of
1997 directed primarily toward the acquired Wells Fargo Armored contracts. This
initiative permitted the Company to eliminate unprofitable service hours from
its routing structure while rationalizing its customer base. In addition to
improving the results of operations, management believes that service quality
has been upgraded as well. The Company has also benefited from the substantial
decreases in fuel prices and the successful efforts to reduce the level of
accounts receivable throughout 1998. These positive trends have allowed for a
$7.0 million reduction in the amount outstanding under the Company's bank credit
facility, thereby reducing interest expense, especially during the third quarter
of 1998.
5
<PAGE>
The following unaudited pro forma information presents a summary of the
consolidated results of the Company, including Wells Fargo Armored, as if the
acquisition had occurred on January 1, 1997. These pro forma results have been
included for comparative purposes only and include certain adjustments to
reflect additional revenue and operating expenses for the 23 days prior to the
combination. They do not purport to be indicative of the results that actually
would have been achieved had the acquisition occurred on January 1, 1997 or of
those results that may be obtained in the future.
<TABLE>
<CAPTION>
(Unaudited, $ in 000's)
Nine Months Ended Quarter Ended
September 30 September 30
----------------------------------------------------------- --------------
1997 Actual 1997 Pro Forma 1998 1997 1998
----------------- ----------------- ----------------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 269,555 100.0% $ 284,883 100.0% $ 288,813 100.0% 100.0% 100.0%
Cost of operations:
Payroll and related expense 166,269 61.7 175,624 61.6 174,582 60.4 62.4 60.0
Vehicle expense 37,257 13.8 38,909 13.7 37,040 12.8 14.2 12.9
Facilities expense 11,547 4.3 12,143 4.3 12,225 4.2 4.5 4.3
Other operating expenses 44,477 16.5 47,395 16.6 54,655 18.9 15.5 18.7
Business combination expenses 3,213 1.2 3,213 1.1 - - 0.9 -
--------- --------- ---------
262,763 277,284 278,502
--------- --------- --------- ------ ------
Operating Income $ 6,792 2.5% $ 7,599 2.7% $ 10,311 3.6% 2.5% 4.1%
========= ========= ========= ====== ======
</TABLE>
As discussed above, revenues and expenses for the nine months ended September
30, 1998 increased over the same period in 1997 partially due to the acquisition
of Wells Fargo Armored on January 24, 1997. To facilitate meaningful analysis
for the comparable nine-month periods, the discussion below focuses on the pro
forma results of operations for 1997 as well as these results expressed as a
percentage of pro forma revenue and compares these figures with the respective
amounts in 1998.
Revenues. Revenues for the nine months ended September 30, 1998 increased by
approximately $3.9 million (1.4%) over pro forma revenues for a comparable
period in 1997 while revenues for the quarter ended September 30, 1998 decreased
by approximately $1.1 million (1.1%) from last years corresponding period.
These results were impacted by the loss of approximately 8.5% of the Wells Fargo
Armored customer base, largely in the ATM market, early in 1997 as a result of
pre-merger service related issues. Management took action to address the cause
of these losses and does not anticipate a recurrence. During the second and
third quarters of 1997, the Company undertook its initiative to improve the
quality of service and revenue on the acquired Wells Fargo Armored contracts. A
majority of the acquired contracts were renegotiated with higher rates by the
end of 1997. These rate increases resulted in higher revenues from the acquired
contracts for much of the third quarter of 1997; however it also resulted in the
loss of certain customers. This revenue initiative has also included a conscious
decision by management to discontinue relationships with specific customers that
were unprofitable or did not meet the Company's strategic objectives. These
factors largely explain the decrease in quarter over quarter revenues.
The following table analyzes revenues by type of service. The pro forma
increases for the nine months ended September 30, 1998 reflect the revenue
improvement initiative previously discussed which resulted in higher revenues in
spite of the partial loss of Wells Fargo Armored's customer base during 1997. A
modest shift from armored to ATM services has also occurred since last year. The
table also reflects an overall increase in the ATM market and a slight reduction
in the cash vault and related services, partially attributable to management's
revenue initiative strategies.
6
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Quarter Ended
September 30 September 30
---------------------------------------------------- ----------------------
1997 1997 Actual Pro Forma
Actual Pro Forma 1998 Change Change 1997 1998 Change
(In millions) -------- --------- ------ -------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Traditional armored transport services $160.3 $168.3 $170.5 $10.2 $2.2 $58.0 $55.7 $ (2.3)
ATM services 77.9 83.6 88.0 10.1 4.4 27.4 29.7 2.3
Cash vault and related services 31.4 33.0 30.3 (1.1) (2.7) 11.1 10.1 (1.0)
-------- --------- ------ -------- --------- ------ ------ ------
Total Revenues $269.6 $284.9 $288.8 $19.2 $3.9 $96.5 $95.5 $(1.0)
======== ========= ====== ======== ========= ====== ====== ======
</TABLE>
Payroll and related expense. Payroll and related expense for the nine months
ended September 30, 1998 decreased by approximately $1.0 million (0.6%) from the
pro forma amount for the comparable period in 1997 and decreased by
approximately $3.0 million (5.0%) for the quarter ended September 30, 1998 from
the corresponding period in 1997. These decreases occurred even after the
Company implemented its business strategy of improved wages and fringe benefits
throughout the acquired operations as well as investments in two and three
person crew complements to enhance security. The decreases in payroll and
related expense were principally related to route efficiencies gained during
1998 and a reduction in driver hours worked during the quarter ended September
30, 1998 corresponding to the slight decrease in routes being serviced. During
the full year 1996, payroll and related expense at Wells Fargo Armored was 55.0%
of revenue. During the full year 1997, the Company's payroll and related
expense increased to 62.4% of revenue. This percentage has remained at
approximately 60.4% during 1998.
Vehicle expense. Vehicle expense for the nine months ended September 30, 1998
decreased by approximately $1.9 million (4.8%) from pro forma amounts for the
comparable period in 1997 and decreased by approximately $1.4 million (10.2%)
for the quarter ended September 30, 1998 from the corresponding period in 1997.
Vehicle expense as a percent of revenues decreased to 12.8% and 12.9% for the
respective nine month and three month periods ended September 30, 1998 from
13.7% and 14.2% for the comparative pro forma periods in 1997. The decreases
were largely a result of the loss of Wells Fargo Armored customers in early
1997, as discussed above, resulting in a reduction in the number of truck hours
required to service the remaining higher quality of revenue customers, and due
to a decrease in fuel prices of approximately 20.0% in 1998. In addition, route
efficiencies were achieved from the consolidation of branches and the
restructuring of routes. Partially offsetting these decreases was an increase
in vehicle communication costs due to the migration from radio systems using
analog technology to digital communication systems.
Facilities expense. Facilities expense for the nine months ended September 30,
1998 increased by approximately $0.1 million over pro forma amounts for the
comparable period in 1997 and decreased by approximately $0.2 million for the
quarter ended September 30, 1998 from the corresponding period in 1997.
Facilities expense as a percent of revenues remained relatively constant at
approximately 4.3% during all periods presented.
Other operating expenses. Other operating expenses for the nine months ended
September 30, 1998 increased by approximately $7.3 million (15.3%) over pro
forma amounts for the comparable period in 1997 and increased by approximately
$2.9 million (19.3%) for the quarter ended September 30, 1998 over the
corresponding period in 1997. Other operating expenses as a percent of revenues
increased to 18.9% and 18.7% for the respective nine month and three month
periods ended September 30, 1998 from 16.6% and 15.5% for the comparative pro
forma periods in 1997. Other operating expenses include such expenses as cargo
insurance premiums and retained losses, costs of a centralized dispatch center,
subcontracting costs, and the testing, recruiting and training of employees.
Combined cash-in-transit insurance premiums and cargo losses totaled
approximately $9.7 million and $12.7 million for the nine months ended September
30, 1998 and 1997, respectively. This decrease was primarily due to fewer cargo
losses occurring in 1998.
7
<PAGE>
Offsetting this decrease was an approximate $2.2 million increase in
subcontracting costs related to a shift from coin operation work previously
performed in-house. The Company began shifting this work to subcontractors in
1996 and has continued to do so with some of the acquired Wells Fargo Armored
branches. Some of the previously coin operations employees were retrained for
traditional crew positions as part of the enhanced crew complement and security
improvements.
In connection with the business combination, the Company recorded a liability
for contracts acquired from Wells Fargo Armored for which variable costs
exceeded revenues. Charges totaling $7.4 million and $3.6 million were taken
against this liability during the nine and three months ended September 30, 1997
with a corresponding decrease in other operating expenses. All losses associated
with these contracts had been incurred by December 31, 1997.
Expenses relating to the business combination. Expenses of $3.2 million and
$0.8 million were recorded in the nine and three months ended September 30,
1997, respectively, for items relating to the purchase of Wells Fargo Armored.
Included were the costs of maintaining the former Wells Fargo Armored corporate
headquarters in Atlanta, temporary personnel and consultants required to convert
the former Wells Fargo Armored systems to the Company's systems and costs of
state registrations and surveys required by the new business entity. The
Company does not anticipate incurring material additional costs related to the
business combination.
Operating income. Operating income for the nine months ended September 30, 1998
increased by $2.7 million (35.7%) over pro forma operating income for the
comparable period in 1997. The quarter ended September 30, 1998 reflected an
increase in operating income of $1.5 million (60.1%) over the respective quarter
in 1997. The above discussion addresses these increases.
Interest expense. Interest expense remained relatively constant for the nine
months ended September 30, 1998 and 1997 and decreased by approximately $0.6
million (14.0%) for the quarter ended September 30, 1998 from the corresponding
period in 1997. Average borrowings under the Company's credit facility were
approximately $20.3 million (25.0%) lower during the quarter ended September 30,
1998 than during the same quarter last year. Interest expense relates directly
to the amounts outstanding on the Company's bank credit facility and the senior
subordinated notes. Interest expense as a percent of revenue decreased slightly
from 4.3% to 4.0% for the respective nine months ended September 30, 1997 and
1998 and from 4.6% to 4.0% for the quarters ended September 30, 1997 and 1998,
respectively.
Extraordinary item. An extraordinary item of $0.1 million was recorded in the
first quarter of 1997 resulting from the write-off of deferred financing costs
associated with the debt retired in January 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources changed significantly as a result
of the business combination in January 1997. Total cash and cash equivalents at
September 30, 1998 and 1997 were $5.6 million and $4.5 million, respectively.
Changes in cash and cash equivalents are described in the statements of cash
flows, which are summarized below.
Nine Months Ended
September 30
-----------------
1997 1998
------- -------
(in millions)
Net cash provided by operating activities $ 3.6 $ 16.2
Net cash used in investing activities (110.3) (6.7)
Net cash provided by (used in) financing activities 110.2 (7.5)
------- -------
Net increase in cash and cash equivalents $ 3.5 $ 2.0
======= =======
8
<PAGE>
OPERATING ACTIVITIES
Net cash was provided by operating activities in the nine months ended September
30, 1998 despite the net loss, partially because the loss included $11.4 million
of noncash depreciation and amortization expense. Accounts receivable decreased
by approximately $21.8 million in the nine months ended September 30, 1998
largely due to improvements to the Company's billing system and collection
efforts. Offsetting this improvement was a decrease in accounts payable and
accrued expenses of $18.1 million. This was primarily due to an $11.7 million
payment to the Company's insurance carrier in January 1998 related to the
recovery of a material cargo loss in December 1997.
INVESTING ACTIVITIES
In the nine months ended September 30, 1998, cash of $7.0 million was used for
acquisitions of property and equipment.
Planned capital expenditures for the next twelve months are $15.0 million. The
Company is evaluating the future acquisition of some of its trucks under
operating leases, which would reduce the planned capital expenditures. These
expenditures will be financed primarily through operating cash flows.
FINANCING ACTIVITIES
In the nine months ended September 30, 1998, net repayments of $7.0 million were
made against the Company's bank credit facility. The reduction in debt was
achieved despite the $11.7 million payment to the Company's insurance carrier,
which was financed by the bank credit facility in January 1998. The primary
reason the Company was able to reduce the level of debt was due to the
conversion of the Company's billing system, with improved collections and the
subsequent reduction in accounts receivable. Average borrowings under the
credit facility were approximately $9.5 million lower during the nine months
ended September 30, 1998 as compared to the corresponding period in 1997.
The Company's balance sheet reflected a working capital deficit of $(6.5)
million at September 30, 1998, an increase from the December 31, 1997 working
capital deficit of $(5.4) million. The Company is highly leveraged, with long-
term liabilities comprising 80.2% of total liabilities and common stockholders'
deficit at September 30, 1998.
The Company's revolving bank credit facility provided an initial aggregate
commitment of $115.0 million through December 1997. The credit facility
agreement includes a step-down of the commitment over the final four years of
the facility. The commitment is reduced by $2.5 million and $3.8 million at the
end of each quarter in 1998 and 1999, respectively. Therefore, a total
commitment of $107.5 million remained at September 30, 1998. The facility
includes guarantees of letters of credit, of which approximately $17.6 million
were outstanding at September 30, 1998. The remaining commitment available
under the facility at September 30, 1998 was $32.9 million. Under the facility,
funds can be borrowed either for unspecified periods of time at a base rate tied
to the bank's prime rate, or for set periods of time under variable rates tied
to LIBOR.
By December 1998, the total commitment under the bank credit facility will
decrease to $105.0 million. It is anticipated that letters of credit
requirements, principally for casualty liabilities, should not exceed $23.0
million by December 31, 1998, leaving $82.0 million in available borrowing
capacity. Management believes that the operating cash flow and this remaining
financing commitment will be more than adequate to fund future operating needs,
capital expenditures, and any required repayments of debt.
9
<PAGE>
IMPACT OF YEAR 2000
The Year 2000 computer issue is primarily the result of computer programs using
a two-digit format, as opposed to four digits, to indicate the year. Such
programs will be unable to interpret dates beyond the year 1999, which could
cause a system failure or other computer errors and a disruption in the
operation of such systems.
State of Readiness
The Company has established an internally staffed Year 2000 Readiness Committee
to address Year 2000 issues. The five objectives of this committee are 1)
create awareness, 2) conduct assessment (identify, evaluate and prioritize), 3)
complete renovation of critical or high priority items, 4) validate or test the
success of our changes, and 5) oversee implementation of those tested changes
into the Company's business processes. The Committee has completed much of its
internal review of the corporate office's operational equipment and has hired
independent consultants to assist in a more in-depth analysis of the computer
hardware, software and equipment purchased from third parties that potentially
could be impacted by Year 2000 issues.
The following is a summary of the key areas of the Year 2000 effort, and their
status:
Computer Systems
The Company's core financial reporting and contract/billing/invoicing systems
were upgraded to a version that is Year 2000 ready in July 1998. However, the
Company will be required to modify or replace portions of its Puerto Rican
billing and operations software so that its computer systems will function
properly with respect to dates in the Year 2000 and thereafter. The Company has
decided to purchase the upgrade to this software, which is Year 2000 ready. The
cost is expected to be immaterial. It is the Company's goal that all other
support systems in facilities that are key to its services will have been
renovated or replaced by June 1999. All new systems being implemented will be
Year 2000 ready when they are put into service.
ATM Services
The Company's national customer service center in Baltimore, MD serves as the
cornerstone of ATM first line maintenance and cash replenishment services. The
initial assessment of the technology utilized there showed no indication of any
Year 2000 issues but, because of the critical role it plays in those services,
the Company is proceeding with a more in-depth review. A technology consulting
company has been engaged to complete a thorough review and test of the entire
facility. Completion is targeted for March 1999.
The vendor who supplies the electronic locks that the Company installs on
customers' ATMs for added security, has assured the Company in writing that
their product is Year 2000 ready. To be cautious, tests will be conducted on
those locks and the supporting equipment to minimize the possibility that
disruption of services to those ATMs will be experienced. Those tests are
expected to be completed by March 1999.
The Company is assisting various customers with their Year 2000 ATM upgrades and
testing; however, the ultimate responsibility of Year 2000 readiness for the
operation of an ATM is carried by the institution that owns and operates that
machine.
Truck Fleet
Since the Company's core business relates to the transportation and handling of
valuables, the truck fleet and its supporting infrastructure is being rigorously
reviewed. The Company is working closely with key vendors to identify any
potential problems. To date, there have been no significant issues identified
with the fleet viability as it pertains to Year 2000. Confirmation has already
been received from the major truck supplier that the engines which have been
supplied for the Company's use will not cease functioning because of the Year
2000 transition. However, this review will continue through the first quarter
of 1999 with additional focus on parts and fuel vendors.
10
<PAGE>
Operating Facilities ("branches")
The Company is currently reviewing operations in its branches to identify all
electronically controlled equipment and services that play key internal
operations roles. Cash and coin processing equipment, vault locks, mobile
radios, telephone switches, alarm systems, pagers, and cellular telephones are
just a few of the types of equipment the Company will test or request assurances
from our vendors for their Year 2000 readiness. This review is targeted for
completion by the end of 1998 and any associated action items will be addressed
by June 1999.
Vendors and Suppliers
Those vendors and suppliers who provide business critical products and/or
services will be asked to verify their status on the Year 2000 readiness of
their products or services. Anyone not able to do so will be seriously
evaluated for the continuation of the Company's relationship.
Contingency Plans
The Company is preparing its contingency plans to identify and determine how to
handle its most reasonably likely worst scenarios. Comprehensive contingency
plans are estimated to be complete by mid-1999.
Costs
The Company estimates aggregate expenditures of approximately $0.3 million to
address Year 2000 issues through December 1999. The entire amount of these
expenditures is being charged to expense. The total amount expended through
September 30, 1998 was approximately $0.1 million, all of which has been charged
to expense. These costs do not include costs incurred by the Company as a
result of the failure of any third parties, including suppliers, to become Year
2000 ready or costs to implement any contingency plans.
Risks of Company's Year 2000 Issues
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and the cost and extent of training
associated with needed conversions and similar uncertainties.
Based on its current assessment efforts, the Company does not believe that Year
2000 issues will have a material adverse effect on its financial condition or
results of operations. However, the Company's Year 2000 issues and any
potential business interruptions, costs, damages or losses related thereto, are
dependent, to a certain degree, upon the Year 2000 readiness of third parties
such as customers, governmental agencies, vendors and suppliers. Consequently,
the Company is unable to determine at this time whether Year 2000 failures will
materially affect the Company. The Company believes that its readiness efforts
have and will reduce the impact on the Company of any such failures.
11
<PAGE>
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S><C><C>
(a) Exhibits
3.1 Certificate of Incorporation of Loomis, Fargo & Co. (Delaware), as amended (1)
3.2 Bylaws of Loomis, Fargo & Co. (Delaware) (1)
3.3 Certificate of Incorporation of LFC Holding Corporation, as amended (1)
3.4 Bylaws of LFC Holding Corporation, as amended (1)
3.5 Articles of Incorporation of Loomis, Fargo & Co. (Texas), as amended (1)
3.6 Bylaws of Loomis, Fargo & Co. (Texas), as amended (1)
3.9 Amended and Restated Articles of Incorporation of Loomis, Fargo & Co. of
Puerto Rico, as amended (1)
3.10 Bylaws of Loomis, Fargo & Co. of Puerto Rico (1)
4.1 Indenture, dated as of January 24, 1997, among Loomis, Fargo & Co. (Delaware), as Issuer, LFC Holding Corporation,
Loomis, Fargo & Co. (Texas), LFC Armored of Texas Inc. (formerly known as Wells Fargo Armored Service Corporation
of Texas), and Loomis, Fargo & Co. of Puerto Rico (formerly known as Wells Fargo Armored Service Corporation of
Puerto Rico), as Guarantors, and Marine Midland Bank, as trustee (1)
4.2 Form of New Note (included in Exhibit 4.1, Exhibit A-3) (1)
27.1 Financial Data Schedule for Loomis, Fargo & Co.*
* Filed herewith
(1) Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-24689) of Loomis, Fargo & Co.
initially filed with the Securities and Exchange Commission on April 7, 1997, as amended.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter for which this report is filed.
</TABLE>
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the co-registrants have duly caused this report to be signed on their
behalf by the undersigned, thereunto duly authorized.
Loomis, Fargo & Co. (Delaware)
LFC Holding Corporation
Loomis, Fargo & Co. (Texas)
Loomis, Fargo & Co. of Puerto
Rico
Date: November 13, 1998 By: /s/ James K. Jennings, Jr.
----------------- -----------------------------
James K. Jennings, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer of the
Co-registrants)
13
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