<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended September 30, 1999
Commission file number: 1-5529
BURNS INTERNATIONAL SERVICES CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3408028
- ------------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 South Michigan Avenue, Chicago, Illinois 60604
- ------------------------------------------------ ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 322-8500
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 (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
--- ---
On October 31, 1999 the registrant had 19,668,642 shares of Common Stock
outstanding.
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BURNS INTERNATIONAL SERVICES CORPORATION AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1999
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statement of Operations for
the Three Months Ended September 30, 1999 and 1998................2
Consolidated Statement of Operations for
the Nine Months Ended September 30, 1999 and 1998.................3
Condensed Consolidated Balance Sheet
at September 30, 1999 and December 31, 1998.......................4
Consolidated Statement of Cash Flows for
the Nine Months Ended September 30, 1999 and 1998.................5
Notes to the Consolidated Financial Statements.....................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ....................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........16
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings..................................................17
Item 2. Changes in Securities..............................................17
Item 3. Defaults Upon Senior Securities ...................................17
Item 4. Submission of Matters to a Vote of Security Holders................17
Item 5. Other Information..................................................17
Item 6. Exhibits and Reports on Form 8-K...................................17
SIGNATURES....................................................................18
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PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
BURNS INTERNATIONAL SERVICES CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(Millions of dollars, except per share)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Net service revenues $349.4 $336.6
Cost of services 295.0 284.2
Selling, general and administrative expenses 37.5 35.5
Depreciation 1.5 1.0
Other expense, net 0.8 1.2
Interest expense and finance charges, net 4.0 3.4
------ ------
Earnings before income taxes 10.6 11.3
Provision for income taxes 3.9 4.5
------ ------
Earnings from continuing operations 6.7 6.8
Earnings from discontinued operations, net
of income taxes -- --
------ ------
Earnings before extraordinary item 6.7 6.8
Extraordinary item:
Loss from early extinguishment of debt -- --
------ ------
Net earnings $ 6.7 $ 6.8
====== ======
Earnings per common share - basic:
Continuing operations $ 0.34 $ 0.29
Discontinued operations -- --
Extraordinary item -- --
Net earnings per share $ 0.34 $ 0.29
======= ======
Earnings per common share - diluted:
Continuing operations $ 0.33 $ 0.29
Discontinued operations -- --
Extraordinary item -- --
Net earnings per share $ 0.33 $ 0.29
======= ======
Comprehensive earnings:
Net earnings $ 6.7 $ 6.8
Other comprehensive earnings:
Currency translation adjustment, net of $0.1 tax
expense in 1999 and $0.1 tax benefit in 1998 0.1 (0.2)
------- ------
Comprehensive earnings $ 6.8 $ 6.6
======= ======
</TABLE>
<PAGE>
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BURNS INTERNATIONAL SERVICES CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(Millions of dollars, except per share)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Net service revenues $1,018.5 $979.1
Cost of services 857.3 826.3
Selling, general and administrative expenses 110.1 121.2
Depreciation 4.0 3.0
Other expense, net 3.1 5.7
Interest expense and finance charges, net 11.7 11.8
-------- ------
Earnings before income taxes 32.3 11.1
Provision for income taxes 12.3 4.4
-------- ------
Earnings from continuing operations 20.0 6.7
Earnings from discontinued operations, net
of income taxes -- 20.3
-------- ------
Earnings before extraordinary item 20.0 27.0
Extraordinary item:
Loss from early extinguishment of debt (12.1) (6.3)
-------- ------
Net earnings $ 7.9 $ 20.7
======== ======
Earnings (loss) per common share - basic:
Continuing operations $ 0.90 $ 0.29
Discontinued operations -- 0.87
Extraordinary item (0.54) (0.27)
-------- ------
Net earnings per share $ 0.36 $ 0.89
======== ======
Earnings (loss) per common share - diluted:
Continuing operations $ 0.88 $ 0.29
Discontinued operations -- 0.83
Extraordinary item (0.53) (0.26)
-------- ------
Net earnings per share $ 0.35 $ 0.86
======== ======
Comprehensive earnings:
Net earnings $ 7.9 $ 20.7
Other comprehensive earnings:
Currency translation adjustment, net of $0.2 tax
expense in 1999 and $0.7 tax benefit in 1998 0.3 (1.0)
-------- ------
Comprehensive earnings $ 8.2 $ 19.7
======== ======
</TABLE>
(The accompanying notes are an integral part of these financial statements)
<PAGE>
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BURNS INTERNATIONAL SERVICES CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Millions of dollars)
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Cash and cash equivalents $ 10.5 $105.7
Receivables, net 58.3 55.9
Other current assets 52.8 68.9
------ ------
Total current assets 121.6 230.5
Property, plant and equipment, at cost 39.5 43.7
Less accumulated depreciation 17.0 25.6
------ ------
Net property, plant and equipment 22.5 18.1
Net excess purchase price over net assets acquired 108.0 111.1
Deferred tax asset, net 42.4 42.4
Other assets 29.9 29.8
------ ------
Total assets $324.4 $431.9
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ -- $ 2.3
Accounts payable and accrued expenses 117.9 130.5
------ ------
Total current liabilities 117.9 132.8
Long-term debt 114.3 124.4
Other long-term liabilities 66.8 77.8
Common stock 0.2 0.2
Other shareholders' equity 25.2 96.7
------ ------
Total shareholders' equity 25.4 96.9
------ ------
Total liabilities and shareholders' equity $324.4 $431.9
====== ======
</TABLE>
(The accompanying notes are an integral part of these financial statements)
<PAGE>
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BURNS INTERNATIONAL SERVICES CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Millions of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------------------
OPERATING: 1999 1998
-------------------- -------------------
<S> <C> <C>
Continuing Operations:
Earnings from continuing operations $ 20.0 $ 6.7
Adjustments to reconcile net earnings to net cash
provided by continuing operations:
Non-cash charges to earnings:
Depreciation and amortization 8.1 8.2
Other, net 2.7 17.1
Changes in assets and liabilities:
Increase in receivables (9.7) (16.5)
Decrease in other current assets 0.1 0.9
Net change in accounts payable and accrued expenses 1.9 8.2
Net change in other long-term assets and liabilities (13.9) (1.1)
------ ------
Net cash provided by continuing operations 9.2 23.5
Discontinued Operations:
Gain from discontinued operations -- 20.3
Other cash related to discontinued operations (8.7) 312.6
------ ------
Net cash (used in) provided by discontinued operations (8.7) 332.9
------ ------
Net cash provided by operating activities 0.5 356.4
------ ------
INVESTING:
Capital expenditures (8.1) (4.4)
Net cash paid for acquisitions (2.0) (11.5)
Other, net 0.3 (2.1)
------ ------
Net cash used in investing activities (9.8) (18.0)
------ ------
FINANCING:
(Decrease) increase in notes payable (2.3) 0.7
Increase (decrease) in debt outstanding under revolving credit facility 114.1 (63.9)
Increase (decrease) in receivables sold 22.6 (7.7)
Retirement of long-term debt (140.9) (157.0)
Treasury shares acquired (81.8) --
Repurchase of old Borg-Warner shares -- (7.9)
Other, net 2.4 1.9
------ ------
Net cash used in financing activities (85.9) (233.9)
------ ------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (95.2) 104.5
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 105.7 8.0
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10.5 $ 112.5
======= =======
</TABLE>
(The accompanying notes are an integral part of these financial statements)
<PAGE>
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The financial statements of Burns International Services Corporation and
consolidated subsidiaries ("the Company") have been prepared in accordance with
the instructions to Form 10-Q. The statements are unaudited, but include all
adjustments, consisting of normal recurring items, which the Company considers
necessary for a fair presentation of the information set forth herein. The
results of operations for the three and nine month periods ended September 30,
1999 and September 30, 1998 are not necessarily indicative of the results to be
expected for the entire year. Certain previously reported 1999 and 1998 amounts
have been reclassified to conform to the current 1999 presentation.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and related disclosures.
Actual results may differ from those estimates.
(2) The Company owns 49% of the common stock of Loomis, Fargo & Co ("Loomis,
Fargo"). This investment is accounted for under the equity method.
The Company recorded $0.4 million equity income for the three months ended
September 30, 1999 for its share of Loomis, Fargo income compared to breakeven
earnings for the same period of 1998. Equity income for the nine months ended
September 30, 1999 was $1.0 million versus a $0.5 million loss in 1998. The
Company does not guarantee the indebtedness of Loomis, Fargo nor is it required
to fund Loomis, Fargo's future operations.
(3) On May 29, 1998, the Company sold its electronic security services
business to ADT Security Services, a subsidiary of Tyco International, Ltd., for
approximately $425 million plus the assumption of approximately $6 million of
debt by the buyer. As a result of this transaction, the Company recorded a net
after-tax gain of $42.5 million in the second quarter of 1998.
On May 29, 1998, the Company also sold its courier services business. In the
first quarter of 1998, the Company recorded a $15.9 million after-tax charge to
reduce its investment in this business, to provide for costs associated with its
disposition and for further anticipated losses prior to the sale. The courier
services operation was carried as a discontinued operation beginning in
September 1996.
As a result of the two sales, the assets, liabilities, results of operations and
cash flows of both businesses have been segregated and reported as discontinued
operations for the nine month period ended September 30, 1998.
Revenues from discontinued operations were $137.2 million for the nine-month
period ended September 30, 1998. The $20.3 million net after-tax gain from
discontinued operations consists of a $42.5 million after-tax gain from the sale
of the alarm services business, a $6.3 million after-tax alarm services
operating loss and a $15.9 million after-tax charge to adjust courier assets to
realizable value and to provide for losses prior to its sale.
(4) The Company's provisions for income taxes for the three and nine month
periods ended September 30, 1999 and 1998 reflect estimated annual tax rates for
the year applied to federal, state and foreign income.
<PAGE>
-7-
(5) Other expense, net is comprised of the following (millions of dollars):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Loomis, Fargo (income) loss $(0.4) $ -- $(1.0) $ 0.5
Excess purchase price amortization 1.2 1.2 4.1 5.2
-------------- ------------- -------------- ---------------
Total other expense, net $ 0.8 $ 1.2 $ 3.1 $ 5.7
============== ============= ============== ===============
</TABLE>
(6) As part of a brand unification strategy (announced May 4, 1999), the
Company entered into an agreement on March 30, 1999 (the "Agreement") with Wells
Fargo & Company ("Wells Fargo") to relinquish its royalty-free license to the
"Wells Fargo" name in the security field. In addition, Wells Fargo granted the
Company a royalty-free license to use the "Wells Fargo" name for a two-year
period commencing on the date of the Agreement. Under the Agreement, Wells
Fargo has reimbursed the Company for incurred and anticipated costs associated
with converting operations to the "Burns International" name. This includes,
among other things, consulting services and uniform, trademark, service mark,
tradename and signage changes.
The Company earns the reimbursement as certain milestones are achieved, as set
forth in the Agreement. The Company has accounted for the payment as a deposit
that will be offset against brand unification and trademark repositioning costs.
(7) Earnings per common share are based on average common shares outstanding
and common share equivalents. Common share equivalents recognize the dilutive
effects of common shares which may be used in the future upon exercise of
certain stock options. The number of shares used in the computation of earnings
per share were as follows (in thousands of shares):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic EPS
Average common shares outstanding 19,666 23,526 22,223 23,531
Diluted EPS
Common share equivalents 399 468 431 606
------------ ------------ ------------ ------------
Average common shares outstanding
and common share equivalents 20,065 23,994 22,654 24,137
============ ============ ============ ============
</TABLE>
On October 26, 1999, the Board of Directors approved a Stockholder Rights Plan
(the "Plan") for the Company. If a distribution were to occur under the Plan,
then earnings per share would be affected by the resultant increase in the
number of common share equivalents. (See Management's Discussion and Analysis
of Financial Condition and Results of Operations for a discussion of the Plan)
<PAGE>
-8-
(8) The allowance for doubtful accounts was $7.2 million at September 30, 1999
and $7.0 million at December 31, 1998, respectively. The accumulated
amortization of excess purchase price over net assets acquired was $50.9 million
at September 30, 1999 and $53.7 million at December 31, 1998.
The Company has an agreement to sell a revolving pool of trade accounts
receivable to a special purpose subsidiary of the Company. Under the current
facility, which supplemented a prior facility until April 26, 1999, and replaced
it thereafter, the subsidiary can sell up to a $120 million undivided interest
in such accounts receivable. At September 30, 1999, the subsidiary had
purchased $142.3 million of the Company's accounts receivable and sold a $105.0
million undivided interest in such receivables. At December 31, 1998, the
subsidiary had purchased $135.7 million of the Company's accounts receivable and
had sold an undivided interest therein equal to $120.0 million. The
subsidiary's unsold interest in such receivables is considered an interest in a
security and is included in "Other current assets." Also included in "Other
current assets" at December 31, 1998 is $37.6 million of interest-bearing cash
deposits held in trust under the terms of the maturing facility. The deposits
represent proceeds of collections held back based on the amount of eligible
receivables in the pool. No such cash deposits were required at September 30,
1999, under the new facility. The Company's retained interests in the
receivables and cash deposits are generally restricted.
Supplemental Cash Flow Information:
Net cash payments for interest and income taxes were as follows (millions of
dollars):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Interest paid $14.5 $34.5
Income taxes paid $ 3.0 $46.2
</TABLE>
(9) The following tables summarize the capitalization of the Company at
September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------------------- ---------------------------------
DEBT
(millions of dollars) Current Long-Term Current Long-Term
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
9-5/8% senior subordinated notes (face
amount of $125 million due 2007) $ -- $ 0.2 $ -- $124.4
Bank revolving credit loan (at an average rate
of 7.8% in 1999) -- 114.1 -- --
Unsecured notes (at an average rate of 8.8% in
1998) -- -- 2.3 --
------------- ------------- ------------- ------------
Total notes payable and long-term debt $ -- $114.3 $ 2.3 $124.4
============= ============= ============= =============
</TABLE>
<PAGE>
-9-
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY September 30, December 31,
(millions of dollars) 1999 1998
------------------- ----------------------
<S> <C> <C>
Common stock $ 0.2 $ 0.2
Capital in excess of par value 37.3 35.2
Retained earnings 78.7 70.8
Accumulated comprehensive loss (1.2) (1.5)
------------------- ----------------------
115.0 104.7
Less treasury common stock, 7,148,207 shares
in 1999 and 2,768,339 shares in 1998, at cost (89.6) (7.8)
------------------- ----------------------
Total shareholders' equity $ 25.4 $ 96.9
=================== ======================
</TABLE>
<TABLE>
<CAPTION>
CAPITAL STOCK - NUMBER OF SHARES
(thousands of shares) September 30, December 31,
1999 1998
-------------------- -----------------------
<S> <C> <C>
Common stock, $.01 par value:
Authorized 50,000.0 50,000.0
Issued 24,096.8 23,879.1
Outstanding 19,668.6 23,830.8
Series I non-voting common stock, $.01 par value:
Authorized 25,000.0 25,000.0
Issued 2,720.0 2,720.0
Outstanding -- --
Preferred stock, $.01 par value:
Authorized 5,000.0 5,000.0
Issued and Outstanding -- --
</TABLE>
(10) On April 28, 1999, the Mission Trust and the Company settled a lawsuit
against the Company related to the Company's discontinued property and casualty
insurance subsidiary, Centaur Insurance Company. The suit had alleged damages in
excess of $100 million against the Company due to Centaur's failure to satisfy
its reinsurance obligations to Mission. As part of the settlement, the Company
paid the Mission Trust $4 million in the second quarter of 1999, and agreed to
pay one-third of any future dividend or other distribution that may be paid to
the Company after rehabilitation of Centaur.
The Company and certain of its current and former subsidiaries have been
identified by the U.S. Environmental Protection Agency and certain state
environmental agencies as potentially responsible parties ("PRPs") at several
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") and equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
The Company believes that none of these matters individually or in the aggregate
will have a material adverse effect on its financial position or future
operating results, generally either because the
<PAGE>
-10-
maximum potential liability at a site is not large or because liability will be
shared with other PRPs, although no assurance can be given with respect to the
ultimate outcome of any such liability. Based on its estimate of allocations of
liability among PRPs, the probability that other PRPs, many of whom are large,
solvent public companies, will fully pay the costs allocated to them, currently
available information concerning the scope of contamination at such sites,
estimated remediation costs at such sites, indemnification obligations in favor
of the Company from the current owners of certain sold or discontinued
operations, estimated legal fees and other factors, the Company has allowances
for indicated environmental liabilities in the aggregate amount of approximately
$2 million (relating to environmental matters with respect to disposed
operations of the Company). Additionally, the Company will be indemnified by
its former subsidiary, Borg-Warner Automotive, against certain future costs
relating to environmental liabilities associated with certain former automotive
operations.
In November and December, 1998, Loomis, Fargo made various claims against the
Company for indemnification under the Contribution Agreement dated November 28,
1996 for certain environmental, cargo loss and other matters. The Company and
Loomis, Fargo have resolved all such matters without a material adverse effect
on the Company.
The Company believes that the various asserted claims and litigation in which it
is involved will not materially affect its financial position, future operating
results or cash flows, although no assurance can be given with respect to the
ultimate outcome of any such claim or litigation.
(11) In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income." The accumulated comprehensive loss
balances as of September 30, 1999 and December 31, 1998 were $1.2 million and
$1.5 million, respectively, and are included in shareholders' equity. The
accumulated comprehensive loss balances for both periods consist solely of
currency translation adjustments, net of tax.
<PAGE>
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ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT EVENTS
- ------------------
On October 28, 1999, the Company announced that the Merrill Lynch Capital
Partners, Inc., ("MLCP"), intends to distribute to its partners the remaining
shares of the Company's common stock currently owned by the fund. MLCP owned
3,217,532 shares on October 28, 1999, representing approximately 16.4% of the
outstanding shares. The general partner of the fund will receive approximately
412,300 shares in the distribution, and has agreed, subject to certain
conditions, to hold the shares until at least April 15, 2000. Other Merrill
Lynch affiliates, not part of the distribution, directly own 1,843,576 shares of
the Company. Of these shares, affiliates owning 788,892 shares agreed to comply
with the holdback arrangement. Current Board members James J. Burke, Jr., Albert
J. Fitzgibbons, III and Alexis P. Michas, formerly representatives of MLCP's
investment interest in the Company, will remain on the Board of Directors at the
Company's request, as independent directors.
On October 28, 1999, the Company announced the resignation of Timothy M. Wood,
Vice President and Chief Financial Officer to pursue other interests. Mr. Wood
will assist the Company with several transitional matters until January 3, 2000.
On October 26, 1999, past Chairman, President and Chief Executive Officer, J.
Joe Adorjan, and retired Chairman and Chief Executive Officer, Donald C.
Trauscht, retired and resigned as members of the Board of Directors.
On October 26, 1999, the Board of Directors approved a Stockholder Rights Plan
designed to enhance the Board's ability to protect the Company's shareholders.
The plan was adopted to protect against unsolicited attempts to acquire control
of the Company when adequate price is not offered to all shareholders or the
offer is not in the best interest of the Company and its shareholders. The
rights will be distributed as a dividend at the rate of one right for each share
of common stock, par value $0.01 per share ("Voting Common Stock"), and Series I
Non-Voting Common Stock, par value $0.01 per share (together with the Voting
Common Stock, the "Common Stock") held by stockholders of record at the close of
business on November 8, 1999. Each right will entitle the holder to purchase,
upon the occurrence of certain events, one unit of a share of preferred stock
for $55.00. The rights generally will be exercisable only if a person or group
acquires beneficial ownership of 15 percent or more of Burns International
Services Corporation's Common Stock or commences a tender or exchange offer
that, upon consummation, would result in a person or group owning 15 percent or
more of Burns International Services Corporation's Common Stock. Under certain
circumstances, the rights are redeemable at a price of $0.01 per right. The
rights will expire on November 8, 2009.
On July 13, 1999, the Company announced that Terry L. Lengfelder was elected to
the Board of Directors.
<PAGE>
-12-
RESULTS OF OPERATIONS
- ---------------------
Revenues
Net service revenues for the three months ended September 30, 1999 increased
$12.8 million, or 3.8% over 1998. Nine-month service revenues increased $39.4
million, or 4.0% over the comparable 1998 period. Higher average billing rates,
growth in permanent guard hours and higher client retention rates contributed to
the increases.
Costs and Expenses
Cost of services increased in line with revenue growth, rising 3.8% for the
three and nine-month periods ended September 30, 1999, compared to the
respective periods of 1998. Three and nine-month labor rates on new business
continued their upward trends, but were largely offset by improved experience
under the Company's self-insurance program. In addition, lower security officer
turnover helped contain costs. Gross margins held steady at 15.6% for the three-
months ended September 30, 1999 and 1998. Nine-month gross margins rose from
15.6% in 1998 to 15.8% in 1999.
Selling, general and administrative expenses for the three-months ended
September 30, 1999, increased $2.0 million, or 5.6% over the same period of
1998. The 1999 third-quarter reflected various non-recurring items that
contributed a net $155,000 reduction, before tax effects, to 1999 third-quarter
selling, general and administrative expenses. These items included $2.4 million
in net receipts from legal settlements and $1.1 million for other matters,
including reversals of legal and other accruals that are no longer required.
Offsetting these amounts were charges of $1.1 million to adjust certain assets
to their realizable value and $2.2 million related to business relocation,
organizational changes and other expenses.
Year-to-date selling, general and administrative expense comparisons are
impacted by a $14.4 million provision recorded in the second quarter of 1998.
Excluding the $14.4 million provision, selling, general and administrative
expenses increased $3.3 million, or 3.1%, over 1998.
Depreciation expense for the three and nine-month periods ended September 30,
1999 increased $0.5 million and $1.0 million, respectively, over 1998. Increased
expense reflects planned and ongoing investments in computer technology and
software.
Included in other net expense is the Company's share of Loomis, Fargo net
earnings. The Company recorded $0.4 million equity income for the three-months
ended September 30, 1999 compared to breakeven earnings for the same period of
1998. Equity income for the nine-months ended September 30, 1999 was $1.0
million versus a $0.5 million loss in 1998. Also included in other net expense
is amortization of excess purchase price. The $1.1 million decline in nine-
month amortization results principally from lower levels of intangibles.
Net Interest Expense and Finance Charges
Third quarter interest expense increased $0.6 million over 1998 due to higher
net debt levels and higher short-term interest rates.
<PAGE>
-13-
Discontinued Operations
The 1998 gain from discontinued operations reflects:
. A $42.5 million gain on the sale of the electronic security services
business (net of $59.8 million tax expense).
. A $6.3 million loss from electronic security services operations prior to
sale of the unit.
. A $15.9 million charge to adjust courier services assets to realizable value
and to provide for future losses prior to its sale.
Extraordinary Items
On June 10, 1999, the Company repurchased $124.8 million principal amount of 9
5/8% senior subordinated notes due 2007 at a premium of 12.35%. Associated with
the repurchase, the Company recorded a $12.1 million extraordinary loss (net of
$7.8 million tax benefit) to capture the call premium paid, cash fees paid on
the transaction and the associated write-off of unamortized finance charges.
On July 3, 1998, all outstanding 9 1/8% senior subordinated notes due 2003 were
redeemed. A $6.3 million extraordinary loss (net of $4.2 million tax benefit)
was recorded for the associated call premium and for the write-off of
unamortized finance charges.
Liquidity
- ---------
The Company's liquidity is provided by its operations and financial resources,
including the facility for sale of receivables. Net funding, which includes
accounts receivable sold through this facility, was as follows (millions of
dollars):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Short-term borrowings $ -- $ 2.3
Long-term debt 114.3 124.4
Securitized accounts receivables sold 105.0 82.4
Less: Cash and cash equivalents (10.5) (105.7)
----------- ---------
Total net funding $ 208.8 $ 103.4
=========== =========
</TABLE>
The Company's net funding requirements increased $105.4 million from its
December 31, 1998 level. Available cash and cash equivalents and increased
borrowings from the Company's accounts receivable and revolving credit
facilities were used to fund the Company's second quarter 1999 stock repurchase
and 9 5/8% subordinated debt buyback.
The Company has access to a number of financing sources, including a $120
million revolving accounts receivable facility and a $225 million revolving bank
line of credit. The available revolving bank facility is reduced by the total
dollar amount of letters of credit issued and outstanding. Letters of credit
issued and outstanding were $59.6 million and $93.2 million at September 30,
1999 and December 31, 1998, respectively.
Following the second quarter 1999 repurchase of the 9 5/8% subordinated debt,
substantially all of the Company's borrowings carry variable rates. To balance
the inherent interest rate exposure, the
<PAGE>
-14-
Company entered into two interest rate swap agreements in June 1999. See Item 3,
Quantitative and Qualitative Disclosures about Market Risk for more information.
Cash Flow
Cash and cash equivalents decreased $95.2 million in 1999 versus a $104.5
million increase in 1998. The $104.5 million inflow in 1998 reflects proceeds
from the Wells Fargo Alarm sale and the offsetting retirement of the 9 1/8%
senior debt.
The 1999 cash and cash equivalents decreased $95.2 million, primarily as a
result of the Company's second quarter 1999 stock repurchase and 9 5/8%
subordinated debt buyback. Earnings from continuing operations were
substantially absorbed by a $13.1 million increase in working capital
requirements and $8.7 million of payments reducing liabilities associated with
discontinued operations.
The Company believes that cash flow from operations, together with existing cash
and borrowing capacity, is adequate to meet its capital needs.
Year 2000
General
Since the inception of computers, software applications were programmed to
identify a year as a two-digit data field. In the new Millennium, computer
applications and software may recognize the year 2000 as two zeros (00) or 1900.
This incorrect date recognition could cause systems and software malfunctions
that could have a material effect on business operations.
Company's Readiness
To ensure minimal business interruption due to computer failure, the Company has
performed a review of all software and computer applications for the Year 2000
entry. Both "IT systems" and "non-IT systems" were reviewed. IT systems refer to
all pre-packaged and internally developed software applications and programs.
Non-IT systems refer to various business machines that have "embedded" computer
language, examples of which are computer integrated circuits ("chips") and
telephone switches. The review was completed using company internal technicians,
as well as outside consulting firms.
System date remediation was conducted in phases. First, all relevant IT systems
and non-IT systems were assessed as to functionality and to determine Year 2000
impact. Second, for those systems and software found to be non-compliant or in
need of upgrading, corrective steps have been and are being taken, such as the
reprogramming or purchasing of replacement system software. Except as detailed
below, systems and software modifications have been tested and then implemented
at all necessary levels.
The Company's crucial computer systems are its source-to-gross payroll, gross-
to-net payroll, general ledger, accounts payable, accounts receivable and
invoicing systems. Specifically, the proprietary source-to-gross payroll system
has been remediated, installed and in operation since November 1997. A compliant
version of the gross-to-net payroll system was purchased and installed in the
second quarter and is currently in operation. The general ledger, accounts
payable, accounts receivable and invoicing systems were replaced with new
purchased, compliant software and are currently in operation. The upgraded
proprietary security guard scheduling system is Year 2000 compliant and has been
installed
<PAGE>
-15-
and tested at all domestic guard sites. Other non-guard operations use only
certain applications of the scheduling system, which are not critical to the
business, and are expected to complete installation and testing by December 15,
1999.
Overall, the Company's domestic operations are Year 2000 compliant, having
completed all three phases of the project. The operations will continue to test
their systems for the remainder of 1999 to verify system and data integrity and
to address software and database implementation and processing issues related to
newly installed systems. The Company's United Kingdom and Canadian operations
are in the final stages of system testing. The Colombian operation plans to be
Year 2000 compliant in late December 1999.
Company Risks and Contingency Plans
Operationally, the worst case scenario would be the failure of the central
payroll, local office guard scheduling systems or the central invoicing system.
In that event, the payroll system would be backed up by a manual/automated
system for the processing of paychecks. The scheduling systems would be backed
up by a central scheduling center and/or an on-line, time-entry system. Client
invoicing would be handled by a branch office supported system. These steps
would preclude any material business interruption.
The likely financial and non-financial impact of non-compliant third party
computer systems on the Company has not been quantified, as the Company cannot
predict other businesses' Year 2000 efforts. However, no single customer or
third party vendor of the Company could likely generate a material adverse
impact on Company operations. As part of the effort to assess its exposure to
risk, the Company mailed compliance questionnaires to its critical supply
vendors. Responses were received and no warnings or indications of non-
compliance were noted.
Costs of Compliance
To date, the Company has spent approximately $1.1 million toward remediation of
its Year 2000 problems, which includes computer consultant costs. Estimates of
the remaining cost of compliance are deemed not material by the Company.
Independent of the Year 2000 issue, the Company has had in process both
upgrading and replacement of certain systems and obsolete hardware to enhance
their functionality.
The Company's Year 2000 analysis and disclosure contains "forward looking"
statements about matters that are inherently difficult to predict. Such
statements include statements regarding the intent, opinion and current
expectations of the Company and its management. Such "forward looking"
statements involve risks and uncertainties that may affect future developments,
such as, the inability to deal with a Year 2000 issue due to a problem arising
on the part of a third party or vendor. While the Company believes that it has
implemented methodologies to address the Year 2000 issue so that it should not
materially affect its financial position, future operating results or cash
flows, no assurance can be given with respect to the ultimate outcome.
<PAGE>
-16-
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company has limited market risk exposures, which are primarily related to
changes in interest rates. The Company's policy is to balance its interest rate
exposure, which it may manage with interest rate swap agreements that hedge
outstanding borrowings. Following the repurchase of the Company's fixed rate
subordinated debt in June 1999, substantially all of the Company's borrowings
carry variable rates. As of September 30, 1999, approximately $114 million was
financed through the revolving bank credit facility, which carries interest
rates based on LIBOR and the prime rate. Approximately $105 million was funded
from the accounts receivable securitization facility, which uses rates based on
short-term commercial paper.
To reduce exposure to market interest rate volatility, the Company entered into
two interest rate swap agreements effective June 15, 1999. The agreements
protect the Company from rising market interest rates by effectively fixing
payment rates on a total of $75.0 million of its net funding. In both swap
agreements, the Company receives variable rate payments based on 3-month LIBOR
and pays fixed rate payments based on the terms of each swap. The differential
paid or received on the swap agreements is recognized as an adjustment to
interest expense in the period earned or incurred. Both swaps call for
settlement payments on a quarterly basis. The contract terms are as follows:
<TABLE>
<CAPTION>
Termination Notional Fixed Payment Floating
Date Amount Rate Rate
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Swap I June 15, 2000 US $25,000,000 5.638% 3-Month LIBOR
Swap II June 15, 2001 US $50,000,000 6.015% 3-Month LIBOR
</TABLE>
Under current and expected market conditions, the Company believes near-term
interest rate movements will not have a material negative impact on its results
of operations. Currently, the Company does not use foreign currency forward
contracts, does not have any material foreign currency exposure and does not use
derivative instruments for speculative purposes.
<PAGE>
-17-
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
Inapplicable.
Item 2. Changes in Securities
---------------------
Inapplicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On July 2, 1999, the Company held a special stockholder's meeting to change
the Company's name to Burns International Services Corporation. A proposal to
approve an Amendment to the Company's Restated Articles of Incorporation was
necessary to change the Company's name. The Amendment was approved by the
following votes:
<TABLE>
<CAPTION>
For Against Abstain
- --------------- ------------------ ------------------
<S> <C> <C>
22,322,858 17,522 7,817
</TABLE>
Item 5. Other Information
-----------------
The Company filed a Form 8-A12B on November 5, 1999, under Item 1,
Description of Registrant's Securities to be Registered, that described the
declaration of a dividend of rights under a new Stockholders' Rights Plan and,
under Item 2, Exhibits, filed a copy of the Rights Agreement.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
27- Financial Data Schedule.
(b) Reports on Form 8-K:
The Company filed a Form 8-K on September 28, 1999, under Item 5,
Other Events, that included an open letter to shareholders from
the Chief Executive Officer.
The Company filed a Form 8-K on November 5, 1999, under Item 5,
Other Events, that reported the declaration of a dividend of
preferred stock purchase rights under a new Shareholder Rights
Plan.
<PAGE>
-18-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Burns International Services Corporation
---------------------------------------------
(Registrant)
By /s/ Brian S. Cooper
---------------------------------------------
(Signature)
Brian S. Cooper
Treasurer
(Principal Financial and Accounting Officer)
By /s/ Robert E. T. Lackey
---------------------------------------------
(Signature)
Robert E. T. Lackey
Vice President, General Counsel and
Corporate Secretary
(Duly Authorized Officer)
Date: November 12, 1999
<TABLE> <S> <C>
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<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 11
<SECURITIES> 0
<RECEIVABLES> 65
<ALLOWANCES> 7
<INVENTORY> 0
<CURRENT-ASSETS> 122
<PP&E> 40
<DEPRECIATION> 17
<TOTAL-ASSETS> 324
<CURRENT-LIABILITIES> 118
<BONDS> 114
0
0
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<OTHER-SE> 25
<TOTAL-LIABILITY-AND-EQUITY> 324
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<OTHER-EXPENSES> 7
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</TABLE>
