The Pittston Company 2000 Annual Report

Brink's Home Security
The following is a table of selected financial data for Brink's Home Security ("BHS") on a comparative basis:

(a) The change in accounting principle (described below) reduced operating revenue by $6.4 million and increased the investment in new subscribers by $2.3 million for the year ended December 31, 2000.

(b) Investment in new subscribers in 2000 primarily includes the marketing and selling expenses, net of the deferral of certain direct costs, incurred to attract new subscribers. Investment in new subscribers in 1999 and 1998 includes the marketing and selling expenses, net of nonrefundable installation revenues. If 2000 were restated on the same basis as 1999, the investment in new subscribers would have been $26.8 million.

(c) Monthly recurring revenues are calculated based on the number of subscribers at period end multiplied by the average fee per subscriber received in the last month of the period for monitoring, maintenance and related services.

(d) EBITDA represents earnings before interest, tax, depreciation and amortization.

Prior to 2000, BHS charged against earnings as incurred, all marketing and selling costs associated with obtaining new subscribers and recognized as revenue all non-refundable payments received from such subscribers to the extent that costs exceeded such revenues. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements", followed by a related interpretation in October 2000. These releases provide interpretive guidance on applying generally accepted accounting principles covering revenue recognition and related costs. Pursuant to this guidance, BHS now defers all new installation revenue and the portion of the new installation costs deemed to be direct costs of subscriber acquisition. Such revenues and costs (i.e. net revenues) are amortized over the expected term of the relationship with the subscriber.

The above has been accounted for as a change in accounting principle. Accordingly, full year 2000 results reflect the impact of the accounting change which was effective January 1, 2000. The Company recorded a non-cash, pretax charge of $84.7 million ($52.0 million after tax) to reflect the cumulative effect of the change in accounting principle on years prior to 2000. Operating revenues and total segment profits reported for 2000 would have been higher by $6.4 million and $2.3 million, respectively, under the accounting principles used to report results for years prior to 2000.

The change in accounting principle implemented during 2000 will have no effect on the economics and cash flows of the business. However, the deferral of new installation revenues, net of a portion of the costs of obtaining new subscribers, may cause reported segment profit to not fully reflect the economic value created by building the subscriber base in order to grow recurring revenues.

Total segment profit comprises two main components, investment in new subscribers and operating profit from recurring services. Investment in new subscribers is the net cost (primarily marketing and selling expenses) of adding to the subscriber base every year. In future years, the level of investment charged to income will be influenced by several factors, including the growth rate of subscribers, the net costs of adding new subscribers and the amortization of deferred net acquisition costs of subscribers. Operating profit from recurring services in 2000 reflects the normal monthly earnings generated from the existing subscriber base plus the amortization of deferred revenues and deferred direct costs from installations. Although it is impacted by the average monitoring fee per subscriber and operational costs, the change in this component is primarily determined by the size of the subscriber base.

Revenues for BHS were $238.1 million in 2000 versus the $228.7 million for 1999. Except for the change in accounting principle, revenues would have been $6.4 million higher or $244.4 million, an increase of 7% over the year earlier period. Such increase resulted primarily from the 7% growth in the average subscriber base. Monthly recurring revenues, measured at year-end, grew a corresponding 7% from 1999 to 2000.

Segment operating profit for 2000 was $54.3 million but would have been $56.7 million under the accounting principles used to report 1999 results. This $2.4 million increase in operating profit from the $54.2 million reported in 1999 was due primarily to the growth in operating profit from recurring services caused by the year over year increase in the subscriber base. This was partially offset by the increased cost of the investment in new subscribers.