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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
_______
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 26, 1997
-------------------------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________________ TO _______________________
COMMISSION FILE NUMBER: 1-11841
PINKERTON'S, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-5318100
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
15910 VENTURA BOULEVARD, SUITE 900, ENCINO, CALIFORNIA 91436-2810
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 380-8800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
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 (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
--- ---
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]
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT ON MARCH 4, 1998 WAS $203,087,746 (EXCLUDING STOCK HELD BY DIRECTORS
AND EXECUTIVE OFFICERS WITHOUT DETERMINING AFFILIATE STATUS).
THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $.001 PER
SHARE, OUTSTANDING ON MARCH 4, 1998 WAS 12,596,587.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE REGISTRANT'S 1997 ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR
ENDED DECEMBER 26, 1997 ARE INCORPORATED BY REFERENCE IN PARTS I AND II
HEREOF. WITH THE EXCEPTION OF THOSE PORTIONS WHICH ARE EXPRESSLY INCORPORATED
BY REFERENCE IN THE ANNUAL REPORT ON FORM 10-K, THE REGISTRANT'S 1997 ANNUAL
REPORT TO STOCKHOLDERS IS NOT DEEMED FILED AS PART OF THIS REPORT. PORTIONS OF
THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION PRIOR TO THE EXPIRATION OF 120 DAYS AFTER DECEMBER 26,
1997, IN CONNECTION WITH THE REGISTRANT'S ANNUAL MEETING OF STOCKHOLDERS TO BE
HELD ON APRIL 30, 1998, ARE INCORPORATED BY REFERENCE IN PART III HEREOF.
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PART I
ITEM 1. BUSINESS
GENERAL
Pinkerton's, Inc. (with its consolidated subsidiaries, "Pinkerton" or the
"Company") is one of the world's leading providers of contract security and
security-related services. The Company, which was founded in 1850 by the
original "private eye," Allan Pinkerton, provides uniformed security officer
services to over 80% of the United States "Fortune 1000" companies. In addition
to security officer services, Pinkerton provides security systems design and
integration services, security consulting, pre-employment background
verification and assessment services, general, undercover and specialized
investigations, and patrol and alarm response services. The Company operates
over 250 offices in the United States, Canada, Latin America, Mexico, Europe and
Asia and has more than 47,000 employees.
Pinkerton is primarily the result of the combination of the businesses of
California Plant Protection, Inc. ("CPP"), founded as a merchant patrol service
in 1947, and Pinkerton's, Inc., founded in 1850 as an investigation service. By
the end of 1987, CPP had grown to become the fourth largest security officer
service company in the United States. CPP acquired Pinkerton in January 1988
from American Brands, Inc. Immediately prior to the acquisition, Pinkerton was
the second largest supplier of security officer services in the United States
and one of the largest national and international investigation companies. As a
consequence of its long and sometimes colorful history, Pinkerton has become one
of the best-known security companies in the world. Immediately after the
acquisition, CPP merged with and into Pinkerton.
In 1997 Pinkerton made further progress towards its strategy of being a world-
class, global security solutions provider. The Company made progress in building
its security systems integration business, a keystone of this strategy, by
acquiring two regional systems integrators another in January 1997. Pinkerton is
now one of the largest independent security systems integrators in the world and
continues to seek acquisitions to build this capability nationwide. In January
1997, the Company acquired WKD Security GmbH, a security service provider in
Germany, and, in June 1997, acquired a 50% interest in Steel S.A., a security
service provider in Santiago, Chile. To broaden the spectrum of services and
products provided by Pinkerton, the Company continued its strategy of forming
strategic alliances with companies having expertise in areas such as electronic
data and computer network security and workplace violence and crisis. During
1997 the Company continued to launch a variety of initiatives intended to make
total quality and continuous improvement a permanent way of life at Pinkerton.
The Company was incorporated in 1925 in the State of Delaware. The Company's
principal executive offices are located at 15910 Ventura Boulevard, Suite 900,
Encino, California 91436-2810; its telephone number is (818) 380-8800.
MARKET OVERVIEW
Industry research firms have categorized the United States security services
market into the following segments: security officer and investigation services,
armored car services, central station monitoring services, and security
consulting and other services. Security officer and investigation services is
the oldest and largest segment of the security industry. Services in this market
segment include armed and unarmed security officer and patrol services and
various types of investigation services, including background, undercover,
insurance claims, financial fraud and other investigations. These services are
often characterized as either "proprietary" or "contract." Under proprietary
arrangements, users of the services employ, schedule and manage their own
security officers and investigators. In contrast, contract services are provided
by independent security officer and investigation service companies such as
Pinkerton to end users pursuant to contracts.
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The Company believes that it offers the broadest array of security and security-
related services and products in its industry. The Company promotes the concept
of "one-stop shopping" as an advantage to clients.
SECURITY OFFICER SERVICES
Pinkerton's principal business consists of providing security officer services
to a wide variety of industrial, commercial and retail businesses, hospitals,
governmental units and sponsors of special events. Security services include the
furnishing of uniformed security officers and other personnel to perform
services associated with physical security and protection. Depending on the
needs of the client, security officers are on hand, often around-the-clock, to
provide facility security, access control, personnel security checks and traffic
and parking control and to protect against fire, theft, sabotage and safety
hazards. In addition, Pinkerton security officers respond to emergency
situations and report fires, intrusions, natural disasters, work accidents and
medical crises to appropriate authorities. Pinkerton provides specialized
vehicle patrol and inspection services and alarm monitoring and response
services. Although Pinkerton supplies both armed and unarmed security officers,
the vast majority are unarmed.
Security officer services are generally provided under specific contracts in
which Pinkerton assumes responsibility to employ, schedule and pay all security
officers and to provide uniforms, equipment, training, supervision, fringe
benefits, bonding and workers' compensation insurance. Pinkerton customarily
charges its clients for its services at an hourly rate per officer. The
contract may provide for a fixed or variable hourly rate. Contracts between
Pinkerton and its clients are frequently the result of competitive bidding. Most
contracts extend for one year but are often terminable on relatively short
notice (usually 30-90 days) by either party.
In fiscal years 1995, 1996 and 1997, security officer services accounted
for approximately 96%, 92% and 90%, respectively, of the Company's
revenues.
SECURITY SYSTEMS INTEGRATION SERVICES
Pinkerton integrates diverse electronic security systems, such as closed circuit
television, access control, fire and burglar alarms, communications, digital
badging and network security, into a coherent interrelated operating system that
enhances security and automates alarm response. The Company also provides
ongoing maintenance of such systems. Pinkerton has supplier and distribution
agreements with the manufacturers of the equipment that the Company believes
best meets client needs. The equipment used by Pinkerton is widely available
from several suppliers. Management believes that, in order to service an
installed security system effectively, a service provider must be located within
a three to four hour drive of the client. Pinkerton currently provides these
services in many, but not all, regions in the United States, and in some
international areas. The Company expects to continue to expand these services by
growing internally and by acquiring additional regional security systems
integration companies in order to assemble nationwide capabilities.
ELECTRONIC SYSTEM MONITORING SERVICES
Through its Advanced Technology Center, located near Atlanta, Georgia, Pinkerton
provides equipment and alarm monitoring services. Such services primarily
involve remote monitoring of security systems, card access and video systems,
event monitoring and service automation. The center can monitor many types of
electronic systems, such as credit card blocking, card access systems for office
buildings and emergency telephones in elevators. The Company also maintains
central monitoring stations in Alaska, Ontario, Quebec, Germany, the Czech
Republic and the United Kingdom.
SECURITY CONSULTING SERVICES
Pinkerton provides security consulting services worldwide. These services
include security surveys, assessments, contingency and crisis planning, design
and engineering services including computer-aided
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designs and specifications and systems design. Pinkerton also provides project
management services, including quality assurance, construction and budget
management and technical documentation. The Company's global risk intelligence
service provides daily, weekly and monthly assessments of international travel
and asset risk related to terrorism, crime and political instability.
INVESTIGATION AND OTHER SECURITY-RELATED SERVICES AND PRODUCTS
Pinkerton provides investigation services on a global basis to a diverse array
of businesses, including general and undercover investigations as well as
insurance and other fraud investigations, surveillance, personal background
checks, mystery shopping, business due diligence investigations, counterfeiting
and intellectual property infringement investigations. Pinkerton also provides
workplace violence prevention and management services as well as investigations
related to kidnap and ransom and product contamination incidents.
Pinkerton usually offers investigation services to clients on a specific project
basis and charges its clients an hourly rate for services performed. Pinkerton
occasionally performs such services on a retainer or fixed fee basis. Most
agreements between Pinkerton and its clients covering investigation services
provide that Pinkerton or the client may terminate their relationship at any
time. Pinkerton, as a matter of Company policy, does not perform family or
domestic relations investigations, political investigations or generally work on
behalf of plaintiffs in civil litigation or defendants in criminal litigation.
PRE-EMPLOYMENT AND WORKPLACE SERVICES
Pinkerton offers information solutions for workplace issues through its employee
selection and internal communications program. Pinkerton helps companies
minimize the risks and business abuses associated with unqualified and poorly
trained employees that can significantly affect a company's bottom line.
Pinkerton provides hiring tools and strategies implemented with technology to
assist its clients in their attempts to hire qualified, honest employees and to
minimize negligent hiring concerns, reduce turnover, and increase productivity.
Pinkerton's employee background investigation software allows its clients to
interface electronically with its Information Center in Charlotte, North
Carolina facilitating requests for background information. In addition,
Pinkerton's internal communications services help clients educate employees on
ethics, compliance, loss prevention, safety and other workplace issues.
Pinkerton also provides a toll-free "hotline" service for reporting of ethical
misconduct, employee concerns or security and safety incidents through
Pinkerton's AlertLine information center 24 hours a day, seven days a week.
STRATEGIC ALLIANCES
The Company has entered into strategic alliances with other companies that allow
Pinkerton to provide its clients with an even broader spectrum of security-
related services. Through these relationships, Pinkerton can provide clients
with crisis prevention and management services, computer network security and
related consulting services.
SALES
Pinkerton organizes its operations into domestic and international regions. The
Company markets and cross-sells its security and security-related services and
products both through its individual district offices worldwide and through its
separate marketing and sales organizations.
COMPETITION
The market for all of Pinkerton's services is highly fragmented and competitive.
Domestically, there are approximately ten national security officer and
investigation services companies, of which Pinkerton believes it is the second
largest based upon annual revenues from security related services. The Company
also competes with large national and multinational security officer companies
in certain of its overseas markets and with numerous smaller regional and local
companies providing similar services in the United States and international
markets.
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In 1996 Pinkerton became, and during 1997 continued to be, one of the largest
independent security systems integrators in the United States on the basis of
annual revenue. There are many security product manufacturers that sell and
install their own manufactured products and, to various degrees, integrate them
with other products; and there are numerous smaller regional and local security
systems installers and integrators in the United States and international
markets.
Competition in the security officer service industry and in the Company's other
service areas is intense and is based primarily on price in relation to the
quality of service; the scope of services performed; the extent and quality of
security officer supervision, recruiting, selection and training; and local
and/or national reputation.
CLIENTS: DOMESTIC AND INTERNATIONAL
The Company provides services to more than 80% of the United States "Fortune
1000" companies. Internationally, the Company provides security officer and
investigation services to firms in the financial, manufacturing, retail and
transportation areas, as well as the United States and foreign governments. The
Company's largest client, General Motors Corporation, contracts for over 145,000
security officer hours per week. In 1997, the security services Pinkerton
provides to General Motors expanded to include investigations, executive
protection and technology support. Total revenue under this contract accounted
for approximately 13% of the Company's revenue in 1997. The loss of sales to
any single client, with the exception of General Motors, would not have a
material adverse effect on the Company. The Company's agreements to supply
contract security to General Motors currently extends to 1999.
EMPLOYEES, MANAGEMENT AND TRAINING
Pinkerton believes that the quality of its security officers is key to its
ability to offer world-class service. Pinkerton's policy is to subject all
employee candidates to a selection process involving an integrity and work ethic
test, a structured computer-assisted employment interview, a background
verification and records check, and a series of interviews.
Pinkerton's training efforts consist of providing employees with field manuals,
training films, tests, client-specific operating instructions and weekly
recorded telephone updates. All security district managers, operations managers
and field supervisors also must complete Pinkerton's proprietary, accredited
Advanced Certification Training Course. In addition, Pinkerton encourages all of
its security officers to take this course.
Many applicants for investigative positions have had experience in law
enforcement, the insurance industry or military branches specializing in
investigation prior to joining Pinkerton and, as such, are trained professionals
with field experience. Once on the job, Pinkerton provides investigators with
field manuals and periodic training.
Pinkerton has more than 47,000 employees. At any given time, up to approximately
one-third of the Company's employees are considered part-time employees.
Collective bargaining agreements cover approximately 5% of its employees in the
United States, approximately 81% of its employees in Canada and approximately
94% of its employees in Mexico. The Company is not a party to any collective
bargaining agreement covering any of its employees in Europe or Asia, but in
Europe is subject to industry-wide collective bargaining agreements. Relations
with employees have generally been satisfactory, and Pinkerton has not
experienced any significant work stoppages attributable to labor disputes.
Security officers and other personnel supplied by Pinkerton to its clients are
Pinkerton's employees, even though they may be stationed regularly at a clients'
premises.
Pinkerton's business is labor intensive and, as a result, is affected by the
availability of qualified personnel and the cost of labor. The Company's ability
to pass along any increases in labor costs may be limited by contract or by
price competition within the industry, which has been intense for several years.
Labor shortages can cause the Company to incur significant overtime expense in
geographic areas experiencing low unemployment. The premium portion of overtime
expense is typically absorbed by the Company.
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REGULATION AND LEGAL CONSIDERATIONS
Pinkerton is subject to and complies with a large number of city, county and
state occupational licensing and firearm laws that apply to security officers
and private investigators. In addition, most states have laws requiring training
and registration of security officers, regulating the use of badges and
uniforms, prescribing the use of identification cards or badges, and imposing
minimum bond surety or insurance standards. Federal legislation has been
introduced to establish minimum Federal standards for security officer
qualification and training and similar legislation is pending in several of
those states that do not already have standards governing security services. The
Company, either directly or through industry trade associations, generally
supports the creation of minimum standards for the industry. The Company does
not expect the establishment of minimum Federal standards to have an adverse
affect on the Company's business. The Company also must comply with city, county
and state licensing requirements in order to provide certain systems integration
and alarm monitoring services. Many foreign countries also have laws that
restrict the ability of Pinkerton to render certain services, including laws
prohibiting the provision of private security services and those limiting
foreign investment.
FINANCIAL INFORMATION ABOUT FOREIGN OPERATIONS
See Note 15 to Notes to Consolidated Financial Statements in the Company's
1997 Annual Report to Stockholders incorporated herein by reference.
NOTE ON FORWARD-LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1996 (the "Reform Act"), the Company is hereby
providing cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made by
or on behalf of the Company. Any statements that express, or involve
discussions as to, expectations, beliefs, plans, objectives, assumptions or
future events or performance (often, but not always, identified through the use
of words or phrases such as the Company or management "believes," "expects,"
"anticipates," "hopes," words or phrases such as "will result," "are expected
to," "will continue," "is anticipated," "estimated," "projection" and "outlook,"
and words of similar import) are not historical facts and may be forward-
looking. Such forward-looking statements involve estimates, assumptions, and
uncertainties, and, accordingly, actual results could differ materially from the
those expressed in the forward-looking statements. Such uncertainties include,
among others, the factors noted under the caption "Outlook: Issues and Risks"
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated by reference into Item 7 of this report from the
Company's 1997 Annual Report to Stockholders and the following:
Acquisition Strategy
In fulfilling the Company's long range strategic goals, the Company is actively
and currently seeking to expand its business through selected acquisitions which
may be substantial in size. Accomplishing this goal will depend on a number of
factors, including the Company's ability to identify and acquire acceptable
businesses, hire and train qualified managers and integrate new acquisitions
into the Company's operations. The process of consummating acquisitions involves
greater risks than management of an existing business, and assimilating acquired
businesses may be prolonged due to unforeseen difficulties, may require a
disproportionate amount of resources and management's attention and may not
result in the expected economic benefits. Factors which may affect the success
of an acquisition include, among other things, the retention of acquired
contracts and management, compatibility of the acquired company's culture with
Pinkerton's, the appropriateness of overhead structure in relation to the size
of the acquired business and the targeted market and trends affecting the
industry generally. There can be no assurance that any one or more acquisition
candidates can be identified or acquired at acceptable prices or be successful.
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Management may determine that it is necessary or desirable to obtain financing
for such acquisitions through bank borrowings or the issuance of debt or equity
securities. Debt financing of any such acquisition could increase the leverage
of the Company. Equity financing of any such acquisition may dilute the
ownership of the Company's stockholders.
Since the beginning of 1995, Pinkerton has acquired eight regional security
systems integration businesses. Despite achieving higher gross margins than the
Company's security officer business, the Company's security systems integration
business has not, in the aggregate, achieved results consistent with
management's expectations in part because of the operating expenses associated
with assimilating these acquisitions, organizing the division and pursuing
additional acquisitions. There can be no assurance that management's
anticipated results will be achieved with security systems integration
businesses acquired or to be acquired by the Company.
International Operations
Pinkerton's international operations are vulnerable to currency fluctuations,
the difficulty of doing business in a foreign culture and regulatory environment
and potential government and economic instability, particularly in Mexico, where
the Company's operations have been negatively impacted by a prior currency
devaluation. Moreover, the Company's ability to expand its international
presence profitably will depend, in large part, upon its successful completion
of acquisitions that carry out its strategic goals in the various markets.
ITEM 2. PROPERTIES
Pinkerton leases approximately 56,000 square feet of office space in Encino,
California for its corporate headquarters. The lease expires in 2003. Pinkerton
has two successive options to further extend the lease until 2013.
Except for a few office locations owned by security systems integration
subsidiaries, Pinkerton has entered into leases covering each of its office
locations. For the year ended December 26, 1997, the aggregate annual rental
for all office space under lease, including the Company's foreign operations,
was approximately $10.5 million. Leases that expire generally are expected to be
renewed or replaced by other leases.
ITEM 3. LEGAL PROCEEDINGS
The nature of the Company's business subjects it to a significant volume of
ordinary, routine claims and lawsuits incidental to such business. The Company
maintains self-insurance programs and insurance coverage that it believes are
appropriate for its liability risks. Nonetheless, many claims or lawsuits
brought against the Company allege substantial damages that, if awarded and
ultimately paid by the Company (rather than insurers or indemnitors), could have
a material adverse effect on the results of operations or financial condition of
the Company. In the opinion of management, based on currently known facts and
the advice of legal counsel, there is no single claim or lawsuit, or group of
claims or lawsuits based on the same facts, pending against the Company that the
disposition of which will have a material adverse effect on the Company's
financial statements taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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EXECUTIVE OFFICERS OF REGISTRANT
Set forth below are the names and positions and ages as of the date hereof of
the Company's current executive officers.
Denis R. Brown (58) was elected the President and Chief Executive Officer and a
director of the Company in April 1994. Prior to joining the Company, Mr. Brown
served at Concurrent Computer Corporation as Chairman of the Board and Chief
Executive Officer from April 1992 until August 1993, as Chairman of the Board,
President and Chief Executive Officer from July 1991 until April 1992, and as
Vice Chairman of the Board, President and Chief Executive Officer from September
1990 until July 1991. Mr. Brown served as President and Chief Executive Officer
of Penn Central Industries Group from May 1985 until January 1990. Prior to
joining Penn Central, Mr. Brown spent 15 years with ITT Corporation, serving as
Corporate Vice President and Group Executive of the Defense Space Group and as
President of the Defense Communications Division. Mr. Brown is also serving as a
director of Farr Company, a producer and distributor of filters and filtration
systems, and CalMat Co., a construction materials supplier and property
development and management company.
C. Michael Carter (54) has served as Executive Vice President, General Counsel
and Corporate Secretary of Pinkerton since joining the Company in September
1994. He directs strategic planning and marketing, corporate development, risk
management, contracts and legal. Prior to joining Pinkerton, Mr. Carter served
at Concurrent Computer Corporation as Senior Vice President, Operations and
Secretary from August 1993 to September 1994, and served as Vice President,
General Counsel and Secretary and directed corporate development from May 1987
to August 1993. He also served as a director of Concurrent from June 1994 to
September 1994. Prior to his employment at Concurrent, Mr. Carter was Senior
Corporate Counsel and Assistant Secretary for RJR Nabisco, Inc. and General
Counsel and Secretary of RJ Reynolds Development Corporation. He also held
senior positions in legal affairs with The Singer Company, and was an associate
with Winthrop, Stimpson, Putnam & Roberts in New York.
James P. McCloskey (57) has served as Executive Vice President and Chief
Financial Officer of the Company since joining the Company in October 1994.
Prior to joining the Company, Mr. McCloskey served as Vice President Finance,
Treasurer and Chief Financial Officer of Concurrent Computer Corporation from
1986 to 1994 and of Sybron Corporation from 1980 to 1986. Prior to that time,
Mr. McCloskey held a number of financial and operating positions with W. R.
Grace & Company. He began his career with Price Waterhouse.
Don W. Walker (56) was named Executive Vice President, The Americas in March
1997, after serving as Executive Vice President, North American Operations since
November 1994. Prior to that he served as Executive Vice President,
Investigations since joining the Company in November 1991 and Executive Vice
President, Investigations and International Operations since June 1993. Mr.
Walker was the founder of Business Risks International ("BRI"), a firm
specializing in security consulting, investigations and loss prevention, and
served as its President and Chief Executive Officer from September 1985 until
joining the Company upon its acquisition of BRI. Prior to founding BRI, Mr.
Walker was Assistant General Counsel and Corporate Security Director for Genesco
Inc. Mr. Walker also is a former Special Agent of the Federal Bureau of
Investigation, and a former President/Chairman of the American Society for
Industrial Security.
Anthony R. Miller (57) has served as Corporate Vice President, Total Quality
Management since joining the Company in May 1995. Prior to joining the Company,
Mr. Miller served as Vice President - Chief Quality Officer of Banc One Services
Corporation from May 1990 to July 1994. He served at Citicorp Global Payment
Products as Vice President - Director Service Management from 1987 to 1990 and
as Vice President - Director of Performance Engineering from 1986 to 1987. Prior
to that, Mr. Miller spent four years with American Express and three years with
International Telephone & Telegraph in systems development positions.
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Michael A. Stugrin (48) has served as Corporate Vice President, Strategic
Planning and Marketing since December 1996, after serving as Corporate Vice
President, Marketing since joining the Company in May 1995. Prior to joining the
Company, Mr. Stugrin served at Concurrent Computer Corporation from 1992 to 1995
in various senior positions, including Director of Strategic Planning, Director
of Corporate and Marketing Communications and Director of National Series 3200
Sales. He served at Unisys Corporation from 1984 to 1992 in various senior
marketing and communications positions and at Westinghouse Electric Corporation
on its Executive Support Staff from 1981 to 1984.
Richard E. Ferens (43) has served as Vice President and Treasurer of the Company
since March 1998, Treasurer since March 1997, and as Director of Taxation since
joining the Company in November 1995. Prior to joining the Company, Mr. Ferens
served at AT&T Corporation as Director of Taxes-Transfer Pricing, from January
1995 to October 1995, and at Concurrent Computer Corporation from October 1988
to December 1994 as Director of Taxation. Prior to Concurrent Computer
Corporation. Mr. Ferens spent 10 years with Merck & Company, Inc. in various
financial positions.
Steven A. Lindsey (47) has served as Controller of the Company since joining the
Company in July 1994, and became Vice President and Controller in March 1997.
Prior to joining the Company, Mr. Lindsey served as Corporate Controller at
Mitsubishi Electronics of America, Inc. from September 1993 until July 1994.
Prior to Mitsubishi, Mr. Lindsey spent 10 years with Standard Brands Paint Co.
serving as the Vice President, Treasurer and Controller. He began his career
with Arthur Andersen & Co.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information called for by this Item is included under the caption "Stock
Market Information" in the Company's 1997 Annual Report to Stockholders and is
incorporated herein by reference, except for information regarding the Company's
limitations on the ability to pay dividends on its Common Stock, which is
provided below in response to this Item.
The ability of the Company to pay cash dividends on its Common Stock is limited
by its Note Purchase Agreement. Under the Note Purchase Agreement, the Company
may not declare, pay or incur any liability to make any payment as dividends
unless, after giving effect thereto, (i) no event of default would occur or
exist, (ii) the Company would be permitted to incur Funded Indebtedness (as
defined in the Note Purchase Agreement) and (iii) the aggregate Restricted
Payments (as defined in the Note Purchase Agreement) made since December 31,
1989 would not exceed the sum of 50% of cumulative Consolidated Net Income (as
defined in the Note Purchase Agreement) plus $1.5 million.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this Item is included under the caption "Selected
Financial Data" in the Company's 1997 Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information called for by this Item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's 1997 Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is included under the captions
"Consolidated Balance Sheets", "Consolidated Statements of Operations",
"Consolidated Statements of Changes in Stockholders' Equity", "Consolidated
Statements of Cash Flows" and "Notes to Consolidated Financial Statements" in
the Company's 1997 Annual Report to Stockholders and is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item is incorporated herein by reference to
the Company's definitive Proxy Statement filed with the Securities and Exchange
Commission prior to the expiration of 120 days after December 26, 1997 in
connection with the Company's Annual Meeting of Stockholders to be held on April
30, 1998, except for information regarding the executive officers of the
Company, which is provided in Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item is incorporated herein by reference to
the Company's definitive Proxy Statement filed with the Securities and Exchange
Commission prior to the expiration of 120 days after December 26, 1997 in
connection with the Company's Annual Meeting of Stockholders to be held on April
30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item is incorporated herein by reference to
the Company's definitive Proxy Statement filed with the Securities and Exchange
Commission prior to the expiration of 120 days after December 26, 1997 in
connection with the Company's Annual Meeting of Stockholders to be held on April
30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item is incorporated herein by reference to
the Company's definitive Proxy Statement filed with the Securities and Exchange
Commission prior to the expiration of 120 days after December 26, 1997 in
connection with the Company's Annual Meeting of Stockholders to be held on April
30, 1998.
11
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) Index to Consolidated Financial Statements, Consolidated Financial
------------------------------------------------------------------
Statement Schedules and Exhibits.
--------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 26, 1997 and
December 27, 1996....................................................... 30*
Consolidated Statements of Operations for the Years Ended
December 26, 1997, December 27, 1996 and
December 29, 1995....................................................... 31*
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 26, 1997,
December 27, 1996 and December 29, 1995................................. 32*
Consolidated Statements of Cash Flows for the Years
Ended December 26, 1997, December 27, 1996 and
December 29, 1995....................................................... 33*
Notes to Consolidated Financial Statements.............................. 34*
Independent Auditors'
Report.................................................................. **
</TABLE>
* Incorporated herein by reference from the indicated pages of the Company's
1997 Annual Report to Stockholders.
** Filed as Exhibit 13.2 to this Annual Report on Form 10-K
With the exception of the information expressly incorporated by reference in the
Annual Report on Form 10-K, the 1997 Annual Report to Stockholders is not deemed
to be "filed" with the Securities and Exchange Commission or otherwise subject
to the liabilities of Section 18 of the Securities Exchange Act of 1934.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Independent Auditors' Report on Financial Statement Schedule........... S-1
Schedule II - Valuation and Qualifying Accounts........................ S-2
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the Consolidated Financial
Statements or Notes thereto.
12
<PAGE>
3. EXHIBIT INDEX
The exhibits set forth below are filed as part of this Annual Report or are
incorporated herein by reference. Where an exhibit is incorporated by reference,
the letter which follows the exhibit number indicates the document to which the
reference is made.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 (h) Restated Certificate of Incorporation of Registrant.
3.2 (l) Amended and Restated By-Laws of Registrant, and Amendment.
4.1 (h) Specimen Common Stock Certificate.
4.2 (c) Rights Agreement, dated July 12, 1991, between Registrant and
Bank of New York, as successor Rights Agent.
10.1 (d) 1990 Stock Option Plan and all amendments.*
10.2 (a) Note Purchase Agreement by and between Registrant and The
Travelers Insurance Company, The Travelers Indemnity Company, The
Equitable Life Assurance Society of the United States, Equitable
Variable Life Assurance Company, Tandem Life Insurance Company
and The Equitable of Colorado, Inc., dated as of June 14, 1990.
10.3 (b) Form of Directors' and Officers' Indemnification Agreement.*
10.4 (e) Master Lease by and between Registrant and Trizec Properties,
10.5 Inc., dated August 20, 1993 for World Support Center office.
(f) Employment Agreement by and between Registrant and Denis R.
Brown, dated April 20, 1994.*
10.6 (f) Personal Services Agreement by and between Registrant and Thomas
W. Wathen, dated February 10, 1994.*
10.7 (g) Amendment No. 1 dated June 15, 1994 to Employment Agreement
between Denis R. Brown and Registrant.*
10.8 (h) Amendment No. 2 dated February 15, 1995 to Employment Agreement
between Denis R. Brown and Registrant.*
10.9 (h) Supplemental letter agreement regarding employment of C. Michael
Carter dated December 9, 1994, with supplement dated February 15,
1995.*
10.10 (h) Supplemental letter agreement regarding December 9, 1994, with
supplement dated employment of James P. McCloskey dated February
15, 1995.*
10.11 (h) 1995 Pinkerton Performance and Equity Incentive Plan.*
10.12 (i) First Amendment to the 1995 Pinkerton Performance and Equity
Incentive Plan.*
10.13 (j) Severance Plan for Executive Vice Presidents.*
10.14 (j) Severance Plan for Corporate Vice Presidents.*
10.15 (j) Revolving Credit Agreement dated as of November 21, 1995 among
the Registrant, Pinkerton GmbH Holding, Pinkerton North named
therein and Citicorp USA, Inc., as Atlantic Limited, the
Financial Institutions agent.
10.16 (j) Amendment dated November 21, 1995 to Pinkerton's, Inc. Note
Purchase Agreement.
10.17 (j) Form of Stock Option Agreement under 1990 Stock Option Plan.*
10.18 (j) Form of Stock Option Agreement (Employee) under 1995 Pinkerton
Performance and Equity Incentive Plan.*
10.19 (j) Form of Stock Option Agreement (Non-Employee Director) under 1995
Pinkerton Performance and Equity Incentive Plan.*
10.20 (k) Amendment No. 4 dated July 1, 1996, to Employment Agreement
between Denis R. Brown and Registrant.*
10.21 (l) Second Amendment to the 1995 Pinkerton Performance and Equity
Incentive Plan.*
10.22 (l) Third Amendment to the 1995 Pinkerton Performance and Equity
Incentive Plan.*
10.23 (l) Supplemental Retirement Income Plan, as restated, effective
January 1, 1996.*
10.24 (l) First Amendment to Revolving Credit Agreement, dated as of
December 1, 1996.
13
<PAGE>
10.25 (m) Amendment No. 5 dated as of February 18, 1997, to the Employment
Agreement between Denis R. Brown and Registrant.*
10.26 (n) Second Amendment to Revolving Credit Agreement dated as of June
27, 1997.
10.27 First Amendment to the January 1, 1996 Restatement of the
Pinkerton's, Inc. Supplemental Retirement Income Plan.*
10.28 Modification and Restatement of Amendment No. 5 dated as of
December 18, 1997, to the Employment Agreement between the
Registrant and Denis R. Brown.*
10.29 Supplemental letter agreement dated December 5, 1997, regarding
employment of C. Michael Carter.*
10.30 Supplemental letter agreement dated December 5, 1997, regarding
employment of James P. McCloskey.*
10.31 Letter agreement dated February 11, 1998, between Don W. Walker
and the Registrant relating to Mr. Walker's retirement benefits.*
10.32 Fourth Amendment to the 1995 Pinkerton Performance and Equity
Incentive Plan.*
10.33 Form of Stock Option Agreement for Performance Accelerated
Vesting Stock Option Program.*
13.1 Sections of the 1997 Annual Report to Stockholders incorporated
herein by reference.
13.2 Independent Auditors' Report
21.1 List of Subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule.
(a) Previously filed with Form 10-K for Fiscal Year ended December 28, 1990.
(b) Previously filed with Registration Statement on Form S-1 (No. 33-39718).
(c) Previously filed with Registration Statement on Form 8-A filed on July 19,
1991.
(d) Previously filed with Registration Statement on Form S-8 (No. 33-68492).
(e) Previously filed with Form 10-K for Fiscal Year ended December 31, 1993.
(f) Previously filed with Form 10-Q for Quarter ended March 25, 1994.
(g) Previously filed with Form 10-Q for Quarter ended June 17, 1994.
(h) Previously filed with Form 10-K for Fiscal Year ended December 30, 1994.
(i) Previously filed with Form 10-Q for Quarter ended September 8, 1995.
(j) Previously filed with Form 10-K for Fiscal Year ended December 29, 1995.
(k) Previously filed with Form 10-Q for Quarter ended September 6, 1996.
(l) Previously filed with Form 10-K for Fiscal Year ended December 27, 1996.
(m) Previously filed with Form 10-Q for Quarter ended June 13, 1997.
(n) Previously filed with Form 10-Q for Quarter ended September 5, 1997.
* Denotes management contract or compensatory plan or arrangement.
14
<PAGE>
(b) Reports on Form 8-K.
-------------------
None.
(c) Exhibits.
---------
Refer to (a)3 above.
(d) Financial Statements and Schedules.
-----------------------------------
Refer to (a)1 and (a)2 above.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PINKERTON'S, INC.
Date: March 25, 1998 By: /s/ C. MICHAEL CARTER
---------------------------------
C. Michael Carter
Executive Vice President,
General Counsel and Corporate
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DENIS R. BROWN President and Chief March 25, 1998
- ----------------------------- Executive Officer, Director
Denis R. Brown (Principal Executive
Officer)
/s/ JAMES P. MCCLOSKEY Executive Vice President March 25, 1998
- ----------------------------- and Chief Financial Officer
James P. McCloskey (Principal Financial
Officer)
/s/ STEVEN A. LINDSEY Vice President and March 25, 1998
- ----------------------------- Controller
Steven A. Lindsey (Principal Accounting
Officer)
/s/ PETER H. DAILEY Director March 25, 1998
- -----------------------------
Peter H. Dailey
/s/ JOHN A. GAVIN Director March 25, 1998
- -----------------------------
John A. Gavin
/s/ JAMES R. MELLOR Director March 25, 1998
- -----------------------------
James R. Mellor
/s/ GERALD D. MURPHY Director March 25, 1998
- -----------------------------
Gerald D. Murphy
/s/ J. KEVIN MURPHY Director March 25, 1998
- -----------------------------
J. Kevin Murphy
/s/ ROBERT H. SMITH Director March 25, 1998
- -----------------------------
Robert H. Smith
/s/ THOMAS W. WATHEN Director March 25, 1998
- -----------------------------
Thomas W. Wathen
/s/ WILLIAM H. WEBSTER Director March 25, 1998
- -----------------------------
William H. Webster
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pinkerton's, Inc.
Under date of February 16, 1998, we reported on the consolidated balance sheets
of Pinkerton's, Inc. and subsidiaries as of December 26, 1997 and December 27,
1996 and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the years ended December 26, 1997,
December 27, 1996 and December 29, 1995 which are included in the Company's
annual report on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule included in the Company's annual report on Form 10-
K. This consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
February 16, 1998
S-1
<PAGE>
SCHEDULE II
PINKERTON'S, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
DESCRIPTION YEAR EXPENSES ACCOUNTS (1) DEDUCTIONS (2) END OF YEAR
------------ ------------ ---------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
receivables:
Year ended
December 26, 1997 $2,572 $ 885 $ 598 $1,107 $2,948
Year ended
December 27, 1996 2,881 1,635 1,069 3,013 2,572
Year ended
December 29, 1995 2,784 1,719 958 2,580 2,881
</TABLE>
- ---------------------------
(1) Amount represents recoveries of accounts receivable previously written off
and opening reserve balances for businesses acquired during the year.
(2) Amount represents accounts receivable written off.
S-2
<PAGE>
EXHIBIT 10.27
FIRST AMENDMENT TO THE JANUARY 1, 1996 RESTATEMENT OF THE PINKERTON'S, INC.
---------------------------------------------------------------------------
SUPPLEMENTAL RETIREMENT INCOME PLAN
-----------------------------------
California Plant Protection adopted this Plan, effective October 1, 1987.
Effective January 1, 1996, the Plan was restated in its entirety. This First
Amendment amends the Plan as follows:
1. Section 4.4(b) is hereby amended by adding to the end of the section
the following sentence:
"Notwithstanding the foregoing, in the case of a Participant who is
mandatorily retired pursuant to the Employer's mandatory retirement policy,
the suspension of benefits shall only be applied to the benefit otherwise
payable above the annual amount required by applicable law or regulation to
permit a mandatory retirement policy (currently $44,000)."
1. Section 6.2 is hereby amended by adding to the end of the section the
following sentence:
"Notwithstanding the foregoing, in the case of a Participant who is
mandatorily retired pursuant to the Employer's mandatory retirement policy,
the forfeiture shall only apply to benefits otherwise payable above the
annual amount required by applicable law or regulation to permit a
mandatory retirement policy (currently $44,000)."
EXECUTED at Encino, California, effective as of August 1, 1997.
PINKERTON'S, INC.
BY: /S/ DENIS R. BROWN
-------------------------------------
Denis R. Brown
President and Chief Executive Officer
<PAGE>
EXHIBIT 10.28
MODIFICATION AND RESTATEMENT OF AMENDMENT NO. 5 TO THE
EMPLOYMENT AGREEMENT DATED AS OF APRIL 20, 1994
BETWEEN DENIS R. BROWN AND PINKERTON'S, INC.
The Employment Agreement (the "Agreement") dated as of April 20, 1994
between Denis R. Brown (the "Executive") and Pinkerton's, Inc., a Delaware
corporation (the "Company") is hereby amended as follows:
1. Section 2.02 of the Agreement shall be modified and restated to read
in its entirety as follows:
Section 2.02 Incentive Compensation
----------------------
The following annual incentive compensation plan will be provided to the
Executive for fiscal 1996 and, if approved by the Company's stockholders at
their 1997 annual meeting, for fiscal 1997 and through the term of this
Agreement (subject to reapproval by the Company's stockholders when
required to qualify the annual incentive compensation plan described in
this section as "performance-based" compensation under Internal Revenue
Code Section 162(m)).
(A) Formula for Determining. In addition to his Base Salary, the
-----------------------
Company shall pay to the Executive as incentive compensation ("Incentive
Compensation"), in respect of each fiscal year of the Company or portion
thereof included within the Employment Period, a cash bonus determined as
follows:
(1) The Compensation Committee of the Board of Directors, in
consultation with the Executive, shall establish annually, and shall
communicate to the Executive prior to the beginning of each fiscal year of
the Company, one or more corporate goals. Each corporate goal shall (x)
relate to the Company's financial or operational performance, (y) be
measured by any method or combination of methods deemed by the Compensation
Committee to be fair and equitable and (z) have assigned to it a numerical
percentage which, when added together, total an aggregate of 50% (the
"Incentive Percentage").
(2) The Executive shall be entitled to receive Incentive
Compensation equal to the product obtained by multiplying the amount of
Base Salary earned during the relevant fiscal year by the sum of
percentages assigned to the corporate goal(s) achieved during such fiscal
year. The Executive shall also be entitled to earn Incentive Compensation
(without duplication) in a lesser or greater amount than the Incentive
Percentage as follows: (i) if 80% of the performance required to achieve
any corporate goal is achieved, then 50% of the percentage assigned to such
goal shall be used in performing the calculation under the immediately
preceding sentence; (ii) for each additional 1% of actual performance
achieved between 80% and 100% of the performance required to
<PAGE>
achieve any corporate goal, there shall be added to 50% an additional 2.50%
to arrive at the percentage assigned to the goal in performing the
calculation under the immediately preceding sentence; and (iii) if greater
than 100% of the performance required to achieve any corporate goal is
achieved, then for each 1% of actual performance over 100% of the
performance required to achieve such goal the percentage assigned to such
goal shall be increased by 2.50% to arrive at the percentage assigned to
the goal in performing the calculation under the immediately preceding
sentence; provided, however, that the maximum percentage assigned to any
corporate goal in performing the calculation under the immediately
preceding sentence shall not exceed 200% of the percentage initially
assigned to such goal and the total Incentive Compensation payable in any
year shall not exceed 100% of Base Salary. Notwithstanding the foregoing,
the Compensation Committee in its sole discretion may increase Incentive
Compensation if the effect of the foregoing "proviso" is to place a
limitation on the amount payable in respect of any corporate goal. The
corporate goal(s) shall be established so that the Executive will have a
reasonable opportunity, through diligent performance of his duties, to earn
Incentive Compensation.
(3) Incentive Compensation for any fiscal year shall not exceed
$1,250,000 regardless of the amount of Base Salary or the results of the
calculations described above.
(B) Time of Payment; Proration. The amount of Incentive Compensation
--------------------------
earned hereunder shall be determined by the Compensation Committee as soon
as reasonably practicable following the end of each fiscal year of the
Company and shall be paid promptly thereafter to the Executive. When
computing the amount of Incentive Compensation payable for periods of
employment of less than one full fiscal year, the percentages established
pursuant to Section 2.02 (A)(2) shall be applied to the actual amount of
Base Salary earned during the relevant period.
2. Capitalized terms herein shall have the meanings ascribed to them in
the Agreement. Except as amended hereby, the remaining provisions of the
Agreement, as amended to date, shall remain in full force and effect.
2
<PAGE>
IN WITNESS THEREOF, the Executive and the undersigned duly authorized
officer of the Company have executed and delivered this Modification and
Restatement of Amendment No. 5 to the Employment Agreement Dated as of April 20,
1998 between Denis R. Brown and Pinkerton's, Inc., as of December 18, 1997.
PINKERTON'S, INC.
BY: /s/ C. Michael Carter
------------------------------------------
C. Michael Carter
Executive Vice President, General
Counsel and Corporate Secretary
Denis R. Brown
/S/ Denis R. Brown
----------------------------------------------
3
<PAGE>
EXHIBIT 10.29
[LETTERHEAD OF PINKERTON]
December 5, 1997
C. Michael Carter, Esq.
Executive Vice President, General Counsel
and Corporate Secretary
Pinkerton
15910 Ventura Boulevard, Suite 900
Encino, California 91436-3095
Dear Michael:
Reference is made to the letters dated September 1 and December 9, 1994 and
February 15, 1995 (collectively, the "Employment Agreement"), which summarize
certain terms of your employment with Pinkerton's, Inc. (the "Company"). The
letters constituting the Employment Agreement are attached as Exhibit "A". In
order to clarify certain provisions contained in the Employment Agreement, the
Employment Agreement is hereby amended as follows:
1. The December 9, 1994 Letter
---------------------------
Paragraph III 2. (B) is amended by deleting subclause (i) and replacing it with
the following:
(i) "2 times the sum of (x) the Executive's base salary in effect on such
date of termination plus (y) the bonus to which the executive was
entitled and/or which he received for the fiscal year immediately
preceding the termination and . . ."
Paragraph III 2 is amended by adding after clause (B) the following paragraph:
"The Executive's bonus plan and/or individual performance objectives in
effect for the fiscal year in which a Change of Control occurs shall not be
modified during the Termination Period without the Executive's Consent."
2. The September 1, 1994 Letter
----------------------------
The last sentence of the paragraph titled "Supplemental Retirement Income Plan"
shall be deleted and replaced with the following:
<PAGE>
Mr. C. Michael Carter
December 5, 1997
Page Two
"In the unlikely event the Board cancels your participation in the Plan, whether
by removing you from the Plan, terminating the Plan or any other action which
terminates your participation, an equivalent program will be provided to you
during your continued employment."
3. Except as amended herein, the remaining provisions of the Employment
Agreement shall remain in full force and effect.
4. This amendment shall become effective upon your execution hereof in the
space provided below.
Sincerely,
/s/ Gary J. Hasenbank
- ----------------------------------
Gary J. Hasenbank
Acknowledged and Accepted on this
5th day of December, 1997.
/s/ C. Michael Carter
- ----------------------------------
C. Michael Carter
<PAGE>
Exhibit "A" to the Supplemental Letter Agreement dated December 5, 1997 was
previously filed as Exhibit 10.13 to Form 10-K for Fiscal Year ended December
30, 1994 and is incorporated herein by reference.
<PAGE>
EXHIBIT 10.30
[LETTERHEAD OF PINKERTON]
December 5, 1997
Mr. James P. McCloskey
Executive Vice President and
Chief Financial Officer
Pinkerton's, Inc.
15910 Ventura Boulevard, Suite 900
Encino, California 91436-3095
Dear Jim:
Reference is made to the letters dated September 1 and December 9, 1994 and
February 15, 1995 (collectively the "Employment Agreement"), which summarize
certain terms of your employment with Pinkerton's, Inc. (the "Company"). The
letters constituting the Employment Agreement are attached as Exhibit "A". In
order to clarify certain provisions contained in the Employment Agreement, the
Employment Agreement is hereby amended as follows:
1. The December 9, 1994 Letter
---------------------------
Paragraph III 2 (B) is amended by deleting subclause (i) and replacing it with
the following:
(i) "2 times the sum of (x) the Executive's base salary in effect on such
date of termination plus (y) the bonus to which the executive was
entitled and/or which he received for the fiscal year immediately
preceding the termination and" . . .
Paragraph III 2 is amended by adding after clause (B) the following paragraph:
"The Executive's bonus plan and/or individual performance objectives in effect
for the fiscal year in which a Change of Control occurs shall not be modified
during the Termination Period without the Executive's Consent."
2. The September 1, 1994 Letter
----------------------------
The last sentence of the paragraph titled "Supplemental Retirement Income Plan"
shall be deleted and replaced with the following:
<PAGE>
Mr. James McCloskey
December 5, 1997
Page 2
"In the unlikely event the Board cancels your participation in the Plan, whether
by removing you from the Plan, terminating the Plan or any other action which
terminates your participation, an equivalent program will be provided to you
during your continued employment."
3. Except as amended herein, the remaining provisions of the Employment
Agreement shall remain in full force and effect.
4. This amendment shall become effective upon your execution hereof in the
space provided below.
Sincerely,
/s/ Gary J. Hasenbank
- ---------------------
Gary J. Hasenbank
Acknowledged and Accepted on this
5th/ day of December, 1997.
/s/ James P. McCloskey
- ----------------------
Mr. James P. McCloskey
<PAGE>
Exhibit "A" to the Supplemental Letter Agreement dated December 5, 1997 was
previously filed as Exhibit 10.14 to Form 10-K for Fiscal Year ended December
30, 1994 and is incorporated herein by reference.
<PAGE>
EXHIBIT 10.31
[LETTERHEAD OF PINKERTON]
February 11, 1998
Mr. Don W. Walker
Executive Vice President, The Americas
Pinkerton
15910 Ventura Boulevard, Suite 900
Encino, California 91436-3095
Re: Supplemental Retirement Income Plan
Dear Don:
The following provision furnishes you with the same benefit provided to the
other Executive Vice Presidents regarding replacement of the Supplemental
Retirement Income Plan:
In the unlikely event the Pinkerton Board of Directors cancels your
participation in the Supplemental Retirement Income Plan (the "Plan"),
whether by removing you from the Plan, terminating the Plan or any other
action which terminates your participation, an equivalent program will be
provided to you during your continued employment.
Very truly yours,
/s/ Sally R. Phillips
Sally R. Phillips
Acknowledged and Accepted on this
9th day of March, 1998
/s/ Don W. Walker
- -----------------
Don W. Walker
<PAGE>
EXHIBIT 10.32
FOURTH AMENDMENT TO THE
1995 PINKERTON PERFORMANCE AND EQUITY INCENTIVE PLAN
The 1995 Pinkerton Performance and Equity Incentive Plan is hereby
amended as follows:
1. Replace in its entirety subsection (r) of Section 2 - "Definitions" with
the following sentence:
"Non-Employee Director" means for the purposes of Section 3(a) a "Non-
Employee Director" as defined in Rule 16b-3 and otherwise means any
Director who is not an employee of the Company or any Subsidiary.
2. Delete in its entirety subsection (kk) of Section 2 - "Definitions."
3. Replace in its entirety the first sentence of Section 3(a) -
"Administration - The Committee" with the following sentence:
The Plan shall be administered by the Committee to be appointed from
time to time by the Board and comprised solely of not less than two of
the then members of the Board each of whom is a "Non-Employee
Director" as defined in Rule 16b-3.
4. Replace in its entirety the third sentence of Section 4(a) - "Shares of
Common Stock subject to Plan - Maximum Number of Shares of Common Stock"
with the following sentence:
The number of Stock Appreciation Rights payable in cash, the number of
Restricted Unit Grants payable in cash, the Performance Equity Grants
payable in cash and other similar Awards payable in cash shall be
counted when computing the total number of shares of Common Stock
available for Awards under the Plan to the extent that they are paid
out in cash.
5. Replace in its entirety the fourth sentence of Section 7(b)(i) - "Non-
Employee Directors - Elective Grant of Common Stock to Non-Employee
Directors - Election" with the following sentence:
Any election made by a Non-Employee Director pursuant to this Section
7(b) shall be irrevocable, except as to fees payable for services
rendered at least six months after such election to revoke or change
is made in writing; provided that no more than one election to revoke
or change may be made within any six month period.
<PAGE>
6. To replace in its entirety the second sentence of Section 17 - "Amendment
and Termination" with the following sentence:
Notwithstanding the previous sentence, (i) the Plan may be amended to
comport with changes in the Code, the Employee Retirement Income
Security Act or the rules thereunder and (ii) no amendment to the Plan
shall be made without the approval of the stockholders of the Company
which would change the material terms of performance goals that were
previously approved by the Company's stockholders within the meaning
of Proposed Treasury Regulation Section 1.162-27(e)(4)(vi) or a
successor provision, unless the Board determines that such approval is
not necessary to avoid loss of a deduction under section 162(m) of the
Code, such approval will not avoid such a loss of deduction or such
approval is not advisable.
In Witness Whereof, the undersigned authorized officer of Pinkerton's,
Inc. certifies that the foregoing amendment has been duly approved and adopted
by the Board of Directors on February 26, 1998.
PINKERTON'S, INC.
By: /s/ C. Michael Carter
------------------------------
C. Michael Carter
Executive Vice President,
General Counsel and
Corporate Secretary
<PAGE>
EXHIBIT 10.33
STOCK OPTION AGREEMENT (EMPLOYEE)
(Non-Qualified Stock Option)
(PERFORMANCE ACCELERATED VESTING STOCK OPTION PROGRAM)
Stock Option Agreement ("Agreement") dated as of [optndate] between
PINKERTON'S, INC., a Delaware corporation (the "Company"), and [firstname]
[lastname] (the "Optionee"), regarding the grant of an option ("Option") to
buy the Company's Common Stock, par value $.001 per share ("Common Stock"), on
the terms set forth in this Agreement. It is the Company's intention that the
Option will serve as an added incentive to use the Optionee's best efforts to
advance the interests of the Company and its stockholders and to reward the
Optionee for resulting increases in the value of the Common Stock.
Therefore, effective [optndate] and pursuant to the Company's 1995
Performance and Equity Incentive Plan (the "Plan," which is attached hereto),
subject to approval by the Company's stockholders at the 1998 Annual Meeting of
Stockholders of an amendment to the Plan increasing the maximum number of shares
of Common Stock with respect to which awards may be granted under the Plan to
2,296,087 shares, the Optionee is granted an Option to purchase [numshares]
shares of Common Stock at a per share price of $[shareprice] (the "Exercise
Price"), vesting according to the schedule shown below and expiring not later
than [expdate] at 12:00 a.m. (Pacific Time) in accordance with the Plan, and
subject to the following terms and conditions:
(1) Except as provided in this Agreement, the Option shall be subject to
all of the terms and conditions of the Plan, which is hereby incorporated herein
by reference. Capitalized terms in this Agreement are defined in the Plan. By
signing this Agreement, the Optionee acknowledges that the Optionee has received
a copy of the Plan, that the Optionee has been given an opportunity to review
the Plan and to discuss it with the Optionee's advisors, and that the Optionee
understands the Plan and agrees to be bound by its terms.
(2) This Option shall be subject to the following additional terms and
conditions:
The Option shall vest on [vestdate]. Notwithstanding the above, the
Option shall vest sooner, in whole or in part, if the Company achieves the
following stock price targets:
<TABLE>
<CAPTION>
Stock Price
Stock Price Targets Stock Price: Achieved by:
------------------- ------------ -----------
<S> <C> <C>
First Stock Price Target $[shareprice*115%] 12/31/98
Second Stock Price Target $[shareprice*132%] 12/31/99
Third Stock Price Target $[shareprice*152%] 12/31/00
Fourth Stock Price Target $[shareprice*175%] 12/31/01
</TABLE>
1
<PAGE>
In the event the Company achieves the First Stock Price Target by 12/31/98,
25% of the shares covered by the Option shall vest and become immediately
exercisable. In the event the Company achieves the Second Stock Price
Target on or before 12/31/99, 50% of the shares covered by the Option
reduced by any previously vested shares covered by the Option shall vest
and become immediately exercisable. In the event the Company achieves the
Third Stock Price Target on or before 12/31/00, 75% of the shares covered
by the Option reduced by any previously vested shares covered by the Option
shall vest and become immediately exercisable. In the event the Company
achieves the Fourth Stock Price Target on or before 12/31/01, 100% of the
shares covered by the Option reduced by any previously vested shares
covered by the Option shall vest and become immediately exercisable.
Stock price targets shall be deemed to be achieved on the date (the
"Accelerated Vesting Date") that the average of the closing daily stock
price during the 20 consecutive trading days prior to the Accelerated
Vesting Date equals the applicable stock price target.
If the Company does not achieve the specified stock price target during or
prior to the end of a particular year, no shares covered by the Option
shall vest and become exercisable on an accelerated basis for that year.
Any shares covered by the Option that have not vested on or before 12/31/01
shall vest on [vestdate]. Notwithstanding the foregoing, in the event of
a Change in Control, all shares covered by the Option shall vest and become
immediately exercisable in full.
(3) This Option shall remain exercisable after the Optionee ceases to be
an Employee for the period of time specified in Section 13 of the Plan, except
as follows:
In the case of termination as a result of death, Disability, or Retirement
of the Optionee, the Option shall remain exercisable until [expdate] at
12:00 a.m. (Pacific Time), to the extent vested, as provided below.
The number of unvested shares covered by the Option that would vest on the
date of such termination shall be the result of: (i) the total number of
shares covered by the Option prorated for the time up to the date of such
termination (i.e., [numshares] multiplied by the number of full months of
service from 1/1/98 to termination date divided by 48) less (ii) the number
of vested shares covered by the Option as of the date of such termination.
In the event of Disability or Retirement, such number of unvested shares
covered by the Option, which vest upon termination, shall become
exercisable upon the earlier of: (i) the attainment of the stock price
targets commensurate therewith, or (ii) [vestdate]. In the event of
death, such number of unvested shares covered by the Option, which vest
upon termination, shall become immediately exercisable. All remaining
unvested shares covered by the Option shall be forfeited as of the date of
termination.
2
<PAGE>
In the case of termination for any reason other than death, Disability, or
Retirement, all unvested shares covered by the Option shall be forfeited as
of the date of termination. Vested shares covered by the Option shall
remain exercisable for up to 90 days after the date of termination.
Notwithstanding the above, in the case of termination for Cause, vested
shares covered by the Option shall immediately terminate upon the date of
termination and shall no longer be exercisable.
(4) This Option may not be transferred by Optionee except by will or the
laws of descent and distribution or pursuant to a qualified domestic relations
order. See Section 14 of the Plan.
(5) No fractional shares shall be issued pursuant to the exercise of the
Option nor shall any cash payment be made in lieu thereof.
(6) Payment of the Exercise Price in shares of Common Stock already owned
by the Optionee is permitted.
X Yes
-------
No
-------
(7) The number of shares of Common Stock subject to this Option shall be
adjusted as provided in Section 15 of the Plan.
The Optionee hereby acknowledges that neither the Plan nor this Agreement
constitutes an employment contract between the Optionee and the Company.
Nothing contained in the Plan or in this Agreement shall give the Optionee the
right to be retained in the service of the Company nor shall anything in the
Plan or this Agreement interfere with or restrict the right of the Company,
which is hereby expressly reserved, to discharge, remove or retire any Employee,
including the Optionee, if applicable, at any time, with or without cause. All
of the Company's Employees are "at will" employees except as specifically set
forth to the contrary in any collective bargaining agreement or any binding
written contract between an individual Employee and the Company which was
intended by the Company to be an explicit contract of employment. The Company
shall be under no obligation to continue to retain the Optionee in its service
until the Option becomes exercisable, and the Company shall have no obligation
to accelerate the exercisability of the Option or make other recompense in the
event that the Optionee would otherwise lose the right to exercise the Option
through no fault of the Optionee's. Thus, for example, if the Company sells a
facility or a Subsidiary and the Optionee transfers to the employ of the buyer
or becomes or remains an employee of the Subsidiary after its sale, the
Optionee's service with the Company and all companies which are then
Subsidiaries will have ended and the Option, to the extent not then exercisable,
will lapse.
3
<PAGE>
The Optionee hereby acknowledges receipt of the Plan Prospectus dated April
28, 1995 and the Company's 1996 Annual Report to Stockholders.
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement,
and in the case of the Company by its duly authorized officer, as of the date
hereof.
Optionee PINKERTON'S, INC.
_________________________________ By:_________________________
[firstname] [lastname]
<PAGE>
EXHIBIT 13.1
- -----------------------
SELECTED FINANCIAL DATA
- -----------------------
In thousands, except per share data
<TABLE>
<CAPTION>
Operating Statement Data
December 26, December 27, December 29, December 30, December 31,
Year Ended 1997 1996 1995 1994 1993/a/
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service revenues $1,001,889 $ 906,247 $ 862,793 $ 849,960 $ 772,026
Cost of services 877,016 791,877 771,172 773,526 688,995
Gross profit 124,873 114,370 91,621 76,434 83,031
Operating expenses 89,039 81,256 61,857 57,983 54,982
Amortization of intangible assets 9,397 9,335 8,873 10,240 8,323
Write-down of intangible assets and
other special charges -- -- -- 14,435 3,800
Gain from litigation settlements, net -- -- -- (2,369) --
Operating profit (loss) 26,437 23,779 20,891 (3,855) 15,926
Provision for reserve against investment -- -- -- -- 3,267
Interest expense, net 2,897 2,253 2,870 3,969 4,238
Other income -- (1,962) -- -- --
Income (loss) before income taxes 23,540 23,488 18,021 (7,824) 8,421
Provision for income taxes 8,807 11,038 7,521 2,418 5,220
Net income (loss) $ 14,733 $ 12,450 $ 10,500 $ (10,242) $ 3,201
- ------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share/b,c/ $ 1.17 $ .99 $ .84 $ (.83) $ .26
Diluted earnings (loss) per share/b,c/ $ 1.12 $ .97 $ .84 $ (.82) $ .26
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Balance Sheet Data
At Year End 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital/d/ $ 86,599 $ 104,459 $ 90,225 $ 85,400 $ 92,100
Total assets 324,196 315,281 290,909 278,090 282,738
Current maturities of long-term debt 8,575 8,575 8,575 8,575 8,575
Long-term debt, less current maturities 25,019 37,313 34,275 42,850 51,425
Total stockholders' equity/e/ 143,629 130,381 113,725 103,422 111,631
Book value per common share/c,f/ $ 10.96 $ 10.19 $ 9.08 $ 8.31 $ 9.02
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Other Financial Data
Year 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross profit margin 12.5% 12.6% 10.6% 9.0% 10.8%
Operating profit (loss) margin 2.6% 2.6% 2.4% (0.5)% 2.1%
Current ratio/d/ 1.84 2.10 2.05 2.06 2.27
Long-term debt-to-equity ratio .17 .29 .30 .41 .46
Return on beginning equity 11.3% 10.9% 10.2% (9.2)% 2.8%
Return on ending capital/g/ 9.8% 8.5% 8.8% (4.9)% 3.1%
Operating cash flow/h/ $ 31,277 $ 28,858 $ 25,876 $ 17,913 $ 19,504
EBITDA/i/ $ 42,981 $ 42,149 $ 36,267 $ 24,300 $ 28,962
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
a The Company's fiscal year 1993 consisted of 53 weeks, whereas all other
fiscal years presented consisted of 52 weeks.
b The earnings per share amounts reflect the application of Statement of
Financial Accounting Standards No. 128, "Earnings per Share," for all periods
presented.
c Effective August 27, 1997, a three-for-two stock split was accomplished by
means of a stock dividend whereby one new share was distributed for each two
shares held. All per share amounts have been adjusted accordingly.
d Working capital and current ratio include the effect of the acquisition of
WKD Security GmbH on January 1, 1997, for $22.4 million in cash. The Company
borrowed $11.6 million in December 1996 under its revolving line of credit,
and paid the balance of the acquisition price of $10.8 million from its
general funds in January 1997.
e No cash dividends were declared during the five years presented.
f Book value per common share has been calculated based upon weighted average
common shares and dilutive potential common shares outstanding during each
year.
g In 1994, return on ending capital was computed using the statutory tax rate.
h Operating cash flow represents net income (loss) plus amortization and
depreciation for all years. Also added back to determine operating cash flow
were: provision for reserve against investment in 1993 and write-down of
intangible assets in 1994.
i EBITDA represents net income (loss) plus interest, taxes, depreciation and
amortization. Also added back to determine EBITDA were: provision for reserve
against investment in 1993 and write-down of intangible assets in 1994.
24
<PAGE>
--------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------
Pinkerton's fiscal year comprises the 52-week (or 53-week) period ending on the
Friday closest to December 31, within the reporting year.
Results of Operations
1997 compared to 1996
Service Revenues
The Company's service revenues increased by $95.7 million, or 10.6%, from
$906.2 million in 1996 to $1,001.9 million in 1997. This increase reflects $30.5
million of revenues from businesses acquired during 1997, a net increase in all
other business of $66.7 million, and revenue reductions arising from currency
fluctuations of $1.5 million.
Domestic Service Revenues
Compared with the prior year, the Company's domestic service revenues increased
by $64.0 million, or 8.6%, from $747.4 million in 1996 to $811.4 million in
1997. This increase reflects $8.9 million of revenues from businesses acquired
during 1997, with revenues from all other domestic sources increasing $55.1
million. Domestic service revenues reflect $119.7 million and $106.7 million of
revenue from General Motors in 1997 and 1996, respectively.
International Service Revenues
Service revenues of the Company's international operations increased by $31.7
million, or 20.0%, from $158.8 million in 1996 to $190.5 million in 1997. This
increase reflects $21.6 million of revenues from businesses acquired in 1997 and
additional business from new and existing clients of $11.6 million, partially
offset by reductions arising from currency fluctuations of $1.5 million. As a
percentage of total service revenues, international operations were 19.0% in
1997 and 17.5% in 1996.
Cost of Services and Gross Profit
The Company's cost of services increased by $85.1 million, or 10.7%, from
$791.9 million in 1996 to $877.0 million in 1997. This increase was primarily
due to payroll and related expenses accompanying the increase in service
revenues noted above. The Company's gross profit margin decreased from 12.6% in
1996 to 12.5% in 1997, principally as a result of increased overtime costs, the
costs of a national infrastructure for the Company's systems integration
businesses, and costs incurred in the Company's United Kingdom (U.K.) subsidiary
in connection with a reorganization program to reposition the U.K. business for
the future, partially offset by higher margins from operations of businesses
acquired in 1997.
Operating Expenses
Operating expenses increased by $7.7 million, or 9.5%, from $81.3 million in
1996 to $89.0 million in 1997. Operating expenses were 8.9% of service revenues
in 1997 and 9.0% of service revenues in 1996. The slightly lower operating
expense percentage reflects the favorable impact of the Company's ability to
leverage semi-fixed operating expenses on higher revenues, partially offset by
increased expenses incurred at the Company's U.K. subsidiary to reposition the
U.K. business for the future.
Amortization
Amortization of intangible assets increased by $0.1 million, or 1.1%, from $9.3
million in 1996 to $9.4 million in 1997, primarily due to acquisitions made in
1997.
Operating Profit
Operating profit was $26.4 million, or 2.6% of service revenues in 1997, as
compared with an operating profit of $23.8 million, or 2.6% of service revenues
in 1996. Operating profit remained constant as a percentage of revenues. A
decrease in the gross profit margin was offset by a decrease in operating
expenses as a percentage of revenues.
Interest
Interest income decreased $1.2 million to $1.2 million in 1997 as a result of a
decrease in average invested funds, primarily due to $10.8 million paid from the
Company's general funds in partial payment of the $22.4 million purchase price
of WKD Security GmbH on January 1, 1997, and as a result of lower interest rates
in 1997 as compared with 1996.
25
<PAGE>
Interest expense decreased by $0.5 million, or 10.9%, from $4.6 million in
1996 to $4.1 million in 1997, primarily as a result of a reduced average level
of outstanding debt in 1997 as compared with 1996.
Other Income
In 1996, the Company entered into an agreement with the previous owner related
to the acquisition of Pinkerton's, Inc. by California Plant Protection, Inc. in
1988. As a result of this agreement, the Company received a cash payment of $5.2
million. Of this amount, $3.2 million represents a reimbursement of income and
other taxes paid on behalf of the previous owner, which had been recorded as a
receivable in the consolidated balance sheet; the remaining amount of $2.0
million was recorded as other income.
Income Taxes
Income taxes were $8.8 million in 1997, as compared with $11.0 million in 1996.
The effective tax rate in 1997 was 37.4%, as compared with 47.0% in 1996. The
lower effective tax rate was the result of the tax benefit of a loss related to
the U.K. subsidiary.
* * *
1996 compared to 1995
Service Revenues
The Company's service revenues increased by $43.4 million, or 5.0%, from $862.8
million in 1995 to $906.2 million in 1996. This increase reflects $19.8 million
of revenues from businesses acquired during 1996, a net increase in all other
business of $27.4 million, and revenue reductions arising from currency
fluctuations of $3.8 million.
Domestic Service Revenues
Compared with the prior year, the Company's domestic service revenues increased
by $21.2 million, or 2.9%, from $726.2 million in 1995 to $747.4 million in
1996. This increase reflects $14.3 million of revenues from businesses acquired
during 1996, with revenues from all other domestic sources increasing $6.9
million. Domestic service revenues reflect $106.7 million and $96.4 million of
revenue from General Motors in 1996 and 1995, respectively.
International Service Revenues
Service revenues of the Company's international operations increased by $22.2
million, or 16.3%, from $136.6 million in 1995 to $158.8 million in 1996. This
increase reflects $5.5 million of revenues from businesses acquired in 1996 and
additional business from new and existing clients of $20.5 million, partially
offset by reductions arising from currency fluctuations of $3.8 million. As a
percentage of total service revenues, international operations were 17.5% in
1996 and 15.8% in 1995.
Cost of Services and Gross Profit
The Company's cost of services increased by $20.7 million, or 2.7%, from $771.2
million in 1995 to $791.9 million in 1996. This increase was primarily due to
payroll and related expenses accompanying the increase in service revenues noted
above. The Company's gross profit margin improved from 10.6% in 1995 to 12.6% in
1996, principally as a result of operating cost efficiencies and reduction in
the number of unprofitable contracts. Gross profit was also favorably impacted
by the inclusion of the Company's security systems integration operations, which
typically experience higher gross margins than the Company's security service
operations.
Operating Expenses
Operating expenses increased by $19.4 million, or 31.3%, from $61.9 million in
1995 to $81.3 million in 1996. Operating expenses were 9.0% of service revenues
in 1996 and 7.2% of service revenues in 1995. The higher operating expense
percentage reflects the Company's ongoing expenditures for new systems, quality
processes and training programs implemented to enhance customer value. Operating
expenses also reflect the operations of the Company's security systems
integration service operations, which have both higher gross profit margins and
operating expenses than the Company's security service operations.
26
<PAGE>
Amortization
Amortization of intangible assets increased by $0.4 million, or 4.5%, from $8.9
million in 1995 to $9.3 million in 1996, primarily due to acquisitions made in
1996.
Operating Profit
Operating profit was $23.8 million, or 2.6% of service revenues in 1996, as
compared with an operating profit of $20.9 million, or 2.4% of revenues in 1995.
Operating profit increased as a percentage of revenues due to improved gross
profit margins, partially offset by an increase in operating expenses discussed
above.
Interest
Interest income decreased $0.3 million to $2.4 million in 1996 as a result of a
decrease in interest rates in 1996 as compared with 1995. Interest expense
decreased by $1.0 million, or 17.9%, from $5.6 million in 1995 to $4.6 million
in 1996 as a result of a reduced average level of outstanding debt in 1996 as
compared with 1995. In December 1996, the Company borrowed DM 18 million ($11.6
million) in connection with the acquisition of WKD Security GmbH.
Other Income
In 1996, the Company entered into an agreement with the previous owner related
to the acquisition of Pinkerton's, Inc. by California Plant Protection, Inc. in
1988. As a result of this agreement, the Company received a cash payment of $5.2
million. Of this amount, $3.2 million represents a reimbursement of income and
other taxes paid on behalf of the previous owner, which had been recorded as a
receivable in the consolidated balance sheet; the remaining amount of $2.0
million was recorded as other income.
Income Taxes
Income taxes were $11.0 million in 1996, as compared with $7.5 million in 1995.
The effective tax rate in 1996 was 47.0%, as compared with 41.7% in 1995. In
1995, the Company's effective tax rate was caused by tax minimization strategies
and benefits from targeted jobs tax credits that expired in 1995.
* * *
Financial Conditions
Capital Resources
At December 26, 1997, the Company had $24.2 million in cash, a decrease of $9.5
million from December 27, 1996, and a zero balance in marketable securities, an
$8.5 million decrease from December 27, 1996. Net cash provided by operating
activities of $20.5 million was reduced by $19.6 million of net cash payments
relating to investing activities and $10.4 million of net cash payments relating
to financing activities. The Company's principal investing activities during
1997 were acquisitions ($22.0 million), the purchase of computer and other
equipment ($6.1 million), and net sales of marketable securities ($8.5 million).
The Company's principal financing activities during 1997 were an annual
principal installment of $8.6 million, reducing the Company's Senior Note debt;
$2.2 million of payments on the revolving line of credit; and $0.4 million of
cash receipts related to the exercise of stock options.
The Company has an acquisitions program intended to implement its strategy
to become a world-class, global security solutions provider. The Company also
has an ongoing program to replace capital equipment and upgrade systems as
required. Both of these activities will continue during 1998. In addition, an
annual principal installment of $8.6 million on the Company's Senior Note debt
is due each June.
One of Pinkerton's significant capital resources is the Pinkerton name, to
which a value of approximately $54.8 million was assigned upon the acquisition
of Pinkerton's Inc. by California Plant Protection, Inc. in January 1988. The
Company believes that the carrying value of the name is supported by its market
value. Management expects that the Company will be able to further capitalize on
the Pinkerton name in the security and security-related service and product
business.
Liquidity
Pinkerton's cash needs during the first six months of each year are greater
because of the impact of higher payroll taxes. In addition, the Company is
required to make annual principal
27
<PAGE>
payments of approximately $8.6 million (in the month of June) through the year
2000 in repayment of its Senior Notes. Semi-annual interest payments of
approximately $1.3 million and $0.9 million related to the Senior Notes are due
in June and December 1998, respectively.
The Company has an unsecured revolving credit facility with a group of
banks. On June 27, 1997, the facility was amended to increase the available
borrowings from up to $70.0 million to up to $100.0 million, of which $50.0
million may be letters of credit. No cash borrowings were made in 1997. At
December 26, 1997, there were DM 14.0 million ($7.9 million) of cash borrowings
outstanding under the revolving line of credit. Also at December 26, 1997, $31.7
million in letters of credit had been issued by the Company to secure
obligations under the Company's self-insurance programs. Such programs cover
workers' compensation, general liability, fidelity, health, dental and
automobile risks up to certain limits. Payments under these programs are not
entirely predictable.
The Company believes existing liquid resources, cash generated from
operations, and funds available under the revolving credit facility are
sufficient for all planned operating and capital requirements. The Company also
has access to capital markets, if necessary, to raise funds for working capital,
capital spending and other investments for business growth.
Outlook: Issues and Risks
Certain statements contained in this report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve estimates, assumptions and
uncertainties, and accordingly, actual results could differ materially from
those expressed in the forward-looking statements. Such uncertainties include,
among others, the factors set forth below and the factors set forth in Item 1 of
the Company's Annual Report on Form 10-K for the fiscal year ended December 26,
1997.
Billing Rates and Competition
Future billing rates the Company will be able to charge for its services may
vary from historical levels, depending on market factors.
Availability and Cost of Labor
The Company's ability to deliver quality services depends heavily on the ready
availability and cost of labor in the Company's markets. A strong economy may
cause labor shortages in a geographical market, which may result in margins
being constrained by unbillable overtime costs.
Risk Arising From Litigation
The nature of the Company's business subjects it to a significant volume of
ordinary, routine claims and lawsuits incidental to such business. The Company
maintains self-insurance programs and insurance coverage that it believes are
appropriate for its liability risks. Nonetheless, many claims or lawsuits
brought against the Company allege substantial damages that, if awarded and
ultimately paid by the Company (rather than insurers or indemnitors), could have
a material adverse effect on the results of operations or financial condition of
the Company. See Note 14 of Notes to Consolidated Financial Statements,
"Commitments and Contingencies."
Year 2000 Issues
In April 1996, the Company began converting its domestic U.S. security computer
information systems to a new client-server enterprise system that is year 2000
compliant. A similar but smaller scale conversion commenced in November 1997 for
the Company's domestic systems integration businesses. Both conversions are
expected to be completed before the year 2000. As part of an enterprise-wide
program implemented by management in June 1997, the Company has identified some
applications that are not year 2000 compliant. The majority of these
applications will be replaced by enterprise systems the Company has identified
and will be implementing prior to the year 2000.
The costs of the replacement systems have been, or will be, recorded as an
asset and amortized. A significant portion of the costs associated with making
applications not covered by
28
<PAGE>
new systems year 2000 compliant is not likely to be an incremental cost to the
Company, but rather will represent the redeployment of existing information
technology resources. Accordingly, the Company does not expect the amounts
required to be expensed over the next two years to have a material effect on its
financial position or results of operations.
Currency Exchange
The Company makes acquisitions and operates in various countries, and transacts
such business in international currencies, subjecting the Company to currency
rate fluctuations. Other than natural hedges created by foreign currency
borrowings, the Company does not invest in foreign currency hedging or other
derivative investments.
European Currency
The creation of a new European common market currency (the Euro) may require
that the Company transact in two different currencies with the same customer and
within the same country. This requirement cannot currently be met by the
Company's computer information systems. The Company is evaluating enterprise
systems that will allow it to meet this requirement.
Accounting Standards
Accounting standards promulgated by the Financial Accounting Standards Board
change periodically. Changes in such standards may have an impact on the
Company's future reported earnings.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements. SFAS
No. 130 is effective for financial statements issued for periods beginning after
December 15, 1997. The application of SFAS No. 130 will require the inclusion of
the Company's foreign currency translation and minimum retirement plans
liability adjustments in comprehensive income.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
annual financial reports issued to shareholders. SFAS No. 131 is effective for
annual financial statements issued for periods beginning after December 15,
1997. The application of SFAS No. 131 is not expected to have a material effect
on the Company's consolidated financial statements.
Retirement Plan Liabilities and Interest Rates
The Company maintains two unfunded retirement plans and one funded retirement
plan, the liabilities of which are significantly affected by changes in
long-term interest rates. Changes in long-term interest rates could have an
impact on the Company's future reported earnings and financial position.
Termination of Contracts
A majority of the Company's revenue is derived from security guard contracts,
which are typically for one-year terms but generally provide for earlier
termination by either party in certain circumstances. A net increase in
terminations could have an adverse impact on the Company's future reported
earnings; however, the Company has historically experienced a low rate of
cancellations.
Ability to Sustain Growth Through Acqusition
The Company's revenue growth is partially dependent upon the Company's ability
to attract and acquire additional business through acquisition.
International Operations
The Company operates in various international markets and engages in security
activities that may contain more risk than operations in the United States. The
profitability of such operations and associated risks may affect the Company's
results and recoverability of goodwill.
29
<PAGE>
- ---------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------
December 26, December 27,
In thousands 1997 1996
- --------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 24,243 $ 33,761
Investment in marketable securities -- 8,460
Accounts receivable (includes unbilled amounts
of $32,397 in 1997 and $30,196 in 1996) 149,668 137,055
Less allowance for doubtful receivables 2,948 2,572
146,720 134,483
Inventory 4,190 3,799
Prepaid expenses and taxes 8,111 11,566
Deferred income taxes 6,129 7,121
Total current assets 189,393 199,190
Equipment and leasehold improvements,
net of accumulated depreciation and amortization
of $29,685 in 1997 and $26,818 in 1996 16,745 14,977
Other assets:
Intangible assets, net 68,210 57,311
Deferred income taxes 24,924 23,467
Other 24,924 20,336
118,058 101,114
$ 324,196 $ 315,281
- -------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 14,021 $ 9,790
Accrued liabilities 80,198 76,366
Current maturities of long-term debt 8,575 8,575
Total current liabilities 102,794 94,731
Accrued retirement benefits and other
non-current liabilities 52,754 52,856
Long-term debt, less current maturities 25,019 37,313
Commitments and contingencies
Stockholders' equity:
Common stock 12 8
Additional paid-in capital 75,329 74,887
Other adjustments (7,368) (5,441)
Retained earnings 75,656 60,927
143,629 130,381
$ 324,196 $ 315,281
- -------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
30
<PAGE>
- -------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------
<TABLE>
<CAPTION>
December 26, December 27, December 29,
In thousands, except per share data 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service revenues $ 1,001,889 $ 906,247 $ 862,793
Cost of services 877,016 791,877 771,172
Gross profit 124,873 114,370 91,621
Operating expenses 89,039 81,256 61,857
Amortization of intangible assets 9,397 9,335 8,873
Operating profit 26,437 23,779 20,891
Other (income) deductions:
Interest Income (1,186) (2,393) (2,713)
Interest Expense 4,083 4,646 5,583
Other -- (1,962) --
2,897 291 2,870
Income before income taxes 23,540 23,488 18,021
Provision for income taxes 8,807 11,038 7,521
Net income $ 14,733 $ 12,450 $ 10,500
- --------------------------------------------------------------------------------------------
Basic earnings per share $ 1.17 $ .99 $ .84
Diluted earnings per share $ 1.12 $ .97 $ .84
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
31
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ----------------------------------------------------------
Additional Total
Preferred Common Paid-In Other Retained Stockholders'
In thousands Stock Stock Capital Adjustments Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 30, 1994 $ 16 $ 8 $ 73,745 $ (8,325) $ 37,978 $ 103,422
Dividends on preferred stock -- -- -- -- (1) (1)
Redemption of preferred stock (1) -- -- -- -- (1)
Cancellation of restricted common stock -- -- (233) -- -- (233)
Exercise of stock options -- -- 951 -- -- 951
Minimum retirement plans liability adjustment -- -- -- (640) -- (640)
Foreign currency translation adjustment -- -- -- (273) -- (273)
Net income -- -- -- -- 10,500 10,500
Balance at December 29, 1995 15 8 74,463 (9,238) 48,477 113,725
Redemption of preferred stock (15) -- -- -- -- (15)
Cancellation of restricted common stock -- -- (2) -- -- (2)
Exercise of stock options -- -- 426 -- -- 426
Minimum retirement plans liability adjustment -- -- -- 2,693 -- 2,693
Foreign currency translation adjustment -- -- -- 1,104 -- 1,104
Net income -- -- -- -- 12,450 12,450
Balance at December 27, 1996 -- 8 74,887 (5,441) 60,927 130,381
Common stock split -- 4 -- -- (4) --
Exercise of stock options -- -- 442 -- -- 442
Minimum retirement plans liability adjustment -- -- -- (24) -- (24)
Foreign currency translation adjustment -- -- -- (1,903) -- (1,903)
Net income -- -- -- -- 14,733 14,733
Balance at December 26, 1997 $ -- $ 12 $ 75,329 $ (7,368) $ 75,656 $ 143,629
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
32
<PAGE>
- -------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
<TABLE>
<CAPTION>
December 26, December 27, December 29,
In thousands 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 14,733 $ 12,450 $ 10,500
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangible assets 9,397 9,335 8,873
Depreciation and other amortization 7,147 7,073 6,503
Provision for losses on doubtful receivables 885 1,635 1,719
Deferred income taxes (449) (2,079) (2,731)
Changes in assets, liabilities and stockholders' equity:
Accounts receivable (6,489) (18,103) (2,501)
Inventory 682 (430) 437
Prepaid expenses and taxes 3,766 2,342 (799)
Other assets (5,602) (5,525) (3,276)
Accounts payable 2,117 1,196 88
Accrued and other non-current liabilities (5,089) 3,593 4,032
Foreign currency revaluation of net assets (532) 920 (867)
Net cash provided by operating activities 20,566 12,407 21,978
INVESTING ACTIVITIES:
Purchase of marketable securities (16,081) (21,545) (52,673)
Sales/redemptions of marketable securities 24,541 32,481 43,858
Purchase of equipment and leasehold improvements (6,086) (5,827) (5,336)
Payments for net assets of acquired businesses,
net of cash acquired (22,018) (7,272) (7,515)
Net cash used in investing activities (19,644) (2,163) (21,666)
FINANCING ACTIVITIES:
Proceeds from long-term debt -- 11,613 --
Principal repayment of long-term debt (10,858) (8,575) (8,575)
Exercise Of stock options 418 279 735
Redemption of preferred stock -- (15) (1)
Net cash (used in) provided by financing activities (10,440) 3,302 (7,841)
Net (decrease) increase in cash and cash equivalents (9,518) 13,546 (7,529)
Cash and cash equivalents at beginning of year 33,761 20,215 27,744
Cash and cash equivalents at end of year $ 24,243 $ 33,761 $ 20,215
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,820 $ 4,449 $ 5,448
Income taxes $ 6,258 $ 13,191 $ 10,215
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
33
<PAGE>
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1
Corporate Organization
The Company's operations consist mainly of providing security officer,
systems integration and investigation services to industrial, commercial,
financial and other similar business clients. Substantially all business
activity is with customers located throughout the United States, Canada,
Europe, Asia, Mexico and South America, and is not concentrated in any
particular geographical region therein or by any type of economic
activity.
Note 2
Summary of Significant Accounting Policies
Accounting Cycle
Pinkerton's fiscal year comprises the 52-week (or 53-week) period ending
on the Friday closest to December 31, within the reporting year. The
Company's quarterly reporting periods consist of three four-week periods
for the first, second and third quarters, and four four-week periods for
the fourth quarter.
Principles of Consolidation
The consolidated financial statements include the accounts of Pinkerton's,
Inc. "the Company" and its subsidiaries, which are primarily wholly owned.
All significant intercompany accounts and transactions have been
eliminated.
Revenue Recognition
Service revenues are recognized as services are provided, including
amounts for unbilled, rendered services. The Company's systems integration
businesses recognize revenue based on the percentage-of-completion method.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions. These affect the reported amounts of assets or
liabilities, and the amount of contingent assets or liabilities disclosed
in the consolidated financial statements. Actual results could differ from
the estimates made.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Equipment is
depreciated over the estimated useful life of the related assets. The
estimated useful life of equipment is three to 10 years. Leasehold
improvements are amortized over the period of the related lease or the
estimated life of the improvement, whichever is shorter. Accelerated
methods of depreciation are used for income tax purposes, and the
straight-line method is utilized for substantially all assets for
financial reporting purposes. When equipment and leasehold improvements
are retired or otherwise disposed of, the cost and related accumulated
depreciation and amortization are removed from the accounts and any
resulting gain or loss is included in the results of operations.
Intangible Assets
Intangible assets include goodwill, which represents the excess of the
purchase price of acquired businesses over fair values of related net
tangible assets, and identifiable intangible assets such as non-compete
agreements, contract rights and copyrights. Goodwill and other intangibles
are amortized on a straight-line basis over periods of 10 to 25 years, and
three to 10 years, respectively.
The Company assesses the recoverability of goodwill and other
intangible assets by determining whether the amortization of those
balances can be recovered through projected (undiscounted) future cash
flows. The amount of impairment, if any, is measured based on projected
discounted future cash flows using a discount rate reflecting the
Company's average cost of capital.
Self-insurance Reserves
The Company maintains various self-insurance programs for workers'
compensation, general liability, fidelity, health, dental and automobile
liability risks in the United States. These programs are administrated by
the Company, insurance companies and other third parties. The Company is
self-insured up to specified per-occurrence limits and maintains insurance
coverage for losses in excess of specified amounts and for certain
international activities not covered by the Company's self-insurance
programs. Estimated costs under
34
<PAGE>
these programs, including incurred but not reported claims, are recorded
as expenses primarily based upon actuarially determined historical
experience and trends of paid and incurred claims.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities, and their respective tax
bases, operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes
the enactment date.
Income taxes have not been provided on the undistributed earnings of
certain foreign subsidiaries, as such earnings will continue to be
invested in those subsidiaries for an indefinite period.
Foreign Currency Translations
The Company translates revenues and expenses of its foreign subsidiaries
using the average exchange rates prevailing during the year. The assets
and liabilities of such subsidiaries are translated at the rate of
exchange in effect at year end, and translation adjustments are recorded
as a component of stockholders' equity in the consolidated balance sheets.
At December 26, 1997, and December 27, 1996, the cumulative multi-year
effect of translation adjustments was a decrease to stockholders' equity
of $5.7 million and $3.8 million, respectively.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share. SFAS No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to fully diluted
earnings per share. Where appropriate, all earnings per share amounts for
all periods have been restated to conform to the SFAS No. 128
requirements.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, which
principally include cash, marketable securities, accounts receivable,
accounts payable and accrued expenses, approximates fair value due to the
relatively short maturity of such instruments. The fair value of the
Company's Senior Notes is estimated to be $26.9 million at December 26,
1997, based on market interest rates for comparable loans.
Credit Concentrations
Sales to a single customer aggregated $134.5 million in 1997, $121.6
million in 1996 and $109.5 million in 1995. The Company estimates an
allowance for doubtful accounts based on the credit worthiness of its
customers as well as general economic conditions. Consequently, an adverse
change in those factors could affect the Company's estimate of its bad
debts.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock.
35
<PAGE>
Marketable Secutites
The Company adopted Statement of Financial Accounting Standards, SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, on
January 1, 1994. SFAS No. 115 requires investments to be classified in one
of three categories: held-to-maturity securities, available-for-sale
securities, and trading securities. The Company classifies its
investments, comprised principally of highly liquid debt instruments with
maturities greater than 90 days, as available-for-sale securities.
Available-for-sale securities are reported at fair value.
Statement of Cash Flows
The Company considers cash equivalents to be all highly liquid investments
with original maturities of 90 days or less.
Stock Split
Effective August 27, 1997, the Company split its outstanding shares of
common stock on a three-for-two basis. The split was accomplished by means
of a stock dividend whereby each holder of common stock received one new
share for each two shares held. All share and per share data included in
the Company's consolidated financial statements have been restated to
reflect the stock split.
Reclassifications
Certain reclassifications have been made to the prior year balances to
conform to the 1997 presentation.
Note 3
Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
In thousands, except December 26, December 27, December 29,
per share data 1997 1996 1995
- --------------------------------------------------------------------------------
Numerator:
Net income $ 14,733 $ 12,450 $ 10,500
Denominator:
Denominator for basic
earnings per share -
weighted average common
shares outstanding 12,559 12,529 12,468
Effect of dilutive securities:
Employee stock options 544 267 59
Denominator for diluted
earnings per share - weighted
average common shares and
dilutive potential common
shares outstanding 13,103 12,796 12,527
- --------------------------------------------------------------------------------
Basic earnings per share $ 1.17 $ .99 $ .84
Diluted earnings per share $ 1.12 $ .97 $ .84
- --------------------------------------------------------------------------------
For the years ended December 26, 1997, December 27, 1996, and December 29,
1995, employee stock options relating to 416,000, 89,000 and 449,000
shares, respectively, were not included in the computation of diluted
earnings per share because the options' exercise prices were greater than
the average market price of the common shares, and therefore, the effect
would be antidilutive.
Note 4
Acquisitions
The Company is pursuing its strategic plan to provide a broader array of
products and services to its client base, including security systems
integration services and products. In pursuit of these plans, the Company
has acquired eight regional security systems integration companies over
the past three years: two in 1995, four in 1996 and two in 1997. In
January 1997, the Company also acquired all of the outstanding stock of
WKD Security GmbH, a German-
36
<PAGE>
based provider of uniformed security officer and cash transit services.
The purchase price was $22.4 million, paid in cash. The Company borrowed
$11.6 million under its revolving line of credit, with the borrowing
denominated in German Deutsche Marks (DM 18.0 million). The balance of the
acquisition price, or $10.8 million, was paid from the Company's general
funds. In June 1997, the Company purchased 50 percent ownership in Steel,
S.A., a uniformed security officer provider based in Chile. This
investment is accounted for under the equity method. In 1996, the Company
acquired the security operations of Select Security, Inc. in Canada.
Pro-forma financial information with respect to the 1996 and 1997
acquisitions (except for WKD) is not included as it is not significant to
the consolidated financial statements. Had Pinkerton's purchased WKD in
1996, service revenues, net income and diluted earnings per share on the
Company's consolidated statement of operations for the year ended December
27, 1996, would have been $930.0 million, $14.3 million and $1.11,
respectively. Operations for the year ended December 26, 1997, include a
full year of WKD results.
Note 5
Intangible Assets
Intangible assets in the accompanying consolidated balance sheets consist
of the following:
December 26, December 27,
In thousands 1997 1996
- -----------------------------------------------------------------------------
Goodwill $ 86,447 $ 76,150
Less accumulated amortization (35,335) (31,573)
51,112 44,577
Other intangibles 48,837 40,954
Less accumulated amortization (31,739) (28,220)
17,098 12,734
$ 68,210 $ 57,311
- -----------------------------------------------------------------------------
NOTE 6
Long-Term Debt
On June 14, 1990, the Company issued $60.0 million of unsecured Senior
Notes to major insurance companies. Under the terms of the Note Purchase
Agreement, which has a term of 10 years, interest is fixed at a rate of
10.35% per annum, payable semi-annually on June 15 and December 15 of each
year. Six annual principal payments of $8.6 million are required under the
agreement beginning in June 1994, with an additional seventh payment of
$8.6 million required at maturity. The balance at December 26, 1997, was
$25.7 million including $8.6 million of current maturities.
The Company has an unsecured revolving credit facility with a group
of banks. On June 27, 1997, the facility was amended to increase the
available borrowings from up to $70.0 million to up to $100.0 million, of
which $50.0 million may be letters of credit (used primarily to support
obligations under the Company's self-insurance programs). Under the
agreement, the Company is required to pay a fee on outstanding letters of
credit of 0.5% per annum, payable quarterly, and interest on cash
borrowings computed at the prime rate of the agent bank, payable monthly.
A commitment fee of .175% per annum, payable monthly, is also required on
any unused portions of the facility. At December 26, 1997, $31.7 million
in letters of credit were outstanding and there were DM 14.0 million ($7.9
million) of cash borrowings outstanding under the revolving line of
credit, included in long-term debt in the accompanying balance sheet,
which were used to acquire WKD on January 1, 1997.
Under the terms of the Note Purchase Agreement and Revolving Credit
Agreement, the Company is required to maintain certain financial ratios
and meet certain net worth and working capital requirements. As of
December 26, 1997, the Company was in compliance with its covenants. In
addition, the agreements limit the Company's ability to pay dividends,
dispose of assets, make capital expenditures and acquisitions, and incur
additional indebtedness, as well as other limitations .
The Company had no foreign or domestic derivatives, interest rate
swaps or other hedge products as of
37
<PAGE>
December 26, 1997.
Note 7
Accrued and Other Non-current Liabilities
Accrued liabilities consist of the following:
December 26, December 27,
In thousands 1997 1996
- -----------------------------------------------------------------------
Self-insurance reserves,
current $ 10,107 $ 12,802
Salaries and wages 26,258 25,053
Payroll taxes and
withholdings 7,740 6,777
Estimated liability for
vacation benefits 9,611 8,376
Other 26,482 23,358
$ 80,198 $ 76,366
- -----------------------------------------------------------------------
The Company establishes self-insurance reserves for the estimated
costs under workers' compensation, general liability, fidelity, health,
dental and automobile liability insurance programs, including reserves for
known claims, estimates of incurred but not reported claims, and the
expected loss development of unsettled claims. Estimated requirements are
periodically reviewed and revisions are charged to operations in the
period that estimates are changed. Activity in these reserve accounts for
1997, 1996 and 1995 is summarized as follows:
December 26, December 27, December 29,
In thousands 1997 1996 1995
- --------------------------------------------------------------------------------
Balance at beginning
of year $ 47,240 $ 49,839 $ 45,078
Provision charged
to operations 36,885 35,263 44,500
Payments (43,059) (37,862) (39,739)
Balance at
end of year 41,066 47,240 49,839
Less current portion
included in accrued
liabilities 10,107 12,802 15,086
Long-term portion $ 30,959 $ 34,438 $ 34,753
- --------------------------------------------------------------------------------
The Company is required to secure its financial obligation to cover
potential future claims. This requirement is being satisfied with letters
of credit issued under the revolving credit facility.
The Company has established trust accounts for its contributions to a
voluntary employees' beneficiary association (VEBA), from which all
employee medical insurance claims, premiums and vacation pay under
Company-sponsored plans are paid. Accrued liabilities at December 26,
1997, and December 27, 1996, reflect the estimated liability to the
trusts.
Note 8
Income Taxes
The components of income (loss) before income taxes for domestic and
foreign operations were as follows:
December 26, December 27, December 29,
In thousands 1997 1996 1995
- -----------------------------------------------------------------------
Domestic $ 26,999 $ 27,378 $ 22,132
Foreign (3,459) (3,890) (4,111)
- -----------------------------------------------------------------------
$ 23,540 $ 23,488 $ 18,021
- -----------------------------------------------------------------------
The following is a summary of the provision (benefit) for income taxes:
December 26, December 27, December 29,
In thousands 1997 1996 1995
- -----------------------------------------------------------------------
Current:
Federal $ 5,885 $ 9,827 $ 7,891
State 1,831 2,424 1,855
Foreign 1,490 757 506
- -----------------------------------------------------------------------
9,206 13,008 10,252
Deferred:
- -----------------------------------------------------------------------
Federal (364) (1,586) (2,343)
State (35) (384) (388)
(399) (1,970) (2,731)
- -----------------------------------------------------------------------
$ 8,807 $ 11,038 $ 7,521
- -----------------------------------------------------------------------
38
<PAGE>
The provision for income taxes for the years ended December 26, 1997,
December 27, 1996, and December 29, 1995, differed from the amount
computed by applying the statutory federal income tax rate of 35% in each
year to income before income taxes. The reasons for these differences are
as follows:
December 26, December 27, December 29,
In thousands 1997 1996 1995
- -------------------------------------------------------------------------------
U.S. Federal income
tax at statutory rate $ 8,239 $ 8,220 $ 6,307
State income taxes, net of
Federal benefit 1,170 1,372 954
9,409 9,592 7,261
Changes resulting from:
Targeted jobs tax credit (521) -- (986)
Purchase price adjustment -- (769) --
Amortization of intangible
assets 982 911 789
Undistributed earnings of
foreign subsidiaries 2,461 268 211
Tax-exempt interest income (120) (123) (92)
Non-taxable dividend income -- (168) --
Tax benefit of loss related to
U.K. subsidiary (4,281) -- --
Other, net 637 (313) 5
Change in valuation
allowance 240 1,640 333
$ 8,807 $ 11,038 $ 7,521
- -------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and liabilities are presented
as follows:
December 26, December 27,
In thousands 1997 1996
- -----------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful
receivables $ 895 $ 727
Self-insurance reserves 16,635 18,430
Retirement plans 6,658 5,644
Provision against investment 1,512 1,592
Vacation pay 3,289 2,911
Benefit from acquired net
operating loss 995 717
Amortization of intangibles 4,379 3,524
Foreign loss carryover 4,439 4,199
Other 459 771
Total deferred tax assets 39,261 38,515
Deferred tax liabilities:
State taxes 1,909 1,895
Prepaid insurance 825 587
Contribution to VEBA 311 336
Other 724 910
Total deferred tax liabilities 3,769 3,728
Deferred tax assets
valuation allowance (4,439) (4,199)
Net deferred tax assets $ 31,053 $ 30,588
- -----------------------------------------------------------------------
Note 9
Other Income
In 1996, the Company entered into an agreement with the previous owner
related to the acquisition of Pinkerton's, Inc. by California Plant
Protection, Inc. in 1988. As a result of this agreement, the Company
received a cash payment of $5.2 million. Of this amount, $3.2 million
represents a reimbursement of income and other taxes paid on behalf of the
previous owner, which had been recorded as a receivable in the
consolidated balance sheet; the remaining amount of $2.0 million was
recorded as other income.
39
<PAGE>
Note 10
Retirement Plans
The Company maintains the Supplemental Retirement Income Plan (SRIP) for
certain executives and key employees. The plan has two benefit levels: (i) a
benefit at age 62 of 2.0% of final five-year average compensation for each full
year of participation, up to a maximum of 40.0%; or (ii) a benefit at age 62 of
3.5% of final five-year average compensation for each full year of
participation, up to a maximum of 52.5%. Vesting of benefits under the SRIP
normally occurs when a participant has five years of SRIP participation.
The SRIP has no plan assets. The Company has purchased life insurance policies
on the lives of certain individual executives as an investment that it may use
to provide pre-retirement death benefits and retirement benefits. The cash
surrender value of these policies aggregated $11.5 million and $9.3 million as
of December 26, 1997, and December 27, 1996, respectively, and is included in
other assets on the Company's consolidated balance sheets. The projected net
present value of future death benefits exceeds the cash surrender value by $21.2
million for both December 26, 1997, and December 27, 1996.
In connection with the acquisition of Pinkerton's, the Company assumed
liability for the Discretionary Unfunded Deferred Compensation Plan for Key
Employees (DUDCPKE), a plan covering a group of former Pinkerton executives.
Participants are entitled to receive monthly payments of deferred compensation
for life upon reaching age 60, in amounts ranging from 20.0% to 40.0% of the
average three highest annual compensation amounts, depending on years of
service. In connection with the operation of a large security contract at the
Company's Canadian subsidiary, the Company operates a Canadian Pension Plan for
the related security guards. The Canadian Pension Plan is a funded plan with
plan assets of $1,481,000.
The following table sets forth the status of the Company's retirement plans and
amounts recognized in the Company's consolidated balance sheets as of December
26, 1997, and December 27, 1996:
December 26, December 27,
In thousands 1997 1996
- --------------------------------------------------------------------------------
Actuarial present value of
benefit obligations:
Vested accumulated benefit obligation $ 19,446 $ 17,894
Unvested accumulated benefit
obligation 2,549 1,790
Accumulated benefit obligation $ 21,995 $ 19,684
Projected benefit obligation $ 26,537 $ 24,086
Plan assets 2,034 1,468
Projected benefit obligation
in excess of plan assets 24,502 22,618
Unrecognized net loss (5,851) (5,795)
Prior service cost not yet recognized
in net retirement plan cost (4,450) (4,763)
Accrued periodic retirement plan
cost before minimum liability 14,201 12,060
Additional minimum liability 6,141 6,397
Liability included in accrued
retirement benefits and other
non-current liabilities $ 20,342 $ 18,457
- --------------------------------------------------------------------------------
Net retirement plan cost for 1997, 1996 and 1995 included the following
components:
December 26, December 27, December 29,
In thousands 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost benefits earned
during the period $ 2,219 $ 1,992 $ 1,349
Interest cost on projected
benefit obligation 1,540 1,440 1,531
Amortization of net loss 252 274 137
Amortization of past
service cost 313 313 313
Net periodic retirement
plan cost $ 4,324 $ 4,019 $ 3,330
- --------------------------------------------------------------------------------
Assumptions used in accounting for the retirement plans as of 1997, 1996 and
1995 were:
December 26, December 27, December 29,
1997 1996 1995
- --------------------------------------------------------------------------------
Discount rates 7.0% 7.0% 7.0%
Rates of increase in
compensation levels 4.0% to 5.0% 4.0% to 5.0% 4.0% to 5.0%
- --------------------------------------------------------------------------------
The Company has no significant post-retirement obligations other than the SRIP,
DUDCPKE and the Canadian Pension Plan.
40
<PAGE>
Note 11
Employee Stock Purchase Plan
The Company has a stock purchase plan for eligible employees under which
Company stock can be purchased at market value through payroll deductions.
Note 12
Stock Option Plans
Effective August 27, 1997, the Company split its outstanding shares of common
stock on a three-for-two basis. The split was accomplished by means of a stock
dividend whereby each holder of common stock received one new share for each two
shares held. Share figures set forth in this note have, to the extent
appropriate, been adjusted to reflect this split.
1990 Stock Option Plan
In February 1990, the Company adopted the 1990 Stock Option Plan "the 1990
Plan," which provided for the granting of either incentive stock options or
nonstatutory stock options to key employees and directors of the Company to
purchase up to an aggregate 405,000 shares of common stock. In April 1993, the
1990 Plan was amended to increase the number of shares of common stock reserved
for issuance upon the exercise of options granted under the Plan from 405,000 to
1,830,000.
In February 1995, in connection with the adoption of the 1995 Pinkerton
Performance and Equity Incentive Plan, the 1990 Plan was frozen such that no
further grants would be made under the plan. At that time, under the 1990 Plan,
options with respect to 1,175,325 shares were outstanding, options with respect
to 48,000 shares had been exercised, and 606,675 shares remained available under
the plan with respect to which future option grants could have been made. At
December 26, 1997, options with respect to 899,020 shares were outstanding,
expiring through December 30, 2004, of which options with respect to 600,430
shares were exercisable.
1995 Pinkerton Performance And Equity Incentive Plan
In February 1995, the Company adopted the 1995 Pinkerton Performance and Equity
Incentive Plan "the 1995 Plan," which provides for the granting of stock
options, stock appreciation rights, restricted stock awards and performance
awards to employees, and stock options or certain common stock grants to
non-employee directors of the Company, to purchase up to an aggregate 606,675
shares of common stock. In November 1997, subject to approval by the
stockholders at the 1998 Annual Meeting of Stockholders, the Board of Directors
unanimously approved an amendment to the 1995 Plan, increasing the maximum
number of shares of common stock with respect to which awards may be granted to
2,296,087, subject to further adjustment for stock dividends, stock splits,
recapitalizations or similar capital changes.
At December 26, 1997, options with respect to 1,190,436 shares were outstanding,
expiring through October 15, 2007, of which options with respect to 130,403
shares were exercisable.
The Company's stock option plans are administered by the Compensation Committee
of the Board of Directors, which consists of four non-employee directors. The
committee is authorized to determine the participants in the 1995 Plan and the
time of, type of, and number of shares underlying awards under such plan.
41
<PAGE>
A summary of the status of the Company's stock option plans as of December 26,
1997, December 27, 1996, and December 29, 1995, and changes during the years
ended on those dates is presented below:
Weighted Average
Number of Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding at
December 30, 1994 1,172,788 $ 12.17
Granted 49,800 11.49
Exercised (94,138) 9.43
Canceled (83,100) 14.14
Outstanding at
December 29, 1995 1,045,350 12.23
Granted 361,500 12.75
Exercised (25,201) 11.07
Canceled (73,631) 14.42
Outstanding at
December 27, 1996 1,308,018 12.27
Granted 844,575 20.39
Exercised (33,811) 12.38
Canceled (29,326) 14.97
Outstanding at
December 26, 1997 2,089,456 $ 15.51
- --------------------------------------------------------------------------------
Options exercisable:
December 29, 1995 303,007
December 27, 1996 475,092
December 26, 1997 730,833
The following table summarizes information about stock options outstanding at
December 26, 1997:
OPTIONS OUTSTANDING
- --------------------------------------------------------------------------------
Number of
Options Weighted
Outstanding at Average Weighted
Range of December 26, Remaining Average
Exercise Prices 1997 Contractual Life Exercise Price
- --------------------------------------------------------------------------------
$ 9.83 - 14.50 1,168,456 7.0 $ 11.85
$ 17.00 - 23.29 921,000 7.8 $ 20.16
OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------
Number of
Options
Exercisable at Weighted
Range of December 26, Average
Exercise Prices 1997 Exercise Price
- --------------------------------------------------------------------------------
$ 9.83 - 14.50 642,333 $ 11.62
$ 17.00 - 23.29 88,500 $ 17.70
Had compensation cost for the Company's stock plans been determined based upon
the fair value at the grant date for awards under these plans, consistent with
the methodology prescribed under Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, the Company's net income and
diluted earnings per share would have been reduced by approximately $2.1
million, or $0.16 per share, for the year ended December 26, 1997, and
approximately $0.6 million, or $0.05 per share, for the year ended December 27,
1996. The weighted average fair value of the options granted during the year
ended December 26, 1997, and December 27, 1996, was estimated as $11.80 per
share and $8.09 per share, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
December 26, December 27,
1997 1996
- --------------------------------------------------------------------------------
Dividend yield -- --
Volatility .35 .37
Risk-free interest rate 6.1% 6.0%
Expected life 7 years 7 years
- --------------------------------------------------------------------------------
42
<PAGE>
Note 13
Capital Stock
Capital stock at December 26, 1997, and December 27, 1996, consists of the
following:
Number of Shares
---------------------------
December 26, December 27,
1997 1996
- -----------------------------------------------------------------------------
8% cumulative preferred stock,
$100 par value:
Class A:
Authorized 1,000 1,000
Issued and outstanding -- --
Class B:
Authorized 47,000 47,000
Issued and outstanding -- --
11% cumulative preferred stock,
$100 par value:
Class C:
Authorized 20,000 20,000
Issued and outstanding -- --
Designated preferred stock,
$.001 par value:
Authorized 5,000,000 5,000,000
Issued and outstanding -- --
Common stock, $.001 par value:
Authorized 100,000,000 100,000,000
Issued and outstanding 12,576,778 12,542,519
- -----------------------------------------------------------------------------
Note 14
Commitments and Contingencies
The Company has commitments under operating leases, primarily for building and
office space, expiring at various dates through December 2003. Certain leases
provide for additional rent based on increases in the consumer price index or
upon stated future rent revisions, payment of insurance, property taxes and
certain other costs of occupancy. Most leases contain renewal options. Rental
expense for the years ended December 26, 1997, December 27, 1996, and December
29, 1995, was approximately $10,481,000, $9,403,000 and $7,747,000,
respectively. The following is a schedule of future minimum annual rental
payments required under the Company's operating leases as of December 26, 1997:
In thousands
- --------------------------------------------------------------------------------
1998 $ 9,930
1999 8,464
2000 6,683
2001 5,019
2002 4,447
2003 and thereafter 8,824
$ 43,367
- --------------------------------------------------------------------------------
In addition to the above, the Company has agreements with leasing companies
to lease automobiles over periods of 24 to 60 months, which are primarily used
in the conduct of the Company's security operations. At December 26, 1997, the
Company had 1,563 vehicles leased under these operating lease agreements. The
maximum aggregate future rental commitment on the vehicles currently leased is
$6,525,000.
The nature of the Company's business subjects it to a significant volume of
ordinary, routine claims and lawsuits incidental to such business. The Company
maintains self-insurance programs and insurance coverage that it believes are
appropriate for its liability risks. Nonetheless, many claims or lawsuits
brought against the Company allege substantial damages that, if awarded and
ultimately paid by the Company (rather than insurers or indemnitors), could have
a material adverse effect on the results of operations or financial condition of
the Company.
In the opinion of management, based on currently known facts and the advice
of legal counsel, there is no single claim or lawsuit, or group of claims or
lawsuits based on the same facts, pending against the Company that the
disposition of which will have a material adverse effect on the Company's
consolidated financial statements taken as a whole.
43
<PAGE>
Note 15
International Operations
The Company has international operations located in Europe, Canada, Mexico,
South America and Asia. Summarized information relating to the international
subsidiaries is as follows:
December 26, December 27, December 29,
In thousands 1997 1996 1995
- --------------------------------------------------------------------------------
For the year:
Service revenues $ 190,451 $ 158,873 $ 136,611
Operating loss $ (2,330) $ (3,417) $ (3,062)
At year end:
Total assets $ 68,857 $ 71,671 $ 41,407
- --------------------------------------------------------------------------------
Note 16
Quarterly Financial Information (Unaudited)
Pinkerton's fiscal year is comprised of the 52-week (or 53-week) period ending
on the Friday closest to December 31, within the reporting year. The Company's
quarterly reporting periods consist of three four-week periods for the first,
second and third quarters, and four four-week periods for the fourth quarter.
First Second Third Fourth
In thousands, except per share data Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Year ended December 26, 1997
Service revenues $220,468 $230,789 $233,736 $316,896
Gross profit 26,135 27,598 29,735 41,405
Net income 1,981 2,715 3,378 6,659
Basic earnings per
share/b,c,d/ $ .16 $ .22 $ .27 $ .53
Diluted earnings per
share/b,c,d/ $ .15 $ .21 $ .26 $ .50
Year ended December 27, 1996
Service revenues $200,036 $200,918 $207,496 $297,797
Gross profit 23,186 23,990 27,558 39,636
Net income 1,709 3,047 3,031 4,663
Basic earnings per
share/b,c,d/ $ .14 $ .24 $ .24 $ .37
Diluted earnings per
share/b,c,d/ $ .14 $ .24 $ .24 $ .36
- --------------------------------------------------------------------------------
a The second quarter of 1996 includes $2.0 million of nonrecurring other
income, resulting from a final agreement regarding certain reimbursable
costs under the 1988 purchase agreement for the acquisition of Pinkerton's.
b The sum of the quarterly earnings per share amounts do not equal the annual
amount reported, since per share amounts are computed independently for each
quarter and for the full year, based on the respective weighted average
common shares and dilutive potential common shares outstanding.
c The earnings per share amounts reflect the application of Statement of
Financial Accounting Standards No. 128, "Earnings per Share," for all
periods presented.
d Effective August 27, 1997, a three-for-two stock split was accomplished by
means of a stock dividend whereby one new share was distributed for each two
shares held. All per share amounts have been adjusted accordingly.
44
<PAGE>
--------------------
Report of Management
--------------------
The management of Pinkerton's, Inc. is responsible for the preparation,
integrity and accuracy of the accompanying consolidated financial statements and
related information. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis and include amounts based on our best estimates and informed judgments, as
required.
Management maintains a comprehensive system of internal controls supported
by formal policies and procedures, a written code of business conduct, periodic
internal audits and management reviews. Although no cost-effective system will
preclude all errors and irregularities, we believe Pinkerton's, Inc. has in
place a system of internal controls which provides reasonable assurance that
assets are safeguarded against material loss from unauthorized use or
disposition, transactions are recorded in accordance with our policies, and the
financial information presented to our stockholders is reliable.
The Audit Committee of the Board of Directors is comprised solely of
outside directors. The Audit Committee meets periodically with the independent
auditors, our internal auditors, and financial management to ensure that each is
carrying out its responsibilities. Both the independent auditors and the
internal auditors have free and direct access to the Audit Committee.
The Company's independent auditors are recommended by the Audit Committee
and selected by the Board of Directors. The consolidated financial statements
have been audited by KPMG Peat Marwick LLP, who have expressed their opinion
elsewhere herein with respect to the fairness of the statements. Their audits
included a review of the system of internal control and tests of transactions to
the extent they considered necessary to render their opinion.
/s/ Denis R. Brown
Denis R. Brown
President and Chief Executive Officer
/s/ James P. McCloskey
James P. McCloskey
Executive Vice President and Chief Financial Officer
/s/ Steven A. Lindsey
Steven A. Lindsey
Vice President and Controller
45
<PAGE>
- -------------------------------------
STOCKHOLDER AND CORPORATE INFORMATION
- -------------------------------------
STOCK MARKET INFORMATION
The Company's common stock is traded on the New York Stock Exchange (NYSE)
under the symbol PKT. From its 1990 initial public offering to June 25, 1996,
the Company's common stock was traded on the Nasdaq National Market (Nasdaq)
under the symbol PKTN. The following table shows the high and low sales prices
as reported by the NYSE and the high and low bid prices reported by Nasdaq.
Effective August 27, 1997, a three-for-two stock split was accomplished by means
of a stock dividend whereby one new share was distributed for each two shares
held. The prices for 1997 and 1996 have been adjusted accordingly.
High Low
- --------------------------------------------------------------------------------
1997
Fourth Quarter $ 24.19 $ 21.25
Third Quarter 23.31 20.00
Second Quarter 20.42 16.83
First Quarter 18.67 16.25
1996
Fourth Quarter $ 18.00 $ 14.92
Third Quarter 16.67 14.00
Second Quarter 17.00 13.17
First Quarter 13.67 12.17
- --------------------------------------------------------------------------------
The Company historically has not paid cash dividends on its common stock,
and its present policy is to retain any earnings for use in its business. The
Company does not intend to change such policy in the foreseeable future.
Additionally, certain covenants of the Company's Note Purchase Agreement place
restrictions on the Company's ability to pay dividends.
On March 4, 1998, there were 255 stockholders of record of the Company's
common stock.
47
<PAGE>
EXHIBIT 13.2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Pinkerton's, Inc.
We have audited the accompanying consolidated balance sheets of Pinkerton's,
Inc. and subsidiaries as of December 26, 1997 and December 27, 1996, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the years ended December 26, 1997, December 27, 1996 and
December 29, 1995. These consolidated financial statements are the
responsibility of the 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 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
consolidated 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 Pinkerton's Inc. and
subsidiaries as of December 26, 1997 and December 27, 1996, and the results of
their operations, changes in stockholders' equity and cash flows for the years
ended December 26, 1997, December 27, 1996, and December 29, 1995 in conformity
with generally accepted accounting principles.
/s/ KMPG Peat Marwick LLP
Los Angeles, California
February 16, 1998
<PAGE>
EXHIBIT 21.1
PINKERTON'S, INC.
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME STATE OR COUNTRY OF ORGANIZATION *
---- ----------------------------------
<S> <C>
Alarm Systems, Inc. Louisiana
Alertline Limited United Kingdom
Barnard Communications, Inc. Minnesota
Barnard Electronics, Inc. Minnesota
Business Risks International (Europe) United Kingdom
Limited
Delta Audio Visual Security, Inc. Louisiana
Delta Audio Visual of Texas, Inc. Texas
Delta Countermeasures, Inc. Louisiana
Delta Alarms Systems, Inc. Louisiana
Distribution Associates South, Inc. Georgia
Guardian Uniforms, Inc. California
J.L. Torbeck Co. Ohio
Judicial Services Limited United Kingdom
Omega Corporation California
Pinkerton (Asia) Limited British Virgin Islands
Pinkerton (Australia) Pty. Ltd. Australia
Pinkerton Aviation Security Limited United Kingdom
Pinkerton's of Canada Limited Canada
Pinkerton (China) Limited Hong Kong
Pinkerton Consulting (M) Sdn Bhd (49% owned) Malaysia
Pinkerton Consulting Services (Taiwan) Ltd. Taiwan
Pinkerton Court Escort Services Limited United Kingdom
Pinkerton C.R. s.r.o Czech Republic
Pinkerton do Brasil Brazil
Pinkerton's du Quebec Limitee Canada
Pinkerton (Far East) Inc. Philippines
Pinkerton Government Services, Inc. Delaware
Pinkerton GmbH Holding Germany
Pinkerton (Hong Kong) Limited Hong Kong
Pinkerton Insurance Company, Inc. Tennessee
Pinkerton Investigation Services Limited United Kingdom
Pinkerton Korea Limited Korea
Pinkerton Management Corporation California
Pinkerton North Atlantic Limited United Kingdom
Pinkerton Protection Services, L.P. Indiana
Pinkerton, SARL France
Pinkerton Security Service GmbH Germany
Pinkerton Security Services Limited United Kingdom
Pinkerton Security Services (Guernsey) Limited United Kingdom
Pinkerton Security Services Ireland
(Ireland), Ltd. (50% owned)
</TABLE>
<PAGE>
PINKERTON'S, INC.
LIST OF SUBSIDIARIES
(continued)
<TABLE>
<CAPTION>
NAME STATE OR COUNTRY OF ORGANIZATION *
---- ----------------------------------
<S> <C>
Pinkerton Security Systems, Inc. California
Pinkerton Service Corporation California
Pinkerton Servicios de Investigacao E Portugal
Seguranca, Lda.
Pinkerton's Servicios de Seguridad Mexico
Privada, S.A. de C.V.
Pinkerton (Singapore) Pte Ltd. Singapore
Pinkerton (Thailand) Limited Thailand
ProNet Image & Audio, Inc. North Carolina
P. T. Pinkerton Indonesia Indonesia
Signacon Controls, Inc. New York
Steel S.A. (50% owned) Chile
The Stanton Corporation North Carolina
Summons & Warrants (U.K.) Limited United Kingdom
Titan Security Services Inc. Michigan
WKD Security GmbH Germany
WKD Pinkerton Security Services GmbH Germany
& Co. KG
Yeoman Security Group Limited United Kingdom
Yeoman Security Guards Limited United Kingdom
125129 Canada, Inc. (dba Canadalarm) Canada
</TABLE>
__________________________________
* Wholly owned except as noted
<PAGE>
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Pinkerton's, Inc.
We consent to incorporation by reference in the registration statements (Nos.
33-36200, 33-41795, 33-68492, 33-93902 and 333-31243) on Form S-8 of
Pinkerton's, Inc. of our reports dated February 16, 1998, relating to the
consolidated balance sheets of Pinkerton's, Inc. and subsidiaries as of December
26, 1997 and December 27, 1996, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years ended
December 26, 1997, December 27, 1996 and December 29, 1995, and the related
schedule, which reports appear in the December 26, 1997 annual report on Form
10-K of Pinkerton's, Inc.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
March 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-29-1995 DEC-27-1996 DEC-26-1997
<PERIOD-START> DEC-31-1994 DEC-30-1995 DEC-28-1996
<PERIOD-END> DEC-29-1995 DEC-27-1996 DEC-26-1997
<CASH> 20,215 33,761 24,243
<SECURITIES> 19,396 8,460 0
<RECEIVABLES> 116,692 137,055 149,668
<ALLOWANCES> 2,881 2,572 2,948
<INVENTORY> 2,516 3,799 4,190
<CURRENT-ASSETS> 176,536 199,190 189,393
<PP&E> 35,636 41,795 46,430
<DEPRECIATION> 21,619 26,818 29,685
<TOTAL-ASSETS> 290,909 315,281 324,196
<CURRENT-LIABILITIES> 86,311 94,731 102,794
<BONDS> 34,275 37,313 25,019
0 0 0
15 0 0
<COMMON> 74,471 74,895 75,341
<OTHER-SE> 39,239 55,486 68,288
<TOTAL-LIABILITY-AND-EQUITY> 290,909 315,281 324,196
<SALES> 862,793 906,247 1,001,889
<TOTAL-REVENUES> 862,793 906,247 1,001,889
<CGS> 771,172 791,877 877,016
<TOTAL-COSTS> 771,172 791,877 877,016
<OTHER-EXPENSES> 69,011 86,994 97,551
<LOSS-PROVISION> 1,719 1,635 885
<INTEREST-EXPENSE> 2,870 2,253 2,897
<INCOME-PRETAX> 18,021 23,488 23,540
<INCOME-TAX> 7,521 11,038 8,807
<INCOME-CONTINUING> 10,500 12,450 14,733
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 10,500 12,450 14,733
<EPS-PRIMARY> .84 .99 1.17<F1>
<EPS-DILUTED> .84 .97 1.12<F1>
<FN>
<F1>EARNINGS PER SHARE OF THE REGISTRANT HAVE BEEN RESTATED TO REFLECT A
THREE-FOR-TWO STOCK SPLIT DISTRIBUTED ON AUGUST 27, 1997 AND TO REFLECT
THE APPLICATION OF SFAS NO. 128, "EARNINGS PER SHARE."
</FN>
</TABLE>
