-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KiKyFb92yZMuxAwYvZG9+CKHh7fW09xk5Xt3A4B0p0R/2nUniS4SM2wMvCUB75Fj +FWUysW0RSNx9dSd1NrdZw== 0000898430-98-001057.txt : 19980327 0000898430-98-001057.hdr.sgml : 19980327 ACCESSION NUMBER: 0000898430-98-001057 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971226 FILED AS OF DATE: 19980326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PINKERTONS INC CENTRAL INDEX KEY: 0000078666 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-DETECTIVE, GUARD & ARMORED CAR SERVICES [7381] IRS NUMBER: 135318100 STATE OF INCORPORATION: DE FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-03017 FILM NUMBER: 98573553 BUSINESS ADDRESS: STREET 1: 15910 VENTURE BLVD STE 900 CITY: ENCINO STATE: CA ZIP: 91436-3095 BUSINESS PHONE: 8183808800 MAIL ADDRESS: STREET 1: 15910 VENTURA BLVD., SUITE 900 CITY: ENCINO STATE: CA ZIP: 91436-2810 10-K405 1 FORM 10-K FOR PERIOD ENDED 12/26/1997 ================================================================================ 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. ================================================================================ 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. 2 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 3 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. 4 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. 5 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. 6 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. 7 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. 8 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. 9 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. 10 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 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. --------------------------------
Page ---- 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.................................................................. **
* 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 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 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 (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 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 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 SCHEDULE II PINKERTON'S, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS --------------------------- BALANCE AT CHARGED TO CHARGED TO BEGINNING OF COSTS AND OTHER BALANCE AT DESCRIPTION YEAR EXPENSES ACCOUNTS (1) DEDUCTIONS (2) END OF YEAR ------------ ------------ ---------- ------------ -------------- ------------ 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
- --------------------------- (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 EX-10.27 2 AMENDMENT TO SUPPLEMENTAL RETIREMENT INCOME PLAN 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 EX-10.28 3 EMPLOYMENT AGREEMENT 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 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 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 EX-10.29 4 SUPPLEMENTAL LETTER AGREEMENT 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: 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 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. EX-10.30 5 SUPPLEMENTAL LETTER AGREEMENT 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: 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 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. EX-10.31 6 LETTER AGREEMENT 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 EX-10.32 7 PERFORMANCE AND EQUITY INCENTIVE PLAN 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. 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 EX-10.33 8 STOCK OPTION AGREEMENT 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:
Stock Price Stock Price Targets Stock Price: Achieved by: ------------------- ------------ ----------- 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
1 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 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 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] EX-13.1 9 SECTIONS OF THE 1997 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13.1 - ----------------------- SELECTED FINANCIAL DATA - ----------------------- In thousands, except per share data
Operating Statement Data December 26, December 27, December 29, December 30, December 31, Year Ended 1997 1996 1995 1994 1993/a/ - ------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------ Balance Sheet Data At Year End 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------ Other Financial Data Year 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------
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 -------------------------------------------------------------------------- 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 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 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 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 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 - --------------------------- 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 - ------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------
December 26, December 27, December 29, In thousands, except per share data 1997 1996 1995 - -------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 31
- ---------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - ---------------------------------------------------------- Additional Total Preferred Common Paid-In Other Retained Stockholders' In thousands Stock Stock Capital Adjustments Earnings Equity - ------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements 32 - ------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------
December 26, December 27, December 29, In thousands 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 33 ------------------------------------------ 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 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 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 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 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 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 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 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 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 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 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 -------------------- 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 - ------------------------------------- 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 EX-13.2 10 INDEPENDENT AUDITORS REPORT 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 EX-21.1 11 LIST OF SUBSIDIARIES EXHIBIT 21.1 PINKERTON'S, INC. LIST OF SUBSIDIARIES
NAME STATE OR COUNTRY OF ORGANIZATION * ---- ---------------------------------- 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)
PINKERTON'S, INC. LIST OF SUBSIDIARIES (continued)
NAME STATE OR COUNTRY OF ORGANIZATION * ---- ---------------------------------- 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
__________________________________ * Wholly owned except as noted EX-23.1 12 CONSENT OF KPMG PEAT MARWICK LLP 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 EX-27.1 13 FINANCIAL DATA SCHEDULE
5 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. 1,000 YEAR YEAR YEAR DEC-29-1995 DEC-27-1996 DEC-26-1997 DEC-31-1994 DEC-30-1995 DEC-28-1996 DEC-29-1995 DEC-27-1996 DEC-26-1997 20,215 33,761 24,243 19,396 8,460 0 116,692 137,055 149,668 2,881 2,572 2,948 2,516 3,799 4,190 176,536 199,190 189,393 35,636 41,795 46,430 21,619 26,818 29,685 290,909 315,281 324,196 86,311 94,731 102,794 34,275 37,313 25,019 0 0 0 15 0 0 74,471 74,895 75,341 39,239 55,486 68,288 290,909 315,281 324,196 862,793 906,247 1,001,889 862,793 906,247 1,001,889 771,172 791,877 877,016 771,172 791,877 877,016 69,011 86,994 97,551 1,719 1,635 885 2,870 2,253 2,897 18,021 23,488 23,540 7,521 11,038 8,807 10,500 12,450 14,733 0 0 0 0 0 0 0 0 0 10,500 12,450 14,733 .84 .99 1.17 .84 .97 1.12 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."
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