-----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, N/ZOVZM6vU1qUEVyKYYqMcZBRuGjbFtfjt/vZXtIsah6jfs6d1iFoEXGUPztjj6P WnS3QTkfeXmwXvcSClxyvQ== 0000898430-96-003052.txt : 19960705 0000898430-96-003052.hdr.sgml : 19960705 ACCESSION NUMBER: 0000898430-96-003052 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19960703 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: 1228 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-06573 FILM NUMBER: 96591076 BUSINESS ADDRESS: STREET 1: 15910 VENTURE BOULEVARD SUITE 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 S-3/A 1 AMENDMENT #1 TO FORM S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996 REGISTRATION NO. 333-6573 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- PINKERTON'S, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- DELAWARE 13-5318100 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 15910 VENTURA BOULEVARD, SUITE 900 ENCINO, CALIFORNIA 91436-2810 (818) 380-8800 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- C. MICHAEL CARTER, ESQ. EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY PINKERTON'S, INC. 15910 VENTURA BOULEVARD, SUITE 900 ENCINO, CALIFORNIA 91436-2810 (818) 380-8800 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: ANDREW E. BOGEN, ESQ. NICHOLAS P. SAGGESE, ESQ. GIBSON, DUNN & CRUTCHER LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM 333 SOUTH GRAND AVENUE 300 SOUTH GRAND AVENUE, SUITE 3400 LOS ANGELES, CA 90071 LOS ANGELES, CALIFORNIA 90071 (213) 229-7000 (213) 687-5000 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement from the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JULY 3, 1996 PROSPECTUS , 1996 2,360,000 SHARES [LOGO OF PINKERTON] COMMON STOCK Of the 2,360,000 shares of Common Stock, par value $.001 per share (the "Common Stock"), being offered hereby (the "Offering"), 1,700,000 shares are being sold by Pinkerton's, Inc. ("Pinkerton" or the "Company"), and 660,000 shares are being sold by a stockholder of the Company (the "Selling Stockholder"). See "Principal Stockholders and Selling Stockholder." The Company will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Stockholder. The Common Stock of the Company is traded on the New York Stock Exchange ("NYSE") under the symbol "PKT." On July 1, 1996, the last reported sale price of the Common Stock was $23 1/4 per share. See "Price Range of Common Stock and Dividend Policy." SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS TO TO THE DISCOUNTS AND TO THE THE SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER(3) - ---------------------------------------------------------------------------------------------- Per Share........................ $ $ $ $ Total(4)......................... $ $ $ $ - ----------------------------------------------------------------------------------------------
(1) The Company and the Selling Stockholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting the Company's share of expenses, estimated at $300,000. (3) Before deducting the Selling Stockholder's share of expenses, estimated at $11,500. (4) The Company has granted to the Underwriters an option, exercisable within 30 days hereof, to purchase up to an aggregate of 354,000 additional shares of Common Stock at the price to the public less underwriting discounts and commissions for the purpose of covering over-allotments, if any. If the Underwriters exercise such option in full, the total price to the public, underwriting discounts and commissions, proceeds to the Company and proceeds to the Selling Stockholder will be $ , $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock are being offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to various prior conditions, including the rights of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares will be made in New York, New York on or about , 1996. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION PRUDENTIAL SECURITIES INCORPORATED SCHRODER WERTHEIM & CO. [FOUR PHOTOGRAPHS OF PINKERTON EMPLOYEES ON DUTY] NOTE ON FORWARD-LOOKING STATEMENTS Certain information set forth in this Prospectus includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act") and is subject to certain risks and uncertainties, including those identified under the caption "Risk Factors." Readers are cautioned not to place undue reliance on these statements, which speak only as of the date hereof. The Company undertakes no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect unanticipated events or developments. This Prospectus also contains market data derived, without independent verification, from a 1995 report (the "Freedonia Report") by the Freedonia Group, Inc., an independent research firm. The Freedonia Report projects growth in the Company's industry; however, there can be no assurance that such industry growth will materialize or will occur at the levels projected. ---------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. Pinkerton is a registered trademark of Pinkerton's, Inc. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, (i) all information in this Prospectus assumes no exercise of the Underwriters' over- allotment option and (ii) all market data are derived from the Freedonia Report. The following summary includes "forward-looking statements." See "Note on Forward-Looking Statements." THE COMPANY Pinkerton 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 more than 5,000 industrial, commercial and governmental customers domestically and internationally, including approximately half of the United States "Fortune 1,000" 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 more than 220 offices in the United States, Canada, Mexico, Europe and Asia and has more than 45,000 employees. During 1994, the Company recruited a new senior management team, implemented a number of measures designed to improve the Company's operating results and initiated a corporate strategy to position Pinkerton for long-term growth and profitability. Management performed a detailed analysis of the Company's profitability on a contract-by-contract basis, which enabled it to identify, renegotiate and when necessary terminate many unprofitable contracts. Management also refocused the Company's sales and marketing efforts, replaced a number of underperforming district managers, instituted a new incentive system designed to promote profitability at the district office level and tightened cost controls. After surveying many customers to better understand their security needs, the Company rededicated itself to providing quality services by commencing total quality management and enhancing employee training programs. These measures have enabled the Company to report increased gross margins in each of the last five quarters over the comparable prior periods. In addition, for the fiscal year ended December 29, 1995 and the twelve weeks ended March 22, 1996, operating profit (before non-recurring items) increased by 154.4% and 26.2%, respectively, over the comparable prior periods. BUSINESS STRATEGY Pinkerton's strategic objective is to be a world-class, global security solutions provider by offering and integrating traditional security services with electronic security systems and a range of consulting services to address all of a customer's security needs. As part of this strategy, the Company intends to: (i) capitalize on its worldwide customer base, widely-recognized brand name and reputation for superior quality by cross-marketing higher margin, value-added services and products, thereby creating security partnerships with its customers and increasing customer retention and (ii) pursue an aggressive acquisition strategy designed both to add core competencies, such as security systems integration, and to grow its security officer franchise. Specifically, the Company's strategy consists of the following: . Promote Widely-Recognized Brand Name. The Company believes that "Pinkerton" is the most widely- recognized brand name in the security industry worldwide. The Company intends to continue to capitalize on Pinkerton's brand name and reputation for superior quality security services and products. . Emphasize World-Class Service. The Company intends to maintain its strong commitment to providing its clients with world-class service and believes that its employee selection process and training programs are the most rigorous and effective in the industry. As the primary interface with its customers on a day-to-day basis, Pinkerton's security officers are the key to the Company's ability to provide world-class customer service and differentiate itself from its competition. 3 . Offer a Full Range of Security Services. The Company intends to aggressively expand its offerings of higher margin, value-added services and products in order to become a single-source provider of security solutions for its existing and future customers. As part of this effort, the Company plans to capitalize on its worldwide customer base by cross- marketing its expanded security service and product offerings. Management believes that as a full-service provider of innovative security solutions Pinkerton can create security partnerships with its existing and future customers, promote customer retention and expand the Company's customer base. . Capitalize on "Outsourcing" and Centralization Trends. Management intends to continue to capitalize on the growing trends among businesses to outsource non-core functions, such as security, and to centralize the procurement and oversight of such functions at the corporate level in order to minimize the number of vendor relationships. Pinkerton believes it has a number of competitive advantages to capitalize on these trends toward outsourcing and centralization, including its long-standing expertise in recruiting, training and managing large numbers of security personnel, its demonstrated ability to manage large, multi-site corporate security contracts and its extensive knowledge of customer security needs. These capabilities have enabled the Company to obtain a contract extending to 1999 to provide security officer services for all of General Motors' North American facilities, a function which General Motors had previously handled primarily in-house. Pinkerton has over 50 customers for which it provides security services on a national or regional level at multiple locations. The Company has embarked on an aggressive effort to broaden its core competencies through acquisitions. Key elements of the Company's acquisition strategy include: . Expand Strategically Into Security Systems Integration. The Company intends to assemble an extensive network of security systems integration businesses in major metropolitan areas as part of its effort to be a single-source provider of security solutions. Since the beginning of 1995, Pinkerton has acquired three regional security systems integration businesses. These businesses provide higher margin, value-added services and products by integrating diverse electronic security systems, such as access control, closed circuit television, alarm monitoring and digital badging, into a coherent interrelated operating system that enhances security and automates alarm response. These businesses also provide ongoing maintenance of such systems. . Consolidate Security Officer Companies. The market for security officer services is highly fragmented, with only a few national operators and over 9,000 independent vendors, most of which serve discrete local markets. The Company estimates, based on industry sources, that Pinkerton and the other two largest companies in the security industry currently have a combined domestic market share of approximately 29%, and that the 20 largest operators have a combined domestic market share of approximately 48%. Management believes that Pinkerton has several competitive advantages to enable it to succeed as an industry consolidator, including a widely-recognized brand name, a strong financial position, access to capital, a reputation for superior quality, the ability to service national and international accounts, management experience in identifying and assimilating acquisitions and sophisticated management information systems. . Expand International Operations. The Company intends to capitalize on future strategic opportunities for international expansion to enhance its ability to provide global security solutions to its existing and future customers. The Company currently has offices in 18 countries throughout North America, Europe and Asia. INDUSTRY The domestic security-related services industry, which includes security officer and investigative services, system integration services, alarm monitoring services, patrol services and security consulting services, accounted for revenues of approximately $16.6 billion in 1994 and is projected to increase at a compound annual 4 growth rate of approximately 7.9% per year to approximately $26 billion by the year 2000. The domestic security officer services segment of the market, from which the Company generated approximately 80% of its revenues in 1995, accounted for approximately $8.6 billion of revenues in 1994 and is projected to increase at a compound annual growth rate of 7.4% to almost $13.2 billion by the year 2000. The Company believes that the projected growth in the security- related services industry in general, and the security officer services segment in particular, is attributable primarily to three factors: (i) increasing incidents of crime, violence and terrorism, (ii) governmental budgetary constraints which limit the resources available to combat such crime, violence and terrorism and (iii) the growing trend among businesses to outsource certain non-core operations, such as security services, to limit required capital expenditures and reduce administrative and labor costs. 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. RISK FACTORS See "Risk Factors" for a discussion of certain factors that should be considered by prospective investors. THE OFFERING Common Stock Offered: By Pinkerton.................... 1,700,000 shares By the Selling Stockholder...... 660,000 shares --------- Total......................... 2,360,000 shares --------- --------- Common Stock to be outstanding after the Offering.............. 10,050,269 shares(a) Use of Proceeds.................. To redeem debt and for general corporate purposes, including future acquisitions. See "Use of Proceeds." NYSE Symbol...................... PKT
- -------------------- (a) Excludes 903,663 shares subject to outstanding options to purchase shares of Common Stock under the Company's employee stock option plans as of July 1, 1996. 5 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables present summary historical financial data for the fiscal years ended December 27, 1991, December 25, 1992, December 31, 1993, December 30, 1994, and December 29, 1995, derived from the Company's Consolidated Financial Statements audited by KPMG Peat Marwick LLP, and for the twelve week periods ended March 24, 1995 and March 22, 1996 and at March 22, 1996, derived from the Company's unaudited interim period Consolidated Financial Statements prepared by the Company's management that include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company's financial position and results of operations for the indicated interim periods. The results for the twelve-week periods ended March 24, 1995 and March 22, 1996 are not necessarily indicative of the results to be expected for the full fiscal year. Such data should be read in conjunction with such Consolidated Financial Statements, the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
FISCAL YEARS ENDED(a) TWELVE WEEKS ENDED(a) ---------------------------------------------------------------- --------------------- DECEMBER 27, DECEMBER 25, DECEMBER 31, DECEMBER 30, DECEMBER 29, MARCH 24, MARCH 22, 1991 1992 1993(B) 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------ ---------- ---------- STATEMENT OF OPERATIONS DATA: Service revenues....... $ 637,837 $ 703,676 $ 772,026 $ 849,960 $ 862,793 $ 198,321 $ 200,036 Gross profit........... 71,685 78,391 83,031 76,434 91,621 18,751 23,186 Non-recurring income (expense), net(c)..... -- (2,500) (3,800) (12,066) -- -- -- Operating profit (loss)................ 26,312 19,011 15,926 (3,855) 20,891 3,185 4,018 Net income (loss)...... 12,573 8,587 3,201 (10,242) 10,500 1,471 1,709 Net income (loss) per common share.......... 1.66 1.04 0.39 (1.24) 1.26 0.18 0.20 Weighted average common shares and common share equivalents..... 7,373 8,257 8,284 8,288 8,351 8,345 8,408 OTHER DATA: EBITDA(d).............. $ 33,284 $ 32,518 $ 32,762 $ 24,159 $ 35,596 $ 6,562 $ 7,616 EBITA(e)............... 31,180 28,953 28,109 18,582 29,964 5,263 6,192 Depreciation .......... 2,104 3,565 4,653 5,577 5,632 1,299 1,424 Amortization .......... 4,868 7,442 8,383 10,371 9,073 2,078 2,174
AT MARCH 22, 1996 ------------------------ ACTUAL AS ADJUSTED(f) --------- -------------- BALANCE SHEET DATA: Working capital...................................... $ 94,423 $ 95,828 Total assets......................................... 291,175 291,342 Total debt (including current maturities)............ 42,850 8,575(g) Stockholders' equity................................. 115,561 151,356
- ------------------- (a) The Company'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. (b) The Company's 1993 fiscal year consisted of 53 weeks, whereas all other fiscal years presented consisted of 52 weeks. (c) In 1994, goodwill and other intangibles, principally contract rights, were written down in the amount of $11,501, and the Company recorded a pre-tax charge of $2,934 consisting primarily of severance, recruiting and relocation charges. In addition, in 1994 the Company recorded a gain from litigation settlements in the amount of $2,369. (d) Earnings before interest, taxes, depreciation, amortization, write-down of intangible assets, other special charges, gain from litigation settlements, net, and provision for reserve against investment. EBITDA should not be construed as an alternative to net income or any other measure of performance determined in accordance with generally accepted accounting principles or an indicator of the Company's operating performance, liquidity or cash flows generated by operating activities. (e) Earnings before interest, taxes, amortization, write-down of intangible assets, other special charges, gain from litigation settlements, net, and provision for reserve against investment. EBITA should not be construed as an alternative to net income or any other measure of performance determined in accordance with generally accepted accounting principles or an indicator of the Company's operating performance, liquidity or cash flows generated by operating activities. (f) Gives effect to the sale by the Company of the shares of Common Stock offered hereby, the application of the estimated net proceeds as set forth under "Use of Proceeds" and an assumed offering price of $23 1/4 per share. (g) Although outstanding on an "as adjusted" basis at March 22, 1996, the Company made a scheduled principal amortization payment on June 17, 1996 of $8,575. Accordingly, after giving effect to the application of the net proceeds to the Company of the Offering, total debt would be zero. 6 RISK FACTORS Each prospective investor should carefully consider all information contained in this Prospectus or incorporated or deemed to be incorporated in this Prospectus and should give particular consideration to the following factors before making an investment in the Common Stock. ACQUISITION STRATEGY 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. 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 three 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 superior to the Company's security officer business 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 The Company's presence in the United Kingdom, Mexico, Continental Europe and Asia is primarily the result of international expansion between 1991 and 1994. The new Pinkerton management team conducted a review of these operations and determined that operations in the United Kingdom and Asia were in need of reorganization, refocusing and strengthening and that the business in Continental Europe required additional volume to become profitable. In the aggregate, the Company's international operations sustained operating losses in 1993, 1994 and 1995. See "Note 14 of Notes to Consolidated Financial Statements." While management believes that the reorganization, refocusing and investment in foreign operations should enable the Company to restore these operations to profitability, no assurance can be given that this will occur. 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 were 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. PRINCIPAL STOCKHOLDER Upon completion of the Offering, Thomas W. Wathen will beneficially own approximately 21.2% of Pinkerton's Common Stock (20.5% if the Underwriters' over-allotment option is exercised in full). Such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of Pinkerton pursuant to a transaction which might otherwise be beneficial to stockholders. 7 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market following the offering could adversely affect the prevailing market price. Beginning 120 days after the date of this Prospectus, approximately 2,393,792 additional shares (251,625 shares of which are subject to currently exercisable options) will become eligible for sale in the public market upon the expiration of certain lock-up agreements with the Underwriters, subject to compliance with Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"). As of July 1, 1996, Pinkerton has reserved for issuance up to 1,398,463 shares of Common Stock under its employee stock option plans, of which 903,663 shares are subject to currently outstanding options. DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock and has no current plans to pay any such dividends in the future. There can be no assurance as to the amount of funds, if any, that will be available for the declaration and payment of dividends in the future. USE OF PROCEEDS The net proceeds to Pinkerton from the Offering, after payment of underwriting discounts and commissions and expenses, are estimated to be approximately $ million ($ million if the Underwriters' over-allotment option is exercised in full), assuming a public offering price of $ per share. Pinkerton will not receive any of the proceeds of the sale of shares of Common Stock by the Selling Stockholder. The Company will use a portion of the estimated net proceeds of the Offering to redeem its 10.35% Senior Notes due 2000 (the "Senior Notes"). Assuming the redemption of the Senior Notes were effected on July 31, 1996, using an assumed Treasury Note rate of 6.43%, the aggregate redemption price (including accrued interest and pre-payment charge) would be $37.1 million after giving effect to an amortization payment of approximately $8.6 million made on June 17, 1996. Any net proceeds to Pinkerton from the Offering not used to redeem the Senior Notes will be used for general corporate purposes including future acquisitions. As of the date hereof, the Company has no definitive agreement or commitment to make any material acquisition. See "Risk Factors--Acquisition Strategy." 8 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Company's Common Stock is traded on the 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 sets forth for the periods indicated the range of high and low bid prices of the Common Stock as reported by Nasdaq and high and low sale prices of the Common Stock as reported by the NYSE, as applicable. As of July 1, 1996, there were approximately 135 holders of record of Common Stock.
PRICE RANGE OF COMMON STOCK --------------- HIGH LOW ------- ------- FISCAL YEAR ENDED DECEMBER 30, 1994: 1st Quarter.................................................. $22 $18 2nd Quarter.................................................. 21 1/4 15 1/4 3rd Quarter.................................................. 17 1/2 15 1/4 4th Quarter.................................................. 20 1/2 14 FISCAL YEAR ENDED DECEMBER 29, 1995: 1st Quarter.................................................. $19 3/4 $15 1/2 2nd Quarter.................................................. 17 14 3/4 3rd Quarter.................................................. 18 3/4 15 3/4 4th Quarter.................................................. 21 1/2 17 5/8 FISCAL YEAR ENDED DECEMBER 27, 1996: 1st Quarter.................................................. $20 1/2 $18 1/4 2nd Quarter.................................................. 26 19 3rd Quarter (through July 1, 1996)........................... 25 22 1/2
On July 1, 1996, the last sale price of the Common Stock, as reported by the NYSE, was $23 1/4 per share. Pinkerton has never paid cash dividends on its Common Stock. The Company intends to retain all of its future earnings to finance its operations and its acquisition program, and does not anticipate paying cash dividends in the foreseeable future. The Senior Notes contain restrictions on the payment of dividends; however, the Company intends to apply a portion of the net proceeds of the Offering to redeem all of the Senior Notes. See "Use of Proceeds." 9 CAPITALIZATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The following table sets forth the consolidated capitalization of the Company at March 22, 1996, and as adjusted to give effect to the sale by the Company of 1,700,000 shares of Common Stock in the Offering and the application of the net proceeds therefrom, assuming no exercise of the Underwriters' over-allotment option. This table should be read in conjunction with the Consolidated Financial Statements and the Notes thereto.
AT MARCH 22, 1996 ------------------------ ACTUAL AS ADJUSTED(a) -------- -------------- Cash, cash equivalents and marketable securities................... $ 43,002 $ 43,052 ======== ======== Total debt (including current portion)(b).......................... $ 42,850 $ 8,575 (c) Stockholders' equity: Common Stock, par value $.001 per share; authorized 100,000,000 shares; issued and outstanding 8,346,469 shares; as adjusted 10,046,469 shares............................................... 8 10 Preferred Stock, authorized 5,068,000 shares; none outstanding... -- -- Additional paid-in capital....................................... 74,485 111,633 Retained earnings................................................ 50,185 48,830 Other adjustments(d)............................................. (9,117) (9,117) -------- -------- Total stockholders' equity..................................... 115,561 151,356 -------- -------- Total capitalization............................................... $158,411 $159,931 ======== ========
- --------------------- (a) Based on a public offering price of $23 1/4 per share for the sale by the Company of 1,700,000 shares of Common Stock offered hereby, less underwriting discounts and commissions and estimated expenses of the Offering. (b) As of March 22, 1996, there was no outstanding balance under the Company's revolving credit facility. (c) Although outstanding on an "as adjusted" basis at March 22, 1996, the Company made a scheduled principal amortization payment on June 17, 1996 of $8,575. Accordingly, after giving effect to the application of the net proceeds to the Company of the Offering, total debt would be zero. (d) Consisting principally of pension adjustments arising from the application of SFAS No. 87 and foreign currency translation adjustments under SFAS No. 52. 10 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables present selected historical financial data for the fiscal years ended and at December 27, 1991, December 25, 1992, December 31, 1993, December 30, 1994 and December 29, 1995, derived from the Company's Consolidated Financial Statements audited by KPMG Peat Marwick LLP, and for the twelve week periods ended March 24, 1995 and March 22, 1996 and at March 22, 1996, derived from the Company's unaudited interim period Consolidated Financial Statements prepared by the Company's management that include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company's financial position and results of operations for the indicated interim periods. The results for the twelve week periods ended March 24, 1995 and March 22, 1996 are not necessarily indicative of the results to be expected for the full fiscal year. Such data should be read in conjunction with such Consolidated Financial Statements, the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
FISCAL YEARS ENDED(a) TWELVE WEEKS ENDED(a) ---------------------------------------------------------------- --------------------- DECEMBER 27, DECEMBER 25, DECEMBER 31, DECEMBER 30, DECEMBER 29, MARCH 24, MARCH 22, 1991 1992 1993(B) 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------ ---------- ---------- STATEMENT OF OPERATIONS DATA: Service revenues....... $ 637,837 $ 703,676 $ 772,026 $ 849,960 $ 862,793 $ 198,321 $ 200,036 Cost of services....... 566,152 625,285 688,995 773,526 771,172 179,570 176,850 --------- --------- --------- --------- --------- ---------- ---------- Gross profit........... 71,685 78,391 83,031 76,434 91,621 18,751 23,186 Operating expenses..... 41,184 49,827 54,982 57,983 61,857 13,523 17,032 Amortization of intangible assets..... 4,189 7,053 8,323 10,240 8,873 2,043 2,136 Write-down of intangible assets and other special charges(c)............ -- (2,500) (3,800) (14,435) -- -- -- Gain from litigation settlements, net...... -- -- -- 2,369 -- -- -- --------- --------- --------- --------- --------- ---------- ---------- Operating profit (loss)................ 26,312 19,011 15,926 (3,855) 20,891 3,185 4,018 Provision for reserve against investment.... -- -- 3,267 -- -- -- -- Interest expense, net.. 5,146 5,062 4,238 3,969 2,870 508 604 --------- --------- --------- --------- --------- ---------- ---------- Income (loss) before income taxes.......... 21,166 13,949 8,421 (7,824) 18,021 2,677 3,414 Provision for income taxes................. 8,593 5,362 5,220 2,418 7,521 1,206 1,705 --------- --------- --------- --------- --------- ---------- ---------- Net income (loss)...... $ 12,573 $ 8,587 $ 3,201 $ (10,242) $ 10,500 $ 1,471 $ 1,709 ========= ========= ========= ========= ========= ========== ========== Net income (loss) per common share.......... $ 1.66 $ 1.04 $ 0.39 $ (1.24) $ 1.26 $ 0.18 $ 0.20 Weighted average common shares and common share equivalents..... 7,373 8,257 8,284 8,288 8,351 8,345 8,408 OTHER DATA: EBITDA(d).............. $ 33,284 $ 32,518 $ 32,762 $ 24,159 $ 35,596 $ 6,562 $ 7,616 EBITA(e)............... 31,180 28,953 28,109 18,582 29,964 5,263 6,192 Depreciation........... 2,104 3,565 4,653 5,577 5,632 1,299 1,424 Amortization........... 4,868 7,442 8,383 10,371 9,073 2,078 2,174
AT -------------------------------------------------------------------------- DECEMBER 27, DECEMBER 25, DECEMBER 31, DECEMBER 30, DECEMBER 29, MARCH 22, 1991 1992 1993 1994 1995 1996 ------------ ------------ ------------ ------------ ------------ --------- BALANCE SHEET DATA: Working capital........ $ 94,434 $ 99,032 $ 92,100 $ 85,400 $ 90,225 $ 94,423 Total assets........... 264,460 260,828 282,738 278,090 287,344 291,175 Total debt (including current maturities)... 60,000 60,000 60,000 51,425 42,850 42,850 Stockholders' equity... 111,415 114,202 111,631 103,422 113,725 115,561
- ------------------- (a) The Company'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. (b) The Company's 1993 fiscal year consisted of 53 weeks, whereas all other fiscal years presented consisted of 52 weeks. (c) In 1994, goodwill and other intangibles, principally contract rights, were written down in the amount of $11,501, and the Company recorded a pre-tax charge of $2,934 consisting primarily of severance, recruiting and relocation charges. (d) Earnings before interest, taxes, depreciation, amortization, write-down of intangible assets, other special charges, gain from litigation settlements, net, and provision for reserve against investment. EBITDA should not be construed as an alternative to net income or any other measure of performance determined in accordance with generally accepted accounting principles or an indicator of the Company's operating performance, liquidity or cash flows generated by operating activities. (e) Earnings before interest, taxes, amortization, write-down of intangible assets, other special charges, gain from litigation settlements, net, and provision for reserve against investment. EBITA should not be construed as an alternative to net income or any other measure of performance determined in accordance with generally accepted accounting principles or an indicator of the Company's operating performance, liquidity or cash flows generated by operating activities. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion and analysis should be read in conjunction with the information set forth under "Selected Consolidated Financial Data" and the Consolidated Financial Statements and Notes thereto included elsewhere herein. 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. RESULTS OF OPERATIONS FIRST QUARTER 1996 COMPARED WITH FIRST QUARTER 1995 Service Revenues. The Company's service revenues increased by $1.7 million, or 0.9%, from $198.3 million in the first quarter of 1995 to $200.0 million in the first quarter of 1996. Domestic Service Revenues. The Company's domestic service revenues increased by $1.2 million, or 0.7%, from $168.0 million in the first quarter of 1995 to $169.2 million in the first quarter of 1996. This increase reflects the revenues of systems integration businesses acquired of $6.1 million less service reductions of $4.9 million. The service reductions occurred primarily as a result of an active program to improve profitability by eliminating unprofitable accounts. International Service Revenues. Service revenues of the Company's international operations increased by $0.5 million, or 1.6%, from $30.3 million in the first quarter of 1995 to $30.8 million in the first quarter of 1996. This increase primarily results from $1.0 million of new business offset by foreign currency exchange reductions of $0.5 million. Cost of Services and Gross Profit. The Company's cost of services decreased by $2.7 million, or 1.5%, from $179.6 million in the first quarter of 1995 to $176.9 million in the first quarter of 1996. This decrease results primarily from the impact of cost efficiencies resulting from the Company's ongoing efforts to reduce the cost of services. Gross profit increased $4.4 million, or 23.4%, from $18.8 million in the first quarter of 1995 to $23.2 million in the first quarter of 1996. Gross profit as a percentage of service revenues increased from 9.5% in the first quarter of 1995 to 11.6% in the first quarter of 1996 reflecting the changes in cost of services discussed above. Gross profit was also favorably impacted by the inclusion of the Company's security systems integration service operations, which typically experience higher gross margins than the Company's security service operations. Operating Expenses. Operating expenses increased by $3.5 million, or 25.9%, from $13.5 million in the first quarter of 1995 to $17.0 million in the first quarter of 1996. As a percentage of service revenues, operating expenses increased from 6.8% in the first quarter of 1995 to 8.5% in the first quarter of 1996. The increased operating expense percentage reflects the operations of the Company's security systems integration service operations which have different operating ratios with both higher gross profit margins and operating expenses than the Company's security service operations. Operating expenses also reflect the Company's ongoing expenditures for quality processes and training programs implemented to enhance customer value. Amortization. Amortization of costs in excess of net assets acquired increased by $0.1 million from $2.0 million in the first quarter of 1995 to $2.1 million in the first quarter of 1996. This reflects additional amortization of intangible assets arising from acquisitions consummated subsequent to the first quarter of 1995. Operating Profit. Operating profit was $4.0 million, or 2.0% of service revenues, for the first quarter of 1996 as compared to $3.2 million, or 1.6% of service revenues, for the same period last year. Operating profit 12 increased due to improved gross profit margins, partially offset by an increase in operating expenses discussed above. Income Taxes. The effective tax rate in the first quarter of 1996 was 50.0% as compared to 45.0% in 1995. The higher tax rate in 1996 is primarily attributable to an increase in certain non-United States losses that have no tax benefit as well as a reduction in targeted jobs tax credits that expired in 1995. 1995 COMPARED WITH 1994 Service Revenues. The Company's services revenues increased by $12.8 million, or 1.5%, from $850.0 million in 1994 to $862.8 million in 1995. This increase reflects $8.9 million of revenues from businesses acquired during 1995, a net increase in all other business of $9.5 million and revenue reductions arising from currency fluctuations of $5.6 million. Domestic Service Revenues. Compared with the prior year, the Company's domestic service revenues increased by $11.7 million, or 1.6%, from $714.5 million in 1994 to $726.2 million in 1995. This increase reflects $8.9 million of revenues from businesses acquired during 1995 with revenues from all other domestic sources increasing $2.8 million. Domestic service revenues reflect $96.4 million and $92.3 million of revenue generated by the General Motors account in 1995 and 1994, respectively. Domestic service revenues, net of acquisition and General Motors revenues, declined $1.2 million in 1995. This decline occurred primarily as a result of an active program to improve profitability by eliminating unprofitable business, which resulted in a reduction in domestic service hours of 2.5%. International Service Revenues. Service revenues of the Company's international operations increased by $1.1 million, or 0.8%, from $135.5 million in 1994 to $136.6 million in 1995. This increase was attributable to increased service requirements from new and existing clients partially offset by reductions arising from currency fluctuations. As a percentage of total service revenues, international operations were 15.9% in 1994 and 15.8% in 1995. Cost of Services and Gross Profit. The Company's cost of services decreased by $2.3 million, or 0.3%, from $773.5 million in 1994 to $771.2 million in 1995. This decrease was primarily due to operating cost efficiencies and the improved availability of labor in the markets in which the Company operates, partially offset by payroll and related expenses accompanying the increase in service revenues noted above. Gross profit increased $15.2 million, or 19.9%, from $76.4 million in 1994 to $91.6 million in 1995. The Company's gross profit margin also improved from 9.0% in 1994 to 10.6% in 1995 principally as a result of operating cost efficiencies and reduction in the number of unprofitable contracts. Operating Expenses. Operating expenses increased by $3.9 million, or 6.7%, from $58.0 million in 1994 to $61.9 million in 1995. Operating expenses were 7.2% of service revenues in 1995 and 6.8% of service revenues in 1994. The increase in 1995 reflects the Company's expenditures in international markets to develop new business as well as company-wide expenditures to advance Pinkerton's quality initiatives, improve the recruitment and training of employees and improve other processes. Amortization. Amortization of intangible assets decreased by $1.3 million, or 12.7%, from $10.2 million in 1994 to $8.9 million in 1995. This decrease reflects lower amortization in the United Kingdom and Mexico due to a write- down of related intangibles in the fourth quarter of 1994. Operating Profit. Operating profit was $20.9 million, or 2.4% of service revenues in 1995, as compared with an operating loss of $3.9 million, or 0.5% of revenues in 1994. Operating profit increased as a percentage of revenues due to improved gross profit margins, partially offset by an increase in operating expenses discussed above. The operating loss in 1994 reflects the write-down of intangible assets of $11.5 million and other special charges of $2.9 million. 13 Interest. Interest income increased $1.2 million to $2.7 million in 1995. The increase resulted from higher average interest rates in 1995 as well as an increase in average invested funds as compared with 1994. Interest expense increased by $0.1 million, or 1.8%, from $5.5 million in 1994 to $5.6 million in 1995. Income Taxes. Income taxes were $7.5 million in 1995 as compared with $2.4 million in 1994. The effective tax rate in 1994 was not meaningful in consideration of the positive tax provision and a net loss. The Company has historically experienced a high effective tax rate due to the cost of expansion into international markets and amortization of intangibles which have historically not been tax deductible. In 1995, the Company employed tax minimization strategies and experienced job-related tax credits which lowered its effective tax rate to 41.7%. 1994 COMPARED WITH 1993 Service Revenues. The Company's service revenues increased by $78.0 million, or 10.1%, from $772.0 million in 1993 to $850.0 million in 1994. This increase was primarily due to approximately $64.7 million of additional service revenue generated by the General Motors account during the year. Also adding to revenue were increases in bill rates in the United States and international security divisions and contract security businesses acquired in domestic and international markets in 1994. Such increases were partially offset by the effects of a 52-week year in 1994 as compared with a 53-week year in 1993 and lower foreign exchange rates related to the Company's international operations. Domestic Service Revenues. Compared with the prior year, the Company's domestic service revenues increased by $52.8 million, or 8.0%, from $661.7 million in 1993 to $714.5 million in 1994. This increase was primarily due to approximately $53.3 million of additional service revenue generated by the General Motors account during the year. Adding to growth were contract security revenues of $14.0 million derived from businesses acquired in 1994. All other increases, net, amounted to $3.8 million. Offsetting growth in 1994 were service reductions by existing clients and the selective elimination of unprofitable contracts and businesses, thereby lowering operating revenues by approximately $20.0 million. International Service Revenues. Service revenues of the Company's international operations increased by $25.2 million, or 22.8%, from $110.3 million in 1993 to $135.5 million in 1994. This increase was primarily attributable to revenue generated by the General Motors contract of $11.4 million, increases in service hours and bill rates, and the acquisition of new operations in Germany. These increases were partially offset by lower foreign exchange rates. As a percentage of total service revenues, international operations increased from 14.3% in 1993 to 15.9% in 1994. Cost of Services and Gross Profit. The Company's cost of services increased by $84.5 million, or 12.3%, from $689.0 million in 1993 to $773.5 million in 1994. These increases were primarily due to payroll and related expenses accompanying the increase in service revenues described above and increased labor costs arising from unbillable overtime which occurred as a result of the Company's inability to fill all available security officer positions due to labor shortages in certain markets. Labor shortages resulted from the improved economy and lower unemployment rates. Cost of services was also affected by an increase in insurance costs in 1994 of $9.1 million resulting primarily from higher payments on claims and increased costs in international operations due to acquisition due diligence and the effects of economic dislocation in Mexico. Gross profit decreased $6.6 million, or 8.0%, from $83.0 million in 1993 to $76.4 million in 1994. Gross profit as a percentage of service revenues decreased from 10.8% in 1993 to 9.0% in 1994. Increased competition for security officer contracts did not permit the Company to increase prices enough to fully recover the increased costs. Operating Expenses. Operating expenses increased by $3.0 million, or 5.5%, from $55.0 million in 1993 to $58.0 million in 1994. The increase in operating expenses resulted from the increase in service revenues, although at a lower rate. Operating expenses were 6.8% of service revenues in 1994 and 7.1% of service revenues in 1993. Actions were taken during 1994 to reduce operating expenses and improve efficiency. 14 Write-down of Intangibles and Other Special Charges. Goodwill and other intangibles, principally contract rights, were written down in 1994 in the amount of $11.5 million. This write-down relates primarily to the Company's business in the United Kingdom ("U.K."). From the inception of the acquisitions which formed the U.K. business, the revenue and earnings projections made at the time of these acquisitions were not attained due to a prolonged economic recession, increased competitive pressures, the loss of contracts and difficulties encountered in developing and managing a large, national U.K. company. These conditions resulted in significant losses after amortization in 1994 and a significant deficiency in the U.K. subsidiary's equity. The Company determined that these trends would continue, and that projected results would not support the remaining balance of goodwill and other intangible assets. The methodology used by the Company to assess the recovery of goodwill and other intangibles was to review recent trends and where appropriate to project future results of operations, considering all available information, for the period of amortization which coincided with the life of the intangible asset as of December 30, 1994. Such methodology established that certain balances of goodwill and other intangible assets in two international businesses (U.K. and Mexico) were impaired and could not be recovered from future operations. Therefore, these intangible assets were written down based on projected discounted future cash flows using a discount rate reflecting the Company's average cost of capital. During 1994, the Company also recorded a pre-tax charge of $2.9 million consisting primarily of severance, recruiting and relocation charges. In 1993, the Company recorded a pre-tax charge of $3.8 million for realignment of field management, the consolidation of headquarters facilities and selected field operations, and a write-down of uniform inventory. Amortization. Amortization of intangible assets increased by $1.9 million, or 22.9%, from $8.3 million in 1993 to $10.2 million in 1994. This increase reflects full-year amortization related to business acquisitions made during 1993 and amortization related to 1994 acquisitions. Operating Loss. Operating loss was $3.9 million, or 0.5% of service revenues, as compared with operating profit of $15.9 million, or 2.1% of revenues, for 1993. Operating profit declined as a percentage of revenues due to increased labor and insurance costs, the write-down of goodwill and other intangible assets, increased amortization costs and higher operating expenses as discussed above. Interest Expense. Interest expense decreased by $0.2 million, or 3.5%, from $5.7 million in 1993 to $5.5 million in 1994. This decline reflects the scheduled repayment of $8.6 million principal amount of Senior Notes made in June 1994. Income Taxes. The Company's positive tax provision in 1994, in spite of an overall loss, reflects the non-deductibility of the goodwill write-down in the U.K., other non-United States losses for which no benefit has been recorded, and fixed, nondeductible goodwill in the United States. The United States statutory rates for 1994 and 1993 approximated 42% (federal rate of 35.0% and average effective state rate of approximately 7%). CAPITAL RESOURCES AND LIQUIDITY Pinkerton's cash needs during the first six months of each year are greater because of higher payroll taxes. At March 22, 1996, the Company had $18.2 million in cash and cash equivalents, a decrease of $2.0 million from December 29, 1995; and $24.8 million in marketable securities, a $5.4 million increase from December 29, 1995. Net cash provided by operating activities of $7.3 million for the first quarter of 1996 was reduced by $9.3 million of net cash payments relating to investing activities. The Company's principal investing activities during the first quarter of 1996 were net purchases of marketable securities ($5.3 million), acquisitions ($2.8 million) and purchases of equipment and leasehold improvements ($1.2 million). The Company intends to apply a portion of the net proceeds to the Company from the Offering to redeem all of its outstanding Senior Notes, including the payment of accrued interest and prepayment charges. See "Use of Proceeds." Such redemption will cause recognition of extraordinary debt extinguishment expenses in the quarter in which it is effected. 15 The Company has an acquisition 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 as required. Both of these activities will continue for the balance of 1996. The Company has an unsecured revolving credit facility with a group of banks for borrowings up to $70.0 million, of which $50.0 million may be letters of credit. The facility also provides for a possible increase up to $100.0 million of borrowings (of which $50.0 million may be letters of credit) upon certain conditions. No cash borrowings have been made during 1996. At July 1, 1996 no amounts were outstanding under the cash borrowing facility and $39.1 million in letters of credit had been issued by the Company to secure obligations under the Company's self-insurance programs. The Company believes existing liquid resources, cash generated from operations and funds available under the revolving credit facility are sufficient for its acquisition program and operating and capital requirements during the next 12 months. The Company also has access to capital markets, if necessary, to raise funds for working capital, capital spending, acquisitions and other investments for business growth. See "Risk Factors--Acquisition Strategy." SUBSEQUENT EVENT During the second quarter of 1996, the Company entered into a settlement related to the acquisition of Pinkerton's, Inc. by California Plant Protection, Inc. in 1988. As a result of this settlement, the Company received a cash payment of $5.2 million in the second quarter of 1996. Of this amount, $3.3 million represented a recovery of income and other taxes paid on behalf of the previous owner which were previously carried on the Company's balance sheet; the remaining $1.9 million (which is not taxable) will be recorded as other income in the second quarter of 1996. 16 Certain information set forth below includes "forward-looking statements." See "Note on Forward-Looking Statements." BUSINESS OVERVIEW Pinkerton 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 more than 5,000 industrial, commercial and governmental customers domestically and internationally, including approximately half of the United States "Fortune 1,000" companies. In addition to security officer services, Pinkerton provides security systems design and integration services; security consulting; pre-employment background verification and assessment service; general, undercover and specialized investigations; and patrol and alarm response services. The Company operates more than 220 offices in the United States, Canada, Mexico, Europe and Asia and has more than 45,000 employees. During 1994, the Company recruited a new senior management team, implemented a number of measures designed to improve the Company's operating results and initiated a corporate strategy to position Pinkerton for long-term growth and profitability. Management performed a detailed analysis of the Company's profitability on a contract-by-contract basis, which enabled it to identify, renegotiate and when necessary terminate many unprofitable contracts. Management also refocused the Company's sales and marketing efforts, replaced a number of underperforming district managers, instituted a new incentive system designed to promote profitability at the district office level and tightened cost controls. After surveying many customers to better understand their security needs, the Company rededicated itself to providing quality services by commencing total quality management and enhancing employee training programs. These measures have enabled the Company to report increased gross margins in each of the last five quarters over the comparable prior periods. In addition, for the fiscal year ended December 29, 1995 and the twelve weeks ended March 22, 1996, operating profit (before non-recurring items) increased by 154.4% and 26.2%, respectively, over the comparable prior periods. BUSINESS STRATEGY Pinkerton's strategic objective is to be a world-class, global security solutions provider by offering and integrating traditional security services with electronic security systems and a range of consulting services to address all of a customer's security needs. As part of this strategy, the Company intends to: (i) capitalize on its worldwide customer base, widely-recognized brand name and reputation for superior quality by cross-marketing higher margin, value-added services and products, thereby creating security partnerships with its customers and increasing customer retention and (ii) pursue an aggressive acquisition strategy designed both to add core competencies, such as security systems integration, and to grow its security officer franchise. See "Risk Factors--Acquisition Strategy." Specifically, the Company's strategy consists of the following: . Promote Widely-Recognized Brand Name. The Company believes that "Pinkerton" is the most widely- recognized brand name in the security industry worldwide. The Company intends to continue to capitalize on Pinkerton's brand name and reputation for superior quality security services and products. . Emphasize World-Class Service. The Company intends to maintain its strong commitment to providing its clients with world-class service and believes that its employee selection process and training programs are the most rigorous and effective in the industry. As the primary interface with its customers on a day-to-day basis, Pinkerton's security officers are the key to the Company's ability to provide world-class customer service and differentiate itself from its competition. . Offer a Full Range of Security Services. The Company intends to aggressively expand its offerings of higher margin, value-added services and products in order to become a single-source provider of security solutions for its existing and future customers. As part of this effort, the Company plans to capitalize on its worldwide customer base by cross- marketing its expanded security service and product offerings. 17 Management believes that as a full-service provider of innovative security solutions Pinkerton can create security partnerships with its existing and future customers, promote customer retention and expand the Company's customer base. . Capitalize on "Outsourcing" and Centralization Trends. Management intends to continue to capitalize on the growing trends among businesses to outsource non-core functions, such as security, and to centralize the procurement and oversight of such functions at the corporate level in order to minimize the number of vendor relationships. Pinkerton believes it has a number of competitive advantages to capitalize on these trends toward outsourcing and centralization, including its long-standing expertise in recruiting, training and managing large numbers of security personnel, its demonstrated ability to manage large, multi-site corporate security contracts and its extensive knowledge of customer security needs. These capabilities have enabled the Company to obtain a contract extending to 1999 to provide security officer services for all of General Motors' North American facilities, a function which General Motors had previously handled primarily in-house. Pinkerton has over 50 customers for which it provides security services on a national or regional level at multiple locations. The Company has embarked on an aggressive effort to broaden its core competencies through acquisitions. See "Risk Factors--Acquisition Strategy." Key elements of the Company's acquisition strategy include: . Expand Strategically Into Security Systems Integration. The Company intends to assemble an extensive network of security systems integration businesses in major metropolitan areas as part of its effort to be a single-source provider of security solutions. Since the beginning of 1995, Pinkerton has acquired three regional security systems integration businesses. These businesses provide higher margin, value-added services and products by integrating diverse electronic security systems, such as access control, closed circuit television, alarm monitoring and digital badging, into a coherent interrelated operating system that enhances security and automates alarm response. These businesses also provide ongoing maintenance of such systems. . Consolidate Security Officer Companies. The market for security officer services is highly fragmented, with only a few national operators and over 9,000 independent vendors, most of which serve discrete local markets. The Company estimates, based on industry sources, that Pinkerton and the other two largest companies in the security industry currently have a combined domestic market share of approximately 29%, and that the 20 largest operators have a combined domestic market share of approximately 48%. Management believes that Pinkerton has several competitive advantages to enable it to succeed as an industry consolidator, including a widely-recognized brand name, a strong financial position, access to capital, a reputation for superior quality, the ability to service national and international accounts, management experience in identifying and assimilating acquisitions and sophisticated management information systems. . Expand International Operations. The Company intends to capitalize on future strategic opportunities for international expansion to enhance its ability to provide global security solutions to its existing and future customers. The Company currently has offices in 18 countries throughout North America, Europe and Asia. 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. 18 The domestic security-related services industry, which includes security officer and investigative services, systems integration services, alarm monitoring services, patrol services and security consulting services, accounted for revenues of approximately $16.6 billion in 1994 and is projected to increase at a compound annual growth rate of approximately 7.9% per year to approximately $26 billion by the year 2000. The domestic security officer services segment of the market, from which the Company generated approximately 80% of its revenues in 1995, accounted for approximately $8.6 billion of revenues in 1994 and is projected to increase at a compound annual growth rate of 7.4% to almost $13.2 billion by the year 2000. The Company believes that the projected growth in the security-related services industry in general, and the security officer services segment in particular, is attributable primarily to three factors: (i) increasing incidents of crime, violence and terrorism, (ii) governmental budgetary constraints which limit the resources available to combat such crime, violence and terrorism and (iii) the growing trend among businesses to outsource certain non-core operations, such as security services, to limit required capital expenditures and reduce administrative and labor costs. PINKERTON OPERATIONS 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 promoters 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 services automated teller machines and 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 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 person. The contract may provide for a fixed or variable hourly rate. Contracts between Pinkerton and its customers are frequently the result of competitive bidding. Most contracts extend for one year but are often terminable on relatively short notice (usually 30 days) by either party. In fiscal years 1993, 1994 and 1995, security officer services accounted for approximately 96%, 96% and 95%, respectively, of the Company's revenues. Since the Company historically has provided primarily security officer services to its customer base of over 5,000 clients, it is well positioned to cross-market additional value-added services and products which could provide the Company with significant opportunities for future growth. Security Systems Integration Services. Through its newly-formed security systems integration division, Pinkerton integrates diverse electronic security systems, such as access control, closed circuit television, alarm monitoring and digital badging, 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 management believes best meets client needs. Equipment used by the division 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 customer. Although Pinkerton currently provides these services only in certain regions, the Company expects to expand this division significantly by growing internally and by acquiring additional regional security systems integration companies in order to assemble nationwide capabilities. See "Risk Factors--Acquisition Strategy." 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 designs and specifications and systems design. Pinkerton also provides project management 19 services, including quality assurance, construction and budget management and technical documentation. The Company's risk assessment 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 to a diverse array of businesses, including general and undercover investigations as well as insurance and other fraud investigations, surveillance, personnel background checks, business due diligence investigations and intellectual property infringement investigations. Pinkerton Investigations 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 customers on a specific project basis and charges its customers an hourly rate for services performed. However, Pinkerton occasionally performs such services on a retainer or fixed fee basis. Most agreements between Pinkerton and its customers covering investigation services provide that Pinkerton or the customer may terminate their relationship at any time. Pinkerton, as a matter of Company policy, does not perform divorce or political investigations or generally work on behalf of plaintiffs in civil litigation or defendants in criminal litigation. Pre-Employment and Workplace Services. Through its Pinkerton Services Group, the Company provides anonymous employee reporting, security and safety incident tracking, integrity testing, employee awareness programs, pre- employment background verifications and assessment services for employee selection such as attitude surveys. These services are proactive security solutions designed to prevent rather than react to security breaches. 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. Management has refocused the Company's sales and marketing efforts, replaced a number of underperforming district managers and instituted a new incentive system designed to promote profitability at the district office level. COMPETITION The markets for Pinkerton's services are highly fragmented and competitive. Domestically, there are approximately ten national security officer and investigation service companies, of which Pinkerton believes it is the second largest on the basis of annual revenue. 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. Competition in the security officer industry is intense and is based on many factors, including price in relation to the quality of service, the scope of services performed, and the extent and quality of security officer supervision, recruiting and selection, training and local and/or national reputation. CUSTOMERS During 1995, the Company provided services to more than 5,000 industrial, commercial and governmental customers, including approximately one-half of the United States "Fortune 1,000" 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 customer, General Motors, contracts for over 120,000 security officer hours per week. Total revenue under this contract accounted for approximately 13% of the Company's revenue in 1995. The Company's agreement to supply contract security to General Motors currently extends to 1999. Other prominent customers include Northrop Grumman, Hewlett Packard, Home Savings of America, ITT Sheraton, General Electric, Toyota, Xerox, Saks Fifth Avenue and Whirlpool Corporation. The loss of sales to any single customer, with the exception of General Motors, would not have a material adverse effect on the Company. 20 EMPLOYEES Pinkerton believes that the quality of its security officers is key to its ability to offer world-class service. Pinkerton subjects security officer candidates to a selection process involving a psychological profile, a structured computer-assisted employment interview, a ten-step background verification and records check and a drug test. Pinkerton managers complete a battery of psychological evaluations and background verification and records check. 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. Pinkerton training efforts consist of providing employees with field manuals, training films, tests, customer- specific operating instructions and weekly recorded telephone updates. All security district managers, security and 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. Pinkerton has approximately 45,000 full-time and part-time employees. Collective bargaining agreements cover approximately 8% of its employees in the United States, approximately 72% 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 Pinkerton employees in Europe or Asia. 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 customers are Pinkerton employees, even though they may be stationed regularly at a customer's 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. REGULATION AND LEGAL PROCEEDINGS 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, many 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 states which 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. Due to its high qualification and training standards, the Company does not expect the establishment of minimum Federal standards or new state standards to have a material adverse effect on the Company's business. 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, in which case the Company provides only the permitted services and may enter into joint venture or alliance arrangements with local security companies in order to offer customers a full range of security services. Many states also require licenses for various aspects of the security systems integration business. In certain circumstances, Pinkerton may potentially be liable for the negligent acts or misconduct of its agents or employees performed while on duty and in the course and scope of their employment. The nature of the services provided by Pinkerton (such as armed and unarmed security officers, crowd control and fire protection) potentially exposes Pinkerton to greater risks of liability for employee conduct than are experienced by many non- security businesses. The Company experiences a significant volume of claims and litigation asserting that the Company is liable for damages as a result of the conduct of its employees or others. Some claims or litigation allege substantial damages. The Company maintains self-insurance programs and insurance 21 coverage for this liability risk. The Company also seeks to mitigate this risk exposure through indemnification or liability limitations in its contracts, analysis of client facilities and programs for employee screening, training, anonymous reporting and supervision. The Company believes that it has established adequate provisions for litigation liabilities in its Consolidated Financial Statements. Management believes, based on currently known facts, that there is no claim or litigation pending against the Company the disposition of which will materially affect its financial position or future operating results, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation. In addition, exposure to litigation is inherent in the Company's ongoing business and may have a material adverse effect in the future. 22 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows:
NAME AGE POSITION ---- --- -------- Thomas W. Wathen............ 66 Chairman of the Board Denis R. Brown.............. 56 President, Chief Executive Officer and Director C. Michael Carter........... 53 Executive Vice President, General Counsel and Corporate Secretary James P. McCloskey.......... 55 Executive Vice President and Chief Financial Officer Don W. Walker............... 54 Executive Vice President, North American Operations Gary J. Hasenbank........... 49 Corporate Vice President, Human Resources Anthony R. Miller........... 55 Corporate Vice President, Total Quality Michael A. Stugrin.......... 46 Corporate Vice President, Marketing Steven A. Lindsey........... 46 Controller Peter H. Dailey............. 66 Director John A. Gavin............... 65 Director Gerald D. Murphy............ 68 Director J. Kevin Murphy............. 69 Director Robert H. Smith............. 60 Director William H. Webster.......... 72 Director
THOMAS W. WATHEN joined the Company's predecessor in 1963 and served on a full-time basis as President, Chief Executive Officer and Chairman of the Board from 1964 to January 1988. Since January 1988, Mr. Wathen has served as President (until October 1990 and from July 1992 until April 1994), Chief Executive Officer (until April 1994) and Chairman of the Board of the Company. For the five years prior to joining the Company's predecessor, Mr. Wathen served as a security representative for North American Aviation and as a security director for RCA and Mattel Toys. From 1951 to 1958, Mr. Wathen served as an industrial security officer for the United States Air Force and special agent for the Department of Defense. DENIS R. BROWN 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 ("Concurrent") as Vice Chairman of the Board, President and Chief Executive Officer from September 1990 until July 1991, then Chairman of the Board, President and Chief Executive Officer until April 1992, and then Chairman of the Board and Chief Executive Officer until August 1993. 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 currently serves as a director of Raydyne Corp. and a privately-held corporation. C. MICHAEL CARTER has served as Executive Vice President, General Counsel and Corporate Secretary of Pinkerton since joining the Company in September 1994. He also directs corporate development, corporate strategy and risk management. Prior to joining Pinkerton, Mr. Carter served at Concurrent 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. He currently serves as a director of a privately-held corporation. 23 JAMES P. MCCLOSKEY 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 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. Mr. McCloskey currently serves as a director of a privately-held corporation. DON W. WALKER has served 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. GARY J. HASENBANK has served as Corporate Vice President, Human Resources since joining the Company in April 1994. Prior to joining the Company, Mr. Hasenbank served as Corporate Director of Human Resources of Herbalife International of America, Inc. from July 1993 until joining the Company. He served at Baxter Healthcare International Pharmaseal Division as Division Director of Human Resources from 1988 to 1993, and as Director of Employee Relations from 1981 to 1988. Prior to that, Mr. Hasenbank had spent six years as Human Resources Manager at PepsiCo International and six years as Employment and Compensation Manager at Cessna Aircraft Company. ANTHONY R. MILLER has served as Corporate Vice President, Total Quality 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. MICHAEL A. STUGRIN has served as Corporate Vice President, Marketing since joining the Company in May 1995. Prior to joining the Company, Mr. Stugrin served at Concurrent from 1992 to 1995 in various senior positions, including Director of Strategic Planning and Director of Corporate and Marketing Communications. He served at Unisys Corporation from 1984 to 1992 in various senior marketing and communications positions. STEVEN A. LINDSEY has served as Controller of the Company since joining the Company in July 1994. 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. PETER H. DAILEY has been a director of the Company since February 1990. Mr. Dailey is Chairman of Enniskerry Financial, Ltd., a private investment company, and Chairman of the Supervisory Board of Memorex Telex Corporation. Mr. Dailey has been the Chief Executive Officer of Memorex Telex since March 1996. Previously he was Vice Chairman, director and principal stockholder of the Interpublic Group of Companies, a holding company for advertising agencies. Mr. Dailey also is a director of Chicago Title and Trust Company, Jacobs Engineering Group, Inc., Sizzler International, Inc. and The Wirthlin Group. Prior to government service, he was a director of Walt Disney Productions and Cement Roadstone Corporation PLC of Ireland. Mr. Dailey has served as United States Ambassador to Ireland and as Special Presidential Envoy to NATO countries for intermediate nuclear weapons negotiations. Mr. Dailey also served as a member of the eleven-member Presidential Advisory Committee on Arms Control and Disarmament. He was appointed by President Reagan 24 and reaffirmed by President Bush in the same capacity. From 1985 to 1988, he served in the Central Intelligence Agency as Counselor to William Casey, Director of Central Intelligence. He also served as the principal media strategist in the election campaigns of President Nixon in 1972, President Reagan in 1980, and the primary campaign of President Ford in 1976. In 1984, he served as Senior Advisor to the re-election campaign of President Reagan. JOHN A. GAVIN has been a director of the Company since April 1993. Mr. Gavin is the founder and is currently Chairman of Gamma Services, Inc., an international venture capital and consulting firm. Mr. Gavin is also serving as Chairman of the Advisory Board of Dresser Industries de Mexico, as Managing Director of Hicks, Muse, Tate and Furst (Latin America) and as a director of Atlantic Richfield Corporation, Wirekraft Holdings Corp. and the Hotchkis & Wiley Funds. From 1987 to 1990, Mr. Gavin served as President of Univisa Satellite Communications, a Spanish-language broadcast communications network, and from 1986 to 1987 he was a Vice President of Atlantic Richfield Corporation. In 1981, Mr. Gavin was appointed United States Ambassador to Mexico by President Reagan and served in this capacity until 1986. Mr. Gavin was also United States Advisor to the Secretary General of the Organization of American States from 1961 through 1974. He remains a consultant to the United States State Department. GERALD D. MURPHY has been a director of the Company or of its predecessor corporation since 1975. Mr. Murphy is Chairman of the Board and Chief Executive Officer of ERLY Industries, Inc. (formerly Early California Industries), a publicly-held company principally involved in international agribusiness, with three major subsidiaries: American Rice, Inc., Chemonics International-Consulting and Chemonics Industries-Fire-Trol. Mr. Murphy is also Chairman of the Board of Directors of American Rice, Inc. and has served as a director for Sizzler International, Inc., Wynn's International, Inc. and Leisure Technology, Inc. J. KEVIN MURPHY has been a director of the Company since October 1990. Mr. Murphy is currently a business consultant to various companies and serves as a director of Health Systems International, Inc. He served as Vice Chairman and a director of Qual-Med, Inc. from 1990 to February 1994 and as Vice Chairman and a director of Preferred Health Network, Inc., a preferred provider health care company from February 1992 to June 1996. Mr. Murphy was President of 655 Associates, Inc., a crisis management and management consulting firm from 1985 to 1991. He is a past president of Purolator Courier Corporation and Trailways, Inc. ROBERT H. SMITH has been a director of the Company since April 1993. Mr. Smith is currently a Managing Director and the Chief Executive Officer of Smith & Crowley, Inc., an investment banking firm specializing in banks. He serves as a director of Edison International, J. G. Boswell Co. and Oasis Residential, Inc. From 1961 to 1992, Mr. Smith served in numerous managerial positions with Security Pacific National Bank and Security Pacific Corporation. From 1991 until April 1992, he served as Chairman of the Board and Chief Executive Officer of Security Pacific Corporation and Chairman of the Board of Security Pacific National Bank. Mr. Smith also served during 1992 as a member of the Board and President and Chief Operating Officer of BankAmerica Corporation and Bank of America NT&SA. WILLIAM H. WEBSTER has been a director of the Company since August 1992 and a partner of the law firm of Milbank, Tweed, Hadley & McCloy since September 1991. Judge Webster is a director of Anheuser-Busch Companies, Inc., Maritz, Inc. and T.L.C. Beatrice International Holdings, Inc. From May 1987 to September 1991, he served as the Director of Central Intelligence and directed the Central Intelligence Agency. From February 1978 to May 1987, Judge Webster served as the Director of the Federal Bureau of Investigation. In 1970, Judge Webster was appointed a Judge of the United States District Court for the Eastern District of Missouri, and in 1973 was elevated to the United States Court of Appeals for the Eighth Circuit. The Company retained Milbank, Tweed, Hadley & McCloy for legal services in 1995. 25 PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDER The following table sets forth information as to the ownership of the Common Stock on July 1, 1996 (unless otherwise indicated), and as adjusted to reflect the sale of the shares of Common Stock offered by the Company and the Selling Stockholder hereby (assuming no exercise of the Underwriter's over-allotment option), by all those known by the Company to be beneficial owners of more than five percent of its Common Stock:
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING AFTER OFFERING ---------------------- NUMBER OF ---------------------- NAME AND ADDRESS NUMBER OF SHARES BEING NUMBER OF OF BENEFICIAL OWNER SHARES PERCENT OFFERED SHARES PERCENT ------------------- ------------ --------- ------------ ------------ --------- Thomas W. Wathen(1)..... 2,792,370 33.4% 660,000 2,132,370 21.2% 15910 Ventura Blvd. Suite 900 Encino, CA 91436 Southeastern Asset Management, Inc.(2).... 830,700 9.9 -- 830,700 8.3 6075 Poplar Avenue Memphis, TN 38119 J.P. Morgan & Co. Incorporated(3)........ 539,230 6.5 -- 539,230 5.4 60 Wall Street New York, NY 10260 Tweedy, Browne Company L.P./ Vanderbilt Partners, L.P.(4)................ 535,735 6.4 -- 535,735 5.3 52 Vanderbilt Avenue New York, NY 10017
- --------------------- (1) Mr. Wathen is Chairman of the Board of Directors of the Company. The Thomas W. Wathen Trust (the "Trust") and the Thomas W. Wathen Charitable Remainder Unitrust (the "Unitrust") hold of record 2,729,388 shares and 44,482 shares of Mr. Wathen's Common Stock, respectively. Of the shares being offered by Mr. Wathen hereby, 44,482 shares are those held of record by the Unitrust, and the balance are held of record by the Trust. The Trust, which is revocable, and the Unitrust, which is irrevocable, were established for the sole benefit of Mr. Wathen during his lifetime. Mr. Wathen has sole voting and investment power with respect to all shares shown as beneficially owned. Also included in Mr. Wathen's beneficial ownership are 18,500 shares of Common Stock issuable under options exercisable currently or within sixty days. (2) As of February 9, 1996, based on public filings. According to public filings, Southeastern Asset Management, Inc., an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, has sole voting and dispositive power over 427,500 of such shares, sole dispositive and no voting power over 47,000 of such shares, and shared voting and dispositive power over 356,200 of such shares. (3) As of February 16, 1996, based on public filings. According to public filings, J.P. Morgan & Co. Incorporated has sole dispositive power over all such shares and sole voting power over 286,750 of such shares. (4) As of June 20, 1996, based on public filings. According to public filings, Tweedy, Browne Company L.P. and Vanderbilt Partners, L.P. disclaim membership in a "group" within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). According to public filings, Tweedy, Browne Company L.P., a broker-dealer and investment advisor registered with the Securities and Exchange Commission, has sole voting power and shared dispositive power over 464,420 of such shares and shared dispositive power and no voting power over 64,215 of such shares, and Vanderbilt Partners, L.P. has sole voting and dispositive power over 7,100 of such shares. The Underwriters have been granted a 30-day over-allotment option to purchase from the Company up to an aggregate of 354,000 additional shares of Common Stock. See "Underwriting." If the over-allotment option is exercised in full, Mr. Wathen, Southeastern Asset Management, Inc., J.P. Morgan & Co. Incorporated and Tweedy, Browne Company L.P./Vanderbilt Partners L.P. would beneficially own 20.5%, 8.0%, 5.2% and 5.1%, respectively, of the Common Stock after completion of the Offering. 26 DESCRIPTION OF CAPITAL STOCK Pinkerton's authorized capital stock consists of 100,000,000 shares of Common Stock, $.001 par value, 68,000 shares of Preferred Stock and 5,000,000 shares of Designated Preferred Stock. There are 1,000 authorized shares of Class A Preferred Stock, $100.00 par value ("Class A Preferred Stock"), 47,000 authorized shares of Class B Preferred Stock, $100.00 par value ("Class B Preferred Stock"), 20,000 authorized shares of Class C Preferred Stock, $100.00 par value ("Class C Preferred Stock"), and 5,000,000 authorized shares of Designated Preferred Stock, $.001 par value ("Designated Preferred Stock," of which 200,000 shares have been designated Series A Junior Participating Designated Preferred Stock). At July 1, 1996, there were 8,350,269 shares of Common Stock outstanding and no shares of Class A, B or C Preferred Stock or Designated Preferred Stock outstanding. On the same date, there were 135 holders of record of Pinkerton Common Stock. On July 1, 1996, there were 1,398,463 shares of Common Stock reserved for issuance to employees and directors under incentive compensation arrangements (of these shares, 903,663 shares underlie outstanding options). COMMON STOCK The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders. Subject to the preferences applicable to the outstanding Preferred Stock, the holders of Common Stock are entitled to receive ratably those dividends declared by the Board of Directors out of legally available funds. In the event of a liquidation, dissolution, or winding up of Pinkerton, the holders of Common Stock are entitled to share ratably all assets remaining after all liabilities and the liquidation preference applicable to the outstanding Preferred Stock have been paid. The holders of Common Stock have no preemptive rights or cumulative voting rights and no rights to convert their Common Stock into any other securities. All outstanding shares of Common Stock are fully paid and nonassessable. PREFERRED STOCK Up to 5,000,000 shares of Designated Preferred Stock may be issued from time to time in one or more series, and the Board of Directors, without further approval of the stockholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, sinking fund and any other rights, preferences, privileges and restrictions applicable to each such series of Preferred Stock. There currently are 200,000 shares of Designated Preferred Stock designated Series A Junior Participating Designated Preferred Stock. See "--Stockholder Rights Plan and Junior Preferred Stock." The purpose of authorizing the Board of Directors to determine such rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuances of Designated Preferred Stock, while providing flexibility in connection with possible financings, acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of Common Stock and, under certain circumstances, may have the effect of deterring hostile takeovers or delaying changes in control or management of the Company. Shares of Class A, B and C Preferred Stock were originally issued to an employee stock ownership plan and have all been redeemed. The terms of such Preferred Stock provide that it may only be issued to an employee stock ownership plan. Pinkerton currently has no employee stock ownership plan. CERTAIN PROVISIONS OF PINKERTON'S CHARTER AND BY-LAWS A provision of Pinkerton's Restated Certificate of Incorporation relates to the rights of stockholders to vote on certain mergers, asset sales and other extraordinary transactions to or with a person or entity who is, or has publicly disclosed a plan or intention to become, the beneficial owner of at least 5% of Pinkerton outstanding voting stock (an "Interested Stockholder"). In general, such business combinations must be approved by (i) the affirmative vote of the holders of 80% of Pinkerton outstanding voting stock, exclusive of shares owned by the Interested Stockholder or (ii) the affirmative vote of a majority of the Continuing Directors of Pinkerton. A Continuing Director is defined as a director who is not an Interested Stockholder or an affiliate or associate of an Interested Stockholder and (i) was a member of the Board of Directors prior to the time that an Interested Stockholder became an Interested Stockholder or (ii) a director who became a member of the Board of Directors 27 after the Interested Stockholder became an Interested Stockholder, if such director's nomination for election to the Board of Directors was recommended or approved by a majority of the Continuing Directors then in office. The Company's Restated Certificate of Incorporation and Amended and Restated By-laws also: (i) provide for a classified Board of Directors divided into three classes of directors, with the term of office of one of the three classes terminating each year and with each class being elected for a three- year term (other than the initial term of each such class); (ii) permit stockholders to remove directors only for cause and by a vote of the holders of at least 80% of Pinkerton outstanding voting stock, (iii) provide that stockholders may act only at a meeting and not by written consent; (iv) provide that only certain persons, not including the stockholders, may call special meetings of stockholders; (v) provide that advance notice (containing certain relevant information) be given of stockholder proposals not less than 120 days prior to the first anniversary of the date of the proxy statement given by the Company to its stockholders in connection with the previous year's annual meeting; (vi) provide that advance notice (containing certain relevant information) be given of nominations of persons for election to the Board of Directors not less than 50 days nor more than 75 days (or within 10 days following notice of a stockholders' meeting, if such notice is not given 60 days before such meeting) before any meeting of stockholders; (vii) require that the By-laws of Pinkerton may only be adopted, amended or repealed by the Board of Directors or by the vote of the holders of at least 80% of Pinkerton outstanding voting stock; and (viii) require the vote of the stockholders of at least 80% of Pinkerton outstanding voting stock to amend or repeal any of the foregoing provisions (excluding the provision relating to the authorization of Designated Preferred Stock, which may be amended or repealed by a vote of the holders of at least a majority of Pinkerton outstanding voting stock). In addition, Pinkerton is a Delaware corporation subject to Section 203 of the Delaware General Corporation Law ("GCL"). Generally, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless: (i) prior to such date, either the business combination or such transaction that resulted in the stockholder becoming an interested stockholder is approved by the board of directors of the corporation; (ii) upon consummation of the transaction which resulted in the stockholder's becoming an interested stockholder, the interested stockholder owns at least 85% of the outstanding voting stock; or (iii) on or after such date, the business combination is approved by the board of directors of the corporation and by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or, within three years, did own) 15% or more of the corporation's outstanding voting stock. All of the foregoing provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of Pinkerton. STOCKHOLDER RIGHTS PLAN AND JUNIOR PREFERRED STOCK In July 1991, Pinkerton's Board of Directors adopted a stockholders' rights plan (the "Rights Plan"), as set forth in a Rights Agreement dated July 12, 1991 (the "Rights Agreement"). The following description of the Rights Plan is qualified in its entirety by reference to the Rights Agreement filed as an exhibit to the Company's Annual Report on Form 10-K. Pursuant to the Rights Plan, one right (a "Right") was distributed with respect to each outstanding share of Company Common Stock, and one Right accompanies each share of Common Stock (including the shares offered hereby) issued prior to the Distribution Date or Expiration Date (each as defined below). Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Designated Preferred Stock, par value $.001 per share (the "Junior Preferred Stock"), at a Purchase Price of $90, subject to adjustment. The Rights are evidenced by Common Stock certificates and no separate rights certificates have been distributed. The Rights will separate from the Common Stock and a distribution date will occur (the "Distribution Date") upon the earlier of (i) the Close of Business on the tenth day following a public 28 announcement that a person (an "Acquiring Person") has acquired beneficial ownership of 15% or more of the outstanding shares of Common Stock or such earlier date as the Company's Board of Directors shall become aware of the existence of such Acquiring Person (the "Stock Acquisition Date") or (ii) the Close of the Business on the tenth business day following the commencement of a tender offer or exchange offer that would result in an Acquiring Person beneficially owning 20% or more of the outstanding shares of Common Stock, unless the tender offer is a cash tender offer for all outstanding shares of Company's Common Stock which is fair to the Company's stockholders and in the best interests of the Company and its stockholders and meets certain other criteria specified in the Rights Agreement ("Qualified Offer"), or such later date as designated by the Board of Directors or a committee thereof. Notwithstanding the foregoing, neither Thomas W. Wathen or any person serving as trustee of a Wathen Trust (as defined in the Rights Agreement) shall be deemed a beneficial owner of the shares of Common Stock held by a Wathen Trust. The Rights are not exercisable until the Distribution Date and will expire at the Close of Business on July 12, 2001 (the "Final Expiration Date"), unless earlier redeemed or exchanged by the Company as described below. In the event that any Acquiring Person or any affiliate or associate thereof engages in certain self-dealing transactions with the Company enumerated in the Rights Agreement or any Acquiring Person becomes the beneficial owner of 20% or more of the then outstanding Common Stock, except as described in the succeeding paragraph or pursuant to a Qualified Offer, then each holder of a Right will thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the exercise price of the Right. Rights are exercisable following the occurrence of the foregoing only after such time as the Rights are no longer redeemable by the Company, as set forth below. Notwithstanding the foregoing, following the occurrence of one of the events referred to in this paragraph, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person or any associate or affiliate thereof will be null and void. In the event that, at any time following the Stock Acquisition Date (which, for purposes of this provision, includes the date of the first public announcement that any Acquiring Person has become the beneficial owner of 15% or more of the then outstanding Common Stock pursuant to a Qualified Offer), (i) the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation or in which the Company's outstanding Common Stock is exchanged for cash, stock or other property, or (ii) 50% or more of the Company's assets or earning power is sold or transferred, each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the Right. Notwithstanding the foregoing, this provision shall not apply to transactions described in clause (i) above where the acquisition of Common Stock of the Company is pursuant to a Qualified Offer meeting certain additional criteria specified in the Rights Agreement. Upon the consummation of such a transaction, all Rights shall expire. In general, the Company may redeem the Rights in whole, but not in part, at a price of $0.01 per right, at any time until the earlier of (i) the Close of Business on the twelfth day following the Stock Acquisition Date, or (ii) the Final Expiration Date. In no event are Rights exercisable until the Company's right of redemption has expired. Immediately upon the action of the Board of Directors ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the $0.01 redemption price. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. Any of the provisions of the Rights Agreement may be supplemented or amended by the Company prior to any Person becoming an Acquiring Person, without approval of the Rights holders, whether or not a supplement or amendment is adverse to the Rights holders. After a Person becomes an Acquiring Person, the provisions of the Rights Agreement may be amended by the Company in order to make changes which do not adversely affect 29 the interests of holders of Rights (excluding the interests of any Acquiring Person or any affiliate or associate thereof). The Rights Plan may have the effect of deterring hostile takeovers or delaying changes in control or management of the Company. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is The Bank of New York. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, Pinkerton will have outstanding 10,050,269 shares of Common Stock, assuming no exercise of the Underwriters' over- allotment option and without taking into account shares of Common Stock issuable upon exercise of outstanding options. The 2,360,000 shares sold in the Offering will be freely tradable without restrictions under the Securities Act, except for any shares purchased by an "affiliate" of Pinkerton, which will be subject to the resale limitations of Rule 144 adopted under the Securities Act ("Rule 144"). Upon completion of the Offering, Mr. Wathen will hold 2,132,370 outstanding shares of Common Stock (18,500 shares of which are subject to currently exercisable options) and these shares will be subject to the resale limitations of Rule 144. All of the shares of Common Stock held by Mr. Wathen are subject to a "lock-up" agreement between Mr. Wathen and the Underwriters which provides that Mr. Wathen may not sell, without the prior consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), any shares in the public market until 120 days after the date of this Prospectus. The Company and Mr. Wathen have entered into a Personal Services Agreement dated February 10, 1994 (the "Personal Services Agreement"), which grants Mr. Wathen certain rights to have his shares of Company Common Stock registered under the Securities Act. Pursuant to the Personal Services Agreement, Mr. Wathen, may, on one occasion prior to April 20, 2004, require the Company to register not less than 250,000 shares and not more than one-half of the total shares of Common Stock owned by Mr. Wathen, but only to the extent such shares are not salable during a 90-day period under Rule 144. Additionally, in the event the Company proposes to register and offer shares of Common Stock, Mr. Wathen is entitled to have certain of his shares registered in such offering on a pro rata basis, but only to the extent that such shares are not salable during a 90-day period under Rule 144. The Personal Services Agreement requires the Company to hold Mr. Wathen harmless from any liabilities and expenses relating to any actual or alleged omission or misstatement in a prospectus or other offering document, and Mr. Wathen is required to hold the Company and all other persons harmless from any liabilities and expenses relating to any actual or alleged omission or misstatement in any prospectus or other offering document which is based on information provided to the Company by Mr. Wathen for its used in such materials. As of July 1, 1996, Pinkerton has reserved 644,013 shares for issuance to executive officers, directors and key employees pursuant to Pinkerton's 1990 Stock Option Plan, all of which shares are subject to outstanding options, and 754,450 shares for issuance to employees and certain non-employee directors of the Company pursuant to the 1995 Pinkerton Performance and Equity Incentive Plan, of which 259,650 shares are subject to currently outstanding options. Pinkerton has registered or will register these shares and related options under the Securities Act, and these shares are or will be eligible for sale at any time after purchase. No further option grants may be made under the 1990 Stock Option Plan. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who for at least two years has beneficially owned shares privately acquired from Pinkerton or from an affiliate of Pinkerton and persons who are "affiliates" of Pinkerton would be entitled to sell within any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Pinkerton Common Stock or (ii) the average weekly trading volume in Pinkerton Common Stock during the four calendar weeks preceding such sale, subject to certain limitations and restrictions. A person (or persons whose shares are aggregated) who is not deemed an affiliate of Pinkerton and who has beneficially owned shares for at least three years is entitled to sell such shares under Rule 144 without regard to the volume limitations described above. 30 UNDERWRITING Subject to the terms and conditions contained in the Underwriting Agreement, a syndicate of underwriters named below (the "Underwriters"), for whom DLJ, Prudential Securities Incorporated and Schroder Wertheim & Co. Incorporated are acting as representatives (the "Representatives"), have severally agreed to purchase from the Company and the Selling Stockholder 1,700,000 shares of Common Stock and 660,000 shares of Common Stock, respectively. The number of shares of Common Stock that each Underwriter has agreed to purchase is set forth opposite its name below.
NUMBER UNDERWRITERS OF SHARES ------------ --------- Donaldson, Lufkin & Jenrette Securities Corporation.............. Prudential Securities Incorporated............................... Schroder Wertheim & Co. Incorporated............................. ------- Total........................................................ =======
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all the shares of Common Stock offered hereby (other than in connection with the over-allotment option described below) if any are taken. The Representatives have advised the Company that the Underwriters propose to offer the shares of Common Stock directly to the public initially at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. Any Underwriter may allow, and such dealers may reallow, a discount not in excess of $ per share to any other Underwriter and to certain other dealers. After the initial public offering of the shares of Common Stock, the public offering price and other selling terms may be changed by the Representatives. Pursuant to the Underwriting Agreement, the Company has granted to the Underwriters an option, exercisable for 30 days from the date hereof, to purchase up to an additional 354,000 shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page hereof. The Underwriters may exercise such option to purchase additional shares solely for the purpose of covering over-allotments, if any, made in connection with the sale of the shares of Common Stock offered hereby. To the extent such over-allotment option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase the same percentage of such additional shares as the number set forth next to such Underwriter's name in the preceding table bears to the total number of shares set forth on the cover page hereof. At the request of the Company, the Underwriters have reserved up to five percent of the number of shares of Common Stock offered hereby for sale at the public offering price to certain directors, officers and employees of the Company. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. The Company, the Selling Stockholder, the directors and certain officers of the Company will agree with the Underwriters not to, directly or indirectly, offer, sell, grant any other option to purchase or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for such 31 Common Stock or in any manner transfer all or a portion of the economic consequences associated with ownership of any such Common Stock for a period of 120 after the date of this Prospectus without the prior written consent of DLJ. The Company and the Selling Stockholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. LEGAL MATTERS Certain legal matters will be passed upon for the Company by Gibson, Dunn & Crutcher LLP, Los Angeles, California and the validity of the shares of Common Stock offered hereby will be passed upon for the Company and the Selling Stockholder by C. Michael Carter, Esq., Executive Vice President, General Counsel and Corporate Secretary of Pinkerton. Mr. Carter owns 1,000 shares of Common Stock and holds options to acquire 65,000 shares of Common Stock (of which 9,750 shares are currently exercisable). Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, Los Angeles, California. EXPERTS The consolidated financial statements of Pinkerton's, Inc. and subsidiaries as of December 30, 1994 and December 29, 1995, and for each of the years in the three-year period ended December 29, 1995, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed a Registration Statement on Form S-3 (the "Registration Statement"), File No. 333-6573, with the Securities and Exchange Commission (the "Commission") under the Securities Act with respect to the securities covered by this Prospectus. This Prospectus omits certain information and exhibits included in the Registration Statement, copies of which may be obtained upon payment of a fee prescribed by the Commission or may be examined free of charge at the principal office of the Commission in Washington, D.C. The Company is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information filed with the Commission by the Company can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Regional Offices of the Commission located at 75 Park Place, 14th Floor, New York, New York 10007 and Northwest Atrium Center, 500 Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. The Commission maintains a World Wide Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Such information is also filed with the NYSE and is available for public inspection at the NYSE, 20 Broad Street, New York, New York 10005. 32 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission are by this reference incorporated in and made a part of this Prospectus: (i) the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1995 (File No. 0-3017); (ii) the Company's Quarterly Report on Form 10-Q for the quarter ended March 22, 1996 (File No. 0-3017); (iii) the description of the Company's Common Stock and Rights contained in its Registration Statement on Form 8-A filed on June 18, 1996 (File No. 1-11841); and (iv) all documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the Offering. Any statement contained in a document incorporated or deemed to be incorporated by reference in the Prospectus shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference in the Prospectus modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. Copies of all documents that are incorporated herein by reference (not including the exhibits to such documents, unless such exhibits are specifically incorporated by reference into such documents or into this Prospectus) will be provided without charge to each person, including any beneficial owner, to whom this Prospectus is delivered, upon a written or oral request to Pinkerton's, Inc., Attention: Corporate Secretary, 15910 Ventura Boulevard, Suite 900, Encino, California 91436-2810, telephone number (818) 380-8800. 33 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report............................................ F-2 Consolidated Balance Sheets at December 30, 1994 and December 29, 1995.. F-3 Consolidated Statements of Operations for the Years Ended December 31, 1993, December 30, 1994 and December 29, 1995.......................... F-4 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1993, December 30, 1994 and December 29, 1995....... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, December 30, 1994 and December 29, 1995.......................... F-6 Notes to Consolidated Financial Statements for the Years Ended December 31, 1993, December 30, 1994 and December 29, 1995...................... F-7 Consolidated Balance Sheets at December 29, 1995 and March 22, 1996 (unaudited)............................................................ F-19 Consolidated Statements of Earnings for the Quarters Ended March 24, 1995 and March 22, 1996 (unaudited).................................... F-20 Consolidated Statements of Cash Flows for the Quarters Ended March 24, 1995 and March 22, 1996 (unaudited).................................... F-21 Notes to Unaudited Consolidated Financial Statements for the Quarters Ended March 24, 1995 and March 22, 1996................................ F-22
F-1 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 30, 1994 and December 29, 1995 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the three years ended December 31, 1993, December 30, 1994 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 consolidated 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 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 30, 1994 and December 29, 1995 and the results of their operations, changes in stockholders' equity and cash flows for the years ended December 31, 1993, December 30, 1994 and December 29, 1995, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Los Angeles, California February 16, 1996 F-2 PINKERTON'S, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 30, DECEMBER 29, 1994 1995 ------------ ------------ (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents.......................... $ 27,744 $ 20,215 Investment in marketable securities................ 10,581 19,396 Accounts receivable (includes unbilled amounts of $28,136 in 1994 and $28,981 in 1995).............. 111,750 113,127 Less allowance for doubtful receivables............ 2,784 2,881 -------- -------- 108,966 110,246 -------- -------- Inventory.......................................... 984 2,516 Prepaid expenses and taxes......................... 13,067 13,762 Deferred income taxes.............................. 4,440 6,836 -------- -------- Total current assets............................. 165,782 172,971 -------- -------- Equipment and leasehold improvements, net of accumulated depreciation and amortization of $16,593 in 1994 and $21,619 in 1995......................... 13,430 14,017 Other assets: Intangible assets, net............................. 62,201 60,895 Deferred income taxes.............................. 23,277 23,612 Other.............................................. 13,400 15,849 -------- -------- 98,878 100,356 -------- -------- $278,090 $287,344 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................... $ 5,673 $ 7,304 Accrued liabilities................................ 66,134 66,867 Current maturities of long-term debt............... 8,575 8,575 -------- -------- Total current liabilities........................ 80,382 82,746 -------- -------- Accrued retirement benefits and other non-current liabilities......................................... 51,436 56,598 Long-term debt, less current maturities.............. 42,850 34,275 Commitments and contingencies Stockholders' equity: Preferred stock.................................... 16 15 Common stock....................................... 8 8 Additional paid-in capital......................... 73,745 74,463 Other adjustments.................................. (8,325) (9,238) Retained earnings.................................. 37,978 48,477 -------- -------- 103,422 113,725 -------- -------- $278,090 $287,344 ======== ========
See accompanying notes to consolidated financial statements. F-3 PINKERTON'S, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, DECEMBER 30, DECEMBER 29, 1993 1994 1995 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Service revenues....................... $772,026 $849,960 $862,793 Cost of services....................... 688,995 773,526 771,172 -------- -------- -------- Gross profit........................... 83,031 76,434 91,621 Operating expenses..................... 54,982 57,983 61,857 Amortization of intangible assets...... 8,323 10,240 8,873 Write-down of intangible assets and other special charges................. 3,800 14,435 -- Gain from litigation settlements, net.. -- (2,369) -- -------- -------- -------- Operating profit (loss)................ 15,926 (3,855) 20,891 Provision for reserve against invest- ment.................................. 3,267 -- -- Other (income) deductions: Interest income...................... (1,509) (1,532) (2,713) Interest expense..................... 5,747 5,501 5,583 -------- -------- -------- 4,238 3,969 2,870 -------- -------- -------- Income (loss) before income taxes...... 8,421 (7,824) 18,021 Provision for income taxes............. 5,220 2,418 7,521 -------- -------- -------- Net income (loss)...................... $ 3,201 $(10,242) $ 10,500 ======== ======== ======== Net income (loss) per common share..... $ .39 $ (1.24) $ 1.26 ======== ======== ======== Weighted average common shares and common share equivalents outstanding.. 8,284 8,288 8,351 ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 PINKERTON'S, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ADDITIONAL TOTAL PREFERRED COMMON PAID-IN OTHER RETAINED STOCKHOLDERS' STOCK STOCK CAPITAL ADJUSTMENTS EARNINGS EQUITY --------- ------ ---------- ----------- -------- ------------- (IN THOUSANDS) Balance at December 25, 1992................... $16 $ 8 $72,597 $(3,440) $ 45,021 $114,202 Dividends on preferred stock.................. -- -- -- -- (1) (1) Issuance of common stock.................. -- -- 274 -- -- 274 Exercise of stock options................ -- -- 115 -- -- 115 Minimum retirement plans liability adjustment... -- -- -- (5,086) -- (5,086) Foreign currency translation adjustment............. -- -- -- (1,074) -- (1,074) Net income.............. -- -- -- -- 3,201 3,201 --- --- ------- ------- -------- -------- Balance at December 31, 1993................... 16 8 72,986 (9,600) 48,221 111,631 Dividends on preferred stock.................. -- -- -- -- (1) (1) Issuance of common stock.................. -- -- 226 -- -- 226 Exercise of stock options................ -- -- 533 -- -- 533 Minimum retirement plans liability adjustment... -- -- -- 1,412 -- 1,412 Foreign currency translation adjustment............. -- -- -- (137) -- (137) Net loss................ -- -- -- -- (10,242) (10,242) --- --- ------- ------- -------- -------- 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 === === ======= ======= ======== ========
See accompanying notes to consolidated financial statements. F-5 PINKERTON'S, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, DECEMBER 30, DECEMBER 29, 1993 1994 1995 ------------ ------------ ------------ (IN THOUSANDS) OPERATING ACTIVITIES: Net income (loss)..................... $ 3,201 $(10,242) $ 10,500 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization of intangible assets..... 8,323 10,240 8,873 Depreciation and other amortization... 4,713 5,708 5,832 Provision for losses on doubtful receivables.......................... 1,896 1,461 1,719 Provision for reserve against investment........................... 3,267 -- -- Write-down of intangible assets....... -- 11,501 -- Changes in assets, liabilities and stockholders' equity: Accounts receivable................... (4,130) (4,637) 1,064 Inventory............................. 2,651 1,056 437 Prepaid expenses and taxes............ (584) (4,359) (799) Deferred income taxes................. (6,280) (2,264) (2,731) Other assets.......................... (1,661) (851) (2,605) Accounts payable...................... (21) (1,527) 88 Accrued and other non-current liabilities.......................... 7,775 14,429 468 Foreign currency revaluation of net assets............................... (858) (565) (867) -------- -------- -------- Net cash provided by operating activities.......................... 18,292 19,950 21,979 -------- -------- -------- INVESTING ACTIVITIES: Purchase of marketable securities..... (41,339) (23,273) (52,673) Sales/redemptions of marketable securities........................... 37,059 31,191 43,858 Purchase of equipment and leasehold improvements......................... (6,852) (4,237) (5,336) Payments for net assets of acquired business, net of cash acquired....... (7,535) (11,678) (7,515) -------- -------- -------- Net cash used in investing activities.......................... (18,667) (7,997) (21,666) -------- -------- -------- FINANCING ACTIVITIES: Principal repayment of long-term debt................................. -- (8,575) (8,575) Exercise of stock options............. 88 405 735 Redemption of preferred stock......... -- -- (1) Preferred dividends paid.............. (1) (1) (1) -------- -------- -------- Net cash (used in) provided by financing activities................ 87 (8,171) (7,842) -------- -------- -------- Net (decrease) increase in cash...... (288) 3,782 (7,529) Cash and cash equivalents at beginning of year............................... 24,250 23,962 27,744 -------- -------- -------- Cash and cash equivalents at end of year.................................. $ 23,962 $ 27,744 $ 20,215 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest.............................. $ 5,495 $ 6,222 $ 5,448 Income taxes.......................... $ 7,883 $ 9,942 $ 10,215 -------- -------- --------
See accompanying notes to consolidated financial statements. F-6 PINKERTON'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. CORPORATE ORGANIZATION Pinkerton's, Inc. and subsidiaries is the resultant corporate entity following the acquisition on January 19, 1988 by California Plant Protection, Inc. of Pinkerton's, Inc. (formerly owned by American Brands, Inc.). 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. Certain reclassifications to prior year amounts have been made to conform to the presentation of financial information for the year ended December 29, 1995. REVENUE RECOGNITION The Company's operations consist mainly of providing security officer 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 and Mexico, and is not concentrated in any particular geographical region therein or by any type of economic activity. Service revenues are recognized as services are provided, including amounts for unbilled, rendered services. Sales to a single customer aggregated $105.3 million in 1994 and $109.5 million in 1995. 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, 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 3 to 5 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 represent the excess of the purchase price of acquired businesses over fair values of related net tangible assets (goodwill) and values assigned to other intangible assets such as non-compete agreements, F-7 PINKERTON'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) contract rights and copyrights. Goodwill and other intangibles are amortized on a straight-line basis over periods of 10 to 25 years, and 3 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 results. 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 coverage for losses in excess of specified amounts and for certain international activities. Estimated costs under these programs, including incurred but not reported claims, are recorded as expenses 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 and operating loss and tax credit carry forward. 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 enacted date. Deferred income taxes have not been provided on undistributed earnings of foreign subsidiaries as the earnings for U.S. tax purposes would be fully offset by foreign tax credit. FOREIGN CURRENCY TRANSLATION The Company translates revenues and expenses of its foreign subsidiaries using an average of exchange rates in effect 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 sheet. At December 29, 1995, the cumulative multi-year effect of translation adjustments was a decrease to stockholders' equity of $4.9 million. INCOME (LOSS) PER SHARE Income (loss) per common share is computed based on the weighted average number of shares of common stock and common stock equivalents, if dilutive, outstanding during each period. Common stock equivalents represent the number of shares that would be issued, assuming the exercise of dilutive stock options, reduced by the number of shares that could be repurchased on the open market with the proceeds from the exercise of those options. Net income (loss) applicable to common shares represents net income less dividends on the Company's cumulative preferred stock. STATEMENT OF CASH FLOWS The Company considers cash equivalents to be all highly liquid investments with original maturities of 90 days or less. F-8 PINKERTON'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) RECLASSIFICATIONS Certain reclassifications have been made to the prior year balances to conform to the 1995 presentation. MARKETABLE SECURITIES The Company adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities," on January 1, 1994. SFAS 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. NOTE 3. ACQUISITIONS In June 1993, the Company signed a Purchase Agreement (commenced in August 1993) to acquire the internal uniformed security operations and assets of General Motors' U.S. security operations. In August 1994, the Company acquired various security contracts from Stanley Smith Security, Inc. The Company is pursuing its strategic plan to provide a broader array of services and products to its client base including security integration services and products. In pursuit of these plans, the Company acquired two regional security integration companies in 1995 with a third company being acquired in January 1996. Pro-forma financial information is not included as it is insignificant to the consolidated financial statements. NOTE 4. INTANGIBLE ASSETS, NET Intangible assets, net, in the accompanying consolidated balance sheets consists of the following:
DECEMBER 30, DECEMBER 29, 1994 1995 ------------ ------------ (IN THOUSANDS) Goodwill........................................... $ 68,847 $ 73,380 Less accumulated amortization...................... (17,828) (28,028) Write-down of goodwill............................. (7,791) -- -------- -------- 43,228 45,352 -------- -------- Other intangibles.................................. 35,137 36,947 Less accumulated amortization...................... (12,454) (21,404) Write-down of other intangibles.................... (3,710) -- -------- -------- 18,973 15,543 -------- -------- Total............................................ $ 62,201 $ 60,895 ======== ========
Goodwill and other intangibles, principally contract rights, were written down in the fourth quarter of 1994 in the amount of $11.5 million. This write- down related primarily to the Company's business in the United Kingdom (U.K.). From inception of the acquisitions which formed the U.K. business, the sales and earnings projections made at the time of these acquisitions were not attained due to a prolonged economic recession, increased competitive pressures, the loss of contracts and difficulties encountered in developing and managing a large, national U.K. company. These conditions resulted in significant losses after amortization in 1994 and a significant deficiency in the U.K. subsidiary's equity. The Company determined that these conditions would continue, and that projected results would not support the remaining balance of goodwill and other intangible assets amounting to $15.4 million. F-9 PINKERTON'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The methodology used by the Company to assess the recovery of goodwill and other intangibles was to review recent trends and where appropriate to project future results of operations, considering all available information, for the remaining life of the intangible asset as of December 30, 1994. Such methodology established that certain balances of goodwill and other intangible assets in two international businesses (U.K. and Mexico) were impaired and could not be recovered from future operations. Therefore, these intangible assets were written down based on projected discounted future cash flows using a discount rate reflecting the Company's average cost of capital. NOTE 5. 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 extends for a period of ten 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 $8,575,000 are required under the agreement beginning in June 1994 with an additional seventh payment of $8,550,000 required at maturity. The fair value of the Senior Notes is estimated to be $48.8 million at December 29, 1995 based on market interest rates for comparable loans. In November 1995, the Company replaced its existing revolving credit facility with an unsecured revolving credit facility with a group of banks for multi-currency borrowings up to $70.0 million, of which $50.0 million may be letters of credit (used primarily to support obligations under the Company's self-insurance programs) through November 1998. The facility also provides for a possible increase up to $100.0 million of borrowings (of which $50.0 million may be letters of credit) upon certain conditions. Under the agreement, the Company is required to pay a fee on outstanding letters of credit of 0.6% per annum, payable quarterly, and interest on cash borrowings computed at the prime rate of the agent bank, payable monthly. A commitment fee of .225% per annum payable monthly is also required on any unused portions of the facility. At December 29, 1995, $33.3 million in letters of credit were outstanding and there were no cash borrowings at any time during the year under the revolving line of credit. 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 29, 1995 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 has no foreign or domestic derivatives, interest rate swaps or other hedge products as of December 29, 1995. NOTE 6. ACCRUED AND OTHER NON-CURRENT LIABILITIES Accrued liabilities consist of the following:
DECEMBER 30, DECEMBER 29, 1994 1995 ------------ ------------ (IN THOUSANDS) Self-insurance reserves............................ $12,689 $15,086 Salaries and wages................................. 22,142 21,824 Payroll taxes and withholdings..................... 8,227 7,199 Estimated liability for vacation benefits.......... 7,334 6,805 Other.............................................. 15,742 15,953 ------- ------- $66,134 $66,867 ======= =======
F-10 PINKERTON'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 1993, 1994, and 1995 is summarized as follows:
DECEMBER 31, DECEMBER 30, DECEMBER 29, 1993 1994 1995 ------------ ------------ ------------ (IN THOUSANDS) Balance at beginning of year........ $ 34,097 $ 38,189 $ 45,078 Provision charged to operations..... 42,033 51,179 44,500 Payments............................ (37,941) (44,290) (39,739) -------- -------- -------- Balance at end of year.............. 38,189 45,078 49,839 -------- -------- -------- Less current portion included in ac- crued liabilities.................. 10,750 12,689 15,086 -------- -------- -------- Long-term portion................... $ 27,439 $ 32,389 $ 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 30, 1994 and December 29, 1995 reflect the estimated liability to the trusts. NOTE 7. INCOME TAXES The components of income (loss) before income taxes for domestic and foreign operations were as follows:
DECEMBER 31, DECEMBER 30, DECEMBER 29, 1993 1994 1995 ------------ ------------ ------------ (IN THOUSANDS) Domestic.......................... $13,355 $ 5,303 $22,132 Foreign........................... (4,934) (13,127) (4,111) ------- -------- ------- $ 8,421 $ (7,824) $18,021 ======= ======== =======
The following is a summary of the provision for income taxes:
DECEMBER 31, DECEMBER 30, DECEMBER 29, 1993 1994 1995 ------------ ------------ ------------ (IN THOUSANDS) Current: Federal........................... $ 7,228 $ 3,360 $ 7,891 State............................. 2,365 1,809 1,855 Foreign........................... 242 234 506 ------- -------- ------- 9,835 5,403 10,252 ------- -------- ------- Deferred: Federal........................... (3,899) (2,516) (2,343) State............................. (732) (511) (388) ------- -------- ------- (4,631) (3,027) (2,731) ------- -------- ------- Tax benefit-exercise of employee stock options...................... 16 42 -- ------- -------- ------- $ 5,220 $ 2,418 $ 7,521 ======= ======== =======
F-11 PINKERTON'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table shows the components of the deferred income tax expense (benefit) for the years ended December 31, 1993, December 30, 1994 and December 29, 1995:
DECEMBER 31, DECEMBER 30, DECEMBER 29, 1993 1994 1995 ------------ ------------ ------------ (IN THOUSANDS) Allowance for doubtful receivables.. $ 176 $ 40 $ 75 Self-insurance reserves............. (756) (3,122) (1,945) Contribution to VEBA................ (846) (406) 161 Deferred state tax.................. 256 179 136 Depreciation........................ (9) (365) (252) Amortization of intangibles......... -- (767) (548) Retirement plans.................... (327) 154 (1,004) Provision for reserve against in- vestment........................... (1,371) -- -- Uniform reserve..................... (755) 555 324 Vacation pay........................ -- -- 171 Foreign losses carryover............ (1,727) (699) (333) Special charges..................... (714) 538 -- Cumulative effect of change in Fed- eral tax rate...................... (351) -- -- Other, net.......................... 66 167 151 Valuation allowance................. 1,727 699 333 ------- ------- ------- $(4,631) $(3,027) $(2,731) ======= ======= =======
The provision for income taxes for the years ended December 31, 1993, December 30, 1994 and December 29, 1995 differed from the amount computed by applying the statutory federal income tax rate of 35% in each year to income (loss) before income taxes. The reasons for these differences are as follows:
DECEMBER 31, DECEMBER 30, DECEMBER 29, 1993 1994 1995 ------------ ------------ ------------ (IN THOUSANDS) U.S. Federal income tax (benefit) at statutory rate..................... $ 2,947 $(2,738) $6,307 State income taxes, net of Federal benefit............................ 1,063 849 954 ------- ------- ------ 4,010 (1,889) 7,261 Changes resulting from: Targeted jobs tax credit.......... (1,105) (1,448) (986) Amortization of intangible assets, domestic & foreign............... 1,781 1,695 789 Foreign taxes, in excess of U.S. tax rate......................... (768) (690) 211 Foreign write-down of intangible assets........................... -- 3,896 -- Tax-exempt interest income........ (151) (225) (92) Cumulative effect of change in Federal tax rate................. (351) -- -- Other, net........................ 77 380 5 Change in valuation allowance..... 1,727 699 333 ------- ------- ------ $ 5,220 $ 2,418 $7,521 ======= ======= ======
F-12 PINKERTON'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are presented below:
DECEMBER 30, DECEMBER 29, 1994 1995 ------------ ------------ (IN THOUSANDS) Deferred tax assets: Allowance for doubtful receivables............... $ 825 $ 750 Self-insurance reserves.......................... 17,817 19,762 Depreciation..................................... -- 32 Retirement plans................................. 5,658 6,662 Uniform reserve.................................. 324 -- Provision against investment..................... 1,597 1,596 Vacation pay..................................... 2,777 2,606 Benefit from acquired net operating loss......... 938 828 Amortization of intangibles...................... 1,507 2,055 Foreign loss carryover........................... 5,516 5,849 Other, net....................................... 125 97 ------- ------- Total deferred tax assets...................... $37,084 $40,237 ======= ======= Deferred tax liabilities: State taxes...................................... $ 1,737 $ 1,873 Prepaid insurance................................ 757 704 Contribution to VEBA............................. 141 302 Depreciation..................................... 220 -- Other, net....................................... 996 1,061 ------- ------- Total deferred tax liabilities................. 3,851 3,940 ------- ------- Deferred tax assets valuation allowance............ (5,516) (5,849) ------- ------- Net deferred tax assets........................ $27,717 $30,448 ======= =======
NOTE 8. OTHER SPECIAL CHARGES In 1993, the Company recorded a pre-tax charge of $3.8 million for the realignment of field management and operations, the consolidation of headquarters facilities and the write-down of uniform inventory. In 1993, a pre-tax charge of $3.3 million was recorded representing a reserve against the Company's investment in an advanced technology security equipment company. In 1994, the Company recorded a pre-tax charge of $2.9 million consisting primarily of severance, recruiting and relocation charges. NOTE 9. RETIREMENT PLANS In 1987, the Company established the Supplemental Income Retirement Plan (the "SERP"). On May 1, 1994 this plan was replaced by the Supplemental Retirement Income Plan (the "SRIP") covering certain executives and key employees. Under provisions designed to simplify the plan, two benefit levels were established: (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%. F-13 PINKERTON'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A participant's vested benefit under the SERP as of April 30, 1994 will not be reduced because of the change to the SRIP. 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 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 $5.6 million and $7.1 million as of December 30, 1994 and December 29, 1995, respectively, and are included in other assets on the Company's consolidated balance sheets. In connection with the acquisition of Pinkerton, the Company assumed liability for the Discretionary Unfunded Deferred Compensation Plan for Key Employees (the "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 an unfunded Canadian Pension Plan for the related security guards. 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 30, 1994 and December 29, 1995:
DECEMBER 30, DECEMBER 29, 1994 1995 ------------ ------------ (IN THOUSANDS) Actuarial present value of benefit obligations: Accumulated benefit obligation................. $17,243 $21,907 ------- ------- Projected benefit obligation................... $17,982 $22,249 ------- ------- Plan assets.................................... -- -- Projected benefit obligation less than (in excess of) plan assets........................ 17,982 22,249 Unrecognized net (loss)........................ (5,390) (6,208) Prior service cost not yet recognized in net retirement plan cost.......................... (3,921) (6,046) ------- ------- Accrued periodic retirement plan cost before min- imum liability.................................. 8,671 9,995 Additional minimum liability..................... 8,572 11,912 ------- ------- Liability included in accrued retirement benefits and other non-current liabilities............... $17,243 $21,907 ======= =======
Net retirement plan cost for 1993, 1994 and 1995 included the following components:
DECEMBER 31, DECEMBER 30, DECEMBER 29, 1993 1994 1995 ------------ ------------ ------------ (IN THOUSANDS) Service costs benefits earned dur- ing the period.................... $1,010 $1,384 $1,349 Interest cost on projected benefit obligation........................ 740 900 1,531 Amortization of net loss........... -- 411 137 Amortization of past service cost.. -- 322 313 ------ ------ ------ Net periodic retirement plan cost.. $1,750 $3,017 $3,330 ====== ====== ======
F-14 PINKERTON'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Assumptions used in accounting for the retirement plans as of 1993, 1994 and 1995 were:
DECEMBER 31, DECEMBER 30, DECEMBER 29, 1993 1994 1995 ------------ ------------ ------------ Discount rates...................... 7.5% 8.5% 7.0% Rates of increase in compensation levels............................. 4.0% 4.0% 4.0% to 5.0%
The Company has no significant post retirement obligations other than the SRIP, DUDCPKE and the Canadian Pension Plan. NOTE 10. EMPLOYEE STOCK OWNERSHIP 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 11. STOCK OPTION PLANS 1988 NON-QUALIFIED STOCK OPTION PLAN In September 1988, the Company adopted a non-qualified stock option plan (the "1988 Plan") and ultimately reserved 358,199 shares of common stock for future grants subject to adjustment for the effect of future sales or issuances of common stock, other options, warrants, stock dividends, stock splits and convertible securities. The 1988 Plan provided that options be granted at an exercise price of $3.59 per share. In February 1990, the Board of Directors amended the 1988 Plan to freeze, effective as of December 29, 1989, the number of shares issuable upon the exercise of outstanding options. Options issued under the 1988 Plan became exercisable 120 days after the effective date of the Company's initial public offering of common stock. These options were exercisable for a period of five years and expired on August 2, 1995. At December 29, 1995, there were no options under the 1988 Plan outstanding or exercisable. 1990 STOCK OPTION PLAN In February 1990, the Company adopted the 1990 Stock Option Plan (the "1990 Plan"), which provides 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 270,000 shares of common stock, subject to adjustment for stock splits, stock dividends or similar capital adjustments. 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 270,000 to 1,220,000. In February 1995, in connection with and subject to stockholder approval 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 783,550 shares were outstanding, options with respect to 32,000 shares had been exercised, and there remained 404,450 shares available under the plan with respect to which future option grants could have been made. At December 29, 1995, options with respect to 672,150 shares were outstanding, expiring through February 14, 2005, of which options with respect to 202,005 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 F-15 PINKERTON'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) and performance awards to employees and stock options or certain common stock awards to non-employee directors of the Company. The maximum number of shares of common stock with respect to which awards may be granted is 404,450, subject to adjustment for stock dividends, stock splits, recapitalizations or similar capital changes. At December 29, 1995, options with respect to 24,750 shares were outstanding, expiring through May 29, 2005, none of which were exercisable. The Company's stock option plans are administered by the Compensation Committee of the Board of Directors, which consists of four independent 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. Transactions involving the stock option plans are as follows:
OPTION PRICE PER SHARE NUMBER OF SHARES ---------------------- ---------------- Outstanding at December 25, 1992... $ 3.59-27.13 269,637 Exercised........................ 3.59-15.25 (6,700) ------------ ------- Outstanding at December 31, 1993... 3.59-27.13 262,937 Granted.......................... 14.75-19.50 614,750 Exercised........................ 3.59-15.50 (29,424) Canceled......................... 15.20-27.13 (66,404) ------------ ------- Outstanding at December 30, 1994... 3.59-27.13 781,859 Granted.......................... 15.50-19.50 33,200 Exercised........................ 3.59-15.50 (62,759) Canceled......................... 15.25-27.13 (55,400) ------------ ------- Outstanding at December 29, 1995... $14.75-27.13 696,900 ============ =======
NOTE 12. CAPITAL STOCK Capital stock at December 30, 1994 and December 29, 1995 consists of the following:
NUMBER OF SHARES ------------------------- DECEMBER 30, DECEMBER 29, 1994 1995 ------------ ------------ 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.......................... 159 153 11% cumulative preferred stock, $100 par value: Class C: Authorized...................................... 20,000 20,000 Issued and outstanding.......................... 1 1 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.......................... 8,294,214 8,344,969
F-16 PINKERTON'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 13. COMMITMENTS AND CONTINGENCIES The Company has commitments under operating leases, primarily for building and office space, expiring at various dates through December 2017. Certain of the 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 for certain other costs of occupancy. Most leases contain renewal options. Rental expense for the years ended December 31, 1993, December 30, 1994 and December 29, 1995 was approximately $6,029,000, $7,679,000 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 29, 1995:
IN THOUSANDS 1996.......................................................... $ 8,024 1997.......................................................... 6,439 1998.......................................................... 5,091 1999.......................................................... 4,125 2000.......................................................... 3,769 2001 and thereafter........................................... 11,588 ------- $39,036 =======
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 29, 1995, the Company had 1,534 vehicles leased under these operating lease agreements. The maximum aggregate future rental commitment on the vehicles currently leased is $5,576,000. The nature of the Company's business subjects it to a significant volume of claims and litigation incidental to such business asserting that the Company is liable for damages as a result of the conduct of its employees or others. Some claims or litigation allege substantial damages. The Company maintains self-insurance programs and insurance coverage for a significant portion of this liability risk. In the opinion of management, based on currently known facts, there is no claim or litigation pending the disposition of which will have a material adverse effect on the results of operations or financial condition of the Company. During 1994 the Company reached litigation settlements relating to the procurement of uniforms and services provided. As a result of these settlements, the Company recorded a net pre-tax gain of $2.4 million. NOTE 14. INTERNATIONAL OPERATIONS The Company has international operations located in Europe, Canada, Mexico and Asia. Summarized information relating to the international subsidiaries is as follows:
DECEMBER 31, DECEMBER 30, DECEMBER 29, 1993 1994 1995 ------------ ------------ ------------ (IN THOUSANDS) For the year: Service revenues.................... $110,280 $135,445 $136,611 Operating profit (loss)............. $ (965) $(15,410) $ (3,062) At year end: Total assets........................ $ 47,696 $ 39,600 $ 37,842 Stockholders' equity................ $ 12,682 $ 9,007 $ 3,998
In 1994, the Company recorded an $11.5 million write-down of goodwill and other intangible assets associated primarily with the Company's business in the United Kingdom. The Company also recapitalized its United Kingdom subsidiary to include in stockholders' equity approximately $6.6 million of intercompany debt. F-17 PINKERTON'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 15. 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 QUARTER(a) QUARTER QUARTER QUARTER(b) ---------- -------- -------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Year ended December 30, 1994 Service revenues..................... $191,545 $193,836 $198,296 $266,283 Gross profit......................... 16,314 18,670 19,703 21,747 Net income (loss).................... 1,327 162 1,820 (13,551) Income (loss) per common share(c).... $ .16 $ .02 $ .22 $ (1.64) Weighted average common shares and common share equivalents outstanding......................... 8,298 8,290 8,282 8,283 Year ended December 29, 1995 Service revenues..................... $198,321 $195,442 $197,942 $271,088 Gross profit......................... 18,751 19,560 22,235 31,075 Net income........................... 1,471 1,563 1,974 5,492 Income per common share(c)........... $ .18 $ .19 $ .24 $ .65 Weighted average common shares and common share equivalents outstanding......................... 8,345 8,303 8,333 8,407
- --------------------- (a) The first quarter of 1994 includes a $2.4 million gain from litigation, net. (b) The fourth quarter of 1994 includes the effect of the write-down of goodwill and other intangible assets in the amount of $11.5 million and a $2.5 million billing credit issued to a customer. The fourth quarter of 1995 includes the impact of tax minimization strategies. (c) The sum of the quarterly income (loss) 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 common share equivalents outstanding. F-18 PINKERTON'S, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DEC. 29, 1995 MARCH 22, 1996 ------------- -------------- (UNAUDITED) (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents....................... $ 20,215 $ 18,225 Investment in marketable securities............. 19,396 24,777 Accounts receivable (includes unbilled amount of $28,981 in 1995 and $24,753 in 1996)........... 113,127 116,448 Less allowance for doubtful receivables......... 2,881 2,706 -------- -------- 110,246 113,742 -------- -------- Inventory....................................... 2,516 2,260 Prepaid expenses and taxes...................... 13,762 10,947 Deferred income taxes........................... 6,836 6,968 -------- -------- Total current assets.......................... 172,971 176,919 -------- -------- Equipment and leasehold improvements, net of accumulated depreciation and amortization of $21,619 in 1995 and $23,072 in 1996.............. 14,017 13,970 Other assets: Intangible assets, net.......................... 60,895 60,008 Deferred income taxes........................... 23,612 24,078 Other........................................... 15,849 16,200 -------- -------- 100,356 100,286 -------- -------- $287,344 $291,175 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................ $ 7,304 $ 6,650 Accrued liabilities............................. 66,867 67,271 Current maturities of long-term debt............ 8,575 8,575 -------- -------- Total current liabilities..................... 82,746 82,496 -------- -------- Accrued retirement benefits and other non-current liabilities...................................... 56,598 58,843 Long-term debt, less current maturities........... 34,275 34,275 Commitments and contingencies Stockholders' equity: Preferred stock................................. 15 -- Common stock.................................... 8 8 Additional paid-in capital...................... 74,463 74,485 Other adjustments............................... (9,238) (9,117) Retained earnings............................... 48,477 50,185 -------- -------- 113,725 115,561 -------- -------- $287,344 $291,175 ======== ========
See accompanying notes to unaudited consolidated financial statements. F-19 PINKERTON'S, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE TWELVE WEEKS ENDED ----------------------------- MARCH 24, 1995 MARCH 22, 1996 -------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Service revenues................................ $198,321 $200,036 Cost of services................................ 179,570 176,850 -------- -------- Gross profit.................................... 18,751 23,186 Operating expenses.............................. 13,523 17,032 Amortization of intangible assets............... 2,043 2,136 -------- -------- Operating profit................................ 3,185 4,018 Other (income) deductions: Interest income............................... (666) (510) Interest expense.............................. 1,174 1,114 -------- -------- 508 604 -------- -------- Income before income taxes...................... 2,677 3,414 Provision for income taxes...................... 1,206 1,705 -------- -------- Net income...................................... $ 1,471 $ 1,709 ======== ======== Net income per common share..................... $ .18 $ .20 ======== ======== Weighted average common shares and common share equivalents outstanding........................ 8,345 8,408 ======== ========
See accompanying notes to unaudited consolidated financial statements. F-20 PINKERTON'S, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE TWELVE WEEKS ENDED ----------------------------- MARCH 24, 1995 MARCH 22, 1996 -------------- -------------- (IN THOUSANDS) Operating Activities: Net income.................................... $ 1,471 $ 1,709 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangible assets............. 2,043 2,136 Depreciation and other amortization........... 1,334 1,462 Provision for losses on doubtful receivables.. 240 239 Changes in assets, liabilities and stockholders' equity: Accounts receivable........................... (2,056) (2,690) Inventory..................................... (558) 526 Prepaid expenses and taxes.................... 5,925 2,842 Deferred income taxes......................... (2,948) (598) Other assets.................................. (1,107) (386) Accounts payable.............................. 1,549 (908) Accrued and other non-current liabilities..... 882 2,820 Foreign currency revaluation of net assets.... 102 121 -------- ------- Net cash provided by operating activities... 6,877 7,273 -------- ------- Investing Activities: Purchase of marketable securities............. (12,879) (6,980) Sales/redemptions of marketable securities.... 9,695 1,599 Purchase of equipment and leasehold improvements................................. (1,104) (1,166) Payments for net assets of acquired businesses, net of cash acquired............. -- (2,753) -------- ------- Net cash used in investing activities....... (4,288) (9,300) -------- ------- Financing Activities: Exercise of stock options..................... 10 22 Redemption of preferred stock................. -- 15 -------- ------- Net cash provided by financing activities... 10 37 -------- ------- Net (decrease) increase in cash............. 2,599 (1,990) Cash and cash equivalents at beginning of year.. 27,744 20,215 -------- ------- Cash and cash equivalents at end of period...... $ 30,343 $18,225 ======== =======
See accompanying notes to unaudited consolidated financial statements. F-21 PINKERTON'S, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) PRESENTATION OF FINANCIAL INFORMATION The quarterly consolidated financial statements included herein have been prepared by the Company and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the fiscal quarters ended March 24, 1995 and March 22, 1996. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although the Company believes the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. The following material is written with the presumption that the users of the interim financial statements have read or have access to the Company's Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 29, 1995 and the Company's 1995 Annual Report to Stockholders. The 1995 Annual Report contains the latest audited consolidated financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 29, 1995 and for the year then ended. The results of operations for the fiscal quarters ended March 24, 1995 and March 22, 1996 are not necessarily indicative of the results for a full year. (2) ADOPTION OF NEW ACCOUNTING STANDARDS In the first quarter of 1996, the Company adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of." This statement provides guidelines for recognition of impairment losses relating to long-term assets. The adoption of this new standard did not have a material effect on the Company's consolidated financial statements. The Company also adopted Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation." This statement encourages, but does not require, a fair value based method of accounting for employee stock options. The Company has elected to continue to measure compensation costs under APB Opinion No. 25 "Accounting for Stock Issued to Employees" and to comply with the pro forma disclosure requirements of Statement No. 123 in the Company's annual consolidated financial statements. (3) SUBSEQUENT EVENTS During the second quarter of 1996, the Company entered into a settlement related to the acquisition of Pinkerton's, Inc. by California Plant Protection, Inc. in 1988. As a result of this settlement, the Company received a cash payment of $5.2 million in the second quarter of 1996. Of this amount, $3.3 million represented a recovery of income and other taxes paid on behalf of the previous owner which were previously carried on the Company's balance sheet; the remaining $1.9 million (which is not taxable) will be recorded as other income in the second quarter of 1996. F-22 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR- MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO- SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDIC- TION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLI- CATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSE- QUENT TO ITS DATE. ----------- TABLE OF CONTENTS
PAGE Prospectus Summary....................................................... 3 Risk Factors............................................................. 7 Use of Proceeds.......................................................... 8 Price Range of Common Stock and Dividend Policy.......................... 9 Capitalization........................................................... 10 Selected Consolidated Financial Data..................................... 11 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 12 Business................................................................. 17 Management............................................................... 23 Principal Stockholders and Selling Stockholder........................... 26 Description of Capital Stock............................................. 27 Shares Eligible For Future Sale.......................................... 30 Underwriting............................................................. 31 Legal Matters............................................................ 32 Experts.................................................................. 32 Available Information.................................................... 32 Incorporation of Certain Documents by Reference.......................... 33 Index to Consolidated Financial Statements............................... F-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2,360,000 SHARES LOGO COMMON STOCK --------------- PROSPECTUS --------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION PRUDENTIAL SECURITIES INCORPORATED SCHRODER WERTHEIM & CO. , 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table itemizes the expenses incurred by the Registrant and Selling Stockholder in connection with the issuance and distribution of the securities being registered, other than underwriting discounts and commissions. All the amounts shown are estimates except the Securities and Exchange Commission registration fee and the National Association of Securities Dealers, Inc. filing fee.
SELLING REGISTRANT STOCKHOLDER ---------- ----------- Securities and Exchange Commission Registration Fee.... $ 17,530 $ 5,633 National Association of Securities Dealers, Inc. Filing Fee................................................... 5,462 1,755 Additional listing fees................................ 7,189 0 Legal Fees and Expenses................................ 80,000 0 Accounting Fees and Expenses........................... 75,000 0 Blue Sky Fees and Expenses, including Legal Fees....... 11,352 3,648 Printing, including Registration Statement, Prospectus, etc................................................... 100,000 0 Miscellaneous Expenses................................. 3,467 464 -------- ------- Total................................................ $300,000 $11,500 ======== =======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Under Section 145 of the Delaware General Corporation Law, the Registrant has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). The Registrant's Amended and Restated By-laws provide that the Registrant will indemnify its directors, officers, employees and other agents (collectively, the "Agents") to the extent permitted by Delaware law. Under the Registrant's Amended and Restated By-laws, an Agent sued in his or her capacity as an Agent is entitled to indemnification if the Agent acted in good faith and in a manner the Agent reasonably believed to be in, or not opposed to, the best interests of the Registrant, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. In stockholder derivative actions, the Registrant will indemnify an Agent if the Agent acted in good faith and in a manner the Agent reasonably believed to be in, or not opposed to, the best interests of the Registrant, except that, if the Agent is adjudged liable to the Registrant, the Registrant will not indemnify the Agent unless the court finds that the Agent is fairly and reasonably entitled to indemnification under the circumstances. To the extent that an Agent succeeds in the defense of any suit or proceeding, the Registrant shall indemnify the Agent against expenses (including attorneys' fees) he or she actually and reasonably incurred in connection with the defense. The Amended and Restated By-laws also require the Registrant to advance litigation expenses in the case of stockholder derivative actions or other actions against an Agent if the person being sued undertakes to repay such advances if it is ultimately determined that the Agent is not entitled to indemnification. The Amended and Restated By-laws further provide that the rights the Amended and Restated By- laws confer shall not be deemed to be exclusive of any other right which the Amended and Restated By-laws, agreement, vote of stockholders or disinterested directors or otherwise may confer upon the Registrant's Agent. In addition, the Registrant's Restated Certificate of Incorporation and Amended and Restated By-Laws provide for indemnification of persons to the extent permitted by Delaware law. Notwithstanding the foregoing sentence, the Registrant shall not indemnify any person with respect to any of the following matters: (i) remuneration paid to such person if it shall be determined by final judgment or other final adjudication that such remuneration was in violation of law; (ii) any accounting of profits made from the purchase or sale by such person of the Registrant's securities within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or similar provisions; (iii) actions brought about or contributed to by the dishonesty of such person, if a final judgment or other final adjudication adverse to such person establishes that II-1 acts of active and deliberate dishonesty were committed or attempted by such person with actual dishonest purpose and intent and were material to the adjudication; (iv) actions based on or attributable to such person having gained any personal profit or advantage to which he or she was not entitled, in the event that a final judgment or other final adjudication adverse to such person establishes that such person in fact gained such personal profit or other advantage to which he or she was not entitled; and (v) any matter in respect of which a final decision by a court with competent jurisdiction shall determine that indemnification is unlawful. The Restated Certificate of Incorporation further provides that, pursuant to Delaware law, the Registrant's directors shall not be liable for monetary damages for breach of the directors' fiduciary duty of care to the Registrant and its stockholders. The provision in the Restated Certificate of Incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Registrant, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The Registrant currently has an insurance policy which insures the directors and officers of the Registrant against losses arising from claims made against them due to wrongful acts while acting in their individual and collective capacities as directors and officers, subject to certain exclusions. The policy also insures the Registrant against loss as to which its officers and directors are entitled to indemnification. The Registrant has entered into supplemental indemnification agreements with the Company's current directors and executive officers. These agreements provide substantially broader indemnity rights than those provided under the Delaware General Corporation Law and the Registrant's Restated Certificate of Incorporation and Amended and Restated By-laws. The indemnification agreements are not intended to deny or otherwise limit third-party or derivative suits against the Registrant or its directors or executive officers, but to the extent a director or executive officer is entitled to indemnity or contribution under the indemnification agreement, the financial burden of a third-party suit would be borne by the Registrant, and the Registrant would not necessarily benefit from all derivative recoveries against the director or executive officer. Certain such recoveries would accrue to the benefit of the Registrant but would be offset by the Registrant's obligations to the director or executive officer under the indemnification agreement. ITEM 16. EXHIBITS. 1 Form of Underwriting Agreement. 5 Opinion of C. Michael Carter, Esq. 23.1 Consent of C. Michael Carter, Esq. (included in Exhibit 5). 23.2 Consent of KPMG Peat Marwick LLP (independent certified public accountants). 24* Power of Attorney. 27* Financial Data Schedule.
- --------------------- * Previously filed. ITEM 17. UNDERTAKINGS. r The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 15 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS OF FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, CALIFORNIA, ON THE 2ND DAY OF JULY, 1996. Pinkerton's, Inc. /s/ C. Michael Carter By: _________________________________ C. MICHAEL CARTER EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE President and Chief * Executive Officer July 2, 1996 - ------------------------------------- (Principal DENIS R. BROWN Executive Officer) Executive Vice * President, Chief July 2, 1996 - ------------------------------------- Financial Officer JAMES P. MCCLOSKEY (Principal Financial Officer) Controller * (Principal July 2, 1996 - ------------------------------------- Accounting Officer) STEVEN A. LINDSEY * Director July 2, 1996 - ------------------------------------- PETER H. DAILEY * Director July 2, 1996 - ------------------------------------- JOHN A. GAVIN II-4 SIGNATURE TITLE DATE * Director July 2, 1996 - ------------------------------------- GERALD D. MURPHY * Director July 2, 1996 - ------------------------------------- J. KEVIN MURPHY * Director July 2, 1996 - ------------------------------------- ROBERT H. SMITH * Director July 2, 1996 - ------------------------------------- THOMAS W. WATHEN * Director July 2, 1996 - ------------------------------------- WILLIAM H. WEBSTER *By /s/ C. Michael Carter Attorney-in-fact July 2, 1996 ---------------------------------- C. MICHAEL CARTER II-5 EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------- -------------------- 1 Form of Underwriting Agreement. 5 Opinion of C. Michael Carter, Esq. 23.1 Consent of C. Michael Carter, Esq. (included in Exhibit 5). 23.2 Consent of KPMG Peat Marwick LLP (independent certified public accountants). 24* Power of Attorney. 27* Financial Data Schedule.
- --------------------- * Previously filed. EX-1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1 2,360,000 Shares PINKERTON'S, INC. Common Stock UNDERWRITING AGREEMENT ---------------------- July __, 1996 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION PRUDENTIAL SECURITIES INCORPORATED SCHRODER WERTHEIM & CO. INCORPORATED As representatives of the several Underwriters named in Schedule I hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Ladies and Gentlemen: Pinkerton's, Inc., a Delaware corporation (the "Company"), and the stockholders of the Company named in Schedule II hereto (collectively, the "Selling Stockholders"), severally propose to sell an aggregate of 2,360,000 shares of Common Stock, par value $.001 per share, of the Company (the "Firm Shares"), to the several underwriters named in Schedule I hereto (the "Underwriters"). The Firm Shares consist of 1,700,000 shares to be issued and sold by the Company and 660,000 outstanding shares to be sold by the Selling Stockholders. The Company also proposes to issue and sell to the several Underwriters not more than an additional 354,000 shares of Common Stock, par value $.001 per share, of the Company (the "Additional Shares"), if requested by the Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional Shares are herein collectively called the Shares. The shares of Common Stock, par value $.001 per share, of the Company, to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the Common Stock. The Company and the Selling Stockholders are hereinafter collectively called the Sellers. 1. Registration Statement and Prospectus. The Company has prepared ------------------------------------- and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively called the "Act"), a registration statement on Form S-3 (No. 333-6573), including a prospectus relating to the Shares, which may be amended. The registration statement, as amended at the time when it becomes effective or, if a post- effective amendment is filed with respect thereto, as amended by such post- effective amendment at the time of its effectiveness, including in each case any registration statement filed pursuant to Rule 462(b) under the Act (the "Rule 462 Registration Statement") and all documents incorporated or deemed to be incorporated by reference therein, financial statements and exhibits and the information (if any) contained in a prospectus that is deemed to be a part of the registration statement at the time of its effectiveness pursuant to Rule 434 under the Act, is hereinafter referred to as the "Registration Statement;" and the prospectus (including any prospectus subject to completion meeting the requirements of Rule 434(c) under the Act provided by the Company with any term sheet meeting the requirements of Rule 434(c) as the prospectus provided to meet the requirement of Section 10(a) of the Act), in the form first used to confirm sales of Shares, whether or not filed with the Commission pursuant to Rule 424(b) under the Act, and including all documents incorporated or deemed to be incorporated by reference therein, are hereinafter referred to as the "Prospectus." As used herein, the term "Incorporated Documents" means the documents that are incorporated by reference in the Registration Statement, any prospectus, the Prospectus or any amendment or supplement thereto as such documents exist at the time they are so incorporated. 2. Agreements to Sell and Purchase. On the basis of the ------------------------------- representations and warranties contained in this Agreement, and subject to its terms and conditions, (i) the Company agrees to issue and sell 1,700,000 Firm Shares, (ii) each Selling Stockholder agrees, severally and not jointly, agrees to sell the number of Firm Shares set forth opposite such Selling Stockholder's name in Schedule II hereto and (iii) each Underwriter agrees, severally and not jointly, to purchase from each Seller at a price per share of $____ (the "Purchase Price") the number of Firm Shares (subject to such adjustments to eliminate fractional shares as you may determine) which bears the same proportion to the total number of Firm Shares to be sold by such Seller as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto bears to the total number of Firm Shares. On the basis of the representations and warranties contained in this Agreement, and subject to the terms and conditions hereof, (i) the Company agrees to sell to the Underwriters, and the Underwriters shall have a right to purchase, severally and not jointly, from time to time, up to the total number of Additional Shares at the Purchase Price. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The Underwriters may exercise their right to purchase Additional Shares in whole or in part from time to time by giving written notice thereof to the Company within thirty days after the date of this Agreement. You shall give any such notice on behalf of the Underwriters and such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof. The date 2 specified in any such notice shall be a business day (i) no earlier than the Closing Date (as hereinafter defined), (ii) no later than ten business days after such notice has been given and (iii) no earlier than two business days after such notice has been given. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) which bears the same proportion to the total number of Additional Shares to be purchased from the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of Firm Shares. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) which bears the same proportion to the total number of Additional Shares to be purchased as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto bears to the total number of Firm Shares. The Sellers hereby agree, severally and not jointly, and the Company shall, concurrently with the execution of this Agreement, deliver an agreement executed by each of the directors and officers of the Company, pursuant to which each such person agrees, not to, directly or indirectly, offer, sell, contract to sell, grant any option to purchase, or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for, or warrants, options or rights to purchase or to acquire Common Stock or in any other manner transfer all or a portion of the economic consequences associated with the ownership of any Common Stock, or enter into any agreement to do any of the foregoing, except pursuant to this Agreement, for a period of 120 days after the date of this Agreement, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). Notwithstanding the foregoing, during such period (i) the Company may grant stock options pursuant to the Company's existing stock option plans and (ii) the Company may issue shares of its Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof. 3. Terms of Public Offering. The Sellers are advised by you that ------------------------ the Underwriters propose (i) to make a public offering of the Shares as soon after the effective date of the Registration Statement as in your judgment is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. 4. Delivery and Payment. Delivery to the Underwriters of and -------------------- payment for the Firm Shares shall be made at 10:00 A.M., New York City time, on the third or fourth business day unless otherwise permitted by the Commission pursuant to Rule 15c6-1 of the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder (the "Exchange Act") (such time and date, the "Closing Date") following the date of the initial public offering, at such place as you shall designate. The Closing Date and the location of delivery of and the form of payment for the Firm Shares may be varied by agreement between you and the Sellers. 3 Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at such place as DLJ shall designate at 10:00 A.M., New York City time, on the date specified in the applicable exercise notice given by you pursuant to Section 2 (each such time and date, an "Option Closing Date"). Any such Option Closing Date and the location of delivery of and the form of payment for such Additional Shares may be varied by agreement between you and the Company. Certificates for the Shares shall be registered in such names and issued in such denominations as you shall request in writing not later than two full business days prior to the Closing Date or an Option Closing Date, as the case may be. Such certificates shall be made available to you for inspection not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date or an Option Closing Date, as the case may be. Certificates in definitive form evidencing the Shares shall be delivered to you or for your account on the Closing Date or an Option Closing Date, as the case may be, with any transfer taxes thereon duly paid by the respective Sellers, for the respective accounts of the several Underwriters, against payment of the Purchase Price therefor by wire transfer of same day funds to the account of the applicable Sellers, which shall have been specified to DLJ in writing, at least two business days preceding the Closing Date or an Option Closing Date, as the case may be. 5. Agreements of the Company. The Company agrees with you: ------------------------- (a) To use its best efforts to cause the Registration Statement to become effective at the earliest possible time. The Company will comply fully and in a timely manner with the applicable provisions of Rule 424 and Rule 434 under the Act. (b) To advise you promptly and, if requested by you, confirm such advice in writing, (i) if and when the Prospectus is sent for filing pursuant to Rule 424 under the Act (including any term sheet within the meaning of Rule 434 under the Act), (ii) when the Registration Statement has become effective, when any Rule 462 Registration Statement is filed and becomes effective, and when any post-effective amendment to the Registration Statement becomes effective, (iii) of the receipt of any comments from the Commission that relate to the Registration Statement or requests by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purpose by the Commission or any state securities commission or other regulatory authority and (v) of the happening of any event during the period referred to in paragraph (e) below which makes any statement of a material fact made in the Registration Statement (as amended or supplemented from time to time) untrue or which requires the making of any additions to or changes in the Registration Statement (as amended or supplemented from time to time) in order to make the statements therein not misleading or that makes any statement of a material fact made in the Prospectus (as 4 amended or supplemented from time to time) untrue or which requires the making of any additions to or changes in the Prospectus (as amended or supplemented from time to time) in order to make the statements therein, in light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption of the Shares under any state securities or Blue Sky laws, the Company shall use every reasonable effort to obtain the withdrawal or lifting of such order at the earliest possible time. (c) To furnish to you, without charge, four copies of the signed copy of the Registration Statement as first filed with the Commission and of each amendment to it, including all exhibits and Incorporated Documents, and to furnish to you and each Underwriter designated by you such number of conformed copies of the Registration Statement as so filed and of each amendment to it, without exhibits, as you may reasonably request. (d) Not to file any amendment or supplement to the Registration Statement or to make any amendment or supplement to the Prospectus, or to file any document which, when filed, will be incorporated or deemed to be incorporated by reference in the Registration Statement or the Prospectus (including the issuance or filing of any term sheet within the meaning of Rule 434 under the Act), in each case of which you shall not previously have been advised or to which you shall reasonably object; and to prepare and file with the Commission, promptly upon your reasonable request, any amendment to the Registration Statement or supplement to the Prospectus (including the issuance or filing of any term sheet within the meaning of Rule 434 under the Act) which may be necessary or advisable in connection with the distribution of the Shares by you, and to use its best efforts to cause the same to become promptly effective. (e) Promptly after the Registration Statement becomes effective, and from time to time thereafter for such period as in your reasonable judgment a prospectus is required by law to be delivered in connection with sales by an Underwriter or a dealer, to furnish to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) as such Underwriter or such dealer may reasonably request. (f) If during the period specified in paragraph (e) any event shall occur as a result of which, in the opinion of counsel for the Underwriters it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing when the Prospectus is delivered to a purchaser, not misleading, or if it is necessary to amend or supplement the Prospectus to comply with any law, forthwith to prepare and file with the Commission an appropriate amendment or supplement to the Prospectus so that the statements in the Prospectus, as so amended or supplemented, will not in the light of the circumstances existing when it is so 5 delivered, be misleading, or so that the Prospectus will comply with law, and to furnish to each Underwriter and to such dealers as you shall specify, such number of copies thereof as such Underwriter or such dealers may reasonably request. (g) Prior to any public offering of the Shares, to cooperate with you and counsel for the Underwriters in connection with the registration or qualification of the Shares for offer and sale by the several Underwriters and by dealers under the state securities or Blue Sky laws of such jurisdictions as you may request, to continue such qualification in effect so long as required for distribution of the Shares and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; provided that the Company shall not be obligated to qualify as a foreign corporation in any jurisdiction in which it is not so qualified nor to take any action that would subject it to general consent to service of process in any jurisdiction in which it is not now so subject. (h) To mail and make generally available to its stockholders as soon as reasonably practicable an earning statement covering a period of at least twelve months after the effective date of the Registration Statement (but in no event commencing later than 90 days after such date) which shall satisfy the provisions of Section 11(a) of the Act, and to advise you in writing when such statement has been so made available. (i) During the period of five years after the date of this Agreement, (i) to mail as soon as reasonably practicable after the end of each fiscal year to the record holders of its Common Stock a financial report of the Company and its subsidiaries on a consolidated basis (and a similar financial report of all unconsolidated subsidiaries, if any), all such financial reports to include a consolidated balance sheet, a consolidated statement of operations, a consolidated statement of cash flows and a consolidated statement of stockholders' equity as of the end of and for such fiscal year, together with comparable information as of the end of and for the preceding year, certified by independent certified public accountants, and (ii) to mail and make generally available as soon as practicable after the end of each quarterly period (except for the last quarterly period of each fiscal year), a consolidated balance sheet, a consolidated statement of operations and a consolidated statement of cash flows as of the end of and for such period, and for the period from the beginning of such year to the close of such quarterly period, together with comparable information for the corresponding periods of the preceding year. (j) During the period referred to in paragraph (i), to furnish to you as soon as available a copy of each report or other publicly available information of the Company mailed to the holders of Common Stock or filed with the Commission and such other publicly available information concerning the Company and its subsidiaries as you may reasonably request. (k) Whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, to pay all costs, expenses, fees and taxes incident to (i) the 6 preparation, printing, filing and distribution under the Act of the Registration Statement (including financial statements and exhibits), each preliminary prospectus and all amendments and supplements to any of them prior to or during the period specified in paragraph (e), (ii) the printing and delivery of the Prospectus and all amendments or supplements to it during the period specified in paragraph (e), (iii) the printing and delivery of this Agreement, any memoranda describing state securities or Blue Sky laws and all other agreements, memoranda, correspondence and other documents printed and delivered in connection with the offering of the Shares (including in each case any disbursements of counsel for the Underwriters relating to such printing and delivery), (iv) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states (including in each case the reasonable fees and out-of-pocket disbursements of counsel for the Underwriters relating to such registration or qualification and memoranda relating thereto), (v) filings and clearance, if any, with the National Association of Securities Dealers, Inc. in connection with the offering (including the reasonable fees and disbursements of counsel for the Underwriters in connection therewith), (vi) the listing of the Shares on the New York Stock Exchange (the "NYSE"), (vii) furnishing copies of the Registration Statement, the Prospectus and all amendments and supplements thereto as may be requested for use in connection with the offering or sale of the Shares by the Underwriters or by dealers to whom Shares may be sold and (vii) the performance by the Sellers of their other obligations under this Agreement. Notwithstanding the foregoing, nothing contained in this Agreement shall affect, as between the Company and the Selling Stockholders, any agreement which the Company and the Selling Stockholders have made or may make regarding payment of any fees and expenses related to the transactions contemplated by this Agreement. (l) To use its best efforts to maintain the listing of the Common Stock on the NYSE (or, alternatively, the Nasdaq National Market ("NNM") or the American Stock Exchange) for a period of five years after the effective date of the Registration Statement. (m) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to the Closing Date and to satisfy all conditions precedent to the delivery of the Shares. 6. Agreements of the Selling Stockholders. Each of the Selling -------------------------------------- Stockholders, severally and not jointly, agrees with you: (a) To take all reasonable actions in cooperation with the Company and the Underwriters to do and perform all things to be done by it pursuant to this Agreement prior to the Closing Date or reasonably requested by the Company in connection herewith and to satisfy all conditions precedent to the delivery of the Shares to be sold by it pursuant to this Agreement. (b) Prior to any public offering of the Shares to be sold by it to the Underwriters pursuant to this Agreement, it will cooperate with the Underwriters and counsel 7 for the Underwriters in connection with the registration or qualification of any such Shares for offer and sale by the Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions as the Underwriters may reasonably request, and will continue such qualification in effect so long as reasonably required for distribution of any such Shares and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; provided, however, that it shall not be required to take any action that would subject it to the general service of process in any jurisdiction where it is not now so subject. (c) To deliver to the Underwriters prior to or at the Closing Date, if applicable, a properly completed and executed United States Treasury Department Form W-9 (or other form as may be required by law). (d) Each Selling Stockholder acknowledges for all purposes under this Agreement (including Section 9 hereof) that the information relating to such Selling Stockholder under the caption "Principal Stockholders and Selling Stockholder" set forth in the Prospectus has been furnished by such Selling Stockholder in writing expressly for use in the Registration Statement and the Prospectus (such information constituting the "Selling Stockholder Information"). (e) At any time during the period described in Section 5(e) hereof, if there is any change in the Selling Stockholder Information, to promptly notify you of such change. 7. Representations and Warranties of the Company. The Company --------------------------------------------- represents and warrants to each Underwriter that: (a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect; and, to the best of its knowledge, no proceedings for such purpose are pending before or threatened by the Commission. (b) (i) Each part of the Registration Statement, when such part became effective, did not contain and each such part, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Act and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph (b) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon and in conformity with (x) information relating to any 8 Underwriter furnished to the Company in writing by or on behalf of such Underwriter through you expressly for use therein or (y) any Selling Stockholder Information). The Company acknowledges for all purposes under this Agreement (including this paragraph and Section 9 hereof) that the statements in the last paragraph on the cover page and in the third paragraph under the caption "Underwriting" in the Prospectus (the "Underwriting Information") constitute the only written information furnished to the Company by or on behalf of the Underwriters expressly for use in the Registration Statement, any preliminary prospectus, or the Prospectus (or any amendment or supplement to any of them) and that the Underwriters shall not be deemed to have provided any other information (and therefore are not responsible for any such statements or omissions). The Incorporated Documents, at the time they were, or hereafter are, filed or last amended, as the case may be, with the Commission, complied and will comply in all material respects with the requirements of the Exchange Act and, when read together and with the other information in the Prospectus, at the time the Registration Statement became or becomes effective, will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were or are made, not misleading. (c) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the Act and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (d) The Company and each of its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as it is currently being conducted and to own, lease and operate its properties, and each is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified could not reasonably be expected to have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect"). (e) All of the outstanding shares of capital stock of, or other ownership interests in, each of the Company's subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by the Company, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature. (f) All the outstanding shares of capital stock of the Company (including the Shares to be sold by the Selling Stockholder) have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar 9 rights, and the Shares to be issued and sold by the Company hereunder have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided in this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive rights. (g) The authorized capital stock of the Company, including the Common Stock, conforms to the description thereof contained in or incorporated by reference into the Prospectus. (h) This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement of the Company enforceable against the Company in accordance with its terms (except as rights to indemnity and contribution hereunder may be limited by applicable law). (i) Neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws or in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture or instrument material to the conduct of the business of the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective property is bound. (j) The execution, delivery and performance of this Agreement, compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not require any consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body (except as such may be required under the securities or Blue Sky laws of the various states) and will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any of its subsidiaries or any agreement, indenture or other instrument to which it or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective property is bound, or violate or conflict with any laws, administrative regulations or rulings or court decrees applicable to the Company, any of its subsidiaries or their respective property. (k) Except as disclosed in the Registration Statement, there are no material legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any of their respective property is the subject, and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated. No contract or document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement is not so described or filed as required. (l) Neither the Company nor any of its subsidiaries has violated any foreign, federal, state or local law or regulation relating to the protection of human health and 10 safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), nor any federal or state law relating to discrimination in the hiring, promotion or pay of employees nor any applicable federal or state wages and hours laws, nor any provisions of the Employee Retirement Income Security Act or the rules and regulations promulgated thereunder, which in each case could reasonably be expected to result in any material adverse change in the business, prospects, financial condition or results of operation of the Company and its subsidiaries, taken as a whole (a "Material Adverse Change"). (m) The Company and each of its subsidiaries has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits"), including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease and operate its respective properties and to conduct its business; the Company and each of its subsidiaries has fulfilled and performed all of its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit; and such permits contain no restrictions that are materially burdensome to the Company or any of its subsidiaries. (n) In the ordinary course of its business, the Company conducts a periodic review of the effect of Environmental Laws on the business, operations and properties of the Company and its subsidiaries, in the course of which it identifies and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such review, the Company has reasonably concluded that such associated costs and liabilities could not, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect. (o) Except as disclosed in the Registration Statement or such as are not material to the business, prospects, financial condition or results of operation of the Company and its subsidiaries, taken as a whole, the Company and each of its subsidiaries has good and marketable title, free and clear of all liens, claims, encumbrances and restrictions (except liens for taxes not yet due and payable), to all property and assets described in the Registration Statement as being owned by it. All leases to which the Company or any of its subsidiaries is a party are valid and binding and no default has occurred or is continuing thereunder which could reasonably be expected to result in any Material Adverse Change, and the Company and its subsidiaries enjoy peaceful and undisturbed possession under all such leases to which any of them is a party as lessee with such exceptions as do not materially interfere with the use made or proposed to be made by the Company or such subsidiary. 11 (p) The Company and each of its subsidiaries maintains reasonably adequate insurance. (q) KPMG Peat Marwick LLP are independent public accountants with respect to the Company as required by the Act. (r) The financial statements, together with related schedules and notes, forming part of, or incorporated or deemed to be incorporated by reference in, the Registration Statement and the Prospectus (and any amendment or supplement thereto), present fairly the consolidated financial position, results of operations and changes in financial position of the Company and its subsidiaries at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes comply as to form in all material respects with the requirements of the Act and have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data set forth in or incorporated or deemed to be incorporated by reference in the Registration Statement and the Prospectus (and any amendment or supplement thereto) is, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (s) The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (t) No holder of any security of the Company has any right to require registration of shares of Common Stock or any other security of the Company. (u) The Company has complied with all provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida). (v) There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens related to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of, or other ownership interest in, the Company or any subsidiary thereof except as otherwise disclosed or incorporated by reference in the Registration Statement. (w) There is (i) no significant unfair labor practice complaint pending against the Company or any of its subsidiaries or, to the best knowledge of the Company, threatened against any of them, before the National Labor Relations Board or any state or local labor relations board, and no significant grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Company or any of its subsidiaries or, to the best knowledge of the Company, threatened against any of them, and (ii) no significant strike, labor dispute, slowdown or stoppage 12 pending against the Company or any of its subsidiaries or, to the best knowledge of the Company, threatened against it or any of its subsidiaries except for such actions specified in clause (i) or (ii) above, which, singly or in the aggregate could not reasonably be expected to have a Material Adverse Effect. (x) The Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (y) All material tax returns required to be filed by the Company and each of its subsidiaries in any jurisdiction have been filed, other than those filings being contested in good faith, and all material taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or pursuant to any assessment received by the Company or any of its subsidiaries have been paid, other than those being contested in good faith and for which adequate reserves have been provided. (z) The Company and its subsidiaries own or possess, or can acquire on reasonable terms, the copyrights, know-how (including trade secrets and other proprietary or confidential information, systems or procedures), trademarks, service marks and trade names presently employed by them in connection with the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could reasonably be expected to result in any Material Adverse Change. (aa) No bid or purchase by the Company, and no bid or purchase that could be attributed to the Company (as a result of bids or purchases by an "affiliated purchaser" within the meaning of Rule 10b-6 under the Exchange Act for or of the Common Stock, any securities of the same class or series as the Common Stock or any securities immediately convertible into or exchangeable for or that represent any right to acquire Common Stock, is now pending or in progress or will have commenced at any time prior to the completion of the distribution of the Shares. 8. Representations and Warranties of the Selling Stockholders. Each ---------------------------------------------------------- Selling Stockholder, severally and not jointly, represents and warrants to each Underwriter that: 13 (a) Such Selling Stockholder has reviewed and is familiar with the Registration Statement and the Prospectus and, to the best knowledge of such Selling Stockholder, the Prospectus (and any supplement thereto) does not (and, as of the Closing Date, will not) include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; and such Selling Stockholder is not prompted to sell the Firm Shares by any information concerning the Company that is not set forth in the Prospectus. (b) Such Selling Stockholder is the registered owner of at least the number of shares of Common Stock listed opposite such Selling Stockholder's name in Schedule II hereto. The Firm Shares to be sold by such Selling Stockholder are not subject to any liens, claims or encumbrances. (c) Upon delivery to the Underwriters pursuant to this Agreement, the Underwriters will acquire all of such Selling Stockholder's rights in the firm Shares free of any adverse claims or restrictions on transfer imposed by the Company (each within the meaning of Section 8302 of the California Uniform Commercial Code). (d) Such Selling Stockholder has, and on the Closing Date will have, full legal right, power and authority to enter into this Agreement and the Agreement between the Selling Stockholders and the Company, as Custodian (the "Custody Agreement") and to sell, assign, transfer and deliver such Shares in the manner provided herein and therein, and this Agreement and the Custody Agreement have been duly authorized, executed and delivered by such Selling Stockholder and each of this Agreement and the Custody Agreement is a valid and binding agreement of such Selling Stockholder enforceable in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by applicable law. (e) The execution, delivery and performance of this Agreement by such Selling Stockholder, and compliance by such Selling Stockholder with all the provisions hereof and the consummation of the transactions contemplated hereby will not require any consent, authorization, approval or order of any court, regulatory body (except as such may be necessary under state securities or Blue Sky laws) and will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, the declaration of trust of such Selling Stockholder, or any agreement, indenture or other instrument to which such Selling Stockholder is bound, or violate or conflict with any laws, administrative regulations or ruling or court decree applicable to such Selling Stockholder or property of such Selling Stockholder. (f) The Selling Stockholder Information does not, and will not on the Closing Date, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 14 (g) Such Selling Stockholder has not taken, and will not take, directly or indirectly, any action designed to, or which might reasonably be expected to, cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares pursuant to the distribution contemplated by this Agreement, and, other than as permitted by the Act, such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares. (h) No stamp duty or similar tax or duty is payable by or on behalf of the Underwriters in connection with the sale and delivery of the Firm Shares by such Selling Stockholder as contemplated by this Agreement. (i) Such Selling Stockholder acknowledges for all purposes under this Agreement that the Underwriting Information constitutes the only written information furnished to the Company by or on behalf of the Underwriters for use in the Registration Statement or the Prospectus (or any amendment or supplement to them) and that the Underwriters shall not be deemed to have provided any other information (and therefore are not responsible for any such statement or omission). 9. Indemnification. --------------- (a) The Company and each Selling Stockholder jointly and severally agree to indemnify and hold harmless (i) each of the Underwriters and (ii) each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) any of the Underwriters (any of the persons referred to in this clause (ii) being hereinafter referred to as a "controlling person"), and (iii) the respective officers, directors, partners, employees, representatives and agents of any of the Underwriters or any controlling person (any person referred to in clause (i), (ii) or (iii) may hereinafter be referred to as an "Indemnified Person") to the fullest extent lawful, from and against any and all losses, claims, damages, judgments, actions, costs, assessments, expenses and other liabilities (collectively, "Liabilities"), including without limitation and as incurred, reimbursement of all costs reasonably incurred in investigating, preparing, pursuing or defending any claim or action, or any investigation or proceeding by any governmental agency or body, commenced or threatened, including the reasonable fees and expenses of counsel to any Indemnified Person, directly or indirectly caused by, related to, based upon, arising out of or in connection with any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any supplement or amendment thereto), or the Prospectus (including any amendment or supplement thereto) or any preliminary prospectus, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, except insofar as such Liabilities are caused by an untrue statement or omission or alleged untrue statement or omission that is made in reliance upon and in conformity with any Underwriting Information. The Company shall notify you promptly of the institution, threat or assertion of any claim, pro- 15 ceeding (including any governmental investigation) or litigation in connection with the matters addressed by this Agreement which involves the Company or an Indemnified Person. (b) In case any action or proceeding (for all purposes of this Section 8, including any governmental investigation) shall be brought or asserted against any of the Indemnified Persons with respect to which indemnity may be sought against the Sellers (each referred to respectively in this Section 9(b) as an "indemnifying party"), such Indemnified Person promptly shall notify the indemnifying party in writing (provided that the failure to give such notice shall not relieve the indemnifying party of its obligations pursuant to this Agreement, except to the extent that such indemnifying party shall have been prejudiced in any material respect by such failure) and the Company and the Selling Stockholders, as the case may be, shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Person and payment of all fees and expenses. Any Indemnified Person shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the indemnifying party agrees to pay such fees and expenses, or (ii) the indemnifying party fails promptly to assume such defense or fails to employ counsel reasonably satisfactory to such Indemnified Person, or (iii) the named parties to any such action or proceeding (including any impleaded parties) include both such Indemnified Person and any indemnifying party or an affiliate thereof, and either (x) there may be one or more legal defenses available to such Indemnified Person that are different from or additional to those available to any indemnifying party or such affiliate or (y) a conflict may exist between such Indemnified Person and any indemnifying party or such affiliate. In the event of any of clause (i), (ii) and (iii) of the immediately preceding sentence, if such Indemnified Person notifies the indemnifying party in writing, the indemnifying party shall not have the right to assume the defense thereof and such Indemnified Person shall have the right to employ its own counsel in any such action and the reasonable fees and expenses of such counsel shall be paid, as incurred, by the indemnifying party, regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder, it being understood, however, that the indemnifying party shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for each such Indemnified Person. No indemnifying party shall be liable for any settlement of any such action or proceeding effected without its prior written consent, and the Sellers jointly and severally agree to indemnify and hold harmless any Indemnified Person from and against any Liabilities by reason of any settlement of any action effected with the written consent of the Sellers. No indemnifying party shall, without the prior written consent of each Indemnified Person, settle or compromise or consent to the entry of any judgment in or otherwise seek to terminate any pending or threatened action, claim, litigation or proceeding in respect of which 16 indemnification or contribution may be sought pursuant hereto (whether or not any Indemnified Person is a party thereto), unless such settlement, compromise, consent or termination includes an unconditional release of each Indemnified Person from all Liabilities arising out of such action, claim, litigation or proceeding. (c) Each of the Underwriters agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, the officers of the Company who sign the Registration Statement, the Selling Stockholders and any person controlling (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) either the Company or the Selling Stockholders, to the same extent as the foregoing indemnity from the Sellers to each of the Indemnified Persons, but only with respect to claims and actions based on any Underwriting Information. In case any action or proceeding (including any governmental investigation) shall be brought or asserted against any of the Sellers, any of their directors, any such officer, or any such controlling person based on the Registration Statement, the Prospectus or any preliminary prospectus in respect of which indemnity is sought against any Underwriter pursuant to the foregoing sentence, such Underwriter shall have the rights and duties given to the Company and the Selling Stockholders (except that if the Company or the Selling Stockholder shall have assumed the defense thereof, such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter), and the Company, their directors, any such officers, the Selling Stockholder and each such controlling person shall have the rights and duties given to each of the Indemnified Person by Section 9(b) above. (d) If the indemnification provided for in this Section 9 is finally determined by a court of competent jurisdiction to be unavailable to an indemnified party in respect of any Liabilities referred to herein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such Liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other hand from the offering of the Shares or (ii), if the allocation provided by clause (i), above, is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i), above, but also the relative fault of the indemnifying parties and the indemnified party, as well as any other relevant equitable considerations. The relative benefits received by the Sellers, on the one hand, and the Underwriters (and their related Indemnified Persons), on the other hand, shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Sellers bears to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the Prospectus. The relative fault of the Sellers, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact related to information supplied by the Sellers, on the one hand, or the Underwriters, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The indemnity and contribution obligations of the Sellers set forth herein shall be 17 in addition to any liability or obligation the Company or the Selling Stockholders may otherwise have to any Indemnified Person. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, judgments, liabilities or expenses referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, no Underwriter (nor any of its related Indemnified Persons) shall be required to contribute, in the aggregate, any amount in excess of the amount by which the total underwriting discount applicable to the Shares purchased by such Underwriter exceeds the amount of any damages or liabilities which such Underwriter (and its related Indemnified Persons) has otherwise been required to pay or incur by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) The provisions of this Section 9 shall not affect, as between the Company and the Selling Stockholders, any agreement which the Company and the Selling Stockholders have made or may make regarding indemnification or contribution with respect to the transactions contemplated by this Agreement. (f) Each Seller hereby designates as its authorized agent, upon which process may be served in any action, suit or proceeding which may be instituted in any state or federal court in the State of New York by any Underwriter or any person controlling an Underwriter asserting a claim for indemnification or contribution under or pursuant to this Section 9. 10. Conditions of the Underwriters' Obligations. The several ------------------------------------------- obligations of the Underwriters to purchase the Shares under this Agreement are subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Company and the Selling Stockholders contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) The Registration Statement shall have become effective not later than 5:00 P.M. on the date of this Agreement (or, if a post effective amendment is required to be filed pursuant to Rule 430A under the Act, such post effective amendment shall have become effective) and any Rule 462 Registration Statement that has been filed shall have become effective, and at the Closing Date no stop order suspending the effectiveness of 18 the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or contemplated by the Commission, every request for additional information on the part of the Commission shall have been complied with in all material respects, and no stop order suspending the sale of the Shares in any jurisdiction referred to in Section 5(g) shall have been issued and no proceeding for that purpose shall have been commenced or shall be pending or threatened. (c) No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any governmental agency, body or official which would, as of the Closing Date, prevent the sale of the Shares; no injunction, restraining order or order of any nature by a United States federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the sale of the Shares; and, except as disclosed in the Prospectus, on the Closing Date, no action, suit or proceeding shall be pending against, or, to the knowledge of the Company or the Selling Stockholder, threatened against, the Company or any of its subsidiaries or the Selling Stockholder, respectively, before any court or arbitrator or any governmental body, agency or official which, if adversely determined, would interfere with or adversely affect the sale of the Shares or could reasonably be expected to have a Material Adverse Effect, or in any manner call into question or invalidate this Agreement or the sale of the Shares contemplated hereby. (d) (i) Since the date of the latest balance sheet included or incorporated by reference in the Registration Statement and the Prospectus, there shall not have been any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, affairs or business prospects, whether or not arising in the ordinary course of business, of the Company, (ii) since the date of the latest balance sheet included or incorporated by reference in the Registration Statement and the Prospectus there shall not have been any change, or any development involving a prospective material adverse change, in the capital stock or in the long-term debt of the Company from that set forth or incorporated by reference in the Registration Statement and Prospectus, (iii) the Company and its subsidiaries shall have no liability or obligation, direct or contingent, which is material to the Company and its subsidiaries, taken as a whole, other than those reflected or incorporated by reference in the Registration Statement and the Prospectus and (iv) on the Closing Date you shall have received a certificate dated the Closing Date, signed by the Chief Executive Officer and by the Chief Financial Officer of the Company, confirming the matters set forth in paragraphs (a), (b), (c), (d)(i), (d)(ii) and (d)(iii) of this Section 9. (e) You shall have received a certificate of each Selling Stockholder, dated the Closing Date, confirming the matters set forth in paragraphs (a), (b), (c), (d), (e), (f) and (g) of Section 8 of this Agreement and such other matters as counsel for the Underwriters shall reasonably request. 19 (f) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of Gibson Dunn & Crutcher LLP, counsel to the Company and the Selling Stockholders to the effect that: (i) the Company and each of its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority required to carry on its business as it is currently being conducted and to own, lease and operate its properties; (ii) all of the outstanding shares of capital stock of, or other ownership interests in, each of the Company's subsidiaries have been duly and validly authorized and issued and are fully paid and non-assessable, and are owned by the Company, to the best of such counsel's knowledge after due inquiry, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature; (iii) the shares of Common Stock to be sold by the Company have been duly authorized and, upon delivery to the Underwriters in accordance with this Agreement will be, validly issued and fully paid and non-assessable and not subject to any preemptive rights; (iv) the authorized capital stock of the Company, including the Common Stock, conforms as to legal matters to the description thereof contained in the Prospectus; (v) the statements under the captions "Business-Regulation and Legal Proceedings," "Description of Capital Stock" and "Underwriting" in the Prospectus and Item 15 of Part II of the Registration insofar as such statements constitute a summary of legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings; (vi) this Agreement has been duly authorized, executed and delivered by the Company; (vii) the Registration Statement has become effective under the Act and, to the knowledge of such counsel, after due inquiry, no stop order suspending its effectiveness has been issued and no proceedings for that purpose are pending before or contemplated by the Commission; 20 (viii) the Company has full power and authority to execute, deliver and perform this Agreement; each document filed pursuant to the Exchange Act and incorporated by reference in the Prospectus, at the time it was filed or last amended (except for financial statements, the notes thereto and related schedules and other financial or accounting data included or incorporated by reference therein or omitted therefrom, as to which such counsel need express no opinion), complied as to form to the applicable requirements of the Exchange Act in all material respects; (ix) the execution, delivery and performance of this Agreement and compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not require any consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body (except such as may be required under the federal securities laws or the Blue Sky laws of the various states) and will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, (A) the charter or by-laws of the Company or any of its subsidiaries or (B) any exhibit to the Registration Statement or listed as an exhibit to the Company's reports filed since January 1, 1996 under Section 12 of the Exchange Act, or (C) violate or conflict with any laws, administrative regulations or rulings or court decrees that are of the type that are, in the experience of such counsel, applicable to the Company or any of its subsidiaries or their respective properties and transactions of the type contemplated hereby (other than the federal securities laws or the Blue Sky laws of the various states) except in the case of (B) or (C), for defaults or conflicts which could not reasonably be expected to have a Material Adverse Effect; (x) such counsel does not know of any legal or governmental proceeding pending or threatened to which the Company or any of its subsidiaries is a party or to which any of their respective property is subject which is required to be described in the Registration Statement or the Prospectus and is not so described, or of any contract or other document which is required to be described in the Registration Statement or the Prospectus or is required to be filed as an exhibit to the Registration Statement which is not described or filed as required; (xi) the Company and each of its subsidiaries has such permits, licenses, franchises and authorizations of government or regulatory authorities ("permits"), including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease and operate its respective properties and to conduct is business in the manner described in the Prospectus; to the best of such counsel's knowledge, after due inquiry, the Company and each of its subsidiaries has fulfilled and performed all of its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material 21 impairment of the rights of the holder of any such permit, subject in each case to such qualification as may be set forth in the Prospectus; and such permits contain no restrictions that are materially burdensome to the Company or any of its subsidiaries; (xii) to the best of such counsel's knowledge, no holder of any security of the Company other than the Selling Stockholder has any right to require registration of shares of Common Stock or any other security of the Company; (xiii) the Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended; (xiv) the Shares to be sold by the Selling Stockholders hereunder have been duly authorized and validly issued and are fully paid and non-assessable; and, to such counsel's knowledge, after due inquiry, the sale of Shares by the Selling Stockholder hereunder is not subject to any preemptive or similar rights. Each of the Firm Shares to be sold by the Selling Stockholders is a "certificated security" in "registered form" within the meaning of Sections 8102(1)(a) and 8102(1)(d) of the California Commercial Code and based solely on such counsel's review of the Company's stock books such Selling Stockholder was the registered owner of the Firm Shares; (xv) this Agreement has been duly authorized, executed and delivered by each Selling Stockholder; (xvi) Assuming the Underwriters acquired their interest in the Firm Shares to be sold by the Selling Stockholders (the "Secondary Securities"), in good faith without notice of any adverse claims, upon delivery of the Secondary Securities indorsed in blank to the Underwriters in the State of California, the Underwriters will acquire all of the Selling Stockholders' rights in the Secondary Securities free of any adverse claims or restrictions on transfer imposed by the Company (each within the meaning of Section 8302 of the California Uniform Commercial Code); (xvii) the Custody Agreement has been duly authorized, executed and delivered by each Selling Stockholder and constitutes a legal, valid and binding agreement of each Selling Stockholder, enforceable in accordance with its terms, except that enforcement thereof may be limited by: (i) bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity (regardless of whether enforceability considered in a proceeding at law or in equity). 22 (xviii) neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws and, to the best of such counsel's knowledge, neither the Company nor any of its subsidiaries is in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture or instrument material to the conduct of the business of the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective property is bound; (xix) neither the sale of the Shares nor the consummation of the transactions contemplated by this Agreement will conflict with, result in a breach or violation of, or constitute a default under (A) the terms of any indenture or other agreement or instrument to which either Selling Stockholder is a party or bound, (B) any statute, rule or regulation to which the Selling Stockholder is subject, or to which any of the properties of either of the Selling Stockholders is subject, or (C) any order of any court or governmental agency or body having jurisdiction over either Selling Stockholder or any of their respective properties, except that such counsel need express no opinion as to state securities or Blue Sky laws; and (xx) neither the sale of the Shares nor the consummation of the transactions contemplated by this Agreement will violate any of the provisions of the declaration of trust of either of the Selling Stockholders as in effect on the date of the opinion. In addition, such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company and the Selling Stockholders, representatives of the independent public accountants for the Company, representatives of the Underwriters and counsel for the Underwriters at which the contents of the Registration Statement, the Prospectus and related matters were discussed and, although such counsel is not passing upon, and does not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus and has made no independent check or verification thereof (except for (iv) and (v) above), during the course of such participation on the basis of the foregoing, no facts have come to such counsel's attention that caused such counsel to believe that the Registration Statement, at the time such Registration Statement or any post-effective amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus as amended or supplemented, if applicable, as of its date and the Closing Date, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances 23 under which they were made, not misleading. Such counsel need express no belief with respect to the financial statements, the notes thereto and related schedules and other financial and accounting data included in, or omitted from, the Registration Statement or the Prospectus. (g) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of C. Michael Carter, Esquire, the Company's General Counsel, to the effect that: (i) all of the outstanding shares of Common Stock (including the Shares to be sold by the Selling Stockholders) have been duly authorized and validly issued and are fully paid and non-assessable and not subject to any preemptive or similar rights; (ii) the Company and each of its subsidiaries is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect; (iii) to the best of his knowledge, after due inquiry, there are no contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or the Incorporated Documents or to be filed as exhibits to the Registration Statement or to the Incorporated Documents other than those so described or referred to therein or so filed as exhibits thereto and that the descriptions thereof insofar as they purport to summarize certain provisions thereof are in all material respects accurate summaries thereof and no default exists in the due performance of any obligation, agreement, covenant or condition exists in any such contract, indenture, mortgage, loan agreement, note, lease or other instrument so described, referred to or filed, except for defaults which could not reasonably be expected to have a Material Adverse Effect; (iv) to the best of his knowledge, after due inquiry, there are no legal or governmental proceedings pending or threatened which are required to be disclosed in the Registration Statement or the Prospectus, other than those disclosed therein, and all pending legal or governmental proceedings to which the Company or its subsidiaries is a party or to which any of the property is subject which are not described in the Registration Statement or Prospectus, including ordinary routine litigation incidental to their business, are, considered in the aggregate, not material to the financial condition of the Company; and (v) the information in the Prospectus under the caption "Business-Regulation and Legal Proceedings" to the extent that it constitutes 24 matters of law, summaries of legal matters, documents or proceedings or legal conclusions, has been reviewed by him and is correct in all material respects. In addition, such counsel shall state that he or lawyers under his supervision have participated in conferences with officers and other representatives of the Company and the Selling Stockholders, representatives of the independent public accountants for the Company, representatives of the Underwriters and counsel for the Underwriters at which the contents of the Registration Statement, the Prospectus and related matters were discussed and, although such counsel is not passing upon, and does not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus and has made no independent check or verification thereof (except for (v) above), during the course of such participation on the basis of the foregoing, no facts have come to his attention that caused such counsel to believe that the Registration Statement, at the time such Registration Statement or any post-effective amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus as amended or supplemented, if applicable, as of its date and the Closing Date, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Such counsel need express no belief with respect to the financial statements, the notes thereto and related schedules and other financial and accounting data included in, or omitted from, the Registration Statement or the Prospectus. (h) You shall have received on the Closing Date an opinion, dated the Closing Date, of Skadden, Arps, Slate, Meagher & Flom, counsel for the Underwriters, in form and substance reasonably satisfactory to you. (i) You shall have received letters on and as of the date hereof as well as on and as of the Closing Date, in form and substance satisfactory to you, from KPMG Peat Marwick LLP, independent public accountants, with respect to the financial statements and certain financial information contained or incorporated by reference in the Registration Statement and the Prospectus and substantially in the form and substance of the letter delivered to you by KPMG Peat Marwick LLP on the date of this Agreement. (j) The Company and the Selling Stockholder shall not have failed in any material respect at or prior to the Closing Date to perform or comply with any of the agreements herein contained and required to be performed or complied with by the Company at or prior to the Closing Date. 25 (k) Prior to the Closing Date, the Company and the Selling Stockholder shall have furnished to you such further information, certificates and documents as you may reasonably request. (l) On or prior to the Closing Date, the Company shall have given notice of the redemption of the Senior Notes pursuant to Section 2.5 of the Note Purchase Agreement dated June 14, 1990 among the Company and the purchasers named therein. (m) The several obligations of the Underwriters to purchase any Additional Shares hereunder are subject to satisfaction on and as of each Option Closing Date of the conditions set forth in paragraphs (a) through (j) except that the opinions called for in paragraphs (f), (g) and (h) and the letters referred to in paragraph (i) shall be revised to reflect the sale of the Additional Shares. 11. Effective Date of Agreement and Termination. This Agreement shall ------------------------------------------- become effective upon the later of (i) execution of this Agreement and (ii) when notification of the effectiveness of the Registration Statement (or, if a post effective amendment is required to be filed pursuant to Rule 430A under the Act, such post effective amendment) has been released by the Commission. This Agreement may be terminated at any time prior to the Closing Date by you by written notice to the Company and the Selling Stockholders if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any adverse change or development involving a prospective adverse change in the condition, financial or otherwise, of the Company or any of its subsidiaries or the earnings, affairs, or business prospects of the Company or any of its subsidiaries, whether or not arising in the ordinary course of business, which would, in DLJ's judgment, make it impracticable or inadvisable to market the Shares on the terms and in the manner contemplated in the Prospectus or to enforce contracts for the sale of the Shares, (ii) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in your judgment, is material and adverse and would, in DLJ's judgment, make it impracticable or inadvisable to market the Shares on the terms and in the manner contemplated in the Prospectus or to enforce contracts for the sale of the Shares, (iii) the suspension or material limitation of trading in securities on the NYSE, the American Stock Exchange or the NNM or limitation on prices for securities on any such exchange or the NNM, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in DLJ's judgment materially and adversely affects, or will materially and adversely affect, the business or operations of the Company or any subsidiary of the Company, (v) the declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in DLJ's judgment has a material adverse effect on the financial markets in the United States. 26 If on the Closing Date or any Option Closing Date, as the case may be, any of the Underwriters shall fail or refuse to purchase Firm Shares or Additional Shares, as the case may be, which it has agreed to purchase hereunder on such date, and the aggregate amount of Firm Shares or Additional Shares, as the case may be, that such defaulting Underwriters agreed but failed or refused to purchase does not exceed 10% of the total number of Shares to be purchased on such date by all of the Underwriters, each non-defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I hereto bears to the total number of Firm Shares which all the non-defaulting Underwriters, as the case may be, have agreed to purchase, or in such other proportion as you may specify, to purchase the Firm Shares or Additional Shares, as the case may be, that such defaulting Underwriter or Underwriters, as the case may be, agreed but failed or refused to purchase on such date; provided that in no event shall the number of Firm Shares or Additional Shares, as the case may be, that any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 11 by an amount in excess of one-ninth of such number of Firm Shares or Additional Shares, as the case may be, without the written consent of such Underwriter. If, on the Closing Date or on the Option Closing Date, as the case may be, any of the Underwriters shall fail or refuse to purchase the Firm Shares or the Additional Shares, as the case may be, and the aggregate number of Shares with respect to such default exceeds 10% of such total number of the Shares to be purchased on such date by all Underwriters and arrangements satisfactory to the other Underwriters, the Selling Stockholder and the Company for the purchase of such Shares are not made within 48 hours after such default, this Agreement shall terminate without liability on the part of the non-defaulting Underwriters, the Selling Stockholder or the Company, except as otherwise provided in this Section 11. In any such case that does not result in termination of this Agreement, the Underwriters, the Selling Stockholder or the Company may postpone the Closing Date or the Option Closing Date, as the case may be, for not longer than seven (7) days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve a defaulting Underwriter from liability in respect of any default by any such Underwriter under this Agreement. 12. Miscellaneous. Notices given pursuant to any provision of this ------------- Agreement shall be addressed as follows: (a) if to the Company, to Pinkerton's, Inc., 15910 Ventura Boulevard, Encino, California 91436, Attention: C. Michael Carter, with a copy to Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, California 90071, Attention: Andrew E. Bogen, (b) if to any Underwriter or to you, c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, with a copy to Skadden, Arps, Slate, Meagher & Flom, 300 South Grand Avenue, Suite 3400, Los Angeles, California 90071, Attention: Nicholas P. Saggese, and (c) if to either Selling Stockholder, to Thomas W. Wathen, 15910 Ventura Boulevard, Suite 900, Encino, California 91436, or in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company, the Selling Stockholders, their respective officers and 27 directors and of the Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter or by or on behalf of the Company or the Selling Stockholders, the officers or directors of the Company or the Selling Stockholders or any controlling person of the Company or the Selling Stockholder, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement. If this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Company or either of the Selling Stockholders to comply with the terms or to fulfill any of the conditions of this Agreement, the party whose failure or refusal to comply with such terms or fulfill such conditions shall reimburse the Underwriters for all out-of-pocket expenses (including the fees and disbursements of counsel) reasonably incurred by them. Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Selling Stockholders, the Underwriters, any indemnified party referred to herein and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Shares from any of the several Underwriters merely because of such purchase. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK AS APPLIED TO CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE COMPANY AND EACH SELLING STOCKHOLDER HEREBY IRREVOCABLY SUBMITS TO THE SOLE AND EXCLUSIVE JURISDICTION OF THE FEDERAL AND NEW YORK STATE COURTS LOCATED IN THE BOROUGH OF MANHATTAN, THE CITY OF NEW YORK IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING RELATED TO THIS AGREEMENT OR ANY OF THE MATTERS CONTEMPLATED HEREBY, IRREVOCABLY WAIVES ANY DEFENSE OF LACK OF PERSONAL JURISDICTION AND IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. EACH OF THE COMPANY AND THE SELLING STOCKHOLDERS IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. Any determination that any provision of this Agreement may be, or is, unenforceable shall not affect the enforceability of the remainder of this Agreement. 28 This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. 29 Please confirm that the foregoing correctly sets forth the agreement among the Company, the Selling Stockholders and the several Underwriters. Very truly yours, PINKERTON'S, INC. By: _______________________________ Name: Title: THE THOMAS W. WATHEN TRUST By: _______________________________ Name: Thomas W. Wathen Title: Trustee THOMAS W. WATHEN CHARITABLE REMAINDER UNITRUST By: _______________________________ Name: Thomas W. Wathen Title: Trustee The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION PRUDENTIAL SECURITIES INCORPORATED SCHRODER, WERTHEIM & CO. INCORPORATED Acting on severally on behalf of themselves and as representatives of the several Underwriters named in Schedule I hereto: By: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: _______________________________ Name: Mark W. Lannigan Title: Managing Director SCHEDULE I ----------
Number of Firm Shares U.S. Underwriters to be Purchased - ----------------- --------------- Donaldson, Lufkin & Jenrette Securities Corporation............................ Prudential Securities Incorporated.............................................. Schroder Wertheim & Co. Incorporated............................................ Total........................................................2,360,000 =========
SCHEDULE II -----------
Number of Firm Shares Selling Stockholders to be Sold - -------------------- ---------- The Thomas W. Wathen Trust............................................ 615,518 Thomas W. Wathen Charitable Remainder Unitrust........................ 44,482 ------- Total........................................................ 660,000 =======
EX-5 3 OPINION OF C. MICHAEL CARTER, ESQ. WORLD HEADQUARTERS 15910 VENTURA BOULEVARD SUITE 900 ENCINO, CA 91436-3095 FACSIMILE 818-380-8445 TELEPHONE 818-380-8800 DIRECT 818-380-8846 C. MICHAEL CARTER EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL & CORPORATE SECRETARY PINKERTON(R) SECURITY & INVESTIGATION SERVICES July 1, 1996 Pinkerton's, Inc. 15910 Ventura Boulevard, Suite 900 Encino, California 91436-2810 Re: Pinkerton's, Inc.--Form S-3 Registration Statement (No. 333-6573) ----------------------------------------------------------------- Ladies and Gentlemen: I am Executive Vice President, General Counsel and Corporate Secretary of Pinkerton's, Inc., a Delaware corporation (the "Company"), and as such I have been requested to render this opinion in connection with the registration by the Company of 2,714,000 shares of the Company's Common Stock (the "Shares") on Form S-3 Registration Statement No. 333-6573 (the "Registration Statement") under the Securities Act of 1933, as amended. Of the 2,714,000 Shares, 1,700,000 Shares are being sold by the Company, 660,000 shares are being sold by a stockholder of the Company (the "Selling Stockholder") and 354,000 Shares are subject to an overallotment option granted to the Underwriters (as defined below) by the Company. I understand that the Company and the Selling Stockholder propose to sell the Shares to a group of underwriters (the "Underwriters") represented by Donaldson, Lufkin & Jenrette Securities Corporation, Prudential Securities Incorporated and Schroder Wertheim & Co. Incorporated, for offering to the public. On the basis of such investigation as I have deemed necessary, I am of the opinion that the Shares have been duly authorized and, when issued and sold or, in the case of outstanding shares, sold in accordance with the terms of the Registration Statement and an underwriting agreement among the Company, the Selling Stockholder and the Underwriters substantially in the form filed as an exhibit to the Registration Statement, will be legally issued, fully paid and nonassessable. EX-23.2 4 CONSENT OF KPMG PEAT MARWICK LLP DATED 7-2-96 EXHIBIT 23.2 CONSENT OF KPMG PEAT MARWICK LLP We consent to the use of our report included herein and to the reference to our Firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP _____________________________________ KPMG Peat Marwick LLP Los Angeles, California July 1, 1996 -----END PRIVACY-ENHANCED MESSAGE-----