FINANCIAL REVIEW
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
MARKET FOR THE CORPORATION'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On October 29, 1994, the corporation declared a 25% stock dividend, effected in
the form of a stock split (the 25% stock dividend), paid on January 9, 1995 to
stockholders of record at the close of business on December 22, 1994. The 25%
stock dividend was paid in series B common stock to holders of the corporation's
series A and B shares. The accompanying consolidated financial statements have
been retroactively restated to reflect the 25% stock dividend.
Regular quarterly dividends of $.072 per share (adjusted for the 25% stock
dividend) on both its outstanding series A and B common stock were declared and
paid for each of the four quarters of fiscal 1994 and 1993. The corporation
intends to declare future quarterly dividends on series A and B common stock,
depending on its earnings, financial condition, capital requirements and other
relevant factors.
The ensuing table shows the high and low prices for the corporation's series A
and B common stock, as reported on the New York Stock Exchange, for each
quarterly period during fiscal 1994 and 1993. The prices shown in the table have
been rounded to the nearest 1/8th and reflect the 25% stock dividend. The
approximate number of record holders of series A and B common stock, as of
February 15, 1995, was 915 and 963, respectively.
Fiscal 1994 Fiscal 1993
- ------------------------------------------------------------------------------------------------------------------------
Series A Series B Series A Series B
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Quarter High Low High Low High Low High Low
- ------------------------------------------------------------------------------------------------------------------------
First $ 11-1/2 $ 9-7/8 $ 9-1/4 $ 8 $ 13-1/4 $ 10-3/4 $ 11-3/4 $ 10-1/4
Second 12-1/8 10-1/8 9-3/8 7-1/2 11-3/4 8-7/8 11-3/8 8-5/8
Third 13 11 11-1/4 8-1/4 11-3/8 9-0/0 10-1/2 8-1/4
Fourth 12-7/8 9-1/8 11-1/8 8-1/2 11-5/8 9-1/4 9-5/8 7-5/8
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- 21 -
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
The selected consolidated financial data should be read in conjunction with the
corporation's consolidated financial statements and the notes thereto.
FISCAL YEARS ENDED: (a) 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Revenues $ 747,666 $ 664,160
Operating income 15,292 4,496
Income before income taxes 3,002 3,371
Income (loss) before extraordinary charge and cumulative effect of accounting change 2,272 3,609
Extraordinary charge - early extinguishment of debt, net of income taxes (887) (1,444)
Cumulative effect of accounting change for income taxes -- --
Net income (loss) 1,385 2,165
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE: (b)
Income (loss) before extraordinary charge and cumulative effect of accounting change $ .24 $ .37
Extraordinary charge - early extinguishment of debt, net of income taxes (.10) (.15)
Cumulative effect of accounting change for income taxes -- --
Net income (loss) $ .14 $ .22
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CASH DIVIDENDS PER SHARE OF COMMON STOCK: (b)
Regular quarterly dividends $ .29 $ .29
Special dividend -- --
Total dividends $ .29 $ .29
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION:
Working capital $ 72,075 $ 56,163
Total assets 212,757 211,297
Long-term debt 38,991 57,484
Total debt 42,756 67,940
Shareholders' equity 57,459 47,362
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Fiscal years 1992 and 1987 included 53 weeks.
(b) Restated to reflect a 25% stock dividend declared during fiscal 1994 and to
reflect a 100% stock dividend, effected in the form of a stock split,
declared during fiscal 1992.
- 22 -
1992 1991 1990 1989 1988 1987 1986 1985 1984
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$ 630,320 $ 572,527 $ 521,191 $ 462,181 $ 400,996 $ 381,972 $ 328,795 $ 308,219 $ 282,269
3,367 13,859 12,097 10,225 5,334 6,032 1,680 7,536 8,638
1,588 11,867 10,664 8,524 7,382 7,915 3,247 10,026 302
1,137 7,721 6,963 5,874 5,195 5,660 2,418 6,779 (1,804)
-- -- -- -- -- -- -- -- --
7,370 -- -- -- -- -- -- -- --
8,507 7,721 6,963 5,874 5,195 5,660 2,418 6,779 (1,804)
- ---------------------------------------------------------------------------------------------------------------------------------
$ .12 $ .80 $ .72 $ .61 $ .54 $ .58 $ .25 $ .70 $ (.18)
-- -- -- -- -- -- -- -- --
.76 -- -- -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
$ .88 $ .80 $ .72 $ .61 $ .54 $ .58 $ .25 $ .70 $ (.18)
- ---------------------------------------------------------------------------------------------------------------------------------
$ .25 $ .24 $ .24 $ .24 $ .24 $ .24 $ .24 $ .24 $ .24
-- -- -- -- 1.20 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
$ .25 $ .24 $ .24 $ .24 $ 1.44 $ .24 $ .24 $ .24 $ .24
- ---------------------------------------------------------------------------------------------------------------------------------
$ 56,932 $ 48,599 $ 42,413 $ 40,635 $ 38,461 $ 35,588 $ 31,572 $ 21,904 $ 8,007
192,236 172,093 164,085 157,681 150,318 130,439 115,930 111,314 103,734
63,260 46,920 46,850 48,500 45,558 10,600 8,400 14,150 9,500
63,990 47,650 46,850 51,325 47,058 10,600 18,400 24,150 19,500
47,587 42,847 37,865 33,616 30,528 39,653 36,191 36,129 31,682
- ---------------------------------------------------------------------------------------------------------------------------------
- 23 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(TABULAR INFORMATION: IN THOUSANDS)
FINANCIAL CONDITION
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents amounted to $13.8 million at January 1, 1995, or an
increase of $6 million from the end of 1993. Net cash generated by operating
activities was $13 million in 1994 and exceeded 1993 by $7.4 million. Generally,
the corporation has generated sufficient cash from operations to finance normal
growth.
Cash provided by investing activities amounted to $24.6 million and included
$14.0 million as a result of the reduction in marketable securities of the
captive reinsurance subsidiary and the $17.6 million proceeds from the sale of a
minority ownership (27%) in Wackenhut Corrections Corporation (WCC), a
subsidiary of the corporation. Capital expenditures of $5.1 million partially
offset these increases.
Funds generated by operating and investing activities were used principally by
the corporation to payoff the senior notes and to reduce bank borrowings. Cash
dividends paid amounted to $2.8 million.
Current cash requirements consist of amounts needed for capital assets, working
capital related to increased revenue from corporate growth, the renovation or
construction of correctional facilities, possible acquisitions and the payment
of dividends. Cash requirements will be met from internally generated funds and
additional borrowings as necessary.
Management continues to pursue major contracts, to expand core business, and
pursue major contracts to provide security to detention centers and construct
detention facilities. These contracts may require substantial initial cash
outlays, which are partially or fully recoverable over the original term of the
contract.
As described in more detail in the Notes to Financial Statements, the
corporation and WCC entered into new credit agreements with banks that provide
$75 million for borrowings and the issuance of letters of credit. In addition,
subsequent to year end, the corporation entered into accounts receivable
securitization agreements with two financial institutions to sell an undivided
interest in a defined pool of trade accounts receivable up to a maximum of $40
million. In January 1995, the corporation prepaid the outstanding balance on the
first mortgage note on the headquarters building with proceeds from the
securitization of accounts receivable.
As a result of the debt restructuring and the initial public offering of WCC,
the corporation significantly increased its borrowing capacity and reduced the
ratio of total debt to total capital to 42% as of year-end 1994.
Management is unaware of any trends or events that are likely to result in
material changes in the liquidity of the corporation other than those factors
mentioned above.
RESULTS OF OPERATIONS
SIGNIFICANT TRENDS
During 1994, operating income increased by $10.8 million, in spite of increased
competitive pressures and reduced profit margins in the traditional guard
business. Strategic decisions made in previous years to diversify into the
corrections business and to pursue national security service contracts were
major contributing factors to the increase in operating income. In addition, the
unprofitable businesses that were discontinued in 1993 contributed to this
turnaround. The downsizing of defense business continued to impact revenue, but
to date has not affected profit margins. The effort to diversify government
business will continue in 1995.
Competitive pressures on billing rates of security services and reductions in
Department of Energy business are expected to continue. Increases in the cost of
workers' compensation, liability and health insurance have continued. In
addition, since the majority of the corporation's business is labor-intensive,
increases in state and federal wage requirements could have an impact on the
corporation's results of operations.
WCC increased revenues to $105.5 million and operating profits to $4.4 million
in 1994. The growth in the corrections business has been significant and should
continue to be a major factor in the overall performance of the corporation in
the future. In 1994, WCC won ten major contracts that will result in annual
operating revenues of $105 million and one-time construction and consulting fees
of $80 million in 1995 and 1996.
The restructuring of the corporation's debt was started in 1994 and finalized
early in 1995. This restructuring increased the corporation's debt capacity and
is expected to reduce interest expense in 1995. Management's decision to sell
the corporation's headquarters building in Coral Gables and move to a more
efficient building in a less expensive location should result in reduced annual
operating costs. Proceeds from the sale of the headquarters building will make
it possible for the corporation to further reduce debt and interest expense.
PERIOD-TO-PERIOD COMPARISONS (1994 VERSUS 1993)
Change Change
1994 (vs. 1993) 1993 (vs. 1992)
----------------------------------------
REVENUES $ 747,666 13% $ 664,160 5%
----------------------------------------
Consolidated revenues increased $83.5 million (13%) in 1994 over the prior year,
compared with revenue growth of 5% in 1993. The revenue growth of the
corporation for 1994 includes $42.7 million of WCC and $37.6 million of the
Security Services Division. Revenues from contracts with the Department of
Energy (DOE) decreased $11.0 million, while the International Group recorded an
increase in revenues of $11.0 million over the previous year, due principally to
growth in Central and South America.
- 24 -
The growth in 1994 revenues of WCC reflected the consolidation of Australasian
Correctional Management Pty., Ltd., (ACM), with revenues of $23.1 million. WCC
recorded a total increase in facility management revenues of $24.0 million,
including ACM. In addition, construction and design revenues increased fourfold
to $23.2 million during fiscal 1994 with revenues from the construction of three
facilities.
The increase in Security Services Division revenues, which represent the more
traditional line of business of the corporation, was largely due to the success
in obtaining national contracts with major corporations in the second half of
1993 and in 1994. In addition, the division was awarded a $34.7 million contract
by the State of Hawaii to supply security at eight airports in August 1994.
Revenues of Wackenhut Services were $8.1 million lower in 1994 than in 1993 as a
result of reductions in manpower requirements by the Department of Energy.
Contracts with the Department of Energy are typically cost reimbursable
contracts for which the division can earn award fees, based on performance
factors. Although award fees have not been reduced significantly, further
reductions in revenues could impact profit contribution from these contracts. In
order to compensate for the decreased DOE revenues, the division has expanded
the scope of its services and is actively pursuing contracts from other
governmental authorities and departments.
Change Change
1994 (vs. 1993) 1993 (vs. 1992)
----------------------------------------
PAYROLL AND RELATED
TAXES $538,297 10% $491,408 5%
----------------------------------------
% of Revenues 72% 74%
----------------------------------------
OTHER OPERATING
EXPENSES $194,077 17% $166,530 5%
----------------------------------------
% of Revenues 26% 25%
----------------------------------------
NON-RECURRING
CHARGES -- -- $1,726 --
----------------------------------------
% of Revenues -- .3%
----------------------------------------
The increase in labor costs of $46.9 million (10%) and other operating expenses
of $27.6 million (17%) reflected the growth in business in Security Services and
WCC facility management. Furthermore, pass-through construction costs of WCC
increased $17.5 million in 1994 compared to 1993. The total increase in other
operating expenses was partially offset by a decrease in underwriting losses of
the casualty reinsurance subsidiary of $4.0 million.
Change Change
1994 (vs. 1993) 1993 (vs. 1992)
----------------------------------------
OPERATING INCOME $15,292 240% $4,496 34%
----------------------------------------
% of Revenues 2% .7%
Operating income was $15.3 million, or 2% of revenues in 1994, compared to $4.5
million, or 0.7% of revenues in 1993. Several factors contributed to this
significant increase. First, the increase in Security Services revenues made a
major contribution to operating income, in spite of reduced profit margins.
Second, excellent ratings at DOE facilities increased operating income due to
higher award fees. The Wackenhut Monitoring Systems and Wackenhut Applied
Technologies Center Divisions, which were sold or discontinued in 1993, had
combined operating losses of approximately $2 million in that year, and
underwriting losses of the casualty reinsurance subsidiary decreased $4 million
in fiscal 1994. And in 1993, the corporation also recorded a $1.7 million non-
recurring charge to operating income. In addition, in 1994 WCC reported
operating income of $4.4 million, including the effect of the consolidation of
ACM, which represented $2.3 million.
Total other expense (net) of $12.3 million in 1994 resulted mainly from three
factors. First, interest expense amounted to $5.1 million and exceeded the
previous year by $874,000. Second, the liquidation of investments of the captive
reinsurance subsidiary resulted in lower interest and investment income ($1.6
million); however, the positive effect of this transaction on earnings was not
fully realized in 1994, but should be a factor in 1995. Finally, in the fourth
quarter of 1994, the carrying value of the headquarters building was written
down to estimated realizable value and a charge of $8.7 million was recognized
as a result of management's decision to sell the facility and relocate its
corporate headquarters.
Change Change
1994 (vs. 1993) 1993 (vs. 1992)
----------------------------------------
INCOME BEFORE INCOME
TAXES $3,002 (11)% $3,371 112%
----------------------------------------
% of Revenues .4% .5%
----------------------------------------
NET INCOME $1,385 (36)% $2,165 (75)%
----------------------------------------
% of Revenues .2% .3%
----------------------------------------
Income before income taxes and extraordinary charge was $3 million for fiscal
1994, compared with $3.4 million in 1993. The provision for income taxes was
$17,000, due to partial utilization of capital loss carryforwards, targeted jobs
tax credits and tax exempt interest income of the captive reinsurance
subsidiary. The effective income tax rate was 14% in 1993 due to similar
factors, and a favorable federal income tax adjustment of $637,000 that resulted
from a revenue agent's examination for the years 1980 to 1986.
Minority interest expense (net of income taxes) increased $637,000 reflecting
the sale of a minority interest (27%) in WCC. Equity income of foreign
affiliates (net of income taxes) decreased $799,000 mainly as a result of the
consolidation of ACM in 1994.
Income before extraordinary charge was $2.3 million in 1994 versus $3.6 million
the year before. In 1994, the corporation prepaid the second senior note to an
insurance company and recognized an extraordinary charge for the early
extinguishment of debt in the amount of $887,000 (net of income taxes). The
corporation also recognized a $1.4 million extraordinary charge (net of income
taxes) for the early extinguishment of the first senior note in 1993.
Net income was $1.4 million in 1994, compared with $2.2 million in 1993.
- 25 -
MANAGEMENT'S SISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PERIOD-TO-PERIOD COMPARISONS (1993 VERSUS 1992)
Consolidated revenues increased $33.8 million (5.4%) in 1993 versus 1992. This
increase is attributed principally to the Domestic Operations Group which
reported an increase of $31.7 million. The increases in revenues of the Domestic
Operations and International Operations Groups offset a decrease of
approximately $5.8 million in revenues of the Government Services Group.
For the most part the increase in revenues of the Domestic Operations Group was
in traditional security services. The Security Services Division, which was
successful in obtaining contracts with several major national clients and
providing emergency strike security services to American Airlines, reported an
increase of $24.4 million in revenues over 1992. In addition, the Food Services
Division reported an increase in revenues of $5.6 million, primarily from
contracts acquired in the third quarter of 1992.
International Group revenues increased $9.1 million, principally in South
America, but the group is experiencing increased competition on all continents.
The group continues to expand into Eastern Europe, the Far East and Africa and
to diversify into other security-related businesses.
Revenues of the Government Group were down as a result of the decline of
Department of Energy (DOE) business. It is believed that DOE has contracted as
much as it is expected to, so revenues should stabilize for 1994. Revenues of
the Corrections and Education Divisions were stable, in total, when compared to
1992; however, 1992 included $14.4 million in pass-through construction revenues
of the Corrections Division. Both the Corrections and Education Divisions
continued to actively pursue additional contracts in 1993.
The increases in labor costs and other operating expenses reflected the growth
in business which resulted from new security services contracts. In addition,
pass-through expenses associated with emergency security services in connection
with the American Airlines strike and the increase in operating expenses of food
service contracts represented approximately $4.8 million of the increase in
other operating expenses. Other operating expenses of the Monitoring Division
amounted to $2.3 million in 1993 and exceeded the same costs in 1992 by $1.5
million.
Underwriting losses of the casualty reinsurance subsidiary, included in other
operating expenses, amounted to $4.6 million in 1993, or an increase of
approximately $456,000 over 1992. Underwriting losses for both 1993 and 1992
have been high due to increases in workers' compensation and general liability
claims and an increase in loss reserves based on actuarial computations. In
response to the increase in insurance claims, management has instituted new
programs to control the severity and frequency of these claims.
In the fourth quarter of 1993 the corporation recognized non-recurring charges
of $1.7 million. A significant portion of these charges was due to a $791,000
decrease in the value of guard contracts acquired in 1991.
Operating income was $4.5 million in 1993, or 0.7% of revenues, after non-
recurring charges of $1.7 million and insurance underwriting losses of $4.6
million. In addition, combined operating losses of Wackenhut Applied
Technologies Center, Inc. and Wackenhut Monitoring Systems, Inc. amounted to
approximately $2 million in 1993. Similarly, operating income was $3.4 million,
or 0.5% of revenues in 1992 due to insurance underwriting losses and legal
reserves along with increases in the allowance for doubtful accounts and other
factors mentioned in the discussion for 1992.
Total other expense (net) of $1.1 million in 1993 resulted from two principal
factors. Interest expense for 1993 was $4.2 million due to an increase in the
level of bank borrowings and was $101,000 higher than in 1992 in spite of lower
interest rates. Interest and investment income amounted to $3.1 million and
increased $755,000 over 1993.
Income before income taxes was $3.4 million in 1993, compared with $1.6 million
in 1992. A favorable federal income tax adjustment of $637,000, which resulted
from a revenue agent's examination for the years 1980 to 1986, partial
utilization of capital loss carryforwards and targeted jobs tax credits reduced
the effective income tax rate to 14% for 1993.
Equity income of foreign affiliates (net of income taxes) included income of the
Australian joint venture of Wackenhut Corrections Corporation.
Income before extraordinary charge was $3.6 million in 1993 versus $1.1 million
the year before. In January 1994, the corporation prepaid $12.5 million of its
senior notes to insurance companies. This prepayment resulted in an
extraordinary charge for early extinguishment of debt in the amount of $1.4
million (net of applicable income taxes), which was reflected in the financial
statements for 1993.
Net income was $2.2 million in 1993, compared to $8.5 million in 1992, which
included a benefit of $7.4 million resulting from the adoption of Statement of
Financial Accounting Standards (SFAS) No. 109.
- 26 -
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
FISCAL YEARS ENDED JANUARY 1, 1995, JANUARY 2, 1994 and JANUARY 3, 1993
1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
REVENUES $ 747,666 $ 664,160 $ 630,320
OPERATING EXPENSES
--------------------------------------------------------------------------------
Payroll and related taxes 538,297 491,408 467,934
Other operating expenses 194,077 166,530 159,019
Non-recurring charges -- 1,726 --
--------------------------------------------
732,374 659,664 626,953
--------------------------------------------------------------------------------
OPERATING INCOME 15,292 4,496 3,367
--------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (5,104) (4,230) (4,129)
Interest and investment income 1,514 3,105 2,350
Write-down of headquarters building (8,700) -- --
--------------------------------------------
(12,290) (1,125) (1,779)
--------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3,002 3,371 1,588
PROVISION FOR INCOME TAXES 17 485 834
MINORITY INTEREST, NET OF INCOME TAXES 999 362 --
EQUITY INCOME OF FOREIGN AFFILIATES, NET OF INCOME TAXES (286) (1,085) (383)
--------------------------------------------
INCOME BEFORE EXTRAORDINARY CHARGE AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 2,272 3,609 1,137
EXTRAORDINARY CHARGE - EARLY EXTINGUISHMENT
OF DEBT, NET OF INCOME TAXES (887) (1,444) --
CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR
INCOME TAXES -- -- 7,370
--------------------------------------------
NET INCOME $ 1,385 $ 2,165 $ 8,507
- --------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Income before extraordinary charge and
cumulative effect of accounting change $ 0.24 $ 0.37 $ 0.12
Extraordinary charge - early extinguishment
of debt, net of income taxes (0.10) (0.15) --
Cumulative effect of accounting change for
income taxes -- -- 0.76
--------------------------------------------
Net income $ 0.14 $ 0.22 $ 0.88
- --------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
- 27 -
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
JANUARY 1, 1995 and JANUARY 2, 1994
1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 13,808 $ 7,821
Accounts receivable, less allowance for doubtful
accounts of $1,056 in 1994 and $687 in 1993 100,425 94,937
Inventories 7,179 6,243
Other 16,233 14,760
----------------------------
137,645 123,761
------------------------------------------------------------------------------------------
NOTES RECEIVABLE 1,646 2,085
------------------------------------------------------------------------------------------
MARKETABLE SECURITIES AND
CERTIFICATES OF DEPOSIT - casualty reinsurance subsidiary 11,495 24,843
------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, at cost 45,928 51,497
Accumulated depreciation (15,102) (13,374)
------------------------------------------------------------------------------------------
30,826 38,123
------------------------------------------------------------------------------------------
DEFERRED TAX ASSET, NET 11,021 6,374
------------------------------------------------------------------------------------------
OTHER ASSETS Investment in and advances to foreign affiliates, at
cost, including equity in undistributed earnings
of $2,066 in 1994 and $2,370 in 1993 6,165 5,742
Other 13,959 10,369
-----------------------------
20,124 16,111
-----------------------------
$ 212,757 $ 211,297
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES Current portion of long-term debt $ -- $ 10,456
Notes payable 3,765 --
Accounts payable 14,839 15,995
Accrued payroll and related taxes 25,761 22,444
Accrued expenses 20,609 18,703
Deferred tax liability, net 596 --
----------------------------
65,570 67,598
------------------------------------------------------------------------------------------
RESERVES FOR LOSSES - casualty reinsurance subsidiary 38,450 33,500
------------------------------------------------------------------------------------------
LONG-TERM DEBT 38,991 57,484
------------------------------------------------------------------------------------------
OTHER 4,029 3,421
------------------------------------------------------------------------------------------
COMMITMENTS AND
CONTINGENCIES (notes 6, 12 and 14) -- --
------------------------------------------------------------------------------------------
MINORITY INTEREST 8,258 1,932
------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY Preferred stock, 10,000,000 shares authorized
Common stock, $.10 par value, 20,000,000
shares authorized
Series A, 3,858,885 issued and outstanding in 1994 and 1993 386 386
Series B, 5,794,539 issued and outstanding in 1994 and
3,858,885 in 1993 579 386
Additional paid-in capital 38,919 26,234
Retained earnings 21,681 23,268
Cumulative translation adjustment (3,552) (3,058)
Unrealized (loss) gain on marketable securities (554) 146
----------------------------
57,459 47,362
------------------------------------------------------------------------------------------
$ 212,757 $ 211,297
- --------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE CONSOLIDATED BALANCE SHEETS.
- 28 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEARS ENDED JANUARY 1, 1995, JANUARY 2, 1994 and JANUARY 3, 1993
1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN):
OPERATING Net Income $ 1,385 $ 2,165 $ 8,507
ACTIVITIES Adjustments -
Depreciation expense 4,374 4,354 3,864
Amortization expense 7,544 6,787 4,173
Provision for bad debts 508 735 1,193
Equity income, net of dividends (202) (1,487) (367)
Minority interests in net income 1,514 548 --
Write-down of headquarters building 8,700 -- --
Extraordinary loss on early extinguishment of debt 1,344 2,348 --
Write-down of note receivable related to Stellar Systems, Inc. -- -- 1,900
Other (495) (75) (48)
Cumulative effect of accounting change -- -- (7,370)
Changes in assets and liabilities, net of acquisitions and divestitures-
(Increase) Decrease in assets:
Accounts receivable (5,745) (9,607) (10,030)
Inventories (5,137) (4,985) (3,018)
Other current assets (1,154) (3,006) (2,291)
Marketable securities and certificates of deposit (1,352) (3,116) 1,193
Other assets (3,567) (2,947) (3,570)
Deferred tax asset (4,647) 624 --
Increase (Decrease) in liabilities:
Accounts payable and accrued expenses 533 234 1,775
Accrued payroll and related taxes 3,280 5,482 (316)
Deferred tax liability - current 596 (545) --
Reserves for losses of casualty reinsurance subsidiary 4,950 7,573 4,736
Other 608 534 534
Deferred income taxes -- -- (4,346)
---------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 13,037 5,616 (3,481)
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING Net proceeds from initial public offering of subsidiary's
ACTIVITIES common stock 17,626 -- --
Payments on notes receivable 438 852 20
Payment for acquisitions, net of cash acquired (935) -- --
Investment in and advances to foreign affiliates (732) (1,310) (1,913)
Capital expenditures (5,091) (3,409) (8,579)
Proceeds from sale of marketable securities of casualty
reinsurance subsidiary 14,000 -- --
Deferred charge expenditures (701) -- --
Sale of non-parental insurance business -- -- 1,168
---------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 24,605 (3,867) (9,304)
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING Proceeds from issuance of debt 196,411 113,270 77,523
ACTIVITIES Payments on debt (225,287) (109,320) (61,183)
Dividends paid (2,779) (2,777) (2,314)
-----------------------------------
Net Cash (Used In) Provided By Financing Activities (31,655) 1,173 14,026
---------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,987 2,922 1,241
CASH AND CASH EQUIVALENTS, AT BEGINNING OF YEAR 7,821 4,899 3,658
---------------------------------
CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 13,808 $ 7,821 $ 4,899
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 4,209 $ 4,172 $ 4,733
Income taxes $ 1,119 $ 1,545 $ 3,921
Non-cash financing and investing activities:
25% and 100% stock dividends declared during 1994 and 1992 $ 193 -- $ 386
Note received related to sale of subsidiary -- $ 1,250 --
- -----------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS
- 29 -
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
FISCAL YEARS ENDED JANUARY 1, 1995, JANUARY 2, 1994 and JANUARY 3, 1993
1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Series A Balance, beginning and end of year $ 386 $ 386 $ 386
Number of shares, all years,
beginning and end, 3,858,885
-------------------------------------------
Series B Balance, beginning of year 386 386 --
25% and 100% stock dividends effected in the
form of stock splits in 1994 and 1992 193 -- 386
-------------------------------------------
Balance, end of year 579 386 386
Number of shares, end of year, 5,794,539 in
1994 and 3,858,885 in 1993 and 1992
--------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN
CAPITAL Balance, beginning of year 26,234 26,234 26,620
100% stock dividend effected in the form of a
stock split declared during 1992 -- -- (386)
Increase due to initial public offering of
subsidiary's common stock 12,685 -- --
-------------------------------------------
Balance, end of year 38,919 26,234 26,234
--------------------------------------------------------------------------------------------
RETAINED EARNINGS Balance, beginning of year 23,268 23,880 17,804
Net income 1,385 2,165 8,507
Dividends (2,779) (2,777) (2,431)
25% stock dividend effected in the form of a
stock split (193) -- --
Balance, end of year 21,681 23,268 23,880
CUMULATIVE
TRANSLATION Balance, beginning of year (3,058) (3,395) (1,963)
ADJUSTMENT Translation adjustment (494) 337 (1,432)
Balance, end of year (3,552) (3,058) (3,395)
---------------------------------------------------------------------------------------------
UNREALIZED (LOSS) GAIN
ON MARKETABLE Balance, beginning of year 146 96 --
SECURITIES Net unrealized (losses) gains for the year (700) 50 96
-------------------------------------------
Balance, end of year (554) 146 96
--------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS'
EQUITY $ 57,459 $ 47,362 $ 47,587
-----------------------------------------------------------------------------------------
DIVIDENDS PER SHARE Restated for the effects of the 25% and 100%
stock dividends effected in the form of
stock splits declared in 1994 and 1992 $ 0.29 $ 0.29 $ 0.25
- -------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
- 30 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR INFORMATION IN THOUSANDS EXCEPT SHARE DATA)
FOR THE FISCAL YEARS ENDED JANUARY 1, 1995, JANUARY 2, 1994 AND JANUARY 3, 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The corporation's fiscal year ends on the Sunday closest to the calendar year
end. Fiscal years 1994 and 1993 each included 52 weeks. Fiscal year 1992
included 53 weeks.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the corporation
and its subsidiaries, including its casualty reinsurance subsidiary. All
significant intercompany transactions and balances have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform with
current year presentation.
MINORITY INTEREST
The minority interest expense represents principally the separate public
ownership (approximately 27%) in Wackenhut Corrections Corporation and the
ownership by foreign investors in several subsidiaries of Wackenhut
International, Incorporated.
INCOME TAXES
As discussed in Note 10, the corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" during 1992.
SFAS No. 109 utilizes the liability method and deferred taxes are determined
based on the estimated future tax effects of differences between the financial
statement and tax bases of assets and liabilities given the provisions of
enacted tax laws.
EARNINGS PER SHARE
Earnings per share are computed using the average number of common shares
outstanding, including common stock equivalents and reflects the declaration of
the 25% and 100% stock dividends effected in the form of stock splits in 1994
and 1992. Prior year's earnings per share have been restated to give effect to
the stock splits. The average number of shares outstanding was 9,653,424 for
1994 and 9,646,672 for 1993.
INVENTORIES
Alarm systems and electronics inventories are carried at the lower of cost or
market, on a first-in first-out basis. Uniform inventories are carried at
amortized cost.
REVENUES
Revenue is recognized as services are provided. During fiscal years 1994, 1993
and 1992, the largest client of the corporation was the U.S. Department of
Energy, accounting for approximately 20%, 24% and 26% respectively, of the
corporation's consolidated revenues.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The corporation considers highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable, other
receivables, notes receivable, notes payable and accounts payable approximates
fair value. The fair value of marketable securities and certificates of deposit
is presented under "wholly-owned casualty reinsurance subsidiary" in Note 6 of
these financial statements. The carrying value of long-term debt (including
current portion) approximates fair value.
(2) BUSINESS SEGMENTS
WACKENHUT CORRECTIONS CORPORATION
The corporation's principal business consists of security guard services to
commercial and governmental clients. A subsidiary of the corporation, Wackenhut
Corrections Corporation (WCC),
provides facility management and construction services to detention and
correctional facilities. WCC operates in a different industry segment than other
divisions of the corporation. A summary of financial data of WCC is presented
below:
1994 1993 1992
Revenues
Facility management $ 82,301 $ 58,289 $ 46,426
Construction and design 23,185 4,523 15,751
--------------------------------------
105,486 62,812 62,177
Operating income before
Corporate G&A 5,682 4,695 4,646
Assets 30,333 19,148 19,898
Depreciation expense 769 654 433
Capital expenditures 598 326 4,584
Equity income (loss)
of affiliates (331) 261 29
Identifiable assets of equity
affiliates 3,420 3,315 2,035
- -----------------------------------------------------------------------
NON-U.S. OPERATIONS
A summary of financial data for foreign operations is shown below. Non-U.S.
operations of the corporation and its subsidiaries are conducted primarily in
South America and Australia. Profit is before the allocation of corporate office
general and administrative expenses and income taxes.
1994 1993 1992
- ---------------------------------------------------------------------------
Revenues $ 111,026 $ 83,523 $ 73,982
Income before Corporate
G&A and income taxes 5,285 4,436 3,747
Assets 48,893 26,557 22,929
- ----------------------------------------------------------------------------
The corporation carries its investment in affiliates (20% to 50% owned) on the
equity method. U.S. income taxes which would be payable upon remittance of
affiliates' earnings to the corporation are provided currently.
Minority interest in consolidated foreign subsidiaries have been reflected net
of applicable income taxes on the accompanying financial statements for 1994 and
1993. The amounts for 1992 were not material.
(3) ACCOUNTS RECEIVABLE SECURITIZATION
Subsequent to year end, the corporation entered into agreements expiring January
1998, with two financial institutions to sell, on an ongoing basis, an undivided
interest in a defined pool of trade accounts receivable up to a maximum of $40
million. Under terms of the agreement, the ongoing costs pertaining to this
program are based on the purchasers' level of investment and cost of issuing
commercial paper plus predetermined fees. The corporation will retain
substantially the same risk of credit loss as if the receivables had not been
sold. As discussed in Note 7, the corporation, subsequent to year end, prepaid
the outstanding balance of the first mortgage note on the headquarters building
with proceeds from the sale of eligible trade accounts receivable.
(4) PROPERTY AND EQUIPMENT AND DEPRECIATION METHODS
The corporation uses principally the straight-line method of depreciation for
property and equipment. The components of property and equipment and their
estimated lives are as follows on page 32:
- 31 -
Years 1994 1993
- ---------------------------------------------------------------------------
Land -- $ 4,444 $ 4,211
Buildings and improvements 20 to 33-1/3 24,722 31,854
Furniture and fixtures 5 to 20 3,608 3,527
Equipment 5 to 20 9,026 8,463
Automobiles and trucks 3 4,128 3,442
---------------------
$ 45,928 $ 51,497
- ----------------------------------------------------------------------------
In the fourth quarter of 1994, the decision was made to sell the headquarters
building located in Coral Gables, Florida. The building has been listed for sale
and has been written down by $8,700,000 to reflect the estimated realizable
value, as determined by an independent third party.
(5) NOTES PAYABLE
At January 1, 1995 the corporation had outstanding notes payable which
represented short-term borrowings of international subsidiaries incurred for
working capital, bearing interest at rates between 14.4% and 27%, with
maturities in 1995.
(6) WHOLLY-OWNED CASUALTY REINSURANCE SUBSIDIARY
In April 1992, the corporation transferred its parental insurance business and
investment portfolio, after the sale of the non-parental insurance business, to
a new domestic subsidiary. The subsidiary reinsures a portion of the
corporation's workers' compensation and general and automobile liability
insurance.
Incurred losses are recorded as reported. Provision is made to cover losses
incurred but not reported. Loss reserves are computed based on actuarial studies
and, in the opinion of management, are adequate. Future adjustments of the
amounts recorded as of January 1, 1995, resulting from a continuous review
process as well as differences between estimates and ultimate payments, will be
reflected in the corporation's consolidated statements of income as such
adjustments become determinable.
A summary of operations for the last three fiscal years is as follows:
1994 1993 1992
- ---------------------------------------------------------------------------
Premiums recognized $ 17,900 $ 16,282 $ 14,521
Loss expense (18,499) (20,863) (18,646)
---------------------------------------------
Underwriting loss (599) (4,581) (4,125)
Investment income 1,486 2,033 1,845
---------------------------------------------
$ 887 $ (2,548) $ (2,280)
- -----------------------------------------------------------------------------
Premiums paid by the corporation to the reinsurance subsidiary of $17,900,000,
$16,282,000 and $14,464,000, for the fiscal years ended 1994, 1993 and 1992,
respectively, have been eliminated in consolidation.
Marketable securities and certificates of deposit, carried at quoted market
value, consisted of the following at January 1, 1995 and January 2, 1994:
1994 1993
- ------------------------------------------------------------
Municipal Bonds $ 7,332 $ 17,927
Government Bonds 968 2,235
Preferred Stock 1,713 3,010
Other 1,482 1,671
----------------------------
Aggregate market value $ 11,495 $ 24,843
----------------------------
Aggregate cost $ 12,396 $ 24,605
- ------------------------------------------------------------
The unrealized (loss) gain on marketable securities of ($901,000) and $238,000
at January 1, 1995 and January 2, 1994, respectively, have been reflected in the
accompanying financial statements net of applicable income taxes.
The corporation has placed in trust, in favor of certain insurance companies,
$1,345,292 in time deposits and has issued irrevocable standby letters of credit
for $37,597,000.
(7) LONG-TERM DEBT
Long-term debt consists of the following:
1994 1993
- ---------------------------------------------------------------------------
Senior notes payable- 10.2% $ -- $25,000
Revolving loan - 7.0% in 1994 and
4.2% in 1993 20,450 26,150
First mortgage note on headquarters
building - 7.1% in 1994 and 4.3%
in 1993 16,060 16,790
Mortgage notes on buildings of
international subsidiaries, varying
interest rates from 11.0% to 11.4%,
due in 2002 947 --
Secured credit lines and other debt,
principally of Australasian Correctional
Management Pty., Ltd., varying
interest rates from 5.9% to 8.0%,
due 1997 to 2009 1,412 --
Other 122 --
38,991 67,940
Less - Current portion of long-term debt -- 10,456
------------------------
$ 38,991 $ 57,484
- ---------------------------------------------------------------------------
In August 1994, the corporation prepaid the remaining $12,500,000 of senior
notes to an insurance company with proceeds from WCC's initial public offering
(IPO) (see Note 11). In January 1994, the corporation used short-term borrowings
to prepay the first $12,500,000 of its senior notes. The prepayments resulted in
extraordinary charges of $887,000 ($1,344,000 before tax), or $.10 per share in
1994, and $1,444,444 ($2,348,000 before tax) or $.15 per share in 1993.
At year end, the corporation had in place a credit agreement with a bank, which
provided a $40,000,000 revolving line of credit facility. The unused portion of
the revolving line of credit was $7,943,000 at January 1, 1995 after deducting
$11,607,000 in outstanding letters of credit. On January 5, 1995, the
corporation entered into a new revolving credit agreement with two banks under
which the corporation may borrow up to $60,000,000. The interest payable is, at
the corporation's option, a function of the prime rate or the applicable LIBOR
or certificate of deposit rates. The agreement requires among other things the
corporation maintain a minimum consolidated net worth, as defined, and limits
certain payments and distributions.
In December 1994, WCC entered into a revolving credit agreement with a bank
under which the subsidiary may borrow up to $15,000,000 until September 30,
2002. The corporation is not a guarantor of the revolving credit agreement which
requires, among other things, that WCC maintain a minimum consolidated tangible
net worth, as defined, and limits certain payments and distributions.
In January 1995, the corporation prepaid the outstanding balance on the first
mortgage note with proceeds from borrowings from the accounts receivable
securitization (see Note 3).
- 32 -
Aggregate annual maturities of long-term debt are as follows:
Year Annual Maturity
- ----------------------------------------------
1996 1,273
1997 14
1998 36,510
1999 --
2000 1,194
-------
$ 38,991
Gains and losses on hedges of existing assets or liabilities are included in the
carrying amount of those assets or liabilities and are ultimately recognized in
income as part of those carrying amounts. Gains and losses on interest rate
swaps that do not qualify as hedges are recognized as an adjustment to interest
expense. The corporation has entered into interest rate swap agreements in order
to manage interest costs. Under the terms of the interest rate swaps, the
corporation agrees with counterparties to exchange at specific intervals, the
difference between fixed rate and floating rate interest amounts calculated in
reference to an agreed upon notional principal amount.
The corporation was a party to two offsetting interest rate swaps with Union
Bank of Switzerland and Bank of America Illinois at year end. The notional
principal amount under both agreements was $81,200,000 and the agreements expire
in December 1998. While the corporation is exposed to loss on the interest
differential in the event of nonperformance by the counterparties, no loss is
anticipated.
(8) PREFERRED AND COMMON STOCK
The board of directors has authorized 10,000,000 shares of preferred stock. In
October 1994, the board of directors declared a 25% stock dividend, effected in
the form of a stock split, payable on January 9, 1995 to stockholders of record
at the close of business on December 22, 1994. The stock dividend was paid in
series B common stock to holders of the corporation's series A and B shares.
Prior periods per share data have been restated. Series B common stock has all
the rights and privileges of the series A common stock with the exception of
voting privileges. In October 1992, the board of directors declared a 100% stock
dividend effected in the form of a stock split, through the issuance of one
share of series B common stock for each share of series A common stock.
(9) RETIREMENT AND DEFERRED COMPENSATION PLANS
The corporation has a noncontributory defined benefit pension plan covering
certain of its executives. Retirement benefits are based on years of service,
employees' average compensation for the last five years prior to retirement and
social security benefits. The plan currently is not funded. The corporation
purchases and is the beneficiary of life insurance policies for each participant
enrolled in the plan.
The assumptions for the discount rate and the average increase in compensation
used in determining the pension expense and funded status information are 8.5%
and 4.0%, respectively.
Total pension expense for 1994, 1993 and 1992 was $267,000, $236,000 and
$224,000, respectively. The present value of accumulated pension benefits at
year end 1994 and 1993 was $1,400,000 and $1,161,000, respectively and is
included in other liabilities in the accompanying consolidated balance sheets.
The corporation has established nonqualified deferred compensation agreements
with certain senior executives providing for fixed annual benefits ranging from
$100,000 to $175,000 payable in event of death or upon retirement at age 60 over
a period of 20 years. Benefits are funded by life insurance contracts purchased
by the corporation. The cost of these agreements is being charged to expense and
accrued using a present value method over the expected terms of employment. The
charge to expense for fiscal 1994, 1993 and 1992 was $444,000, $403,000 and
$394,000, respectively. The liability for deferred compensation was $2,629,000
and $2,260,000 at year-end 1994 and 1993, respectively and is included in other
liabilities in the accompanying consolidated balance sheets.
(10) INCOME TAXES
The corporation adopted SFAS No. 109 in 1992 and recognized the cumulative
benefit of the change in accounting principle of $7,370,000, which increased
earnings per share by $.76.
The provision (credit) for income taxes consists of the following:
Fiscal year ended 1994 1993 1992
Federal income taxes:
Current $ 3,014 $ 669 $ 3,851
Deferred (3,112) (385) (3,249)
---------------------------------------
(98) 284 602
State income taxes:
Current 527 252 882
Deferred (412) (51) (650)
---------------------------------------
115 201 232
---------------------------------------
Total $ 17 $ 485 $ 834
- ---------------------------------------------------------------
Deferred income taxes resulted from timing differences in the recognition of
revenues and expenses for tax and financial reporting purposes. The tax effects
of the principal timing differences are as follows:
Fiscal year ended 1994 1993 1992
- -----------------------------------------------------------------------------
Senior note prepayment
premium $ 904 $ (904) $ --
Income of foreign subsidiaries
and affiliates 1,186 972 740
Reserve for losses of reinsurance
subsidiary (8) (462) (1,579)
Reserve for claims of employee
health trust (1,191) (148) (1,366)
Accrued expenses (326) (349) (909)
Building write-down (3,350) -- --
Allowance for doubtful accounts (15) 434 (582)
Deferred compensation (398) (268) (277)
Depreciation (486) 106 122
Amortization of deferred charges 205 173 86
Other, net (45) 10 (134)
-------------------------------------
$ (3,524) $(436) $(3,899)
- ------------------------------------------------------------------------------
A reconciliation of the statutory U.S. federal and state income tax rates
(38.5%) and the effective income tax rate is as follows:
Fiscal year ended 1994 1993 1992
- -----------------------------------------------------------------------------
Provision using statutory
federal tax rate $ 1,021 $ 1,146 $ 540
Capital loss carryforward (use) (814) (228) 486
Targeted jobs tax credits (235) (109) (368)
Tax exempt interest (295) (321) (187)
Other, net, including 1993
RAR settlement 225 (204) 131
-----------------------------------
(98) 284 602
State income taxes 115 201 232
-----------------------------------
$ 17 $ 485 $ 834
- -----------------------------------------------------------------------------
The tax effect of the extraordinary charge for the early extinguishment of debt
during fiscal 1994 and 1993 amounted to $457,000 and $904,000, respectively (see
Note 7).
- 33 -
The components of the net non-current deferred tax asset at January 1, 1995 and
January 2, 1994 are shown below:
Fiscal year ended 1994 1993
- -----------------------------------------------------------------------------
Reserve for losses of casualty reinsurance
subsidiary $ 5,270 $ 5,262
Undistributed income of foreign
subsidiaries (5,614) (4,428)
Reserves for claims of employee
health trust 4,692 3,502
Reserves for legal and other expenses 899 --
Capital loss carryforward 150 2,632
Deferred compensation 2,660 2,240
Depreciation (363) (848)
Building write-down 3,350 --
Other, net 127 646
------------------------
11,171 9,006
Valuation allowance (150) (2,632)
------------------------
Deferred tax asset, net $ 11,021 $ 6,374
- ------------------------------------------------------------------------------
The components of the net current deferred tax (liability) asset at January 1,
1995 and January 2, 1994 are as shown below:
Fiscal year ended 1994 1993
- ------------------------------------------------------------------------------
Amortization of uniforms and accessories $ (1,818) $ (1,818)
Senior note prepayment premium -- 904
Accrued vacation pay 1,033 828
Allowance for doubtful accounts 189 175
-----------------------
Deferred tax (liability) asset, net $ (596) $ 89
- -----------------------------------------------------------------------------
At January 1, 1995, the corporation had available a capital loss carryforward of
$391,000 which expires in 1998. The capital loss carryforward has been fully
reserved due to the uncertainty of the corporation's ability to generate future
capital gains. The change in the valuation allowance during 1994 and 1993 is due
to the utilization of the capital loss carryforwards.
(11) WACKENHUT CORRECTIONS CORPORATION INITIAL PUBLIC OFFERING
In July and September 1994, WCC, formerly a wholly-owned subsidiary of the
corporation, sold 2,185,000 shares of common stock at an offering price of $9.00
per share in connection with its IPO. WCC received net proceeds of approximately
$17,626,000 from the IPO which were used to repay bank debt and indebtedness to
the corporation. The corporation has reflected amounts received in excess of its
investment in WCC, less the approximate 27% minority interest, as an increase in
additional paid-in capital. Following the offering, WCC has 8,185,000 shares
outstanding of which the corporation owns 73%. Under two stock option plans, the
board of directors of WCC has granted non-qualified stock options to purchase up
to 797,863 shares of common stock which, if exercised, would reduce the
corporation's ownership in WCC to approximately 67%.
(12) WACKENHUT MONITORING SYSTEMS BUSINESS
In 1993, the corporation sold its Wackenhut Monitoring Systems subsidiary in
exchange for a $1,250,000 note and $100,000 cash which resulted in a loss of
approximately $95,000. In connection with this transaction, the corporation has
guaranteed indebtedness related to certain operating leases which totaled
approximately $1,819,929 at January 1, 1995 and expire from 1995 to 1997.
(13) NON-RECURRING CHARGES
In the fourth quarter of 1993, the corporation recognized non-recurring charges
of $1,726,000. A significant portion of these charges was due to a $791,000
decrease in the value of guard contracts acquired in 1991.
(14) COMMITMENTS AND CONTINGENCIES
During the first quarter of 1994, the corporation and its insurance carriers
settled a $6,000,000 judgment for $4,500,000. The corporation's insurance
carriers contributed funds for that settlement, but these carriers dispute their
legal obligation for the amounts paid. In the opinion of management, after
consultation with outside counsel, it is more likely than not that the judgment
will be covered by the corporation's insurance carriers. In a second case, a
former employee has obtained a $1.8 million judgment against the corporation
comprised almost entirely of punitive damages. The corporation is cautiously
optimistic that its appeal will result in the diminution of the punitive damages
awarded. Finally, in a case alleging tortious interference with contract and
other related torts, plaintiff claims multimillion dollar damages, which the
insurance carrier for the corporation has denied coverage. The corporation
denies these claims and intends to vigorously defend the action. While there can
be no absolute assurance that reserves provided by the corporation are adequate,
management has made its best estimate of the potential exposure in these
matters.
The nature of the corporation's business results in claims for damages arising
from the conduct of its employees or others. In the opinion of management, there
are no other pending legal proceedings that would have a material effect on the
consolidated financial statements of the corporation.
The corporation leases office space, data processing equipment and automobiles
under non-cancelable operating leases expiring between 1995 and 2004. Rent
expense for the fiscal years ended January 1, 1995, January 2, 1994 and January
3, 1993 was $4,993,000, $6,312,000 and $4,325,000, respectively. The minimum
commitments under these leases are as follows:
Year Annual Maturity
- ---------------------------------------------
1995 $ 3,737
1996 2,710
1997 1,482
1998 635
1999 279
Thereafter 501
----------
$ 9,344
- ------------------------------------------
(15) STOCK INCENTIVE AND STOCK OPTION PLANS
Key employees of the corporation and its subsidiaries are eligible to
participate in the Key Employee Long-Term Incentive Stock Plan (incentive stock
plan). Under the incentive stock plan, options for the corporation's common
stock are granted to participants as approved by the Nominating and Compensation
Committee of the corporation's board of directors (committee).
Under terms of the incentive stock plan, options are granted at prices not less
than the fair market value at date of grant, or as otherwise determined by the
committee, become exercisable after a minimum of six months, and expire no later
than ten years after the date of grant. The committee may grant incentive stock
options or non-qualified stock options. Options are subject to adjustment upon
the occurrence of certain events, including stock splits and stock dividends.
- 34 -
On April 30, 1994, the committee granted non-qualified stock options to purchase
323,750 shares of series B common stock at an exercise price of $7.70 per share,
as adjusted for the 25% stock dividend. The options are exercisable after May 1,
1995 and expire on April 30, 2004. All options were outstanding at January 1,
1995. On January 27, 1995, the committee granted additional non-qualified stock
options to purchase 175,000 shares of the corporation's series B common stock at
$13.50 per share.
(16) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the corporation and its subsidiaries for
the fiscal years ended January 1, 1995 and January 2, 1994, is as follows:
First Second Third Fourth
1994 Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
Revenues $ 174,537 $ 180,462 $ 196,031 $ 196,636
Income from operations (1) $ 3,203 $ 4,042 $ 3,863 $ 4,184
Income (loss) before extraordinary charge $ 1,820 $ 1,953 $ 1,982 $ (3,483)
Extraordinary charge -- early extinguishment
of debt, net of income taxes (1) -- -- $ (887) --
Net income (loss) $ 1,820 $ 1,953 $ 1,095 $ (3,483)
Earnings (loss) per share: (3)
Before extraordinary charge $ 0.19 $ 0.20 $ 0.21 $ (0.36)
Extraordinary charge -- -- $ (.10) --
Net income (loss) $ 0.19 $ 0.20 $ 0.11 $ (0.36)
- ------------------------------------------------------------------------------------------------------------------------------
1993
Revenues $ 162,112 $ 162,051 $ 165,111 $ 174,886
Income (loss) from operations (2) $ 3,081 $ 1,727 $ 2,669 $ (2,981)
Income (loss) before extraordinary charge $ 1,859 $ 1,348 $ 1,627 $ (1,225)
Extraordinary charge -- early extinguishment of
debt, net of income taxes (2) -- -- -- $ (1,444)
Net income (loss) $ 1,859 $ 1,348 $ 1,627 $ (2,669)
Earnings (loss) per share: (3)
Before extraordinary charge $ 0.19 $ 0.14 $ 0.17 $ (0.13)
Extraordinary charge -- -- -- (0.15)
Net income (loss) $ 0.19 $ 0.14 $ 0.17 $ (0.28)
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) IN THE FOURTH QUARTER OF 1994, THE CARRYING VALUE OF THE HEADQUARTERS
BUILDING WAS WRITTEN DOWN TO ITS ESTIMATED REALIZABLE VALUE AND A CHARGE OF
$8,700,000 WAS RECOGNIZED (SEE NOTE 4). ADDITIONALLY, AN EXTRAORDINARY
CHARGE OF $887,000 (AFTER TAX), OR $.10 PER SHARE, WAS RECOGNIZED IN THE
THIRD QUARTER OF 1994 FOR THE EARLY RETIREMENT OF SENIOR DEBT (SEE NOTE 7).
(2) IN THE FOURTH QUARTER OF 1993, THE CORPORATION RECOGNIZED UNUSUAL CHARGES
TO INCOME FROM OPERATIONS IN THE AMOUNT OF $1,726,000, OR $1,061,000 AFTER
TAX (SEE NOTE 12) AND AN EXTRAORDINARY CHARGE OF $1,444,000 (AFTER TAX), OR
$.15 PER SHARE, FOR THE EARLY RETIREMENT OF SENIOR DEBT (SEE NOTE 7). IN
ADDITION, THE INSURANCE LOSS RESERVES WERE INCREASED BY $3,600,000.
(3) EARNINGS PER SHARE HAVE BEEN RESTATED TO INCLUDE THE 25% STOCK DIVIDEND TO
BE EFFECTED IN THE FORM OF A STOCK SPLIT, DECLARED ON OCTOBER 29, 1994 AND
PAID ON JANUARY 9, 1995 (SEE NOTES 1 AND 8).
- 35 -
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of
The Wackenhut Corporation:
We have audited the accompanying consolidated balance sheets of The Wackenhut
Corporation (a Florida corporation) and subsidiaries as of January 1, 1995 and
January 2, 1994, and the related consolidated statements of income, cash flows
and shareholders' equity for each of the three fiscal years in the period ended
January 1, 1995. These financial statements are the responsibility of the
corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Wackenhut Corporation and
subsidiaries as of January 1, 1995 and January 2, 1994, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended January 1, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 17, 1995.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
To the Shareholders of
The Wackenhut Corporation:
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. They include amounts based on
judgments and estimates.
Representations in the financial statements and the fairness and integrity of
such statements are the responsibility of management. In order to meet
management's responsibility, the corporation maintains a system of internal
controls and procedures and a program of internal audits designed to provide
reasonable assurance that the corporation's assets are controlled and
safeguarded, that transactions are executed in accordance with management's
authorization and properly recorded, and that accounting records may be relied
upon in the preparation of financial statements.
The financial statements have been audited by Arthur Andersen LLP, independent
public accountants, whose appointment was ratified by shareholders. Their report
expresses a professional opinion as to whether management's financial statements
considered in their entirety present fairly, in conformity with generally
accepted accounting principles, the corporation's financial position and results
of operations. Their audit was conducted in accordance with generally accepted
auditing standards. As part of this audit, Arthur Andersen LLP considered the
corporation's system of internal controls to the degree they deemed necessary to
determine the nature, timing and extent of their audit tests which support their
opinion on the financial statements.
The audit committee of the board of directors meets periodically with
representatives of management, the independent public accountants and the
corporation's internal auditors to review matters relating to financial
reporting, internal accounting controls and auditing. Both the internal auditors
and the independent public accountants have unrestricted access to the audit
committee to discuss the results of their reviews.
/s/ George R. Wackenhut
- ---------------------------
George R. Wackenhut
Chairman of the Board
and Chief Executive Officer
/s/ Richard C. DeCook
- ---------------------------
Richard C. DeCook
Senior Vice President,
Chief Financial Officer
and Treasurer
Miami, Florida,
February 17, 1995.
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