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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 1-5450
THE WACKENHUT CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 59-0857245
(State of incorporation or organization) (I.R.S. Employer Identification No.)
4200 Wackenhut Dr. #100,
Palm Beach Gardens, FL 33410-4243
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (561) 622-5656
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, Series A, $.10 par value New York Stock Exchange
Common Stock, Series B, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
At February 16, 2001, the aggregate value of 1,922,111 shares of Series
A Common Stock and 8,188,165 shares of Series B Common Stock held by
non-affiliates of the Registrant was $114,145,044.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 2000 are incorporated by reference into Parts II and IV of
this Report.
Parts of the registrant's Proxy Statement for its 2001 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Report.
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PART I
ITEM 1. BUSINESS
GENERAL
The Wackenhut Corporation (the "Company") is a leading provider of
diversified services to business and government. The Company focuses
strategically on three major businesses worldwide - security related and other
operational support services, developer and manager of privatized correctional
and detention facilities and personnel employee leasing and temporary services.
The Security Services business operates in North American (domestic) and
international markets. The domestic security-related service businesses have
expanded into a range of other support services to include base operations,
facility management, fire and emergency medical services. Internationally,
Security Services provides a greater variety of services than the Company offers
domestically. These services include, among other things, electronic security
systems, central station monitoring, cash-in-transit, satellite tracking of
vehicles and cargo, building maintenance, secure storage of documents, postal
services and distribution logistics. The Company, through its approximately 57%
owned publicly-held subsidiary, Wackenhut Corrections Corporation (NYSE: WHC)
designs, constructs, finances and manages correctional, detention and public
sector mental health facilities and performs separate correctional-related
services, including prisoner transportation, home detention monitoring and
correctional health care. The Company has established a strong presence in the
southeast and midwest United States in the flexible staffing industry that
includes, personnel employee leasing, temporary services, recruiting, risk
management, payroll processing and human resource services. The Company has
approximately 65,000 full and part-time employees, worldwide, serving over
11,000 commercial and governmental customers through an extensive network of
offices and operations in 48 states and approximately 50 countries.
The Company was incorporated in 1958 to continue the businesses that
were originally established in 1954 by its Chairman, George R. Wackenhut, to
provide security-related services to commercial and governmental customers.
Since its founding, the Company has grown by: (i) enhancing its position in its
security-related services business through the development of specialized and
upgraded services; (ii) targeting specific segments of the security services
industry; and (iii) expanding into a range of other support services in response
to a growing trend toward privatization of governmental services and outsourcing
by commercial customers.
The Company is the largest U.S.-based global security services
provider, with 120 customer support centers across the United States and
additional centers in approximately 50 other countries around the world. In
addition to its physical security and uniformed officer services, the Company is
a leader in the development of specialized niche services. For example, in
response to a growing demand in the marketplace for security professionals with
greater skill and responsibility levels, the Company has developed its Custom
Protection Officer(R) ("CPO") program to provide highly specialized and trained
security professionals to a broad range of customers such as national retailers,
financial institutions and gated communities. CPO security professionals also
are used as supplemental law enforcement forces by public transportation
authorities and other governmental entities. Custom Protection Officer(R) is a
Registered Service Mark of the Company. Another market initiative is the
Company's National Accounts program, developed to provide focused and consistent
service quality across its larger client's national, regional and global
organizations. These clients asked for, and received, a dedicated executive
within the Company to integrate and coordinate client security programs. These
quality-centered programs partner the Company and its clients in performance
excellence across the client's organization. The Company believes that the
National Accounts program may also enable it to expand the scope of services
offered worldwide to its National Account customers. Management believes that
the high quality and consistent service of its CPO and National Accounts
programs provide the Company with an opportunity to maintain and enhance
long-term relationships with its clients.
As part of its strategy to respond to the growing trend toward
privatization of governmental services, in 1984, the Company entered into the
development and management of privatized correctional and detention facilities,
a business which is now operated exclusively through its approximately 57% owned
subsidiary Wackenhut Corrections Corporation ("WHC"). As of December 2000, WHC
had contracts to manage 55 privatized
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correctional and detention facilities, with a rated capacity of 39,522 beds. It
also had contracts for prisoner transportation, correctional health care
services, mental health services and electronic monitoring.
Building upon four decades of expertise in providing services to
businesses and government, in the fourth quarter of 1996, the Company entered
into the professional employer organization ("PEO") employee leasing business by
establishing Oasis Outsourcing, Inc. During 1997, the Company continued to
expand its market presence in these areas when, Wackenhut Resources, Inc. (WRI),
a subsidiary of the Company, acquired the King Companies, in May 1997, and
Professional Employee Management, Inc. (PEM Companies) in December 1997. Both
companies were professional employer organizations, and in addition, the King
Companies was in the temporary employment and recruiting service business. These
two companies were combined with Oasis Outsourcing, Inc., under Wackenhut
Resources, Inc., to form Flexible Staffing Services (Staffing Services). In
November 1998, Flexible Staffing Services acquired Sharp Services and Advantage
Temporary Services companies. During Fiscal 2000, the regional structure of
Staffing Services was reorganized under a single name of "Oasis" to achieve a
single identity for the marketing of its services. By the end of Fiscal 2000,
Flexible Staffing Services had 38 offices in 11 states.
In addition to the services that the Company has specifically targeted
for expansion, the Company continues to explore and selectively invest in other
service businesses, including commercial and governmental support services,
supplemental police services, crash-fire-rescue services and fire protection
services. See Note 18 of Notes to Consolidated Financial Statements included in
Exhibit 13.0 to this Form 10-K for a summary of the contribution to consolidated
revenues and operating income by each of the Company's business segments and by
domestic and international operations for fiscal 2000, 1999 and 1998 (53 weeks).
BUSINESS STRATEGY
The Company focuses strategically on three major businesses worldwide -
security related and other support services, developer and manager of privatized
correctional, detention and public sector mental health facilities and personnel
employee leasing and temporary staffing. Key elements of the Company's business
strategy are described below:
SECURITY SERVICES
o ENHANCE LEADERSHIP POSITION OF SECURITY-RELATED SERVICES. The Company
strives to enhance its market position by attempting to provide the most
reliable and consistent service in the industry. The Company believes
its security professionals provide quality service because of: (i)
strictly enforced screening and hiring procedures; (ii) intensive
training; (iii) well organized supervisory and feedback procedures and
(iv) management dedicated to total quality programs.
o DEVELOP SPECIALIZED SECURITY SERVICES. The Company has identified and
targeted the National Account and CPO programs, as well as the
traditional small commercial client market, as ongoing growth avenues
toward market expansion. Management believes that the high quality and
consistent service of its National Accounts and CPO programs provide the
Company with an opportunity to establish and enhance long-term
relationships with all its clients.
o DEVELOP COMPLEMENTARY SUPPORT SERVICES. The Company will seek to expand
the scope of complementary support services it offers. The Company's
successful identification and development of the correctional services
and the staffing services has provided it with the experience it
believes will allow it to develop other specialized programs and support
services.
o FOCUSED GEOGRAPHIC PRESENCE. In order to enhance quality revenue and
earnings growth, the Company seeks to focus its international presence
in countries where it can achieve a proper critical mass. To achieve
this strategic initiative, during fiscal 2000, management initiated an
ongoing review of the
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Company's international security-related businesses, with a view towards
concentrating the Company's resources to achieve a proper critical mass.
Correctional Services
Correctional Service's objective is to enhance its position as one of
the leading providers of privatized correctional, detention and public
sector mental health facility services. Key elements of Correctional
Service's business strategy include: (i) effective management of projects;
(ii) selective development of new business opportunities such as mental
health services provided through its subsidiary Atlantic Shores Healthcare,
Inc.; (iii) selective pursuit of acquisitions; (iv) expansion of its scope
of services; (v) expansion into international markets by establishing
alliances with strategic local partners; and (vi) limiting capital risk.
Flexible Staffing Services
Wackenhut Resources has expanded to become one of the leading
outsourcing companies in the southeast, with a principal concentration in
Florida, and the midwest. Its growth is resulting from the increasing trend
of small and medium size businesses to lease employees from PEOs or use
temporary workers in order to cut costs and provide more and better
employee benefits. Wackenhut Resources' strategy for growth is to expand
PEO services while maintaining a viable temporary services network. The
Company believes that this broader blend of human resources services will
better meet the needs of our clients as outsourcing trends continue.
Staffing services derives a competitive advantage in the PEO market by
providing an "a la carte" menu of staffing alternatives and attractive
benefit options. In addition to internal growth, the Company has increased
its presence in staffing services through selective acquisitions such as
the acquisitions of the King Companies in May 1997, Professional Employee
Management, Inc. (PEM Companies) in December 1997, and Sharp Services and
Advantage Temporary Services Companies in November 1998. During 2000 the
regional structure of Staffing Services was reorganized under a single
brand name of "Oasis" to achieve a single identity for the marketing of its
services.
Pursue Selected Acquisitions
In addition to internal growth, the Company's growth strategy
includes selected acquisitions.
MARKETS
SECURITY SERVICES. The private security-related services industry
includes guard services, alarm-monitoring services, security consulting
services, armored car transport and other security services. The largest and
most visible component of the industry is the guard service component, which
also accounts for the largest portion of Security Service's revenues.
Guard service is often characterized within the industry as either
"proprietary" or "contract," depending on the service provider. Under
proprietary arrangements, end users of the services employ, schedule and manage
their own security officers. In contrast, contract services are provided to end
users pursuant to contracts with independent security-related service firms such
as Wackenhut. Management believes that the advantages to clients of using
contract security service providers rather than providing services internally on
a proprietary basis are threefold: (i) the client may realize cost and
administrative savings; (ii) the client is freed to concentrate on its core
competencies; and (iii) the client may be able to reduce labor management
concerns with security-related employees, who are employed by the Company.
CORRECTIONAL SERVICES. Correctional Service's customer base is
principally governmental agencies responsible for state correctional facilities
in the United States and governmental agencies responsible for correctional
facilities in the United Kingdom and Australia. Correctional Service's other
customers include the U.S. Immigration and Naturalization Service, other federal
and local agencies in the United States and other foreign governmental agencies.
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FLEXIBLE STAFFING SERVICES. Staffing Services provides temporary
staffing, permanent placement, and Professional Employer Organization (PEO)
services. The PEO provides integrated human resource administration, such as
personnel employee leasing, risk management, payroll processing and human
resource services. Client companies outsource a large part of the human resource
function to the PEO. While the PEO becomes the employer of record for payroll
and tax purposes, the client maintains control of the activities of the worksite
employees. Due to the increasing complexity of the regulatory environment,
employment costs per employee are rising dramatically, and constitute one of the
market determinants. Outsourcing is expected to have a very compelling appeal to
companies in the process of downsizing and reengineering.
COMPANY ORGANIZATION
The Company's business can be divided into the Global Security
Services, Correctional Services and Flexible Staffing Services. Security
Services provides security-related and other support services. Correctional
Services, which consists exclusively of the business conducted through WHC,
provides privatized correctional, detention, and public sector mental health,
facility design, development and management services. Flexible Staffing Services
provides personnel employee leasing, temporary services, recruiting, risk
management, payroll processing and human resource services.
GLOBAL SECURITY SERVICES
Global Security Services is conducted in North American and
international markets.
NORTH AMERICAN MARKET. Security Services provides security-related and
other support services throughout the United States and Canada. The North
American market is divided into commercial, government and regulated industry
accounts. In providing its Security Services, the Company has adopted a quality
management approach to its services. General management responsibilities for
each operation are vested in managers of geographic regions supported by a small
group of managers located at Company headquarters. Day-to-day management
responsibility for each group is vested in regional and site field managers who
have primary responsibility for client contact and satisfaction. Field managers
are selected through an intensive screening process and receive what the Company
believes is state-of-the-art training. Supervisory personnel from Company
headquarters periodically visit region headquarters and sites and carefully
monitor operating results.
COMMERCIAL ACCOUNTS. The Company furnishes security officers (armed and
unarmed) to protect its clients' property, in the United States and Canada,
against fire, theft, intrusion, vandalism and other physical harm. Specialized
security services offered by the Company include crash-fire-rescue services,
fire protection services and airport services. The Company also provides
security-consulting services including security assessment and program
development, specialized training programs for security guards,
fire-crash-rescue personnel, and background investigative services. The Company
will further enhance its market position in the security-related services
industry through internal growth by continuing to: (i) pursue domestic and
international National Accounts; (ii) differentiate its security-related
services within the industry by emphasizing its CPO program; and (iii) market
the Company's services to specialized market niches such as gated residential
communities and hospitals.
The Company intends to emphasize attracting and retaining national
accounts that benefit from security-related services on a national or regional
level at multiple locations. Such clients include retail chains, banks,
specialized manufacturers and high tech companies. Management believes that such
clients value the flexibility and service provided by a dedicated single point
of contact with the Company through these nationally managed programs.
For its CPO program, the Company recruits law enforcement academy
graduates, former military police, and members of elite military units and
college graduates with criminology-related degrees. These recruits are prepared
for critical security assignments after completing a Company training program
that surpasses any state or local requirements for security officer licensing.
CPO security personnel perform such functions as prisoner
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transportation in Maryland and Colorado, neighborhood and downtown security in
Florida, transit security in Wisconsin and Colorado, and other supplemental law
enforcement-related services. Management believes that services provided by CPO
security personnel distinguish the Company's services from those of the
competition by providing highly specialized and trained security personnel
capable of undertaking and accepting responsibilities that are beyond the
capabilities of traditional security guards.
Contracts with private industry generally are for a minimum of a
one-year term. Most of these contracts are subject to termination by either
party on 30 days prior notice. For most small accounts, billing rates are
typically based on a specified rate per hour and generally are subject to
renegotiations or escalation if related costs increase because of changes in
minimum wage laws, payroll tax changes or certain other events beyond the
control of the Company. For many larger accounts, cost plus performance and
management fee contracts are becoming the norm.
The Company designs and engineers integrated security programs using
both security officers and electronic equipment. These services include planning
master security programs for particular facilities, custom designing security
systems, procuring requisite electronic equipment, managing contracts and
construction, training security personnel, and reviewing and evaluating security
programs. Contracts for these integrated security-related services generally
provide for a fixed fee and are awarded by competitive bidding.
The Company complements security services provided to its clients with
investigative services, such as employee background screening and insurance
fraud investigations. The Company maintains a national research center with the
latest information-gathering technology for public records and a
"fraud-waste-criminal" hotline for employees of clients to report workplace
abuses. Clients ordinarily are charged an hourly rate for investigative services
and a flat rate for background record searches.
GOVERNMENT AND REGULATED INDUSTRY ACCOUNTS. The Company provides
specialized security-related and support services for United States federal
government entities and nuclear power generating facilities. Wackenhut Services,
Inc. ("WSI") provides security services primarily to United States federal
government entities. Services provided by WSI range from basic security and
administrative support to specialized emergency response. In the United States,
WSI provides security-related services at 12 sensitive government installations.
For example, the Company has held the operations and maintenance contract for
the Savannah River Site in South Carolina since 1983, the single largest
government contract for security-related services. The Company since 1990 has
managed the Rocky Flats Environmental Technology Site near Denver, since 1964
the Nevada Test Site near Las Vegas, and began providing security services
during 2000 at the Oak Ridge Site near Oak Ridge, Tennessee. Since 1984, WSI has
overseen training and resource development for the United States Department of
Energy at the Nonproliferation and National Security Institute in Albuquerque,
New Mexico. The Company's service contracts with governmental agencies are
typically cost-reimbursable contracts providing the Company the ability to earn
award fees based upon the achievement of performance goals. The Company's
service contracts with governmental agencies are subject to annual governmental
appropriations.
With contracts at 27 commercial nuclear power plants in 13 states, the
Company is the market share leader in the Nuclear Services niche market. The
Company provides Nuclear Utility customers with highly trained and qualified
security personnel, emergency planning, electronic detection equipment and
integrated security systems to these utility companies. The terms of contracts
entered into by the Nuclear Division generally are multi-year and include a
variety of fee arrangements. The Company's experience with requirements and
standards of the Nuclear Regulatory Commission ("NRC") enable it to assist
customers in ensuring NRC compliance.
INTERNATIONAL MARKETS. International security services are provided
primarily through Wackenhut International, Inc., ("WII") and its subsidiaries,
affiliates and strategic partners.
WII includes a network of subsidiaries, partnerships and affiliates in
approximately 50 countries. The majority of WII's international operations are
structured through local joint ventures with parties who operate in the given
market. These parties often provide valuable insight into local markets, in
addition to sharing financial responsibility for the venture. WII also provides
a greater variety of services than the Company offers domestically. These
services include, among other things, electronic security systems, central
station monitoring, cash-in-transit,
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satellite tracking of vehicles and cargo, building maintenance, secure storage
of documents, postal services, and distribution logistics. In addition to
providing traditional security services to commercial customers at overseas
locations, WII provides security for the U.S. Department of State at embassies
and missions in 17 locations. WII also provides protective services at NASA
space shuttle support sites in Africa. Major competitors of WII include sizable
foreign concerns such as Group 4, Securitas, Securicor, and Chubb and local and
regional companies.
In order to enhance quality revenue and earnings growth, the Company
seeks to focus its international presence in countries where it can achieve a
proper critical mass. To achieve this strategic initiative, during fiscal 2000,
management initiated an ongoing review of the Company's international
security-related businesses, with a view towards concentrating the Company's
resources to achieve a proper critical mass.
CORRECTIONAL SERVICES
Correctional Services is conducted through the operations of Wackenhut
Corrections Corporation ("WHC"). WHC is a leading developer and manager of
privatized correctional, detention and public sector mental health facilities in
the United States, the United Kingdom, Australia and South Africa. Correctional
Services was founded in 1984 as a division of the Company to capitalize on
emerging opportunities in the private correctional services market. As of
December 2000, Correctional Services had contracts to manage 55 correctional and
detention facilities with an aggregate rated capacity of 39,522 beds. It also
had contracts for prisoner transportation, correctional health care services,
mental health services and electronic monitoring. Correctional Services offers a
comprehensive range of correctional, detention and public sector mental health
facility management services from individual consulting projects to the
integrated design, construction and management of correctional, detention and
public sector mental health facilities. In addition to providing the fundamental
services relating to the security of facilities and the detention and care of
inmates, Correctional Services has built a reputation as an effective provider
of a wide array of in-facility rehabilitative and educational programs, such as
chemical dependency counseling and treatment, basic education, and job and life
skills training. Management believes that Correctional Service's experience in
delivering a full range of quality privatization services on a cost-effective
basis to governmental agencies provides such agencies strong incentives to
choose WHC when awarding new contracts or renewing existing contracts.
WHC's facility management contracts typically have original terms
ranging from one to ten years and give the customer at least one renewal option.
STAFFING SERVICES
Building upon four decades of expertise in providing services to
businesses and government the Company entered into the professional employer
organization ("PEO") employee leasing business by establishing Oasis
Outsourcing, Inc., a majority owned subsidiary, in the fourth quarter 1996.
During 1997, the Company continued to expand its market presence when Wackenhut
Resources, Inc. (WRI), a subsidiary of the Company, acquired the King Companies,
in May 1997, and Professional Employee Management, Inc. (PEM Companies) in
December 1997. Both companies were professional employer organizations, and in
addition, the King Companies was in the temporary employment and recruiting
service business. These two companies were combined with Oasis Outsourcing,
Inc., under Wackenhut Resources, Inc., to form Flexible Staffing Services
(Staffing Services). In November 1998 Flexible Staffing Services acquired Sharp
Services Inc. and Advantage Temporary Services companies. By the end of 2000,
Flexible Staffing Services had 38 offices in 11 states. During 2000, the
regional structure of Staffing Services was reorganized under a single name of
"Oasis" to achieve a single identity for the marketing of its services.
CUSTOMERS
During 2000, Security Services provided services to approximately 8,600
customers worldwide. The United States Department of Energy accounted for 8% and
6% of the Company's revenue during Fiscal 2000 and Fiscal
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1999, respectively. Correctional Services contracts with the State of Florida
accounted for 4% of the Company's revenues in Fiscal 2000 and Fiscal 1999 and
contracts with governmental agencies of the State of Texas accounted for 3% and
4% of the Company's revenue in Fiscal 2000 and Fiscal 1999, respectively. The
Staffing Services Business provides services to over 1,100 employee leasing
clients and more than 1000 temporary services clients.
COMPETITION
The Company is the largest United States-based security and protective
services organization and a leading provider of such services worldwide. The
Company competes domestically and internationally with Securitas, which acquired
the Company's largest U.S.-based competitors Burns Security Company and
Pinkertons in Fiscal 2000 and Fiscal 1999, respectively. The Company also
competes with numerous local and regional security services companies. The top
five providers of services similar to those provided by Security Services
account for less than 15% of the security-services market in the United States.
Competition in the security-related and other support services business is
intense and is based primarily on price in relation to quality of service, the
scope of services performed, and the extent of employee training and
supervision. However, potential competitors can enter the security-related and
other support services business without substantial capital investment or
expense.
WHC competes primarily on the basis of the quality and range of
services offered, and its experience and reputation, both domestically and
internationally, in the design and management of facilities. WHC competes with a
number of companies, including, but not limited to, Corrections Corporation of
America, Correctional Services Corporation, Group 4 International Corrections
Service, U.K. Detention Services, Ltd., Cornell Corrections Corporation,
Securicor Group and Prison Realty Trust. Some of WHC's competitors are larger
and have greater resources than WHC. WHC also competes on a localized basis in
some markets with small companies that may have better knowledge of the local
conditions and may be better able to gain political and public acceptance.
Potential competitors can enter the correctional business without substantial
capital investment or experience in management of correctional or detention
facilities. In addition, in some markets, WHC may compete with governmental
agencies that are responsible for correctional facilities.
Staffing Services competes primarily on the basis of the quality and
range of services offered. Staffing Services competes domestically with a number
of companies, including but not limited to Spherion, Staff Leasing, Administaff,
ADP Total Source and many regional based firms. Some of the competitors are
larger and have greater resources than Staffing Services.
EMPLOYEES
Security Services principal business is labor intensive, and is
affected substantially by the availability of qualified personnel and the cost
of labor. As of December 2000, Security Services had over 55,000 full and
part-time employees worldwide, most of whom are security officers and other
personnel providing physical security services. The Company has not experienced
any material difficulty in employing sufficient numbers of suitable security
officers. Security officers and other personnel supplied by the Company to its
clients are employees of the Company, even though stationed regularly at a
client's premises. A small percentage of the employees of the Security Service
business are covered by collective bargaining agreements. Relations with
employees have been generally satisfactory.
As of December 2000, Correctional Services had approximately 9,000
full-time employees. Correctional Services employs management, administrative
and clerical, security, educational services, health services and general
maintenance personnel. WHC's correctional officer employees at George W. Hill
Correctional Facility (Pennsylvania), Queens Private Correctional Facility (New
York), and Junee Correctional Centre, Arthur Gorrie Correctional Centre, Fulham
Correctional Centre and Immigration Detention Services (Australia) are members
of unions. WHC has entered into a contract with the union for the correctional
officers at the Queens Private Correctional Facility and Junee Correctional
Centre, however, WHC has not entered into a contract with the other two unions.
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Staffing Services had approximately 300 administrative employees as of
December 2000. In addition, the PEO Division of Flexible Staffing Services had
over 35,900 work-site employees as of December 2000.
BUSINESS REGULATIONS AND LEGAL CONSIDERATIONS
Security Services is subject to numerous city, county, and state
firearm and occupational licensing laws that apply to security officers and
private investigators. Many states have laws requiring training and registration
of security officers, regulating the use of badges and uniforms, and imposing
minimum bond, surety, or insurance standards. Many foreign countries have laws
that restrict the Company's ability to render certain services, including laws
prohibiting security-related services or limiting foreign investment.
In addition, many state and local governments are required to enter
into a competitive bidding procedure before awarding contracts for products or
services. The laws of certain jurisdictions may also require the Company to
award subcontracts on a competitive basis or to subcontract with businesses
owned by women or members of minority groups.
The industry in which the Correctional Services operates is subject to
national, federal, state and local regulations in the United States, Europe,
South Africa and Australia which are administered by a variety of regulatory
authorities. Generally, prospective providers of correctional services must be
able to detail their readiness to, and must comply with, a variety of applicable
state and local regulations, including education, health care and safety
regulations. WHC's contracts frequently include extensive reporting requirements
and require supervision and on-site monitoring by representatives of contracting
governmental agencies. WHC's Kyle New Vision Chemical Dependency Treatment
Center is licensed by the Texas Department of Criminal Justice to provide
substance abuse treatment. Certain states, such as Florida and Texas, deem
prison guards to be peace officers and require WHC personnel to be licensed and
may make them subject to background investigation. State law also typically
requires corrections officers to meet certain training standards.
Flexible Staffing Services is subject to federal and state laws
regarding the employer-employee relationship, including numerous federal and
state laws relating to labor, tax and discrimination matters. While many states
do not explicitly regulate PEO activities, a number of states have passed laws
that have licensing or registration requirements for PEO companies and other
states are considering such regulation. Such laws vary from state to state but
generally provide for monitoring the fiscal responsibility of PEO companies.
Management believes it conducts its business in compliance with the licensing
and registration requirements of the states in which it operates and monitors
such compliance annually.
The failure to comply with applicable laws, rules or regulations or the
loss of any required license could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
the current and future operations of the Company may be subject to additional
regulations as a result of, among other factors, new statutes and regulations
and changes in the manner in which existing statutes and regulations are or may
be interpreted or applied. Any such additional regulations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company may, under certain circumstances, be responsible for the
actions of its employees and agents. Under the common law of negligence in many
states, the Company can be held vicariously liable for wrongful acts or
omissions of its agents or employees performed in the course and within the
scope of their agency or employment. In addition, some states have statutes that
expressly impose on the Company legal responsibility for the conduct of its
agents or employees. The nature of the security-related services provided by the
Company (such as armed security officers and fire rescue) may expose it to
greater risks of liability for employee acts or omissions than are posed to
other businesses. The Company maintains public liability insurance to mitigate
against this exposure, although the laws of many states limit or prohibit
insurance coverage of liability for punitive damages arising from willful,
wanton or grossly negligent conduct.
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COMMITMENTS AND CONTINGENCIES
WHC's contract to manage the Jena Juvenile Justice Center in Jena,
Louisiana was terminated by the Louisiana Department of Public Safety and
Corrections on June 30, 2000. WHC has a ten-year non-cancelable operating lease
for the facility with Correctional Properties Trust (CPV). WHC has recorded an
operating charge of $3.8 million ($2.3 million after tax) that represents the
expected losses to be incurred on the lease with CPV. After taxes and minority
interest effect, this charge reduced the Company's diluted earnings per share by
$0.09. See Note 9 of the "Notes to Consolidated Financial Statements".
WHC has a contract with the State of Florida Department of Children and
Families (DCF) to design and construct a new 350-bed South Florida State
Psychiatric Hospital for approximately $35 million. The construction is
complete. However, WHC has incurred additional costs in excess of $2 million
beyond the initial scope of the construction contract through December 31. 2000.
WHC is in the process of negotiating with DCF to recover these additional costs.
There can be no assurances that WHC will be successful in negotiating for
additional funding of this project. Accordingly, WHC has recognized these
additional costs as incurred and has not recorded revenue on the pending claim.
CERTAIN FACTORS THAT MAY EFFECT FUTURE RESULTS
Prospective investors should carefully consider the following factors
that may effect future results, together with the other information contained in
this Annual Report on Form 10-K, in evaluating the Company and its business
before purchasing its securities. In particular, prospective investors should
note that this Annual Report on Form 10-K contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
that actual results could differ materially form those contemplated by such
statements. See "Safe Harbor Statements under the Private Securities Litigation
Reform Act of 1995" below. The factors listed below represent certain important
factors the Company believes could cause such results to differ. These factors
are not intended to represent a complete list of the general or specific risks
that may affect the Company. It should be recognized that other risks may be
significant, presently or in the future, and the risks set forth below may
affect the Company to a greater extent than indicated.
REVENUE AND PROFIT GROWTH DEPENDENT ON EXPANSION. The Company's growth
depends to a significant degree upon its ability to obtain additional service
contracts, PEO clients and correctional and detention facility development and
management contracts and to retain existing contracts. The Company faces
significant competition among: (i) providers of security-related and other
support services for service contracts and for the renewal of such contracts
upon expiration, (ii) operators of correctional and detention facilities for
development and management contracts for new facilities and for the renewal of
those contracts upon expiration and (iii) other PEO and temporary staffing
companies. Accordingly, there can be no assurance that the Company will be able
to obtain additional contracts or to retain contracts upon expiration thereof.
Growth of the Correctional Services is generally dependent on the development
and management of new correctional and detention facilities, since contracts to
manage existing public facilities are not typically offered to private
operators. The rate of development of new facilities and, therefore, the
Correctional Services' potential for growth, will depend on a number of factors,
including crime rates and sentencing patterns in countries in which WHC
operates, governmental and public acceptance of the concept of privatization,
the number of facilities available for privatization and WHC's ability to obtain
awards for contracts and to integrate new facilities into its management
structure on a profitable basis. In addition, certain jurisdictions in the past
have required the successful bidder to make a significant capital investment in
connection with the financing of a particular project. WHC's ability to secure
awards under such circumstances will, therefore, also depend on WHC having
sufficient capital resources.
GROWTH/ACQUISITION STRATEGY. The Company has grown its Security
Services, Staffing Services and Correctional Services through internal expansion
and through selective acquisitions of additional companies or assets that would
expand its existing business. There can be no assurance that the Company will be
able to identify, acquire or profitably manage additional companies or assets or
successfully integrate such additional companies or assets into the Company
without substantial costs, delays or other problems. In addition, there can be
no assurance that companies acquired in the future will be profitable at the
time of their acquisition or will achieve levels of
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profitability that justify the investment therein. Acquisitions may involve a
number of special risks, including, but not limited to, adverse short-term
effects on the Company's reported operating results, diversion of management's
attention, dependence on retaining, hiring and training key personnel, risks
associated with unanticipated problems or legal liabilities and amortization of
acquired intangible assets, some or all of which could have a material adverse
effect on the Company's operations and financial performance.
CAPITAL REQUIREMENTS TO FUND GROWTH. The Company's acquisition strategy
may require substantial capital. While the Company believes that its present
capital position will be sufficient to meet its capital requirements, future
acquisitions may require additional capital. Such capital may be obtained by
borrowings under the Company's existing credit facilities, through the issuance
of long-term or short-term indebtedness or through the issuance of equity
securities in private or public transactions. This could result in dilution of
existing equity positions and/or increased interest expense. There can be no
assurance that acceptable capital financing for future acquisitions can be
obtained on suitable terms, if at all.
INTERNATIONAL OPERATIONS. In Fiscal 1998, Fiscal 1999, Fiscal 2000,
revenues derived from the provision of services to customers outside the United
States accounted for approximately 11.8%, 11.1% and 11.9%, respectively, of the
Company's consolidated revenues. The Company anticipates that international
revenues will continue to account for a significant portion of consolidated
revenues in the foreseeable future. The Company's operating results, therefore,
are subject to the risks inherent in international operations, including various
regulatory requirements, fluctuations in currency exchange rates, political and
economic changes and disruptions, tariffs or other barriers, and difficulties in
staffing and managing foreign operations. One or more of these factors may have
a material adverse effect on the Company's future international operations and,
consequently, on the Company's operating results.
BUSINESS CONCENTRATION. Contracts with the United States Department of
Energy accounted for approximately 8% and 6% of the Company's consolidated
revenues in Fiscal 2000 and Fiscal 1999, respectively. Moreover, correctional
contracts with governmental agencies of the State of Texas accounted for 3% and
4% of the Company's consolidated revenues in Fiscal 2000 and Fiscal 1999,
respectively. Correctional Services contracts with the State of Florida
accounted for 4% of the Company's consolidated revenues in both Fiscal 2000 and
Fiscal 1999. The loss of, or a significant decrease in, the Company's business
with the Department of Energy or WHC's business with the foregoing agencies
could have a material adverse effect on the Company's results of operations.
CORRECTIONAL CONTRACTS. WHC's facility management contracts typically
have terms ranging from one to five years. WHC has 18 contracts that will expire
in 2001. WHC's management contracts generally contain one or more renewal
options for terms ranging from one to five years. Only the contracting
governmental agency may exercise a renewal option. No assurance can be given
that any agency will exercise a renewal option in the future. Additionally, the
contracting governmental agency typically may terminate a facility contract
without cause by giving WHC adequate written notice. Furthermore, in certain
cases the development of facilities to be managed by WHC is subject to the
facility obtaining construction financing. Such financing may be obtained
through a variety of means, including without limitation, sale of tax-exempt
bonds or other obligations or direct governmental appropriation. The sale of
tax-exempt bonds may be adversely affected by changes in applicable tax laws or
adverse changes in the market for tax-exempt bonds or other obligations.
POTENTIAL LEGAL LIABILITY. The Company's Security Services and
Correctional Services exposes the Company to potential third-party claims or
litigation by persons for personal injury or other damages resulting from
contact with Company or WHC personnel. In the case of WHC, such damages may
arise from a prisoner's escape or from a disturbance or riot at a WHC-managed
facility. WHC's management contracts generally require WHC to indemnify the
governmental agency against any damages to which the governmental agency may be
subject in connection with such claims or litigation. Under principles of common
law, the Company can generally be held liable for wrongful acts or omissions of
its agents or employees performed in the course and within the scope of their
agency or employment. In addition, some states have adopted statutes that
expressly impose on the Company legal responsibility for the conduct of its
agents and employees. While the Company maintains an insurance program that
provides coverage for certain liability risks, including personal injury, death
and property damage where the Company or WHC is found negligent, the laws of
many states limit or prohibit insurance coverage for
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liability for punitive damages arising from willful, wanton or grossly negligent
conduct. There can be no assurance that the Company's insurance will be adequate
to cover all potential claims or damages.
INFLATION. The Company's largest expense is personnel costs. A number
of the Company's security-related and correctional and detention facility
management contracts, including contracts with governmental agencies and
national accounts, provide for payments of either fixed fees or fees that
increase by only small amounts during their terms. If, due to inflation or other
causes, the Company must increase the wages and salaries of its employees at
rates faster than it can increase the fees charged under such contracts, the
Company's profitability would be adversely affected.
COMPETITION. The security-related and other support service industries
are highly competitive and fragmented. The Company competes with a number of
major companies, as well as local or regional security service companies.
Through WHC, the Company competes with a number of companies in the correctional
business, including Corrections Corporation of America, U.K. Detention Services,
Ltd. and Correctional Services Corporation. Some of the companies with which the
Company and WHC compete are larger and have greater resources than the Company
or WHC. The smaller local and regional companies with which the Company and WHC
compete may have better knowledge of the local conditions and be better able to
gain political and substantial capital investment or previous experience. In
addition, the Company and WHC may compete in some markets with governmental
agencies that provide security-related or other support services and manage
correctional facilities.
ACCEPTANCE OF PRIVATIZATION OF TRADITIONAL PUBLIC FUNCTIONS.
Privatization of traditional governmental functions such as the management of
correctional and detention facilities by private entities has not achieved
complete acceptance by either governments or the public. Some sectors of the
federal government and some state governments are legally unable to delegate
traditional management responsibilities, including management of correctional
and detention facilities, to private companies. The performance of traditional
government functions by private companies is not widely understood by the public
and has encountered resistance from certain groups, such as labor unions,
sheriff's departments and groups that believe certain functions, including
correctional and detention facility management should only be conducted by
governmental agencies. Such resistance may cause a change in public and
governmental acceptance of privatization in general. In addition, changes in
dominant political parties in any of the markets in which the Company or WHC
operates could result in significant changes to previously established views of
privatization in such markets.
GOVERNMENTAL REGULATION; OVERSIGHT, AUDITS AND INVESTIGATIONS. The
Company's Correctional Services and certain portions of its Security Services
are highly regulated by a variety of governmental authorities which oversee the
Company's businesses and operations. For example, with respect to the
Correctional Services, the contracting agency typically assigns full-time,
on-site personnel to a facility to monitor WHC's compliance with contract terms
and applicable laws and regulations. Failure by WHC to comply with contract
terms or regulations could expose it to substantial penalties, including the
loss of a facility management contract. In addition, changes in existing
regulations could require the Company to modify substantially the manner in
which it conducts business and, therefore, could have a material adverse effect
on the Company's results of operations.
Additionally, the Company's security-related and correctional contracts
give the contracting agency the right to conduct audits of the Company's
services provided or the facilities and operations managed by the Company for
the agency, and such audits occur routinely. An audit involves a governmental
agency's review of the Company's compliance with the prescribed policies and
procedures established with respect to services provided or the facility
managed. The Company also may be subject to investigations as a result of an
audit or other causes.
DEPENDENCE UPON EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES. The
continued success of the Company is dependent to a significant degree upon the
continuing services of its executive officers. The loss or unavailability of any
of the Company's executive officers could have an adverse effect on the Company.
The Company does not have long-term employment contracts with most of its
executive officers. In addition, the Company is dependent upon its ability to
hire and retain senior operational employees.
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CONTROL OF COMPANY. George R. Wackenhut and his wife, Ruth J.
Wackenhut, individually and through trusts over which they have sole dispositive
and voting power, control approximately 50.05% of the issued and outstanding
voting common stock of the Company. As a result, George R. Wackenhut and Ruth J.
Wackenhut have significant voting power on all matters requiring approval of the
shareholders of the Company, including the election of all of the directors.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report and the documents incorporated by referenced herein contain
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. "Forward-looking" statements are any statements that are not based
on historical information. Such statements involve risks and uncertainties,
including but not limited to: general economic conditions; competitive factors
and pricing pressures; shifts in market demand; the performance and needs of
clients served by the Company; actual future costs of operating expenses;
self-insurance claims and employee wages and benefits; possible changes in
ownership positions of the Company's subsidiaries; and other factors discussed
elsewhere in this report and the documents filed by the Company with the
Securities and Exchange Commission. These risks and uncertainties may cause the
Company's results to differ materially from the statements made in this report
or otherwise made by or on behalf of the Company.
ITEM 2. PROPERTIES
The Company's executive offices are in The Wackenhut Center, located at
4200 Wackenhut Drive #100, Palm Beach Gardens, Florida. The Wackenhut Center
contains approximately 95,000 square feet and is leased from Lepercq Corporate
Income Fund, L.P., for an initial term of 15 years, commencing in March 1996,
with consecutive options to extend the term of the lease for three additional
five-year periods. This lease requires annual rental payments of approximately
$1.8 million with no escalation during the initial 15-year term.
In 1997, WHC purchased and renovated a 72-bed psychiatric hospital in
Ft. Lauderdale, Florida.
In December 1997, WHC entered into a $220 million operating lease
facility that was established to acquire and develop new correctional
institutions used in its business. As a condition of this facility, WHC
unconditionally agreed to guarantee certain obligations of First Security Bank,
N.A., a party to the aforementioned operating lease facility. As of December 31,
2000, approximately $142.7 million of this operating lease facility was utilized
for properties in operation or under development.
The Company owns a 15,000 square foot warehouse building in Miami,
Florida. In addition, the Company owns three buildings in Ecuador and one each
in the Dominican Republic, Costa Rica, Puerto Rico, Peru and Uruguay that are
used for the operations of its foreign subsidiaries in those countries. All
other offices of the Company are leased.
The aggregate fiscal 2000 rent expense for all non-cancelable operating
leases of office space, automobiles, data processing and other equipment was
$26.9 million. The Company owns substantially all uniforms, firearms, and
accessories used by its security officers.
ITEM 3. LEGAL PROCEEDINGS
In December 1999, a Travis County, Texas grand jury indicted twelve of
WHC's former facility employees for various types of sexual misconduct at the
Travis County Community Justice Center. Management believes these indictments
are not expected to have any material financial impact on the Company. Eleven of
the twelve indicted former employees already resigned from or had been
terminated by WHC as a result of WHC initiated
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investigations over the course of the prior three years. WHC is not providing
counsel to assist in the defense of these twelve individuals. The District
Attorney in Travis County continues to review WHC documents at the Travis County
Facility. At this time, WHC cannot predict the outcome of this investigation or
the potential impact on WHC's financial position, results of operations and cash
flow.
The Company is presently, and is from time to time, subject to claims
arising in the ordinary course of its business. In certain of such actions,
plaintiffs request punitive or other damages that may not be covered by
insurance. In the opinion of management, there are no other pending legal
proceedings except those disclosures above, for which the potential impact if
decided unfavorable to the Company could have a material adverse effect on the
consolidated financial statements of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
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EXECUTIVE OFFICERS OF THE REGISTRANT
GEORGE R. WACKENHUT is Chairman of the Board of the Company and has been
since its inception. He was Chief Executive Officer of the Company from the time
it was founded until February 17, 2000. He was President of the Company from the
time it was founded until April 26, 1986. He formerly was a Special Agent of the
Federal Bureau of Investigation. Mr. Wackenhut is Chairman of the Board of
Directors for Wackenhut Corrections Corporation, a member of the Board of
Trustees of Correctional Properties Trust and is on the Dean's Advisory Board of
the University of Miami School of Business. He is on the National Council of
Trustees, Freedoms Foundation at Valley Forge, and the President's Advisory
Council for the Small Business Administration, Region IV. He is a past
participant in the Florida Governor's War on Crime and a past member of the Law
Enforcement Council, National Council on Crime and Delinquency, and the Board of
Visitors of the U.S. Army Military Police School. He is also a former member of
the Board of Directors of SSJ Medical Development, Inc., Miami, Florida. Mr.
Wackenhut is also a member of the American Society for Industrial Security. He
was a recipient in 1990 of the Labor Order of Merit, First Class, from the
government of Venezuela and in 1999 was awarded the distinguished Ellis Island
Medal of Honor by the National Ethnic Coalition of Organizations. Also in 1999,
he was inducted into the West Chester University Hall of Fame and the Athlete's
Hall of Fame in Delaware County, Pennsylvania. Mr. Wackenhut received his B.S.
degree from the University of Hawaii and his M.Ed. degree from Johns Hopkins
University. He has been named a Distinguished Alumnus by West Chester University
(1979), the University of Hawaii (1987), and Johns Hopkins University (2000).
Mr. Wackenhut is married to Ruth J. Wackenhut, Secretary of the Company. His
son, Richard R. Wackenhut, is Vice Chairman of the Board of the Company and is
President and Chief Executive Officer of the Company.
RICHARD R. WACKENHUT is Vice Chairman of the Board of Directors, President
and Chief Executive Officer of the Company. He has been Vice Chairman of the
Board since August 1999, and Chief Executive Officer since February 2000. Mr.
Wackenhut was appointed President and Chief Operating Officer of the Company and
a member of the Board of Directors in 1986. He was Senior Vice President of
Operations from 1983 to 1986. He was Manager of Physical Security from 1973 to
1974 and also served as Manager, Development at the Company's Headquarters from
1974 to 1976; Area Manager, Columbia, South Carolina, from 1976 to 1977;
District Manager, Columbia, South Carolina from 1977 to 1979; Director, Physical
Security Division at Corporate Headquarters from 1979 to 1980; Vice President,
Operations from 1981 to 1982; and Senior Vice President, Domestic Operations
from 1982 to 1983. Mr. Wackenhut is a Director of Wackenhut del Ecuador, S.A.;
Wackenhut UK Limited; Wackenhut Dominicana, S.A.; and several domestic
subsidiaries of the Company, including Wackenhut Corrections Corporation. He is
also Vice Chairman of the Board of Trustees of Correctional Properties Trust. He
is Vice Chairman of Associated Industries of Florida and is also a member of the
American Society for Industrial Security, the International Association of
Chiefs of Police and the International Security Management Association. He
received his B.A. degree from The Citadel in 1969 and is currently a member of
The Citadel Advisory Council. He also completed the Advanced Management Program
of the Harvard University School of Business Administration in 1987. Mr.
Wackenhut is the son of George R. Wackenhut, Chairman of the Board of the
Company, and Ruth J. Wackenhut, Secretary of the Company.
ALAN B. BERNSTEIN was elected to the Company's Board of Directors May 5,
1998, is Executive Vice President of the Company, beginning in 2000 became
President, Global Security, and was promoted to Chief Operating Officer
effective March 9, 2000. Mr. Bernstein was President, North American Operations
from 1991 through 1999. Prior to that, Mr. Bernstein was Senior Vice President,
Domestic Operations from 1986 to 1991. He has been employed by the Company since
1976, except for a brief absence during 1982 when he was a partner in a
family-owned security alarm business in New York State. Mr. Bernstein has served
in the following positions with the Company or its subsidiaries: Vice President
of Domestic Operations, 1985; Vice President, Corporate Business Development,
1984; President, Wackenhut Systems Corporation, 1983; Director of Integrated
Guard Security, 1981; and Manager of Wackenhut Electronic Systems Corporation
(Miami) from 1976 to 1981. He also serves on the Board of Directors of several
subsidiaries of the Corporation. He received his B.S.E.E. degree from the
University of Rochester, and a M.B.A. degree from Cornell University.
FERNANDO CARRIZOSA is Senior Vice President and President, Wackenhut
International, Inc. and has been since January 28, 1989. Mr. Carrizosa was Vice
President of International Operations from January 31, 1988 to
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January 28, 1989. He joined Wackenhut de Colombia in 1968 as Manager of
Investigations. He was promoted to Manager of Human Resources, and then to
Assistant to the President in 1974. He moved to Headquarters as a trainee in
1974, and was promoted to Manager of Latin American Operations in 1980, a
capacity in which he served until 1983. Mr. Carrizosa also served as Executive
Vice President of Wackenhut International, 1983 to 1984 and President of
Wackenhut International, 1984 to 1988. He is a Director of several subsidiaries
and affiliates of the Company. He received a B.B.A. from Universidad Javeriana
in Colombia, and a M.B.A. with honors from Florida International University in
1976. He also completed the Advanced Management Program at the Wharton School of
Business in 1992.
ROBERT C. KNEIP is Senior Vice President of the Company, and President and
Chief Executive Officer of Wackenhut Resources, Inc. Since he joined the Company
in 1982, Dr. Kneip has held various positions in the Company including Director,
Power Generating Services; Director, Contracts Management; Vice President,
Contracts Management; Vice President, Planning and Development and Senior Vice
President, Corporate Planning and Development. Dr. Kneip started Flexible
Staffing Services by establishing OASIS Outsourcing, Inc., a majority owned
subsidiary of the Company in 1996 and continues to be a major force in the
Company's development of the Staffing Services Business. Prior to joining the
Company, Dr. Kneip was employed by the Atomic Energy Commission, the Nuclear
Regulatory Commission and Dravo Utility Constructors, Inc. He received a B.A.
(Honors) from the University of Iowa, and an M.A. and Ph.D. from Tulane
University. Dr. Kneip also serves on the Board of Directors of Ecometry
Corporation, as well as numerous civic organizations.
PHILIP L. MASLOWE is Executive Vice President and Chief Financial Officer
and Treasurer of the Company and has been since March 30, 2000. He joined the
Company in August 1997 as Senior Vice President and Chief Financial Officer of
the Company and was given the title of Treasurer effective March 9, 2000. Prior
to joining the Company, Mr. Maslowe was employed by KinderCare Learning Centers,
Inc., as Executive Vice President and Chief Financial Officer since 1993. Before
joining KinderCare, he was Executive Vice President and Chief Financial Officer
of Thrifty Corporation. From 1980 to 1991, Mr. Maslowe was with The Vons
Companies, Inc., where he served as Group Vice President, Finance. Mr. Maslowe
is a graduate of Loyola University of Chicago (magna cum laude) and holds a
M.B.A. from the J.L. Kellogg Graduate School of Management at Northwestern
University. Mr. Maslowe also serves on the Board of Directors of Bruno's
Supermarkets, Inc.
SANDRA L. NUSBAUM is Senior Vice President, Human Resources of the Company.
Since she joined the Company in 1981, Ms. Nusbaum has held various positions in
the Company including Personnel Representative, Director of Compensation and
Benefits, and Vice President, Human Resources. Prior to joining the Company, Ms.
Nusbaum was employed by DAK Industries. Ms. Nusbaum received a B.B.A. degree in
Personnel Management and Marketing from Florida International University.
JAMES P. ROWAN is Executive Vice President General Counsel and Assistant
Secretary of the Company. He joined the Company in 1979 as Assistant General
Counsel, became Associate General Counsel in 1982, a Vice President in 1986 and
a Senior Vice President in 1998. He is an attorney admitted to the Bar of the
States of Indiana, Iowa and Michigan. He holds degrees of B.S.C. (Accounting)
and J.D. (Law) from the University of Iowa and a C.P.A. from the University of
Illinois.
RUTH J. WACKENHUT is Secretary of the Company and has been since 1958. She
is married to George R. Wackenhut, Chairman of the Board of the Company and her
son, Richard R. Wackenhut, is Vice Chairman, President and Chief Executive
Officer of the Company and is also a director.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to
page 25 of the Registrant's 2000 Annual Report to Shareholders, Exhibit 13.0.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to
pages 26 through 27 of the Registrant's 2000 Annual Report to Shareholders,
Exhibit 13.0.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference to
pages 28 through 33 of the Registrant's 2000 Annual Report to Shareholders,
Exhibit 13.0.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to
pages 34 through 48 of the Registrant's 2000 Annual Report to Shareholders,
Exhibit 13.0, except for the Financial Statement Schedule listed in Item
14(a)(2) of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required by Items 10, 11, 12 and 13 of Form 10-K (except
such information as is furnished in a separate caption "Executive Officers of
the Registrant" and is included in Part I, hereto) is contained in, and is
incorporated by reference from, the proxy statement (with the exception of the
Board Compensation Committee Report and the Performance Graph) for the Company's
2001 Annual Meeting of Shareholders, which has been filed with the Securities
and Exchange Commission pursuant to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of the Company,
included in the Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 2000 are incorporated by reference in
Part II, Item 8:
Consolidated Balance Sheets - December 31, 2000 and January 2, 2000
Consolidated Statements of Income - Fiscal years ended December 31,
2000, January 2, 2000 and January 3, 1999
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Consolidated Statements of Cash Flows - Fiscal years ended
December 31, 2000, January 2, 2000, and January 3, 1999
Consolidated Statements of Shareholders' Equity Notes to Consolidated
Financial Statements - Fiscal years ended December 31, 2000,
January 2, 2000, and January 3, 1999
With the exception of the information incorporated by reference
from the 2000 Annual Report to Shareholders in Part II, Items 5,6,7,8,
and Parts IV of the Form 10-K, the Registrant's 2000 Annual Report to
Shareholders is not to be deemed filed as part of this Report.
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts - Page 24
All other schedules specified in the accounting regulations of the
Securities and Exchange Commission have been omitted because they are
either inapplicable or not required. Individual financial statements of
the Company have been omitted because it is primarily an operating
Company and all significant subsidiaries included in the consolidated
financial statements filed with this Annual Report are majority-owned.
3. Exhibits
The following exhibits are filed as part of this Annual Report:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation as amended and restated.
3.2 Bylaws currently in effect (incorporated by reference to the
Registrants Form 10-K Annual Report for the fiscal year ended
January 2, 2000).
4.1 Credit Agreement dated as of November 13, 2000 by and among The
Wackenhut Corporation, as Borrower, Bank of America, N.A., as
Administrative Agent and as Lender and Scotiabanc Inc., as
Syndication Agent and as Lender and First Union National Bank, As
Documentation Agent and a Lender and the Lenders party hereto from
time to time.
4.2 Receivables Purchase Agreement dated as of December 30, 1997 among
Wackenhut Funding Corporation, as Transferor, The Wackenhut
Corporation, as Servicer, Enterprise Funding Corporation, as a
Purchaser, and Nations Bank, N.A., as Agent (incorporated by
reference to the Registrants Form 10-K Annual Report for the fiscal
year ended January 3, 1999).
4.3 Amendment Agreement No. 1, dated December 12, 2000 to the Credit
Agreement dated as of November 12, 2000 by and among The Wackenhut
Corporation, as Borrower, Bank of America, N.A., as Administrative
Agent and as Lender and Scotiabanc Inc., as Syndication Agent and as
Lender and First Union National Bank, As Documentation Agent and a
Lender and the Lenders party hereto from time to time.
4.4 Amended and Restated Transfer and Administrative Agreement dated as
of January 26, 2001, among Wackenhut Funding Corporation, a Delaware
corporation and its successors and assigns, The Wackenhut
Corporation, a Florida Corporation Individually and as Servicer,
Enterprise Funding Corporation, a Delaware corporation and its
successors assigns, and Bank of America, N.A. (as successor to
Nationsbank, N.A.),
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a national banking association, as agent for Enterprise and the Bank
Investors and as a Bank Investor.
4.5 Amendment Number 1 to Receivable Purchase Agreement dated as of
January 26, 2001, between Wackenhut Funding Corporation, a Delaware
corporation and its successors and assigns and The Wackenhut
Corporation, a Florida corporation, and its successors assigns,
amending that certain Receivables Purchase Agreement dated as of
December 30, 1997.
4.6 LC Account Agreement dated November 13, 2000 among The Wackenhut
Corporation, a Florida corporation, and Bank of America, N.A., as the
agent for the Lenders party to the Credit Agreement dated as of
November 13, 2000 by and among The Wackenhut Corporation, as
Borrower, Bank of America, N.A., as Administrative Agent and as
Lender and Scotiabanc Inc., as Syndication Agent and as Lender and
First Union National Bank, As Documentation Agent and a Lender and
the Lenders party hereto from time to time.
4.7 Amended and Restated Credit Agreement, dated December 18, 1997, by
and among Wackenhut Corrections Corporation, Nations Bank, National
Association, Scotia Banc Inc. and the Lenders Party thereto from time
to time (incorporated by reference to Wackenhut Corrections
Corporation's Form 10-K Annual Report for the fiscal year ended
December 28, 1997).
4.8 Amended and Restated Participation Agreement, dated June 19, 1997
among Wackenhut Corrections Corporation, First Security Bank,
National Association, the Various Bank and other Lending Institutions
which are partners thereto from time to time, Scotia Banc Inc., and
Nations Bank, National Association (incorporated by reference to
Wackenhut Corrections Corporation's Form 10-K Annual Report for the
fiscal year ended December 28, 1997).
4.9 Amended and Restated Lease Agreement, dated as of June 19, 1997,
between First Security Bank, National Association and Wackenhut
Corrections Corporation (incorporated by reference to Wackenhut
Corrections Corporation's Form 10-K Annual Report for the fiscal year
ended December 28, 1997).
4.10 Guaranty and Suretyship Agreement, dated December 18, 1997, among the
Guarantors parties thereto and Nations Bank, National Association
(incorporated by reference to Wackenhut Corrections Corporation's
Form 10-K Annual Report for the fiscal year ended December 28, 1997).
4.11 Third Amended and Restated Trust Agreement, dated as of June 19,
1997, among Nations Bank, National Association and other financial
institutions parties thereto and First Security Bank, National
Association. (incorporated by reference to Wackenhut Corrections
Corporation's Form 10-K Annual Report for the fiscal year ended
December 28, 1997).
10.1 Amended and restated Senior Officer Retirement/Deferred
Compensation Agreements for Executive Officers (the "Senior Plan"):
Alan B. Bernstein, Fernando Carrizosa, Robert C. Kneip, Sandra
Nusbaum, Philip L. Maslowe, and Richard R. Wackenhut (incorporated by
reference to the Registrants Form 10-Q Quarterly Report for the
quarterly period ended April 2, 2000).
10.2 Executive Severance Agreements for Alan B. Bernstein, Fernando
Carrizosa, Robert C. Kneip, Sandra Nusbaum, and Philip L. Maslowe
(incorporated by reference to the Registrants Form 10-Q Quarterly
Report for the quarterly period ended April 2, 2000).
10.3 Executive Officer Retirement Plan.
10.4 Amended and Restated Split Dollar arrangement with George R. and Ruth
J. Wackenhut.
19
20
10.5 Employment Agreement with G.R. Wackenhut (incorporated by reference
to the Registrants Form 10-Q Quarterly Report for the quarterly
period ended April 2, 2000).
10.6 Employment Agreement with R.W. Wackenhut (incorporated by reference
to the Registrants Form 10-Q Quarterly Report for the quarterly
period ended April 2, 2000).
10.7 Office Lease dated April 18, 1995 by and between The Wackenhut
Corporation and Daniel S. Catalfumo, as Trustee under F.S. 689.071.
10.8 First Amendment dated November 3, 1995 to Office Lease dated April
18, 1995 by and between The Wackenhut Corporation and Daniel S.
Catalfumo, as Trustee under F.S. 689.071.
10.9 The Wackenhut Corporation Key Employee Long-Term Incentive Stock Plan
Amendments through May 5, 2000.
10.10 Second Amendment dated August 1, 1996 to Office Lease dated April 18,
1995 by and between The Wackenhut Corporation and Daniel S.
Catalfumo, as Trustee under F.S. 689.071 (incorporated by reference
to the Registrant's Form 10-K Annual Report for the fiscal year ended
December 28, 1997).
10.11 Amended Non-employee Director Stock Option Plan dated October 29,
1996 (incorporated by reference to the Registrant's Form 10-K Annual
Report for the fiscal year ended December 28, 1997).
10.12 Third Amendment dated December 10, 1997 to Office Lease dated April
18, 1995 by and between The Wackenhut Corporation and Daniel S.
Catalfumo, as Trustee under F.S. 689.071 (incorporated by reference
to the Registrants Form 10-K Annual Report for the fiscal year ended
January 3, 1999).
10.13 Summary description of the amendment to the Key Employee Long-Term
Incentive Stock Plan effective as of January 28, 1997 (incorporated
by reference to the Registrants Form 10-K Annual Report for the
fiscal year ended January 3, 1999).
10.14 Senior Officer Retirement Agreement for James P. Rowan (incorporated
by reference to the Registrants Form 10-K Annual Report for the
fiscal year ended January 2, 2000).
10.15 Fourth Amendment dated April 1, 1999 to Office Lease dated April 18,
1995 by and between The Wackenhut Corporation and Lepercq Corporate
Income Fund L.P., as successor-in-interest to PGA Professional
Center, LTD.
10.16 Designated Executive Officer Bonus Plan for Fiscal 2000.
10.17 Senior Management Bonus Plan for Fiscal 2000.
13.0 Annual Report to Shareholders for the year ended December 31, 2000,
beginning with page 25 (to be deemed filed only to the extent
required by the instructions to exhibits for reports on this Form
10-K).
21.1 Subsidiaries of The Wackenhut Corporation.*
23.1 Consent of Arthur Andersen LLP.*
24.1 Powers of Attorney.
*Filed herewith.
(b). Reports on Form 8-K.
None.
20
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE WACKENHUT CORPORATION
By: /s/ Philip L. Maslowe Date: March 21, 2001
----------------------
Philip L. Maslowe
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER AND TREASURER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Richard R. Wackenhut * Vice Chairman of the Board, President and Chief March 6, 2001
-----------------------------------Executive Officer (principal executive officer)
Richard R. Wackenhut
/s/ Philip L. Maslowe Executive Vice President and Chief Financial Officer March 21, 2001
-----------------------------------and Treasurer
Philip L. Maslowe
/s/ Juan D. Miyar Vice President and Corporate Controller March 21, 2001
-----------------------------------(principal accounting officer)
Juan D. Miyar
/s/ Alan B. Bernstein * Director March 6, 2001
-----------------------------------
Alan B. Bernstein
/s/ Julius W. Becton, Jr. * Director March 6, 2001
-----------------------------------
Julius W. Becton, Jr.
/s/ Carroll A. Campbell * Director March 6, 2001
-----------------------------------
Carroll A. Campbell
/s/ Benjamin R. Civiletti * Director March 6, 2001
-----------------------------------
Benjamin R. Civiletti
/s/ Anne N. Foreman * Director March 6, 2001
-----------------------------------
Anne N. Foreman
/s/ Edward L. Hennessy, Jr. * Director March 6, 2001
-----------------------------------
Edward L. Hennessy, Jr.
/s/ Paul X. Kelley * Director March 6, 2001
-----------------------------------
Paul X. Kelley
/s/ Nancy Clark Reynolds * Director March 6, 2001
-----------------------------------
Nancy Clark Reynolds
/s/ John F. Ruffle* Director March 6, 2001
-----------------------------------
John F. Ruffle
Director
-----------------------------------
Thomas P. Stafford
21
22
SIGNATURE TITLE DATE
--------- ----- ----
/s/ George R. Wackenhut * Director March 6, 2001
-----------------------------------
George R. Wackenhut
/s/ Richard R. Wackenhut * Director March 6, 2001
-----------------------------------
Richard R. Wackenhut
*/s/ James P. Rowan Executive Vice President, General Counsel and March 6, 2001
-----------------------------------Assistant Secretary
James P. Rowan
Attorney-in-fact
22
23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Wackenhut Corporation:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in The Wackenhut
Corporation's 2000 Annual Report to Shareholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated February 8, 2001. Our
audits were made for the purpose of forming an opinion on those consolidated
financial statements taken as a whole. The schedule listed in Item 14(a)2 of
the Wackenhut Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
February 8, 2001.
23
24
SCHEDULE II
THE WACKENHUT CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 JANUARY 2, 2000 AND JANUARY 3, 1999
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED DEDUCTIONS, BALANCE AT
BEGINNING COST AND TO OTHER ACTUAL END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS CHARGE-OFFS PERIOD
- ----------- ---------- ---------- -------- ----------- ---------
YEAR ENDED DECEMBER 31, 2000:
Allowance for doubtful accounts.................. $ 5,202 3,238 200 (3,797) $ 4,843
YEAR ENDED JANUARY 2, 2000:
Allowance for doubtful accounts.................. $ 4,699 257 1,631 (1,385) $ 5,202
YEAR ENDED JANUARY 3, 1999:
Allowance for doubtful accounts.................. $ 2,713 3,079 515 (1,608) $ 4,699
24
25
FINANCIAL REVIEW
The Wackenhut Corporation and Subsidiaries
Market for the Company's Common Equity and Related Stockholder Matters
The ensuing table shows the high and low prices for the Company's series A
[NYSE: WAK] and B [NYSE: WAKB] common stock, as reported on the New York Stock
Exchange, for each quarterly period during fiscal 2000 and 1999. Holders of
series A, the voting stock, have control over all aspects of the operations of
the Company. Holders of series B only have voting rights in connection with a
transaction affecting the essence of their shareholder rights. In all other
respects, series B shareholders have the same rights as series A shareholders.
The approximate number of record holders of series A and B common stock as of
February 8, 2001, was 555 and 585, respectively.
During the 2000 fiscal year, the Company's publicly owned, separately traded
subsidiary, Wackenhut Corrections Corporation [NYSE: WHC], purchased 500,000
shares of its common stock at an average price of $9.87.
- ---------------------------------------------------------------------------------------------------------------------------------
Fiscal 2000 Fiscal 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Series A Series B Series A Series B
- ---------------------------------------------------------------------------------------------------------------------------------
High Low High Low High Low High Low
First $ 15.5625 $ 12.8750 $ 11.2500 $ 8.6250 $ 26.0000 $ 21.0000 $ 21.6875 $ 6.6875
Second 14.5000 12.5000 10.0000 7.7500 29.7500 20.0000 24.0000 14.7500
Third 15.2500 12.7500 10.3750 7.9375 29.0000 19.5000 23.5000 14.5625
Fourth 14.6250 11.4375 8.7500 6.6250 20.0000 12.3750 15.0000 8.2500
- ---------------------------------------------------------------------------------------------------------------------------------
Forward-Looking Statements
The management's discussion and analysis of financial condition and results of
operations, corporate profile, letter to shareholders, corporate diversity, and
the February 9, 2001 press release contain forward-looking statements that are
based on current expectations, estimates and projections about the segments in
which the corporation operates. These sections of the annual report also include
beliefs and assumptions made by management. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," and
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions ("Future
Factors") which are difficult to predict. Therefore, actual outcomes and results
may differ materially from what is expressed or forecasted in such
forward-looking statements. The corporation undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
Future Factors include increasing price and product/service competition by
domestic and foreign competitors, including new entrants; rapid technological
developments and changes; the ability to continue to introduce competitive new
products and services on a timely, cost effective basis; the mix of
products/services; the achievement of lower costs and expenses; domestic and
foreign governmental and public policy changes including environmental
regulations; protection and validity of patent and other intellectual property
rights; reliance on large customers; technological, implementation and
cost/financial risks in increasing use of large, multi-year contracts; the
outcome of pending and future litigation and governmental proceedings and
continued availability of financing, financial instruments and financial
resources in the amounts, at the times and on the terms required to support the
corporation's future business; and other factors discussed in the Company's
filings with the Securities and Exchange Commission. These are representative of
the Future Factors that could affect the outcome of the forward-looking
statements. In addition, such statements could be affected by general industry
and market conditions and growth rates, general domestic and international
economic conditions including interest rate and currency exchange rate
fluctuations and other future factors. The Company does not assume any
obligation to update any such forward-looking statements.
26
The Wackenhut Corporation and Subsidiaries
Selected Financial Data
(in millions except per share data)
The selected consolidated financial data should be read in conjunction with the
Company's consolidated financial statements and the notes thereto.
FISCAL YEAR ENDED: 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Revenues $ 2,505.1 $ 2,152.3
Operating income [a] 34.9 37.9
Income before income taxes [a] 33.3 39.9
Income before extraordinary charge and cumulative effect of accounting change [a] 17.6 19.6
Extraordinary charge - early extinguishment of debt, net of income taxes
Cumulative effect of accounting change [b] (0.8)
---------------------------
Net income $ 16.8 $ 19.6
- -----------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE - BASIC: [c]
Income before extraordinary charge and cumulative effect of accounting change [a] $ 1.17 $ 1.31
Extraordinary charge - early extinguishment of debt, net of income taxes
Cumulative effect of accounting change [b] (0.05)
---------------------------
Earnings per share - Basic $ 1.12 $ 1.31
- -----------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE - ASSUMING DILUTION: [c]
Income before extraordinary charge and cumulative effect of accounting change [a] $ 1.15 $ 1.28
Extraordinary charge - early extinguishment of debt, net of income taxes
Cumulative effect of accounting change [b] (0.05)
---------------------------
Earnings per share - Assuming Dilution $ 1.10 $ 1.28
- -----------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE OF COMMON STOCK: [c]
Total Dividends $ none $ .08
- -----------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION:
Working capital $ 130.6 $ 124.0
Total assets 570.3 521.0
Total debt [d] 16.5 21.2
Shareholders' equity 177.8 163.9
- -----------------------------------------------------------------------------------------------------------------------
(a) Fiscal year 2000 includes an operating charge of $3.8 million before
income taxes ($1.3 million after income taxes and minority interest
expense) or $0.09 per share related to the deactivation of the Jena
Juvenile Justice Center, see note 9 to the consolidated financial
statements. Fiscal year 1997 includes a one-time pre-tax charge of
$18.3 million before income taxes ($11.3 million after income taxes) or
$0.76 per share.
(b) See Note 2 to the consolidated financial statements.
(c) Restated to reflect a 25% stock dividend declared during fiscal 1995
and 1994 and to reflect a 100% stock dividend, effected in the form of
a stock split, declared during fiscal 1992. After the first quarter of
fiscal 1999, dividends were discontinued to optimize growth
opportunities.
(d) Includes current portion of long-term debt, notes payable and long-term
debt.
* 53 weeks.
27
1998* 1997 1996 1995 1994 1993 1992* 1991
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1,755.1 $ 1,126.8 $ 906.0 $ 797.0 $ 727.0 $ 659.0 $ 615.0 $ 570.0
32.4 3.3 16.3 15.8 6.6 4.5 3.4 13.9
34.6 6.0 17.9 13.7 3.0 3.4 1.6 11.9
15.9 0.1 9.1 7.3 2.3 3.6 1.1 7.7
(0.9) (1.4)
(6.6) 7.4
- -----------------------------------------------------------------------------------------------------------------------------------
$ 9.3 $ 0.1 $ 9.1 $ 7.3 $ 1.4 $ 2.2 $ 8.5 $ 7.7
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1.07 $ .01 $ .66 $ .60 $ .19 $ .30 $ .09 $ .64
(.08) (.12)
(.44) .61
- -----------------------------------------------------------------------------------------------------------------------------------
$ .63 $ .01 $ .66 $ .60 $ .11 $ .18 $ .70 $ .64
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1.03 $ (.01) $ .65 $ .60 $ .19 $ .30 $ .09 $ .64
(.08) (.12)
(.44) .61
- -----------------------------------------------------------------------------------------------------------------------------------
$ .59 $ (.01) $ .65 $ .60 $ .11 $ .18 $ .70 $ .64
- -----------------------------------------------------------------------------------------------------------------------------------
$ .30 $ .26 $ .26 $ .24 $ .23 $ .23 $ .20 $ .19
- -----------------------------------------------------------------------------------------------------------------------------------
$ 98.2 $ 116.8 $ 148.1 $ 51.9 $ 75.6 $ 56.2 $ 56.9 $ 48.6
445.0 404.4 323.9 197.9 212.8 211.3 192.2 172.1
7.8 15.8 5.9 6.5 42.8 67.9 64.0 47.7
149.2 146.8 148.2 62.9 57.5 47.4 47.6 42.8
- -----------------------------------------------------------------------------------------------------------------------------------
28
The Wackenhut Corporation and Subsidiaries
Management's Discussion and
Analysis of Financial Condition
and Results of Operations
(Tabular information in millions)
Overview
The Wackenhut Corporation, a Florida corporation, and subsidiaries (the
"Company") is a major provider of global business services including providing
security-related and other support services to business and government,
developing and managing privatized correctional, detention and public sector
mental health services facilities through Correctional Services or WHC, a 57%
owned public subsidiary, and providing employee leasing and temporary staffing.
Global Security Services includes security operations, facility management and
fire and emergency medical services. WHC designs, constructs, finances and
manages correctional, detention and mental health psychiatric facilities and
performs separate correctional-related services, including prisoner
transportation, home detention monitoring and correctional health care. The
Company's flexible staffing business includes worksite employee leasing,
temporary services, recruiting, risk management, payroll processing and human
resource services.
Fiscal year 2000 revenues of $2.5 billion when compared to fiscal year 1999
revenues of $2.2 billion grew 16 percent. Growth occurred in all three of the
Company's service businesses - Security Services, Correction Services and
Flexible Staffing Services.
Comparing this year's Security Services' revenues with the prior year's revenues
results in a 12 percent growth rate attributable to several new government and
commercial contracts. In the fourth quarter 2000, the Company agreed to sell
certain assets of its food service division, part of Security Services, with
fiscal year 2000 revenues of approximately $69 million, and completed this sale
in the first quarter 2001.
In 2000 Correctional Services' revenues increased by 22 percent through the
addition of revenue producing beds and two construction projects. Although
domestic beds are estimated to increase in fiscal 2001, an anticipated decrease
in construction revenues and Australian immigration activity is expected to
reduce fiscal 2001 revenues slightly below the same level achieved in 2000. At
present, the backlog of additional beds expected to be contracted by government
agencies worldwide over approximately the next 18 months is 16,000.
The Company's Flexible Staffing services business had a 19 percent growth rate
during the 2000 fiscal year. Because of the restructuring of a large temporary
staffing account, growth rates for fiscal year 2001 are expected to be lower
than the preceding year. Flexible Staffing services continues to grow by
expanding and developing existing offices.
Improved profitability and margins in Security Services was more than offset by
Correctional Services' decreased earnings in 2000. WHC's earnings were adversely
affected by the recognition of an operating charge related to the deactivation
of the Jena facility, additional expenses related to the operations at six
facilities, and an increase in insurance expense.
The Company's Chilean affiliate reported a loss over last year due to increased
borrowing levels and further expansion in diversified businesses. Management has
developed and implemented strategies to restructure its Chilean affiliate to
improve operating performance. Correctional Services has put measures in place
to improve its profitability. There can be no assurances that these strategies
will be successful. Management continually monitors the operations of its
subsidiaries and affiliates. If conditions were to arise that indicate an
impairment of one of these investments, this could have an adverse impact on the
Company's results of operations.
During the fourth quarter of 2000, the Company adopted SEC Staff Accounting
Bulletin No. 101 (SAB No. 101) - Revenue Recognition. Government contract award
fees, previously accrued for based on the Company's performance and long-term
historical experience of being awarded such fees, are now only recognized when
formally awarded. SAB No. 101 applied retroactively for recognition of such
award fees to the first quarter 2000, resulted in a decrease in 2000 of net
income of $0.8 million. On a diluted basis, the cumulative effect of the change
was $0.05 per share. On a basic and diluted basis for 1999 and 1998, the pro
forma effect of the adoption of SAB No. 101 was $0.02 per share less than that
reported for each of these years.
Liquidity and Capital Resources
The Company's principal sources of liquidity are from operations and borrowings
under its credit facilities. Cash and cash equivalents totaled $60.8 million at
December 31, 2000, compared to $67 million at January 2, 2000. Of this $60.8
million, $17.6 million collateralizes certain obligations of the Company's
captive insurance subsidiary. In addition, cash and cash equivalents of WHC,
which totaled $33.8 million at December 31, 2000, is generally not available to
the Company in any form, including dividends or loans.
The total amount available to the Company from its revolving credit and
securitization facilities is $187.5 million. On November 13, 2000, the Company
entered into a new three year credit facility increasing the Company's borrowing
capacity from $95 million to $112.5 million. On January 26, 2001, the Company
amended and restated its agreement to sell, on an ongoing basis, eligible
receivables up to a maximum of $75 million. This agreement is subject to renewal
on an annual basis. Additionally, at December 31, 2000, WHC had a $30 million
multi-currency revolving credit facility, which includes $5 million for the
issuance of letters of credit and twelve letters of guarantee totaling $13.3
million under separate international facilities. WHC also has a $220 million
operating lease facility to acquire and develop new correctional facilities used
in its business. At December 31, 2000, $142.7 million of this operating lease
facility was utilized for properties in operation or under development.
At December 31, 2000, the Company had borrowings of $0.5 million and $44.6
million of outstanding letters of credit against its revolving bank facility.
The unused portion of the revolving line of credit was $67.4 million. Some of
the Company's outstanding letters of credit are in support of international
operations including support of the affiliate in Chile of $20 million. If
adverse conditions were to arise at the Company's international operations,
there could be an adverse impact on the Company's cash position. Under the
accounts receivable securitization agreement, $67.5 million was outstanding at
the end of fiscal 2000. Under the terms of the securitization facility, the
Company retains substantially the same risk of credit loss as if receivables had
not been sold under this facility. At December 31, 2000, $10 million was
outstanding under WHC's revolving credit facility and six letters of credit were
outstanding in an aggregate amount of $2.8 million.
On January 7, 2000, WHC exercised its right to acquire the 276-bed Jena Juvenile
Justice Center (the "Facility") in Jena, Louisiana from the trust of WHC's
operating lease facility and,
29
simultaneously sold it to Correctional Properties Trust ("CPV"), a Maryland real
estate investment trust. This Facility is being leased back to WHC under a 10
year noncancelable operating lease. On May 17, 2000, the Louisiana Department of
Public Safety and Corrections removed all inmates from the Facility and WHC
terminated the employment of the Facility staff. The cooperative agreement for
such Facility was terminated June 30, 2000. WHC has recorded an operating charge
of $3.8 million ($2.3 million after tax, or on a WHC diluted basis, $0.11 per
share), that represents the losses expected to be incurred on the lease. WHC's
management estimates that the Facility will remain inactive through the end of
2001. After taxes and minority interest expense, this charge reduced the
Company's diluted earnings per share by $0.09. WHC is continuing its efforts to
sublease or find an alternative use for the Facility. If WHC is unable to
sublease or find an alternative use for the Facility, there could be an adverse
impact on WHC's and the Company's financial positions and future results of
operations.
WHC's access to capital and ability to compete for future capital intensive
projects is dependent upon, among other things, its ability to meet certain
financial covenants included in the $220 million operating lease facility and
$30 million revolving credit facility. A substantial decline in WHC's financial
performance as a result of an increase in operational expenses relative to
revenue could negatively impact WHC's ability to meet these covenants, and could
therefore limit WHC's access to capital. With the completion of the remaining
properties under development, WHC will have consumed its available capacity
under the operating lease facility. WHC is exploring other financing
alternatives for future project development such as the sale of facilities to
government entities, the third-party sale and leaseback of facilities, and the
issuance of taxable or nontaxable bonds by local government entities.
Current cash requirements consist of amounts needed for capital expenditures,
increased working capital needs resulting from corporate growth and business
expansion, payment of liabilities incurred in the operation of the Company's
business, the renovation or construction of correctional facilities by WHC, and
possible acquisitions. The Company continues to expand its domestic and
international businesses and to pursue major contracts, some of which may
require substantial initial cash outlays, which are partially or fully
recoverable over the original term of the contract. As a result of the Company's
ongoing efforts to restructure its Chilean affiliate, additional cash
commitments may become necessary.
Management believes that cash on hand, cash provided by operating activities and
available lines of credit will be adequate to support currently planned business
expansion and various obligations incurred in the operation of the Company's
business through 2001. Management will continue to review its capital/financial
planning alternatives to ensure long-term financial capital access and
availability. Proceeds from the sale of the Company's food services division
will be used for general corporate purposes.
Inflation
Management believes that inflation has not had a material effect on the
Company's results of operations during the past three fiscal years. Some of the
Company's contracts include provisions for inflationary indexing. During a
period of low unemployment, some business units may experience difficulty in
finding qualified personnel. Since personnel costs represent the Company's
largest expense, this could have a substantial adverse effect on the Company's
results of operations in the future to the extent that wages and salaries
increase at a faster rate than the per diem or fixed rate received by the
Company for its services.
Market Risk
The Company is exposed to market risks, including changes in interest rates and
currency exchange rates. These exposures primarily relate to outstanding
balances under the revolving line of credit and securitization facilities and
international investments. In addition, WHC is exposed to market risks arising
from changes in interest rates with respect to its $220.0 million operating
lease facility and the $30.0 million revolving credit facility. Based on the
Company's interest rate and foreign exchange rate position at December 31, 2000,
a hypothetical 100 basis point change in market interest rate or a 10% change in
the historical currency rates would not have a material effect on the Company's
financial position or results of operations over the next fiscal year.
Results of Operations
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto.
The table on page 30 summarizes results of operations for the Company's three
business segments by organizational group.
Fiscal 2000 compared with Fiscal 1999
Revenues
Fiscal 2000 consolidated revenues increased $352.8 million, or 16.4%, over
fiscal 1999 due to increases in all business groups. The Company's growth in
security services and in the staff leasing/temporary services were the largest
contributors to the increase over fiscal 1999. Correctional Services also showed
solid growth.
Global Security Services
Fiscal 2000 Global Security Services' revenues increased $127.2 million, or
12.2%, to $1,168.2 million from $1,041.0 million in fiscal 1999. North American
market revenues increased $109.0 million, or 12.2%, to $1,001.3 million in
fiscal 2000 from $892.3 million in fiscal 1999. Within the North American
market, revenues from commercial accounts represented approximately 60% of total
revenues of the group in fiscal 2000 versus 62% in fiscal 1999, and revenues
from government/regulated industries represented the other portion. Commercial
account revenues increased approximately 8% in fiscal 2000 over fiscal 1999,
primarily due to a combination of higher billing rates and increases in billable
hours as the Company continued to expand its base of national accounts and
Custom Protection Officer(R) ("CPO") clients. Revenues of government and
regulated industries increased 28% in fiscal 2000 over fiscal 1999, principally
due to a new contract at the U.S. Department of Energy's Oak Ridge facility with
revenues of approximately $50 million and several new security contracts in the
nuclear industry. International market revenues increased $18.2 million, or
12.2%, to $166.9 million in fiscal 2000 from $148.7 million in fiscal 1999,
primarily due to growth in the United Kingdom. Revenues in Latin America,
principally in Peru, Guatemala, Costa Rica and Paraguay continued to increase
mainly through expansion of the security-related business, diversification of
services, and expansion of the client base of multi-national companies.
Correctional Services Business
Fiscal 2000 Correctional Services' revenues increased $97.1 million, or 22.1%,
to $535.6 million in fiscal 2000 from $438.5
30
million in fiscal 1999. Of the increase in revenues in 2000 compared with 1999,
$68.7 million is attributable to increased compensated resident days resulting
from the opening of two new facilities in 2000 and increased compensated
resident days at six facilities, $27.8 million is due to project revenues for
the development of a hospital and a prison, and the balance represents
facilities open during all of both periods.
WHC expects to open two facilities in the first quarter 2001. When opening a new
facility, WHC incurs significant costs for payroll and training of new
personnel. However, WHC does not receive occupants until the contracting agency
has certified the facility as being complete and ready for use. WHC believes it
will meet all the necessary requirements and intake inmates in accordance with
its planned schedule. However, there can be no assurances that the contracting
agency will certify the facility and as a result that the facility will open as
scheduled. Any delays in opening could significantly impact the Company's first
quarter 2001 results of operations. Average facility occupancy in domestic
facilities remained constant at 97.4% of capacity for 2000 and 1999. Average
facility occupancy in Australian facilities increased to 99.1% of capacity in
2000 compared to 96.6% in 1999. Total compensated resident days increased to
10.6 million in fiscal 2000 from 9.6 million in fiscal 1999.
Flexible Staffing Services Business
Flexible Staffing Services' revenues increased $128.5 million, or 19.1%, to
$801.3 million in fiscal 2000 from $672.8 million in fiscal 1999 and is
attributable to internal growth. Worksite employees grew to 35,900 at the end of
2000 from 29,500 at the end of 1999. Temporary staffing hours were approximately
3.6 million in 2000 compared to 3.3 million in 1999.
Operating Income
Fiscal 2000 consolidated operating income was $34.9 million versus $37.9 million
in fiscal 1999. The operating margin for fiscal 2000 decreased to 1.4% from 1.8%
in 1999. This decrease is primarily related to WHC due to: [1] a $3.8 million
operating charge related to the deactivation of the Jena, Louisiana facility,
[2] additional expenses related to operations at six facilities, and [3] an
increase in insurance expense. Although WHC has put strategies in place to
improve profitability, there can be no assurances these strategies will be
successful. This decrease in operating margin was partially offset by improved
profitability and margins in Security Services.
Global Security Services
Fiscal 2000 Security Services' business operating income of $33.4 million
increased $5.7 million, or 20.6%, from $27.7 million in fiscal 1999. Margins
increased to 2.9% in 2000 from 2.7% in 1999.
Fiscal 2000 operating income of $30.1 million in the North American market
increased $5.4 million, or 21.9%, from $24.7 million in fiscal 1999. This
increase can be attributed mainly to increased revenue growth from commercial
and government-regulated security services net of decreased profits in food
services. North American market operating income as a percentage of revenues
increased 20 basis points in fiscal 2000 compared to fiscal 1999 due to an
increase in billing rates.
Security Services fiscal 2000 operating income in the international market
increased $0.3 million, or 10.0%, to $3.3 million from $3.0 million in 1999 with
operating margins remaining the same at 2.0%. Improved operations of
subsidiaries in the United Kingdom and Africa contributed to this improvement.
Correctional Services Business
Fiscal 2000 operating income from Correctional Services decreased $7.1 million,
or 27.4%, to $18.9 million from $26.0 million in fiscal 1999. This decrease is
due to WHC reporting a third quarter operating charge of $3.8 million related to
the deactivation of the Jena, Louisiana facility. WHC estimates this facility
will remain inactive through the end of 2001. There were also additional
expenses related to the operations at six facilities in the United States. WHC
has developed strategies to improve
2000 1999 1998*
-----------------------------------------------------------------------------------
$ % $ % $ %
------------- ------------- ------------- ------------- ------------- -------------
REVENUES (a)
GLOBAL SECURITY SERVICES $ 1,168.2 46.6 $1,041.0 48.3 $ 947.2 54.0
CORRECTIONAL SERVICES 535.6 21.4 438.5 20.4 312.8 17.8
FLEXIBLE STAFFING SERVICES 801.3 32.0 672.8 31.3 495.1 28.2
-----------------------------------------------------------------------------------
CONSOLIDATED REVENUES $ 2,505.1 100.0 $2,152.3 100.0 $ 1,755.1 100.0
-----------------------------------------------------------------------------------
OPERATING INCOME (b)
GLOBAL SECURITY SERVICES $ 33.4 2.9 $ 27.7 2.7 $ 24.2 2.6
CORRECTIONAL SERVICES 18.9 3.5 26.0 5.9 22.5 7.2
FLEXIBLE STAFFING SERVICES 3.7 0.5 3.5 0.5 2.7 0.5
UNALLOCATED CORPORATE EXPENSE ( 21.1) ( 0.8) ( 19.3) (0.9) (17.0) (1.0)
------------- ------------- -------------
CONSOLIDATED OPERATING INCOME $ 34.9 1.4 $ 37.9 1.8 $ 32.4 1.8
------------- ------------- -------------
- ----------------------------------------------------------------------------------------------------------------------
(a) Represents percent of total revenues.
(b) Represents percent of respective business related revenues.
* 53 weeks
31
the operational performance of these facilities, however, there can be no
assurances that these strategies will be successful.
Additionally, WHC has informed a state board of corrections that it would not
consider a third extension of its management contract for two correctional
facilities, both owned by the state, under the contracts' current terms and
conditions which expire on June 30, 2001. WHC does not expect the expiration of
the current management contracts to have any material impact on the Company's
financial guidance for fiscal 2001. However, there can be no assurance that WHC
will be able to exit these facilities without negative financial impact.
In addition, there has been an increase in insurance expense. WHC continues to
incur additional insurance expense which could have an adverse impact on WHC's
and the Company's future financial results of operations. Although WHC is
developing a strategy to improve the management of loss claims incurred, there
can be no assurances that this strategy will be successful.
Additional payroll costs were incurred related to unanticipated wage increases
due to tight labor markets in 2000. WHC also experienced increased medical costs
for offsite hospitalizations and treatment of serious illnesses of certain
residents, which were beyond the treatment capabilities of WHC's facilities.
Operating margin as a percentage of revenues was 3.5% in fiscal 2000, compared
to 5.9% in fiscal 1999.
Flexible Staffing Services Business
Flexible Staffing Services' operating income of $3.7 million increased $0.2
million, or 5.7%, from $3.5 million in fiscal 1999. The operating income of the
Flexible Staffing Services as a percentage of total Flexible Staffing revenues
was 0.5% for fiscal 2000 and fiscal 1999.
Corporate Expenses
Unallocated corporate general and administrative expenses increased to $21.1
million from $19.3 million in 1999. As a percentage of consolidated revenues,
unallocated corporate general and administrative expenses did not significantly
change.
EBITDA
Fiscal 2000 EBITDA, defined as earnings before interest expense, income taxes,
depreciation and amortization was $60.8 million. Fiscal 1999 EBIDTA was also
$60.8 million.
Other Income (Expense)
Interest and investment income decreased $2.1 million (29.2%) in fiscal 2000
over fiscal 1999 primarily due to WHC recognizing $2.0 million more in gains
from the sale of its loans to overseas affiliates in 1999. Interest expense
increased $1.5 million to $6.7 million in fiscal 2000 from $5.2 million in 1999.
The increase in interest expense is primarily attributable to increases in the
average outstanding balances for securitized accounts receivable and the
revolving credit facility.
Minority Interest
Minority interest (net of income taxes) decreased to $8.2 million in fiscal 2000
from $10.9 million in fiscal 1999, reflecting principally the decrease of $2.5
million in minority interest pertaining to decreased earnings of WHC.
Equity in Income of Affiliates
Equity in income of affiliates (net of income taxes) decreased $0.7 million, or
9.9%, to $5.8 million in fiscal 2000 from $6.5 million in fiscal 1999. Equity
income of the Chilean affiliate decreased by $1.8 million after tax due to a
decrease in operating income and an increase in interest expense. Management has
developed strategies to restructure its Chilean affiliate and to improve
operating performance; however, there can be no assurances that these strategies
will be successful. This decrease is partially offset by improved performance of
WHC's U.K. affiliate due to the expansion of services and a full year of
operations at H.M. Prison Kilmarnock which opened in March 1999, the
Hassockfield Secure Training Centre in Medomsley England, which opened in
September 1999, and H.M. Prison & Youth Offender Institution Ashfield in
Pucklechurch, England, which opened in November 1999.
Income Before Cumulative Effect of Change in Accounting Principle
Income before cumulative effect of change in accounting principle decreased $2.0
million to $17.6 million in fiscal 2000, compared to $19.6 million in fiscal
1999. Diluted earnings per share before the cumulative effect of change in
accounting principle was $1.15 in fiscal 2000, compared to $1.28 in fiscal 1999.
Cumulative Effect of Change in Accounting Principle
In fiscal 2000, the Company adopted SAB No. 101. The adoption of SAB No. 101
resulted in a one-time charge in 2000 of $0.8 million, net of income taxes.
Net Income
Net income was $16.8 million for fiscal 2000, or $1.12 basic earnings per share,
as compared to $19.6 million, or $1.31 per share for fiscal 1999. Earnings per
share on a diluted basis was $1.10 in fiscal 2000 compared to $1.28 for fiscal
1999. Goodwill amortization, after tax, amounted to $1.5 million for fiscal
2000. Excluding goodwill amortization, after tax, basic and diluted earnings per
share would have been $0.09 and $0.10 more, respectively.
Fiscal 1999 compared with Fiscal 1998
Revenues
Fiscal 1999 consolidated revenues increased $397.2 million, or 23%, over fiscal
1998 due to increases in all business groups. The Company's growth in the staff
leasing/temporary services and the correctional business were the largest
contributors to the increase over fiscal 1998. Security services also showed
solid growth.
Global Security Services Business
Fiscal 1999 Global Security Services' revenues increased $93.8 million, or 10%,
to $1,041.0 million from $947.2 million in fiscal 1998. North American market
revenues increased $82.3 million, or 10%, to $892.3 million in fiscal 1999 from
$810.0 million in fiscal 1998. Within the North American market, revenues from
commercial accounts represented approximately 62% of total revenues of the group
in fiscal 1999 versus 60% in fiscal 1998, and revenues from government/regulated
industries represented the other portion. Commercial account revenues increased
approximately 15% in fiscal 1999 over fiscal 1998, primarily due to a
combination of higher billing rates and increases in billable hours as the
Company continued to expand its base of national accounts and Custom Protection
Officer(R) ("CPO") clients. Revenues of government and regulated industries
increased 3% in fiscal 1999 over fiscal 1998. International market revenues
increased $11.5 million, or 8%, to $148.7 million in fiscal 1999
32
from $137.2 million in fiscal 1998. Revenues in Latin America, principally in
Venezuela, Guatemala, Peru, Uruguay and Costa Rica continued to increase mainly
through expansion of the security-related business, diversification of services,
and expansion of the client base of multi-national companies. In addition, a
Mexican subsidiary, previously an affiliate, had revenues in 1999 of $4.3
million.
Correctional Services Business
Fiscal 1999 Correctional Services' revenues increased $125.7 million, or 40%, to
$438.5 million in fiscal 1999 from $312.8 million in fiscal 1998. Of the
increase in revenues in 1999 compared with 1998, $110.6 million is attributable
to increased compensated resident days resulting from the opening of six new
facilities in 1999 and increased compensated resident days at ten facilities
that opened in 1998, $8.9 million is due to project revenues for the development
of a hospital, and the balance represents facilities open during all of both
periods. Average facility occupancy in domestic facilities increased slightly to
97.4% of capacity in 1999 compared to 95.4% in 1998. Average facility occupancy
in Australian facilities decreased slightly to 96.6% of capacity in 1999
compared to 98.2% in 1998. Total compensated resident days increased to 9.6
million in fiscal 1999 from 7.7 million in fiscal 1998.
Flexible Staffing Services Business
The significant growth in the Flexible Staffing Services business has resulted
from both internal growth and acquisitions. Flexible Staffing Services' 1999
revenues of $672.8 million reflect the acquisition, in November 1998, of Sharp
and Advantage Temporary Staffing Companies and were 36% above last year's
revenues of $495.1 million. Worksite employees grew to 29,500 at the end of 1999
from 25,000 at the end of 1998. Including Sharp and Advantage, temporary
staffing hours were approximately 3.3 million in 1999 compared to 2.2 million in
1998.
Operating Income
Fiscal 1999 consolidated operating income was $37.9 million versus $32.4 million
in fiscal 1998. The operating margin for fiscal 1999 remained flat at 1.8%.
Although Security Services' operating margin improved, this improvement was
offset by a decline in WHC's operating margin and an increase in information
technology costs related to the roll-out of new enterprise-wide systems. WHC's
decline was due to the following factors: [1] lease payments to CPV for a full
year in 1999, [2] an increase in expenses related to the construction of the
South Florida State Hospital, and [3] additional expenses related to operations
at seven facilities.
Global Security Services Business
Fiscal 1999 Security Services business operating income of $27.7 million
increased $3.5 million, or 14%, from $24.2 million in fiscal 1998. In the North
American market fiscal 1999 operating income of $24.7 million increased $2.5
million, or 11%, from $22.2 million in fiscal 1998. This increase can be
attributed mainly to increased revenue growth from commercial and
government-regulated security services net of decreased profit margins in food
services. These increases were offset by increases in administrative and
corporate costs. The increase in administrative and corporate expenses as
compared to fiscal 1998 was due to increases in information technology costs as
the Company continued to roll out new enterprise wide systems. Despite the
higher costs associated with information technology, the North American market
operating income as a percentage of revenues increased slightly in fiscal 1999
compared to fiscal 1998. The 1999 operating income in the international market
increased $1.0 million, or 50%, to $3.0 million from $2.0 million in 1998 with
operating margins improving to 2.0% in 1999 versus 1.5% in 1998. Improved
operations of subsidiaries in Africa and Europe and growth in the security
business contributed to this improvement.
Correctional Services Business
Fiscal 1999 operating income from Correctional Services increased $3.5 million,
or 16%, to $26.0 million from $22.5 million in fiscal 1998. The increase is due
principally to the increased profits from the six new facilities opened in
fiscal 1999 and ten facilities opened in 1998. Operating margin as a percentage
of revenues was 5.9% in fiscal 1999, compared to 7.2% in fiscal 1998. The
decrease in operating margin was due partially to lease payments to CPV of $20.6
million offset by the amortization of deferred revenues of $1.7 million and
expenses related to the development of the South Florida State Hospital.
Additional expenses were also incurred related to operations at seven facilities
in the United States.
Flexible Staffing Services Business
Flexible Staffing Services operating income of $3.5 million increased $0.8
million, or 30%, from $2.7 million in fiscal 1998. The operating income of the
Flexible Staffing Services as a percentage of total Flexible Staffing revenues
was 0.5% for fiscal 1999 and fiscal 1998.
Corporate Expenses and Information Systems
Unallocated corporate general and administrative expenses increased 14% to $19.3
million from $17.0 million in 1998. The increase reflects the continuing
increase in information technology costs related to the rollout of new
enterprise-wide systems and payroll-related costs attributable to corporate
staff. However, as a percentage of consolidated revenues, unallocated corporate
general and administrative expenses decreased to 0.9% from 1.0% in 1998.
EBITDA
Fiscal 1999 EBITDA, defined as earnings before interest expense, income taxes,
depreciation and amortization of $60.8 million increased $10.9 million, or 22%,
from $49.9 million in fiscal 1998. As a percentage of revenues, EBITDA remained
flat at 2.8%.
Other Income (Expense)
Interest and investment income increased $2.2 million (44%) in fiscal 1999 over
fiscal 1998 primarily due to WHC recognizing a gain of $2.6 million from the
sale of approximately one-half of its loans to overseas affiliates. This
increase was more than offset by an increase in interest expense of $2.4 million
to $5.2 million in fiscal 1999 from $2.8 million in 1998. The increase in
interest expense is primarily attributable to increases in the average
outstanding balances for securitized accounts receivable and the revolving
credit facility.
Minority Interest
Minority interest (net of income taxes) increased to $10.9 million in fiscal
1999 from $8.5 million in fiscal 1998, reflecting principally the increase of
$2.0 million in minority interest pertaining to increased earnings of WHC.
Minority interest in international subsidiaries increased $0.4 million in fiscal
1999 over fiscal 1998.
33
Equity in Income of Affiliates
Equity in income of foreign affiliates (net of income taxes) increased $3.0
million, or 86%, to $6.5 million in fiscal 1999 from $3.5 million in fiscal
1998. This increase relates to the Space Gateway joint venture in the North
American Market and improved performances overseas, primarily in the U.K. due to
the commencement of home monitoring contracts in January 1999, the opening of a
prison in March 1999 and a juvenile detention center in September 1999.
Income Before Cumulative Effect of Change in Accounting Principle
Income before cumulative effect of change in accounting principle increased $3.7
million to $19.6 million in fiscal 1999, compared to $15.9 million in fiscal
1998. Diluted earnings per share before the cumulative effect of change in
accounting principle was $1.28 in fiscal 1999, compared to $1.03 in fiscal 1998.
Cumulative Effect of Change in Accounting Principle
In fiscal 1998, the Company adopted SOP 98-5. The adoption of SOP 98-5 resulted
in 1998 a one-time charge of $6.6 million, net of income taxes.
Net Income
Net income was $19.6 million for fiscal 1999, or $1.31 basic earnings per share,
as compared to $9.3 million, or $0.63 per share for fiscal 1998. Earnings per
share on a diluted basis was $1.28 in fiscal 1999 compared to $0.59 for fiscal
1998. Goodwill amortization, after tax, amounted to $1.2 million for fiscal
1999. Excluding goodwill amortization, after tax, basic and diluted earnings per
share would have been $0.08 and $0.07 more, respectively.
34
The Wackenhut Corporation and Subsidiaries
Consolidated Statements of Income
(in millions except per share data)
FISCAL YEARS ENDED DECEMBER 31, 2000, JANUARY 2, 2000, and JANUARY 3, 1999
2000 1999 1998*
- --------------------------------------------------------------------------- ------------------ ------------------ -----------------
REVENUES $ 2,505.1 $ 2,152.3 $ 1,755.1
------------------ ------------------ -----------------
OPERATING EXPENSES
Payroll and related taxes 1,950.4 1,688.5 1,359.5
Other operating expenses 493.9 403.0 345.7
Depreciation and amortization 25.9 22.9 17.5
------------------ ------------------ -----------------
OPERATING INCOME 34.9 37.9 32.4
------------------ ------------------ -----------------
OTHER INCOME (EXPENSE)
Interest and investment income 5.1 7.2 5.0
Interest expense (6.7) (5.2) (2.8)
------------------ ------------------ -----------------
INCOME BEFORE INCOME TAXES 33.3 39.9 34.6
INCOME TAXES (13.3) (15.9) (13.7)
MINORITY INTEREST, NET OF INCOME TAXES OF $5.5, $7.2 AND $5.5 (8.2) (10.9) (8.5)
EQUITY IN INCOME OF AFFILIATES, NET OF INCOME TAXES OF
$3.9, $4.3 AND $2.3 5.8 6.5 3.5
------------------ ------------------ -----------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 17.6 19.6 15.9
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET (Note 2) (0.8) - (6.6)
------------------ ------------------ -----------------
NET INCOME $ 16.8 $ 19.6 $ 9.3
------------------ ------------------ -----------------
EARNINGS (LOSS) PER SHARE:
Basic
Income before cumulative effect of change in accounting principle $ 1.17 $ 1.31 $ 1.07
Cumulative effect of change in accounting principle (0.05) - (0.44)
------------------ ------------------ -----------------
Net income $ 1.12 $ 1.31 $ 0.63
------------------ ------------------ -----------------
Diluted
Income before cumulative effect of change in accounting principle $ 1.15 $ 1.28 $ 1.03
Cumulative effect of change in accounting principle (0.05) - (0.44)
------------------ ------------------ -----------------
Net income $ 1.10 $ 1.28 $ 0.59
------------------ ------------------ -----------------
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15.0 14.9 14.8
------------------ ------------------ -----------------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15.1 15.1 15.1
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
* 53 weeks
35
The Wackenhut Corporation and Subsidiaries
Consolidated Balance Sheets
(in millions except share data)
DECEMBER 31, 2000 and JANUARY 2, 2000
2000 1999
- ---------------------------------------------------------------------------------------------- ------------------ -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 60.8 $ 67.0
Accounts receivable, net 218.4 182.3
Inventories 11.5 14.7
Deferred taxes, net 12.1 10.5
Prepaid expenses 10.6 12.5
Other 15.1 12.1
------------------ -----------------
328.5 299.1
MARKETABLE SECURITIES 37.3 28.8
PROPERTY AND EQUIPMENT, 118.2 96.1
Less: accumulated depreciation and amortization (38.8) (27.9)
------------------ -----------------
79.4 68.2
DEFERRED TAXES, net 7.5 9.9
OTHER ASSETS
Goodwill, net 50.1 52.3
Other intangibles, net 14.1 16.7
Investment in and advances to affiliates 44.9 37.3
Other 8.5 8.7
------------------ -----------------
117.6 115.0
------------------ -----------------
$ 570.3 $ 521.0
- ---------------------------------------------------------------------------------------------- ------------------ -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current portion of long-term debt $ 5.1 $ 4.7
Accounts payable 36.9 36.5
Accrued payroll and related taxes 90.3 77.1
Accrued expenses 65.6 56.8
------------------ -----------------
197.9 175.1
RESERVES FOR INSURANCE LOSSES 92.7 77.5
LONG-TERM DEBT 11.4 16.5
DEFERRED REVENUE 12.8 15.2
OTHER 19.6 17.4
COMMITMENTS AND CONTINGENCIES (notes 3, 9 and 17)
MINORITY INTEREST 58.1 55.4
SHAREHOLDERS' EQUITY
Preferred stock, 10 million shares authorized, none outstanding - -
Common stock, $.10 par value, 50 million shares authorized
Series A, 3.9 million issued and outstanding 0.4 0.4
Series B, 11.1 million issued and outstanding 1.1 1.1
Additional paid-in capital 121.9 121.7
Retained earnings 67.8 51.0
Accumulated other comprehensive loss (13.4) (10.3)
------------------ -----------------
177.8 163.9
------------------ -----------------
$ 570.3 $ 521.0
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
36
The Wackenhut Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in millions)
FISCAL YEARS ENDED DECEMBER 31, 2000, JANUARY 2, 2000 and JANUARY 3, 1999
2000 1999 1998*
- ----------------------------------------------------------------------------- ------------------ ------------------ ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 16.8 $ 19.6 $ 9.3
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of accounting changes 0.8 - 6.6
Depreciation and amortization expense 25.9 22.9 17.5
Deferred taxes 0.8 1.1 (16.1)
Provision for bad debts 3.2 0.3 3.0
Equity income, net of dividends received (7.2) (8.1) (5.7)
Minority interests in net income 13.7 18.1 14.0
Tax benefit from exercise of stock options - 0.4 0.3
Other (1.5) 0.5 (0.7)
Changes in operating assets and liabilities, net of acquisitions and
divestitures -
(Increase) Decrease in operating assets:
Accounts receivable (38.4) (31.2) (50.6)
Inventories (4.7) (8.2) (11.0)
Prepaid expenses 1.9 (5.4) 2.0
Other current assets (3.1) 0.1 (5.0)
Other (0.5) (4.8) (5.8)
Increase (Decrease) in operating liabilities:
Accounts payable and accrued expenses 14.8 5.1 13.5
Accrued payroll and related taxes 13.2 7.2 17.6
Reserve for insurance losses 15.2 20.4 9.7
Other (0.2) (0.7) 1.2
------------------ ------------------ ----------------
Net Cash Provided By (Used In) Operating Activities 50.7 37.3 (0.2)
------------------ ------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from sale of prison facilities to CPV (see note 10) - 22.3 41.8
Payments for acquisitions, net of cash acquired (10.3) (4.7) (8.1)
Net investment in and advances (to) from affiliates and joint ventures - 7.4 (10.9)
Capital expenditures (24.3) (44.0) (33.9)
Sales of marketable securities 14.3 6.2 17.4
Purchases of marketable securities (20.1) (19.5) (28.1)
Non-current assets - (1.5) (7.7)
------------------ ------------------ ----------------
Net Cash Used In Investing Activities (40.4) (33.8) (29.5)
------------------ ------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from exercise of stock options of subsidiary - 0.2 1.8
Net proceeds from exercise of stock options - 1.1 0.9
Proceeds from issuance of debt 369.3 315.0 294.5
Payments on debt (374.0) (301.6) (305.7)
Dividends paid - (2.2) (4.4)
Net cash settlements from sales of accounts receivable (2.0) 16.5 53.0
Shares repurchased and retired, including subsidiary's (4.9) (8.0) (10.8)
------------------ ------------------ ----------------
Net Cash (Used In) Provided by Financing Activities (11.6) 21.0 29.3
------------------ ------------------ ----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (4.9) (1.0) (1.3)
------------------ ------------------ ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6.2) 23.5 (1.7)
CASH AND CASH EQUIVALENTS, beginning of year 67.0 43.5 45.2
------------------ ------------------ ----------------
CASH AND CASH EQUIVALENTS, end of year $ 60.8 $ 67.0 $ 43.5
------------------ ------------------ ----------------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for - interest $ 8.0 $ 6.3 $ 2.8
- income taxes 8.6 12.6 18.4
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
* 53 weeks
37
The Wackenhut Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(in millions except share data in thousands)
FISCAL YEARS ENDED DECEMBER 31, 2000, JANUARY 2, 2000, and JANUARY 3, 1999
Common Stock
Par Value $.10
------------------------------------- Unrealized
Series A Series B Addi- Gain Total
------------------ ----------------- tional Foreign (Loss) Share-
Number Number Paid-in Retained Currency on holders'
of Shares Amount of Shares Amount Capital Earnings Translation Securities Equity
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 28, 1997 3,855 $ 0.4 10,998 $ 1.1 $ 124.1 $ 27.6 $ (6.4) $ - $146.8
Proceeds from the exercise of stock options 79 0.9 0.9
Tax benefit related to employee stock options 0.3 0.3
Subsidiary's exercise of stock options 3.9 3.9
Subsidiary's shares repurchased (4.8) (4.8)
Shares repurchased and retired (109) (1.9) (1.9)
Dividends (4.4) (4.4)
Comprehensive income (loss):
Net Income 9.3
Foreign currency translation adjustments,
net of income tax benefits of $0.6 (0.9)
Total comprehensive income 8.4
---------------------------------------------------------------------------------------
BALANCE, JANUARY 3, 1999 3,855 0.4 10,968 1.1 122.5 32.5 (7.3) 149.2
Proceeds from the exercise of stock options 110 1.1 1.1
Tax benefit related to employee stock options 0.4 0.4
Issuance of Performance Shares 38 0.6 0.6
Subsidiary's exercise of stock options 1.7 1.7
Subsidiary's shares repurchased (4.5) (4.5)
Shares repurchased and retired (5) (0.1) (0.1)
Dividends (1.1) (1.1)
Comprehensive income (loss):
Net Income 19.6
Foreign currency translation adjustments,
net of income tax benefits of $0.7 (1.1)
Unrealized loss on marketable securities,
net of income tax benefits of $1.0 (1.9)
Total comprehensive income 16.6
---------------------------------------------------------------------------------------
BALANCE, JANUARY 2, 2000 3,855 0.4 11,111 1.1 121.7 51.0 (8.4) (1.9) 163.9
Equity increase from affiliate stock offering 0.9 0.9
Issuance of Performance Shares 33 0.5 0.5
Subsidiary's shares repurchased (1.2) (1.2)
Comprehensive income (loss):
Net Income 16.8
Foreign currency translation adjustments,
net of income tax benefits of $3.3 (4.9)
Unrealized gain on marketable securities,
net of income taxes of $0.9 1.8
Total comprehensive income 13.7
---------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 3,855 $ 0.4 11,144 $ 1.1 $ 121.9 $ 67.8 $ (13.3) $(0.1) $177.8
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
38
The Wackenhut Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Tabular dollar information in millions except share and per share data)
For the Fiscal Years Ended December 31, 2000, January 2, 2000, and January 3,
1999
(1) General
The Wackenhut Corporation (the "Company") is a major provider of global business
services including providing security-related and other support services to
business and government, developing and managing privatized correctional,
detention and public sector mental health services facilities through Wackenhut
Corrections Corporation ("WHC") a 57% owned public subsidiary, and providing
worksite employees and temporary staffing.
(2) Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year ends on the Sunday closest to the calendar year end.
Fiscal years 2000 and 1999 each included 52 weeks. Fiscal year 1998 included 53
weeks.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of all wholly owned
and majority owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Partially owned equity
affiliates are accounted for under the equity method. Certain prior year amounts
have been reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Estimates are used for, but
not limited to, the accounting for doubtful accounts, depreciation of fixed
assets, amortization of intangibles, and contingencies. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, other
receivables, notes payable, accounts payable and long-term debt approximates
fair value. Accounts receivable are reported net of allowances of $4.8 million
and $5.2 million at December 31, 2000 and January 2, 2000, respectively.
Marketable Securities
Marketable securities are classified as available-for-sale. Realized gains and
losses from the sale of securities are based on specific identification of the
security. Unrealized gains and losses on marketable securities are included in
shareholders' equity as a component of accumulated other comprehensive income
(loss).
Cash and Cash Equivalents
The Company classifies as cash equivalents all interest-bearing deposits or
investments with original maturities of three months or less. Cash of the
Company's captive insurance subsidiary collateralizes certain obligations. Cash
and cash equivalents of WHC is generally not available to the Company in any
form, including dividends or loans.
Inventories
Food, 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 and are amortized over a period of eighteen months. A provision
has been made to reduce obsolete or excess inventories to market.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Maintenance and repairs are expensed as incurred. Depreciation is computed using
the straight-line method over the estimated useful lives of related assets.
Accelerated methods of depreciation are generally used for income tax purposes.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the improvement or the term of the lease.
Impairment of Long-lived Assets
Long-lived assets including certain identifiable intangibles, and the goodwill
related to those assets, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset in question may
not be recoverable including, but not limited to, a deterioration of profits for
a business segment that has long-lived assets, and when other changes occur
which might impair recovery of long-lived assets. Management has reviewed the
Company's long-lived assets and has determined that there are no events
requiring impairment loss recognition. The method used to determine the
existence of an impairment would be undiscounted operating cash flows estimated
over the remaining amortization period for the related long-lived assets.
Impairment is measured as the difference between fair value and unamortized cost
at the date impairment is determined.
Goodwill and Other Intangibles
Goodwill represents the cost of an acquired enterprise in excess of the fair
value of the net tangible and identifiable intangible assets acquired. Other
intangibles include the fair market value of contracts purchased in
acquisitions. Goodwill and contract values are amortized on a straight-line
basis over 10 to 30 years.
Reserves for Insurance Losses
The Company's wholly owned casualty insurance subsidiary reinsures a portion of
the Company's workers' compensation, 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.
39
Deferred Revenue
Deferred revenue primarily represents the unamortized net profit on the sale of
properties by WHC to Correctional Properties Trust ("CPV"), a Maryland real
estate investment trust. WHC leases these properties back from CPV. Deferred
revenue is being amortized over the lives of the leases and is recognized in
income as a reduction of rental expense.
Foreign Currency Translation
The Company's foreign operations use the local currency as their functional
currency. Assets and liabilities of the operations (except for countries with
highly inflationary economies) are translated at the exchange rates in effect on
the balance sheet date. Equity is translated using historical exchange rates.
Income statement items (except for countries with highly inflationary economies)
are translated at the average exchange rates for the reporting period. The
impact of currency fluctuations on these transactions is included in
shareholders' equity as a component of accumulated other comprehensive income
(loss) except for intercompany accounts which are included in gains (losses).
The financial statements of subsidiaries located in highly inflationary
economies are remeasured as if the functional currency were the U.S. dollar. The
remeasurement of these local currencies into U.S. dollars creates translation
adjustments which are included in the consolidated statements of income. Foreign
exchange gains or (losses) were ($0.5) million, $0.2 million, and ($1.5) million
for 2000, 1999 and 1998, respectively.
Revenues
Project development and design revenues are recognized as earned on a percentage
of completion basis measured by the percentage of costs incurred to date as
compared to estimated total cost for each contract. This method is used because
management considers costs incurred to date to be the best available measure of
progress on these contracts. Provisions for estimated losses on uncompleted
contracts are made in the period in which the Company determines that such
losses are probable. Contract costs include all direct material and labor costs
and those indirect costs related to contract performance. Changes in job
performance, job conditions, estimated profitability, including those arising
from contract penalty provisions, and final contract settlements may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. Revenues earned from services are recognized when
services are provided. During the fourth quarter 2000, the Company adopted SAB
No. 101 which resulted in government contract award fees, previously accrued for
based on the Company's performance and long-term historical experience of being
awarded such fees, being recognized only when awarded.
Income Taxes
Deferred income taxes are determined on the estimated future tax effects of
differences between the financial reporting and tax basis of assets and
liabilities given the provisions of enacted tax laws. Deferred income tax
provisions and benefits are based on changes to the asset or liability from year
to year. Valuations allowances are recorded related to deferred tax assets if
their realization does not meet the "not more likely than" criteria detailed in
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes." The Company and WHC file separate tax returns.
Minority Interest
The minority interest expense represents principally the separate public
ownership in WHC, as listed on the New York Stock Exchange, and the ownership by
foreign investors in several international subsidiaries.
SEC Staff Accounting Bulletin: No. 51 (SAB No. 51)
In connection with the initial public offering of our Greek affiliate, the
Company adopted SEC Staff Accounting Bulletin: No. 51 (SAB No. 51) - Accounting
for Sale of Stock by a Subsidiary, which provides guidance related to gain
recognition upon public sale of shares of a subsidiary. SAB No. 51 allows for
the recording of gains from the sale of newly issued shares of a subsidiary
directly to shareholders' equity and is reflected in additional paid-in capital.
SEC Staff Accounting Bulletin: No. 101 (SAB No. 101)
During the fourth quarter of 2000, the Company adopted SEC Staff Accounting
Bulletin: No. 101 (SAB No. 101) - Revenue Recognition. Government contract award
fees, previously accrued for based on the Company's performance and long-term
experience of being awarded such fees, are now only recognized when formally
awarded. SAB No. 101 applied retroactively to the first quarter of 2000,
resulted in a one-time charge in 2000 of $0.8 million, net of income taxes. On a
diluted basis, the cumulative effect of change in accounting principle was $0.05
per share during 2000. On a basic and diluted basis for 1999 and 1998, the pro
forma effect was $0.02 per share less than that reported for each of these
years.
AICPA Statement of Position 98-5 (SOP 98-5)
During the fourth quarter of 1998, the Company adopted AICPA Statement of
Position 98-5 (SOP 98-5), "Accounting for Costs of Start-up Activities." SOP
98-5 requires the expensing of start-up costs, defined as pre-opening,
pre-operating and pre-contract type costs. The adoption of SOP 98-5, which was
applied retroactively to the first quarter of 1998, resulted in a one-time
charge in 1998 of $6.6 million, net of income taxes and after deducting the
portion applicable to minority shareholders of WHC. On a diluted basis, the
cumulative effect of change in accounting principle was $0.44 per share in 1998.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding. In the computation of
diluted earnings per share, net income is reduced by the dilutive effect of
subsidiaries' stock options and dividing the result by the weighted-average
number of common shares outstanding of all potential dilutive common stock
equivalents except in cases where the effect would be anti-dilutive.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" requires companies to report all
changes in equity in a financial statement for the period in which they are
recognized, except those resulting from investment by owners and distributions
to owners. The Company has chosen to disclose Comprehensive Income, which
encompasses net income and foreign currency translation adjustments, net of tax,
in the Consolidated
40
Statements of Shareholders' Equity and Comprehensive Income.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents, trade accounts
receivable and financial instruments used in hedging activities. The Company's
cash management and investment policies restrict investments to short and medium
term securities, and the Company performs periodic evaluations of the credit
standing of the financial institutions with which it deals. The Company performs
ongoing credit evaluations of its customers' financial condition and generally
does not require collateral. The Company maintains reserves for potential credit
losses, and such losses traditionally have been within management's expectations
and have not been material in any year. As of December 31, 2000 and January 2,
2000, management believes the Company had no significant concentrations of
credit risk.
Accounting Pronouncements
The Company will adopt SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 137 and 138, on January 1, 2001. The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. WHC's 50% owned equity foreign affiliate has
entered into interest rate swaps to fix the interest rate it receives on its
variable rate credit facility. WHC's management has determined the swaps to be
effective cash flow hedges. Accordingly, WHC will record its share of the
affiliate's change in other comprehensive income as a result of applying SFAS
133. The adoption of SFAS 133 will result in a $12 million reduction in
shareholders equity in WHC's financial statements for the quarter ended April 1,
2001, and approximately $6.9 million in the Company's financial statements for
the same period.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of APB
Opinion No. 25 and, among other issues clarifies the following: the definition
of an employee for purposes of applying APB Opinion No. 25: the criteria for
determining whether a plan qualifies as a noncompensatory plan; the accounting
consequence of various modifications to the terms of previously fixed stock
options or awards; and the accounting for an exchange of stock compensation
awards in a business combination. The adoption of FIN 44 did not have an impact
on the Company's financial position, results of operations or cash flow.
(3) Acquisitions
In November 1998, the Company purchased certain assets and assumed certain
liabilities of Sharp Services, Inc. and Advantage Temporary Services, Inc., for
an initial payment of $8.1 million in cash, with a contingent cash payment,
payable no later than May 2001, subject to adjustments based on actual workers'
compensation claims. In no event will the total purchase price exceed $10.0
million. The acquisitions were accounted for under the purchase method, and the
Company recorded approximately $6.5 million of goodwill which is being amortized
on a straight-line basis over 30 years.
The results of operations for Sharp and Advantage Companies have been included
in the Company's consolidated financial statements from the date of acquisition.
The following unaudited pro forma information combines the consolidated results
of operations of the Company, Sharp and Advantage as if the acquisitions had
occurred at the beginning of 1998.
1998*
- ------------------------------------------------------------
Pro forma revenues $ 1,771.9
Pro forma net income $ 9.8
Pro forma per share - basic $ 0.66
Pro forma per share - diluted $ 0.63
- ------------------------------------------------------------
* 53 weeks
The unaudited pro forma results have been prepared for comparative purposes
only, after the cumulative effect of change in accounting principle in 1998, and
include adjustments for additional amortization expense as a result of goodwill
and the related income tax effects. The pro forma results may not be indicative
of results that would have occurred had the combination been in effect for the
period presented, nor do they purport to be indicative of the results that will
be obtained in the future.
In December 1997, the Company purchased certain assets and assumed certain
liabilities of Professional Employee Management, Inc. An initial payment of
$18.9 million in cash was made together with a series of annual contingent
earn-out payments that have been paid out or become payable based on annual
performance through 2000. At December 31, 2000, no additional liability was
required to be accrued under the contingent earn-out. In no event will the total
purchase price exceed $50.7 million. The acquisition was accounted for under the
purchase method, and to date the Company has recorded $32.8 million of goodwill,
which is being amortized on a straight-line basis over 30 years.
(4) Property and Equipment
Property and equipment consist of the following at fiscal year end:
Useful 2000 1999
Life
- ----------------------------------------------------------
Land $ 2.8 $ 3.5
Buildings and improvements 7 to 30 53.2 23.2
Equipment 11/2to 20 44.7 33.6
Furniture and fixtures 3 to 10 7.4 6.9
Automobiles 3 9.3 7.7
Construction in progress 0.8 21.2
-------------------
$ 118.2 $ 96.1
- ----------------------------------------------------------
(5) Marketable Securities
Marketable securities, carried at fair value, consist of the following at fiscal
year end:
2000 1999
- --------------------------------------------------------------
Fair Fair
Value Cost Value Cost
- --------------------------------------------------------------
Municipal Bonds $ 20.7 $ 20.6 $ 11.7 $ 12.8
Taxable Bonds 9.1 8.9 10.7 10.9
Preferred Stock 7.5 8.0 6.4 8.0
-----------------------------------------
$ 37.3 $ 37.5 $ 28.8 $ 31.7
- --------------------------------------------------------------
The Company has placed in trust, in favor of certain insurance companies, its
marketable securities and $17.6 million in cash and cash equivalents, and has
issued irrevocable standby letters of credit for $22.7 million. Municipal bonds
mature from 5
41
months to 24 years and taxable bonds, which includes corporate and government
bonds, mature in periods ranging from 8 months to 30 years. At December 31,
2000, the Company's reinsurance subsidiary has specific restrictions on future
purchases of marketable securities, and on withdrawals from the trust.
(6) Investment in Affiliates
Equity in undistributed earnings of affiliates approximated $27.6 million and
$22.5 million at December 31, 2000, and January 2, 2000, respectively, and is
included in "Investments in and advances to affiliates" in the consolidated
balance sheets. The following is a summary of condensed unaudited information
pertaining to affiliates:
2000 1999
- -------------------------------------------------------------
Balance sheet items at fiscal year end:
Current assets $ 190.0 $ 142.6
Noncurrent assets 358.5 280.6
Current liabilities 147.3 93.0
Noncurrent liabilities 320.7 262.2
Minority interest liability 0.4 0.5
Income statement items for the
fiscal year:
Revenues $ 596.9 $ 545.5
Operating income 32.6 31.9
Net income before taxes 23.2 23.7
- -------------------------------------------------------------
(7) Goodwill and Other Intangibles
Goodwill and other intangibles consist of the following at fiscal year end:
2000 1999
- -------------------------------------------------------------
Goodwill $ 58.0 $ 57.6
Contract values 15.6 15.6
Other 8.7 8.8
--------------------------
82.3 82.0
Accumulated amortization
Goodwill 7.9 5.3
Contract values 5.7 4.8
Other 4.5 2.9
--------------------------
18.1 13.0
--------------------------
Net $ 64.2 $ 69.0
- -------------------------------------------------------------
Amortization expense of intangibles was $5.4 million, $4.9 million, and $3.7
million for fiscal years 2000, 1999, and 1998, respectively.
(8) Notes Payable and Long-Term Debt
Long-term debt consists of the following at fiscal year end:
2000 1999
- -------------------------------------------------------------
Revolving loans -
The Wackenhut Corporation, parent $ 0.5 $ -
WHC 10.0 15.0
Lease obligation payable in
installments through 2004 at a
weighted average rate of 4.5% 1.3 1.8
Other debt principally related to
security services 4.7 4.4
--------------------------
Total 16.5 21.2
Less: current portion 5.1 4.7
--------------------------
Total $ 11.4 $ 16.5
- -------------------------------------------------------------
On November 13, 2000, the Company entered into a new, three year, Credit
Facility increasing the Company's borrowing capacity from $95 million to $112.5
million. As of December 31, 2000, the unused portion of the revolving line of
credit was $67.4 million, after deducting $44.6 million in outstanding letters
of credit and $0.5 million loan balance outstanding with an interest rate of
8.75% at year end maturing November 2003. The agreement requires, among other
things, that the Company maintain a minimum consolidated net worth and limits
certain payments and distributions. As of December 31, 2000, the Company and its
subsidiaries were in compliance with applicable covenants.
On January 26, 2001, the Company amended and restated its agreement to sell, on
an ongoing basis, eligible receivables up to a maximum of $75 million. This
agreement is subject to renewal on an annual basis. The costs associated with
this sale of receivables are based on the volume and cost of issued commercial
paper plus predetermined fees. Such costs are included in "Interest expense" in
the consolidated statements of income. There were $67.5 million and $69.5
million accounts receivable sold under this agreement at December 31, 2000, and
January 2, 2000, respectively.
The total amount available to the Company from its revolving credit and accounts
receivable securitization facility is $187.5 million.
The Company has a demand operating line of credit with a Canadian bank with a
maximum borrowing amount of $2.7 million. At December 31, 2000, the Company had
short-term borrowings under this line of credit of $2.5 million for working
capital purposes, bearing interest at a rate based on the bank's prime lending
rate, or 8.25% at year end. The Company had outstanding notes payable and
operating lines of credit of $2.2 million at December 31, 2000 to meet working
capital needs of its international subsidiaries with $2.1 million due within one
year.
In December 1997, WHC entered into a five year $30 million multi-currency
revolving credit facility with a syndicate of banks, which includes a $5 million
line of credit for the issuance of letters of credit. Indebtedness under this
facility bears interest at the alternate base rate, defined as the higher of
prime rate or federal funds rate plus 0.5%, or LIBOR plus 150 to 250 basis
points, depending upon fixed charge coverage ratios. The facility requires WHC
to, among other things, maintain a maximum leverage ratio; minimum fixed charge
coverage ratio; and a minimum tangible net worth. The facility also limits
certain payments and distributions. As of December 31, 2000, $10 million was
outstanding under this facility with an interest rate of 8.4% and six
outstanding letters of credit amounted to $2.8 million, in addition to twelve
letters of guarantee totaling $13.3 million under a separate foreign facility.
The $10 million debt becomes due in 2002.
In December 1997, WHC entered into a $220 million operating lease facility that
was established to acquire and develop new correctional institutions used in its
business. As a condition of this facility, WHC unconditionally agreed to
guarantee certain obligations of First Security Bank, N.A., a party to the
aforementioned operating lease facility. As of December 31, 2000, approximately
$142.7 million of properties were under development under this facility.
The long-term portion of the capital lease obligation maturing during the next
two years after 2000 is $0.6 million and $0.1 million, respectively.
The Company leases correctional facility office space, computers and vehicles
under non-cancelable operating leases expiring through 2009. Rent expense for
the fiscal years ended December 31, 2000, January 2, 2000, and January 3, 1999
was $26.9 million, $22.2 million, and $15.8 million, respectively.
42
The minimum commitments under these leases and the 15 year lease for the
corporate headquarters, are as follows:
Minimum
Year Commitments
- -------------------------------------------------------------
2001 $ 21.9
2002 19.5
2003 17.7
2004 15.1
2005 11.5
Thereafter 61.2
----------------
$ 146.9
- -------------------------------------------------------------
(9) Jena Charge
On January 7, 2000, WHC exercised its right to acquire the 276-bed Jena Juvenile
Justice Center (the "Facility") in Jena, Louisiana from the trust of WHC's
operating lease facility and, simultaneously sold it to Correctional Properties
Trust ("CPV"). This Facility is being leased back to WHC under a ten year
non-cancelable operating lease. On May 17, 2000, the Louisiana Department of
Public Safety and Corrections and WHC had removed all inmates from the Facility
and WHC terminated the employment of the facility staff. The cooperative
agreement for such Facility was terminated June 30, 2000. WHC has recorded an
operating charge of $3.8 million ($2.3 million after tax, or on a WHC diluted
basis, $0.11 per share), that represents the expected losses to be incurred on
the lease with CPV, including lease costs and property taxes. WHC's management
estimates that the facility will remain inactive through the end of 2001. After
taxes and minority interest effect, this charge reduced the Company's diluted
earnings per share by $0.09. WHC is continuing its efforts to sublease or find
an alternative correctional use for the facility. If WHC is unable to sublease
or find an alternative use for the facility, there could be an adverse impact on
WHC's and the Company's financial position, future results of operations, and
future cash flows.
(10) Sale of Facilities to Correctional Properties Trust
On April 28, 1998, CPV acquired eight correctional and detention facilities
operated by WHC. WHC received approximately $42 million for the three facilities
owned by it and for the rights to acquire four of the other five facilities, and
realized a profit of approximately $18 million. The eighth facility was
purchased directly from the government entity. CPV was also granted the option
to acquire three additional correctional facilities and the fifteen year right
to acquire and lease back future correctional and detention facilities developed
or acquired by WHC. During fiscal 1998 and 1999, CPV acquired two additional
facilities for $94.1 million. In fiscal 2000, CPV purchased an eleventh facility
that WHC had the right to acquire for $15.3 million. WHC recognized no net
proceeds from the sale.
Simultaneous with the purchases, WHC entered into ten year operating leases of
these facilities from CPV. As the lease agreements are subject to contractual
lease increases, WHC records operating lease expense for these leases on a
straight-line basis over the term of the leases.
The deferred unamortized net profit at December 31, 2000, which is included in
"Deferred revenue" in the accompanying consolidated balance sheets, is $13.8
million with $1.9 million short-term included in "Accrued Expenses," and $11.9
million long-term, excluding the long-term portion of deferred development fee
revenue. The net gain is being amortized over the ten year lease terms. The
Company recorded net rental expense related to CPV of $19.7 million in 2000,
excluding the Jena rental expense, and $18.9 million and $6.9 million in 1999
and 1998, respectively. The future minimum lease commitments under the leases
for these eleven facilities are as follows:
Annual
Year Rental
- -------------------------------------------------------------
2001 $ 22.7
2002 22.7
2003 22.7
2004 22.7
2005 22.7
Thereafter 61.5
-----------
$ 175.0
- -------------------------------------------------------------
(11) Preferred and Common Stock and Shares Repurchased and Retired
The Board of Directors has authorized 10 million shares of preferred stock. As
of December 31, 2000, no preferred stock has been issued.
The Board of Directors has authorized 50 million shares of the Company's common,
with 3.9 million shares to be designated as series A common stock and 46.1
million shares to be designated as series B common stock. Holders of series A,
the voting stock, have control over all aspects of the operations of the
Company. Holders of series B only have voting rights in connection with a
transaction affecting the essence of their shareholder rights. In all other
respects, series B shareholders have the same rights as series A shareholders.
The Board of Directors of the Company and of WHC authorized the repurchase, at
the discretion of each company's senior management, of up to 0.5 million shares
of Series B common stock and 1.0 million shares of WHC's common stock,
respectively. In February 2000, the Board of Directors of WHC authorized, in
addition to that previously authorized, the repurchase of up to 0.5 million
shares of its common stock. All of the Company's repurchases of shares of common
stock have been retired and result in a reduction of shareholders' equity. WHC's
common stock repurchases are recorded as a reduction to additional paid-in
capital and minority interest. As of December 31, 2000, the Company had bought
back 201,492 shares of the Company's Series B common stock at an average price
of $15.52, and WHC repurchased 1,378,000 shares of WHC's common stock at an
average price of $15.77 per share. All shares repurchased by the Company and WHC
were retired.
(12) Stock Incentive and Stock Option Plans
Key employees of the Company 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 Company's series B common stock are
granted to participants as approved by the Nominating and Compensation Committee
of the Company's Board of Directors (the "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. The
incentive stock plan authorizes the
43
Company to award or grant restricted stock and performance shares to key
employees. Performance shares are earned only if certain three year earnings per
share performance goals established by the Compensation Committee are met.
Non-employee directors of the Company are eligible to participate in The
Wackenhut Corporation non-employee directors' stock option plan (the "Directors'
Stock Option Plan"). Under the Directors' Stock Option Plan, non-employee
directors were granted 2,000 stock options for series B common stock upon their
election or re-election to the Board of Directors. Under terms of the directors'
stock option plan, options are granted at the fair market value at date of
grant, become exercisable at date of grant, and expire ten years after the date
of grant.
At December 31, 2000, 2,356,870 shares of series B common stock were reserved
for issuance, including 555,443 shares available for future grants or awards.
A summary of the status of the Company's employee stock option plans, as of
December 31, 2000, January 2, 2000, and January 3, 1999 is presented in the
following chart:
2000 1999 1998
- ----------------------------------------------------------------------
Shares Price* Shares Price* Shares Price*
- ----------------------------------------------------------------------
Outstanding at
beginning of
year 978,904 $15.06 847,630 $14.06 668,693 $11.64
Options:
Granted 587,000 9.71 230,000 16.69 255,000 19.75
Exercised - - (101,851) 10.15 (76,063) 11.71
Forfeited (32,250) 15.66 3,125 6.16 - -
------------------------------------------------------
Outstanding
& exercisable
end of year 1,533,654 13.01 978,904 15.06 847,630 14.06
- ----------------------------------------------------------------------
*Weighted average exercise price.
Option groups outstanding at December 31, 2000 and related exercise price and
remaining life information are as follows:
Outstanding Exercise Remaining
Grant Date & Exercisable Price Life (Years)
- -------------------------------------------------------------
04/30/94 130,104 $ 6.16 3
01/28/95 96,750 $ 10.80 4
01/31/96 110,000 $ 14.00 5
01/28/97 127,800 $ 15.25 6
08/09/97 30,000 $ 18.94 6
01/27/98 243,000 $ 19.75 7
02/18/99 218,000 $ 16.69 8
02/17/00 520,200 $ 9.75 9
05/05/00 57,800 $ 9.38 9
- -------------------------------------------------------------
Total 1,533,654 $ 13.01* 7*
- -------------------------------------------------------------
*Weighted average exercise price and life.
The Company applies Accounting Principles Board Opinion No. 25 ("APB No. 25")
and related interpretations in accounting for its stock-based compensation
plans. Accordingly, no compensation cost has been recognized for its stock
option plans. Had compensation for the Company's stock-based compensation plans
been determined pursuant to Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have decreased accordingly. Using the Black-Scholes option
pricing model for all options granted after January 1, 1995, the Company's pro
forma net income, pro forma net income per share and pro forma weighted average
fair value of options granted, with related assumptions, are as follows:
2000 1999 1998*
- -------------------------------------------------------------
Pro forma basic net income $ 15.0 $ 18.6 $ 8.2
Pro forma basic earnings
per share $ 1.00 $ 1.25 $ 0.55
Pro forma diluted net income $ 14.9 $ 18.5 $ 7.7
Pro forma diluted earnings
per share $ 0.99 $ 1.22 $ 0.51
Pro forma weighted average
fair value of options granted $ 4.42 $ 6.69 $ 6.94
Risk-free interest rate 6.7% 4.9% - 5.4% -
5.4% 5.6%
Expected life (years) 5 5 5
Expected volatility 38.0% 38.0% 35.0%
Quarterly dividend** - - $ 0.075
- -------------------------------------------------------------
*53 weeks
**The Company discontinued its quarterly dividend after the first quarter of
1999.
(13) WHC Stock Option Plans
In January 1996, WHC sold 4.6 million shares of common stock at an offering
price of $12.00 per share. After the offering, the Company's ownership in WHC
was reduced to approximately 55%.
During 2000, WHC shares repurchased and retired resulted in the Company's
ownership of WHC equaling approximately 57.1% at December 31, 2000.
The Board of Directors of WHC has granted non-qualified stock options to
purchase common stock which, if fully exercised, would reduce the Company's
ownership in WHC to approximately 53.1%.
(14) Retirement and Deferred Compensation Plans
The Company 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. Currently, the plan is not funded. The Company 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 7.5%
and 4.0%, respectively.
Total pension expense for fiscal 2000, 1999, and 1998 was $0.6 million, $0.5
million, and $0.6 million, respectively. The present value of accumulated
pension benefits was $2.8 million and $3.0 million at the end of 2000 and 1999,
respectively, and is included in "Other liabilities" in the accompanying
consolidated balance sheets.
The Company has established non-qualified deferred compensation agreements with
certain senior executives providing for fixed annual benefits ranging from
$175,000 to $250,000 payable upon retirement at age 60 for a period of 25 years.
In the event of death before retirement, annual benefits are paid to
beneficiaries for a period of 12 1/2 years. Currently, the plan is not funded.
The Company purchases and is the beneficiary of life insurance policies for each
participant enrolled in the plan. 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 2000, 1999, and 1998 was $1.5
million, $0.8 million, and $1.5 million, respectively. The liability for
deferred
44
compensation was $7.3 million and $6.4 million at fiscal year end 2000 and 1999,
respectively, and is included in "Other liabilities" in the accompanying
consolidated balance sheets.
(15) Income Taxes
The provision for income taxes in the consolidated statements of income,
consists of the following:
2000 1999 1998*
- -------------------------------------------------------------
Federal income taxes:
Current $ 5.6 $ 7.7 $ 23.5
Deferred 1.0 3.6 (13.8)
---------------------------------
6.6 11.3 9.7
State income taxes:
Current $ 1.7 $ 2.2 $ 4.6
Deferred 0.1 0.4 (1.7)
---------------------------------
1.8 2.6 2.9
Foreign
Current $ 5.2 $ 4.9 $ 1.7
Deferred (0.3) (2.9) (0.6)
---------------------------------
4.9 2.0 1.1
---------------------------------
Total $ 13.3 $ 15.9 $ 13.7
- -------------------------------------------------------------
*53 weeks
A reconciliation of the statutory U.S. federal tax rate (35%) and the effective
income tax rate is as follows:
2000 1999 1998*
- -------------------------------------------------------------
Provision using statutory
Federal income tax rate $ 11.7 $ 14.0 $ 12.1
State income taxes, net of
Federal benefit 1.4 1.7 1.6
Other, net 0.2 0.2 -
---------------------------------
$ 13.3 $ 15.9 $ 13.7
- -------------------------------------------------------------
*53 weeks
The components of the net current deferred income tax asset are as follows at
fiscal year end:
2000 1999
- -------------------------------------------------------------
Amortization of uniforms and
accessories $ (2.2) $ (2.1)
Accrued vacation pay 3.9 2.8
Other reserves 10.4 9.8
--------------------
Current deferred tax asset, net $ 12.1 $ 10.5
- -------------------------------------------------------------
The components of the net non-current deferred income tax asset at fiscal year
end are shown below:
2000 1999
- -------------------------------------------------------------
Income of foreign subsidiaries and
affiliates $(21.3) $(20.9)
Gain on sale of properties to CPV 8.7 8.4
Deferred compensation 8.5 7.8
Reserve for losses of reinsurance
subsidiary 6.5 5.7
Reserve for claims of employee health
trust 1.9 4.5
Deferred charges - 0.1
Other, net 3.2 4.3
--------------------
Non-current deferred tax asset, net $ 7.5 $ 9.9
- -------------------------------------------------------------
The exercise of non-qualified stock options which have been granted under the
Company's stock option plans gives rise to compensation which is includable in
the taxable income of the applicable employees and deducted by the Company for
federal and state income tax purposes. Such compensation results from increases
in the fair market value of the Company's common stock subsequent to the date of
grant. In accordance with APB No. 25, such compensation is not recognized as an
expense for financial accounting purposes and related tax benefits are credited
directly to additional paid-in-capital.
(16) Earnings Per Share
The table below shows the amounts used in computing earnings per share in
accordance with SFAS No. 128. Common stock equivalents related to stock options
if exercised are excluded from diluted earnings (loss) per share calculations if
their effect would be anti-dilutive. In fiscal 2000, 1999 and 1998 the total
number of stock options excluded because their effect would have been
anti-dilutive were 1,569,410, 329,100, and 263,321, respectively (share data in
millions).
2000 1999 1998*
- -------------------------------------------------------------
Basic
Net income $ 16.8 $ 19.6 $ 9.3
------------------------------
Weighted average common
shares outstanding 15.0 14.9 14.8
------------------------------
Basic earnings per share $ 1.12 $ 1.31 $ 0.63
------------------------------
Diluted
Net income $ 16.8 $ 19.6 $ 9.3
Effect of subsidiaries
stock options (0.2) (0.2) (0.4)
------------------------------
Net income $ 16.6 $ 19.4 $ 8.9
------------------------------
Weighted average common
shares outstanding 15.0 14.9 14.8
Assumed exercise of stock
options, net of common
shares assumed repurchased
with the proceeds 0.1 0.2 0.3
------------------------------
Adjusted weighted average
common shares outstanding 15.1 15.1 15.1
------------------------------
Diluted earnings per share $ 1.10 $ 1.28 $ 0.59
- -------------------------------------------------------------
*53 weeks
(17) Commitments and Contingencies
In December 1999, a Travis County, Texas grand jury indicted twelve of WHC's
former facility employees for various types of sexual misconduct at the Travis
County Community Justice Center. Eleven of the twelve indicted former employees
already resigned from or had been terminated by WHC as a result of WHC initiated
investigations over the course of the prior three years. WHC is not providing
counsel to assist in the defense of these twelve individuals. Management does
not expect these indictments to have a material financial impact on the Company.
The District Attorney in Travis County continues to review WHC documents for
alleged document tampering at the Travis County Facility. At this time WHC
cannot predict the outcome of this investigation or the potential impact on
WHC's financial position, results of operations and cash flow.
WHC has experienced adverse claims and settlements, which directly impact WHC's
insurance premiums. If the insurance premiums continue to increase through 2001
then WHC's and the Company's results of operations and the financial guidance
for 2001 may be significantly impacted.
During 1998, WHC entered into a contract with the State of Florida Department of
Children and Families ("DCF") to design and construct a new 350 bed South
Florida State Psychiatric Hospital for approximately $35 million. WHC also
entered into a separate contract to manage the operations of an existing 350 bed
facility prior to and during construction of the new facility and to manage the
operations of the new facility upon construction completion. The construction
phase of the contract is complete. However, during construction, WHC incurred
additional costs in excess of $2 million beyond the
45
initial scope of the construction contract through December 31, 2000. WHC is in
the process of negotiating with DCF to recover these additional costs. There can
be no assurances that WHC will be successful in negotiating for additional
funding of this project. Accordingly, WHC has recognized these additional costs
as incurred and has not recorded revenue on the pending claim.
The Company is presently, and is from time to time, subject to other claims
arising in the ordinary course of its business. In certain of such actions,
plaintiffs request punitive or other damages that may not be covered by
insurance. In the opinion of management, there are no other pending legal
proceedings except those disclosures above, for which the potential impact if
decided unfavorable to the Company could have a material adverse effect on the
consolidated financial statements of the Company.
(18) Business Segments
The Company's principal segments are grouped based on similarity of business
services provided and the type of customer for which these services are offered.
These services consist of global security services, correction services and
flexible staffing services.
The Company is a major provider of global business services including providing
security-related and other support services to business and government,
developing and managing privatized correctional, detention and public sector
mental health services facilities through WHC, a 57% owned public subsidiary,
and providing worksite employees and temporary staffing. For segment reporting,
the accounts of the Company's captive insurance company have been included in
unallocated corporate expenses. Intersegment transactions are accounted for on
an arms-length basis and are eliminated in consolidation. Direct general and
administrative expenses are allocated based on usage.
2000 1999 1998*
- -------------------------------------------------------------
REVENUES:
Global security services $1,168.2 $1,041.0 $ 947.2
Correctional services 535.6 438.5 312.8
Staffing services 801.3 672.8 495.1
---------------------------------
Total revenues $2,505.1 $2,152.3 $1,755.1
- -------------------------------------------------------------
OPERATING INCOME:
Global security services $ 33.4 $ 27.7 $ 24.2
Correctional services 18.9 26.0 22.5
Staffing services 3.7 3.5 2.7
Unallocated corporate
expenses (21.1) (19.3) (17.0)
---------------------------------
Total operating income $ 34.9 $ 37.9 $ 32.4
- -------------------------------------------------------------
EQUITY IN INCOME OF
AFFILIATES, NET OF TAXES:
Global security services $ 1.3 $ 3.2 $ 1.4
Correctional services 4.5 3.3 2.1
---------------------------------
Total equity income $ 5.8 $ 6.5 $ 3.5
- -------------------------------------------------------------
CAPITAL EXPENDITURES:
Global security services $ 3.7 $ 3.0 $ 4.6
Correctional services 19.1 39.0 25.0
Staffing services 0.8 0.8 0.9
Unallocated corporate
expenses 0.7 1.2 3.4
---------------------------------
Total capital expenditures $ 24.3 $ 44.0 $ 33.9
- -------------------------------------------------------------
DEPRECIATION AND
AMORTIZATION EXPENSE:
Global security services $ 12.7 $ 12.7 $ 11.5
Correctional services 8.6 5.4 3.6
Staffing services 2.5 2.0 1.5
Unallocated corporate
expenses 2.1 2.8 0.9
---------------------------------
Total expenses $ 25.9 $ 22.9 $ 17.5
- -------------------------------------------------------------
IDENTIFIABLE ASSETS at
fiscal year end:
Global security services $ 181.5 $ 163.3 $ 168.3
Correctional services 223.6 208.2 145.5
Staffing services 85.0 76.1 62.6
Unallocated corporate
assets 80.2 73.4 68.6
---------------------------------
Total identifiable assets $ 570.3 $ 521.0 $ 445.0
- -------------------------------------------------------------
* 53 weeks
Domestic and International Operations
Non-U.S. operations of the Company and its subsidiaries are conducted primarily
in South America, the United Kingdom and Australia. No individual foreign
subsidiary of the Company represented over 10% of combined revenues in 2000,
1999, or 1998. Minority interest in consolidated foreign subsidiaries has been
reflected, net of applicable income taxes, in the accompanying consolidated
financial statements. The Company carries its investment in affiliates under the
equity method. U.S. income taxes which would be payable upon remittance of
affiliates' earnings to the Company are provided currently. Long-lived assets
consist of property and equipment.
A summary of domestic and international operations is shown below:
2000 1999 1998*
- --------------------------------------------------------------
REVENUES:
Domestic operations $ 2,206.9 $ 1,914.4 $ 1,548.7
International operations 298.2 237.9 206.4
--------------------------------
Total revenues $ 2,505.1 $ 2,152.3 $ 1,755.1
- --------------------------------------------------------------
OPERATING INCOME:
Domestic operations $ 22.0 $ 27.5 $ 26.2
International operations 12.9 10.4 6.2
--------------------------------
Total operating income $ 34.9 $ 37.9 $ 32.4
- --------------------------------------------------------------
EQUITY IN INCOME OF
AFFILIATES, NET OF TAXES:
Domestic operations $ 1.3 $ 1.4 $ -
International operations 4.5 5.1 3.5
--------------------------------
Total equity income $ 5.8 $ 6.5 $ 3.5
- --------------------------------------------------------------
CAPITAL EXPENDITURES:
Domestic operations $ 16.4 $ 39.7 $ 29.5
International operations 7.9 4.3 4.4
--------------------------------
Total capital expenditures $ 24.3 $ 44.0 $ 33.9
- --------------------------------------------------------------
DEPRECIATION AND
AMORTIZATION EXPENSE:
Domestic operations $ 20.6 $ 18.1 $ 12.8
International operations 5.3 4.8 4.7
--------------------------------
Total expenses $ 25.9 $ 22.9 $ 17.5
- --------------------------------------------------------------
LONG-LIVED ASSETS at fiscal
year end:
Domestic operations $ 61.1 $ 52.7 $ 46.9
International operations 18.3 15.5 9.7
--------------------------------
Total long-lived assets $ 79.4 $ 68.2 $ 56.6
- --------------------------------------------------------------
*53 weeks
46
(19) Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for the Company and its subsidiaries for the
fiscal years ended December 31, 2000, as previously reported (pro forma for
fourth quarter only) and restated for SAB No. 101, and January 2, 2000, is as
follows:
First Second Third Fourth
- ----------------------------------------------------------------------------------------------------------------
2000 Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------
As previously reported (pro forma for fourth quarter only):
Revenues $ 594.0 $ 617.6 $ 639.9 $ 654.6
Operating income 8.7 8.9 6.6 11.7
Net Income 4.3 5.1 4.1 4.7
Impact of adopting SAB No. 101:
Revenues (0.6) (0.3) (1.1) 1.0
Operating income (0.6) (0.3) (1.1) 1.0
Cumulative effect of change in accounting principle (1) (0.8) -- -- --
Net Income (1.4) 0.1 (1.0) 0.9
Restated for SAB No. 101:
Revenues 593.4 617.3 638.8 655.6
Operating income 8.1 8.6 5.5 12.7
Cumulative effect of change in accounting principle (1) (0.8) -- -- --
Net Income 2.9 5.2 3.1 5.6
Earnings per share - basic
Income before cumulative change in accounting principle 0.25 0.34 0.21 0.37
Cumulative effect of change in accounting principle (0.05) -- -- --
Net Income 0.20 0.34 0.21 0.37
Earnings per share - diluted
Income before cumulative change in accounting principle 0.24 0.34 0.21 0.37
Cumulative effect of change in accounting principle (0.05) -- -- --
Net Income $ 0.19 $ 0.34 $ 0.21 $ 0.37
- ----------------------------------------------------------------------------------------------------------------
1999
- ----------------------------------------------------------------------------------------------------------------
Revenues $ 500.1 $ 530.3 $ 547.5 $ 574.4
Income from operations 7.9 9.0 10.9 10.1
Net income 4.0 4.7 5.4 5.5
Earnings per share - basic 0.27 0.31 0.36 0.37
Earnings per share - diluted $ 0.26 $ 0.30 $ 0.35 $ 0.37
- ----------------------------------------------------------------------------------------------------------------
Note: Each quarter has 13 weeks. The sum of quarterly earnings per share amounts
differs from those reflected in the Company's Consolidated Statements of Income
due to the weighting of common and common equivalent shares outstanding during
each of the respective periods.
(1) In the fourth quarter the Company adopted SAB No. 101 resulting in a charge
of $0.8 million after-tax (described in Note 2, hereto) and has been recognized
retroactively to the first quarter of 2000.
47
Report of Independent Certified Public Accountants
The Wackenhut Corporation:
We have audited the accompanying consolidated balance sheets of The Wackenhut
Corporation (a Florida corporation) and subsidiaries as of December 31, 2000 and
January 2, 2000 and the related consolidated statements of income, cash flows
and shareholders' equity and comprehensive income for each of the three fiscal
years in the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 December 31, 2000 and January 2, 2000, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, effective
January 3, 2000 and December 29, 1997, the Company changed its method of
accounting for certain revenue transactions and its accounting for costs of
start-up activities, respectively.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
February 8, 2001
Management's Responsibility for Financial Statements
To the Shareholders of
The Wackenhut Corporation:
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. They include amounts
based on judgments and estimates.
Representation in the consolidated financial statements and the fairness and
integrity of such statements are the responsibility of management. In order to
meet management's responsibility, the Company maintains a system of internal
controls and procedures and a program of internal audits designed to provide
reasonable assurance that the Company'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 consolidated financial statements.
The consolidated financial statements have been audited by Arthur Andersen LLP,
independent certified 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 Company'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 Company'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 consolidated financial
statements.
The audit committee of the board of directors meets periodically with
representatives of management, the independent certified public accountants and
the Company's internal auditors to review matters relating to financial
reporting, internal accounting controls and auditing. Both the internal auditors
and the independent certified public accountants have unrestricted access to the
audit committee to discuss the results of their reviews.
George R. Wackenhut Philip L. Maslowe
Chairman of the Board Executive Vice President,
Chief Financial Officer
Palm Beach Gardens, Florida,
February 8, 2001