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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 30, 2001
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 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 08, 2002, the aggregate value of 1,922,111 shares of
Series A Common Stock and 8,217,490 shares of Series B Common Stock held by
non-affiliates of the Registrant was $236,165,743.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant's Annual Report to Shareholders for the fiscal
year ended December 30, 2001 are incorporated by reference into Parts II and IV
of this Report.
Parts of the registrant's Proxy Statement for its 2002 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, development and management of privatized
correctional and detention facilities, and personnel employee leasing and
temporary services. The security services business ("Global Security Services")
operates in North American (domestic) and international markets. Domestically,
Global Security Services has expanded into a range of other support services to
include base operations, facility management, fire and emergency medical
services. Internationally, Global 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 healthcare
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 68,000
full and part-time employees, worldwide, serving approximately 11,000
commercial and governmental customers through an extensive network of offices
and operations in 48 states and approximately 45 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 142 customer support centers across the United States and
additional centers in approximately 40 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 clients' 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 initiatives 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 ("Correctional Services") which is now operated exclusively through
its approximately 57% owned subsidiary Wackenhut Corrections Corporation
("WHC"). As of December 2001, WHC had contracts or awards to
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manage 59 privatized correctional, detention and healthcare facilities, with a
rated capacity of nearly 42,500 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") 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 WRI, to
form flexible staffing services business ("Staffing Services"). In November
1998, WRI acquired the 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 2001, Staffing Services had 39
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 19 of Notes to Consolidated Financial Statements included in
Exhibit 13.0 to this Annual Report on 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
each of Fiscal 2001, 2000 and 1999.
BUSINESS STRATEGY
The Company focuses strategically on three major businesses worldwide
- - Security services, Correctional services, and Staffing services. Key elements
of the Company's business strategy are described below:
GLOBAL SECURITY SERVICES
- 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.
- DEVELOP SPECIALIZED SECURITY SERVICES. The Company has
identified and targeted the National Accounts and CPO
programs, as well as the traditional small commercial client
market, as ongoing growth avenues toward continued 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 of its clients.
- 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 Correctional services and Staffing services
has provided it with the experience it believes will allow it
to develop other specialized programs and support services.
- 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 Company's international security-related businesses, with
a view towards concentrating the Company's resources to
achieve a proper critical mass.
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CORRECTIONAL SERVICES
Correctional Service's objective is to enhance its position as one of
the leading providers of privatized correctional, detention and public sector
healthcare 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 psychiatric 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.
STAFFING SERVICES
Staffing Services 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 professional employer
organizations ("PEOs") or use temporary workers in order to cut costs and
provide more and better employee benefits. Staffing Service's 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 its 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, PEM 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.
SELECTED ACQUISITIONS
In addition to internal growth, the Company's growth strategy includes
selected acquisitions.
MARKETS
GLOBAL 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 the Company. 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 views governmental
agencies responsible for federal correctional facilities in the United States
and governmental agencies responsible for correctional facilities in the United
Kingdom and Australia as its primary potential customers. Correctional
Service's secondary customers include state and local agencies in the United
States and other foreign governmental agencies.
STAFFING SERVICES. Staffing Services provides temporary staffing,
permanent placement, and PEO services. The PEO provides integrated human
resource administration, such as personnel employee leasing, risk management,
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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 Staffing Services. Global 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. 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 Operations. Security Services provides security-related
and other support services throughout the United States and Canada. The North
American Operations ("NAO") 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 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, crash-fire-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 are often entrusted to perform supplemental
law-enforcement-related services, such as transit security in Florida, Utah and
Oregon, prisoner transportation in Maryland, and court house security in
numerous states. 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.
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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 renegotiation 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 security/law
enforcement, fire protection, facility maintenance, aviation to emergency
medical services. 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, the single largest government contract for security-related services,
since 1983. The Company has managed the Rocky Flats Environmental Technology
Site near Denver since 1990, the Nevada Test Site near Las Vegas since 1964,
and began providing security services during 2000 at the Oak Ridge Site near
Oak Ridge, Tennessee. 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 Since 1984. 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 28 commercial nuclear power plants in 14 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 38 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, 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 18 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
Falck, Securitas, Securicor, Chubb and local and regional companies.
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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.
CORRECTIONAL SERVICES
Correctional Services is conducted through the operations of WHC. WHC
is a leading developer and manager of privatized correctional, detention and
public sector 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 30, 2001, Correctional Services
had contracts or contract awards to manage 59 correctional, detention and
public sector healthcare facilities with an aggregate rated capacity of nearly
42,500 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 healthcare facility management services from individual
consulting projects to the integrated design, construction and management of
correctional, detention and public sector healthcare 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 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 WRI, a subsidiary of the Company, acquired the King
Companies, in May 1997, and PEM 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 WRI to form Staffing
Services. In November 1998 Staffing Services acquired Sharp Services Inc. and
Advantage Temporary Services companies. 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. By the end of 2001, Staffing
Services had 39 offices in 11 states.
CUSTOMERS
During 2001, Security Services provided services to approximately 8,200
customers worldwide. The United States Department of Energy accounted for 8% of
the Company's revenue during Fiscal 2001 and Fiscal 2000. Correctional Services
contracts with the various Federal Government agencies accounted for 4% and 3%
of the Company's revenues in Fiscal 2001 and Fiscal 2000, respectively and
contracts with the State of Florida accounted for 3% and 4% of the Company's
revenues in Fiscal 2001 and Fiscal 2000, respectively, and contracts with
governmental agencies of the State of Texas accounted for 3% of the Company's
revenue in Fiscal 2001 and Fiscal 2000. Staffing Services provides services to
nearly 1,400 clients in both the employee leasing and temporary staffing
businesses.
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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 International
Security Company and Pinkerton, in Fiscal 2000 and Fiscal 1999, respectively.
The Company also competes with numerous local and regional security services
companies. Although, the market is fragmented, with over 15,000 security
service providers in the United States, recent industry consolidations have
resulted in the top four providers of services similar to those provided by
Global Security Services accounting for approximately 30% of the contracted out
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, through which Correctional Services operates, 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, Sodexho, and
Management and Training Corporation. 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
Global 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 30, 2001, Global Security Services had
approximately 57,000 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 Global Security Services are covered by collective bargaining
agreements. Relations with employees have been generally satisfactory.
As of December 30, 2001, Correctional Services had 10,763 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), Junee Correctional Centre (Australia), Arthur Gorrie Correctional Centre
(Australia), Fulham Correctional Centre (Australia), Melbourne Correctional
Center (Australia), Auckland Central Remand Prison (New Zealand) and
Immigration Detention Services (Australia) are members of unions. WHC has
entered into a contract with the union at each of these facilities. In
addition, the employees of Premier Custodial Group, Ltd. (PCG), in the United
Kingdom are covered by a national collective bargaining agreement with the
Prison Service Union. Other than the contracts described above, WHC has no
union contracts or collective bargaining agreements. WHC believes its relations
with its employees are good.
Staffing Services had approximately 350 administrative employees as of
December 2001. In addition, the PEO division of Staffing Services served over
42,200 work-site employees as of December 30, 2001.
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BUSINESS REGULATIONS AND LEGAL CONSIDERATIONS
Global 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 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.
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.
COMMITMENTS AND CONTINGENCIES
The Company and WHC lease correctional facilities, office space,
computers and vehicles under non-cancelable operating leases expiring through
2009. Rent expense for the fiscal years ended December 30, 2001,
9
December 31, 2000 and January 2, 2000 was $35.6 million, $26.9 million and
$22.2 million, respectively. The minimum commitments under these leases and the
15 year lease for the corporate headquarters, are as follows:
Minimum
Year Commitments
- --------------------------------------
2002 $ 31.5
2003 18.4
2004 15.1
2005 10.6
2006 7.0
Thereafter 36.1
-------
$118.7
- --------------------------------------
In fiscal year 2001, the Company recorded after-tax charges of $17.9
million ($29.2 million pre-tax) representing its share of the losses of its
affiliated operations in Chile.
In the third quarter 2001, the Company completed the cash funding of
its $32 million of bank letters of credit issued to secure a portion of its
Chilean affiliate's debt. With the payment of the bank standby letters of
credit, the Company's Chilean affiliate has substituted short-term debt
obligations with local Chilean lenders with a one-year term maturity funding
directly with the Company.
The Company's Chilean affiliate defaulted on certain of its bank loan
obligations earlier in the year because it had been unable to generate
sufficient cash, either from ongoing operations or the sale of assets, to repay
its obligations. In conjunction with the Company's payment of the $32 million of
letters of credit, the affiliate obtained a 180-day term bank creditor
standstill agreement on October 18, 2001. During this standstill period, the
affiliate is restructuring its operations and attempting to sell non-core
security businesses to repay or reduce the local Chilean debt, as well as debt
due the Company, and to provide sufficient working capital for the core security
business. The Chilean affiliate also has engaged a local investment bank to
assist in the sale of the non-core businesses. This restructuring will likely
include the Company attaining majority ownership of the Chilean affiliate.
At present there can be no assurance that the Chilean affiliate will
be able to sell assets to enable it to repay its outstanding debt. Inability to
sell non-core assets during this standstill period could have a material
adverse impact on the Chilean affiliate's financial position, results of
operations and/or cash flows. The timing of such activities cannot be certain
as the completion of any such transaction depends upon the needs of potential
acquirers, buyers or investors, as well as financing, regulatory/legal
requirements and other factors.
The Chilean affiliate's total outstanding debt is approximately $52.9
million as of December 30, 2001, including the $37.9 million owed to the
Company, and there can be no assurance that the Chilean affiliate will be able
to generate enough cash from operations or the sale of non-strategic businesses
to satisfy these debts. The Company has also provided comfort letters for
approximately $1.0 million. At this time management is unable to estimate the
amount of loss, if any, that would be recorded should the sale of assets, or
ongoing operating results, be unable to generate sufficient cash to repay the
Chilean affiliate's obligations including amounts owed to the Company, and there
can be no assurance that the ultimate outcome of this uncertainty would not have
a material adverse impact on the Company's financial position, results of
operations or cash flows. At December 30, 2001 the Company's net investment
balance related to its Chilean affiliate approximates $10.2 million, including
amounts owed to the Company.
The Company continues to review its international security operations in
order to enhance the quality of revenue and earnings growth. Management
determined that it needed to focus the Company's resources in international
markets where it could best achieve a proper critical mass. In aligning its
international resources with this strategy, management believes that there may
be conditions where the Company may consider exiting a country, or refocusing an
operation. As a result, there could be an impairment of assets, or a need to
provide for losses, particularly in certain subsidiaries and affiliates that
were or are experiencing liquidity issues or were thinly capitalized.
During fiscal year 2001, the Company focused on realigning its
international security management and consolidating its global security
operations. As it focused on this repositioning and change in its management
structure, the Company's management provided for asset impairments and
provisions for losses after tax of approximately $8.7 million ($14.3 million
pre-tax) associated with various international operations, principally in Latin
America excluding Chile. The Company has operations in most Latin American
countries, and therefore, has exposure to the ongoing economic difficulties in
the region.
Although significant progress has been made in achieving management's
restructuring objectives, these efforts will continue in 2002. During this
review process, conditions may arise that will cause the Company to record
10
additional impairments to investments in particular locations. Also, in some
locations, local economic conditions may result in reporting losses. At this
time, management is unable to estimate the amount of these write-downs or
losses, if any, that would be reported, and there can be no assurance that the
ultimate outcome of this process would not have a material adverse impact on
the Company's financial position, results of operations and cash flows.
In December 2001, WHC was issued a notice of contract non-renewal by
the Administration of Corrections from the Commonwealth of Puerto Rico for the
management of the Bayamon Correctional Facility. The current contract is set to
expire March 23, 2002. WHC has met with various government officials in an
effort to reverse the initial decision. There can be no assurances that these
efforts will be successful. WHC does not expect the discontinuation of the
management contract to have a significant impact on WHC's future results of
operations and cash flows. The Bayamon Correctional Facility is owned by the
government and there is no lease commitment on the part of WHC.
On June 30, 2002, WHC's contract with the California Department of
Corrections (the "Department") for the management of the McFarland Community
Corrections Center is set to expire. WHC believes that the Department may not
renew this contract due to budgetary constraints. Although WHC is continuing its
efforts to extend the current contract through discussions with the legislature
and department officials, as well as offering the facility to other interested
government agencies, there can be no assurances that these efforts will be
successful. The facility is currently in the fourth year of a ten-year
non-cancelable operating lease with CPV. In the event WHC is unable to extend
the contract or find an alternative use for the facility, WHC will be required
to record an operating charge in 2002 related to future minimum lease
commitments with CPV. The remaining lease obligation is approximately $6.0
million through April 28, 2008.
WHC's casualty insurance premiums related to workers' compensation,
comprehensive general liability and automobile insurance coverage are provided
by an independent insurer. A portion of this insurance is reinsured by the
Company's wholly owned captive reinsurance subsidiary. WHC pays the Company a
fee for the transfer of the deductible exposure. WHC continues to incur higher
insurance costs due to a hardened seller's insurance market, which was
exacerbated by the events of September 11, 2001 and historical adverse claims
experience, and although WHC has implemented a strategy to improve the
management of future claims, WHC can not provide assurances that this strategy
will result in a lower insurance rate. WHC's insurance costs increased
significantly during the third and fourth quarter of 2001. WHC's management
believes these costs have stabilized; however, the increases may continue
through 2002.
In December 1997, WHC entered into a $220 million operating lease
facility that has been established to acquire and develop new correctional
institutions used in its business. As a condition of this facility, WHC
unconditionally agreed to guarantee certain debt obligations of First Security
Bank, National Association, a party to the aforementioned operating lease
facility. As of December 30, 2001, approximately $154.3 million of this
operating lease facility was utilized for four properties in operation.
The term of the operating lease facility expires December 18, 2002.
WHC is exploring a number of alternatives to refinance the outstanding balance,
and believes it will be successful in these efforts. However, there can be no
assurance that WHC will be able to complete the refinancing prior to December
18, 2002. Upon expiration of the operating lease facility, WHC may purchase the
properties in the facility for their original acquisition cost. If WHC were to
purchase the properties, WHC may use a number of forms of debt financing which
would require the properties and any related debt incurred to purchase the
properties, to be reported on WHC's and the Company's balance sheet.
Alternatively, WHC may cause the properties to be sold to third parties. If the
sales proceeds yield less than the original acquisition cost, WHC will make up
the difference up to a maximum of 88% of the original acquisition costs.
In connection with the financing and management of one Australian
facility, WHC's wholly owned Australian subsidiary was required to make an
investment of approximately $5 million. The balance of the facility was
financed with long-term debt obligations that are nonrecourse to WHC. WHC's
Australian subsidiary has a leasehold interest in the facility and does not
have the ultimate rights of ownership. In the event the management contract is
terminated for default, WHC's investment of approximately $5 million is at
risk. WHC believes that the risk of termination for default is remote and notes
that the project has operated successfully for 5 years. The management contract
is up for renewal in September 2002. WHC's management believes the management
contract will be renewed. If the management contract is not renewed (other than
due to a default), WHC's subsidiary's investment must be repaid by the state
government.
The Company has employment agreements with its Chairman of the Board
of Directors and its Vice-Chairman of the Board of Directors and Chief
Executive Officer. These agreements are for terms of three and ten years,
respectively. The agreements also contain termination provisions. During fiscal
2001 and 2000 aggregate base salary and bonus under these two agreements were
approximately $4.5 million and $3.7 million, respectively. Also, the Company
has severance agreements with certain executives that provide for specified
benefits in the event of termination of employment due to a change of control.
11
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.
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 from 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.
UNCERTAINTY IN THE AFTERMATH OF SEPTEMBER 11. The effects of the
terrorist attacks of September 11, 2001 and of potential future terrorist
attacks on general economic conditions and on the Company's businesses, in
particular, are uncertain. For example, in the event that any facilities at
which the Company provides security related services are attacked by terrorists
in the future, liabilities resulting from such attacks could, to the extent not
covered by insurance, have a material adverse effect on the Company's business.
In addition, terrorist attacks, including the attacks of September 11th that do
not directly involve facilities serviced by the Company or that are fully
insured against, could have a material impact on the Company by, among other
things, sharply increasing the Company's insurance coverage costs including
workers' compensation insurance, making insurance coverage unavailable
altogether or prompting expanded security rules and regulations for airports,
commercial buildings or other facilities. Other effects of terrorist acts that
could materially impact the Company include but are not limited to: (i) an
overall decline in the economy; (ii) a decline in air travel; and/or (iii) a
decrease in the efficiency of the Company's security services as a result of
compliance with expanded security rules and regulations.
REVENUE AND PROFIT GROWTH DEPENDENT ON EXPANSION. The Company's growth
depends to a significant degree upon its ability to obtain additional service
contracts 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 and
(ii) operators of correctional and detention facilities for development and
management contracts for new facilities and for the renewal of those contracts
upon expiration. 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.
12
ABILITY OF WHC TO REFINANCE CREDIT FACILITIES. Two of WHC's sources of
liquidity are a $30 million multi-currency revolving credit facility, which
includes $5.0 million for the issuance of letters of credit and a $220 million
operating lease facility established to acquire and develop new correctional and
detention facilities used in its business. As of December 30, 2001 there was no
balance outstanding on the revolving credit facility and there was $154.3
million of the operating lease facility utilized for properties in operation.
Both of these facilities expire December 18, 2002. WHC is exploring a number of
alternatives to refinance both facilities. However, there can be no assurance
that WHC will be able to complete a refinancing prior to December 18, 2002. Upon
expiration of the operating lease facility, WHC may purchase the properties in
the facility for their original acquisition cost. If WHC were to purchase the
properties, WHC may use a number of forms of debt financing which would require
the properties, and any related debt incurred to purchase the properties, to be
reported on the Company's and WHC's balance sheet. Alternatively, WHC may cause
the properties to be sold to a third party. If the sales proceeds yield less
than the original acquisition cost, WHC will make up the difference up to a
maximum of 88% of the original acquisition cost.
GROWTH/ACQUISITION STRATEGY. The Company has grown its Security
Services, Correctional Services and Staffing 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
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 1999, Fiscal 2000, Fiscal 2001,
revenues derived from the provision of services to customers outside the United
States accounted for approximately 11.1%, 11.8% and 10.8%, 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% of the Company's consolidated revenues in
both Fiscal 2001 and Fiscal 2000. Moreover, correctional contracts with
governmental agencies of the State of Texas accounted for 3% of the Company's
consolidated revenues in both Fiscal 2001 and Fiscal 2000. Correctional
Services contracts with the State of Florida accounted for 3% and 4% of the
Company's consolidated revenues in Fiscal 2001 and Fiscal 2000, respectively.
Correctional Services contracts with various Federal Government agencies
accounted for 4% and 3% of the Company's consolidated revenues in Fiscal 2001
and Fiscal 2000, respectively. 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.
13
CORRECTIONAL CONTRACTS. WHC's facility management contracts typically
have terms ranging from one to five years. WHC has 21 contracts that will
expire in 2002. 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 personnel of the Company or WHC. 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 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 food service at
prisons and 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.
14
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.
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.
The Company owns a 15,000 square foot warehouse building in Miami,
Florida. In addition, the Company owns three buildings in Ecuador and Peru, two
buildings in the Dominican Republic, and one each in Costa Rica, and Uruguay
that are used for the operations of its foreign subsidiaries in those
countries. The Company has a 50% interest in a partnership that owns a building
in Puerto Rico. All other offices of the Company are leased.
15
WHC also leases the space for the following facilities it manages
under operating leases: (i) Aurora INS Processing Center; (ii) Broward County
Work Release Center; (iii) Central Texas Parole Violator Facility; (iv) Central
Valley Community Correctional Facility; (v) Coke County Juvenile Justice
Facility; (vi) Desert View Community Correctional Facility; (vii) Golden State
Community Correctional Facility; (viii) Guadalupe County Correctional Facility;
(ix) Jena Juvenile Justice Center; (x) Karnes County Correctional Center; (xi)
Lawton Correctional Facility; (xii) Lea County Correctional Facility; (xiii)
McFarland Community Correctional Facility; (xiv) Michigan Youth Correctional
Facility; (xv) North Texas Intermediate Sanction Facility; (xvi) Queens Private
Correctional Facility; (xvii) Rivers Correctional Institution; (xviii) Western
Region Detention Facility at San Diego and (xix) Val Verde Correctional
Facility.
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 debt obligations of First Security
Bank, N.A., a party to the aforementioned operating lease facility. As of
December 30, 2001, approximately $154.3 million of this operating lease
facility was utilized for properties in operation or under development.
The term of the operating lease facility expires December 18, 2002.
WHC is exploring a number of alternatives to refinance the outstanding balance,
and believes it will be successful in these efforts. However, there can be no
assurance that WHC will be able to complete the refinancing prior to December
18, 2002. Upon expiration, WHC may either purchase the property for its
original acquisition cost or cause the properties in the operating lease
facility to be sold to third parties. Should the sales proceeds yield less than
the original acquisition cost, WHC is required to make up the difference up to
a maximum of 88% of the original acquisition cost.
WHC owns a 72-bed psychiatric hospital in Fort Lauderdale, Florida
that it purchased and renovated in 1997.
The aggregate Fiscal 2001 rent expense for all non-cancelable
operating leases of office space, automobiles, data processing and other
equipment was $35.6 million. The Company owns substantially all uniforms,
firearms, and accessories used by its security officers.
ITEM 3. LEGAL PROCEEDINGS
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 pending legal proceedings
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.
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 WHC, 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
16
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; the Athlete's Hall of Fame in his home county,
Delaware County, Pennsylvania; and the "Wall of Fame," consisting of prominent
graduates of Upper Delray (PA) High School. 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,
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 WHC. He is also Vice
Chairman of the Board of Trustees of Correctional Properties Trust. He is a
former Vice Chairman of Associated Industries of Florida and is presently 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 a
former 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, and was appointed Chief Operating Officer of the Company in March
2000. He has been Executive Vice President of the Company since 1991, and was
named President, Global Security in 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 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.
ROBERT C. KNEIP is Senior Vice President of the Company, and President
and Chief Executive Officer of WRI. 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 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.
17
PHILIP L. MASLOWE is Executive Vice President and Chief Financial
Officer 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 and was
given the title of Treasurer effective March 9, 2000; he relinquished
Treasurers title August 3, 2001. 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 where he also
served on the Board of Directors. From 1980 to 1991, Mr. Maslowe was with The
Vons Companies, Inc., where his last position was 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 WHC and AMF Bowling, 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 Manager, Equal Employment Opportunity and
Affirmative Action Programs, 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.
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.
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 F1 of the Registrant's 2001 Annual Report to Shareholders, which are filed
as Exhibit 13.0 hereto.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to
pages F3 through F4 of the Registrant's 2001 Annual Report to Shareholders,
which are filed as Exhibit 13.0 hereto.
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 F5 through F12 of the Registrant's 2001 Annual Report to Shareholders,
which are filed as Exhibit 13.0 hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to
pages F13 through F30 of the Registrant's 2001 Annual Report to Shareholders,
which are filed as Exhibit 13.0 hereto, 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.
18
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 2002 Annual Meeting of Shareholders, which will be 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 30, 2001 are incorporated by
reference in Part II, Item 8:
Consolidated Balance Sheets - December 30, 2001 and December
31, 2000
Consolidated Statements of Income - Fiscal years ended
December 30, 2001, December 31, 2000 and January 2, 2000
Consolidated Statements of Cash Flows - Fiscal years ended
December 30, 2001, December 31, 2000 and January 2, 2000
Consolidated Statements of Shareholders' Equity and
Comprehensive Income (Loss) - Fiscal years ended December 30,
2001, December 31, 2000 and January 2, 2000
Notes to Consolidated Financial Statements - Fiscal years
ended December 30, 2001, December 31, 2000 and January 2,
2000
With the exception of the information incorporated by
reference from the 2001 Annual Report to Shareholders in Part II,
Items 5,6,7,8, and Parts IV of the Form 10-K, the Registrant's 2001
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 25
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:
19
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Articles of Incorporation as amended and restated (incorporated by reference to the Registrants Form 10-K
Annual Report for the fiscal year ended December 31, 2000).
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 (incorporated by reference to the Registrants Form 10-K Annual Report
for the fiscal year ended December 31, 2000).
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 (incorporated
by reference to the Registrants Form 10-K Annual Report for the fiscal year ended December 31, 2000).
4.4 The Second Amended and Restated Transfer and Administration Agreement dated as of January 25, 2002,
among Wackenhut Funding Corporation as Transferor, The Wackenhut Corporation as Servicer,
Enterprise Funding Corporation as Purchaser, and Bank of America, N.A. as Agent 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. (incorporated by reference to the Registrants Form 10-K Annual Report for the fiscal year
ended December 31, 2000).
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. (incorporated by reference to the
Registrants Form 10-K Annual Report for the fiscal year ended December 31, 2000).
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).
20
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).
4.12 Amendment Agreement No. 2, dated June 22, 2001 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 Scotiabank 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 (incorporated by reference to the Registrant's
Form 10-Q Quarterly Report for the quarterly period ended July 1, 2001).
4.13 Amendment Agreement No. 3, dated September 24, 2001 to the Credit Agreement dated November 13, 2000,
among The Wackenhut Corporation as Borrower and Bank of America, N.A. as Agent for the Lenders, as amended by
Amendment Agreement No. 1 dated December 12, 2000 and Amendment Agreement No. 2 dated June 22, 2001
(incorporated by reference to the Registrant's Form 10-Q Quarterly Report for the quarterly period ended
September 20, 2001).
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 Amended and restated Executive Severance Agreements for Alan B. Bernstein,, Robert C. Kneip, Sandra L. Nusbaum,
and Philip L. Maslowe.
10.3 Executive Officer Retirement Plan (incorporated by reference to the Registrants Form 10-K Annual Report for
the fiscal year ended December 31, 2000).
10.4 Amended and Restated Split Dollar arrangement with George R. and Ruth J. Wackenhut (incorporated by
reference to the Registrants Form 10-K Annual Report for the fiscal year ended December 31, 2000).
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 (incorporated by reference to the Registrants Form 10-K Annual Report
for the fiscal year ended December 31, 2000).
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 (incorporated by reference to the
Registrants Form 10-K Annual Report for the fiscal year ended December 31, 2000).
10.9 The Wackenhut Corporation Key Employee Long-Term Incentive Stock Plan as Amended July 23, 2001.
21
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 The Wackenhut Corporation Non-employee Director Stock Option Plan as Amended through February 9, 2001.
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 (incorporated by reference to the Registrants Form 10-K Annual Report for the fiscal year ended
December 31, 2000).
10.16 Designated Executive Officer Bonus Plan for Fiscal 2001.
10.17 Senior Management Bonus Plan for Fiscal 2001.
10.18 First Amendment to Employment Agreement with R.W. Wackenhut dated February 19, 2002.
13.0 Annual Report to Shareholders for the year ended December 30, 2001, beginning with page F1 (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.
(b). Reports on Form 8-K.
None
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: February 26, 2002
------------------------
Philip L. Maslowe
Executive Vice President and
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Philip L. Maslowe and Juan D. Miyar, and
each of them, as true and lawful attorneys-in-fact and agents with full power
of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K, and to file the same with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission,
22
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the foregoing, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
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 February 13, 2002
- ----------------------------------- Executive Officer (principal executive officer)
Richard R. Wackenhut
/s/ Philip L. Maslowe Executive Vice President and Chief Financial Officer February 26, 2002
- -----------------------------------
Philip L. Maslowe
/s/ Juan D. Miyar Vice President and Corporate Controller February 26, 2002
- ----------------------------------- (principal accounting officer)
Juan D. Miyar
/s/ Alan B. Bernstein Director February 13, 2002
- -----------------------------------
Alan B. Bernstein
/s/ Julius W. Becton, Jr. Director February 13, 2002
- -----------------------------------
Julius W. Becton, Jr.
/s/ Carroll A. Campbell Director February 12, 2002
- -----------------------------------
Carroll A. Campbell
/s/ Benjamin R. Civiletti Director February 12, 2002
- -----------------------------------
Benjamin R. Civiletti
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Anne N. Foreman Director February 13, 2002
- -----------------------------------
Anne N. Foreman
/s/ Edward L. Hennessy, Jr. Director February 13, 2002
- -----------------------------------
Edward L. Hennessy, Jr.
/s/ Paul X. Kelley Director February 13, 2002
- -----------------------------------
Paul X. Kelley
/s/ Nancy Clark Reynolds Director February 20, 2002
- -----------------------------------
Nancy Clark Reynolds
/s/ John F. Ruffle Director February 13, 2002
- -----------------------------------
John F. Ruffle
/s/ Thomas P. Stafford Director February 13, 2002
- -----------------------------------
Thomas P. Stafford
/s/ George R. Wackenhut Director February 13, 2002
- -----------------------------------
George R. Wackenhut
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 2001 Annual Report to Shareholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated February 7, 2002. 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 30, 2001 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 7, 2002.
24
SCHEDULE II
THE WACKENHUT CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED DECEMBER 30, 2001,
DECEMBER 31, 2000 AND JANUARY 2, 2000
(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 30, 2001:
Allowance for doubtful accounts .... $4,843 6,541 -- (4,573) $6,811
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
25
[FINANCIAL REVIEW LOGO]
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 2001 and 2000. 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 7, 2002, was 528 and 535, respectively.
During the 2001 fiscal year, the Company's publicly owned, separately traded
subsidiary, Wackenhut Corrections Corporation [NYSE: WHC], purchased 122,000
shares of its common stock at an average price of $12.68.
- -----------------------------------------------------------------------------------------------------------------------------
Fiscal 2001 Fiscal 2000
- -----------------------------------------------------------------------------------------------------------------------------
Series A Series B Series A Series B
- -----------------------------------------------------------------------------------------------------------------------------
High Low High Low High Low High Low
First $ 16.7500 $ 13.3750 $ 11.1000 $ 8.5000 $ 15.5625 $ 12.8750 $ 11.2500 $ 8.6250
Second 17.3300 14.1000 13.7600 9.8600 14.5000 12.5000 10.0000 7.7500
Third 24.0000 16.3500 18.5000 13.3500 15.2500 12.7500 10.3750 7.9375
Fourth 28.1000 21.2600 21.1000 15.0700 14.6250 11.4375 8.7500 6.6250
- -----------------------------------------------------------------------------------------------------------------------------
Forward-Looking Statements
Statements made in the management's discussion and analysis of financial
condition and results of operations, the corporate profile, the letter to
shareholders, corporate diversity, and the February 8, 2002 press release are
based on current expectations, estimates and projections, are forward-looking in
nature, and these statements 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 Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
Future Factors include, but are not limited to, 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 Company'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.
Uncertainty in the Aftermath of September 11
The effects of the terrorist attacks of September 11, 2001, and of potential
future terrorist attacks on general economic conditions and on the Company's
businesses, in particular, are uncertain. For example, in the event that any
facilities at which the Company provides security related services are attacked
by terrorists in the future, liabilities resulting from such attacks could, to
the extent not covered by insurance, have a material adverse effect on the
Company's business. In addition, terrorist attacks, including the attacks of
September 11th that do not directly involve facilities serviced by the Company
or that are fully insured against, could have a material impact on the Company
by, among other things, sharply increasing the Company's insurance coverage
costs including workers' compensation insurance, making insurance coverage
unavailable altogether or prompting expanded security rules and regulations for
airports, commercial buildings or other facilities. Other effects of terrorist
acts that could materially impact the
F 1
Company include but are not limited to: (i) an overall decline in the economy;
(ii) a decline in air travel; and/or (iii) a decrease in the efficiency of the
Company's security services as a result of compliance with expanded security
rules and regulations.
F 2
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: 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Revenues $ 2,809.0 $ 2,505.1
Operating income [a] 44.3 34.9
Income before income taxes [a] 44.3 33.3
Income before extraordinary charge and cumulative effect of accounting change [a] 3.7 17.6
Extraordinary charge - early extinguishment of debt, net of income taxes
Cumulative effect of accounting change [b]
(0.8)
------------------------
Net income [a] $ 3.7 $ 16.8
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE - BASIC: [c]
Income before extraordinary charge and cumulative effect of accounting change [a] $ 0.25 $ 1.17
Extraordinary charge - early extinguishment of debt, net of income taxes
Cumulative effect of accounting change [b] (0.05)
------------------------
Earnings per share - Basic $ 0.25 $ 1.12
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE - ASSUMING DILUTION: [c]
Income before extraordinary charge and cumulative effect of accounting change [a] $ 0.23 $ 1.15
Extraordinary charge - early extinguishment of debt, net of income taxes
Cumulative effect of accounting change [b] (0.05)
------------------------
Earnings per share - Assuming Dilution $ 0.23 $ 1.10
- -----------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE OF COMMON STOCK: [c]
Total Dividends $ none $ none
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION:
Working capital $ 158.8 $ 130.6
Total assets 619.9 570.3
Total debt [d] 16.3 16.5
Shareholders' equity 174.1 177.8
- -----------------------------------------------------------------------------------------------------------------------------------
(a) Fiscal year 2001 includes a pre-tax operating charge of $10.0 million
($6.1 million after tax) and equity in loss of affiliates had a pre-tax
charge of $33.5 million ($20.5 million after tax) connected with the
Company's efforts to reposition and stabilize its international
operations or a total year-to-date impact of a $1.73 per share after
tax. Fiscal year 2001 and 2000, respectively, include an operating
charge of $3.0 million and $3.8 million before income taxes ($1.0
million and $1.3 million after income taxes and minority interest
expense) or $0.07 per share and $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.
F 3
1999 1998* 1997 1996 1995 1994 1993* 1992
- ----------------------------------------------------------------------------------------------------------------------------
$ 2,152.3 $ 1,755.1 $ 1,126.8 $ 906.0 $ 797.0 $ 727.0 $ 659.0 $ 615.0
37.9 32.4 3.3 16.3 15.8 6.6 4.5 3.4
39.9 34.6 6.0 17.9 13.7 3.0 3.4 1.6
19.6 15.9 0.1 9.1 7.3 2.3 3.6 1.1
(0.9) (1.4)
(6.6) 7.4
- ----------------------------------------------------------------------------------------------------------------------------
$ 19.6 $ 9.3 $ 0.1 $ 9.1 $ 7.3 $ 1.4 $ 2.2 $ 8.5
- ----------------------------------------------------------------------------------------------------------------------------
$ 1.31 $ 1.07 $ .01 $ .66 $ .60 $ .19 $ .30 $ .09
(.08) (.12)
(.44) .61
- ----------------------------------------------------------------------------------------------------------------------------
$ 1.31 $ .63 $ .01 $ .66 $ .60 $ .11 $ .18 $ .70
- ----------------------------------------------------------------------------------------------------------------------------
$ 1.28 $ 1.03 $ (.01) $ .65 $ .60 $ .19 $ .30 $ .09
(.08) (.12)
(.44) .61
- ----------------------------------------------------------------------------------------------------------------------------
$ 1.28 $ .59 $ (.01) $ .65 $ .60 $ .11 $ .18 $ .70
- ----------------------------------------------------------------------------------------------------------------------------
$ .08 $ .30 $ .26 $ .26 $ .24 $ .23 $ .23 $ .20
- ----------------------------------------------------------------------------------------------------------------------------
$ 124.0 $ 98.2 $ 116.8 $ 148.1 $ 51.9 $ 75.6 $ 56.2 $ 56.9
521.0 445.0 404.4 323.9 197.9 212.8 211.3 192.2
21.2 7.8 15.8 5.9 6.5 42.8 67.9 64.0
163.9 149.2 146.8 148.2 62.9 57.5 47.4 47.6
- ----------------------------------------------------------------------------------------------------------------------------
F 4
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" or "TWC") 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 Staffing Services' business includes worksite employee leasing,
temporary services, recruiting, risk management, payroll processing and human
resource services.
The Company's continued goal is to build on its reputation as a global provider
of integrated business services to government and commercial clients and to be
distinguished by the quality of those services.
Fiscal year 2001 revenues of $2.8 billion when compared to fiscal year 2000
revenues of $2.5 billion grew 12 percent. Growth occurred in all three of the
Company's service businesses - Global Security Services, Correctional Services
and Staffing Services.
Comparing this year's Global Security Services' revenues with the prior year's
revenues results in a 6 percent growth rate. This growth can be attributable to
several new government and commercial contracts as well as increased demand from
new and existing customers after September 11, 2001.
In 2001, Correctional Services' revenues increased by 5 percent principally
through the addition of revenue producing beds. At present, the backlog of
additional beds expected to be contracted by government agencies worldwide over
approximately the next 18 months is 18,000.
The Company's Staffing Services business had a 25 percent growth rate during the
2001 fiscal year. Staffing Services continues to grow by expanding and
developing existing offices.
Improved profitability and margins in Global Security and Correctional Services
was offset by equity in losses incurred from international affiliates'
operations. The Company's management continued to review its international
operations in order to enhance the quality of revenue and earnings growth.
In 2001, the Company recorded after-tax charges of $17.9 million ($29.2 million
pre-tax) representing its share of losses associated with its affiliated
operations in Chile, and funded $32 million of bank letters of credit issued to
secure a portion of this affiliate's debt. Also during the year, the Company's
management provided for asset impairments and provisions for losses after tax of
approximately $8.7 million ($14.3 million pre-tax) associated with various
international operations, principally in Latin America excluding Chile.
Management has developed and implemented strategies to restructure its
international security operations in order to enhance the quality of revenue and
earnings growth. 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.
In 2001, WHC's earnings were adversely affected by the recognition of an
additional operating charge related to the deactivation of the Jena facility and
an increase in insurance expense.
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. Another principal source of liquidity for WHC is
the sale of its rights to acquire prison facilities. Cash and cash equivalents
totaled $86.9 million at December 30, 2001, compared to $60.8 million at
December 31, 2000. Of this $86.9 million, $27.5 million collateralizes certain
obligations of the Company's captive insurance subsidiary. In addition, cash and
cash equivalents of WHC, which totaled $46.1 million at December 30, 2001, is
generally not available to the Company in any form, including dividends or
loans.
The Company's sources of liquidity are in the form of $112.5 million in lines of
credit, available for revolving loans or letters of credit, and a $75 million
accounts receivable securitization facility. This securitization facility is
subject to renewal on an annual basis and was renewed for another year on
January 25, 2002.
At December 30, 2001, the Company had borrowings of $9.6 million and $26.3
million of outstanding letters of credit against its revolving bank facility.
The unused portion of the revolving line of credit was $76.6 million. There were
$68.0 million accounts receivable sold under the securitization facility at
December 30, 2001. Accordingly, such receivables are not reflected in the
consolidated balance sheet. Therefore, as of December 30, 2001, the total amount
available for additional borrowings to the Company from its
F 5
revolving credit and accounts receivable securitization facility was $83.6
million.
In fiscal year 2001, the Company recorded after-tax charges of $17.9 million
($29.2 million pre-tax) representing its share of the losses of its affiliated
operations in Chile.
In the third quarter 2001, the Company completed the cash funding of its $32
million of bank letters of credit issued to secure a portion of its Chilean
affiliate's debt. With the payment of the bank standby letters of credit, the
Company's affiliate, Wackenhut Chile S.A., has substituted short-term debt
obligations with local Chilean lenders with a one-year term maturity funding
directly with the Company.
The Company's Chilean affiliate defaulted on certain of its bank loan
obligations earlier in the year because it had been unable to generate
sufficient cash, either from ongoing operations or the sale of assets, to repay
its obligations. In conjunction with the Company's payment of the $32.0 million
of letters of credit, the affiliate obtained a 180-day term bank creditor
standstill agreement on October 18, 2001. During this standstill period, the
affiliate is restructuring its operations and attempting to sell non-core
security businesses to repay or reduce the local Chilean secured debt, as well
as debt due the Company, and to provide sufficient working capital for the core
security business. Wackenhut Chile S.A. also has engaged a local investment bank
to assist in the sale of the non-core businesses. This restructuring will likely
include the Company attaining majority ownership of the Chilean affiliate.
At present there can be no assurance that the Chilean affiliate will be able to
sell assets to enable it to repay its outstanding debt. Inability to sell
non-core assets during this standstill period could have a material adverse
impact on the Chilean affiliate's financial position, results of operations
and/or cash flows. The timing of such activities cannot be certain as the
completion of any such transaction depends upon the needs of potential
acquirers, buyers or investors, as well as financing, regulatory/legal
requirements and other factors.
The Chilean affiliate's total outstanding debt is approximately $52.9 million as
of December 30, 2001, including the $37.9 million owed to the Company, and there
can be no assurance that the Chilean affiliate will be able to generate enough
cash from operations or the sale of non-strategic businesses to satisfy these
debts. The Company has also provided comfort letters for approximately $1.0
million. At this time management is unable to estimate the amount of loss, if
any, that would be recorded should the sale of assets, or ongoing operating
results, be unable to generate sufficient cash to repay the Chilean affiliate's
obligations including amounts owed to the Company, and there can be no assurance
that the ultimate outcome of this uncertainty would not have a material adverse
impact on the Company's financial position, results of operations or cash flows.
At December 30, 2001, the Company's investment balance related to its Chilean
affiliate approximates $10.2 million, including amounts owed to the Company.
The Company continues to review its international security operations in order
to enhance the quality of revenue and earnings growth. Management determined
that it needed to focus the Company's resources in international markets where
it could best achieve a proper critical mass. In aligning its international
resources with this strategy, management believes that there may be conditions
where the Company may consider exiting a country, or refocusing an operation. As
a result, there could be an impairment of assets, or a need to provide for
losses, particularly in certain subsidiaries and affiliates that are
experiencing liquidity issues or are thinly capitalized.
During fiscal year 2001, the Company focused on realigning its international
security management and integrating its global security operations. As it
focused on this repositioning and change in its management structure, the
Company's management provided for asset impairments and provisions for losses
after tax of approximately $8.7 million ($14.3 million pre-tax) associated with
various international operations, principally in Latin America excluding Chile.
The Company has operations in most Latin American countries, and therefore, has
exposure to the ongoing economic difficulties in the region.
Although significant progress has been made in achieving management's
restructuring objectives, these efforts will continue in 2002. During this
review process, conditions may arise that will cause the Company to record
additional impairments to investments in particular locations. Also, in some
locations, local economic conditions may result in reporting losses. At this
time, management is unable to estimate the amount of these write-downs or
losses, if any, that would be reported, and there can be no assurance that the
ultimate outcome of this process would not have a material adverse impact on the
Company's financial position, results of operations and cash flows. As of
December 30, 2001, the Company's investment balance related to its international
affiliates' security operations totals approximately $6.7 million, excluding
Chile.
At December 30, 2001, WHC had a $30 million multi-currency revolving credit
facility, which includes $5 million for the issuance of letters of credit and
thirteen letters of guarantee totaling $10.2 million under separate
international facilities. WHC also has a $220 million operating lease facility
established to acquire and develop new correctional facilities used in its
business. At December 30, 2001, WHC had no amounts outstanding under its
revolving credit facility and $154.3 million was outstanding for four properties
in operation under its operating lease facility. These amounts are not reflected
on the consolidated balance sheet.
The term of WHC's operating facility expires December 18, 2002. WHC is exploring
a number of alternatives to refinance the outstanding balance, and believes it
will be successful in these efforts. However, there can be no assurance that WHC
will be able to complete the refinancing prior to December 18, 2002. Upon
expiration of WHC's operating facility, WHC may purchase the properties in the
facility for their original acquisition cost. If WHC were to
F 6
purchase the properties, WHC may use a number of forms of debt financing which
would require the properties, and any related debt incurred to purchase the
properties, to be reported on WHC's and the Company's balance sheet.
Alternatively, WHC may cause the properties to be sold to a third party. If the
sales proceeds yield less than the original acquisition cost, WHC will make up
the difference up to a maximum of 88% of the original acquisition cost.
In connection with the financing and management of one Australian facility,
WHC's wholly owned Australian subsidiary was required to make an investment of
approximately $5 million. The balance of the facility was financed with
long-term debt obligations that are nonrecourse to WHC. WHC's Australian
subsidiary has a leasehold interest in the facility and does not have the
ultimate rights of ownership. In the event the management contract is terminated
for default, WHC's investment of approximately $5 million is at risk. WHC
believes that the risk of termination for default is remote and notes that the
project has operated successfully for 5 years. The management contract is up for
renewal in September 2002. WHC's management believes the management contract
will be renewed. If the management contract is not renewed (other than due to a
default), WHC's subsidiary's investment must be repaid by the state government.
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.
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 2002. Management will continue to review its capital/financial
planning alternatives to ensure long-term financial capital access and
availability.
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, 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 which both expire
in December 2002. Based on the Company's interest rate and foreign exchange rate
position at December 30, 2001, 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 F8 summarizes results of operations for the Company's three
business segments by organizational group.
Critical Accounting Policies
The Company's critical accounting policies are discussed in detail in footnote
2 to the consolidated financial statements on pages F17 through F20.
Fiscal 2001 compared with Fiscal 2000
Revenues
Fiscal 2001 consolidated revenues increased $304.0 million, or 12.1%, over
fiscal 2000 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 2000. Correctional Services also showed
solid growth.
Global Security Services
Fiscal 2001 Global Security Services' revenues increased $74.3 million, or 6.4%,
to $1,242.5 million from $1,168.2 million in fiscal 2000. North American market
revenues increased $68.8 million, or 6.9%, to $1,070.1 million in fiscal 2001
from $1,001.3 million in fiscal 2000. Within the North American market, revenues
from commercial accounts represented approximately 62.5% of total revenues of
the group in fiscal 2001 versus 60% in fiscal 2000, and revenues from
government/regulated industries represented the other portion. Commercial
account revenues increased approximately 12.1% in fiscal 2001 over fiscal 2000,
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 15.9% in fiscal 2001 over fiscal 2000,
principally due to the U.S. Department of Energy's Oak Ridge facility running at
full capacity in fiscal year 2001, a contract begun in January 2000, and scope
increases at several security contracts in the nuclear industry. These North
American market revenue increases for commercial and regulated accounts were
partially offset due to the sale of the food services division in the first half
of fiscal year 2001. International market revenues increased $5.5 million, or
3.3%, to $172.4 million in fiscal 2001 from $166.9
F 7
million in fiscal 2000, primarily due to growth in the United Kingdom.
Correctional Services Business
Fiscal 2001 Correctional Services' revenues increased $26.5 million, or 5.0%, to
$562.1 million in fiscal 2001 from $535.6 million in fiscal 2000. This increase
is the result of new facility openings offset by lower construction revenues,
closure of two facilities and lower compensated resident days at the Department
of Immigration and Multicultural Affairs ("DIMA") facilities in Australia.
Approximately $52.5 million of this increase in revenues is attributable to an
increase in compensated resident days resulting from the opening of two
facilities in fiscal 2001 and a full year of operations in fiscal 2001 for two
facilities opened in fiscal 2000. The number of compensated resident days in all
facilities increased to approximately 11.1 million in fiscal 2001 from 10.6
million in fiscal 2000. Revenues decreased approximately $27.3 million due to a
decrease in construction activity. Revenues also decreased by approximately
$10.4 million due to the cessation of operations at the Jena facility, the
expiration of two contracts for two facilities and a decline in compensated
resident days at the DIMA facilities. The balance of the increase is
attributable to facilities opened during both periods and an increase in per
diem rates.
Average facility occupancy in domestic facilities remained constant at 97.0% of
capacity for 2001 and 2000. Average facility occupancy in Australian facilities
decreased to 94.3% of capacity in 2001 compared to 99.1% in 2000.
Staffing Services Business
Staffing Services' revenues increased $203.1 million, or 25.3%, to $1,004.4
million in fiscal 2001 from $801.3 million in fiscal 2000 and is attributable to
internal growth. Worksite employees grew to 42,200 at the end of 2001 from
35,900 at the end of 2000. Temporary staffing hours were approximately 3.5
million in 2001 compared to 3.6 million in 2000.
Operating Income
Fiscal 2001 consolidated operating income was $44.3 million versus $34.9 million
in fiscal 2000. The operating margin for fiscal 2001 increased to 1.6% from 1.4%
in 2000. The operating margin increases for Global Security Services and
Correctional Services, along with a slight decrease in unallocated corporate
expense as a percentage of total consolidated revenues, more than offset lower
operating margins in Staffing Services.
Global Security Services
Fiscal 2001 Global Security Services' business operating income of $36.6 million
increased $3.2 million, or 9.6%, from $33.4 million in fiscal 2000. Margins were
2.9% in 2001 and 2000.
Fiscal 2001 operating income of $42.0 million in the North American market
increased $11.9 million, or 39.5%, from $30.1 million in fiscal 2000. This
increase can be attributed mainly to increased revenue growth from commercial
and government-regulated security services net of decreased profits in the food
services division that was sold in the first half of fiscal year 2001. Excluding
the food service division, North American security operations' operating income,
as a percentage of revenues, increased 80 basis points in fiscal 2001 compared
to fiscal 2000, due to an increase in billing rates and improved operations.
2001 2000 1999
-------------------------------------------------------------------------------------
$ % $ % $ %
-------------------------------------------------------------------------------------
REVENUES (a)
NORTH AMERICAN SERVICES $ 1,070.1 38.1 $ 1,001.3 40.0 $ 892.3 41.4
INTERNATIONAL SERVICES 172.4 6.1 166.9 6.6 148.7 6.9
-------------------------------------------------------------------------------------
GLOBAL SECURITY SERVICES 1,242.5 44.2 1,168.2 46.6 1,041.0 48.3
CORRECTIONAL SERVICES 562.1 20.0 535.6 21.4 438.5 20.4
STAFFING SERVICES 1,004.4 35.8 801.3 32.0 672.8 31.3
-------------------------------------------------------------------------------------
CONSOLIDATED REVENUES $ 2,809.0 100.0 $ 2,505.1 100.0 $ 2,152.3 100.0
-------------------------------------------------------------------------------------
OPERATING INCOME (b)
NORTH AMERICAN SERVICES $ 42.0 3.9 $ 30.1 3.0 $ 24.7 2.8
INTERNATIONAL SERVICES (5.4) (3.1) 3.3 2.0 3.0 2.0
--------- --------- ---------
GLOBAL SECURITY SERVICES 36.6 2.9 33.4 2.9 27.7 2.7
CORRECTIONAL SERVICES 24.2 4.3 18.9 3.5 26.0 5.9
STAFFING SERVICES 3.9 0.4 3.7 0.5 3.5 0.5
UNALLOCATED CORPORATE EXPENSE (20.4) (0.7) (21.1) (0.8) (19.3) (0.9)
--------- --------- ---------
CONSOLIDATED OPERATING INCOME $ 44.3 1.6 $ 34.9 1.4 $ 37.9 1.8
--------- --------- ---------
- --------------------------------------------------------------------------------
(a) Represents percent of total revenues.
(b) Represents percent of respective business related revenues.
F 8
During fiscal 2000, management decided to focus the Company's resources in
international markets where it could best achieve a proper critical mass and
improve revenue and earnings growth. During fiscal year 2001, as the Company
focused on this repositioning and change in its management structure, asset
impairments and provisions for losses impacting operating income of
approximately $10.0 million pre-tax ($6.1 million after tax) were provided for
in connection with various international operations, excluding Chile, in Latin
America, Asia and Africa. As a result of these provisions, fiscal 2001 operating
income in the international security market decreased $8.7 million to a loss of
$5.4 million from income of $3.3 million in fiscal 2000, with operating margins
declining to a negative 3.1% versus a positive 2.0% in fiscal 2000. Although
significant progress has been made in achieving management's restructuring
objectives, these efforts will continue in 2002. During this review process,
conditions may arise that will cause the Company to record additional
impairments to investments in particular locations. Also, in some locations,
local economic conditions may result in reporting losses. At this time,
management is unable to estimate the amount of these write-downs or losses, if
any, that would be reported, and there can be no assurance that the ultimate
outcome of this process would not have a material adverse impact on the
Company's financial position, results of operations and cash flows.
Correctional Services Business
Fiscal 2001 operating income from Correctional Services increased $5.3 million,
or 28.0%, to $24.2 million from $18.9 million in fiscal 2000. This increase is
principally the result of new facility openings offset by lower compensated
resident days at DIMA facilities in Australia. Additionally, this increase is
due to improved operations at a number of facilities. WHC implemented strategies
to improve the operational performance of these facilities and believes their
performance has stabilized. However, there can be no assurances that these
strategies will continue to be successful.
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"), 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 recorded in fiscal year 2001 and 2000, respectively, operating charges of
$3.0 million and $3.8 million ($1.8 million and $2.3 million after tax),
representing the losses expected at the time to be incurred on the lease. After
taxes and minority interest expense, these charges reduced the Company's fiscal
year 2001 and 2000 diluted earnings per share by $0.07 and $0.09, respectively.
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 will be additional adverse impacts on WHC's and the Company's
financial positions and future results of operations. Remaining payments under
this lease are approximately $14.0 million.
WHC continues to incur higher insurance costs due to a hardened seller's
insurance market, which was exacerbated by the events of September 11, 2001 and
historical adverse claims experience, and although WHC has implemented a
strategy to improve the management of future claims, WHC can not provide
assurances that this strategy will result in lower insurance costs. WHC
insurance costs increased significantly during the third and fourth quarters of
2001. WHC's management believes these costs have stabilized; however, the
increases may continue through fiscal 2002.
WHC has 21 existing contracts up for renewal in 2002 and WHC's management
expects to renew these contracts with the possible exceptions of the Bayamon
Correctional Facility and McFarland Community Corrections Center. However, there
can be no assurances that WHC will be successful in these efforts. Operating
margin as a percentage of revenues was 4.3% in fiscal 2001, compared to 3.5% in
fiscal 2000.
Staffing Services Business
Staffing Services' operating income of $3.9 million increased $0.2 million, or
5.4%, from $3.7 million in fiscal 2000. The operating income of the Staffing
Services as a percentage of total Staffing Services' revenues decreased to 0.4%
for fiscal 2001 compared to 0.5% for fiscal 2000, due principally to higher
fixed insurance costs.
Corporate Expenses
Unallocated corporate general and administrative expenses decreased $0.7 million
to $20.4 million from $21.1 million in 2000. As a percentage of consolidated
revenues, unallocated corporate general and administrative expenses decreased
slightly.
EBITDA
Fiscal 2001 EBITDA, defined as earnings before interest expense, income taxes,
depreciation and amortization was $73.0 million. Fiscal 2000 EBITDA was $60.8
million.
Other Income (Expense)
Interest and investment income decreased $0.2 million to $6.2 million in fiscal
2001 from $6.4 million in fiscal 2000. Interest expense decreased $1.8 million
to $6.2 million in fiscal 2001 from $8.0 million in 2000. The decrease in
interest expense is primarily due to a decrease in average debt outstanding as
well as a decrease in average borrowing rates.
Minority Interest
Minority interest (net of income taxes) increased to $9.1 million in fiscal 2001
from $8.2 million in fiscal 2000, principally reflecting the increase of $1.0
million in minority interest pertaining to increased earnings of WHC.
F 9
Equity in (Loss) Income of Affiliates
Equity in loss of affiliates (net of income tax benefit) was $14.2 million in
fiscal 2001 compared to income of $5.8 million in fiscal 2000. Equity loss
related to the Chilean affiliate increased by $17.2 million after tax ($28.0
pre-tax) from a loss of $0.7 million after tax ($1.2 million pre-tax) in fiscal
year 2000 to a loss of $17.9 million after tax ($29.2 pre-tax) in fiscal year
2001, due to an increase in losses plus the write-down of the Company's
advances. At December 30, 2001 the Company's investment balance related to its
Chilean affiliate approximated $10.2 million.
The Company launched a full scale analysis of all aspects of the uncertain
situation of its affiliated operations and is currently working with the
affiliate's management team and its bankers in assessing its alternatives with
respect to the affiliate's operations in Chile, including the sale of
non-strategic businesses. At this time management is unable to estimate the
amount of loss, if any, that would be recorded should the sale of assets, or
ongoing operating results, be unable to generate sufficient cash to repay the
Chilean affiliate's obligations including the $37.9 million owed to the Company,
and there can be no assurance that the ultimate outcome of this uncertainty
would not have a material adverse impact on the Company's financial position,
results of operations or cash flows.
The Company's management continued to review its international security
operations in order to enhance the quality of revenue and earnings growth and
determined that it needed to focus the Company's resources in international
markets where it could best achieve a proper critical mass. Therefore, of the
$20.0 million decrease in equity income for this year compared to last year, a
$2.6 million after tax charge ($4.3 million pre-tax) was incurred primarily
related to the complete write-down of the Company's investments in certain
countries, principally Latin America. As of December 30, 2001, the Company's
investment balance related to its international affiliates' security operations
totals approximately $6.7 million, excluding Chile. Although significant
progress has been made in achieving management's restructuring and repositioning
objectives, these efforts will continue in 2002. During this review process,
conditions may arise that will cause the Company to record additional
impairments to investments in particular locations. Also, in some locations,
local economic conditions may result in reporting losses. At this time,
management is unable to estimate the amount of these write-downs or losses, if
any, that would be reported, and there can be no assurance that the ultimate
outcome of this process would not have a material adverse impact on the
Company's financial position, results of operations and cash flows.
Income Before Cumulative Effect of Change in Accounting Principle
Income before cumulative effect of change in accounting principle decreased
$13.9 million to $3.7 million in fiscal 2001, compared to $17.6 million in
fiscal 2000. Diluted earnings per share before the cumulative effect of change
in accounting principle was $0.23 in fiscal 2001, compared to $1.15 in fiscal
2000.
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 $3.7 million for fiscal 2001, or $0.25 basic earnings per share,
as compared to $16.8 million, or $1.12 per share for fiscal 2000. Earnings per
share on a diluted basis was $0.23 in fiscal 2001 compared to $1.10 for fiscal
2000. Goodwill amortization, after tax, amounted to $1.4 million for fiscal
2001. Excluding goodwill amortization, after tax, basic and diluted earnings per
share would have been $0.08 and $0.09 more, respectively. In future years,
goodwill will no longer be amortized but will be reviewed for potential
impairment under SFAS No. 142.
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.
F10
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 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.
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.
Staffing Services Business
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. This decrease in operating margin was
partially offset by improved profitability and margins in Security Services.
Global Security Services
Fiscal 2000 Global 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.
Global 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 2002. There were also
additional expenses related to the operations at six facilities in the United
States. In addition, there has been an increase in insurance expense.
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.
Staffing Services Business
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 Staffing
Services as a percentage of total Staffing Services' 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
F11
due to a decrease in operating income and an increase in interest expense. 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.
F12
The Wackenhut Corporation and Subsidiaries
Consolidated Statements of Income
(in millions except share data)
FISCAL YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000, and JANUARY 2, 2000
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
REVENUES $2,809.0 $2,505.1 $2,152.3
OPERATING EXPENSES
Payroll and related taxes 2,264.1 1,950.4 1,688.5
Other operating expenses 471.9 493.9 403.0
Depreciation and amortization 28.7 25.9 22.9
-------- -------- --------
OPERATING INCOME 44.3 34.9 37.9
-------- -------- --------
OTHER INCOME (EXPENSE)
Interest and investment income 6.2 6.4 7.2
Interest expense (6.2) (8.0) (5.2)
-------- -------- --------
INCOME BEFORE INCOME TAXES 44.3 33.3 39.9
INCOME TAXES (17.3) (13.3) (15.9)
MINORITY INTEREST, NET OF INCOME TAXES OF $5.8, $5.5 AND $7.2 (9.1) (8.2) (10.9)
EQUITY IN INCOME (LOSS) OF AFFILIATES, NET OF INCOME TAX
(BENEFIT) OF $(9.1), $3.9 AND $4.3 (14.2) 5.8 6.5
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 3.7 17.6 19.6
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET (Note 2) -- (0.8) --
-------- -------- --------
NET INCOME $ 3.7 $ 16.8 $ 19.6
-------- -------- --------
EARNINGS (LOSS) PER SHARE:
Basic
Income before cumulative effect of change in accounting principle $ 0.25 $ 1.17 $ 1.31
Cumulative effect of change in accounting principle -- (0.05) --
-------- -------- --------
Net income $ 0.25 $ 1.12 $ 1.31
-------- -------- --------
Diluted
Income before cumulative effect of change in accounting principle $ 0.23 $ 1.15 $ 1.28
Cumulative effect of change in accounting principle -- (0.05) --
-------- -------- --------
Net income $ 0.23 $ 1.10 $ 1.28
-------- -------- --------
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15.0 15.0 14.9
-------- -------- --------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15.4 15.1 15.1
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F13
The Wackenhut Corporation and Subsidiaries
Consolidated Balance Sheets
(in millions except share data)
DECEMBER 30, 2001 and DECEMBER 31, 2000
2001 2000
- ----------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 86.9 $ 60.8
Accounts receivable, net 248.0 218.4
Inventories 9.6 11.5
Deferred taxes 23.2 12.1
Prepaid expenses 7.5 10.6
Other 10.9 15.1
------ ------
386.1 328.5
MARKETABLE SECURITIES 37.6 37.3
PROPERTY AND EQUIPMENT 125.5 118.2
Less: accumulated depreciation and amortization (49.4) (38.8)
------ ------
76.1 79.4
DEFERRED TAXES
18.6 7.5
OTHER ASSETS
Goodwill, net 47.6 50.1
Other intangibles, net 6.5 14.1
Investment in and advances to affiliates 38.0 44.9
Other 9.4 8.5
------ ------
101.5 117.6
------ ------
$619.9 $570.3
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current portion of long-term debt $ 4.8 $ 5.1
Accounts payable 31.5 36.9
Accrued payroll and related taxes 106.8 90.3
Accrued expenses 84.2 65.6
------ ------
227.3 197.9
RESERVES FOR INSURANCE LOSSES 104.9 92.7
LONG-TERM DEBT 11.5 11.4
DEFERRED REVENUE 9.8 12.8
OTHER 33.6 19.6
COMMITMENTS AND CONTINGENCIES (Notes 9, 10, and 18)
MINORITY INTEREST 58.7 58.1
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, 11.2 and 11.1 million issued and outstanding, respectively 1.1 1.1
Additional paid-in capital 123.5 121.9
Retained earnings 71.5 67.8
Accumulated other comprehensive loss (22.4) (13.4)
------ ------
174.1 177.8
------ ------
$619.9 $570.3
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F14
The Wackenhut Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in millions)
FISCAL YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000, and JANUARY 2, 2000
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3.7 $ 16.8 $ 19.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting changes -- 0.8 --
Depreciation and amortization 28.7 25.9 22.9
Deferred taxes (22.2) 0.8 1.1
Provision for bad debts 6.5 3.2 0.3
Equity in loss (income), net of dividends received
of $5.8, $2.5 and $2.7 29.1 (7.2) (8.1)
Minority interest, net of taxes 9.1 8.2 10.9
Tax benefit from exercise of stock options 0.3 -- 0.4
Non-cash compensation charge 1.4 -- --
Foreign currency adjustment 0.5 0.5 (0.2)
Other (1.1) (1.5) 0.5
Changes in operating assets and liabilities, net of
acquisitions and divestitures -
(Increase) Decrease in operating assets:
Accounts receivable (38.3) (38.4) (31.2)
Inventories (7.7) (4.7) (8.2)
Prepaid expenses 2.9 1.9 (5.4)
Other current assets 1.3 (3.1) 0.1
Other (1.2) (0.5) (4.8)
Increase (Decrease) in operating liabilities:
Accounts payable and accrued expenses 13.3 19.8 12.5
Accrued payroll and related taxes 17.1 13.2 7.2
Reserve for insurance losses 12.2 15.2 20.4
Other 11.1 (0.2) (0.7)
------ ------ ------
Net Cash Provided By Operating Activities 66.7 50.7 37.3
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of food service division 14.6 -- --
Net proceeds from sale of prison facilities to CPV -- -- 22.3
Payments for acquisitions (2.2) (10.3) (4.7)
Net investment in and advances (to) from affiliates
and joint ventures (35.6) -- 7.4
Capital expenditures (14.5) (24.3) (44.0)
Sales of marketable securities 78.7 14.3 6.2
Purchases of marketable securities (79.1) (20.1) (19.5)
Non-current assets -- -- (1.5)
------ ------ ------
Net Cash Used In Investing Activities (38.1) (40.4) (33.8)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from exercise of stock options of subsidiary 0.4 -- 0.2
Net proceeds from exercise of stock options -- -- 1.1
Proceeds from issuance of debt 401.9 369.3 315.0
Payments on debt (402.2) (374.0) (301.6)
Dividends paid -- -- (2.2)
Net cash settlements from sales of accounts receivable 0.5 (2.0) 16.5
Shares repurchased and retired, including subsidiary's (1.5) (4.9) (8.0)
------ ------ ------
Net Cash (Used In) Provided by Financing Activities (0.9) (11.6) 21.0
------ ------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (1.6) (4.9) (1.0)
------ ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 26.1 (6.2) 23.5
CASH AND CASH EQUIVALENTS, beginning of year 60.8 67.0 43.5
------ ------ ------
CASH AND CASH EQUIVALENTS, end of year $ 86.9 $ 60.8 $ 67.0
------ ------ ------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for - interest $ 5.8 $ 8.0 $ 6.3
- income taxes $ 22.9 $ 8.6 $ 12.6
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F15
The Wackenhut Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
(in millions except share data in thousands)
FISCAL YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000, and JANUARY 2, 2000
Common Stock
Par Value $.10
---------------------------------------------
Series A Series B
-------------------- --------------------- Additional
Number Number Paid-in
of Shares Amount of Shares Amount Capital
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 3, 1999 3,855 $0.4 10,968 $1.1 $122.5
Proceeds from the exercise of stock options 110 1.1
Tax benefit related to employee stock options 0.4
Issuance of Performance Shares 38 0.6
Subsidiary's exercise of stock options 1.7
Subsidiary's shares repurchased (4.5)
Shares repurchased and retired (5) (0.1)
Dividends
Comprehensive income (loss):
Net Income
Foreign currency translation adjustments,
net of income tax benefits of $0.7
Unrealized loss on marketable securities,
net of income tax benefits of $1.0
Total comprehensive income
---------------------------------------------------------
BALANCE, JANUARY 2, 2000 3,855 0.4 11,111 1.1 121.7
Equity increase from affiliate stock offering 0.9
Issuance of Performance Shares 33 0.5
Subsidiary's shares repurchased (1.2)
Comprehensive income (loss):
Net Income
Foreign currency translation adjustments,
net of income tax benefits of $3.3
Unrealized gain on marketable securities,
net of income taxes of $0.9
Total comprehensive income
---------------------------------------------------------
BALANCE, DECEMBER 31, 2000 3,855 0.4 11,144 1.1 121.9
Proceeds from issuance of stock options 8 0.1
Issuance of Performance Shares 30 0.5
Non-cash compensation charge 1.4
Subsidiary's exercise of stock options 0.2
Subsidiary's shares repurchased (0.6)
Comprehensive income (loss):
Net Income
Foreign currency translation adjustments,
net of income tax benefits of $1.2
Unrealized loss on marketable securities,
net of income tax benefit of $0.1
Unrealized loss on WHC's affiliate's
derivative instruments, net of
income tax benefit of $0.2
Cumulative effect of change in accounting
principle related to WHC's affliiate's
derivative instruments, net of income
tax benefit of $4.6 million
Total comprehensive income (loss)
---------------------------------------------------------
BALANCE, DECEMBER 30, 2001 3,855 $0.4 11,182 $1.1 $123.5
- ---------------------------------------------------------------------------------------------------------------------
Unrealized
Foreign Gain (Loss) Total
Retained Currency on Shareholders'
Earnings Translation Securities Equity
- -----------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 3, 1999 $ 32.5 $ (7.3) $ -- $149.2
Proceeds from the exercise of stock options 1.1
Tax benefit related to employee stock options 0.4
Issuance of Performance Shares 0.6
Subsidiary's exercise of stock options 1.7
Subsidiary's shares repurchased (4.5)
Shares repurchased and retired (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 51.0 (8.4) (1.9) 163.9
Equity increase from affiliate stock offering 0.9
Issuance of Performance Shares 0.5
Subsidiary's shares repurchased (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 67.8 (13.3) (0.1) 177.8
Proceeds from issuance of stock options 0.1
Issuance of Performance Shares 0.5
Non-cash compensation charge 1.4
Subsidiary's exercise of stock options 0.2
Subsidiary's shares repurchased (0.6)
Comprehensive income (loss):
Net Income 3.7
Foreign currency translation adjustments,
net of income tax benefits of $1.2 (1.8)
Unrealized loss on marketable securities,
net of income tax benefit of $0.1 (0.1)
Unrealized loss on WHC's affiliate's
derivative instruments, net of
income tax benefit of $0.2 (0.3)
Cumulative effect of change in accounting
principle related to WHC's affliiate's
derivative instruments, net of income
tax benefit of $4.6 million (6.8)
Total comprehensive income (loss) (5.3)
--------------------------------------------------------
BALANCE, DECEMBER 30, 2001 $ 71.5 $ (15.1) $ (7.3) $174.1
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F16
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 30, 2001, December 31, 2000, and January 2,
2000
(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 employee leasing 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 2001, 2000 and 1999 each included 52 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. The Company's significant
estimates include the allowance for doubtful accounts, depreciation of fixed
assets, amortization of intangibles, construction cost estimates, employee
deferred compensation accruals, the reserve related to the Jena facility,
reserves for insurance losses, reserves related to the Company's international
affiliates, certain reserves under its operating contracts 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 $6.8 million
and $4.8 million at December 30, 2001 and December 31, 2000, respectively.
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 wholly owned casualty 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.
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).
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 recognized in Fiscal 2001 impairment losses
primarily related to its international
F17
operations. 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 undiscounted and are
computed based on actuarial studies and, in the opinion of management, are
adequate.
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 that 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,
($0.5) million, and $0.2 million for 2001, 2000 and 1999, respectively.
Revenues
Revenues earned from services are recognized when services are provided. During
the fourth quarter 2000, the Company adopted SEC Staff Accounting Bulletin: 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. 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.
Income Taxes
Deferred income taxes are determined on the estimated future tax effects of
differences between the financial reporting and tax bases 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. Valuation 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, to a lesser
extent, the ownership by foreign investors in several international
subsidiaries.
SEC Staff Accounting Bulletin: No. 51 (SAB No. 51)
In fiscal year 2000 in connection with the sale of stock by 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.
F18
SEC Staff Accounting Bulletin: No. 101 (SAB No. 101)
During the fourth quarter of 2000, the Company adopted SAB No. 101 - Revenue
Recognition. SAB No. 101 states that revenue generally is realized and earned
when persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the price to the buyer is fixed or determinable
and collectibility is reasonably assured. 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 2000 and 1999,
the pro forma effect was $0.02 per share less than that reported for each of
these years.
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 (loss),
which encompasses net income and foreign currency translation adjustments, net
of tax, in the Consolidated Statements of Shareholders' Equity and
Comprehensive Income (Loss).
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 by type, credit
and issuer, 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 30, 2001 and December 30, 2000, management believes the Company had no
significant concentrations of credit risk.
Recent Accounting Pronouncements
The Company adopted SFAS No. 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 No. 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 recorded its share of the
affiliate's change in other comprehensive income (loss) as a result of applying
SFAS No. 133. In the Company's and WHC's financial statements, the adoption of
SFAS No. 133 resulted in a $6.8 million and a $12.1 million reduction in
shareholders' equity, respectively. As of December 30, 2001, the swaps
approximated $7.1 million and $12.6 million in the Company's and WHC's
financial statements, respectively, as a component of other comprehensive loss.
In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" was issued and was
effective for servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. This statement replaces SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," and revises the accounting and disclosure of such
transactions; however, most of SFAS No. 125's provisions continue to apply. See
footnote 8 for additional disclosures regarding SFAS No. 140.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS 141
addresses financial accounting and reporting for business combinations and
supercedes APB No. 16, "Business Combinations" and SFAS No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises." All business
combinations in the scope of SFAS 141 are to be accounted for under the purchase
method. SFAS 141 was effective June 30, 2001. The adoption of SFAS 141 did not
have an impact on the Company's financial position, results of operations or
cash flows.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" effective for fiscal years beginning after December 15, 2001. SFAS No.
142 addresses financial accounting and reporting for intangible assets acquired
individually or with a group of other assets (but not those acquired in a
business combination) at acquisition. SFAS No. 142 also addresses financial
accounting and reporting for goodwill and other intangible
F19
assets subsequent to their acquisition. With the adoption of SFAS No. 142,
goodwill is no longer subject to amortization. Rather, goodwill will be subject
to at least an annual assessment for impairment by applying a fair value test.
The Company is currently assessing the impact of adopting this statement.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" effective for fiscal years beginning after June 15, 2002. SFAS No.
143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The Company does not expect there will be
an impact to its financial statements upon adoption of SFAS No. 143.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" effective for fiscal year beginning after
December 15, 2001. For long-lived assets to be held and used, SFAS No. 144
retains the existing requirements to (a) recognize an impairment loss only if
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and (b) measure an impairment loss as the difference
between the carrying amount and the fair value of the asset. SFAS No. 144
establishes one accounting model to be used for the long-lived assets to be
disposed of by sale. The Company does not expect there will be an impact to its
financial statements upon adoption of SFAS No. 144.
(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 and contingent cash payments subject
to adjustments based on actual workers' compensation claims. The final
contingent cash payment was paid in Fiscal 2001 and amounted to $2.2 million.
The acquisitions were accounted for under the purchase method, and the Company
recorded approximately $8.7 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
Life 2001 2000
- --------------------------------------------------------------------
Land $ 2.7 $ 2.8
Buildings and improvements 7 to 30 58.6 53.2
Equipment 1 1/2 to 20 47.0 44.7
Furniture and fixtures 3 to 10 6.6 7.4
Automobiles 3 9.3 9.3
Construction in progress 1.3 0.8
------ ------
$125.5 $118.2
- --------------------------------------------------------------------
(5) Marketable Securities
Marketable securities related to the Company's wholly owned casualty insurance
subsidiary, carried at fair value, consist of the following at fiscal year end:
2001 2000
- ----------------------------------------------------------------------------------------
Fair Fair
Value Cost Value Cost
- ----------------------------------------------------------------------------------------
Municipal Bonds $24.2 $24.2 $20.7 $20.6
Taxable Bonds 12.6 12.6 9.1 8.9
Preferred Stock 0.8 1.0 7.5 8.0
----- ----- ----- -----
$37.6 $37.8 $37.3 $37.5
- ----------------------------------------------------------------------------------------
The Company has placed in trust related to its wholly owned casualty insurance
subsidiary, in favor of certain insurance companies, its marketable securities
and $27.5 million in cash and cash equivalents, and has issued irrevocable
standby letters of credit for $24.5 million related to its insurance
subsidiary. Municipal bonds mature from 21 months to 32 years and taxable
bonds, which includes corporate and government bonds, mature in periods ranging
from 16 months to 29.6 years. At December 30, 2001, the Company's wholly owned
casualty insurance subsidiary has specific restrictions on future purchases of
marketable securities, and on withdrawals from the trust. Realized gains for
fiscal 2001 were $0.6 million for municipal bonds and $0.4 million for taxable
bonds and preferred stock. Realized gains for fiscal 2000 and 1999 were not
significant.
(6) Investment in Affiliates
Equity in undistributed earnings (loss) of affiliates approximated $(6.1)
million and $27.6 million at December 30, 2001, and December 31, 2000,
respectively, and is included in "Investments in and advances to affiliates" in
the consolidated balance sheets. The decrease in undistributed earnings is
primarily attributable to losses the Company recorded on its Chilean affiliate.
The following is a summary of condensed unaudited information pertaining to
affiliates:
2001 2000
- --------------------------------------------------------------------------------
Balance sheet items at fiscal year end:
Current assets $ 196.3 $ 196.5
Noncurrent assets 379.3 379.4
Current liabilities 126.4 147.4
Noncurrent liabilities 391.5 334.7
Minority interest liability 1.0 0.4
Income statement items for the fiscal year:
Revenues $ 617.9 $ 596.9
Operating income 4.2 32.6
Net income (loss) before taxes (5.7) 29.2
- --------------------------------------------------------------------------------
(7) Goodwill and Other Intangibles
Goodwill and other intangibles consist of the following at fiscal year end:
F20
2001 2000
- --------------------------------------------------------------------
Goodwill $58.6 $58.0
Contract values -- 15.6
Other 12.6 8.7
----- -----
71.2 82.3
Accumulated amortization
Goodwill 11.0 7.9
Contract values -- 5.7
Other 6.1 4.5
----- -----
17.1 18.1
----- -----
Net $54.1 $64.2
- --------------------------------------------------------------------
Amortization expense of intangibles was $6.0 million, $5.4 million, and $4.9
million for fiscal years 2001, 2000 and 1999, respectively. The reduction of
contract values is related to the sale of the Company's food services division.
(8) Notes Payable and Long-Term Debt
Long-term debt consists of the following at fiscal year end:
2001 2000
- -----------------------------------------------------------------------------
Revolving loans -
The Wackenhut Corporation, parent $ 9.6 $ 0.5
WHC -- 10.0
Lease obligation payable through
2001 at a weighted average rate
of 4.5% 0.7 1.3
Other debt principally related to
security services 6.0 4.7
----- -----
Total 16.3 16.5
Less: current portion 4.8 5.1
----- -----
Total $11.5 $11.4
- -----------------------------------------------------------------------------
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 30, 2001, the unused portion of the revolving line of credit was
$76.6 million, after deducting $26.3 million in outstanding letters of credit
and $9.6 million loan balance outstanding which bears interest at a rate
defined as either prime rate less 25 to 125 basis points or LIBOR plus 90 to
175 basis points, depending upon leverage ratios, 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 30, 2001, the Company and its subsidiaries were in compliance with
applicable covenants.
On January 26, 2001, the Company amended and restated its agreement (the
"Securitization Agreement") with a financial institution to sell on a
continuous basis undivided interests in certain eligible trade accounts
receivable. On January 25, 2002, the Company amended, restated and extended the
Securitization Agreement to expire in January 2003, where it may be extended
upon the financial institution's acceptance. Pursuant to the Securitization
Agreement, the Company formed Wackenhut Funding Corporation ("WFC"), a wholly
owned, non-qualifying special purpose, bankruptcy-remote subsidiary. WFC was
formed for the sole purpose of buying and selling receivables generated by the
Company, where the Company sells all of their eligible accounts receivable to
WFC irrevocably and without recourse. From time to time and in accordance with
the Securitization Agreement, WFC will sell undivided interests in these
receivables to the financial institution, up to a maximum purchase limit of $75
million.
This two-step transaction is accounted for as a sale of receivables under the
provisions of SFAS No. 140. There were $68.0 million and $67.5 million accounts
receivable sold under the Securitization Agreement at December 30, 2001 and
December 31, 2000, respectively. Accordingly, such receivables are not
reflected in the consolidated balance sheet. In fiscal 2001, proceeds from new
securitizations were $157.6 million and payments on securitizations were $157.1
million. The costs associated with this sale of receivables are based on the
volume of receivables sold and existing markets for A1+/P-1 asset backed
commercial paper rates, primarily relate to the discount and loss on sale, and
ranged between 2.3% and 7.2% during fiscal 2001. Such costs are included in
"Interest Expense" in the consolidated statements of income and were
approximately $2.8 million and $4.7 million for the twelve months ended
December 30, 2001 and December 31, 2000.
Therefore, as of December 30, 2001, the total amount available for additional
borrowings to the Company from its revolving credit and accounts receivable
securitization facility is $83.6 million.
The Company has a demand operating line of credit with a Canadian bank with a
maximum borrowing amount of $2.8 million. At December 30, 2001, the Company had
short-term borrowings under this line of credit of $2.0 million for working
capital purposes, bearing interest at a rate based on the bank's prime lending
rate, or 5.3% at year end. The Company had outstanding notes payable, capital
leases and operating lines of credit of $4.1 million at December 30, 2001 to
meet working capital needs of its international subsidiaries with $2.3 million
due within one year.
At December 30, 2001, WHC had a $30 million multi-currency revolving credit
facility, which includes $5 million for the issuance of letters of credit and
thirteen letters of guarantee totaling $10.2 million under separate
international facilities. WHC also has a $220 million operating lease facility
established to acquire and develop new correctional facilities used in its
business. At December 30, 2001, WHC had no amounts outstanding under its
revolving credit facility and $154.3 million was outstanding for four
properties in operation under its operating lease facility. These amounts are
not reflected on the consolidated balance sheet.
(9) Jena Charge
During the third quarter of 2000, WHC recorded an operating charge of $3.8
million ($2.3 million after tax) related to the lease of the 276-bed Jena
Juvenile Justice Center in Jena, Louisiana which had been vacated. The charge
represented the expected losses to be incurred under the lease
F21
agreement with CPV through 2001. At that time, WHC's management estimated the
Jena Facility would remain inactive through the end of 2001.
In June 2001, the Louisiana State Senate passed a resolution requesting the
Louisiana Department of Public Safety and Corrections to enter into discussions
regarding the potential purchase of a facility in LaSalle Parish. Subsequently,
the State and WHC, in coordination with CPV, began discussions regarding
the sale of the Jena facility located in LaSalle Parish. WHC's management
believes a sale of the Jena facility will be finalized by December 29, 2002.
Accordingly, in December 2001, WHC recorded an additional operating charge of
$3.0 million ($1.8 million after tax) related to the Jena Facility which
represents the expected losses to be incurred on the lease through December
2002.
There can be no assurance that WHC and CPV will be able to successfully complete
a sale. If a sale is not completed prior to December 29, 2002, or if WHC is
unable to sublease or find an alternative use for the Jena Facility prior to
December 29, 2002, an additional charge related to the Jena Facility would be
required. Remaining payments under this lease are approximately $14.0 million.
(10) Related Party Transactions with Correctional Properties Trust
On April 28, 1998, CPV acquired eight correctional and detention facilities
operated by WHC. WHC and CPV have three common members on their respective Board
of Directors. CPV also was granted 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. There were no purchase and sale transactions between WHC and CPV in 2001.
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 gain related to the sale of the facilities to CPV
at December 30, 2001, which is included in "Deferred revenue" in the
accompanying consolidated balance sheets, is $11.7 million with $1.9 million
short-term and $9.8 million long-term, excluding the long-term portion of
deferred development fee revenue. The gain is being amortized over the ten year
lease terms. WHC recorded net rental expense related to CPV of $19.1 million and
$19.7 million in 2001 and 2000, respectively, excluding the Jena rental expense,
and $18.9 million in 1999.
The future minimum lease commitments under the leases for these eleven
facilities are as follows:
Annual
Year Rental
- ---- --------
2002 $ 23.1
2003 23.2
2004 23.3
2005 23.4
2006 23.4
Thereafter 41.7
-------
$ 158.1
- -------------------- -----------
(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 30, 2001, no preferred stock has been issued.
The Board of Directors has authorized 50 million shares of the Company's common
stock, 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 30, 2001, 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 had repurchased all 1.5 million shares authorized of its
common stock also at an average price of $15.52 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
F22
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 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'
plan"). Under the directors' plan, non-employee directors are granted 5,000
stock options for series B common stock upon their election or re-election to
the Board of Directors. Under terms of the directors' 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 30, 2001 2,468,234 shares of series B common stock were reserved for
issuance. Under the directors' plan, 60,000 shares were available for future
grants and awards. The employee plan expired in July 2001. During 2001, the
Company modified stock options for three employees and recorded non-cash
compensation expense of approximately $1.4 million.
A summary of the status of the Company's employee stock option plans, as of
December 30, 2001, December 31, 2000 and January 2, 2000 is presented in the
following chart:
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
Shares Price* Shares Price* Shares Price*
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at
beginning of
Year 1,533,654 $ 13.01 978,904 $ 15.06 847,630 $ 14.06
Options:
Granted 600,000 11.42 587,000 9.71 230,000 16.69
Exercised (8,126) 8.35 -- -- (101,851) 10.15
Forfeited -- -- (32,250) 15.66 3,125 6.16
------------------------------------------------------------------------------------------------------
Outstanding
& exercisable
End of year 2,125,528 $ 12.58 1,533,654 $ 13.01 978,904 $ 15.06
- -------------------------------------------------------------------------------------------------------------------------------
*Weighted average exercise price.
Option groups outstanding at December 30, 2001 and related exercise price and
remaining life information are as follows:
Remaining
Outstanding Exercise Life
Grant Date & Exercisable Price (Years)
- -------------------------------------------------------------
04/30/94 126,978 $ 6.16 2
01/28/95 96,750 10.80 3
01/31/96 110,000 14.00 4
01/28/97 127,800 15.25 5
08/09/97 30,000 18.94 5
01/27/98 243,000 19.75 6
02/18/99 218,000 16.69 7
02/17/00 515,700 9.75 8
05/05/00 57,300 9.38 8
02/09/01 360,000 9.80 9
07/10/01 240,000 13.85 9
- -------------------------------------------------------------
Total 2,125,528 $ 12.58* 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. Had compensation for the Company's stock-based compensation plans been
determined pursuant to SFAS 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:
2001 2000 1999
- ---------------------------------------------------------------------------
Pro forma basic net income $ 1.9 $ 15.0 $ 18.6
Pro forma basic earnings
per share $ 0.13 $ 1.00 $ 1.25
Pro forma diluted net income $ 1.7 $ 14.9 $ 18.5
Pro forma diluted earnings
per share $ 0.11 $ 0.99 $ 1.22
Pro forma weighted average
fair value of options granted $ 4.69 $ 4.42 $ 6.69
Risk-free interest rate 4.8%-4.9% 6.7% 4.9%-5.4%
Expected life (years) 5 5 5
Expected volatility 38.0% 38.0% 38.0%
Quarterly dividend - - -
- ---------------------------------------------------------------------------
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 2001, the exercise of 86,200
non-qualified stock options of WHC, net of 122,000 WHC shares repurchased and
retired, resulted in the Company's ownership of WHC equaling approximately 57.2%
at December 30, 2001.
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 53.6%.
F23
(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 6.75%
and 4.0%, respectively, as of and for the year ended December 30, 2001. Total
pension expense for fiscal 2001, 2000 and 1999 was $0.4 million, $0.6 million,
and $0.5 million, respectively. The present value of accumulated pension
benefits was $3.4 million and $2.8 million at the end of 2001 and 2000,
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 2001, 2000 and 1999 was $5.6
million, $1.5 million, and $0.8 million, respectively. The increase in pension
expense in fiscal 2001 is primarily attributable to the Company recognizing past
service costs on those employees who terminated and a decrease in the discount
rate. The liability for deferred compensation was $12.6 million and $7.3 million
at fiscal year end 2001 and 2000, 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:
2001 2000 1999
- -----------------------------------------------------------------------
Federal income taxes:
Current $ 31.3 $ 5.6 $ 7.7
Deferred (20.1) 1.0 3.6
--------------------------------------
11.2 6.6 11.3
State income taxes:
Current $ 5.8 $ 1.7 $ 2.2
Deferred (2.5) 0.1 0.4
--------------------------------------
3.3 1.8 2.6
Foreign:
Current $ 2.4 $ 5.2 $ 4.9
Deferred 0.4 (0.3) (2.9)
--------------------------------------
2.8 4.9 2.0
--------------------------------------
Total $ 17.3 $ 13.3 $ 15.9
- ----------------------------------------------------------------------
A reconciliation of the statutory U.S. federal tax rate (35%) and the effective
income tax rate is as follows:
2001 2000 1999
- -------------------------------------------------------------------------------
Provision using statutory
federal income tax rate $ 15.5 $ 11.7 $ 14.0
State income taxes, net of
federal benefit 1.2 1.4 1.7
Other, net 0.6 0.2 0.2
---------------------------------------
$ 17.3 $ 13.3 $ 15.9
- -------------------------------------------------------------------------------
The components of the current deferred income tax asset are as follows
at fiscal year end:
2001 2000
- --------------------------------------------------------------------------------
Amortization of uniforms and
accessories $(2.2) $(2.2)
Accrued vacation pay 4.3 3.9
Bad debt reserves 6.4 1.3
Other reserves 14.7 9.1
-----------------------
Current deferred tax asset $23.2 $12.1
- -------------------------------------------------------------------------------
The components of the non-current deferred income tax asset at fiscal year end
are shown below:
2001 2000
- ---------------------------------------------------------------------------------
Income of foreign subsidiaries and $(19.8) $(21.3)
affiliates
Gain on sale of properties to CPV 7.5 8.7
Deferred compensation 12.9 8.5
Reserve for insurance losses 13.9 6.5
Reserve for claims of employee health
trust 1.4 1.9
Other, net 2.7 3.2
------------------------
Non-current deferred tax asset $ 18.6 $ 7.5
- -------------------------------------------- ------------------------
The Company provides United States taxes on unremitted foreign earnings. 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
F24
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. Common
stock equivalents related to stock options are excluded from diluted earnings
(loss) per share calculations if their effect would be anti-dilutive. In fiscal
2001, 2000 and 1999 the total number of stock options excluded because their
effect would have been anti-dilutive were 1,026,800, 1,569,410, and 329,100,
respectively (share data in millions).
2001 2000 1999
- -------------------------------------------------------------------------------
Basic
Net income $ 3.7 $ 16.8 $ 19.6
--------------------------------------
Weighted average common
shares outstanding 15.0 15.0 14.9
--------------------------------------
Basic earnings per share $ 0.25 $ 1.12 $ 1.31
--------------------------------------
Diluted
Net income $ 3.7 $ 16.8 $ 19.6
Effect of subsidiaries
stock options (0.2) (0.2) (0.2)
--------------------------------------
Net income $ 3.5 $ 16.6 $ 19.4
--------------------------------------
Weighted average common
shares outstanding 15.0 15.0 14.9
Assumed exercise of stock
options, net of common
shares assumed repurchased
with the proceeds 0.4 0.1 0.2
--------------------------------------
Adjusted weighted average
common shares outstanding 15.4 15.1 15.1
--------------------------------------
Diluted earnings per share $ 0.23 $ 1.10 $ 1.28
- -------------------------------------------------------------------------------
(17) Related Party Transactions
Related party transactions occur in the normal course of business between the
Company and WHC. Such transactions include the purchase of goods and services
and corporate costs for management support, office space, insurance and interest
expense. The Company charged the following expenses related to transactions with
WHC during the fiscal years ended:
Fiscal Year 2001 2000 1999
- -------------------------------------------------------------------------------
General and administrative
expenses $ 2.8 $ 3.5 $ 2.9
Casualty insurance premiums 22.0 13.6 9.4
Rent 0.3 0.3 0.3
Net interest income -- -- (0.4)
--------------------------------------
$ 25.1 $ 17.4 $ 12.2
- -------------------------------------------------------------------------------
General and administrative expenses represent charges for management and support
services. The Company provides various general and administrative services to
WHC under a Services Agreement. The initial agreement expired December 31, 1997
and provided for one-year renewal periods at WHC's option. Annual rates are
negotiated by the Company and WHC based upon the level of service provided.
Management believes that the difference between these charges and those that
would have been incurred by WHC on a stand-alone basis is not material.
(18) Commitments and Contingencies
The Company and WHC lease correctional facilities, office space, computers and
vehicles under non-cancelable operating leases expiring through 2009. Rent
expense for the fiscal years ended December 30, 2001, December 31, 2000 and
January 2, 2000 was $35.6 million, $26.9 million and $22.2 million,
respectively.
The minimum commitments under these leases and the 15 year lease for the
corporate headquarters, are as follows:
Minimum
Year Commitments
- -------------------------------------------------------------
2002 $ 31.5
2003 18.4
2004 15.1
2005 10.6
2006 7.0
Thereafter 36.1
-------------
$ 118.7
- -------------------------------------------------------------
In fiscal year 2001, the Company recorded after-tax charges of $17.9 million
($29.2 million pre-tax) representing its share of the losses of its affiliated
operations in Chile.
In the third quarter 2001, the Company completed the cash funding of its $32
million of bank letters of credit issued to secure a portion of its Chilean
affiliate's debt. With the payment of the bank standby letters of credit, the
Company's Chilean affiliate has substituted short-term debt obligations with
local Chilean lenders with a one-year term maturity funding directly with the
Company.
The Company's Chilean affiliate defaulted on certain of its bank loan
obligations earlier in the year because it had been unable to generate
sufficient cash, either from ongoing operations or the sale of assets, to repay
its obligations. In conjunction with the Company's payment of the $32 million of
letters of credit, the affiliate obtained a 180-day term bank creditor
standstill agreement on October 18, 2001. During this standstill period, the
affiliate is restructuring its operations and attempting to sell non-core
security businesses to repay or reduce the local Chilean debt, as well
F25
as debt due the Company, and to provide sufficient working capital for the core
security business. The Chilean affiliate also has engaged a local investment
bank to assist in the sale of the non-core businesses. This restructuring will
likely include the Company attaining majority ownership of the Chilean
affiliate.
At present there can be no assurance that the Chilean affiliate will be able to
sell assets to enable it to repay its outstanding debt. Inability to sell
non-core assets during this standstill period could have a material adverse
impact on the Chilean affiliate's financial position, results of operations
and/or cash flows. The timing of such activities cannot be certain as the
completion of any such transaction depends upon the needs of potential
acquirers, buyers or investors, as well as financing, regulatory/legal
requirements and other factors.
The Chilean affiliate's total outstanding debt is approximately $52.9 million as
of December 30, 2001, including the $37.9 million owed to the Company, and there
can be no assurance that the Chilean affiliate will be able to generate enough
cash from operations or the sale of non-strategic businesses to satisfy these
debts. The Company has also provided comfort letters for approximately $1.0
million. At this time management is unable to estimate the amount of loss, if
any, that would be recorded should the sale of assets, or ongoing operating
results, be unable to generate sufficient cash to repay the Chilean affiliate's
obligations including amounts owed to the Company, and there can be no assurance
that the ultimate outcome of this uncertainty would not have a material adverse
impact on the Company's financial position, results of operations or cash flows.
At December 30, 2001 the Company's net investment balance related to its Chilean
affiliate approximates $10.2 million, including amounts owed to the Company.
The Company continues to review its international security operations in order
to enhance the quality of revenue and earnings growth. Management determined
that it needed to focus the Company's resources in international markets where
it could best achieve a proper critical mass. In aligning its international
resources with this strategy, management believes that there may be conditions
where the Company may consider exiting a country, or refocusing an operation. As
a result, there could be an impairment of assets, or a need to provide for
losses, particularly in certain subsidiaries and affiliates that are
experiencing liquidity issues or are thinly capitalized.
During fiscal year 2001, the Company focused on realigning its international
security management and consolidating its global security operations. As it
focused on this repositioning and change in its management structure, the
Company's management provided for asset impairments and provisions for losses
after tax of approximately $8.7 million ($14.3 million pre-tax) associated with
various international operations, principally in Latin America excluding Chile.
The Company has operations in most Latin American countries, and therefore, has
exposure to the ongoing economic difficulties in the region.
Although significant progress has been made in achieving management's
restructuring objectives, these efforts will continue in 2002. During this
review process, conditions may arise that will cause the Company to record
additional impairments to investments in particular locations. Also, in some
locations, local economic conditions may result in reporting losses. At this
time, management is unable to estimate the amount of these write-downs or
losses, if any, that would be reported, and there can be no assurance that the
ultimate outcome of this process would not have a material adverse impact on the
Company's financial position, results of operations and cash flows.
In December 2001, WHC was issued a notice of contract non-renewal by the
Administration of Corrections from the Commonwealth of Puerto Rico for the
management of the Bayamon Correctional Facility. The current contract is set to
expire March 23, 2002. WHC has met with various government officials in an
effort to reverse the initial decision. There can be no assurances that these
efforts will be successful. WHC does not expect the discontinuation of the
management contract to have a significant impact on WHC's future results of
operations and cash flows. The Bayamon Correctional Facility is owned by the
government and there is no lease commitment on the part of WHC.
On June 30, 2002, WHC's contract with the California Department of Corrections
(the "Department") for the management of the McFarland Community Corrections
Center is set to expire. WHC believes that the Department may not renew this
contract due to budgetary constraints. Although WHC is continuing its efforts to
extend the current contract through discussions with the legislature and
department officials, as well as offering the facility to other interested
government agencies, there can be no assurances that these efforts will be
successful. The facility is currently in the fourth year of a ten-year
noncancelable operating lease with CPV. In the event WHC is unable to extend the
contract or find an alternative use for the facility, WHC will be required to
record an operating charge in 2002 related to future minimum lease commitments
with CPV. The remaining lease obligation is approximately $6.0 million through
April 28, 2008.
WHC's casualty insurance premiums related to workers' compensation,
comprehensive general liability and automobile insurance coverage are provided
by an independent insurer. A portion of this insurance is reinsured by the
Company's wholly owned captive reinsurance subsidiary. WHC pays the Company a
fee for the transfer of the deductible exposure. WHC continues to incur higher
insurance costs due to a hardened seller's insurance market, which was
exacerbated by the events of September 11, 2001 and historical adverse claims
experience, and although WHC has implemented a strategy to improve the
management of future claims, WHC can not provide assurances that this strategy
will result in a lower insurance rate. WHC's
F26
insurance costs increased significantly during the third and fourth quarter of
2001. WHC's management believes these costs have stabilized; however, the
increases may continue through 2002.
In December 1997, WHC entered into a $220 million operating lease facility that
has been established to acquire and develop new correctional institutions used
in its business. As a condition of this facility, WHC unconditionally agreed to
guarantee certain debt obligations of First Security Bank, National Association,
a party to the aforementioned operating lease facility. As of December 30, 2001,
approximately $154.3 million of this operating lease facility was utilized for
four properties in operation.
The term of the operating lease facility expires December 18, 2002. WHC is
exploring a number of alternatives to refinance the outstanding balance, and
believes it will be successful in these efforts. However, there can be no
assurance that WHC will be able to complete the refinancing prior to December
18, 2002. Upon expiration of the operating lease facility, WHC may purchase the
properties in the facility for their original acquisition cost. If WHC were to
purchase the properties, WHC may use a number of forms of debt financing which
would require the properties and any related debt incurred to purchase the
properties, to be reported on WHC's and the Company's balance sheet.
Alternatively, WHC may cause the properties to be sold to third parties. If the
sales proceeds yield less than the original acquisition cost, WHC will make up
the difference up to a maximum of 88% of the original acquisition costs.
In connection with the financing and management of one Australian facility,
WHC's wholly owned Australian subsidiary was required to make an investment of
approximately $5 million. The balance of the facility was financed with
long-term debt obligations that are nonrecourse to WHC. WHC's Australian
subsidiary has a leasehold interest in the facility and does not have the
ultimate rights of ownership. In the event the management contract is terminated
for default, WHC's investment of approximately $5 million is at risk. WHC
believes that the risk of termination for default is remote and notes that the
project has operated successfully for 5 years. The management contract is up for
renewal in September 2002. WHC's management believes the management contract
will be renewed. If the management contract is not renewed (other than due to a
default), WHC's subsidiary's investment must be repaid by the state government.
The Company has employment agreements with its Chairman of the Board of
Directors and its Vice-Chairman of the Board of Directors and Chief Executive
Officer. These agreements are for terms of three and ten years, respectively.
The agreements also contain termination provisions. During fiscal 2001 and 2000
aggregate base salary and bonus under these two agreements were approximately
$4.5 million and $3.7 million, respectively. Also, the Company has severance
agreements with certain executives that provide for specified benefits in the
event of termination of employment due to a change of control.
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.
(19) 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, Correctional Services and
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 and providing employee leasing 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.
2001 2000 1999
- -------------------------------------------------------------------------------
REVENUES:
Global security services
North America $1,070.1 $1,001.3 $ 892.3
International 172.4 166.9 148.7
----------------------------------
1,242.5 1,168.2 1,041.0
Correctional services 562.1 535.6 438.5
Staffing services 1,004.4 801.3 672.8
----------------------------------
Total revenues $2,809.0 $2,505.1 $2,152.3
- -------------------------------------------------------------------------------
OPERATING INCOME:
Global security services
North America $ 42.0 $ 30.1 $ 24.7
International (5.4) 3.3 3.0
----------------------------------
36.6 33.4 27.7
Correctional services 24.2 18.9 26.0
Staffing services 3.9 3.7 3.5
Unallocated corporate
expenses (20.4) (21.1) (19.3)
----------------------------------
Total operating income $ 44.3 $ 34.9 $ 37.9
- -------------------------------------------------------------------------------
EQUITY IN INCOME OF
AFFILIATES, NET OF TAXES:
Global security services
North America $ 1.5 $ 1.4 $ 1.4
International (19.9) (0.1) 1.8
----------------------------------
(18.4) 1.3 3.2
Correctional services 4.2 4.5 3.3
----------------------------------
Total equity income (loss) $ (14.2) $ 5.8 $ 6.5
- -------------------------------------------------------------------------------
F27
CAPITAL EXPENDITURES:
Global security services
North America $ 1.6 $ 2.0 $ 2.8
International 3.5 2.7 1.3
----------------------------------
5.1 4.7 4.1
Correctional services 7.0 18.1 37.9
Staffing services 1.7 0.8 0.8
Unallocated corporate
expenses 0.7 0.7 1.2
----------------------------------
Total capital expenditures $ 14.5 $ 24.3 $ 44.0
- ---------------------------------------------------------------------
DEPRECIATION AND
AMORTIZATION EXPENSE:
Global security services
North America $ 8.8 $ 9.2 $ 9.2
International 5.2 3.5 3.5
----------------------------------
$ 14.0 $ 12.7 $ 12.7
Correctional services 9.9 8.6 5.4
Staffing services 2.7 2.5 2.0
Unallocated corporate
expenses 2.1 2.1 2.8
----------------------------------
Total expenses $ 28.7 $ 25.9 $ 22.9
- ---------------------------------------------------------------------
IDENTIFIABLE ASSETS at
fiscal year end:
Global security services
North America $122.1 $107.5 $ 93.2
International 64.7 74.0 70.1
----------------------------------
$186.8 $181.5 $163.3
Correctional services 221.1 223.6 208.2
Staffing services 88.3 85.0 76.1
Unallocated corporate
assets 123.7 80.2 73.4
----------------------------------
Total identifiable assets $619.9 $570.3 $521.0
- ---------------------------------------------------------------------
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 2001,
2000 or 1999. 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:
2001 2000 1999
- --------------------------------------------------------------------------------------------
REVENUES:
Domestic operations $ 2,506.3 $ 2,206.9 $ 1,914.4
International operations 302.7 298.2 237.9
-----------------------------------------------
Total revenues $ 2,809.0 $ 2,505.1 $ 2,152.3
- --------------------------------------------------------------------------------------------
OPERATING INCOME:
Domestic operations $ 45.1 $ 22.0 $ 27.5
International operations (0.8) 12.9 10.4
-----------------------------------------------
Total operating income $ 44.3 $ 34.9 $ 37.9
- --------------------------------------------------------------------------------------------
EQUITY IN INCOME (LOSS) OF
AFFILIATES, NET OF TAXES:
Domestic operations $ 1.5 $ 1.3 $ 1.4
International operations (15.7) 4.5 5.1
-----------------------------------------------
Total equity income $ (14.2) $ 5.8 $ 6.5
- --------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES:
Domestic operations $ 9.1 $ 16.8 $ 40.0
International operations 5.4 7.5 4.0
-----------------------------------------------
Total capital expenditures $ 14.5 $ 24.3 $ 44.0
- --------------------------------------------------------------------------------------------
DEPRECIATION AND
AMORTIZATION EXPENSE:
Domestic operations $ 20.8 $ 20.6 $ 18.1
International operations 7.9 5.3 4.8
-----------------------------------------------
Total expenses $ 28.7 $ 25.9 $ 22.9
- --------------------------------------------------------------------------------------------
LONG-LIVED ASSETS at fiscal
year end:
Domestic operations $ 59.3 $ 61.1 $ 52.7
International operations 16.8 18.3 15.5
-----------------------------------------------
Total long-lived assets $ 76.1 $ 79.4 $ 68.2
- --------------------------------------------------------------------------------------------
F28
(20) Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for the Company and its subsidiaries
for the fiscal years ended December 30, 2001 and December 31, 2000,
is as follows:
First Second Third Fourth
- --------------------------------------------------------------------------------------------------------------------------------
2001 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $ 663.5 $ 686.0 $ 706.2 $ 753.3
Operating income 7.9 7.9 14.6 13.9
Net income (1.5) 1.0 0.9 3.3
Earnings (loss) per share - basic (0.10) 0.07 0.06 0.22
Earnings (loss) per share - diluted $ (0.10) $ 0.06 $ 0.06 $ 0.21
- --------------------------------------------------------------------------------------------------------------------------------
2000
- --------------------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------------------
Note: Each quarter has 13 weeks. The sum of quarterly earnings per share
amounts can differ 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 of 2000 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.
F29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE WACKENHUT CORPORATION:
We have audited the accompanying consolidated balance sheets of The Wackenhut
Corporation (a Florida corporation) and subsidiaries as of December 30, 2001 and
December 31, 2000 and the related consolidated statements of income, cash flows
and shareholders' equity and comprehensive income (loss) for each of the three
fiscal years in the period ended December 30, 2001. 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 30, 2001 and December 31, 2000, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 30, 2001, 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, the Company changed its method of accounting for certain
revenue transactions and effective January 1, 2001, the Company changed its
method of accounting for derivative instruments.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
February 7, 2002.
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 7, 2002.
F30