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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 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
THE WACKENHUT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-0857245
(STATE OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
4200 WACKENHUT DR. #100,
PALM BEACH GARDENS, FL 33410-4243
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (561) 622-5656
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, Series A, $.10 par value New York Stock Exchange
Common Stock, Series B, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
At February 13, 1998, the aggregate value of 1,922,611 shares of Series
A Common Stock and 8,884,540 shares of Series B Common Stock held by
non-affiliates of the Registrant was $231,636,535.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant's Annual Report to Shareholders for the fiscal year
ended December 28, 1997 are incorporated by reference into Parts II and IV of
this Report.
Parts of the registrant's Proxy Statement for its 1998 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 international
provider of security-related and other support services and a leading developer
and manager of privatized correctional and detention facilities. The company
provides security services and other support services to commercial and
governmental customers through its services business (the "Services Business").
Through its correctional business (the "Correctional Business"), the company
also provides correctional and detention facility design, development and
management services to governmental agencies. The company has approximately
56,000 full and part-time employees serving over 17,000 commercial and
governmental customers through an extensive network of offices and operations in
48 states and approximately 50 countries.
The company was incorporated in 1958 to continue the businesses that were
originally established in 1954 by its Chairman and Chief Executive Officer,
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 core 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 third largest security services organization in the
United States and is the leading United States-based provider of security
services abroad. In addition to its core security-related services, which
include guard and investigative 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, banks
and other financial institutions and gated communities. CPOs are also used as
supplemental law enforcement forces by public transportation authorities and
other governmental entities. Custom Protection Officer is a Registered Service
Mark of The Wackenhut Corporation. Moreover, in seeking to respond to the
specialized needs of its larger clients, the company developed its national
accounts ("National Accounts") program to provide customized security services
on a national or regional level to large customers with multiple locations. The
National Accounts program provides customers with a high level of service by
providing a dedicated contact person with the company who is responsible for
coordinating their accounts on a nationwide basis. 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 enhance long-term
relationships with its clients.
As part of its strategy to respond to the growing trend toward privatization of
governmental services, in 1984 the company entered into the development and
management of privatized correctional and detention facilities, a business which
is now operated exclusively through its 54% owned Wackenhut Corrections
Corporation subsidiary ("WHC"). As of January 1998 WHC has contracts to manage
46 correctional and detention facilities, with a rated capacity of 30,144 beds.
From December 29, 1991 to December 28, 1997, WHC's revenues increased from $37.9
million to $206.9 million and operating income increased from $1.7 million to
$16.5 million, representing compound annual growth rates of 32.7% and 46.1%,
respectively. As of February 27, 1998, WHC's total equity market capitalization
was approximately $631.8 million.
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The company has leveraged its management skills to expand into other
support services in addition to its expansion into the Correctional Business. In
1992, the company entered into the foodservice business for correctional
institutions. At December 29, 1996, only 14% of the correctional foodservice
market has been privatized. Consequently, the company believes that as
privatization of correctional food services continues to gain acceptance at
state and local levels, the Correctional Foodservice Management Division will
have opportunities for expansion*.
In the third quarter of 1996, the company entered into the professional
employer organization ("PEO") employee leasing business by establishing Oasis
Outsourcing, Inc., a majority owned subsidiary. During 1997, the company
continued to expand its market presence in these areas and, consistent with that
strategy, Wackenhut Resources, Inc. (WRI), a subsidiary of the company, acquired
the King Companies, in May 1997, and Professional Employee Management, Inc. (PEM
Companies) in December 1997. Both companies are professional employer
organizations and, in addition, a good percentage of the business of the King
Companies is in the temporary staffing business. These two companies were
combined with Oasis Outsourcing, Inc., under Wackenhut Resources, Inc., to form
the Staffing Services Business. By the end of 1997, the Staffing Services
Business, including PEM, had 15 offices and personnel in 35 states.
In addition to the services, which 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, fire protection
services, and airport services.
BUSINESS STRATEGY
The company's business strategy is focused on two primary objectives: (i)
enhancing its position as a leading international provider of security and
security-related services by distinguishing the type and quality of security
services it provides; and (ii) using its security service expertise and contacts
to offer other support services to its clients. Key elements of the company's
business strategy are described below:
* ENHANCE LEADERSHIP POSITION OF CORE SECURITY-RELATED SERVICE BUSINESS.
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; and (iii) well organized supervisory and feedback
procedures.
* DEVELOP SPECIALIZED SECURITY SERVICES. The company has identified and
targeted National Accounts and CPOs as its primary growth areas in the
security services business and seeks to expand its market position.
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 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 the correctional business
and the foodservice business has provided it with the experience it
believes will allow it to develop other specialized programs and support
services such as professional employer organization, temporary services,
building maintenance, supplemental police services, crash-fire-rescue
services, fire protection services, and airport services.
* GEOGRAPHIC EXPANSION. The company seeks to increase revenues and
enhance earnings stability by continuing to expand its international
presence. Historical revenue growth has been centered in Central and
South America and, more recently, Western Europe. The company has also
been expanding into Central and Eastern Europe, the former Soviet Union,
the People's Republic of China and other countries in the Far
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* Refer to Forward Looking Statements included as Exhibit 13.0 - page 21 to this
Form 10-K
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East in an attempt to capitalize on recent economic developments and
political reforms in these areas. The company believes this geographic
diversity helps to protect its revenues and earnings from adverse
regional economic and business cycles. In addition, the company believes
that its far-reaching geographic presence in approximately 50 countries
worldwide provides it with an advantage when pursuing contracts with
multi-national corporations.
* CORRECTIONAL SERVICES BUSINESS. WHC's objective is to enhance its
position as one of the leading providers of privatized correctional and
detention services. Key elements of WHC's business strategy include: (i)
effective management of projects; (ii) selective development of new
business opportunities; (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 BUSINESS. Professional employer organizations were
founded to take advantage of the trend of small and medium size
businesses to lease employees in order to cut costs and provide more and
better employee benefits. With a national growth strategy, Wackenhut
Resources plans a measured expansion into new markets and regions.
Wackenhut Resources' strategy for growth is to seek a balance between
employee leasing and temporary staffing. It is felt that this broader
blend of human resources services will better meet the needs of our
clients as outsourcing trends continue. In addition to internal growth
the company seeks to increase its presence in staffing services through
selective acquisitions such as the acquisitions of the King Companies,
in May 1997, and Professional Employee Management, Inc. (PEM Companies),
Florida in December 1997.
* PURSUE SELECTED ACQUISITIONS. In addition to internal growth, the
company's growth strategy includes selected acquisitions.
MARKETS
SERVICES BUSINESS. The private security-related services industry includes
guard and investigative 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 and investigative services
component, which also accounts for the largest portion of the company's
revenues.
Guard and investigative services are 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 and detectives. In contrast,
contract services are provided to end users pursuant to contracts with
independent security-related service firms such as the company. The company
believes that the advantages to clients of using contract security service
providers rather than providing services internally on a proprietary basis are
three-fold: (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 BUSINESS. WHC views governmental agencies responsible
for state correctional facilities in the United States and governmental agencies
responsible for correctional facilities in the United Kingdom and Australia as
its primary potential customers. WHC's secondary customers include the INS,
other federal and local agencies in the United States and other foreign
governmental agencies.
STAFFING SERVICES BUSINESS. As a Professional Employer Organization (PEO),
the staffing services group provides integrated human resource administration,
such as payroll, management and risk management 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
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compelling appeal to companies in the process of downsizing and reengineering.
As a result of the acquisition of the King Companies, the staffing services
group also entered the temporary staffing business.
COMPANY ORGANIZATION
The company's business can be divided into the Security Services Business,
Correctional Business and Staffing Services Business. The Securities Services
Business encompasses all commercial and governmental business of the North
American Operations Group (including Wackenhut of Canada Limited) and the
International Operations Group. The Security Services Business provides
security-related and other support services. The Correctional Business, which
consists exclusively of the business conducted through WCC, provides
correctional and detention facility design, development and management services
to government agencies. The Staffing Services Business provides employee leasing
and temporary staffing services. Provided below is financial information for
each business segment for Fiscal 1997, Fiscal 1996 and Fiscal 1995. The
following table sets forth the contribution to consolidated revenues and
operating income by each of the company's business segments. See Note 17 of
Notes to Consolidated Financial Statements (which also includes a summary of
domestic and international operations) included in Exhibit 13.0 to this Form
10-K.
FISCAL FISCAL FISCAL
1997 1996 1995
AMOUNT AMOUNT AMOUNT
BUSINESS SEGMENT ------ ------ ------
- ---------------- (IN THOUSANDS)
Revenues:
Security Services................................. $ 828,974 $ 768,065 $ 697,301
Correctional Services............................. 206,930 137,784 99,431
Staffing Services................................. 90,898 207 -
------------ ------------ ------------
Total Revenues................................. $ 1,126,802 $ 906,056 $ 796,732
============ ============ ============
Operating Income:
Security Services................................. $ 20,281 $ 18,736 $ 20,500
Correctional Services............................. 16,545 9,731 7,229
Staffing Services................................. (272) (365) -
Unallocated corporate expenses.................... (14,982) (11,032) (11,955)
------------ ------------ ------------
Operating Income before one time charges and
impairment of assets and relocation costs....... 21,572 17,070 15,774
One time charges and impairment of assets........... (18,300) (750) -
------------ ------------ ------------
Total Operating Income................................. $ 3,272 $ 16,320 $ 15,774
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SECURITY SERVICES BUSINESS
The Security Services Business is conducted through two separate operating
groups: the North American Operations Group and the International Operations
Group. The following table sets forth the contribution of each operating group
to the total revenues and total operating income of the Security Services
Business during Fiscal 1997, Fiscal 1996 and Fiscal 1995.
REVENUES
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FISCAL 1997 FISCAL 1996 FISCAL 1995
-------------- -------------- ---------------
OPERATING GROUP AMOUNT % AMOUNT % AMOUNT %
- --------------- -------------- -------------- ---------------
(IN THOUSANDS)
North American Operations Group
Commercial accounts................................. $ 421,054 51 $ 379,362 49 $ 331,759 47
Government/regulated industries..................... 290,771 35 285,116 37 255,575 37
---------- --- ----------- --- ----------- ---
Sub-total North American Operations................. 711,825 86 664,478 86 587,334 84
International Operations Group......................... 117,149 14 103,587 14 109,967 16
---------- --- ----------- --- ----------- ---
Total Security Services Revenues.............. $ 828,974 100 $ 768,065 100 $ 697,301 100
========== === =========== === =========== ===
OPERATING INCOME
-----------------------------------------------------------
FISCAL 1997 FISCAL 1996 FISCAL 1995
-------------- -------------- ---------------
OPERATING GROUP AMOUNT % AMOUNT % AMOUNT %
- --------------- -------------- -------------- ---------------
(IN THOUSANDS)
North American Operations Group
Commercial accounts................................. $ 14,251 70 $ 13,665 73 $ 12,486 61
Government/regulated industries..................... 5,846 29 6,328 34 5,136 25
---------- --- ----------- --- ----------- ---
Sub-total North American Operations................. 20,097 99 19,993 107 17,622 86
International Operations Group......................... 184 1 (1,257) (7) 2,878 14
---------- --- ----------- --- ----------- ---
Total Security Services Operating Income...... $ 20,281 100 $ 18,736 100 $ 20,500 100
========== === =========== === =========== ===
NORTH AMERICAN OPERATIONS GROUP. The North American Operations Group has
historically provided the majority of the company's consolidated revenues. This
group provides security-related and other support services throughout the United
States and Canada. The North American Operations Group is subdivided between
commercial and government and regulated industry accounts. In conducting its
Security Services Business, the company has adopted a quality management
approach. General management responsibilities for each operating group is vested
in a small group of managers located at company headquarters. Day-to-day
management responsibility for each group is vested in 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 sites and carefully monitor operating results.
COMMERCIAL ACCOUNTS. The company furnishes security officers (armed and
unarmed) to protect its clients' property, in the United States and Canada,
against fire, theft, intrusion, vandalism and other physical harm. Specialized
security services offered by the company include executive protection,
crash-fire-rescue services, fire protection services and airport services. The
company also provides security-consulting services including security assessment
and program development, specialized training programs for security guards,
fire-crash-rescue personnel, and investigative services for attorneys, financial
institutions and retail and industrial businesses. The company will attempt to
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.
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The company intends to emphasize attracting and retaining National Accounts
that require security-related services on a national or regional level at
multiple locations. Such clients include retail chains, banks, manufacturers and
restaurant chains. Management believes that such clients value the flexibility
and service provided by a dedicated single point of contact with the company
through the National Accounts program.
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.
CPOs perform such functions as prisoner transportation in Maryland and Colorado,
neighborhood and downtown security in Florida, transit security in Wisconsin and
California, and other supplemental law enforcement-related services. Management
believes that services provided by CPOs distinguish the company's services from
those of the competition by providing highly specialized and trained security
personnel capable of undertaking and accepting responsibilities that are beyond
the capabilities of traditional security guards.
Contracts with private industry usually are for a one- year term. Most of
these contracts are subject to termination by either party on 30 days prior
notice. Billing rates are based on a specified rate per hour and generally are
subject to renegotiations or escalation if related costs increase because of
changes in minimum wage laws or certain other events beyond the control of the
company.
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, nuclear power generating facilities and prison and jail
commissaries. Wackenhut Services, Inc. ("WSI") provides security services
primarily to United States federal government entities. Services provided by WSI
range from basic security and administrative support to specialized emergency
response. In the United States, WSI provides security-related services at 10
sensitive government installations. For example, the company has held the
operations and maintenance contract for the Savannah River Site in South
Carolina since 1983, the single largest government contract for security-related
services. Since 1990, the company has managed the Rocky Flats Environmental
Technology Site near Denver and since 1964, has managed the Nevada Test Site
near Las Vegas. Since 1984, WSI has overseen training and resource development
for the United States Department of Energy at the Central Training Academy in
Albuquerque, New Mexico. The company's service contracts with governmental
agencies are typically cost-reimbursable contracts providing the company the
ability to earn award fees based upon the achievement of performance goals. The
company's service contracts with governmental agencies are subject to annual
governmental appropriations.
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.
The company's correctional foodservice business, the second largest in the
industry, provides over 61 million meals annually to over 100 jail and prison
facilities in 27 states throughout the United States. Food for regular,
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therapeutic and religious diets is prepared using conventional or cook-chill
methods. The company provides a quality assurance program that encompasses all
aspects of the foodservice business. Specifically, the company provides product
testing and menu development through its staff of nutritional experts, which
includes professional dietitians. Also, to ensure high quality of service and
product, facility audits are conducted on an on-going basis. The company bids
for foodservice contracts and provides food services on a cost per meal basis.
Complete foodservice management, commissary, laundry and janitorial programs are
available to correctional clients.
INTERNATIONAL OPERATIONS GROUP. The International Operations Group accounts
for approximately 10% of the company's consolidated revenues. The International
Operations Group's business is conducted primarily through Wackenhut
International, Inc., ("WII").
Since its organization in 1967, WII has grown to include a network of
subsidiaries, partnerships and affiliates in 45 countries. Management believes
the company's international presence, through the operations of WII, is larger
than any of its domestic competitors. The company believes that its risk
exposure in international operations conducted through WII is reduced
substantially by the fact that the vast majority of its international operations
are structured through 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, central station monitoring, armored cars
and janitorial services. The company believes that this experience will be
valuable in assisting the company's domestic expansion into new support service
areas.
The company's goal is to increase its international presence by further
developing existing markets and by expanding into new markets. Most recently,
WII has expanded into Central and Eastern Europe, the former Soviet Union, the
People's Republic of China and other countries in the Far East in an attempt to
capitalize on recent economic developments and political reforms in these areas.
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 19 locations. WII also provides protective services at
NASA space shuttle support sites in Africa. Major competitors of WII include
large United States-based companies with operations overseas, sizable foreign
concerns such as Group 4 and Securitas, and local and regional companies.
CORRECTIONAL SERVICES BUSINESS
The company's Correctional Services Business is conducted through the
operations of WHC. WHC is a leading developer and manager of privatized
correctional and detention facilities in the United States, the United Kingdom
and Australia. WHC was founded in 1984 as a division of the company to
capitalize on emerging opportunities in the private correctional services
market. As of January 1998, WHC has contracts to manage 46 correctional and
detention facilities with an aggregate rated capacity of 30,144 beds, 35 are
currently in operation and 11 are under development by WHC. WHC offers
governmental agencies a comprehensive range of correctional and detention
facility management services from individual consulting projects to the
integrated design, construction and management of correctional and detention
facilities. In addition to providing the fundamental services relating to the
security of facilities and the detention and care of inmates, WHC 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. The company
believes that WHC'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 governmental agency at least one renewal option.
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STAFFING SERVICES BUSINESS
In the third quarter of 1996, the company entered into the PEO employee
leasing business by establishing Oasis Outsourcing, Inc., a majority owned
subsidiary. During 1997, the company continued to expand its market presence in
this area and, consistent with that strategy, the company acquired the King
Companies, in May 1997, and PEM Companies in December 1997. Both companies are
professional employer organizations and, in addition, a good percentage of the
business of the King Companies is in the temporary staffing business. These two
companies were combined with Oasis Outsourcing, Inc., under Wackenhut Resources,
Inc., to form the Staffing Services Business. By the end of 1997, the Staffing
Services Group had 15 offices and personnel in 35 states. Wackenhut Resources is
now one of the largest human resources firms in the Southeast with over 600
clients. In addition to internal growth, the company will seek to increase its
presence in the employee leasing and temporary staffing markets through
selective acquisitions and new marketing initiatives*.
CUSTOMERS
During Fiscal 1997, the Services Businesses provided services to more than
17,000 customers. The company's largest customer was the United States
Department of Energy, which accounted for approximately 11% and 15% of the
company's consolidated revenue in Fiscal 1997 and Fiscal 1996, respectively.
Correctional contracts with governmental agencies of the State of Texas
accounted for 32% and 39% of WHC's revenues in Fiscal 1997 and Fiscal 1996,
respectively and Contracts with the State of Florida Correctional Privatization
committee accounted for 13% and 9% of WHC's revenues in Fiscal 1997 and Fiscal
1996, respectively. The Staffing Services Business provides services to
approximately 600 clients.
COMPETITION
The company is the third largest security and protective services
organization in the United States and a leading provider of such services
worldwide. The company competes domestically and internationally with
Borg-Warner Security Company and Pinkerton's, Inc. The company also competes
with numerous local and regional security services companies. The top five
providers of services similar to those provided by the company account for less
than 25% of the security-services market in the United States. Competition in
the security-related and other support services business is intense and is based
primarily on price in relation to quality of service, the scope of services
performed, and the extent of employee training and supervision. However,
potential competitors can enter the security-related and other support services
business without substantial capital investment or expense.
WHC competes primarily on the basis of the quality and range of services
offered, and its experience and reputation, both domestically and
internationally, in the design and management of facilities. WHC competes with a
number of companies domestically and internationally, such as Corrections
Corporation of America, Correctional Services Corporation, Group 4 International
Corrections Service, Securicor Group, U.K. Detention Services, Ltd., Cornell
Corrections Corporation, and United States Corrections Corp. Some of the
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 addition, in some
markets WHC may compete with governmental agencies that are responsible for
correctional facilities.
The company operates the staffing business mainly in Florida, which is one
of three states with the largest concentration of PEOs. Although the
overwhelming majority of PEOs are small, regionally based firms (the total
number has been estimated at approximately 1,300), the company competes with
other major companies such as Staff Leasing, Administaff and Vicam.
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* Refer to Forward Looking Statements included as Exhibit 13.0 - page 21 to this
Form 10-K
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EMPLOYEES
The Services Business' principal business is labor intensive, and is
affected substantially by the availability of qualified personnel and the cost
of labor. As of February 15, 1998, the Services Business had over 48,000 full
and part-time employees, most of whom are security officers and other personnel
providing physical security services. The company has not experienced any
material difficulty in employing sufficient numbers of suitable security
officers. Security officers and other personnel supplied by the company to its
clients are employees of the company, even though stationed regularly at a
client's premises. A small percentage of the employees of the Security Service
business are covered by collective bargaining agreements. Relations with
employees have been generally satisfactory.
At January 30, 1998, the Correctional Business had 6,301 full-time
employees. The Correctional Business employs management, administrative and
clerical, security, educational services, health services and general
maintenance personnel. Employees at seven of WHC's Australian facilities are
unionized.
Staffing Services had approximately 200 administrative employees at
December 31, 1997.
BUSINESS REGULATIONS AND LEGAL CONSIDERATIONS
The Security Services Business is subject to numerous city, county, and
state firearm and occupational licensing laws that apply to security officers
and private investigators. Many states have laws requiring training and
registration of security officers, regulating the use of badges and uniforms,
and imposing minimum bond, surety, or insurance standards. Many foreign
countries have laws that restrict the company's ability to render certain
services, including laws prohibiting security-related services or limiting
foreign investment.
In addition, many state and local governments are required to enter into a
competitive bidding procedure before awarding contracts for products or
services. The laws of certain jurisdictions may also require the company to
award subcontracts on a competitive basis or to subcontract with businesses
owned by women or members of minority groups.
The industry in which the Correctional Business operates is subject to
national, federal, state and local regulations in the United States, United
Kingdom 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.
The Staffing Services Business is subject to all 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. The
company 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.
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11
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.
ITEM 2. PROPERTIES
The company relocated its executive offices to The Wackenhut Center, a
newly constructed building located at 4200 Wackenhut Drive #100, Palm Beach
Gardens, Florida, in March 1996. The Wackenhut Center contains approximately
91,800 square feet and is leased from P.G.A. Professional Center, Ltd., for an
initial term of 15 years, with consecutive options to extend the term of the
lease for three additional five-year periods. This lease requires annual rental
payments in the amount of $1,758,102 with no escalation during the initial
15-year term.
WHC owns the land and a 66,000 square foot building in Aurora, Colorado,
and the land and a 61,400 square foot building in Queens, New York, which are
operated by WHC as detention centers under contracts with the United States
Government and a 35,000 square foot building operated by WHC as a correctional
facility under contract with the State of California in McFarland, California.
In 1997, WHC purchased and renovated an 86-bed psychiatric hospital in Ft.
Lauderdale, Florida.
The company owns a 15,000 square foot warehouse building in Miami,
Florida. In addition, the company owns two buildings in Ecuador and one each in
the Dominican Republic, Costa Rica, Puerto Rico and Uruguay that are used for
the operations of its foreign subsidiaries in those countries. All other offices
of the company are leased. The aggregate annual rent for all non-cancelable
operating leases of office space, automobiles, data processing and other
equipment is approximately $10,055,000. 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, the various asserted claims and
litigation in which the company is currently involved will not materially affect
its financial position or future operating results, although no assurance can be
given with respect to the ultimate outcome for any such claim or litigation. The
foregoing opinion is based in part upon the fact that the company believes it
has established adequate reserves for litigation contingencies in its financial
statements in accordance with generally accepted accounting principles.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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EXECUTIVE OFFICERS OF THE REGISTRANT
GEORGE R. WACKENHUT is Chairman of the Board and Chief Executive Officer of
the company and has been since its inception. 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 also a director
of WCC. Mr. Wackenhut is on the Dean's Advisory Board of the University of Miami
School of Business. He is on the National Council of Trustees, Freedoms
Foundation at Valley Forge, and the President's Advisory Council for the Small
Business Administration, Region IV. He is a past participant in the Florida
Governor's War on Crime and a past member of the Law Enforcement Council,
National Council on Crime and Delinquency, and the Board of Visitors of the U.S.
Army Military Police School and 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. Mr.
Wackenhut received his B.S. degree from the University of Hawaii and his M.Ed.
degree from Johns Hopkins University. Mr. Wackenhut is married to Ruth J.
Wackenhut, Secretary of the company. His son, Richard R. Wackenhut, is President
and Chief Operating Officer of the company and also a Director.
RICHARD R. WACKENHUT is President and Chief Operating Officer of the
company and a member of the Board of Directors and has been since April 26,
1986. Prior to that, Mr. Wackenhut was Senior Vice President of Operations from
1983 to 1986. He was Manager of Physical Security from 1973 to 1974. He 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 Director of Wackenhut del Ecuador, S.A.; Wackenhut UK Limited;
Wackenhut Dominicana, S.A.; and several domestic subsidiaries of the company,
including WCC. He is a member of the St. Thomas University Advisory Board. He is
also a member of the American Society for Industrial Security, the International
Association of Chiefs of Police and the International Security Management
Association. He received his B.A. degree from The Citadel in 1969 and 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 and Chief Executive Officer of the company, and Ruth J.
Wackenhut, Secretary of the company.
ALAN B. BERNSTEIN is Executive Vice President of the company and President,
North American Operations Group and has been since April 27, 1991. 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; Acting President, Wackenhut
Systems Corporation, 1983; Director of Integrated Guard Security, 1981; and
Manager of Wackenhut Electronic Systems Corporation (Miami) from 1976 to 1981.
He received his B.S.E.E. degree from the University of Rochester, and a M.B.A.
degree from Cornell University.
FERNANDO CARRIZOSA is Senior Vice President and President, International
Operations Group and has been since January 28, 1989. Mr. Carrizosa was Vice
President of International Operations Group from January 31, 1988 to January 28,
1989. He joined Wackenhut de Colombia in 1968 as Manager of Investigations. He
was promoted to Manager of Human Resources, and then to Assistant to the
President in 1974. He moved to Headquarters as a trainee in 1974, and was
promoted to Manager of Latin American Operations in 1980, a capacity in which he
served until 1983. Mr. Carrizosa also served as Executive Vice President of
Wackenhut International, 1983 to 1984 and President of Wackenhut International,
1984 to 1988. He is a Director of several subsidiaries and affiliates of the
company. He received a B.B.A. from Universidad Javeriana in Colombia, and a
M.B.A. with honors from Florida International University in 1976.
ROBERT C. KNEIP is Senior Vice President, Corporate Planning and
Development of the company, and Chief Executive Officer of Wackenhut Resources,
Inc. Since he joined the company in 1982, Dr. Kneip has held various positions
in the company including Director, Power Generating Services; Director,
Contracts Management;
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Vice President, Contracts Management; and Vice President, Planning and
Development. Dr. Kneip started the Staffing Services Business by establishing
Oasis Outsourcing, Inc., a majority owned subsidiary of the Company in 1996 and
continues to be a major factor 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.
PHILIP L. MASLOWE is Senior Vice President and Chief Financial Officer of
the company. He joined the company in August 1997. Prior to joining the company,
Mr. Maslowe was employed by KinderCare Learning Centers, Inc., as Executive Vice
President and Chief Financial Officer since 1993. Before joining KinderCare, he
was Executive Vice President and Chief Financial Officer of Thrifty Corporation.
From 1980 to 1991, Mr. Maslowe was with The Vons Companies, Inc., where he
served as Group Vice President, Finance. Before joining Vons, he was audit
manager with Price Waterhouse and Company. Mr. Maslowe is a graduate of Loyola
University of Chicago and holds a M.B.A. from the J.L. Kellogg Graduate School
of Management at Northwestern University.
SANDRA L. NUSBAUM is Senior Vice President, Human Resources of the company.
Since she joined the company in 1981 Ms. Nusbaum has held various positions in
the company including Personnel Representative, Director of Compensation and
Benefits, and Vice President, Human Resources. Prior to joining the company, Ms.
Nusbaum was employed by DAK Industries. Ms. Nusbaum received a BBA degree in
Personnel Management and Marketing from Florida International University.
JAMES P. ROWAN is Senior Vice President General Counsel and Assistant
Secretary of the company. He joined the company in 1979 as Assistant General
Counsel, became Associate General Counsel in 1982 and a Vice President in 1986.
He is an attorney admitted to the Bar of the States of Indiana, Iowa and
Michigan. He holds degrees of B.S.C. (Accounting) and J.D. (Law) from the
University of Iowa and a C.P.A. from the University of Illinois.
RUTH J. WACKENHUT is Secretary of the company and has been since 1958. She
is married to George R. Wackenhut, Chairman of the Board and Chief Executive
Officer of the company and her son, Richard R. Wackenhut, is President and Chief
Operating Officer of the company and also a director.
GEORGE C. ZOLEY is Senior Vice President of the company and Vice Chairman
and Chief Executive Officer of the Wackenhut Corrections Corporation. He has
served as President and a Director of the Wackenhut Corrections Corporation
since it was incorporated in 1988, and Chief Executive Officer since April 1994.
Dr. Zoley established Wackenhut Corrections Corporation as a division of The
Wackenhut Corporation in 1984, and continues to be a major factor in the
company's development of privatized correctional and detention facilities
business. Dr. Zoley has also served as a manager, director and then Vice
President of Government Services for Wackenhut Services, Inc. from 1981 through
1988. Prior to joining Wackenhut Services, Inc., Dr. Zoley held various
administrative and management positions for city and county governments in South
Florida. Dr. Zoley has a Masters and Doctorate Degree in Public Administration.
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
21 of the Registrant's 1997 Annual Report to Shareholders, EXHIBIT 13.0.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to pages
22 through 23 of the Registrant's 1997 Annual Report to Shareholders, Exhibit
13.0.
13
14
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
24 through 29 of the Registrant's 1997 Annual Report to Shareholders, Exhibit
13.0.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to pages
30 through 42 of the Registrant's 1997 Annual Report to Shareholders, Exhibit
13.0, except for the Financial Statement Schedule listed in Item 14(a)(2) of
this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
The information required by Items 10, 11, 12 and 13 of Form 10-K (except
such information as is furnished in a separate caption "Executive Officers of
the Registrant" and is included in Part I, hereto) is contained in, and is
incorporated by reference from, the proxy statement (with the exception of the
Board Compensation Committee Report and the Performance Graph) for the company's
1998 Annual Meeting of Shareholders, which has been filed with the Securities
and Exchange Commission pursuant to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of the company,
included in the Registrant's Annual Report to Shareholders for the
fiscal year ended December 28, 1997 are incorporated by reference in
Part II, Item 8:
Consolidated Balance Sheets - December 28, 1997 and December 29, 1996
Consolidated Statements of Income - Fiscal years ended December 28,
1997, December 29, 1996 and December 31, 1995
Consolidated Statements of Cash Flows - Fiscal years ended December
28, 1997, December 29, 1996 and December 31, 1995
Consolidated Statements of Shareholders' Equity Notes to Consolidated
Financial Statements - Fiscal years ended December 28, 1997, December
29, 1996 and December 31, 1995
With the exception of the information incorporated by reference
from the 1997 Annual Report to Shareholders in Part II, Items 5,6,7,8,
and Parts IV of the Form 10-K, the Registrant's 1997 Annual Report to
Shareholders is not to be deemed filed as part of this Report.
2. Financial Statement Schedule
14
15
Schedule II - Valuation and Qualifying Accounts - Page 20
All other schedules specified in the accounting regulations of the
Securities and Exchange Commission have been omitted because they are
either inapplicable or not required. Individual financial statements of
the company have been omitted because it is primarily an operating
company and all significant subsidiaries included in the consolidated
financial statements filed with this Annual Report are majority-owned.
3. Exhibits
The following exhibits are filed as part of this Annual Report:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Articles of Incorporation as amended (incorporated by reference to
the Registrant's Form 10-K Annual Report for the fiscal year ended
December 31, 1995)
3.2 Bylaws currently in effect (incorporated by reference to the
Registrant's Form 10-K Annual Report for the fiscal year ended
December 31, 1995)
4.1 Revolving Credit and Reimbursement Agreement dated December 30, 1997
by and among The Wackenhut Corporation, Nations Bank, N.A.,
ScotiaBanc, and SunTrust Bank, as Lenders, and NationsBank, N.A., as
Agent
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
4.3 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)
4.4 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)
4.5 Amended and Restated Lease Agreement, dated as of June 19, 1997,
between First Security Bank, National Association and Wackenhut
Corrections Corporation (incorporated by reference to Wackenhut
Corrections Corporation's Form 10-K Annual Report for the fiscal year
ended December 28, 1997)
4.6 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)
4.7 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)
15
16
4.8 LC account agreement, dated as of December 30, 1997, and made between
The Wackenhut Corporation, a Florida Corporation and Nations Bank,
National Association, a national banking association, as a Lender
4.9 Amended and Restated Guaranty and Suretyship agreement, dated as of
December 30, 1997
10.1 Form of Deferred Compensation Agreement for Executive Officers (the
"Senior Plan"): Alan B. Bernstein, Fernando Carrizosa, Robert C.
Kneip, and Richard R. Wackenhut
10.2 Amendments to the Deferred Compensation Agreements for Executive
Officers (the "Senior Plan"): Alan B. Bernstein, Fernando Carrizosa,
Robert C. Kneip, and Richard R. Wackenhut
10.3 Executive Officer Retirement Plan (incorporated by reference to the
Registrant's Form 10-K Annual Report for the fiscal year ended
December 31, 1995)
10.4 Amended and Restated Split Dollar arrangement with George R. and Ruth
J. Wackenhut (incorporated by reference to the Registrant's Form 10-K
Annual Report for the fiscal year ended December 31, 1995)
10.5 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 31, 1995)
10.6 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 Registrant's Form 10-K Annual Report for the fiscal year ended
December 31, 1995)
10.7 Key Employee Long-Term Incentive Stock Plan dated July 1991
(incorporated by reference to the Registrant's Form 10-K Annual
Report for the fiscal year ended December 31, 1995)
10.8 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 29, 1996)
10.9 Amended Non-employee Director Stock Option Plan dated October 29,
1996 (incorporated by reference to the Registrant's Form 10-K Annual
Report for the fiscal year ended December 29, 1996)
10.10 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
10.11 Summary description of the amendment to the Key Employee Long-Term
Incentive Stock Plan effective as of January 28, 1997
13.0 Annual Report to Shareholders for the year ended December 28, 1997,
beginning with page 21 (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
16
17
24.1 Powers of Attorney
27.1 Financial Data Schedule (for SEC use only)
(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: March 16, 1998
----------------------
Philip L. Maslowe
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
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/ George R. Wackenhut* Chairman of the Board and Chief Executive March 9, 1998
- ----------------------------------------- Officer (principal executive officer)
George R. Wackenhut
/s/Philip L. Maslowe Senior Vice President and Chief Financial March 16, 1998
- ----------------------------------------- Officer
Philip L. Maslowe
/s/ Juan D. Miyar Vice President and Corporate Controller March 16, 1998
- ----------------------------------------- (principal accounting officer)
Juan D. Miyar
/s/ Julius W. Becton, Jr.* Director March 7, 1998
- -----------------------------------------
Julius W. Becton, Jr.
/s/ Carroll A. Campbell* Director March 9, 1998
- -----------------------------------------
Carroll A. Campbell
/s/ Richard G. Capen, Jr.* Director March 6, 1998
- -----------------------------------------
Richard G. Capen, Jr.
/s/ Anne N. Forman* Director March 11, 1998
- -----------------------------------------
Anne N. Foreman
/s/ Edward L. Hennessy, Jr.* Director March 13, 1998
- -----------------------------------------
Edward L. Hennessy, Jr.
17
18
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Paul X. Kelley* Director March 9, 1998
- -----------------------------------------
Paul X. Kelley
/s/ Nancy Clark Reynolds* Director March 13, 1998
- -----------------------------------------
Nancy Clark Reynolds
/s/ Geroge R. Wackenhut* Director March 9, 1998
- -----------------------------------------
George R. Wackenhut
/s/ Richard R. Wackenhut* Director March 12, 1998
- -----------------------------------------
Richard R. Wackenhut
*By: /s/ James P. Rowan Senior Vice President, General Counsel and March 16, 1998
- ----------------------------------------- Assistant Secretary
James P. Rowan
Attorney-in-fact
18
19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in The Wackenhut Corporation's 1997
Annual Report to Shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 11, 1998. Our audits were made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed above in Item 14(a)(2) of the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 28, 1997 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 LLPs
West Palm Beach, Florida,
February 11, 1998.
19
20
SCHEDULE II
THE WACKENHUT CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996
AND DECEMBER 31, 1995
(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 28, 1997:
Allowance for doubtful accounts.................. $ 1,997 $ 1,249 $ 38 $ (571) $ 2,713
Valuation allowance - deferred tax asset......... $ 142 - - $ (81) $ 61
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful accounts.................. $ 1,268 $ 1,362 - $ (633) $ 1,997
Valuation allowance - deferred tax asset......... $ 162 $ - - $ (20) $ 142
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful accounts.................. $ 1,056 $ 863 $ (162) $ (489) $ 1,268
Valuation allowance - deferred tax asset......... $ 150 $ 12 - $ - $ 162
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21
FINANCIAL REVIEW
The Wackenhut Corporation and Subsidiaries
Market for the Company's Common Equity and Related Stockholder Matters
During the second quarter of 1996, the company sold 2,500,000 shares of its
series B common stock in connection with a public offering at a price of $23.50
per share, before deducting underwriting discounts and commissions and estimated
offering expenses. Net proceeds of $54,020,000 from the offering were used to
repay the outstanding balance on the revolving loan, to repurchase a portion of
the receivables sold under the accounts receivable securitization facility and
for general corporate purposes.
Regular quarterly dividends of $.065 per share on both its outstanding series A
and B common stock were declared and paid for each of the four quarters of
fiscal 1997 and 1996, respectively. The company intends to declare future
quarterly dividends on series A and B common stock, depending on its earnings,
financial condition, capital requirements and other relevant factors.
The ensuing table shows the high and low prices for the company's series A and B
common stock, as reported on the New York Stock Exchange, for each quarterly
period during fiscal 1997 and 1996. The prices shown in the table have been
rounded to the nearest 1/16th. The approximate number of record holders of
series A and B common stock, as of March 2, 1998, was 682 and 722, respectively.
Fiscal 1997 Fiscal 1996
- ---------------------------------------------------------------------------------------------------------------------------
Series A Series B Series A Series B
- ---------------------------------------------------------------------------------------------------------------------------
Quarter High Low High Low High Low High Low
- ---------------------------------------------------------------------------------------------------------------------------
First $ 19 $ 16-1/2 $ 15-3/4 $ 13-5/8 $ 20-3/8 $ 14-1/4 $ 17-1/8 $12-3/8
Second 19-3/8 15-3/8 20-7/8 13-3/4 31-1/8 18-3/4 27-7/8 14-3/4
Third 24-1/2 18-3/4 20-5/8 17-1/4 24-5/8 16-3/4 18-1/2 13-3/8
Fourth 24-11/16 19 22-7/8 16-7/8 20-5/8 14-5/8 17-1/4 11-7/8
- ---------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Forward-Looking Statements
The management's discussion and analysis of financial condition and results of
operations, corporate profile, letter to shareholders, corporate diversity, and
the February 19, 1998 press release contain forward-looking statements that are
based on current expectations, estimates and projections about the segments in
which the corporation operates. These sections of the annual report also include
management's beliefs and assumptions made by management. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions (future
factors) which are difficult to predict. Therefore, actual outcomes and results
may differ materially from what is expressed or forecasted in such
forward-looking statements. The corporation undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
Future factors include increasing price and product/service competition by
domestic and foreign competitors, including new entrants; rapid technological
developments and changes; the ability to continue to introduce competitive new
products and services on a timely, cost effective basis; the mix of
products/services; the achievement of lower costs and expenses; domestic and
foreign governmental and public policy changes including environmental
regulations; protection and validity of patent and other intellectual property
rights; reliance on large customers; technological, implementation and
cost/financial risks in increasing use of large, multi-year contracts; the
outcome of pending and future litigation and governmental proceedings and
continued availability of financing; financial instruments and financial
resources in the amounts, at the times and on the terms required to support the
corporation's future business. 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.
- --------------------------------------------------------------------------------
21
22
The Wackenhut Corporation and Subsidiaries
Selected Financial Data
(in thousands 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 YEARS ENDED: (a) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Revenues $1,126,802 $906,056
Operating income (b) 3,272 16,320
Income before income taxes (b) 6,029 17,875
Income before extraordinary charge and cumulative effect of accounting change (b) 103 9,057
Extraordinary charge - early extinguishment of debt, net of income taxes
Cumulative effect of accounting change for income taxes
-------------------------
Net income $ 103 $ 9,057
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE - BASIC: (c)
Income before extraordinary charge and cumulative effect of accounting change (b) $ .01 $ .66
Extraordinary charge - early extinguishment of debt, net of income taxes
Cumulative effect of accounting change for income taxes
-------------------------
Net income - Basic $ .01 $ .66
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE - ASSUMING DILUTION: (c)
Income (loss) before extraordinary charge and cumulative effect of accounting change (b) $ (.01) $ .65
Extraordinary charge - early extinguishment of debt, net of income taxes
Cumulative effect of accounting change for income taxes
-------------------------
Net income (loss) - Assuming Dilution $ (.01) $ .65
- ---------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE OF COMMON STOCK: (c)
Regular quarterly dividends $ .26 $ .26
Special dividend
Total dividends $ .26 $ .26
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION:
Working capital $ 116,909 $148,076
Total assets 404,442 323,918
Total debt (d) 15,849 5,890
Shareholders' equity 146,839 148,229
- ---------------------------------------------------------------------------------------------------------------------------
(a) Fiscal years 1992 and 1987 included 53 weeks.
(b) 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. as
discussed in Note 2 of 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.
(d) Includes current portion of long-term debt, notes payable and long-term
debt.
22
23
1995 1994 1993 1992 1991 1990 1989 1988 1987
- ---------------------------------------------------------------------------------------------------------------------------
$ 796,732 $ 726,753 $659,256 $615,378 $ 570,411 $521,191 $ 462,181 $400,996 $ 381,972
15,774 6,592 4,496 3,367 13,859 12,097 10,225 5,334 6,032
13,733 3,002 3,371 1,588 11,867 10,664 8,524 7,382 7,915
7,260 2,272 3,609 1,137 7,721 6,963 5,874 5,195 5,660
(887) (1,444)
7,370
- ---------------------------------------------------------------------------------------------------------------------------
$ 7,260 $ 1,385 $ 2,165 $ 8,507 $ 7,721 $ 6,963 $ 5,874 $ 5,195 $ 5,660
- ---------------------------------------------------------------------------------------------------------------------------
$ .60 $ .19 $ .30 $ .09 $ .64 $ .58 $ .49 $ .43 $ .46
(.08) (.12)
.61
- ---------------------------------------------------------------------------------------------------------------------------
$ .60 $ .11 $ .18 $ .70 $ .64 $ .58 $ .49 $ .43 $ .46
- ---------------------------------------------------------------------------------------------------------------------------
$ .60 $ .19 $ .30 $ .09 $ .64 $ .58 $ .49 $ .43 $ .46
(.08) (.12)
.61
- ---------------------------------------------------------------------------------------------------------------------------
$ .60 $ .11 $ .18 $ .70 $ .64 $ .58 $ .49 $ .43 $ .46
- ---------------------------------------------------------------------------------------------------------------------------
$ .24 $ .23 $ .23 $ .20 $ .19 $ .19 $ .19 $ .19 $ .19
.96
$ .24 $ .23 $ .23 $ .20 $ .19 $ .19 $ .19 $ 1.15 $ .19
- ---------------------------------------------------------------------------------------------------------------------------
$ 51,865 $ 75,589 $ 56,163 $ 56,932 $ 48,599 $ 42,413 $ 40,635 $ 38,461 $ 35,588
197,927 212,757 211,297 192,236 172,093 164,085 157,681 150,318 130,439
6,502 42,756 67,940 63,990 47,650 46,850 51,325 47,058 10,600
62,904 57,459 47,362 47,587 42,847 37,865 33,616 30,528 39,653
- ---------------------------------------------------------------------------------------------------------------------------
23
24
The Wackenhut Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Tabular information in thousands)
OVERVIEW
The company is a leading provider of security-related and other support services
to business and government and a developer and manager of privatized
correctional and detention facilities. Also, in 1996, the company entered into
the employee leasing and temporary staffing businesses. The company provides
security-related, outsourcing and other support services through the security
services business. Through the correctional business, the company provides
correctional and detention facility design, development and management services
to government agencies. The company's business is organized into four major
groups: North American Operations, Wackenhut Corrections Corporation (NYSE:
WHC), the company's 54% owned corrections subsidiary, International Operations
and Staffing Services.
The company is well established in its core security-related services business
and has expanded into a range of other support services, which include
construction, management and administration of correctional facilities, food
services for correctional institutions, and more recently, employee leasing and
temporary staffing. During 1997, the company continued to expand its market
presence in these areas and, consistent with that strategy, acquired the
businesses and certain assets of the Jim King Companies (King Companies) in
Jacksonville, Florida in May 1997, and Professional Employee Management, Inc.
(PEM) in Sarasota, Florida in December 1997. Both companies are professional
employer organizations.
During the fourth quarter of 1997, the company recognized a one-time pretax
charge of $18.3 million ($11.3 million after income taxes, or $0.76 per common
share). The one-time charge included a loss of $6.0 million ($3.8 million after
income taxes) on the sale of the company's Australian security business. Also,
as a result of a strategic review process and analysis, the company determined
that deferred information systems costs and certain domestic and international
investments were identified as impaired, resulting in a write-off of $12.3
million ($7.4 million after income taxes). These assets were not functional as
part of the company's upgraded information technology platform or impaired due
to their inability to generate future cash flows. The one-time charges will not
result in any significant future cash requirements.
RESULTS OF OPERATIONS
The table on page 25 summarizes results of operations for the company's three
business segments by organizational group.
COMPARISON OF FISCAL YEAR 1997 TO FISCAL YEAR 1996
REVENUES
Fiscal 1997 consolidated revenues increased $220.7 million or 24% over fiscal
1996.
SECURITY SERVICES BUSINESS
Fiscal 1997 security services business revenues increased $60.9 million or 8% to
$828.9 million from $768.1 million in fiscal 1996.
North American Operations
Revenues of the North American Operations Group increased $47.3 million, or 7%,
to $711.8 million in fiscal 1997 from $664.5 million in fiscal 1996. Within the
North American Operations Group, revenues from commercial accounts represented
approximately 59% of total revenues of the group in fiscal 1997 versus 57% in
fiscal 1996. Revenues from government/regulated industries represented the other
portion of revenues. Commercial account revenues increased 11% in fiscal 1997
over fiscal 1996, primarily due to the continued success of the group in
developing its client base of national accounts, which increased 13% over the
prior year, and marketing its higher level of quality security services of the
Custom Protection Officer(R) (CPO), which increased 35% this year as compared to
last year. Revenues of government and regulated industries increased 2% in
fiscal 1997 over fiscal 1996.
International Operations
International Operations' revenues increased $13.6 million, or 13%, to $117.1
million in fiscal 1997 from $103.6 million in fiscal 1996. Revenues in Latin
America and Europe continued to increase principally through expansion of the
core businesses and diversification of services. In December 1997, the company
sold its Australian security subsidiary, which had revenues of $13.8 million in
fiscal 1997 and $13.7 million in 1996.
CORRECTIONAL BUSINESS
Fiscal 1997 correctional business revenues increased $69.1 million, or 50%, to
$206.9 million in fiscal 1997 from $137.8 million in fiscal 1996. The increase,
which reflects the dramatic growth in the industry, was due principally to the
opening of seven domestic facilities and six foreign facilities. Design capacity
of facilities in operation increased by 8,485 beds, or 69%, to 20,720 beds at
year-end, up from 12,235 beds at the beginning of the year. Occupancy increased
to 97.2% of capacity in fiscal 1997 from
24
25
1997 1996 1995
------------------------ ---------------------- -----------------------
$ % $ % $ %
------------------------ ---------------------- -----------------------
REVENUES (a)
SECURITY SERVICES
North American Operations $ 711,825 63.2 $ 664,478 73.4 $ 587,334 73.7
International Operations 117,149 10.4 103,587 11.4 109,967 13.8
------------------------ ---------------------- -----------------------
828,974 73.6 768,065 84.8 697,301 87.5
CORRECTIONAL SERVICES 206,930 18.3 137,784 15.2 99,431 12.5
STAFFING SERVICES 90,898 8.1 207 0.0
------------------------ ---------------------- -----------------------
CONSOLIDATED REVENUES $1,126,802 100.0 $ 906,056 100.0 $ 796,732 100.0
------------------------ ---------------------- -----------------------
OPERATING INCOME (b)
SECURITY SERVICES
North American Operations $ 20,097 2.8 $ 19,993 3.0 $ 17,622 3.0
International Operations 184 0.2 (1,257) (1.2) 2,878 2.6
------------------------ ---------------------- -----------------------
20,281 2.4 18,736 2.4 20,500 2.9
CORRECTIONAL SERVICES 16,545 8.0 9,731 7.1 7,229 7.3
STAFFING SERVICES (272) (0.3) (365) (176.3)
UNALLOCATED CORPORATE EXPENSES (14,982) (1.3) (11,032) (1.2) (11,955) (1.5)
ONE-TIME CHARGE AND IMPAIRMENT OF ASSETS (18,300) (1.6) (750) (0.1)
------------------------ ---------------------- -----------------------
CONSOLIDATED OPERATING INCOME $ 3,272 0.3 $ 16,320 1.8 $ 15,774 2.0
------------------------ ---------------------- -----------------------
(a) Represents percent of total revenues.
(b) Represents percent of respective business related revenues.
96.8% in fiscal 1996, and total compensated resident days increased 45% to 5.2
million at the end of fiscal 1997 from 3.6 million for fiscal 1996.
STAFFING SERVICES
Staffing Services was started in the third quarter of 1996, and in May 1997, the
company acquired the business and certain assets of the King Companies. Staffing
Services revenues were $90.9 million for fiscal 1997. In December 1997, the
company acquired the business and substantially all of the assets of PEM.
The operating results of the company included the results of operations of the
King Companies since May 1997 and PEM since December 22, 1997. PEM had revenues
of approximately $200 million for its fiscal 1997. The company intends to
continue developing the staffing services business through internal growth and
acquisitions.*
OPERATING INCOME
Fiscal 1997 consolidated operating income was $3.3 million versus $16.3 million
in fiscal 1996. Before the one-time charges, fiscal 1997 operating income of
$21.6 million was $4.5 million, or 26%, higher than fiscal 1996 operating income
of $17.1 million.
SECURITY SERVICES BUSINESS
Fiscal 1997 security services business operating income of $20.3 million
increased $1.5 million, or 8%, from $18.7 million in fiscal 1996.
North American Operations
North American operating income remained essentially flat. However, operating
results for the second half of 1996, benefited from a one-time reduction
("holiday") in health insurance costs and adjustments to insurance accruals of
approximately $0.8 million.
International Operations
As previously discussed, the company sold its Australian security business and
certain related assets in January 1998. The operating loss of Wackenhut of
Australia was $1.6 million in fiscal 1997 and $2.5 million in fiscal 1996.
International Operations operating income increased $1.4 million to $0.2 million
in fiscal 1997 from a loss of $1.3 million in fiscal 1996. Excluding the loss of
Wackenhut of Australia, International Group operating income was $0.5 million,
or 44%, higher in fiscal 1997 versus fiscal 1996. The operating income of
subsidiaries in Latin American and Europe continued to show significant
improvements as a result
* Refer to Forward-Looking Statements on page 21.
25
26
of increases in the core security business and diversification into other
security-related services.
CORRECTIONAL BUSINESS
Fiscal 1997 operating income from the correctional business increased $6.8
million, or 70%, to $16.5 million from $9.7 million in fiscal 1996. Operating
margin improved 0.9% as a percentage of revenues from 7.1% in fiscal 1996 to
8.0% in fiscal 1997. The improved results are attributable principally to
increased profit contribution from new facilities, increased utilization of
existing facilities and continued leveraging of overhead.
STAFFING SERVICES
Staffing Services operating loss was $272,000 in fiscal 1997, its first full
year of operations, compared to a loss of $365,000 in fiscal 1996.
CORPORATE EXPENSES AND INFORMATION SYSTEMS
The increase in corporate expenses resulted principally from an increase in
information technology costs in fiscal 1997 compared to fiscal 1996, as the
company redesigns its systems hardware and software architecture. In addition,
there was an increase in personnel related costs attributable to the return to
fully-staffed levels after the relocation of the headquarters facility.
During the current year, management reviewed the information systems
requirements of the company and determined that the investment in deferred
information systems costs was impaired. Consequently, the company wrote off its
investment in deferred information systems costs in the fourth quarter of 1997.
In addition, management developed a plan to address its future information
systems needs and the Year 2000 issue. The preliminary estimate of the total
costs to be incurred in new systems is approximately $21.0 million over the next
two years, of which approximately $19.0 million will be capitalized and $2.0
million will be expensed.
Capitalized costs will be amortized over the software's useful life. The company
has not completely determined the effect of expenditures related to the year
2000 issue, but they are not expected to be significant and will be expensed as
incurred.*
EBITDA
Fiscal 1997 EBITDA, defined as earnings before interest expense, income taxes,
depreciation and amortization, was $20.8 million versus $30.2 million in fiscal
1996. Adjusted EBITDA, which excludes the one-time charges for both years,
increased 26%, or $8.2 million, to $39.1 million from $30.9 million in fiscal
1996. As a percentage of revenues, Adjusted EBITDA improved to 3.5% from 3.4%.
Neither EBITDA nor Adjusted EBITDA represents cash flow from operations as
defined by generally accepted accounting principles.
OTHER INCOME/EXPENSE
Other income increased $1.2 million to $2.7 million in fiscal 1997 from $1.6
million in fiscal 1996, primarily due to the decrease in interest expense of
$1.3 million. Borrowings under the accounts receivable securitization and
revolving credit facilities were at a minimum during 1997, as cash from
operations and cash proceeds from the 1996 public offerings of the company and
Wackenhut Corrections were used for acquisitions, start-up and construction of
new facilities.
INCOME BEFORE INCOME TAXES
Fiscal 1997 income before income taxes was $6.0 million, after deducting the
one-time charge of $18.3 million, compared to $17.9 million in fiscal 1996.
Before the one-time charge, income before income taxes was $24.3 million in
fiscal 1997, compared to $17.9 million in fiscal 1996 for an increase of $6.5
million, or 36%.
INCOME TAXES
The combined federal and state effective income tax rate was 37.7% for fiscal
1997 and 35.3% for fiscal 1996. The higher effective rate in fiscal 1997 was due
to decreases in the utilization of capital loss carryforwards and tax exempt
income of the reinsurance subsidiary.
MINORITY INTEREST EXPENSE
Minority interest expense (net of income taxes) increased to $5.8 million in
1997 from $4.1 million in 1996, reflecting principally the increase in earnings
of Wackenhut Corrections Corporation.
EQUITY INCOME OF FOREIGN AFFILIATES
Equity income of foreign affiliates (net of income taxes) increased $0.5
million, or 28%, to $2.1 million in fiscal 1997 from $1.6 million in fiscal
1996, primarily due to an increase in the income of the joint venture of
Wackenhut Corrections in the United Kingdom.
NET INCOME
Net income was $103,000 for fiscal 1997, or $0.01 per share, as compared to $9.1
million, or $0.66 per share for fiscal 1996. Earnings per share on a diluted
basis was a loss of $0.01 in fiscal 1997 compared to earnings per share of $0.65
for fiscal 1996. Net income for fiscal 1997 was reduced by the one-time charge
of $11.3 million after income taxes, or $0.76 per share.
26
27
COMPARISON OF FISCAL YEAR 1996 TO FISCAL YEAR 1995
REVENUES
Consolidated revenues increased 14% to $906.1 million in 1996 from $796.7
million in fiscal 1995.
SECURITY SERVICES BUSINESS
Security services business revenues increased 10% to $768.1 million in fiscal
1996 from $697.3 million in fiscal 1995.
North American Operations
Revenues of the North American Operations Group increased $77.2 million, or 13%,
to $664.5 million in fiscal 1996 from $587.3 million in fiscal 1995. Revenues
from commercial accounts represented 57% of the total revenues of the group in
fiscal 1996 versus 56% in fiscal 1995. Commercial accounts revenue increased
$47.6 million, or 14%, in fiscal 1996 over fiscal 1995, primarily due to the
increase in revenues from national accounts and Custom Protection Officer(R)
revenues, which increased by 25% and 15%, respectively. Revenues to the U.S.
Government and regulated industries were 43% of total revenues of the group in
fiscal 1996, versus 44% in fiscal 1995, and increased 12% during the same
period. The increase was due principally to the acquisition of the business of
the correctional Food Services Division of Service America Corporation, which
was partially offset by the loss of the Strategic Petroleum Reserve contract
with DynMcDermott and reductions in government funding at U.S. Department of
Energy facilities.
International Operations
International Operations Group revenues decreased 6% to $103.6 million in fiscal
1996 from $110.0 million in fiscal 1995 due principally to the deconsolidation
of the former subsidiary in Chile which is now a minority-owned affiliate.
Revenues of the Chilean operations for the first nine months of fiscal 1995
amounted to $14.2 million. Excluding the effects of the Chilean operation,
revenues of the International Operations Group were actually $7.8 million higher
than in fiscal 1995 due to the increased revenues in Europe and Australia.
CORRECTIONAL BUSINESS
Correctional Business revenues increased 39% to $137.8 million in fiscal 1996
from $99.4 million in fiscal 1995. Of the increase in fiscal 1996 revenues,
$35.4 million was generated by domestic operations and $3.0 million was
generated by operations in Australia. The increase in domestic revenues in
fiscal 1996 was primarily attributable to an increase in compensated resident
days of 1.2 million resulting from the opening of new facilities and increased
services to existing facilities. Compensated resident days of the Australian
subsidiary of Wackenhut Corrections increased to 440,000 in fiscal 1996 from
420,000 in fiscal 1995.
OPERATING INCOME
Consolidated operating income increased to $16.3 million in fiscal 1996, after
deducting $750,000 for relocation costs, from $15.8 million in fiscal 1995.
Excluding the provision for relocation costs, consolidated operating income
increased 8% in fiscal 1996 versus fiscal 1995.
SECURITY SERVICES BUSINESS
Operating income from the security services business decreased 9% to $18.7
million in fiscal 1996 from $20.5 million in fiscal 1995. The decrease in the
operating income of the security services business can be attributed principally
to the operating losses of Wackenhut of Australia Pty., Ltd. of $2.5 million in
fiscal 1996.
North American Operations
The operating income of the North American Operations Group increased 14% to
$20.0 million in fiscal 1996 from $17.6 million in fiscal 1995. There was a
significant increase in the profit contribution of the core security-related
business resulting from consistent profit margins and higher revenues. The group
also realized a significant increase in operating profits principally due to the
acquisition of Service America's food service unit.
International Operations
The International Operations Group had an operating loss of $1.3 million in
fiscal 1996 compared to operating income of $2.9 million in fiscal 1995. The
operating loss in fiscal 1996 was primarily due to: (i) the operating losses of
$2.5 million from the new security services subsidiary in Australia, Wackenhut
of Australia Pty., Ltd.; (ii) the decrease in operating income which resulted
from the deconsolidation of the former subsidiary in Chile; and (iii) operating
losses in the Czech Republic and other subsidiaries principally in Africa.
CORRECTIONAL BUSINESS
Wackenhut Corrections operating income increased 35% to $9.7 million in fiscal
1996 from $7.2 million in fiscal 1995. Of this increase, domestic operating
income increased 58% to $7.1 million in fiscal 1996 from $4.5 million in fiscal
1995, reflecting the increase in compensated resident days. These increases in
operating income were partially offset by higher overhead expenses of Wackenhut
Corrections.
Wackenhut Corrections international operating income decreased 3% to $2.6
million in fiscal 1996 from $2.7 million in fiscal 1995, attributable to higher
operating expenses at Wackenhut Corrections' Australian facilities.
* Refer to Forward-Looking Statements on page 21.
27
28
CORPORATE EXPENSES
Corporate expenses decreased 8% to $11.0 million in fiscal 1996 from $12.0
million in fiscal 1995 as a result principally of cost reduction measures
implemented this year.
OTHER INCOME/EXPENSE
Other income was $1.6 million in fiscal 1996 compared to other expense of $2.0
million in fiscal 1995. The increase in interest and investment income of $3.0
million in fiscal 1996 included interest income of approximately $2.1 million
from the investment of the net proceeds of Wackenhut Corrections' public
offering. Interest expense decreased by $590,000 in fiscal 1996 compared to
fiscal 1995, primarily due to a decline in costs associated with the accounts
receivable securitization facility which was repaid with the proceeds from the
company's public offering.
INCOME BEFORE INCOME TAXES
Income before income taxes, which included a $750,000 provision for relocation
costs in fiscal 1996, increased 30% to $17.9 million in fiscal 1996 from $13.7
million in fiscal 1995.
INCOME TAXES
The combined federal and state effective income tax rate was 35.3% for fiscal
1996 and 34.5% for fiscal 1995, respectively. The increase in the effective rate
in fiscal 1996 was due to: (i) the statutory elimination of targeted job tax
credits; (ii) a decrease in capital loss carryforward utilization; and (iii) a
decrease in tax exempt income of the captive reinsurance subsidiary.
MINORITY INTEREST EXPENSE
Minority interest expense (net of income taxes) increased 75% to $4.1 million in
fiscal 1996 from $2.4 million in fiscal 1995, reflecting principally the
increase in earnings of and the public ownership in Wackenhut Corrections.
EQUITY INCOME OF FOREIGN AFFILIATES
Equity income of foreign affiliates (net of income taxes) increased 159% to $1.6
million in fiscal 1996 from $631,000 in fiscal 1995, primarily resulting from
the increased earnings of security services affiliates in South America, the
joint venture of Wackenhut Corrections in the United Kingdom and the inclusion
of the corporation's equity income of the Chilean operations.
NET INCOME
Net income increased to $9.1 million in fiscal 1996, or $0.66 per share, after
the $750,000 provision for relocation costs ($461,000 net of income taxes),
compared to $7.3 million or $0.60 per share in fiscal 1995.
INFLATION
Management believes that inflation has not had a material effect on the
company's results of operations during the past three fiscal years. Many of the
company's service contracts provide for either fixed management fees or for fees
that increase by only small amounts during the terms of the contracts. Since
personnel costs represent the company's largest expense, inflation 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.*
LIQUIDITY AND CAPITAL RESOURCES
The company's principal sources of liquidity have been from funds from
operations, borrowings under its credit facilities, and from net proceeds in
connection with the public offering of the company's common stock. Cash and
equivalents totaled $45.2 million at December 28, 1997, compared to $52.8
million at December 29, 1996. Of this cash and cash equivalents, $13.9 million
serves as collateral for certain obligations of the company's captive insurance
subsidiary.
The company had additional sources of liquidity available in the form of a $40
million revolving line of credit (previously it was $50 million) which is
available for letters of credit and under which the company may borrow up to $15
million under a swingline to meet short term liquidity needs, and a $60 million
accounts receivable securitization facility. The total amount available to the
company from its revolving credit and accounts receivable securitization
facility is $100 million as of December 28, 1997, or an increase of $15 million
over last year. Additionally, at December 28, 1997, the company's Wackenhut
Corrections subsidiary had in place a $30 million revolving credit facility,
which includes $5 million for the issuance of letters of credit, and a $220
million operating lease facility to acquire and develop new correctional
institutions used in its business.
At December 28, 1997, the company had $13 million outstanding under credit
facility and $24.9 million outstanding in the form of letters of credit securing
reserves of the captive reinsurance subsidiary and other corporate transactions.
The unused portion of the revolving line of credit was $2.1 million. There were
no balances outstanding under the accounts receivable securitization agreement
at the end of fiscal 1997. Under the terms of the accounts receivable
securitization facility, the company retains substantially the same risk of
credit loss as if receivables had not been sold under this facility. At December
28, 1997, no amounts were outstanding under Wackenhut Corrections' revolving
credit facility, but four standby letters of credit were outstanding in an
aggregate amount of $0.22 million.
28
29
During the second quarter of 1996, the company sold 2,500,000 shares of its
series B common stock in connection with a public offering. Net proceeds from
the offering were approximately $54 million, which were partly used to repay the
outstanding balance on the revolving loan, to repurchase receivables sold under
the accounts receivable securitization facility and for general corporate
purposes. In January 1996, Wackenhut Corrections sold 4,600,000 shares of its
common stock in connection with a public offering. Net proceeds from the
offering were approximately $52 million, which were partly used for the
acquisition or renovation of correctional facilities, start-up costs, leasehold
improvements, equity investments in correctional facilities or temporarily
invested.
In May 1997, the company purchased the King Companies of Jacksonville, Florida,
a professional employer organization and temporary employment business, for
approximately $10.7 million in cash and $0.8 million in shares of Wackenhut
series B (non-voting) common stock.
In December 1997, the company purchased the business and certain assets of PEM,
a professional employer organization in Sarasota, Florida for an initial payment
of $18.9 million in cash, together with a series of contingent earn-out payments
which will become payable in cash or shares of the company's series B Common
Stock (at the option of the company) based on performance. In no event, will the
total purchase price exceed $50.7 million.
In June 1997, Wackenhut Corrections purchased the Queens Private Correctional
Facility in New York City, New York, a 66,000 square foot building currently
being used by Wackenhut Corrections as a 200-bed federal detention facility, for
$6.6 million. Wackenhut Corrections also has invested another $4.7 million to
renovate the building.
The company and Wackenhut Corrections anticipate making cash investments in
connection with future acquisitions. In addition, Wackenhut Corrections will
continue to use cash and its available sources of funds to finance start-up
costs, leasehold improvements and equity investments in correctional facilities,
if appropriate, in connection with undertaking new contracts.*
Net cash generated by operating activities was $42.7 million in fiscal 1997
compared to $14.8 million in fiscal 1996.
Cash used in investing activities amounted to $54.8 million in fiscal 1997,
including capital expenditures of $27.7 million, which reflect the investment in
facilities of Wackenhut Corrections and the purchases of equipment related to
the provision of security-related services. Payments for acquisitions amounted
to $30.1 million and included the acquisitions of the King Companies and PEM
mentioned before. In addition, deferred costs, which include deferred start-up
costs of Wackenhut Corrections amounted to $12.4 million. The net decrease in
marketable securities of the company's captive reinsurance subsidiary was $7.6
million.
Cash provided by financing activities amounted to $5.7 million including $8.4
million net proceeds from issuance of debt. Cash dividends paid in fiscal 1997
amounted to $3.8 million.
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 Wackenhut
Corrections, possible acquisitions, investment in information systems and the
payment of dividends. The company continues to expand its domestic and
international businesses and to pursue major contracts, some of which may
require substantial initial cash outlays, which are partially or fully
recoverable over the original term of the contract.
As a result of the public stock offerings, both the company and Wackenhut
Corrections significantly increased their borrowing capacity. In addition,
management believes that cash on hand, cash funds from operations 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,
both on a near term and long term basis.*
MARKET RISK
The company is exposed to market risks, including changes in interest rates and
currency exchange rates. On occasion the company has entered into swap
agreements to reduce the interest rate exposure associated with its bank
borrowings (Note 1). In addition, Wackenhut Corrections is exposed to market
risks arising from changes in interest rates with respect to a $220 million
operating lease facility (Note 16). Based on the company's interest rate and
foreign exchange rate exposure at December 28, 1997, a 10% change in the current
interest rate or historical currency rate movements would not have a material
effect on the company's financial position or results of operations over the
next fiscal year.*
* Refer to Forward-Looking Statements on page 21.
29
30
The Wackenhut Corporation and Subsidiaries
Consolidated Statements of Income
(in thousands except per share data)
FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 and DECEMBER 31, 1995
1997 1996 1995
- ------------------------------------------------------------------ ---------- -------- --------
REVENUES $1,126,802 $906,056 $796,732
---------- -------- --------
OPERATING EXPENSES
Payroll and related taxes 835,651 657,275 587,644
Operating expenses 260,946 224,956 187,491
Depreciation expense 6,388 4,735 4,489
Amortization of intangible assets 2,245 2,020 1,334
One-time charges and impairment of assets 18,300 750
---------- -------- --------
OPERATING INCOME 3,272 16,320 15,774
---------- -------- --------
OTHER INCOME (EXPENSE)
Interest expense (1,473) (2,766) (3,356)
Interest and investment income 4,230 4,321 1,315
---------- -------- --------
INCOME BEFORE INCOME TAXES 6,029 17,875 13,733
---------- -------- --------
INCOME TAXES 2,271 6,311 4,742
MINORITY INTEREST, NET OF INCOME TAXES OF $3,816, $2,318, AND $1,217 5,753 4,140 2,362
EQUITY INCOME OF FOREIGN AFFILIATES, NET OF INCOME TAXES OF
$1,359, $957, AND $383 (2,098) (1,633) (631)
---------- -------- --------
NET INCOME $ 103 $ 9,057 $ 7,260
---------- -------- --------
EARNINGS (LOSS) PER SHARE:
Basic $ 0.01 $ 0.66 $ 0.60
Assuming dilution $ (0.01) $ 0.65 $ 0.60
---------- -------- --------
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 14,746 13,636 12,132
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 14,746 13,878 12,172
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
30
31
The Wackenhut Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands except share data)
DECEMBER 28, 1997 and DECEMBER 29, 1996
1997 1996
- -------------------------------------------------------------------------------- -------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 45,168 $ 52,755
Accounts receivable, less allowance for doubtful
accounts of $2,713 in 1997 and $1,997 in 1996 171,373 131,325
Inventories 10,270 10,082
Deferred taxes 3,548 252
Other 21,568 26,160
-------- --------
251,927 220,574
NOTES RECEIVABLE 667 1,181
-------- --------
MARKETABLE SECURITIES AND CERTIFICATES OF DEPOSIT 7,772 14,753
-------- --------
PROPERTY AND EQUIPMENT, - at cost 72,280 46,726
- accumulated depreciation (15,810) (12,184)
-------- --------
56,470 34,542
DEFERRED TAXES 450
-------- --------
OTHER ASSETS
Intangibles and deferred start-up costs 61,565 29,010
Investment in and advances to foreign affiliates, at cost 20,578 13,508
Other 5,013 10,350
-------- --------
87,156 52,868
-------- --------
$404,442 $323,918
- -------------------------------------------------------------------------------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,508
Accounts payable 38,640 $ 20,488
Accrued payroll and related taxes 52,456 35,715
Accrued expenses 41,414 16,295
-------- --------
135,018 72,498
-------- --------
RESERVES FOR LOSSES - casualty reinsurance subsidiary 45,786 43,806
-------- --------
LONG-TERM DEBT 13,341 5,890
-------- --------
DEFERRED TAXES 1,165
-------- --------
OTHER 15,528 11,372
-------- --------
COMMITMENTS AND CONTINGENCIES (note 16)
MINORITY INTEREST 47,930 40,958
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, 10,000,000 shares authorized
Common stock, $.10 par value, 50,000,000 shares authorized in 1997 and 1996
Series A, 3,855,582 issued and outstanding in 1997 and 3,858,885 in 1996 386 386
Series B, 11,085,703 issued and outstanding in 1997 and 10,902,199 in 1996 1,109 1,090
Additional paid-in capital 125,248 120,703
Retained earnings 27,614 31,347
Cumulative translation adjustment (6,418) (4,128)
Unrealized loss on marketable securities (69)
Treasury stock at cost, 87,000 shares of Series B (1,100) (1,100)
-------- --------
146,839 148,229
-------- --------
$404,442 $323,918
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
31
32
The Wackenhut Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 and DECEMBER 31, 1995
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net income $ 103 $ 9,057 $ 7,260
Adjustments -
One-time charges and impairment of assets 18,300
Depreciation expense 6,388 4,735 4,489
Amortization expense 11,129 9,105 7,682
Provision for bad debts 905 1,362 863
Equity income, net of dividends (3,251) (2,130) (562)
Minority interests in net income 9,569 6,458 3,579
Income tax benefit related to stock options 2,227 1,369
Other (2,509) (496) (424)
Changes in assets and liabilities, net of acquisitions and divestitures
(Increase) Decrease in assets:
Accounts receivable (33,713) (20,566) (14,200)
Inventories (5,699) (7,332) (5,460)
Other current assets (4,141) 766 (5,244)
Marketable securities and certificates of deposit (1) (35) 329
Deferred taxes (3,746) 5,918 4,529
Other (1,690) (411) (2,233)
Increase (Decrease) in liabilities:
Accounts payable and accrued expenses 31,788 (4,105) 7,055
Accrued payroll and related taxes 12,765 5,385 3,801
Reserves for losses of casualty reinsurance subsidiary 1,980 3,688 1,668
Deferred taxes (1,165) 1,048 (479)
Other 3,455 944 710
--------- --------- ---------
Net Cash Provided By Operating Activities 42,694 14,760 13,363
--------- --------- ---------
INVESTING ACTIVITIES
Net proceeds from public offerings of subsidiary's common stock 51,581
Net proceeds from exercise of stock options of subsidiary 1,650 766 1,147
Proceeds from notes receivable 9,486
Payments for acquisitions, net of cash acquired (30,090) (13,703) (2,606)
Investment in and advances to foreign affiliates (3,327) (690) (1,410)
Capital expenditures (27,692) (19,917) (6,857)
Proceeds from sales (payments for purchases) of marketable securities 7,619 (9,081) 6,227
Deferred charges (12,397) (6,201) (7,430)
Purchase of treasury stock (1,100)
Sale of headquarters building 1,675
--------- --------- ---------
Net Cash Provided By (Used In) Investing Activities (54,751) 1,655 (9,254)
--------- --------- ---------
FINANCING ACTIVITIES
Net proceeds from public offering of company's common stock 54,020
Proceeds from the exercise of stock options 1,125 1,100 404
Proceeds from issuance of debt 51,738 11,142 314,365
Payments on debt (43,332) (11,792) (344,491)
Dividends paid (3,836) (3,500) (2,909)
Proceeds from sales (payments for repurchases) of accounts receivable (35,000) 35,000
--------- --------- ---------
Net Cash Provided By Financing Activities 5,695 15,970 2,369
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,225) 185 (101)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,587) 32,570 6,377
CASH AND CASH EQUIVALENTS, at beginning of year 52,755 20,185 13,808
--------- --------- ---------
CASH AND CASH EQUIVALENTS, at end of year $ 45,168 $ 52,755 $ 20,185
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for - interest $ 1,484 $ 2,774 $ 3,366
- income taxes 2,405 3,380 2,687
Non-cash financing and investing activities:
Common stock issued in acquisition 842
Note received related to sale of headquarters building 9,000
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
32
33
The Wackenhut Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
(in thousands except share data)
FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Series A
Balance, beginning and end of year $ 386 $ 386 $ 386
--------- --------- ---------
Number of shares, end of year, 3,855,582 in 1997, 3,858,885
in 1996 and 1995
Series B
Balance, beginning of year 1,090 827 579
Proceeds from stock offering 250
25% stock dividends effected in the form of stock splits in 1995 242
Common stock issued in acquisition 7
Proceeds from the exercise of stock options 12 13 6
--------- --------- ---------
Balance, end of year 1,109 1,090 827
--------- --------- ---------
Number of shares, end of year, 11,085,703 in 1997, 10,902,199
in 1996 and 8,272,887 in 1995
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 120,703 39,644 38,919
Proceeds from stock offering 53,770
Common stock issued in acquisition 835
Increase due to public offerings of subsidiary's common
stock and exercise of stock options 370 24,833 327
Proceeds from the exercise of stock options 1,113 1,087 398
Tax benefit related to employee stock options 2,227 1,369
--------- --------- ---------
Balance, end of year 125,248 120,703 39,644
--------- --------- ---------
RETAINED EARNINGS
Balance, beginning of year 31,347 25,790 21,681
Net income 103 9,057 7,260
Dividends (3,836) (3,500) (2,909)
25% stock dividend effected in the form of a stock split (242)
--------- --------- ---------
Balance, end of year 27,614 31,347 25,790
--------- --------- ---------
CUMULATIVE TRANSLATION ADJUSTMENT
Balance, beginning of year (4,128) (3,702) (3,552)
Translation adjustment (2,290) (426) (150)
--------- --------- ---------
Balance, end of year (6,418) (4,128) (3,702)
--------- --------- ---------
UNREALIZED (LOSS) GAIN ON MARKETABLE SECURITIES
Balance, beginning of year (69) (41) (554)
Net unrealized gains (losses) for the year 69 (28) 513
--------- --------- ---------
Balance, end of year (69) (41)
--------- --------- ---------
TREASURY STOCK
Balance, beginning of year (1,100)
Purchase of treasury stock (1,100)
--------- --------- ---------
Balance, end of year (1,100) (1,100)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY
$ 146,839 $ 148,229 $ 62,904
--------- --------- ---------
DIVIDENDS PER SHARE
Restated for the effect of the 25% stock dividend
effected in the form of a stock split declared in 1995 $ 0.26 $ 0.26 $ 0.24
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
33
34
The Wackenhut Corporation and Subsidiaries
Notes to Consolidated Financial
Statements
(Tabular information in thousands except per share data)
FOR THE FISCAL YEARS ENDED DECEMBER 28, 1997,
DECEMBER 29, 1996, AND DECEMBER 31, 1995
(1) Summary of Significant Accounting
Policies
Fiscal Year
The company's fiscal year ends on the Sunday closest to the calendar year end.
Fiscal years 1997, 1996 and 1995 each included 52 weeks.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of the company and
its subsidiaries, including its casualty reinsurance subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.
The accounts of the captive insurance company have been included in unallocated
corporate expenses for segment reporting. Certain prior year amounts have been
reclassified to conform with current year presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles 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. Actual results could differ from those estimates.
Minority Interest
The minority interest expense represents principally the separate public
ownership in Wackenhut Corrections Corporation, listed on the New York Stock
Exchange as "WHC," and the ownership by foreign investors in several
subsidiaries of Wackenhut International, Incorporated.
Income Taxes
The company accounts for its income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Earnings Per Share
In 1997, the company adopted Statement of Financial Accounting Standards No.
128, Earnings per Share (SFAS 128). SFAS 128 requires the disclosure of basic
and diluted earnings per share for periods ending after December 15, 1997 and
restatement of prior periods to conform with the new disclosure format. The
computation under SFAS 128 differs from the primary and fully diluted earnings
per share computed under APB No. 15 primarily in the manner in which potential
common stock is treated. 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, the weighted-average number of common
shares outstanding is adjusted for the effect of all potential common stock.
Cash and Cash Equivalents
The company considers highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
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.
Revenues
Revenue is recognized as services are provided. During fiscal years 1997, 1996
and 1995, the largest client of the company was the U.S. Department of Energy,
accounting for approximately 11%, 15% and 17%, respectively, of the company's
consolidated revenues.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, other
receivables, notes receivable, notes payable, accounts payable and long-term
debt approximates fair value. 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.
Interest Rate Swaps
On occasion the company enters into swap agreements to reduce the interest rate
exposure associated with a portion of its variable rate indebtedness. These
agreements modify the interest characteristics of the company's variable rate
indebtedness by synthetically converting a portion of the indebtedness to a
fixed rate. The company does not utilize derivative financial instruments for
trading or other speculative purposes.
Interest earned (payable) under the interest rate swap is credited (charged) to
interest expense using the accrual method. The related accrued receivable or
payable is included in accounts receivable or accrued expenses. The fair market
value of the swap agreement is not reflected in the financial statements.
Derivative financial instruments terminated at a loss (gain) prior to maturity
are (credited) charged to interest expense over the remaining original life of
the derivative financial instrument.
The company is a party to two offsetting interest rate swaps. The notional
principal amount under both agreements was $81.2 million and the agreements
expire in December 1998. Based on the interest rates in effect at December 28,
1997, the company was not exposed to a material loss in the event that either
party failed completely to perform according to the terms of the contract.
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35
Interest Rate Sensitivity
Wackenhut Corrections is exposed to market risks arising from changes in
interest rates with respect to a $220 million operating lease facility. Monthly
lease payments under this facility are indexed to a variable interest rate.
Management has determined that a 10% change in the current lease rate would have
an immaterial effect on the company's pre-tax earnings over the next fiscal
year.
Stock-Based Compensation Plans
The company has chosen to continue to account for stock-based compensation using
the intrinsic value based method prescribed in APB Opinion No. 25. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
Long-lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
requires that long-lived assets, including certain identifiable intangibles and
the goodwill related to those assets, be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. Management has reviewed the company's
long-lived assets and has determined that there are no events requiring
impairment loss recognition, other than those disclosed.
Intangibles and Deferred Start-Up Costs
Goodwill represents the cost of an acquired enterprise in excess of the fair
market value of the net tangible and identifiable intangible assets acquired.
Contract value represents the fair market value of existing contracts purchased
in an acquisition. Goodwill and contract value are being amortized on a
straight-line basis over 10 - 30 years.
Project development costs consisting of direct and incremental costs paid to
unrelated third parties that can be directly associated with a specific
anticipated contract are deferred until the anticipated contract has been
awarded. At the time the contract is awarded to the company, the deferred
project development costs are either capitalized as part of the property and
equipment or are amortized over five years as project development costs.
Internal costs associated with securing new contracts are expensed as incurred.
Project development costs are charged to general and administrative expenses
when the success of obtaining a new contract is considered doubtful.
Deferred start-up costs, which consist of costs of initial employee training,
travel and other direct expenses incurred in connection with the opening of new
correctional facilities, are capitalized and amortized on a straight-line basis
over the lesser of the initial term of the contract plus renewals or five years.
Deferred Software and Development Costs
The company capitalizes purchased software which is ready for service and
development costs related to the design and implementation of purchased and
internally developed information systems software with a useful life of more
than one year. The costs of computer software upgrades and maintenance are
expensed as incurred. Deferred computer software costs will be amortized using
the straight line method over the expected useful life of the product.
Foreign Currency Translation
Foreign currency transactions and financial statements (except for countries
with highly inflationary economies) are translated into U.S. dollars at current
exchange rates, except for revenues, costs and expenses which are translated at
average exchange rates during each reporting period. Adjustments resulting from
translation of financial statements are reflected as a separate component of
shareholders' equity. 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 their local currencies into U.S. dollars
creates translation adjustments which are included in the statements of income.
(2) One-Time Charge
During the fourth quarter of 1997, the company recognized a one-time pretax
charge of $18.3 million ($11.3 million after income taxes or $0.76 per share).
The one-time charge included a loss of $6 million ($3.8 million after income
taxes) on the sale of the company's Australian security subsidiary. In addition,
deferred information systems costs and certain domestic and international
investments were identified as impaired as a result of the company's strategic
review process and updated analysis, resulting in a write-off of $12.3 million
($7.4 million after income taxes). The one-time charge will not result in any
significant future cash requirements.
(3) Accounts Receivable Securitization
In December, 1997, the company entered into a three-year agreement to sell, on
an on-going basis, an undivided interest in a defined pool of eligible
receivables up to a maximum of $60 million (formally $35 million). The costs
associated with this program are based upon the purchasers' level of investment
and cost of issuing commercial paper plus predetermined fees. Such costs are
included in "Interest expense" in the consolidated statements of income. There
were no accounts receivable sold under this agreement at December 28, 1997 and
December 29, 1996.
(4) Acquisitions
In May 1997, the company purchased the King Companies of Jacksonville, Florida,
a professional employer organization and temporary employment business, for
approximately $10.7 million in cash and $.84 million in shares of Wackenhut
Series B (non-voting) common stock. The acquisition of the King Companies was
accounted for under the purchase method. The company recorded approximately
$11.3 million of goodwill for the King Companies.
In December 1997, the company purchased the business and certain assets of
Professional Employee Management, Inc., a professional employer organization in
Sarasota, Florida for an initial payment of $18.9 million in cash, together with
a series of contingent
35
36
earn-out payments which will become payable either in cash or shares of the
company's series B Common Stock (at the option of the company) based on
performance. In no event, will the total purchase price exceed $50.7 million.
The company recorded approximately $17.6 million of goodwill for Professional
Employee Management, Inc.
The results of operations for King and PEM have been included in the company's
consolidated financial statements from the date of acquisition. The following
unaudited pro forma information combines the consolidated results of operations
of the company, King and PEM as if the acquisition had occurred at the beginning
of the periods presented.
1997 1996
- -----------------------------------------------------------------------
Revenues $ 1,348,484 $ 1,118,367
Net Income 887 9,449
Per share - basic 0.06 0.69
Per share - assuming full dilution 0.05 0.67
- -----------------------------------------------------------------------
The unaudited pro forma results have been prepared for comparative purposes only
and include adjustments for additional amortization expense as a result of
goodwill and the related income tax effects. The pro forma results do not
purport to be indicative of results that would have occurred had the combination
been in effect for the periods presented, nor do they purport to be indicative
of the results that will be obtained in the future.
(5) Property and Equipment and
Depreciation Methods
Property and equipment are stated at cost, less accumulated depreciation. The
company uses principally the straight-line method of depreciation for property
and equipment. 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.
The components of property and equipment and their estimated lives are as
follows:
Years 1997 1996
- ----------------------------------------------------------------
Land $ 5,062 $ 2,234
Buildings and improvements 20 to 40 40,898 22,386
Equipment 3 to 20 15,205 12,195
Furniture and fixtures 3 to 20 6,489 5,090
Automobiles 3 4,626 4,821
--------------------
$72,280 $46,726
- ----------------------------------------------------------------
(6) Wholly Owned Casualty Reinsurance
Subsidiary
The company has a wholly owned casualty insurance subsidiary which reinsures a
portion of the company's workers' compensation and general and automobile
liability insurance. Incurred losses are recorded as reported. Provision is made
to cover losses incurred but not reported. Loss reserves are computed based on
actuarial studies and, in the opinion of management, are adequate. A summary of
operations for the last three fiscal years is as follows:
1997 1996 1995
- --------------------------------------------------------------
Intercompany premiums $ 20,727 $ 18,624 $ 17,642
Loss expense (21,237) (19,101) (18,239)
------------------------------------
Underwriting loss (510) (477) (597)
Investment income 2,918 2,667 2,245
------------------------------------
$ 2,408 $ 2,190 $ 1,648
- --------------------------------------------------------------
Marketable securities and certificates of deposit, carried at fair value,
consisted of the following at December 28, 1997 and December 29, 1996:
1997 1996
- ----------------------------------------------------------------
Fair Value Cost Fair Value Cost
- ----------------------------------------------------------------
Municipal Bonds $3,168 $ 3,146 $ 2,061 $ 2,076
Government Bonds 3,504 3,526 6,228 6,243
Preferred Stock 1,098 1,100 3,964 4,040
Other 2,500 2,500
------------------------------------------
$7,770 $ 7,772 $14,753 $14,859
- ----------------------------------------------------------------
The company has placed in trust, in favor of certain insurance companies, its
marketable securities and $13.9 million in cash and cash equivalents, and has
issued irrevocable standby letters of credit for $21.4 million. Municipal bonds
mature from 2018 to 2026, government bonds mature in periods ranging from 3 to
25 years, and other marketable securities matured in 1997. As of December 28,
1997, the company's reinsurance subsidiary has specific restrictions on future
purchases of marketable securities, and on withdrawals from the trust.
(7) Investment in Affiliates
Equity in undistributed earnings of foreign affiliates approximated $8,846,000
and $5,540,000 at December 28, 1997 and December 29, 1996, respectively, and is
included in "Investments in and advances to foreign affiliates." The following
is a summary of condensed unaudited information pertaining to foreign
affiliates:
- --------------------------------------------------------
Balance sheet items as of December 28, 1997
Current assets $ 55,563
Noncurrent assets 31,229
Current liabilities 39,721
Noncurrent liabilities 19,413
Minority interest liability 3,789
Income statement items for the fiscal year
ended December 28, 1997
Revenues $184,933
Operating income 11,565
Net income before taxes 9,111
- --------------------------------------------------------
(8) Intangibles and Deferred Start-Up Costs
Intangibles and deferred start-up costs at December 28, 1997 and December 29,
1996 consist of the following:
1997 1996
- -------------------------------------------------
Goodwill $34,199 $ 7,573
Contract value 15,586 15,586
Deferred start-up costs 21,550 11,962
Other 2,105 1,918
-------------------
73,440 37,039
Accumulated amortization 11,875 8,029
-------------------
$61,565 $29,010
- -------------------------------------------------
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37
In April 1997, the Financial Accounting Standards Board issued an exposure draft
that proposed the issuance of a statement of position (SOP) on accounting for
the costs of start-up activities. If adopted, this SOP would require the
expensing of deferred start-up costs as incurred. The effects of adoption, which
would affect principally deferred start-up costs of Wackenhut Corrections, would
be reported as a cumulative change in accounting principle; thus, any costs
previously capitalized would be written off at the time the SOP is adopted. The
adoption of this SOP in 1998 would result in a pre-tax write-off of
approximately $18.2 million (or $10.9 million after income taxes).
(9) Notes Payable and Long-Term Debt
At December 31, 1997, the company had an outstanding note payable of $2.5
million which represented short-term borrowings of an international subsidiary
incurred for working capital, bearing interest at an average rate of 7.2%. The
company intends to pay this note in full in 1998.
Long-term debt consists of the following:
1997 1996
- --------------------------------------------------------
Revolving loan -
6.9% in 1997 and 6.1% in 1996 $12,950 $2,800
Other debt principally related to
Wackenhut Corrections and
international subsidiaries 391 3,090
------------------
$13,341 $5,890
- --------------------------------------------------------
On December 30, 1997, the company entered into a revolving credit agreement
under which the company may borrow up to $40 million (previously it was $50
million). Concurrently, at December 30, 1997, the company increased its accounts
receivable securitization facility to $60 million (Note 3). The unused portion
of the revolving line of credit was $2.1 million, after deducting $24.9 million
in outstanding letters of credit. The interest payable is, at the company's
option, a function of the applicable LIBOR or certificate of deposit rates. The
agreement requires, among other things, that the company maintain a minimum
consolidated net worth, as defined, and limits certain payments and
distributions.
In June, 1997, Wackenhut Corrections entered into a $30 million revolving credit
facility with a syndicate of banks, which includes a $5 million line of credit
for the issuance of letters of credit. The interest payable is a function of the
prime rate, federal funds rate or LIBOR, depending upon fixed charge coverage
ratios. The facility also limits certain payments and distributions. As of
December 28, 1997, no amounts were outstanding under this facility, but
outstanding letters of credit amounted to $0.22 million.
The total amount of long term debt will mature in 1999.
(10) Preferred, Common and Treasury Stock
The board of directors has authorized 10 million shares of preferred stock. In
October 1995, the board of directors declared a 25% stock dividend, effected in
the form of a stock split. Prior periods' per share data have been restated. The
stock dividends were paid in series B common stock to holders of the company's
series A and B shares. Series B common stock has all the rights and privileges
of the series A common stock with the exception of voting privileges.
In early 1996, the board of directors increased the authorized shares of the
company's common stock from 20 million shares to 50 million shares, with 3.86
million shares to be designated as series A common stock and 46.1 million shares
to be designated as series B common stock.
During the second quarter of 1996, the company sold 2.5 million shares of its
series B common stock in connection with a public offering at a price of $23.50
per share, before deducting underwriting discounts and commissions and estimated
offering expenses.
During the second quarter of 1997, the company issued 69.2 thousand shares of
its series B common stock in connection with the acquisition of the King
Companies at a price of $12.15 per share.
The board of directors has authorized the buy back of up to 0.5 million shares
of series B common stock. At December 28, 1997 the company had bought back 87
thousand shares of series B common stock at an average price of $12.64.
(11) 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 (committee). Under terms of the incentive
stock plan, options are granted at prices not less than the fair market value at
date of grant (or as otherwise determined by the committee), become exercisable
after a minimum of six months, and expire no later than ten years after the date
of grant. The committee may grant incentive stock options or non-qualified stock
options. Options are subject to adjustment upon the occurrence of certain
events, including stock splits and stock dividends. The incentive stock plan
authorizes the company to award or grant, from time to time to key employees,
restricted stock and performance stock.
Nonemployee directors of the company are eligible to participate in The
Wackenhut Corporation nonemployee director stock option plan (directors' stock
option plan). Under the directors' stock option plan, nonemployee directors are
granted 2,000 stock options for series B common stock upon their election or
reelection to the board of directors. Under terms of the directors' stock option
plan, options are granted at the fair market value at date of grant, become
exercisable at date of grant, and expire ten years after the date of grant.
At December 28, 1997, 1,331,005 shares of series B com mon stock were reserved
for issuance, including 616,312 shares available for future grants or awards.
Changes in outstanding non-qualified stock options for
37
38
series B common stock, as adjusted for a 25% stock dividend in 1995, are as
follows:
1997 1996 1995
- --------------------------------------------------------------------------
Outstanding at beginning of year 597,255 557,818 391,568
Options granted 213,000 202,000 218,750
Options exercised (119,687) (129,312) (52,500)
Options forfeited (21,875) (33,251)
------------------------------------
Outstanding at end of year 668,693 597,255 557,818
------------------------------------
Exercisable at end of year 638,693 424,255 339,068
- --------------------------------------------------------------------------
Weighted average option exercise price on information for the fiscal years 1997,
1996 and 1995 is as follows:
1997 1996 1995
- -----------------------------------------------------------------
Outstanding at beginning of year $ 9.75 $ 7.98 $ 6.16
Granted during the year $15.77 $14.00 $10.80
Exercised during the year $10.56 $ 8.50 $ 6.16
Forfeited during the year $ 6.16 $10.69 $
----------------------------
Outstanding at end of year $11.64 $ 9.75 $ 7.98
----------------------------
Exercisable at end of year $11.30 $ 8.02 $ 6.16
- -----------------------------------------------------------------
Significant option groups outstanding at December 28, 1997 and related weighted
average price and life information are as follows:
Grant Options Options Exercise Remaining
Date Outstanding Exercisable Price Life (Years)
- --------------------------------------------------------------------------
04/30/94 192,193 192,193 $ 6.16 6
01/28/95 132,500 132,500 $10.80 7
01/31/96 150,000 150,000 $14.00 8
01/28/97 164,000 164,000 $15.25 9
08/09/97 30,000 $18.94 9
- --------------------------------------------------------------------------
The company applies APB No. 25 and related interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation for the company's
stock-based compensation plans been determined pursuant to SFAS No. 123, 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:
1997 1996 1995
- ------------------------------------------------------------------------------
Pro forma basic net income $ (643) $ 8,425 $ 6,708
Pro forma basic earnings
per share $ (0.04) $ 0.62 $ 0.55
Pro forma diluted net income $ (746) $ 8,374 $ 6,708
Pro forma diluted earnings
per share $ (0.05) $ 0.60 $ 0.55
Pro forma weighted average
fair value of options granted $ 5.65 $ 4.81 $ 4.86
Expected life (years) 5 5 5
Risk-free interest rate 5.9%-6.3% 5.6% 7.4%
Expected volatility 36.0% 36.0% 36.0%
Quarterly dividend $ 0.065 $ 0.065 $ 0.075
- ------------------------------------------------------------------------------
As SFAS No. 123 method of accounting has not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
(12) 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. The plan currently is not funded. The company purchases and
is the beneficiary of life insurance policies for each participant enrolled in
the plan.
The assumptions for the discount rate and the average increase in compensation
used in determining the pension expense and funded status information are 7.0%
and 4.0%, respectively.
Total pension expense for 1997, 1996, and 1995 was $0.45 million, $0.42 million,
and $0.33 million, respectively. The present value of accumulated pension
benefits at year end 1997, 1996 and 1995 was $2.97 million, $2.44 million, and
$1.90 million, 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
$100,000 to $175,000 payable upon retirement at approximately age 60 for a
period of 20 years. In the event of death before retirement, annual benefits are
paid for a period of 10 years. Benefits are funded by life insurance contracts
purchased by the company. 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 1997, 1996 and 1995 was $0.59
million, $0.53 million, and $0.47 million, respectively. The liability for
deferred compensation was $3.97 million and $3.48 million at year end 1997 and
1996, respectively and is included in "Other liabilities" in the accompanying
consolidated balance sheets.
(13) Income Taxes
The provision (credit) for income taxes consists of the following:
Fiscal year ended 1997 1996 1995
- ---------------------------------------------------------
Federal income taxes:
Current $ 1,736 $(3,356) $ 581
Deferred (110) 8,590 3,578
--------------------------------
1,626 5,234 4,159
State income taxes:
Current $ 925 $ 319 $ 104
Deferred (280) 595 479
--------------------------------
645 914 583
--------------------------------
Foreign $ 163
--------------------------------
Total $ 2,271 $ 6,311 $4,742
- ---------------------------------------------------------
38
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Deferred income taxes resulted from timing differences in the recognition of
revenues and expenses for tax and financial reporting purposes. The tax effects
of the principal timing differences are as follows:
Fiscal year ended 1997 1996 1995
- ------------------------------------------------------------------------
Income of foreign subsidiaries
and affiliates $ 2,247 $ 534 $ 1,336
Reserve for losses of reinsurance
subsidiary (523) 4,854 (1,222)
Reserve for claims of employee
health trust (712) 779 (412)
Headquarters building write-down 374 2,976
Deferred compensation (2,190) (765) (491)
Depreciation 150 (8) (824)
Amortization of deferred charges 2,152 2,339 2,601
Non-deductible reserves (5,315) (930) (40)
Non-qualified stock options 3,724 2,289
Other, net 77 (281) 133
---------------------------------
$ (390) $ 9,185 $ 4,057
- ------------------------------------------------------------------------
The reconciliation of income tax computed at the federal statutory tax rate
(34%) to income tax expense follows:
Fiscal year ended 1997 1996 1995
- ----------------------------------------------------------------------------
Provision using statutory
federal tax rate $ 2,050 $ 6,077 $ 4,670
Capital loss carryforward utilization (241) (358) (330)
Tax exempt interest (40) (128) (167)
Other, net 247 193 21
2,016 5,784 4,194
---------------------------------
State income taxes, net of
federal benefit 255 527 548
---------------------------------
$ 2,271 $ 6,311 $ 4,742
- ----------------------------------------------------------------------------
The components of the net non-current deferred tax asset (liability) at December
28, 1997 and December 29, 1996 are shown below:
Fiscal year ended 1997 1996
- -----------------------------------------------------------------------
Income of foreign subsidiaries and affiliates $(9,731) $(7,484)
Deferred charges (5,039) (4,517)
Reserve for claims of employee health trust 5,037 4,325
Deferred compensation 6,105 3,915
Reserve for losses of reinsurance subsidiary 2,161 1,638
Reserves for legal and other expenses 1,603 211
Depreciation 297 447
Capital loss carryforward 61 142
Other, net 17 300
--------------------
511 (1,023)
Valuation allowance (61) (142)
--------------------
Deferred tax asset (liability), net $ 450 $(1,165)
- -----------------------------------------------------------------------
The components of the net current deferred tax asset (liability) at December 28,
1997 and December 29, 1996 are shown below:
Fiscal year ended 1997 1996
- -----------------------------------------------------------------
Amortization of uniforms and accessories $(2,004) $(1,939)
Amortization of deferred charges (1,631)
Accrued vacation pay 2,204 1,374
Other reserves 4,979 817
--------------------
Deferred tax asset, net $ 3,548 $ 252
- -----------------------------------------------------------------
At December 28, 1997, the company had available a capital loss carryforward of
$159,000 of which $129,000 expires in 1998 and $30,000 expires in 2000.
At December 28, 1997, Wackenhut Corrections had federal and state net operating
loss carryforwards of $4.62 million and $4.05 million, respectively. The federal
net operating losses will expire between 2010 and 2011, while certain state net
operating losses will expire between 2000 and 2011. Utilization of net operating
losses in future years may be subject to annual limitations due to the ownership
change limitations provided by the Internal Revenue Code of 1986 and similar
state provisions. Such limitations, if any, are not expected to impact the
ultimate utilization of the carryforwards.
The company's loss carryforwards are solely attributable to Wackenhut
Corrections compensation deductions on its income tax return which were not
recognized for financial accounting purposes. The exercise of non-qualified
stock options which have been granted under the Wackenhut Corrections stock
option plans give rise to compensation which is includable in the taxable income
of the applicable employees and deducted by Wackenhut Corrections for federal
and state income tax purposes. Such compensation results from increases in the
fair market value of the Wackenhut Corrections 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. In the years ended
December 28, 1997 and December 29, 1996, such deductions resulted in significant
federal and state deductions which may be carried forward. Utilization of such
deductions will increase additional paid-in-capital.
(14) Wackenhut Corrections Corporation
Public Offerings
In January 1996, Wackenhut Corrections sold 4.6 million shares of common stock
at an offering price of $12.00 per share. Net proceeds of approximately $51.6
million from the offering have been and will be used for possible future
acquisitions, capital investments in new facilities, working capital
requirements and general corporate purposes. After the offering, the company's
ownership in Wackenhut Corrections was reduced to approximately 55%.
During 1997, the exercise of 230,550 non-qualified stock options of Wackenhut
Corrections reduced the company's ownership of Wackenhut Corrections to 54.1% at
December 28, 1997.
The board of directors of Wackenhut Corrections has granted non-qualified stock
options to purchase common stock which, if fully exercised, would reduce the
company's ownership in Wackenhut Corrections to approximately 52%.
39
40
(15) Earnings Per Share
The table below shows the amounts used in computing earnings per share in
accordance with SFAS No. 128 and the effects on income and the weighted average
number of shares of potential dilutive common stock. The number of shares used
in the calculations in 1995 reflect the declaration of a 25% stock dividend
effected in the form of a stock split. The incremental shares from assumed
conversions of the company's stock options in 1997 are not included because
there was a loss, not income, available to common shareholders for purposes of
computing the diluted earnings per share.
The company has entered into an acquisition (Note 4) which may result in
contingently issuable shares.
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
-----------------------------------------------------------------------------------------
Net Income $ 103 $9,057 $7,260
Basic EPS:
Income available to common shareholders 103 14,746 $ 0.01 9,057 13,636 $ 0.66 7,260 12,132 $ 0.60
Effect of dilutive securities:
Stock options 242 40
Stock options of Wackenhut Corrections (203) (51)
Diluted EPS:
Income (loss) available to common
shareholders $(100) 14,746 $ (0.01) $9,006 13,878 $ 0.65 $7,260 12,172 $ 0.60
- -----------------------------------------------------------------------------------------------------------------------------------
(16) Commitments and Contingencies
The nature of the company's business results in claims for damages arising from
the conduct of its employees or others. In the opinion of management, there are
no pending legal proceedings that would have a material effect on the
consolidated financial statements of the company.
The company leases office space, data processing equipment and automobiles under
non-cancelable operating leases expiring between 1998 and 2017. The company
entered into a lease for its new corporate headquarters in Palm Beach Gardens,
Florida, in 1996. The lease requires annual payments of $1.8 million for an
initial term of 15 years with 3 five-year options to extend the term of the
lease. Rent expense for the fiscal years ended December 28, 1997, December 29,
1996 and December 31, 1995 was $10 million, $9.6 million, and $7 million,
respectively.
In December 1997, Wackenhut Corrections 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, Wackenhut
Corrections unconditionally agreed to guarantee certain obligations of First
Security Bank, N.A., a party to the aforementioned operating lease facility. As
of December 28, 1997, approximately $69 million of properties were under
development under this facility.
The minimum commitments under these leases and the 15 year lease for the new
corporate headquarters, are as follows:
Minimum
Year Commitment
- ---------------------------------------------------------
1998 $11,450
1999 9,680
2000 8,545
2001 7,405
2002 6,629
Thereafter 16,687
--------
$60,396
- ---------------------------------------------------------
(17) Business Segments
Security services, correctional services and
staffing services
The company's principal segments are security services, correctional services,
and staffing services. The security services provides security-related and other
support services to commercial and governmental/regulated industries clients. A
subsidiary of the company, Wackenhut Corrections Corporation, provides facility
management and construction services to detention and correctional facilities.
The staffing services provides employee leasing and temporary staffing services.
Fiscal year 1997 1996 1995
- ---------------------------------------------------------------------------
REVENUES:
Security services $ 828,974 $ 768,065 $ 697,301
Correctional services 206,930 137,784 99,431
Staffing services 90,898 207
-------------------------------------
Total revenues $ 1,126,802 $ 906,056 $ 796,732
- ---------------------------------------------------------------------------
OPERATING INCOME:
Security services $ 20,281 $ 18,736 $ 20,500
Correctional services 16,545 9,731 7,229
Staffing services (272) (365)
Unallocated corporate
expenses (14,982) (11,032) (11,955)
One-time charges and
impairment of assets (18,300) (750)
-------------------------------------
Total operating income $ 3,272 $ 16,320 $ 15,774
- ---------------------------------------------------------------------------
EQUITY INCOME (LOSS) OF FOREIGN
AFFILIATES, NET OF TAXES:
Security services $ 993 $ 1,029 $ 744
Correctional services 1,105 604 (113)
-------------------------------------
Total equity income $ 2,098 $ 1,633 $ 631
- ---------------------------------------------------------------------------
CAPITAL EXPENDITURES:
Security services $ 2,867 $ 3,871 $ 3,959
Correctional services 23,965 12,476 2,720
Staffing services 294 85
Unallocated corporate 566 3,485 178
-------------------------------------
Total capital expenditures $ 27,692 $ 19,917 $ 6,857
- ---------------------------------------------------------------------------
DEPRECIATION AND
AMORTIZATION EXPENSE:
Security services $ 10,088 $ 9,438 $ 7,891
Correctional services 6,303 3,532 2,303
Staffing services 385 3
Unallocated corporate
expenses 741 867 1,977
-------------------------------------
Total expenses $ 17,517 $ 13,840 $ 12,171
- ---------------------------------------------------------------------------
40
41
- -----------------------------------------------------------------
IDENTIFIABLE ASSETS:
Security services $171,288 $158,413 $ 98,057
Correctional services 139,203 106,811 38,840
Staffing services 45,137 961
Unallocated corporate 48,814 57,733 61,030
----------------------------------
Total identifiable assets $404,442 $323,918 $197,927
- -----------------------------------------------------------------
DOMESTIC AND INTERNATIONAL OPERATIONS
Non-U.S. operations of the company and its subsidiaries are conducted primarily
in South America and Australia. Minority interest in consolidated foreign
subsidiaries have been reflected net of applicable income taxes in the
accompanying financial statements. The company carries its investment in
affiliates (20% to 50% owned) under the equity method. U.S. income taxes which
would be payable upon remittance of affiliates' earnings to the company are
provided currently.
A summary of domestic and international operations is shown below:
Fiscal year 1997 1996 1995
- ---------------------------------------------------------------------------
REVENUES:
Domestic operations $ 952,978 $ 760,038 $652,723
International operations 173,824 146,018 144,009
----------------------------------------
Total revenues $ 1,126,802 $ 906,056 $796,732
- ---------------------------------------------------------------------------
OPERATING INCOME:
Domestic operations $ 17,085 $ 15,675 $ 11,407
International operations 4,487 1,395 4,367
One-time charges and
impairment of assets (18,300) (750)
----------------------------------------
TOTAL OPERATING INCOME $ 3,272 $ 16,320 $ 15,774
- ---------------------------------------------------------------------------
- ------------------------------------------------------------------
EQUITY INCOME OF FOREIGN
AFFILIATES, NET OF TAXES:
Domestic operations
International operations $ 2,098 $ 1,633 $ 631
----------------------------------
Total equity income $ 2,098 $ 1,633 $ 631
- ------------------------------------------------------------------
CAPITAL EXPENDITURES:
Domestic operations $ 19,588 $ 16,569 $ 2,911
International operations 8,104 3,348 3,946
----------------------------------
Total capital expenditures $ 27,692 $ 19,917 $ 6,857
- ------------------------------------------------------------------
DEPRECIATION AND
AMORTIZATION EXPENSE:
Domestic operations $ 12,888 $ 9,678 $ 9,512
International operations 4,629 4,162 2,659
----------------------------------
Total expenses $ 17,517 $ 13,840 $ 12,171
- ------------------------------------------------------------------
IDENTIFIABLE ASSETS:
Domestic operations $368,349 $294,066 $141,431
International operations 36,093 29,852 56,496
----------------------------------
Total identifiable assets $404,442 $323,918 $197,927
- ------------------------------------------------------------------
(18) Selected Quarterly Financial Data
(Unaudited)
Selected quarterly financial data for the company and its subsidiaries for the
fiscal years ended December 28, 1997 and December 29, 1996 is as follows:
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------
Revenues $242,134 $273,592 $294,885 $ 316,191
Income (loss) from operations (1) $ 4,000 $ 4,909 $ 6,680 $ (12,317)
Net income (loss) $ 1,968 $ 2,508 $ 3,330 $ (7,703)
Earnings (loss) per share - basic $ 0.13 $ 0.17 $ 0.23 $ (0.52)
Earnings (loss) per share - assuming dilution $ 0.13 $ 0.17 $ 0.22 $ (0.53)
- ---------------------------------------------------------------------------------------------------
1996
- ---------------------------------------------------------------------------------------------------
Revenues $212,474 $222,904 $236,869 $ 233,809
Income from operations $ 2,063 $ 3,721 $ 5,224 $ 5,312
Net income $ 945 $ 1,907 $ 3,038 $ 3,167
Earnings (loss) per share - basic $ 0.08 $ 0.15 $ 0.21 $ 0.22
Earnings (loss) per share - assuming dilution $ 0.08 $ 0.14 $ 0.20 $ 0.20
- ---------------------------------------------------------------------------------------------------
(1) The results of operations in the fourth quarter were affected by a one-time
charge of $18,300,000 (Note 2)
41
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Report of independent certified public accountants
To the Shareholders of
The Wackenhut Corporation:
We have audited the accompanying consolidated balance sheets of The Wackenhut
Corporation (a Florida corporation) and subsidiaries as of December 28, 1997 and
December 29, 1996, and the related consolidated statements of income, cash flows
and shareholders' equity for each of the three fiscal years in the period ended
December 28, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Wackenhut Corporation and
subsidiaries as of December 28, 1997 and December 29, 1996, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 28, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
February 11, 1998.
Management's responsibility for financial statements
To the Shareholders of
The Wackenhut Corporation:
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. They include amounts based on
judgments and estimates.
Representations in the financial statements and the fairness and integrity of
such statements are the responsibility of management. In order to meet
management's responsibility, the 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 financial statements.
The 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 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.
/s/ George R. Wackenhut /s/ Philip L. Maslowe
George R. Wackenhut Philip L. Maslowe
Chairman of the Board Senior Vice President and
and Chief Executive Officer Chief Financial Officer
Palm Beach Gardens, Florida,
February 11, 1998.
42