Audit # 2004-4
Issue Date: February 28, 2005

Executive Office of the Governor

Office of The Chief Inspector General

Prison Rehabilitative Industries and Diversified Enterprises, Inc.,
Industries Training Corporation and Affiliates
Audit Number 2004-4
Date: February 28, 2005

Audit # 2004-4
Issue Date: February 28, 2005

TABLE

OF

CONTENTS

PRISON REHABILITATIVE INDUSTRIES AND DIVERSIFIED ENTERPRISES, INC.,
INDUSTRIES TRAINING CORPORATION AND AFFILIATES
AUDIT REPORT NUMBER 2004-4

TABLE OF CONTENTS
EXECUTIVE SUMMARY ............................................................3
BACKGROUND ........................................................................3
SCOPE, METHODOLOGY AND OBJECTIVES ..............................5
FINDINGS AND RECOMMENDATIONS .....................................6
EXHIBITS ............................................................................. 19
RESPONSES.......................................................................... 29
Response from PRIDE
Response from ITC

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Audit # 2004-4
Issue Date: February 28, 2005

PRISON REHABILITATIVE INDUSTRIES AND DIVERSIFIED ENTERPRISES, INC.,
INDUSTRIES TRAINING CORPORATION AND AFFILIATES
EXECUTIVE SUMMARY
The Office of the Chief Inspector General
performed an audit of Prison Rehabilitative
Industries and Diversified Enterprise, Inc.
(PRIDE), Industries Training Corporation (ITC)
and its affiliated entities for the period January
1, 1999, through June 30, 2004. The audit
objectives were designed to assess the overall
effectiveness and efficiency of the financial
operations of PRIDE and its affiliates in order to
determine whether they were operating in
accordance with the purposes for which PRIDE
was statutorily created.
The findings in this report revealed significant
decline in the financial condition of PRIDE, ITC
and its affiliates.
In addition, the findings
revealed a breakdown in accountability, as well
an inadequate system of internal controls.

•

PRIDE did not enter into a formal contract
with ITC, although required by the letter
agreement dated June 30, 1999. Currently,
no formal contract exists.

•

Payments made to ITC by PRIDE for
management services have not been in
accordance with the June 30, 1999
agreement or sound business practices.

•

PRIDE has loaned/advanced funds to ITC
and its affiliates interest-free, without any
stated terms of repayment. Also, amounts
recorded in PRIDE’s financial records as due
from ITC and ITC affiliates have been
reduced by significant amounts for reasons
that were sometimes questionable.

•

Management had not established a policy
setting limits on the amount of funds that
can be used to support ITC and its
affiliates. The lack of such a policy has
resulted in significant advances being made
to ITC and its affiliates at the expense of
PRIDE’s financial welfare.

•

The amounts paid to PRIDE and ITC
executives were not reasonable considering
the companies’ financial condition.

PRIDE’s response addressed and generally
agreed
with
our
findings
and
recommendations.
Responses from both
PRIDE and ITC are included in this report.

Synopsis of Findings:
•

The
organizational
and
operational
relationship between PRIDE and ITC
continues to be flawed in large measure
because PRIDE initially adopted a corporate
and governance structure which was
inconsistent with the Florida Statutes
applicable to managing and leasing
correctional work programs.

•

Management’s system of internal controls
was inadequate to ensure effective,
efficient, and proper use of resources.

•

PRIDE experienced a significant financial
decline from July 1, 1999 to December 31,
2003, recently resulting in cash flow
difficulties.

•

ITC is a financially troubled entity and its
current financial condition raises concerns
as to whether it will be able to continue to
operate.

BACKGROUND
In 1981, the Legislature passed legislation to
provide for a not-for-profit corporation to lease
and manage the correctional work programs of
the Department of Corrections (Department).
Once such not-for-profit corporation was
organized, no other not-for-profit corporation
could be organized for this purpose.
The
corporation’s board would be made up of
members appointed by the Governor and
confirmed by the Senate. In December 1981,
Prison Rehabilitative Industries and Diversified
Enterprises, Inc. (PRIDE) was incorporated
and, in 1983, the Legislature authorized PRIDE
to assume the responsibilities of managing the
Department’s correctional work programs. The
Department transferred to PRIDE certain assets
of the correctional work program.
PRIDE
recorded these transfers at estimated fair
market value. In addition to these transfers,
various lease agreements between PRIDE and
the Department provided for PRIDE to use
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Audit # 2004-4
Issue Date: February 28, 2005
Since the mid 1990’s, the PRIDE Board has
been considering ways to improve PRIDE’s
performance, specifically in the area of job
creation and market diversification. At PRIDE’s
strategic planning workshop in August 1997,
the Board developed a model for how PRIDE
could expand its reach, diversify its market,
and increase inmate jobs. They anticipated
PRIDE would maintain and expand government
markets and identify other markets that could
be developed for the products produced in the
current industries. The Board felt that creating
a “strategic leadership” company would assist
PRIDE in developing a variety of relationships,
either through joint ventures, acquisition, or
the creation of other companies. Also, the cost
of the administrative support services, i.e.:
human resources, information resources,
finance and accounting, etc., would be shared
by all other companies, thus reducing the
overall cost to PRIDE.
The Board also
concluded
that
creating
a
“partnership
outsourcing” company could benefit PRIDE by
targeting and focusing on the commercial forprofit sectors that were determined to be best
suited for the prison environment. RISE, an
affiliate of PRIDE, would expand its transitional
support services and expand into a temporary
employment company providing job placement
opportunities for inmates released from prison,
in addition to the PRIDE workers.

certain land, buildings, and equipment in the
operation of its correctional work programs.
PRIDE’s mission as stated in Section
946.501(2), Florida Statutes, in administering
the correctional work program is, “in order of
priority:
(a) To provide a joint effort between the
department, the correctional work
programs, and other vocational training
programs
to
reinforce
relevant
education, training, and postrelease job
placement
and
help
reduce
recommitment.
(b) To serve the security goals of the state
through the reduction of idleness of
inmates and the provision of an
incentive for good behavior in prison.
(c) To reduce the cost of state government
by operating enterprises primarily with
inmate labor, which enterprises do not
seek to unreasonably compete with
private enterprise.
(d) To serve the rehabilitative goals of the
state by duplicating, as nearly as
possible, the operating activities of a
free-enterprise type of profitmaking
enterprise.”
To assist PRIDE in its mission, the Legislature
granted it certain privileges.
PRIDE has
sovereign immunity, which shields it from
liability in the same manner as the State. In
addition, PRIDE is not subject to the authority
of any state agency, except the auditing and
investigatory powers of the Legislature and the
Governor. Legislation also granted purchasing
preference for PRIDE, meaning that state
agencies must buy its products when they are
of similar quality and price to those offered by
outside vendors.

A business development consultant was hired
in 1998 to develop a comprehensive growth
strategy for a for-profit company to enhance
PRIDE’s effectiveness.
The PRIDE Board
approved the consultant’s proposal and
subsequent business plan to create separate
but related companies.
The intent of the
creation of these new companies was to help
PRIDE find ways to increase the number of
inmate jobs and to expand its social mission.
In addition, PRIDE wanted to establish clear
criteria for the separation of markets and the
allocation of capital resources between the
proposed businesses. Effective July 1, 1999,
PRIDE formed Industries Training Corporation
(ITC), a tax exempt organization, for the
purpose of entering into relationships and
managing prison work programs for PRIDE and
any other tax exempt, governmental and forprofit sectors located in the state and the
United States. In addition, ITC created the
following affiliates to assist in its mission:

PRIDE operates a variety of industries including
furniture manufacturing, agriculture, digital
print technologies, textiles, and services.
PRIDE receives no funding from the Legislature
and is totally supported by the earnings it
generates from the sale of its products. The
majority of its sales are to state agencies. In
fiscal year 2003 (January 1 – December 31),
PRIDE provided 1,995 inmate work positions at
21 prisons throughout Florida and generated
$60.9 million in sales. Exhibit 1 of this report
lists PRIDE’s Board of Directors.
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Audit # 2004-4
Issue Date: February 28, 2005
FIGURE 1—CORPORATE STRUCTURE OF PRIDE, ITC & AFFILIATES

PRIDE

•Non-profit
•Trains and works inmates to aid
rehabilitative goals, enhance security, and reduce inmate idleness
and recidivism

Industries Training
Corporation
•Non-profit
•Provides administrative and
managerial support for PRIDE

Florida Citrus Partners

•Limited Liability
•Partnership between ITC and

Labor Line Services

private sector associate (50%
owned by each)
•Produces fresh citrus juice and
sectioned fruit

•Non-profit
•Provides transition support and
job training services for former
PRIDE inmates

Global Outsourcing
Labor Line, Inc,
•For-profit temp-to-hire staffing
agency
•Works with underemployed
individuals, including former
inmates

Florida Citrus
Producers
•For-profit
•Established June 2004
•Produces fresh citrus juice and

•For-profit
•Develops partnerships with private businesses

•Acts as private sector partner for PRIDE
when necessary

•D/b/a Global Digital and Global Reman

Diversified Supply
Management
•For-profit
•40% owned by ITC

Northern Outfitters
•For-profit
•Manufacturers extreme weather apparel
using inmate labor in Utah

sectioned fruit

Labor Line, Inc. (LLI); Labor Line Services, Inc.
(LLS) and Global Outsourcing, Inc. (Global)
and purchased its wholly owned subsidiary,
Northern Outfitters. ITC also formed private
partnerships to create Florida Citrus Partners
(FCP), in which ITC has 50% ownership and
Diversified Supply Management Company
(DSM) in which ITC has 40% ownership.
PRIDE considers ITC and its affiliates related
parties for financial reporting purposes. The
members of ITC’s Board of Directors are listed
in Exhibit 1 of this report. Figure 1 above
illustrates the corporate structure of PRIDE,
ITC and the affiliates.

affiliates. This request was made in response
to concerns raised in the Office of Program
Policy Analysis and Government Accountability
(OPPAGA) Special Report No. 03-68, PRIDE
Benefits the State But Needs to Improve
Transparency in Operations, issued December
2003.
The objectives of the audit were to determine:
•

Whether management’s system of internal
control was adequate to ensure effective,
efficient, and proper use of resources;

•

Whether management established policies
regarding investment best practices and
whether
management
followed
those
policies;

SCOPE, METHODOLOGY AND OBJECTIVES

•

The Chief Inspector General initiated this audit
in response to a request by the Governor to
conduct a review of PRIDE, ITC and the

Whether the organizational relationships
between PRIDE, ITC and the related
affiliates are appropriate;

•

Whether the relationships between key

In fiscal year 2003 (January 1 - December 31),
ITC and its affiliates generated $20,256,522 in
sales.

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Audit # 2004-4
Issue Date: February 28, 2005
FINDINGS AND RECOMMENDATIONS

employees of PRIDE, ITC and the related
affiliates are appropriate and do not contain
any conflicts of interest;
•

Whether the salaries of PRIDE and ITC
senior management are reasonable and in
accordance with similar positions in other
organizations; and

•

Whether the organization is fulfilling its
statutory purpose to duplicate as nearly as
possible the operating activities of a profitmaking enterprise.

Audit Finding #1
The
organizational
and
operational
relationship between PRIDE and ITC
continues to be flawed in large measure
because
PRIDE
initially
adopted
a
corporate and governance structure which
was inconsistent with the Florida Statutes
applicable to managing and leasing
correctional work programs.
In early 1999 the PRIDE Board of Directors
approved a number of initiatives for the stated
purpose of expanding sales outside the
historical outlets of the State of Florida and
local governments. One of the initiatives was
to create additional entities.

To meet these objectives, we reviewed
transactions and selected activities occurring
during the period January 1, 1999 through
June 30, 2004 and additional activities through
December 2004. Our methodology included
the following:
•

Interviews with members of both Boards of
Directors, and selected officers and
managers

•

Analyses
of
documents

•

Review of minutes of meetings of the
PRIDE and ITC Boards of Directors

•

Review of statutes, corporate
bylaws, policies and procedures

•

Review of financial reports, including
audited and unaudited financial statements

•

Review of annual reports

•

Examination
of
selected
financial
transactions and supporting documentation

•

Examination of personnel files

financial

records

A consultant was engaged to develop a
comprehensive business plan to determine the
feasibility of establishing a for-profit operation
under the Prison Industry Enhancement (PIE)
program1 within the PRIDE corporate structure.
The consultant proposed restructuring PRIDE
under a management company format as
illustrated in Figure 2.

and

The structure shows a management company
as a holding company with PRIDE, RISE, and a
for-profit company as subsidiaries. Industries
Management Corporation was established as
the management company (the name was later
changed to Industries Training Corporation –
ITC) and Global Outsourcing, Inc. was created
as the for-profit entity. In ITC’s 1999 and
2000 financial statements, PRIDE’s accounts
were consolidated with ITC and its affiliates.
(PRIDE issued separate, audited financial
statements.) The CFO explained that including
PRIDE as a subsidiary of ITC was considered
appropriate since PRIDE and ITC had the same
individuals serving on their respective Boards
of Directors.
In our interviews with Board
members, at least one indicated that PRIDE is
subordinate to ITC.

charters,

Our audit was conducted in accordance with
the International Standards for the Professional
Practice of Internal Auditing published by the
Institute of Internal Auditors.

The creation of a management company
organizationally superior to PRIDE appears to
be contrary to Section 946.502(1), Florida

1
PIE programs are authorized by Federal law for the purpose of allowing goods manufactured in prison industries to be
sold in the competitive retail market. To ensure that the prison industries do not have an unfair advantage due to the small
salary amounts paid to their inmates, the inmates working in PIE programs must be paid the current prevailing wage

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Audit # 2004-4
Issue Date: February 28, 2005
FIGURE 2—CONSULTANT-PROPOSED REVISED CORPORATE STRUCTURE

Management
Company
Commercial Sector

PRIDE

RISE

Prision Rehabilitative Industriesand Diversified
Enterprises,Inc

Retraining Industrial Skills
Enterprises,Inc

L
Government Products
& Services Only

L

L

Mix of Government
& Private Services

L
Contracts with Government Agencies &
Prisons Only

NewCo
PIE

Commercial Products
& Services Only

L

L

Contracts with both
Government and Pri vate Enterprise

Contracts with Private Enterprise
& Prisons Only

justified. While the original consultant’s report
may have brought to light a reasonable means
of expanding PRIDE, it does not appear that
other
options/proposals/alternatives
were
considered. Other options may have provided
a means by which PRIDE could have expanded
its sales market with companies created as
PRIDE subsidiaries.

Statutes, which provides, “It is the intent of the
Legislature that a not-for-profit corporation
lease and manage the correctional work
programs of the Department of Corrections.
Section 946.502(2), Florida Statutes provides,
“It is further the intent of the Legislature that
once one such not-for-profit corporation is
organized, no other not-for-profit corporation
be organized for the purpose of carrying out
this part . . ..”

We made inquiries of senior executives and
board members as to the reasons for creating
ITC as a separate entity.
Generally, the
reasons expressed were:
(1) to expand
PRIDE’s sales base into non-State and private
market segments; (2) the reluctance of private
firms to do business with PRIDE because of
concerns about the perceived ability of
government to examine their records once they
entered into a business relationship with
PRIDE, and (3) to market products without the
stigma associated with inmate-produced goods.

In Report No. 03-68 dated December 2003,
OPPAGA staff reported that PRIDE had failed to
adequately maintain the distinction between
itself and its related businesses. They go on to
state, “The relationship between PRIDE, ITC
and the other corporations is intertwined and
difficult to separate. For example, PRIDE and
ITC have some common managers, common
board members, and use the same offices.”
(See Exhibits 1 and 2.)

We question, at least to some degree, the
validity of these bases for establishing the
separate entities because:

The structure of the organization should
promote the mission of the organization and
each unit within the organization should
function to further that mission.
Private
corporations in some instances have wholly
owned subsidiaries. The purposes of wholly
owned subsidiaries may be to spread risk so
that a judgment against one subsidiary could
not be enforced against other subsidiaries and
subsidiaries are sometimes created to compete
in different markets. Although these may have
been the reasons for which PRIDE created ITC,
PRIDE’s decision to create entities outside the
control of PRIDE does not appear to be

•

7

PRIDE does not control ITC or any of its
affiliates, therefore PRIDE has no voice in
how any profits would be distributed or
used. We saw no evidence of how the
activities of the companies increased
PRIDE’s sales. Rather, PRIDE’s sales have
ranged from $60,930,000 to $65,278,000
over the last 3 years, which is a significant
decrease from the sales of $93,677,000
reported in 2000.

Audit # 2004-4
Issue Date: February 28, 2005
•

•

Section 946.517, Florida Statutes, provides
that “corporation [PRIDE] records are public
records; however, proprietary confidential
business information shall be confidential
and exempt from the provisions of s.
119.07(1) and s. 24(a), Art. I of the State
Constitution. …
‘Proprietary confidential
business information’ means information
regardless of form or characteristics, that is
owned or controlled by the corporation; is
intended to be and is treated by the
corporation as private and the disclosure of
the information would cause harm to the
corporation’s business operations.”
This
information includes “information relating
to private contractual data, the disclosure
of which would impair the competitive
interest of the provider of the information.”
Such an exemption from public records
disclosure laws appear to cover the records
of private companies doing business with
PRIDE.

outline the provisions for the repayment of
amounts ITC and its affiliates owe PRIDE,

•

An effort has been made to formalize the
June 30, 1999 letter agreement,

•

Loan documents have been drafted which

accounts

have

•

ITC’s financial statements no longer include
PRIDE account balances.

Given ITC’s poor financial performance and
current financial state, we recommend that
PRIDE discontinue its relationship with ITC. If
the Board chooses to continue the relationship,
it should be re-structured so PRIDE is superior
to ITC and its affiliates in form and substance
and PRIDE ultimately benefits from operations
of the related entities.
Audit Finding #2
Management’s system of internal controls
was inadequate to ensure effective,
efficient, and proper use of resources.
State resources were transferred to PRIDE for
the purpose of leasing and managing the
correctional work programs of the Florida
Department of Corrections (Department). The
PRIDE Board of Directors had a fiduciary
responsibility to safeguard those assets and
manage the correctional work programs in a
manner that would provide income to expand
the program and make lease payments to the
Department. An adequate system of internal
control was necessary to satisfy the obligations
set forth in the Florida Statutes and the related
lease agreements.

Although the erroneous financial reporting
methodology of 1999 and 2000 was corrected
in 2001, vestiges of ITC’s superiority continued
(e.g.
PRIDE’s
CEO
was
also
ITC’s
President/CEO and PRIDE’s CFO and internal
auditor are organizationally responsible to the
ITC President/CEO). Currently, PRIDE is taking
steps to clarify the relationship between PRIDE
and the related entities. We noted that:
Separate
bank
established,

ITC’s President/CEO is no longer PRIDE’s
CEO and

Recommendation:

In our interviews with staff of prison
industry programs in other states, several
indicated they are fairly successful in
dealing with private companies even though
their products are produced using inmate
labor.
We realize that some major
companies have a strict policy against
establishing a relationship with prison
industries, but considering the success of
some other states’ programs, there are
companies that do not have such a policy
and could provide a sales market for PRIDE
products.

•

•

Authoritative accounting literature defines
internal control as a process affected by an
entity board of directors, management and
other personnel.
The process should be
designed to provide reasonable assurance
regarding achievement of objectives relating
to: (1) reliability of financial reporting, (2)
effectiveness and efficiency of operations, and
(3) compliance with applicable laws and
regulations.
The foundation for all other
components of internal control, providing
discipline and structure, is the control
environment, which sets the tone of the
organization.
There are seven control

been

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Audit # 2004-4
Issue Date: February 28, 2005
environment factors.

between the Board of Directors and senior
management
would
be
detrimental
to
operations of the organization but the Board of
Directors should be sufficiently independent to
provide an appropriate level of oversight. The
Board of Directors did not have staff and
therefore they depended on senior managers
to provide information needed for making
important decisions.

a.
b.
c.
d.

Integrity and ethical values
Commitment to competence
Board of directors or audit committee
Management’s philosophy and operating
style
e. Organizational structure
f. A ss ig n m e n t
of
a u th o r it y
and
responsibility
g. Human
resources
policies
and
procedures

The Board’s involvement and scrutiny of
activities and the degree with which difficult
questions were raised and pursued with
management seemed limited. Our review of
the Board packets (documents provided to
Board members for review before the
meetings), and the Board meeting minutes did
not always document vigorous scrutiny and
questioning on major decisions. For example,
our review of the documents provided to the
Board relating to the December 9, 2002 Board
meeting disclosed a one page document
providing a summary of the reasons for the
asset write down ($5,279,190 receivable
reduction described in Finding No. 7) and
estimates of the amounts involved.
The
meeting minutes indicated:

Our review raised questions as to the adequacy
of controls related to items (c) - the board of
directors, (e) - organizational structure and
item (f) – assignment of authority and
responsibility.
The Board of Directors
An entity’s control consciousness is influenced
significantly by the entity’s board of directors
or audit committee.
Attributes include the
board or audit committee’s independence from
management, the experience and stature of its
members, the extent of its involvement and
scrutiny of activities, the appropriateness of its
actions, the degree with which difficult
questions are raised and pursued with
management, and its interaction with internal
and external auditors.

The finance committee had previously
met to review the financial results. Mike
Smith shared the summary of the
results
and
reviewed
the
recommendation of the asset writedowns of procurement management,
business
development
and
inmate
placement.
Upon a motion by Ed
Peddie, seconded by Marcelo Alvarez,
the recommended write-downs were
unanimously approved.2

Our review disclosed that the PRIDE Board of
Directors is not sufficiently independent from
management. PRIDE’s Board asked Deloitte
Consulting LLP to conduct a management
assessment. The report indicated,
“There is a perception among several
interviewees [selected board members,
employees and outside stakeholders] that
the Board member nomination and
selection process is not independent from
the CEO, impairing the Board’s ability to
provide
oversight
and
effective
governance.”

This
is
an
example
of
the
limited
documentation available on key decisions made
by the Board. PRIDE has a Finance Committee
that is responsible for determining that
accurate and adequate accounts of the
property and business transactions of the
corporation are kept. We could not determine
the level of scrutiny provided by this critical
committee regarding the receivable reductions
because minutes are not recorded at their
meetings.

Our interviews of PRIDE Board members
disclosed that the majority of the Board
“trusted” the PRIDE management team and did
not always provide vigorous oversight when
warranted.
An antagonistic relationship
2

Mike Smith is the Chief Financial Officer of PRIDE and ITC; Ed Peddie and Marcelo Alvarez are PRIDE Board members.

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Audit # 2004-4
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President.
An
August 4,
2004
ITC
organizational chart showed the internal
auditor as an employee of ITC reporting to the
President/CEO; however, ITC’s Internal Auditor
has access to PRIDE’s information and financial
records.
During the audit, ITC’s Internal
Auditor was designated as our liaison and initial
contact for scheduling interviews and obtaining
PRIDE records. However, PRIDE’s most recent
organizational chart does not show an internal
audit section. Without an effective internal
audit function, the Board does not have an
independent, internal source of information
regarding the propriety of actions taken by
management.

Organizational
Structure/Assignment
of
Authority and Responsibility
An entity’s organization structure provides the
framework within which its activities for
achieving entity-wide objectives are planned,
executed, controlled, and monitored.
Some
of the dual positions held raise concerns. As
shown in Exhibit 2, Pamela Davis served as
PRIDE’s Chief Executive Officer (CEO) (until
July 2004) and serves as the President/CEO of
ITC and several affiliates. Robert (Mike) Smith
serves as the Chief Financial Officer (CFO) for
both PRIDE and ITC (reporting to the
President/CEO of ITC) and treasurer for several
affiliates. These assignments appear to place
the CEO and CFO in positions with competing
interests. PRIDE has the line of credit and
holds most of the assets, while ITC is the entity
that has not had a profitable year and
consistently needs to borrow funds to cover
operating
expenses.
We
noted
several
instances in which decisions made by the CEO
and CFO would improve the financial condition
of one company while impairing the financial
condition of the other. For example:
•

•

Recommendation:
The PRIDE Board should review the present
management structure and implement a
system of internal controls adequate to ensure
the objectives of the enterprise are fulfilled.
Audit Finding #3
PRIDE experienced a significant financial
decline from July 1, 1999 to December 31,
2003, recently resulting in cash flow
difficulties.

The CFO approved the PRIDE payments to
ITC for administrative services which were
based on PRIDE sales with no subsequent
determination by the CFO as to ITC’s actual
cost for providing the services, as required
by the June 30, 1999 agreement. (See
Finding No. 6)

PRIDE’s audited financial statements indicated
that, as of June 30, 1999, net assets exceeded
$42 million. In 1999, the PRIDE Board of
Directors approved the creation of ITC and ITC
created affiliates and partnerships. However,
due to declining sales, discontinued operations,
asset transfers to ITC and asset write-downs
(fair market value reductions), PRIDE’s net
assets had dropped to approximately $26
million as of December 31, 2003, a reduction
of $16 million over a four year period. From
1999 to 2003, PRIDE’s annual sales have
ranged from a high of $93,677,025 in 2000 to
a low of $60,930,006 in 2002, resulting in an
average of $65 million for the period. Figure 3
shows the disposition of PRIDE’s funds from
July 1, 1999 through December 31, 2003.

The CFO recommended that the PRIDE
Board approve the significant reduction of
the amount due from ITC. The reasons for
the deduction are questionable.
(See
Finding No. 7).

Although the managers indicated that they
finitely discharge their duties for each entity,
the appearance of a conflict of interest cannot
be disputed.
Also related to efficient operations, internal
auditors contribute to the monitoring of
activities and the results of their reviews are
reported directly to the Audit Committee.
PRIDE had established an internal audit
position and the Audit Committee met with the
Internal Auditor twice a year. However, the
PRIDE internal audit manual, dated July 1,
1990,
states
that
the
Internal
Audit
Department is a staff function reporting to the

PRIDE
has
made
substantial
financial
contributions, both in direct contributions and
loans, to the startup of ITC and the other
entities.
Despite
their
poor
financial
performance, PRIDE has continued to approve
loans to these failing entities, so that as of
December 31, 2003, ITC and its affiliate, FCP,
10

Audit # 2004-4
Issue Date: February 28, 2005
FIGURE 3—PRIDE DISPOSITION OF FUNDS

Year

Disposition of Funds
Gain/(Loss) from Asset Decreases
Gain/(Loss)
Discontinued
Related to ITC &
From Operations
Operations
Affiliates

1999 (6 months)
2000
2001
2002
2003

$
(5,673.00)
$ (3,468,765.00)
$ (1,057,299.00) $
(653,083.00)
$ (2,076,931.00) $ (5,575,671.00)
$ 2,876,225.00 $
815,444.00 $ (5,279,190.00)
$ (2,183,825.00)

management confirmed that PRIDE was
experiencing short-term cash flow problems.
PRIDE’s solvency status is questionable
because if PRIDE needs funds for operations,
they have very few assets they can convert to
cash.
Much of the surplus property once
owned by PRIDE and available to convert to
cash has been sold, transferred by gift to ITC
or cannot be sold because the buildings are
located on state-owned land. The efficiency
ratios show that PRIDE is efficient in using its
assets to generate sales.
However, the
profitability ratios indicate PRIDE’s assets,
sales and net income are not generating a
return on the investment and therefore PRIDE
is not considered a profitable entity.
The
details for each ratio, including how it is
calculated, what it represents, what is a
desirable ratio and PRIDE’s ratio at December
31, 2003 are contained in Exhibit 3 of this
report.

owed PRIDE a total of $5,351,459, with no
stated terms of repayment. Also, PRIDE’s bank
line of credit was structured so that PRIDE and
ITC were cross-collateralized, meaning that
both entities could draw down funds from
PRIDE’s line of credit and each was responsible
for the outstanding obligation. PRIDE used the
funds to finance its operations and repaid its
obligation from operating revenues. ITC also
drew funds from this account as authorized by
its Chief Financial Officer (who is also PRIDE’s
Chief Financial Officer).
The amounts
borrowed by ITC limited PRIDE’s access to cash
it may have needed to fund its prison industry
units’ operations. PRIDE’s cash balances for
the period 1999 through 2003 have decreased
by an average of $600,000 each year. On
January 1, 1999, PRIDE’s cash balance
exceeded $3 million and had decreased to
approximately $250,000 as of December 31,
2003. In its current financial state, PRIDE has
not been able to meet its financial obligations.
Based on information provided to us by ITC’s
Internal Auditor, the terms of the crosscollateralized line of credit were revised in
November 2004 to make the amount due from
PRIDE separate from the amount due from ITC.
Under the revised arrangement, if the bank
requires payment of the outstanding balances,
PRIDE is no longer responsible for ITC’s debt.

Recommendation:
We recommend that PRIDE take measures to
reduce and eventually eliminate the trend
toward financial and economic decline. These
efforts should include a careful review of how
PRIDE’s funds are used and the elimination of
financial support for any business ventures,
including ITC and its affiliates, which are not
generating profits for PRIDE.

To obtain a clearer picture of PRIDE’s financial
state, we used data from the 2003 audited
financial statements and calculated ratios that
indicated the solvency, profitability and
efficiency of PRIDE’s operations. Our analyses
indicated that PRIDE is having difficulty
meeting its current obligations. During our
fieldwork in September 2004, PRIDE senior

Audit Finding #4
ITC is a financially troubled entity and its
current financial condition raises concerns
as to whether it will be able to continue to
operate.
11

Audit # 2004-4
Issue Date: February 28, 2005
FIGURE 4—PRIDE DISPOSITION OF FUNDS

Period Ended
December 31, 1999 *
December 31, 2000
December 31, 2001
December 31, 2002
December 31, 2003
June 30, 2004 **
TOTAL
* July - December only
** January - June only

Revenues ITC and
Subsidiaries
$ 5,002,994
14,718,054
17,868,492
16,484,325
20,256,522
9,760,601
$ 84,090,988

ITC provides management services to PRIDE
and ITC affiliates. As shown in Figure 4, ITC is
heavily dependent upon PRIDE as a funding
source.

Revenue
Attributed
to PRIDE
100.00%
67.30%
51.39%
37.90%
32.77%
35.24%
48.06%

has no net worth, meaning its liabilities exceed
its assets. While ITC appears to be efficient in
using its revenues to pay its suppliers, it is not
as efficient in collecting its receivables. ITC
has not generated any profits therefore there
are no returns on assets or sales. The details
for each ratio, including how it is calculated,
what it represents, what is a desirable ratio and
ITC’s ratio at December 31, 2003 are contained
in Exhibit 4.

Not only is PRIDE one of ITC’s major
customers, PRIDE has provided financial
support in other ways. In 1999, PRIDE made a
significant contribution by transferring by gift
to ITC land and buildings. When the properties
were sold by ITC, they retained the profits.
Also, ITC had access to additional funds
through PRIDE’s line of credit.
During our
audit period, ITC was not considered
creditworthy and since they could not obtain
their own line of credit, they used PRIDE’s line
of credit to obtain working capital.
(ITC’s
Internal Auditor indicated that as of November
2004, ITC no longer has access to PRIDE’s line
of credit.)
Despite the infusion of PRIDE’s
assets to the start-up and operations of ITC,
financial records indicate ITC has not been
profitable since its inception. Net losses each
year have been as follows:
1999 (July - Dec.)
2000
2001
2002
2003
TOTAL

PRIDE
Support
Payments
$ 5,002,994
9,905,388
9,183,504
6,246,744
6,639,053
3,439,506
$ 40,417,189

Our conclusion is that ITC is not a viable
business entity that can promote PRIDE’s goals
and missions. ITC is an entity struggling to
survive. If PRIDE withdrew its support, ITC
could not survive in its present form. ITC and
its affiliates would have to significantly
downsize operations and staff, expand their
sales markets, reduce overhead and search for
new customers and funding sources.
The
benefits PRIDE envisioned in the creation of
ITC and its affiliates have not been realized and
have, to a degree, contributed to the financial
decline of PRIDE.

$

(130,182.00)
(1,399,102.00)
(4,882,701.00)
(1,869,527.00)
(1,265,145.00)
$ (9,546,657.00)

Recommendation:
Given ITC’s financial failures and the effect it is
having on PRIDE’s financial condition, we
recommend that the PRIDE Board of Directors
sever its relationship.
However, if PRIDE
chooses to continue the relationship, the basis
for that decision should be documented. A key
element to be considered by the Board is
whether further support of ITC and its affiliates
is an effective and efficient use of resources.

A financial analysis and calculation of financial
ratios for solvency, efficiency and profitability
present a bleak picture for ITC. ITC is not
solvent in that it has few assets which can be
used to pay its current liabilities. The company
12

Audit # 2004-4
Issue Date: February 28, 2005
letter agreement was executed by the
President/CEO of ITC (who was also the CEO of
PRIDE) and the CFO of PRIDE (who also
became the CFO of ITC).

Audit Finding #5
PRIDE did not enter into a formal contract
with ITC, although required by the letter
agreement
dated
June
30,
1999.
Currently, no formal contract exists.

Our audit disclosed that the comprehensive
agreement has not been executed.
When
asked why a formal agreement had not already
been executed, PRIDE senior management
indicated, “we just didn’t get around to it”. In
June 2004, a proposed agreement was drafted
and was to be presented to the Board for
approval. At the request of the Chief Inspector
General, final approval was deferred until the
completion of this audit. Since June 30, 1999,
the letter agreement has been the complete
agreement of the parties; however, several key
issues have arisen over the past five years that
are not addressed in the letter agreement,
including:

ITC provides assistance, management services
and support to PRIDE. The terms under which
ITC will operate are set forth in a letter
agreement dated June 30, 1999. Per the letter
agreement, the central goal of PRIDE and ITC
is to work toward the implementation of Prison
Industries Enhancement (PIE) Programs. To
meet the goal, ITC agreed to perform services
such as:
•

Training and recruiting employees to work
for PRIDE;

•

Analyzing data to determine enterprises,
people and locations which will complement
PRIDE’s mission, particularly with respect to
PIE programs;

•

Providing accounting and payroll support;

•

•

The repayment terms for money borrowed
from PRIDE by ITC,

•

The extent to which ITC could use funds
from PRIDE’s line of credit,

Providing computer support;

•

Transfer of land and buildings from PRIDE
to ITC and

•

Providing assistance in accounts receivable
and collection;

•

Details of PRIDE initiatives assumed by ITC
and ITC’s responsibilities.

•

Entering into
arrangements;

•

Providing human resources services;

•

Arranging for employee health, pension,
and other benefits;

•

Providing assistance
representation and

•

Providing assistance in acquiring, leasing,
constructing and mortgaging real and
personal property.

banking

in

and

financing

selecting

The provisions relating to such critical issues
should have been outlined in a formal
document.
Without formalization of those
provisions, there is no assurance that these
matters will be handled in a consistent manner
when decisions must be made.
Recommendation:

legal

Given ITC’s current financial condition and its
inability to meet the goals of the June 30, 1999
agreement, it does not appear reasonable for
PRIDE to enter into a formal contract with ITC.
We recommend that the PRIDE Board of
Directors sever its relationship with ITC.
However, if the Board chooses to continue that
relationship, the justification should
be
documented and a formal contract detailing the
responsibilities of each party should be
immediately executed.

ITC and PRIDE were to develop a more
extensive operating agreement to accomplish
the goals and purposes of PRIDE with respect
to the PIE Programs. The parties contemplated
finalizing
the
operating
agreement
by
December 31, 1999, with a 10-year term. The

13

Audit # 2004-4
Issue Date: February 28, 2005
In formalizing the administrative support
services agreement between PRIDE and ITC,
the June 2004 proposed contract provided
that, in addition to PRIDE paying all costs and
expenses paid in connection with the
performance of the services, the administrative
service fee paid to ITC would be 10% of the
gross amount of PRIDE’s total support and
revenues realized from all sources and would
be paid until PRIDE and ITC could agree on a
fixed monthly amount.

Audit Finding #6
Payments made to ITC by PRIDE for
management services have not been in
accordance with the June 30, 1999
agreement or sound business practices.
Effective June 30, 1999, a letter agreement
was executed between PRIDE and ITC to set
forth the terms under which ITC would provide
assistance, service and support to PRIDE. With
regard to fees to be paid to ITC by PRIDE, the
agreement provides:

One additional observation is that ITC’s cost of
providing administrative services may be high.
We found no evidence that this possibility was
explored
because
the
PRIDE
Board/
management did not obtain quotes or bids
from other companies as a means of
determining
the
reasonableness
of
the
amounts being charged by ITC. The failure of
the PRIDE Board and management to properly
monitor the fees paid to ITC has possibly
resulted in PRIDE further subsidizing ITC
operations to PRIDE’s detriment.

“The initial fees for services rendered
by ITC will be estimated based on
PRIDE’s estimated budget as reflected
in its financial statements for the period
ending June 30, 2000. PRIDE and ITC
will work together to schedule, in
reasonable detail, the fee to be paid by
PRIDE for each of the services outlined
in the agreement. The fees will be paid
quarterly in advance and will be based
on estimated costs incurred by ITC in
providing the services. The fee will be
adjusted annually to reflect actual costs
to ITC of providing the services. PRIDE
shall have the right to audit any
calculation of these fees.”

Recommendation:
We recommend that PRIDE immediately
exercise its right to audit the calculation of fees
charged by ITC in prior years. PRIDE should
require immediate repayment of any amounts
overpaid to ITC. Also, if PRIDE’s relationship
with ITC continues, the Board should take
steps to ensure that ITC is the best company
to provide administrative services and that the
fee being charged is reasonable.
The fee
payment calculation should conform to best
business practices.

PRIDE’s financial records indicate that PRIDE
has made payments totaling $40,417,189 to
ITC during the period July 1, 1999 through
June 30, 2004 (see chart in Finding No. 4).
During 2000 and 2001, ITC’s management
services fee was calculated at 10% of PRIDE’s
budgeted revenues. For 2002 and 2003, ITC
charged PRIDE a flat rate of 10% of PRIDE’s
gross sales. Each year, the administrative
services fee was included in PRIDE’s budget
which was approved by the Board; however we
found no evidence that the Board was aware of
the methodology being used to determine the
amounts to be paid to ITC. The ITC charges
were not calculated in accordance with the
methodology outlined in the June 30, 1999
agreement. Also, payment for services based
on the receiving agency’s budget or sales are
not normal business practice. As of June 30,
2004, neither PRIDE nor ITC had determined
actual costs and the amounts paid had not
been adjusted accordingly.
The possibility
exists that ITC may have overcharged PRIDE.

Inspector General’s Comment:
In response to Finding No. 6, the PRIDE
Chairman indicates that, although PRIDE
believes that there have been overpayments in
the past, the actual computation of those
overpayments would be very difficult and very
time consuming to perform. Further, even if
an acceptable management service fee could
be computed for prior periods, and even if it
was less than the actual fee paid, based upon
the information in Finding No. 4, it is unlikely
that PRIDE would be able to collect on the
overpayments. Given ITC’s current financial
status, the ability to collect any overpayment
14

Audit # 2004-4
Issue Date: February 28, 2005
FIGURE 5—PRIDE RELATED PARTY RECEIVABLES

As of Dec. 31
1999
2000
2001
2002
2003

Current
$
$ 3,867,777.00
$
807,331.00
$ 1,196,915.00
$ 1,511,000.00

does seem unlikely.
However, ITC is
continuing to operate. In the event that the
company does become profitable in the future,
PRIDE may have legal recourse for collecting
overpayment of fees. As PRIDE continually
monitors the likelihood of collecting its
receivables due from ITC, periodically PRIDE
should also evaluate the feasibility of
calculating ITC’s cost and the possibility of
collecting a refund for any amounts overpaid.

$
$
$
$
$

Long-Term
8,682,751.00
8,463,973.00
3,840,459.00

Total
$
$
$
$
$

3,867,777.00
9,490,082.00
9,660,888.00
5,351,459.00

of Board-approved reductions of $5,279,190
and $4,106,546, respectively. Our findings on
each of these reductions are addressed below.
2002 Reduction of the Amount Due from ITC’s
Affiliates
In 2002, PRIDE management requested
approval from the Board to reduce the
amounts
due
from
RISE3
($1,572,926
reduction), Global ($1,945,042 reduction) and
DSM
($1,775,622
reduction)
totaling
$5,293,590. The Board approved a reduction
of $5,279,190. PRIDE’s 2002 Annual Report
indicates:

In the response from ITC’s Chairman, he
indicates ITC does not believe there have been
past overpayments.
Without a review to
determine the actual costs to ITC for the
services it provided to PRIDE, that assumption
cannot be verified.

PRIDE and ITC concluded that ITC would
not benefit from certain initiatives as PRIDE
had
assumed
responsibility
for
administering them. As a result, it was
agreed that PRIDE would assume the initial
and the majority of the operational costs of
these initiatives.
Management identified
these initiatives, isolated the costs and
adjusted the amount due from ITC.

Audit Finding #7
PRIDE has loaned/advanced funds to ITC
and its affiliates interest-free, without any
stated terms of repayment. Also, amounts
recorded in PRIDE’s financial records as
due from ITC and ITC affiliates have been
reduced by significant amounts for
reasons
that
were
sometimes
questionable.

We were unable to verify which PRIDE
initiatives were transferred to ITC (see Finding
#5) and which initiatives were re-assumed by
PRIDE. The validity of the reasons for the
reduction of receivables is questionable. We
noted:

Since the creation of ITC and its affiliates,
PRIDE has advanced funds to them for the
purpose of funding ITC initiatives. Currently,
there are no stated terms of repayment. The
related party receivables (amounts due from
ITC and its affiliates) that have been reported
in PRIDE’s financial statements are listed in
Figure 5.

•

The amounts shown for 2002 and 2003 are net
3

RISE became Labor Line, Inc, (LLI) and
Labor Line Service (LLS) which are both
currently subsidiaries of ITC.
RISE’s
mission to assist PRIDE inmates and the
mainstream population in finding jobs was
assumed by LLI. LLI generates income by

RISE (Renewed for Industries, Services and Employment) was a tax exempt organization established to provide job
placement and related services for ex-offenders and other underemployed persons. In addition, RISE organized a network
of services that enhance the participants’ ability to stay on the job. These services included support during the transition of
ex-offenders from prison to the community. The organization was supported by PRIDE through an operations agreement to
secure job placement for 400 PRIDE inmates upon their release.

15

Audit # 2004-4
Issue Date: February 28, 2005
providing temporary employment services
to hard-to-place individuals, such as low
income or under employed persons. ITC
staff estimates that approximately 60% of
the individuals on LLI’s staff available for
temporary employment are ex-offenders.
LLS assumed Rise’s second mission, which
was to provide transitional (from prison
back to the community) support to PRIDE
inmates upon their release from prison.
PRIDE pays a monthly fee to LLS for
providing this service for PRIDE inmates.
Currently, LLS provides services only to
former PRIDE inmates.
It appears that
Labor Line, Inc. and Labor Line Services,
not PRIDE, have assumed the RISE
initiative.
•

•

Neither
explanation
provides
justification for the 2002 reduction.

a

clear

2003 Reduction of Amount Due from ITC
The $4,106,546 reduction in 2003 related to
PRIDE’s pension obligations to ITC. PRIDE’s
2003 Annual Report indicates:
This obligation relates to the fact that
for the years ended December 31, 2002
and 2003, the defined benefit pension
plan was underfunded due to market
losses
and
changes
in
actuarial
assumptions. The obligation represents
PRIDE’s share of the additional pension
expense incurred by ITC.
It was
actuarially determined based on the
participation of PRIDE employees in the
plan, PRIDE employees account for
approximately
93%
of
the
total
obligation.
It was recognized by
reducing PRIDE’s receivable from ITC.

Global’s current mission is to establish
private enterprise partners that would
increase inmate jobs and provide inmate
training. The reduction in the amount owed
to PRIDE was related to organization and
process development costs for this purpose,
which appear to be directly related to the
mission of Global.

This transaction did not result in a decrease in
the amount by which the pension plan was
under funded; it simply shifted the obligation
from PRIDE to ITC.
Given ITC’s current
financial condition, concerns are raised as to
how they (ITC) will pay the obligation when it
becomes due.
As of June 30, 2004,
sponsorship of the defined benefit pension plan
has been transferred back to PRIDE. As a
result, the $4.1 million effectively paid by
PRIDE to ITC at December 31, 2003 for its
share of the unfunded pension liability must be
transferred back to PRIDE.
PRIDE staff
indicated that the appropriate accounting
entries have been drafted and will be included
in the accounting records and financial
statements for the fiscal year ended December
31, 2004.

DSM’s mission was to purchase and provide
services and products from and to minorityowned vendors and customers. ITC is a
40% shareholder in the company. As an
ITC initiative, it is unclear as to why this
company’s obligation to PRIDE was written
off rather than being assumed by ITC.

While PRIDE’s financial statements explained
the reduction in receivables as being a result of
PRIDE assuming responsibility for certain
initiatives, the information presented to the
Board for approval of the asset write downs
indicated a different reason. The information
provided to the Board indicated the reductions
were necessary because certain obligations
may have been over-valued given the market
conditions at the time. In order to reflect a
more conservative valuation, a write down was
recommended.
Board
minutes
and
corresponding documents did not provide an
explanation of how these project costs were
determined to be over-valued and how the
more conservative valuation amounts were
calculated. Minutes were not available from
meetings of the Finance Committee, which
should have been involved in this decision
making process.

Recommendation:
We recommend that the PRIDE Board
determine whether either of the explanations
for the 2002 accounts receivable reduction–
assumption of initiatives or adjustment for
overvaluation
of
assets
is
valid.
Documentation should be obtained from
management providing the details of the
transactions and the basis for the decision to
request the reduction. If it is determined that
the transaction, or any portion thereof, was not
16

Audit # 2004-4
Issue Date: February 28, 2005
valid, PRIDE should demand payment of the
invalid amount.

the criteria for deciding whether to continue or
discontinue support of the project.

In addition, if PRIDE chooses to continue its
relationship with ITC, documents should be
prepared to memorialize the bases on which
the decision was made to allow the $5,279,190
reduction in receivables.

Consider PRIDE’s relationship with Florida
Citrus Producers.
This entity is a recently
created affiliate of ITC that was established to
take over the operations of the citrus
processing operation in 2004 as Florida Citrus
Partners (FCP) was winding down operations
due to a legal dispute between ITC and its
partner. At the July 22, 2004 PRIDE Board
meeting, ITC indicated that it could no longer
manage and run the operation. PRIDE’s Board
Chairman indicated that since PRIDE owned
most of the FCP assets, a determination should
be made regarding taking over the operations
or allowing ITC to shut it down.
Per the
minutes, after significant discussion, the PRIDE
Board unanimously approved a $390,000 line
of credit to ITC for the continuation of Florida
Citrus Producers operation through December
2004. This decision was made without the
benefit of an investment policy, during a time
when PRIDE was experiencing immediate cash
flow problems and ITC’s ability to pay its
current receivable to PRIDE was doubtful. A
clearly defined investment plan outlining the
level of support PRIDE would provide to Florida
Citrus Producers or any other entity would
have provided some assurance that all risks
were considered and the decision made was
based on a proper consideration of those risks.
(Note:
At the September 16, 2004 Board
meeting, PRIDE management advised the
Board that PRIDE did not have the money to
fund the line of credit approved for Florida
Citrus Producers.
The Board unanimously
agreed to withdraw the line of credit extended
on July 22, 2004.)

For the 2003 write-down, the appropriate
PRIDE staff should monitor the proposed
accounting entry to ensure that it is properly
recorded at fiscal year end.
Audit Finding #8
Management had not established a policy
setting limits on the amount of funds that
can be used to support ITC and its
affiliates. The lack of such a policy has
resulted in significant advances being
made to ITC and its affiliates at the
expense of PRIDE’s financial welfare.
Risk assessment is the entity’s identification
and analysis of relevant risks to achieve its
objectives, forming a basis for determining how
risks should be managed. Such an assessment
should
have
been
made
by
PRIDE’s
management prior to recommending advances
to support the activities of ITC and its affiliates
and should have been reviewed by the PRIDE
Board prior to approving the advances
especially since PRIDE was concerned about its
own decreasing sales volume and revenues.
The PRIDE Board of Directors approved the use
of PRIDE resources to provide funding to ITC or
business ventures established by ITC. Criteria
for the basis of decisions relating to the
amounts advanced to the affiliates were not
provided for our examination. PRIDE did not
have an overall plan outlining the criteria
whereby PRIDE’s resources would be evaluated
and a determination made as to the specific
amount of venture capital that was available
for the new businesses. Such a plan should
include criteria that would be used as a basis
for approving or disapproving a specific funding
proposal, procedures for evaluating PRIDE’s
financial condition to determine the level of
funding that could be safely committed, the
balance to be achieved between profitability
and achievement of the societal mission and

Recommendation:
PRIDE should establish a financially sound
policy for evaluating all investments. Future
investment decisions should be firmly grounded
in a plan geared to attaining the projected
return on the investment.
Audit Finding #9
The amounts paid to PRIDE and ITC
executives
were
not
reasonable
considering
the
companies’
financial
condition.
17

Audit # 2004-4
Issue Date: February 28, 2005
ITC executives’ salaries greatly exceeded (and
in some cases were more than double) that
paid to the chief executives managing those
programs, including California, which generates
annual revenues of approximately $160 million.

In many ways, PRIDE and ITC function like
private sector businesses.
Private sector
practice would dictate that salary increases for
senior managers be based on operational
performance of the company. Given the recent
state of the economy, the decline in PRIDE and
ITC revenues and net assets, and in
comparison to the level of compensation
provided to managers in similar programs in
other states and not-for-profit organizations, it
appears that the amount of compensation
provided to some PRIDE and ITC executives is
excessive.

The Chairman of the Board approves the
salaries and bonuses for the executive
management team.
Accountability for the
results of decisions made which have adversely
affected the financial status of the entities
appears to be lacking.
Our review also disclosed that a supplemental
executive retirement plan was initiated by ITC
effective October 1, 2001.
The ITC plan
provided for supplemental retirement benefits
for senior managers. Ten years of service was
required to qualify for benefits. Benefits were
payable over a 15 year period calculated at
40% for 10 years of service, 45% for 11 years
but less than 16 years of service, 50% for 16
years but less than 20 years of service, and
60% for over 20 years of service.
These
amounts will be reduced by amounts received
from the defined benefit plan. Payments into
the supplemental retirement plan totaled
$357,226 as of June 30, 2004.
Currently,
ITC’s President/CEO and CFO and Global’s COO
qualify for this plan.

In performing our analysis of salary increases,
we made the assumption that an average
annual increase of 10% or less was reasonable.
That assumption is conservative and may be
too high relative to the declining financial
condition of the entities and the current U.S.
salary trends.
Using this assumption, the
salary increases (including bonuses) given to
some senior managers appeared to be
unreasonable.
From 1998 to 2004, the
increases given to PRIDE’s President and Vice
President
of
Operations
and
ITC’s
President/CEO and CFO averaged more than
14% annually. (See Exhibit 5.)
We
obtained
the
Association
Executive
Compensation and Benefits Study, Fourteenth
Edition, produced by the American Society of
Association Executives.
We used this
document to help assess the reasonableness of
the ITC President/CEO’s compensation. The
total compensation of the President/CEO falls
within the salary range for a CEO within a trade
association with a budget of $15 million or
more (the industry type of the organizations
within this category were not determinable).
However, in a separate analysis, we noted that
the total compensation paid to the ITC
President/CEO
exceeded
the
$245,250
maximum annual salary for CEOs surveyed in
the manufacturing category.
Based on our
review of information obtained from prison
industry programs in other states, PRIDE and

Recommendation:
We recommend that the PRIDE and ITC Boards
revisit their policies for calculating salary
increases and bonuses. Not only should the
attainment of operational goals (e.g., number
of products produced; meeting contract
deadlines, etc.) be considered but goals related
to the financial growth of the company should
also be included.
The attainment of those
goals and the company’s ability to pay should
be the basis for determining the amount of
salary increases given. Justification for the
supplemental executive retirement plan should
be documented.

This audit was conducted in accordance with the International Standards for the Professional Practice of Internal
Auditing, published by the Institute of Internal Auditors. This audit was conducted by Deette Preacher, CPA, P.A., an
independent contractor, and supervised by Kim Mills. Please address inquiries regarding this report to Kim Mills,
Director of Auditing, at (850) 922-4637.

18

Audit # 2004-4
Issue Date: February 28, 2005

EXHIBIT 1—PRIDE

AND

ITC BOARD

OF

DIRECTORS

PRIDE Board of Directors
(prior to December 31, 2004)
Maria Camila Leiva, Chairman
Pamela Davis, CEO (until July 22, 2004)
Jack Edgemon, Interim CEO
(as of September 29, 2004)
John F. Bruels, President
(until July 22, 2004)
Kenneth L. Mellem
Lawrence W. Hamilton
Marcelo A. Alvarez
William G. Dresser
Richard L. Hanas
Walter B. “Mike” Hill
James V. Crosby
Edward C. Peddie
Carol S. Spalding
Gwendolyn W. Stephenson
Derrick D. Wallace (until July 22, 2004)

ITC Board of Directors
(prior to December 31, 2004)
Randall L. May, Chairman
Pamela Davis, President/CEO
Maria Camilla Leiva (until December 16,2004)
Kenneth Mellem (until December 22, 2004)
Lawrence Hamilton (until December 31, 2004)
Marcelo Alvarez (until December 17, 2004)
Cecilia Bryant
R. Ray Goode
James E. Huff
Roy Harrell, General Counsel

19

Audit # 2004-4
Issue Date: February 28, 2005

EXHIBIT 2—KEY EMPLOYEES, PRIDE, ITC

PRIDE, Inc.

Date
Filed*
12/14/81

ITC

4/22/99

Labor Line
Services,
Inc.
Labor Line,
Inc.
Florida Citrus
Partners,
LLC
Florida Citrus
Producers,
Inc.
Diversified
Supply Mgt,
Inc.
Northern Outfitters
Global Outsourcing,
Inc.
Global Reman
Services,
Inc.

1/18/96

Mike
Smith
CFO

Mike
Jouret

P/CEO,
D
CEO,
D

VP,
CFO
T

IA

T

7/8/99

CEO,
D
Mgr

6/10/04

D

6/6/02

D

9/13/99

Pamela
Davis
CEO **

AND

Mike
Harrell

AFFILIATES—1999-2004

Jack Edgemon
VP – Ops.,
Interim
CEO **

Bea Battistoni

Bob
Bury

Esther
Knightly
AS****
S
S

VP

S

Mgr
Mgr

D

AT

AS

11/4/93

P

1/5/99

CEO,
D

6/10/04

D

T

COO

S

Legend
CEO ....................................Chief Executive Officer
CFO......................................Chief Financial Officer
COO ....................................Chief Operating Officer
P .................................................................President
VP ..................................................... Vice President
IA ....................................................Internal Auditor

T ................................................................ Treasurer
Mgr............................................................. Manager
D.................................................................. Director
S ................................................................ Secretary
A.................................................................Assistant

Note: Excluding Northern Outfitters, the Department of State, Div. Of Corp. database lists all organizations
above as Active and the principal and mailing addresses for all organizations are 12425 28th St. North;
Suite 103; St. Petersburg, Florida 33716.
*

**
***
****

Date corporation documents filed with Department of State, Division of Corporations.
Ms. Davis served as CEO until July 22, 2004. Mr. Edgemon was appointed as Interim CEO, effective
September 29, 2004.
Mr. Smith served as CFO until November 30, 2004.
Ms. Knightly served as Assistant Secretary until May 2003.
20

Audit # 2004-4
Issue Date: February 28, 2005

EXHIBIT 3—PRIDE RATIO ANALYSES
PRIDE’s Ratio Analysis at
December 31, 2003

PRIDE’s Ratio

Quick Ratio

.68:1

Current Ratio

1.7:1

Current Liabilities to Net
Worth Ratio
Total Liabilities to Net
Worth Ratio (Debt to Equity)
Fixed Assets to Net Worth

38%

AS OF

DECEMBER 31, 2003

Standard Ratio
Greater than 1:1 is
desirable
2:1 or higher

Favorable/
Unfavorable
Unfavorable
Unfavorable

50% or less is desirable
Not to exceed 100%

Favorable

67%

75% or less

Favorable

37 days

40 days or less

Favorable

Assets to Sales Ratio

59%

Favorable

Sales to Net Working Capital Ratio
Accounts Payable to Sales
Ratio
Return on Sales

9.11
6.41%

Greater than 25%,
lower than 75%
Less than or equal to
11
8.5% or lower

-3.35%

Should be positive

Favorable for
12/31/03
Unfavorable

Return on Assets

-5.64%

Should be positive

Unfavorable

-8.41

Should be positive

Unfavorable

12.8%

33% manufacturing
& 82% for services.
Combined weighted
average 60%
Range from 18% to
43%
61% to 87.5%. Combined weighted average 76.6%

Unfavorable

Collection Period Ratio

Return on Net Worth
Gross Margin Percentage

Operating Expenses as a
Percentage of Sales
Total Expenses as a Percentage of Sales

Approximately
50%

13%
103.3%

Favorable

Favorable

Favorable
Unfavorable

PRIDE’s ratio analyses are as follows:
Quick Ratio: Unfavorable - A solvency ratio that measures the extent to which a
business can cover its current liabilities with those current assets readily
convertible to cash, a ratio greater than 1:1 is desirable.4 PRIDE’s ratio of
68% or (.68:1) at December 31, 2003 shows that the company is not in a
liquid position and may have difficulties in meeting its current obligations
without further leveraging or selling off of property and equipment. PRIDE has
not been considered in a liquid position since December 31, 1999.

4

Source—American Express Small Business Resources Understanding Financial Ratios

21

Audit # 2004-4
Issue Date: February 28, 2005
Current Ratio: Unfavorable - A solvency ratio that measures the degree to which
current assets cover current liabilities. The higher the ratio, the more likely the
company will be able to meet its liabilities. A ratio of 2:1 or higher is
standard.5 PRIDE’s current ratio is 1.7:1 and has not been over 2:1 since
December 31, 2000.
Current Liabilities to Net Worth Ratio: Favorable – A solvency ratio that
indicates the amount due creditors within a year as a percentage of the net
assets or net worth. A ratio less than or equal to 50% is desirable and
according to Dun & Bradstreet,6 a business starts to have trouble when this
relationship exceeds 80%. For PRIDE this ratio at December 31, 2003 is 38%
and has never exceeded 50%.
Total Liabilities to Net Worth Ratio (Debt to Equity): Favorable – A solvency
ratio that shows how all of the company’s debt relates to the equity or net
assets. The higher this ratio, the less protection there is for creditors.
Generally, this ratio should not exceed 100% because at this point creditors
would have more at stake than owners. PRIDE’s ratio is approximately 50% at
December 31, 2003, total liabilities have never exceeded net worth.
Fixed Assets to Net Worth: Favorable – A solvency ratio that shows the
percentage of assets centered in fixed assets compared to total equity.
According to Dun & Bradstreet,7 the higher this percentage is over 75%, the
more vulnerable a concern becomes to unexpected hazards and business
climate changes. Capital is frozen in the form of property and equipment and
the margin for operating funds becomes too narrow to support day-to-day
operations. For PRIDE, this ratio was 67% and has never exceeded 75%.
Collection Period Ratio: Favorable – An efficiency ratio that is helpful in analyzing
the collectibility of accounts receivable, or how fast a business can increase its
cash supply. For PRIDE, the collection period has been approximately 37 days
for the last three years. Generally, where most sales are for credit, any
collection period more than one-third over normal selling terms (40 for 30-day
terms) is indicative of some slow-turning receivables.
Because PRIDE
operates in multiple industries a general collection period of 37 days indicates
no slow turning accounts receivable.
Assets to Sales Ratio: Favorable – An efficiency ratio that rates sales to the total
investment that is used to generate those sales. This ratio ties in sales and the
total investment that is used to generate those sales. Abnormally low
percentages (above the upper quartile) can indicate overtrading, which may
lead to financial difficulties if not corrected. Extremely high percentages
(below the lower quartile) can be the result of overly conservative or poor
sales management, indicating a more aggressive sales policy may need to be
followed.8 PRIDE’s assets to sales ratio is 59% on December 31, 2003 and
indicates no issues.

5
6
7
8

Source—American Express Small Business Resources Understanding Financial Ratios
Source—Dun & Bradstreet—Fourteen Key Business Ratios
Source—Dun & Bradstreet—Fourteen Key Business Ratios
Source—Dun & Bradstreet—Fourteen Key Business Ratios

22

Audit # 2004-4
Issue Date: February 28, 2005
Sales to Net Working Capital Ratio: Favorable – An efficiency ratio that
measures the number of times working capital turns over annually in relation
to net sales. This relationship indicates whether a company is overtrading or
conversely carrying more liquid assets than needed for its volume. PRIDE’s
sales to working capital ratio is 9.11 times. An average range of annual sales
to net working capital listed as 11.0 and under as measured by insurance
industry analysts.9 A high turnover may indicate that the business relies
extensively upon credit granted by suppliers or the bank as a substitute for an
adequate margin of operating funds.
Accounts Payable to Sales Ratio: Favorable – An efficiency ratio that measures
how the company pays its suppliers in relation to the sales volume being
transacted. For PRIDE this ratio was 6.41% as of December 31, 2003. A low
percentage would indicate that the entity generally pays its suppliers when
bills are due. Whereas a higher percentage would indicate that the entity may
be using suppliers to help finance operations. PRIDE appears to have a ratio
indicating that its suppliers are being paid on time or within 23 days (6.41% *
365 days). This may not be indicative of the daily account balances during the
fiscal year.
Return on Sales: Unfavorable – A profitability ratio that measures profits after
taxes on the year’s sales (profits earned per dollar of sales). PRIDE’s return on
sales was –3.35% for the year ended December 31, 2003 and since 1999 has
averaged –3.43%, therefore no return on sales has been recognized.
Return on Assets: Unfavorable – A profitability ratio that is the key indicator of
profitability according to Dunn & Bradstreet.10 PRIDE’s return on assets for the
year ended December 31, 2003 was –5.64% and since 1999 has averaged
–4.85%, again showing no return.
Return on Net Worth: Unfavorable – A profitability ratio that measures the ability
of a company’s management to realize an adequate return on the capital
invested. PRIDE’s return on net worth for the year ended December 31, 2003
was –8.41 and has averaged -7.00 percent since 1999, again showing no
return.
Gross Margin Percentage: Unfavorable – A profitability ratio that measures gross
profit as a percentage of sales. For PRIDE this percentage was 12.8% as of
December 31, 2003 and averaged 11.1% for all years since 1999 indicating a
very slim gross margin. When compared to a composite of businesses with
similar product mixes,11 these businesses had a gross margin percentage of
ranging from 33% for manufacturing to 82% for service businesses and a
weighted average of 60% based on the same proportion of sales as PRIDE.
Operating Expenses as a Percentage of Sales: Favorable – A profitability ratio
that measures operating expenses as a percentage of sales. This ratio for
PRIDE was 13.0% for the year ended December 31, 2003. The average for all
years since 1999 was 13.4% indicating very low operating expenses. A
composite of business with similar product mixes,12 shows these businesses
had operating expenses ranging between 18% and 43% of sales.
9

Source—Surety Company of the Pacific Ratio Table
Source—Dun & Bradstreet—Fourteen Key Business Ratios
11
Source—BizStats.com—Average Profitability and Expense Percentages for U.S. Small Businesses
12
Source—BizStats.com—Average Profitability and Expense Percentages for U.S. Small Businesses
10

23

Audit # 2004-4
Issue Date: February 28, 2005
Total Expenses as a Percentage of Sales: Unfavorable – A profitability ratio that
measures total expenses as a percentage of sales. This ratio for PRIDE was
103.3% of sales and averaged 104.2% since 1999, indicating a serious and
chronic profitability issue. Compared to a composite of businesses with similar
product mixes13 that show the total expenses ranged from 61% to 87.5% and
a weighted average of 76.6% for these businesses.

13

Source—BizStats.com—Average Profitability and Expense Percentages for U.S. Small Businesses

24

Audit # 2004-4
Issue Date: February 28, 2005

EXHIBIT 4—ITC RATIO ANALYSES

ITC’s Ratio Analysis at
December 31, 2003

ITC’s Ratio

Quick Ratio

1:1

Current Liabilities to Net
Worth Ratio
Total Liabilities to Net
Worth Ratio (Debt to
Equity)
Fixed Assets to Net Worth
Collection Period Ratio

-78%

Unfavorable
Unfavorable

-35%

75% or less

Unfavorable

Avg 61 days

40 days or less

Unfavorable

45%

Favorable

No working
Capital
2.31%

Greater than 25%,
Less than 75%
Less than or equal
to 11
8.5% or lower

Unfavorable

-2.98%

Should be positive

Unfavorable

-1.27

Should be positive

Unfavorable

No history of any
returns on
investments

Should be positive

Unfavorable

-256%

Return on Assets
Return on Net Worth

Greater than 1:1
desirable
2:1 or higher

Favorable/
Unfavorable
Unfavorable

50% or less is
desirable
Not to exceed
100%

Assets to Sales Ratio
Sales to Net Working
Capital Ratio
Accounts Payable to Sales
Ratio
Return on Sales

DECEMBER 31, 2003

Standard Ratio

.75:1

Current Ratio

AS OF

Unfavorable

Favorable

ITC’s ratio analyses are as follows:
Quick Ratio: Unfavorable - A solvency ratio that measures the extent to which a
business can cover its current liabilities with those current assets readily
convertible to cash, a ratio greater than 1:1 (100%) is desirable.14 ITC’s ratio
of 75% (.75:1) at December 31, 2003 shows that the company is not in a
liquid position and may not be able to pay its current liabilities. ITC has not
been considered liquid since December 31, 2000.
Current Ratio: Unfavorable - A solvency ratio that measures the degree to which
current assets cover current liabilities. The higher the ratio, the more likely the
company will be able to meet its liabilities. A ratio of 2:1 (200%) or higher is
desirable.15 ITC’s current ratio is nearly 1:1 and has not been over 2:1 since
December 31, 1999.
Current Liabilities to Net Worth Ratio: Unfavorable - A solvency ratio that
indicates the amount due creditors within a year as a percentage of the net
assets. According to Dun & Bradstreet,16 a business starts to have trouble
when this relationship exceeds 80%. For ITC this ratio at December 31, 2003
is -78% and has never exceeded 50%.
14
15
16

Source—American Express Small Business Resources Understanding Financial Ratios
Source—American Express Small Business Resources Understanding Financial Ratios
Source—Dun & Bradstreet—Fourteen Key Business Ratios

25

Audit # 2004-4
Issue Date: February 28, 2005
Total Liabilities to Net Worth Ratio: Unfavorable - A solvency ratio that shows
how all of the company’s debt relates to the equity or net assets. The higher
this ratio, the less protection there is for creditors. ITC’s ratio is approximately
–256% at December 31, 2003, net worth has never exceeded total liabilities.
Fixed Assets to Net Worth: Unfavorable - A solvency ratio that shows the
percentage of assets centered in fixed assets compared to total equity.
According to Dun & Bradstreet,17 the higher this percentage is over 75%, the
more vulnerable a concern becomes to unexpected hazards and business
climate changes. Capital is frozen in the form of property and equipment and
the margin for operating funds becomes too narrow to support day-to-day
operations. For ITC, this ratio was -35% and was at 74% at December 31,
2000 but has never exceeded 75%.
Collection Period Ratio: Unfavorable - An efficiency ratio that is helpful in
analyzing the collectibility of accounts receivable, or how fast a business can
increase its cash supply. For ITC, the collection period averages 61 days.
Generally, where most sales are for credit, any collection period month than
one-third over normal selling terms (40 for 30-day terms) is indicative of
some slow-turning receivables. ITC appears to have slow-turning receivables.
This may indicate that ITC may have accounts receivable that are uncollectible
or that ITC grants terms in excess of 30 days.
Assets to Sales Ratio: Favorable - An efficiency ratio that rates sales to the total
investment that is used to generate those sales. This ratio ties in sales and the
total investment that is used to generate those sales. Abnormally low
percentages (above the upper quartile) can indicate overtrading, which may
lead to financial difficulties if not corrected. Extremely high percentages
(below the lower quartile) can be the result of overly conservative or poor
sales management, indicating a more aggressive sales policy may need to be
followed.18 ITC’s assets to sales ratio are 45% on December 31, 2003 and
indicates no issues.
Sales to Net Working Capital Ratio:Unfavorable – An efficiency ratio that
measures the number of times working capital turns over annually in relation
to net sales. Should be viewed in conjunction with the assets to sales ratio.
ITC’s sales to working capital ratio is over extraordinarily high because it has
virtually no working capital at December 31, 2003.
Accounts Payable to Sales Ratio: Favorable - An efficiency ratio that measures
how the company pays its suppliers in relation to the sales volume being
transacted. For ITC this ratio was 2.31% as of December 31, 2003. A low
percentage would indicate a healthy ratio. A high percentage indicates the firm
may be using suppliers to help finance operations.
Return on Sales: Unfavorable - A profitability ratio that measures profits after
taxes on the year’s sales (profits earned per dollar of sales). ITC’s return on
sales for the year ended December 31, 2003 was –2.98% and since 1999 has
averaged –8.57%, therefore no return on sales has ever been recognized.

17
18

Source—Dun & Bradstreet—Fourteen Key Business Ratios
Source—Dun & Bradstreet—Fourteen Key Business Ratios

26

Audit # 2004-4
Issue Date: February 28, 2005
Return on Assets: Unfavorable - A profitability ratio that is the key indicator of
profitability according to Dun & Bradstreet.19 ITC’s return on assets for the
year ended December 31, 2003 was –1.27% and the average since 1999 has
been –12.87%, again showing no return.
Return on Net Worth: Unfavorable - A profitability ratio that measures the ability
of a company’s management to realize an adequate return on the capital
invested. ITC has never provided a return on investment.

19

Source—Dun & Bradstreet—Fourteen Key Business Ratios

27

Audit # 2004-4
Issue Date: February 28, 2005

EXHIBIT 5—SALARY

PROGRESSION FOR

KEY PRIDE

AND

ITC EMPLOYEES—1999-2003

300,000

280,000

$275,573.66
$262,975.78

260,000

240,000

$238,200.71
$231,542.87

220,000

200,000

$195,987.51

180,000

$175,711.02

$170,223.50
$161,538.00

160,000

$164,230.78

$151,342.33
140,000

$141,317.48

$139,916.18

120,000

$114,995.00

$113,122.08

$144,849.43

$110,708.01

100,000
1999

2000

Davis

2001

Smith

2002

Bruels

2003

Edgemon

Note 1: The amounts shown are total compensation consisting of salary and bonuses.
Note 2: The 2001 salary shown for Bruels (PRIDE’s President) is annualized based on his actual salary for the
period August 1, 2001 (employment date) through December 31, 2001.

28