<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended October 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to _______
Commission file number 1-5450
THE WACKENHUT CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-0857245
- --------------------------------------------------------------------------------
(State of incorporation or organization) (I.R.S. Employer Identification No.)
4200 Wackenhut Drive #100, Palm Beach Gardens, FL 33410-4243
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (561) 622-5656
- --------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF
CHANGED SINCE LAST REPORT.
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 [ ]
At November 8, 1999, 3,855,582 shares of Series A were issued and outstanding
and 11,111,149 shares of Series B of the registrant's Common Stock were
outstanding after deducting 201,492 shares held in treasury.
Page 1 of 27
<PAGE> 2
THE WACKENHUT CORPORATION AND SUBSIDIARIES
------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following consolidated financial statements of The Wackenhut Corporation and
subsidiaries (the "Company") have been prepared in accordance with the
instructions to Form 10-Q and therefore, omit or condense certain footnotes and
other information normally included in financial statements prepared in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the financial information for the interim
periods reported have been made. Results of operations for the thirty-nine weeks
ended October 3, 1999 are not necessarily indicative of the results for the
entire fiscal year ending January 2, 2000.
Page 2 of 27
<PAGE> 3
THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED
OCTOBER 3, 1999 and SEPTEMBER 27, 1998
(In millions except per share data)
UNAUDITED
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------- ----------------------------
1999 1998 1999 1998
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 547.5 $ 438.4 $ 1,577.9 $ 1,253.7
---------- ------------ ------------ ------------
OPERATING EXPENSES:
Payroll and related taxes 432.7 339.9 1,246.2 979.2
Other operating expenses 98.1 85.9 287.2 238.6
Depreciation expense 2.5 1.4 7.4 5.3
Amortization expense 3.3 2.5 9.3 7.2
---------- ------------ ------------ ------------
536.6 429.7 1,550.1 1,230.3
---------- ------------ ------------ ------------
OPERATING INCOME 10.9 8.7 27.8 23.4
---------- ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and investment income 1.3 1.3 3.5 3.1
Interest expense (1.5) (0.3) (3.7) (1.7)
---------- ------------ ------------ ------------
(0.2) 1.0 (0.2) 1.4
---------- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 10.7 9.7 27.6 24.8
Provision for income taxes (4.3) (3.7) (11.0) (9.8)
Minority interest, net of income taxes (2.7) (2.3) (7.7) (6.2)
Equity income of affiliates, net of income
taxes of $1.1, $0.5, $3.4, and $1.5 1.7 0.7 5.2 2.1
---------- ------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 5.4 4.4 14.1 10.9
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- -- -- (6.6)
---------- ------------ ------------ ------------
NET INCOME $ 5.4 $ 4.4 $ 14.1 $ 4.3
========== ============ ============ ============
Earning per share - basic
Income before cumulative effect of change $ 0.36 $ 0.30 $ 0.94 $ 0.73
in accounting principle
Cumulative effect of change in accounting principle -- -- -- (0.44)
---------- ------------ ------------ ------------
Net Income - basic $ 0.36 $ 0.30 $ 0.94 $ 0.29
========== ============ ============ ============
Earning per share - diluted
Income before cumulative effect of change $ 0.35 $ 0.29 $ 0.92 $ 0.72
in accounting principle
Cumulative effect of change in accounting principle -- -- -- (0.44)
---------- ------------ ------------ ------------
Net Income - diluted $ 0.35 $ 0.29 $ 0.92 $ 0.28
========== ============ ============ ============
Basic weighted average shares outstanding 15.0 14.9 14.9 14.9
Diluted weighted average shares outstanding 15.2 15.1 15.1 15.2
</TABLE>
See notes to unaudited consolidated financial statements
Page 3 of 27
<PAGE> 4
THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 3, 1999 AND JANUARY 3, 1999
(In millions)
UNAUDITED
<TABLE>
<CAPTION>
October 3, January 3,
1999 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 43.5 $ 43.5
Accounts receivable, less allowance for doubtful accounts
of $5.9 at October 3, 1999, and $4.7 at January 3, 1999 (note 6) 173.6 167.8
Inventories 15.9 14.5
Deferred taxes 7.7 7.4
Prepaids 8.8 10.2
Other 14.0 11.4
-------- --------
263.5 254.8
-------- --------
MARKETABLE SECURITIES of casualty reinsurance subsidiary 20.5 18.5
-------- --------
PROPERTY AND EQUIPMENT, at cost 80.4 76.2
Accumulated depreciation (25.8) (19.6)
-------- --------
54.6 56.6
-------- --------
DEFERRED TAXES 8.6 12.2
-------- --------
OTHER ASSETS:
Intangibles 56.9 56.0
Investment in and advances to affiliates, at cost 46.6 36.7
Other 14.1 14.0
-------- --------
117.6 106.7
-------- --------
$ 464.8 $ 448.8
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
Page 4 of 27
<PAGE> 5
THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 3, 1999 AND JANUARY 3, 1999
(In millions except share data)
UNAUDITED
<TABLE>
<CAPTION>
October 3, January 3,
1999 1999
----------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 3.5 $ 4.4
Accounts payable 35.2 36.4
Accrued payroll and related taxes 64.7 70.0
Accrued expenses 46.6 53.6
-------- --------
150.0 164.4
RESERVES FOR LOSSES of casualty reinsurance subsidiary 60.1 50.8
-------- --------
LONG-TERM DEBT 8.4 3.4
-------- --------
DEFERRED REVENUES 16.1 16.7
-------- --------
OTHER 18.7 16.7
-------- --------
MINORITY INTEREST 51.6 47.6
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, 10 million shares authorized -- --
Common stock, $.10 par value, 50 million shares authorized:
Series A common stock, 3.9 million issued and outstanding 0.4 0.4
Series B common stock, 11.1 million issued and outstanding 1.1 1.1
Additional paid-in capital 124.8 125.5
Retained earnings 45.5 32.5
Accumulated other comprehensive loss (8.8) (7.3)
Treasury stock at cost, 0.2 million shares of Series B (3.1) (3.0)
-------- --------
159.9 149.2
-------- --------
$ 464.8 $ 448.8
======== ========
</TABLE>
See notes to unaudited consolidated financial statements
Page 5 of 27
<PAGE> 6
THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 3, 1999 AND SEPTEMBER 27, 1998
(In millions)
UNAUDITED
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net Income $ 14.1 $ 4.3
Adjustments -
Cumulative effect of change in accounting change principle -- 6.6
Depreciation expense 7.4 5.3
Amortization expense 3.4 2.5
Uniform amortization 5.9 4.7
Provision for bad debts 0.8 1.3
Equity income, net of dividends (7.1) (3.5)
Minority interests in net income 12.9 10.2
Other 0.5 (0.4)
(Increase) decrease in assets:
Accounts receivable (28.6) (12.5)
Inventories (7.3) (7.9)
Prepaid expense 1.4 (5.5)
Other current assets (2.7) (4.8)
Deferred taxes 3.9 (7.5)
Other (5.7) (4.3)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (9.9) 11.5
Accrued payroll and related taxes (5.2) (4.9)
Reserve for losses of casualty reinsurance subsidiary 9.3 3.4
Deferred revenue (0.6) --
Other 2.0 --
------- -------
Net Cash Used In Operating Activities $ (5.5) $ (1.5)
------- -------
</TABLE>
See notes to unaudited consolidated financial statements.
Page 6 of 27
<PAGE> 7
THE WACKENHUT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 3, 1999 AND SEPTEMBER 27, 1998
(In millions)
UNAUDITED
(Continued)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Net proceeds from sale of prison facilities to CPV (note 8) $ 22.3 $ 41.8
Investment in and advances to affiliates and joint ventures (3.6) (2.1)
Capital expenditures (27.7) (14.8)
Sales of marketable securities 6.0 6.6
Purchases of marketable securities (9.9) (21.8)
Non-current assets 1.3 (5.4)
-------- --------
Net Cash (Used in) Provided by Investing Activities (11.6) 4.3
-------- --------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Purchase of Treasury Stock -- (0.2)
Proceeds from exercise of stock options 1.1 0.9
Net proceeds from exercise of stock options of subsidiary 0.2 1.2
Proceeds from issuance of debt 228.0 206.8
Payments on debt (223.9) (216.3)
Purchase of treasury stock by subsidiary (7.9) (3.8)
Proceeds from sales of accounts receivable 22.0 25.0
Dividends paid (2.2) (3.4)
-------- --------
Net Cash Provided By Financing Activities 17.3 10.2
-------- --------
Effect of Exchange Rate Changes on Cash (0.2) (2.5)
-------- --------
Net increase in Cash and Cash Equivalents -- 10.5
Cash and Cash Equivalents, at beginning of period 43.5 45.2
-------- --------
Cash and Cash Equivalents, at end of period $ 43.5 $ 55.7
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 4.4 $ 1.6
Income taxes $ 10.1 $ 14.9
</TABLE>
See notes to unaudited consolidated financial statements.
Page 7 of 27
<PAGE> 8
THE WACKENHUT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. GENERAL
The consolidated financial statements of the Company are unaudited and, in the
opinion of management, include all adjustments necessary to fairly present the
Company's financial condition, results of operations and cash flows for the
interim period. The results for the thirty-nine weeks ended October 3, 1999 are
not necessarily indicative of the results of operations to be expected for the
full year. These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended January 3, 1999. Certain prior year amounts have been
reclassified to conform with current year presentation. The Company's
subsidiary, Wackenhut Corrections Corporation ("WHC"), is listed on the New York
Stock Exchange as "WHC."
2. INVESTMENT IN AFFILIATES
Equity in undistributed earnings of affiliates approximated $20.3 million and
$14.0 million at October 3, 1999 and January 3, 1999, respectively, and is
included in "Investment in and advances to affiliates" in the accompanying
consolidated balance sheets. The following is a summary of condensed unaudited
financial information pertaining to affiliates (dollars in millions):
<TABLE>
<CAPTION>
October 3, January 3,
Balance sheet items: 1999 1999
---------- ---------
<S> <C> <C>
Current assets $ 130.2 $ 95.4
Non-current assets 61.9 49.1
Current liabilities 90.7 63.4
Non-current liabilities 34.4 33.3
Minority interest liability 4.8 6.5
October 3, September 27,
Income statement items for the thirty-nine weeks ended: 1999 1998
---------- -------------
Revenues $ 439.6 $ 172.3
Operating income 25.9 12.5
Net income before taxes 22.5 10.9
</TABLE>
Page 8 of 27
<PAGE> 9
3. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS
No. 130"), "Reporting Comprehensive Income", effective January 3, 1999. SFAS No.
130 establishes standards for reporting and displaying comprehensive income and
its components in financial statements. The components of the Company's
comprehensive income are as follows (dollars in millions):
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
------------------------- --------------------------
October 3, September 27, October 3, September 27,
1999 1998 1999 1998
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Net income $ 5.4 $ 4.4 $ 14.1 $ 4.3
Unrealized gain (loss) on marketable securities, net of income
tax benefits (expense) of $0.4, $(0.1), $0.8 and none
for the thirteen weeks and thirty-nine weeks ended
October 3, 1999 and September 27, 1998, respectively (0.6) 0.1 (1.2) --
Foreign currency translation adjustments, net of income
tax benefits (expense) of $(0.3), $0.2, $0.2 and $1.1
for the thirteen weeks and thirty-nine weeks ended
October 3, 1999 and September 27, 1998, respectively 0.5 (0.2) (0.2) (1.7)
------- ------- -------- -------
Comprehensive Income $ 5.3 $ 4.3 $ 12.7 $ 2.6
======= ======= ======== =======
</TABLE>
4. INTANGIBLES
Intangibles at October 3, 1999 and January 3, 1999 consisted of the following
(dollars in millions):
1999 1998
--------- --------
Goodwill $ 47.4 $ 45.2
Contract value 15.6 15.6
Other 4.2 3.2
--------- --------
67.2 64.0
Accumulated amortization (10.3) (8.0)
--------- --------
$ 56.9 $ 56.0
========= ========
Page 9 of 27
<PAGE> 10
5. INCOME TAXES
The combined Federal and state effective income tax rate was 39.8% for the first
thirty-nine weeks of 1999 and 39.7% for the first thirty-nine weeks of 1998.
6. LONG TERM DEBT
Long-term debt consists of the following (dollars in millions):
<TABLE>
<CAPTION>
October 3, January 3,
1999 1999
--------- ----------
<S> <C> <C>
Revolving loan - 6.1% and 5.4%, respectively $ 6.7 $ 1.8
Lease obligation payable in installments through 2004
at a weighted average rate of 4.5% 1.7 1.8
Other 3.5 4.2
--------- ----------
Total 11.9 7.8
Less current portion (3.5) (4.4)
--------- ----------
Total $ 8.4 $ 3.4
========= ==========
</TABLE>
In December 1997, the Company entered into a three-year agreement to sell, on an
ongoing basis, an undivided interest in a defined pool of eligible receivables
up to a maximum of $60 million. In February 1999, the Company amended the
agreement to increase the eligible receivables to a maximum of $75 million. The
costs associated with this program are based upon the purchasers' level of
investment and the cost of issuing commercial paper plus predetermined fees.
Such costs are included in "Interest expense" in the consolidated statements of
income. There were $75.0 million and $53.0 million accounts receivable sold
under this agreement at October 3, 1999 and January 3, 1999, respectively.
In September 1999, the Company modified its bank agreements to increase its
available borrowings by $30.0 million. As of October 3, 1999, the total amount
available to the Company from its revolving credit and accounts receivable
securitization facility was $61.7 million.
The Company has a demand operating line of credit with a Canadian bank with a
maximum borrowing amount of $2.1 million. The Company has short-term borrowings
under this line of credit of $1.6 million and $1.0 million at October 3, 1999
and January 3, 1999, respectively, for working capital purposes, bearing
interest at the bank's prime lending rate of 6.8%. The Company had outstanding
notes payable and operating lines of credit of $1.9 million and $2.9 million at
October 3, 1999 and January 3, 1999, respectively, to meet working capital needs
of its international subsidiaries.
The long-term portion of the capital lease obligation maturing during each of
the four years after 1999 is $0.8 million, $0.4 million, $0.4 million and $0.1
million, respectively. All other long-term debt matures in 2000.
Page 10 of 27
<PAGE> 11
7. EARNINGS PER SHARE
The table below shows the amounts used in computing earnings per share and the
effects on income and the weighed average number of shares of potential dilutive
common stock (in millions except for per share amounts).
PN 11
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-----------------------------
October 3, September 27,
1999 1998
------------ -------------
<S> <C> <C>
Basic
Net Income $ 5.4 $ 4.4
-------- --------
Weighted average common shares outstanding 15.0 14.9
-------- --------
Basic earnings per share $ 0.36 $ 0.30
-------- --------
Diluted
Net Income $ 5.4 $ 4.4
Effect of Wackenhut Corrections Stock Options (0.1) --
-------- --------
Net Income $ 5.3 $ 4.4
-------- --------
Weighted average common shares outstanding 15.0 14.9
Assumed exercise of stock options, net of common
shares assumed repurchased with the proceeds 0.2 0.2
-------- --------
Adjusted weighted average common shares outstanding 15.2 15.1
-------- --------
Diluted earnings per share $ 0.35 $ 0.29
-------- --------
</TABLE>
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-------------------------
October 3, September 27,
1999 1998
----------- ------------
<S> <C> <C>
Basic
Net Income $ 14.1 $ 4.3
-------- --------
Weighted average common shares outstanding 14.9 14.9
-------- --------
Basic earnings per share $ 0.94 $ 0.29
-------- --------
Diluted
Net Income $ 14.1 $ 4.3
Effect of Wackenhut Corrections Stock Options (0.2) --
-------- --------
Net Income $ 13.9 $ 4.3
-------- --------
Weighted average common shares outstanding 14.9 14.9
Assumed exercise of stock options, net of common
shares assumed repurchased with the proceeds 0.2 0.3
-------- --------
Adjusted weighted average common shares outstanding 15.1 15.2
-------- --------
Diluted earnings per share $ 0.92 $ 0.28
-------- --------
</TABLE>
Options to purchase 311,100 shares of common stock at October 3, 1999, and
315,000 at September 27, 1998, were excluded from the diluted earnings per share
calculation as their impact would have been antidilutive.
Page 11 of 27
<PAGE> 12
8. SALE OF FACILITIES TO CORRECTIONAL PROPERTIES TRUST
In January 1999, WHC sold to Correctional Properties Trust ("CPV") one facility
and its right to acquire one facility for $66.1 million resulting in net
proceeds to WHC of $22.3 million. Simultaneous with these purchases, WHC entered
into ten-year operating leases of the facilities from CPV. These properties
require initial annual lease payments of $6.3 million and include annual
increases for changes in the consumer price index with minimum increases of 3%
for each of the following two years.
9. TREASURY STOCK
The Board of Directors of the Company and of Wackenhut Corrections authorized
the repurchase, at the discretion of each company's senior management, of up to
0.5 million shares of Series B common stock and 0.5 million shares of Wackenhut
Corrections common stock, respectively. The Company's repurchases of shares of
common stock are recorded as treasury stock and result in a reduction of
stockholders' equity. Wackenhut Corrections' repurchases of shares of common
stock are recorded as a reduction to additional paid-in capital and minority
interest. As of January 3, 1999, the Company had bought back 196,400 shares of
the Company's Series B common stock at an average price of $15.48 per share, and
Wackenhut Corrections purchased 453,500 shares of Wackenhut Corrections common
stock, during 1998, at an average price of $19.52 per share. In February 1999,
the Board of Directors of Wackenhut Corrections authorized, in addition to that
previously authorized, the repurchase of up to 0.5 million shares of its common
stock. From January 4, 1999 to October 3, 1999, WHC had repurchased an
additional 424,500 shares of its common stock at an average price of $18.72 per
share.
Page 12 of 27
<PAGE> 13
10. BUSINESS SEGMENTS
The Company's principal segments are grouped based on similarity of business
services provided and the type of customer for which these services are offered.
These services consist of security services, correctional services and flexible
staffing services. The Company is a major provider of business services
including security-related and other support services to business and
government, a leading developer and manager of privatized correctional and
detention facilities, and a provider of employee leasing and temporary staffing.
Intersegment transactions are accounted for on an arms-length basis and are
eliminated in consolidation. Direct general and administrative expenses are
allocated based on usage.
<TABLE>
<CAPTION>
October 3, September 27,
1999 1998
---------- -------------
<S> <C> <C>
(dollars in millions)
Revenues:
Security services $ 768.6 $ 688.3
Correctional services 315.5 224.1
Staffing services 493.8 341.3
---------- ----------
Total revenues $ 1,577.9 $ 1,253.7
========== ==========
Operating Income:
Security services $ 19.2 $ 17.3
Correctional services 20.3 17.5
Staffing services 2.5 1.7
Unallocated corporate expenses (14.2) (13.1)
---------- ----------
Total operating income $ 27.8 $ 23.4
========== ==========
Equity Income of Affiliates, net of taxes:
Security services $ 2.7 $ 0.8
Correctional services 2.5 1.3
---------- ----------
Total equity income $ 5.2 $ 2.1
========== ==========
Capital Expenditures:
Security services $ 2.8 $ 2.9
Correctional services 23.4 10.3
Staffing services 0.7 0.6
Unallocated corporate expenditures 0.8 1.0
---------- ----------
Total capital expenditures $ 27.7 $ 14.8
========== ==========
Depreciation and Amortization:
Security services 9.4 $ 8.1
Correctional services 3.8 2.9
Staffing services 1.5 1.0
Unallocated corporate expenses 2.0 0.5
---------- ----------
Total expenses $ 16.7 $ 12.5
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Identifiable Assets: October 3, 1999 January 3, 1999
--------------- ---------------
<S> <C> <C>
Security services $ 167.3 $ 167.4
Correctional services 169.0 146.4
Staffing services 67.5 62.6
Unallocated corporate assets 61.0 72.4
------------ ----------
Total identifiable assets $ 464.8 $ 448.8
============ ==========
</TABLE>
Page 13 of 27
<PAGE> 14
11. 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 on the
accompanying financial statements. The Company carries its investments 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.
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-----------------------------
October 3, September 27,
1999 1998
------------ --------------
<S> <C> <C>
(dollars in millions)
Revenues:
Domestic operations $ 1,407.4 $ 1,102.4
International operations 170.5 151.3
---------- -----------
Total revenues $ 1,577.9 $ 1,253.7
========== ===========
Operating Income:
Domestic operations $ 22.0 $ 19.4
International operations 5.8 4.0
---------- -----------
Total operating income $ 27.8 $ 23.4
========== ===========
Equity Income of Affiliates, net of taxes:
Domestic operations $ 1.2 $ --
International operations 4.0 2.1
---------- -----------
Total equity income $ 5.2 $ 2.1
========== ===========
Capital Expenditures:
Domestic operations $ 24.8 $ 11.7
International operations 2.9 3.1
---------- -----------
Total capital expenditures $ 27.7 $ 14.8
========== ===========
Depreciation and Amortization:
Domestic operations $ 13.2 $ 9.2
International operations 3.5 3.3
---------- -----------
Total expenses $ 16.7 $ 12.5
========== ===========
</TABLE>
<TABLE>
<CAPTION>
October 3, 1999 January 3, 1999
--------------- ---------------
<S> <C> <C>
Long-lived Assets:
Domestic operations $ 39.6 $ 46.9
International operations 15.0 9.7
---------- -----------
Total long-lived assets $ 54.6 $ 56.6
========== ===========
</TABLE>
12. SUBSEQUENT EVENT
On August 31, 1999, the Company's 55% owned subsidiary, Wackenhut Corrections
Corporation (WHC), announced the mutual decision between WHC, the Texas
Department of Criminal Justice State Jail Division (TDCJ) and Travis County,
Texas to discontinue WHC's contract for the operation of the Travis County
Community Justice Center. The contract was discontinued effective November 8,
1999. WHC is involved in discussions with TDCJ regarding close-out of all
contract claims. WHC cannot predict the outcome of these discussions at this
time.
Page 14 of 27
<PAGE> 15
THE WACKENHUT CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Wackenhut Corporation and its Subsidiaries (the "Company") is a leading
outsourcer of diversified services to business and government. The Company
focuses strategically on three major businesses worldwide - security related and
other operational support services, development and management of privatized
correctional and detention facilities, and personnel employee leasing and
temporary services. The security-related services have expanded into a range of
support services to include security operations, facility management, fire and
emergency medical services and food service to private and publicly managed
correctional facilities. The Security Services business is organized into North
American Operations and International Operations. The Company, through its 55%
owned public subsidiary, Wackenhut Corrections Corporation (NYSE: WHC) designs,
constructs, finances and manages correctional, detention and mental health
psychiatric facilities and performs separate correctional-related services,
including prisoner transportation, home detention monitoring and correctional
health care. The Company has established a national presence in the flexible
leasing, temporary services, recruiting, risk management, payroll processing and
human resource services.
FINANCIAL CONDITION
Reference is made to pages 24 through 29 of the Company's Annual Report to
Shareholders, filed as Exhibit 13.0 with the Company's Annual Report Form 10-K
for the fiscal year ended January 3, 1999 for further discussion and analysis of
information pertaining to the Company's financial condition.
FORWARD-LOOKING STATEMENTS: Management's discussion and analysis of financial
condition and results of operations and Market Risk and Year 2000 Readiness
Disclosure and the November 5, 1999 press release announcing the Company's
quarterly earnings contain forward-looking statements that are based on current
expectations, estimates and projections about the segments in which the Company
operates. This section of the quarterly report also includes management's
beliefs and assumptions made by management. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," variation
of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions ("future
factors") which are difficult to predict. Therefore, actual outcomes and results
may differ materially from what is expressed or forecasted in such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
Future factors include: increasing price and product/service competition by
foreign and domestic 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; and financial instruments and financial
resources in the amounts, at the times and on the terms required to support the
Company'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.
Page 15 of 27
<PAGE> 16
LIQUIDITY
Cash and cash equivalents at October 3, 1999 of $43.5 million was the same at
January 3, 1999. Cash used by operating activities amounted to $5.5 million
through the third quarter 1999, versus $1.5 million through the third quarter
1998. This increase in cash used by operating activities is primarily related to
an increase in accounts receivable offset by an increase in net income. Cash
used in investing activities amounted to $11.6 million through the third quarter
1999 versus cash provided of $4.3 million for the same period in the last year,
primarily reflecting a decrease in proceeds from the sale of prison facilities
to Correctional Properties Trust ("CPV"). Cash provided by financing activities
through the third quarter 1999 amounted to $17.3 million, reflecting primarily
$22.0 million proceeds for sales of accounts receivable net of $7.9 million for
treasury stock purchases made by WHC. As of October 3, 1999, the total amount
available to the Company from its revolving credit and accounts receivable
securitization facility was $61.7 million.
In January 1999, WHC sold to CPV one facility and its right to acquire one
facility for $66.1 million resulting in net proceeds to WHC of $22.3 million. In
connection with this sale, WHC entered into a ten-year lease with CPV.
As of October 3, 1999, approximately $82.0 million of WHC's $220.0 million
operating lease facility, established to acquire and develop new correctional
facilities, was outstanding for properties under development.
MARKET RISK
The Company is exposed to market risks, including changes in interest rates and
currency exchange rates. These exposures primarily relate to outstanding
balances under the revolving line of credit and securitization facilities,
international investments and from changes in interest rates with respect to a
$220.0 million operating lease facility.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the result of shortcomings in many electronic data
processing systems and other equipment that make operations beyond the year 1999
troublesome. The internal clocks in computers and other equipment will roll over
from "12/31/99" to "01/01/00" and programs and hardware, if not corrected, will
be unable to distinguish between the year 2000 and the year 1900. This may
result in processing data inaccurately or in stopping data processing
altogether.
Management continued its review of the installation of new mission critical
information systems hardware and software and determined that the installation
is on schedule for completion before the Year 2000. Other business unit and
operating systems, including embedded technology, such as security systems, also
are being reviewed and this review was substantiallY completed by October 1999.
Implementation of the Company's Year 2000 compliant financial information
systems has been achieved in the third quarter 1999. Implementation of all other
mission critical Year 2000 compliant information systems was substantially
completed by the end of the third quarter 1999.
The Company has incurred and will continue to incur expenses related to Year
2000 compliance. These costs include time and effort of internal staff and
consultants for renovation, validation and implementation, and computer
enhancements and/or replacements. The total costs to be expensed for achieving
Year 2000 compliance is funded from working capital and monitored by each
business unit. Through the third quarter of 1999, $0.3 million was spent on
completing Year 2000 information systems compliance. To complete Year 2000
information systems compliance, the Company estimates an additional $0.5 million
will be expensed.
Page 16 of 27
<PAGE> 17
These costs for Year 2000 compliance exclude the Company's total costs estimated
to be incurred in previously planned new systems. Estimated costs of
implementing these new systems is $19.1 million, with costs incurred through
September 1999 totaling $17.6 million, of which $10.9 million was capitalized
and $6.7 million expensed. To complete these new systems, the Company estimates
$1.5 million is expected to be incurred of which approximately 50% is expected
to be capitalized and amortized and the other 50% expensed. Deferral of other
projects that would have a material effect on operations has not been required,
nor anticipated, as a result of the Company's Year 2000 efforts. The Company has
developed contingency plans and expects in 1999 to be Year 2000 compliant, in
all significant and material respects, for all mission critical systems.
The Company is also assessing the risks and full impact on operations should the
most reasonably likely worst case year 2000 scenario occur. In order to minimize
any adverse impact on its operations of the Year 2000 problem, the Company has
developed operational contingency plans.
Management continues to review the state of Year 2000 readiness for third
parties with whom the Company shares a material relationship. Written inquiries
have been sent and continue to be sent to third parties. At this time, the
Company is unaware of any third party Year 2000 issues that would materially
affect these relationships. Notwithstanding the successful implementation of the
Company's Year 2000 plan, the Company's operations could nevertheless be
affected by the ability of third parties, such as customers, suppliers and
utilities dealing with the Company, to remediate their own Year 2000 issues over
which the Company has no control.
Page 17 of 27
<PAGE> 18
RESULTS OF OPERATIONS
COMPARISON OF THIRTEEN WEEKS ENDED OCTOBER 3, 1999 AND THIRTEEN WEEKS ENDED
September 27, 1998
The table below summarizes the Company's results of operations for the thirteen
weeks ended October 3, 1999 ("third quarter of 1999") and September 27, 1998
("third quarter of 1998") by the Company's organizational business segments. The
following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes thereto (dollars in
millions):
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-------------------------------------------------------
October 3, 1999 September 27, 1998
------------------------- ---------------------------
$ % $ %
----------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
REVENUES (a)
Security Services:
North American Operations 222.4 40.6 202.3 46.1
International Operations 36.8 6.7 35.7 8.2
----------- ----------- -------------- ----------
259.2 47.3 238.3 54.3
Correctional Services 112.0 20.5 78.2 17.8
Flexible Staffing Services 176.3 32.2 122.2 27.9
----------- ----------- -------------- ----------
Consolidated revenues 547.5 100.0 438.4 100.0
=========== =========== ============== ==========
OPERATING INCOME (b)
Security Services:
North America Operations 6.0 2.7 5.9 2.9
International Operations 1.1 3.0 0.3 0.8
----------- --------------
7.1 2.7 6.2 2.6
Correctional Services 7.0 6.3 6.1 7.8
Flexible Staffing Services 1.0 0.6 0.9 0.7
Unallocated corporate expense (4.2) (0.8) (4.5) (1.0)
----------- --------------
Consolidated operating income 10.9 2.0 8.7 2.0
=========== ==============
</TABLE>
(a) Represents percent of total revenues.
(b) Represents percent of respective business related revenues.
Page 18 of 27
<PAGE> 19
COMPARISON OF THIRTEEN WEEKS ENDED OCTOBER 3, 1999 AND THIRTEEN WEEKS ENDED IN
SEPTEMBER 27, 1998
REVENUES
Third quarter 1999 consolidated revenues increased $109.1 million, or 24.9%, to
$547.5 million from $438.4 million in the third quarter of 1998. The Company's
expansion into flexible staffing services, the increase in domestic and
international security services and the increase in correctional services were
the contributors to the improvements over the prior year's third quarter.
SECURITY SERVICES
Third quarter 1999 Security Services revenues increased $21.2 million, or 8.9%,
to $259.2 million from $238.0 million in the third quarter of 1998. Revenues
from North American Operations increased $20.1 million, or 9.9%, to $222.4
million in the third quarter of 1999 from $202.3 million in the third quarter of
1998. There was an expansion of revenues from national accounts due to new
contracts and increases in existing contracts. International Operations revenues
increased $1.1 million, or 3.1%, to $36.8 million in the third quarter of 1999
compared to $35.7 million in the third quarter of 1998. Increases in
international security revenues are primarily attributable to growth in Europe
and Latin America.
CORRECTIONAL SERVICES
Third quarter 1999 Correctional Services revenues increased $33.8 million, or
43.2%, to $112.0 million from $78.2 million in the comparable quarter last year.
Approximately $26.8 million of the increase in revenues in the third quarter
1999 compared to the third quarter 1998 is attributable to an increase in
compensated resident days resulting from the opening of 6 facilities in 1998
subsequent to the second quarter of 1998, and with the opening of 4 facilities
in 1999. The balance of the increase in revenues was attributable to facilities
open during all of both periods. Compensated resident days increased to
approximately 2,476,576 in the third quarter of 1999 from 1,864,649 in the third
quarter of 1998. Occupancy at facilities increased to approximately 97.6% of
capacity compared to 96.0% in the third quarter of 1998.
FLEXIBLE STAFFING SERVICES
Flexible Staffing Services third quarter 1999 revenues of $176.3 million reflect
the acquisition, in November 1998, of Sharp and Advantage Temporary Staffing
Companies and were $54.1 million above revenues of $122.2 in the same quarter
last year. Leased employees grew to approximately 29,600 at the end of the third
quarter 1999 from 24,100 at the end of the third quarter 1998. Including Sharp
and Advantage, temporary staffing hours grew to approximately 856,300 during the
third quarter 1999 from approximately 475,600 during the third quarter 1998.
OPERATING INCOME
Third quarter 1999 consolidated operating income increased $2.2 million, or
25.3%, to $10.9 million from $8.7 million in the third quarter of 1998. The
operating margin for the third quarter of 1999 and third quarter 1998 remained
stable at 2.0%.
SECURITY SERVICES
The operating income of the security services business increased $0.9 million,
or 14.5%, to $7.1 million in the third quarter of 1999 from $6.2 million for the
comparable quarter last year. North American Operations' operating income
increased $0.1 million, or 1.7%, to $6.0 million in the third quarter 1999 from
$5.9 million in the third quarter 1998. The increase in operating income of
North American Operations can be attributed mainly to increased revenue growth.
The operating income of North American Operations for the third quarter of 1999,
as a percentage of revenues, decreased slightly to 2.7% from 2.9% for the
comparable third quarter of 1998. This decrease is principally attributable to
an increase in the allocation of general and administrative expenses.
International Operations' operating income increased $0.8 million to $1.1
million in the third quarter 1999 from $0.3 million in the third quarter 1998,
due principally to improved operations in Africa and Europe.
Page 19 of 27
<PAGE> 20
CORRECTIONAL SERVICES
Third quarter 1999 operating income increased $0.9 million, or 14.8%, to $7.0
million from $6.1 million in the comparable period in 1998. Third quarter 1999
operating income as a percent of revenue declined to 6.3% from 7.8% in 1998. The
decrease in operating margin was due partially to lease payments to CPV of $5.2
million offset by the amortization of deferred revenue of $0.4 million from the
sale of properties and expenses related to the construction of a new facility
for South Florida State Hospital. Additional expenses were also incurred related
to operations at the Jena Juvenile Justice Center, (Louisiana), Lea County
Correctional Facility (New Mexico), Guadalupe County Correctional Facility (New
Mexico), and Taft Correctional Institution (California). WHC has developed
strategies to improve the operational performance of these facilities, however,
there can be no assurances that these strategies will be successful.
FLEXIBLE STAFFING SERVICES
The operating profit of Flexible Staffing Services was $1.0 million in the third
quarter of 1999, as compared to $0.9 million in third quarter 1998. The
improvement is attributable to revenue growth (both temporary hours and number
of leased employees) and improved margins in employee leasing operations.
Salaries, wages, payroll taxes and other direct costs of worksite employees
(i.e. leased employees) hours, are pass-through costs not subject to the
Company's control and therefore increase revenues without a commensurate
operating margin benefit.
UNALLOCATED CORPORATE EXPENSES AND INFORMATION SYSTEMS
Unallocated corporate general and administrative expenses decreased 6.7% to $4.2
million in the third quarter 1999 from $4.5 million in the third quarter 1998.
This decrease is principally attributable to an increased allocation of general
and administrative expenses to the business segments. As a percentage of
consolidated revenues, unallocated corporate general and administrative expenses
decreased to 0.8% of revenues in the third quarter 1999 from 1.0% of revenues in
the third quarter 1998.
OTHER INCOME/EXPENSE
The Company realized other expense, net, of $0.2 million in the third quarter
1999 compared to $1.0 million of net other income in the third quarter of 1998.
Investment income remained flat at $1.3 million. Interest expense increased $1.2
million to $1.5 million in the third quarter 1999 from $0.3 million in the third
quarter 1998. This increase is primarily attributable to increased interest
expense related to the increase in securitized accounts receivables and the
revolver loan along with higher interest rates.
INCOME BEFORE INCOME TAXES
Third quarter 1999 income before taxes increased $1.0 million, or 10.3%, to
$10.7 million from $9.7 million in the third quarter 1998.
EBITDA, defined as earnings before interest expense, income taxes, depreciation
and amortization, was $16.7 million, or 3.1% of revenues for the third quarter
1999, which was $4.1 million, or 32.5%, higher than the third quarter 1998.
EBITDA does not necessarily indicate that cash flow is sufficient to fund all
the Company's cash needs or represent cash flow from operations as defined by
generally accepted accounting principles.
INCOME TAXES
The combined Federal and state effective income tax rate was 39.8% for the first
three quarters of 1999 and 39.7% for the first three quarters of 1998.
MINORITY INTEREST EXPENSE
Minority interest expense (net of income taxes) increased $0.4 million to $2.7
million in the third quarter 1999 from $2.3 million in the third quarter 1998,
reflecting principally the increase in earnings of WHC.
Page 20 of 27
<PAGE> 21
EQUITY INCOME OF AFFILIATES
Equity income of affiliates (net of income taxes) increased $1.0 million to $1.7
million in the third quarter 1999 from $0.7 million in the third quarter 1998.
This increase relates to the Space Gateway Support joint venture in the North
American Operations and in the U.K. due to the commencement of home monitoring
contracts in January 1999 and a prison which opened in March 1999.
NET INCOME
Net income was $5.4 million for the third quarter 1999, or $0.36 basic earnings
per share, as compared to $4.4 million, or $0.30 basic earnings per share for
the same period in 1998. Earnings per share on a diluted basis was $0.35 in the
third quarter 1999 compared to $0.29 per share for the same period in 1998.
Goodwill amortization, after tax, amounted to $0.3 million for each of the third
quarters ended 1999 and 1998. Excluding goodwill amortization, after tax, basic
earnings per share were $0.38 and $0.32 for the third quarter 1999 and 1998,
respectively. Likewise, diluted earnings per share were $0.37 and $0.31 for the
third quarter 1999 and 1998, respectively.
Page 21 of 27
<PAGE> 22
RESULTS OF OPERATIONS
Comparison of Thirty-nine Weeks Ended October 3, 1999 and Thirty-nine Weeks
Ended September 27, 1998
The table below summarizes the Company's results of operations for the
thirty-nine weeks ended October 3, 1999 ("year-to-date") and September 27, 1998
(`year-to-date") by the Company's organizational business segments. The
following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes thereto (dollars in
millions):
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-------------------------------------------------------
October 3, 1999 September 27, 1998
------------------------- ---------------------------
$ % $ %
----------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
REVENUES (a)
Security Services:
North American Operations 658.4 41.7 588.4 46.9
International Operations 110.2 7.0 99.9 8.0
----------- ----------- -------------- ----------
768.6 48.7 688.3 54.9
Correctional Services 315.5 20.0 224.1 17.9
Flexible Staffing Services 493.8 31.3 341.3 27.2
----------- ----------- -------------- ----------
Consolidated revenues 1,577.9 100.0 1,253.7 100.0
=========== =========== ============== ==========
OPERATING INCOME (b)
Security Services:
North America Operations 17.3 2.6 16.1 2.7
International Operations 1.9 1.7 1.2 1.2
----------- --------------
19.2 2.5 17.3 2.5
Correctional Services 20.3 6.4 17.5 7.8
Flexible Staffing Services 2.5 0.5 1.7 0.5
Unallocated corporate expense (14.2) (0.9) (13.1) (1.0)
----------- --------------
Consolidated operating income 27.8 1.8 23.4 1.9
=========== ==============
</TABLE>
(a) Represents percent of total revenues.
(b) Represents percent of respective business related revenues.
Page 22 of 27
<PAGE> 23
COMPARISON OF THIRTY-NINE WEEKS ENDED OCTOBER 3, 1999 AND THIRTY-NINE WEEKS
ENDED IN SEPTEMBER 27, 1998
REVENUES
Year-to-date 1999 consolidated revenues increased $324.2 million, or 25.9%, to
$1,577.9 million from $1,253.7 million in 1998. The Company's expansion into
flexible staffing services, the increase in domestic and international security
services and the increase in correctional services were the contributors to the
improvements over the prior year.
SECURITY SERVICES
Year-to-date 1999 Security Services revenues increased $80.3 million, or 11.7%,
to $768.6 million from $688.3 million in the first three quarters of 1998.
Revenues from North American Operations increased $70.0 million, or 11.9%, to
$658.4 million in the first three quarters of 1999 from $588.4 million in the
first three quarters of 1998. There was an expansion of revenues from national
accounts due to new contracts and increases in existing contracts. International
Operations revenues increased $10.3 million, or 10.3%, to $110.2 million in the
first three quarters of 1999 compared to $99.9 million in the first three
quarters of 1998. Increases in international security revenues are primarily
attributable to growth in Europe and Latin America.
CORRECTIONAL SERVICES
Year-to-date 1999 Correctional Services revenues increased $91.4 million, or
40.8%, to $315.5 million from $224.1 million in the comparable period of 1998.
Approximately $75.2 million of the increase in revenues in the first three
quarters of 1999 compared to the same period in 1998 is attributable to an
increase in compensated resident days resulting from the opening of 8 facilities
in 1998, and with the opening of 4 facilities in 1999. The balance of the
increase in revenues was attributable to facilities open during all of both
periods. Compensated resident days increased to approximately 7,116,074 in the
first nine months of 1999 from 5,265,787 in the comparable period during 1998.
Occupancy at facilities increased to approximately 97.0% of capacity compared to
96.0% in the first nine months of 1998.
FLEXIBLE STAFFING SERVICES
Flexible Staffing Services year to date 1999 revenues of $493.8 million reflect
the acquisition, in November 1998, of Sharp and Advantage Temporary Staffing
Companies and were 44.7% above last year's revenues of $341.3. Leased employees
grew to approximately 29,600 at the end of the third quarter 1999 from 24,100 at
the end of the third quarter 1998. Including Sharp and Advantage, temporary
staffing hours grew to approximately 856,300 during the third quarter 1999 from
approximately 475,600 during the third quarter 1998.
OPERATING INCOME
Year to date 1999 consolidated operating income increased $4.4 million, or
18.8%, to $27.8 million from $23.4 million in the same period of 1998.
Year-to-date 1998 consolidated operating income as a percent of consolidated
revenues decreased to 1.8% from 1.9% from the comparable period in 1998.
Offsetting the increase in operating income from higher revenues were WHC's
lease payments to CPV, the increase in revenues attributable to pass-through
costs of Staffing Services which are not subject to the Company's control, and a
decrease in operating income of certain subsidiaries of International
Operations.
Page 23 of 27
<PAGE> 24
SECURITY SERVICES
The operating income of the security services business increased $1.9 million,
or 11.0%, to $19.2 million in the first nine months of 1999 from $17.3 million
for the comparable period of last year. North American Operations' operating
income increased $1.2 million, or 7.5%, to $17.3 million in the first three
quarters of 1999 from $16.1 million in the same period of 1998. The increase in
operating income of North American Operations can be attributed mainly to
increased revenue growth. The operating income of North American Operations, as
a percentage of revenues, decreased slightly to 2.6% as compared to 2.7% for the
same period in 1998. This decrease is principally attributable to an increase in
the allocation of general and administrative expenses. International Operations'
operating income increased $0.7 million to $1.9 million in the first nine months
of 1999 from $1.2 million in the first nine months of 1998 due principally to
improved operations in Africa and Europe.
CORRECTIONAL SERVICES
Year-to-date 1999 operating income increased $2.8 million, or 16.0%, to $20.3
million from $17.5 million in the comparable period in 1998. Year to date 1999
operating income as a percent of revenue declined to 6.4% from 7.8% in 1998. The
decrease in operating margin was due partially to lease payments to CPV of $15.3
million offset by the amortization of deferred revenue of $1.2 million and
expenses related to the construction of a new facility for South Florida State
Hospital. Additional expenses were also incurred related to operations at the
New Mexico facilities, East Mississippi Correctional Facility (Mississippi),
Jena Juvenile Justice Center (Louisiana), Ronald McPherson Correctional Facility
(Arkansas) and Taft Correctional Institute (California). WHC has developed
strategies to improve the operational performance of these facilities, however,
there can be no assurances that these strategies will be successful.
FLEXIBLE STAFFING SERVICES
The operating profit of Flexible Staffing Services was $2.5 million in the first
three quarters of 1999, as compared to $1.7 million in the comparable period in
1998. The improvement is attributable to revenue growth (both temporary hours
and number of leased employees) and improved margins in employee leasing
operations. Salaries, wages, payroll taxes and other direct costs of worksite
employees (i.e. leased employees) hours, are pass-through costs not subject to
the Company's control and therefore increase revenues without a commensurate
operating margin benefit.
UNALLOCATED CORPORATE EXPENSES AND INFORMATION SYSTEMS
Unallocated corporate general and administrative expenses increased 8.4% to
$14.2 million in the first nine months of 1999 from $13.1 million in the first
nine months of 1998. The increase over the prior year reflects the continuing
increase in information technology costs related to the rollout of new
enterprisewide systems and personnel costs of administrative departments. As a
percentage of consolidated revenues, unallocated corporate general and
administrative expenses decreased to 0.9% of revenues in the first nine months
of 1999 from 1.0% of revenues in the same period of 1998.
OTHER INCOME/EXPENSE
The Company realized other expense, net, of $0.2 million through the first three
quarters of 1999 compared to $1.4 million of net other income for the same
period in 1998. Investment income increased $0.4 million to $3.5 million in the
first nine months of 1999 from $3.1 million in the first nine months of 1998.
This increase is primarily attributable to WHC's investment of cash proceeds
from sales to CPV. Interest expense increased $2.0 million to $3.7 million in
the first nine months of 1999 from $1.7 million in the same period of 1998. This
increase is primarily attributable to increased interest expense related to
increases in the average outstanding balances for securitized accounts
receivables and the revolver loan along with higher interest rates.
INCOME BEFORE INCOME TAXES
Year-to-date 1999 income before taxes increased $2.8 million, or 11.3%, to $27.6
million from $24.8 million in the first nine months of 1998.
EBITDA, defined as earnings before interest expense, income taxes, depreciation
and amortization, was $44.5 million, or 2.8% of revenues for the first nine
months of 1999, which was $8.6 million, or 24.0%, higher than the comparable
period of 1998. EBITDA does not necessarily indicate that cash flow is
sufficient to fund all the Company's cash needs or represent cash flow from
operations as defined by generally accepted accounting principles.
Page 24 of 27
<PAGE> 25
INCOME TAXES
The combined Federal and state effective income tax rate was 39.8% for the first
three quarters of 1999 and 39.7% for the first three quarters of 1998.
MINORITY INTEREST EXPENSE
Minority interest expense (net of income taxes) increased $1.5 million to $7.7
million in the first nine months of 1999 from $6.2 million in the first nine
months of 1998, reflecting principally the increase in earnings of WHC.
EQUITY INCOME OF AFFILIATES
Equity income of affiliates (net of income taxes) increased $3.1 million to $5.2
million in the first three quarters of 1999 from $2.1 million in the same period
of 1998. This increase relates to the Space Gateway Support joint venture in the
North American Operations; improved performances overseas, primarily in Chile
and Greece; and in the U.K. due to the commencement of home monitoring contracts
in January 1999 and the opening of a prison in March 1999.
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Income before the cumulative effect of change in accounting principle increased
$3.2 million, to $14.1 million in the first nine months of 1999 compared to
$10.9 million in the first nine months of 1998. Diluted earnings per share
before the cumulative effect of change in accounting principle was $0.92 in the
first nine months of 1999, compared to $0.72 for the same period in 1998.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In fiscal 1998, the Company adopted SOP 98-5. The adoption of SOP 98-5 resulted
in a one-time charge of $6.6 million, net of income taxes, and after deducting
the portion applicable to minority shareholders of Wackenhut Corrections
Corporation. On a diluted basis, the cumulative effect of the change in
accounting principle was a loss of $0.44 per share.
NET INCOME
Net income was $14.1 million for the first nine months 1999, or $0.94 basic
earnings per share, as compared to $4.3 million for the same period in 1998.
Earnings per share on a diluted basis was $0.92 in the first nine months of 1999
compared to $0.28 per share for the same period in 1998. Goodwill amortization,
after tax, amounted to $0.9 million and $0.8 million for the nine months ended
1999 and 1998, respectively. Excluding goodwill amortization, after tax, basic
earnings per share were $1.00 and $0.34 for the first three quarters of 1999 and
1998, respectively. Likewise, diluted earnings per share were $0.97 and $0.33
for the first three quarters of 1999 and 1998, respectively.
Page 25 of 27
<PAGE> 26
THE WACKENHUT CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. 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 from any such claims or litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits -
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b). Reports on Form 8-K
The Company did not file a Form 8-K during the third quarter of 1999.
Page 26 of 27
<PAGE> 27
THE WACKENHUT CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Quarterly Report on Form 10-Q for the
Thirty-nine weeks ended October 3, 1999 to be signed on its behalf by the
undersigned hereunto duly authorized.
THE WACKENHUT CORPORATION
DATE: November 15, 1999
/s/ Philip L. Maslowe
------------------------------
Philip L. Maslowe,
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Page 27 of 27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO FORM 10-Q FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 3,
1999.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JUL-05-1999
<PERIOD-END> OCT-03-1999
<CASH> 44
<SECURITIES> 21<F1>
<RECEIVABLES> 180
<ALLOWANCES> 6
<INVENTORY> 16
<CURRENT-ASSETS> 264<F2>
<PP&E> 80
<DEPRECIATION> 26
<TOTAL-ASSETS> 465
<CURRENT-LIABILITIES> 150<F3>
<BONDS> 8
2
0
<COMMON> 0
<OTHER-SE> 158
<TOTAL-LIABILITY-AND-EQUITY> 465<F4>
<SALES> 0
<TOTAL-REVENUES> 1,578
<CGS> 0
<TOTAL-COSTS> 1,550
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 28
<INCOME-TAX> 11
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14<F5>
<EPS-BASIC> 0.94
<EPS-DILUTED> 0.92
<FN>
<F1>MARKETABLE SECURITIES ARE CLASSIFIED AS NON-CURRENT ASSETS ON THE BALANCE
SHEET.
<F2>INCLUDES $8 MILLION OF DEFERRED TAXES, $9 MILLION OF PREPAID EXPENSES AND $14
MILLION OF OTHER CURRENT ASSETS.
<F3>INCLUDES $38 MILLION OF NOTES AND ACCOUNTS PAYABLE, $65 MILLION OF ACCRUED
PAYROLL AND RELATED TAXES AND $47 MILLION OF ACCRUED EXPENSES.
<F4>INCLUDES $60 MILLION RESERVE FOR LOSSES OF CASUALTY REINSURANCE SUBSIDIARY, $52
MILLION MINORITY INTEREST, $16 MILLION DEFERRED REVENUE AND $19 MILLION OF
OTHER LONG TERM LIABILITIES.
<F5>INCLUDES MINORITY INTEREST AND EQUITY INCOME OF FOREIGN AFFILIATES - NET OF
INCOME TAXES OF $(8) MILLION AND $5 MILLION RESPECTIVELY.
</FN>
</TABLE>
