<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 July 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to _______
Commission file number 1-5450
THE WACKENHUT CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-0857245
--------------------------------------------------------------------------------
(State of incorporation or organization) (I.R.S. Employer Identification No.)
4200 Wackenhut 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 August 11, 2000, 3,855,582 shares of the registrant's Series A common stock
were issued and outstanding and 11,144,409 shares of Series B Common Stock were
issued and outstanding.
Page 1 of 29
<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 accounting principles generally accepted in the United States.
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 twenty-six weeks ended July 2, 2000 are not necessarily
indicative of the results for the entire fiscal year ending December 31, 2000.
Page 2 of 29
<PAGE> 3
THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED
JULY 2, 2000 and JULY 4, 1999
(In millions except per share data)
UNAUDITED
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------- -----------------------
2000 1999 2000 1999
------- ----- -------- --------
<S> <C> <C> <C> <C>
REVENUES $ 617.6 $ 530.3 $1,211.6 $1,030.4
------- ----- -------- --------
OPERATING EXPENSES:
Payroll and related taxes 484.5 424.7 937.4 813.5
Other operating expenses 118.1 90.9 244.2 189.1
Depreciation and amortization expense 6.1 5.7 12.4 10.9
------- ----- -------- --------
OPERATING INCOME 8.9 9.0 17.6 16.9
------- ----- -------- --------
OTHER INCOME (EXPENSE):
Interest and investment income 1.9 1.3 3.0 2.2
Interest expense (1.8) (1.2) (3.5) (2.2)
------- ----- -------- --------
INCOME BEFORE INCOME TAXES 9.0 9.1 17.1 16.9
Income taxes (3.6) (3.6) (6.8) (6.7)
Minority interest, net of income taxes of $1.6, $1.7,
$3.1, and $3.3 (2.3) (2.6) (4.6) (5.0)
Equity in income of affiliates, net of income
taxes of $1.4, $1.2, $2.5, and $2.4 2.0 1.8 3.7 3.5
------- ----- -------- --------
NET INCOME $ 5.1 $ 4.7 $ 9.4 $ 8.7
======= ===== ======== ========
EARNING PER SHARE:
Basic $ 0.34 $ 0.31 $ 0.63 $ 0.58
Diluted $ 0.33 $ 0.30 $ 0.61 $ 0.57
Basic weighted average shares outstanding 15.0 14.9 15.0 14.9
Diluted weighted average shares outstanding 15.1 15.1 15.1 15.1
</TABLE>
See notes to unaudited consolidated financial statements.
Page 3 of 29
<PAGE> 4
THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 2, 2000 AND JANUARY 2, 2000
(In millions)
UNAUDITED
<TABLE>
<CAPTION>
July 2, January 2,
2000 2000
-------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 67.0 $ 67.0
Accounts receivable, net 198.2 182.3
Inventories 12.4 14.7
Deferred taxes, net 10.4 10.5
Prepaid expenses 10.6 12.5
Other 14.1 12.1
-------- --------
312.7 299.1
-------- --------
MARKETABLE SECURITIES 27.2 28.8
-------- --------
PROPERTY AND EQUIPMENT - at cost 112.8 96.1
- accumulated depreciation (33.3) (27.9)
-------- --------
79.5 68.2
-------- --------
DEFERRED TAXES, net 9.4 10.0
OTHER ASSETS:
Goodwill, net 52.4 52.3
Other intangibles, net 15.8 16.7
Investment in and advances to affiliates, at cost 47.8 42.0
Other 8.6 8.6
-------- --------
124.6 119.6
-------- --------
$ 553.4 $ 525.7
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
Page 4 of 29
<PAGE> 5
THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 2, 2000 AND JANUARY 2, 2000
(In millions except share data)
UNAUDITED
<TABLE>
<CAPTION>
July 2, January 2,
2000 2000
-------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 13.9 $ 4.7
Accounts payable 27.2 36.5
Accrued payroll and related taxes 79.9 77.1
Accrued expenses 61.4 61.5
-------- ---------
182.4 179.8
RESERVES FOR INSURANCE LOSSES 81.7 77.5
-------- ---------
LONG-TERM DEBT 29.2 16.5
-------- ---------
DEFERRED REVENUES 14.6 15.2
-------- ---------
OTHER 18.8 17.4
-------- ----------
COMMITMENTS AND CONTINGENCIES (note 9)
MINORITY INTEREST 55.3 55.4
-------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, 10 million shares authorized, none outstanding -- --
Common stock, $.10 par value, 50 million shares authorized:
Series A, 3.9 million issued and outstanding 0.4 0.4
Series B, 10.9 million issued and outstanding 1.1 1.1
Additional paid-in capital 120.8 121.7
Retained earnings 60.4 51.0
Accumulated other comprehensive loss (11.3) (10.3)
-------- ---------
171.4 163.9
-------- ---------
$ 553.4 $ 525.7
======== =========
</TABLE>
See notes to unaudited consolidated financial statements.
Page 5 of 29
<PAGE> 6
THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JULY 2, 2000 AND JULY 4, 1999
(In millions)
UNAUDITED
<TABLE>
<CAPTION>
July 2, July 4,
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net Income $ 9.4 $ 8.7
Adjustments to reconcile net income to net cash
provided by (used in) operating activites:
Depreciation expense 5.9 4.9
Uniform amortization 3.8 3.9
Other amortization expense 2.7 2.1
Deferred taxes 0.3 0.4
Provision for bad debts 1.1 0.5
Equity income, net of dividends (4.8) (4.5)
Minority interests in net income 7.7 8.4
Other (0.5) 0.7
Changes in assets and liabilities, net of acquisitions and divestitures -
(Increase) Decrease in assets:
Accounts receivable (9.0) (5.9)
Inventories (1.5) (6.0)
Prepaid expense 1.9 (5.1)
Other current assets (2.1) 1.3
Other (2.1) 4.2
Increase (Decrease) in liabilities:
Accounts payable and accrued expenses (1.3) (12.8)
Accrued payroll and related taxes 2.8 6.8
Reserves for insurance losses 4.2 9.8
Deferred revenue (0.6) (0.9)
Other 1.5 1.6
------- -------
Net Cash Provided By Operating Activities $ 19.4 $ 18.1
------- -------
INVESTING ACTIVITIES
Net proceeds from sale of prison facilities to CPV -- 22.3
Payments for contingent acquisition fees (10.3) (4.7)
Net investment in and advances to affiliates and joint ventures (2.0) (0.8)
Capital expenditures (16.9) (18.0)
Sales of marketable securities 9.3 6.0
Purchases of marketable securities (6.9) (9.9)
Non-current assets -- 1.2
------- -------
Net Cash Used In Investing Activities $ (26.8) $ (3.9)
------- -------
</TABLE>
See notes to unaudited consolidated financial statements.
Page 6 of 29
<PAGE> 7
THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JULY 2, 2000 AND JULY 4, 1999
(In millions)
UNAUDITED
(Continued)
<TABLE>
<CAPTION>
July 2, July 4,
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN):
FINANCING ACTIVITIES
Net proceeds from exercise of stock options of subsidiary $ -- $ 0.2
Proceeds from the exercise of stock options -- 0.9
Proceeds from issuance of debt 210.1 146.7
Payments on debt (188.2) (146.4)
Dividends paid -- (2.2)
Net proceeds from sales (payment for repurchases) of accounts receivable (8.0) 14.5
Shares repurchased by subsidiary (4.9) (6.1)
------- -------
Net Cash Provided by Financing Activities 9.0 7.6
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1.6) (0.7)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS -- 21.1
CASH AND CASH EQUIVALENTS, beginning of period 67.0 43.5
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 67.0 $ 64.6
======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 4.0 $ 2.4
Income taxes 3.9 4.6
Non-cash financing and investing activities:
Impact on equity from tax benefit related to the exercise of options issued
under the Company's non-qualified stock option plan $ -- $ 0.3
</TABLE>
See notes to unaudited consolidated financial statements.
Page 7 of 29
<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 Company's subsidiary, Wackenhut Corrections Corporation
("WHC"), is listed on the New York Stock Exchange as "WHC." The results for the
twenty-six weeks ended July 2, 2000 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 fiscal year ended January 2,
2000. Certain prior year amounts have been reclassified to conform to current
year presentation. Accounts receivable are net of allowances of $5.0 million and
$5.2 million at July 2, 2000 and January 2, 2000, respectively.
2. INVESTMENT IN AFFILIATES
Equity in undistributed earnings of affiliates approximated $26.5 million and
$22.5 million at July 2, 2000 and January 2, 2000, 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>
July 2, January 2,
2000 2000
------- ----------
<S> <C> <C>
Balance sheet items:
Current assets $ 175.4 $ 142.6
Non-current assets 298.5 280.6
Current liabilities 102.9 93.0
Non-current liabilities 295.9 262.2
Minority interest liability 0.6 0.5
</TABLE>
<TABLE>
<CAPTION>
July 2, July 4,
2000 1999
------- -------
<S> <C> <C>
Income statement items for the twenty-six weeks ended:
Revenues $ 297.2 $ 264.2
Operating income 16.8 17.5
Net income before taxes 13.3 12.3
</TABLE>
Page 8 of 29
<PAGE> 9
3. COMPREHENSIVE INCOME
The components of the Company's comprehensive income are as follows (dollars in
millions):
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net Income $ 5.1 $ 4.7 $ 9.4 $ 8.7
Unrealized gain (loss) on marketable securities, net of income
tax benefits (expense) of $(0.1), $0.3, $(0.4) and $0.4 0.1 (0.5) 0.6 (0.6)
Foreign currency translation adjustments, net of income
tax benefits of $0.5, $0.5, $1.4 and $0.5 (0.7) (0.7) (1.6) (0.7)
------- ------- ------- -------
Comprehensive Income $ 4.5 $ 3.5 $ 8.4 $ 7.4
======= ======= ======= =======
</TABLE>
4. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consisted of the following (dollars in millions):
July 2, January 2,
2000 2000
------- ----------
Goodwill $ 59.0 $ 57.6
Contract value 15.6 15.6
Other 9.2 8.8
------- -------
$ 83.8 $ 82.0
Accumulated amortization
Goodwill 6.6 5.3
Contract value 5.3 4.8
Other 3.7 2.9
------- -------
15.6 13.0
------- -------
Net $ 68.2 $ 69.0
======= =======
Page 9 of 29
<PAGE> 10
5. INCOME TAXES
The combined Federal and state effective income tax rate was 39.8% for the first
twenty-six weeks of 2000 and 39.7% for the first twenty-six weeks of 1999.
6. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following (dollars in millions):
July 2, January 2,
2000 2000
------- ----------
Revolving loans at weighted average
rate of 8.0% $ 38.0 $15.0
Lease obligation payable in
installments through 2004 at a
weighted average rate of 4.5% 1.6 1.8
Other debt principally related to
North American operations and
International subsidiaries 3.5 4.4
------ -----
Total 43.1 21.2
Less: current portion (13.9) (4.7)
------ -----
Total $ 29.2 $16.5
------ -----
Subsequent to July 2, 2000, WHC repaid $10.0 million of its revolver loans.
TWC's revolving credit and accounts receivable securitization facilities mature
within one year which the Company intends to refinance.
Page 10 of 29
<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).
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
------- ------- ------- --------
<S> <C> <C> <C> <C>
Basic
Net Income $ 5.1 $ 4.7 $ 9.4 $ 8.7
------- ------- ------- -------
Weighted average common shares outstanding 15.0 14.9 15.0 14.9
------- ------- ------- -------
Basic earnings per share $ 0.34 $ 0.31 $ 0.63 $ 0.58
------- ------- ------- -------
Diluted
Net Income $ 5.1 $ 4.7 $ 9.4 $ 8.7
Effect of Stock Options of Subsidiaries (0.1) (0.1) (0.1) (0.1)
------- ------- ------- -------
Net Income $ 5.0 $ 4.6 $ 9.3 $ 8.6
------- ------- ------- -------
Weighted average common shares outstanding 15.0 14.9 15.0 14.9
Assumed exercise of stock options, net of common
shares assumed repurchase with the proceeds 0.1 0.2 0.1 0.2
------- ------- ------- -------
Adjusted weighted average common shares outstanding 15.1 15.1 15.1 15.1
------- ------- ------- -------
Diluted earnings per share $ 0.33 $ 0.30 $ 0.61 $ 0.57
------- ------- ------- -------
</TABLE>
Options to purchase shares of 1,599,000, 1,452,000, 315,000 and 285,000 of
common stock for the thirteen and twenty-six weeks ended July 2, 2000 and July
4, 1999, respectively, have been excluded from the diluted earnings per share
calculation as their impact would have been antidilutive.
8. SHARES REPURCHASED
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 the Company's Series B common stock and 0.5 million shares
of Wackenhut Corrections common stock, respectively. 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. All
of the Company's common stock repurchases have been retired 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 2, 2000, the Company had bought back 196,400
shares of the Company's Series B common stock at an average price of $15.48, and
Page 11 of 29
<PAGE> 12
Wackenhut Corrections repurchased 878,000 shares of Wackenhut Corrections common
stock at an average price of $19.13 per share. From January 3, 2000 to July 2,
2000, WHC had repurchased an additional 500,000 shares of its common stock at an
average price of $9.87 per share.
9. COMMITMENTS AND CONTINGENCIES
On August 31, 1999, 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 successfully completed the close-out of contract claims with the TDCJ
which resulted in no adverse impact to the Company's financial position and
results of operation.
In New Mexico, WHC has been in discussions with the State's Department of
Corrections and Legislative Finance Committee and has submitted proposed
contract modifications regarding additional compensation for physical plant
modification and increased staffing at Guadalupe County Correctional Facility
and Lea County Correctional Facility which have been or are in the process of
being implemented by WHC. At this time no agreement has been reached regarding
these contract modifications.
On May 17, 2000, the Louisiana Department of Public Safety and Corrections
("LDPSC") had removed all inmates from the Jena Juvenile Justice Center in Jena,
Louisiana and WHC terminated the employment of the facility staff. The
cooperative agreement for such facility was terminated effective June 30, 2000.
WHC is continuing its efforts to find an alternative use for the facility.
If WHC is unable to find an alternative use for the facility, there could
be an adverse impact on the Company's financial position and future results of
operations.
Page 12 of 29
<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 global business services
which include security-related and other support services to business and
government, a leading developer and manager of privatized correctional,
detention and public sector mental health services facilities, and a provider of
employee leasing and temporary staffing. For segment reporting, the accounts of
the Company's captive insurance company have been included in unallocated
corporate expenses. Intersegment transactions are accounted for on an
arms-length basis and are eliminated in consolidation. Direct general and
administrative expenses are allocated based on usage.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
---------------------------- ---------------------------
July 2, 2000 July, 4, 1999 July 2, 2000 July 4, 1999
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
(dollars in millions)
Revenues:
Security services $287.7 $258.7 $ 572.7 $ 509.4
Correction services 133.9 106.1 264.4 203.5
Staffing services 196.0 165.5 374.5 317.5
------ ------ -------- --------
Total revenues $617.6 $530.3 $1,211.6 $1,030.4
====== ====== ======== ========
Operating Income:
Security services $ 7.8 $ 6.3 $ 16.1 $ 12.1
Correction services 5.0 6.8 10.6 13.3
Staffing services 1.1 0.9 1.8 1.5
Unallocated corporate expenses (5.0) (5.0) (10.9) (10.0)
------ ------ -------- --------
Total operating income $ 8.9 $ 9.0 $ 17.6 $ 16.9
====== ====== ======== ========
Equity Income of Affiliates,
net of taxes:
Security services $ 0.9 $ 1.0 $ 1.5 $ 2.0
Correction services 1.1 0.8 2.2 1.5
------ ------ -------- --------
Total equity income $ 2.0 $ 1.8 $ 3.7 $ 3.5
====== ====== ======== ========
Capital Expenditures:
Security services $ 1.3 $ 0.5 $ 1.3 $ 1.2
Correction services 4.6 4.2 14.9 13.9
Staffing services 0.2 0.8 0.4 1.1
Unallocated corporate expenditures 0.1 1.7 0.3 1.8
------ ------ -------- --------
Total capital expenditures $ 6.2 $ 7.2 $ 16.9 $ 18.0
====== ====== ======== ========
Depreciation and Amortization:
Security services $ 3.1 $ 3.1 $ 6.2 $ 6.1
Correction services 1.8 1.2 3.9 2.5
Staffing services 0.6 0.5 1.2 1.0
Unallocated corporate expenses 0.6 0.9 1.1 1.3
------ ------ -------- --------
Total expenses $ 6.1 $ 5.7 $ 12.4 $ 10.9
====== ====== ======== ========
July 2, 2000 January 2, 2000
------------ ---------------
Identifiable Assets:
Security services $ 183.4 $ 163.3
Correction services 224.5 208.2
Staffing services 77.4 76.1
Unallocated corporate assets 68.1 78.1
-------- --------
Total identifiable assets $ 553.4 $ 525.7
======== ========
</TABLE>
Page 13 of 29
<PAGE> 14
DOMESTIC AND INTERNATIONAL OPERATIONS
Non-U.S. operations of the Company and its subsidiaries are conducted primarily
in South America, the United Kingdom and Australia. No individual foreign
subsidiary of the Company represented over 10% of combined revenues for the
first half of 2000 and 1999. Minority interest in consolidated foreign
subsidiaries has been reflected, net of applicable income taxes, in the
accompanying financial statements. The Company carries its investment in
affiliates (20% to 50% owned) under the equity method. U.S. income taxes, which
would be payable upon remittance of affiliates' earnings to the Company, are
provided currently. Long-lived assets consist of property, plant and equipment.
A summary of domestic and international operations is shown below:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------------- ---------------------------
July 2, 2000 July 4, 1999 July 2, 2000 July 4, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(dollars in millions)
Revenues:
Domestic operations $542.6 $471.8 $1,061.4 $ 917.6
International operations 75.0 58.5 150.2 112.8
------ ------ -------- --------
Total revenues $617.6 $530.3 $1,211.6 $1,030.4
====== ====== ======== ========
Operating Income:
Domestic operations $ 5.2 $ 7.6 $ 8.8 $ 13.5
International operations 3.7 1.4 8.8 3.4
------ ------ -------- --------
Total operating income $ 8.9 $ 9.0 $ 17.6 $ 16.9
====== ====== ======== ========
Equity Income of Affiliates, net of taxes:
Domestic operations $ 0.5 $ 0.3 $ 0.8 $ 0.8
International operations 1.5 1.5 2.9 2.7
------ ------ -------- --------
Total equity income $ 2.0 $ 1.8 $ 3.7 $ 3.5
====== ====== ======== ========
Capital Expenditures:
Domestic operations $ 4.6 $ 6.3 $ 12.5 $ 16.6
International operations 1.6 0.9 4.4 1.4
------ ------ -------- --------
Total capital expenditures $ 6.2 $ 7.2 $ 16.9 $ 18.0
====== ====== ======== ========
Depreciation and Amortization
Domestic operations $ 5.0 $ 4.6 $ 9.8 $ 8.5
International operations 1.1 1.1 2.6 2.4
------ ------ -------- --------
Total expenses $ 6.1 $ 5.7 $ 12.4 $ 10.9
====== ====== ======== ========
July 2, 2000 January 2, 2000
------------ ---------------
Long-lived Assets
Domestic operations $ 62.4 $ 52.7
International operations 17.1 15.5
-------- --------
Total long-lived assets $ 79.5 $ 68.2
======== ========
</TABLE>
Page 14 of 29
<PAGE> 15
11. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." The Statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138 ("SFAS 138"), "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an Amendment of SFAS 133." SFAS 138 addresses a
limited number of issues causing implementation difficulties for numerous
entities that apply SFAS 133 and amends the accounting and reporting
standards of SFAS 133 for certain derivative instruments and certain hedging
activities. SFAS 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. In management's opinion, the impact of adopting
SFAS 133 and 138 will not have a material impact upon the Company's results of
operations or financial position.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "Revenue
Recognition" ("SAB No. 101"), which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
SEC. SAB No. 101 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosure related to revenue recognition
policies. An amendment in June 2000 delayed the effective date until the fourth
quarter of 2000. We believe our revenue recognition practices are in conformity
with the guidelines prescribed in SAB No. 101.
Page 15 of 29
<PAGE> 16
THE WACKENHUT CORPORATION AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS: Management's discussion and analysis of financial
condition, results of operations, market risk and the August 4, 2000 press
release 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 beliefs and
assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," and variations of such
words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions ("future factors") which
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Future factors include: 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Wackenhut Corporation, a Florida corporation, and subsidiaries (the
"Company"), including WHC, a 57% owned public subsidiary, is a major provider of
global business services which include security-related and other support
services to business and government, a leading developer and manager of
privatized correctional, detention and public sector mental health services
facilities, and a provider of employee leasing and temporary staffing. Security
Services has 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. Wackenhut Corrections 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. During the past four years,
the Company has established a national presence in the flexible staffing
business, which includes personnel employee leasing, temporary services,
recruiting, risk management, payroll processing and human resource services.
FINANCIAL CONDITION
Reference is made to pages 26 through 32 of the Company's Annual Report to
Shareholders, filed as Exhibit 13.0 with the Company's Annual Report on Form
10-K for the fiscal year ended January 2, 2000, for further discussion and
analysis of information pertaining to the Company's financial condition.
LIQUIDITY
Cash and cash equivalents at July 2, 2000 of $67.0 million remained unchanged
from January 2, 2000. Cash provided by operating activities amounted to $19.4
million and $18.1 million in the first half 2000 and first half 1999,
respectively. Cash used in investing activities amounted to $26.8 in the first
half 2000 versus $3.9 million for the same period in the prior year, primarily
reflecting proceeds from the sale of prison facilities to Correctional
Properties Trust ("CPV") in the prior year. Cash provided by financing
activities amounted to $9.0 million and $7.6 million in the first half 2000 and
first half 1999, respectively. As of July 2, 2000, the net amount available to
the Company from its revolving credit and accounts receivable securitization
facilities after deducting balances outstanding was $55.5 million. The Company
intends to refinance these facilities that become due within one year.
As of July 2, 2000, approximately $101.1 million of WHC's $220.0 million
operating lease facility, established to acquire and develop new correctional
facilities, was outstanding for properties under development. Also as of July 2,
2000, WHC had $24.0 million outstanding of its $30.0 million revolving credit
facility for the funding of construction projects. WHC's access to capital and
ability to compete for future capital intensive projects is dependent upon,
among other things, its ability to meet certain financial covenants included in
the $220.0 million operating lease facility and $30.0 million revolving credit
facility. A substantial decline in WHC's financial performance as a result of an
increase in operational expenses relative to revenue could negatively impact
WHC's ability to meet these covenants, and could therefore limit WHC's access to
capital.
With the completion of the remaining properties under development, WHC will
have consumed its available capacity under the operating lease facility. WHC is
exploring other financing alternatives for future project development such as
the sale of facilities to government entities, the third-party sale and
leaseback of facilities, and the issuance of taxable or nontaxable bonds by
local government entities.
On January 7, 2000, WHC exercised the right to acquire the 276-bed Jena
Juvenile Justice Center in Jena, Louisiana from the trust of WHC's operating
lease facility and, simultaneously sold it to Correctional Properties Trust
("CPV"). WHC did not receive any proceeds from the sale. This facility is being
leased back to WHC under a 10-year operating lease. On May 17, 2000, the
Louisiana Department of Public Safety and Corrections ("LDPSC") had removed all
inmates from the Jena Juvenile Justice Center and WHC terminated the employment
of the facility staff. The cooperative agreement for such facility was
terminated effective June 30, 2000. WHC is continuing its efforts to find an
alternative use for the facility. If WHC is unable to find an alternative use
for the facility, there could be an adverse impact on the Company's financial
position and future results of operations.
Page 16 of 29
<PAGE> 17
MARKET RISK
The Company is exposed to market risks, including changes in interest rates and
currency exchange rates. These exposures primarily relate to outstanding
balances under the revolving line of credit and securitization facilities and
international investments. In addition, WHC is exposed to market risks arising
from changes in interest rates with respect to its $220.0 million operating
lease facility. Based on the Company's interest rate and foreign exchange rate
position at July 2, 2000, a hypothetical 100 basis point change in market
interest rates or a 10% change in the historical currency rates would not have a
material effect on the Company's financial position or results of operations.
Page 17 of 29
<PAGE> 18
RESULTS OF OPERATIONS
The table below summarizes the Company's results of operations for the
thirteen weeks ended July 2, 2000 ("second quarter 2000") and July 4, 1999
("second quarter 1999") by its 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):
Thirteen Weeks Ended
-----------------------------------
July 2, 2000 July 4, 1999
--------------- ---------------
$ % $ %
----- ----- ----- -----
REVENUES[a]
Security Services:
North American Operations 246.8 40.0 221.8 41.8
International Operations 40.9 6.6 36.9 7.0
----- ----- ----- -----
287.7 46.6 258.7 48.8
Correctional Services 133.9 21.7 106.1 20.0
Flexible Staffing Services 196.0 31.7 165.5 31.2
----- ----- ----- -----
Consolidated revenues 617.6 100.0 530.3 100.0
===== ===== ===== =====
OPERATING INCOME[b]
Security Services:
North American Operations 7.0 2.8 6.0 2.7
International Operations 0.8 2.0 0.3 0.8
----- -----
7.8 2.7 6.3 2.4
Correctional Services 5.0 3.7 6.8 6.4
Flexible Staffing Services 1.1 0.6 0.9 0.5
Unallocated corporate expense (5.0) (0.8) (5.0) (0.9)
----- -----
Consolidated operating income 8.9 1.4 9.0 1.7
===== =====
[a] Represents percent of total revenues.
[b] Represents percent of respective business related revenues.
COMPARISON OF THIRTEEN WEEKS ENDED JULY 2, 2000 AND THIRTEEN WEEKS ENDED
JULY 4, 1999
REVENUES
Global Security Services
Second quarter 2000 Global Security Services revenues increased $29.0 million,
or 11.2%, to $287.7 million from $258.7 million in the second quarter 1999.
Revenues of the North American Operations increased $25.0 million, or 11.3%, to
$246.8 million in the second quarter 2000 from $221.8 million in the second
quarter 1999. There was continued expansion of revenues from national accounts
due to new contracts and increases in existing contracts. Revenues were boosted
by the start-up in the third and fourth quarters of 1999 from security
operations at six nuclear power plants in Illinois with annualized revenues of
$19.0 million, the start of an annual $7.0 million contract at the TMI nuclear
unit in Pennsylvania in the first quarter 2000, and operations initiated in
January 2000 at the U.S. Department of Energy's Oak Ridge facility with
annualized contract revenues of $75.0 million. International Operations'
revenues increased $4.0
Page 18 of 29
<PAGE> 19
million, or 10.8%, to $40.9 million in the second quarter 2000 compared to
$36.9 million in the second quarter 1999. Increases in international security
revenues are primarily attributable to growth in Europe due to new contracts.
Correctional Services
Second quarter 2000 Correctional Services revenues increased $27.8 million, or
26.2%, to $133.9 million from $106.1 million in the comparable quarter last
year. Approximately $15.9 million of the increase in revenues in the second
quarter 2000 compared to the second quarter 1999 is attributable to increased
compensated resident days resulting from the opening of six facilities in 1999.
The number of compensated resident days in domestic facilities increased to
2,163,793 in the second quarter 2000 from 2,135,658 in the second quarter 1999.
Compensated resident days in Australian facilities increased to 513,205 from
251,701 for the comparable periods primarily due to higher compensated resident
days at the immigration detention facilities and the opening of two such
facilities. Approximately $10.0 million of the increase in revenues is
attributable to the construction of new facilities. These increases were
partially offset by a $4.1 million revenue decrease due to the loss of two
contracts and a decrease in development activities. The balance of the increase
is attributable to facilities open during all of both periods. The average
facility occupancy in domestic facilities was 97.2% of capacity in the second
quarter 2000 compared to 98.3% in the second quarter 1999 due primarily to the
loss of the two contracts.
Flexible Staffing Services
Staffing Services second quarter 2000 revenues increased $30.5 million, or
18.4%, to $196.0 million from $165.5 million in the comparable quarter last
year. Leased employees grew to approximately 34,200 at the end of the second
quarter 2000 from 28,300 at the end of the second quarter 1999. Temporary
placement hours grew 10.8% to approximately 913,000 during the second quarter
2000 from approximately 824,000 during the second quarter 1999.
OPERATING INCOME
Second quarter 2000 consolidated operating income decreased $0.1 million, or
1.1%, to $8.9 million from $9.0 million in the second quarter 1999. The
operating margin for the second quarter 2000 decreased to 1.4% as compared to
1.7% for the second quarter 1999. The operating margin decrease for Correctional
Services more than offset the operating margin increases for all other business
units including a favorable decrease in unallocated corporate expenses as a
percentage of consolidated revenues. During a period of low unemployment, some
business units may experience difficulty in finding qualified personnel. This
could have an adverse impact on the Company's results of operations to the
extent wages and salaries increase at a faster rate than the per diem or fixed
rate received by the Company for its services.
Security Services
The operating income of the security services business increased $1.5 million,
or 23.8%, to $7.8 million in the second quarter 2000 from $6.3 million for the
comparable quarter last year. North American Operations' operating income
increased $1.0 million, or 16.7%, to $7.0 million in the second quarter 2000
from $6.0 million in the second quarter 1999. The increase in operating income
of the North American Operations can be attributed mainly to increased revenue
growth. The operating income of North American Operations as a percentage of
revenues increased 10 basis points to 2.8% in the second quarter 2000 compared
to the second quarter 1999. This increase is primarily attributable to
Page 19 of 29
<PAGE> 20
the expensing of start-up costs in the second quarter 1999, relating to the
opening of five offices on the West Coast, and a reduction in IT project costs.
International Operations' operating income increased $0.5 million to $0.8
million in the second quarter 2000 from $0.3 million in the second quarter 1999,
and is primarily attributable to improved margins in Europe and Latin America
partially offset by increased losses in Mexico.
Correctional Services
Second quarter 2000 operating income decreased $1.8 million, or 26.5%, to $5.0
million from $6.8 million in the comparable period in 1999. As a percentage of
revenue, operating income decreased to 3.7% in the second quarter 2000 from 6.4%
in the second quarter 1999. This decrease is due to expenses related to the
construction of two facilities, additional expenses related to the closing of
one facility and the operations at six facilities in the United States. WHC has
developed strategies to improve the operational performance of these facilities;
however, there can be no assurances that these strategies will be successful. In
addition, there has been an adverse trend in the development of general
liability claims experience, and although WHC is developing a strategy to
improve the management of loss claims incurred, there can be no assurances that
this strategy will be successful. As a result, WHC has incurred additional
operating expenses related to general comprehensive liability insurance. WHC
continues to incur this additional insurance expense which could have an adverse
impact on the Company's future financial results of operations.
On August 31, 1999, WHC announced the mutual decision to discontinue its
contract for the operation of the Travis County Community Justice Center
effective November 8, 1999, and has successfully completed the close-out of all
contract claims, which resulted in no adverse impact to the Company's financial
position or results of operation. WHC has been in discussions regarding its New
Mexico operations and has submitted proposed contract modifications regarding
additional compensation for physical plant modification and increased staffing,
which have been or are in the process of being implemented by WHC. At this time
no agreement has been reached regarding these contract modifications.
On May 17, 2000, the Louisiana Department of Public Safety and Corrections had
removed all inmates from the Jena Juvenile Justice Center and terminated the
cooperative agreement for such facility effective June 30, 2000. If WHC is
unable to find an alternative use, there could be an adverse impact on the
Company's future financial position and future results of operations.
Flexible Staffing Services
The operating profit of Staffing Services was $1.1 million in the second quarter
2000, as compared to $0.9 million for the second quarter 1999. This increase is
attributable to revenue growth.
Unallocated Corporate Expenses
Unallocated corporate general and administrative expenses remained unchanged at
$5.0 million for both the second quarter 2000 and second quarter 1999. However,
as a percentage of consolidated revenues, unallocated corporate general and
administrative expenses decreased 0.1% to 0.8% in the second quarter 2000 from
0.9% in the second quarter 1999.
Page 20 of 29
<PAGE> 21
OTHER INCOME/EXPENSE
The Company incurred other income of $0.1 million in the second quarter 2000 and
second quarter 1999. Investment income increased $0.6 million to $1.9 million in
the second quarter 2000 from $1.3 million in the second quarter 1999 due to WHC
recognizing a gain of $0.6 million from the sale of its loan receivable from an
overseas affiliate. Interest expense increased $0.6 million to $1.8 million in
the second quarter 2000 from $1.2 million in the second quarter 1999. This
increase is primarily attributable to increased interest expense related to the
increase in the securitized accounts receivables and the revolver loan along
with higher interest rates.
INCOME BEFORE INCOME TAXES
Second quarter 2000 income before taxes decreased $0.1 million to $9.0 million
from $9.1 million in the second quarter 1999.
EBITDA, defined as earnings before interest expense, income taxes, depreciation
and amortization, was $15.0 million, or 2.4% of revenues for the second quarter
2000, which was $0.3 million, or 2.0%, higher than the second quarter 1999.
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
second quarter 2000 and 39.7% for the second quarter 1999.
MINORITY INTEREST
Minority interest (net of income taxes) decreased $0.3 million to $2.3 million
in the second quarter 2000 from $2.6 million in the second quarter 1999,
reflecting principally the decrease in earnings of WHC.
EQUITY INCOME OF AFFILIATES
Equity income of affiliates (net of income taxes) increased $0.2 million to $2.0
million in the second quarter 2000 from $1.8 million in the second quarter 1999.
NET INCOME
Net income was $5.1 million for the second quarter 2000, or $0.34 basic earnings
per share, as compared to $4.7 million, or $0.31 basic earnings per share for
the same period in 1999. Earnings per share on a diluted basis was $0.33 in the
second quarter 2000 compared to $0.30 per share for the same period in 1999.
Goodwill amortization, after tax, amounted to $0.4 million and $0.3 million for
the second quarter 2000 and second quarter 1999, respectively. Excluding
goodwill amortization, after tax, basic earnings per share would have been $0.02
more for both the second quarter 2000 and second quarter 1999. In addition,
diluted earnings per share would have been $0.03 and $0.02 more for the second
quarter 2000 and second quarter 1999, respectively.
Page 21 of 29
<PAGE> 22
RESULTS OF OPERATIONS
The table below summarizes the Company's results of operations for the
twenty-six weeks ended July 2, 2000 ("year-to-date") and July 4, 1999
("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):
Twenty-six Weeks Ended
-------------------------------------
July 2, 2000 July 4, 1999
----------------- -----------------
$ % $ %
------- ----- ------- -----
REVENUES[a]
Security Services:
North American Operations 490.5 40.5 436.0 42.3
International Operations 82.2 6.8 73.4 7.1
------- ----- ------- -----
572.7 47.3 509.4 49.4
Correctional Services 264.4 21.8 203.5 19.8
Flexible Staffing Services 374.5 30.9 317.5 30.8
------- ----- ------- -----
Consolidated revenues 1,211.6 100.0 1,030.4 100.0
======= ===== ======= =====
OPERATING INCOME[b]
Security Services:
North American Operations 14.1 2.9 11.3 2.6
International Operations 2.0 2.4 0.8 1.1
------- -------
16.1 2.8 12.1 2.4
Correctional Services 10.6 4.0 13.3 6.5
Flexible Staffing Services 1.8 0.5 1.5 0.5
Unallocated corporate expense (10.9) (0.9) (10.0) (1.0)
------- -------
Consolidated operating income 17.6 1.5 16.9 1.6
======= =======
[a] Represents percent of total revenues.
[b] Represents percent of respective business related revenues.
Page 22 of 29
<PAGE> 23
COMPARISON OF TWENTY-SIX WEEKS ENDED JULY 2, 2000 AND TWENTY-SIX WEEKS ENDED
JULY 4, 1999
REVENUES
Global Security Services
Year-to-date 2000 Security Services revenues increased $63.3 million, or 12.4%,
to $572.7 million from $509.4 million in the first half 1999. Revenues from
North American Operations increased $54.5 million, or 12.5%, to $490.5 million
in the first half 2000 from $436.0 million in the first half 1999. There was
continued expansion of revenues from national accounts due to new contracts and
increases in existing contracts. Revenues were boosted by the start-up in the
third and fourth quarters of 1999 from security operations at six nuclear power
plants in Illinois with annualized revenues of $19.0 million, the start of an
annual $7.0 million contract at the TMI nuclear unit in Pennsylvania in the
first quarter 2000, and operations initiated in January 2000 at the U.S.
Department of Energy's Oak Ridge facility with annualized contract revenues of
$75.0 million. International Operations revenues increased $8.8 million, or
12.0%, to $82.2 million in the first half 2000 compared to $73.4 million in the
first half 1999. Increases in international security revenues are primarily
attributable to growth in Europe and Latin America.
Correctional Services
Year-to-date 2000 Correctional Services revenues increased $60.9 million, or
29.9%, to $264.4 million from $203.5 million in the comparable period last year.
Approximately $36.9 million of the increase in revenues in the first half 2000
compared to the same period in 1999 is attributable to an increase in
compensated resident days resulting from the opening of seven facilities in
1999. The number of compensated resident days in domestic facilities increased
to 4,329,665 in the first half of 2000 from 4,165,528 for the first half of
1999. Compensated resident days in Australian facilities increased to 999,551
from 473,970 for the comparable periods primarily due to higher compensated
resident days at the immigration detention facilities and the opening of two
such facilities. Approximately $17.4 million of the increase in revenues is
attributable to the construction of new facilities. These increases were
partially offset by a $6.8 million revenue decrease due to the loss of two
contracts and a decrease in development activities. The balance of the increase
is attributable to facilities open during all of both periods. The average
facility occupancy in domestic facilities was 97.3% of capacity in the first
half of 2000 compared to 97.6% in the first half of 1999 due primarily to the
loss of the two contracts.
Flexible Staffing Services
Flexible Staffing Services year-to-date 2000 revenues of $374.5 million were
$57.0 million above revenues of $317.5 in the same period last year due to
growth. Leased employees grew to approximately 34,200 at the end of the second
quarter 2000 from 28,300 at the end of the second quarter 1999. Temporary
placement hours grew 9.7% to approximately 1,790,000 during the first half 2000
from approximately 1,632,000 during the same period in 1999.
OPERATING INCOME
Year-to-date 2000 consolidated operating income increased $0.7 million, or 4.1%,
to $17.6 million from $16.9 million for the same period in 1999. The operating
margin through the second quarter 2000 decreased to 1.5% from 1.6% for the same
period in the prior year. The operating margin decrease for Correctional
Services more than offset the operating margin increases for all other business
units including a favorable decrease in unallocated corporate expenses as a
percentage of consolidated revenues. During a period of low unemployment, some
business units may experience difficulty in finding qualified personnel. This
could have an adverse impact on the Company's results of operations to the
extent wages and salaries increase at a faster rate than the per diem or fixed
rate received by the Company for its services.
Page 23 of 29
<PAGE> 24
Security Services
The operating income of the security services business increased $4.0 million,
or 33.1%, to $16.1 million in the first half of 2000 from $12.1 million for the
comparable period last year. North American Operations' operating income
increased $2.8 million, or 24.8%, to $14.1 million in the first half of 2000
from $11.3 million for the same period in 1999. 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 first half of
2000, as a percentage of revenues, increased to 2.9% from 2.6% for the
comparable period in 1999. This increase is principally attributable to the
expensing of start-up costs in the first half of 1999, relating to the opening
of five offices on the West Coast, and a reduction in IT project costs.
International Operations' operating income increased $1.2 million to $2.0
million in the first half of 2000 from $0.8 million for the same period in 1999,
due principally to improved operations in Europe and Latin America partially
offset by increased losses in Mexico.
Correctional Services
Year-to-date 2000 operating income decreased $2.7 million, or 20.1%, to $10.6
million from $13.3 million in the comparable period in 1999. As a percentage of
revenue, operating income decreased to 4.0% in the first half of 2000 from 6.5%
in the same period in 1999. This decrease is due to expenses related to the
construction of two facilities, additional expenses related to the closing of
one facility, and the operations at five facilities in the United States. WHC
has developed strategies to improve the operational performance of these
facilities; however, there can be no assurances that these strategies will be
successful. In addition, there has been an adverse trend in the development of
general liability claims experience, and although WHC is developing a strategy
to improve the management of loss claims incurred, there can be no assurances
that this strategy will be successful. As a result, WHC has incurred additional
operating expenses related to general comprehensive liability insurance. WHC
continues to incur this additional insurance expense which could have an adverse
impact on the Company's future financial results of operations.
On August 31, 1999, WHC announced the mutual decision to discontinue its
contract for the operation of the Travis County Community Justice Center
effective November 8, 1999, and has successfully completed the close-out of all
contract claims, which resulted in no adverse impact to the Company's financial
position or results of operation. WHC has been in discussions regarding its New
Mexico operations and has submitted proposed contract modifications regarding
additional compensation for physical plant modification and increased staffing,
which have been or are in the process of being implemented by WHC. At this time
no agreement has been reached regarding these contract modifications.
On May 17, 2000, the Louisiana Department of Public Safety and Corrections had
removed all inmates from the Jena Juvenile Justice Center and terminated the
cooperative agreement for such facility effective June 30, 2000. If WHC is
unable to find an alternative use, there could be an adverse impact on the
Company's future financial position and future results of operations.
Page 24 of 29
<PAGE> 25
Flexible Staffing Services
The operating profit of Flexible Staffing Services was $1.8 million in the first
half of 2000, as compared to $1.5 million in the same period in 1999. The
improvement is attributable to revenue growth.
Unallocated Corporate Expenses
Unallocated corporate general and administrative expenses increased 9.0% to
$10.9 million in the first half of 2000 from $10.0 million in the same period in
1999. This increase over the prior year primarily reflects a non-recurring
increase in consulting fees. As a percentage of consolidated revenues,
unallocated corporate general and administrative expenses decreased to 0.9% of
revenues in the first half of 2000 from 1.0% of revenues in the first half of
1999.
OTHER INCOME/EXPENSE
The Company realized other expense, net, of $0.5 million in the first half of
2000 compared to none in the first half of 1999. Investment income increased
$0.8 million in the first half of 2000 to $3.0 million from $2.2 million in the
same period in 1999. This increase is primarily attributable to WHC recognizing
a gain of $0.6 million from the sale of its loan receivable from an overseas
affiliate. Interest expense increased $1.3 million to $3.5 million in the first
half of 2000 from $2.2 million in the same period in 1999. 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
Year-to-date 2000 income before taxes increased $0.2 million, or 1.2%, to $17.1
million from $16.9 million for the same period in 1999.
EBITDA, defined as earnings before interest expense, income taxes, depreciation
and amortization, was $30.0 million, or 2.5% of revenues for the first half of
2000, which was $1.2 million, or 4.2%, higher than the first half of 1999.
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
half of 2000 and 39.7% for the same period in 1999.
MINORITY INTEREST EXPENSE
Minority interest expense (net of income taxes) decreased $0.4 million to $4.6
million in the second half of 2000 from $5.0 million for the same period 1999,
reflecting principally the decrease in earnings of WHC.
EQUITY INCOME OF AFFILIATES
Equity income of affiliates (net of income taxes) increased $0.2 million to $3.7
million in the second half of 2000 from $3.5 million for the same period in
1999.
NET INCOME
Net income was $9.4 million for the first half of 2000, or $0.63 basic earnings
per share, as compared to $8.7 million, or $0.58 basic earnings per share for
the same period in 1999. Earnings per share on a diluted basis was $0.61 for the
first half 2000 compared to $0.57 per share for the same period in 1999.
Goodwill amortization, after tax, amounted to $0.7 million and $0.6 million for
the first half 2000 and first half 1999. Excluding goodwill amortization, after
tax, basic earnings per share would have been $0.04 more for both the first
half 2000 and
Page 25 of 29
<PAGE> 26
first half 1999, respectively. Likewise, diluted earnings per share would have
been $0.05 and $0.03 more for the first half 2000 and first half 1999,
respectively.
Page 26 of 29
<PAGE> 27
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, there are no other pending legal proceedings except
those disclosures below, for which the potential impact if decided unfavorable
to the Company could have a material adverse effect on the consolidated
financial statements of the Company.
In Travis County, Texas, a grand jury indicated twelve of WHC's former facility
employees for various types of sexual misconduct at the Travis County Community
Justice Center. Eleven of the twelve indicted former employees already resigned
from or had been terminated by WHC as a result of WHC initiated investigations
over the course of the prior three years. WHC is not providing counsel to
assist in the defense of these twelve individuals. Management believes these
indictments are not expected to have any material financial impact on the
Company. The District Attorney in Travis County continues to review WHC
documents for alleged document tampering at the Travis County Facility. At this
time, WHC cannot predict the outcome of this investigation or the potential
impact on the Company's financial position and results of operations.
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
The Annual Meeting of Shareholders of the Company was held on May 5, 2000 in
Manalapan, Florida. The following proposals were acted upon by the shareholders:
Proposal No. 1
All directors nominated for election were elected in an uncontested election. A
tabulation of results is as follows:
Name Votes for Votes Withheld
---- --------- --------------
Julius W. Becton, Jr. 3,263,440 10,006
Alan B. Bernstein 3,263,553 9,893
Carroll A. Campbell 3,263,001 10,445
Benjamin R. Civiletti 3,263,301 10,145
Anne N. Foreman 3,263,693 9,753
Edward L. Hennessy, Jr. 3,263,627 9,819
Paul X. Kelley 3,263,427 10,019
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Name Votes for Votes Withheld
---- --------- --------------
Nancy Reynolds 3,263,527 9,919
John F. Ruffle 3,263,288 10,158
Thomas P. Stafford 3,263,606 9,840
George R. Wackenhut 3,262,555 10,891
Richard R. Wackenhut 3,260,821 12,625
Tabulation of the results of other matters voted upon at the Annual Meeting is
as follows:
Proposal No. 2
Appointment of Independent Certified Public Accountants -
For..3,260,863 Against..8,739 Abstain..3,844
Proposal No. 3
Additional shares for the Key Employee Long-Term Incentive Stock Plan -
For..2,982,242 Against..280,844 Abstain..10,360
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 second quarter 2000.
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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 twenty-six
weeks ended July 2, 2000 to be signed on its behalf by the undersigned hereunto
duly authorized.
THE WACKENHUT CORPORATION
DATE: August 16, 2000 /s/ Philip L. Maslowe
---------------------------------
Philip L. Maslowe,
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
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