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 April 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
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(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 May 12, 2000, 3,855,582 shares of Series A were issued and outstanding and
11,144,409 shares of Series B of the registrant's Common Stock were outstanding
after deducting 201,492 shares held in treasury.
Page 1 of 25
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 thirteen weeks
ended April 2, 2000 are not necessarily indicative of the results for the entire
fiscal year ending December 31, 2000.
Page 2 of 25
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED
APRIL 2, 2000 and APRIL 4, 1999
(in millions except per share data)
UNAUDITED
2000 1999
-------- --------
REVENUES $ 594.0 $ 500.1
-------- --------
OPERATING EXPENSES:
Payroll and related taxes 452.9 388.8
Other operating expenses 126.1 98.2
Depreciation and amortization expense 6.3 5.2
-------- --------
585.3 492.2
-------- --------
OPERATING INCOME 8.7 7.9
-------- --------
OTHER INCOME (EXPENSE):
Interest and investment income 1.1 0.9
Interest expense (1.7) (1.0)
-------- --------
(0.6) (0.1)
-------- --------
INCOME BEFORE INCOME TAXES 8.1 7.8
Provision for income taxes (3.2) (3.1)
Minority interest, net of income taxes of $1.5 and $1.6 (2.3) (2.4)
Equity income of affiliates, net of income taxes
of $1.1 and $1.1 1.7 1.7
-------- --------
NET INCOME $ 4.3 $ 4.0
======== ========
EARNING PER SHARE:
Basic $ 0.29 $ 0.27
Diluted $ 0.28 $ 0.26
Basic weighted average shares outstanding 15.0 14.9
Diluted weighted average shares outstanding 15.1 15.1
See notes to unaudited consolidated financial statements
Page 3 of 25
4
THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 2, 2000 AND JANUARY 2, 2000
(in millions)
UNAUDITED
April 2, January 2,
2000 2000
------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 49.1 $ 67.0
Accounts receivable, net 204.2 182.3
Inventories 13.1 14.7
Deferred taxes 10.2 10.5
Prepaid expenses 12.4 12.5
Other 13.4 12.1
------ ------
302.4 299.1
------ ------
MARKETABLE SECURITIES 24.7 28.8
------ ------
PROPERTY AND EQUIPMENT - at cost 106.6 96.1
- accumulated depreciation (30.5) (27.9)
------ ------
76.1 68.2
------ ------
DEFERRED TAXES 9.7 10.0
------ ------
OTHER ASSETS:
Goodwill, net 53.1 52.3
Other intangibles, net 16.1 16.7
Investment in and advances to affiliates, at cost 50.0 42.0
Other 8.1 8.6
------ ------
127.3 119.6
------ ------
$540.2 $525.7
====== ======
See notes to unaudited consolidated financial statements.
Page 4 of 25
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 2, 2000 AND JANUARY 2, 2000
(in millions except share data)
UNAUDITED
April 2, January 2,
2000 2000
-------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 3.7 $ 4.7
Accounts payable 36.4 38.3
Accrued payroll and related taxes 81.0 77.1
Accrued expenses 59.1 59.7
------ ------
180.2 179.8
------ ------
RESERVES FOR INSURANCE LOSSES 75.4 77.5
------ ------
LONG-TERM DEBT 30.9 16.5
------ ------
DEFERRED REVENUE 14.8 15.2
------ ------
OTHER 18.0 17.4
------ ------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
MINORITY INTEREST 54.0 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, 11.1 million issued and outstanding 1.1 1.1
Additional paid-in capital 123.9 124.8
Retained earnings 55.3 51.0
Accumulated other comprehensive loss (10.7) (10.3)
Treasury stock at cost, 0.2 million shares of Series B shares (3.1) (3.1)
------ ------
166.9 163.9
------ ------
$540.2 $525.7
====== ======
See notes to unaudited consolidated financial statements.
Page 5 of 25
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED APRIL 2, 2000 AND APRIL 4, 1999
(In millions)
UNAUDITED
April 2, April 4,
2000 1999
-------- -------
CASH FLOWS PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net income $ 4.3 $ 4.0
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation expense 2.8 2.4
Uniform amortization 2.0 2.1
Other amortization expense 1.5 0.7
Deferred taxes 0.2 (1.9)
Provision for bad debts 0.7 0.1
Equity income, net of dividends (2.8) (2.6)
Minority interests in net income 3.8 4.1
Other (1.2) (0.4)
Changes in assets and liabilities, net of acquisitions and divestitures -
(Increase) Decrease in assets:
Accounts receivable (23.6) 1.3
Inventories (0.4) (3.2)
Prepaid expenses 0.1 (8.2)
Other current assets (1.3) (1.6)
Other (1.2) (2.3)
Increase (Decrease) in liabilities:
Accounts payable and accrued expenses (3.1) 10.7
Accrued payroll and related taxes 3.9 (3.5)
Reserves for insurance losses (2.1) 3.5
Deferred revenue (0.4) (0.2)
Other 0.7 0.6
------ -----
Net Cash (Used In) Provided By Operating Activities (16.1) 5.6
------ -----
INVESTING ACTIVITIES
Net proceeds from sale of prison facilities to CPV -- 22.3
Net investment in and advances to affiliates and joint ventures (5.1) --
Capital expenditures (10.7) (10.8)
Sales of marketable securities 8.0 4.7
Purchases of marketable securities (3.2) (8.9)
Non-current assets -- 1.3
------ -----
Net Cash (Used In) Provided By Investing Activities (11.0) 8.6
------ -----
Page 6 of 25
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED APRIL 2, 2000 AND APRIL 4, 1999
(in millions)
UNAUDITED
(Continued)
April 2, April 4,
2000 1999
--------- --------
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 -- 0.7
Proceeds from issuance of debt 95.6 47.6
Payments on debt (82.3) (46.2)
Dividends paid -- (2.2)
Net proceeds from sales (payments for repurchases) of accounts receivable 1.0 (15.0)
Purchase of treasury stock of subsidiary (4.2) (4.3)
------ ------
Net Cash Provided By (Used In) Financing Activities 10.1 (19.2)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (0.9) 0.2
------ ------
NET DECREASE IN CASH AND EQUIVALENTS (17.9) (4.8)
CASH AND CASH EQUIVALENTS, at beginning of period 67.0 43.5
------ ------
CASH AND CASH EQUIVALENTS, at end of period $ 49.1 $ 38.7
====== ======
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 1.7 $ 1.1
Income taxes 0.1 1.4
Non-cash financing and investing activities:
Impact on equity from the exercise and tax benefit related to the exercise of
options issued under the Company's non-qualified stock option plan $ -- $ 1.6
See notes to unaudited consolidated financial statements.
Page 7 of 25
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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
thirteen weeks ended April 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 $5.1 million and $5.2
million at April 2, 2000 and January 2, 2000, respectively.
2. INVESTMENT IN AFFILIATES
Equity in undistributed earnings of affiliates approximated $24.1 million and
$22.5 million at April 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):
April 2, January 2,
2000 2000
------- ---------
Balance sheet items:
Current assets $ 173.3 $ 142.6
Non-current assets 293.9 280.6
Current liabilities 100.9 92.3
Non-current liabilities 259.6 262.2
Minority interest liability 0.7 1.3
April 2, April 4,
2000 1999
------- -------
Income statement items for the thirteen weeks ended:
Revenues $ 147.9 $ 116.7
Operating income 12.1 9.1
Net income before taxes 7.4 6.8
Page 8 of 25
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3. COMPREHENSIVE INCOME
The components of the Company's comprehensive income are as follows (dollars in
millions):
Thirteen weeks ended
-------------------------------
April 2, April 4,
2000 1999
-------- -------
Net income $ 4.3 $ 4.0
Foreign currency translation adjustments, net of income tax
benefits of $0.6 million and $0.1 million, respectively (0.9) (0.2)
Unrealized gain on marketable securities, net of income
tax of $0.3 million and none, respectively 0.5 --
-------- -------
Comprehensive income $ 3.9 $ 3.8
======== =======
4. INTANGIBLES
Intangibles consisted of the following (dollars in millions):
April 2, January 2,
2000 2000
------- ----------
Goodwill $ 59.1 $ 57.6
Contract value 15.6 15.6
Other 8.8 8.8
------- -------
$ 83.5 $ 82.0
Accumulated amortization
Goodwill 6.0 5.3
Contract value 5.0 4.8
Other 3.3 2.9
------- -------
14.3 13.0
------- -------
Net $ 69.2 $ 69.0
------- -------
Page 9 of 25
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5. INCOME TAXES
The combined Federal and state effective income tax rate was 39.9% for the first
thirteen weeks of 2000 and 39.7% for the first thirteen weeks of 1999.
6. LONG TERM DEBT
Long-term debt consists of the following (dollars in millions):
April 2, January 2,
2000 2000
-------- -----------
Revolving loans at weighted average
rate of 7.5% and 8.0%, respectively $29.5 $15.0
Lease obligation payable in
installments through 2004 at a
weighted average rate of 4.5% 1.7 1.8
Other debt principally related to
North American operations and
International subsidiaries 3.4 4.4
----- -----
Total 34.6 21.2
Less: current portion (3.7) (4.7)
----- -----
Total $30.9 $16.5
----- -----
Page 10 of 25
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).
April 2, April 4,
2000 1999
-------- --------
Basic
Net income $ 4.3 $ 4.0
Weighted average common
shares outstanding 15.0 14.9
------- --------
Basic earnings per share $ 0.29 $ 0.27
------- --------
Diluted
Net income $ 4.3 $ 4.0
Effect of Wackenhut Corrections
stock options (0.1) --
------- --------
Net income $ 4.2 $ 4.0
------- --------
Weighted average common
shares outstanding 15.0 14.9
Assumed exercise of stock
options, net of common
shares assumed repurchased
with the proceeds 0.1 0.2
------- --------
Adjusted weighted average
common shares outstanding 15.1 15.1
------- --------
Diluted earnings per share $ 0.28 $ 0.26
-------- --------
Options to purchase 924,300 and 285,000 shares of common stock at April 2, 2000
and April 4, 1999, respectively, were excluded from the diluted earnings per
share calculation as their impact would have been antidilutive.
Page 11 of 25
12
8. SALE OF FACILITIES TO CORRECTIONAL PROPERTIES TRUST
On January 7, 2000, WHC sold its right to acquire the correctional facility in
Jena, Louisiana to Correctional Properties Trust ("CPV") for $15.3 million. As
the facility was sold at cost, WHC did not realize a gain or loss on the sale.
This facility is being leased back to WHC under an operating lease.
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. 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. 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 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 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 April 2, 2000, WHC had repurchased an additional 424,800 shares of
its common stock at an average price of $9.99 per share. Subsequent to April 2,
2000, WHC repurchased an additional 75,200 shares at an average price of $9.13.
10. 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 is involved in discussions with TDCJ regarding close-out of all
contract claims. The Company cannot predict the outcome of these discussions at
this time.
In New Mexico, WHC has been is 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 implemented or are in the
process of being implemented by WHC. At this time no agreement has been reached
regarding these contract modifications.
Page 12 of 25
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11. 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.
Thirteen Weeks Ended
-----------------------------------------
(dollars in millions) April 2, 2000 April 4, 1999
------------- -------------
Revenues:
Security services $ 285.0 $ 250.7
Correctional services 130.5 97.4
Staffing services 178.5 152.0
-------- -------
Total Revenues $ 594.0 $ 500.1
======== =======
Operating Income:
Security services $ 8.3 $ 5.8
Correctional services 5.6 6.5
Staffing services 0.7 0.6
Unallocated corporate expenses (5.9) (5.0)
-------- -------
Total operating income $ 8.7 $ 7.9
======== =======
Equity Income of Affiliates, net of taxes:
Security services $ 0.6 $ 1.0
Correctional services 1.1 0.7
-------- -------
Total equity income $ 1.7 $ 1.7
======== =======
Capital Expenditures:
Security services $ 0.2 $ 0.7
Correctional services 10.1 9.7
Staffing services 0.2 0.3
Unallocated corporate expenditures 0.2 0.1
-------- -------
Total capital expenditures $ 10.7 $ 10.8
======== =======
Depreciation and Amortization:
Security services $ 3.1 $ 3.0
Correctional services 2.1 1.3
Staffing services 0.6 0.5
Unallocated corporate expenses 0.5 0.4
-------- -------
Total depreciation and amortization expense $ 6.3 $ 5.2
======== =======
April 2, 2000 January 2, 2000
----------------- ------------------
Identifiable Assets:
Security services $ 180.2 $ 163.3
Correctional services 213.2 208.2
Staffing services 76.6 76.1
Unallocated corporate assets 70.2 78.1
-------- -------
Total identifiable assets $ 540.2 $ 525.7
======== =======
Page 13 of 25
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 in 1999 or
in the first quarter of 2000. 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:
Thirteen Weeks Ended
-----------------------------------------
(dollars in millions) April 2, 2000 April 4, 1999
------------- -------------
Revenues:
Domestic operations $ 518.8 $ 445.8
International operations 75.2 54.3
-------- -------
Total Revenues $ 594.0 $ 500.1
======== =======
Operating Income:
Domestic operations $ 2.2 $ 5.9
International operations 6.5 2.0
-------- -------
Total operating income $ 8.7 $ 7.9
======== =======
Equity Income of Affiliates, net of taxes:
Domestic operations $ 0.3 $ 0.5
International operations 1.4 1.2
-------- -------
Total equity income $ 1.7 $ 1.7
======== =======
Capital Expenditures:
Domestic operations $ 7.9 $ 10.3
International operations 2.8 0.5
-------- -------
Total capital expenditures $ 10.7 $ 10.8
======== =======
Depreciation and Amortization:
Domestic operations $ 4.8 $ 3.9
International operations 1.5 1.3
-------- -------
Total depreciation and amortization expense $ 6.3 $ 5.2
======== =======
April 2, 2000 January 2, 2000
----------------- ------------------
Long-lived Assets:
Domestic operations $ 59.2 $ 52.7
International operations 16.9 15.5
-------- -------
Total long-lived assets $ 76.1 $ 68.2
======== =======
Page 14 of 25
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12. SUBSEQUENT EVENT
On May 12, 2000, the Louisiana Department of Public Safety and Corrections
("LDPSC") notified WHC of its intention to remove all inmates from the Jena
Juvenile Justice Center in Jena, Louisiana and to terminate the cooperative
agreement for such facility effective June 30, 2000. WHC notified facility staff
that their employment would be terminated effective May 17, 2000. The LDPSC will
continue to make lease payments to WHC through June 30, 2000. WHC is continuing
its efforts to find an alternative use for the facility. However, during this
period of transition, WHC will continue to incur certain fixed costs. 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 15 of 25
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
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 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 April 2, 2000 of $49.1 million decreased $17.9
million from January 2, 2000. Cash used in operating activities amounted to
$16.1 million in the first quarter 2000, versus $5.6 million provided by
operating activities in the first quarter 1999 primarily related to an increase
in accounts receivable and a decrease in accounts payable and accrued expenses.
Cash used in investing activities amounted to $11.0 in the first quarter 2000
versus cash provided by investing activities of $8.6 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 in the first quarter 2000 amounted to $10.1
million, reflecting primarily $95.6 million in proceeds from issuance of debt,
offset by $82.3 million for payments on debt. Cash used in financing activities
was $19.2 million in the first quarter of 1999. As of April 2, 2000, the total
amount available to the Company from its revolving credit and accounts
receivable securitization facility was $70.4 million.
As of April 2, 2000, approximately $81.1 million of WHC's $220.0 million
operating lease facility, established to acquire and develop new correctional
facilities, was outstanding for properties under development.
Page 16 of 25
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, Wackenhut Corrections 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 April 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.
*FORWARD-LOOKING STATEMENTS: Management's discussion and analysis of financial
condition and results of operations and Market Risk and the May 5, 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 management's
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.
Page 17 of 25
18
RESULTS OF OPERATIONS
The table below summarizes the Company's results of operations 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
------------------------------------------------
April 2, 2000 April 4, 1999
---------------- ------------------
$ % $ %
----- ----- ----- -----
REVENUES [a]
Global Security Services:
North American Operations 243.7 41.0 214.2 42.8
International Operations 41.3 7.0 36.5 7.3
----- ----- ----- -----
285.0 48.0 250.7 50.1
Correction Services 130.5 22.0 97.4 19.5
Flexible Staffing Services 178.5 30.0 152.0 30.4
----- ----- ----- -----
Consolidated revenues 594.0 100.0 500.1 100.0
===== ===== ===== =====
OPERATING INCOME [b]
Global Security Services:
North America Operations 7.1 2.9 5.3 2.5
International Operations 1.2 2.9 0.5 1.4
----- -----
8.3 2.9 5.8 2.3
Correction Services 5.6 4.3 6.5 6.7
Flexible Staffing Services 0.7 0.4 0.6 0.4
Unallocated corporate expense (5.9) (1.0) (5.0) (1.0)
----- -----
Consolidated operating income 8.7 1.5 7.9 1.6
===== =====
[a] Represents percent of total revenues.
[b] Represents percent of respective business related revenues.
COMPARISON OF THIRTEEN WEEKS ENDED APRIL 2, 2000 AND THIRTEEN WEEKS ENDED APRIL
4, 1999
REVENUES
Global Security Services
First quarter 2000 Global Security Services revenues increased $34.3 million, or
13.7%, to $285.0 million from $250.7 million in the first quarter of 1999.
Revenues of the North American Operations increased $29.5 million, or 13.8%, to
$243.7 million in the first quarter of 2000 from $214.2 million in the first
quarter of 1999. There was continued expansion of revenues from national
accounts due to new contracts and increases in existing contracts. International
Operations' revenues increased $4.8 million, or 13.2%, to $41.3 million in the
first quarter of 2000 compared to $36.5 million in the first quarter of
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1999. Increases in international security revenues are primarily attributable to
growth in Europe and Latin America due to new contracts.
Correctional Services
First quarter 2000 Correctional Services revenues increased $33.1 million, or
33.9%, to $130.5 million from $97.4 million in the comparable quarter last year.
Approximately $26.9 million of the increase in revenues in the first quarter
2000 compared to the first 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 2,165,872 in
the first quarter 2000 from 2,029,870 in the first quarter 1999. Compensated
resident days in Australian facilities increased to 486,346 from 222,269 for the
comparable periods primarily due to higher compensated resident days at the
immigration detention facilities. Approximately $7.4 million of the increase in
revenues is attributable to the construction of new facilities. Revenues
decreased $2.7 million due to the loss of a contract. 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 quarter 2000 compared to 96.9% in the first quarter 1999.
Staffing Services
Staffing Services first quarter 2000 revenues increased $26.5 million, or 17.4%,
to $178.5 million from $152.0 million in the comparable quarter last year.
Leased employees grew to approximately 31,000 at the end of the first quarter of
2000 from 27,000 at the end of the first quarter of 1999. Temporary placement
hours grew 8.5% to approximately 877,000 during the first quarter of 2000 from
approximately 808,000 during the first quarter of 1999.
OPERATING INCOME
First quarter 2000 consolidated operating income increased $0.8 million, or
10.1%, to $8.7 million from $7.9 million in the first quarter of 1999. The
operating margin for the first quarter of 1999 decreased slightly to 1.5% as
compared to 1.6% for the comparable first quarter of 1999. 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 $2.5 million,
or 43.1%, to $8.3 million in the first quarter of 2000 from $5.8 million for the
comparable quarter last year. North American Operations' operating income
increased $1.8 million, or 34.0%, to $7.1 million in the first quarter of 2000
from $5.3 million in the first quarter of 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 40 basis points to 2.9% in the first quarter of 2000 compared
to the same quarter of 1999. This increase is primarily attributable to the
expensing of start-up costs in the first 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 $0.7 million to $1.2
million in the first quarter 2000 from $0.5 million in the first quarter 1999,
and is primarily attributable to improved margins in Europe and Latin America.
CORRECTIONAL SERVICES
First quarter 2000 operating income decreased $0.9 million, or 14.9%, to $5.6
million from $6.5 million in the comparable period in 1999. As a percentage of
revenue, operating income decreased to 4.3% in the first quarter of 2000 from
6.7% in the first quarter of 1999. This decrease is due to expenses related to
the construction of two facilities and additional expenses related to operations
at six facilities in the
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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 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 will incur
additional operating expenses related to general comprehensive liability
insurance that 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 is currently involved in discussions regarding
close-out of all contract claims. The Company cannot predict the outcome of
these discussions at this time. 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.
The Louisiana authorities have notified WHC of its intention to remove all
juvenile inmates from the Jena Juvenile Justice Center and to terminate the
cooperative agreement for such facility effective June 30, 2000. WHC is
attempting to find an alternative use for the facility and will continue to
incur certain fixed costs during this transition period. If WHC is unable to
find an alternative use, there could be an adverse impact on the Company's
future financial results of operations.
STAFFING SERVICES
The operating profit of Staffing Services was $0.7 million in the first quarter
of 2000, as compared to $0.6 million for the first quarter of 1999. This
increase is attributable to revenue growth.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate general and administrative expenses increased 18.0% to
$5.9 million in the first quarter of 2000 from $5.0 million in the first quarter
of 1999. This increase over the prior year primarily reflects a non-recurring
increase in consulting fees. However, as a percentage of consolidated revenues,
unallocated corporate general and administrative expenses remained the same at
1.0% of revenues in the first quarter of 2000 and 1999.
OTHER INCOME/EXPENSE
The Company incurred other expense of $0.6 million in the first quarter of 2000
compared to $0.1 million in the first quarter of 1999. Investment income
increased $0.2 million to $1.1 million in the first quarter of 2000 from $0.9
million in the first quarter of 1999. This increase is primarily attributable to
WHC's return on investment in overseas affiliates. Interest expense increased
$0.7 million to $1.7 million in the first quarter of 2000 from $1.0 million in
the first quarter of 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
First quarter 2000 income before taxes increased $0.3 million, or 3.8%, to $8.1
million from $7.8 million in the first quarter of 1999.
EBITDA, defined as earnings before interest expense, income taxes, depreciation
and amortization, was $15.0 million, or 2.5% of revenues for the first quarter
of 1999, which was an increase of $1.9 million, or 14.5%, over the $13.1
million, or 2.6% of revenues, EBITDA in the first quarter 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 39.9% for the first
thirteen weeks of 2000 and 39.7% for the first thirteen weeks of 1999.
MINORITY INTEREST
Minority interest (net of income taxes) decreased $0.1 million to $2.3 million
in the first quarter of 2000 from $2.4 million in the first quarter of 1999,
reflecting principally the decrease in earnings of WHC.
EQUITY INCOME OF AFFILIATES
Equity income of affiliates (net of income taxes) remained the same at $1.7
million for the first quarter 2000 and first quarter 1999.
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21
NET INCOME
Net income was $4.3 million for the first quarter 2000, or $0.29 basic earnings
per share, as compared to $4.0 million, or $0.27 basic earnings per share for
the same period in 1999. Earnings per share on a diluted basis was $0.28 in the
first quarter 2000 compared to $0.26 per share for the same period in 1999.
Goodwill amortization, after tax, amounted to $0.5 million and $0.3 million for
the first quarter 2000 and first quarter 1999, respectively. Excluding goodwill
amortization, after tax, basic earnings per share would have been $0.02 more for
both the first quarter 2000 and first quarter 1999. In addition, diluted
earnings per share would have been $0.03 and $0.02 more for the first quarter
2000 and first quarter 1999, respectively.
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22
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 indicted 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. WHC believes that if
the outcome of this investigation is unfavorable, there could be an adverse
effect upon the Company's financial position and future 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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits
Exhibit
Number Description
- ------- -----------
4. Fifth Amendment to Transfer and Administration Agreement (this
"Amendment"), dated March 31, 2000, among Wackenhut Funding
Corporation, a Delaware Corporation (the "Transferor") and its
successors and assigns, The Wackenhut Corporation, a Florida
corporation, individually and as servicer ("Wackenhut" or the
"Servicer"), Enterprise Funding Corporation, a Delaware
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23
corporation ("Enterprise" or the "Purchaser") and its successors
assigns, and Bank of America, N.A. (as successor to Nationsbank,
N.A.), a national banking association ("Bank of America"), as
agent for Enterprise and the Bank Investors (in such capacity, the
"Agent") and as a Bank Investor, amending that certain Transfer
and Administration Agreement dated as of December 30, 1997 among
the Transferor, the Servicer, the Purchaser, the Agent and Bank of
America (collectively, the "Parties"), as amended to the date
hereof by the First Amendment to Transfer and Administration
Agreement dated as of March 24, 1998, among the Parties, the
Second Amendment to Transfer and Administration Agreement dated
December 23, 1998, among the Parties, the Third Amendment to the
Transfer and Administration Agreement dated January 29, 1999,
among the Parties, and the Fourth Amendment to the Transfer and
Administration Agreement dated January 28, 2000, among the Parties
(collectively, the "Original Agreement," and said agreement as
amended by this Amendment, the "Agreement").
10.1 Amended and restated Senior Officer Retirement / Deferred
Compensation Agreement dated December 29, 1985 for Richard R.
Wackenhut
10.2 Amended and restated Senior Officer Retirement / Deferred
Compensation Agreement dated August 11, 1997 for Alan B.
Bernstein.
10.3 Amended and restated Senior Officer Retirement / Deferred
Compensation Agreement dated March 30, 1989 for Fernando
Carrizosa.
10.4 Amended and restated Senior Officer Retirement / Deferred
Compensation Agreement dated March 11, 1998 for Sandra L. Nusbaum.
10.5 Amended and restated Senior Officer Retirement / Deferred
Compensation Agreement dated August 2, 1999 for Timothy J. Howard.
10.6 Amended and restated Senior Officer Retirement / Deferred
Compensation Agreement dated April 30, 1988 for Robert C. Kneip.
10.7 Amended and restated Senior Officer Retirement / Deferred
Compensation Agreement dated August 11, 1997 for Philip L.
Maslowe.
10.8 Employment Agreement with G.R. Wackenhut dated March 17, 2000.
10.9 Employment Agreement with R.R. Wackenhut dated March 17, 2000.
10.10 Executive Severance Agreement with Fernando Carrizosa dated March
17, 2000.
10.11 Executive Severance Agreement with Sandra L. Nusbaum dated March
17, 2000.
10.12 Executive Severance Agreement with Robert C. Kneip dated March 17,
2000.
10.13 Executive Severance Agreement with Timothy J. Howard dated March
17, 2000.
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10.14 Executive Severance Agreement with Alan B. Bernstein dated March
17, 2000.
10.15 Executive Severance Agreement with Philip L. Maslowe dated March
17, 2000.
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 first quarter of 2000.
Page 24 of 25
25
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 thirteen
weeks ended April 2, 2000 to be signed on its behalf by the undersigned hereunto
duly authorized.
THE WACKENHUT CORPORATION
DATE: May 17, 2000 /s/ PHILIP L. MASLOWE
-----------------------------
Philip L. Maslowe,
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
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