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 1, 2001
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
--------------
Not Applicable
- --------------------------------------------------------------------------------
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 7, 2001, 3,855,582 shares of the registrant's Series A Common Stock
were issued and outstanding and 11,172,249 shares of Series B Common Stock were
issued and outstanding.
Page 1 of 33
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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 1, 2001 are not necessarily
indicative of the results for the entire fiscal year ending December 30, 2001.
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The Wackenhut Corporation and Subsidiaries
Consolidated Statements of Income
FOR THE PERIODS ENDED JULY 1, 2001 and JULY 2, 2000
(In millions except per share data)
UNAUDITED
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
*Restated *Restated
2001 2000 2001 2000
-------- -------- --------- ---------
REVENUES $ 686.0 $ 617.3 $ 1,349.5 $ 1,210.7
OPERATING EXPENSES
Payroll and related taxes 547.4 494.4 1,081.2 953.9
Other operating expenses 123.9 108.2 238.9 227.7
Depreciation and amortization expense 6.8 6.1 13.6 12.4
-------- -------- -------- --------
678.1 608.7 1,333.7 1,194.0
OPERATING INCOME 7.9 8.6 15.8 16.7
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Interest and investment income 1.6 2.0 3.3 3.3
Interest expense (1.4) (2.0) (3.7) (3.9)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 8.1 8.6 15.4 16.1
INCOME TAXES (3.1) (3.4) (6.0) (6.4)
MINORITY INTEREST, NET OF INCOME
TAXES OF $1.6, $1.6, $2.5, and $3.1 (2.5) (2.3) (3.9) (4.6)
EQUITY IN INCOME (LOSS) OF AFFILIATES, NET OF INCOME
TAX (BENEFIT) PROVISION OF $(0.8), $1.4, $(3.8), $2.5 (1.5) 2.2 (6.0) 3.7
-------- -------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE $ 1.0 $ 5.1 $ (0.5) $ 8.8
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- -- -- (0.8)
-------- -------- -------- --------
NET INCOME (LOSS) $ 1.0 $ 5.1 $ (0.5) $ 8.0
======== ======== ======== ========
EARNING (LOSS) PER SHARE
Basic
Income (loss) before cumulative effect of
change in accounting principle $ 0.07 $ 0.34 $ (0.03) $ 0.59
Cumulative effect of change in accounting principle -- -- -- (0.05)
------- -------- -------- --------
Net income (loss) $ 0.07 $ 0.34 $ (0.03) $ 0.54
======= ======== ======== ========
Diluted
Income (loss) before cumulative effect of
change in accounting principle $ 0.06 $ 0.34 (0.04) $ 0.58
Cumulative effect of change in accounting principle -- -- -- (0.05)
------- -------- -------- --------
Net income (loss) $ 0.06 $ 0.34 $ (0.04) $ 0.52
======= ======== ======== ========
BASIC WEIGHTED AVERAGE SHARE OUTSTANDING 15.0 15.0 15.0 15.0
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15.3 15.1 15.0 15.1
*Restated for the adoption of SAB No. 101.
See accompanying notes to unaudited consolidated financial statements.
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The Wackenhut Corporation and Subsidiaries
Consolidated Balance Sheets
(In millions except share data)
July 1,
2001 December 31,
Unaudited 2000
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 54.2 $ 60.8
Accounts receivable, net 224.9 218.4
Inventories 9.2 11.5
Deferred taxes 15.1 12.1
Prepaid expenses 9.6 10.6
Other 14.1 15.1
------------- -------------
327.1 328.5
------------- -------------
MARKETABLE SECURITIES 50.7 37.3
------------- -------------
PROPERTY AND EQUIPMENT 122.7 118.2
Less: accumulated depreciation and amortization (44.4) (38.8)
------------- -------------
78.3 79.4
------------- -------------
DEFERRED TAXES 13.1 7.5
------------- -------------
OTHER ASSETS
Goodwill, net 50.8 50.1
Other intangibles, net 5.8 14.1
Investment in and advances to affiliates 35.0 44.9
Other 9.6 8.5
------------- -------------
101.2 117.6
------------- -------------
$ 570.4 $ 570.3
============= =============
(Continued)
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The Wackenhut Corporation and Subsidiaries
Consolidated Balance Sheets
(In millions except share data)
July 1,
2001 December 31,
Unaudited 2000
------------ --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current portion of long-term debt $ 4.2 $ 5.1
Accounts payable 30.3 36.9
Accrued payroll and related taxes 97.8 90.3
Accrued expenses 66.1 65.6
------------ ------------
198.4 197.9
RESERVES FOR INSURANCE LOSSES 95.8 92.7
------------ ------------
LONG-TERM DEBT, net of current portion 2.3 11.4
------------ ------------
DEFERRED REVENUE 11.3 12.8
------------ ------------
OTHER 36.4 19.6
------------ ------------
COMMITMENTS AND CONTINGENCIES (note 7)
MINORITY INTEREST 56.1 58.1
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, 10 million shares authorized, none outstanding -- --
Common stock, $.10 par value, 50 million shares authorized:
Series A, 3.9 million shares issued and outstanding 0.4 0.4
Series B, 11.1 million shares issued and outstanding 1.1 1.1
Additional paid-in capital 123.0 121.9
Retained earnings 67.3 67.8
Accumulated other comprehensive loss (21.7) (13.4)
------------ ------------
170.1 177.8
------------ ------------
$ 570.4 $ 570.3
============ ============
See accompanying notes to unaudited consolidated financial statements.
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The Wackenhut Corporation and Subsidiaries
Consolidated Statements of Cash Flows
FOR THE TWENTY-SIX WEEKS ENDED JULY 1, 2001 AND JULY 2, 2000
(In millions)
UNAUDITED
Restated *
July 1, July 2,
2001 2000
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (0.5) $ 8.0
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Cumulative effect of change in accounting principle -- 0.8
Depreciation and amortization 13.6 12.4
Deferred taxes (8.6) 0.3
Provision for bad debts 2.5 1.1
Equity in loss (income), net of dividends received 12.4 (4.8)
Minority interest in net income, net of income taxes 3.9 4.6
Tax benefit from exercise of stock options 0.2 -
Other (1.2) (0.5)
Changes in operating assets and liabilities, net of divestitures -
Accounts receivable 12.4 (8.1)
Inventories (3.9) (1.5)
Prepaid expenses 0.9 1.9
Other current assets 0.5 (2.1)
Other assets (3.0) (2.1)
Accounts payable and accrued expenses (8.3) 6.2
Accrued payroll and related taxes 7.5 2.8
Reserves for insurance losses 3.1 4.2
Other liabilities 3.4 0.9
---------- ----------
Net Cash Provided By Operating Activities 34.9 24.1
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of food service division 14.6 --
Payments for contingent acquisition fees (1.9) (10.3)
Net investment in and advances to affiliates and joint ventures 0.1 (6.7)
Capital expenditures (6.4) (16.9)
Sales of marketable securities 40.2 9.3
Purchases of marketable securities (53.5) (6.9)
---------- ----------
Net Cash Used In Investing Activities (6.9) (31.5)
---------- ----------
(Continued)
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The Wackenhut Corporation and Subsidiaries
Consolidated Statements of Cash Flows
FOR THE TWENTY-SIX WEEKS ENDED JULY 1, 2001 AND JULY 2, 2000
(In millions)
UNAUDITED
(continued)
Restated *
July 1, July 2,
2001 2000
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt $ 203.9 $ 210.1
Payments on debt (213.8) (188.2)
Net cash settlements from sales of accounts receivable (21.5) (8.0)
Shares repurchased and retired, including subsidiary's -- (4.9)
---------- ----------
Net Cash (Used in) Provided by Financing Activities (31.4) 9.0
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (3.2) (1.6)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6.6) --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 60.8 67.0
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 54.2 $ 67.0
========== ==========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for - interest $ 3.6 $ 4.0
- income tax $ 6.7 $ 3.9
* Restated for adoption of SAB No. 101.
See accompanying notes to unaudited consolidated financial statements.
Page 7 of 33
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLAR INFORMATION IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)
(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 1, 2001 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 December
31, 2000. Certain prior year amounts have been reclassified to conform to
current year presentation. Accounts receivable are net of allowances of $6.3
million and $4.8 million at July 1, 2001 and December 31, 2000, respectively.
During the fourth quarter of 2000, the Company adopted SEC Staff Accounting
Bulletin: No. 101 (SAB No. 101) - Revenue Recognition. Government contract award
fees, previously accrued for based on the Company's performance and long-term
experience of being awarded such fees, are now only recognized when formally
awarded. SAB No. 101 applied retroactively to the first quarter of 2000,
resulted in a one-time charge in 2000 of $0.8 million, net of income taxes. On a
diluted basis, the cumulative effect of change in accounting principle was $0.05
per share during 2000.
The Company and WHC adopted Statement of Financial Accounting Standards ("SFAS")
No.133, "Accounting for Derivative Instruments and Hedging Activities", on
January 1, 2001. 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. WHC's 50% owned equity
affiliate operating in the United Kingdom has entered into interest rate swaps
to fix the interest rate it receives on its variable rate credit facility.
Management of WHC has determined the swaps to be effective cash flow hedges.
Accordingly, WHC recorded its share of the affiliate's change in other
comprehensive income as a result of applying SFAS 133. As of July 1, 2001, the
swaps approximated $9.1 million which is reflected as a reduction in
shareholders' equity in WHC's financial statements for the quarter ended July 1,
2001, and approximately $5.2 million in the Company's financial statements for
the same period.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which was
effective for servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. This statement replaces SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities", and revises the accounting and disclosure of such transactions,
however, most of SFAS No. 125's provisions will continue to be applicable. On
December 30, 1997, the Company entered into an agreement with a financial
institution to sell on a continuous basis undivided interests in certain,
eligible trade accounts receivable. In accordance with SFAS No. 140 during the
Page 8 of 33
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second quarter 2001, and in accordance with SFAS 125 during all previous
periods, the Company removes receivable balances from the consolidated balance
sheets at the time the receivables are sold. Costs associated with the sale of
receivables, primarily related to the consolidated discount and loss on sale,
are included in "Interest expense" in the consolidated statements of income.
In June 2001, the FASB issued SFAS 141, "Business Combinations." SFAS 141
addresses financial accounting and reporting for business combinations and
supercedes APB No. 16, "Business Combinations" and SFAS No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises." All business
combinations in the scope of SFAS 141 are to be accounted for under the purchase
method. SFAS 141 is effective June 30, 2001. The Company does not expect the
adoption of SFAS 141 to have an impact on its financial position, results of
operations or cash flows.
In June 2001, the FASB also issued SFAS 142, "Goodwill and Other Intangible
Assets." SFAS 142 addresses financial accounting and reporting for intangible
assets acquired individually or with a group of other assets (but not those
acquired in a business combination) at acquisition. SFAS 142 also addresses
financial accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. With the adoption of SFAS 142, goodwill is no
longer subject to amortization. Rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair value test. The impairment
loss is the amount, if any, by which the implied fair value of goodwill is less
than the carrying or book value. SFAS 142 is effective for fiscal years
beginning after December 15, 2001. Impairment loss for goodwill arising from the
initial application of SFAS 142 is to be reported as resulting from a change in
accounting principle. The Company is currently assessing the impact of adopting
SFAS 142 and believes, excluding impairments, net income for fiscal year 2002
will be increased, since goodwill is no longer subject to amortization, by
approximately $2.3 million or $0.15 per diluted share, excluding any possible
tax impact.
2. INVESTMENT IN AFFILIATES
Equity in undistributed earnings of affiliates approximated $12.1 million and
$27.6 million at July 1, 2001 and December 31, 2000, respectively, and is
included in "Investment in and advances to affiliates" in the accompanying
consolidated balance sheets. This decrease in undistributed earnings is
primarily attributable to losses the Company recorded on its Chilean affiliate.
The following is a summary of condensed unaudited financial information
pertaining to affiliates:
July 1, December 31,
2001 2000
----------------- -------------------
Balance sheet items:
Current assets $ 179.5 $ 190.0
Non-current assets 401.9 365.0
Current liabilities 157.4 147.3
Non-current liabilities 346.7 320.7
Minority interest liability 0.5 0.4
July 1, July 2,
2001 2000
----------------- -------------------
Income statement items for the twenty-six weeks ended:
Revenues $ 354.6 $ 297.2
Operating income 16.5 24.5
Income before taxes (5.4) 23.9
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3. COMPREHENSIVE INCOME (LOSS)
The components of the Company's comprehensive income (loss) are as follows:
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
-------- ------- --------- --------
Income (loss) $ 1.0 $ 5.1 $ (0.5) $ 8.0
Foreign currency translation adjustments, net of income tax
benefit of $2.3, $0.5, $2.1, and $1.4, respectively (3.5) (0.7) (3.2) (1.6)
Cumulative effect of change in accounting principle related
to WHC's affiliate's derivative instruments, net of income
tax benefit of $4.6 million (6.9)
Unrealized gain on WHC's affiliate's derivative instruments,
net of income tax expense of $1.9 million and $1.1 million,
respectively 2.8 1.7
Unrealized gain (loss) on marketable securities, net of
income tax benefit (expense) of $0.2, $(0.1), $(0.1), and
$(0.4), respectively (0.3) 0.1 0.1 0.6
-------- -------- --------- --------
Comprehensive income (loss) $ -- $ 4.5 $ (8.8) $ 7.0
======== ======== ========= ========
4. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consisted of the following:
July 1, December 31,
2001 2000
---------------- ----------------
Goodwill $ 59.6 $ 58.0
Contract value -- 15.6
Other 10.7 8.7
---------------- ----------------
70.3 82.3
Accumulated amortization
Goodwill 8.8 7.9
Contract value -- 5.7
Other 4.9 4.5
---------------- ----------------
13.7 18.1
---------------- ----------------
Net $ 56.6 $ 64.2
================ ================
The reduction of contract value is related to the sale of the Company's food
services division.
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5. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
July 1, December 31,
2001 2000
-------------- ------------------
Revolving loans -
The Wackenhut Corporation, parent $0.5 $0.5
WHC -- 10.0
Lease obligation payable in
installments through 2004 at a
weighted average rate of 4.5% 1.0 1.3
Other debt principally related to
security services 5.0 4.7
-------------- ------------------
Total 6.5 16.5
Less: current portion 4.2 5.1
-------------- ------------------
Total $2.3 $11.4
============== ==================
As of July 1, 2001, the net amount available to the Company from its existing
revolving credit and accounts receivable securitization facilities, after
deducting $46.0 million accounts receivable sold under the Company's
securitization agreement, $58.4 million in outstanding letters of credit, and
$0.5 million revolving loans, was $82.6 million.
On December 20, 1997, the Company entered into an agreement (the "Securitization
Agreement") with a financial institution to sell on a continuous basis undivided
interests in certain, eligible trade accounts receivable. On January 26, 2001,
the Company amended, restated and extended the Securitization Agreement to
expire in January 2002, where it may be extended further upon the financial
institution's acceptance. Pursuant to the Securitization Agreement, the Company
formed Wackenhut Funding Corporation ("WFC"), a wholly owned, non-qualifying
special purpose, bankruptcy-remote subsidiary. WFC was formed for the sole
purpose of buying and selling receivables generated by the Company, where the
Company sells all of their accounts receivable to WFC irrevocably and without
recourse. From time to time and in accordance with the Securitization Agreement,
WFC will sell undivided interests in these receivables to the financial
institution, up to a maximum purchase limit of $75 million. This two-step
transaction is accounted for as a sale of receivables under the provisions of
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." There were $46.0 million and $67.5 million
accounts receivable sold under the Securitization Agreement at July 1, 2001 and
December 31, 2001, respectively, where such amounts were removed from the
consolidated balance sheet. The costs associated with this sale of receivables
are based on the volume of receivables sold and existing markets for A2/P2
commercial paper and primarily relate to the discount and loss on sale. Such
costs are included in "Interest Expense" in the consolidated statements of
income and were $0.7 million and $1.1 million for the three months ending July
1, 2001 and July 2, 2000, respectively, and $1.7 and $2.3 for the six months
ending July 1, 2001 and July 2, 2000 respectively.
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6. EARNINGS PER SHARE
The table below shows the amounts used in computing earnings per share and the
effects on income and the weighted average number of shares of potential
dilutive common stock (in millions except for per share amounts).
Thirteen Weeks Ended Twenty-six Weeks Ended
----------------------- ------------------------
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
----------------------- ------------------------
Basic
Net Income (loss) $ 1.0 $ 5.1 $ (0.5) $ 8.0
-------- ------- ------- -------
Weighted average common shares outstanding 15.0 15.0 15.0 15.0
-------- ------- ------- -------
Basic earnings (loss) per share $ 0.07 $ 0.34 $ (0.03) $ 0.54
-------- ------- ------- -------
Diluted
Net Income (loss) $ 1.0 $ 5.1 $ (0.5) $ 8.0
Effect of subsidiary's stock options -- -- (0.1) (0.1)
-------- ------- ------- -------
Net Income (loss) $ 1.0 $ 5.1 $ (0.6) $ 7.9
-------- ------- ------- -------
Weighted average common shares outstanding 15.0 15.0 15.0 15.0
Assumed exercise of stock options, net of common
shares assumed repurchased with the proceeds 0.3 0.1 -- 0.1
-------- ------- ------- -------
Adjusted weighted average common shares outstanding 15.3 15.1 15.0 15.1
-------- ------- ------- -------
Diluted earnings per share $ 0.06 $ 0.34 $ (0.04) $ 0.52
-------- ------- ------- -------
Common stock equivalents related to stock options if exercised were excluded
from the diluted loss per share calculation for the six month period ended July
1, 2001 as their effect would have been anti-dilutive. Options to purchase
shares of 786,800, 1,599,000, and 315,000 of common stock for the thirteen weeks
ended July 1, 2001, and July 2, 2000, and for the twenty-six weeks ended July 2,
2000, respectively, were excluded from the diluted earnings per share
calculation as their impact would have been anti-dilutive.
7. COMMITMENTS AND CONTINGENCIES
Through the first half of 2001, the Company recorded after-tax charges of $8.8
million ($14.7 million pre-tax) representing its share of the losses of its 50%
owned affiliated operations in Chile.
The Company has launched a full scale analysis of all aspects of the precarious
situation of its affiliated operations in Chile and is currently working with
the affiliate's management team and its bankers in assessing its alternatives
with respect to the affiliate's operations in Chile. These alternatives include
the sale of its non-strategic businesses, and a stand-still agreement with
unsecured lenders and a bridge loan during the restructuring period. However,
there can be no assurance that the affiliate will obtain a stand-still agreement
and a bridge loan and this could have a material adverse impact on the Company's
financial position, results of operations or cash flows. Recently the Company
was notified that two of the Chilean unsecured bank lenders notified the
affiliate that it was in default on payments of its unsecured loans.
During fiscal 2000, in connection with a consideration of strategic alternatives
with respect to the Chilean operations, the Chilean affiliate received inquiries
from possible buyers for certain segments of its business. However, at the time
of the inquiries, the ownership structure of the Chilean companies would not
facilitate the Chilean affiliate to act upon these inquiries. The Chilean
affiliate is continuing its efforts to sell certain segments of its business but
there can be no assurances that this will occur.
The Chilean affiliates' total outstanding debt is approximately $54.3 million,
and there can be no assurance that the Chilean affiliate will be able to
generate enough cash from operations or obtain a stand-still agreement with
unsecured lenders and a bridge loan while it sells non-strategic businesses. The
Company has exposure
Page 12 of 33
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for $32.0 million of letters of credit issued to secure a portion of the Chilean
affiliates $54.3 million debt. The Company has also provided comfort letters for
approximately $5.8 million. At this time management is unable to estimate the
amount of loss, if any, that would be recorded should the sale of assets, or
ongoing operating results, be unable to generate sufficient cash to repay the
Chilean affiliate's obligations secured by the Company's outstanding letters of
credit, and there can be no assurance that the ultimate outcome of this
uncertainty would not have a material adverse impact on the Company's financial
position, results of operations or cash flows.
During fiscal 2000, the Company's management began reviewing its international
security operations in order to enhance the quality of revenue and earnings
growth. Management determined at that time that it needed to focus the Company's
resources in international markets where it could best achieve a proper critical
mass. In aligning its international resources with this strategy, management
believes that there may be conditions where the Company may consider exiting a
country, or refocusing an operation. As a result, there could be an impairment
of assets, or a need to provide for losses, particularly in certain subsidiaries
and affiliates that were or are experiencing liquidity issues or were thinly
capitalized.
The Company is in the process of realigning its international security
management and consolidating its global security operations. During the second
quarter 2001, as it focused on this repositioning and change in its management
structure, the Company's management provided for asset impairments and
provisions for losses of approximately $3.2 million associated with various
international operations. As the Company continues this process, additional
asset impairments and provisions for losses may need to be provided for.
The Company has previously disclosed that the Travis County, Texas District
Attorney was reviewing certain WHC documents related to the operation of WHC's
facility in Travis County, Texas. WHC no longer operates the facility and has no
further information related to the document review.
During the third quarter 2000, WHC recorded an operating charge of $3.8 million
($2.3 million after tax) related to the lease of the 276-bed Jena Juvenile
Justice Center in Jena, Louisiana, which had been vacated. The charge
represented the expected losses to be incurred on the lease with Correctional
Properties Trust (CPV), including lease costs and property taxes for the second
half of 2000 and all of 2001. At that time, WHC's management estimated the Jena
Facility would remain inactive through the end of 2001.
In June 2001, the Louisiana State Senate passed a resolution requesting the
Louisiana Department of Public Safety and Corrections to enter into discussions
and negotiations regarding the potential purchase of a facility in LaSalle
Parish. Subsequently, the State and WHC in coordination with CPV began
discussions regarding the sale of the Jena Facility located in LaSalle Parish.
In addition to these activities, WHC is continuing its efforts to sublease or
find an alternative correctional use for the facility including a sale of the
facility to a Federal agency. There can be no assurance that WHC and CPV will be
able to successfully negotiate with any of these entities for the final sale or
alternate use of the facility. In the event the facility is sold or subleased at
a loss, WHC would be required to compensate CPV for such loss. If CPV does not
complete the sale of the facility prior to December 30, 2001, or if WHC is
unable to sublease or find an alternative correctional use for the facility
during 2001, an additional charge related to the facility would be required. WHC
Page 13 of 33
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estimates the impact of any delay past December 30, 2001, to be approximately $2
million per year during the period in which the Facility is expected to be
vacant. WHC's total remaining obligation under the lease agreement is
approximately $16 million.
On June 30, 2001, WHC's contract with the Arkansas Board of Correction and
Community Punishment and the Arkansas Department of Correction for the
management of the Grimes and McPherson correctional facilities expired and the
contract was discontinued by mutual agreement between the client and WHC. On
July 11, 2001, WHC issued a 120-day notice to the Delaware County Board of
Prison Inspectors, pursuant to the terms of its contract, to discontinue its
operation of the George W. Hill Correctional Facility located in Thorton,
Pennsylvania, effective November 11, 2001. Costs associated with the expiration
and discontinuation of these contracts were not and are not expected to be
significant. WHC does not believe or expects that the expiration and
discontinuation of these contracts to have a significant impact on WHC's future
results of operations or cash flows.
In December 1997, WHC entered into a $220 million operating lease facility
established to acquire and develop new correctional institutions used in its
business. As a condition of this facility, WHC unconditionally agreed to
guarantee certain obligations of the bank, a party to the operating lease
facility. These obligations include, among other things, amounts equal to 88% of
amounts outstanding under the operating lease facility.
Page 14 of 33
15
8. 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 global security services, correctional services and
flexible staffing services. The Company is a major provider of global business
services including providing security-related and other support services to
business and government, developing and managing privatized correctional,
detention and public sector mental health services through WHC, a 57% owned
public subsidiary, and providing worksite employees 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 Twenty-six Weeks Ended
------------------------------ -----------------------------------
July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000
-------------- ------------ -------------- -----------------
Revenues:
Global security services $ 297.0 $ 287.4 $ 595.0 $ 571.8
Correctional services 141.7 133.9 276.7 264.4
Flexible staffing services 247.3 196.0 477.8 374.5
-------------- -------------- -------------- ------------------
Total revenues $ 686.0 $ 617.3 $ 1,349.5 $ 1,210.7
============== ============== ============== ==================
Operating Income:
Global security services $ 5.7 $ 7.5 $ 15.9 $ 15.2
Correctional services 6.5 5.0 9.0 10.6
Flexible staffing services 0.9 1.1 1.8 1.8
Unallocated corporate expenses (5.2) (5.0) (10.9) (10.9)
-------------- -------------- -------------- ------------------
Total operating income $ 7.9 $ 8.6 $ 15.8 $ 16.7
============== ============== ============== ==================
Equity Income (Loss) of Affiliates, net of taxes:
Global security services $ (2.8) $ 1.1 $ (8.2) $ 1.5
Correctional services 1.3 1.1 2.2 2.2
-------------- -------------- -------------- ------------------
Total equity income $ (1.5) $ 2.2 $ (6.0) $ 3.7
============== ============== ============== ==================
Capital Expenditures:
Global security services $ 0.9 $ 1.3 $ 1.2 $ 1.3
Correctional services 1.3 4.6 3.9 14.9
Flexible staffing services 0.8 0.2 0.9 0.4
Unallocated corporate expenditures 0.1 0.1 0.4 0.3
-------------- -------------- -------------- ------------------
Total capital expenditures $ 3.1 $ 6.2 $ 6.4 $ 16.9
============== ============== ============== ==================
Depreciation and Amortization:
Global security services $ 3.4 $ 3.1 $ 6.6 $ 6.2
Correctional services 2.2 1.8 4.7 3.9
Flexible staffing services 0.7 0.6 1.3 1.2
Unallocated corporate expenses 0.5 0.6 1.0 1.1
-------------- -------------- -------------- ------------------
Total depreciation and amortization $ 6.8 $ 6.1 $ 13.6 $ 12.4
============== ============== ============== ==================
July 1, 2001 December 31, 2000
-------------- ------------------
Identifiable Assets:
Global security services $ 167.7 $ 181.5
Correctional services 212.1 223.6
Flexible staffing services 85.9 85.0
Unallocated corporate assets 104.7 80.2
-------------- ------------------
Total identifiable assets $ 570.4 $ 570.3
============== ==================
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16
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 2000 or
the first half of 2001. Minority interest in consolidated foreign subsidiaries
has been reflected, net of applicable income taxes, in the accompanying
consolidated financial statements. The Company carries its investment in
affiliates 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 Twenty-six Weeks Ended
-------------------------------- ----------------------------------
July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000
--------------- ------------- --------------- ----------------
Revenues:
Domestic operations $ 611.5 $ 542.3 $ 1,203.9 $ 1,060.5
International operations 74.5 75.0 145.6 150.2
--------------- --------------- ---------------- -----------------
Total revenues $ 686.0 $ 617.3 $ 1,349.5 $ 1,210.7
=============== =============== ================ =================
Operating Income:
Domestic operations $ 8.8 $ 4.9 $ 13.8 $ 7.9
International operations (0.9) 3.7 2.0 8.8
--------------- --------------- ---------------- -----------------
Total operating income $ 7.9 $ 8.6 $ 15.8 $ 16.7
=============== =============== ================ =================
Equity Income (Loss) of Affiliates, net of taxes:
Domestic operations $ 0.8 $ 0.7 $ 0.9 $ 0.8
International operations (2.3) 1.5 (6.9) 2.9
--------------- --------------- ---------------- -----------------
Total equity income $ (1.5) $ 2.2 $ (6.0) $ 3.7
=============== =============== ================ =================
Capital Expenditures:
Domestic operations $ 2.4 $ 4.6 $ 4.6 $ 12.5
International operations 0.7 1.6 1.8 4.4
--------------- --------------- ---------------- -----------------
Total capital expenditures $ 3.1 $ 6.2 $ 6.4 $ 16.9
=============== =============== ================ =================
Depreciation and Amortization:
Domestic operations $ 5.1 $ 5.0 $ 10.4 $ 9.8
International operations 1.7 1.1 3.2 2.6
--------------- --------------- ---------------- -----------------
Total depreciation and amortization expense $ 6.8 $ 6.1 $ 13.6 $ 12.4
=============== =============== ================ =================
December 31,
July 1, 2001 2000
---------------- ----------------
Long-lived Assets:
Domestic operations $ 60.7 $ 61.1
International operations 16.7 18.3
---------------- -----------------
Total long-lived assets $ 77.4 $ 79.4
================ =================
Page 16 of 33
17
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" or "TWC") is a major provider of global business services including
providing security-related and other support services to business and
government, developing and managing privatized correctional, detention and
public sector mental health services facilities through Correctional Services or
WHC, a 57% owned public subsidiary, and providing employee leasing and temporary
staffing. Global Security Services includes security operations, facility
management and fire and emergency medical services. WHC designs, constructs,
finances and manages correctional, detention and mental health psychiatric
facilities and performs separate correctional-related services, including
prisoner transportation, home detention monitoring and correctional health care.
The Company's flexible staffing business includes worksite employee leasing,
temporary services, recruiting, risk management, payroll processing and human
resource services. The Company completed the sale in the second quarter 2001 of
certain assets of its food service division, part of Global Security Services.
FINANCIAL CONDITION
Reference is made 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
December 31, 2000, for further discussion and analysis of information pertaining
to the Company's financial condition.
LIQUIDITY
The Company's borrowing capacity under its Credit Facility and securitization
agreement totals $187.5 million. As of July 1, 2001, the net amount available to
the Company from its existing revolving credit and accounts receivable
securitization facilities, after deducting $46.0 million accounts receivable
sold under the Company's securitization agreement, $58.4 million in outstanding
letters of credit, and $0.5 of revolving loans, was $82.6 million. Some of the
Company's $58.6 million of outstanding letters of credit are in support of
international operations including support of the affiliate in Chile of $32.0
million.
Through the first half of 2001, the Company recorded after-tax charges of $8.8
million ($14.7 million pre-tax) representing its share of the losses of its 50%
owned affiliated operations in Chile.
The Company has launched a full scale analysis of all aspects of the precarious
situation of its affiliated operations in Chile and is currently working with
the affiliate's management team and its bankers in assessing its alternatives
with respect to the affiliate's operations in Chile. These alternatives include
the sale of its non-strategic businesses, and a stand-still agreement with
unsecured lenders and a bridge loan during the restructuring period. However,
there can be no assurance that the affiliate will obtain a stand-still agreement
and a bridge loan and this could have a material adverse impact on the Company's
financial position, results of operations or cash flows. Recently the Company
was notified that two of the Chilean unsecured bank lenders notified the
affiliate that it was in default on payments of its unsecured loans.
During fiscal 2000, in connection with a consideration of strategic alternatives
with respect to the Chilean operations, the Chilean affiliate received inquiries
from possible buyers for certain segments of its business. However, at the time
of the inquiries, the ownership structure of the Chilean companies would not
facilitate the Chilean affiliate to act upon these inquiries. The Chilean
affiliate is continuing its efforts to sell certain segments of its business but
there can be no assurances that this will occur.
Page 17 of 33
18
The Chilean affiliates' total outstanding debt is approximately $54.3 million,
and there can be no assurance that the Chilean affiliate will be able to
generate enough cash from operations or obtain a stand-still agreement with
unsecured lenders and a bridge loan while it sells non-strategic businesses. The
Company has exposure for $32.0 million of letters of credit issued to secure a
portion of the Chilean affiliates $54.3 million debt. The Company has also
provided comfort letters for approximately $5.8 million. At this time management
is unable to estimate the amount of loss, if any, that would be recorded should
the sale of assets, or ongoing operating results, be unable to generate
sufficient cash to repay the Chilean affiliate's obligations secured by the
Company's outstanding letters of credit, and there can be no assurance that the
ultimate outcome of this uncertainty would not have a material adverse impact on
the Company's financial position, results of operations or cash flows.
During fiscal 2000, the Company's management began reviewing its international
security operations in order to enhance the quality of revenue and earnings
growth. Management determined at that time that it needed to focus the Company's
resources in international markets where it could best achieve a proper critical
mass. In aligning its international resources with this strategy, management
believes that there may be conditions where the Company may consider exiting a
country, or refocusing an operation. As a result, there could be an impairment
of assets, or a need to provide for losses, particularly in certain subsidiaries
and affiliates that were or are experiencing liquidity issues or were thinly
capitalized.
The Company is in the process of realigning its international security
management and consolidating its global security operations. During the second
quarter, 2001, as it focused on this repositioning and change in its management
structure, the Company's management provided for asset impairments and
provisions for losses of approximately $3.2 million associated with various
international operations. As the Company continues this process, additional
asset impairments and provisions for losses may need to be provided for.
During the third quarter of 2000, WHC recorded an operating charge of $3.8
million ($2.3 million after tax) for the 276-bed Jena Juvenile Justice Center in
Jena, Louisiana. The charge represented the expected losses to be incurred on
the lease with Correctional Properties Trust (CPV), including lease costs and
property taxes. Management estimates that the facility will remain inactive
through the end of 2001.
WHC is continuing its efforts to sublease or find an alternative correctional
use for the facility. If WHC is unable to sublease or find an alternative
correctional use for the facility by the end of 2001, there would be an adverse
impact on WHC's and the Company's financial position, future results of
operations and future cash flows.
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 its $220 million operating lease facility and
$30 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. As of July 1, 2001, approximately
$154.3 million of WHC's $220 million operating lease facility, established to
Page 18 of 33
19
acquire and develop new correctional facilities, was outstanding for completed
properties. Currently, WHC has no properties under development and has $23
million of available capacity remaining under their 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. Also as of July 1, 2001, no amounts were outstanding
on WHC's $30 million multi-currency revolving credit facility.
Current cash requirements consist of amounts needed for capital expenditures,
increased working capital needs resulting from corporate growth and business
expansion, payment of liabilities incurred in the operation of the Company's
business, the renovation or construction of correctional facilities by WHC, and
possible acquisitions. The Company continues to expand its domestic and
international businesses and to pursue major contracts, some of which may
require substantial initial cash outlays, which are partially or fully
recoverable over the original term of the contract.
Management believes that cash on hand, cash provided by operating activities and
available lines of credit will be adequate to support currently planned business
expansion and various obligations incurred in the operation of the Company's
business through 2001. Management will continue to review its capital/financial
planning alternatives to ensure long-term financial capital access and
availability. Proceeds from the sale of the Company's food services division
were used to pay down debt.
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 and the $30.0 million revolving credit facility. Based on the
Company's interest rate and foreign exchange rate position at July 1, 2001, a
hypothetical 100 basis point change in market interest rate 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 over the next fiscal year.
*FORWARD-LOOKING STATEMENTS The management's discussion and analysis of
financial condition and results of operations, corporate profile, letter to
shareholders, and the August 3, 2001 press release contain forward-looking
statements that are based on current expectations, estimates and projections
about the segments in which the corporation operates. These sections of the
annual report also include 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
domestic and foreign competitors, including new entrants; rapid technological
developments and changes; the ability to continue to introduce competitive new
products and services on a timely, cost effective basis; the mix of
Page 19 of 33
20
products/services; the achievement of lower costs and expenses; domestic and
foreign governmental and public policy changes including environmental
regulations; protection and validity of patent and other intellectual property
rights; reliance on large customers; technological, implementation and
cost/financial risks in increasing use of large, multi-year contracts; the
outcome of pending and future litigation and governmental proceedings and
continued availability of financing, financial instruments and financial
resources in the amounts, at the times and on the terms required to support the
corporation's future business; and other factors discussed in the Company's
filings with the Securities and Exchange Commission. 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. The Company does not assume any
obligation to update any such forward-looking statements.
Page 20 of 33
21
RESULTS OF OPERATIONS
The table below summarizes the Company's results of operations for the thirteen
weeks ended July 1, 2001 ("second quarter 2001") and July 2, 2000 ("second
quarter 2000") 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
-------------------------------------------------------
Restated *
July 1, 2001 July 2, 2000
-------------------------- --------------------------
$ % $ %
------------ ----------- ------------ -----------
REVENUES [a]
GLOBAL SECURITY SERVICES 297.0 43.3 287.4 46.5
CORRECTIONAL SERVICES 141.7 20.7 133.9 21.7
FLEXIBLE STAFFING SERVICES 247.3 36.0 196.0 31.8
------------ ----------- ------------ -----------
CONSOLIDATED REVENUES 686.0 100.0 617.3 100.0
============ =========== ============ ===========
OPERATING INCOME [b]
GLOBAL SECURITY SERVICES 5.7 1.9 7.5 2.6
CORRECTIONAL SERVICES 6.5 4.6 5.0 3.7
FLEXIBLE STAFFING SERVICES 0.9 0.4 1.1 0.6
UNALLOCATED CORPORATE EXPENSE (5.2) (0.8) (5.0) (0.8)
------------ -----------
CONSOLIDATED OPERATING INCOME 7.9 1.2 8.6 1.4
============ ===========
* Restated for the adoption of SAB No. 101.
[a] Represents percent of total revenues.
[b] Represents percent of respective business related revenues.
Page 21 of 33
22
COMPARISON OF THIRTEEN WEEKS ENDED JULY 1, 2001 AND RESTATED
THIRTEEN WEEKS ENDED JULY 2, 2000
REVENUES
GLOBAL SECURITY SERVICES
Second quarter 2001 Global Security Services' revenues increased $9.6 million,
or 3.3%, to $297.0 million from $287.4 million in the second quarter 2000. North
American market revenues increased $7.5 million, or 3.0%, to $254.0 million in
the second quarter 2001 from $246.5 million in the second quarter 2000. There
was continued growth of revenues from national accounts due to new contracts and
increases in existing contracts. International market revenues increased $2.1
million, or 5.1%, to $43.0 from $40.9 in the second quarter 2001 with U.K.,
Ecuador, Venezuela, Peru and Guatemala contributing to this increase offset by a
decline in revenues for Puerto Rico.
CORRECTIONAL SERVICES
Second quarter 2001 Correctional Services' revenues increased $7.8 million, or
5.8%, to $141.7 million from $133.9 million in the comparable quarter last year.
Approximately $18.4 million of the increase in revenues in the second quarter
2001 compared to the second quarter 2000 is attributable to increased
compensated resident days resulting from the opening of two facilities in 2000
and two facilities in the first quarter 2001. The number of compensated resident
days in domestic facilities increased to 2,358,801 in the second quarter 2001
from 2,163,793 in the second quarter 2000. Compensated resident days in
Australian facilities decreased to 446,418 from 513,205 for the comparable
periods primarily due to lower compensated resident days at the immigration
detention facilities. Revenues decreased by approximately $8.2 million in the
second quarter 2001 compared to second quarter 2000 due to the substantial
completion of construction of the South Florida State Hospital. Revenues also
decreased by approximately $5.9 million in second quarter 2001 as compared to
the same period in 2000 due to the cessation of operations at the Jena Juvenile
Justice Center and a decline in mandays at the immigration detention facilities.
The balance of the increase in revenues was attributable to facilities open
during all of both periods. The average facility occupancy in domestic
facilities decreased to 96.8% of capacity in the second quarter 2001 compared to
97.2% in the second quarter 2000 due primarily to the termination of the Jena
Juvenile Justice Center contract.
FLEXIBLE STAFFING SERVICES
Flexible Staffing Services' second quarter 2001 revenues increased $51.3
million, or 26.2%, to $247.3 million from $196.0 million in the comparable
quarter last year. Leased employees grew to approximately 41,000 at the end of
the second quarter 2001 from 34,160 at the end of the second quarter 2000.
Temporary placement hours decreased 5.0% to approximately 867,800 during the
second quarter 2001 from approximately 912,600 during the second quarter 2000
due to lower demand from a major client and lower demand in the midwest light
industrial segment. However, compared to the first quarter 2001, temporary
placement hours increased 9.7%.
OPERATING INCOME
Second quarter 2001 consolidated operating income decreased $0.7 million, or
8.1%, to $7.9 million from $8.6 million in the second quarter 2000. Second
quarter 2001 operating income was reduced by $3.1 million of charges related to
the Company's review of its international security operations. However, in the
Page 22 of 33
23
second quarter 2001 there were no start-up expenses whereas for the second
quarter 2000 there were $1.4 million of start-up expenses. Therefore, in
comparing operating income for the second quarter 2001 with the same period in
the prior year, operating income was reduced by the net difference of these two
amounts or $1.7 million. Mostly offsetting this was a 30 basis point increase in
operating margin for the North American Market and a $1.5 million increase in
Wackenhut Corrections operating income. The operating margin for the second
quarter 2001 decreased to 1.2% as compared to 1.4% for the comparable second
quarter 2000. 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 overtime
premium increase at a faster rate than the per diem or fixed rates received by
the Company for its services or cannot be passed on to clients.
GLOBAL SECURITY SERVICES
Global Security Services' business operating income decreased $1.8 million, or
24.0%, to $5.7 million in the second quarter 2001 from $7.5 million for the
comparable quarter last year. North American market operating income increased
$0.9 million, or 13.4%, to $7.6 million in the second quarter 2001 from $6.7
million in the second quarter 2000. North American market operating income as a
percentage of revenues increased 30 basis points to 3.0% in the second quarter
2001 compared to the same quarter 2000 primarily due to improved performance of
its government contract division. Security Services operating income in the
international market decreased $2.7 million to a loss of $1.9 million in the
second quarter 2001 from income of $0.8 million in the second quarter 2000,
primarily due to $3.1 million of charges mentioned previously related to the
Company's review of its international security operations.
During fiscal 2000, the Company's management began reviewing its international
security operations in order to enhance the quality of revenue and earnings
growth. Management determined at that time that it needed to focus the Company's
resources in international markets where it could best achieve a proper critical
mass. In aligning its international resources with this strategy, management
believes that there might be conditions where the Company may consider exiting a
country, or refocusing an operation. As the Company continues this process,
additional asset impairments and provisions for losses may need to be provided
for.
The Company is in the process of realigning its international security
management and consolidating its global security operations. During the second
quarter, 2001, as it focused on this repositioning and change in its management
structure, the Company's management provided for asset impairments and
provisions for losses of approximately $3.1 million associated with various
international operations. The write-down pertains to international locations in
Latin America and provisions associated with reorganization of management. As
the Company looks forward to the remaining portion of 2001, it is management's
intent to accelerate this review and repositioning process, so that it will have
been substantially completed by year-end 2001, however, there can be no
assurances that it will be completed within this timeframe. In completing this
process, conditions may arise that will cause the Company to record additional
impairments to investments in particular locations. Also, in some locations
local economic conditions may result in reporting losses. At this time,
management is unable to estimate the amount of these write-downs or losses, if
any, that would be reported, and again there can be no assurance that the
ultimate outcome of this process would not have a material adverse impact on the
Company's financial position, results of operations and cash flows.
Page 23 of 33
24
CORRECTIONAL SERVICES
Second quarter 2001 operating income increased $1.5 million, or 30%, to $6.5
million from $5.0 million in the comparable period in 2000. As a percentage of
revenue, operating income increased to 4.6% in the second quarter 2001 from 3.7%
in the second quarter 2000. This increase is primarily the result of the
activation of four newly constructed facilities, two that opened in the third
quarter 2000 and two that opened in the first quarter 2001, a decline in
construction activity and improved financial performance at a number of
additional facilities. WHC continues to incur increasing insurance costs due to
adverse claims experience. WHC is implementing a strategy to improve the
management of future loss claims incurred but can provide no assurances that
this strategy will be successful. WHC anticipates significant increases in
insurance costs during the third and fourth quarters of 2001, which could
adversely impact WHC's 2001 results of operations and cash flows.
FLEXIBLE STAFFING SERVICES
The operating profit of Flexible Staffing Services was $0.9 million in the
second quarter 2001 compared to $1.1 million for the second quarter 2000. This
decrease is attributable to re-organizational costs of $0.4 million related to
the consolidation of services.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate general and administrative expenses increased 4.0% to $5.2
million in the second quarter 2001 from $5.0 million in the second quarter 2000.
As a percentage of consolidated revenues, unallocated corporate general and
administrative expenses remained the same at 0.8% of revenues for both the
second quarter 2001 and 2000.
OTHER INCOME/EXPENSE
The Company incurred other income of $0.2 million in the second quarter 2001 and
none in the second quarter 2000. Investment income decreased $0.4 million to
$1.6 million in the second quarter 2001 from $2.0 million in the second quarter
2000. This decrease is primarily attributable to WHC recognizing in the second
quarter 2000 a gain of $0.6 million from the sale of its loan receivable from an
overseas affiliate. Partially offsetting this decrease was an increase in
investment income related to an increase in investments of the Company's wholly
owned casualty insurance subsidiary. Interest expense decreased $0.6 million to
$1.4 million in the second quarter 2001 from $2.0 million in the second quarter
2000, primarily attributable to a decrease in average debt outstanding as well
as a decrease in the average borrowing rates.
MINORITY INTEREST
Minority interest (net of income taxes) increased $0.2 million to $2.5 million
in the second quarter 2001 from $2.3 million in the second quarter 2000,
reflecting principally the increase in earnings of WHC for the second quarter
2001 compared to the second quarter 2000.
EQUITY IN INCOME (LOSS) OF AFFILIATES
Equity in loss of affiliates (net of income taxes) was $1.5 million in the
second quarter 2001 compared to income of $2.3 million for the second quarter
2000. The loss in the second quarter of 2001 was primarily
Page 24 of 33
25
due to the Company recording after tax charges of $3.0 million ($5.4 million
pre-tax) representing its share of losses of its 50% owned affiliated operations
in Chile plus a $0.1 million after tax charge related to the write-down of its
investments in China and India.
The Company has launched a full scale analysis of all aspects of the precarious
situation of its affiliated operations in Chile and is currently working with
the affiliate's management team and its bankers in assessing its alternatives
with respect to the affiliate's operations in Chile. See the "Liquidity" section
for additional discussion regarding Chile and the Company's international
strategy.
NET INCOME
Net income was $1.0 million for the second quarter 2001, or $0.07 basic earnings
per share, as compared to $5.1 million income, or $0.34 basic earnings per share
for the same period in 2000. Earnings per share on a diluted basis was $0.06 in
the second quarter 2001 compared to income of $0.34 per share for the same
period in 2000. Goodwill amortization, after tax, amounted to $0.4 million for
both the second quarter 2001 and second quarter 2000. Excluding goodwill
amortization, after tax, basic earnings per share would have been $0.02 more for
both the second quarter 2001 and second 2000. In addition, diluted earnings per
share would have been $0.02 more and $0.03 more for the second quarter 2001 and
the second quarter 2000, respectively.
Page 25 of 33
26
RESULTS OF OPERATIONS
The table below summarizes the Company's results of operations for the
twenty-six weeks ended July 1, 2001 ("year-to-date") and July 2, 2000
("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
--------------------------------------------------------
Restated *
July 1, 2001 July 2, 2000
------------------------- --------------------------
$ % $ %
----------- ------------ ------------- -----------
REVENUES [a]
GLOBAL SECURITY SERVICES 595.0 44.1 571.8 47.3
CORRECTIONAL SERVICES 276.7 20.5 264.4 21.8
FLEXIBLE STAFFING SERVICES 477.8 35.4 374.5 30.9
----------- ------------ ------------ -----------
CONSOLIDATED REVENUES 1,349.5 100.0 1,210.7 100.0
=========== ============ ============ ===========
OPERATING INCOME [b]
GLOBAL SECURITY SERVICES 15.9 2.7 15.2 2.7
CORRECTIONAL SERVICES 9.0 3.3 10.6 4.0
FLEXIBLE STAFFING SERVICES 1.8 0.4 1.8 0.5
UNALLOCATED CORPORATE EXPENSE (10.9) (0.8) (10.9) (0.9)
------------ ------------
CONSOLIDATED OPERATING INCOME 15.8 1.2 16.7 1.4
============ ============
* Restated for the adoption of SAB No. 101.
[a] Represents percent of total revenues.
[b] Represents percent of respective business related revenues.
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COMPARISON OF TWENTY-SIX WEEKS ENDED JULY 1, 2001 AND RESTATED
TWENTY-SIX WEEKS ENDED JULY 2, 2000
REVENUES
GLOBAL SECURITY SERVICES
Year-to-date 2001 Global Security Services' revenue increased $23.2 million, or
4.1%, to $595.0 million from $571.8 million in the first half 2000. Revenues
from North American Operations increased $21.1 million, or 4.3%, to $510.7
million in the first half 2001 from $489.6 million in the first half 2000. There
was continued expansion of revenues from national accounts due to new contracts
and increases in existing contracts. International Operations revenues increased
$2.1 million, or 2.6%, to $84.3 million in the first half 2001 compared to $82.2
million in the first half 2000 with U.K., Ecuador, Venezuela, Peru and Guatemala
contributing to this increase offset by a decline in revenues for Puerto Rico.
CORRECTIONAL SERVICES
Year-to-date 2001 Correctional Services' revenues increased $12.3 million, or
4.7%, to $276.7 million from $264.4 million in the comparable period last year.
Approximately $31.1 million of the increase in revenues in the first half 2001
compared to the same period in 2000 is attributable to an increase in
compensated resident days resulting from the opening of two facilities in the
third quarter 2000 and two facilities in the first quarter 2001. The number of
compensated resident days in domestic facilities increased to 4,654,026 in the
first half of 2001 from 4,329,665 for the first half of 2000. Compensated
resident days in Australian facilities decreased to 896,417 from 999,551 for the
comparable periods primarily due to lower compensated resident days at the
immigration detention facilities. This increase was partially offset by a $26.0
million revenue decrease due to the substantial completion of construction of
the South Florida State Hospital, cessation of operations at the Jena Juvenile
Justice Center, and a decline in mandays at the immigration detention
facilities. The balance of the increase is attributable to facilities open
during all of both periods and increases in per diem rates. The average facility
occupancy in domestic facilities decreased to 96.8% of capacity in the first
half of 2001 compared to 97.3% in the first half of 2000 due primarily to the
termination of the Jena Juvenile Justice Center contract.
FLEXIBLE STAFFING SERVICES
Flexible Staffing Services' year-to-date 2001 revenues of $477.8 million were
$103.3 million above revenues of $374.5 in the same period last year due to
growth. Leased employees grew to approximately 41,000 at the end of the second
quarter 2001 from 34,160 at the end of the second quarter 2000. Temporary
placement hours declined 7.3% to approximately 1,659,000 during the first half
2001 from approximately 1,790,000 during the same period in 2000 due to lower
demand from a major client and lower demand in the midwest light industrial
segment. However, comparing the second quarter 2001 to the first quarter 2001,
temporary placement hours increased 9.7%.
OPERATING INCOME
Year-to-date 2001 consolidated operating income decreased $0.9 million, or 5.4%,
to $15.8 million from $16.7 million for the same period in 2000. The operating
margin through the second quarter 2001 decreased to 1.2% from 1.4% for the same
period in the prior year. The operating margin decrease for Correctional
Services more than offset the operating margin increases for Global Security
Services 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
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28
extent wages and salaries increase at a faster rate than the per diem or fixed
rate received by the Company for its services or can not be passed on to
clients.
GLOBAL SECURITY SERVICES
The operating income of the Global Security Services' business increased $0.7
million, or 4.6%, to $15.9 million in the first half of 2001 from $15.2 million
for the comparable period last year. North American Operations' operating income
increased $3.1 million, or 23.5%, to $16.3 million in the first half of 2001
from $13.2 million for the same period in 2000. North American market operating
income as a percentage of revenues increased 50 basis points to 3.2% in the
first half of 2001 compared to the same period in 2000 primarily due to award
fees earned on the Oak Ridge contract. International Operations' operating
income decreased $2.4 million to a loss of $0.4 million in the first half of
2001 from income of $2.0 million for the same period in 2000, primarily due to
$3.1 million of charges mentioned previously related to the Company's review of
its international security operations.
During fiscal 2000, the Company's management began reviewing its international
security operations in order to enhance the quality of revenue and earnings
growth. Management determined at that time that it needed to focus the Company's
resources in international markets where it could best achieve a proper critical
mass. In aligning its international resources with this strategy, management
believes that there might be conditions where the Company may consider exiting a
country, or refocusing an operation. As the Company continues this process,
additional asset impairments and provisions for losses may need to be provided
for.
The Company is in the process of realigning its international security
management and consolidating its global security operations. During the second
quarter, 2001, as it focused on this repositioning and change in its management
structure, the Company's management provided for asset impairments and
provisions for losses of approximately $3.1 million associated with various
international operations. The write-down pertains to international locations in
Latin America and provisions associated with reorganization of management. As
the Company looks forward to the remaining portion of 2001, it is management's
intent to accelerate this review and repositioning process, so that it will have
been substantially completed by year-end 2001, however, there can be no
assurances that it will be completed within this timeframe. In completing this
process, conditions may arise that will cause the Company to record additional
impairments to investments in particular locations. Also, in some locations
local economic conditions may result in reporting losses. At this time,
management is unable to estimate the amount of these write-downs or losses, if
any, that would be reported, and again there can be no assurance that the
ultimate outcome of this process would not have a material adverse impact on the
Company's financial position, results of operations and cash flows.
CORRECTIONAL SERVICES
Year-to-date 2001 operating income decreased $1.6 million, or 15.1%, to $9.0
million from $10.6 million in the comparable period in 2000. As a percentage of
revenue, operating income decreased to 3.3% in the first half of 2001 from 4.0%
in the same period in 2000. This decrease is due to an increase in operating
expenses and depreciation and amortization expenses. Operating expenses
increased by a net $1.9 million related to start-up expenses and an increase in
insurance costs due to adverse claims experience. WHC is implementing a strategy
to improve the management of future loss claims incurred but can provide no
assurances that this strategy will be successful. WHC anticipates significant
increases in insurance costs during the third and fourth quarters of 2001, which
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29
could adversely impact WHC's 2001 results of operations and cash flows.
Depreciation and amortization expenses increased due to leasehold improvements
at three facilities and additional operational assets.
FLEXIBLE STAFFING SERVICES
The operating profit of Flexible Staffing Services remained the same at $1.8
million for the first half of 2001 and 2000.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate general and administrative expenses remained the same at
$10.9 million for the first half of 2001 and 2000. As a percentage of
consolidated revenues, unallocated corporate general and administrative expenses
decreased to 0.8% of revenues in the first half of 2001 from 0.9% of revenues in
the first half of 2000.
OTHER INCOME/EXPENSE
The Company realized other expense, net, of $0.4 million in the first half of
2001 compared to $0.6 in the first half of 2000. Investment income remained the
same at $3.3 million for the first half of 2001 and 2000. Interest expense
decreased $0.2 million to $3.7 million in the first half of 2001 from $3.9
million in the same period in 2000, primarily attributable to a decrease in
average debt outstanding as well as a decrease in the average borrowing rates.
MINORITY INTEREST
Minority interest expense (net of income taxes) decreased $0.7 million to $3.9
million in the second half of 2001 from $4.6 million for the same period 2000,
reflecting principally the decrease in earnings of WHC.
EQUITY IN INCOME (LOSS) OF AFFILIATES
Equity in income of affiliates (net of income taxes) decreased $9.7 million to a
loss of $6.0 million in the second half of 2001 from income of $3.7 million for
the same period in 2000. The loss in the first half of 2001 was primarily due to
the Company recording after tax charges of $9.0 million ($14.7 million pre-tax)
representing its share of losses of its 50% owned affiliated operations in Chile
plus a $0.1 million after tax charge related to the write-down of its
investments in China and India.
The Company has launched a full scale analysis of all aspects of the precarious
situation of its affiliated operations in Chile and is currently working with
the affiliate's management team and its bankers in assessing its alternatives
with respect to the affiliate's operations in Chile, including the sale of its
non-strategic businesses. See the "Liquidity" section for additional discussion
regarding Chile and the Company's international strategy.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
During the fourth quarter of 2000, the Company adopted SEC Staff Accounting
Bulletin: No. 101 (SAB No. 101) - Revenue Recognition. Government contract award
fees, previously accrued for based on the Company's performance and long-term
experience of being awarded such fees, are now only recognized when formally
awarded. SAB No. 101 applied retroactively to the first quarter of 2000,
resulted in a one-time charge in 2000 of $0.8 million, net of income taxes. On a
diluted basis, the cumulative effect of change in accounting principle was $0.05
per share during 2000.
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30
NET INCOME (LOSS)
Net loss was $0.5 million for the first half of 2001, or $0.03 basic loss per
share, as compared to $8.0 million, or $0.54 basic earnings per share for the
same period in 2000. Losses per share on a diluted basis was $.04 for the first
half 2001 compared to $0.52 earnings per share for the same period in 2000.
Goodwill amortization, after tax, amounted to $0.6 million and $0.7 million for
the first half 2001 and first half 2000. Excluding goodwill amortization, after
tax, basic earnings per share would have been $0.04 more for both the first half
2001 and first half 2000. Likewise, diluted earnings per share would have been
$0.04 and $0.05 more for the first half 2001 and first half 2000, respectively.
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31
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 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.
WHC previously disclosed that the Travis County, Texas District Attorney was
reviewing certain WHC documents related to the operation of WHC's facility in
Travis County, Texas. WHC no longer operates the facility and has no further
information related to the document review.
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 4, 2001 in
Palm Beach, 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. 3,310,531 253,259
Alan B. Bernstein 3,312,104 251,686
Carroll A. Campbell 3,205,137 358,653
Benjamin R. Civiletti 3,306,282 257,508
Anne N. Foreman 3,312,144 251,646
Edward L. Hennessy, Jr. 3,311,891 251,899
Paul X. Kelley 3,311,841 251,949
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32
Name Votes for Votes Withheld
- ---- --------- --------------
Nancy Reynolds 3,310,741 253,049
John F. Ruffle 3,312,593 251,197
Thomas P. Stafford 3,312,191 251,599
George R. Wackenhut 3,303,872 259,918
Richard R. Wackenhut 3,310,704 253,086
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..3,550,753 Against..6,400 Abstain..6,637
Proposal No. 3
Additional shares for the Key Employee Long-Term Incentive Stock Plan -
For..3,015,021 Against..535,973 Abstain..12,796
Proposal No. 4
Amend the Key Employee Long-Term Incentive Plan -
For..3,249,744 Against..297,552 Abstain..16,492
Proposal No. 5
Additional shares for the Nonemployee Director Stock Option Plan -
For..3,155,788 Against..392,560 Abstain..15,422
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits
Exhibit 4.1 - Amendment Agreement No. 2, dated June 22, 2001 to the Credit
Agreement dated as of November 13, 2000 by and among The Wackenhut Corporation,
as Borrower, Bank of America, N.A., as Administrative Agent and as Lender and
Scotiabank Inc., as Syndication Agent and as Lender and First Union National
Bank, As Documentation Agent and a Lender and the Lenders party hereto from time
to time.
(b). Reports on Form 8-K
The Company did not file a Form 8-K during the thirteen weeks ended July 1,
2001.
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33
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 1, 2001 to be signed on its behalf by the undersigned hereunto
duly authorized.
THE WACKENHUT CORPORATION
DATE: August 13, 2001 /s/ PHILIP L. MASLOWE
-----------------------
Philip L. Maslowe,
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
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