-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TpIdU9NHr8D6p1Mw+5kGmrqLeUa1KX+lCjt8ymlgCIi7OBVtFQTJjGW2W8DsCCGj 0t7y7wIv10iZwZeGyTfLbQ== 0000950144-01-505675.txt : 20010814 0000950144-01-505675.hdr.sgml : 20010814 ACCESSION NUMBER: 0000950144-01-505675 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010701 FILED AS OF DATE: 20010813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WACKENHUT CORP CENTRAL INDEX KEY: 0000104030 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-DETECTIVE, GUARD & ARMORED CAR SERVICES [7381] IRS NUMBER: 590857245 STATE OF INCORPORATION: FL FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05450 FILM NUMBER: 1707625 BUSINESS ADDRESS: STREET 1: 4200 WACKENHUT DRIVE STREET 2: #100 CITY: PALM BEACH GARDEN STATE: FL ZIP: 33410 BUSINESS PHONE: 5616225656 MAIL ADDRESS: STREET 1: 4200 WACKENHUT DR STREET 2: #100 CITY: PALM BEACH GARDEN STATE: FL ZIP: 33410 10-Q 1 g71041e10-q.txt WACKENHUT CORP. 10-Q 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 2 THE WACKENHUT CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following consolidated financial statements of The Wackenhut Corporation and subsidiaries (the "Company") have been prepared in accordance with the instructions to Form 10-Q and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial information for the interim periods reported have been made. Results of operations for the twenty-six weeks ended July 1, 2001 are not necessarily indicative of the results for the entire fiscal year ending December 30, 2001. Page 2 of 33 3 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. Page 3 of 33 4 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) Page 4 of 33 5 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. Page 5 of 33 6 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) Page 6 of 33 7 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 8 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 9 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
Page 9 of 33 10 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. Page 10 of 33 11 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. Page 11 of 33 12 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 13 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 14 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 ============== ==================
Page 15 of 33 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. Page 26 of 33 27 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 Page 27 of 33 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 Page 28 of 33 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. Page 29 of 33 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. Page 30 of 33 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 Page 31 of 33 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. Page 32 of 33 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 Page 33 of 33 EX-4.1 3 g71041ex4-1.txt AMENDMENT AGREEMENT NO. 2 TO CREDIT AGREEMENT 1 AMENDMENT AGREEMENT NO 2. TO CREDIT AGREEMENT THIS AMENDMENT AGREEMENT is made and entered into as of this 22nd day of June, 2001, by and among THE WACKENHUT CORPORATION, a Florida corporation (herein called the "Borrower"), BANK OF AMERICA, N.A. (the "Agent"), as Agent for the lenders (the "Lenders") party to the Credit Agreement dated November 13, 2000 among such Lenders, Borrower and the Agent, as amended by Amendment Agreement No. 1 dated December 12, 2000 (the "Agreement") and the Lenders whose names are subscribed hereto. W I T N E S S E T H: ------------------- WHEREAS, the Borrower, the Agent and the Lenders have entered into the Agreement pursuant to which the Lenders have agreed to make revolving loans to the Borrower in the aggregate principal amount of up to $112,500,000 as evidenced by the Notes (as defined in the Agreement) and to issue Letters of Credit for the benefit of the Borrower; and WHEREAS, as a condition to the making of the loans pursuant to the Agreement the Lenders have required that all Wholly-owned Subsidiaries of the Borrower, other than Titania, guarantee payment of all Obligations of the Borrower arising under the Agreement; and WHEREAS, the Borrower has requested that the Agreement be further amended in the manner set forth herein; NOW, THEREFORE, the Borrower, the Agent and the Lenders do hereby agree as follows: 1. DEFINITIONS. The term "Agreement" as used herein and in the Loan Documents (as defined in the Agreement) shall mean the Agreement as hereinafter amended and modified. Unless the context otherwise requires, all terms used herein without definition shall have the definition provided therefor in the Agreement. 2. AMENDMENT. Subject to the conditions set forth herein, the Agreement is hereby amended, effective as of the date hereof, as follows: (a) The definition of "Chile" in SECTION 1.1 is hereby amended in its entirety so that as amended it shall read as follows: "'Chile' means, collectively, Wackenhut Chile S.A., Wackenhut Safety S.A. and Wackenhut Mantenimiento Integral S.A., each a SOCIEDAD ANONIMA organized under the laws of the Republic of Chile." (b) The definition of "Restricted Investment" in SECTION 1.1 is hereby amended by deleting the word "and" at the end of clause (g); (ii) relettering clause (h) as clause (i); and (iii) inserting a new clause (h) reading as follows: 2 "(h) Investments securing Indebtedness of Chile in an amount not to exceed $20,000,000; and" (c) SECTION 9.4 is hereby amended by (i) deleting the word "and" at the end of clause (h); (ii) deleting the period at the end of clause (i) and inserting in lieu thereof a semi-colon; and (iii) adding new clauses (j) and (k) thereto reading as follows: "(j) a Lien on a $20,000,000 deposit account of the Borrower securing a loan to Chile which loan shall be deemed a loan or advance made for the benefit of Chile pursuant to SECTION 9.13; and (k) Liens on the assets or stock of Chile, its Subsidiaries or affiliates securing a loan to Chile, its Subsidiaries or affiliates which loan shall be deemed a loan or advance made for the benefit of Chile pursuant to SECTION 9.13." (d) SECTION 9.9 is hereby amended by (i) deleting the word "and" at the end of clause (a) and inserting in lieu thereof a comma; (ii) deleting the period at the end thereof and inserting in lieu thereof the word "and"; and (iii) inserting a new clause (c) thereto reading as follows: "(c) Guaranties of Rate Hedging Obligations to which Chile is a party in an aggregate notional amount not exceeding $20,000,000, which such Rate Hedging Obligations provide exchange rate and interest rate protection with respect to the Indebtedness referred to in SECTION 9.4(j)." 3. SUBSIDIARY CONSENTS. Each Subsidiary of the Borrower that has delivered a Guaranty to the Agent has joined in the execution of this Amendment Agreement for the purpose of (i) agreeing to the amendment to the Agreement and (ii) confirming its guarantee of payment of all the Obligations. 4. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants that: (a) The representations and warranties made by Borrower in Article VII of the Agreement are true on and as of the date hereof; (b) There has been no material adverse change in the condition, financial or otherwise, of the Borrower and its Subsidiaries since the date of the most recent financial reports of the Borrower received by each Lender under SECTION 7.6 thereof, other than changes in the ordinary course of business, none of which has been a material adverse change; (c) The business and properties of the Borrower and its Subsidiaries are not and have not been adversely affected in any substantial way as the result of any fire, explosion, earthquake, accident, strike, lockout, combination of workers, flood, embargo, 2 3 riot, activities of armed forces, war or acts of God or the public enemy, or cancellation or loss of any major contracts; and (d) No event has occurred and no condition exists which, upon the consummation of the transaction contemplated hereby, constitutes a Default or an Event of Default on the part of the Borrower under the Agreement, the Notes or any other Loan Document either immediately or with the lapse of time or the giving of notice, or both. 5. CONDITIONS. This Amendment Agreement shall become effective upon the Borrower delivering to the Agent seven (7) counterparts of this Amendment Agreement duly executed by the Agent, the Lenders, and the Borrower and consented to by each of the Guarantors. 6. ENTIRE AGREEMENT. This Amendment Agreement sets forth the entire understanding and agreement of the parties hereto in relation to the subject matter hereof and supersedes any prior negotiations and agreements among the parties relative to such subject matter. No promise, conditions, representation or warranty, express or implied, not herein set forth shall bind any party hereto, and no one of them has relied on any such promise, condition, representation or warranty. Each of the parties hereto acknowledges that, except as in this Amendment Agreement otherwise expressly stated, no representations, warranties or commitments, express or implied, have been made by any other party to the other. None of the terms or conditions of this Amendment Agreement may be changed, modified, waived or canceled orally or otherwise, except by writing, signed by all the parties hereto, specifying such change, modification, waiver or cancellation of such terms or conditions, or of any proceeding or succeeding breach thereof. 7. FULL FORCE AND EFFECT OF AGREEMENT. Except as hereby specifically amended, modified or supplemented, the Agreement and all of the other Loan Documents are hereby confirmed and ratified in all respects and shall remain in full force and effect according to their respective terms. [Remainder of page intentionally left blank.] 3 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment Agreement to be duly executed by their duly authorized officers, all as of the day and year first above written. BORROWER: THE WACKENHUT CORPORATION By:______________________________________ Name:____________________________________ Title:___________________________________ 4 5 GUARANTORS: TITANIA ADVERTISING, INCORPORATED TWC/FL/01, INC. TWC/FL/02, INC. WACKENHUT INTERNATIONAL, INCORPORATED WACKENHUT SERVICES, INCORPORATED WACKENHUT AIRLINE SERVICES, INC. AMERICAN GUARD & ALERT, INCORPORATED By:_________________________________ Name:_______________________________ Title:______________________________ 5 6 GUARANTORS: WACKENHUT EDUCATIONAL SERVICES, INC. WACKENHUT MONITORING SYSTEMS, INC. DIVERSIFIED CORRECTIONAL SERVICES, INCORPORATED WACKENHUT.COM ONLINE STORE, INC. SAVE-A-FRIEND, INC. WACKENHUT FINANCIAL, INC. TUHNEKCAW, INC. TITANIA INSURANCE COMPANY OF AMERICA, INC. By:_______________________________________ Name:_____________________________________ Title:____________________________________ 6 7 GUARANTORS: WACKENHUT RESOURCES, INCORPORATED WRI EMPLOYERS INSURANCE, INC. KING STAFFING, INC. KING TEMPORARY STAFFING, INC. KING BENEFITS, INC. KING EMPLOYEE SERVICES, INC. WORKFORCE ALTERNATIVE, INC. OASIS OUTSOURCING, INC. OASIS OUTSOURCING II, INC. OASIS OUTSOURCING III, INC. OASIS OUTSOURCING IV, INC. OASIS OUTSOURCING BENEFITS, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ WRI STAFFING, INC. WRI II, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ PROFESSIONAL EMPLOYEE MANAGEMENT, INC. PROFESSIONAL EMPLOYEE MANAGEMENT II, INC. PROFESSIONAL EMPLOYEE MANAGEMENT III, INC. PROFESSIONAL EMPLOYEE MANAGEMENT IV, INC. PROFESSIONAL EMPLOYEE MANAGEMENT BENEFITS, INC. PROFESSIONAL EMPLOYEE MANAGEMENT SERVICES, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ 7 8 GUARANTORS: WACKENHUT SERVICES, LLC By:_________________________________________ Name:_______________________________________ Title:______________________________________ 8 9 GUARANTORS: WACKENHUT OF NEVADA, INC. By:_________________________________________ Name:_______________________________________ Title:______________________________________ 9 10 BANK OF AMERICA, N.A., as Agent for the Lenders By:________________________________ Name: John E. Williams Title: Managing Director BANK OF AMERICA, N.A. By: ________________________________ Name: John E. Williams Title: Managing Director 10 11 SCOTIABANC INC. By:_________________________________ Name:_______________________________ Title:______________________________ 11 12 FIRST UNION NATIONAL BANK By:_________________________________ Name:_______________________________ Title:______________________________ 12 13 SUNTRUST BANK By:_________________________________ Name:_______________________________ Title:______________________________ 13 14 DRESDNER BANK LATEINAMERIKA AG, MIAMI AGENCY By:_________________________________ Name:_______________________________ Title:______________________________ By:_________________________________ Name:_______________________________ Title:______________________________ 14 15 BANCO SANTANDER PR By:_________________________________ Name:_______________________________ Title:______________________________ 15 -----END PRIVACY-ENHANCED MESSAGE-----