-----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, QWVJwF27afWeZnYzJMymmTaHQFcv1ZQbc0TRAduj4hdy1bdXjf67zNQB2E3/8o6B a3ZYLsrh3VpNqTmFgJnoPg== 0000950144-99-010479.txt : 19990818 0000950144-99-010479.hdr.sgml : 19990818 ACCESSION NUMBER: 0000950144-99-010479 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990704 FILED AS OF DATE: 19990817 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: SEC FILE NUMBER: 001-05450 FILM NUMBER: 99694545 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 THE WACKENHUT CORP FORM 10-Q 7-4-99 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 4, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ________ to _______ Commission file number 1-5450 THE WACKENHUT CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Florida 59-0857245 - -------------------------------------------------------------------------------- (State of incorporation or organization) (I.R.S. Employer Identification No.) 4200 Wackenhut Drive #100, Palm Beach Gardens, FL 33410-4243 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (561) 622-5656 - -------------------------------------------------------------------------------- FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At August 13, 1999, 3,855,582 shares of Series A were issued and outstanding and 11,307,516 shares of Series B of the registrant's Common Stock were outstanding after deducting 201,492 shares held in treasury. Page 1 of 28 2 THE WACKENHUT CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following consolidated financial statements of The Wackenhut Corporation and subsidiaries (the "Company") have been prepared in accordance with the instructions to Form 10-Q and therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial information for the interim periods reported have been made. Results of operations for the twenty-six weeks ended July 4, 1999 are not necessarily indicative of the results for the entire fiscal year ending January 2, 2000. Page 2 of 28 3 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS ENDED JULY 4, 1999 and JUNE 28, 1998 (In millions except per share data) UNAUDITED
Thirteen Weeks Ended Twenty-six Weeks Ended ------------------------ ------------------------ 1999 1998 1999 1998 --------- --------- --------- --------- REVENUES $ 530.3 $ 416.7 $ 1,030.4 $ 815.3 --------- --------- --------- --------- OPERATING EXPENSES: Payroll and related taxes 424.7 325.2 813.5 639.3 Other operating expenses 90.9 78.2 189.1 152.7 Depreciation expense 2.5 2.1 4.9 3.9 Amortization expense 3.2 2.4 6.0 4.7 --------- --------- --------- --------- 521.3 407.9 1,013.5 800.6 --------- --------- --------- --------- OPERATING INCOME 9.0 8.8 16.9 14.7 --------- --------- --------- --------- OTHER INCOME (EXPENSE): Interest and investment income 1.5 1.1 2.6 1.8 Interest expense (1.4) (0.8) (2.6) (1.3) --------- --------- --------- --------- 0.1 0.3 0.0 0.5 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 9.1 9.1 16.9 15.2 Provision for income taxes (3.6) (3.6) (6.7) (6.1) Minority interest, net of income taxes (2.6) (2.3) (5.0) (4.0) Equity income of affiliates, net of Income taxes of $1.2, $0.6, $2.4 and $0.4 1.8 0.8 3.5 1.4 --------- --------- --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 4.7 4.0 8.7 6.5 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- -- -- (6.6) --------- --------- --------- --------- NET INCOME (LOSS) $ 4.7 $ 4.0 $ 8.7 $ (0.1) ========= ========= ========= ========= Earning per share - basic Income before cumulative effect of change in accounting principle $ 0.31 $ 0.27 $ 0.58 $ 0.44 Cumulative effect of change in accounting principle -- -- -- (0.44) --------- --------- --------- --------- Net Income $ 0.31 $ 0.27 $ 0.58 $ -- ========= ========= ========= ========= Earning (loss) per share - diluted Income before cumulative effect of change in accounting $ 0.30 $ 0.26 $ 0.57 $ 0.42 principle Cumulative effect of change in accounting principle -- -- -- (0.44) --------- --------- --------- --------- Net Income (loss) $ 0.30 $ 0.26 $ 0.57 $ (0.02) ========= ========= ========= ========= Basic weighted average shares outstanding 14.9 14.9 14.9 14.9 Diluted weighted average shares outstanding 15.1 15.3 15.1 15.3
See notes to unaudited consolidated financial statements. Page 3 of 28 4 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JULY 4, 1999 AND JANUARY 3, 1999 (In millions) UNAUDITED
July 4, January 3, 1999 1999 ------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 64.6 $ 43.5 Accounts receivable, less allowance for doubtful accounts of $5.2 at July 4, 1999, and $4.7 at January 3, 1999 (note 6) 158.8 167.8 Inventories 16.5 14.5 Deferred taxes 7.9 7.4 Prepaids 8.7 10.2 Other 13.5 11.4 ------ ------ 270.0 254.8 ------ ------ MARKETABLE SECURITIES of casualty reinsurance subsidiary 21.5 18.5 ------ ------ PROPERTY AND EQUIPMENT, at cost 71.3 76.2 Accumulated depreciation (23.9) (19.6) ------ ------ 47.4 56.6 ------ ------ DEFERRED TAXES 11.6 12.2 ------ ------ OTHER ASSETS: Intangibles 58.0 56.0 Investment in and advances to affiliates, at cost 41.6 36.7 Other 12.6 14.0 ------ ------ 112.2 106.7 ------ ------ $462.7 $448.8 ====== ======
See notes to unaudited consolidated financial statements. Page 4 of 28 5 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JULY 4, 1999 AND JANUARY 3, 1999 (In millions) UNAUDITED
July 4, January 3, 1999 1999 ------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ 5.5 $ 4.4 Accounts payable 35.6 36.4 Accrued payroll and related taxes 76.7 70.0 Accrued expenses 46.6 53.6 ------ ------ 164.4 164.4 ------ ------ RESERVES FOR LOSSES of casualty reinsurance subsidiary 56.3 50.8 ------ ------ LONG-TERM DEBT 2.6 3.4 ------ ------ DEFERRED REVENUES 15.9 16.7 ------ ------ OTHER 18.3 16.7 ------ ------ MINORITY INTEREST 50.7 47.6 ------ ------ SHAREHOLDERS' EQUITY: Preferred stock, 10 million shares authorized Common stock, $.10 par value, 50 million shares authorized: Series A common stock, 3.9 million issued and outstanding 0.4 0.4 Series B common stock, 11.1 million issued and outstanding 1.1 1.1 Additional paid-in capital 124.8 125.5 Retained earnings 40.0 32.5 Accumulated other comprehensive income (loss) (8.6) (7.3) Treasury stock at cost, 0.2 million shares of Series B shares (3.1) (3.0) ------ ------ 154.6 149.2 ------ ------ $462.7 $448.8 ====== ======
See notes to unaudited consolidated financial statements Page 5 of 28 6 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED JULY 4, 1999 AND JUNE 28, 1998 (In millions) UNAUDITED
1999 1998 ----- ----- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net Income (loss) $ 8.7 $(0.1) Adjustments - Cumulative effect of change in accounting change principle -- 6.6 Depreciation expense 4.9 3.9 Amortization expense 2.1 1.6 Uniform amortization 3.9 3.1 Provision for bad debts 0.5 1.0 Equity income, net of dividends (4.5) (2.3) Minority interests in net income 8.4 6.6 Other 0.7 (0.7) (Increase) decrease in assets: Accounts receivable (6.0) (13.4) Inventories (6.0) (5.2) Prepaid expense 1.5 (8.5) Other current assets (2.1) (2.5) Deferred taxes 0.4 (8.1) Other (3.9) (0.7) Increase (decrease) in liabilities: Accounts payable and accrued expenses (8.1) 9.3 Accrued payroll and related taxes 6.7 5.3 Reserve for losses of casualty reinsurance subsidiary 5.4 0.8 Deferred revenue (0.8) -- Other 1.6 (0.4) ----- ----- Net Cash Provided by (Used In) Operating Activities $13.4 $(3.7) ----- -----
See notes to unaudited consolidated financial statements. Page 6 of 28 7 THE WACKENHUT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED JULY 4, 1999 AND JUNE 28, 1998 (In millions) UNAUDITED (Continued)
1999 1998 ------ ------ CASH FLOWS PROVIDED BY INVESTING ACTIVITIES: Net proceeds from sale of prison facilities to CPV (note 8) $ 22.3 $ 42.2 Investment in and advances to affiliates and joint ventures (0.8) (0.8) Capital expenditures (18.0) (5.2) Sales of marketable securities 6.0 3.7 Purchases of marketable securities (9.9) (19.6) Non-current assets 1.2 (4.3) ------ ------ Net Cash Provided by Investing Activities 0.8 16.0 ------ ------ CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: Proceeds from exercise of stock options 0.9 0.9 Net proceeds from exercise of stock options of subsidiary 0.2 1.2 Proceeds from issuance of debt 146.7 132.8 Payments on debt (146.4) (144.3) Purchase of treasury stock by subsidiary (6.1) Proceeds from sales of accounts receivable 14.5 18.0 Dividends paid (2.2) (2.2) ------ ------ Net Cash Provided By Financing Activities 7.6 6.4 ------ ------ Effect of Exchange Rate Changes on Cash (0.7) (1.5) ------ ------ Net increase in Cash and Cash Equivalents 21.1 17.2 Cash and Cash Equivalents, at beginning of period 43.5 45.2 ------ ------ Cash and Cash Equivalents, at end of period $ 64.6 $ 62.4 ====== ====== SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest $ 2.4 $ 1.4 Income taxes $ 4.6 $ 1.2
See notes to unaudited consolidated financial statements. Page 7 of 28 8 THE WACKENHUT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED 1. GENERAL The consolidated financial statements of the Company are unaudited and, in the opinion of management, include all adjustments necessary to fairly present the Company's financial condition, results of operations and cash flows for the interim period. The results for the twenty-six weeks ended July 4, 1999 are not necessarily indicative of the results of operations to be expected for the full year. These statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended January 3, 1999. Certain prior year amounts have been reclassified to conform with current year presentation. The Company's subsidiary, Wackenhut Corrections Corporation ("WHC"), is listed on the New York Stock Exchange as "WHC." 2. INVESTMENT IN AFFILIATES Equity in undistributed earnings of foreign affiliates approximated $18.2 million and $14.0 million at July 4, 1999 and January 3, 1999, respectively, and is included in "Investment in and advances to foreign affiliates" in the accompanying consolidated balance sheets. The following is a summary of condensed unaudited financial information pertaining to foreign affiliates (dollars in millions):
July 4, January 3, 1999 1999 ------- ---------- Balance sheet items: Current assets $ 118.4 $ 95.4 Non-current assets 63.7 49.1 Current liabilities 91.2 63.4 Non-current liabilities 31.5 33.3 Minority interest liability 0.5 6.5
July 4, June 28, Income statement items for the twenty-six weeks ended: 1999 1998 ------- ------- Revenues $ 298.5 $ 107.3 Operating income 18.3 8.2 Net income before taxes 15.0 6.5
Page 8 of 28 9 3. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income", effective January 3, 1999. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. The components of the Company's comprehensive income are as follows (dollars in millions):
Twenty-six weeks ended ---------------------- July 4, June 28, 1999 1998 -------- -------- Net income (loss) $ 8.7 $ (0.1) Unrealized loss on marketable securities, net of income tax benefits of $0.4 for 1999 and none for 1998 (0.6) -- Foreign currency translation adjustments, net of income tax benefits of $0.5 and $1.0 for 1999 and 1998 (0.7) (1.5) -------- -------- Comprehensive income (loss) $ 7.4 $ (1.6) ======== ========
4. INTANGIBLES Intangibles at July 4, 1999 and January 3, 1999 consisted of the following (dollars in millions):
1999 1998 -------- -------- Goodwill $ 47.7 $ 45.2 Contract value 15.6 15.6 Other 4.0 3.2 -------- -------- 67.3 64.0 Accumulated amortization (9.3) (8.0) -------- -------- $ 58.0 $ 56.0 ======== ========
Page 9 of 28 10 5. INCOME TAXES The combined Federal and state effective income tax rate was 39.7% for the first twenty-six weeks of 1999 and 40.3% for the first twenty-six weeks of 1998. The lower effective rate in the first twenty-six weeks of 1999 was due to increases in tax exempt income on government securities. 6. LONG TERM DEBT Long-term debt consists of the following (dollars in millions):
July 4, January 3, 1999 1999 -------- -------- Revolving loan - 5.3% and 5.4%, respectively $ 0.8 $ 1.8 Lease obligation payable in installments through 2004 at a weighted average rate of 4.5% 1.6 1.8 Other 5.7 4.2 -------- -------- Total 8.1 7.8 Less current portion (5.5) (4.4) -------- -------- Total 2.6 3.4 ======== ========
In December 1997, the Company entered into a three-year agreement to sell, on an ongoing basis, an undivided interest in a defined pool of eligible receivables up to a maximum of $60 million. In February 1999, the Company amended the agreement to increase the eligible receivables to a maximum of $75 million. The costs associated with this program are based upon the purchasers' level of investment and the cost of issuing commercial paper plus predetermined fees. Such costs are included in "Interest expense" in the consolidated statement of income. There were $67.5 million and $53.0 million accounts receivable sold under this agreement at July 4, 1999 and January 3, 1999, respectively. As of July 4, 1999, the total amount available to the Company from its revolving credit and accounts receivable securitization facility was $43.7 million. The Company has a demand operating line of credit with a Canadian bank with a maximum borrowing amount of $2.1 million. The Company has short-term borrowings under this line of credit of $2.0 and $1.0 million at July 4, 1999 and January 3, 1999, respectively, for working capital purposes, bearing interest at the bank's prime lending rate of 6.8%. The Company had outstanding notes payable and operating lines of credit of $3.8 million and $2.9 million at July 4, 1999 and January 3, 1999, respectively, to meet working capital needs of its international subsidiary. The long-term portion of the capital lease obligation maturing during each of the four years after 1999 is $0.8 million, $0.4 million, $0.5 million and $0.1 million, respectively. All other long-term debt matures in 2000. Page 10 of 28 11 7. EARNINGS PER SHARE The table below shows the amounts used in computing earnings per share and the effects on income and the weighed average number of shares of potential dilutive common stock (in millions except for per share amounts).
THIRTEEN WEEKS ENDED ------------------------------ July 4, 1999 June 28, 1998 ------------ ------------- Basic Net Income $ 4.7 $ 4.0 -------- -------- Weighted average common shares outstanding 14.9 14.9 -------- -------- Basic earnings per share $ 0.31 $ 0.27 -------- -------- Diluted Net Income 4.7 4.0 Effect of Wackenhut Corrections Stock Options (0.1) (0.1) -------- -------- Net Income $ 4.6 $ 3.9 -------- -------- Weighted average common shares outstanding 14.9 14.9 -------- -------- Assumed exercise of stock options, net of common Shares assumed repurchased with the proceeds 0.2 0.4 -------- -------- Adjusted weighted average Common shares outstanding 15.1 15.3 -------- -------- Diluted earnings (loss) per share $ 0.30 $ 0.26
Options to purchase 315,000 shares of common stock at July 4, 1999, and 16,000 at June 28, 1998, were excluded from the diluted earnings (loss) per share calculation as their impact would have been antidilutive.
TWENTY - SIX WEEKS ENDED ------------------------- July 4, 1999 June 28, 1998 ------------ ------------ Basic Net Income (loss) $ 8.7 $ (0.1) ------ ------ Weighted average common shares outstanding 14.9 14.9 ------ ------ Basic earnings per share $ 0.58 $ -- ------ ------ Diluted Net Income (loss) 8.7 (0.1) Effect of Wackenhut Corrections Stock Options (0.1) (0.2) ------ ------ Net Income (loss) $ 8.6 $ (0.3) ------ ------ Weighted average common shares outstanding 14.9 14.9 ------ ------ Assumed exercise of stock options, net of common shares assumed repurchased with the proceeds 0.2 0.4 ------ ------ Adjusted weighted average Common shares outstanding 15.1 15.3 ------ ------ Diluted earnings (loss) per share $ 0.57 $(0.02)
Page 11 of 28 12 8. SALE OF FACILITIES TO CORRECTIONAL PROPERTIES TRUST In January 1999, WHC sold to Correctional Properties Trust ("CPV") one facility and its right to acquire one facility for $66.1 million resulting in net proceeds to WHC of $22.3 million. Simultaneous with these purchases, WHC entered into ten-year operating leases of the facilities from CPV. These properties require initial annual lease payments of $6.3 million and include annual increases for changes in the consumer price index with minimum increases of 3% for each of the following two years. 9. TREASURY STOCK The Board of Directors of the Company and of Wackenhut Corrections authorized the repurchase, at the discretion of each company's senior management, of up to 0.5 million shares of Series B common stock and 0.5 million shares of Wackenhut Corrections common stock, respectively. The Company's repurchases of shares of common stock are recorded as treasury stock and result in a reduction of stockholders' equity. Wackenhut Corrections' repurchases of shares of common stock are recorded as a reduction to additional paid-in capital and minority interest. As of January 3, 1999, the Company had bought back 196,400 shares of the Company's Series B common stock at an average price of $15.48 per share, and Wackenhut Corrections purchased 153,500 shares of Wackenhut Corrections common stock, during 1998, at an average price of $19.52 per share. In February 1999, the Board of Directors of Wackenhut Corrections authorized, in addition to that previously authorized, the repurchase of up to 0.5 million shares of its common stock. From January 4, 1999 to July 4, 1999, WHC had repurchased an additional 299,500 shares of its common stock at an average price of $20.47 per share. Page 12 of 28 13 10. BUSINESS SEGMENTS The Company's principal segments are grouped based on similarity of business services provided and the type of customer for which these services are offered. These services consist of security services, correctional services and flexible staffing services. The Company is a major provider of business services including security-related and other support services to business and government, a leading developer and manager of privatized correctional and detention facilities, and a provider of employee leasing and temporary staffing. Intersegment transactions are accounted for on an arms-length basis and are eliminated in consolidation. Direct general and administrative expenses are allocated based on usage.
TWENTY-SIX WEEKS ENDED ------------------------------ (dollars in millions) July 4, 1999 June 28, 1998 ----------- ------------- Revenues: Security services 509.4 450.3 Correctional services 203.5 145.9 Staffing services 317.5 219.1 -------- -------- Total revenues $1,030.4 $ 815.3 ======== ======== Operating Income: Security services 12.1 11.0 Correctional services 13.3 11.5 Staffing services 1.5 0.8 Unallocated corporate expenses (10.0) (8.6) -------- -------- Total operating income $ 16.9 $ 14.7 ======== ======== Equity Income of Affiliates, net of taxes: Security services 2.0 0.6 Correctional services 1.5 0.8 -------- -------- Total equity income $ 3.5 $ 1.4 ======== ======== Capital Expenditures: Security services 1.2 2.4 Correctional services 13.9 1.8 Staffing services 1.1 0.4 Unallocated corporate expenditures 1.8 0.6 -------- -------- Total capital expenditures $ 18.0 $ 5.2 ======== ======== Depreciation and Amortization: Security services 6.1 5.3 Correctional services 2.5 2.4 Staffing services 1.0 0.6 Unallocated corporate expenses 1.3 0.3 -------- -------- Total expenses $ 10.9 $ 8.6 ======== ======== Identifiable Assets: July 4, 1999 January 3, 1999 ----------- ------------- Security services 159.9 167.4 Correctional services 167.1 146.4 Staffing services 70.0 62.6 Unallocated corporate assets 65.7 72.4 -------- -------- Total identifiable assets $ 462.7 $ 448.8 ======== ========
Page 13 of 28 14 11. DOMESTIC AND INTERNATIONAL OPERATIONS Non-U.S. operations of the Company and its subsidiaries are conducted primarily in South America and Australia. Minority interest in consolidated foreign subsidiaries have been reflected net of applicable income taxes on the accompanying financial statements. The Company carries its investments in affiliates (20% to 50% owned) under the equity method. U.S. income taxes which would be payable upon remittance of affiliates' earnings to the Company are provided currently. A summary of domestic and international operations is shown below.
TWENTY-SIX WEEKS ENDED ---------------------------- (dollars in millions) July 4, 1999 June 28, 1998 ------------ ------------- Revenues: Domestic operations $ 917.6 $ 716.4 International operations 112.8 98.9 -------- -------- Total revenues $1,030.4 $ 815.3 -------- -------- Operating Income: Domestic operations $ 13.5 $ 12.0 International operations 3.4 2.7 -------- -------- Total operating income $ 16.9 $ 14.7 -------- -------- Equity Income of Affiliates, net of taxes: Domestic operations $ 0.8 $ -- International operations 2.7 1.4 -------- -------- Total equity income $ 3.5 $ 1.4 -------- -------- Capital Expenditures: Domestic operations $ 16.6 $ 3.3 International operations 1.4 1.9 -------- -------- Total capital expenditures $ 18.0 $ 5.2 -------- -------- Depreciation and Amortization: Domestic operations $ 8.5 $ 6.1 International operations 2.4 2.5 -------- -------- Total expenses $ 10.9 $ 8.6 -------- -------- July 4, 1999 January 3, 1999 ------------ -------------- Long-lived Assets: Domestic operations $ 32.4 $ 46.9 International operations 15.0 9.7 -------- -------- Total long-lived assets $ 47.4 $ 56.6 -------- --------
Page 14 of 28 15 THE WACKENHUT CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Wackenhut Corporation and its Subsidiaries (the "Company") is a leading outsourcer of diversified services to business and government. The Company focuses strategically on three major businesses worldwide - security related and other operational support services, development and management of privatized correctional and detention facilities, and personnel employee leasing and temporary services. The security-related services have expanded into a range of support services to include security operations, facility management, fire and emergency medical services and food service to private and publicly managed correctional facilities. The Security Services business is organized into North American Operations and International Operations. The Company, through its 55% owned public subsidiary, Wackenhut Corrections Corporation (NYSE:WHC) designs, constructs, finances and manages correctional, detention and mental health psychiatric facilities and performs separate correctional-related services, including prisoner transportation, home detention monitoring and correctional health care. The Company has established a national presence in the flexible leasing, temporary services, recruiting, risk management, payroll processing and human resource services. FINANCIAL CONDITION Reference is made to pages 24 through 29 of the Company's Annual Report to Shareholders, filed as Exhibit 13.0 with the Company's Annual Report Form 10-K for the fiscal year ended January 3, 1999 for further discussion and analysis of information pertaining to the Company's financial condition. FORWARD-LOOKING STATEMENTS: Management's discussion and analysis of financial condition and results of operations and Market Risk and Year 2000 Readiness Disclosure and the August 6, 1999 press release contain forward-looking statements that are based on current expectations, estimates and projections about the segments in which the Company operates. This section of the quarterly report also includes management's beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variation of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("future factors") which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Future factors include: increasing price and product/service competition by foreign and domestic competitors, including new entrants; rapid technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost effective basis; the mix of products/services; the achievement of lower costs and expenses; domestic and foreign governmental and public policy changes, including environmental regulations; protection and validity of patent and other intellectual property rights; reliance on large customers; technological, implementation and cost/financial risks in increasing use of large, multi-year contracts; the outcome of pending and future litigation and governmental proceedings and continued availability of financing; and financial instruments and financial resources in the amounts, at the times and on the terms required to support the Company's future business. These are representative of the future factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic and international economic conditions, including interest rate and currency exchange rate fluctuations and other future factors. LIQUIDITY Cash and cash equivalents at July 4, 1999 of $64.6 million increased $21.1 million from January 3, 1999. Cash provided by operating activities amounted to $13.4 million through the second quarter 1999, versus cash used of $3.7 million through the second quarter 1998. Cash provided by investing activities amounted to $0.8 through the second quarter 1999 versus $16.0 million for the same period in the last year, primarily reflecting proceeds from the sale of prison facilities to Correctional Properties Trust ("CPV"). Cash provided by financing activities through the second quarter 1999 amounted to $7.6, reflecting primarily $14.5 million proceeds for sales of accounts receivable net of $6.1 million for treasury stock purchases made by WHC. As of July 4, 1999, the total amount available to the Company from its revolving credit and accounts receivable securitization facility was $43.7 million. In January 1999, WHC sold to CPV one facility and its right to acquire one facility for $66.1 million resulting in net proceeds to WHC of $22.3 million. In connection with this sale, WHC entered into a ten-year lease with CPV. As of July 4, 1999, approximately $74.0 million of WHC's $220.0 million operating lease facility, established to acquire and develop new correctional facilities, was outstanding for properties under development. MARKET RISK The Company is exposed to market risks, including changes in interest rates and currency exchange rates. These exposures primarily relate to outstanding balances under the revolving line of credit and securitization facilities, international investments and from changes in interest rates with respect to a $220.0 million operating lease facility. Management continues to monitor the operations of several international subsidiaries and affiliates in countries affected by the current economic and financial crises. The losses attributable to operations in those countries and related Page 15 of 28 16 foreign exchange fluctuations did not significantly affect the consolidated results of operations for fiscal 1998. In addition, barring a further deterioration of the international markets, management does not believe that the consolidated results of operations will be significantly affected by these events in fiscal 1999. YEAR 2000 READINESS DISCLOSURE The Year 2000 issue is the result of shortcomings in many electronic data processing systems and other equipment that make operations beyond the year 1999 troublesome. The internal clocks in computers and other equipment will roll over from "12/31/99" to "01/01/00" and programs and hardware, if not corrected, will be unable to distinguish between the year 2000 and the year 1900. This may result in processing data inaccurately or in stopping data processing altogether. Management continued its review of the installation of new information systems hardware and software and determined that the installation is on schedule for completion before the Year 2000. Other systems, including embedded technology, such as security systems, also are being reviewed and this review is expected to be substantially completed by October 1999. There are five phases that describe the Company's process of becoming Year 2000 compliant. The awareness phase encompasses developing a budget and project plan. The assessment phase identifies mission-critical systems to check for compliance. Based on current information, both of these phases have been completed. The Company is at various stages in the three remaining phases: renovation, validation and implementation. Renovation is the design of the systems to be Year 2000 compliant. Validation is testing the systems followed by implementation. Implementation of the Company's Year 2000 compliant financial information systems has begun and is scheduled for complete implementation in third quarter 1999. Implementation of all other major Year 2000 compliant information systems is scheduled for completion by the end of the third quarter 1999. The Company has incurred and will continue to incur expenses related to Year 2000 compliance. These costs include time and effort of internal staff and consultants for renovation, validation and implementation, and computer enhancements and/or replacements. The total costs to be expensed for achieving Year 2000 compliance is funded from working capital and monitored by each business unit. Through the second quarter of 1999, $0.2 million was spent on completing Year 2000 information systems compliance. To complete Year 2000 information systems compliance, the Company estimates an additional $0.7 million will be expensed. These costs for Year 2000 compliance exclude the Company's total costs estimated to be incurred in previously planned new systems. Estimated costs of implementing these new systems is $19.1 million, with costs incurred through December 1998 totaling $12.4 million, of which $9.1 million was capitalized and $3.3 million expensed. Through the second quarter 1999, an additional $4.4 million has been incurred with $3.9 million capitalized and $0.5 million expensed. To complete these new systems, the Company estimates $2.3 million is expected to be incurred of which $1.4 million is expected to be capitalized and amortized and $.9 million will be expensed. Deferral of other projects that would have a material effect on operations has not been required, nor anticipated, as a result of the Company's Year 2000 efforts. The Company is developing a contingency plan and expects to substantially complete it in all significant and material respects by the end of the third quarter 1999. The Company expects to be Year 2000 compliant in 1999 for all major systems. The Company is also assessing the risks and full impact on operations should the most reasonably likely worst case year 2000 scenario occur. In order to minimize any adverse impact on its operations of the Year 2000 problem, the Company is in the process of developing contingency plans which it intends to complete substantially in all significant and material respects by the end of the third quarter of 1999. Page 16 of 28 17 Management is reviewing the state of Year 2000 readiness for third parties with whom the Company shares a material relationship. Written inquiries have been sent and continue to be sent to third parties. At this time, the Company is unaware of any third party Year 2000 issues that would materially affect these relationships. Notwithstanding the successful implementation of the Company's Year 2000 plan, the Company's operations could nevertheless be affected by the ability of third parties, such as customers, suppliers and utilities dealing with the Company, to remediate their own Year 2000 issues over which the Company has no control. Page 17 of 28 18 RESULTS OF OPERATIONS Comparison of Thirteen Weeks Ended July 4, 1999 and Thirteen Weeks Ended June 28, 1998 The table below summarizes the Company's results of operations for the thirteen weeks ended July 4, 1999 ("second quarter of 1999") and June 28, 1998 ("second quarter of 1998") by the Company's organizational business segments. The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto (dollars in millions):
Thirteen weeks ended ----------------------------------------------------------- July 4, 1999 June. 28, 1998 ------------------------- ------------------------- $ % $ % -------- -------- -------- -------- REVENUES [a] Security Services: North American Operations 221.8 41.8 194.3 46.6 International Operations 36.9 7.0 33.2 8.0 -------- -------- -------- -------- 258.7 48.8 227.5 54.6 Correctional Services 106.1 20.0 74.6 17.9 Flexible Staffing Services 165.5 31.2 114.6 27.5 -------- -------- -------- -------- Consolidated revenues 530.3 100.0 416.7 100.0 ======== ======== ======== ======== OPERATING INCOME [b] Security Services: North America Operations 6.0 2.7 5.4 2.8 International Operations 0.3 0.8 0.8 2.4 -------- -------- -------- -------- 6.3 2.4 6.2 2.7 Correctional Services 6.8 6.4 6.4 8.6 Flexible Staffing Services 0.9 0.5 0.5 0.4 Unallocated corporate expense (5.0) (0.9) (4.3) (1.0) -------- -------- -------- -------- Consolidated operating income 9.0 1.7 8.8 2.1 ======== ======== ======== ========
[a] Represents percent of total revenues. [b] Represents percent of respective business related revenues. Page 18 of 28 19 COMPARISON OF THIRTEEN WEEKS ENDED JULY 4, 1999 AND THIRTEEN WEEKS ENDED IN JUNE 28, 1998 REVENUES SECURITY SERVICES Second quarter 1999 Security Services revenues increased $31.2 million, or 13.7%, to $258.7 million from $227.5 million in the second quarter of 1998. Revenues from North American Operations increased $27.5 million, or 14.2%, to $221.8 million in the second quarter of 1999 from $194.3 million in the second quarter of 1998. There was an expansion of revenues from national accounts due to new contracts and increases in existing contracts. International Operations revenues increased $3.7 million, or 11.1%, to $36.9 million in the second quarter of 1998 compared to $33.2 million in the second quarter of 1998. Increases in international security revenues are primarily attributable to growth in Latin America and Africa. CORRECTIONAL SERVICES Second quarter 1999 Correctional Services revenues increased $31.5 million, or 42.2%, to $106.1 million from $74.6 million in the comparable quarter last year. Approximately $27.8 million of the increase in revenues in the second quarter 1999 compared to the second quarter 1998 is attributable to an increase in compensated resident days resulting from the opening of 6 facilities in 1998 subsequent to the second quarter of 1998, and with the opening of 3 facilities in the second quarter 1999. The balance of the increase in revenues was attributable to facilities open during all of both periods and to development activities. Compensated resident days increased to approximately 2,387,000 in the second quarter of 1999 from 1,846,000 in the second quarter of 1998. Occupancy at facilities increased to approximately 97.4% of capacity compared to 96.9% in the second quarter of 1998. FLEXIBLE STAFFING SERVICES Flexible Staffing Services second quarter 1999 revenues of $165.5 million reflect the acquisition, in November 1998, of Sharp and Advantage Temporary Staffing Companies and were 44.4% above last year's revenues of $114.6. Leased employees grew organically to approximately 28,300 at the end of the second quarter 1999 from 22,100 at the end of the second quarter 1998. Including Sharp and Advantage, temporary staffing hours grew to approximately 824,000 during the second quarter 1999 from approximately 485,000 during the second quarter 1998. OPERATING INCOME Second quarter 1999 consolidated operating income increased $0.2 million, or 2.3%, to $9.0 million from $8.8 million in the second quarter of 1998. The operating margin for the second quarter of 1999 decreased to 1.7% from 2.1% for the comparable second quarter of 1998. Offsetting the increase in operating income from higher revenues were WHC's lease payments to CPV, the increase in revenues attributable to pass-through costs of Staffing Services which are not subject to the Company's control, and a decrease in operating income of certain subsidiaries of International Operations. SECURITY SERVICES The operating income of the security services business increased $0.1 million, or 1.6%, to $6.3 million in the second quarter of 1999 from $6.2 million for the comparable quarter last year. North American Operations' operating income increased $0.6 million, or 11.1%, to $6.0 million in the second quarter 1999 from $5.4 million in the second quarter 1998. The increase in operating income of North American Operations can be attributed mainly to increased revenue growth. The operating income of North American Operations for the second quarter of 1999, as a percentage of revenues, decreased slightly to 2.7% from 2.8% for the comparable second quarter of 1998. International Operations' operating income decreased $0.5 million to $0.3 million in the second quarter 1999 from $0.8 million in the second quarter 1998, due principally to operating losses in the United Kingdom and Mexico. Page 19 of 28 20 CORRECTIONAL SERVICES Second quarter 1999 operating income increased $0.4 million, or 6.3%, to $6.8 million from $6.4 million in the comparable period in 1998. Second quarter 1999 operating income as a percent of revenue declined to 6.4% from 8.6% in 1998. The decrease in operating margin was due partially to the lease payments to CPV, which began in April 1998, and an increase in start-up costs related to the opening of new facilities. FLEXIBLE STAFFING SERVICES The operating profit of Flexible Staffing Services was $0.9 million in the second quarter of 1999, as compared to $0.5 million in second quarter 1998. The improvement is attributable to revenue growth and improved margins in employee leasing operations. Salaries, wages, payroll taxes and other direct costs of worksite employees (i.e. leased employees), hours are pass-through costs not subject to the Company's control and therefore increase revenues without a commensurate operating margin benefit. The controllable revenues, excluding pass-through costs, were $21.9 million and $14.4 million with operating margins of 4.1% and 3.5% for the second quarters ended 1999 and 1998, respectively. UNALLOCATED CORPORATE EXPENSES AND INFORMATION SYSTEMS Unallocated corporate general and administrative expenses increased 16.3% to $5.0 million in the second quarter 1999 from $4.3 million in the second quarter 1998. The increase over the prior year reflects the continuing increase in information technology costs related to the rollout of new enterprisewide systems and personnel costs of administrative departments. However, as a percentage of consolidated revenues, unallocated corporate general and administrative expenses decreased to 0.9% of revenues in the second quarter 1999 from 1.0% of revenues in the second quarter 1998. OTHER INCOME/EXPENSE The Company realized other income, net, of $0.1 million in the second quarter 1999 compared to $0.3 million in the second quarter of 1998. Investment income increased $0.4 million to $1.5 million in the second quarter 1999 from $1.1 million in the second quarter 1998. This increase is primarily attributable to WHC's investment of cash proceeds from sales to CPV. Interest expense increased $0.6 million to $1.4 million in the second quarter 1999 from $0.8 million in the second quarter 1998. This increase is primarily attributable to increased interest expense related to the increase in securitized accounts receivables and higher interest rates. INCOME BEFORE INCOME TAXES Second quarter 1999 and 1998 income before taxes remained the same at $9.1 million. EBITDA, defined as earnings before interest expense, income taxes, depreciation and amortization, was $14.7 million, or 2.8% of revenues for the second quarter 1999, which was $1.4 million, or 10.5%, higher than the second quarter 1998. EBITDA does not necessarily indicate that cash flow is sufficient to fund all the Company's cash needs or represent cash flow from operations as defined by generally accepted accounting principles. INCOME TAXES The combined Federal and state effective income tax rate was 39.7% for the second quarter 1999 and 39.1% for the second quarter of 1998. MINORITY INTEREST EXPENSE Minority interest expense (net of income taxes) increased $0.3 million to $2.6 million in the second quarter 1999 from $2.3 million in the second quarter 1998, reflecting principally the increase in earnings of WHC. Page 20 of 28 21 EQUITY INCOME OF AFFILIATES Equity income of affiliates (net of income taxes) increased $1.0 million to 1.8 million in the second quarter 1999 from $0.8 million in the second quarter 1998. This increase relates to the Space Gateway Support joint venture in the North American Operations; improved performances overseas, primarily of Chile and Greece; and due to the commencement of home monitoring contracts in January 1999 and the opening of a U.K. prison opened in March 1999. NET INCOME Net income was $4.7 million for the second quarter 1999, or $0.31 basic earnings per share, as compared to $4.0 million, or $0.27 basic earnings per share for the same period in 1998. Earnings per share on a diluted basis was $0.30 in the second quarter 1999 compared to $0.26 per share for the same period in 1998. Goodwill amortization, after tax, amounted to $0.3 million for each of the second quarters ended 1999 and 1998. Excluding goodwill amortization, after tax, basic earnings per share were $0.33 and $0.29 for the second quarter 1999 and 1998, respectively. Likewise, diluted earnings per share were $0.32 and $0.28 for the second quarter 1999 and 1998, respectively. Page 21 of 28 22 RESULTS OF OPERATIONS Comparison of Twenty-six Weeks Ended July 4, 1999 and Twenty-six Weeks Ended June 28, 1998 The table below summarizes the Company's results of operations for the twenty-six weeks ended July 4, 1999 ("second quarter of 1999") and June 28, 1998 ("second quarter of 1998") by the Company's organizational business segments. The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto (dollars in millions):
Twenty-six weeks ended --------------------------------------------------- July 4, 1999 June. 28, 1998 ----------------------- ---------------------- $ % $ % -------- -------- -------- -------- REVENUES [a] Security Services: North American Operations 436.0 42.3 386.1 47.3 International Operations 73.4 7.1 64.2 7.9 -------- -------- -------- -------- 509.4 49.4 450.3 55.2 Correctional Services 203.5 19.8 145.9 17.9 Flexible Staffing Services 317.5 30.8 219.1 26.9 -------- -------- -------- -------- Consolidated revenues 1030.4 100.0 815.3 100.0 ======== ======== ======== ======== OPERATING INCOME [b] Security Services: North America Operations 11.3 2.6 10.2 2.6 International Operations 0.8 1.1 0.9 1.4 -------- -------- -------- -------- 12.1 2.4 11.1 2.5 Correctional Services 13.3 6.5 11.4 7.9 Flexible Staffing Services 1.5 0.5 0.8 0.3 Unallocated corporate expense (10.0) (1.0) (8.6) (1.1) -------- -------- -------- -------- Consolidated operating income 16.9 1.6 14.7 1.8 ======== ======== ======== ========
[a] Represents percent of total revenues. [b] Represents percent of respective business related revenues. Page 22 of 28 23 COMPARISON OF TWENTY-SIX WEEKS ENDED JULY 4, 1999 AND TWENTY-SIX WEEKS ENDED IN JUNE 28, 1998 REVENUES SECURITY SERVICES Year to date 1999 Security Services revenues increased $59.1 million, or 13.1%, to $509.4 million from $450.3 million in the first half of 1998. Revenues from North American Operations increased 49.9 million, or 12.9%, to $436.0 million in the first half of 1999 from $386.1 million in the first half of 1998. There was an expansion of revenues from national accounts due to new contracts and increases in existing contracts. International Operations revenues increased $9.2 million, or 14.3%, to $73.4 million in the first half of 1999 compared to $64.2 million in the first half of 1998. Increases in international security revenues are primarily attributable to growth in Latin America and Africa. CORRECTIONAL SERVICES First half 1999 Correctional Services revenues increased $57.6 million, or 39.5%, to $203.5 million from $145.9 million in the comparable half of 1998. Approximately $52.1 million of the increase in revenues in the first half of 1999 compared to the same period in 1998 is attributable to an increase in compensated resident days resulting from the opening of 10 facilities in 1998 subsequent to the second quarter of 1998, and with the opening of 3 facilities in the second quarter 1999. The balance of the increase in revenues was attributable to facilities open during all of both periods and to development activities. Compensated resident days increased to approximately 4,640,000 in the first half of 1999 from 3,596,000 in the second quarter of 1998. Occupancy at facilities increased to approximately 97.3% of capacity compared to 96.3% in the first half of 1998. FLEXIBLE STAFFING SERVICES Flexible Staffing Services year to date 1999 revenues of $317.5 million reflect the acquisition, in November 1998, of Sharp and Advantage Temporary Staffing Companies and were 44.9% above last year's revenues of $219.1. Leased employees grew organically to approximately 28,300 at the end of the second quarter 1999 from 22,100 at the end of the second quarter 1998. Including Sharp and Advantage, temporary staffing hours grew to approximately 824,000 during the second quarter 1999 from approximately 485,000 during the second quarter 1998. OPERATING INCOME Year to date 1999 consolidated operating income increased $2.2 million, or 15.0%, to $16.9 million from $14.7 million in the same period of 1998. First half 1998 consolidated operating income decreased to 1.6% from 1.8% from the comparable period in 1998. Offsetting the increase in operating income from higher revenues were WHC's lease payments to CPV, the increase in revenues attributable to pass-through costs of Staffing Services which are not subject to the Company's control, and a decrease in operating income of certain subsidiaries of International Operations. SECURITY SERVICES The operating income of the security services business increased $1.0 million, or 9.0%, to $12.1 million in the first half of 1999 from $11.1 million for the comparable half of last year. North American Operations' operating income increased $1.1, or 10.8%, to $11.3 million in the first half of 1999 from $10.2 million in the first half of 1998. The increase in operating income of North American Operations can be attributed mainly to increased revenue growth. The operating income of North American Operations, as a percentage of revenues, stayed the same at 2.6% in the first half of 1999 and 1998. International Operations' operating income decreased $0.1 million to $0.8 million in the first half of 1999 from $0.9 million in the first half of 1998. Page 23 of 28 24 CORRECTIONAL SERVICES First half 1999 operating income increased $1.9 million, or 16.7%, to $13.3 million from $11.4 million in the comparable period in 1998. Year to date 1999 operating income as a percent of revenue declined to 6.5% from 7.8% in 1998. The decrease in operating margin was due partially to the lease payments to CPV, which began in April 1998. FLEXIBLE STAFFING SERVICES The operating profit of Flexible Staffing Services was $1.5 million in the first half of 1999, as compared to $0.8 million in the comparable period in 1998. The improvement is attributable to revenue growth and improved margins in employee leasing operations. Salaries, wages, payroll taxes and other direct costs of worksite employees (i.e. leased employees), hours are pass-through costs not subject to the Company's control and therefore increase revenues without a commensurate operating margin benefit. The controllable revenues, excluding pass-through costs, were $41.4 million and $28.4 million with operating margins of 3.6% and 2.8% for the six months ended 1999 and 1998, respectively. UNALLOCATED CORPORATE EXPENSES AND INFORMATION SYSTEMS Unallocated corporate general and administrative expenses increased 16.3% to $10.0 million in the first half of 1999 from $8.6 million in the first half of 1998. The increase over the prior year reflect the continuing increase in information technology costs related to the rollout of new enterprisewide systems and personnel costs of administrative departments. However, as a percentage of consolidated revenues, unallocated corporate general and administrative expenses decreased to 1.0% of revenues in the first half of 1999 from 1.1% of revenues in the first half of 1998. OTHER INCOME/EXPENSE The Company's other income offset other expense in the first half of 1999 compared to other income, net, of $0.5 million in the first half of 1998. Investment income increased $0.8 million to $2.6 million in the first half of 1999 from $1.8 million in the first half of 1998. This increase is primarily attributable to WHC's investment of cash proceeds from sales to CPV. Interest expense increased $1.3 million to $2.6 million in the first half of 1999 from $1.3 million in the first half of 1998. This increase is primarily attributable to increased interest expense related to the increase in securitized accounts receivables and higher interest rates. INCOME BEFORE INCOME TAXES First half 1999 income before taxes increased $1.7 million, or 11.2%, to $16.9 million from $15.2 million in the first half of 1998. EBITDA, defined as earnings before interest expense, income taxes, depreciation and amortization, was $27.8 million, or 2.7% of revenues for the first half of 1999, which was $4.5 million, or 19.3%, higher than the first half of 1998. EBITDA does not necessarily indicate that cash flow is sufficient to fund all the Company's cash needs or represent cash flow from operations as defined by generally accepted accounting principles. INCOME TAXES The combined Federal and state effective income tax rate was 39.7% for principally half of 1999 and 40.3% for the first half of 1998. The lower effective rate in the second quarter 1999 was due to increases in tax exempt income on government securities. Page 24 of 28 25 MINORITY INTEREST EXPENSE Minority interest expense (net of income taxes) increased $1.0 million to $5.0 million in the first half of 1999 from $4.0 million in the first half of 1998, reflecting principally the increase in earnings of WHC. EQUITY INCOME OF AFFILIATES Equity income of affiliates (net of income taxes) increased $2.1 million to $3.5 million in the first half of 1999 from $1.4 million in the first half of 1998. This increase relates to the Space Gateway Supportjoint venture in the North American Operations; improved performances overseas, primarily of Chile and Greece; and due to the commencement of home monitoring contracts in January 1999 and the opening of a U.K. prison opened in March 1999. INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE Income before the cumulative effect of change in accounting principle increased $2.2 million, to $8.7 million in the first half of 1999 compared to $6.5 million in the first half of 1998. Diluted earnings per share before the cumulative effect of change in accounting principle was $0.57 in the first half of 1999, compared to $0.42 for the same period in 1998. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE In fiscal 1998, the Company adopted SOP 98-5. The adoption of SOP 98-5 resulted in a one-time charge of $6.6 million, net of income taxes, and after deducting the portion applicable to minority shareholders of Wackenhut Corrections Corporation. On a diluted basis, the cumulative effect of the change in accounting principle was a loss of $0.44 per share. NET INCOME Net income was $8.7 million for the first half 1999, or $0.58 basic earnings per share, as compared to a loss of $0.1 million. Earnings per share on a diluted basis was $0.57 in the first half of 1999 compared to a loss of $0.02 per share for the same period in 1998. Goodwill amortization, after tax, amounted to $0.6 million and $0.5 million for the six months ended 1999 and 1998, respectively. Excluding goodwill amortization, after tax, basic earnings per share were $0.62 and $0.03 for the first half of 1999 and 1998, respectively. Likewise, diluted earnings per share were $0.60 and $0.05 for the first half of 1999 and 1998, respectively. Page 25 of 28 26 THE WACKENHUT CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is presently, and is from time to time, subject to claims arising in the ordinary course of its business. In certain of such actions plaintiffs request punitive or other damages that may not be covered by insurance. In the opinion of management, the various asserted claims and litigation in which the Company is currently involved will not materially affect its financial position or future operating results, although no assurance can be given with respect to the ultimate outcome from any such claims or litigation. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of the Company was held on May 7, 1999 in Manalapan, Florida. The following proposals were acted upon by the shareholders: Proposal No. 1 All directors nominated for election were elected in an uncontested election. A tabulation of the results is as follows: NAME VOTES FOR VOTES WITHHELD --------- -------------- Julius W. Becton, Jr 3,457,276 16,498 Alan B. Bernstein 3,458,115 15,659 Carroll A. Campbell 3,458,184 15,590 Benjamin R. Civiletti 3,457,666 16,108 Anne N. Foreman 3,458,271 15,503 Edward L. Hennessy, Jr 3,457,376 16,398 Paul X. Kelley 3,457,275 16,499 Nancy Reynolds 3,457,327 16,447 John F. Ruffle 3,458,015 15,759 Thomas P. Stafford 3,456,838 16,936 George R. Wackenhut 3,457,287 16,487 Richard R. Wackenhut 3,458,031 15,743 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 3,425,880 Against 5,064 Abstain 6,830 Proposal No. 3 Additional shares for the Key Employee Long-Term Incentive Stock Plan - For 2,864,282 Against 253,997 Abstain..17,519 Page 26 of 28 27 ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a). Exhibits - Exhibit 27 - Financial Data Schedule (for SEC use only) (b). Reports on Form 8-K The Company did not file a Form 8-K during the second quarter of 1999. Page 27 of 28 28 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 4, 1999 to be signed on its behalf by the undersigned hereunto duly authorized. THE WACKENHUT CORPORATION Date: August 17, 1999 /s/ Philip L. Maslowe ------------------------- Philip L. Maslowe, Senior Vice President and Chief Financial Officer Page 28 of 28 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO FORM 10-Q FOR THE TWENTY-SIX WEEKS ENDED JULY 4, 1999. 1,000,000 3-MOS JAN-02-2000 APR-05-1999 JUL-04-1999 65 22 159 5 17 270 71 24 463 164 3 0 0 2 153 463 0 1,030 0 1,014 0 0 3 17 7 0 0 0 0 9 0.58 0.57 MARKETABLE SECURITIES AND CERTIFICATES OF DEPOSIT ARE CLASSIFIED AS NON-CURRENT ASSETS ON THE BALANCE SHEET. INCLUDES $14 MILLION OF OTHER CURRENT ASSETS. INCLUDES $56 MILLION RESERVE FOR LOSSES OF CASUALTY REINSURANCE SUBSIDIARY, $51 MILLION MINORITY INTEREST, $16 MILLION DEFERRED REVENUE AND $18 MILLION OF OTHER LIABILITIES. INCLUDES MINORITY INTEREST AND EQUITY INCOME OF FOREIGN AFFILIATES - NET OF INCOME TAXES OF $(5) MILLION AND $4 MILLION RESPECTIVELY.
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