-----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, D/Z4XXUpjSueLdmCcEagKiwRnzXS6b/V7Wl+Himg0taNVbAYSROF6OxoPCjDwW6B hEP/MZXgU/8JxnMdamrqMw== 0000950144-98-005886.txt : 19980513 0000950144-98-005886.hdr.sgml : 19980513 ACCESSION NUMBER: 0000950144-98-005886 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980329 FILED AS OF DATE: 19980512 SROS: NASD 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: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05450 FILM NUMBER: 98616630 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 WACKENHUT CORPORATION FORM 10-Q 03/29/98 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 March 29, 1998 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 May 4, 1998, 3,855,582 shares of Series A were issued and outstanding and 11,029,703 shares of Series B of the registrant's Common Stock was outstanding after deducting 87,000 shares held in treasury. Page 1 of 21 2 THE WACKENHUT CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following consolidated financial statements of the The Wackenhut Corporation and subsidiaries (the "Company") have been prepared in accordance with the instructions to Form 10-Q and therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial information for the interim periods reported have been made. Results of operations for the thirteen weeks ended March 29, 1998 are not necessarily indicative of the results for the entire fiscal year ending January 3, 1999. Page 2 of 21 3 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THIRTEEN WEEKS ENDED MARCH 29, 1998 and MARCH 30, 1997 (In thousands except per share data) UNAUDITED
1998 1997 --------- --------- REVENUES $ 398,623 $ 242,134 --------- --------- OPERATING EXPENSES: Payroll and related taxes 314,148 179,454 Other operating expenses 73,949 54,973 Depreciation expense 1,966 1,436 Amortization of intangible assets 2,132 2,271 --------- --------- 392,195 238,134 --------- --------- OPERATING INCOME 6,428 4,000 --------- --------- OTHER INCOME (EXPENSE): Interest and investment income 698 912 Interest expense (586) (335) --------- --------- 112 577 --------- --------- INCOME BEFORE INCOME TAXES 6,540 4,577 Provision for income taxes 2,726 1,709 Minority interest, net of income taxes of $1,189 and $769 1,783 1,309 Equity income of foreign affiliates, net of income taxes of $391 and $284 (630) (409) --------- --------- NET INCOME $ 2,661 $ 1,968 ========= ========= EARNINGS PER SHARE: Basic $ .18 $ .13 Assuming dilution $ .17 $ .13 ========= ========= Basic weighted average shares outstanding 14,857 14,671 Diluted weighted average shares outstanding 15,222 14,883
See notes to unaudited consolidated financial statements. Page 3 of 21 4 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 29, 1998 AND DECEMBER 28, 1997 (In thousands except share data) UNAUDITED
1998 1997 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 30,168 $ 45,168 Accounts receivable, less allowance for doubtful accounts of $3,199 in 1998 and $2,713 in 1997 162,935 171,373 Inventories 12,095 10,270 Deferred taxes 3,611 3,548 Other 25,732 21,568 --------- --------- 234,541 251,927 --------- --------- NOTES RECEIVABLE 665 667 --------- --------- MARKETABLE SECURITIES of casualty reinsurance subsidiary 22,846 7,772 --------- --------- PROPERTY AND EQUIPMENT, at cost 74,859 72,280 Accumulated depreciation (17,656) (15,810) --------- --------- 57,203 56,470 --------- --------- DEFERRED TAXES 62 450 --------- --------- OTHER ASSETS: Intangibles and deferred start-up costs 59,791 61,565 Investment in and advances to foreign affiliates, at cost 20,250 20,578 Other 9,100 5,013 --------- --------- 89,141 87,156 --------- --------- $ 404,458 $ 404,442 ========= =========
See notes to unaudited consolidated financial statements. Page 4 of 21 5 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 29, 1998 AND DECEMBER 28, 1997 (In thousands except share data) UNAUDITED
1998 1997 --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ 2,560 $ 2,508 Accounts payable 34,155 38,640 Accrued payroll and related taxes 58,629 52,456 Accrued expenses 46,818 41,414 --------- --------- 142,162 135,018 --------- --------- RESERVES FOR LOSSES of casualty reinsurance subsidiary 45,458 45,786 --------- --------- LONG-TERM DEBT 899 13,341 --------- --------- OTHER 15,124 15,528 --------- --------- MINORITY INTEREST 50,522 47,930 --------- --------- SHAREHOLDERS' EQUITY: Preferred stock, 10,000,000 shares authorized - - Common stock, $.10 par value, 50,000,000 shares authorized: Series A common stock, 3,855,582 issued and outstanding 386 386 Series B common stock, 11,102,578 issued and outstanding in 1998 and 11,085,703 issued and outstanding in 1997 1,110 1,109 Additional paid-in capital 127,210 125,248 Retained earnings 29,160 27,614 Accumulated other comprehensive income (6,473) (6,418) Treasury stock at cost, 87,000 shares of Series B (1,100) (1,100) --------- --------- 150,293 146,839 --------- --------- $ 404,458 $ 404,442 ========= =========
See notes to unaudited consolidated financial statements. Page 5 of 21 6 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THIRTEEN WEEKS ENDED MARCH 29, 1998 AND MARCH 30, 1997 (In thousands) UNAUDITED
1998 1997 ------- ------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net Income $ 2,661 $ 1,968 Adjustments - Depreciation expense 1,966 1,436 Amortization expense 3,772 2,305 Provision for bad debts 528 136 Equity income, net of dividends (953) (633) Minority interests in net income 2,972 2,078 Income tax benefit related to stock options 2,044 Other 806 (365) (Increase) decrease in assets: Accounts receivable (9,090) (2,140) Inventories (3,322) (1,601) Other current assets 111 (4,884) Marketable securities and certificates of deposit (108) (31) Deferred taxes 325 Other (4,590) (4,450) Increase (decrease) in liabilities: Accounts payable and accrued expenses (763) 7,367 Accrued payroll and related taxes 6,173 3,180 Reserve for losses of casualty reinsurance subsidiary (328) 61 Deferred taxes 928 Other (404) 596 ------- ------- Net Cash Provided by Operating Activities 1,800 5,951 ------- -------
See notes to unaudited consolidated financial statements. Page 6 of 21 7 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THIRTEEN WEEKS ENDED MARCH 29, 1998 AND MARCH 30, 1997 (In thousands) UNAUDITED (Continued)
1998 1997 -------- -------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Net proceeds from exercise of stock options of subsidiary $ 1,031 $ 197 Investment in and advances to foreign affiliates 692 (977) Capital expenditures (2,700) (2,905) Proceeds from sales (payments for purchases) of marketable securities (15,243) 1,970 Deferred charges (4,162) (3,819) -------- -------- Net Cash Used In Investing Activities (20,382) (5,534) -------- -------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds from exercise of stock options 138 Purchase and cancellation of common stock (139) Net payment on revolving credit agreement (12,441) (405) Proceeds from sales of accounts receivable 17,000 Dividends paid (1,115) (953) -------- -------- Net Cash Provided By (Used In) Financing Activities 3,582 (1,497) -------- -------- Net increase (decrease) in Cash and Cash Equivalents (15,000) (1,080) Cash and Cash Equivalents, at beginning of period 45,168 52,755 -------- -------- Cash and Cash Equivalents, at end of period $ 30,168 $ 51,675 ======== ======== SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest $ 548 $ 470 Income taxes $ 101 $ 102
See notes to unaudited consolidated financial statements. Page 7 of 21 8 THE WACKENHUT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED 1. GENERAL The consolidated financial statements of the Company are unaudited and, in the opinion of management, include all adjustments necessary to fairly present the Company's financial condition, results of operations and cash flows for the interim period. The Company's subsidiary, Wackenhut Corrections Corporation ("WHC"), is listed on the New York Stock Exchange as "WHC." The results for the thirteen weeks ended March 29, 1998 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 December 28, 1997. Certain prior year amounts have been reclassified to conform with current year presentation. Page 8 of 21 9 2. INVESTMENT IN AFFILIATES Equity in undistributed earnings of foreign affiliates approximated $9.2 million and $8.8 million at March 29, 1998 and December 28, 1997, 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 thousands):
Mar. 29, Dec. 28, 1998 1997 ------- ------- Balance sheet items: Current assets $40,947 $55,563 Noncurrent assets 36,131 31,229 Current liabilities 32,747 39,721 Noncurrent liabilities 18,027 19,413 Minority interest liability 301 292
Mar. 29, Mar. 30, 1998 1997 ------- ------- Income statement items for the thirteen weeks ended: Revenues $50,068 $42,759 Operating income 3,418 3,147 Net income before taxes 2,580 2,262
3. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income", effective January 1, 1998. 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 thousands):
Thirteen weeks ended --------------------- Mar. 29, Mar. 30, 1998 1997 ------- ------- Net income $ 2,661 $ 1,968 Unrealized loss on marketable securities, net of income taxes (108) Foreign currency translation adjustments, net of income taxes (55) 29 ------- ------- Comprehensive income $ 2,606 $ 1,889 ======= =======
The effect of income taxes on unrealized loss and on foreign currency translation adjustments was not significant. Page 9 of 21 10 4. INTANGIBLES AND DEFERRED START-UP COSTS Intangibles and deferred start-up costs at March 29, 1998 and December 28, 1997 consist of the following:
1998 1997 ---------- ---------- Goodwill $ 34,799 $ 34,199 Contract value 15,586 15,586 Deferred start-up costs 20,904 21,550 Other 3,035 2,105 ---------- ---------- 27,703 73,440 Accumulated amortization 14,533 11,875 ---------- ---------- $ 59,791 $ 61,565 ========== ==========
Goodwill represents the excess of cost over net assets of businesses acquired. Through December 28, 1997, WHC capitalized and amortized facility start-up costs on a straight-line basis over the lesser of the original contract term plus renewals or five years. Deferred facility start-up costs consist of costs of initial employee training, travel and other direct expenses incurred in connection with the opening of new facilities. Effective December 29, 1997, WHC modified this policy to amortize facility start-up costs over the lesser of the initial contract term or five years. Had this policy been followed in prior periods, the impact would have been immaterial. In April 1998, the Financial Accounting Standards Board issued Statement of Position 98-5 ("SOP 98-5") on Accounting for Costs of Start-up Activities. SOP 98-5 requires the expensing of start-up costs, defined as pre-opening, per-operating and pre-contract type costs, as incurred and is effective for fiscal years beginning after December 15, 1998. If adopted by the Company in fiscal 1998, the Company anticipates a pre-tax write-off of approximately $18.2 million (or $10.9 million after-tax) to record the cumulative effect of the change in accounting principle. The Company will concurrently record a $4.9 million reduction in minority interest expense. The write-off includes both current and long-term portions of deferred start-up costs. The current portion of deferred start-up costs is approximately $6.6 million. 5. INCOME TAXES The combined Federal and state effective income tax rate was 41.7% for the first thirteen weeks of 1998 and 37.3% for the first thirteen weeks of 1997. The higher effective rate in the first thirteen weeks of 1998 was due to decreases in the utilization of capital loss carryforwards and tax exempt income of the reinsurance subsidiary. In addition, the statutory Federal income tax rate applicable to the Company increased to 35% from 34%. In 1998, consolidated taxable income is expected to exceed the threshold where the 35% rate is applicable. Page 10 of 21 11 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 thousands except for per share amounts).
March 29, 1998 March 30, 1997 ---------------------------------- ----------------------------------- Per Per Share Share Income Shares Amount Income Shares Amount ------------------------------------- ----------------------------------- Net income $ 2,661 $ 1,968 ============ ========== Basic EPS: Income available to common shareholders 2,661 14,857 $0.18 1,968 14,671 $ 0.13 ===== ====== Effect of dilutive securities: Stock options 365 212 Stock options of WHC (33) (40) ------------ ------ ---------- ------ Diluted EPS: Income available to common shareholders 2,628 15,222 0.17 1,928 14,883 0.13 ===================================== ===================================
7. SALE OF FACILITIES TO CORRECTIONAL PROPERTIES TRUST On April 28, 1998, Correctional Properties Trust ("CPV"), a Maryland real estate investment trust, sold 6.2 million shares of common stock at an offering price of $20.00 per share in an initial public offering. Approximately $113.0 million of the net proceeds of the offering were used to acquire eight correctional and detention facilities operated by WHC. Subsequent to the purchase, CPV is leasing these eight facilities to WHC. In connection with the sale, Wackenhut Corrections received approximately $42 million. WHC received approximately $42 million for the three facilities owned by it and for the rights to acquire four of the remaining five facilities, resulting in a net profit of approximately $18 million which will be amortized over the ten-year lease term. Subsequent to the purchase, CPV is leasing these eight facilities to WHC. CPV was also granted the option to acquire three additional correctional facilities currently under development by WHC and the fifteen-year right to acquire and lease back future correctional and detention facilities developed or acquired by WHC. Page 11 of 21 12 8. BUSINESS SEGMENTS The Company's principal segments are security services, correctional services, and staffing services. The security services provides security-related and other support services to commercial and governmental/regulated industries clients. A subsidiary of the Company, WHC, provides facility management and construction services to detention and correctional facilities. The staffing services provides employee leasing and temporary staffing services.
THIRTEEN WEEKS ENDED ------------------------------- (dollars in thousands) MAR. 29, 1998 MAR. 30, 1997 ------------- ------------- Revenues: Security services $ 222,868 $ 197,098 Correctional services 71,269 41,227 Staffing services 104,486 3,809 --------- --------- Total revenues $ 398,623 $ 242,134 ========= ========= Operating Income: Security services $ 4,907 $ 4,721 Correctional services 5,556 3,272 Staffing services 280 (333) Unallocated corporate expenses (4,315) (3,660) --------- --------- Total operating income $ 6,428 $ 4,000 ========= ========= Equity Income of Affiliates, net of taxes: Security services $ 366 $ 163 Correctional services 264 246 --------- --------- Total equity income $ 630 $ 409 ========= ========= Capital Expenditures: Security services $ 1,194 $ 337 Correctional services 1,128 2,272 Staffing services 257 14 Unallocated corporate expenditures 121 282 --------- --------- Total capital expenditures $ 2,700 $ 2,905 ========= ========= Depreciation and Amortization: Security services $ 2,601 $ 2,404 Correctional services 2,667 1,148 Staffing services 309 12 Unallocated corporate expenses 161 177 --------- --------- Total expenses $ 5,738 $ 3,741 ========= ========= Identifiable Assets: MAR. 29, 1998 DEC. 28, 1997 ------------- ------------- Security services $ 183,018 $ 171,288 Correctional services 146,717 139,203 Staffing services 47,972 45,137 Unallocated corporate assets 26,751 48,814 --------- --------- Total identifiable assets $ 404,458 $ 404,442 ========= =========
Page 12 of 21 13 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.
THIRTEEN WEEKS ENDED ---------------------------- (dollars in thousands) MAR. 29, 1998 MAR. 30, 1997 ------------- ------------- Revenues: Domestic operations $350,190 $201,980 International operations 48,433 40,154 -------- -------- Total revenues $398,623 $242,134 ======== ======== Operating Income: Domestic operations $ 5,181 $ 3,157 International operations 1,247 843 -------- -------- Total operating income $ 6,428 $ 4,000 ======== ======== Equity Income of Affiliates, net of taxes: Domestic operations International operations $ 630 $ 409 -------- -------- Total equity income $ 630 $ 409 ======== ======== Capital Expenditures: Domestic operations $ 2,277 $ 2,734 International operations 423 171 -------- -------- Total capital expenditures $ 2,700 $ 2,905 ======== ======== Depreciation and Amortization: Domestic operations $ 4,486 $ 2,620 International operations 1,252 1,121 -------- -------- Total expenses $ 5,738 $ 3,741 -------- -------- Identifiable Assets: MAR. 29, 1998 DEC. 28, 1997 ------------- ------------- Domestic operations $364,325 $368,349 International operations 40,133 36,093 -------- -------- Total identifiable assets $404,458 $404,442 ======== ========
Page 13 of 21 14 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 diversified outsourcer providing security and physical protection, employee leasing and temporary staffing, personnel and facility management, food service, education and training, and fire, supplemental police and emergency services. The Company's business is organized into four major groups: North American Operations (security services), International Operations (security services), Wackenhut Corrections Corporation and Staffing Services. The Company provides security-related, outsourcing and other support services through the security services business. The Wackenhut Corrections Corporation, a 54% owned corrections subsidiary, is a developer and manager of privatized correctional and detention facilities. Through the correctional business, the Company provides correctional and detention facility design, development and management services to government agencies. In 1996 the Company entered into the employee leasing and temporary staffing businesses. 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 December 28, 1997 for further discussion and analysis of information pertaining to the Company's financial condition. During the thirteen weeks ended March 29, 1998, the Company sold $17 million of accounts receivable under its accounts receivable securitization agreements and paid down its revolving credit agreement by $12.3 million. On April 28, 1998, WHC sold three facilities and the rights to acquire four additional facilities to Correctional Properties Trust for approximately $42 million, resulting in a net profit of approximately $18 million which will be amortized over the ten-year lease term. In connection with the sale, WHC entered into a ten-year lease with CPV for eight correctional and detention facilities currently operated by WHC. FORWARD-LOOKING STATEMENTS: The management's discussion and analysis of financial condition and results of operations and the April 24, 1998, 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. Page 14 of 21 15 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; financial instruments and financial resources in the amounts, at the times and on the terms required to support the Company's future business. These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic and international economic conditions including interest rate and currency exchange rate fluctuations and other future factors. Page 15 of 21 16 RESULTS OF OPERATIONS The table below summarizes the Company's results of operations 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 thousands):
Thirteen weeks ended -------------------------------------------------- Mar. 29, 1998 Mar. 30, 1997 ----------------------- ----------------------- $ % $ % -------- --------- -------- ------- REVENUES [a] Security Services: North American Operations 191,835 48.1 168,427 69.6 International Operations 31,033 7.8 28,671 11.8 -------- ------- -------- -------- 222,868 55.9 197,098 81.4 Correctional Services 71,269 17.9 41,227 17 Staffing Services 104,486 26.2 3,809 1.6 -------- ------- -------- -------- Consolidated revenues 398,623 100 242,134 100 ======== ======= ======== ======== OPERATING INCOME [b] Security Services: North America Operations 4,821 2.5 4,611 2.7 International Operations 86 0.3 110 0.4 -------- -------- 4,907 2.2 4,721 2.4 Correctional Services 5,556 7.8 3,272 7.9 Staffing Services 280 0.3 (333) (8.7) Unallocated corporate expense (4,315) (1.1) (3,660) (1.5) -------- -------- Consolidated operating income 6,428 1.6 4,000 1.7 ======== ========
[a] Percentages represent percent of total revenues [b] Percentages represent percent of respective business related revenues. Page 16 of 21 17 COMPARISON OF THIRTEEN WEEKS ENDED MARCH 29, 1998 AND THIRTEEN WEEKS ENDED MARCH 30, 1997 REVENUES SECURITY SERVICES First quarter 1998 Security Services revenues increased $25.8 million, or 13%, to $222.9 million from $197.1 million in the first quarter of 1997. Revenues of the North American Operations increased $23.4 million, or 14%, to $191.8 million in the first quarter of 1998 from $168.4 million in the first quarter of 1997. Both commercial and government/regulated services showed strong improvement in the quarter versus the first quarter 1997. International Operations revenues increased $2.4 million, or 8%, to $31.0 million in the first quarter of 1998 compared to $28.7 million in the first quarter of 1997. Increases in international security revenues in Central, South America and Europe were partially offset by the exit from the Australian security market. Revenues of Wackenhut of Australia Pty., Ltd., were $4.0 million in the first quarter of 1997. CORRECTIONAL SERVICES First quarter 1998 Correctional Services revenues increased $30.0 million, or 73%, to $71.2 million from $41.2 million in the comparable quarter last year. The increase was due principally to the increase in compensated resident days by 60% to approximately 1,541,000 in the first quarter of 1998 from 964,000 in the first quarter of 1997, which resulted principally from the opening of new facilities during 1997 and in the first quarter of 1998. Occupancy decreased slightly to approximately 95.6% of capacity in domestic facilities compared to 97.6% in the first quarter of 1997 due to new openings. STAFFING SERVICES Staffing Services was started in the third quarter of 1996. In May 1997, the Company acquired the business and certain assets of the King Companies in Jacksonville, Florida and in December 1997, the Company acquired the business and substantially all of the assets of Professional Employee Management, Inc., of Sarasota, Florida. Revenues of Staffing Services amounted to $104.5 million in the first quarter of 1998, compared to $3.8 million in the comparable quarter last year. OPERATING INCOME First quarter 1998 consolidated operating income increased $2.4 million, or 61%, to $6.4 million from $4.0 million in the first quarter of 1997. The operating margin for the first quarter of 1998 remained basically flat at 1.6% as compared to 1.7% for the comparable first quarter of 1997. Page 17 of 21 18 SECURITY SERVICES The operating income of the services business increased $186,000, or 4%, to $4.9 million in the first quarter of 1998 from $4.7 million for the comparable quarter last year. North American Operations operating income increased $210,000, or 5%, to $4.8 million in the first quarter of 1998 from $4.6 million in the first quarter of 1997. The increase in operating income of the North American Operations can be attributed mainly to its increased revenue growth and improved profit margins in the Security Services which were partially offset by an increase in the allocation of direct corporate general and administrative costs. The increase in corporate general and administrative expenses this quarter, as compared to the first quarter of 1997 was due to increases in information technology and payroll related costs attributable to the corporate staff. The operating income of the North American Operations as a percentage of revenues decreased slightly to 2.5% in the first quarter of 1998 from 2.7% in the first quarter of 1997. International Operations operating income remained relatively flat in the first quarter of 1998 as compared with the first quarter of 1997. In January 1998, the Company sold the security business and certain related assets of Australian security operations, which incurred an operating loss of $500,000 in the first quarter of 1997. Softness in the operating results of European and Asian operations reduced income in the quarter versus the comparable quarter in 1997. In addition, there was an increase in the allocation of corporate general and administrative expenses for the first quarter of 1998, as compared to the first quarter of 1997, as discussed above. CORRECTIONAL SERVICES First quarter 1998 operating income increased $2.3 million, or 70%, to $5.6 million from $3.3 million in the comparable period in 1997. The improved results are attributable principally to increased profit contribution from new facilities, increased utilization of existing facilities and continued leveraging of overhead. STAFFING SERVICES The operating profit of Staffing Services was $280,000 in the first quarter of 1998 as compared to an operating loss of $333,000 for the first quarter of 1997. The improvement in operating profit is attributable principally to the acquisitions of new businesses and improvement in the profit contribution of internally developed staffing services. UNALLOCATED CORPORATE EXPENSES Unallocated corporate general and administrative expenses increase 18% to $4.3 million in the first quarter of 1998 from $3.6 million in the first quarter of 1997. The increase was due principally to an increase in information technology costs in the first quarter of 1998 compared to the first quarter of 1997. In addition, there were increases in labor and labor related costs attributable to the corporate staff as the Company fully restaffed after its corporate relocation. However, as a percentage of consolidated revenues, unallocated corporate general and administrative expenses decreased to 1.1% of revenues in the first quarter of 1998 from 1.5% of revenues in the first quarter of 1997. OTHER INCOME/EXPENSE Other income decreased $465,000, or 81%, to $112,000 in the first quarter of 1998 from $577,000 in the first quarter of 1997. Interest income was lower in the first quarter of 1998, as compared to the first quarter of 1997, due to a decrease in excess funds available for investment which were used for acquisitions and renovation or construction of correctional facilities during the latter part of 1997 and in the first quarter of 1998. Higher interest costs were incurred on increased borrowings under the accounts receivable and revolving credit facilities in the first quarter of 1998. Page 18 of 21 19 INCOME BEFORE INCOME TAXES First quarter 1998 income before taxes increased $2.0 million, or 43%, to $6.5 million from $4.5 million in the first quarter of 1997. EBITDA, defined as earnings before interest expense, income taxes, depreciation and amortization, was $12.2 million, or 3.1% of revenues for the first quarter of 1998, which was $4.5 million, or 58.4%, higher than the first quarter of 1997. 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 41.7% for the first quarter of 1998 and 37.3% for the first quarter of 1997. The higher effective rate in the first quarter of 1998 was due to decreases in the utilization of capital loss carryforwards and tax exempt income of the reinsurance subsidiary. In addition, the statutory federal income tax rate applicable to the Company increased to 35% from 34%. In 1998, consolidated taxable income is expected to exceed the threshold where the 35% taxable rate is applicable. MINORITY INTEREST EXPENSE Minority interest expense (net of income taxes) increased $474,000 to $1.8 million in the first quarter of 1998 from $1.3 million in the first quarter of 1997, reflecting principally the increase in earnings of WHC. EQUITY INCOME OF FOREIGN AFFILIATES Equity income of foreign affiliates (net of income taxes) increased $221,000, or 54%, to $630,000 in the first quarter of 1998 from $409,000 in the first quarter of 1997, primarily due to improved operations in Greece, Argentina and Chile. NET INCOME Net income increased $693,000, or 35%, to $2.7 million in the first quarter of 1998 compared to $2.0 million in the first quarter of 1997. Earnings per share on a diluted basis was $0.17 in the first quarter of 1998 compared to $0.13 in the first quarter of 1997. Page 19 of 21 20 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 Not applicable. ITEM 5. OTHER INFORMATION Wackenhut Corrections Corporation, a majority owned subsidiary of the Company has filed Amendment No. 4 to Registration Statement on Form S-3 under the Securities Act of 1993 on April 22, 1998 in connection with the public offering of Correctional Properties Trust, a Maryland real estate investment trust, formed to acquire correctional and detention facilities from both private prison operators and governmental entities. Correctional Properties Trust has also filed Amendment No. 4 to Registration Statement on Form S-11 under the Securities Act of 1993 on April 22, 1998. The Registration Statements on Form S-3 and S-11 and subsequent amendments are hereby incorporated by reference into this Quarterly Report on Form 10-Q. 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 first quarter of 1998. Page 20 of 21 21 THE WACKENHUT CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q for the thirteen weeks ended March 29, 1998 to be signed on its behalf by the undersigned hereunto duly authorized. THE WACKENHUT CORPORATION DATE: May 11, 1998 /s/ PHILIP L. MASLOWE -------------------------- Philip L. Maslowe, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Page 21 of 21 EX-27 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 QUARTERLY PERIOD ENDED MARCH 29, 1998. 1,000 3-MOS JAN-03-1999 DEC-29-1997 MAR-29-1998 30,168 22,846 166,134 3,199 12,095 234,541 74,859 17,656 404,458 142,162 899 1,496 0 0 148,797 404,458 0 398,623 0 392,195 0 528 586 6,540 2,726 0 0 0 0 2,661 0.18 0.17 MARKETABLE SECURITIES ARE CLASSIFIED AS NON-CURRENT ASSETS ON THE BALANCE SHEET. INCLUDES $25,732 OF OTHER CURRENT ASSETS AND $3,611 OF DEFERRED TAXES. INCLUDES $45,458 RESERVE FOR LOSSES OF CASUALTY REINSURNACE SUBSIDIARY, $50,522 MINORITY INTEREST, AND $15,124 OTHER LIABILITIES. INCLUDES MINORITY INTEREST AND EQUITY INCOME OF FOREIGN AFFILIATES - NET OF INCOME TAXES OF $1,189 AND $391, RESPECTIVELY.
-----END PRIVACY-ENHANCED MESSAGE-----