-----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, EFKBVIaqJ1aQYGrDQ5UMYq5oG6ivWfUWPMroNDVtHZWV2yT75dTOM9N1RmiVFyzq hRoU2UgfqgWRv2UfKrQ0MA== 0000950144-98-009411.txt : 19980812 0000950144-98-009411.hdr.sgml : 19980812 ACCESSION NUMBER: 0000950144-98-009411 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980628 FILED AS OF DATE: 19980811 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: 98682446 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 CORP. FORM 10-Q DATED 06/28/98 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 June 28, 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 July 31, 1998, 3,855,582 shares of Series A were issued and outstanding and 11,072,766 shares of Series B of the registrant's Common Stock was outstanding after deducting 87,000 shares held in treasury. Page 1 of 27 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 June 28, 1998 are not necessarily indicative of the results for the entire fiscal year ending January 3, 1999. Page 2 of 27 3 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS ENDED JUNE 28, 1998 and JUNE 29, 1997 (In thousands except per share data) UNAUDITED
Thirteen Weeks Twenty-six Weeks Ended Ended ----------------------- ----------------------- 1998 1997 1998 1997 --------- --------- --------- --------- REVENUES $ 416,659 $ 273,592 $ 815,282 $ 515,726 --------- --------- --------- --------- OPERATING EXPENSES: Payroll and related taxes 325,223 200,915 639,371 380,369 Other operating expenses 79,250 65,904 153,199 122,707 Depreciation expense 2,208 1,363 4,174 2,799 Amortization of intangible assets 2,262 501 4,394 942 --------- --------- --------- --------- 408,943 268,683 801,138 506,817 --------- --------- --------- --------- OPERATING INCOME 7,716 4,909 14,144 8,909 --------- --------- --------- --------- OTHER INCOME (EXPENSE): Interest and investment income 1,140 1,002 1,838 1,914 Interest expense (781) (618) (1,367) (953) --------- --------- --------- --------- 359 384 471 961 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 8,075 5,293 14,615 9,870 Provision for income taxes 3,159 1,987 5,885 3,695 Minority interest, net of income taxes 2,070 1,319 3,853 2,628 Equity income of foreign affiliates, net of income taxes (794) (521) (1,424) (930) --------- --------- --------- --------- NET INCOME $ 3,640 $ 2,508 $ 6,301 $ 4,477 ========= ========= ========= ========= EARNINGS PER SHARE: Basic $ 0.24 $ 0.17 $ 0.42 $ 0.30 Assuming dilution $ 0.23 $ 0.17 $ 0.41 $ 0.30 ========= ========= ========= =========
See notes to unaudited consolidated financial statements. Page 3 of 27 4 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 28, 1998 AND DECEMBER 28, 1997 (In thousands except share data) UNAUDITED
1998 1997 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 62,368 $ 45,168 Accounts receivable, less allowance for doubtful accounts of $3,625 in 1998 and $2,713 in 1997 165,779 171,373 Inventories 12,336 10,270 Deferred taxes 4,014 3,548 Other 27,756 21,568 --------- --------- 272,253 251,927 --------- --------- NOTES RECEIVABLE 665 667 --------- --------- MARKETABLE SECURITIES of casualty reinsurance subsidiary 23,575 7,772 --------- --------- PROPERTY AND EQUIPMENT, at cost 51,769 72,280 Accumulated depreciation (17,897) (15,810) --------- --------- 33,872 56,470 --------- --------- DEFERRED TAXES 8,078 450 --------- --------- OTHER ASSETS: Intangibles and deferred start-up costs 59,101 61,565 Investment in and advances to foreign affiliates 23,077 20,578 Other 10,648 5,013 --------- --------- 92,826 87,156 --------- --------- $ 431,269 $ 404,442 ========= =========
See notes to unaudited consolidated financial statements Page 4 of 27 5 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 28, 1998 AND DECEMBER 28, 1997 (In thousands except share data) UNAUDITED
1998 1997 --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ -- $ 2,508 Accounts payable 24,288 38,640 Accrued payroll and related taxes 57,708 52,456 Accrued expenses 62,997 41,414 --------- --------- 144,993 135,018 --------- --------- RESERVES FOR LOSSES of casualty reinsurance subsidiary 46,614 45,786 --------- --------- LONG-TERM DEBT 4,326 13,341 --------- --------- DEFERRED REVENUES 15,631 -- --------- --------- OTHER 15,087 15,528 --------- --------- MINORITY INTEREST 52,311 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, 11,159,766 issued and outstanding in 1998 11,085,703 issued and outstanding in 1997 1,116 1,109 Additional paid-in capital 128,183 125,248 Retained earnings 31,684 27,614 Accumulated other comprehensive income (7,962) (6,418) Treasury stock at cost, 87,000 shares of Series B common stock (1,100) (1,100) --------- --------- 152,307 146,839 --------- --------- $ 431,269 $ 404,442 ========= =========
See notes to unaudited consolidated financial statements. Page 5 of 27 6 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997 (In thousands) UNAUDITED
1998 1997 -------- -------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net Income $ 6,301 $ 4,477 Adjustments - Depreciation expense 4,174 2,799 Amortization expense 7,772 5,056 Provision for bad debts 958 563 Equity income, net of dividends (2,258) (1,385) Minority interests in net income 6,422 4,171 Income tax benefit related to stock options 2,331 -- Other (1,192) (675) (Increase) decrease in assets: Accounts receivable (13,365) (8,138) Inventories (5,147) (2,801) Other current assets (6,186) 2,176 Deferred taxes (8,066) (254) Other (1,078) 91 Increase (decrease) in liabilities: Accounts payable and accrued expenses 2,094 2,880 Accrued payroll and related taxes 5,252 3,772 Reserve for losses of casualty reinsurance subsidiary 828 1,051 Deferred taxes -- 882 Other (441) 2,302 -------- -------- Net Cash (Used In) Provided by Operating Activities $ (1,601) $ 16,967 -------- --------
See notes to unaudited consolidated financial statements. Page 6 of 27 7 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997 (In thousands) UNAUDITED (Continued)
1998 1997 -------- -------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Net proceeds from sale of prison facilities to CPV (note 7) $ 42,211 $ -- Net proceeds from exercise of stock options of subsidiary 1,189 412 Payments for acquisitions, net of cash acquired -- (10,349) Investment in and advances to foreign affiliates (824) (2,148) Capital expenditures (5,242) (12,871) Net payments for purchases of marketable securities (15,888) (1,595) Deferred charges (6,784) (9,779) -------- -------- Net Cash Provided by (Used In) Investing Activities 14,662 (36,330) -------- -------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds from exercise of stock options 862 -- Purchase and cancellation of common stock -- (139) Net payment on notes payable (2,673) 175 Net payment on revolving credit agreement (8,850) -- Proceeds from sales of accounts receivable 18,000 -- Dividends paid (2,231) (1,911) -------- -------- Net Cash Provided By (Used In) Financing Activities 5,108 (1,875) -------- -------- Effect of Exchange Rate Changes on Cash (969) (250) -------- -------- Net increase (decrease) in Cash and Cash Equivalents 17,200 (21,488) Cash and Cash Equivalents, at beginning of period 45,168 52,755 -------- -------- Cash and Cash Equivalents, at end of period $ 62,368 $ 31,267 ======== ======== SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest $ 1,427 $ 932 Income taxes $ 1,200 $ 2,179
See notes to unaudited consolidated financial statements. Page 7 of 27 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 June 28, 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. 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 $10.5 million and $8.8 million at June 28, 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):
Jun. 28, Dec. 28, Balance sheet items: 1998 1997 -------- -------- Current assets $47,770 $55,563 Noncurrent assets 39,277 31,229 Current liabilities 37,882 39,721 Noncurrent liabilities 16,601 19,413 Minority interest liability 189 292 Jun. 28, Jun. 29, Income statement items for the twenty-six weeks ended: 1998 1997 -------- -------- Revenues $107,322 $90,840 Operating income 8,187 6,719 Net income before taxes 6,528 5,714
Page 8 of 27 9 3. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income", effective December 29, 1997. 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):
Twenty-six weeks ended ------------------------ June 28, June 29, 1998 1997 ------- ------- Net income $ 6,301 $ 4,477 Unrealized loss on marketable securities, net of income taxes (55) (50) Foreign currency translation adjustments, net of income taxes (1,489) (709) ------- ------- Comprehensive income $ 4,757 $ 3,718 ======= =======
The effect of income taxes on foreign currency translation adjustments was $875,000 and $403,000 for 1998 and 1997 respectively. 4. INTANGIBLES AND DEFERRED START-UP COSTS Intangibles and the long-term portion of deferred start-up costs at June 28, 1998 and December 28, 1997 consisted of the following (dollars in thousands):
1998 1997 -------- -------- Goodwill $35,128 $34,199 Contract value 15,587 15,586 Deferred start-up costs 22,081 21,550 Other 2,701 2,105 -------- -------- 75,497 73,440 Accumulated amortization 16,396 11,875 -------- -------- $59,101 $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. Page 9 of 27 10 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, pre-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. Further, 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 40.3% for the first twenty-six weeks of 1998 and 37.4% for the first twenty-six weeks of 1997. The higher effective rate in the first twenty-six 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% taxable rate is applicable. 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).
Thirteen Weeks Ended -------------------------------------------------------------------------- June 28, 1998 June 29, 1997 -------------------------------- --------------------------------- Per Per Share Share Income Shares Amount Income Shares Amount ------- ------ ------ ------ ------ ------ Net income $ 3,640 $2,508 ======= ====== Basic EPS: Income available to common shareholders $ 3,640 14,897 $ 0.24 $2,508 14,709 $0.17 ====== ===== Effect of dilutive securities: Stock options 381 404 Stock options of WHC (57) - ------- ------ ------ ------ Diluted EPS: Income available to common shareholders $ 3,583 15,278 $ 0.23 $2,508 15,113 $0.17 ======== ====== ====== ====== ====== =====
Page 10 of 27 11
Twenty-six Weeks Ended ----------------------------------------------------------------------- June 28, 1998 June 29, 1997 ------------------------------- -------------------------------- Per Per Share Share Income Shares Amount Income Shares Amount ------ ------ ------ ------- ------ ------ Net income $ 6,301 $ 4,477 ======= ======= Basic EPS: Income available to common shareholders $ 6,301 14,877 $ 0.42 $ 4,477 14,690 $ 0.30 ====== ====== Effect of dilutive securities: Stock options 401 377 Stock options of WHC (90) (6) ------- ------ ------- ------ Diluted EPS: Income available to common shareholders $ 6,211 15,278 $ 0.41 $ 4,471 15,067 $ 0.30 ======= ====== ====== ======= ====== ======
Options to purchase 16,000 shares of series B common stock at $22.625 per share were outstanding during the first half of 1998 but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the series B common shares. The options, which expire in April 2008, were still outstanding at June 28, 1998. 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. 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 to WHC which will be amortized over the ten-year lease term. Deferred revenue of $15.6 million on the balance sheet at June 28, 1998 represents the long term portion of the unamortized net profit. Subsequent to the purchase, CPV is leasing these eight facilities to WHC. CPV also was 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. 8. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. Management believes the impact of adopting this statement in 2000 will not have a material impact upon the Company's results of operations or financial position. Page 11 of 27 12 9. BUSINESS SEGMENTS The Company's principal segments are security services, correctional services, and staffing services. Security services provides security-related and other support services to commercial and governmental/regulated industries worldwide clients. A subsidiary of the Company, WHC, provides design, construction, financing and management services to detention and correctional facilities. Staffing services provides employee leasing and temporary staffing services.
Twenty-six weeks ended -------------------------------- (dollars in thousands) June 28, 1998 June 29, 1997 ------------- ------------- Revenues: Security services $ 450,343 $ 400,494 Correctional services 145,886 92,735 Staffing services 219,053 22,497 --------- --------- Total revenues $ 815,282 $ 515,726 ========= ========= Operating Income: Security services $ 11,077 $ 9,455 Correctional services 10,884 7,061 Staffing services 756 (465) Unallocated corporate expenses (8,573) (7,142) --------- --------- Total operating income $ 14,144 $ 8,909 ========= ========= Equity Income of Affiliates, net of taxes: Security services $ 625 $ 433 Correctional services 799 497 --------- --------- Total equity income $ 1,424 $ 930 ========= ========= Capital Expenditures: Security services $ 2,356 $ 722 Correctional services 1,799 11,764 Staffing services 449 14 Unallocated corporate expenditures 638 371 --------- --------- Total capital expenditures $ 5,242 $ 12,871 ========= ========= Depreciation and Amortization: Security services $ 5,345 $ 4,761 Correctional services 5,614 2,658 Staffing services 639 93 Unallocated corporate expenses 348 343 --------- --------- Total expenses $ 11,946 $ 7,855 ========= ========= Identifiable Assets: June 28, 1998 Dec. 28, 1997 ------------- ------------- Security services $ 185,777 $ 171,288 Correctional services 169,603 139,203 Staffing services 47,164 45,137 Unallocated corporate assets 28,725 48,814 --------- --------- Total identifiable assets $ 431,269 $ 404,442 ========= =========
Page 12 of 27 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.
Twenty-six weeks ended ------------------------------ (dollars in thousands) June 28, 1998 June 29, 1997 ------------- ------------- Revenues: Domestic operations $716,354 $432,287 International operations 98,928 83,439 -------- -------- Total revenues $815,282 $515,726 ======== ======== Operating Income: Domestic operations $ 11,486 $ 7,534 International operations 2,658 1,375 -------- -------- Total operating income $ 14,144 $ 8,909 ======== ======== Equity Income of Affiliates, net of taxes: International operations $ 1,424 $ 930 -------- -------- Total equity income $ 1,424 $ 930 ======== ======== Capital Expenditures: Domestic operations $ 3,346 $ 10,569 International operations 1,896 2,302 -------- -------- Total capital expenditures $ 5,242 $ 12,871 ======== ======== Depreciation and Amortization: Domestic operations $ 9,114 $ 5,651 International operations 2,832 2,204 -------- -------- Total expenses $ 11,946 $ 7,855 ======== ======== Identifiable Assets: June 28, 1998 Dec. 28, 1997 ------------- ------------- Domestic operations $389,687 $368,349 International operations 41,582 36,093 -------- -------- Total identifiable assets $431,269 $404,442 ======== ========
Page 13 of 27 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 worldwide pioneer in providing outsourcing services to business and industry and privatizing services for federal, state and local governmental agencies. Its diversified services include security and physical protection, employee leasing and temporary staffing, personnel and facility management, food service, cash in-transit, and fire, emergency and supplemental police 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, provides design, construction, financing and management services for a broad spectrum of detention and correctional facilities 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 twenty-six weeks ended June 28, 1998, the Company sold $18 million of accounts receivable under its accounts receivable securitization agreement, and paid down its revolving credit agreement by $8.9 million. On April 28, 1998, WHC sold three facilities and the rights to acquire four facilities to Correctional Properties Trust ("CPV") 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. During the second quarter of 1998 cash and cash equivalents increased to $62.3 million due primarily to proceeds received from the sale of correctional and detention facilities to CPV. On August 7, 1998 the Company announced that it is considering the repurchase of up to 413,000 shares of its series B, nonvoting, common stock. Also on August 7, 1998, WHC announced that it is considering the repurchase of up to 500,000 shares of its common stock. FORWARD-LOOKING STATEMENTS: The management's discussion and analysis of financial condition and results of operations and the July 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 27 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 27 16 RESULTS OF OPERATIONS COMPARISON OF THIRTEEN WEEKS ENDED JUNE 28, 1998 AND THIRTEEN WEEKS ENDED JUNE 29, 1997 The table below summarizes the Company's results of operations for the thirteen weeks ended June 28, 1998 ("second quarter of 1998") and June 29, 1997 ("second quarter of 1997") 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 ------------------------ ------------------------ Jun. 28, 1998 Jun. 29, 1997 ------------------------ ------------------------ $ % $ % -------- ----- -------- ----- REVENUES [a] Security Services: North American Operations 194,316 46.6 175,082 64.0 International Operations 33,159 8.0 28,309 10.4 -------- ----- -------- ----- 227,475 54.6 203,391 74.4 Correctional Services 74,617 17.9 51,508 18.8 Staffing Services 114,567 27.5 18,693 6.8 -------- ----- -------- ----- Consolidated revenues 416,659 100.0 273,592 100.0 ======== ===== ======== ===== OPERATING INCOME [b] Security Services: North America Operations 5,356 2.8 4,929 2.8 International Operations 814 2.5 (195) (0.7) -------- -------- 6,170 2.7 4,734 2.3 Correctional Services 5,328 7.1 3,789 7.4 Staffing Services 476 0.4 (128) (0.7) Unallocated corporate expense (4,258) (1.0) (3,486) (1.3) -------- -------- Consolidated operating income 7,716 1.9 4,909 1.8 ======== ========
[a] Percentages represent percent of total revenues. [b] Percentages represent percent of respective business related revenues. Page 16 of 27 17 REVENUES Security Services Second quarter 1998 Security Services revenues increased $24.1 million, or 11.8%, to $227.5 million from $203.4 million in the second quarter of 1997. Revenues from North American Operations increased $19.2 million, or 11%, to $194.3 million in the first quarter of 1998 from $175.1 million in the first quarter of 1997. Both commercial and government/regulated services showed good revenue performance in the quarter versus the second quarter 1997. International Operations revenues increased $4.9 million, or 17.1%, to $33.2 million in the second quarter of 1998 compared to $28.3 million in the second quarter of 1997. Increases in international security revenues were partially offset by the exit from the Australian security market. Revenues of Wackenhut of Australia Pty., Ltd., were $3.7 million in the second quarter of 1997. Correctional Services Second quarter 1998 Correctional Services revenues increased $23.1 million, or 44.9%, to $74.6 million from $51.5 million in the comparable quarter last year. The increase was due principally to the increase in compensated resident days by 45.5% to approximately 1,868,685 in the second quarter of 1998 from 1,284,447 in the second quarter of 1997, which resulted principally from the opening of new facilities during 1997 and in the first quarter of 1998. During the past 12 months Corrections has opened 13 facilities with a total of 8,068 new beds. Occupancy increased slightly to approximately 96.9% of capacity compared to 96.8% of capacity in the second quarter of 1997. 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 $114.6 million in the second quarter of 1998, compared to $18.7 million in the comparable quarter last year. In addition to increased revenues from acquisitions made in 1997, Staffing Services has increased its number of employees by 38% since the beginning of 1998 through internal growth. Its leased employee base is now in excess of 22,100 personnel. OPERATING INCOME Second quarter 1998 consolidated operating income increased $2.8 million, or 57.2%, to $7.7 million from $4.9 million in the second quarter of 1997. The operating margin for the second quarter of 1998 increased slightly to 1.9% from 1.8% for the comparable second quarter of 1997. Page 17 of 27 18 Security Services The operating income of the security services business increased $1.4 million, or 30.3%, to $6.2 million in the second quarter of 1998 from $4.7 million for the comparable quarter last year. North American Operations operating income increased $427,000, or 8.7%, to $5.4 million in the second quarter of 1998 from $4.9 million in the second quarter of 1997. The increase in operating income of North American Operations can be attributed mainly to increased revenue growth from commercial and government/regulated security services and improved profit margins in food services; these increases were partially offset by increases in direct corporate general and administrative costs. The increase in corporate general and administrative expenses as compared to the second quarter of 1997 was due to increases in information technology as the Company rolls out new enterprise wide systems and payroll related costs attributable to corporate staff. The operating income of North American Operations, as a percentage of revenues, stayed the same at 2.8% in the second quarter of 1998 and 1997. International Operations operating income increased $1.0 million in the second quarter of 1998 as compared with the second 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 $487,000 in the second quarter of 1997. Correctional Services Second quarter 1998 operating income increased $1.5 million, or 40.6%, to $5.3 million from $3.8 million in the comparable period in 1997. The improved results are attributable principally to profit contribution from new facilities, increased utilization of existing facilities and continued leveraging of overhead. Second quarter 1998 operating income as a percent of revenue declined to 7.1% from 7.4% in 1997. The decrease is due partly to increased depreciation and amortization from the start-up of new facilities and from a reduction in the amortization period of start-up costs. The introduction of lease payments to CPV (note 7 to the financial statements) also reduced the relative percentage of operating income. However, during the second quarter of 1998 these additional costs have been substantially offset by increased interest earnings. Staffing Services The operating profit of Staffing Services was $476,000 in the second quarter of 1998, as compared to an operating loss of $128,000 for the second 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 AND INFORMATION SYSTEMS Unallocated corporate general and administrative expenses increased 22.1% to $4.3 million in the second quarter of 1998 from $3.5 million in the second quarter of 1997. The increase was due principally to an increase in information technology costs as the Company rolls out new enterprise wide systems and payroll related costs attributable to corporate staff. However, as a percentage of consolidated revenues, unallocated corporate general and administrative expenses decreased to 1.0% of revenues in the second quarter of 1998 from 1.3% of revenues in the second quarter of 1997. During the second quarter of 1998, management continued its review of the installation of new systems hardware and software and determined that the installation is on schedule for completion before the year 2000. In addition, management is continuing to assess the company wide effect of the Year 2000 issue. The Company has not completely determined the effect of expenditures related to the Year 2000 issue, but they are not expected to be significant and will be expensed as incurred. Page 18 of 27 19 OTHER INCOME/EXPENSE Other income decreased $25,000, or 6.5%, to $359,000 in the second quarter of 1998 from $384,000 in the second quarter of 1997. Interest income was slightly higher in the second quarter of 1998, as compared to the second quarter of 1997, due to proceeds received from the sale of correctional and detention facilities to Correctional Properties Trust, a REIT that will provide financing and ownership of WHC managed properties. Higher interest costs were incurred on increased borrowings under the accounts receivable securitization agreement in the second quarter of 1998. INCOME BEFORE INCOME TAXES Second quarter 1998 income before taxes increased $2.8 million, or 52.6%, to $8.0 million from $5.3 million in the second quarter of 1997. EBITDA, defined as earnings before interest expense, income taxes, depreciation and amortization, was $13.9 million, or 3.3% of revenues for the second quarter of 1998, which was $4.9 million, or 54.3%, higher than the second 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 39.1% for the second quarter of 1998 and 37.5% for the second quarter of 1997. The higher effective rate in the second 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 $0.8 million to $2.1 million in the second quarter of 1998 from $1.3 million in the second quarter of 1997, reflecting principally the increase in earnings of WHC. Page 19 of 27 20 EQUITY INCOME OF FOREIGN AFFILIATES Equity income of foreign affiliates (net of income taxes) increased $273,000, or 52.4%, to $794,000 in the second quarter of 1998 from $521,000 in the second quarter of 1997, primarily due to improved operations in Greece, Argentina and Chile. NET INCOME Net income increased $1.1 million, or 45.1%, to $3.6 million in the second quarter of 1998 compared to $2.5 million in the second quarter of 1997. Earnings per share on a diluted basis was $0.23 in the second quarter of 1998 compared to $0.17 in the second quarter of 1997. Page 20 of 27 21 COMPARISON OF TWENTY-SIX WEEKS ENDED JUNE 28, 1998 AND TWENTY-SIX WEEKS ENDED JUNE 29, 1997 The table below summarizes the Company's results of operations for the twenty-six weeks ended June 28, 1998 ("first half of 1998") and June 29, 1997 ("first half of 1997") 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):
Twenty-six weeks ended ---------------- ---------------- Jun. 28, 1998 Jun. 29, 1997 ---------------- ---------------- $ % $ % ------- ------ ------- ----- REVENUES [a] Security Services: North American Operations 386,151 47.3 343,514 66.6 International Operations 64,192 7.9 56,980 11.1 ------- ------ ------- ----- 450,343 55.2 400,494 77.7 Correctional Services 145,886 17.9 92,735 18.0 Staffing Services 219,053 26.9 22,497 4.3 ------- ------ ------- ----- Consolidated revenues 815,282 100.0 515,726 100.0 ======= ====== ======= ===== OPERATING INCOME [b] Security Services: North America Operations 10,177 2.6 9,540 2.8 International Operations 900 1.4 (85) (0.1) ------- ------- 11,077 2.5 9,455 2.4 Correctional Services 10,884 7.5 7,061 7.6 Staffing Services 756 0.3 (465) (2.1) Unallocated corporate expense (8,573) (1.1) (7,142) (1.4) ------- ------- Consolidated operating income 14,144 1.7 8,909 1.7 ======= =======
[a] Percentages represent percent of total revenues. [b] Percentages represent percent of respective business related revenues. Page 21 of 27 22 REVENUES Security Services Year to date 1998 Security Services revenues increased $49.8 million, or 12.4%, to $450.3 million from $400.5 million in the first half of 1998. Revenues from North American Operations increased $42.6 million, or 12.4%, to $386.1 million in the first half of 1998 from $343.5 million in the first half of 1997. Commercial and government/regulated services showed good revenue performance in the first half of 1998 versus the first half of 1997. International Operations revenues increased $7.2 million, or 12.7%, to $64.2 million in the first half of 1998 compared to $57.0 million in the first half of 1997. Increases in international security revenues were partially offset by the exit from the Australian security market in January 1998. Revenues of Wackenhut of Australia Pty., Ltd., were $7.7 million in the first half of 1997. Correctional Services First half 1998 Correctional Services revenues increased $53.2 million, or 57.3%, to $145.9 million from $92.7 million in the comparable half of 1997. The increase was due principally to the increase in compensated resident days by 54.4% to approximately 3,636,541 in the first half of 1998 from 2,355,701 in the first half of 1997, which resulted principally from the opening of new facilities during 1997 and in the first half of 1998. During the past 12 months Corrections has opened 13 facilities with a total of 8,068 new beds. Occupancy decreased slightly to approximately 96.3% of capacity compared to 97.2% of capacity in the first half of 1997. 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 $219.1 million in the first half of 1998, compared to $22.5 million in the comparable half of 1997. In addition to increased revenues from acquisitions made in 1997, Staffing Services has increased its number of employees by 38% since the beginning of 1998 through internal growth. Its leased employee base is now in excess of 22,100 personnel. OPERATING INCOME First half 1998 consolidated operating income increased $5.2 million, or 58.8%, to $14.1 million from $8.9 million in the first half of 1997. The operating margin for the first half of 1998 remained the same at 1.7% from the comparable twenty-six week period. Security Services The operating income of the Security Services business increased $1.6 million, or 17.2%, to $11.1 million in the first half of 1998 from $9.5 million for the comparable half of last year. North American Operations operating income increased $0.7 million or 6.7%, to $10.2 million in the first half of 1998 from $9.5 million in the first half of 1997. The increase in operating income of North American Operations can be attributed mainly to increased revenue growth in commercial and government/regulated services and improved profit margins in food services; these increases were partially offset by increases in direct corporate general and administrative costs. The increase in corporate general and administrative expenses this half, as compared to the first half of 1997 was due to increases in information technology as the Company rolls out new enterprise wide systems and payroll related costs attributable to corporate staff. The operating income of North American Operations as a percentage of revenues decreased to 2.6% in the first half of 1998 from Page 22 of 27 23 2.8% in the first half of 1997. International Operations operating income increased $985,000 to $900,000 in the first half of 1998 from a loss of $85,000 in the first half 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 $983,000 in the first half of 1997. International Operations operating income (excluding Australian security operations) remained relatively flat in the first half of 1998 as compared with the first half of 1997. In addition, there were increases in corporate general and administrative expenses for the half of 1998, as compared to the first half of 1997, as discussed above. Correctional Services First half 1998 operating income increased $3.8 million, or 54.1%, to $10.8 million from $7.1 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 $756,000 in the first half of 1998, as compared to an operating loss of $465,000 for the first half 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 increased 20% to $8.6 million in the first half of 1998 from $7.1 million in the first half of 1997. The increase was due principally to an increase in information technology costs as the Company rolls out new enterprise wide systems and payroll related costs attributable to corporate staff. However, as a percentage of consolidated revenues, unallocated corporate general and administrative expenses decreased to 1.1% of revenues in the first half of 1998 from 1.4% of revenues in the first half quarter of 1997. OTHER INCOME/EXPENSE Other income decreased $490,000, or 51%, to $471,000 in the first half of 1998 from $961,000 in the first half of 1997. Interest expense increased $414,000 on increased borrowings under the accounts receivable securitization agreement in the first half of 1998. Interest income was lower in the first half of 1998, as compared to the first half of 1997 contributing to the overall decrease in other income. INCOME BEFORE INCOME TAXES First half 1998 income before taxes increased $4.7 million, or 48.1%, to $14.6 million from $9.9 million in the first half of 1997. EBITDA, defined as earnings before interest expense, income taxes, depreciation and amortization, was $26.1 million, or 3.2% of revenues for the first half of 1998, which was $9.3 million, or 55.6%, 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. Page 23 of 27 24 INCOME TAXES The combined Federal and state effective income tax rate was 40.3% for the first half of 1998 and 37.4% for the first half 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 $1.2 million to $3.9 million in the first half of 1998 from $2.6 million in the first half of 1998, reflecting principally the increase in earnings of WHC. EQUITY INCOME OF FOREIGN AFFILIATES Equity income of foreign affiliates (net of income taxes) increased $494,000, or 53.1%, to $1.4 million in the first half of 1998 from $930,000 in the first half of 1997, primarily due to improved operations in Greece, Argentina and Chile. NET INCOME Net income increased $1.8 million, or 40.7%, to $6.3 million in the first half of 1998 compared to $4.5 million in the first half of 1997. Earnings per share on a diluted basis was $0.41 in the first half of 1998 compared to $0.30 in the first half of 1997. Page 24 of 27 25 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 April 24, 1998 in Palm Beach, Florida. 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. 3,479,259 158,631 Alan B. Bernstein 3,627,040 10,850 Carroll A. Campbell, Jr. 3,622,326 15,564 Benjamin R. Civiletti 3,622,326 15,564 Anne Newman Foreman 3,627,111 10,779 Edward L. Hennessy, Jr. 3,625,779 12,111 Paul X. Kelley 3,626,436 11,454 Nancy Clark Reynolds 3,626,365 11,525 John F. Ruffle 3,622,826 15,064 George R. Wackenhut 3,626,535 11,355 Richard R. Wackenhut 3,626,216 11,674
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..3,629,004 Against...3,537 Abstain....5,349 Page 25 of 27 26 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 second quarter of 1998. Page 26 of 27 27 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 June 28, 1998 to be signed on its behalf by the undersigned hereunto duly authorized. THE WACKENHUT CORPORATION DATE: August 7, 1998 /s/ Philip L. Maslowe --------------------------- Philip L. Maslowe, Senior Vice President and Chief Financial Officer Page 27 of 27 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME OF THE WACKENHUT CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 28, 1998. 1,000 U.S. DOLLARS 6-MOS JAN-03-1999 DEC-29-1998 JUN-28-1998 1 62,368 23,575 169,404 3,625 12,336 272,253 51,769 17,897 431,269 144,993 4,326 0 0 1,502 150,805 431,269 0 815,282 0 801,138 0 901 1,367 14,615 5,885 0 0 0 0 6,301 0.42 0.41 MARKETABLE SECURITIES ARE CLASSIFIED AS NON-CURRENT ASSETS ON THE BALANCE SHEET. INCLUDES $27,756 OF OTHER CURRENT ASSETS. INCLUDES $46,614 RESERVES FOR LOSSES OF CASUALTY REINSURANCE SUBSIDIARY, $52,311 MINORITY INTEREST, $15,631 DEFERRED REVENUES AND $15,087 OTHER LIABILITIES. INCLUDES MINORITY INTEREST AND EQUITY INCOME OF FOREIGN AFFILIATES - NET OF INCOME TAXES OF $3,863 AND $(1,424) RESPECTIVELY.
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