-----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, Vz4MMSnKBTgcmHCgNJur1g/brPYlz5O55lSwGhDYCi9uLloSfPOTwhgSZjlkwV1H a2kn3uADMkU+ZhkK9yCZFg== 0000950144-98-012275.txt : 19981113 0000950144-98-012275.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950144-98-012275 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19981112 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: 98743773 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 FOR 9/27/98 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 September 27, 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 October 31, 1998, 3,855,582 shares of Series A were issued and outstanding and 11,052,595 shares of Series B of the registrant's Common Stock was outstanding after deducting 196,400 shares held in treasury. Page 1 of 29 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 thirty-nine weeks ended September 27, 1998 are not necessarily indicative of the results for the entire fiscal year ending January 3, 1999. Page 2 of 29 3 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS ENDED SEPTEMBER 27, 1998 and SEPTEMBER 28, 1997 (In thousands except per share data) UNAUDITED
Thirteen Weeks Thirty-nine Weeks Ended Ended Ended ------------------------- ------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- REVENUES $ 438,405 $ 294,885 $1,253,687 $ 810,611 ---------- ---------- ---------- ---------- OPERATING EXPENSES: Payroll and related taxes 339,880 211,600 979,251 591,969 Other operating expenses 85,621 74,400 238,820 197,108 Depreciation expense 1,609 1,706 5,783 4,505 Amortization of intangible assets 2,383 499 6,777 1,441 ---------- ---------- ---------- ---------- 429,493 288,205 1,230,631 795,023 ---------- ---------- ---------- ---------- OPERATING INCOME 8,912 6,680 23,056 15,588 ---------- ---------- ---------- ---------- OTHER INCOME (EXPENSE): Interest and investment income 1,302 813 3,140 2,637 Interest expense (340) (421) (1,707) (1,284) ---------- ---------- ---------- ---------- 962 392 1,433 1,353 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 9,874 7,072 24,489 16,941 Provision for income taxes 3,830 2,675 9,715 6,370 Minority interest, net of income taxes 2,221 1,572 6,074 4,200 Equity income of foreign affiliates, net of income taxes (715) (505) (2,139) (1,435) ---------- ---------- ---------- ---------- NET INCOME $ 4,538 $ 3,330 $ 10,839 $ 7,806 ========== ========== ========== ========== EARNINGS PER SHARE: Basic $ 0.30 $ 0.23 $ 0.73 $ 0.53 Assuming dilution $ 0.29 $ 0.22 $ 0.71 $ 0.52 ========== ========== ========== ==========
See notes to unaudited consolidated financial statements. Page 3 of 29 4 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 27, 1998 AND DECEMBER 28, 1997 (In thousands except share data)
1998 (Unaudited) 1997 ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 55,681 $ 45,168 Accounts receivable, less allowance for doubtful accounts of $3,863 in 1998 and $2,713 in 1997 157,573 171,373 Inventories 13,486 10,270 Deferred taxes 4,521 3,548 Prepaid expenses 15,726 9,073 Other 16,130 12,495 ---------- ---------- 263,117 251,927 ---------- ---------- NOTES RECEIVABLE 665 667 ---------- ---------- MARKETABLE SECURITIES of casualty reinsurance subsidiary 22,930 7,772 ---------- ---------- PROPERTY AND EQUIPMENT, at cost 60,382 72,280 Accumulated depreciation (18,510) (15,810) ---------- ---------- 41,872 56,470 ---------- ---------- DEFERRED TAXES 6,979 450 ---------- ---------- OTHER ASSETS: Intangibles and deferred start-up costs 59,593 61,565 Investment in and advances to foreign affiliates 25,610 20,578 Other 14,345 5,013 ---------- ---------- 99,548 87,156 ---------- ---------- $ 435,111 $ 404,442 ========== ==========
(continued) See notes to unaudited consolidated financial statements. Page 4 of 29 5 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 27, 1998 AND DECEMBER 28, 1997 (In thousands except share data) (continued)
1998 (Unaudited) 1997 ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ -- $ 2,508 Accounts payable 36,651 38,640 Accrued payroll and related taxes 47,639 52,456 Accrued expenses 61,377 41,414 ---------- ---------- 145,667 135,018 ---------- ---------- RESERVES FOR LOSSES of casualty reinsurance subsidiary 49,196 45,786 ---------- ---------- LONG-TERM DEBT 3,273 13,341 ---------- ---------- DEFERRED REVENUES 15,189 -- ---------- ---------- OTHER 15,535 15,528 ---------- ---------- MINORITY INTEREST 52,307 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, 11,161,995 issued and outstanding in 1998 and 11,085,703 issued and outstanding in 1997 1,116 1,109 Additional paid-in capital 126,810 125,248 Retained earnings 35,103 27,614 Accumulated other comprehensive income (8,116) (6,418) Treasury Series B common stock at cost, 102,100 shares in 1998 87,000 shares in 1997 (1,355) (1,100) ---------- ---------- 153,944 146,839 ---------- ---------- $ 435,111 $ 404,442 ========== ==========
See notes to unaudited consolidated financial statements Page 5 of 29 6 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997 (In thousands) UNAUDITED
1998 1997 ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net Income $ 10,839 $ 7,806 Adjustments - Depreciation expense 5,783 4,505 Amortization expense 11,919 8,228 Provision for bad debts 1,260 1,081 Equity income, net of dividends (3,506) (2,084) Minority interests in net income 10,124 6,720 Income tax benefit related to stock options 2,389 -- Other (448) (1,477) (Increase) decrease in assets: Accounts receivable (12,460) (12,210) Inventories (7,907) (3,755) Prepaid expenses (6,653) (386) Other current assets (3,633) 560 Deferred taxes (7,514) 974 Other (3,658) (653) Increase (decrease) in liabilities: Accounts payable and accrued expenses 12,006 16,273 Accrued payroll and related taxes (4,817) 5,423 Reserve for losses of casualty reinsurance subsidiary 3,410 1,931 Deferred taxes -- 3,540 Other 7 2,523 ---------- ---------- Net Cash Provided by Operating Activities $ 7,141 $ 38,999 ---------- ----------
(continued) See notes to unaudited consolidated financial statements. Page 6 of 29 7 THE WACKENHUT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 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 8) $ 41,768 $ -- Payments for acquisitions, net of cash acquired -- (10,349) Investment in and advances to foreign affiliates (2,090) (2,796) Capital expenditures (14,852) (21,211) Sales of marketable securities 6,634 20,170 Purchases of marketable securities (21,757) (17,068) Deferred charges (10,929) (11,259) ---------- ---------- Net Cash Used In Investing Activities (1,226) (42,513) ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds from sales of accounts receivable 25,000 -- Net payment on revolving credit agreement (9,900) (800) Purchase of treasury stock of subsidiary (3,855) -- Dividends paid (3,350) (2,871) Net payment on notes payable (2,676) (1,595) Net proceeds from exercise of stock options of subsidiary 1,227 1,011 Proceeds from exercise of stock options 883 509 Purchase of treasury stock (255) (139) ---------- ---------- Net Cash Provided By (Used In) Financing Activities 7,074 (3,885) ---------- ---------- Effect of Exchange Rate Changes on Cash (2,476) (250) ---------- ---------- Net increase (decrease) in Cash and Cash Equivalents 10,513 (7,649) Cash and Cash Equivalents, at beginning of period 45,168 52,755 ---------- ---------- Cash and Cash Equivalents, at end of period $ 55,681 $ 45,106 ========== ========== SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest $ 1,611 $ 1,028 Income taxes $ 1,994 $ 1,823
See notes to unaudited consolidated financial statements. Page 7 of 29 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 thirty-nine weeks ended September 27, 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 $11.8 million and $8.8 million at September 27, 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):
Sept. 27, Dec. 28, 1998 1997 ---------- ---------- Balance sheet items: Current assets $ 49,373 $ 55,563 Noncurrent assets 41,327 31,229 Current liabilities 39,882 39,721 Noncurrent liabilities 15,632 19,413 Minority interest liability 184 174 Sept. 27, Dec. 28, 1998 1997 ---------- ---------- Income statement items for the thirty-nine weeks ended: Revenues $ 172,338 $ 133,908 Operating income 12,533 8,433 Net income before taxes 10,914 6,922
Page 8 of 29 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):
Thirteen weeks ended Thirty-nine weeks ended ------------------------- ------------------------- Sept. 27, Sept. 28, Sept. 27, Sept. 28, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net income $ 4,538 $ 3,330 $ 10,839 $ 7,806 Unrealized gain on marketable securities, net of income taxes 82 286 27 236 Foreign currency translation adjustments, net of income taxes (236) (671) (1,725) (1,380) ---------- ---------- ---------- ---------- Comprehensive income $ 4,384 $ 2,945 $ 9,141 $ 6,662 ========== ========== ========== ==========
The income tax expense on unrealized gain on marketable securities was $52,000, $174,000, $18,000 and $142,000 for the thirteen weeks and thirty-nine weeks ended September 27, 1998 and September 28, 1997, respectively. The income tax benefit on foreign currency translation adjustments was $150,000, $408,000, $1,136,000 and $832,000 for the thirteen weeks and thirty-nine weeks ended September 27, 1998 and September 28, 1997, respectively. 4. INTANGIBLES AND DEFERRED START-UP COSTS Intangibles and the long-term portion of deferred start-up costs at September 27, 1998 and December 28, 1997 consisted of the following (dollars in thousands): 1998 1997 ---------- ---------- Goodwill $ 35,306 $ 34,199 Contract value 15,586 15,586 Deferred start-up costs 24,855 21,550 Other 2,721 2,105 ---------- ---------- 78,468 73,440 Accumulated amortization (18,875) (11,875) ---------- ---------- $ 59,593 $ 61,565 ========== ========== Page 9 of 29 10 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, 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 $19.0 million (or $11.5 million after-tax) to record the cumulative effect of the change in accounting principle. Further, the Company will concurrently record a $5.2 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 $5.1 million. 5. INCOME TAXES The combined Federal and state effective income tax rate was 39.7% for the first thirty-nine weeks of 1998 and 37.6% for the first thirty-nine weeks of 1997. The higher effective rate in the first thirty-nine 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. LONG TERM DEBT Long-term debt consists of the following:
Sept. 27, Dec. 28, 1998 1997 ---------- ---------- Revolving loan - 5.9% in 1998 and 6.9% in 1997 $ 3,050 $ 12,950 Other debt principally related to Wackenhut Corrections and international subsidiaries 223 391 ---------- ---------- $ 3,273 $ 13,341 ========== ==========
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 (securitized receivables) up to a maximum of $60 million. The costs associated with this program are based upon the purchaser's 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. At September 27, Page 10 of 29 11 1998, the Company sold $25 million of accounts receivable under this agreement which is reflected as a reduction of accounts receivable. 7. 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 --------------------------------------------------------------------------- September 27, 1998 September 28, 1997 ------------------------------------ ------------------------------------ Per Per Share Share Income Shares Amount Income Shares Amount ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 4,538 $ 3,330 ========== ========== Basic EPS: Income available to common shareholders $ 4,538 14,925 $ 0.30 $ 3,330 14,761 $ 0.23 ========== ========== Effect of dilutive securities: Stock options 150 294 Stock options of WHC (103) (16) ---------- ---------- ---------- ---------- Diluted EPS: Income available to common shareholders $ 4,435 15,075 $ 0.29 $ 3,314 15,055 $ 0.22 ========== ========== ========== ========== ========== ==========
Thirty-nine Weeks Ended --------------------------------------------------------------------------- September 27, 1998 September 28, 1997 ------------------------------------ ------------------------------------ Per Per Share Share Income Shares Amount Income Shares Amount ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 10,839 $ 7,806 ========== ========== Basic EPS: Income available to common shareholders $ 10,839 14,893 $ 0.73 $ 7,806 14,714 $ 0.53 ========== ========== Effect of dilutive securities: Stock options 298 294 Stock options of WHC (124) (20) ---------- ---------- ---------- ---------- Diluted EPS: Income available to common shareholders $ 10,715 15,191 $ 0.71 $ 7,786 15,008 $ 0.52 ========== ========== ========== ========== ========== ==========
Page 11 of 29 12 Options to purchase 315,000 shares of series B common stock at prices ranging from $18.94 to $22.63 per share were outstanding during the first three quarters of 1998 but were not included in the computation of diluted EPS because their effect would be anti-dilutive. The options, which expire between the years 2006 and 2008, were still outstanding at September 27, 1998. Options to purchase 14,000 shares of series B common stock at $20.00 per share were outstanding during the first three quarters of 1997 but were not included in the computation of diluted EPS because their effect would be anti-dilutive. The options, which expire in the year 2006 were still outstanding at September 27, 1998. 8. 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 $15.2 million on the balance sheet at September 27, 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. 9. 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. 10. TREASURY STOCK In July and October 1996, the Board of Directors of the Company and of WHC authorized the repurchase, at the discretion of the senior management, of up to 500,000 shares of Series B common stock and 500,000 shares of WHC 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. WHC's repurchases of shares of Common Stock are recorded as a reduction to additional paid-in capital and minority interest. As of September 27, 1998, TWC had purchased 102,100 shares of WAK.B at an average price of $13.27 per share, and WHC had purchased 225,500 shares of WHC at an average price of $17.10 per share. From the beginning of the current fiscal year through November 11, 1998, TWC had purchased 109,400 shares of WAK.B at an average price of $17.75 per share, and WHC had purchased 442,800 of WHC at an average price of $19.35 per share. Page 12 of 29 13 11. 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.
Thirty-nine weeks ended ------------------------- Sept. 27, Sept. 28, (dollars in thousands) 1998 1997 ---------- ---------- Revenues: Security services $ 688,282 $ 610,403 Correctional services 224,063 147,840 Staffing services 341,342 52,368 ---------- ---------- Total revenues $1,253,687 $ 810,611 ========== ========== Operating Income: Security services $ 17,228 $ 14,819 Correctional services 17,206 11,862 Staffing services 1,722 (274) Unallocated corporate expenses (13,100) (10,819) ---------- ---------- Total operating income $ 23,056 $ 15,588 ========== ========== Equity Income of Affiliates, net of taxes: Security services $ 870 $ 751 Correctional services 1,269 684 ---------- ---------- Total equity income $ 2,139 $ 1,435 ========== ========== Capital Expenditures: Security services $ 2,920 $ 2,393 Correctional services 10,307 18,278 Staffing services 650 39 Unallocated corporate expenditures 975 501 ---------- ---------- Total capital expenditures $ 14,852 $ 21,211 ========== ========== Depreciation and Amortization: Security services $ 8,104 $ 7,351 Correctional services 8,023 4,605 Staffing services 1,014 235 Unallocated corporate expenses 561 542 ---------- ---------- Total expenses $ 17,702 $ 12,733 ========== ========== Sept. 27, Dec. 28, 1998 1997 ---------- ---------- Identifiable Assets: Security services $ 198,230 $ 171,288 Correctional services 167,650 139,203 Staffing services 44,396 45,137 Unallocated corporate assets 24,835 48,814 ---------- ---------- Total identifiable assets $ 435,111 $ 404,442 ========== ==========
Page 13 of 29 14 DOMESTIC AND INTERNATIONAL OPERATIONS Non-U.S. operations of the Company and its subsidiaries are conducted primarily in South America, the United Kingdom and Australia. 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.
Thirty-nine weeks ended ------------------------- Sept. 27, Sept. 28, (dollars in thousands) 1998 1997 ---------- ---------- Revenues: Domestic operations $1,102,427 $ 683,711 International operations 151,260 126,900 ---------- ---------- Total revenues $1,253,687 $ 810,611 ========== ========== Operating Income: Domestic operations $ 18,838 $ 13,537 International operations 4,218 2,051 ---------- ---------- Total operating income $ 23,056 $ 15,588 ========== ========== Equity Income of Affiliates, net of taxes: International operations $ 2,139 $ 1,435 ---------- ---------- Total equity income $ 2,139 $ 1,435 ========== ========== Capital Expenditures: Domestic operations $ 11,755 $ 17,720 International operations 3,097 3,491 ---------- ---------- Total capital expenditures $ 14,852 $ 21,211 ========== ========== Depreciation and Amortization: Domestic operations $ 13,902 $ 9,307 International operations 3,800 3,426 ---------- ---------- Total expenses $ 17,702 $ 12,733 ========== ========== Sept. 27, Dec. 28, 1998 1997 ---------- ---------- Identifiable Assets: Domestic operations $ 388,781 $ 368,349 International operations 46,330 36,093 ---------- ---------- Total identifiable assets $ 435,111 $ 404,442 ========== ==========
Page 14 of 29 15 12. SUBSEQUENT EVENTS On November 2, 1998, the Corporation purchased certain assets and assumed certain liabilities of Sharp Services, Inc., and Advantage Temporary Services, Inc., for an initial payment of $8.0 million in cash, together with a contingent cash payment based on actual workers' compensation claims. In no event will the total purchase price exceed $10.0 million. Both Sharp Services and Advantage Temporary Services are staffing companies, providing a full range of temporary placement, recruitment and outsourcing services from nine offices in Kansas, Nebraska, Oklahoma and Missouri. Due to the softening stock market, the Company and WHC actively pursued their stock buy-back programs in open market and block purchases. From September 28, 1998 through November 11, 1998, TWC had purchased 94,300 shares of WAK.B at an average price of $17.88 per share, and WHC had purchased 217,300 shares of WHC at an average price of $21.74 per share. Page 15 of 29 16 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 thirty-nine weeks ended September 27, 1998, the Company sold $25 million of accounts receivable under its accounts receivable securitization agreement, and paid down its revolving credit agreement by $9.9 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. 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 foreign exchange fluctuations did not significantly affect the consolidated results of operations for the third quarter of 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 the fourth quarter of 1998.* On August 7, 1998, the Company announced that it was 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 was considering the repurchase of up to 500,000 shares of its common stock. During the third quarter the Company and WHC, due to the softening stock market, actively pursued their stock buy-back programs in open market and block purchases. As of September 27, 1998, TWC had purchased 102,100 shares of WAK.B at an average price of $13.27 per share, and WHC had purchased 225,500 shares of WHC at an average price of $17.10 per share. From the beginning of the current fiscal year through November 11, 1998, TWC had purchased 109,400 shares of WAK.B at an average price of $17.75 per share, and WHC had purchased 442,800 of WHC at an average price of $19.35 per share. * Refer to Forward-Looking Statements on page 17. Page 16 of 29 17 FORWARD-LOOKING STATEMENTS: The management's discussion and analysis of financial condition and results of operations and the October 23, 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. 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 17 of 29 18 RESULTS OF OPERATIONS COMPARISON OF THIRTEEN WEEKS ENDED SEPTEMBER 27, 1998 AND THIRTEEN WEEKS ENDED SEPTEMBER 28, 1997 The table below summarizes the Company's results of operations for the thirteen weeks ended September 27, 1998 ("third quarter of 1998") and September 28, 1997 ("third 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 ------------------------- ------------------------- Sept. 27, 1998 Sept. 28, 1997 ------------------------- ------------------------- $ % $ % ---------- ---------- ---------- ---------- REVENUES (a) Security Services: North American Operations 202,231 46.2 180,865 61.3 International Operations 35,708 8.1 29,043 9.9 ---------- ---------- ---------- ---------- Total Security Services 237,939 54.3 209,908 71.2 Correctional Services 78,177 17.8 55,105 18.7 Staffing Services 122,289 27.9 29,872 10.1 ---------- ---------- ---------- ---------- Consolidated revenues 438,405 100.0 294,885 100.0 ========== ========== ========== ========== OPERATING INCOME (b) Security Services: North America Operations 5,951 2.9 5,342 2.9 International Operations 200 0.6 22 .1 ---------- ---------- 6,151 2.6 5,364 2.6 Correctional Services 6,322 8.1 4,801 8.7 Staffing Services 966 0.8 191 0.6 Unallocated corporate expense (4,527) (1.0) (3,676) (1.2) ---------- ---------- Consolidated operating income 8,912 2.0 6,680 2.3 ========== ==========
(a) Percentages represent percent of total revenues. (b) Percentages represent percent of respective business related revenues. Page 18 of 29 19 REVENUES Security Services Third quarter 1998 Security Services revenues increased $28.0 million, or 13.3%, to $237.9 million from $209.9 million in the third quarter of 1997. Revenues from North American Operations increased $21.3 million, or 11.8%, to $202.2 million in the third quarter of 1998 from $180.9 million in the third quarter of 1997. Both commercial and government/regulated services showed improvement over last year with strong results from commercial security. International Operations revenues increased $6.7 million, or 23.1%, to $35.7 million in the third quarter of 1998 compared to $29.0 million in the third quarter of 1997. Increases in international security revenues were partially offset by the exit from the Australian security market in the fourth quarter of 1997. Revenues of Wackenhut of Australia Pty., Ltd., were $3.1 million in the third quarter of 1997. Correctional Services Third quarter 1998 Correctional Services revenues increased $23.1 million, or 41.9%, to $78.2 million from $55.1 million in the comparable quarter last year. This increase correlates to the increase in bed capacity of 45.9% from 15,900 in the last year to 23,200 this year. During the past 12 months Corrections has opened 15 facilities with a total of 7,300 new beds. During this quarter, the first 600-bed phase of the 1,500-bed facility under construction in Lawton, Oklahoma and the second 300-bed phase of the 1,200-bed facility being built in Hobbs, New Mexico were opened. These facilities are scheduled to be completed for full occupancy before the end of the fourth quarter. A total of 2,472 new revenue-producing beds are scheduled to come on line during the fourth quarter, located in Louisiana, New Mexico, Texas, and Oklahoma barring inclement weather, labor strikes or any other unforeseen problems.* On November 1, WHC began management of the 350-bed South Florida State Psychiatric Hospital. 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 $122.3 million in the third quarter of 1998, compared to $29.9 million in the comparable quarter last year. In addition to increased revenues from acquisitions made in 1997, Staffing Services has increased its number of leased employees by 42% from 16,800 to 24,000 since the beginning of 1998 through internal growth. Temporary placement hours have also grown 20%. In November 1998, the Company acquired certain assets and liabilities of Sharp Services, Inc., and Advantage Temporary Services, Inc., providing a full range of temporary placement, recruitment and outsourcing services from nine offices in Kansas, Nebraska, Oklahoma and Missouri. OPERATING INCOME Third quarter 1998 consolidated operating income increased $2.2 million, or 33.4%, to $8.9 million from $6.7 million in the third quarter of 1997. The operating margin for the third quarter of 1998 decreased to 2.0% from 2.3% for the comparable third quarter of 1997. This decrease is primarily due to WHC's lease payments to CPV and an increase in their deferred charge amortization. *Refer to Forward-Looking statements on page 17. Page 19 of 29 20 Security Services The operating income of the security services business increased $.8 million, or 14.8%, to $6.2 million in the third quarter of 1998 from $5.4 million for the comparable quarter last year. North American Operations operating income increased $.7 million, or 13.2%, to $6.0 million in the third quarter of 1998 from $5.3 million in the third 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 administrative and corporate costs. The increase in administrative and corporate expenses as compared to the third quarter of 1997 was due to increases in information technology costs as the Company rolls out new enterprise wide systems and payroll related costs attributable to corporate staff. Operating income in the third quarter of 1998 of North American Operations, as a percentage of revenues, remained unchanged from the prior year. International Operations operating income, as a percentage of revenues, for the third quarter of 1998 is .6% of related revenues compared to .1% for the third 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 $334,000 in the third quarter of 1997. Excluding the Australian operations, International Operation's operating income is down $156,000 due to lower margins in Europe and Asia. Correctional Services Third quarter 1998 operating income increased $1.5 million, or 31.3%, to $6.3 million from $4.8 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. Third quarter 1998 operating income as a percent of revenue declined to 8.1% from 8.7% 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 8 to the financial statements) also reduced the relative percentage of operating income. However, during the third quarter of 1998 these additional costs have been substantially offset by increased interest earnings. Staffing Services The operating profit of Staffing Services was $966,000 in the third quarter of 1998, as compared to $191,000 for the third 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 21.6% to $4.5 million in the second quarter of 1998 from $3.7 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 third quarter of 1998 from 1.2% of revenues in the third quarter of 1997. Page 20 of 29 21 YEAR 2000 During the third 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. This review also encompasses other systems including embedded technology, such as security systems. There are five phases that describe the Company's process in 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. 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 operating systems has begun and is scheduled for complete implementation in third quarter 1999. Implementation of all other major year 2000 compliant systems is scheduled for completion in 1999. Although the Company has not completely determined the effect of expenditures related to the year 2000 issue, they are not expected to be significant and will be expensed as incurred. The state of year 2000 readiness for third parties with who the Company shares a material relationship, such as banks and vendors used by the Company, is being reviewed by management. At this time, the Company is unaware of any third party year 2000 issues that would materially effect these relationships. The Company expects to be year 2000 compliant in 1999 for all major systems. If the most reasonably likely worst case year 2000 scenario were to occur, the Company is assessing its risk and full impact on operations. In conjunction with this assessment, the Company is developing contingency plans and expects completing them in 1999.* OTHER INCOME/EXPENSE Other income increased $570,000, or 145.4%, to $962,000 in the third quarter of 1998 from $392,000 in the third quarter of 1997. Interest income was higher in the third quarter of 1998, as compared to the third 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. INCOME BEFORE INCOME TAXES Third quarter 1998 income before taxes increased $2.8 million, or 39.4%, to $9.9 million from $7.1 million in the third quarter of 1997. EBITDA, defined as earnings before interest expense, income taxes, depreciation and amortization, was $14.3 million, or 3.3% of revenues for the third quarter of 1998, which was $2.9 million, or 25.4%, higher than the third 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. * Refer to Forward-Looking Statements on page 17. Page 21 of 29 22 INCOME TAXES The combined Federal and state effective income tax rate was 38.8% for the third quarter of 1998 and 37.8% for the third quarter of 1997. The higher effective rate in the third 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 $.6 million to $2.2 million in the third quarter of 1998 from $1.6 million in the third quarter of 1997, reflecting principally the increase in earnings of WHC. Page 22 of 29 23 EQUITY INCOME OF FOREIGN AFFILIATES Equity income of foreign affiliates (net of income taxes) increased $210,000 or 41.6%, to $715,000 in the third quarter of 1998 from $505,000 in the third quarter of 1997, primarily due to improved operations in Greece, Argentina and Chile. NET INCOME Net income increased $1.2 million, or 36.4%, to $4.5 million in the third quarter of 1998 compared to $3.3 million in the third quarter of 1997. Earnings per share on a diluted basis was $0.29 in the third quarter of 1998 compared to $0.22 in the third quarter of 1997. Page 23 of 29 24 COMPARISON OF THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1998 AND THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1997 The table below summarizes the Company's results of operations for the thirty-nine weeks ended September 27, 1998 ("the first nine months of 1998") and September 28, 1997 ("the first nine months 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):
Thirty-nine weeks ended ------------------------- ------------------------- Sept. 27, 1998 Sept. 28, 1997 ------------------------- ------------------------- $ % $ % ---------- ---------- ---------- ---------- REVENUES (a) Security Services: North American Operations 588,382 46.9 524,379 64.7 International Operations 99,900 8.0 86,023 10.6 ---------- ---------- ---------- ---------- Total Security Services 688,282 54.9 610,402 75.3 Correctional Services 224,063 17.9 147,840 18.2 Staffing Services 341,342 27.2 52,369 6.5 ---------- ---------- ---------- ---------- Consolidated revenues 1,253,687 100.0 810,611 100.0 ========== ========== ========== ========== OPERATING INCOME (b) Security Services: North America Operations 16,128 2.7 14,882 2.8 International Operations 1,100 1.1 (63) (.1) ---------- ---------- 17,228 2.5 14,819 2.4 Correctional Services 17,206 7.7 11,862 8.0 Staffing Services 1,722 0.5 (274) (0.5) Unallocated corporate expense (13,100) (1.0) (10,819) (1.3) ---------- ---------- Consolidated operating income 23,056 1.8 15,588 1.9 ========== ==========
(a) Percentages represent percent of total revenues. (b) Percentages represent percent of respective business related revenues. Page 24 of 29 25 REVENUES Security Services Year-to-date 1998 Security Services revenues increased $77.9 million, or 12.8%, to $688.3 million from $610.4 million in the first nine months of 1998. Revenues from North American Operations increased $64.0 million, or 12.2%, to $588.4 million in the first nine months of 1998 from $524.4 million in the first nine months of 1997. Commercial and government/regulated services showed improvement over last year with strong result from commercial security. International Operations revenues increased $13.9 million, or 16.2%, to $99.9 million in the nine months of 1998 compared to $86.0 million in the first nine months 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 $10.8 million in the first nine months of 1997. Correctional Services Year-to-date 1998 Correctional Services revenues increased $76.3 million, or 51.6%, to $224.1 million from $147.8 million in the first nine months of 1997. This increase correlates to the increase in bed capacity of 45.9% from 15,900 in the last year to 23,200 this year. During the past 12 months Corrections has opened 15 additional facilities and nearly 7,300 new revenue-producing beds. WHC has contracts/awards to manage 47 facilities in North America, Europe, and Australia, and additional contracts for prisoner transportation, correctional health care services, mental health services, and facility design and construction. Management of the 350-bed South Florida State Psychiatric Hospital began November 1, 1998. 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 $341.3 million in the first nine months of 1998, compared to $52.4 million in the comparable nine months of 1997. In addition to increased revenues from acquisitions made in 1997, Staffing Services has increased its number of leased employees to 24,000 from 16,800, or a 43% increase, since the beginning of 1998 through internal growth. Temporary placement hours have also grown 20%. OPERATING INCOME Year-to-date 1998 consolidated operating income increased $7.5 million, or 48.1%, to $23.1 million from $15.6 million in the first nine months of 1997. The operating margin for the first nine months of 1998 decreased slightly to 1.8% from 1.9% for the comparable thirty-nine week period. This decrease is primarily due to WHC's lease payments to CPV and an increase in their deferred charge amortization. Security Services The operating income of the Security Services business increased $2.4 million, or 16.2%, to $17.2 million in the first nine months of 1998 from $14.8 million for the comparable nine months of last year. North American Operations operating income increased $1.2 million or 8.1%, to $16.1 Page 25 of 29 26 million in the first nine months of 1998 from $14.9 million in the first nine months 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 in the first nine months of 1998, as compared to the first nine months 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 2.7% in the first nine months of 1998 from 2.8% in the first nine months of 1997. International Operations operating income increased $1.2 million to $1.1 million in the first nine months of 1998 from a loss of $63,000 in the first nine months 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 $1.3 million in the first nine months of 1997. International Operations operating income (excluding Australian security operations) remained relatively flat in the first nine months of 1998 as compared with the first nine months of 1997. In addition, there were increases in corporate general and administrative expenses during the first nine months of 1998, as compared to the first nine months of 1997, as discussed above. Correctional Services Year-to-date 1998 operating income increased $5.3 million, or 44.5%, to $17.2 million from $11.9 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. Staffing Services The operating profit of Staffing Services was $1.7 million in the first nine months of 1998, as compared to an operating loss of $274,000 for the first nine months 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 21.1% to $13.1 million in the first nine months of 1998 from $10.8 million in the first nine months 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 first nine months of 1998 from 1.3% of revenues in the first nine months of 1997. OTHER INCOME/EXPENSE Other income increased $80,000, or 5.9%, to $1,433,000 in the first nine months of 1998 from $1,353,000 in the first nine months of 1997. Interest income increased $503,000 in the first nine months of 1998 compared to the same period in 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. This increase is offset by an increase in Page 26 of 29 27 interest expense of $423,000 due to increased borrowings under the accounts receivable securitization agreement in the first nine months of 1998. INCOME BEFORE INCOME TAXES Year-to-date 1998 income before taxes increased $7.6 million, or 45.0%, to $24.5 million from $16.9 million in the first nine months of 1997. EBITDA, defined as earnings before interest expense, income taxes, depreciation and amortization, was $40.7 million, or 3.2% of revenues for the first nine months of 1998, which was $12.5 million, or 44.3% higher than the comparable period ended 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 39.7% for the first nine months of 1998 and 37.6% for the first nine months of 1997. The higher effective rate in the first nine months 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 $1.9 million to $6.1 million in the first nine months of 1998 from $4.2 million for the comparable period ended 1997, reflecting principally the increase in earnings of WHC. EQUITY INCOME OF FOREIGN AFFILIATES Equity income of foreign affiliates (net of income taxes) increased $704,000, or 50.3%, to $2.1 million in the first nine months 1998 from $1.4 in the first nine months of 1997, primarily due to improved operations in Greece, Argentina and Chile. NET INCOME Net income increased $3.0 million, or 38.5%, to $10.8 million in the first nine months of 1998 compared to $7.8 million in the first half of 1997. Earnings per share on a diluted basis was $0.71 in the first nine months of 1998 compared to $0.52 in the first nine months of 1997. Page 27 of 29 28 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 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 third quarter of 1998. Page 28 of 29 29 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 thirty-nine weeks ended September 27, 1998 to be signed on its behalf by the undersigned hereunto duly authorized. THE WACKENHUT CORPORATION DATE: November 9, 1998 /s/ PHILIP L. MASLOWE ------------------------------- Philip L. Maslowe, Senior Vice President and Chief Financial Officer Page 29 of 29 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998. 1,000 9-MOS JAN-03-1999 DEC-29-1997 SEP-27-1998 55,681 22,930 161,436 3,863 13,486 263,117 60,382 18,510 435,111 145,667 3,273 1,502 0 0 152,442 435,111 0 1,253,687 0 1,230,631 0 1,158 1,707 24,489 9,715 0 0 0 0 10,839 0.73 0.71 MARKETABLE SECURITIES ARE CLASSIFIED AS NON-CURRENT ASSETS ON THE BALANCE SHEET. INCLUDES $15,726 OF PREPAID EXPENSES AND $16,130 OF OTHER CURRENT ASSETS. INCLUDES $49,196 RESERVE FOR LOSSES OF CASUALTY REINSURANCE SUBSIDIARY, $52,307 MINORITY INTEREST, $15,189 DEFERRED REVENUES AND $15,535 OTHER LIABILITIES. INCLUDES MINORITY INTEREST AND EQUITY INCOME OF FOREIGN AFFILIATES - NET OF INCOME TAXES OF $6,074 AND $(2,139) RESPECTIVELY.
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