1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1996
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
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(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
1500 San Remo Avenue, Coral Gables, FL 33146
- --------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
At May 2, 1996, 3,858,885 shares of Series A and 8,309,762 shares of Series
B of the registrant's Common Stock were issued and outstanding.
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Corporation have been
prepared in accordance with the instructions to Form 10-Q and therefore, omit
or condense certain footnotes and other information normally included in
financial statements prepared in accordance with generally accepted accounting
principles. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the financial
information for the interim periods reported have been made. Results of
operations for the thirteen weeks ended March 31, 1996 are not necessarily
indicative of the results for the entire fiscal year ending December 29, 1996.
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS ENDED
MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
1996 1995
-------------------------------
REVENUES $ 212,474 $ 189,792
-------------------------------
OPERATING EXPENSES:
Payroll and related taxes 153,403 141,608
Other operating expenses 56,258 45,129
Provision for relocation costs 750 -
-------------------------------
210,411 186,737
-------------------------------
OPERATING INCOME 2,063 3,055
-------------------------------
OTHER INCOME (EXPENSE):
Interest expense (884) (737)
Interest and investment income 1,055 325
-------------------------------
171 (412)
-------------------------------
INCOME BEFORE INCOME TAXES 2,234 2,643
Provision for income taxes 769 898
Minority interest, net of income taxes 827 371
Equity income of foreign affiliates, net of income taxes (307) (225)
-------------------------------
NET INCOME $ 945 $ 1,599
===============================
EARNINGS PER SHARE $ 0.08 $ 0.13
===============================
See notes to Consolidated Financial Statements.
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
1996 1995
ASSETS ------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 67,390 $ 20,185
Accounts receivable (net of allowances for
doubtful accounts of $1,588 in 1996 and
$1,268 in 1995) 73,472 77,121
Inventories, net 6,047 6,798
Other 18,060 18,058
------------------------------
164,969 122,162
------------------------------
NOTES RECEIVABLE 10,435 10,540
------------------------------
MARKETABLE SECURITIES AND CERTIFICATES OF DEPOSIT
of casualty reinsurance subsidiary 14,681 5,774
------------------------------
PROPERTY AND EQUIPMENT, at cost 31,204 29,132
Accumulated depreciation (10,191) (9,851)
------------------------------
21,013 19,281
------------------------------
DEFERRED TAX ASSET, NET 570 6,170
------------------------------
OTHER ASSETS:
Investment in and advances to foreign affiliates,
at cost, including equity in undistributed earnings
of $4,371 in 1996 and $4,098 in 1995 11,711 10,984
Other 36,199 23,016
------------------------------
47,910 34,000
------------------------------
$ 259,578 $ 197,927
==============================
(continued)
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
(CONTINUED)
1996 1995
---------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 11 $ 11
Notes payable - 1,115
Accounts payable 14,686 20,223
Accrued payroll and related taxes 32,369 29,602
Accrued expenses 22,150 21,456
Deferred tax liability, net - 117
---------------------
69,216 72,524
---------------------
RESERVES FOR LOSSES of casualty reinsurance
subsidiary 42,087 40,118
---------------------
LONG-TERM DEBT 15,310 5,376
---------------------
OTHER 8,205 8,027
---------------------
MINORITY INTEREST 36,504 8,978
---------------------
SHAREHOLDERS' EQUITY:
Preferred stock, 10,000,000 shares authorized - -
Common stock, $.10 par value, 20,000,000
shares authorized;
Series A common stock, 3,858,885 issued and
outstanding in 1996 and 1995 386 386
Series B common stock, 8,309,762 issued and
outstanding in 1996 and 8,272,887 in 1995 831 827
Additional paid-in capital 64,934 39,644
Retained earnings 25,937 25,790
Cumulative translation adjustment (3,671) (3,702)
Unrealized loss on marketable securities (161) (41)
---------------------
88,256 62,904
---------------------
$259,578 $197,927
=====================
See notes to Consolidated Financial Statements.
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED MARCH 31, 1996 AND APRIL 2, 1995
(In Thousands)
(UNAUDITED)
1996 1995
-------------------------
CASH FLOWS PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net Income $ 945 $ 1,599
Adjustments -
Depreciation expense 886 1,153
Amortization expense 2,554 1,244
Provision for bad debts 524 276
Equity income, net of dividends (419) (287)
Minority interests in net income 1,221 562
Other 460 (102)
Changes in assets and liabilities, net of acquisitions and divestitures-
(Increase) Decrease in assets:
Accounts receivable (6,875) 957
Inventories (381) (560)
Other current assets (2) (2,213)
Marketable securities and certificates of deposit (36) (199)
Other assets 48 (251)
Deferred tax asset, net 5,600 1,269
Increase (Decrease) in liabilities:
Accounts payable and accrued expenses (5,672) (1,549)
Accrued payroll and related taxes 2,767 2,570
Deferred tax liability, net (117) (302)
Reserve for losses of casualty reinsurance subsidiary 1,969 914
Other 178 628
-------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,650 5,709
-------------------------
CASH FLOWS PROVIDED BY (USED IN):
INVESTING ACTIVITIES
Net proceeds from public offering of subsidiary's common stock 51,776 -
Net proceeds from exercise of stock options of subsidiary 174 246
Payments on notes receivable - 76
Payments for acquisitions (13,703) -
Investment in and advances to foreign affiliates (454) (177)
Capital expenditures (2,383) (503)
Proceeds from sales/(payments for purchases) of marketable securities of
casualty reinsurance subsidiary, net (8,991) 1,087
Deferred charge expenditures (1,115) (16)
-------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 25,304 713
-------------------------
(Continued)
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS)
(UNAUDITED)
(CONTINUED)
1996 1995
---------------------
CASH FLOWS PROVIDED BY (USED IN):
FINANCING ACTIVITIES
Proceeds from issuance of debt 8,783 -
Payments on debt (2) (35,931)
Proceeds from the exercise of
stock options 268 -
Proceeds from sales of accounts receivable 10,000 28,940
Dividends paid (798) (730)
----------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 18,251 (7,721)
----------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 47,205 (1,299)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 20,185 13,808
----------------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $67,390 $ 12,509
======================
SUPPLEMENTAL DISCLOSURES
CASH PAID DURING THE PERIOD FOR:
Interest $ 987 $ 773
Income taxes $ 45 $ 34
See notes to Consolidated Financial Statements.
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed for the quarterly financial reporting are the
same as those disclosed in Note 1 of the Notes to Consolidated Financial
Statements included in the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995. Certain prior year amounts have been
reclassified to conform with current year financial statement presentation.
2. ACCOUNTS RECEIVABLE
In January 1995, the Corporation entered into a three year agreement with two
financial institutions to sell on an on-going basis, an undivided
interest in a defined pool of eligible receivables up to a maximum of
$40,000,000. In December 1995, the accounts receivable securitization
facility was increased to $50,000,000. The costs associated with this program
are based upon the purchasers' level of investment and cost of issuing
commercial paper plus predetermined fees. Such costs are included in
"Interest Expense," in the Consolidated Statements of Income. At March 31,
1996, $45,000,000 of accounts receivable had been sold under this agreement.
The defined pool of accounts receivable sold at March 31, 1996 approximates
fair value. The Corporation retains substantially the same risk of credit
loss as if the receivables had not been sold.
3. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
MARCH December
31, 31,
1996 1995
-----------------------------
Revolving loan - 6.06% in 1996 and 6.20% 1995 $ 9,450 $ 1,400
Other debt principally related to WCC and
international subsidiaries 5,871 3,987
-----------------------------
15,321 5,387
Less - Current portion of long-term debt (11) (11)
-----------------------------
$ 15,310 $ 5,376
=============================
4. WACKENHUT CORRECTIONS CORPORATION ("WCC") STOCK OFFERING
In January 1996, WCC (a subsidiary of the Corporation) sold 2,300,000 shares
of common stock in connection with a public offering at a price of $24.00 per
share. Net proceeds of approximately $51,776,000 from the offering will be
used for possible future acquisitions, capital investments in new facilities,
working capital requirements and general corporate purposes.
5. CORRECTIONAL FOODSERVICE ACQUISITION
In January 1996, the Corporation acquired the contracts and certain assets, of
the Correctional Food Service Division of Service America Corporation for
approximately $13.7 million. Proforma financial information is not presented,
as the results of operations herein are not materially affected.
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6. BUSINESS SEGMENTS
SECURITY-RELATED AND OTHER SUPPORT SERVICES AND CORRECTIONAL SERVICES
The Corporation's principal business consists of security related and other
support services to commercial and governmental clients. WCC provides facility
management and construction services to detention and correctional facilities.
Provided below is various financial information for each segment:
THIRTEEN WEEKS ENDED
----------------------------------
(THOUSANDS OF DOLLARS) MARCH 31, 1996 APRIL 2, 1995
---------------- ----------------
REVENUES:
Security-related and other support services $183,040 $166,318
Correctional services 29,434 23,474
-------- --------
Total revenues $212,474 $189,792
======== ========
OPERATING INCOME:
Security-related and other support services $ 1,094 $ 1,465
Correctional services 1,719 1,590
Provision for relocation costs (750) -
-------- --------
Total operating income $ 2,063 $ 3,055
======== ========
EQUITY INCOME (LOSS) OF FOREIGN AFFILIATES, NET OF TAXES:
Security-related and other support services $ 265 $ 303
Correctional services 42 (78)
-------- --------
Total equity income $ 307 $ 225
======== ========
CAPITAL EXPENDITURES:
Security-related and other support services $ 1,725 $ 60
Correctional services 658 443
-------- --------
Total capital expenditures $ 2,383 $ 503
======== ========
DEPRECIATION AND AMORTIZATION EXPENSE:
Security-related and other support services $ 2,604 $ 1,911
Correctional services 836 486
-------- --------
Total expenses $ 3,440 $ 2,397
======== ========
IDENTIFIABLE ASSETS AT MARCH 31, 1996 AND
DECEMBER 31, 1995:
Security-related and other support services $166,414 $159,087
Correctional services 93,164 38,840
-------- --------
Total identifiable assets $259,578 $197,927
======== ========
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DOMESTIC AND INTERNATIONAL OPERATIONS
Non-U.S. operations of the Corporation and its subsidiaries are conducted
primarily in South America and Australia. The Corporation 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 Corporation are provided currently. Minority interest in consolidated
foreign subsidiaries have been reflected net of applicable income taxes on the
accompanying financial statements. A summary of domestic and international
operations is shown below:
THIRTEEN WEEKS ENDED
(THOUSANDS OF DOLLARS) MARCH 31, 1996 APRIL 2, 1995
---------------- ----------------
REVENUES:
Domestic operations $177,258 $158,611
International operations 35,216 31,181
-------- --------
Total revenues $212,474 $189,792
======== ========
OPERATING INCOME:
Domestic operations $ 2,312 $ 1,670
International operations 501 1,385
Provision for relocation costs (750) -
-------- --------
Total operating income $ 2,063 $ 3,055
======== ========
EQUITY INCOME OF FOREIGN AFFILIATES, NET OF TAXES:
Domestic operations - -
International operations $ 307 $ 225
-------- --------
Total equity income $ 307 $ 225
======== ========
CAPITAL EXPENDITURES:
Domestic operations $ 2,200 $ 425
International operations 183 78
-------- --------
Total capital expenditures $ 2,383 $ 503
======== ========
DEPRECIATION AND AMORTIZATION EXPENSE:
Domestic operations $ 2,650 $ 1,806
International operations 790 591
-------- --------
Total expenses $ 3,440 $ 2,397
======== ========
IDENTIFIABLE ASSETS at March 31, 1996 and
December 31, 1995 :
Domestic operations $202,767 $141,431
International operations 56,811 56,496
-------- --------
Total identifiable assets $259,578 $197,927
======== ========
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Reference is made to Item 7, Part II of the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1995 for further discussion and
analysis of information pertaining to the Corporation's financial condition.
COMPARISON OF THIRTEEN WEEKS ENDED MARCH 31, 1996 AND
THIRTEEN WEEKS ENDED APRIL 2, 1995
The following discussion and analysis should be read in conjunction with the
Corporation's consolidated financial statements and the notes thereto.
COMPARISON OF THIRTEEN WEEKS ENDED MARCH 31, 1996 TO
THIRTEEN WEEKS ENDED APRIL 2, 1995
REVENUES
Consolidated revenues increased 12.0% to $212.5 million in the thirteen
weeks ended March 31, 1996 (the "First Thirteen Weeks of 1996") from $189.8
million in the thirteen weeks ended April 2, 1995 (the "First Thirteen Weeks of
1995").
SERVICES BUSINESS
Services Business revenues increased 10.1% to $183.0 million in the First
Thirteen Weeks of 1996 from $166.3 million in the First Thirteen Weeks of 1995.
Domestic Operations Group. Domestic Operations Group revenues increased
17.4% to $119.4 million in the First Thirteen Weeks of 1996 from $101.8 million
in the First Thirteen Weeks of 1995. Within the Domestic Operations Group,
revenues from the Security Services Division increased 12.1% to $89.0 million in
the First Thirteen Weeks of 1996 from $79.4 million in the First Thirteen Weeks
of 1995. The Security Services Division continued to increase its revenue base,
primarily as a result of obtaining and maintaining contracts with major national
accounts and continuing success in the CPO business. The CPO business revenues
increased 14.9% during the First Thirteen Weeks of 1996 compared to the First
Thirteen Weeks of 1995. Revenues of the Food Division almost doubled during the
First Thirteen Weeks of 1996 to $15.8 million, compared to revenues of $8.3
million for the First Thirteen Weeks of 1995, reflecting the acquisition of the
contracts and certain assets of the Correctional Food Services Division of
Service America Corporation and new business development. Revenues from the
Nuclear Division remained relatively unchanged from the First Thirteen Weeks
of 1995, reflecting the maturation of the nuclear power industry and limited
opportunities for growth in this market.
Government Services Group. Government Services Group revenues (excluding
WCC) decreased 4.6% to $39.5 million in the First Thirteen Weeks of 1996 from
$41.4 million for the First Thirteen Weeks of 1995. Within the Government
Services Group, revenues of Wackenhut Services, Inc. decreased 3.6% to $34.4
million in the First Thirteen Weeks of 1996 from $35.7 million in the First
Thirteen Weeks of 1995, principally due to reductions in government funding for
security at United States Department of Energy facilities. Management believes
this reduction in funding will continue to affect Government Services Group
revenues and operating income. Revenues of Wackenhut Educational Services, Inc.
decreased $4.4 million to $1.3 million in the First Thirteen Weeks of 1996 due
to the loss of two contracts in Fiscal 1995. However, revenues of Wackenhut of
Australia Pty., Ltd., which was acquired in July of last year, amounted to $3.8
million in the First Thirteen Weeks of Fiscal 1996.
International Group. International Group revenues remained relatively
unchanged during the First Thirteen Weeks of 1996 compared to the same period in
1995, as a result of the deconsolidation in the fourth quarter of 1995 of the
former subsidiary in Chile, which is now a minority-owned affiliate. Revenues of
the Chilean operation for the First Thirteen Weeks of 1995 amounted to $4.2
million. Excluding the effect of the Chilean operation, revenues of the
International Group increased approximately $3.7 million.
CORRECTIONAL BUSINESS
Correctional Business revenues increased 25.4% to $29.4 million in the
First Thirteen Weeks of 1996 from $23.5 million in the First Thirteen Weeks of
1995. The increase was attributable principally to an increase in compensated
resident days resulting from the opening of three domestic facilities (Moore
Haven Correctional Facility in Florida, and John R. Lindsey Unit and Willacy
County Unit in Texas) in the second half of Fiscal 1995 and in the First
Thirteen Weeks of 1996. In addition, revenues of Australasian Correctional
Management Pty Limited ("ACM") increased 11.1% or $713,000, resulting
principally from the expansion of the Arthur Gorrie Correctional Centre in
Wacol, Australia.
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OPERATING INCOME
Consolidated operating income, which included a $750,000 provision for
relocation costs in the First Thirteen Weeks of 1996, decreased 32.5% to $2.1
million in the First Thirteen Weeks of 1996 from $3.1 million in the First
Thirteen Weeks of 1995. Excluding relocation costs, consolidated operating
income decreased 7.9%.
SERVICES BUSINESS
Operating income from the Services Business decreased 25.3% to $1.1 million
in the First Thirteen Weeks of 1996 from $1.5 million in the First Thirteen
Weeks of 1995.
Domestic Operations Group. Domestic Operations Group operating income
remained relatively unchanged at $2.9 million in the First Thirteen Weeks of
1996 compared to the First Thirteen Weeks of 1995. Increases in the profit
contributions of the core security-related and foodservice businesses were
offset by higher group overhead costs and greater absorption of direct corporate
general and administrative expenses which increased as a result of higher
payroll related costs.
Government Services Group. Government Services Group (excluding WCC)
operating income increased 22.7% to $1.1 million in the First Thirteen Weeks of
1996 compared to $895,000 in the First Thirteen Weeks of 1995. The increase was
principally due to recaptured allowable general and administrative expenses
from a contract with the United States Department of Energy, and anticipated
award fee revenues in other contracts with the United States Department of
Energy. However, this increase was partially offset by operating losses from
the new security services subsidiary in Australia, Wackenhut of Australia
Pty., Ltd., which recorded an operating loss of approximately $500,000 in the
First Thirteen Weeks of 1996. Currently, the Company is in the process of
aligning its organizational structure in Australia to that of its other security
operations in order to enhance operational efficiency and to increase its
revenue base in Australia.
International Group. International Group operating income decreased 60% to
$192,000 in the First Thirteen Weeks of 1996 from $480,000 for the First
Thirteen Weeks of 1995. Increases in operating losses in Canada, Ecuador,
Venezuela and the deconsolidation of operations in Chile offset increases in
operating income in other countries.
CORPORATE EXPENSES AND UNDERWRITING LOSSES
The increase in corporate expenses and underwriting losses resulted
principally from increases in variable general and administrative
personnel-related costs principally attributed to the Headquarters relocation
and general growth.
CORRECTIONAL BUSINESS
Operating income from the Correctional Business increased 8.1% to $1.7
million in the First Thirteen Weeks of 1996 from $1.6 million for the First
Thirteen Weeks of 1995. The increase was principally attributable to the
increase in domestic facility management services as a result of the opening of
two facilities in the second half of 1995 and one facility in January 1996.
OTHER INCOME/EXPENSE
Other income was $171,000 in the First Thirteen Weeks of 1996 compared
to other expense of $412,000 for the First Thirteen Weeks of 1995 due to two
principal factors. First, interest and investment income increased $730,000 and
included interest income of approximately $641,000 from the investment of the
net proceeds of WCC's public offering in January 1996. Second, interest expense
increased $147,000 due principally to the increase in the level of corporate
bank borrowings and fees incurred under the accounts receivable securitization
facility. Proceeds from the additional bank borrowings and sales of receivables
under the accounts receivable securitization facility were used by the Company
principally to effect the foodservice acquisition, to begin improvement of its
information systems, and to penetrate the Australian security-services market.
Page 12 of 15
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INCOME BEFORE INCOME TAXES
Income before income taxes, which included a $750,000 provision for
relocation costs in the First Thirteen Weeks of 1996, decreased 15.5% to $2.2
million from $2.6 million in the First Thirteen Weeks of 1995.
The combined federal and state effective income tax rate was 34.4% for
the First Thirteen Weeks of 1996 and 34.0% for the First Thirteen Weeks of
1995. The higher effective rate in the First Thirteen Weeks of 1996 was due
to: (i) the statutory elimination of targeted job tax credits; and (ii) a
decrease in tax exempt income of the captive reinsurance subsidiary.
MINORITY INTEREST EXPENSE
Minority interest expense (net of income taxes) increased to $827,000 in
the First Thirteen Weeks of 1996 from $371,000 in the First Thirteen Weeks of
1995, reflecting principally the increase in earnings of and the public
ownership in WCC.
EQUITY INCOME OF FOREIGN AFFILIATES
Equity income of foreign affiliates (net of income taxes) increased 36.4%
to $307,000 in the First Thirteen Weeks of 1996 from $225,000 in the First
Thirteen Weeks of 1995, primarily resulting from increased earnings of security
services affiliates in South America and Europe, the joint venture of WCC in
the United Kingdom and the inclusion of the Company's equity income of the
Chilean operations'.
NET INCOME
Net income decreased to $945,000 in the First Thirteen Weeks of 1996, or
$0.08 per share, after the $750,000 provision for relocation costs ($461,000 net
of income taxes), compared to $1.6 million or $0.13 per share for the First
Thirteen Weeks of 1995.
INFLATION
Management believes that inflation has not had a material effect on the
Corporation's results of operations during the past three fiscal years and the
First Thirteen Weeks of 1996. However, many of the Corporation's service
contracts provide for either fixed management fees or for fees that increase by
only small amounts during the terms of the contracts. Since personnel costs
represent the Corporation's largest expense, inflation could have a substantial
adverse effect on the Corporation's results of operations in the future to the
extent that wages and salaries increase at a faster rate than the per diem or
fixed rates received by the Corporation for its services.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's principal sources of funds have been, and are
expected to continue to be, cash flows from operations and borrowings under
lines of credit provided by banks in the United States and abroad. Cash and
cash equivalents amounted to $67.4 million at March 31, 1996 compared to $20.2
million at December 31, 1995. Cash and cash equivalents at March 31, 1996
includes $54.2 million of cash and cash equivalents of WCC which were not
available for use by the Corporation. In addition, $1.5 million serves as
collateral for certain obligations of the Corporation's captive reinsurance
subsidiary.
The Corporation has additional sources of liquidity available in the
form of a $50 million revolving line of credit and a $50 million accounts
receivable securitization facility. Additionally, at March 31, 1996, WCC had in
place a $15 million revolving line of credit, and subsidiaries of the
Corporation and WCC had in place credit agreements with banks providing
Australian $10.5 million (approximately $8.2 million U.S. at March 31, 1996).
WCC's $15 million revolving line of credit contains certain covenants that
restrict WCC's ability to pay dividends to the Corporation.
At March 31, 1996, the Corporation had $9.5 million outstanding under
its $50 million revolving line of credit and $37.2 million outstanding in the
form of letters of credit securing reserves of the captive reinsurance
subsidiary and other corporate transactions. The unused portion of the
revolving line of credit was $3.4 million at March 31, 1996. In addition, at
March 31, 1996, the Corporation had sold $45 million of accounts receivable
under its accounts receivable securitization facility. Under the terms of the
accounts receivable securitization facility, the Corporation retains
substantially the same risk of credit loss as if receivables had not been sold
under this facility. At March 31, 1996, WCC and the subsidiaries of the
Corporation and WCC had $5.9 million outstanding under their credit agreements.
At March 31, 1996 and December 31, 1995, the ratio of total debt to total
capitalization was 14.8% and 9.4%, respectively.
WCC anticipates making cash investments in connection with future
acquisitions. In addition, in line with a developing industry trend toward
requiring private operators to make capital investments in facilities and to
enter into direct financing arrangements in connection with the development of
such facilities, WCC plans to use part of the net proceeds of $51.8 million
from the January 1996 public offering of shares of its common stock to finance
start-up costs, leasehold improvements and equity investments in facilities, if
appropriate, in connection with undertaking new contracts. In connection with
the award of one project, WCC recently has agreed to make an approximate $4.0
million equity investment in the project and to assist in the financing of the
project by guaranteeing up to approximately $20.0 million of the permanent
pass-through financing. The governmental entity that has contracted for the
project is the ultimate pass-through source of payments and the recourse
obligations of WCC and the subsidiary through which it will hold its investment
in the project are substantially limited in type and likelihood. WCC and its
subsidiary have made application to restructure the pass-through financing to a
non-recourse basis. WCC has structured the transaction so that the financing
for the project will be repaid from funds generated by the project. In
addition, to the extent that WCC elects to receive dividends from its
subsidiary, it will be required to arrange for a letter of credit in favor of
the subsidiary to provide security for the payment of certain possible future
tax obligations of the subsidiary. The letter of credit will not be issued any
earlier than the second half of 1997 and, consequently, any financing
arrangements with respect to such letter of credit have not been determined.
The Corporation does not believe that the issuance of the letter of credit will
have a material impact on its liquidity or capital resources or the liquidity
or capital resources of WCC.
Net cash generated by operating activities was $3.7 million for the First
Thirteen Weeks of 1996 compared to $5.7 million in the First Thirteen Weeks of
1995.
Cash provided by investing activities amounted to $25.3 million in the
First Thirteen Weeks of 1996. Net proceeds from the public offering of WCC of
$51.8 million in 1996 were partially offset by payments of $13.7 million for the
acquisition of the contracts and certain assets of the Correctional Food
Services Division of Service America Corporation. Capital expenditures of $2.4
million reflect the investment in leasehold improvements in the new headquarters
building, purchases of equipment related to the provision of security-related
services and investments in facilities by WCC.
Cash provided by financing activities was $18.3 million for the First
Thirteen Weeks of 1996. Cash proceeds under the Corporation's accounts
receivable securitization facility with two banks amounted to $10.0 million.
The Corporation increased by $8.8 million the amounts outstanding under its
revolving line of credit with two banks.
Cash dividends paid in the First Thirteen Weeks of 1996 amounted to
$798,000.
Current cash requirements consist of amounts needed for capital
expenditures, increased working capital needs resulting from corporate growth,
payment of liabilities incurred in the operation of the Corporation's business,
the renovation or construction of correctional facilities by WCC, possible
acquisitions and the payment of dividends. The Corporation continues to expand
its domestic and international businesses and to pursue major contracts, some
of which may require substantial initial cash outlays, which are partially or
fully recoverable over the original term of the contract.
In January 1996, WCC sold 2.3 million shares of its common stock at a
price of $24.00 per share. Such proceeds were only available to WCC. The
offering resulted in net proceeds to WCC of approximately $51.8 million.
Management believes that cash on hand, internally generated cash flows and
available lines of credit will be adequate to support currently planned
business expansion and various obligations incurred in the operation of the
Corporation's business, both on a near term and long term basis.
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14
THE WACKENHUT CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 29, 1996, the Corporation settled a lawsuit alleging tortious
interference with contract and other related torts by the Corporation ("Essex
Company vs. Wackenhut Services, Inc.," Case No. 94-908 JC/DJS United States
District Court for the District of New Mexico). The reserves previously
provided by the Corporation were adequate to cover the exposure in this matter.
The Corporation 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 Corporation 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 for any such claim
or litigation.
ITEM 2. CHANGES IN SECURITIES
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 4.5 - Amendment dated March 28, 1996 to the Revolving Credit and
Reimbursement Agreement dated January 5, 1995 by and among
The Wackenhut Corporation, NationsBank of Florida, N.A.
(South), as successor to NationsBank of Florida, N.A., and
Bank of America Illinois, as Lenders, and NationsBank, N.A.
(South), as successor to NationsBank of Florida, N.A. as
Agent.
Exhibit 4.6 - Letter dated April 26, 1996 amending the Revolving Credit and
Reimbursement Agreement dated January 5, 1995 by and among
The Wackenhut Corporation, NationsBank, N.A. (South), as
successor to NationsBank of Florida, N.A., and Bank of
Illinois, as Lenders, and NationsBank, N.A. (South), and
NationsBank, N.A. (South), as successor to NationsBank of
Florida, N.A., as Agent.
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K - No reports on Form 8-K were filed by the Corporation
during the first thirteen weeks of fiscal year ending December 29, 1996.
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15
THE WACKENHUT CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Quarterly Report on Form 10-Q for the thirteen
weeks ended March 31, 1996 to be signed on its behalf by the undersigned
thereunto duly authorized.
THE WACKENHUT CORPORATION
/s/ Juan D. Miyar
DATE: May 7, 1996 -----------------------------
By: Juan D. Miyar, Duly
Authorized Officer and
Chief Accounting Officer
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