<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended JANUARY 3, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-14260
WACKENHUT CORRECTIONS CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 65-0043078
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4200 WACKENHUT DRIVE #100, PALM BEACH GARDENS, FLORIDA 33410-4243
- ------------------------------------------------------ ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER (INCLUDING AREA CODE): (561) 622-5656
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ----------------------------- -----------------------------------------
Common Stock, $0.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------- -----------------------------------------
None None
- -------------------------------------------------------------------------------
Indicate by a 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
At February 19, 1999, the aggregate market value of the 10,381,722 shares of
Common Stock held by non-affiliates of the registrant was $205,039,010. At
February 19, 1999, there were outstanding 22,381,722 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Parts of the Registrant's Proxy Statement for its 1999 Annual Meeting of
Shareholders are incorporated by reference in Part III of this report.
Parts of the Registrant's Annual Report to Shareholders for the fiscal year
ended January 3, 1999 are incorporated by reference into Parts II and IV of
this report.
EXHIBIT INDEX IS LOCATED ON PAGE 26
PAGE 1 of 26
<PAGE> 2
PART I
ITEM 1. BUSINESS
THE COMPANY
Wackenhut Corrections Corporation ("the Company"), a 55% owned subsidiary of
The Wackenhut Corporation ("TWC"), is an industry leader in the privatization
of correctional facilities throughout the world. The Company was founded in
1984 as a division of TWC, a leading provider of professional security
services. In 1986, the Company received its first contract, from the United
States Immigration and Naturalization Service (the "INS"), to design, construct
and manage a detention facility with a design capacity of 150 beds.
The Company offers governmental agencies a comprehensive range of correctional
and related institutional services to federal, state, local and overseas
government agencies. Correctional services include the management of a broad
spectrum of facilities, including male and female adult facilities; juvenile
facilities; community corrections; work programs; prison industries; substance
abuse treatment facilities; and mental health, geriatric and other special
purpose institutions. Other management contracts include psychiatric health
care, electronic home monitoring, prisoner transportation, correctional health
services, and facility maintenance. The Company has an in-house capability for
the design and construction of new facilities, and offers a full privatization
package to government agencies, to include financing. The Company believes that
its experience in delivering governmental agencies high quality cost-effective
correctional and related institutional services provides such agencies strong
incentive to select the Company when renewing and awarding contracts.
On November 1, 1998, the Company began management of the 350-bed South Florida
State Psychiatric Hospital, representing a historic milestone for public sector
mental health services and a significant diversification of the Company's
service offerings.
As of January 3, 1999, the Company had 52 correctional and detention facilities
either under contract or award with an aggregate design capacity of 35,707
beds. Of these 52 facilities, 40 are currently in operation, and 12 are being
developed by the Company. Of the facilities being developed, six are scheduled
to commence operations during 1999 (one in the first quarter, two in the second
quarter, two in the third quarter and one in the fourth quarter).* In addition,
at January 3, 1999, the Company had outstanding written responses to Requests
for Proposal ("RFPs") for nine projects with an aggregate design capacity of
4,200 beds.
The Company has obtained and is pursuing construction and management contracts
for correctional and detention facilities outside the United States and
presently operates facilities in the United Kingdom and Australia. Through its
wholly-owned subsidiary, Wackenhut Corrections Corporation Australia Pty
Limited ("WCCA"), the Company manages three correctional facilities, four
immigration detention centers, one Health Care Services entity and one court
escort contract. In the United Kingdom, the Company formed two joint ventures
to pursue construction and management contracts for privatized correctional and
detention facilities. Premier Prison Services, Ltd. ("PPS"), a joint venture
with Serco Limited, currently manages two correctional facilities and two court
escort contracts and will commence management of three additional correctional
facilities and two electronic monitoring services contracts in 1999. Under
court escort contracts, a private company, on behalf of a governmental agency,
transports prisoners between police stations, prisons and courts and is
responsible for the custody of such prisoners during transportation and court
appearances. Electronic monitoring services involve the electronic tagging of
offenders sentenced to home incarceration. In February 1994, through Wackenhut
Corrections (UK) Limited, the Company formed Premier Custodial Development
("PCD"), as a joint venture with a wholly-owned subsidiary of Kvaerner
Construction Limited, for the design and construction of new detention
facilities and prisons. The Company expects that PCD will bid with PPS for the
design, construction management and finance of new correctional and detention
facilities in the United Kingdom.
*See note on page three regarding forward-looking statements.
PAGE 2 of 26
<PAGE> 3
In the majority of contracts, the Company manages facilities owned or leased by
a governmental agency. The agency may finance the construction of such
facilities through various methods including, but not limited to, the
following: (i) a one time general revenue appropriation by the governmental
agency for the cost of the new facility; (ii) general obligation bonds that are
secured by either a limited or unlimited tax levy by the issuing entity; or
(iii) lease revenue bonds or certificates of participation secured by an annual
lease payment that is subject to annual or bi-annual legislative
appropriations. In some instances, the Company may be required to own and/or
finance the facility. The construction of these facilities will be financed
through various methods including, but not limited to the following: (i) funds
from equity offerings of the Company's stock; (ii) borrowings from banks or
other institutions; or (iii) lease arrangements with third parties.
The Company was incorporated in Florida in April, 1988. The Company's principal
executive offices are located at 4200 Wackenhut Drive #100, Palm Beach Gardens,
Florida 33410-4243, and its telephone number is (561) 622-5656.
See the Company's Consolidated Financial Statements on pages 34 through 37 and
Note 8 of Notes to Consolidated Financial Statements on pages 41 and 42 of the
Company's 1998 Annual Report to Shareholders for financial information
regarding domestic and international operations.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Except for historical
matters, the matters discussed in this Form 10-K contain forward-looking
statements that are based on current expectations and are subject to a number
of risks and uncertainties. Actual results could differ materially from current
expectations due to a number of factors, including but not limited to: general
economic conditions; competitive factors and pricing pressures; shifts in
market demand; the performance and needs of clients served by the Company;
actual future costs of operating expenses; self-insurance claims and employee
wages and benefits; possible changes in ownership positions of the Company's
subsidiaries; and such other risks which may be described from time to time in
the Company's SEC filings. These statements are marked with an " * ".
PAGE 3 of 26
<PAGE> 4
FACILITIES
The following table summarizes certain information with respect to facilities
currently under management contract or award for management by the Company (or
a subsidiary or joint venture of the Company) at January 3, 1999.
In April, 1998 the Company sold three facilities owned by it and the rights to
acquire four other facilities to Correctional Properties Trust ("CPV"), a
Maryland real estate investment trust. An eighth facility was purchased directly
from a government entity. In October, 1998 the Company sold the completed
portion of an additional facility to CPV. The facilities were then leased back
to the Company under operating leases. See Item 2 -- "Properties."
<TABLE>
<CAPTION>
FACILITY NAME COMPANY DESIGN FACILITY SECURITY COMMENCEMENT OF RENEWAL
LOCATION ROLE CAPACITY TYPE LEVEL CURRENT CONTRACT TERM OPTION
- ------------------------- ---------------- --------- ------------------- --------------- ------------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CORRECTIONAL FACILITIES
- -----------------------
FEDERAL GOVERNMENT
CONTRACTS:
Aurora INS Processing Construction/ 300 INS Detention Minimum/ May 1998 1 year Four
Center, Aurora, Management Facility Medium One-year
Colorado(6)
Queens Private Construction/ 200 INS Detention Minimum/ June 1998 1 year Two,
Correctional Facility, Management Facility Medium One-year
Queens, New York(6)
Taft Correctional Management 2,048 Federal Low/ August 1997 3 years Seven,
Institution Prison Minimum One-year
Taft, California
STATE GOVERNMENT
CONTRACTS:
Allen Correctional Management 1,538 State Prison Medium/ December 1998 2 years One,
Center Maximum Two-year
Kinder, Louisiana
Bayamon Correctional Design/ 500 State Prison Medium March 1997 5 years One,
Facility Construction/ Five-year
Bayamon, Puerto Rico Consultation/
Management
Bridgeport Pre-Release Construction/ 520 Pre-Release Center Minimum September 1995 5 years None
Center Management
Bridgeport, Texas
Central Texas Parole Renovation/ 623 Parole Violator All levels September 1997 Varies Varies
Violator Facility Management Facility/U.S. (1) (1)
San Antonio, Texas Marshal Detention
Facility/
Out of State
Prison Inmates
Central Valley Design/ 550 State Community Medium December 1997 10 years None
Community Correctional Construction/ Correctional
Facility Management Facility
McFarland, California(6)
Charlotte County Design/ 1,000 State Prison Medium 4th Quarter 2000* (2) (2)
Correctional Facility Construction/ (Estimated)
Charlotte County, Management
Virginia
Cleveland Correctional Management 520 State Prison Medium January 1999 1 2/3 Two
Center years One-year
Cleveland, Texas
Coke County Juvenile Design/ 200 Juvenile Offender Medium/ March 1997 2 years Automatic.
Justice Facility Construction/ Facility Maximum Unlimited,
Coke County, Texas Management Two-year
</TABLE>
*See note on page three regarding forward-looking statements.
PAGE 4 OF 26
<PAGE> 5
<TABLE>
<CAPTION>
FACILITY NAME COMPANY DESIGN FACILITY SECURITY COMMENCEMENT RENEWAL
LOCATION ROLE CAPACITY TYPE LEVEL OF CONTRACT TERM OPTION
- ------------------------- ---------------- --------- ------------------- --------------- ------------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Desert View Community Design/ 568 State Community Medium December 1997 10 years None
Correctional Facility Construction/ Correctional
Adelanto, California(6) Management Facility
East Mississippi Design/ 500 Mental Health All levels 2nd Quarter 1999* 5 years One,
Correctional Facility Construction/ Correctional (Estimated) Two-year
Lauderdale County, Management Facility
Mississippi
Golden State Community Design/ 550 State Community Medium December 1997 10 years None
Correctional Facility Construction/ Correctional
McFarland, California(6) Management Facility
Guadalupe County Design/ 600 State Prison All levels October 1998 3 years Annual
Correctional Facility Construction/
Santa Rosa, Management
New Mexico
John R. Lindsey Unit Design/ 1,031 State Jail Medium September 1998 3 years Two
Jack County, Texas Consultation/ Facility One-year
Management
Karnes County Management 579 State Prison All levels January 1998 Varies Varies
Correctional Center
Karnes City, Texas(6)
Kyle New Vision Construction/ 520 State Prison/ Minimum September 1995 5 years None
Chemical Dependency Management/ In-Prison
Treatment Center (3) Chemical Chemical
Kyle, Texas Dependency Dependency
Treatment Treatment Center
Lea County Correctional Design/ 1,200 State Prison All levels May 1998 3 years Annual
Facility Construction/
Hobbs, New Mexico(6) Management
Lawton Correctional Design/ 1,800 State Prison Medium July 1998 1 year Four
Facility Construction/ One-Year
Lawton, Oklahoma Management
Lockhart Renaissance Design/ 500 State Prison Minimum/ January 1999 1 year Four
Facility Construction/ Medium One-year
Lockhart, Texas Management
Lockhart Work Program Construction/ 500 Work Program Minimum January 1999 1 year Four
Facility Management Facility One-year
Lockhart, Texas
Marshall County Design/ 1,000 State Prison Medium May 1996 5 years Unlimited,
Correctional Facility Construction/ Two-year
Marshall County, Management
Mississippi
McFarland Community Construction/ 224 State Community Minimum/ February 1998 1 year None
Correctional Facility Management Correctional Medium
McFarland, California(6) Facility
Michigan Youth Design/ 480 Juvenile Maximum 3rd Quarter 1999* 4 years Two,
Correctional Facility Construction/ (Estimated) Four-year
Baldwin, Michigan Management
</TABLE>
*See note on page three regarding forward-looking statements.
PAGE 5 of 26
<PAGE> 6
<TABLE>
<CAPTION>
FACILITY NAME COMPANY DESIGN FACILITY SECURITY COMMENCEMENT RENEWAL
LOCATION ROLE CAPACITY TYPE LEVEL OF CONTRACT TERM OPTION
- ------------------------- ---------------- --------- ------------------- --------------- ------------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Moore Haven Design/ 750 State Prison Medium July 1998 2 years Unlimited,
Correctional Facility Construction/ Two-year
Moore Haven, Florida Management
North Texas Renovation/ 400 Intermediate Minimum September 1998 1 year None
Intermediate Sanction Management Sanction Facility
Facility
Fort Worth, Texas
Ronald "Opie" McPherson Design/ 600 State Prison All levels January 1998 2 1/2 years Unlimited,
Correctional Facility Construction/ Two-year
Newport, Arkansas Management
Scott Grimes Design/ 600 State Prison Minimum/ January 1998 2 1/2 years Unlimited,
Correctional Facility, Construction/ Medium Two-year
Newport, Arkansas Management
South Bay Correctional Design/ 1,318 State Prison Medium/ February 1997 3 years Unlimited,
Facility Construction/ Close Custody Two-year
South Bay, Florida Management
Travis County Community Design/ 1,000 State Jail Medium March 1997 5 years Automatic,
Justice Center Consultation/ Facility Unlimited,
Travis County, Texas Management Two-year
Willacy County Unit Design/ 1,000 State Jail Medium September 1998 1 year Four
Raymondville, Texas Consultation/ Facility One-year
Management
Val Verde Correctional Design/ 600 State Prison Medium/ 1st Quarter 2000* (2) (2)
Facility Construction/ Maximum (Estimated)
Del Rio, Texas Management
LOCAL GOVERNMENT
CONTRACTS:
Broward County Work Design/ 300 Community Work Non-secure February 1998 5 years Unlimited,
Release Center Construction/ Release Center Two-year
Broward County, Management
Florida(6)
Delaware County Prison Design/ 1,562 County Jail All levels July 1998 5 years Unlimited,
Delaware County, Construction/ Facility Two-year
Pennsylvania Management
Jena Juvenile Justice Design/ 276 Juvenile Center All levels December 1998 25 years None
Center Construction/
Jena, Louisiana Management
San Diego Correctional Renovation/ 900 County Jail All levels 1st Quarter 2000* (2) (2)
Facility Management (Estimated)
San Diego, California
Val Verde County Jail Management 184 County Jail All Levels 1st Quarter 2000* (2) (2)
Del Rio, Texas (Estimated)
INTERNATIONAL CONTRACTS:
Arthur Gorrie Management 995 Remand and All levels August 1997 5 years None
Correctional Centre Reception Center
Wacol, Australia
Court Escort Management NA Court Custody/ All levels May 1996 6 years Two,
West Midlands Area Transport-Escort Three-year
England
</TABLE>
*See note on page three regarding forward-looking statements.
PAGE 6 of 26
<PAGE> 7
<TABLE>
<CAPTION>
FACILITY NAME COMPANY DESIGN FACILITY SECURITY COMMENCEMENT RENEWAL
LOCATION ROLE CAPACITY TYPE LEVEL OF CONTRACT TERM OPTION
- ------------------------- ---------------- --------- ------------------- --------------- ------------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Court Escort Management N/A Court Custody/ All levels May 1996 6 years Two,
South East Area Transport-Escort Three-year
England
Hassockfield Secure Design/ 40 Correctional Medium 3rd Quarter 1999* 15 years None
Training Centre Construction/ Youth Training (Estimated)
Medomsley, England Management Center
H.M. Prison Doncaster Management 1,111 National Prison All levels June 1994 5 years Three,
and Youth Offender Three-year
Institution
Doncaster, England
Fulham Correctional Design/ 600 State Prison Minimum/ March 1997 5 years Five,
Centre Consultation/ Medium Three-year
Victoria, Australia Management
Junee Correctional Construction/ 600 State Prison Medium April 1998 3 years None
Centre Management
Junee, Australia
H.M. Prison Kilmarnock Management 500 National Prison All levels 2nd Quarter 1999* 25 years None
Kilmarnock, Scotland (Estimated)
H.M. Prison Lowdham Management 500 National Prison All levels February 1998 25 years None
Grange
Nottinghamshire, England
Maribyrnong Detention Management 80 Immigration All levels December 1997 3 years Two
Centre Detention Three-year
Melbourne, Australia
The New Prison at Design/ 800 National Prison All levels 3rd Quarter 2000* (2) (2)
Moreton Lane Construction/ and Therapeutic (Estimated)
Marchington, England Management Community
New Brunswick Youth Design/ N/A Province Juvenile All levels October 1997 25 years None
Centre (4) Consultation/ Facility
New Brunswick, Canada Maintenance
Perth Detention Centre Management 40 Immigration All levels December 1997 3 years Two
Perth, Australia Detention Three-year
Port Hedland Detention Management 700 Immigration All levels December 1997 3 years Two
Center Detention Three-year
Port Hedland, Australia
PPS Home Monitoring Management N/A Home Detention Non-secure January 1999 5 years None
Service Services
Norfolk, England
Pucklechurch Youth Management 400 Youth Prison All levels 4th Quarter 1999* 15 years None
Offender Institution (Estimated)
Pucklechurch, UK
Public Corrections Management N/A Health Care N/A January 1998 3 years Two
Enterprise Services One-year
Victoria, Australia
Victoria Court Custody Management N/A Court All levels September 1998 3 years None
Services, Melbourne, Custody/Transport-
Australia Escort
Villawood Detention Management 300 Immigration All levels November 1997 3 Years Two
Centre Detention Three-year
Sydney, Australia
</TABLE>
*See note on page three regarding forward-looking statements.
PAGE 7 of 26
<PAGE> 8
<TABLE>
<CAPTION>
FACILITY NAME COMPANY DESIGN FACILITY SECURITY COMMENCEMENT RENEWAL
LOCATION ROLE CAPACITY TYPE LEVEL OF CONTRACT TERM OPTION
- ------------------------- ---------------- --------- ------------------- --------------- ------------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FACILITIES
- -----------------
South Florida State Design/ 350 State Psychiatric N/A November 1998 5 years Three
Hospital, Construction/ Hospital Five-year
Pembroke Pines, Florida Management
Atlantic Shores Hospital Management 86 Psychiatric N/A (5) (5) (5)
Fort Lauderdale, Florida Hospital
</TABLE>
- --------------------
(1) This facility is occupied by inmates under several contracts with
varying terms and renewal options. The terms of these contracts range
from two weeks to an indefinite period and the renewal option features
range from no option to unlimited renewals.
(2) Contract terms have yet to be negotiated.
(3) The Company operates a chemical dependency treatment center located in
this facility under a separate contract. This contract is for a
one-year term expiring August 31, 1999.
(4) The Company holds a contract for maintenance only of this facility.
(5) The Company purchased this facility in July, 1997 and provides services
on an individual patient basis, therefore, there are no contracts with
government agencies subject to terms and/or renewals
(6) The Company leases these Facilities from CPV.
PAGE 8 of 26
<PAGE> 9
The Company offers services that go beyond simply housing inmates. The
Company's wide array of in-facility rehabilitative and educational programs
differentiates it from many competitors who lack the experience or resources to
provide such programs. Inmates at most facilities managed by the Company can
also receive basic education through academic programs designed to improve
inmates' literacy levels and to offer the opportunity to acquire General
Education Development ("GED") certificates. Most Company-managed facilities
also offer vocational training for in-demand occupations to inmates who lack
marketable job skills. In addition, most Company-managed facilities offer life
skills/transition planning programs that provide inmates job search training
and employment skills, anger management skills, health education, financial
responsibility training, parenting skills and other skills associated with
becoming productive citizens. For example, at the Lockhart Work Program
Facility, Lockhart, Texas, the Company, as part of its job training program,
recruited firms from private industry to employ inmates at the facility.
Inmates who participate in such programs receive job skills training and are
paid at least the minimum wage. The inmates earnings are used to compensate
victims, defray the inmates' housing costs and support their dependents. The
Company also offers counseling, education and/or treatment to inmates with
alcohol and drug abuse problems at thirty-four of the facilities it manages.
The Company believes that its program at the Kyle New Vision Chemical
Dependency Treatment Center is the largest privately managed in-prison program
of this nature in the United States.
The Company operates each facility in accordance with the Company-wide policies
and procedures and with the standards and guidelines required under the
relevant contract. For many facilities, the standards and guidelines include
those established by the American Correctional Association ("ACA"). The ACA, an
independent organization of corrections professionals, establishes correctional
facility standards and guidelines that are generally acknowledged as a
benchmark by governmental agencies responsible for correctional facilities.
Many of the Company's contracts for facilities in the United States require the
Company to seek accreditation of the facility. The Company has sought and
received ACA accreditation for fifteen of the facilities it manages and has
always received ACA accreditation when sought.
Contracts to design and construct or to redesign and renovate facilities may be
financed in a variety of ways. See also "Business -- Facility Design,
Construction and Finance." If the project is financed using direct governmental
appropriations, using proceeds of the sale of bonds or other obligations issued
prior to the award of the project or by the Company directly, then financing is
in place when the contract relating to the construction or renovation project is
executed. If the project is financed using project-specific tax-exempt bonds or
other obligations, the construction contract is generally subject to the sale of
such bonds or obligations. Generally, substantial expenditures for construction
will not be made on such a project until the tax-exempt bonds or other
obligations are sold; and, if such bonds or obligations are not sold,
construction and, therefore, management of the facility may either be delayed
until alternative financing is procured or development of the project will be
entirely suspended. If the project is self-financed by the Company, then
financing is in place prior to the commencement of construction.
When the Company is awarded a facility management contract, appropriations for
the first annual or bi-annual period of the contract's term have generally
already been approved, and the contract is subject to governmental
appropriations for subsequent annual or bi-annual periods.
PAGE 9 of 26
<PAGE> 10
FACILITY MANAGEMENT CONTRACTS
Other than listed in the following table, no other single customer accounted
for 10% or more of the Company's total revenues for Fiscal 1998, 1997, and
1996.
<TABLE>
<CAPTION>
CUSTOMER 1998 1997 1996
- --------------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Various agencies of the State of Texas... 25% 32% 39%
California Department of Corrections..... 17% 10% 5%
State of Florida Correctional
Privatization Committee................ 11% 13% 9%
New South Wales Department of
Corrective Services.................... 4% 7% 10%
Queensland Corrective Services........... 4% 7% 11%
</TABLE>
Except for its contract for the Taft Correctional Institution, and the
facilities in the United Kingdom and Australia, all of which provide for fixed
monthly rates, the Company's facility management contracts provide that the
Company is compensated at an inmate per diem rate based upon actual or
guaranteed occupancy levels. Such compensation is invoiced in accordance with
applicable law and is paid on a monthly basis. All of the Company's contracts
are subject to either annual or bi-annual legislative appropriations. A failure
by a governmental agency to receive appropriations could result in termination
of the contract by such agency or a reduction of the management fee payable to
the Company. To date, the Company has not encountered a situation where
appropriations have not been made to a governmental agency with regard to the
Company's contracts, although no assurance can be given that the governmental
agencies will continue to receive appropriations in all cases.
The Company's facility management contracts typically have original terms
ranging from one to ten years and give the governmental agency at least one
renewal option, generally for a term ranging from one to five years. Some of
the Company's management contracts fall within the definition of "qualified
management contracts" under the rules of the Internal Revenue Service.
Therefore, such contracts are for one five-year term with the power to
terminate for convenience at the end of three years. The Company has: (i) eight
contracts expiring in 1999 (one with an automatic unlimited two-year extension,
two with no renewal options, three with four one-year renewal options, one with
two one-year extensions, and one with three three-year extensions); (ii) eleven
contracts expiring in 2000 (two with no renewal option, four with unlimited two
year renewal options, one with seven, one-year renewal options, two with four
one-year extensions, one with two one-year extensions, and one with one
two-year extension); (iii) four expiring in 2001 (one with two one-year
renewal options, two with no renewal options, and one with unlimited two-year
options); (iv) six expiring in 2002 (one with no renewal option, one with
unlimited automatic two-year extensions, one with five three-year extensions,
two with two three-year extensions, and one with one five-year extension); (v)
six expiring in 2003 (four with two three-year extensions and two with
unlimited two-year extensions); (vi) three expiring in 2004 (two with no
renewal option and one with two one-year extensions); (vii) one expiring in
2006 with three five-year renewal options; (viii) four expiring in 2007, all
with no renewal options; (ix) one in 2023 with no renewal option; (x) one in
2025 with no renewal option; and (xi) one in 2026 with no renewal option. The
remainder of the Company's contracts are either in negotiation currently or
have varied renewal options that are dependent upon the agency contracted with,
the type of inmate, and other factors. See also "Business-Facilities." Except
as described below, to date, all renewal options under the Company's management
contracts have been exercised. However, in connection with the exercise of the
renewal option, the contracting government agency or the Company typically has
requested changes or adjustments to the contract terms.
The Company's contracts typically allow a contracting governmental agency to
terminate a contract for cause by giving the Company written notice ranging
from 30 to 180 days. No contracts have been terminated prior to the end of the
contract term. To date, the only Company contract that did not extend for the
full term was
PAGE 10 of 26
<PAGE> 11
for the management of the Monroe County, Florida jail. By mutual agreement of
the Company and the Monroe County Board of Commissioners the contract was
discontinued in 1990 on an amicable basis.
In addition, in connection with the Company's management of such facilities, the
Company is required to comply with all applicable local, state and federal laws
and related rules and regulations. The Company's contracts typically require it
to maintain certain levels of insurance coverage for general liability, workers'
compensation, vehicle liability, and property loss or damage. If the Company
does not maintain the required categories and levels of coverage, the
contracting governmental agency may be permitted to terminate the contract.
Presently, the Company, through TWC, has general liability insurance coverage of
$50 million per occurrence and in the aggregate. See "Business -- Insurance." In
addition, the Company is required under its contracts to indemnify the
contracting governmental agency for all claims and costs arising out of the
Company's management of facilities and in some instances the Company is required
to maintain performance bonds.
FACILITY DESIGN, CONSTRUCTION AND FINANCE
The Company provides governmental agencies consultation and management services
relating to the design and construction of new correctional and detention
facilities and the redesign and renovation of older facilities. Through
February 19, 1999, the Company has provided service for the design and
construction of twenty-seven facilities and for the redesign and renovation of
three facilities and has contracts to design and construct four new facilities.
The Company is willing to perform consultation and management services for the
design and construction or redesign and renovation of a facility regardless of
whether it has been awarded the contract for the management of such facility.
See table in "Business - Facilities."
Under its construction and design management contracts, the Company agrees to
be responsible for overall project development and completion. The Company
makes use of an in-house staff of architects and operational experts from
various corrections disciplines (e.g., security, medical service, food service,
inmate programs and facility maintenance) as part of the decision team that
participates from conceptual design through final construction of the project.
When designing a facility, the Company's architects seek to utilize, with
appropriate modifications, prototype designs the Company has used in developing
prior projects. The Company believes that the use of such proven designs allows
it to reduce cost overruns and construction delays and to reduce the number of
guards required to staff a facility, thus controlling costs both to construct
and to manage the facility. Security is maintained because the Company's
facility designs increase the area of vision under surveillance by guards and
make use of additional electronic surveillance.
The Company typically acts as the primary developer on construction contracts
for facilities and subcontracts with local general contractors. Where possible,
the Company subcontracts with construction companies with which it has
previously worked. The Company has an in-house team of design, construction and
prison security experts that coordinate all aspects of the development with
subcontractors and provide site-specific services. It has been the Company's
experience that it typically takes 9 to 24 months to construct a facility after
the contract is executed and financing approved.
The Company may also propose to contracting governmental agencies various
financing structures for construction finance. The governmental agency may
finance the construction of such facilities through various methods including,
but not limited to, the following: (i) a one time general revenue appropriation
by the government agency for the cost of the new facility, (ii) general
obligation bonds that are secured by either a limited or unlimited tax levy by
the issuing governmental entity, or (iii) lease revenue bonds or certificates
of participation secured by an annual lease payment that is subject to annual
or bi-annual legislative appropriations. The Company may also act as a source
of financing or as a broker in any regard with respect to any financing. In
these cases, the construction of such facilities may be financed through
various methods including, but not limited to, the following: (i) funds from
equity offerings of the Company's stock; (ii) borrowing from banks or other
institutions; or (iii) lease arrangements with third parties. Of the 52
facilities
PAGE 11 of 26
<PAGE> 12
managed or contracted to be managed by the Company, 34 are funded using one of
the above-described financing vehicles, and 18 are or will be directly leased.
However, alternative financing arrangements may be required for certain
facilities. A growing trend in the correctional and detention industry requires
private operators to make capital investments in new facilities and enter into
direct financing arrangements in connection with the development of such
facilities. By participating in such projects, private operators achieve
economic benefits and tax advantages that are not typically available in
connection with more traditional arrangements.
MARKETING
The Company views governmental agencies responsible for state correctional
facilities in the United States and governmental agencies responsible for
correctional facilities in the United Kingdom and Australia as its primary
potential customers. The Company's secondary customers include the INS, other
federal and local agencies in the United States and other foreign governmental
agencies.
Governmental agencies responsible for correctional and detention facilities
generally procure goods and services through RFPs. A typical RFP requires
bidders to provide detailed information, including, but not limited to,
descriptions of the following: the services to be provided by the bidder, its
experience and qualifications, and the price at which the bidder is willing to
provide the services (which services may include the renovation; improvement or
expansion of an existing facility; or the planning, design and construction of
a new facility). As part of the Company's process of responding to RFPs,
management meets with appropriate personnel from the requesting agency to best
determine the prospective client's distinct needs.
If the project fits within the Company's strategy, the Company then will submit
a written response to the RFP. The Company estimates that it typically spends
between $10,000 and $150,000 when responding to an RFP. The Company has engaged
and intends in the future to engage independent consultants. Activities of the
independent consultants include assisting the Company in developing
privatization opportunities and in responding to RFPs, monitoring the
legislative and business climate and maintaining relationships with existing
clients.
There are several critical events in the marketing process. These include
issuance of an RFP by a governmental agency, submission of a response to the
RFP by the Company, the award of a contract by a governmental agency and the
commencement of construction or management of a facility. The Company's
experience has been that a period of approximately five to ten weeks is
generally required from the issuance of an RFP to the submission of the
Company's response to the RFP; that between one and four months elapse between
the submission of the Company's response and the agency's award for a contract;
and that between one and four months elapse between the award of a contract and
the commencement of construction or management of the facility. If the facility
for which an award has been made must be constructed, the Company's experience
is that construction usually takes between 9 and 24 months; therefore,
management of a newly constructed facility typically commences between 10 and
28 months after the governmental agency's award.
BUSINESS PROPOSALS
The Company pursues both domestic and international projects. At January 3,
1999, the Company had outstanding written responses to RFPs for 9 projects with
a total of 4200 beds. The Company also is pursuing prospects for other projects
for which it has not yet submitted, and may not submit, a response to an RFP.
No assurance can be given that the Company will be successful in its efforts to
receive additional awards with respect to any proposals submitted.
INSURANCE
Presently, the Company is named insured under a liability insurance program
maintained by TWC (the "Insurance Program"). The Insurance Program includes
general comprehensive liability, automobile liability and workers'
PAGE 12 of 26
<PAGE> 13
compensation coverage for TWC and all of its domestic subsidiaries. The
Insurance Program consists of primary and excess insurance coverage. The
primary coverage consists of up to $5 million of coverage per occurrence with
no aggregate coverage limit. The excess coverage consists of up to $50 million
of coverage per occurrence and in the aggregate. The Company believes such
limits are adequate to insure against the various liability risks of its
business. The premium to be paid by the Company to TWC for coverage under the
Insurance Program in 1998 was approximately $7.4 million, representing premiums
paid to a captive reinsurance company that is wholly owned by TWC. The Company
believes that the premiums it is charged under the Insurance Program are less
than those that would be charged by a third party insurer. The facility
management contracts and various state statutes require the Company to maintain
such insurance and the management contracts provide that the contracting agency
may terminate the contract if the Company fails to maintain the required
insurance coverages. Under the Insurance Program, the first $2 million of
costs, expenses, and losses per occurrence during the first half of 1998, and
the first $1 million of costs, expenses, and losses per occurrence during the
second half of 1998 were reinsured by TWC's wholly-owned captive reinsurance
company. During fiscal 1999, the first $1 million of costs, expenses, and
losses per occurrence are reinsured by TWC's wholly-owned captive reinsurance
company.
EMPLOYEES AND EMPLOYEE TRAINING
At January 3, 1999, the Company had 8,000 full-time employees. Of such full-time
employees, 62 were employed at the Company's headquarters and 7,938 were
employed at facilities. The Company employs management, administrative and
clerical, security, educational services, health services and general
maintenance personnel. The Company's correctional officer employees at Queens
Private Correctional Facility (New York) and Junee Correctional Centre, Arthur
Gorrie Correctional Centre, Fulham Correctional Centre and Immigration Detention
Services (Australia) are members of unions. The Company has entered into a
contract with the union for the correctional officers at the Queens Private
Correctional Facility and Junee facility, however, the Company has not entered
into a contract with the other two unions. Other than the contracts described
above, the Company has no union contracts or collective bargaining agreements.
The Company believes its relations with its employees are good.
Under the laws applicable to most of the Company's operations, and internal
Company policy, the Company's corrections officers are required to complete a
minimum amount of training prior to employment. At least 160 hours of training
by the Company is required under most state laws before an employee is allowed
to work in a position that will bring him or her in contact with inmates.
Florida law requires that the correction officers receive 520 hours of
training. The Company's training programs meet or exceed all applicable
requirements.
The Company's training begins with approximately 40 hours of instruction
regarding Company policies, operational procedures and management philosophy.
Training continues with an additional 120 hours of instruction covering legal
issues, rights of inmates, techniques of communication and supervision,
interpersonal skills and job training relating to the particular position to be
held. Each Company employee who has contact with inmates receives a minimum of
40 hours of additional training each year, and each manager receives at least
24 hours of training each year.
At least 222 hours of training is required for United Kingdom employees and 240
hours of training is required for Australian employees before such employees
are allowed to work in positions that will bring them into contact with
inmates. Company employees in the United Kingdom and Australia receive a
minimum of 40 hours of additional training each year.
COMPETITION
The Company competes primarily on the basis of the quality and range of
services offered, its experience (both domestically and internationally) in the
design, construction and management of privatized correctional and detention
facilities, and its reputation. The Company competes with a number of
companies, including, but not
PAGE 13 of 26
<PAGE> 14
limited to, Corrections Corporation of America, Correctional Services
Corporation, Group 4 International Corrections Service, U.K. Detention
Services, Ltd., and Cornell Corrections Corporation. Some of the Company's
competitors are larger and have greater resources than the Company. The Company
also competes in some markets with small local companies that may have a better
knowledge of the local conditions and may be better able to gain political and
public acceptance. Potential competitors can enter the Company's business
without substantial capital investment or experience in management of
correctional or detention facility experience. In addition, in some markets,
the Company may compete with governmental agencies that are responsible for
correctional facilities.
NON-U.S. OPERATIONS
Although most of the operations of the Company are within the United States,
its international operations make a significant contribution to income.
International operations of the Company provide correctional and detention
facilities management in Australia and the United Kingdom.
A summary of domestic and international operations is presented below:
<TABLE>
<CAPTION>
---------------- ---------------- ----------------
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
REVENUES
Domestic operations................... $ 264,642 $ 167,223 $ 108,245
International operations.............. 48,117 39,707 29,539
---------------- ---------------- ----------------
Total revenues..................... $ 312,759 $ 206,930 $ 137,784
================ ================ ================
OPERATING INCOME
Domestic operations................... $ 18,649 $ 12,388 $ 7,087
International operations.............. 3,852 4,157 2,644
---------------- ---------------- ----------------
Total operating income............. $ 22,501 $ 16,545 $ 9,731
================ ================ ================
LONG-LIVED ASSETS
Domestic operations................... $ 32,218 $ 34,061 $ 18,418
International operations.............. 4,061 4,693 557
---------------- ---------------- ----------------
Total long-lived assets............ $ 36,279 $ 38,754 $ 18,975
================ ================ ================
</TABLE>
The Company has affiliates (50% or less owned) that provide correctional and
detention facilities management in the United Kingdom. The following table (in
thousands) summarizes certain financial information pertaining to these
unconsolidated foreign affiliates, on a combined basis, for the last three
fiscal years.
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues.................................... $ 91,071 $ 51,009 $ 28,953
Operating income (loss)..................... 7,032 3,884 1,764
Net income (loss) .......................... 4,163 2,209 1,208
BALANCE SHEET DATA
Current Assets.............................. $ 25,274 $ 14,595 $ 13,145
Noncurrent Assets........................... 145,433 517 538
Current liabilities......................... 17,769 8,115 8,518
Noncurrent liabilities...................... 141,165 4,029 5,075
Stockholders' equity........................ 11,773 2,968 90
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
PAGE 14 of 26
<PAGE> 15
BUSINESS REGULATIONS AND LEGAL CONSIDERATIONS
The industry in which the Company operates is subject to national, federal,
state, and local regulations in the United States, United Kingdom, Australia
and Puerto Rico which are administered by a variety of regulatory authorities.
Generally, prospective providers of corrections services must be able to detail
their readiness to, and must comply with, a variety of applicable state and
local regulations, including education, health care and safety regulations. The
Company's contracts frequently include extensive reporting requirements and
require supervision and on-site monitoring by representatives of contracting
governmental agencies. The Company's Kyle New Vision Chemical Dependency
Treatment Center is licensed by the Texas Commission on Alcohol and Drug Abuse
to provide substance abuse treatment. Certain states, such as Florida and
Texas, deem correctional officers to be peace officers and require Company
personnel to be licensed and subject to background investigation. State law
also typically requires corrections officers to meet certain training
standards.
In addition, many state and local governments are required to enter into a
competitive bidding procedure before awarding contracts for products or
services. The laws of certain jurisdictions may also require the Company to
award subcontracts on a competitive basis or to subcontract with businesses
owned by women or members of minority groups.
The failure to comply with any applicable laws, rules or regulations or the
loss of any required license could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
the current and future operations of the Company may be subject to additional
regulations as a result of, among other factors, new statutes and regulations
and changes in the manner in which existing statutes and regulations are or may
be interpreted or applied. Any such additional regulations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters office space in Palm Beach
Gardens, Florida, from TWC. In addition, the Company leases office space for
its regional offices in Austin, Texas; Irvine, California; Lake Charles,
Louisiana; and Sydney, Australia.
The Company also leases the space for the following facilities it manages under
operating leases: (i) North Texas Intermediate Sanction Facility; (ii) Central
Texas Parole Violator Facility; (iii) Central Valley Community Correctional
Facility; (iv) Desert View Community Correctional Facility; (v) Golden State
Community Correctional Facility; (vi) Lea County Correctional Facility; (vii)
Karnes County Correctional facility; (viii) Broward Work Release Center; (ix)
Aurora INS Processing Center; (x) Queens Private Correctional Facility; (xi)
McFarland Community Correctional Facility; (xii) Lawton Correctional Facility;
(xiii) Jena Juvenile Justice Center; and (xiv) Coke County Juvenile Justice
Center.
In December 1997, the Company entered into a $220 million operating lease
facility that was established to acquire and develop new correctional
institutions used in its business. As a condition of this facility, the Company
unconditionally agreed to guarantee certain obligations of First Security Bank,
N.A., a party to the aforementioned operating lease facility. As of January 3,
1999, approximately $100.9 million of this operating lease facility was utilized
for properties under development.
On April 28, 1998, Correctional Properties Trust ("CPV"), a Maryland real estate
investment trust, sold 6.2 million shares of common stock at $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 the Company. These facilities were then leased back to the Company
under operating leases. The Company received approximately $42 million for the
three facilities owned by it and for its right to acquire four of the other five
facilities realizing a profit of $18 million, which will
PAGE 15 of 26
<PAGE> 16
be amortized over the ten-year lease term. The eighth facility was purchased
directly from a government entity. CPV was also granted the option to acquire
three additional correctional facilities then under development by the Company
and the fifteen-year right to acquire and lease back future correctional and
detention facilities developed or acquired by the Company. On October 30, 1998,
CPV acquired the completed portion of one of the option facilities for $26
million.
The Company owns an 86-bed psychiatric hospital in Fort Lauderdale, Florida
which it purchased and renovated in 1997.
ITEM 3. LEGAL PROCEEDINGS
On August 31, 1995, the Company was joined as an indispensable party in an
action filed by the Delaware County Prison Employees Independent Union (the
"Union") in the Court of Common Pleas of Delaware County, Pennsylvania. The
action questioned the Delaware County Board of Prison Inspectors' (the "Board")
authority under a contract between the Union and the Board to award the
contract to manage the existing Delaware County Prison to the Company. This
action was resolved in the Company's favor in fiscal 1998.
Except for the litigation set forth above and routine litigation incidental to
the business of the Company, there are no pending material legal proceedings to
which the Company or any of its subsidiaries is a party or to which any of
their property is subject. The Company believes that the outcome of the
proceedings to which it is currently a party will not have a material adverse
effect upon its operations or financial condition. The nature of the Company's
business results in claims or litigation against the Company for damages
arising from the conduct of its employee or others.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PAGE 16 of 26
<PAGE> 17
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
George R. Wackenhut 79 Chairman of the Board and Director
George C. Zoley 49 Vice Chairman of the Board, Chief Executive Officer, and Director
Wayne H. Calabrese 48 President and Chief Operating Officer
John G. O'Rourke 48 Senior Vice President, Chief Financial Officer, and Treasurer
Carol M. Brown 44 Senior Vice President, Health Services
Robert W. Mianowski 48 Senior Vice President, Operations
Patricia McNair Persante 49 Senior Vice President, Contract Compliance
David N.T. Watson 33 Controller, Chief Accounting Officer, and Assistant Treasurer
</TABLE>
GEORGE R. WACKENHUT is the Chairman of the Board. He is also the Chief
Executive Officer of The Wackenhut Corporation ("TWC") and a Trustee of
Correctional Properties Trust ("CPV"). He was President of TWC from the time it
was founded until April 26, 1986. He formerly was a Special Agent of the Federal
Bureau of Investigation. He is a former member of the Board of Directors of SSJ
Medical Development, Inc., Miami, Florida, and is on the Dean's Advisory Board
of the University of Miami School of Business. He is on the National Council of
Trustees, Freedoms Foundation at Valley Forge, the President's Advisory Council
for the Small Business Administration, Region IV, and a member of the National
Board of the National Soccer Hall of Fame. He is a past participant in the
Florida Governor's War on Crime and a past member of the Law Enforcement
Council, National Council on Crime and Delinquency, and the Board of Visitors of
the U.S. Army Military Police School. He is also a member of the American
Society for Industrial Security. He was a recipient in 1990 of the Labor Order
of Merit, First Class, from the government of Venezuela. Mr. Wackenhut received
his B.S. degree from the University of Hawaii and his M.Ed. degree from John
Hopkins University.
GEORGE C. ZOLEY has served as Vice Chairman of the Board since January
1997. Previously he had served as President and Director of the Company since
it was incorporated in 1988, and Chief Executive Officer since April, 1994. Dr.
Zoley established the correctional division for TWC in 1984 and was, and
continues to be, a major factor in the company's development of its privatized
correctional and detention facility business. Dr. Zoley is also a director of
each of the entities through which the Company conducts its international
operations and a Trustee of CPV. From 1981 through 1988, as manager, director,
and then Vice President of Government Services of Wackenhut Services, Inc.
("WSI"), Dr. Zoley was responsible for the development of opportunities in the
privatization of government services by WSI. Currently Dr. Zoley serves as a
Senior Vice President of The Wackenhut Corporation. Prior to joining WSI, Dr.
Zoley held various administrative and management positions for city and county
governments in South Florida. Dr. Zoley holds Masters and Doctorate degrees in
Public Administration.
WAYNE H. CALABRESE has served as President since January 1997, Chief
Operating Officer since January 1996, a director of the Company since April,
1998, and as Executive Vice President of the Company from 1994 to 1996. Mr.
Calabrese is also a director of each of the entities through which the Company
conducts its international operations. Mr. Calabrese served as Chief Executive
Officer of Australasian Correctional Management, Pty Ltd., a subsidiary of the
Company, from 1991 until he returned to the United States in 1994. Mr.
Calabrese joined the Company as Vice President, Business Development in 1989,
became Executive Vice President in 1994 and became Chief Operating Officer in
1996. Mr. Calabrese's prior experience in the public sector includes positions
as Assistant City Law Director in Akron, Ohio; and Assistant County Prosecutor,
and later, Chief of the County Bureau of Support for Summit County, Ohio. Mr.
Calabrese was also Legal Counsel
PAGE 17 of 26
<PAGE> 18
and Director of Development for the Akron Metropolitan Housing Authority. Prior
to joining the Company, Mr. Calabrese was engaged in the private practice of
law as a partner in the Akron law firm of Calabrese, Dobbins and Kepple.
JOHN G. O'ROURKE has served as Chief Financial Officer and Treasurer
of the Company since April, 1994, and has been the Senior Vice President,
Finance of the Company since June, 1991. Prior to joining the Company Mr.
O'Rourke spent twenty years as an officer in the United States Air Force where
his most recent position was as the Strategic Division Chief in the Office of
the Secretary of the Air Force, responsible for acquisitions and procurement
matters for strategic bomber aircraft.
CAROL M. BROWN has served as Senior Vice President, Health Services of
the Company since August, 1990, and as President of the Company's healthcare
subsidiary, Atlantic Shores Healthcare, Inc., since April 1997. Ms. Brown is a
certified specialist in correctional health care management. From 1988 until
joining the Company Ms. Brown was a Consultant for medical case management and
workers' compensation in South Florida for Health and Rehabilitation
Management, Inc. From 1987 to 1988, Ms. Brown was Medical Manager for Metlife
Healthcare of South Florida. Ms. Brown was an Administrator for health care
services for Medical Personnel Pool, Inc. from 1985 to 1987 and for Upjohn
Healthcare from 1981 to 1985.
ROBERT W. MIANOWSKI has served as the Senior Vice President,
Operations of the Company since May, 1990. From May, 1988, until joining the
Company, Mr. Mianowski was Criminal Prosecuting Attorney for the City of
Cuyahoga Falls, Ohio, Department of Law, and was previously in private law
practice. Mr. Mianowski's career as practicing attorney was preceded by
fourteen (14) years in the field of law enforcement, having served as a law
enforcement officer in several Ohio municipalities, and as Chief of Police of
Boston Heights, Ohio, from 1984 to 1986.
PATRICIA MCNAIR PERSANTE has served as Senior Vice President, Contract
Compliance of the Company since February, 1995 and was Vice President, Contract
Compliance of the Company from 1990 to February 1995. From 1988 until joining
the Company, Ms. Persante was engaged in private law practice with the San
Antonio law firm of Smith, Barshop, Stoffer & Millsap. From 1983 to 1988, Ms.
Persante was Assistant Criminal District Attorney for Bexar County, Texas.
DAVID N.T. WATSON has served as Controller and Assistant Treasurer of
the Company since November, 1994 and also serves as the Company's Chief
Accounting Officer. From 1989 until joining the Company, Mr. Watson was with
the Miami office of Arthur Andersen LLP where his most recent position was
Manager, in the Audit and Business Advisory Services Group. Mr. Watson has a
B.A. in Economics from the University of Virginia and an M.B.A. from Rutgers,
the State University of New Jersey. Mr. Watson is a member of the American
Institute of Certified Public Accountants and the Florida Institute of
Certified Public Accountants.
PAGE 18 of 26
<PAGE> 19
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to Page 25
of the Registrant's 1998 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to Pages 26
and 27 of the Registrant's 1998 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by these items is incorporated by reference to Pages 28
through 33 of the Registrant's 1998 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to Pages 34
through 45 of the Registrant's 1998 Annual Report to Shareholders except for
the Financial Statement and Schedule listed in Item 14 (a)(2) of this Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PAGE 19 of 26
<PAGE> 20
PART III
The information required by Items 10, 11, 12, and 13 of Form 10-K (except such
information as is furnished in a separate caption "Executive Officers of the
Company" and included in Part I, hereto) will be contained in, and is
incorporated by reference from, the proxy statement (with the exception of the
Board Compensation Committee Report and the Performance Graph) for the
Company's 1999 Annual Meeting of Shareholders, which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this Annual Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Report of Independent Certified Public Accountants - This
item is incorporated by reference to Page 46 of the
Registrant's 1998 Annual Report to Shareholders.
The following consolidated financial statements of the
Company, included in the Registrant's 1998 Annual Report to
its Shareholders for the fiscal year ended January 3, 1999,
are incorporated by reference in Part II, Item 8:
Consolidated Balance Sheets - January 3, 1999 and December
28, 1997 - Page 35
Consolidated Statements of Income - Fiscal years ended
January 3, 1999, December 28, 1997 and December 29, 1996 -
Page 34
Consolidated Statements of Cash Flows - Fiscal years ended
January 3, 1999, December 28, 1997, and December 29, 1996 -
Page 37
Consolidated Statements of Shareholders' Equity and
Comprehensive Income - Fiscal years ended January 3, 1999,
December 28, 1997, and December 29, 1996 - Page 36
Notes to Consolidated Financial Statements - Pages 38
through 45
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II - Valuation and Qualifying Accounts - Page 25
All other schedules specified in the accounting regulations
of the Securities and Exchange Commission have been omitted
because they are either inapplicable or not required.
3. EXHIBITS. THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS
ANNUAL REPORT:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1** Amended and Restated Articles of Incorporation of the Company
dated May 16, 1994.
3.2** Bylaws of the Company.
4.1* Amended and Restated Credit Agreement, dated December 18, 1997,
by and among Wackenhut Corrections Corporation, NationsBank,
National Association, Scotia Banc, Inc. and the Lenders Party
thereto from time to time.
4.2* Amended and Restated Participation Agreement, dated June 19,
1997, among Wackenhut Corrections Corporation, First security
Bank, National Association, the Various Bank and other Lending
Institutions which are Partners thereto from time to time, Scotia
Banc Inc., and NationsBank, National Association.
PAGE 20 of 26
<PAGE> 21
4.3* Amended and Restated Lease Agreement, dated as of June 19, 1997,
between First Security Bank, National Association and Wackenhut
Correction Corporation.
4.4* Guaranty and Suretyship Agreement, dated December 18, 1997, by
and among the Guarantors parties thereto and NationsBank,
National Association.
4.5* Third Amended and Restated Trust Agreement, dated as of June 19,
1997, among, NationsBank, National Association, and other
financial institutions parties thereto and First security Bank,
National Association.
10.2+** Wackenhut Corrections Corporation 1994 Stock Option Plan.
10.3+** Form of Indemnification Agreement between the Company and its
Officers and Directors.
10.4+** Wackenhut Corrections Corporation Senior Officer Retirement Plan.
10.5+** Wackenhut Corrections Corporation Director Deferral Plan.
10.6+** Wackenhut Corrections Corporation Senior Officer Incentive Plan.
10.7 Services Agreement dated as of January 3, 1994 between the
Company and TWC (incorporated by reference to Exhibit 10.4 of the
Company's Registration Statement on Form S-1, as amended,
Registration Number 33-79264).
10.8*** Services Agreement effective as of January 1, 1996 between the
Company and TWC.
10.9 Lease Agreement effective as of January 3, 1994 between the
Company and TWC (incorporated by reference to Exhibit 10.5 of the
Company's Registration Statement on Form S-1, as amended,
Registration Number 33-79264)
10.10 Revolving Credit Facility Agreement dated December 12, 1994
between the Company and Barnett Bank of South Florida, N.A.
(incorporated by reference to Exhibit 10.106 of the Company's
Annual Report on Form 10-K for the Fiscal Year ended January 1,
1995).
10.11**** Form of Master Agreement to Lease between CPT Operating
Partnership L.P. and Wackenhut Corrections Corporation; Form of
Lease Agreement between CPT Operating Partnership L.P. and
Wackenhut Corrections Corporation; Form Right to Purchase
Agreement between Wackenhut Corrections Corporation and CPT
Operating Partnership L.P.; and, Form of Option Agreement between
Wackenhut Corrections Corporation and CPT Operating Partnership
L.P.
13.0 Annual Report to Shareholders for the year ended January 3, 1999,
beginning with page 25 (to be deemed filed only to the extent
required by the instructions to exhibits for reports on this Form
10-K).
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Certified Public Accountants.
24.1* Powers of Attorney (included as part of the signature page
hereto).
27.1 Financial Data Schedule (For SEC use only).
- --------------
* Filed herewith.
** Incorporated herein by reference to exhibit of the same number filed in the
Company's Registration Statement, as amended, on Form S-1 (Registration Number
33-79264)
***Incorporated herein by reference to exhibit of the same number filed in the
Company's Registration Statement, as amended, on Form S-1 (Registration Number
33-80785)
****Incorporated by reference to Exhibits 10.2, 10.3, 10.4, and 10.5 of the
Company's Registration Statement on Form S-3 (Registration Number 333-46681).
+ Management contract or compensatory plan, contract or agreement as
defined in Item 402(a) (3) of Regulation S-K.
(b) Reports on Form 8-K. The Company did not file a current report on Form
8-K during the fourth quarter of fiscal year 1998.
- -----------------------------------
PAGE 21 of 26
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
WACKENHUT CORRECTIONS CORPORATION
/s/ John G. O'Rourke
Date: April 2, 1999 ------------------------------
JOHN G. O'ROURKE
Senior Vice President - Finance,
Treasurer & Chief Financial Officer
Each person whose signature appears below hereby constitutes and appoints John
G. O'Rourke, Senior Vice President -- Finance, Treasurer and Chief Financial
Officer; David N.T. Watson, Controller, Chief Accounting Officer and Assistant
Treasurer; James P. Rowan, General Counsel; and Francis E. Finizia, Corporate
Counsel and Assistant Secretary; and each of them, the true and lawful
attorneys-in-fact and agents of the undersigned, with full power undersigned, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, and hereby
grants to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Date: April 2, 1999 /s/ George C. Zoley
------------------------------
GEORGE C. ZOLEY
Vice Chairman of the Board and
Chief Executive Officer
(principal executive officer)
Date: April 2, 1999 /s/ John G. O'Rourke
------------------------------
JOHN G. O'ROURKE
Senior Vice President -- Finance,
Treasurer & Chief Financial Officer
(principal financial officer)
Date: April 2, 1999 /s/ David N.T. Watson
------------------------------
DAVID N.T. WATSON
Controller, Chief Accounting Officer,
& Assistant Treasurer
(principal accounting officer)
Date: April 2, 1999 /s/ George R. Wackenhut
------------------------------
GEORGE R. WACKENHUT
Director
Date: April 2, 1999 /s/ Richard R. Wackenhut
------------------------------
RICHARD R. WACKENHUT
Director
Date: April 2, 1999 /s/ Wayne H. Calabrese
------------------------------
WAYNE H. CALABRESE
Director
PAGE 22 of 26
<PAGE> 23
Date: April 2, 1999 /s/ NORMAN A. CARLSON
------------------------------
NORMAN A. CARLSON
Director
Date: April 2, 1999 /s/ BENJAMIN R. CIVILETTI
------------------------------
BENJAMIN R. CIVILETTI
Director
Date: April 2, 1999 /s/ MANUEL J. JUSTIZ
------------------------------
MANUEL J. JUSTIZ
Director
Date: April 2, 1999 /s/ JOHN F. RUFFLE
------------------------------
JOHN F. RUFFLE
Director
Date: April 2, 1999 /s/ RICHARD H. GLANTON
------------------------------
RICHARD H. GLANTON
Director
PAGE 23 of 26
<PAGE> 24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Wackenhut Corrections
Corporation's 1998 Annual Report to Shareholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated February 9, 1999. Our
audits were made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The schedule listed above in item 14(a)2
of the Corporation's Annual Report on Form 10-K for the fiscal year ended
January 3, 1999 is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida
February 9, 1999
PAGE 24 of 26
<PAGE> 25
SCHEDULE II
WACKENHUT CORRECTIONS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED, JANUARY 3, 1999, DECEMBER 28, 1997, AND
DECEMBER 29, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------- -------------- - -------------- -- -------------- -- -------------- -- -------------
BALANCE AT CHARGED TO CHARGED DEDUCTIONS, BALANCE AT
BEGINNING COST AND TO OTHER ACTUAL END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS CHARGE-OFFS PERIOD
----------- -------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 3, 1999:
Allowance for doubtful accounts..... $ 627 $ 4,278 $ -- $ (1,121) $ 3,784
YEAR ENDED DECEMBER 28, 1997:
Allowance for doubtful accounts...... $ -- $ 1,745 $ -- $ (1.118) $ 627
YEAR ENDED DECEMBER 29, 1996:
Allowance for doubtful accounts...... $ -- $ -- $ -- $ -- $ --
</TABLE>
PAGE 25 of 26
<PAGE> 26
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ----------------- ---------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the
Company dated May 16, 1994.
4.1 Amended and Restated Credit Agreement, dated December 18,
1997, by and among Wackenhut Corrections Corporation,
NationsBank, National Association, Scotia Banc, Inc. and
the Lenders Party thereto from time to time.
4.2 Amended and Restated Participation Agreement, dated June
19, 1997, among Wackenhut Corrections Corporation, First
security Bank, National Association, the Various Bank and
other Lending Institutions which are Partners thereto from
time to time, Scotia Banc Inc., and NationsBank, National
Association.
4.3 Amended and Restated Lease Agreement, dated as of June 19,
1997, between First Security Bank, National Association
and Wackenhut Correction Corporation.
4.4 Guaranty and Suretyship Agreement, dated December 18,
1997, by and among the Guarantors parties thereto and
NationsBank, National Association.
4.5 Third Amended and Restated Trust Agreement, dated as of
June 19, 1997, among, NationsBank, National Association,
and other financial institutions parties thereto and First
security Bank, National Association.
3.2 Bylaws of the Company.
10.1 Wackenhut Corrections Corporation Stock Option Plan.
10.2 Wackenhut Corrections Corporation 1994 Stock Option Plan.
10.3 Form of Indemnification Agreement between the Company and
its Officers and Directors.
10.4 Wackenhut Corrections Corporation Senior Officer
Retirement Plan.
10.5 Wackenhut Corrections Corporation Director Deferral Plan.
10.6 Wackenhut Corrections Corporation Senior Officer Incentive
Plan.
10.7 Services Agreement dated as of January 3, 1994 between the
Company and TWC (incorporated by reference to Exhibit 10.4
of the Company's Registration Statement on Form S-1, as
amended, Registration Number 33-79264).
10.8 Services Agreement effective as of January 1, 1996 between
the Company and TWC.
10.9 Lease Agreement effective as of January 3, 1994 between
the Company and TWC (incorporated by reference to Exhibit
10.5 of the Company's Registration Statement on Form S-1,
as amended, Registration Number 33-79264)
10.10 Revolving Credit Facility Agreement dated December 12,
1994 between the Company and Barnett Bank of South
Florida, N.A. (incorporated by reference to Exhibit 10.106
of the Company's Annual Report on Form 10-K for the Fiscal
Year ended January 1, 1995).
10.11 Form of Master Agreement to Lease between CPT Operating
Partnership L.P. and Wackenhut Corrections Corporation;
Form of Lease Agreement between CPT Operating Partnership
L.P. and Wackenhut Corrections Corporation; Form Right to
Purchase Agreement between Wackenhut Corrections
Corporation and CPT Operating Partnership L.P.; and, Form
of Option Agreement between Wackenhut Corrections
Corporation and CPT Operating Partnership L.P.
13.0 Annual Report to shareholders for the year ended January 3,
1999, beginning with page 25 (to be deemed filed only to
the extext required by the instructions to exhibits for
reports on this Form 10-K).
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Certified Public Accountants.
24.1 Powers of Attorney. (included as part of the signature page
hereto).
PAGE 26 of 26
<PAGE> 1
EXHIBIT 13
FINANCIAL
REVIEW
WACKENHUT CORRECTIONS CORPORATION
Market for the Company's Common Equity and Related Shareholder Matters
The ensuing table shows the high and low prices for Wackenhut Corrections
Corporation's ("the Company") common stock, as reported by the New York Stock
Exchange, for each of the four quarters of Fiscal 1998 and 1997. The prices
shown have been rounded to the nearest $1/16th. The approximate number of
shareholders of record as of February 26, 1999, was 278.
1998 1997
- --------------------------------------------------------------------------------
Quarter High Low High Low
- --------------------------------------------------------------------------------
FIRST $ 30-7/8 $ 21-15/16 $ 22-1/4 $15-3/4
SECOND 28-13/16 23-5/16 29-9/16 15-7/8
THIRD 24-1/16 15 30 24-1/8
FOURTH 29 18-1/8 35-1/4 21-13/16
- --------------------------------------------------------------------------------
The Company intends to retain its earnings to finance the growth and development
of its business and does not anticipate paying cash dividends on its capital
stock in the foreseeable future. Future dividends, if any, will depend, among
other things, on the future earnings, capital requirements and financial
condition of the Company, and on such other factors as the Company's Board of
Directors may consider relevant.
Due to the softening stock market, the Company actively pursued its stock
buy-back program in open market and block purchases. During the 1998 fiscal
year, the Company purchased 453,500 shares of its common stock at an average
price of $19.52 per share and accounted for the transactions using the treasury
stock method.
FORWARD-LOOKING STATEMENTS
The management's discussion and analysis of financial condition and results of
operations, corporate profile, letter to shareholders, and the February 18, 1999
press release (as amended February 19, 1999) contain forward-looking statements
that are based on current expectations, estimates and projections about the
industry 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," and variations 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 risk 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.
These statements are marked: *.
<PAGE> 2
WACKENHUT CORRECTIONS CORPORATION
Selected Financial Data
(In thousands, except per share and operational data)
The selected consolidated financial data should be read in conjunction with the
Company's consolidated financial statements and the notes thereto.
FISCAL YEARS ENDED: (1) 1998
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Revenues $ 312,759 100.0%
Operating income 22,501 7.2%
Income before cumulative effect of change in
accounting for start-up costs 16,828 5.4%
Cumulative effect of change in accounting for
start-up costs (11,528) (3.7%)
-----------------
Net income $ 5,300 1.7%
- --------------------------------------------------------------------------------
EARNINGS PER SHARE - BASIC:
Income before cumulative effect
of change in accounting for start-up costs $ 0.76
Cumulative effect of change in accounting
for start-up costs (0.52)
---------
Net income $ 0.24
- --------------------------------------------------------------------------------
EARNINGS PER SHARE - DILUTED:
Income before cumulative effect of change
in accounting for start-up costs $ 0.74
Cumulative effect of change in accounting
for start-up costs (0.51)
---------
Net income $ 0.23
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 22,119
Diluted 22,683
- --------------------------------------------------------------------------------
FINANCIAL CONDITION:
Current assets 94,464
Current liabilities 31,419
Total assets 151,282
Total debt 213
Shareholders' equity 102,940
- --------------------------------------------------------------------------------
OPERATIONS DATA:
Contracts 52
Facilities in operation 40
Design capacity of contracts 35,707
Design capacity of facilities in operation 26,651
Compensated resident days (2) 7,678,858
- --------------------------------------------------------------------------------
(1) The Company's fiscal year ends on the Sunday closest to the calendar
year end. Fiscal 1998 included 53 weeks. Fiscal 1997, 1996, 1995 and
1994 each included 52 weeks.
(2) Compensated resident days are calculated as follows: (a) per diem rate
facilities - the number of beds occupied by residents on a daily basis
during the fiscal year and, (b) fixed rate facilities - the design
capacity of the facility multiplied by the number of days the facility
was in operation during the fiscal year. Amounts exclude compensated
resident days for United Kingdom facilities.
<PAGE> 3
<TABLE>
<CAPTION>
1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 206,930 100.0% $ 137,784 100.0% $ 99,431 100.0% $ 84,026 100.0%
16,545 8.0% 9,731 7.1% 7,229 7.3% 4,446 5.3%
11,875 5.7% 8,261 6.0% 4,440 4.5% 2,193 2.6%
-- 0.0% -- 0.0% -- 0.0% -- 0.0%
- ------------------------------------------------------------------------------------------------------------
$ 11,875 5.7% $ 8,261 6.0% $ 4,440 4.5% $ 2,193 2.6%
- ------------------------------------------------------------------------------------------------------------
$ 0.54 $ 0.39 $ 0.26 $ 0.15
-- -- -- --
- ------------------------------------------------------------------------------------------------------------
$ 0.54 $ 0.39 $ 0.26 $ 0.15
- ------------------------------------------------------------------------------------------------------------
$ 0.52 $ 0.37 $ 0.25 $ 0.15
-- -- -- --
- ------------------------------------------------------------------------------------------------------------
$ 0.52 $ 0.37 $ 0.25 $ 0.15
- ------------------------------------------------------------------------------------------------------------
22,015 21,361 16,850 16,370
22,697 22,128 17,708 17,403
- ------------------------------------------------------------------------------------------------------------
75,172 75,313 22,353 18,225
23,946 13,183 8,898 8,031
139,203 106,811 38,840 30,333
225 237 991 1,422
102,295 87,969 25,229 19,727
- ------------------------------------------------------------------------------------------------------------
46 34 24 22
32 19 16 15
30,144 24,371 16,054 13,732
20,720 12,235 9,135 7,164
5,192,614 3,585,100 2,350,843 2,090,625
- ------------------------------------------------------------------------------------------------------------
</TABLE>
WACKENHUT CORRECTIONS CORPORATION
Management's Discussion and
Analysis of Financial Condition
and Results of Operations
Introduction
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the consolidated financial statements and
notes thereto.
Overview
The Company, a 55% owned subsidiary of The Wackenhut Corporation ("TWC", NYSE:
WAK and WAKB), is a leader in offering government agencies a turnkey approach to
developing new correctional institutions that includes design, construction,
financing and operations. It provides a broad spectrum of correctional services,
which include adult corrections, juvenile facilities, community corrections and
special purpose institutions.
The company has contracts/awards to manage 52 facilities in North America, the
United Kingdom, South Africa, and Australia with a total of 35,707 beds, and
additional contracts for prisoner transportation, correctional health care
services, mental health services, and facility design and construction. On
November 1, the Company began management of the 350-bed South Florida State
Psychiatric Hospital representing a historic milestone for public sector mental
health services and a significant diversification of the Company's service
offerings.
During fiscal 1998, the Company adopted SOP (American Institute of Certified
Public Accountants Statement of Position) 98-5, "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 a result, the
Company recognized a pre-tax write-off of current and long-term deferred charges
of $19.5 million (or $11.5 million net of tax benefits or $0.51 per common
share) to record the cumulative effect of the change in accounting principle.
Financial Condition
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are from operations, borrowings
under its credit facilities, and sale of its rights to acquire prison
facilities. Cash and equivalents totaled $20.2 million at January 3, 1999,
compared to $29.0 million at December 28, 1997.
The Company has additional sources of liquidity in the form of a $30.0 million
multi-currency revolving credit facility, which includes $5.0 million for the
issuance of letters of credit. At January 3, 1999, six letters of credit were
outstanding in an aggregate amount of approximately $2.6 million in addition to
seven letters of guarantee amounting to approximately $3.2 million under a
separate Australian facility.
The Company also has a $220 million operating lease facility established to
acquire and develop new correctional institutions used in its business. As of
January 3, 1999, approximately $100.9 million of this operating lease facility
was utilized for properties under development.
On April 28, 1998, Correctional Properties Trust ("CPV"), a Maryland real estate
investment trust, sold 6.2 million shares of common stock at $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 the Company. These properties were then leased back to the Company
under operating leases. The Company received approximately $42 million for the
three facilities owned by it and for its right to acquire four of the other five
facilities and realized a profit on the sale of approximately $18 million,
deferred over the ten-year lease term. The eighth facility was purchased
directly from a government entity. CPV was also granted the option to acquire
three additional correctional facilities then under development by the Company
and the fifteen-year right to acquire and lease back future correctional and
detention facilities developed or acquired by the Company. On October 30, 1998,
CPV acquired the completed portion of one option facility for approximately $26
million, which was leased back to the Company under an operating lease.
Cash used in operating activities amounted to $14.0 million in 1998 versus cash
provided by operating activities of $21.4 million in 1997, primarily reflecting
an increase in accounts receivable.
Cash provided by investing activities amounted to $12.6 million in fiscal 1998,
including capital expenditures of approximately $24.5 million representing the
investment in facilities and purchases of
<PAGE> 4
equipment, offset by proceeds of $41.8 million from the sale of facilities to
CPV.
Cash used in financing activities in fiscal 1998 amounted to $6.9 million,
reflecting purchases of treasury stock of the Company of $8.9 million. Current
cash requirements consist of amounts needed for working capital; furniture,
fixtures, equipment, and supply purchases; investments in joint ventures; and
investments in facilities. Some of the Company's management contracts require
the Company to make substantial initial expenditures of cash in connection with
opening or renovating a facility. The initial expenditures subsequently are
fully or partially recoverable as pass-through costs or are billable as a
component of the "per diem" rates or monthly fixed fee to the contracting agency
over the original term of the contract.
The accumulated other comprehensive loss component of shareholders' equity
increased from a deficit of $2.2 million at December 28, 1997 to a deficit of
$3.1 million at January 3, 1999, primarily due to the decline in the value of
the Australian dollar relative to the United States dollar.
As a result of sales to CPV in 1998 and a public stock offering in 1996, the
Company significantly increased its borrowing capacity. In addition, management
believes that cash on hand, cash funds from operations and available lines of
credit will be adequate to support currently planned business expansion and
various obligations incurred in the operation of the Company's business, both on
a near and long-term basis.*
YEAR 2000 READINESS DISCLOSURE*
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.*
The year 2000 issue is the result of shortcomings in many electronic data
processing systems and other equipment that make operations beyond the year 1999
troublesome. The internal clocks in computers and other equipment will roll over
from "12/31/99" to "01/01/00" and programs and hardware, if not corrected, will
be unable to distinguish between the year 2000 and the year 1900. This may
result in processing data inaccurately or in stopping data processing
altogether.*
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. Based on current information, both of these phases have been
completed. The Company is at various stages in the three remaining phases:
renovation, validation and implementation. Renovation is the design of the
systems to be year 2000 compliant. Validation is testing the systems followed by
implementation.*
Implementation of the Company's year 2000 compliant financial 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.*
The Company has incurred and will continue to incur expenses related to year
2000 compliance. These costs include time and effort of internal staff and
consultants for renovation, validation and implementation, and computer and
embedded technology systems enhancements and/or replacements. The total costs,
funded from working capital and not considered material, for achieving year 2000
compliance, are estimated at approximately $0.5 million. Of the total estimated
amount, approximately $0.3 million will be capitalized and $0.2 million will be
expensed.*
This total estimated costs excludes payroll costs of internal staff related to
year 2000 compliance as the Company does not separately track such costs. In
addition, this total estimated amount to achieve year 2000 compliance excludes
the Company's total costs estimated to be incurred in previously planned new
systems. Implementation of these new systems has not been accelerated due to the
year 2000 problem. Deferral of other projects that would have a material effect
on operations has not been required, nor anticipated, as a result of the
Company's year 2000 efforts.*
The state of year 2000 readiness for third parties with whom the Company shares
a material relations, 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. The
Company is assessing its risk and full impact on operations should the most
reasonably likely worst case year 2000 scenario occur. In conjunction with this
assessment, the Company is developing contingency plans and expects to complete
them in 1999.*
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations during the past three fiscal years. While some
*See note on page 25 regarding forward-looking statements.
<PAGE> 5
of the Company's contracts include provisions for inflationary indexing, since
personnel costs represent the Company's largest expense in the facilities it
manages, inflation could have a substantial adverse effect on the Company'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
Company for its management services.*
MARKET RISK
The Company is exposed to market risks, including changes in interest rates and
currency exchange rates.
These exposures primarily relate to changes in interest rates with respect to a
$220 million operating lease facility (Note 6). Monthly lease payments under
this facility are indexed to a variable interest rate. Based upon the Company's
interest rate and foreign currency exchange rate exposure at January 3, 1999, a
10% change in the current interest rate or historical currency rate movements
would not have material effect on the Company's financial position or results of
operations over the next fiscal year.
Results of Operations
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto.
FISCAL 1998 COMPARED WITH FISCAL 1997
Revenues increased $105.8 million, or 51.1%, to $312.8 million in 1998 from
$206.9 million in 1997. Approximately $103.7 million of the increase in revenues
in 1998 compared with 1997 is attributable to increased compensated resident
days resulting from the opening of ten new domestic facilities in 1998 and
increased compensated resident days at thirteen facilities that opened in 1997
(see Table 1 below). The balance of the increase in revenues was attributable to
facilities open during all of both periods.
The number of compensated resident days in domestic and Australian facilities
increased to 7.7 million in 1998 from 5.2 million in 1997. Average facility
occupancy in domestic and Australian facilities remained at approximately 97%,
decreasing slightly to 96.6% of capacity in 1998 compared to 97.2% in 1997.
Operating expenses increased by 53.7% to $264.4 million in 1998 from $172.0
million in 1997 resulting from the new facilities opened in 1998 and 1997. As a
percentage of revenues, operating expenses increased to 84.5% from 83.1% due
primarily to lease payments to CPV. Start-up expenses increased to $7.5 million
in 1998 due to the opening of ten new domestic facilities during the year (see
Table 1) and the Company's implementation of SOP 98-5.
Depreciation and amortization decreased by 43.4% to $3.6 million in 1998 from
$6.3 million in 1997. This decrease results from the implementation of AICPA SOP
98-5 and the elimination of start-up cost amortization during the year.
Contribution from operations increased 30.6% to $37.4 million in 1998 from $28.6
million in 1997. As discussed above, this increase is due to new facilities
opened in 1998 and 1997. As a percentage of revenues, contribution from
operations decreased to 11.9% from 13.8% impacted by lease payments to CPV REIT
which commenced in April 1998 and the expensing of $7.5 million of start-up
costs, partially offset by the decrease in amortization expense.
General and administrative expenses increased by 23.2% to $14.9 million in 1998
from $12.1 million in 1997. This reflects increased business development
activities and additional infrastructure including expansion of the Company's
regional offices. General and administrative expenses decreased to 4.7% of total
revenues in 1998 from 5.8% in 1997.
Operating income increased by 36.0% to $22.5 million in 1998 from $16.5 million
in 1997 as result of the factors described above. As a percentage of revenue,
operating income decreased to 7.2% from 8.0% due to the factors impacting
contribution from operations offset by leveraging of overhead.
Interest income was $2.4 million in 1998 compared to interest income of $1.5
million in 1997, resulting from an increase in average invested cash related to
the sale of facilities to CPV and to the return on investment in overseas
projects.
Income before income taxes, equity in earnings of affiliates and cumulative
effect of change in accounting for start-up costs increased to $24.9 million in
1998 from $18.0 million in 1997 due to the factors described above.
Provision for income taxes increased to $10.2 million in 1998 from $7.2 million
in 1997 due to higher taxable income and an increase in the Company's effective
tax rate to 40.8% from 40.2% in 1997.
Equity in earnings of affiliates increased to $2.1 million in 1998 from $1.1
million in 1997. This increase is due to the opening of H.M. Prison Lowdam
Grange in February 1998, and improved operational performance.
Income before Cumulative Effect of Change in Accounting for Start-up Costs
increased 41.7% to $16.8 million in 1998 from $11.9 million in 1997 as a result
of the factors discussed above.
<PAGE> 6
Cumulative Effect of Change in Accounting for Start-up Costs, net of tax was
$11.5 million in 1998, representing the Company's adoption of SOP 98-5. On a
diluted basis, the cumulative effect of the change in accounting principle was
$0.51 per share.
Net income decreased by 55.4% to $5.3 million in 1998 from $11.9 million in 1997
resulting solely from the Company's implementation of SOP 98-5.
FISCAL 1997 COMPARED WITH FISCAL 1996
Revenues increased $69.1 million, or 50.2%, to $206.9 million in 1997 from
$137.8 million in 1996. The entire increase in 1997 revenues compared with 1996
is attributable to increased compensated resident days resulting from the
opening of thirteen new facilities in 1997 and increased compensated resident
days at three facilities that opened in 1996 (see Table 1 below).
The number of compensated resident days in domestic and Australian facilities
increased to 5.2 million in 1997 from 3.6 million in 1996. As a result of the
increase in compensated resident days, average facility occupancy in domestic
and Australian facilities increased to 97.2% of capacity in 1997 compared to
96.8% in 1996.
Operating expenses increased by 48.5% to $172.0 million in 1997 from $115.8
million in 1996. As a percentage of revenues, operating expenses decreased to
83.1% from 84.1% due to improving margins from the Company's Australian
operations.
Depreciation and amortization increased by 78.4% to $6.3 million in 1997 from
$3.5 million in 1996. This is due to the increase in capital and deferred charge
expenditures incurred by the thirteen facilities that opened in 1997, a full
year of depreciation and amortization for the facilities that opened in 1996,
and depreciation associated with the purchase of two facilities in 1997.
Contribution from operations increased 55.4% to $28.6 million in 1997 from $18.4
million in 1996. As discussed above, this increase is due to thirteen new
facilities that opened in 1997. As a percentage of revenues, contribution from
operations increased to 13.8% from 13.4%.
General and administrative expenses increased by 38.9% to $12.1 million in 1997
from $8.7 million in 1996. This reflects increased business development
activities in response to additional interest in the Company's services and
increased infrastructure related to current and future corporate growth. General
and administrative expenses decreased to 5.8% of total revenues in 1997 from
6.3% in 1996.
Operating income increased by 70% to $16.5 million in 1997 from $9.7 million in
1996 as a result of the factors described above. As a percentage of revenue,
operating income increased to 8.0% from 7.1% due primarily to the continued
leveraging of overhead.
Interest income was $1.5 million in 1997 compared to interest income of $2.2
million in 1996, resulting from a decrease in average invested cash as the
Company had deployed cash to select project opportunities and operations.
Income before income taxes and equity in earnings of affiliates increased to
$18.0 million in 1997 from $11.9 million in 1996 due to the factors described
above.
Provision for income taxes increased to $7.2 million in 1997 from $4.3 million
in 1996 due to higher taxable income and an increase in the Company's effective
tax rate.
Equity in earnings of affiliates increased to $1.1 million in 1997 from $604,000
in 1996. This increase is due to three expansions of the H.M. Prison Doncaster
(Doncaster, England) in November 1996, March 1997 and July 1997, and a full year
of operations for the two court escort contracts that commenced in May 1996.
Net income increased by 43.8% to $11.9 million in 1997 from $8.3 million in 1996
as a result of the factors described above.
<PAGE> 7
Table 1 :
The following table summarizes certain information with respect to facilities
opened by the Company (or a subsidiary or joint venture of the Company) during
fiscal years 1998, 1997, and 1996.
<TABLE>
<CAPTION>
FACILITY NAME COMPANY DESIGN FACILITY SECURITY OPENING RENEWAL
LOCATION ROLE CAPACITY TYPE LEVEL DATE TERM OPTION
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
CORRECTIONAL FACILITIES OPENED IN 1998:
Scott Grimes Correctional Design/ 600 State Prison Minimum/ January 1998 2 years Unlimited,
Facility Construction/ Medium Two-year
Newport, Arkansas Management
- ------------------------------------------------------------------------------------------------------------------------------------
Ronald McPherson Design/ 600 State Prison All Levels January 1998 2 years Unlimited,
Correctional Facility Construction/ Two-year
Newport, Arkansas Management
- ------------------------------------------------------------------------------------------------------------------------------------
Karnes County Management 579 County Jail All levels January 1998 Varies(1) Varies(1)
Correctional Center
Karnes City, Texas
- ------------------------------------------------------------------------------------------------------------------------------------
Broward County Work Design/ 300 Community Work Non- February 1998 5 years Unlimited,
Release Center Construction/ Release Center Secure Two-year
Broward County, FL Management
- ------------------------------------------------------------------------------------------------------------------------------------
H.M. Prison Lowdham Management 500 National Prison All levels February 1998 25 years None
Grange
Nottinghamshire, England
- ------------------------------------------------------------------------------------------------------------------------------------
Lea County Correctional Design/ 1,200 County Jail All levels May 1998 3 years Annual
Facility Construction/
Hobbs, New Mexico Management
- ------------------------------------------------------------------------------------------------------------------------------------
Lawton Correctional Design/ 1,500 State Prison Medium July 1998 1 year Four,
Facility Construction/ One-year
Lawton, Oklahoma Management
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware County Prison Design/ 1,562(2) County Jail All levels July 1998 5 years Unlimited,
Delaware County, Construction/ Facility Two-year
Pennsylvania Management
- ------------------------------------------------------------------------------------------------------------------------------------
Jena Juvenile Justice Design/ 276 Juvenile Center All levels December 1998 25 years None
Center Construction/
Jena, Louisiana Management
- ------------------------------------------------------------------------------------------------------------------------------------
Cleveland Correctional Management 520 State Prison Medium January 1999 1 year Four,
Center One-year
Cleveland, Texas
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER FACILITIES OPENED IN 1998:
South Florida State Design/ 350 State Psychiatric N/A November 5 years Three,
Hospital Construction/ Hospital 1998 Five-year
Management
- ------------------------------------------------------------------------------------------------------------------------------------
CORRECTIONAL FACILITIES OPENED IN 1997:
South Bay Correctional Design/ 1,318 State Prison Medium/ February 1997 3 years Unlimited,
Facility Construction/ Close Custody Two-year
South Bay, Florida Management
- ------------------------------------------------------------------------------------------------------------------------------------
Bayamon Correctional Design/ 500 Prison Medium March 1997 5 years One,
Facility Construction/ Five-year
Bayamon, Puerto Rico Consultation/
Management
- ------------------------------------------------------------------------------------------------------------------------------------
Travis County Design/ 1,000 State Jail Medium March 1997 5 years Automatic,
Community Justice Consultation/ Facility Unlimited,
Center Management Two-year
Travis County, Texas
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
FACILITY NAME COMPANY DESIGN FACILITY SECURITY OPENING RENEWAL
LOCATION ROLE CAPACITY TYPE LEVEL DATE TERM OPTION
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Queens Private Construction/ 200 INS Detention Minimum/ March 1997 1 year Four,
Correctional Facility Management Facility Medium One-year
Queens, New York
- ------------------------------------------------------------------------------------------------------------------------------------
Fulham Correctional Design/ 600 State Prison Minimum/ March 1997 5 years Five,
Centre Consultation/ Medium Three-year
Victoria, Australia Management
- ------------------------------------------------------------------------------------------------------------------------------------
Villawood Detention Management 300 Immigration All levels November 1997 3 years Two,
Centre Detention Three-year
Sydney, Australia
- ------------------------------------------------------------------------------------------------------------------------------------
Central Valley Design/ 550 State Community Medium December 1997 10 years None
Community Correctional Construction/ Correctional Facility
Facility Management
McFarland, California
- ------------------------------------------------------------------------------------------------------------------------------------
Desert View Community Design/ 568 State Community Medium December 1997 10 years None
Correctional Facility Construction/ Correctional Facility
Adelanto, California Management
- ------------------------------------------------------------------------------------------------------------------------------------
Golden State Community Design/ 550 State Community Medium December 1997 10 years None
Correctional Facility Construction/ Correctional Facility
McFarland, California Management
- ------------------------------------------------------------------------------------------------------------------------------------
Maribyrnong Detention Management 80 Immigration All levels December 1997 3 years Two,
Centre Detention Three-year
Melbourne, Australia
- ------------------------------------------------------------------------------------------------------------------------------------
Perth Detention Centre Management 40 Immigration All levels December 1997 3 years Two,
Perth, Australia Detention Three-year
- ------------------------------------------------------------------------------------------------------------------------------------
Port Hedland Detention Management 700 Immigration All levels December 1997 3 years Two,
Center Detention Three-year
Port Hedland, Australia
- ------------------------------------------------------------------------------------------------------------------------------------
Taft Correctional Management 2,048 Federal Low/ December 1997 3 years Seven,
Institution Prison Minimum One-year
Taft, California
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER FACILITIES OPENED IN 1997:
Atlantic Shores Hospital Management 86 Psychiatric N/A July 1997 N/A(3) N/A(3)
Hospital
- ------------------------------------------------------------------------------------------------------------------------------------
Pacific Shores Healthcare Management N/A Correctional All levels November 1997 3 years One,
Healthcare Two-year
- ------------------------------------------------------------------------------------------------------------------------------------
CORRECTIONAL FACILITIES OPENED IN 1996:
Delaware County Prison Design/ 1,000(2) County Jail All levels April 1996 3 years Unlimited,
Delaware County, Construction/ Facility Two-year
Pennsylvania Management
- ------------------------------------------------------------------------------------------------------------------------------------
Marshall County Design/ 1,000 State Prison Medium May 1996 5 years Unlimited,
Correctional Facility Construction/ Two-year
Marshall County, Management
Mississippi
- ------------------------------------------------------------------------------------------------------------------------------------
Willacy County Unit Design/ 1,000 State Jail Medium September 1996 1 year Four,
Raymondville, Texas Consultation/ Facility One-year
Management
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This facility is occupied by inmates under several contracts with varying
terms and renewal options. The terms of these contracts range from two weeks
to an indefinite period and the renewal option features range from no option
to unlimited renewals.
(2) The new 1,562-bed facility opened in 1998 replaced the existing 1,000-bed
facility managed by the Company.
(3) The Company provides services on an individual patient basis, therefore
there are no contracts with government agencies subject to terms and/or
renewals.
<PAGE> 9
WACKENHUT CORRECTIONS CORPORATION
Consolidated Statements of Income
(In thousands, except per share data)
FISCAL YEARS ENDED January 3, 1999, December 28, 1997, and December 29, 1996
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $ 312,759 $ 206,930 $ 137,784
OPERATING EXPENSES
(including amounts related to The Wackenhut Corporation
("TWC") of $8,182, $5,337, and $3,693) 264,381 172,031 115,848
START-UP EXPENSES 7,459 -- --
DEPRECIATION AND AMORTIZATION 3,567 6,303 3,532
--------- --------- ---------
CONTRIBUTION FROM OPERATIONS 37,352 28,596 18,404
GENERAL AND ADMINISTRATIVE EXPENSES
(including amounts related to TWC
of $2,159, $1,566, and $1,432) 14,851 12,051 8,673
--------- --------- ---------
OPERATING INCOME 22,501 16,545 9,731
INTEREST INCOME, NET
(including amounts related to TWC of
$122, ($10), AND ($40)) 2,410 1,451 2,195
--------- --------- ---------
INCOME BEFORE INCOME TAXES, EQUITY IN EARNINGS OF
AFFILIATES, AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR START-UP COSTS 24,911 17,996 11,926
PROVISION FOR INCOME TAXES 10,164 7,226 4,269
--------- --------- ---------
INCOME BEFORE EQUITY IN EARNINGS OF AFFILIATES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR START-UP COSTS 14,747 10,770 7,657
EQUITY IN EARNINGS OF AFFILIATES,
net of income tax provision of $1,434, $692, and $378 2,081 1,105 604
--------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR START-UP COSTS 16,828 11,875 8,261
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
START-UP COSTS, NET OF TAX 11,528 -- --
--------- --------- ---------
NET INCOME $ 5,300 $ 11,875 $ 8,261
--------- --------- ---------
EARNINGS PER SHARE
Basic
Income before cumulative effect of change in
accounting for start-up costs $ 0.76 $ 0.54 $ 0.39
Cumulative effect of change in accounting
for start-up costs (0.52) -- --
--------- --------- ---------
Net income $ 0.24 $ 0.54 $ 0.39
--------- --------- ---------
Diluted
Income before cumulative effect of change in
accounting for start-up costs $ 0.74 $ 0.52 $ 0.37
Cumulative effect of change in accounting
for start-up costs (0.51) -- --
--------- --------- ---------
Net income $ 0.23 $ 0.52 $ 0.37
--------- --------- ---------
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 22,119 22,015 21,361
--------- --------- ---------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 22,683 22,697 22,128
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE> 10
WACKENHUT CORRECTIONS CORPORATION
Consolidated Balance Sheets
(In thousands, except share data)
JANUARY 3, 1999 and DECEMBER 28, 1997
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 20,240 $ 28,960
Accounts receivable, net 61,188 36,755
Current portion of deferred income tax asset, net 1,769 --
Other 11,267 9,457
------------ ------------
Total current assets 94,464 75,172
------------ ------------
PROPERTY AND EQUIPMENT, NET 36,279 38,754
INVESTMENTS IN AND ADVANCES TO AFFILIATES 15,447 7,325
DEFERRED CHARGES, NET -- 14,218
GOODWILL 2,011 2,359
DEFERRED INCOME TAX ASSET, NET 1,277 --
OTHER 1,804 1,375
------------ ------------
$ 151,282 $ 139,203
- ----------------------------------------------------------------------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 9,218 $ 6,160
Accrued payroll and related taxes 9,955 8,316
Accrued expenses 9,850 8,206
Current portion of deferred revenue 2,383 861
Current portion of long-term debt 13 12
Current portion of deferred income tax liability, net -- 391
------------ ------------
Total current liabilities 31,419 23,946
------------ ------------
DEFERRED INCOME TAX LIABILITY, NET -- 10,099
LONG-TERM DEBT 200 213
DEFERRED REVENUE 16,723 2,650
------------ ------------
COMMITMENTS AND CONTINGENCIES (note 6)
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares authorized -- --
Common stock, $.01 par value, 60,000,000
shares authorized, 22,347,922 and 22,168,542
shares issued and outstanding 223 222
Additional paid-in capital 83,164 78,006
Retained earnings 31,523 26,223
Accumulated other comprehensive loss (3,117) (2,156)
Less: common stock in treasury at cost -- 453,500 shares (8,853) --
------------ ------------
Total shareholders' equity 102,940 102,295
------------ ------------
$ 151,282 $ 139,203
- ----------------------------------------------------------------------- ------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
<PAGE> 11
WACKENHUT CORRECTIONS CORPORATION
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(In thousands)
FISCAL YEARS ENDED JANUARY 3, 1999, DECEMBER 28, 1997, and DECEMBER 29, 1996
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
Number Paid-in Retained Comprehensive Treasury Shareholders'
of Shares Amount Capital Earnings Income Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 17,079 $ 171 $ 18,860 $ 6,087 $ 111 $ -- $ 25,229
Proceeds from stock offering 4,600 46 51,535 -- -- -- 51,581
Proceeds from stock options exercised 259 2 764 -- -- -- 766
Tax benefit related to employee
stock options -- -- 1,827 -- -- -- 1,827
Comprehensive income
Net Income -- -- -- 8,261 -- --
Change in foreign currency
translation net of income
taxes of $170 -- -- -- -- 305 --
Total comprehensive income -- -- -- -- -- -- 8,566
---------------------------------------------------------------------------------
BALANCE, DECEMBER 29, 1996 21,938 219 72,986 14,348 416 -- 87,969
Proceeds from stock options exercised 231 3 1,757 -- -- -- 1,760
Tax benefit related to employee stock
options -- -- 3,263 -- -- -- 3,263
Comprehensive income
Net Income -- -- -- 11,875 -- --
Change in foreign currency
translation net of income tax
benefits of $1,644 -- -- -- -- (2,572) --
Total comprehensive income -- -- -- -- -- -- 9,303
---------------------------------------------------------------------------------
BALANCE, DECEMBER 28, 1997 22,169 222 78,006 26,223 (2,156) -- 102,295
Proceeds from stock options exercised 179 1 1,927 -- -- -- 1,928
Tax benefit related to employee
stock options -- -- 3,231 -- -- -- 3,231
Treasury stock purchased -- -- -- -- -- (8,853) (8,853)
Comprehensive income
Net Income -- -- -- 5,300 -- --
Change in foreign currency
translation net of income tax
benefits of $614 -- -- -- -- (961) --
Total comprehensive income -- -- -- -- -- -- 4,339
---------------------------------------------------------------------------------
BALANCE, JANUARY 3, 1999 22,348 $ 223 $ 83,164 $ 31,523 $ (3,117) $ (8,853) $ 102,940
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE> 12
WACKENHUT CORRECTIONS CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
FISCAL YEARS ENDED JANUARY 3, 1999, DECEMBER 28, 1997, and DECEMBER 29, 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,300 $ 11,875 $ 8,261
Adjustments to reconcile net income to net cash (used in) provided
by operating activities
Depreciation and amortization expense 3,567 6,303 3,532
Equity in earnings of affiliates (3,515) (1,797) (982)
Cumulative effect of change in accounting for start-up costs 11,528 -- --
Changes in assets and liabilities
(Increase) decrease in assets:
Accounts receivable (24,745) (12,623) (6,943)
Other current assets (5,561) (3,606) (2,384)
Deferred income tax asset (3,046) -- 51
Other assets (1,053) (201) 34
Goodwill -- (782) --
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 9,083 10,739 2,003
Accrued payroll and related taxes 1,740 4,027 1,152
Deferred income taxes, net (7,259) 7,442 4,404
--------- --------- ---------
Net cash (used in) provided by operating activities (13,961) 21,377 9,128
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in affiliates (4,607) (3,718) (428)
Capital expenditures (24,516) (23,965) (12,476)
Proceeds from sale of facilities to CPV 41,768 -- --
Deferred charge expenditures -- (9,625) (4,505)
--------- --------- ---------
Net cash provided by (used in) investing activities 12,645 (37,308) (17,409)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock -- -- 51,581
Proceeds from exercise of stock options 1,927 1,760 766
Payments on debt (12) (12) (792)
Advances from TWC 175,091 116,019 102,431
Repayments to TWC (175,091) (116,019) (102,431)
Repurchase of common stock (8,853) -- --
--------- --------- ---------
Net cash (used in) provided by financing activities (6,938) 1,748 51,555
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (466) (1,225) 185
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH (8,720) (15,408) 43,459
CASH, beginning of period 28,960 44,368 909
--------- --------- ---------
CASH, end of period $ 20,240 $ 28,960 $ 44,368
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Income taxes $ 16,849 $ 100 $ 976
--------- --------- ---------
Non-cash activities:
Impact on equity from tax benefit related to the exercise of options
issued under the Company's non-qualified stock option plan $ 3,231 $ 3,263 $ 1,827
--------- --------- ---------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE> 13
WACKENHUT CORRECTIONS CORPORATION
Notes to Consolidated Financial Statements
(Tabular information in thousands except per share data)
For the Fiscal Years Ended January 3, 1999, December 28, 1997, and December 29,
1996
(1) General
Wackenhut Corrections Corporation, a Florida corporation, and subsidiaries (the
"Company"), a majority owned subsidiary of The Wackenhut Corporation ("TWC"), is
a leading developer and manager of privatized correctional and detention
facilities located in North America, the United Kingdom, South Africa and
Australia.
(2) Summary of Significant Accounting Policies
FISCAL YEAR
The Company's fiscal year ends on the Sunday closest to the calendar year end.
Fiscal 1998 included 53 weeks and fiscal 1997 and 1996 each included 52 weeks.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Investments in 20 percent to 50 percent owned affiliates are
accounted for under the equity method. All significant intercompany transactions
and balances between the Company and its subsidiaries have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform with
current year presentation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents all interest-bearing deposits or
investments with original maturities of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Maintenance and repairs are expensed as incurred. Depreciation is computed using
the straight-line method over the estimated useful lives of related assets.
Accelerated methods of depreciation are generally used for income tax purposes.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the improvement or the term of the lease.
GOODWILL
Goodwill represents the cost of an acquired enterprise in excess of the fair
market value of the net tangible and identifiable intangible assets acquired.
Goodwill is amortized on a straight-line basis over the period, which represents
management's estimation of the related benefit to be derived from the acquired
business, not to exceed twenty-five years. Accumulated amortization totaled
approximately $1.4 million and $1.1 million at January 3, 1999 and December 28,
1997, respectively.
LONG-LIVED ASSETS
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS 121 requires that long-lived assets, including certain identifiable
intangibles, and the goodwill related to those assets, be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset in question may not be recoverable. Management has
reviewed the Company's long-lived assets and has determined that there are no
events requiring impairment loss recognition.
DEFERRED CHARGES
Through December 28, 1997, the Company capitalized and amortized facility
start-up costs, consisting of costs of initial employee training, travel and
other direct expenses incurred in connection with the opening of new facilities,
on a straight-line basis over the lesser of the original contract term plus
renewals or five years.
Also through December 28, 1997, project development costs consisting of direct
and incremental costs paid to unrelated third parties that were directly
associated with a specific anticipated contract were deferred until the
anticipated contract had been awarded. At the time the contract was awarded to
the Company, the deferred project development costs were either capitalized as
part of property and equipment or were amortized over five years as project
development costs. Project development costs were charged to general and
administrative expenses when the success of obtaining a new contract was
considered doubtful. Internal costs associated with securing new contracts are
expensed as incurred.
<PAGE> 14
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. By adopting SOP 98-5 in fiscal
1998, the Company wrote-off existing unamortized start-up costs and project
development costs of $19.5 million (or $11.5 million after-tax) to record the
cumulative effect of the change in accounting principle. Also, upon adoption,
the Company reversed start-up amortization expense recorded during the year and
expensed start-up and project development costs previously deferred during the
year. All future start-up and project development costs will be expensed as
incurred.
REVENUE RECOGNITION
Facility management revenues are recognized as services are provided based on a
net rate per day per inmate or on a fixed monthly rate. Project development and
design revenues are recognized as earned on a percentage of completion basis.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under this method,
deferred income taxes are determined on the estimated future tax effects of
differences between the financial reporting and tax basis of assets and
liabilities given the provisions of enacted tax laws. Deferred income tax
provisions and benefits are based on changes to the asset or liability from year
to year.
EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128"). Basic earnings per share is computed by
dividing net income by the weighted-average number of common shares outstanding.
In the computation of diluted earnings per share, the weighted-average number of
common shares outstanding is adjusted for the effect of all potential common
stock.
FOREIGN CURRENCY TRANSLATION
The Company's foreign operations use the local currency as their functional
currency. Assets and liabilities of the operations are translated at the
exchange rates in effect on the balance sheet date. Income statement items are
translated at the average exchange rates for the year. The impact of currency
fluctuation is included in shareholders' equity as other comprehensive income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, accounts payable, and long-term
debt approximates fair value.
MARKET RISK
The Company is exposed to market risks, including changes in interest rates and
currency exchange rates. These exposures relate to changes in interest rates
with respect to a $220 million operating lease facility (Note 6). Monthly lease
payments under this facility are indexed to a variable interest rate. Management
has determined that a 10% change in this interest rate would have an immaterial
effect on the Company's pre-tax earnings over the next fiscal year.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB 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 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS 133 is effective for fiscal years
beginning after June 15, 1999. In management's opinion, the impact of adopting
this statement in 2000 will not have a material impact upon the Company's
results of operations or financial position.
(3) Property and Equipment
Property and equipment consists of the following at fiscal year end:
(In thousands)
<TABLE>
<CAPTION>
Years 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Land -- $ 2,069 $ 4,527
Buildings and improvements 20 - 40 9,361 34,107
Equipment 3 - 20 6,760 2,786
Furniture and fixtures 3 - 20 1,994 2,307
Construction in Progress -- 21,312 --
-------- --------
$ 41,496 $ 43,727
Less - accumulated depreciation (5,217) (4,973)
-------- --------
$ 36,279 $ 38,754
-------- --------
</TABLE>
Construction in progress represents costs incurred in the development of
facilities intended for sale to Correctional Properties Trust.
(4) Long-Term Debt
Long-term debt consists of the following:
(In thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Note payable - 8% $ 213 $ 225
Less - current portion 13 12
------- -------
$ 200 $ 213
------- -------
</TABLE>
<PAGE> 15
In June 1994, the Company signed an unsecured note payable in the amount of
$262,000 for the purchase of land for the construction of a correctional
facility. The note bears interest at 8.0% and matures in July 2009. The Company
makes monthly principal and interest payments of $2,504.
In June 1997, the Company entered into a $30.0 million multi-currency revolving
credit facility with a syndicate of banks, the proceeds of which may be used for
working capital, acquisitions and general corporate purposes. The credit
facility also includes a letter of credit of up to $5.0 million for the issuance
of standby letters of credit. Indebtedness under this facility will bear
interest at the alternate base rate (defined as the higher of prime rate or
federal funds plus 0.5%) or LIBOR plus 150 to 250 basis points, depending upon
fixed charge coverage ratios. The facility requires the Company to, among other
things, maintain a maximum leverage ratio; minimum fixed charge coverage ratio;
and a minimum tangible net worth. The facility also limits certain payments and
distributions. As of January 3, 1999, no amounts were outstanding under this
facility. However, at January 3, 1999, the Company had six standby letters of
credit outstanding under this facility in an aggregate amount of approximately
$2.6 million, in addition to seven letters of guarantee totaling approximately
$3.2 million under a separate Australian facility.
Aggregate annual maturities of long-term debt are as follows:
(In thousands)
Fiscal Year Annual Maturity
- ----------- ---------------
1999 $ 13
2000 15
2001 16
2002 17
2003 17
Thereafter 135
----
$213
----
(5) 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 $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 the Company. The Company received approximately $42 million for the
three facilities owned by it and for its right to acquire four of the other five
facilities, and realized a profit on the sale of approximately $18 million which
is included in deferred revenue on the balance sheet and is being amortized over
the ten-year lease term. The eighth facility was purchased directly from the
government entity. Subsequent to the purchase, the Company has entered into
operating leases with CPV for these eight facilities. As the lease agreements
are subject to contractual lease increases, the Company records operating lease
expense for these leases on a straight-line basis over the term of the leases.
CPV was also granted the option to acquire three additional correctional
facilities currently under development by the Company and the fifteen-year right
to acquire and lease back future correctional and detention facilities developed
or acquired by the Company.
On October 30, 1998, CPV acquired the completed portion of the Lea County
Correctional Facility in Hobbs, New Mexico for $26.0 million. Simultaneous with
the purchase, the Company entered into a ten-year lease of the facility from
CPV. The Company recorded net rental expense related to CPV in 1998 of $6.9
million. The future minimum lease commitments under the leases for these nine
facilities are as follows:
(In thousands)
Fiscal Year Annual Rental
- ----------- -------------
1999 $ 13,479
2000 13,883
2001 14,058
2002 14,058
2003 14,058
Thereafter 57,366
--------
$126,902
--------
(6) Commitments and Contingencies
The nature of the Company's business results in claims for damages arising from
the conduct of its employees or others. In the opinion of management, there are
no pending legal proceedings that would have a material effect on the
consolidated financial statements of the Company.
The Company leases correctional facility office space, computers and vehicles
under non-cancelable operating leases expiring between 1999 and 2008. The future
minimum commitments under these leases exclusive of lease commitments related to
the sale of correctional facilities to CPV (Note 5), are as follows:
(In thousands)
Fiscal Year Annual Rental
- ----------- -------------
1999 $ 4,357
2000 3,722
2001 3,064
2002 2,699
2003 2,144
Thereafter 3,896
-------
$19,882
-------
In December 1997, the Company also entered into a $220 million operating lease
facility that has been established to acquire and develop new correctional
institutions used in its business. As a condition of this facility,
<PAGE> 16
the Company unconditionally agreed to guarantee certain obligations of First
Security Bank, National Association, a party to the aforementioned operating
lease facility. As of January 3, 1999, approximately $100.9 million of this
operating lease facility was utilized for properties under development.
Rent expense was approximately $4.7 million, $3.4 million, and $2.1 million for
Fiscal 1998, 1997, and 1996 respectively.
(7) Common, Preferred and Treasury Stock
In January 1996, the Company sold 4.6 million shares of its common stock in
connection with a second offering at a price of $12.00 per share, before
deducting underwriting discounts and commissions and estimated offering
expenses. Net proceeds from the offering were approximately $51.6 million.
On April 25, 1996, the Company's Board of Directors declared a two-for-one split
effected in the form of a 100% common stock dividend paid on June 4, 1996.
Except as otherwise noted, all share data relating to the Company's common stock
reflects the two-for-one stock split.
In April 1994, the Company's Board of Directors authorized 10,000,000 shares of
"blank check" preferred stock. The Board of Directors is authorized to determine
the rights and privileges of any future issuance of preferred stock such as
voting and dividend rights, liquidation privileges, redemption rights and
conversion privileges.
On August 7, 1998, the Board of Directors of the Company authorized the
repurchase, at the discretion of the senior management, of up to 500,000 shares
of the Company's common stock. As of January 3, 1999, the Company had
repurchased 453,500 shares of common stock, which are recorded as treasury stock
and result in a reduction of shareholders' equity. In February 1999, the
Company's Board of Directors authorized the repurchase of up to an additional
500,000 shares of the Company's common stock.
(8) Business Segment and Geographic Information
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" which was adopted by the Company in 1998.
SFAS 131 establishes standards for reporting information about operating
segments and related disclosures about products and services, geographic areas
and major customers.
The Company operates in one industry segment encompassing the development and
management of privatized government institutions located in the North America,
the United Kingdom, South Africa and Australia. As the Company operates and
tracks its results in one operating segment, certain disclosure requirements are
not applicable. Information about the Company's operations in different
geographical regions is shown below. Sales are attributed to geographical areas
based on location of operations and long-lived assets consist of property, plant
and equipment.
<TABLE>
<CAPTION>
(In thousands)
Fiscal year 1998 1997 1996
- ----------- -------- -------- --------
<S> <C> <C> <C>
REVENUES:
Domestic operations $264,642 $167,223 $108,245
International operations 48,117 39,707 29,539
-------- -------- --------
Total revenues $312,759 $206,930 $137,784
OPERATING INCOME:
Domestic operations $ 18,649 $ 12,388 $ 7,087
International operations 3,852 4,157 2,644
-------- -------- --------
Total operating income $ 22,501 $ 16,545 $ 9,731
LONG-LIVED ASSETS:
Domestic operations $ 32,218 $ 34,061 $ 18,418
International operations $ 4,061 $ 4,693 $ 557
-------- -------- --------
Total long-lived assets $ 36,279 $ 38,754 $ 18,975
-------- -------- --------
</TABLE>
The Company's international operations represent its wholly-owned Australian
subsidiaries which are pursuing construction and management contracts for
correctional and detention facilities. Through its wholly-owned subsidiary,
Wackenhut Corrections Corporation Australia Pty. Limited, the Company currently
manages three correctional facilities and four immigration detention centers.
Except for the major customers noted in the following table, no single customer
provided more than 10% of consolidated revenues during Fiscal 1998, 1997 and
1996:
Customer 1998 1997 1996
- -------- ---- ---- ----
Various agencies of the State of Texas 25% 32% 39%
California Department of Corrections 17% 10% 5%
State of Florida Correctional
Privatization Committee 11% 13% 9%
Queensland Corrective Services
Commission 4% 7% 11%
New South Wales Department of
Corrective Services 4% 7% 10%
Concentration of credit risk related to accounts receivable is reflective of the
related revenues.
Equity earnings of affiliates represents the operations of the Company's 50%
owned joint ventures in the United Kingdom (Premier Prison Services, Ltd.,
Lowdham Prison Services, Ltd, and Kilmarnock Prison Services, Ltd.). These
entities, accounted for under the equity method, commenced operations of an
initial prison in Fiscal 1994, two court escort and transport contracts in
fiscal 1996 and a second correctional facility in fiscal 1998. 1998 equity in
earnings of affiliates also includes
<PAGE> 17
start-up expenses related to the Company's joint venture in South Africa. Total
equity in the undistributed earnings for Fiscal 1998, 1997, and 1996 was $3.5
million, $1.8 million and $982,000, respectively.
A summary of financial data for the Company's equity affiliates is as follows:
(In thousands)
1998 1997 1996
-------- -------- --------
STATEMENT OF OPERATIONS DATA
Revenues $ 91,071 $ 51,009 $ 28,953
Operating income 7,032 3,884 1,764
Net income 4,163 2,209 1,208
BALANCE SHEET DATA
Current assets 25,274 14,595 13,145
Noncurrent assets 145,433 517 538
Current liabilities 17,769 8,115 8,518
Noncurrent liabilities 141,165 4,029 5,075
Stockholders' equity 11,773 2,968 90
-------- -------- --------
The Company provided management services to one U.K. affiliate in Fiscal 1997
and 1996. The management fees for such services totaled $0.5 million for Fiscal
1997 and 1996. No management fees were charged by the Company in Fiscal 1998.
(9) Income Taxes
The provision for income taxes in the consolidated statements of income consists
of the following components:
(In thousands)
1998 1997 1996
-------- -------- --------
Federal income taxes:
Current $ 11,440 $ 175 $ --
Deferred (3,233) 6,131 3,588
-------- -------- --------
8,207 6,306 3,588
State income taxes:
Current $ 2,447 $ 300 $ 30
Deferred (490) 620 488
-------- -------- --------
1,957 920 518
Foreign income taxes -- -- 163
-------- -------- --------
Total $ 10,164 $ 7,226 $ 4,269
-------- -------- --------
A reconciliation of the statutory U.S. federal tax rate (35.0%) and the
effective income tax rate is as follows:
(In thousands)
1998 1997 1996
------- ------- -------
Provision using statutory
federal income tax rate $ 8,718 $ 6,299 $ 4,054
State income tax, net of federal
tax benefit 1,101 818 508
Other, net 345 109 (293)
------- ------- -------
$10,164 $ 7,226 $ 4,269
------- ------- -------
The components of the net current deferred income tax liability/ (asset) at
fiscal year end are as follows:
(In thousands)
1998 1997
------- -------
Uniforms $ 320 $ 244
Accrued vacation (529) (291)
Deferred charges -- 1,630
Accrued liabilities (1,560) (1,192)
------- -------
$(1,769) $ 391
------- -------
The components of the net non-current deferred income tax liability/ (asset) at
fiscal year end are as follows:
(In thousands)
1998 1997
-------- --------
Deferred revenue $ (9,026) $ --
Deferred charges (291) 4,909
Income of foreign subsidiaries and affiliates 8,086 5,284
Other, net (46) (94)
-------- --------
$ (1,277) $ 10,099
-------- --------
The exercise of non-qualified stock options which have been granted under the
Company's stock option plans give rise to compensation which is includable in
the taxable income of the applicable employees and deducted by the Company for
federal and state income tax purposes. Such compensation results from increases
in the fair market value of the Company's common stock subsequent to the date of
grant. In accordance with Accounting Principles Board Opinion No. 25, such
compensation is not recognized as an expense for financial accounting purposes
and related tax benefits are credited directly to additional paid-in-capital.
(10) Earnings Per Share
The table at the top of page 43 shows the amounts used in computing earnings per
share in accordance with Statement of Financial Accounting Standards No. 128 and
the effects on income and the weighted average number of shares of potential
dilutive common stock. The number of shares used in the calculation for 1996
reflects a 100% common stock dividend paid on June 4, 1996.
Options to purchase 178,000 shares of the Company's common stock at prices
ranging from $25.06 to $29.56 per share were outstanding during 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 2007 and 2008, were
still outstanding at January 3, 1999.
Options to purchase 1,000 shares of the Company's common stock at a price of
$29.56 per share were outstanding during 1997, but were not included in the
computation of diluted EPS because their effect would be anti-dilutive. The
options, which expire in 2007 were still outstanding at December 28, 1997.
<PAGE> 18
<TABLE>
<CAPTION>
(In thousands, except per share data)
1998 1997 1996
------------------ --------------------- ---------------------
Income Shares Income Shares Income Shares
------ ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net income $5,300 $11,875 $8,261
BASIC EPS
Income available to common shareholders $5,300 22,119 $11,875 22,015 $8,261 21,361
Per share amount $ 0.24 $ 0.54 $ 0.39
EFFECT OF DILUTIVE SECURITIES $(0.01) 564 $ (0.02) 682 $(0.02) 767
DILUTED EPS
Income available to common shareholders $5,300 22,683 $11,875 22,697 $8,261 22,128
Per share amount $ 0.23 $ 0.52 $ 0.37
</TABLE>
Options to purchase 60,000 shares of the Company's common stock at $22.63 per
share were outstanding during 1996 but were not included in the computation of
diluted EPS because their effect would be anti-dilutive. The options, which
expire in 2006, were still outstanding at December 29, 1996.
(11) Related Party Transactions
Related party transactions occur in the normal course of business between the
Company and TWC. Such transactions include the purchase of goods and services
and corporate costs for management support, office space, insurance and interest
expense.
The Company incurred the following expenses related to transactions with TWC in
the following years:
(In thousands)
1998 1997 1996
-------- -------- --------
Food services $ 839 $ 461 $ 450
General and administrative
expenses 1,718 1,200 1,100
Casualty insurance premiums 7,423 4,957 3,306
Rent 361 285 269
Interest (income) charges (122) 10 40
$ 10,219 $ 6,913 $ 5,165
Food services represent charges for meals for inmates at certain correctional
facilities operated by the Company. General and administrative expenses
represent charges for management and support services. TWC provides various
general and administrative services to the Company under a Services Agreement.
The initial Agreement expired December 31, 1997 and provided for one-year
renewal periods at the Company's option. Annual rates are negotiated by the
Company and TWC based upon the level of service provided. The Company monitors
the scope of these services on an ongoing basis and may adjust the level and
related charges as required. Expenses under the Agreement for Fiscal 1998,
Fiscal 1997, and Fiscal 1996 were $1.7 million, $1.2 million and $1.1 million,
respectively. Casualty insurance premiums related to workers' compensation,
general liability and automobile insurance coverage are provided through an
insurance subsidiary of TWC. In addition, the Company is charged or charges
interest on intercompany indebtedness at rates which reflect TWC's average
interest costs on long-term debt, exclusive of mortgage financing. Interest
expense (income) is calculated based on the average intercompany indebtedness.
The Company's corporate offices are located in TWC's corporate office building
for which it is allocated rent based upon space occupied under separate lease
agreements.
Management believes that the difference between these expenses and those that
would have been incurred on a stand-alone basis is not material.
(12) Stock Options
The Company has three stock option plans, the Wackenhut Corrections Corporation
1994 Stock Option Plan (First Plan), the Wackenhut Corrections Corporation Stock
Option Plan (Second Plan) and the 1995 Non-Employee Director Stock Option Plan
(Third Plan).
Under the First Plan, the Company may grant up to 897,600 shares of common stock
to key employees and consultants. All options granted under this plan are
exercisable at the fair market value of the common stock at date of grant, vest
100% after a minimum of six months and no later than ten years after the date of
grant.
Under the Second Plan, the Company may grant options to key employees for up to
1,500,000 shares of common stock. Under the terms of this plan, the exercise
price per share and vesting period is determined at the sole discretion of the
Board of Directors. All options that have been granted under this plan are
exercisable at the fair market value of the common stock at date of grant.
Generally, the options vest and become exercisable ratably over a five-year
period, beginning immediately on the date of grant. However, the Board of
Directors has exercised its discretion and has granted options that vest 100%
after a minimum of six months. All options under the Second Plan expire no later
than ten years after the date of grant.
Under the Third Plan, the Company may grant up to 60,000 shares of common stock
to non-employee directors of the Company. Under the terms of this plan, options
are granted at the fair market value of the common stock at date of grant,
become 100% exercisable immediately, and expire ten years after the date of
grant.
A summary of the status of the Company's three stock option plans as of January
3, 1999, December 28, 1997, and December 29, 1996, and changes during the years
then ended is presented below.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 923,484 $ 9.76 989,534 $ 7.16 1,210,132 $ 5.58
Granted 191,000 25.02 176,500 21.08 60,000 22.63
Exercised 179,380 9.98 228,550 7.12 258,598 2.96
Forfeited/Canceled 5,200 21.93 14,000 11.88 22,000 11.88
------- --------- ------- --------- --------- ---------
Options outstanding at end of year 929,904 12.78 923,484 9.76 989,534 7.16
------- --------- ------- --------- --------- ---------
Options exercisable at year end 758,904 11.50 629,084 6.13 744,734 4.46
</TABLE>
The following table summarizes information about the stock options outstanding
at January 3, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- --------------------------
Number Wtd. Avg. Wtd. Avg. Number Wtd. Avg.
Outstanding Remaining Exercise Exercisable Exercise
Range of Exercise Prices at 1/3/99 Contractual Life Price at 1/3/99 Price
------------------------ --------- ---------------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$ 1.20 - $ 3.75 401,704 5.3 $ 3.49 401,704 $ 3.49
$11.88 - $13.75 159,000 7.0 11.90 101,400 11.97
$16.63 - $16.88 12,000 8.3 16.74 7,000 16.77
$17.63 - $21.50 122,200 8.1 21.41 42,400 21.34
$22.63 - $25.06 224,000 8.6 24.48 204,000 24.66
$26.13 - $29.56 11,000 9.2 26.44 2,400 26.70
------- -------
929,904 758,904
------- -------
</TABLE>
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined based on the fair value at date of grant in accordance with FASB
Statement No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts as follows:
<TABLE>
<CAPTION>
Pro Forma Disclosures 1998 1997
- ---------------------- ------ -------
<S> <C> <C>
Pro forma net earnings $4,234 $11,197
Pro forma basic net earnings per share $ 0.19 $ 0.51
Pro forma diluted net earnings per share $ 0.19 $ 0.49
Pro forma weighted average fair value of options granted $14.36 $ 11.10
Risk free interest rates 4.49%-5.79% 5.52%-5.70%
Expected lives 4-8 years 4-8 years
Expected volatility 55% 48%
</TABLE>
<PAGE> 19
(13) Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for the Company and its subsidiaries for the
fiscal years ended January 3, 1999, and December 28, 1997 is as follows:
(In thousands, except per share data)
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1998
- ----
Revenues $71,269 $74,617 $78,177 $88,696
Operating income $ 4,992 $ 6,369 $ 6,101 $ 5,039
Net income (loss) $(8,165) $ 4,652 $ 4,337 $ 4,476
Basic earnings per share
Income before cumulative effect of change in accounting
for start-up costs $ 0.15 $ 0.21 $ 0.20 $ 0.20
Cumulative effect of change in accounting for start-up costs (0.52) $ -- $ -- $ --
Net income (loss) $ (0.37) $ 0.21 $ 0.20 $ 0.20
Diluted earnings per share
Income before cumulative effect of change in accounting
for start-up costs $ 0.15 $ 0.20 $ 0.19 $ 0.20
Cumulative effect of change in accounting for start-up costs $ (0.51) -- -- --
Net income (loss) $ (0.36) $ 0.20 $ 0.19 $ 0.20
1997
- ----
Revenues $41,227 $51,509 $55,104 $59,090
Operating income $ 3,272 $ 3,789 $ 4,801 $ 4,683
Net income $ 2,581 $ 2,723 $ 3,188 $ 3,383
Basic earnings per share $ 0.12 $ 0.12 $ 0.14 $ 0.15
Diluted earnings per share $ 0.11 $ 0.12 $ 0.14 $ 0.15
</TABLE>
Report of independent certified public accountants
To the Shareholders of
Wackenhut Corrections Corporation:
We have audited the accompanying consolidated balance sheets of Wackenhut
Corrections Corporation (a Florida corporation) and subsidiaries as of January
3, 1999, and December 28, 1997, and the related consolidated statements of
income, shareholders' equity and comprehensive income and cash flows for each of
the three fiscal years in the period ended January 3, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wackenhut Corrections
Corporation and subsidiaries as of January 3, 1999, and December 28, 1997, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended January 3, 1999, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, effective
December 29, 1997 the Company changed its method of accounting for costs of
start-up activities.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
February 9, 1999.
<PAGE> 20
Management's responsibility for financial statements
To the Shareholders of
Wackenhut Corrections Corporation:
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principals. They include amounts
based on judgments and estimates.
Representation in the consolidated financial statements and the fairness and
integrity of such statements are the responsibility of management. In order to
meet management's responsibility, the Company maintains a system of internal
controls and procedures and a program of internal audits designed to provide
reasonable assurance that the Company's assets are controlled and safeguarded,
that transactions are executed in accordance with management's authorization and
properly recorded, and that accounting records may be relied upon in the
preparation of financial statements.
The consolidated financial statements have been audited by Arthur Andersen LLP,
independent certified public accountants, whose appointment was ratified by
shareholders. Their report expresses a professional opinion as to whether
management's consolidated financial statements considered in their entirety
present fairly, in conformity with generally accepted accounting principles, the
Company's financial position and results of operations. Their audit was
conducted in accordance with generally accepted auditing standards. As part of
this audit, Arthur Andersen LLP considered the Company's system of internal
controls to the degree they deemed necessary to determine the nature, timing,
and extent of their audit tests which support their opinion on the consolidated
financial statements.
The Audit Committee of the Board of Directors meets periodically with
representatives of management, the independent certified public accounts and the
Company's internal auditors to review matters relating to financial reporting,
internal accounting controls and auditing. Both the internal auditors and the
independent public accountants have unrestricted access to the Audit Committee
to discuss the results of their reviews.
/s/ George R. Wackenhut /s/ John G. O'Rourke
George R. Wackenhut John G. O'Rourke
Chairman Senior Vice President
Chief Financial Officer
and Treasurer
/s/ George C. Zoley
George C. Zoley
Vice Chairman and
Chief Executive Officer
<PAGE> 1
EXHIBIT 21.1
WACKENHUT CORRECTIONS CORPORATION'S SUBSIDIARIES
WACKENHUT CORRECTIONS (UK) LIMITED
WACKENHUT CORRECTIONS CORPORATION AUSTRALIA PTY LIMITED
WACKENHUT CORRECTIONAL SERVICES PTY LIMITED
AUSTRALASIAN CORRECTIONAL MANAGEMENT PTY LIMITED
AUSTRALASIAN CORRECTIONAL INVESTMENT PTY LIMITED
ATLANTIC SHORES HEALTHCARE, INC.
MIRAMICHI YOUTH CENTRE MANAGEMENT, INC.
WACKENHUT CORRECTIONS CANADA, INC.
WACKENHUT CORRECTIONS PUERTO RICO, INC.
WCC DEVELOPMENT, INC.
WCC/FL/01, INC.
WCC/FL/02, INC.
WCC REAL ESTATE HOLDINGS, INC.
WACKENHUT CORRECTIONS DESIGN SERVICES, INC.
WCC FINANCIAL, INC.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report incorporated by reference into this Form 10-K, into
the Company's previously filed Registration Statement File Nos. 333-17265,
333-09981, 333-09977, and 33-90606.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JANUARY 3, 1999 AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE FISCAL PERIOD ENDING JANUARY 3, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> JAN-03-1999
<CASH> 20,240
<SECURITIES> 0
<RECEIVABLES> 61,188
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 94,464
<PP&E> 41,496
<DEPRECIATION> 5,217
<TOTAL-ASSETS> 151,282
<CURRENT-LIABILITIES> 31,419
<BONDS> 213
0
0
<COMMON> 223
<OTHER-SE> 102,717
<TOTAL-LIABILITY-AND-EQUITY> 151,282
<SALES> 0
<TOTAL-REVENUES> 312,759
<CGS> 0
<TOTAL-COSTS> 275,407
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 24,911
<INCOME-TAX> 10,164
<INCOME-CONTINUING> 16,828
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 11,528
<NET-INCOME> 5,300
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.23
</TABLE>
