<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended October 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
- -------------------------------------------------------------------------------
(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)
(561) 622-5656
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- -------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF
CHANGED SINCE LAST REPORT.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such report), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
At November 10, 1999, 22,386,992 shares of the registrant's Common Stock were
issued and outstanding.
Page 1 of 18
<PAGE> 2
WACKENHUT CORRECTIONS CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following consolidated financial statements of Wackenhut Corrections
Corporation, a Florida corporation (the "Company"), have been prepared in
accordance with the instructions to Form 10-Q and, therefore, omit or condense
certain footnotes and other information normally included in financial
statements prepared in accordance with generally accepted accounting
principles. Certain amounts in the prior year have been reclassified to conform
to the current presentation. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of the financial information for the interim periods reported have
been made. Results of operations for the thirty-nine weeks ended October 3,
1999 are not necessarily indicative of the results for the entire fiscal year
ending January 2, 2000.
Page 2 of 18
<PAGE> 3
WACKENHUT CORRECTIONS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED
OCTOBER 3, 1999 AND SEPTEMBER 27, 1998
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
----------------------------- ------------------------------
OCT. 3, 1999 SEPT. 27, 1998 OCT. 3, 1999 SEPT. 27, 1998
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Revenues ............................................ $112,046 $78,177 $315,526 $ 224,063
Operating expenses (including amounts related
to Parent of $2,571, $1,846, $7,290 and $5,854).. 99,051 67,729 278,752 193,060
Depreciation and amortization ....................... 1,283 615 3,761 2,866
-------- ------- -------- ---------
Contribution from operations .................... 11,712 9,833 33,013 28,137
G&A expense (including amounts related to
Parent of $787, $542, $2,442 and $1,653) ........ 4,778 3,732 12,747 10,675
-------- ------- -------- ---------
Operating income ................................ 6,934 6,101 20,266 17,462
Interest income (including interest income
related to Parent of $84, $ -, $463, and $72)... 969 586 2,030 1,395
-------- ------- -------- ---------
Income before income taxes, equity in earnings
of affiliates, and cumulative effect of change in
accounting for start-up costs ................... 7,903 6,687 22,296 18,857
Provision for income taxes .......................... 3,170 2,820 8,941 7,774
-------- ------- -------- ---------
Income before equity in earnings of affiliates and
cumulative effect of change in accounting
for start-up costs .............................. 4,733 3,867 13,355 11,083
Equity in earnings of affiliates, net of income
tax provision of $643, $305, $1,697 and $825) ... 961 470 2,535 1,269
-------- ------- -------- ---------
Income before cumulative effect of change in
accounting for start-up costs ................... 5,694 4,337 15,890 12,352
Cumulative effect of change in accounting for
start-up costs, net of tax ...................... -- -- -- (11,528)
-------- ------- -------- ---------
Net income .......................................... $ 5,694 $ 4,337 $ 15,890 $ 824
======== ======= ======== =========
Basic earnings per share:
Income before cumulative effect of change
in accounting for start-up costs ........... $ 0.26 $ 0.20 $ 0.73 $ 0.56
Cumulative effect of change in accounting for
start-up costs, net of tax ................. -- -- -- (0.52)
-------- ------- -------- ---------
Net income ...................................... $ 0.26 $ 0.20 $ 0.73 $ 0.04
======== ======= ======== =========
Diluted earnings per share:
Income before cumulative effect of change
in accounting for start-up costs ........... $ 0.26 $ 0.19 $ 0.72 $ 0.55
Cumulative effect of change in accounting
for start-up costs, net of tax ............. -- -- -- (0.51)
-------- ------- -------- ---------
Net income ...................................... $ 0.26 $ 0.19 $ 0.72 $ 0.04
======== ======= ======== =========
Basic weighted average shares outstanding ........... 21,593 22,145 21,699 22,188
======== ======= ======== =========
Diluted weighted average shares outstanding ......... 22,062 22,681 22,125 22,769
======== ======= ======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
Page 3 of 18
<PAGE> 4
WACKENHUT CORRECTIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
OCTOBER 3, 1999 AND JANUARY 3, 1999
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 3, 1999 JANUARY 3, 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .......................... $ 22,711 $ 20,240
Accounts receivable, net ........................... 74,463 61,188
Current portion of deferred income tax asset, net .. 1,853 1,769
Other .............................................. 8,848 11,267
--------- ---------
Total current assets .................. 107,875 94,464
Property and equipment, net ........................ 30,733 33,005
Investments in and advances to affiliates .......... 22,629 15,447
Goodwill ........................................... 1,900 2,011
Deferred income tax asset, net ..................... -- 1,277
Other .............................................. 4,658 1,804
--------- ---------
$ 167,795 $ 148,008
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................... $ 11,180 $ 5,944
Accrued payroll and related taxes .................. 8,516 9,955
Accrued expenses ................................... 14,950 9,850
Current portion of deferred revenue ................ 2,105 2,383
Current portion of long-term debt .................. -- 13
--------- ---------
Total current liabilities ............. 36,751 28,145
--------- ---------
Deferred income tax liability, net ...................... 2,277 --
Long-term debt .......................................... -- 200
Deferred revenue ........................................ 16,125 16,723
Shareholders' equity:
Preferred stock, $.01 par value,
10,000,000 shares authorized ................... -- --
Common stock, $.01 par value,
60,000,000 shares authorized,
22,386,992 and 22,347,922 shares
issued and outstanding ......................... 224 223
Additional paid-in capital ......................... 83,699 83,164
Retained earnings .................................. 47,413 31,523
Accumulated other comprehensive loss ............... (1,894) (3,117)
Less: common stock in treasury at cost--
878,000 and 453,500 shares ..................... (16,800) (8,853)
--------- ---------
Total shareholders' equity ............ 112,642 102,940
--------- ---------
$ 167,795 $ 148,008
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
Page 4 of 18
<PAGE> 5
WACKENHUT CORRECTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED
OCTOBER 3, 1999 AND SEPTEMBER 27, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
--------------------------------
OCTOBER 3, 1999 SEPT. 27, 1998
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................ $ 15,890 $ 824
Adjustments to reconcile net income to net cash
provided by (used in) operating activities--
Depreciation and amortization expense ....... 3,761 2,866
Equity in earnings of affiliates ............. (4,232) (2,094)
Cumulative effect of change in accounting for
start-up costs, net ...................... -- 11,528
Changes in assets and liabilities --
(Increase) decrease in assets:
Accounts receivable .......................... (12,904) (11,207)
Deferred income tax asset .................... 1,193 --
Other current assets ......................... 2,347 (5,072)
Other assets ................................. (2,356) (1,796)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses ........ 9,387 2,244
Accrued payroll and related taxes ............ (1,556) (820)
Deferred income tax liability, net ........... 2,277 (4,455)
-------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 13,807 (7,982)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in affiliates ......................... (2,950) (2,155)
Capital expenditures .............................. (23,437) (10,307)
Proceeds from sale of capital assets to CPV ....... 22,281 41,768
-------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (4,106) 29,306
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options ........... 214 1,227
Payments on debt .................................. (213) (9)
Advances to The Wackenhut Corporation ............. (17,910) (112,650)
Repayments from The Wackenhut Corporation ......... 17,910 112,650
Repurchase of common stock ........................ (7,947) (3,855)
-------- ---------
NET CASH USED IN FINANCING ACTIVITIES ............. (7,946) (2,637)
-------- ---------
Effect of exchange rate changes on cash .................... 716 (913)
Net increase in cash ....................................... 2,471 17,774
Cash, beginning of period .................................. 20,240 28,960
-------- ---------
CASH, END OF PERIOD ........................................ $ 22,711 $ 46,734
======== =========
SUPPLEMENTAL DISCLOSURES:
Impact on equity from tax benefit related to the
exercise of options issued under the company's non-
qualified stock option plan ....................... $ 321 $ 309
======== =========
Income taxes paid ................................. $ 5,673 $ 12,944
======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
Page 5 of 18
<PAGE> 6
WACKENHUT CORRECTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed for the quarterly financial reporting are the
same as those disclosed in Note 2 of the Notes to Consolidated Financial
Statements included in the Company's Form 10-K filed with the Securities and
Exchange Commission on April 2, 1999 for the fiscal year ended January 3,
1999. Certain prior year amounts have been reclassified to conform with current
year financial statement presentation.
2. DOMESTIC AND INTERNATIONAL OPERATIONS
A summary of domestic and international operations is presented below (dollars
in thousands):
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
--------------------------------------------
OCTOBER 3, 1999 SEPTEMBER 27, 1998
--------------- ------------------
<S> <C> <C>
REVENUES
Domestic operations........................ $271,697 $187,990
International operations................... 43,829 36,073
-------- --------
Total revenues............................ $315,526 $224,063
======== ========
OPERATING INCOME
Domestic operations......................... $ 16,566 $ 14,745
International operations.................... 3,700 2,717
-------- --------
Total operating income................... $ 20,266 $ 17,462
======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
-------------------------------------------
OCTOBER 3, 1999 JANUARY 3, 1999
--------------- ---------------
<S> <C> <C>
LONG-LIVED ASSETS
Domestic operations......................... $ 26,987 $ 28,944
International operations.................... 3,746 4,061
-------- --------
Total long-lived assets.................. $ 30,733 $ 33,005
======== ========
</TABLE>
Long-lived assets consist of property, plant and equipment.
3. DEFERRED CHARGES
Effective December 29, 1997, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position 98-5 ("SOP 98-5") on
Accounting for Costs of Start-up Activities. Under this policy, the Company is
required to expense all start-up and project development costs as incurred. For
year ended January 3, 1999, 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. The adoption of SOP 98-5 required a restatement of the previously
issued financial statements for the thirteen weeks and thirty-nine weeks ended
September 27, 1998.
Page 6 of 18
<PAGE> 7
WACKENHUT CORRECTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," establishes standards for reporting and display of comprehensive
income and its components in financial statements. The components of the
Company's comprehensive income are as follows (dollars in thousands):
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
--------------------------------------
OCTOBER 3, 1999 SEPTEMBER 27, 1998
--------------- ------------------
<S> <C> <C>
Net income $15,890 $ 824
Foreign currency translation adjustments, net of income tax
expense of $819 and $1,170, respectively. 1,223 (1,664)
------- -------
Comprehensive income (loss) $17,113 $ (840)
======= =======
</TABLE>
5. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share
(EPS) 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 (in thousands except per share data).
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
---------------------------------- ----------------------------------
OCT. 3, 1999 SEPT. 27, 1998 OCT. 3, 1999 SEPT. 27, 1998
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Net Income..................... $ 5,694 $ 4,337 $15,890 $ 824
Basic earnings per share:
Weighted average shares
Outstanding.................. 21,593 22,145 21,699 22,188
------- ------- ------- -------
Per share amount............... $ 0.26 $ 0.20 $ 0.73 $ 0.04
======= ======= ======= =======
Diluted earnings per share:
Weighted average shares
outstanding.................. 21,593 22,145 21,699 22,188
Effect of dilutive securities:
Employee and director stock
options...................... 469 536 426 581
------- ------- ------- -------
Weighted average shares
assuming dilution............ 22,062 22,681 22,125 22,769
======= ======= ======= =======
Per share amount............... $ 0.26 $ 0.19 $ 0.72 $ 0.04
======= ======= ======= =======
</TABLE>
Options to purchase 606,500 shares of the Company's common stock, with exercise
prices ranging from $18.38 to $26.88 per share and expiration dates between
2006 and 2009, were outstanding at October 3, 1999, but were not included in
the computation of diluted EPS because their effect would be anti-dilutive if
exercised. At September 27, 1998, outstanding options to purchase 356,000
shares of the Company's common stock, with exercise prices ranging from $20.25
to $29.56 and expiration dates between 2006 and 2008, were also excluded from
the computation of diluted EPS because their effect would be anti-dilutive if
exercised.
Page 7 of 18
<PAGE> 8
WACKENHUT CORRECTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SALE OF FACILITIES TO CORRECTIONAL PROPERTIES TRUST
On January 15, 1999, the Company sold its right to acquire a 1,500-bed
correctional facility located in Lawton, Oklahoma and sold the 600-bed
expansion of the Lea County Correctional Facility to Correctional Properties
Trust ("CPV") for a total of approximately $66.1 million. Net proceeds to the
Company from the sale were approximately $22.3 million. Simultaneous with these
purchases, the Company entered into ten-year operating leases with CPV for
these facilities. These properties require initial annual lease payments of
$6.3 million and include annual increases for changes in the consumer price
index with minimum increases of 3% for each of the following two years.
7. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 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. In June 1999, FASB amended the effective date of SFAS 133 to fiscal years
beginning after June 15, 2000. In management's opinion, the impact of adopting
this statement will not have a material impact upon the Company's results of
operations or financial position.
8. TREASURY STOCK
On August 7, 1998, the Board of Directors of the Company authorized the
repurchase, at the discretion of 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. 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. As of October 3, 1999, the Company had
repurchased a total of 878,000 of the one million common shares authorized for
repurchase at an average price per share of $19.13. For fiscal year 1999, the
Company had repurchased 424,500 shares at an average price of $18.72. The
repurchased shares had been recorded by the Company as treasury stock resulting
in a reduction of shareholders' equity.
9. COMMITMENTS AND CONTINGENCIES
In Texas, grand juries have been convened in Travis and Caldwell Counties and
are taking testimony regarding alleged sexual misconduct and document tampering
by individuals employed or formerly employed by the Company. At this time, the
Company is unable to predict the outcome of these investigations and any
potential impact on the financial position, net worth or results of operations
of the Company.
In New Mexico, the Company has been in discussions with the State's Department
of Corrections and the Legislative Finance Committee to remedy serious
operational issues at the Company's facilities in Lea and Guadalupe Counties.
The Company has developed and presented to the State of New Mexico (the "State")
recommended contract modifications with associated operational and fiscal
resource needs for both facilities. The Company can give no assurances as to the
ultimate acceptability of these contract modifications by the State.
Additionally, the Company has submitted a proposal to the Federal Bureau of
Prisons for the Lea County Correctional Facility for its possible use to hold
low security criminal aliens.
Page 8 of 18
<PAGE> 9
WACKENHUT CORRECTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. SUBSEQUENT EVENT
On August 31, 1999, the Company announced the mutual decision between the
Company, the Texas Department of Criminal Justice State Jail Division (TDCJ)
and Travis County, Texas to discontinue the Company's contract for the
operation of the Travis County Community Justice Center. The contract was
discontinued effective November 8, 1999. The Company is involved in discussions
with TDCJ regarding close-out of all contract claims. The Company cannot
predict the outcome of these discussions at this time.
Page 9 of 18
<PAGE> 10
WACKENHUT CORRECTIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Reference is made to Part II, Item 7 of the Company's Annual Report on Form
10-K for the fiscal year ended January 3, 1999, filed with the Securities and
Exchange Commission on April 2, 1999, for further discussion and analysis of
information pertaining to the Company's results of operations, liquidity and
capital resources.
FORWARD-LOOKING STATEMENTS: The management's discussion and analysis of
financial condition and results of operations and the November 4, 1999 press
release announcing earnings contain forward-looking statements that are based
on current expectations, estimates and projections about the segments in which
the Company operates. This section of the quarterly report also includes
management's beliefs and assumptions made by management. Words such as
"expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates",
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 risks in increasing use of large, multi-year contracts; the
outcome of pending and future litigation and governmental proceedings and
continued availability of financing; financial instruments and financial
resources in the amounts, at the times and on the terms required to support the
Company's future business. These are representative of the Future Factors that
could affect the outcome of the forward-looking statements. In addition, such
statements could be affected by general industry and market conditions and
growth rates, general domestic and international economic conditions including
interest rate and currency rate fluctuations and other future factors.
LIQUIDITY AND CAPITAL RESOURCES
On January 15, 1999 the Company sold its right to acquire a 1,500-bed
correctional facility located in Lawton, Oklahoma and sold the 600-bed
expansion of the Lea County Correctional Facility located in Hobbs, New Mexico
to CPV for approximately $66.1 million. Net proceeds to the Company from the
sale were approximately $22.3 million. Both facilities are being leased back to
the Company under an operating lease.
Cash and cash equivalents at October 3, 1999 of $22.7 million increased $2.5
million from January 3, 1999. Cash provided by operating activities amounted to
$13.8 million in the thirty-nine weeks ended October 3, 1999 ("Nine Months
1999") versus cash used in operating activities of $8.0 million in thirty-nine
weeks ended September 27, 1998 ("Nine Months 1998") primarily reflecting lower
balances in other current assets, accounts payable and accrued expenses, and
deferred income taxes.
Cash used in investing activities increased by $33.4 million in the Nine Months
1999 as compared to the same period in 1998. This increase is primarily due to
higher capital expenditures of $13.1 million, representing investments in
facilities and the purchase of equipment, and a decrease of $19.5 million in
proceeds from the
Page 10 of 18
<PAGE> 11
WACKENHUT CORRECTIONS CORPORATION
sale of assets to CPV. The Company received proceeds of $22.3 million for the
sale of Lea County Correctional Facility to CPV in the Nine Months 1999 and had
received $41.8 million for the sale of three facilities and the right to
acquire 4 other facilities in the Nine Months 1998.
Cash used in financing activities increased by $5.3 million in the Nine Months
1999 as compared to the same period in 1998 primarily reflecting the increase of
$4.1 million in purchases of treasury stock and a decrease of $1.0 million in
proceeds from the exercise of stock options.
Working capital increased from $66.3 million at January 3, 1999 to $71.1 million
at October 3, 1999 primarily due to the increase in the balance of accounts
receivable offset by increases in payables and accrued expenses.
As of October 3, 1999, approximately $82 million of the Company's $220 million
operating lease facility, established to acquire and develop new correctional
facilities, was outstanding for properties under development.
The Company's access to capital and ability to compete for future capital
intensive projects is dependent upon, among other things, its ability to meet
certain financial covenants included in the $220 million operating lease
facility and the Company's $30 million revolving credit facility. A substantial
decline in the Company's financial performance as a result of an increase in
operational expenses relative to revenue could negatively impact the Company's
ability to meet these covenants, and could therefore, limit the Company's
access to capital.
COMMITMENTS AND CONTINGENCIES
In Texas, grand juries have been convened in Travis and Caldwell Counties and
are taking testimony regarding alleged sexual misconduct and document tampering
by individuals employed or formerly employed by the Company. At this time, the
Company is unable to predict the outcome of these investigations and any
potential impact on the financial position, net worth or results of operations
of the Company.
In New Mexico, the Company has been in discussions with the State's Department
of Corrections and the Legislative Finance Committee to remedy serious
operational issues at the Company's facilities in Lea and Guadalupe Counties.
The Company has developed and presented to the State of New Mexico (the "State")
recommended contract modifications with associated operational and fiscal
resource needs for both facilities. The Company can give no assurances as to the
ultimate acceptability of these contract modifications by the State.
Additionally, the Company has submitted a proposal to the Federal Bureau of
Prisons for the Lea County Correctional Facility for its possible use to hold
low security criminal aliens.
YEAR 2000 READINESS DISCLOSURE
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.
Management continued its review of the installation of new information systems
hardware and software and determined that the installation is on schedule for
completion before the year 2000. This review, substantially completed by
November 1999, also encompasses other systems including embedded technology,
such as security systems.
Page 11 of 18
<PAGE> 12
WACKENHUT CORRECTIONS CORPORATION
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. 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 been achieved in the third quarter 1999, as were significantly all other
computer systems.
The Company has incurred costs related to Year 2000 compliance which 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, for
achieving Year 2000 compliance were approximately $0.3 million for the Nine
Months 1999. Significantly all of these costs were capitalized and are being
amortized over the appropriate period. The Company does not anticipate
incurring any additional material amounts related to Year 2000 compliance.
These total costs exclude payroll costs of internal staff related to Year 2000
compliance as the Company does not separately track such costs. In addition,
the total amount funded to achieve Year 2000 compliance excluded the Company's
total costs 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
material relations, such as banks and vendors used by the Company, is
continuing to be reviewed by management. The Company had sent written inquiries
to these third parties. At this time, the Company is unaware of any third party
Year 2000 issues that would materially effect these relationships.
Notwithstanding the successful implementation of the Company's Year 2000 plan,
the Company's operations could nevertheless be affected by the ability of third
parties, such as customers, suppliers and utilities dealing with the Company to
remediate their own Year 2000 issues over which the Company has no control.
The Company expects to be Year 2000 compliant in 1999 for all major systems.
The Company has assessed its risk and the full impact on operations should the
most reasonably likely worse case Year 2000 scenario occur. In order to
minimize any adverse impact on its operations of the Year 2000 problem, the
Company has developed operational contingency plans.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes thereto.
COMPARISON OF THIRTEEN WEEKS ENDED OCTOBER 3, 1999 AND THIRTEEN WEEKS ENDED
SEPTEMBER 27, 1998
Revenues increased by 43.3% to $112.0 million in the thirteen weeks ended
October 3, 1999 ("Third Quarter 1999") from $78.2 million in the thirteen weeks
ended September 27, 1998 ("Third Quarter 1998"). Approximately $26.8 million of
the increase in revenues in Third Quarter 1999 compared to Third Quarter 1998
is attributable to increased compensated resident days resulting from the
opening of six facilities in 1998 (Lea County Correctional Facility, Hobbs, New
Mexico in May 1998; Lawton Correctional Facility, Lawton, Oklahoma in July,
1998; George W. Hill Correctional Facility, Thornton, Pennsylvania in July,
1998; South Florida State Hospital, Pembroke Pines, Florida in November, 1998;
Jena Juvenile Justice Center, Jena,
Page 12 of 18
<PAGE> 13
WACKENHUT CORRECTIONS CORPORATION
Louisiana in December, 1998; and Cleveland Correctional Center, Cleveland,
Texas in January, 1999) and with the opening of four facilities in 1999;
(Guadalupe County Correctional Facility, Santa Rosa, New Mexico in January,
1999; Melbourne Custody Detention Centre, Melbourne, Australia in March 1999;
East Mississippi Correctional Facility, Meridian, Mississippi in April, 1999
and the Michigan Youth Correctional Facility, Baldwin, Michigan in July, 1999).
The 1,562-bed George W. Hill Correctional Facility opened in 1998 replaced the
existing 1,000-bed facility managed by the Company. 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 facilities increased to
2,209,563 in Third Quarter 1999 from 1,674,768 in Third Quarter 1998. The
average facility occupancy in domestic facilities was 97.7% of capacity in
Third Quarter 1999 compared to 96.0% in Third Quarter 1998. Compensated
resident days in Australian facilities increased to 267,013 from 189,881 for
the comparable periods primarily due to higher compensated resident days at the
immigration detention facilities.
Operating expenses increased by 46.2% to $99.0 million in Third Quarter 1999
compared to $67.7 million in Third Quarter 1998. As a percentage of revenues,
operating expenses increased to 88.4% in Third Quarter 1999 from 86.6% in the
comparable period in 1998. This increase primarily reflects the ten facilities
that were opened in 1998 and 1999, as described above. Additionally, there are
a number of secondary factors contributing to the increase which include the
following: lease payments to CPV of $5.2 million offset by the amortization of
deferred revenue of $0.4 million from the sale of properties; expenses related
to the construction of a new facility for South Florida State Hospital; and
additional expenses related to operations at the Jena Juvenile Justice Center
(Louisiana), Lea County Correctional Facility (New Mexico), Guadalupe County
Correctional Facility (New Mexico), and Taft Correctional Institution
(California). The Company has developed strategies to improve the operational
performance of these facilities, however, there can be no assurances that these
strategies will be successful.
Depreciation and amortization increased by 108.6% to $1.3 million in Third
Quarter 1999 from $0.6 million in Third Quarter 1998. As a percentage of
revenues, depreciation and amortization slightly increased to 1.1% from 0.8% in
the Third Quarter in 1998.
Contribution from operations increased 19.1% to $11.7 million in Third Quarter
1999 from $9.8 million in Third Quarter 1998. As discussed above, this increase
is primarily attributable to ten new facilities that opened in 1998 and 1999.
As a percentage of revenue, contribution from operations decreased to 10.5% in
Third Quarter 1999 from 12.6% in Third Quarter 1998. This decrease is primarily
due to the factors impacting the increase in operating expenses as discussed
above.
General and administrative expenses increased 28.0% to $4.8 million in Third
Quarter 1999 from $3.7 million in Third Quarter 1998. The increase reflects
costs related to additional infrastructure and continued growth in the
Company's business development efforts as well as additional costs related to
the Company's service agreement with The Wackenhut Corporation ("Parent"). As a
percentage of revenue, general and administrative expenses decreased to 4.2% in
Third Quarter 1999 from 4.8% in Third Quarter 1998.
Operating income increased by 13.7% to $6.9 million in Third Quarter 1999 from
$6.1 million in Third Quarter 1998. As a percentage of revenue, operating
income decreased to 6.2% in Third Quarter 1999 from 7.8% in Third Quarter 1998
due to the factors impacting contribution from operations offset by leveraging
of overhead.
Interest income was $1.0 million during the Third Quarter 1999 compared to $0.6
million in Third Quarter 1998 resulting from an increase in the return on
investment in overseas projects.
Page 13 of 18
<PAGE> 14
WACKENHUT CORRECTIONS CORPORATION
Income before income taxes, equity in earnings of affiliates, and cumulative
effect of change in accounting for start-up costs increased to $7.9 million in
Third Quarter 1999 from $6.7 million in Third Quarter 1998 due to the factors
described above.
Provision for income taxes increased to $3.2 million in Third Quarter 1999 from
$2.8 million in Third Quarter 1998 due to higher taxable income.
Equity in earnings of affiliates, net of income tax provision, increased to
$1.0 million in Third Quarter 1999 from $0.5 million in Third Quarter 1998 due
to the commencement of home monitoring contracts in January 1999 and the
opening of H.M. Prison Kilmarnock in March, 1999 and the Hassockfield Secure
Training Centre in Medomsley, England in September 1999.
Net income increased to $5.7 million in Third Quarter 1999 from $4.3 million in
Third Quarter 1998 as a result of the factors described above.
COMPARISON OF THIRTY-NINE WEEKS ENDED OCTOBER 3, 1999 AND THIRTY-NINE WEEKS
ENDED SEPTEMBER 27, 1998:
Revenues increased by 40.8% to $315.5 million in the Nine Months 1999 from
$224.1 million in the Nine Months 1998. Approximately $75.2 million of the
increase in revenues in Nine Months 1999 compared to Nine Months 1998 is
attributable to increased compensated resident days resulting from the opening
of eight facilities in 1998 (Karnes County Correctional Center, Karnes City,
Texas in January, 1998; Broward County Work Release Center, Broward County,
Florida in February, 1998; Lea County Correctional Facility, Hobbs, New Mexico
in May, 1998; Lawton Correctional Facility, Lawton, Oklahoma in July, 1998;
George W. Hill Correctional Facility, Thornton, Pennsylvania in July, 1998;
South Florida State Hospital, Pembroke Pines, Florida in November, 1998; Jena
Juvenile Justice Center, Jena, Louisiana in December, 1998; and Cleveland
Correctional Center, Cleveland, Texas in January, 1999) and with the opening of
four facilities in the Nine Months 1999 (Guadalupe County Correctional Facility,
Santa Rosa, New Mexico in January, 1999; Melbourne Custody Detention Centre,
Melbourne, Australia in March 1999; East Mississippi Correctional Facility,
Meridian, Mississippi in April, 1999; and the Michigan Youth Correctional
Facility, Baldwin, Michigan in July 1999). The 1,562-bed George W. Hill
Correctional Facility opened in 1998 replaced the existing 1,000-bed facility
managed by the Company. 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 facilities increased to
6,375,091 in Nine Months 1999 from 4,853,591 in Nine Months 1998. The average
facility occupancy in domestic facilities was 97.7% of capacity in Nine Months
1999 compared to 96.9% in Nine Months 1998. Compensated resident days in
Australian facilities increased to 740,983 from 412,196 for the comparable
periods primarily due to higher compensated resident days at the immigration
detention facilities.
Operating expenses increased by 44.4% to $278.7 million in Nine Months 1999
compared to $193.1 million in Nine Months 1998. The increase primarily reflects
the twelve facilities that opened in 1998 and 1999, as described above.
Additionally, there are a number of secondary factors contributing to the
increase which include the following: lease payments to CPV of $15.3 million
offset by the amortization of deferred revenue of $1.2 million, expenses related
to the construction of a new facility for South Florida State Hospital and
additional expenses related to operations at the New Mexico facilities, East
Mississippi Correctional Facility (Mississippi), Jena Juvenile Justice Center
(Louisiana), Ronald McPherson Correctional Facility (Arkansas) and Taft
Correctional Institution (California). The Company has developed strategies to
improve
Page 14 of 18
<PAGE> 15
WACKENHUT CORRECTIONS CORPORATION
the operational performance of these facilities, however, there can be no
assurances that these strategies will be successful.
Depreciation and amortization increased by 31.2% to $3.8 million in the Nine
Months 1999 from $2.9 million in the Nine Months 1998. As a percentage of
revenue, depreciation and amortization decreased to 1.2% from 1.3%.
Contribution from operations increased by 17.3% to $33.0 million in Nine Months
1999 from $28.1 million in Nine Months 1998. As discussed above, this increase
is primarily attributable to twelve new facilities that opened in 1998 and 1999.
As a percentage of revenue, contribution from operations decreased to 10.5% in
Nine Months 1999 from 12.6% in Nine Months 1998. This decrease is primarily due
to the factors discussed above regarding the increase of operating expenses.
General and administrative expenses increased by 19.4% to $12.7 million in Nine
Months 1999 from $10.7 million in Nine Months 1998. This increase reflects costs
related to additional infrastructure and continued growth in the Company's
business development efforts as well as additional costs related to the
Company's service agreement with Parent. As a percentage of revenue, general and
administrative expenses decreased to 4.0% in the Nine Months 1999 from 4.8% in
the Nine Months 1998.
Operating income increased by 16.1% to $20.3 million in Nine Months 1999 from
$17.5 million in Nine Months 1998. As a percentage of revenue, operating income
decreased to 6.4% in Nine Months 1999 from 7.8% in Nine Months 1998 due to the
factors impacting contribution from operations offset by leveraging of overhead.
Interest income increased 45.5% to $2.0 million in Nine Months 1999 from $1.4
million in Nine Months 1998 resulting from increases in the average invested
cash balance and the return on investment in overseas projects.
Income before income taxes, equity in earnings of affiliates, and the cumulative
effect of change in accounting for start-up costs increased by 18.2% to $22.3
million in Nine Months 1999 from $18.9 million in Nine Months 1998 due to the
factors described above.
Provision for income taxes increased to $8.9 million in Nine Months 1999 from
$7.8 million in Nine Months 1998 due to higher taxable income.
Equity in earnings of affiliates, net of income tax provision, increased 99.8%
to $2.5 million for Nine Months 1999 from $1.3 million in Nine Months 1998 due
to the commencement of home monitoring contracts in January 1999 and the
opening of H.M. Prison Kilmarnock in March 1999 and the Hassockfield Secure
Training Centre in Medomsley, England in September 1999.
Income before cumulative effect of change in accounting for start-up costs
increased 28.6% to $15.9 million in Nine Months 1999 from $12.4 million in Nine
Months 1998 as a result of the factors discussed above.
Cumulative effect of change in accounting for start-up costs was $11.5 million
in First Quarter 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 increased to $15.9 million in Nine Months 1999 from $0.8 million in
Nine Months 1998 as a result of the factors described above.
Page 15 of 18
<PAGE> 16
WACKENHUT CORRECTIONS CORPORATION
SUBSEQUENT EVENT
On August 31, 1999, the Company announced the mutual decision between the
Company, the Texas Department of Criminal Justice State Jail Division (TDCJ)
and Travis County, Texas to discontinue the Company's contract for the
operation of the Travis County Community Justice Center. The contract was
discontinued effective November 8, 1999. The Company is involved in discussions
with TDCJ regarding close-out of all contract claims. The Company cannot
predict the outcome of these discussions at this time.
Page 16 of 18
<PAGE> 17
WACKENHUT CORRECTIONS CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Item 7A, Part II of the Company's Annual Report on Form
10-K for the fiscal year ended January 3, 1999, for discussion pertaining to
the Company's exposure to certain market risks. There have been no material
changes in the disclosure for the thirteen weeks ended October 3, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except for disclosures made in "Commitments and Contingencies" 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 nature of the Company's
business results in claims or litigation against the Company for damages arising
from the conduct of its employees or others. 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.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K - The Company did not file a Form 8-K
during the thirteen weeks ended October 3, 1999.
Page 17 of 18
<PAGE> 18
WACKENHUT CORRECTIONS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WACKENHUT CORRECTIONS CORPORATION
November 17, 1999 /s/ John G. O'Rourke
- ------------------------- --------------------------------------
Date John G. O'Rourke
Senior Vice President - Finance,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Page 18 of 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT OCTOBER 3, 1999 AND THE CONSOLIDATED STATEMENTS OF
INCOME FOR THE FISCAL PERIOD ENDING OCTOBER 3, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<PERIOD-END> OCT-03-1999
<CASH> 22,711
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<RECEIVABLES> 74,809
<ALLOWANCES> 346
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<PP&E> 38,303
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