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 December 28, 1997 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) <TABLE> <CAPTION> <S> <C> Florida 65-0043078 ------- ---------- (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 4200 Wackenhut Drive #100, Palm Beach Gardens, Florida 33410-4243 - ------------------------------------------------------ ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) </TABLE> REGISTRANT'S TELEPHONE NUMBER (INCLUDING AREA CODE): (561) 622-5656 - ------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Common Stock $0.01 Par Value 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 January 30, 1998, the aggregate market value of the 10,168,797 shares of Common Stock held by non-affiliates of the registrant was $259,304,324, At January 30, 1998, there were outstanding 22,168,797 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Parts of the Registrant's Proxy Statement for its 1998 Annual Meeting of Shareholders are incorporated by reference in Part III of this Annual Report. EXHIBIT INDEX IS LOCATED ON PAGE 53 PAGE 1 of 60
2 PART I ITEM 1. BUSINESS THE COMPANY Wackenhut Corrections Corporation is a leading developer and manager of privatized correctional and detention facilities in the United States, Puerto Rico, Canada, the United Kingdom and Australia. The Company was founded in 1984 as a division of The Wackenhut Corporation ("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 detention facility management services from individual consulting projects to the integrated design, construction and management of such facilities. In addition to providing the fundamental residential services relating to the security of facilities and the detention and care of inmates, Wackenhut Corrections Corporation has built a reputation as an effective provider of a wide array of in-facility rehabilitative and educational programs. These programs include chemical dependency counseling and treatment, basic education, and job and life skills training. Additionally, the Company continuously seeks to expand into complementary services such as work release programs, youth detention services and prisoner transport services (known as court escort services in the United Kingdom). The Company believes that its experience in delivering governmental agencies high quality cost-effective correctional and detention facility management services provides such agencies strong incentive to select the Company when renewing and awarding contracts. As of January 30, 1998 the Company has 46 correctional and detention facilities either under contract or award with an aggregate design capacity of 30,144 beds. Of these 46 facilities, 35 are currently in operation, and 11 are being developed by the Company. Of the facilities being developed, six are scheduled to commence operations during 1998 (two in the first quarter, one in the second quarter, two in the third quarter and one in the fourth quarter)*. In addition, at January 30, 1998, the Company had outstanding written responses to Requests for Proposal ("RFPs") for 7 projects with an aggregate design capacity of 1,819 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 and four immigration detention centers. 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 one correctional facility and two court escort contracts and will commence management of a second correctional facility in 1998. 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. 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 Trafalgar House Limited, for the design, construction and financing of new detention facilities and prisons. The Company expects that PCD will bid with PPS for the design, development and management of new correctional and detention facilities in the United Kingdom. Generally, 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 Page 2 of 60
3 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) borrowing 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 24 through 28 and Note 4 of Notes to Consolidated Financial Statements 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 60
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 30, 1998. <TABLE> <CAPTION> FACILITY NAME COMPANY DESIGN FACILITY SECURITY COMMENCEMENT TERM RENEWAL LOCATION ROLE CAPACITY TYPE LEVEL OF CURRENT CONTRACT OPTION - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> FEDERAL GOVERNMENT CONTRACTS: Aurora INS Processing Construction/ 300 INS Detention Minimum/ January 1998 (7) Ongoing Center Management Facility Medium basis Aurora, Colorado Queens Private Construction/ 200 INS Detention Minimum/ March 1997 1 year Four, Correctional Facility Management Facility Medium One-year Queens, New York 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 1,474 State Prison Medium/ December 1993 3 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 (1) Bridgeport, Texas Central Texas Parole Renovation/ 623 Parole Violator All levels September 1997 Varies (2) Varies (2) Violator Facility Management Facility/U.S. 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 Charlotte County Design/ 1,000 State Prison Medium 2000* (3) (3) Correctional Facility Construction/ (Estimated) Charlotte County, Management Virginia Coke County Juvenile Design/ 104 Juvenile Offender Medium/ October 1996 2 years Automatic, Justice Facility Construction/ Facility Maximum Unlimited, Coke County, Texas Management Two-year </TABLE> PAGE 4 of 60
5 <TABLE> <CAPTION> FACILITY NAME COMPANY DESIGN FACILITY SECURITY COMMENCEMENT TERM RENEWAL LOCATION ROLE CAPACITY TYPE LEVEL OF CONTRACT OPTION - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Desert View Community Design/ 550 State Community Medium December 1997 10 years None Correctional Facility Construction/ Correctional Adelanto, California Management Facility Golden State Community Design/ 550 State Community Medium December 1997 10 years None Correctional Facility Construction/ Correctional McFarland, California Management Facility Guadalupe County Design/ 600 State Prison All levels 4th Quarter 1998* (3) (3) Correctional Facility Construction/ (Estimated) Santa Rosa, Management New Mexico John R. Lindsey Unit Design/ 1,000 Texas State Jail Medium September 1995 3 years One, Jack County, Texas Consultation/ Facility Two-year Management Karnes County Management 480 State Prison All levels January 1998 Varies Varies Correctional Center Karnes City, Texas Kyle New Vision Construction/ 520 State Prison/ Minimum September 1995 5 years None Chemical Dependency Management/ In-Prison (1) Treatment Center (4) Chemical Chemical Kyle, Texas Dependency Dependency Treatment Treatment Center Lea County Design/ 1,200 State Prison All levels 2nd Quarter 1998* (3) (3) Correctional Facility Construction/ (Estimated) Hobbs, New Mexico Management East Mississippi Design/ 500 Mental Health All levels 1st Quarter 1999* 5 years One, Correctional Facility Construction/ Corrections (Estimated) Two-Year Lauderdale County, Management Mississippi Lawton Correctional Design/ 1,500 State Prison Medium 1st Quarter 1999* (3) (3) Facility Construction/ (Estimated) Lawton, Oklahoma Management Lockhart Renaissance Design/ 500 State Prison Minimum/ August 1997 1 year One, Facility Construction/ Medium One-year Lockhart, Texas Management Lockhart Work Program Construction/ 500 Work Program Minimum September 1997 1 year None Facility Management Facility 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 1994 5 years None Correctional Facility Management Correctional Medium McFarland, California Facility Michigan Youth Design/ 480 Juvenile Maximum 2nd Quarter 1999* (3) (3) Correctional Facility Construction/ (Estimated) Baldwin, Michigan Management </TABLE> PAGE 5 of 60
6 <TABLE> <CAPTION> FACILITY NAME COMPANY DESIGN FACILITY SECURITY COMMENCEMENT TERM RENEWAL LOCATION ROLE CAPACITY TYPE LEVEL OF CONTRACT OPTION - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Moore Haven Design/ 750 State Prison Medium July 1995 3 years Unlimited, Correctional Facility Construction/ Two-year Moore Haven, Florida Management North Texas Renovation/ 400 Intermediate Minimum September 1997 1 year None Intermediate Sanction Management Sanction Facility Facility Fort Worth, Texas Ronald "Opie" Design/ 600 State Prison All levels January 1998 2 years Unlimited, McPherson Correctional Construction/ Two-year Facility Management Newport, Arkansas Scott Grimes Design/ 600 State Prison Minimum/ January 1998 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 Design/ 1,000 Texas State Jail Medium March 1997 2 - 1/3 Automatic, Community Justice Consultation/ Facility years Unlimited, Center Management (5) Two-year Travis County, Texas Willacy County Unit Design/ 1,000 Texas State Jail Medium January 1996 2 - 1/2 One, Raymondville, Texas Consultation/ Facility years Two-year Management LOCAL GOVERNMENT CONTRACTS: Broward County Work Design/ 300 Community Work None 1st Quarter 1998* 5 year Unlimited, Release Center Construction/ Release Center (Estimated) Two-year Broward County, Management Florida Jena Juvenile Justice Design/ 276 City Jail All levels 3rd Quarter 1998* 25 years None Center Construction/ (Estimated) Jena, Louisiana Management San Diego City Jail Construction/ 200 City Jail Facility Minimum May 1997 5 years None San Diego, California Management Delaware County Prison Design/ 1,200 County Jail All levels 3rd Quarter 1998* 3 years Unlimited, Delaware County, Construction/ Facility (Estimated) Two-year Pennsylvania (6) Management INTERNATIONAL CONTRACTS: Arthur Gorrie Management 608 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 7 years Two, West Midlands Area Transport-Escort Three-year England </TABLE> PAGE 6 of 60
7 <TABLE> <CAPTION> FACILITY NAME COMPANY DESIGN FACILITY SECURITY COMMENCEMENT TERM RENEWAL LOCATION ROLE CAPACITY TYPE LEVEL OF CONTRACT OPTION - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> Court Escort Management NA Court Custody/ All levels May 1996 7 years Two, South East Area Transport-Escort Three-year England 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 1993 5 years One, Centre Management Three-year 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 1st Quarter 1998* 25 years None Grange (Estimated) Nottinghamshire, England Maribyrnong Detention Management 80 Immigration All levels December 1997 3 years One to Centre Detention Three Years Melbourne, Australia New Brunswick Youth Design/ 112 Province Juvenile All levels October 1997 25 years None Centre Consultation/ Facility New Brunswick, Canada Maintenance Perth Detention Centre Management 40 Immigration All levels December 1997 3 years One to Perth, Australia Detention Three Years Port Hedland Detention Management 700 Immigration All levels December 1997 3 years One to Centre Detention Three Years Port Hedland, Australia Pucklechurch Youth Management 400 Youth Prison All levels 4th Quarter 1999* (3) (3) Offender Institution (Estimated) Pucklechurch, UK Public Corrections Management NA Health Care NA January 1998 3 years One, Enterprise Services Two-year Victoria, Australia Villawood Detention Management 300 Immigration All levels December 1997 3 years One to Centre Detention Three Years Sydney, Australia </TABLE> (1) Subject to termination option on August 31, 1998. (2) 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. (3) Contract terms have yet to be negotiated. (4) 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 September 30, 1998. (5) Expires August 31, 1998. (6) The Company has a contract to manage and operate an existing 1,000 bed facility in Delaware County, Pennsylvania. This contract will terminate upon the completion of a new 1,200 bed facility currently being constructed by the Company. The Company will manage and operate such facility upon its completion. (7) Interim contract expires in February 1998. Final contract terms have yet to be negotiated. PAGE 7 of 60
8 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 twenty-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 ten 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 "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 8 of 60
9 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 1997, 1996, and 1995. <TABLE> <CAPTION> CUSTOMER 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Various agencies of the State of Texas 32% 39% 37% Louisiana Department of Public Safety and Corrections 6% 9% 11% State of Florida Correctional Privatization Committee 13% 9% 8% New South Wales Department of Corrective Services 7% 10% 13% Queensland Corrective Services 7% 11% 13% - -------------------------------------------------------------------------------------------------------------------- </TABLE> Except for its contract for the Taft Correctional Institution, San Diego City Jail facility 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 will be 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) eleven contracts expiring in 1998 (one with automatic unlimited two-year extensions, two with a single two-year renewal option, one with unlimited two-year renewal options, one with a single three-year renewal option, four with no renewal options, one with four one-year renewal options, and one with a one-year renewal option); (ii) two contracts expiring in 1999 (one with no renewal option and one with three, three-year renewal options); (iii) six expiring in 2000 (two with no renewal option, three with unlimited two-year renewal options and one with seven, one-year renewal options); (iv) three expiring in 2001 (one with a single five-year renewal option and two with unlimited, two-year renewal options); (v) three expiring in 2002 (two with no renewal options and one with automatic, unlimited, two-year renewal options); (vi) and three expiring in 2003 (two with a single, four-year renewal option and one with unlimited two-year renewal options). 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 management contract for the New York INS facility expired effective March 31, 1995, and was not renewed by the INS due to the closure of the facility. The INS subsequently awarded the Company a contract to construct and manage PAGE 9 of 60
10 a New York facility called the Queens Privatized Correctional Facility. This facility opened in March, 1997. 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 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 $55 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 require the Company 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 January 30, 1998, the Company has provided service for the design and construction of twenty-one facilities and for the redesign and renovation of two facilities and has contracts to design and construct nine new facilities. 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. In addition, the Company has provided consulting services in connection with the construction of three new facilities in Texas. The Company has consulted on and/or managed the design and construction of the following facilities: (i) Aurora INS Processing Center; (ii) McFarland Community Correctional Facility; (iii) Bridgeport Pre-Release Center; (iv) Kyle New Vision Chemical Dependency Treatment Center; (v) Junee Correctional Centre; (vi) San Diego City Jail; (vii) Lockhart Work Program Facility; (viii) Lockhart Renaissance Facility; (ix) Moore Haven Correctional Facility; (x) Coke County Juvenile Justice Facility; (xi) South Bay Correctional Facility; (xii) Marshall County Correctional Facility; (xiii) Bayamon Regional Detention Center; (xiv) Ronald "Opie" McPherson Correctional Facility; (xv) Scott Grimes Correctional Facility; (xvi) Queens Private Correctional Facility; (xvii) Fulham Correctional Centre; (xviii) Central Valley Community Correctional Facility; (xix) Desert View Community Correctional Facility; (xx) Golden State Community Correctional Facility; and (xxi) New Brunswick Youth Centre. The Company is currently consulting on and/or managing the design and construction of the following facilities: (i) Broward County Work Release Center; (ii) Michigan Youth Correctional Facility; (iii) Lawton Correctional Facility; (iv) East Mississippi Correctional Facility; (v) the new Delaware County Prison; (vi) Charlotte County Correctional Facility; (vii) Jena Juvenile Justice Center; (viii) Guadalupe County Correctional Facility; and (ix) Lea County Correctional Facility. The Company also has provided consultation and management services in connection with the redesign and renovation of the following facilities: (i) North Texas Intermediate Sanction Facility; and (ii) Central Texas Parole Violator Facility. PAGE 10 of 60
11 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. 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. 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 46 facilities managed or contracted to be managed by the Company, 31 are funded using one of the above-described financing vehicles, twelve are or will be directly leased and three are owned. 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. PAGE 11 of 60
12 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 30, 1998, the Company had outstanding written responses to RFPs for 7 projects with a total of 1,819 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 (the "Insurance Program") maintained by TWC. The Insurance Program includes general comprehensive liability, automobile liability and workers' 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 $55 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 1997 was approximately $4,957,000, 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 PAGE 12 of 60
13 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 are reinsured by a captive reinsurance company that is wholly owned by TWC. EMPLOYEES AND EMPLOYEE TRAINING At January 30, 1998, the Company had 6,301 full-time employees. Of such full-time employees, 64 were employed at the Company's headquarters and 6,237 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 Junee Correctional Centre, Arthur Gorrie Correctional Centre, Fulham Correctional Centre, Maribyrnong Detention Centre, Perth Detention Centre, Port Hedland Detention Centre, and Villawood Detention Centre in Australia are members of unions. The Company has entered into a contract with the union for the correctional officers at these facilities. 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 corrections 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 limited to, Corrections Corporation of America, Correctional Services Corporation, Group 4 International Corrections Service, U.K. Detention Services, Ltd., Cornell Corrections Corporation and United States 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 PAGE 13 of 60
14 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> ------------ ------------- ------------ 1997 1996 1995 ------------ ------------- ------------ <S> <C> <C> <C> REVENUES Domestic operations $ 167,223 $ 108,245 $ 72,852 International operations 39,707 29,539 26,579 ------------ ------------- ------------ Total revenues 206,930 137,784 99,431 ============ ============= ============ OPERATING INCOME Domestic operations 12,388 7,087 4,501 International operations 4,157 2,644 2,728 ------------ ------------- ----------- Total operating income 16,545 9,731 7,229 ============ ============= =========== ASSETS Domestic operations 120,538 96,872 0,641 International operations 18,665 9,939 8,199 ------------ ------------- ----------- Total assets $ 139,203 $ 106,811 $ 38,840 ============ ============= =========== </TABLE> PAGE 14 of 60
15 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> 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA Revenues $ 51,009 $ 28,953 $ 17,705 Operating income (loss) 3,884 1,764 (357) Net income (loss) 2,209 1,208 (225) BALANCE SHEET DATA Current Assets 14,595 13,145 1,783 Noncurrent Assets 517 538 509 Current liabilities 8,115 8,518 3,702 Noncurrent liabilities 4,029 5,075 -- Stockholders' equity/(deficit) $ 2,968 $ 90 $ (1,410) - ------------------------------------------------------------------------------------------------------------------------- </TABLE> 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 PAGE 15 of 60
16 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 and Costa Mesa , California, and for a local office in Fort Lauderdale, Florida. The Company also leases the space for the following facilities it manages: (i) North Texas Intermediate Sanction Facility; (ii) Central Texas Parole Violator Facility; (iii) San Diego City Jail; (iv) Central Valley Community Correctional Facility; (v) Desert View Community Correctional Facility; (vi) Golden State Community Correctional Facility; and (vii) Broward County Work Release Center. The Company owns the land and a 66,000 square foot building for the Aurora INS Processing Center and the land and a 61,400 square foot building for the Queens Private Correctional Facility that the Company manages under contracts with the U.S. Government. The Company also owns the land and a 35,000 square foot building for the McFarland Community Correctional Facility that the Company manages under a contract with the State of California. 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 questions 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. An adverse determination in this action could result in the loss of the Company's contract to manage the existing facility, although the Company does not believe that such a loss would have a material adverse effect on the Company. The Company does not expect that this action would have an adverse impact on the Company's new Delaware County Prison constructed by the Company. The Company has not commenced operations at the new facility. 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. PAGE 16 of 60
17 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. 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 78 Chairman of the Board and Director George C. Zoley 48 Vice Chairman of the Board, Chief Executive Officer, and Director Wayne H. Calabrese 47 President and Chief Operating Officer John G. O'Rourke 47 Senior Vice President, Chief Financial Officer, and Treasurer Charles R. Jones 49 Senior Vice President, Business Development Carol M. Brown 43 Senior Vice President, Health Services Robert W. Mianowski 47 Senior Vice President, Operations Patricia McNair Persante 48 Senior Vice President, Contract Compliance David N.T. Watson 32 Controller, Chief Accounting Officer, and Assistant Treasurer </TABLE> GEORGE R. WACKENHUT has served as a director of The Company since it was incorporated in 1988 and has been the Chairman of the Board of The Company since July 1996. Mr. Wackenhut is the Chairman of the Board, Chief Executive Officer and founder of The Wackenhut Corporation, the parent of The Company. Mr. Wackenhut was President of The Wackenhut Corporation from the time of its founding in 1955 until 1986. Prior to that, Mr. Wackenhut had been a Special Agent of the Federal Bureau of Investigation from 1950 to 1954. He received a Bachelor of Science Degree from the University of Hawaii and a Masters of Education Degree from Johns Hopkins University. Mr. Wackenhut is on the Dean's Advisory Board of the University of Miami School of Business, the National Council of Trustees, Freedom 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. Mr. Wackenhut is a past member of the Law Enforcement Council, National Council on Crime and Delinquency, and the Board of Visitors of the United States Army Military Police School. His son, Richard R. Wackenhut, is a director of the Company. GEORGE C. ZOLEY has served as Vice Chairman of the Board since January, 1997, has served as President and a 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. From 1981 through 1988, as manager, director, and then Vice President of Government Services of 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 TWC. Prior to joining WSI, Dr. Zoley held various administrative and management positions for city and county governments in South Florida. WAYNE H. CALABRESE has served as President since January 1997, Chief Operating Officer since January 1996 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 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 PAGE 17 of 60
18 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. CHARLES R. JONES has served as Senior Vice President, Business Development since January 1997 after serving as Vice President, Business Development since joining the Company in June 1996. Previously, Mr. Jones was a senior investment banker specializing in structured finance and privatization consulting for the corrections industry with Rauscher, Pierce, Refsnes, Inc. in Dallas Texas, where he was Chairman of the firm's Banking Advisory Counsel. From 1973 to 1980 Mr. Jones, a CPA, practiced with Peat, Marwick, Mitchell & Co. specializing in the taxation of commercial real estate and financial institutions. CAROL M. BROWN has served as Senior Vice President, Health Services of the Company since August, 1990. 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 in private law practice for the prior two years. 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 is a member of the American Institute of Certified Public Accountants and the Florida Institute of Certified Public Accountants. PAGE 18 of 60
19 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS In March 1996, the Company changed its listing from WCCX on the Nasdaq Stock Market's National Market to WHC on the New York Stock Exchange. The ensuing table shows the high and low prices for the Company's common stock, as reported on the Nasdaq Stock Market's National Market and New York Stock Exchange, for each of the four quarters of Fiscal 1997 and 1996. All price data have been restated for the 100% stock dividend (treated as a stock split) paid on June 4, 1996. The approximate number of shareholders of record, as of January 30, 1998, was 298. <TABLE> <CAPTION> 1997 1996 --------------------------------------- ---------------------------------- High Low High Low - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> First Quarter $ 22-1/4 $ 15-3/4 $ 20-7/8 $ 12-3/16 Second Quarter 29-9/16 15-7/8 44-3/4 19-7/8 Third Quarter 30 24-1/8 35-3/4 19-3/4 Fourth Quarter 35-1/4 21-13/16 24-3/8 16 </TABLE> 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. PAGE 19 of 60
20 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data should be read in conjunction with the Company's consolidated financial statements and the notes thereto. <TABLE> <CAPTION> FISCAL YEARS ENDED: (A) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> RESULTS OF OPERATIONS: Revenues $ 206,930 $ 137,784 $ 99,431 $ 84,026 $ 58,784 Operating expenses 172,031 115,848 82,285 70,670 50,573 Depreciation and amortization 6,303 3,532 2,303 2,287 2,101 ------------------------------------------------------------------------------- Contribution from operations 28,596 18,404 14,843 11,069 6,110 General and administrative expenses 12,051 8,673 7,614 6,623 4,664 ------------------------------------------------------------------------------- Operating Income 16,545 9,731 7,229 4,446 1,446 Interest income (expense) 1,451 2,195 186 (261) (544) ------------------------------------------------------------------------------- Income before income taxes and equity income (loss) of affiliates 17,996 11,926 7,415 4,185 902 Provision for income taxes 7,226 4,269 2,862 1,661 368 ------------------------------------------------------------------------------- Income before equity income (loss) of affiliates 10,770 7,657 4,553 2,524 534 Equity income (loss) of affiliates, net of income taxes 1,105 604 (113) (331) 261 ------------------------------------------------------------------------------- Net Income $ 11,875 $ 8,261 $ 4,440 $ 2,193 $ 795 Basic earnings per share $ 0.54 $ 0.39 $ 0.26 $ 0.15 $ 0.06 Diluted earnings per share $ 0.52 $ 0.37 $ 0.25 $ 0.15 $ 0.06 FINANCIAL CONDITION: Working capital $ 48,576 $ 62,130 $ 13,455 $ 10,194 $ 5,032 Total assets 139,203 106,811 38,840 30,333 19,148 Long-term debt 213 225 980 1,412 --- Total debt 225 237 991 1,422 --- Shareholders' equity $ 102,295 $ 87,969 $ 25,229 $ 19,727 $ 4,212 - ------------------------------------------------------------------------------------------------------------------------ </TABLE> (A) The Company's fiscal year ends on the Sunday closest to the calendar year end. Fiscal 1997, 1996 and 1995 each included 52 weeks. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities amounted to $21,377,000 in 1997 versus $9,128,000 in 1996. The Company's primary capital requirements are 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 to the contracting agency over the original term of the contract. The cash required for these needs will be derived from internally generated funds, the proceeds from public stock offerings, and additional borrowings, if necessary.* PAGE 20 of 60
21 The Company anticipates making cash investments in connection with future acquisitions. In addition, in line with a developing industry trend toward requiring private operators to make capital investments in facilities and to enter into direct financing arrangements in connection with the development of such facilities, the Company anticipates utilizing cash to finance start-up costs, leasehold improvements and equity investments in facilities, if appropriate, in connection with undertaking new contracts.* Prior to the initial public offering (IPO) in July 1994, the Company financed its operations through borrowing from TWC. Interest on intercompany indebtedness was computed at rates which reflected TWC's average interest costs on long-term debt, exclusive of mortgage financing. Subsequent to the IPO and through Fiscal 1997, financing was obtained from internally generated funds, third-party borrowings, or proceeds from public stock offerings. In January 1996, the Company sold 4,600,000 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 $51,581,000. In 1996, the Company used $5.7 million of the proceeds to acquire the McFarland Community Correctional Facility. In 1997, the Company also purchased the Queens Private Correctional Facility for $6.6 million and spent another $4.7 million to renovate the building. Additionally, the Company invested $7.0 million to purchase and renovate an 86-bed psychiatric hospital. In June 1997, the Company entered into a $30,000,000 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 $5,000,000 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 1/2 of 1%) 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 December 28, 1997, no amounts were outstanding under this facility. However, at December 28, 1997, the Company had outstanding four standby letters of credit outstanding with a bank in an aggregate amount of approximately $222,000. In December 1997, the Company also entered into an $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, the Company unconditionally agreed to guarantee certain obligations of First Security Bank, National Association, a party to the aforementioned operating lease facility. As of December 28, 1997, approximately $69 million of properties were under development. The ratio of total debt to total capitalization was 0.2% at the end of Fiscal 1997 and 0.3% at the end of Fiscal 1996. Management is unaware of any other evident trends that are likely to result in material increases or decreases in the liquidity of the Company other than those factors mentioned above.* Management is constantly reviewing matters that could require significant outlays of cash with respect to corporate growth strategies; however, these matters are always reviewed in the light of appropriateness and availability of financing. PAGE 21 of 60
22 There are no other known material trends, favorable or unfavorable, in the capital resources of the Company. In the event that the Company would have any significant requirement beyond the matters discussed above, capital resources are available under its revolving line of credit with a bank, and management believes that additional resources may be available to the Company through a variety of other methods of financing.* YEAR 2000 The Company has several information system improvement initiatives under way that will require increased expenditures during the next few years. These initiatives include the replacement of certain Company computer systems to be Year 2000 compliant. The Year 2000 issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the century date change occurs, date-sensitive systems will recognize the year 2000 as 1900, or not at all. This inability to recognize or properly treat the Year 2000 may cause systems to process critical financial and operational information incorrectly. Anticipated spending for this modification will be expensed as incurred and is not expected to have a significant impact on the Company's ongoing results of operations. INTEREST RATE SENSITIVITY The Company is exposed to market risks arising from changes in interest rates with respect to a $220 million operating lease facility. Monthly lease payments under this facility are indexed to a variable interest rate. Management has determined that a 10% change in the current lease rate would have an immaterial effect on the Company's pre-tax earnings over the next fiscal year. PAGE 22 of 60
23 RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto. The following table sets forth certain Statements of Income data expressed as percentages of total revenues for the following fiscal years: <TABLE> <CAPTION> 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Revenues 100.0% 100.0% 100.0% Operating expenses 83.1 84.1 82.8 Depreciation and amortization 3.1 2.5 2.3 ------------------------------------------------------------------------------ Contribution from operations 13.8 13.4 14.9 General and administrative expenses 5.8 6.3 7.6 ------------------------------------------------------------------------------ Operating income 8.0 7.1 7.3 Interest income 0.7 1.6 0.2 ------------------------------------------------------------------------------ Income before income taxes and equity income (loss) of affiliates 8.7 8.7 7.5 Provision for income taxes 3.5 3.1 2.9 Equity income (loss) of affiliates, net of income taxes 0.5 0.4 (0.1) Net income 5.7% 6.0% 4.5% - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> FISCAL 1997 COMPARED WITH FISCAL 1996 Revenues increased by 50.2% to $206.9 million in 1997 from $137.8 million in 1996. The increase in revenues in 1997 compared with 1996 is primarily attributable to increased compensated resident days resulting from the opening of the following ten facilities in 1997 (South Bay Correctional Facility, South Bay, Florida in February 1997, Travis County Community Justice Center, Travis County, Texas in March 1997; Bayamon Regional Detention Center, Bayamon, Puerto Rico in March 1997; Queens Private Correctional Facility, Queens, New York in March 1997; Fulham Correctional Centre, Victoria, Australia in March 1997; Taft Correctional Institution, Taft, California in December 1997; Maribyrnong Detention Centre, Melbourne, Australia in December 1997; Perth Detention Centre, Perth, Australia in December 1997; Port Hedland Detention Centre, Port Hedland, Australia in December 1997 and Villawood Detention Center, Sydney, Australia in October 1997); and increased compensated resident days at three facilities that opened in the first half of 1996 (Willacy County Unit, Willacy, Texas in January 1996, Delaware County Prison in April 1996, and Marshall County Correctional Facility, Marshall County, Mississippi in June 1996). PAGE 23 of 60
24 The following table sets forth the number of facilities under contract or award at the end of the following fiscal years: <TABLE> <CAPTION> 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Contracts (1) 46 34 24 Facilities in operation 32 19 16 Design capacity of contracts 30,144 24,371 16,054 Design capacity of facilities in operation 20,720 12,235 9,135 Compensated resident days (2) 5,192,614 3,585,100 2,350,843 - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Comprised of facilities in operation, facilities under development and facilities for which awards have been obtained. (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 H.M. Prison Doncaster, England. 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 and minimum occupancy guarantees at several of the new facilities that opened in 1997, 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 resulting from ten new facilities that opened in 1997 and three facilities that opened 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 increase is due to 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. This increase is due to ten new facilities discussed above 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 additional infrastructure to support the Company's expanded operations. General and administrative expenses decreased to 5.8% of total revenues in 1997 from 6.3% in 1996. Operating income increased by 70.0% to $16.5 million in 1997 from $9.7 million in 1996 as 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. PAGE 24 of 60
25 Interest income was $1.4 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 income 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 income of affiliates increased to $1,105,000 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. FISCAL 1996 COMPARED WITH FISCAL 1995 Revenues increased by 38.6% to $137.8 million in 1996 from $99.4 million in 1995. The increase in revenues in 1996 compared with 1995 is primarily attributable to increased compensated resident days resulting from the increasing occupancy of two facilities that opened in the second half of 1995 (Moore Haven Correctional Facility, Moore Haven, Florida in July 1995 and John R. Lindsey Unit, Jack County, Texas in September 1995), the opening of two facilities in the first half of 1996 (Willacy County Unit, Willacy County, Texas in January 1996 and Marshall County Correctional Facility, Marshall County, Mississippi in June 1996), the assumption of operational responsibility for an existing facility (Delaware County Prison, Delaware County, Pennsylvania in April 1996) the expansion on one facility (Allen Correctional Center, Kinder, Louisiana) and the temporary double up at another facility (Arthur Gorrie Correctional Centre, Wacol, Australia). The number of compensated resident days in domestic and Australian facilities increased to 3.6 million in 1996 from 2.4 million in 1995. As a result of the increase in compensated resident days, average facility occupancy in domestic and Australian facilities increased to 96.8% of capacity in 1996 compared to 94.8% in 1995. Operating expenses increased by 40.8% to $115.8 million in 1996 from $82.3 million in 1995. As a percentage of revenues, operating expenses increased to 84.1%. This increase is primarily attributable to higher operating expenses at the Company's Australian facilities. Depreciation and amortization increased by 53.4% to $3.5 million in 1996 from $2.3 million in 1995. This increase is due to the increase in capital and deferred charge expenditures resulting from the opening of the new facilities, the assumption of correctional services, the purchase of one facility and the expansions discussed above. Contribution from operations increased 24.0% to $18.4 million in 1996 from $14.8 million in 1995. As a percentage of revenues, contribution from operations decreased to 13.4% from 14.9%. As discussed above, this decrease is due primarily to the Company's Australian operations. PAGE 25 of 60
26 General and administrative expenses increased by 13.9% to $8.7 million in 1996 from $7.6 million in 1995. 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 6.3% of total revenues in 1996 from 7.7% in 1995. Operating income increased by 34.6% to $9.7 million in 1996 from $7.2 million in 1995 as a result of the factors described above. As a percentage of revenue, operating income decreased to 7.1% from 7.3%. Interest income was $2.2 million in 1996 compared to interest income of $186,000 in 1995. The increase is attributable to interest earned on the proceeds of the January 1996 stock offering. Income before income taxes and equity (loss) income of affiliates increased to $11.9 million in 1996 from $7.4 million in 1995 due to the factors described above. Provision for income taxes increased to $4.3 million in 1996 from $2.9 million in 1995 due to higher taxable income. Equity income (loss) of affiliates increased to $604,000 in 1996 from ($113,000) in 1995. Current and prior year performance reflects the activities of Premier Prison Services, a U.K. joint venture. The increase in current year income results from three expansion at the H.M. Prison Doncaster (Doncaster, England) in November 1995, June 1996 and November 1996, respectively, and income earned from two court escort contracts that were awarded in December 1995 and commenced operations in May 1996. 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 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.* PAGE 26 of 60
27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WACKENHUT CORRECTIONS CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> 1997 1996 1995 ----------------------------------------------------------------------------- <S> <C> <C> <C> Revenues $ 206,930 $ 137,784 $ 99,431 Operating expenses (including amounts related to The Wackenhut Corporation ("TWC") of $5,337, $3,693 and $6,008) 172,031 115,848 82,285 Depreciation and amortization 6,303 3,532 2,303 ----------------------------------------------------------------------------- Contribution from operations 28,596 18,404 14,843 General and administrative expenses (including amounts related to TWC of $1,566, $1,432 and $1,264) 12,051 8,673 7,614 ----------------------------------------------------------------------------- Operating income 16,545 9,731 7,229 Interest income (including amounts related to TWC of ($10), ($40) and $172) 1,451 2,195 186 ----------------------------------------------------------------------------- Income before income taxes and equity income (loss) of affiliate 17,996 11,926 7,415 Provision for income taxes 7,226 4,269 2,862 ----------------------------------------------------------------------------- Income before equity income (loss) of affiliate 10,770 7,657 4,553 Equity income (loss) of affiliate, net of income taxes (benefit) of $692, $378 and ($70) 1,105 604 (113) ----------------------------------------------------------------------------- Net income $ 11,875 $ 8,261 $ 4,440 ============================================================================== Basic earnings per share (Note 9) $ 0.54 $ 0.39 $ 0.26 ============================================================================== Diluted earnings per share (Note 9) $ 0.52 $ 0.37 $ 0.25 ============================================================================== Basic weighted average shares outstanding 22,015 21,361 16,850 ============================================================================== Diluted weighted average shares outstanding 22,697 22,128 17,708 ============================================================================== </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. PAGE 27 of 60
28 WACKENHUT CORRECTIONS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS) FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 <TABLE> <CAPTION> COMMON STOCK ADDITIONAL CUMULATIVE TOTAL NUMBER PAID-IN RETAINED TRANSLATION SHAREHOLDERS' OF SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> BALANCE, JANUARY 1, 1995 16,370 $ 164 $ 17,720 $ 1,647 $ 196 $ 19,727 TRANSLATION ADJUSTMENT -- -- -- -- (85) (85) PROCEEDS FROM STOCK OPTION EXERCISES 709 7 970 -- -- 977 TAX BENEFIT RELATED TO EMPLOYEE STOCK OPTIONS -- -- 170 -- -- 170 NET INCOME -- -- -- 4,440 -- 4,440 ----------------------------------------------------------------------------------------- BALANCE, DECEMBER 31,1995 17,079 171 18,860 6,087 111 25,229 TRANSLATION ADJUSTMENT -- -- -- -- 305 305 PROCEEDS FROM STOCK OFFERING 4,600 46 51,535 -- -- 51,581 PROCEEDS FROM STOCK OPTION EXERCISES 259 2 764 -- -- 766 TAX BENEFIT RELATED TO EMPLOYEE STOCK OPTIONS -- -- 1,827 -- -- 1,827 NET INCOME -- -- -- 8,261 -- 8,261 ----------------------------------------------------------------------------------------- BALANCE, DECEMBER 29, 1996 21,938 219 72,986 14,348 416 87,969 TRANSLATION ADJUSTMENT -- -- -- -- (2,572) (2,572) PROCEEDS FROM STOCK OPTION EXERCISES 231 3 1,757 -- -- 1,760 TAX BENEFIT RELATED TO EMPLOYEE STOCK -- -- 3,263 -- -- 3,263 OPTIONS NET INCOME -- -- -- 11,875 -- 11,875 ----------------------------------------------------------------------------------------- BALANCE DECEMBER 28, 1997 22,169 $ 222 $ 78,006 $26,223 $ (2,156) $ 102,295 - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. PAGE 28 of 60
29 WACKENHUT CORRECTIONS CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 28, 1997 AND DECEMBER 29, 1996 (IN THOUSANDS, EXCEPT SHARE DATA) <TABLE> <CAPTION> 1997 1996 --------------------------------------------------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 28,960 $ 44,368 Accounts receivable, net 36,755 24,879 Other 9,457 6,066 --------------------------------------------------- Total current assets 75,172 75,313 Property and equipment, net 38,754 18,975 Investments in and advances to affiliates 7,325 1,810 Deferred charges, net 14,218 7,522 Unamortized cost in excess of net assets of acquired companies, net 2,359 2,224 Other 1,375 967 --------------------------------------------------- $ 139,203 $ 106,811 =================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 6,160 $ 4,020 Accrued payroll and related taxes 8,316 4,558 Accrued expenses 11,717 3,717 Current portion of long-term debt 12 12 Deferred income tax liability, net 391 876 --------------------------------------------------- Total current liabilities 26,596 13,183 --------------------------------------------------- Deferred income tax liability, net 10,099 5,434 --------------------------------------------------- Long-term debt 213 225 --------------------------------------------------- Commitments and contingencies (Note 7) Shareholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized --- --- Common stock, $.01 par value, 60,000,000 shares authorized, 22,168,542 and 21,937,992 shares issued and outstanding 222 219 Additional paid-in capital 78,006 72,986 Retained earnings 26,223 14,348 Cumulative translation adjustment (2,156) 416 --------------------------------------------------- Total shareholders' equity 102,295 87,969 --------------------------------------------------- $ 139,203 $ 106,811 =================================================== </TABLE> The accompanying notes to consolidated financial statements are an integral part of these balance sheets. PAGE 29 of 60
30 WACKENHUT CORRECTIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 (IN THOUSANDS) <TABLE> <CAPTION> 1997 1996 1995 --------------------------------------------------------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 11,875 $ 8,261 $ 4,440 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization expense 6,303 3,532 2,303 Equity (income) loss of affiliates (1,797) (982) 183 Changes in assets and liabilities - (Increase) decrease in assets: Accounts receivable (12,623) (6,943) (7,355) Other current assets (3,606) (2,384) (1,966) Other assets (201) 34 (76) Deferred income tax asset -- ` 51 20 Unamortized cost in excess of net assets acquired (782) -- -- Increase (decrease) in liabilities: Accounts payable and accrued expenses 10,739 2,003 (238) Accrued payroll and related taxes 4,027 1,152 1,293 Deferred income taxes, net 7,442 4,404 2,741 --------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 21,377 9,128 1,345 --------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in affiliates (3,718) (428) (372) Capital expenditures (23,965) (12,476) (2,720) Deferred charge expenditures (9,625) (4,505) (3,693) --------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (37,308) (17,409) (6,785) --------------------------------------------------------- </TABLE> (Continued) The accompanying notes to consolidated financial statements are an integral part of these statements. PAGE 30 of 60
31 WACKENHUT CORRECTIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 (IN THOUSANDS) (Continued) <TABLE> <CAPTION> 1997 1996 1995 --------------------------------------------------------- <S> <C> <C> <C> CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock $ -- $ 51,581 $ -- Proceeds from exercise of stock options 1,760 766 977 Retirement of debt (12) (792) (381) Advances from TWC 116,019 102,431 66,502 Repayments to TWC (116,019) (102,431) (66,629) --------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,748 51,555 469 --------------------------------------------------------- Effect of exchange rate changes on cash (1,225) 185 (101) --------------------------------------------------------- Net (decrease) increase in cash (15,408) 43,459 (5,072) Cash, beginning of period 44,368 909 5,981 --------------------------------------------------------- CASH, END OF PERIOD $ 28,960 $ 44,368 $ 909 ========================================================= SUPPLEMENTAL DISCLOSURES: Cash paid during the year for: Income taxes $ 100 $ 976 $ 1,156 Interest $ 59 $ 114 $ 20 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 $ 3,263 $ 1,827 $ 170 ========================================================= </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. PAGE 31 of 60
32 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (TABULAR INFORMATION: IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) FOR THE FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 (1) GENERAL Wackenhut Corrections Corporation, a Florida corporation, and subsidiaries (Company), a majority owned subsidiary of The Wackenhut Corporation (TWC), is a leading developer and manager of privatized correctional and detention facilities located in the United States, the United Kingdom 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 1997, 1996 and 1995 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 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. 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. UNAMORTIZED COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES (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 $1.1 million and $969,000 at December 28, 1997 and December 29, 1996, respectively. PAGE 32 of 60
33 DEFERRED CHARGES Facility start-up costs, which consist of costs of initial employee training, travel and other direct expenses incurred in connection with the opening of new facilities, are capitalized and amortized on a straight-line basis over the lesser of the initial term of the contract plus renewals or five years. Project development costs consisting of direct and incremental costs paid to unrelated third parties that can be directly associated with a specific anticipated contract are deferred until the anticipated contract has been awarded. At the time the contract is awarded to the Company, the deferred project development costs are either capitalized as part of property and equipment or are amortized over five years as project development costs. Internal costs associated with securing new contracts are expensed as incurred. Project development costs are charged to general and administrative expenses when the success of obtaining a new contract is considered doubtful. Accumulated amortization totaled $7,332,000 and $4,440,000 in Fiscal 1997 and 1996, respectively. In April 1997, the Financial Accounting Standards Board issued an Exposure Draft that proposed the issuance of a Statement of Position (SOP) on Accounting for the Costs of Start-up Activities. If adopted, this SOP would require the expensing of start-up costs, defined as pre-opening, pre-operating and pre-contract type costs, as incurred. Management expects the effects of adoption would be reported as a cumulative change in accounting principle; thus, any costs previously capitalized would be written off at the time the SOP is adopted. If this SOP is adopted in 1998, the Company anticipates a pre-tax write-off of approximately $18.2 million (or $10.9 million after-tax) to record the cumulative effect of the change in accounting principle. REVENUES AND OPERATING PROFIT 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. Except for the major customers noted in the following table, no single customer provided more than 10% of consolidated revenues during Fiscal 1997, 1996 and 1995: <TABLE> <CAPTION> CUSTOMER 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Various agencies of the State of Texas 32% 39% 37% Louisiana Department of Public Safety and Corrections 6% 9% 11% State of Florida Correctional Privatization Committee 13% 9% 8% New South Wales Department of Corrective Services 7% 10% 13% Queensland Corrective Services 7% 11% 13% Commission - -------------------------------------------------------------------------------------------------------------------- </TABLE> Concentration of credit risk related to accounts receivable is reflective of the related revenues. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) 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 PAGE 33 of 60
34 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"). SFAS 128 requires the disclosure of basic and diluted earnings per share for periods ending after December 15, 1997 and restatement of prior periods to conform with the new disclosure format. The computation under SFAS 128 differs from the primary and fully diluted earnings per share computed under APB Opinion No. 15 primarily in the manner in which potential common stock is treated. 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. CASH AND CASH EQUIVALENTS The Company classifies as cash equivalents all interest-bearing deposits or investments with original maturities of three months or less. 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 a translation adjustment. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash, accounts receivable, accounts payable, and long-term debt approximates fair value. INTEREST RATE SENSITIVITY The Company is exposed to market risks arising from changes in interest rates with respect to a $220 million operating lease facility (Note 7). Monthly lease payments under this facility are indexed to a variable interest rate. Management has determined that a 10% change in the current lease rate would have an immaterial effect on the Company's pre-tax earnings over the next fiscal year. STOCK-BASED COMPENSATION PLANS In 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value based method of accounting for stock-based compensation or continuation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has chosen to continue to account for stock-based compensation using the intrinsic value based method prescribed in APB 25. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the corporation's stock at the date of the PAGE 34 of 60
35 grant over the amount an employee must pay to acquire the stock. Pro forma disclosures of net income and earnings per share as if the fair value method had been adopted are presented in Note 11. LONG-LIVED ASSETS In 1995, the Financial Accounting Standards Board 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. ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" which requires adoption in Fiscal 1998. This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This statement requires that an enterprise (a) classify items of other comprehensive income by their nature in financial statements and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of statements of financial position. Comprehensive income is defined as the change in equity during the financial reporting period of a business enterprise resulting from non-owner sources. In June 1997, the FASB issued Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" which requires adoption in Fiscal 1998. This statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments including, among other things, a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. PAGE 35 of 60
36 (3) PROPERTY AND EQUIPMENT Property and equipment consist of the following at fiscal year end: (In Thousands) <TABLE> <CAPTION> YEARS 1997 1996 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Land -- $ 4,527 $ 1,698 Building and improvements 20 - 40 34,107 16,430 Equipment 3 - 20 2,786 2,677 Furniture and fixtures 3 - 20 2,307 1,251 -------------------------------------------------- 43,727 22,056 Less - accumulated depreciation (4,973) (3,081) -------------------------------------------------- $ 38,754 $ 18,975 - --------------------------------------------------------------------------------------------------------------------- </TABLE> (4) DOMESTIC AND INTERNATIONAL OPERATIONS A summary of domestic and international operations is presented below: (In Thousands) <TABLE> <CAPTION> 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Revenues Domestic operations $ 167,223 $ 108,245 $ 72,852 International operations 39,707 29,539 26,579 ----------------------------------------------------------------------------- Total revenues 206,930 137,784 99,431 perating Income Domestic operations 12,388 7,087 4,501 International operations 4,157 2,644 2,728 ----------------------------------------------------------------------------- Total operating income 16,545 9,731 7,229 Assets Domestic operations 120,538 96,872 30,641 International operations 18,665 9,939 8,199 ----------------------------------------------------------------------------- Total assets $ 139,203 $ 106,811 $ 38,840 - --------------------------------------------------------------------------------------------------------------------- </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, four immigration detention centers, and the State of Victoria's Correctional health care services. The Company's 50% owned United Kingdom joint venture (Premier Prison Services, Ltd.), accounted for under the equity method, commenced management of a correctional facility in Fiscal 1994 and two court escort and transport contracts in Fiscal 1996. Equity in the undistributed income (loss) for Fiscal 1997, 1996, and 1995 was $1,797,000, $982,000, and ($183,000), respectively. PAGE 36 of 60
37 A summary of financial data for the Company's equity affiliate is as follows: (In Thousands) <TABLE> <CAPTION> 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA Revenues $ 51,009 $ 28,953 $ 17,705 Operating income (loss) 3,884 1,764 (357) Net income (loss) 2,209 1,208 (225) BALANCE SHEET DATA Current Assets 14,595 13,145 1,783 Noncurrent Assets 517 538 509 Current liabilities 8,115 8,518 3,702 Noncurrent liabilities 4,029 5,075 -- Stockholders' equity/(deficit) $ 2,968 $ 90 $ (1,410) - ----------------------------------------------------------------------------------------------------------------- </TABLE> The Company provided management services to the U.K. affiliate in Fiscal 1997 and 1996. The management fees for such services totaled $484,000 and $450,000 for Fiscal 1997 and 1996, respectively. (5) INCOME TAXES The provision for income taxes in the consolidated statements of income consists of the following components: (In Thousands) <TABLE> <CAPTION> 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Federal Income Taxes: Current $ 175 $ -- $ -- Deferred 6,131 3,588 2,497 ---------------------------------------------------------------- 6,306 3,588 2,497 ---------------------------------------------------------------- State Income Taxes: Current 300 30 30 Deferred 620 488 335 ---------------------------------------------------------------- 920 518 365 Foreign Income Taxes -- 163 -- ---------------------------------------------------------------- Total $ 7,226 $ 4,269 $ 2,862 ---------------------------------------------------------------- </TABLE> Deferred income taxes result from temporary differences in the recognition of revenue and expense for tax and financial reporting purposes. PAGE 37 of 60
38 The principal temporary differences and their tax effects are summarized as follows: (In Thousands) <TABLE> <CAPTION> 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Amortization of deferred charges $ 2,921 $ 1,561 $ 1,605 Income of foreign subsidiary 1,681 617 1,062 Accrued liabilities (1,136) NSO benefit, booked to equity 3,263 1,827 170 Other, net 22 71 (5) ------------------------------------------------------------------------- $ 6,751 $ 4,076 $ 2,832 - ---------------------------------------------------------------------------------------------------------------------- </TABLE> A reconciliation of the statutory U.S. federal tax rate (35.0% in 1997, 34.0% in 1996 and 1995) and the effective income tax rate is as follows: (In Thousands) <TABLE> <CAPTION> 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Provision using statutory federal income tax rate $ 6,299 $ 4,054 $ 2,521 State income tax 818 508 354 Effect of foreign operations, net of foreign income tax provision -- (264) -- Other, net 109 (29) (13) -------------------------------------------------------------------- $ 7,226 $ 4,269 $ 2,862 - ----------------------------------------------------------------------------------------------------------------- </TABLE> The components of the net current deferred income tax liability/ (asset) at fiscal year end are as follows: (In Thousands) <TABLE> <CAPTION> 1997 1996 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> Uniforms $ 244 $ 160 Accrued vacation (291) (123) Deferred charges 1,630 895 Accrued liabilities (1,192) (56) ------------------------------------------------------------- $ 391 $ 876 - ----------------------------------------------------------------------------------------------------------------- </TABLE> The components of the net non-current deferred income tax liability at fiscal year end are as follows: (In Thousands) <TABLE> <CAPTION> 1997 1996 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> Deferred charges $ 4,909 $ 2,724 Income of foreign subsidiaries and affiliates 5,284 2,911 Other, net (94) (201) ------------------------------------------------------------- $ 10,099 $ 5,434 - ----------------------------------------------------------------------------------------------------------------- </TABLE> As of December 28, 1997, the Company had federal and state net operating loss carryforwards of approximately $4,616,000, and $4,051,000, respectively. The federal net operating losses will expire between 2010 and 2011, while certain state net operating losses will expire between 2000 and 2011. PAGE 38 of 60
39 Utilization of net operating losses in future years may be subject to annual limitations due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. Such limitations, if any, are not expected to impact the ultimate utilization of the carryforwards. The Company's loss carryforwards are attributable to compensation deductions on its income tax return which were not recognized for financial accounting purposes. 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. In the years ended December 28, 1997 and December 29, 1996, such deductions resulted in significant federal and state deductions which may be carried forward. Utilization of such deductions will increase additional paid-in-capital. (6) LONG-TERM DEBT Long-term debt consists of the following: (In Thousands) <TABLE> <CAPTION> 1997 1996 - ------------------------------------------------------------------------------ <S> <C> <C> Note payable for property - 8% $ 225 $ 237 Less - current portion 12 12 ----------------------------------------- $ 213 $ 225 - ------------------------------------------------------------------------------- </TABLE> 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 $30,000,000 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 facility of up to $5,000,000 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 1/2 of 1%) 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 December 28, 1997, no amounts were outstanding under this facility. However, at December 28, 1997, the Company had four standby letters of credit outstanding with a bank in an aggregate amount of approximately $222,000. PAGE 39 of 60
40 Aggregate annual maturities of long-term debt are as follows: (In Thousands) <TABLE> <CAPTION> - -------------------------------------------------------------------------------- FISCAL YEAR ANNUAL MATURITY - -------------------------------------------------------------------------------- <S> <C> 1998 $ 12 1999 13 2000 15 2001 16 2002 17 Thereafter 152 ---------------------------- $ 225 - -------------------------------------------------------------------------------- </TABLE> (7) 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 1998 and 2002. The future minimum commitments under these leases are as follows: (In Thousands) <TABLE> <CAPTION> FISCAL YEAR ANNUAL RENTAL - -------------------------------------------------------------------------------- <S> <C> 1998 $ 5,544 1999 5,307 2000 4,820 2001 4,517 2002 4,093 ------------------------------ $ 24,281 - -------------------------------------------------------------------------------- </TABLE> In December 1997, the Company also entered into an $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, the Company unconditionally agreed to guarantee certain obligations of First Security Bank, National Association, a party to the aforementioned operating lease facility. As of December 28, 1997, approximately $69 million of properties were under development under this facility. Rent expense was approximately $3,351,000, $2,143,000 and $1,512,000 for Fiscal 1997, 1996, and 1995 respectively. The Company contracted with third parties to provide meals for inmates at two correctional facilities operated by the Company under agreements expiring in 1995 and 1996. Food service expense related to these agreements was $53,000 and $580,000 in Fiscal 1996 and 1995 respectively. (8) COMMON AND PREFERRED STOCK 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 has been restated to reflect 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 PAGE 40 of 60
41 issuance of preferred stock such as voting and dividend rights, liquidation privileges, redemption rights and conversion privileges. The Company follows the practice of recording amounts received upon the exercise of stock options by crediting common stock and additional paid-in-capital. No charges are reflected in the consolidated statements of income as a result of the grant of stock options, since all grants under the Company's stock option plans (Note 11) have been made at not more than the fair value at the date of grant. The Company realizes an income tax benefit from the exercise of certain stock options of the Company's non-qualified stock options. Since no compensation cost resulted from the grant of stock options in Fiscal 1997 and 1996, this benefit results in a decrease in current income taxes payable and an increase in additional paid-in capital. (9) EARNINGS PER SHARE The following table shows the amounts used in computing earnings per share in accordance with SFAS 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 calculations for 1996 and 1995 reflect a 100% common stock dividend paid on June 4, 1996. (In Thousands, except per share data) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 ----------------------------------------------------------------------------------------- INCOME SHARES INCOME SHARES INCOME SHARES ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> NET INCOME $ 11,875 $ 8,261 $ 4,440 BASIC EPS: Income available to common shareholders $ 11,875 22,015 $ 8,261 21,361 $ 4,440 16,850 Per share amount $ 0.54 $ 0.39 $ 0.26 EFFECT OF DILUTIVE SECURITIES: $ (0.02) 682 $ (0.02) 767 $ (0.01) 858 DILUTED EPS: Income available to common shareholders $ 11,875 22,697 $ 8,261 22,128 $ 4,440 17,708 Per share amount $ 0.52 $ 0.37 $ 0.25 - ----------------------------------------------------------------------------------------------------------------------------- </TABLE> (10) 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. PAGE 41 of 60
42 The Company incurred the following expenses related to transactions with TWC in the following years: (In Thousands) <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------- Description 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Food services $ 461 $ 450 $ 3,903 General and administrative expenses 1,200 1,100 1,093 Casualty insurance premiums 4,957 3,306 2,169 Interest (income) charges 10 40 (172) Rent 285 269 106 ------------------------------------------------------------------------- $ 6,913 $ 5,165 $ 7,099 - ---------------------------------------------------------------------------------------------------------------------- </TABLE> Food services represent charges for meals for inmates at certain correctional facilities operated by the Company. In third quarter 1995, the Company began to provide its own in-house food services at all but one of its facilities. General and administrative expenses represent charges for management and support services. Beginning in Fiscal 1994, TWC provided various general and administrative services to the Company under a Services Agreement. The Agreement expired December 31, 1997 and provides for one year renewal periods at the Company's option. Expenses under the Agreement for Fiscal 1997, Fiscal 1996 and Fiscal 1995 were $1,200,000, $1,100,000 and $1,093,000, 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. For purposes of computing 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. (11) 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. PAGE 42 of 60
43 A summary of the status of the Company's three stock option plans as of December 31, 1995, December 29, 1996, and December 28, 1997, and changes during the years then ended is presented below: <TABLE> <CAPTION> 1997 1996 1995 ------------------------ ------------------------ ----------------------- WTD. AVG. WTD. AVG. WTD. AVG. SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE PRICE PRICE PRICE - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Outstanding at beginning of year 987,534 $ 7.13 1,210,132 $ 5.58 1,595,726 $ 2.32 Granted 156,500 21.03 60,000 22.63 343,000 11.90 Exercised 230,550 7.16 258,598 2.96 709,394 1.38 Forfeited/Canceled 22,000 11.88 24,000 12.77 19,200 2.32 ------------- ------------- ------------- Options outstanding at end of year 891,484 9.44 987,534 7.13 1,210,132 5.58 ============= ============= ============= Options exercisable at year end 629,084 -- 744,734 -- 939,732 -- ============= ============= ============= </TABLE> The following table summarizes information about the stock options outstanding at December 28, 1997: <TABLE> <CAPTION> OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- ------------------------------------ Number Wtd Avg Wtd Avg Number Wtd Avg Outstanding Remaining Exercise Exercisable Exercise RANGE OF EXERCISE PRICES at 12/28/97 Contractual Life Price at 12/28/97 Price - ---------------------------- --------------- ------------------- ------------ ----------------- --------------- <S> <C> <C> <C> <C> <C> $1.20 - $3.75 496,984 6.3 $ 3.54 496,984 $ 3.54 $11.88 - $13.75 189,600 7.9 11.91 77,600 11.97 $16.63 - $16.88 15,000 9.2 16.77 7,000 16.86 $20.25 - $29.56 189,900 8.9 21.84 47,500 22.12 --------------- -------------- 891,484 629,084 =============== ============== </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 1997 1996 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Pro forma net earnings $11,197 $7,750 Pro forma basic net earnings per share 0.51 0.37 Pro forma diluted net earnings per share 0.49 0.35 Pro forma weighted average fair value of options granted $11.07 $11.80 Risk free interest rates 5.52% - 5.70% 6.25% - 6.55% Expected lives 4 -8 years 4 - 8 years Expected volatility 48% 46% - --------------------------------------------------------------------------------------------------------------------- </TABLE> Because the Statement 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. (12) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) PAGE 43 of 60
44 Selected quarterly financial data for the Company and its subsidiaries for the fiscal years ended December 28, 1997 and December 29, 1996 is as follows: (In Thousands, except per share data) <TABLE> <CAPTION> FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 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 1996 REVENUES $ 29,433 $ 33,416 $ 36,785 $ 38,149 OPERATING INCOME 1,719 1,913 2,939 3,160 NET INCOME 1,468 1,814 2,411 2,568 BASIC EARNINGS PER SHARE 0.07 0.08 0.11 0.12 DILUTED EARNINGS PER SHARE 0.07 0.08 0.11 0.11 - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> PAGE 44 of 60
45 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 December 28, 1997 and December 29, 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years in the period ended December 28, 1997. 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 December 28, 1997 and December 29, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP West Palm Beach, Florida, February 6, 1998. PAGE 45 of 60
46 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS To the Shareholders of Wackenhut Corrections Corporation: The accompanying financial statements have been prepared in conformity with generally accepted accounting principals. They include amounts based on judgments and estimates. Representation in the 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 financial statements have been audited by Arthur Andersen LLP, independent public accountants, whose appointment was ratified by shareholders. Their report expresses a professional opinion as to whether management's 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 financial statements. The Audit Committee of the Board of Directors meets periodically with representatives of management, the independent 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. George R. Wackenhut John G. O'Rourke Chairman Senior Vice President Chief Financial Officer and Treasurer PAGE 46 of 60
47 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 1998 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 1. Financial Statements. Report of Independent Certified Public Accountants - Page 46 Consolidated Balance Sheets - December 28, 1997 and December 29, 1996 - Page 29 Consolidated Statements of Income - Fiscal years ended December 28, 1997 December 29, 1996 and December 31, 1995 - Page 27 Consolidated Statements of Cash Flows - Fiscal years ended December 28, 1997, December 29, 1996 and December 31, 1995 - Pages 30 - 31 Consolidated Statements of Shareholders' Equity - Fiscal years ended December 28, 1997, December 29, 1996 and December 31, 1995 - Page 28 Notes to Consolidated Financial Statements - Pages 32 - 45 2. Financial Statement Schedules. Schedule II - Valuation and Qualifying Accounts - Page 52 All schedules specified in the accounting regulations of the Securities and Exchange Commission have been omitted because they are either inapplicable or not required. Page 47 of 60
48 3. Exhibits. The following exhibits are filed as part of this Annual Report: <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------- ----------- <S> <C> 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, Nations Bank, National Association, Scotia Banc Inc. and the Leders 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 Nations Bank, 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 Nations Bank, National Association. 4.5* Third Amended and Restated Trust Agreement, dated as of June 19, 1997, among, Nations Bank, National Association, and the other financial institutions parties thereto and First Security Bank, National Association. 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). 21.1*** Subsidiaries of the Company. 24.1* Powers of Attorney. (Included as part of the signature page hereto.) 27.1 Financial Date Schedule (for SEC use only). </TABLE> - ---------- * 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) + 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 1997. PAGE 48 of 60
49 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 Date: February 20, 1998 /s/ John G. O'Rourke ------------------------------------- JOHN G. O'ROURKE Senior Vice President - Finance, Treasurer and Chief Financial Officer Each person whose signature appears below hereby constitutes and appoints George C. Zoley, John G. O'Rourke and David N.T. Watson and each of them, the true and lawful attorneys-in-fact and agents of the undersigned, with full power of substitution and resubstitution, for and in the name, place and stead of the 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 hereof. 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: February 20, 1998 /s/ George C. Zoley ------------------------------------------ GEORGE C. ZOLEY Vice Chairman of the Board and Chief Executive Officer (principal executive officer) Date: February 20, 1998 /s/ John G. O'Rourke ------------------------------------------ JOHN G. O'ROURKE Senior Vice President - Finance, Treasurer and Chief Financial Officer (principal financial officer) Date: February 20, 1998 /s/ David N.T. Watson ------------------------------------------ DAVID N.T. WATSON Controller, Chief Accounting Officer, and Assistant Treasurer (principal accounting officer) Date: February 20, 1998 /s/ George R. Wackenhut ------------------------------------------ GEORGE R. WACKENHUT Director PAGE 49 of 60
50 /s/ Richard R. Wackenhut ------------------------------------------ Date: February 20, 1998 RICHARD R. WACKENHUT Director /s/Norman A. Carlson ----------------------------- Date: February 20, 1998 NORMAN A. CARLSON Director /s/Benjamin R. Civiletti ----------------------------- Date: February 20, 1998 BENJAMIN R. CIVILETTI Director /s/Manuel J. Justiz ----------------------------- Date: February 20, 1998 MANUEL J. JUSTIZ Director /s/John F. Ruffle ----------------------------- Date: February 20, 1998 JOHN F. RUFFLE Director /s/Anthony P. Travisono ----------------------------- Date: February 20, 1998 ANTHONY P. TRAVISONO Director PAGE 50 of 60
51 SCHEDULE II WACKENHUT CORRECTIONS CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS ENDED, DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995 (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 DECEMBER 28, 1997: Allowance for doubtful accounts $ -- $ 1,745 $ -- $ (1,118) $ 627 YEAR ENDED DECEMBER 29, 1996: Allowance for doubtful accounts $ $ $ $ $ YEAR ENDED DECEMBER 31, 1995: Allowance for doubtful $ $ $ $ $ - ------------------------------------------------------------------------------------------------------------------------- </TABLE> PAGE 51 of 60
52 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION -------- ----------- <S> <C> 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, Nations Bank, National Association, Scotia Banc Inc. and the Leders 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 Nations Bank, 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 Nations Bank, National Association. 4.5* Third Amended and Restated Trust Agreement, dated as of June 19, 1997, among, Nations Bank, National Association, and the other financial institutions parties thereto and First Security Bank, National Association. 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). 21.1*** Subsidiaries of the Company. 24.1* Powers of Attorney. (Included as part of the signature page hereto.) 27.1 Financial Date Schedule (for SEC use only). </TABLE> PAGE 52 of 60