1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended July 4, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ____________ to ____________ COMMISSION FILE NUMBER 1-14260 WACKENHUT CORRECTIONS CORPORATION - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Florida 65-0043078 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4200 Wackenhut Drive #100, Palm Beach Gardens, Florida 33410-4243 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (561) 622-5656 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - ------------------------------------------------------------------------------- FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At August 10, 1999, 22,386,992 shares of the registrant's Common Stock were issued and outstanding. Page 1 of 16
2 WACKENHUT CORRECTIONS CORPORATION PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following consolidated financial statements of Wackenhut Corrections Corporation, a Florida corporation (the "Company"), have been prepared in accordance with the instructions to Form 10-Q and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles. Certain amounts in the prior year have been reclassified to conform to the current presentation. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial information for the interim periods reported have been made. Results of operations for the twenty-six weeks ended July 4, 1999 are not necessarily indicative of the results for the entire fiscal year ending January 2, 2000. Page 2 of 16
3 WACKENHUT CORRECTIONS CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 4, 1999 AND JUNE 28, 1998 (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-six Weeks Ended ----------------------------------- ----------------------------------- July 4, 1999 June 28, 1998 July 4, 1999 June 28, 1998 ---------------- ---------------- ---------------- ---------------- <S> <C> <C> <C> <C> Revenues.......................................... $ 106,049 $ 74,617 $ 203,480 $ 145,886 Operating expenses (including amounts related to Parent of $2,392, $2,018, $4,719 and $4,007) 93,578 63,879 179,701 125,331 Depreciation and amortization..................... 1,175 1,214 2,478 2,251 ---------------- ---------------- ---------------- ---------------- Contribution from operations.................. 11,296 9,524 21,301 18,304 G&A expense (including amounts related to Parent of $803, $570, $1,655 and $1,111)...... 4,507 3,155 7,969 6,943 ---------------- ---------------- ---------------- ---------------- Operating income.............................. 6,789 6,369 13,332 11,361 Interest income (including interest income related to Parent of $200, $37, $379, and $72) 654 564 1,061 809 ---------------- ---------------- ---------------- ---------------- Income before income taxes, equity in earnings of affiliates, and cumulative effect of change in accounting for start-up costs.............. 7,443 6,933 14,393 12,170 Provision for income taxes........................ 2,984 2,816 5,771 4,954 ---------------- ---------------- ---------------- ---------------- Income before equity in earnings of affiliates and cumulative effect of change in accounting for start-up costs............................ 4,459 4,117 8,622 7,216 Equity in earnings of affiliates, net of income tax provision of $601, $348, $1,054 and $520.. 898 535 1,574 799 ---------------- ---------------- ---------------- ---------------- Income before cumulative effect of change in accounting for start-up costs................. 5,357 4,652 10,196 8,015 Cumulative effect of change in accounting for start-up costs, net of tax.................... -- -- -- (11,528) ================ ================ ================ ================ Net income (loss)................................. $ 5,357 $ 4,652 $ 10,196 $ (3,513) ================ ================ ================ ================ Basic earnings (loss) per share: Income before cumulative effect of change in accounting for start-up costs......... $ 0.25 $ 0.21 $ 0.47 $ 0.36 Cumulative effect of change in accounting for start-up costs, net of tax............... -- -- -- (0.52) ================ ================ ================ ================ Net income (loss)............................. $ 0.25 $ 0.21 $ 0.47 $ (0.16) ================ ================ ================ ================ Diluted earnings (loss) per share: Income before cumulative effect of change in accounting for start-up costs......... $ 0.24 $ 0.20 $ 0.46 $ 0.36 Cumulative effect of change in accounting for start-up costs, net of tax........... -- -- -- (0.51) ---------------- ---------------- ---------------- ---------------- Net income (loss)............................. $ 0.24 $ 0.20 $ 0.46 $ (0.15) ================ ================ ================ ================ Basic weighted average shares outstanding......... 21,654 22,233 21,752 22,209 ================ ================ ================ ================ Diluted weighted average shares outstanding....... 22,034 22,810 22,157 22,813 ================ ================ ================ ================ </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. Page 3 of 16
4 WACKENHUT CORRECTIONS CORPORATION CONSOLIDATED BALANCE SHEETS JULY 4, 1999 AND JANUARY 3, 1999 (IN THOUSANDS EXCEPT SHARE DATA) <TABLE> <CAPTION> July 4, 1999 January 3, 1999 ----------------------- ----------------------- (Unaudited) <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents............................. $ 43,547 $ 20,240 Accounts receivable, net.............................. 63,181 61,188 Current portion of deferred income tax asset, net..... 2,073 1,769 Other................................................. 8,843 11,267 ----------------------- ----------------------- Total current assets..................... 117,644 94,464 Property and equipment, net........................... 23,183 33,005 Investments in and advances to affiliates............. 19,612 15,447 Goodwill.............................................. 1,953 2,011 Deferred income tax asset, net........................ -- 1,277 Other................................................. 3,396 1,804 ----------------------- ----------------------- $ 165,788 $ 148,008 ======================= ======================= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable...................................... $ 7,889 $ 5,944 Accrued payroll and related taxes..................... 14,416 9,955 Accrued expenses...................................... 14,721 9,850 Current portion of deferred revenue................... 2,606 2,383 Current portion of long-term debt..................... -- 13 ----------------------- ----------------------- Total current liabilities................ 39,632 28,145 ----------------------- ----------------------- Deferred income tax liability, net......................... 1,156 -- Long-term debt............................................. -- 200 Deferred revenue........................................... 15,856 16,723 Shareholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized...................... -- -- Common stock, $.01 par value, 60,000,000 shares authorized, 22,392,422 and 22,347,922 shares issued and outstanding............................ 224 223 Additional paid-in capital............................ 83,684 83,164 Retained earnings..................................... 41,719 31,523 Accumulated other comprehensive loss.................. (1,518) (3,117) Less: common stock in treasury at cost-- 753,000 and 453,500 shares........................ (14,965) (8,853) ----------------------- ----------------------- Total shareholders' equity............... 109,144 102,940 ----------------------- ----------------------- $ 165,788 $ 148,008 ======================= ======================= </TABLE> The accompanying notes to consolidated financial statements are an integral part of these balance sheets. Page 4 of 16
5 WACKENHUT CORRECTIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED JULY 4, 1999 AND JUNE 28, 1998 (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> Twenty-six Weeks Ended ----------------------------------------------- July 4, 1999 June 28, 1998 ------------------------ ---------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................................. $ 10,196 $ (3,513) Adjustments to reconcile net income to net cash provided by (used in) operating activities-- Depreciation and amortization expense.................... 2,478 2,251 Equity in earnings of affiliates......................... (2,628) (1,319) Cumulative effect of change in accounting for start-up costs, net.................................. -- 11,528 Changes in assets and liabilities -- (Increase) decrease in assets: Accounts receivable...................................... (1,569) (8,191) Deferred income tax asset................................ 973 -- Other current assets .................................... 2,476 (2,773) Other assets............................................. (1,213) (1,393) Increase (decrease) in liabilities: Accounts payable and accrued expenses.................... 5,923 9,238 Accrued payroll and related taxes........................ 4,311 1,483 Deferred income tax liability, net ...................... 1,156 (5,523) ------------------------ ---------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES................ 22,103 1,788 ------------------------ ---------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in affiliates..................................... (1,537) (1,190) Capital expenditures.......................................... (14,506) (1,799) Proceeds from sale of capital assets to CPV................... 22,281 42,211 ------------------------ ---------------------- NET CASH PROVIDED BY INVESTING ACTIVITIES................ 6,238 39,222 ------------------------ ---------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options....................... 209 1,189 Payments on debt.............................................. (213) (6) Advances to The Wackenhut Corporation......................... (17,444) (48,706) Repayments from The Wackenhut Corporation..................... 17,444 48,706 Repurchase of common stock.................................... (6,112) -- ------------------------- ---------------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES...... (6,116) 1,183 ------------------------- ---------------------- Effect of exchange rate changes on cash................................ 1,082 (969) Net increase in cash................................................... 23,307 41,224 Cash, beginning of period.............................................. 20,240 28,960 ------------------------- ---------------------- CASH, END OF PERIOD.................................................... $ 43,547 $ 70,184 ========================= ====================== SUPPLEMENTAL DISCLOSURES: Impact on equity from tax benefit related to the exercise of options issued under the company's non- qualified stock option plan.................................. $ 311 $ 2,048 ========================= ====================== Income taxes paid............................................. $ 15,775 $ 850 ========================= ====================== </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. Page 5 of 16
6 WACKENHUT CORRECTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES The accounting policies followed for the quarterly financial reporting are the same as those disclosed in Note 2 of the Notes To Consolidated Financial Statements included in the Company's Form 10-K filed with the Securities and Exchange Commission on April 2, 1999 for the fiscal years ended January 3, 1999, December 28, 1997, and December 29, 1996. Certain prior year amounts have been reclassified to conform with current year financial statement presentation. 2. DOMESTIC AND INTERNATIONAL OPERATIONS A summary of domestic and international operations is presented below (dollars in thousands): <TABLE> <CAPTION> Twenty-six Weeks Ended ---------------------------------------------------- July 4, 1999 June 28, 1998 ------------------------ ------------------------ <S> <C> <C> REVENUES Domestic operations........................ $ 175,304 $ 121,348 International operations................... 28,176 24,538 ------------------------ ------------------------ Total revenues............................ $ 203,480 $ 145,886 ======================== ======================== OPERATING INCOME Domestic operations......................... $ 10,814 $ 9,692 International operations.................... 2,518 1,669 ------------------------ ------------------------ Total operating income................... $ 13,332 $ 11,361 ======================== ======================== </TABLE> <TABLE> <CAPTION> As of ---------------------------------------------------- July 4, 1999 January 3, 1999 ------------------------ ------------------------ <S> <C> <C> LONG-LIVED ASSETS Domestic operations......................... $ 18,586 $ 28,944 International operations.................... 4,597 4,061 ------------------------ ------------------------ Total long-lived assets.................. $ 23,183 $ 33,005 ======================== ======================== </TABLE> Long-lived assets consist of property, plant and equipment. 3. DEFERRED CHARGES Effective December 29, 1997, the Company adopted the American Institute of Certified Public Accountants' Statement of Position 98-5 ("SOP 98-5") on Accounting for Costs of Start-up Activities. Under this policy, the Company is required to expense all start-up and project development costs as incurred. In fiscal 1998, the Company wrote-off existing unamortized start-up costs and project development costs of $19.5 million (or $11.5 million after-tax) to record the cumulative effect of the change in accounting principle. The adoption of SOP 98-5 required a restatement of the previously issued financial statements for the thirteen weeks and twenty-six weeks ended June 28, 1998. Page 6 of 16
7 WACKENHUT CORRECTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income," establishes standards for reporting and display of comprehensive income and its components in financial statements. The components of the Company's comprehensive income are as follows (dollars in thousands): <TABLE> <CAPTION> Twenty-six Weeks Ended ------------------------------------------------ July 4, 1999 June 28, 1998 ---------------------- ---------------------- <S> <C> <C> Net income (loss) $ 10,196 $ (3,513) Foreign currency translation adjustments, net of income tax expense of $1,070 and $875, respectively. 1,599 (1,274) ---------------------- ---------------------- Comprehensive income (loss) $ 11,795 $ (4,787) ====================== ====================== </TABLE> 5. EARNINGS PER SHARE The following table shows the amounts used in computing earnings (loss) per share in accordance with Statement of Financial Accounting Standards No. 128 and the effects on income and the weighted average number of shares of potential dilutive common stock (in thousands except per share data). <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-six Weeks Ended -------------------------------------- ------------------------------------- July 4, 1999 June 28, 1998 July 4, 1999 June 28, 1998 ----------------- ----------------- ---------------- ---------------- <S> <C> <C> <C> <C> Net Income..................... $ 5,357 $ 4,652 $ 10,196 $ (3,513) Basic earnings (loss) per share: Weighted average shares outstanding.................. 21,654 22,233 21,752 22,209 ----------------- ----------------- ---------------- ---------------- Per share amount............... $ 0.25 $ 0.21 $ 0.47 $ (0.16) ----------------- ----------------- ---------------- ---------------- Diluted earnings (loss) per share: Weighted average shares outstanding.................. 21,654 22,233 21,752 22,209 Effect of dilutive securities: Employee and director stock options...................... 380 577 405 604 ----------------- ----------------- ---------------- ---------------- Weighted average shares assuming dilution............ 22,034 22,810 22,157 22,813 ----------------- ----------------- ---------------- ---------------- Per share amount............... $ 0.24 $ 0.20 $ 0.46 $ (0.15) ================= ================= ================ ================ </TABLE> Options to purchase 368,500 shares of the Company's common stock, with exercise prices ranging from $20.25 to $29.56 per share and expiration dates between 2006 and 2009, were outstanding at July 4, 1999, but were not included in the computation of diluted EPS because their effect would be anti-dilutive if exercised. At June 28, 1999, outstanding options to purchase 168,000 shares of the Company's common stock, with exercise prices ranging from $25.06 to $29.56 and expiration dates between 2006 and 2008, were also excluded from the computation of diluted EPS because their effect would be anti-dilutive if exercised. Page 7 of 16
8 WACKENHUT CORRECTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. SALE OF FACILITIES TO CORRECTIONAL PROPERTIES TRUST On January 15, 1999, the Company sold its right to acquire a 1,500-bed correctional facility located in Lawton, Oklahoma and sold the 600-bed expansion of the Lea County Correctional Facility to Correctional Properties Trust ("CPV") for a total of approximately $66.1 million. Net proceeds to the Company from the sale were approximately $22.3 million. Simultaneous with these purchases, the Company entered into ten-year operating leases with CPV for these facilities. These properties require initial annual lease payments of $6.3 million and include annual increases for changes in the consumer price index with minimum increases of 3% for each of the following two years. 7. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133 In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. In June 1999, FASB amended the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. In management's opinion, the impact of adopting this statement will not have a material impact upon the Company's results of operations or financial position. 8. TREASURY STOCK On August 7, 1998, the Board of Directors of the Company authorized the repurchase, at the discretion of the senior management, of up to 500,000 shares of the Company's common stock. As of January 3, 1999, the Company had repurchased 453,500 shares of common stock. In February 1999, the Company's Board of Directors authorized the repurchase of up to an additional 500,000 shares of the Company's common stock. As of July 4, 1999, the Company had repurchased a total of 753,000 of the one million common shares authorized for repurchase at an average price per share of $19.87. For fiscal year 1999, the Company had repurchased 299,500 shares at an average price of $20.47. The repurchased shares had been recorded by the Company as treasury stock resulting in a reduction of shareholders' equity. Page 8 of 16
9 WACKENHUT CORRECTIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Reference is made to Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1999, filed with the Securities and Exchange Commission on April 2, 1999, for further discussion and analysis of information pertaining to the Company's results of operations, liquidity and capital resources. FORWARD-LOOKING STATEMENTS: The management's discussion and analysis of financial condition and results of operations and the August 5, 1999 press release contain forward-looking statements that are based on current expectations, estimates and projections about the segments in which the Company operates. This section of the quarterly report also includes management's beliefs and assumptions made by management. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Future Factors include increasing price and product/service competition by foreign and domestic competitors, including new entrants; rapid technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost effective basis; the mix of products/services; the achievement of lower costs and expenses; domestic and foreign governmental and public policy changes including environmental regulations; protection and validity of patent and other intellectual property rights; reliance on large customers; technological, implementation and cost/financial risks in increasing use of large, multi-year contracts; the outcome of pending and future litigation and governmental proceedings and continued availability of financing; financial instruments and financial resources in the amounts, at the times and on the terms required to support the Company's future business. These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic and international economic conditions including interest rate and currency rate fluctuations and other future factors. LIQUIDITY AND CAPITAL RESOURCES On January 15, 1999 the Company sold its right to acquire a 1,500-bed correctional facility located in Lawton, Oklahoma and sold the 600-bed expansion of the Lea County Correctional Facility located in Hobbs, New Mexico to CPV for approximately $66.1 million. Net proceeds to the Company from the sale were approximately $22.3 million. Both facilities are being leased back to the Company under an operating lease. Cash and cash equivalents at July 4, 1999 of $43.5 million increased $23.3 million from January 3, 1999. Cash provided by operating activities amounted to $22.1 million in the twenty-six weeks ended July 4, 1999 ("First Half 1999") versus cash provided by operating activities of $1.8 million in twenty-six weeks ended June 28, 1998 ("First Half 1998") primarily reflecting lower trade accounts receivable, other current assets and deferred income tax balances. Cash provided by investing activities amounted to $6.2 million in the First Half 1999, including capital expenditures of $14.5 million representing the investment in facilities and purchase of equipment offset by proceeds from the sale of the Lea County Correctional Facility to CPV. Cash used in financing activities in First Half 1999 amounted to $6.1 million, reflecting primarily purchases of treasury stock of the Company. Page 9 of 16
10 WACKENHUT CORRECTIONS CORPORATION Working capital increased from $66.3 at January 3, 1999 to $78.0 at the end of the Second Quarter of 1999 primarily due to the sale of the Lea County Correctional Facility offset by increases in payables and accrued expenses. As of July 4, 1999, approximately $74.0 million of the Company's $220 million operating lease facility, established to acquire and develop new correctional facilities, was outstanding for properties under development. YEAR 2000 READINESS DISCLOSURE Management continued its review of the installation of new information systems hardware and software and determined that the installation is on schedule for completion before the year 2000. This review also encompasses other systems including embedded technology, such as security systems. The year 2000 issue is the result of shortcomings in many electronic data processing systems and other equipment that make operations beyond the year 1999 troublesome. The internal clocks in computers and other equipment will roll over from "12/31/99" to "01/01/00" and programs and hardware, if not corrected, will be unable to distinguish between the year 2000 and the year 1900. This may result in processing data inaccurately or in stopping data processing altogether. There are five phases that describe the Company's process in becoming year 2000 compliant. The awareness phase encompasses developing a budget and project plan. The assessment phase identifies mission-critical systems to check for compliance. Based on current information, both of these phases have been completed. The Company is at various stages in the three remaining phases: renovation, validation and implementation. Renovation is the design of the systems to be year 2000 compliant. Validation is testing the systems followed by implementation. Implementation of the Company's year 2000 compliant financial operating systems has begun and is scheduled for complete implementation in third quarter 1999. Implementation of all other major year 2000 compliant systems is scheduled for completion in the third quarter of 1999. The Company has incurred and will continue to incur expenses related to year 2000 compliance. These costs include time and effort of internal staff and consultants for renovation, validation and implementation, and computer and embedded technology systems enhancements and/or replacements. The total costs, funded from working capital and not considered material, for achieving year 2000 compliance, are estimated at approximately $0.5 million. Of the total estimated amount, $0.3 million will be capitalized and amortized and $0.2 million will be expensed. These total estimated costs exclude payroll costs of internal staff related to year 2000 compliance as the Company does not separately track such costs. In addition, the total estimated amount to achieve year 2000 compliance excludes the Company's total costs estimated to be incurred in previously planned new systems. Implementation of these new systems has not been accelerated due to the year 2000 problem. Deferral of other projects that would have a material effect on operations has not been required, nor anticipated, as a result of the Company's year 2000 efforts. The state of year 2000 readiness for third parties with whom the Company shares material relations, such as banks and vendors used by the Company, is being reviewed by management. The Company had sent written inquiries to these third parties. At this time, the Company is unaware of any third party year 2000 issues that would materially effect these relationships. Page 10 of 16
11 WACKENHUT CORRECTIONS CORPORATION The Company expects to be year 2000 compliant in 1999 for all major systems. The Company is assessing its risk and full impact on operations should the most reasonably likely worst case year 2000 scenario occur. In conjunction with this assessment, the Company is developing contingency plans and expects completion during the third quarter of 1999. RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the notes thereto. COMPARISON OF THIRTEEN WEEKS ENDED JULY 4, 1999 AND THIRTEEN WEEKS ENDED JUNE 28, 1998 Revenues increased by 42.1% to $106.0 million in the thirteen weeks ended July 4, 1999 ("Second Quarter 1999") from $74.6 million in the thirteen weeks ended June 28, 1998 ("Second Quarter 1998"). Approximately $27.8 million of the increase in revenues in Second Quarter 1999 compared to Second Quarter 1998 is attributable to increased compensated resident days resulting from the opening of six facilities in 1998, (Lea County Correctional Facility, Hobbs, New Mexico in May, 1998; Lawton Correctional Facility, Lawton, Oklahoma in July, 1998; George W. Hill Correctional Facility, Thornton, Pennsylvania in July, 1998; South Florida State Hospital, Pembroke Pines, Florida in November, 1998; Jena Juvenile Justice Center, Jena, Louisiana in December, 1998; and Cleveland Correctional Center, Cleveland, Texas in January, 1999) and with the opening of three facilities in the Second Quarter 1999; (Guadalupe County Correctional Facility, Santa Rosa, New Mexico in January, 1999; Melbourne Custody Detention Centre, Melbourne, Australia in March 1999; and East Mississippi Correctional Facility, Meridian, Mississippi in April, 1999). The 1,562-bed George W. Hill Correctional Facility opened in 1998 replaced the existing 1,000-bed facility managed by the Company. The balance of the increase in revenues was attributable to facilities open during all of both periods and to development activities. The number of compensated resident days in domestic facilities increased to 2,135,658 in Second Quarter 1999 from 1,639,688 in Second Quarter 1998. Compensated resident days in Australian facilities increased to 251,701 from 205,934 for the comparable periods primarily due to higher compensated resident days at the immigration detention facilities as well as the opening of the Melbourne Custody Detention Centre. The average facility occupancy in domestic facilities was 97.4% of capacity in Second Quarter 1999 compared to 96.9% in Second Quarter 1998. Operating expenses increased by 46.5% to $93.6 million in Second Quarter 1999 compared to $63.9 million in Second Quarter 1998. This increase primarily reflected the nine facilities that were opened in 1998 and 1999, as described above. As a percentage of revenues, operating expenses increased to 88.2% from 85.6% due primarily to lease payments to CPV of $5.2 million offset by the amortization of deferred revenue of $0.4 million from the sale of properties. Depreciation and amortization remained constant in Second Quarter 1999 at $1.2 million as compared with Second Quarter 1998. As a percentage of revenues, depreciation and amortization decreased to 1.1% from 1.6% in the Second Quarter in 1998. Contribution from operations increased 18.6% to $11.3 million in Second Quarter 1999 from $9.5 million in Second Quarter 1998. As discussed above, this increase is primarily attributable to nine new facilities that opened in 1998 and 1999. As a percentage of revenue, contribution from operations decreased to 10.7% in Second Quarter 1999 from 12.8% in Second Quarter 1998. This decrease is primarily due to the lease payments resulting from the sale of correctional facilities to CPV in the Second Quarter of 1998 and from additional expenses related to the start-up of new facilities. Page 11 of 16
12 WACKENHUT CORRECTIONS CORPORATION General and administrative expenses increased by 42.9% to $4.5 million in Second Quarter 1999 from $3.2 million in Second Quarter 1998. The increase reflects costs related to additional infrastructure and continued growth in the Company's business development efforts. As a percentage of revenue, general and administrative expenses remained constant at 4.2% for both periods. Operating income increased by 6.6% to $6.8 million in Second Quarter 1999 from $6.4 million in Second Quarter 1998. As a percentage of revenue operating income decreased to 6.4% in Second Quarter 1999 from 8.5% in Second Quarter 1998 due to the factors impacting contribution from operations. Interest income was $654,000 during the Second Quarter 1999 compared to $564,000 in Second Quarter 1998 resulting from an increase in the return on investment in overseas projects. Income before income taxes, equity in earnings of affiliates, and cumulative effect of change in accounting for start-up costs increased to $7.4 million in Second Quarter 1999 from $6.9 million in Second Quarter 1998 due to the factors described above. Provision for income taxes increased to $3.0 million in Second Quarter 1999 from $2.8 million in Second Quarter 1998 due to higher taxable income. Equity in earnings of affiliates increased to $898,000 in Second Quarter 1999 from $535,000 in Second Quarter 1998 due to the commencement of home monitoring contracts in January 1999 and the opening of H.M. Prison Kilmarnock in March, 1999. Net income increased to $5.4 million in Second Quarter 1999 from $4.7 million in Second Quarter 1998 as a result of the factors described above. COMPARISON OF TWENTY-SIX WEEKS ENDED JULY 4, 1999 AND TWENTY-SIX WEEKS ENDED JUNE 28, 1998: Revenues increased by 39.5% to $203.5 million in the twenty-six weeks ended July 4, 1999 ("First Half 1999") from $145.9 million in the twenty-six weeks ended June 28, 1998 ("First Half 1998"). Approximately $52.1 million of the increase in revenues in First Half 1999 compared to First Half 1998 is attributable to increased compensated resident days resulting from the opening of ten facilities in 1998 (Scott Grimes Correctional Facility, Newport, Arkansas in January, 1998; Ronald McPherson Correctional Facility, Newport, Arkansas in January, 1998; Karnes County Correctional Center, Karnes City, Texas in January, 1998; Broward County Work Release Center, Broward County, Florida in February, 1998; Lea County Correctional Facility, Hobbs, New Mexico in May, 1998; Lawton Correctional Facility, Lawton, Oklahoma in July, 1998; George W. Hill Correctional Facility, Thornton, Pennsylvania in July, 1998; South Florida State Hospital, Pembroke Pines, Florida in November, 1998; Jena Juvenile Justice Center, Jena, Louisiana in December, 1998; and Cleveland Correctional Center, Cleveland, Texas in January, 1999) and with the opening of three facilities in the First Half 1999 (Guadalupe County Correctional Facility, Santa Rosa, New Mexico in January, 1999; Melbourne Custody Detention Centre, Melbourne, Australia in March 1999; and East Mississippi Correctional Facility. Meridian, Mississippi in April, 1999). The 1,562-bed George W. Hill Correctional Facility opened in 1998 replaced the existing 1,000-bed facility managed by the Company. The balance of the increase in revenues was attributable to facilities open during all of both periods and to development activities. The number of compensated resident days in domestic facilities increased to 4,165,528 in First Half 1999 from 3,185,025 in First Half 1998. Compensated resident days in Australian facilities increased to 473,970 from 411,297 for the comparable period primarily due to higher compensated resident days at the Page 12 of 16
13 WACKENHUT CORRECTIONS CORPORATION immigration detention facilities and the opening of the Melbourne Custody Detention Centre. The average facility occupancy in domestic facilities was 97.3% of capacity in First Half 1999 compared to 96.3% in First Half 1998. Operating expenses increased by 43.4% to $179.7 million in First Half 1999 compared to $125.3 million in First Half 1998. The increase primarily reflected the thirteen facilities that opened in 1998 and 1999, as described above. Depreciation and amortization increased by 10.1% to $2.5 million in the First Half 1999 from $2.3 million in the First Half 1998. As a percentage of revenue, depreciation and amortization decreased to 1.2% from 1.5%. Contributions from operations increased by 16.4% to $21.3 million in First Half 1999 from $18.3 million in First Half 1998. As discussed above, this increase is primarily attributable to thirteen new facilities that opened in 1998 and 1999. As a percentage of revenue, contribution from operations decreased to 10.5% in First Half 1999 from 12.5% in First Half 1998. This decrease is primarily due to the lease payments to CPV resulting from the sale of correctional facilities in the Second Quarter of 1998 and First Quarter of 1999. General and administrative expenses increased by 14.8% to $8.0 million in First Half 1999 from $6.9 million in First Half 1998. This increase reflects costs related to additional infrastructure and continued growth in the Company's business development efforts. As a percentage of revenue, general and administrative expenses decreased to 3.9% in the First Half 1999 from 4.8% in the First Half 1998. Operating income increased by 17.3% to $13.3 million in First Half 1999 from $11.4 million in First Half 1998. As a percentage of revenue operating income decreased to 6.6% in First Half 1999 from 7.8% in First Half 1998 due to the factors impacting contribution from operations offset by leveraging of overhead. Interest income increased 31.1% to $1.1 million in First Half 1999 from $809,000 in First Half 1998 resulting from an increase in the average invested cash balance. Income before income taxes, equity in earnings of affiliates, and the cumulative effect of change in accounting for start-up costs increased by 18.3% to $14.4 million in First Half 1999 from $12.2 million in First Half 1998 due to the factors described above. Provision for income taxes increased to $5.8 million in First Half 1999 from $5.0 million in First Half 1998 due to higher taxable income. Equity in earnings of affiliates increased 97.0% to $1.6 million for First Half 1999 from $799,000 in First Half 1998 due to the commencement of home monitoring contracts in January 1999 and the opening of H.M. Prison Kilmarnock in March 1999. Income before cumulative effect of change in accounting for start-up costs increased 27.2% to $10.2 million in First Half 1999 from $8.0 million in First Half 1998 as a result of the factors discussed above. Cumulative effect of change in accounting for start-up costs was $11.5 million in First Quarter 1998 representing the Company's adoption of SOP 98-5. On a diluted basis, the cumulative effect of the change in accounting principle was ($0.51) per share. Net income increased to $10.2 million in First Half 1999 from a loss of $3.5 million in First Half 1998 as a result of the factors described above. Page 13 of 16
14 WACKENHUT CORRECTIONS CORPORATION ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to Item 7A, Part II of the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1999, for discussion pertaining to the Company's exposure to certain market risks. There have been no material changes in the disclosure for the twenty-six weeks ended July 4, 1999. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Except for routine litigation incidental to the business of the Company, there are no pending material legal proceedings to which the Company or any of its subsidiaries is a party or to which any of their property is subject. The nature of the Company's business results in claims or litigation against the Company for damages arising from the conduct of its employees or others. The Company believes that the outcome of the proceedings to which it is currently a party will not have a material adverse effect upon its operations or financial condition. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of the Company was held on May 6, 1999 in Manalapan, Florida. All directors nominated for election were elected by a majority of the votes cast and the tabulation of the votes cast were as follows: Votes For Votes Withheld --------- -------------- Wayne H. Calabrese 21,237,542 183,186 Norman Carlson 21,236,742 183,986 Benjamin R. Civilette 21,236,597 184,131 Richard H. Glanton 21,237,397 183,331 Manuel J. Justiz 21,238,642 182,086 John Ruffle 21,260,792 159,936 George R. Wackenhut 21,235,570 185,158 Richard R. Wackenhut 21,236,975 183,753 George C. Zoley 21,237,942 182,786 The second matter voted upon at the Annual Meeting was the ratification of the action of the Board of Directors appointing the firm of Arthur Andersen LLP to be the independent certified public accountants of the Company for the fiscal year 1999. The tabulation of the votes on this matter was as follows: For: 21,373,820 Against: 21,326 Abstain: 25,582 Page 14 of 16
15 WACKENHUT CORRECTIONS CORPORATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - CONT. The final matter voted upon at the Annual Meeting was the approval of the Wackenhut Corrections Corporation Stock Option Plan and the setting aside of 550,000 shares for future issuance under that plan. The tabulation of the votes on this matter was as follows: For: 20,073,537 Against: 1,274,979 Abstain: 72,212 ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description ------- ----------- 10.1 Wackenhut Corrections Corporation 1999 Stock Option Plan 27.1 Financial Data Schedule (SEC use only) (b) Reports on Form 8-K - The Company did not file a Form 8-K during the second quarter of the fiscal year ending January 2, 2000. Page 15 of 16
16 WACKENHUT CORRECTIONS CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WACKENHUT CORRECTIONS CORPORATION August 16, 1999 /s/ John G. O'Rourke Date ------------------------------------------ John G. O'Rourke Senior Vice President - Finance, Chief Financial Officer and Treasurer (Principal Financial Officer) Page 16 of 16