WACKENHUT CORRECTIONS CORP - 10-Q Quarterly Report

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 30, 2003


o		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 incorporation or organization)		(I.R.S. Employer Identification No.)

One Park Place, 621 NW 53rd Street, Suite 700, Boca Raton, Florida		33487

(Address of principal executive offices) (Zip code)

(561) 893-0101

(Registrant’s telephone number, including area code)

4200 Wackenhut Drive #100, Palm Beach Gardens, Florida 33410-4243

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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).


Yes x		No o

At May 12, 2003, 21,278,286 shares of the registrant’s Common Stock were issued and outstanding.

WACKENHUT CORRECTIONS CORPORATION

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

The following condensed 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 thirteen weeks ended March 30, 2003 are not necessarily indicative of the results for the entire fiscal year ending December 28, 2003.

WACKENHUT CORRECTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS ENDED
MARCH 30, 2003 AND MARCH 31, 2002
(In thousands except per share data)
(UNAUDITED)


		Thirteen Weeks Ended

		March 30, 2003			March 31, 2002

Revenues		$	145,254		$	140,182
Operating expenses (including amounts related to The Wackenhut Corporation (“TWC”) of $0 and $5,927))			123,300			123,664
Depreciation and amortization			3,313			2,485

	Contribution from operations		18,641			14,033
G&A expense (including amounts related to TWC of $655 and $814)			8,935			8,115

	Operating income		9,706			5,918
Interest income (including amounts related to TWC of $0 and $1)			1,129			999
Interest expense (including amounts related to TWC of $0 and ($18))			(3,003	)		(848	)

Income before income taxes and equity in earnings of affiliates			7,832			6,069
Provision for income taxes			3,280			2,472

Income before equity in earnings of affiliates			4,552			3,597
Equity in earnings of affiliates, net of income tax provision of $449 and $1,007			620			1,586

Net income		$	5,172		$	5,183

Basic earnings per share:
	Net income	$	0.24		$	0.25

	Basic weighted average shares outstanding		21,246			20,977

Diluted earnings per share:
	Net income	$	0.24		$	0.24

	Diluted weighted average shares outstanding		21,325			21,276

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

WACKENHUT CORRECTIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 30, 2003 AND DECEMBER 29, 2002
(In thousands except share data)


			March 30, 2003			December 29, 2002

			(UNAUDITED)
ASSETS
Current assets:
	Cash and cash equivalents		$	48,324		$	35,240
	Accounts receivable, less allowance for doubtful accounts of $1,238 and $1,644			86,207			84,737
	Deferred income tax asset			7,632			7,161
	Other			7,320			12,445

		Total current assets		149,483			139,583

Property and equipment, net				205,931			206,466
Investments in and advances to affiliates				20,371			19,776
Deferred income tax asset				1,069			119
Direct finance lease receivable				34,013			30,866
Other non current assets				4,675			5,848

			$	415,542		$	402,658

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	14,178		$	10,138
	Accrued payroll and related taxes			16,166			17,489
	Accrued expenses			41,944			43,046
	Current portion of deferred revenue			1,837			2,551
	Current portion of long-term debt and non-recourse debt			1,770			1,770

		Total current liabilities		75,895			74,994

Deferred revenue				7,579			7,348
Other				14,578			13,058
Long-term debt				123,750			123,750
Non-recourse debt				34,013			30,866
Commitments and contingencies
Shareholders’ equity:
	Preferred stock, $.01 par value, 10,000,000 shares authorized			—			—
	Common stock, $.01 par value, 30,000,000 shares authorized, 21,245,620 shares issued and outstanding			212			212
	Additional paid-in capital			63,500			63,500
	Retained earnings			116,509			111,337
	Accumulated other comprehensive loss			(20,494	)		(22,407	)

		Total shareholders’ equity		159,727			152,642

			$	415,542		$	402,658

The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets.

WACKENHUT CORRECTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED
MARCH 30, 2003 AND MARCH 31, 2002
(In thousands)
(UNAUDITED)


			Thirteen Weeks Ended

			March 30, 2003			March 31, 2002

Cash flows from operating activities:
	Net income		$	5,172		$	5,183
	Adjustments to reconcile net income to net cash used in operating activities—
		Depreciation and amortization		3,313			2,485
		Deferred tax (benefit) provision		(1,474	)		1,033
		Provision for doubtful accounts		104			87
		Equity in earnings of affiliates, net of tax		(620	)		(1,586	)
	Changes in assets and liabilities —
	(Increase) decrease in assets:
		Accounts receivable		(401	)		3,736
		Other current assets		5,432			(5,960	)
		Other assets		135			2,257
	Increase (decrease) in liabilities:
		Accounts payable and accrued expenses		2,179			(9,238	)
		Accrued payroll and related taxes		(1,521	)		431
		Deferred revenue		(483	)		(694	)
		Other liabilities		1,520			1,430

	Net cash provided by (used in) operating activities			13,356			(836	)

Cash flows from investing activities:
	Investments in and advances to affiliates			(118	)		(768	)
	Capital expenditures			(2,224	)		(1,573	)

	Net cash used in investing activities			(2,342	)		(2,341	)

Cash flows from financing activities:
	Proceeds from non-recourse debt			972			—

	Net cash provided by financing activities			972			—

Effect of exchange rate changes on cash				1,098			1,332

Net increase (decrease) in cash				13,084			(1,845	)
Cash, beginning of period				35,240			46,099

Cash, end of period			$	48,324		$	44,254

Supplemental disclosures:
	Cash paid for income taxes		$	2,600		$	917

	Cash paid for interest		$	2,176		$	80

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

WACKENHUT CORRECTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Consolidated Financial Statements included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 20, 2003 for the fiscal year ended December 29, 2002. Certain prior period amounts have been reclassified to conform with current period financial statement presentations.

RECENT ACCOUNTING PRONOUNCEMENTS

In October 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This standard requires companies to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the Company capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the Company either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The adoption of SFAS No. 143 did not have a material impact on the consolidated financial statements of the Company.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145, among other things, requires gains and losses on extinguishment of debt to be classified as part of continuing operations rather than treated as extraordinary, as previously required in accordance with SFAS No. 4. SFAS No. 145 also modifies accounting for subleases where the original lessee remains the secondary obligor and requires certain modifications to capital leases to be treated as a sale-leaseback transaction. The adoption of SFAS No. 145 did not have a material impact on the consolidated financial statements of the Company.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an Amendment of FASB Statement No. 123.” SFAS No. 148 amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Currently, the Company accounts for stock option plans under intrinsic value method APB Opinion No. 25, under which no compensation has been recognized. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The Company currently does not intend to change its policy with regard to stock based compensation and there was no impact on the Company’s financial position, results of operations or cash flows upon adoption.

WACKENHUT CORRECTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

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:


		Three Months Ended		Three Months Ended
		March 30, 2003		March 31, 2002

		(In thousands, except per share data)
Net income:
	As reported	$	5,172	$	5,183
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		75		1,001
	Pro forma		5,097		4,182
Basic earnings per share:
	As reported	$	0.24	$	0.25
	Pro forma		0.24		0.20
Diluted earnings per share:
	As reported	$	0.24	$	0.24
	Pro forma		0.24		0.20

For purposes of the pro forma calculations, the fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model, assuming no expected dividends and the following assumptions:


	Stock options granted during the

	Three Months Ended		Three Months Ended
	March 30, 2003		March 31, 2002

Expected volatility factor		49%		49%
Approximate risk free interest rate		2.56%		1.95%
Expected lives		4.5 years		2.6 years

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” which addresses consolidation by a business of variable interest entities in which it is the primary beneficiary. FIN No. 46 is effective immediately for certain disclosure requirements and variable interest entities created after January 1, 2003, and in the first fiscal year or interim period beginning after June 15, 2003 for all other variable interest entities. The Company is currently in the process of determining the effects, if any, on its financial position, results of operations and cash flows that will result from the adoption of FIN No. 46.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This Statement is generally effective for contracts entered into or modified after June 30, 2003 and is not expected to have a material impact on the Company’s financial statements. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Act. See “Forward-Looking Statements” on page 16.

WACKENHUT CORRECTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

2. DOMESTIC AND INTERNATIONAL OPERATIONS

A summary of domestic and international operations is presented below (dollars in thousands):


					Thirteen Weeks Ended

					March 30, 2003		March 31, 2002

Revenues
	Domestic operations				$	113,505	$	111,861
	International operations					31,749		28,321

			Total revenues		$	145,254	$	140,182

Operating Income
		Domestic operations			$	8,926	$	5,721
		International operations				780		197

				Total operating income	$	9,706	$	5,918


			As of

			March 30, 2003		December 29, 2002

Long-lived Assets
	Domestic operations		$	199,604	$	200,258
	International operations			6,327		6,208

		Total long-lived assets	$	205,931	$	206,466

Long-lived assets consist of property and equipment.

The Company has affiliates (50% or less owned) that provide correctional detention facilities management, home monitoring and court escort services in the United Kingdom. The following table summarizes certain financial information pertaining to these unconsolidated foreign affiliates, on a combined basis (dollars in thousands):


	Thirteen Weeks Ended

	March 30, 2003		March 31, 2002

Statement of Operations Data
Revenues	$	50,981	$	45,551
Operating income		1,596		11,049
Net income		1,037		4,314
Balance Sheet Data
Current assets	$	100,688	$	91,741
Noncurrent assets		299,881		276,299
Current liabilities		43,312		37,541
Noncurrent liabilities		317,894		300,833
Stockholders’ equity		39,363		29,666

WACKENHUT CORRECTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

2. DOMESTIC AND INTERNATIONAL OPERATIONS (CONTINUED)

The Company’s equity affiliate in the United Kingdom has entered into interest rate swaps to fix the interest rate it receives on its variable rate credit facility. Management of the Company has determined the swaps to be effective cash flow hedges. Accordingly, the Company records its share of the affiliates’ change in other comprehensive income. The swaps fair value approximated $12.1 million, net of tax, and $11.9 million, net of tax, at March 30, 2003 and December 29, 2002, respectively, and are reflected as a component of accumulated other comprehensive loss in the Company’s financial statements.

During 2000, the Company began developing a correctional facility and preparing the facility for operation in South Africa through 50% owned foreign affiliates. In February 2002, the Company successfully opened the 3,024-bed maximum security correctional facility. The following table summarizes certain financial information pertaining to these unconsolidated foreign affiliates, on a combined basis (dollars in thousands):


	Thirteen Weeks Ended
	March 30, 2003			March 31, 2002

Statement of Operations Data
Revenues	$	8,239		$	791
Operating income (loss)		2,435			(1,148	)
Net income (loss)		203			(1,140	)
Balance Sheet Data
Current assets	$	7,580		$	2,718
Noncurrent assets		52,045			37,022
Current liabilities		3,268			1,423
Noncurrent liabilities		56,468			36,689
Stockholders’ (deficit) equity		(111	)		1,628

WACKENHUT CORRECTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

3. 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):


	Thirteen Weeks Ended

	March 30, 2003			March 31, 2002

Net income	$	5,172		$	5,183
Change in foreign currency translation, net of income tax expense of $1,408 and $786, respectively		2,202			1,230
Minimum pension liability adjustment, net of income tax expense of $65		101			—
Unrealized (loss) gain on derivative instruments, net of income tax benefit (expense) of $249 and ($308), respectively		(390	)		482

Comprehensive income	$	7,085		$	6,895

4. EARNINGS PER SHARE

The following table shows the amounts used in computing earnings per share (EPS) in accordance with Statement of Financial Accounting Standards No. 128 and the effects on income and the weighted average number of shares of potential dilutive common stock (in thousands except per share data):


		Thirteen Weeks Ended