Geo Group Inc (GEO) 2003 Q2 法說會逐字稿

Good day and welcome to today's Wackenhut Corrections Corporation's second quarter earnings results conference call. Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to Miss Rosa Suarez [ph].

Thank you, Operator. Good afternoon, everyone, and thank you for joining us for today's discussion of Wackenhut Corrections' second quarter 2003 earnings results. With us today is George Zoley, Chairman and Chief Executive Officer, accompanied by Wayne Calabrese, Vice Chairman, President, and Chi Operating Officer, Jerry O'Rourke, Chief Financial Officer, David Watson, Treasurer and Vice President of Finance, and Brian Evans [ph], Vice President of Accounting and Chief Accounting Officer.

This afternoon we will discuss our second quarter performance, current business development activities and conclude the call with a question and answer session. This call is being webcast live at the company's web site at www.wcc-corrections.com. A telephonic replay will be available through September 8. The replay telephone number is 1-800-839-6806.

Before I turn the call over to George, please let me remind you that much of the information we will discuss today, including the answers we give in response to your questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall within the Safe Harbor provisions of the securities laws. Our actual results may differ materially from those in the forward-looking statements as a result of various other factors contained in the company's Securities and Exchange Commission filings, including the Forms 10-K, 10-Q and 8-K reports. With that, please allow me to turn the call over to George Zoley. George?

Thank you, Rosa. Good afternoon to everyone and thank you for joining us today as I provide an overview of WCC's financial results for the second quarter of 2003. When I conclude my prepared remarks, I will open the call up to a question and answer session. As announced in the press release we issued this morning, Wackenhut Corrections' second quarter earnings were 29 cents a share or $6.3 million, up 17% from $5.4 million for the comparable period in 2002. Our net income for the first six months of the year increased to $11.5 million, up from $10.6 million for the comparable period in 2002, representing an 8% increase. Our second quarter revenue increased 9% to $153 million, up from $141 million for the same period in 2002.

Revenue for the first six months of the year increased by 6% to $298 million compared with $281 million during the first six months of last year. These increases reflect the opening of the Lawrenceville correctional facility in March of this year, a strengthening of the Australian dollar by approximately 15% from 2002, improved occupancy rates and contractual adjustments for inflation. These increases more than offset the impact of the [Inaudible] Puerto Rico contract which was discontinued in June 2002.

Our second quarter 2003 operating expenses increased 5% to $129.5 million from $123 million for the same period in 2002. For the first half of 2003, operating expenses increased 3% to $253 million from $247 million for the first half of 2002. These increases primarily reflect the opening of the Lawrenceville facility and the impact of the stronger Australian dollar offset by lower workers' compensation and general liability insurance expense and lower lease expense due to the purchase of our four previously-leased facilities in December of 2002.

Second quarter 2003 depreciation and amortization expense increased to $3.6 million from [Inaudible] million dollars in the same period 2002. For the first half of 2003, depreciation and amortization expense increased to $6.9 million from $4.9 million for the first half of 2002. These increases primarily reflect the purchase of four previously-leased facilities for $155 million in 2002, December. These facilities are being depreciated over an estimated useful life of approximately 40 years.

Our contribution from operations increased 27% to $20.1 million during the second quarter, up from [Inaudible] million dollars in the second quarter of 2002. For the first six months of 2003 our contribution from operations increased 30% to $38.7 million, up from $29.8 million in the first six months of 2002. Our second quarter 2003 general and administrative expenses increased to $10.1 million, up from $8.3 million for the same period a year ago. For the first six months of 2003 general and administrative expenses increased to $19.1 million, up from $16.4 million for the same period a year ago.

This quarter's general and administrative expenses increased -- includes approximately $1.8 million of expense related to the share repurchase from Group 4 Falck, the settlement of the dispute with our former joint venture partner in the UK and payments made under the employment agreements with certain key executives triggered by the changing control from the sale of The Wackenhut Corporation's [Inaudible] in May, 2002. Our effective tax rate for the second quarter 2003 was approximately 41%. We anticipate that our rate to remain consistent for the remainder of 2003. Our equity income from affiliates decreased to $1.4 million for the second quarter of 2003 compared to $1.6 million for the second quarter of 2002. In the first six months of 2003 equity income from affiliates decreased to $2.1 million, down from $3.2 million for the same period a year ago. The year-to-date decrease is primarily the result of a reduction in revenues at a UK facility during the first quarter of this year.

Our compensated man days were $2.8 million for the second quarter of 2003, representing a 99.1% occupancy rate. These figures exclude our UK and South Africa joint ventures. Our occupancy rate for the first six months of 2003 was approximately 99% compared to 97% for the first six months of 2002. Our average facility bed per diem rates for the second quarter of 2003, exclusive of hospital revenue, was $51.25 compared to [Inaudible] for the second quarter of 2002. Our average facility per diem rates for the first six months of 2003, exclusive of hospital revenue, was $51.08 compared to $49.19 for the same period of 2002. These increases are due to higher per diem rates generated from our existing contracts.

Turning to our balance sheet, cash at the end of the second quarter was approximately $59 million compared with $35 million at year-end 2002. On July 9 we completed a refinancing of our senior secured credit facilities, a new $150 million senior secured credit facility, consists of a $100 million, six-year amortized term loan and a $50 million, five-year revolving credit facility. This replaces the previous senior secured credit facility which consisted of a $125 million, six-year amortized term loan and a $50 million, five-year revolving credit facility. Both the new term loans and the new revolver bear interest at LIBOR plus 3%. The previous term loan for interest at 6% and the previous revolver bore interest at LIBOR plus 3%.

In addition, on July 9 we completed the sale of $150 million in ten-year 8.25% senior unsecured notes. The proceeds from the sale of the senior unsecured notes were used to repurchase the 12 million shares of WTC common stock owned by [Inaudible] at a price of $132 million. I will discuss the repurchase of the shares in just a few moments. This concludes my overview of our financial performance during the second quarter; but I would like to say we're very pleased with these results, and we're enthusiastic of business development activities we're pursuing to drive future growth. However, before moving on to a discussion of those activities, I'd like to update you on a number of significant events and outstanding issues.

The first issue is regarding the [Inaudible] Louisiana facility. We are continuing our efforts to sublease or finding an alternative [Inaudible] use for the deactivated 276-bed [Inaudible] Louisiana facility. The current reserve balance related to the facility's sufficient to cover costs under the lease through early 2004. If the company is unable to sublease or find an alternative corrections for the facility, an additional charge will be required. The maximum amount of such a charge could be up to $11 million, which represents the total remaining lease payment through 2009.

The second issue concerns are 224-bed McFarland, California, facility. The fiscal year budget recently approved by the legislature in California and signed by the Governor only appropriates funds [Inaudible] through year-end 2003. But we are currently in discussion with state officials to seek supplementary funding for the remainder of the state's fiscal year to continue the facility's existing use or find alternative uses for the facility by the California Department of Corrections. Additionally, we've begun discussions with a federal agency regarding the possible use of the facility for detention purposes. On July 9 we completed one of the most significant events in our company's history by repurchasing 12 million shares of our common stock owned by Group 4 Falck. This transaction has transformed WCC from a corporate subsidiary into a truly independent company.

For the first time in WCC's history our company will have full and enhanced access to the Capital Markets and will be able to pursue new growth opportunities. WCC has entered into an agreement in May to repurchase all 12 million shares of common stock held by Group 4 Falck for $132 million cash or $11 per share. The transaction was negotiated by a special committee of WCC's board of directors and approved by the independent directors on the WCC board. The completion of the transaction was made possible through the sale of $150 million in 10-year, 8.25% senior unsecured notes and refinancing the WCC senior credit facility as previously discussed. [Inaudible] the restructuring of WCC senior credit facility. [Inaudible] and Lehman Brothers co-arranged the offering of the senior unsecured notes. The share repurchase agreement and details of the finance can be found in documents that have been filed with the SEC.

The two Group 4 Falck representatives have resigned from the WCC board of directors and several agreements involving WCC and Group 4 Falck have been terminated. These include the March 7, 2002, agreement which governs certain aspects of the relationship between WCC, Group 4 Falck and The Wackenhut Corporation. Additionally, the sublease between WCC and The Wackenhut Corporation which covered WCC's former corporate offices terminated effective July 19. This sublease was due to expire in 2011 and had an annual lease cost of -- to WC of approximately $650,000. The remaining cost under this lease would have been approximately $5 million. We relocated our corporate offices to Boca Raton, Florida, on April 14, 2003.

Our leased corporate space has increased from 26,000 square feet to 41,000 square feet, providing us with additional space for expansion of our in-house support services consistent with our plan to be fully self-sufficient by year-end. Under the terms of the share purchase agreement, we are also required to change our names within the next 12 months. Finally the services agreement dated October 28, 2002, between WCC and The Wackenhut Corporation for the provision of information systems services will be terminated effective December 31, 2003, eliminating the service payment by WCC to TWC of $1.75 million in 2004. We believe that we can provide the same services for approximately the same amount or less.

On behalf of the company, I would like to express our belief that this transaction represents a unique opportunity to increase WCC's independence and create long-term value for WCC's shareholders. We also feel confident that the removal of a controlling shareholder will provide WCC with more flexibility to pursue new diversified business opportunities both domestically and internationally. On July 2 we completed the sale of our 50% interest in the United Kingdom joint venture Premier Custodial Group, PCG, to our former joint venture partner, Serco Investment Limited. We received approximately $80 million in pretax proceeds or approximately $52 million in after-tax proceeds from Serco for the sale of PCG. This represents a one-time [Inaudible] gain for the company of approximately $32 million which will be reported in the third quarter results.

We intend to use the proceeds from the sale, along with our expanded credit facility and new access to the Capital Markets, to pursue one or more acquisition opportunities rather than pay down borrowings under our new senior secured credit facilities. We intend to pursue acquisition opportunities in the U.S. and international markets within our existing business lines of correctional and mental healthcare services. We have previously given investor guidance for 2003 earnings per share within the range of $1.04 to $1.06, which did not assume either the repurchase of the 12 million shares from Group 4 Falck or the sale of WCC's 50% interest in PCG. The repurchase of the 12 million shares from Group 4 Falck reduced the number of outstanding shares from 21.4 million to 9.4 million, resulting in 15.3 million of weighted average shares for the fiscal year 2003.

With the reduction in the weighted average shares and the sale of WCC's 50% interest in PCG, we estimate 2003 earnings per share to be within the range of $3.00 to $3.20 inclusive of an after-tax booking of approximately 32 million from the sale of PCG. Investor guidance previously given by WCC for 2004 did not reflect the sale of PCG -- WCC's interest in PCG. Since WCC has not yet allocated the proceeds from the sale for any specific purpose, WCC is not providing any updated investor guidance for 2004 at this time. The WCC Board of Directors has adopted a shareholders rights plan. The rights plan is intended to assist WCC in pursuing the long-term business strategies to enhance shareholder value.

Before turning to the topic of new business opportunities, I'd like to give you a brief review of the activation of our newest contract. During the first six months of the year, we added over 2,000 new beds either through new contract beds, the award or expansion of the existing facilities or react [Inaudible] of existing facilities. On July 11, 2003, we awarded a contract for 200 beds by the Department of Homeland Security, Bureau of Immigration and Customs Enforcement for the operation of the Broward transition center in Florida. We've been providing these services on an emergency basis since August of last year. The contract also allows for an expansion of up to 250 beds. We estimate the annual revenues from this contract to be approximately 7 million or 35 million over a five-year contract term before cost of living adjustments.

On June 3, 2003, the full correctional center in Victoria, Australia, operated by our Australian subsidiary, ACM, was expanded by 68 beds. This expansion placed into operation the [Inaudible] challenged community as an intensive program for inmates selected to participate from area prisons in a rigorous regime of personal development much more intensive than that of operating in any other prison environment in Victoria. This management contract with annual values of U.S. 1.6 million is subject to five, 3-year reviews over a 15-year period with a total contract value of 24 million U.S.

On July 3, 2003, ACM detention services reactivated the Christmas Island facility to hold 60 immigration detainees for the Australian Department of Immigration and Multicultural and Indigenous Affairs [Inaudible]. This facility has the capacity to hold up to 300 detainees. Additionally, as I've stated in prior calls, [Inaudible] announced during December of 2002 its intention to enter into contract negotiations with a competitor of our Australian facility for the management and operation of Australia's immigration center, to continue to operate the centers under our current contract which was due to expire on or before June 23, 2003, but has been extended by the government through December 23, 2003. And to date, negotiations with the preferred tenderer have not been completed.

Moving to our business development activities, we are continuing our efforts to expand every area of our business, including domestic and international correctional management services and [Inaudible] for mental health, special needs populations and other related management services. With respect to the U.S. corrections market, we continue to pursue new opportunities for contracted correctional services and are excited about our potential for growth. We have submitted proposals for projects that are currently pending award totaling approximately 750 beds at the local level. In addition, we expect to see a number of project opportunities at the local state and federal levels over the next 12 to 18 months, totaling approximately 15,000 to 19,000 additional new beds including the possible expansion of approximately 1,000 to 1500 beds at a number of our existing facilities.

This domestic growth potential is based on a growing need for beds in selected state and local jurisdictions, together with the federal government's reorganization of the INS detention function into the Department of Homeland Security. Two pilot projects under the Office of Federal Detention Trustee are located in Chicago, Northern Illinois region and the El Paso, Texas region totaling approximately 3,000 beds. Additionally, we have recently received a presolicitation notice from the Office of Federal Detention Trustee for a 1750-bed project in the Baltimore-Washington, D.C., area. We expect to see procurements by the U.S. Marshals Service for up to 2800 beds in the Laredo, Texas, area and possibly [Inaudible] contracts held by our competitors in Arizona for approximately 3,000 beds.

In addition, President Bush's 2004 fiscal year Department of Justice budget makes the case for greater use of private facilities to assist the federal government in the housing of low and minimum security inmates. Specific to the Federal Bureau of Prisons, the budget recommends increased reliance on contract bed space for low and minimal special category inmates. The Homeland Security Bill and the revised [Inaudible] circular rules provide that the agencies, with greater flexibility in their efforts to procure detention beds, services, [Inaudible] more efficient procurement process. Moreover, we believe that the government will tighten its security [Inaudible] illegal residents resulting in demand for more secure facilities for a population estimated to be as high as 30,000 individuals driving the need for further outsourcing key detention operations to companies such as ours.

On the state level, we are preparing to respond to several RFPs and to negotiate for a number of new or existing private contracts representing a total of approximately 7,500 beds. In Texas we are preparing to submit bids for some or all of the 13 facilities that are currently up for a rebid, including 5 correctional centers, 5 state jails and 3 intermediate [Inaudible] facilities. Six of the 13 facilities are currently operated by WCC.

The 10 correctional and state jail beds -- bids are due to be submitted on August 22, and the three intermediate sanction facility bids are due to be submitted by December [Inaudible]. We expect contract award decisions to be made during the fourth quarter of this year with operations to begin in early 2004. At the local level, we are in discussion with several existing, potential new clients for the provision of facilities and services totaling approximately 2,000 beds.

Turning to the international area, we continue to see new opportunities for us to partner with government agencies. We expect to see a number of project opportunities over the next 12 to 18 months totaling approximately 15,000 additional new beds. We anticipate that in the near future the government of the Republic of South Africa will begin the procurement process for up to four new 3,000-bed prisons. We also anticipate that within the next 12 months, the UK government will begin the RSV process for the design, construction management of up to 8 immigration centers for approximately 3,000 new beds. We intend on re-establishing a presence in the UK market and are not constrained by any noncompete agreements as a result of the sale of our 50% [Inaudible] in our former UK joint venture.

We have a signed five-year extension for our management contract from the Florida Department of Children and Families for the operation of the South Florida state psychiatric hospital effective July 1, 2003. The annual contract values is approximately $30 million and has a five-year value of approximately $150 million. We're continuing our aggressive marketing of our diversified services offerings, including providing mental health services, special needs, management services, home detention, electronic monitoring, and offender transport.

President Bush's New Freedom Commission Report on Mental Health was released July 22, 2003. The report draws public attention to mental health and the first such report published in 25 years. The Commission recommends [Inaudible] transporting how mental healthcare is delivered across America consistent with the project we have developed in Florida. We believe that this report will bring new business opportunities in the mental health services market, and we continue to have very positive interactions with political and governmental leadership in the development of policy initiatives for public-private partnerships. According to The Wall Street Journal, 5 to 7% of adults in the U.S. have serious mental illness [Inaudible] project [Inaudible] for 3,000 mental health beds in multiple states throughout the U.S. That concludes my presentation. I will be glad to address any questions from the audience.

Thank you. If you'd like to ask a question or make a comment, you may signal us by pressing the star key followed by the 1 on your telephone keypad. Once again, press star 1 on your telephone keypad if you would like to ask a question or make a comment. We will pause for a moment to assemble our roster. Our first question comes from Jim MacDonald with First Analysis. Go ahead, sir.

Good quarter, guys.

Thanks, Jim.

So in California, do you think Arnold Schwarzenegger is going to be a tough negotiator?

[Laughter] We're going to arm wrestle him!

Seriously, anymore flavor on that? I mean, it seems kind of odd to just extend the contract for six months. I know they have tough budget situations. Is it a budget situation or do they really intend to terminate those beds?

Well, I think they did some odd things at the end there to close the gap at least temporarily. But, you know, as I said in the conference call speech and then maybe I can give a little bit more color on. We are in discussions with the state officials about the [Inaudible] of that facility. They liked the facility. I believe they're going to be asking for continuation of funds for the existing mission, which is a parole violater facility, for a revised mission, possibly, [Inaudible] facility. There's been a recent court case and a ruling that impacts how they are processing parole violators which, from our reading of it, puts them kind of in a crunch that they may need more beds than they presently have for parole violators in particular. Wayne, would you like to comment further on this?

Yeah, I think under their current processing they were taking 90 days to process the parole violators into the system and I believe the court case gives them a ten-day timeline, which means they may need to move much faster to place more people into more beds. And so the impact of that case, I think, is still being adjusted by ourselves and the state officials. But we think that together with a remissioning of the facility for DUI-type offenders, parole violators who have DUI offenses, may give them reason to reconsider. I think what George said earlier is the case, Jim.

There was a lot of last-minute movements to try and close the gap as best they could. I think people were locked in rooms. It was very difficult to get information in or out of those rooms at the end, and certainly we were happy to see three of our facilities continue to be funded in full; but the fourth one, the smallest of the four, received only six months funding. I think it's clear to us, and it should be clear to the state officials who have time to consider it more fully, that taking detainees out of a facility like the ones they're in at McFarland and placing them in prison is not a cost effective move, it is costly. When that sinks in we're hopeful that they will be able to restore the funding for the rest of the fiscal year.

And that court ruling only occurred this week.

Right.

So that's a recent development. It was not considered in the budget process, so we are optimistic on McFarland.

Okay. Moving to Australia, your contract was extended to December 23, but that can be canceled kind of almost on no notice, right?

Or it can be extended as well.

But I think it requires notice. I forget the days, but it can't be [Inaudible] phone call. We'd like to see it over tomorrow.

But it's not a firm contract through December 23rd?

No, but our information is that it will probably extend through that and perhaps a little longer. The contract negotiations are still underway and our international Senior VP was just over in Australia, and his best sense of the situation after talking with [Inaudible] it's likely that it will go the distance through December 23rd and and perhaps further. We have no assurance one way or the other.

Okay. And could you give us the -- I know you've talked about reutilizing the money from the Serco sale. Any update on the -- how your acquisition process is going? And, specifically, are there any international candidates to actually replace, you know, rather than start up de novo in the UK?

We have engaged investment bankers and we are actively involved in assessing multiple acquisitions, both domestically and internationally, simultaneously. And we have a 270-day time period from the closing of our financing, which takes us, I think, through April ... April 4, in which to use the proceeds without any further waivers. So we are very much inclined to try to make that time period.

Okay. I'll ask one more and let somebody else ask and come back. Florida just announced, I think, a new opportunity and I believe that they'll be rebidding their facilities. What are your -- is that true and what are your thoughts around the timing and the situation in Florida?

Well, there's two types of developments in Florida. One is that there is approximately 1,000 new beds that are going to be allocated to the private sector, and we're hopeful that we're going get our fair share of those 1,000 beds. That would be done through [Inaudible] a negotiated basis. Secondarily, there will be RFPs on rebids of all of the existing contracts and I guess those come in two ways. The first one is in August, we believe. That will include our South Bay contract [Inaudible] with decisions by the end of the year. And the next round is -- begins in November, which will include our Moore Haven facility. We expect decisions by around the end of the first quarter of next year, so March 1. And we are reasonably optimistic that we're going to retain our facilities.

Okay. I will come back. Thanks.

And up next we go to Susan Jansen with Lehman Brothers.

Good afternoon, everyone. And, again, congratulations on a great quarter. Two questions on your contracts and your outlook. And by the way, George, thank you for that very thorough review of the outlook from the international level all the way down to the local level. You mentioned Arizona and maybe 3,000 beds in Arizona. I was hopeful you could talk about that a little bit more. Also, if you could maybe give us just a big picture overview of the status of all of your expiring contracts over the next, say, six months, between now and the end of the year. I think at the beginning of the June you had about 22, including the Texas ones, that were coming up for renewal. Could you just talk to that sort of status at this point?

I will turn it over to Wayne Calabrese for most of that. Go ahead.

Hi, Susan.

Hey, Wayne.

I guess with respect to Arizona first, it's not to be confused with the state Arizona RFP for, I think it's up to 3200 state prisoners, females. We're referring to a federal agency contract in Arizona that were recently awarded and we believe are coming up for rebid within the next 12 to 18 months. At least that's our best understanding [Inaudible]. Federal [Inaudible] in Arizona with private sector currently.

Okay, that's very helpful.

And your second question regarding those other contracts, I don't have that information. And, you know, once we completed the road show I deleted all of those files from my mind! [Laughter] And I think George did a good job of going over the State of Texas in his earlier remarks. There are 13 facilities there that are up for rebid, and we have six of those currently. We'll certainly be bidding on most or nearly all of those facilities. Michigan was renewed, I think that was underway during the road show. It has, in fact, been signed for a four- or five-year extension.

Oklahoma, I think, was renewed. Delaware County we are finalizing negotiations with the union there, and we have an extension with the county government on that contract, so that once the union agreement is in place, we will work very quickly to complete negotiations with the county and extend that. That's probably the bulk of them. I'm sure I'm forgetting a couple, but the rest I think as we said, again, on the road, so it's our expectation that they will be renewed as they have been in the past on a routine basis. It's not just our company, the industry incumbents have enjoyed remarkably high renewal rates.

Okay. That's very helpful. Finally, just one sort of housekeeping item. I don't know if you have it with you, Jerry, but if you have capital expenditures during the quarter, that would be helpful.

We've got $2 million on -- $2 million for the quarter, so our annualized rate is running as predicted at $8 million a year.

Perfect. Thank you very much.

And moving on, we'll go to Jeffries and Company's Arthur Henderson.

Hi. Very nice quarter. You guys have done a lot of hard work in a short period of time. I'm relatively new to this story and, George, I know you've emphasized a lot on the mental health initiatives and some of the, you know, targeting that area. I'm wondering how big could that possibly be? How important is that to you strategically? And are you reimbursed or are you paid in the same sort of way you are on your correctional facilities?

I think that business for us could be, you know, 3 to $500 million; and that's by the nature of the contracts. Our one contract is worth $30 million, and it's kind of a medium- to small-sized facility by comparison. There are much larger facilities around the country. So it wouldn't take very many to build a very significant revenue base. And, again, the contracts are single-payer contracts with a government agency and in Florida it's the Department of Children and Families. And there is no occupancy -- [loss of audio] -- so we get [Inaudible] the contracts that operate.

Do those type of contracts kind of have the same margins as you do on your correctional facilities? I imagine that the per diems are much higher I would guess, and I'm wondering if the margins are kind of comparable?

The per diems are much higher. There is triple digit, there are, you know, they can be $250, for example, and up. And the operating margins are comparable to our other business activities as far as gross margin, but particularly attractive further is there's no investment required. On such a contract, because the projects would be typically financed through tax-exempt bonds.

Okay, great. Now, jumping over -- your South African operations which, I guess, now that you have gotten -- that you're not in the UK anymore, if I'm right on that, your South African operations account for all of the line -- and your joint venture line, your equity and earnings of affiliates; is that right?

That's correct.

And that -- and how many ...

Well, on a prospective basis. There was some in the second quarter that was a residual [Inaudible] up to the point that we sold our interest [Inaudible].

Okay, right. So going forward in Q3, that would be a pure South African number?

That's right.

And is -- I know traditionally looking at your financial documents, you've indicated that that has operated at a loss historically; but I'm wondering going forward, is that -- have you now moved that to a profitable -- is it operating at a profit now?

Yes, it is.

Okay. Okay. And do you have any sense as to what that should contribute on a quarterly basis or an annual basis? Rough it. I mean, not precise, but just roughly.

100 to 150 per quarter.

150, okay. A couple more things and I will jump out of the queue, as well. George, you had mentioned in the past, I guess, EBITDA guidance of roughly about $54 million, if I'm right on that for the year. Are you still thinking along those lines?

Yes.

Okay. $54 million. And do you have any sort of revenue guidance or anything that you've given out historically?

I guess for the first half we hit almost $300 million. I think we will exceed that for the second half, so approximately $600 million for the year.

Okay. Okay, great. And then one last question and I will get out. Jerry, cash flow from operations for the quarter, do you happen to have that handy?

Our margin is running at $20 million [Inaudible]. Contribution margin from operations is at $20 million for the quarter.

Okay. Okay. Thanks so much. Very good job.

Thank you.

And before moving on I'd once again like to remind our audience to press the star key followed by the number 1 on your telephone keypad if you would like to ask a question. Now we'll go to Rudy Mueller from Winchester Group.

Yes. Everything considered, what do you now anticipate will happen to the demand and supply for prison beds over the next 18 months in this country?

Well, I think we've seen a pickup in our industry, and that's reflected if our occupancy rates, that have gone from the long, sustained 97% [Inaudible] occupancy for, you know, 3 to 5 years. Now we're at effectively 100%. Meaning that on a companywide basis, meaning that some facilities are not at full occupancy but others are in excess of their designed capacity. So we see a pickup in the need for beds both at the state and federal levels in particular.

While I was asking, though, what's happening to the incarceration rate? Is it the -- what's the number of -- the total number of prisoners? At what rate is it growing?

This last report shows the first significant uptick, I think, over 3% uptick, you know, that we've had in several years. It is now increasing. I think this is the beginning of the impact of the echo boomer population in one measure and probably coupled with an increase detention of illegal and criminal aliens.

Okay. And I was going to ask you, of this increase, what proportion is ordinary criminals and what proportion is what I would call political criminals?

I don't know that we could share that [Inaudible] of ordinary versus criminal.

Yeah. Okay. And can you tell me in rough terms, how many new beds are being built net of retirements?

We used to run about 1,000 a month.

1,000 a month. Okay. Thank you.

The country was building about a thousand beds [Inaudible] a week.

And that's net?

[Inaudible]

Is that a net figure?

No, no, no. Wait. Oh, what's your question?

How many are -- there are also some prisons are being closed. I'm just wondering what the net figure is?

Well, we've been saying that because of the historical rate has been 6% [Inaudible] against 2 million people incarcerated. That means there's a need for over 100,000 new prison beds every year just based on the historical rate of growth.

Okay.

100,000.

All right. And do you have any idea how many prisons and how many beds are being closed?

No, I don't. That's not a statistic that we read about.

Yeah. Okay. Thank you.

We will now go Jim MacDonald with First Analysis.

Yeah. Given all the changes in the G&A line, I was wondering if you could give us some help for the kind of third quarter, or will that also have some one-time items related to all these transactions?

Well, the third quarter will have a lot of one-time charges, Jim, because of the transaction.

But it won't be in the G&A line, I hope?

No.

And the G&A was especially high this quarter, and I was just wondering, you know, will it be coming back down?

We think on a normalized basis it should be at approximately $9 million per quarter, but we have some unusual charges this quarter and we will in the third quarter, as well.

And it wasn't a huge number, but sequentially D&A was up from the first quarter to the second quarter. Could you tell me what that relates to? The new Florida project?

D&A? Well, I think --

Depreciation and amortization. There's nothing particular there, Jim. There were probably a little catch-up in some areas, probably from new assets coming on, but nothing --

There was an, you know, a small accounting adjustment there, nothing material, though.

Okay. Thanks very much.

And as a final reminder before moving on, press star 1 on your telephone keypad if you would like to ask a question or make a comment. We'll now go Tim Hall.

Hi, thank you. I'm a private investor and shareholder. I'd like to know where was the EBITDA in the quarter without PCG's contribution? You know, when I look at the press release it says 10 million of EBIT and about 3.5 of depreciation and amortization. Will that change? How much of that was from PCG's -- the 50% interest in PCG?

The contributions that are coming from PCG, we're running approximately just what the dividends that were coming out of that, and on an annualized basis that was about $2 million. So in our EBITDA numbers we were only up -- we only captured the dividends that has actually been [Inaudible].

Okay. See, I was under the impression that for an $80 million proceeds that was maybe a 6 to 7 or 8 times EBITDA multiple that you received for that. Is that not the way it worked?

No. There was an expert valuation process by people who value companies and they came up with the number.

Okay. So the contribution, then, from the PCG is not in the equity and earnings of affiliates line of $1.4 million? It was actually in the EBIT number?

No. It was in the contribution line.

It was in the contribution line, the $20 million?

No. It's in the equity income of affiliates --

Right.

-- reflect the UK which was PCG and South Africa. So there was nothing related to the UK in revenue, contribution [Inaudible] income.

Okay. So then the EBITDA would have been about $13.5 million without PCG, then, basically?

That is correct.

Okay. And what -- lastly, what is the total debt now and total cash after the divestiture?

It's about 250 debt and it's about 100 million in cash.

Okay. And 9.4 million shares, right?

Yeah.

Okay. Thank you.

We'll go back to Arthur Henderson at Jeffries & Company.

Just real quick on the SG&A this quarter. Was the total additional expenditures associated with the repurchased and the executive compensation items, was that $1.8 million in total?

That was -- $1.8 million was related to this quarter.

Was this quarter, and it included all of those sort of one-time charges?

Right. And then year-to-date there would have been about another 3/4 of a million for -- well, probably about another million or so for executive payments and additional professional fees.

Okay. That's it. Great, thanks.

And at this point we have no further questions. Mr. Zoley, I'll turn things back to you for any additional or closing comments today.

Well, we thank everyone for participating in this quarter's conference call. We look forward to addressing you in the next quarter. Thank you.

That concludes our program. Once again, everyone, thank you for your participation and have a pleasant day.