Geo Group Inc (GEO) 2003 Q3 法說會逐字稿

Good afternoon, my name is Amanda and I will be your conference facilitator. At this time, I would like to welcome everyone to Wackenhut Corrections third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press star then the number two.

I would now like to turn the conference over to Rosa Suarez. Ms. Suarez, you may begin the conference.

Thank you, operator. Good afternoon, everyone and thank you for joining us for today's discussion of Wackenhut Corrections' 3rd quarter 2003 earnings results. With us today is George Zoley, Chairman and Chief Executive Officer, accompanied by Wayne Calabrese, Vice Chairman, President and Chief Operating Officer, Jerry O'Rourke, Chief Financial Officer, David Watson, Treasurer and Vice President of Finance, and Brian Evans, Vice President of Accounting and Chief Accounting Officer.

This afternoon, we'll discuss our third quarter performance, current development activities and conclude the call with a question-and-answer session. This conference is also being web cast live at the company's website at www.wcc-corrections.com. A telephonic replay will be available through December 8th. The telephone replay number is 1-800-642-1687.

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 this call over to George Zoley. George?

Thank you, Rosa and good afternoon, everyone. Thanks for joining me today as I provide an overview of WCC financial results for the 3rd quarter of 2003. When I conclude my remarks, I'll open the call up to a question-and-answer session.

As announced in the press release we issued earlier today, Wackenhut Corrections's 3rd quarter earnings were $2.79 per share or $30.4 million compared to 25 cents per share or $5.4 million for the 3rd quarter of 2002. These results are inclusive of a one time after-tax gain of approximately $32.7 million from the sale of our joint venture interest in the U.K, a charge of approximately $1.2 million after tax related to the refinancing of our former senior credit facility, a write-off of approximately $3 million after tax related to our deactivated Gina, Louisiana facility and approximately $1.8 million after tax for transition costs related to our Demia contract.

Our net income for the first nine months of the year increased to $41.8 million, up from $16.9 million for the comparable period in 2002. These year to date results are inclusive of the previously mentioned items. Our 3rd quarter earnings per share reflect a repurchase of 12 million shares of our common stock from Group 4 Falck which resulted in 10.9 million diluted weighted average shares outstanding for the 3rd quarter in 2003 compared to 21.4 million shares outstanding for the same period in 2002. Our year to date earnings per share reflect 17.9 million diluted weighted average shares outstanding for 2003, compared to 21.3 million shares outstanding for 2002. There are currently 9.6 million diluted weighted average shares outstanding.

Additionally, our 3rd quarter results reflect a higher interest expense due to the financing of our former senior credit facility and the offering of senior unsecured notes. Our third quarter revenue increased 11% to $158 million, up from $142 million for the same period in 2002. Revenues for the first nine months of the year increased by 8% to $456 million compared with $423 million for the first nine 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 17% from 2002, improved average occupancy rates and cost of living contractual adjustments.

Our 3rd quarter 2003 operating expenses increased 15% to $142 million from $124 million for the same period in 2002. For the first nine months of 2003, operating expenses increased 7% to $395 million from $370 million for the first nine months of 2002. This quarter's operating expense increase reflects a charge of approximately $5 million pretax, or $3 million after tax related to our deactivated Gina, Louisiana facility and expenses of approximately $3 million pretax or $1.8 million after tax related to the transitioning of our DIMIA contract. I will discuss both of those items later in the call.

Additionally, the increase in our year to date operating expenses reflect the opening of our Lawrenceville, Virginia facility in March and the impact of the stronger Australian dollar this year offset by lower worker's compensation and general liability insurance expenses and lower lease expenses due to bringing our four previously leased properties on to our balance sheets in December, 2002. Third quarter 2003, depreciation and amortization expenses increased to $3.4 million from $2.4 million for the same period in 2002.

For the first nine months of 2003, depreciation and amortization expense increased to $10.4 million from $7.3 million for the first nine months of 2002. These increases primarily reflect bringing the four previously leased facilities on to our balance sheet at a value of $155 million in December 2002. These facilities are being depreciated over an estimated fiscal life of approximately 40 years.

Our 3rd quarter 2003 general and administrative expenses increased to $9.5 million, up from $7.8 million for the same period a year ago. For the first nine months of 2003, general and administrative expenses increased to $28.6 million, up from $24.3 million for the same period a year ago. This quarter's general and administrative expense increase reflects increased professional fees, increased D&O insurance and travel Additionally the increase in year-to-date administrative expenses reflect payments made under the employment agreements with certain key executives triggered by the change in control from the sale of the corporation in May, 2002, higher professional fees associated with share repurchase for Group 4 Falck and increased D&O insurance and travel.

Our effective tax rate for the third quarter of 2003 was approximately 47%. We anticipate this rate to remain constant for the full year 2003. This higher rate is primarily the result of differences between the book basis and the tax basis related, again, to the sale of our joint venture interest in the U.K.

Our equity income from affiliates decreased to $500,000 for the 3rd quarter of 2003 compared to $700,000 for the 3rd quarter of 2002. Third quarter 2003 represents the results of our South African joint venture only, while the 3rd quarter 2002 included both joint ventures in the South Africa and the United kingdom. For the first nine months of 2003, equity income from affiliates decreased $2.6 million, down from $3.9 million for the same period a year ago. 3rd quarter and year to date 2003 decreases reflect the sale of our former joint venture in the United Kingdom.

Our compensated mandates increased to $2.8 million for the 3rd quarter of 2003 as compared to $2.7 million for the 3rd quarter 2002 representing a 100% occupancy rate for the 3rd quarter, company wide, during the 3rd quarter 2003. These figures exclude our South Africa joint venture. The 3rd quarter achieved the highest average occupancy rate in the entire history of our company and is a reflection of the increased need for bed space, particularly by federal agencies.

Our occupancy rate for the first nine months of 2003 was approximately 99% as compared to approximately 97% for the first nine months of 2002. Our average correctional per diem rate for the 3rd quarter of 2003 was $53.39 compared to $49.48 for the 3rd quarter of 2002. Our average correctional per diem rate for the first nine months of 2003 was $51.86 compared to $49.29 for the same period in 2002. These increases are due to higher per diem rates generated from our existing correctional contracts.

Turning to our balance sheet, cash at the end of the 3rd quarter was approximately $120 million compared to $35 million at year-end of 2002. This increase in cash primarily reflects the proceeds from the sale of our joint venture in the U.K. during the 3rd quarter for approximately $80.7 million, U.S.

As we discussed in our previous conference call on July 9th, we amended our senior secured credit facility. The facility now consists of a $100 million six-year amortizing term loan and a $50 million five-year revolving credit facility. Both the term loan and the revolver bear interest at LIBOR plus 3%. Additionally on July 9th, we completed the sale of $150 million in 10-year 8 1/4% senior unsecured notes. The proceeds from the sale of the senior unsecured notes were used to repurchase the 12 million shares of WCC common stock sold by Group 4 Falck at a price of $132 million Currently, we have not repatriated the proceeds of the sale of the U.K., consequently, during the 3rd quarter of 2003, we borrowed $20 million against the revolver to repay the tax liability related to the gains on the sale of our interest in the joint venture.

Additionally in September, we entered into a $50 million of reverse interest rate swaps to hedge a portion of our fixed rate notes. Under the terms of the swap, we receive a fixed rate in exchange for a payment of LIBOR plus three at .45%, effectively converting 50 million of the fixed rate notes to floating rate debt.

This concludes my overview of our financial performance during the 3rd quarter and I'd like to say that we're very pleased with these results and equally enthusiastic about the business development activities we are pursuing to drive our 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 our Gina, Louisiana Facility. We are continuing our efforts to sublease or find an alternative correctional use for the deactivated 276 bed Louisiana Facility. However, during September 2003, parties that we previously believed might sublease the facility from us prior to early 2004 either indicated they did not have an immediate need for the facility or did not intend to enter into a binding commitment to sublease the facility by that date. As a result, we determined that we are unlikely to sublease the facility or find an alternative correctional use for the facility prior to the expiration of the current reserve in early 2004.

As a result, we've incurred an additional pretax operating charge of $5 million during the 3rd quarter of 2003. We believe that this additional operating charge is sufficient to cover both our costs under the lease for the facility until a new client or sublease is in place including any discount related to a perspective sublease or until an alternative correctional use is established. If a new client or sublease is not activated by January, 2006, an additional charge will be necessary.

The second issue concerns our 224 bed McFarland Facility in California. As we stated in our last conference call, the California fiscal year budget only appropriated funds for this facility through year-end of 2003. We currently are seeking supplementary funding from the state legislature for the remainder of the state's fiscal year to continue for this facility's existing use. We are also looking for alternative uses of the facility by the California Department of Corrections. Additionally, we've begun discussions with a federal agency and city officials regarding the possible use of the facility for detention purposes. Unless the State of California extends our contract or we are able to find an alternative client by January 2004, we will be required under the new accounting rules to expense the related lease costs as they occur. We estimate the annual lease costs and other related costs for this facility to be approximately $1 million.

On July 2, 2003, we sold 50% of our interest in Premier Custodial Group to our former joint ventures partner, Serco, for approximately $80.7 million pretax. During the 3rd quarter, 2003, we recognized a one time pretax gain of $61 million or $32.7 million after tax. On October 9th, we announced that our Board of Directors had approved a shareholders' rights plan. We feel the shareholder's rights plan helps preserve and enhance shareholder value, the shareholder's rights plan approved by our Board is a matter of good corporate planning and does not come in response to any specific known effort to acquire control of our company.

Subsequently, on October 21st, we announced that our Board of Directors had called a special shareholders meeting for November 18th for the purpose of approving our proposed name change from Wackenhut Corrections Corporation to the GEO Group, Incorporated. The name change is required under the terms of our share repurchase agreement with Group 4 Falck.

Before turning to the topic of new business opportunities, I'd like to give you a brief review of the activation of our newest contracts. During the first nine months of the year we've added approximately 2,500 new beds either through new contract beds, new awards, expansion of the existing facilities or reactivation of existing facilities. On October 14, 2003, the Florida Correctional Privatization Commission announced that it plans to expand its South Florida Facility by approximately 543 beds.

On October 16, 2003, our contract with the Delaware County Board of Prison Inspectors for the operation management of the 1,714 bed George W. Hill Correctional Facility in Delaware County, Pennsylvania was renewed for a three-year term beginning June 1, 2003 and ending May 31, 2006. The new contract has an value of approximately $28 million which represents an increase of approximately 10% from the previous contract amount and calls for annual increases of 3.5% in each of the last two years. The new three-year Delaware County contract also includes the construction by the County of a new 206-bed general population unit and a 46-bed expansion to the special medical care unit which are expected to open by the 3rd quarter of 2004. Once both units have opened, the contract is expected to generate annual revenues of approximately $32 million.

Additionally, DIMIA in Australia, that is the Department of Immigration, has entered into an agreement with the division of Group 4 Falck for the management and operation of Australia's immigration centers. We have begun to transition some of the centers under a current contract that is due to expire February 23, 2004. During the 3rd quarter, we incurred expenses of approximately $3 million in pretax or $1.3 million after tax for certain transitions costs related to this contract.

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, management services 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 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 1,500 beds at a number of our existing facilities. This domestic growth potential is based on a growing need for beds in select state and local jurisdictions together with the Federal Government's reorganization of the I.N.S. detention functions into the Department of Homeland Security.

On the state level, we're expecting any day to hear the results of the Texas Department of Criminal Justice rebids, including 10 facilities totaling approximately 11,000 beds. We currently manage four of these 10 facilities and have committed bids on those four, plus five additional centers. We are hopeful of retaining all four, all of our current facilities and possibly picking up additional beds in Texas through this procurement process and look forward to the announcement of the preferred offers at any time.

Intermediate sanction facility beds up for rebid in the state of Texas as well. WCC has submitted proposals for up to 1,000 beds in various locations throughout the state. WCC currently operates intermediate sanctioned facility contracts in two locations totaling nearly 600 beds. We expect the Texas Department of Criminal Justice to make award decisions for this sometime towards the end of 4th quarter 2003 and again, we are hopeful of retaining our existing beds and possible winning additional beds through this process.

In addition, we are prepared to respond to the Florida procurements for new or existing contracts representing the total of approximately 5,100 beds. The Florida Correctional Privatization Commission, or CPC, currently has three of their contracts up for rebid totaling 2,500 beds. That includes the 1,318 bed facility at South Bay Correctional Center, 1,800 beds at the Gadsen Correctional Facility and 350 beds at the Lake City Correctional Facility. We believe the second round of the CPC rebids totaling 1,500 beds will begin late in the 4th quarter as we previously discussed, the CPC has voted to expand the South Bay and Lake City Correctional Facilities by 543 beds each.

We continue to see significant opportunities at the Federal level. As we have previously stated in our previous conference call, President Bush's 2004 fiscal year Department of Justice budget makes the case for a greater use of private facilities to assist the Federal Government in the housing of low and minimum security facilities, inmates specific to the Federal Bureau of Prisons, the President's budget recommends increase reliance on contracts for bed space for low, minimum and special needs inmates. In addition, Attorney General John Ashcroft directed federal prosecutors to pursue the toughest sentence possible under the federal sentencing guidelines and steer clear of plea bargainings, we view this Attorney General's directive as a potential growth driver for our industry.

We believe that the government will continue to tighten its security related to illegal aliens resulting in a demand for secure facilities for a population estimated to be as high as 30,000 individuals which we believe will drive a need to further outsource key detention operations to the private sector.

Two pilot projects under the Office of the Federal Detention Trustee are located in the Chicago, Northern Illinois, and El Paso, Texas, region totaling approximately 3,000 beds. Additionally, we have received a presolicitation notice from the Office of Federal Detention Trustee for a 1,750 bed project in the Baltimore or Washington, D.C. area and have submitted two potential sites for consideration. We expect to see procurements by the U.S. Marshal Service for up to 2,800 beds in the Loredo, Texas area and possible rebids for contracts held by our competitors in Arizona for approximately 3,000 beds. We've submitted two sites for consideration for the project in Laredo and expect the solicitation to be issued this month.

Moreover, we have recently received a sources sought notice from the Bureau of Prisons regarding the availability of existing space at low security correctional facilities to accommodate between 1,000 and 1,500 low security U.S. citizen males by summer 2004. We believe we will see more projects such as from the Bureau of Prisons as a result of increases in the criminal alien population.

Turning to the international arena, we continue to see new opportunities for us to partner with government agencies around the globe. We expect to see a number of project opportunities over the next 12 to 18 months totaling approximately 15,000 additional new beds. We expect the Government of the Republic of South Africa to begin the procurement process for four new 3,000 bed prisons in the coming months. In addition, we foresee that within the next 12 months, the S.A. Government will begin the RFP process of the construction of up to eight immigration centers for approximately 3,000 new beds.

As we stated in our previous conference call, we have every intention of reentering the UK market. We continue to market our diversified service offerings to achieve this, which include providing mental health services, special needs management services, home detention and electronic monitoring.

A number of our company representatives have been invited recently to make presentations regarding specialized services in public/private partnerships. We have made such presentations and participated in forums for the National Governors Association, the Republic and Democratic Governors Association, the International Corrections and Prisons Association and the National Attorney Generals Association and the like. All of these presentations have been aimed at assisting government entities in developing policies that encourage and support private sector involvement in the delivery of diverse government services.

Through various recent publications, articles and presentations, we have begun to see an apparent positive effect from President Bush's new Freedom Commission Report on Mental Health. Government entities, trade organizations and other organizations and entities have begun to address the issue systematically, which includes looking at the concept of public/private partnerships as a tool for governments to better handle their current deficits and lack of quality mental health services.

Additionally, the legislation has begun to emerge from several states allowing for public/private mental health services services to develop. We are marketing our mental health model to several states and expect to see a number of project opportunities for approximately 1,750 beds in the next 12 to 18 months.

That concludes my presentation. I would be glad to address any questions from our audience .

At this time, I would like to remind everyone, if you would like to ask a question, please press star then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from James MacDonald of First Analysis.

Good quarter, guys.

Thank you, Jim.

Before I start, can I just put out that am I right in calculating that your earnings would be about 34 cents excluding kind of the one-time items in the quarter?

We trust your math, Jim.

Okay, just checking. I guess my next question is, you didn't mention anything about the acquisition, if I remember, the clock is ticking on using some of that hundred million dollars. It sounds like some of the $120 million in cash you have on the books is earmarked to pay some taxes. Is that right as well ?

Well, you know we've announced we paid $20 million in taxes and we borrowed on the revolver for that amount.

Okay, so that really $100 million then. What's the status on the acquisition front?

Well, you know we couldn't tell you, Jim, if we wanted to. We've engaged investment bankers to assist us, we are pursuing opportunities but there's nothing to report today.

Okay, on some of the development projects, could you kind of go through the competition in Florida is and how you're feeling there and when you think Chicago and El Paso will be decided and how you're feeling on that, on those?

I'll ask Wayne to address that.

The first question, Jim, was the competition in Florida, was that correct? The competition in Florida, would include obviously, the incumbents, ourselves, CCA. I would expect that the usual round of suspects would be involved in the bidding, so I would expect to see MTC, Cornell, perhaps CSC and others bid vigorously on those projects. The second question was the federal projects in Chicago, I think you mentioned.

And El Paso.

And El Paso, you know, in both instances, I think it's fair to say that the agency or the Office of Detention Trustee has solicited expressions of interest and in some cases, gone further and requested that the MPAs be submitted for the proposed sites but the RFPs are still to be issued. And so, it is hard to gauge those agencies will work, there is still some coordination going on among the Office of Federal Detention Trustee on behalf of FIC and the U.S. Marshal Service, so I wouldn't want to predict when I think those RFPs will come out.

I think George also mentioned Laredo. The project down there seems to be proceeding on a bit faster track . Certainly, submission on the NEPA status have been made and reviewed in a public hearing on that process and our expectation, as George said is that the RFP on the Laredo project should come out within the next month or so. Washington, D.C., Baltimore, again, I wouldn't want to predict when the RFPs were to be issued but the solicitations or at least the expression of interest requests have been out and I know the companies are working hard in that area to find sites. We've submitted sites, I guess, is more appropriate and plan to push the project forward .

And I guess the most imminent announcement will be tomorrow in Texas with regards to the rebid of those 10 facilities?

Again, we think there has been a lot of interest in that from all the major players in the industry.

Okay, just one more question and I'll let someone else ask. What is the schedule of transitioning out of Gina, has it kind of already started or will it happen at once?

It's already started and, as I said on my conference call presentation, the last phase out will occur by the end of February, February 23rd.

Can we assume it will happen kind of gradually over the period or there is a particular point where it mostly happens?

There is a schedule that's been established I think it is still being tweaked, the first hand over is later this month or December and they'll probably go sequentially after that. It's facility by facility, there won't be a day where, say, three of them transfer.

Okay, I'll come back in queue, thanks.

Your next question is from Andrew May of Jefferies & Company.

Good afternoon. You described a request from a federal agency for a 1,000 to 1500 low to medium-security beds to be available as soon as the summer of 2004. I wonder if you have beds to offer them?

Yes, we do.

You're at 100%, which is impressive, where would you go on that short a time horizon?

I would really consider that competitive information.

Okay, but you do have a place to put 1,000 prisoners this summer? That will be great.

We'll be responding to that solicitation.

Terrific. I don't think I got every, I want to make sure I got the details right on Texas, the near term awards there. Would you just go over one more time for the slow people what you are the incumbent on, how many beds you are the incumbent on and how many beds are up for bid, walk through those details one more time?

There's 10 facilities in contention. Four of those facilities are ours that we presently manage and have managed for a number of years. We've bid on nine of the 10 facilities in contention.

And George, I think it's accurate, there are approximately 11,000 beds in those 10 facilities. We bid on only nine of them. We currently have about 3,500 beds in the four facilities we manage now.

So you bid on about 10,000 beds

Nine to 10,000

Okay, on which you are the incumbent on 3,500. You also describe that there is to be, that the Florida Privatization Commission, I believe, is the entity, is going to expand or that South Bay be expanded but that facility is also up for rebid for a July contract expiration, if I understand correctly? How does the notion of expanding that in the near term fit together with its being up for competitive rebid?

Andy, it's Wayne again.

Okay.

I guess first of all, the two facilities that were selected by the Commission for expansion of about 543 beds each were South Bay and Lake City. Those two facilities, as well as Gadsen, are in the current round of bidding. All three are due to expire on June 30, 2004 and a new award presumably beginning July 1, 2004.

The Commission has put out an ITN, an invitation to negotiate to the industry to manage and operate those facilities and those bids are due within this year, and additionally, they've asked construction firms or development companies to submit proposals pursuant to an invitation to negotiate to expand those projects and those were just issued, I believe late last week, perhaps Friday of last week, and so it still remains to be seen how the commission will organize bidding for the expanded facilities as those expansions take place but our expectation is, that they will ask either those selected in the first round who will manage the two facilities to be expanded to negotiate for the operation of the expansion when completed or perhaps amend the current round of ITN procurements to accommodate the expansion at those two places.

Right, so for the moment, these things will go on parallel tracks but there's no likelihood that they'll extend the June 30 contracts without a new competitive bid?

Certainly, they have not given any reason to believe that is the case to this point but, like all procurements, especially ones as complicated and complex as this is becoming, anything can probably happen. So, we're going forward the way it's put together, that is we are putting together proposals for one or more of the projects at the three that are currently up for bid. We'll be prepared to bid on the others when they come due and be prepared to submit bids to operate expansions as requested .

Very well, thank you very much.

Thank you.

Your next question is from Steven Raher of CCJRC.

Yeah, I was wondering, what the current costs are so far, in Pueblo, Colorado and when you expect that facility to be online?

Which costs, Steven?

Pueblo costs?

How much have we spent so far, in Pueblo?

Yeah.

There has been really no serious expenditure other than just some best development costs, they have been expensed as they have been incurred. At this point, we're still waiting for the dust to clear on the site. There has been a suit filed by a public interest group who are claiming that the city, I guess, violated the Sunshine Law in part of the process that led to the annexation of the site on our behalf, so we're waiting for that to clear up and then to proceed further after that. So, at this point we have not invested any capital in the project, in fact, the acquisition of the site remains extended as an option pending the outcome of that suit.

Thanks.

Your next question is from Susan Jansen of Lehman Brothers.

Good afternoon, everyone. My congratulations on a good quarter and George, thank you very much for all the details that you provided us in your overview. Just going back to that and I may not have been fast enough with my pen to write it all down, can you give us the number of beds that might be associated with Chicago, El Paso, and Laredo, I'm not sure I caught those?

Laredo is 2,800 beds, the other two, I think, total 3,000 and it's probable, Susan, it's 1500 apiece. Or you can divide it up some other way.

Okay, perfect. Also, you mentioned something towards the end of the conversation on Arizona. Could you just tell us a little bit more about that?

I don't believe I discussed Arizona.

I'm sorry.

That was another conference call. There are efforts under way in Arizona by the organization of our colleagues in the industry just to promote privatization at the state level but we have no activity in the state at this time.

Okay, I thought you had mentioned that as a possible place you were looking at. And then finally, you did mention and I didn't quite catch it, and maybe this is a question for Jerry, what was the pretax number for the DIMIA write down?

The pretax was 3 million, 1.8 after taxes.

Okay, thank you very much.

Your next question is from Brad Evans of High Rock Capital.

Gentlemen, good afternoon.

Good afternoon.

I have to admit, I'm a little confused here. Bear with me for a second, I'd like to get this on the call so maybe it doesn't confuse everybody else. You reported $64.2 million of operating income, if you back that nonrecurring item out of that number, the $61 million you're at roughly $3.1 million. So, we should add back the $5 million for Gina, the pretax number for Gina and we should add back the $3 million for DIMIA which would on an adjusted basis take operating income to $11.2 million and if you take the interest expense and the income as reported, add at a 41.5% tax rate which is basically what you've been running year-to-date, it looks like your net income is around $4.8 million, 44 cents. I thought Jim was a little shy on his 34 cent number.

Yeah, our tax rate is actually running a little bit higher than that this quarter.

But on a normalized basis, your tax rate should be in the low 40s, correct?

Yes, on a normalized basis it would be.

Okay, so it's higher than 34 but maybe a little bit less than 44, I guess?

Under the applicable rules, we're really not commenting on what would be termed, I suppose, pro forma sorts of conclusions. We have reported our results under GAAP and we've allowed others to pull out their calculators out and made their calculations. Jim did a good job at it, as far as we can tell. If you want us to repeat what was in the numbers, we'd be glad to do that.

Was I accurate in all the numbers that I just listed there?

Well, except for the tax rate.

That's fine. Great. So your EBITDA on an adjusted basis should have been closer to $15 million then?

Again, it's not the sort of thing that --

We're not supposed to do that calculation.

Again, that's not the GAAP method of pronouncements discussing EBITDA.

Okay, well, I just wanted to make sure, there is a lot of confusion, I think. You helped to put some, you know, to give us a little firmer footing to stand on there. Congratulations on a very solid quarter, your stock is not reacting to the strength of your quarter, I think it is because of all the confusion, frankly. Last question I have for you is, could you just give us a snapshot of, I guess, as we look at the 10-Q here prospectively, is there still $100 million drawn on the $150 million term loan?

Yes, on the term V loan, we have 100 million plus we have 20 million drawn on the revolver.

And the 150 on the 8 1/4 senior notes?

For a total of 270

And that 20 million should be paid down here subsequently as you repatriate the capital?

That is our plan.

All right, nice quarter. Thank you.

Thank you. And let me say that we sympathize with your frustration. We share it, in fact, and we would like to provide specificity as to the net effect of all these adjustments but we're not supposed to. The new S.E.C. rules say they're supposed to format our presentation as we've done so today.

Your next question is from Andrew Berg from Financial Management Advisors.

Hi guys, lets go back to the Gina Facility for a minute, with the write down that you took now, what does it take it down to in terms of what you have on the books and if I understood your comments correctly, it means that we should not expect to see any other additional write downs until 2006, at which point we could see another one?

That's correct. The current write down will take us through January 1, 2006.

And let's assume that you can't get it released by then, what's left on here to potentially write down and why not just write the whole thing down now and then, if you get it sooner, bring it back on the books at that point?

What's left is six more years --

Six more million.

That is the answer to the first question. The answer to the second question is, the process we're supposed to follow in establishing any write downs charges, we're supposed to reach a judgment as to how long the facility would remain vacant until it's properly occupied. We've taken our best guess at that. If we are wrong in that it's not occupied by that date, we will have to take another write down based on our judgment at that time. If it is occupied before January 1, 2006, we'll have to reverse that portion of the write down to reflect that the facility is being occupied, so it works both ways.

I understand. It would strike me as being slightly more conservative to write it all down and than bring it back on but I understand what you are doing. And what was your cap ex in the quarter?

We're running on an analyzed basis of about $8 million.

Very good. Thank you.

Thank you.

Again, if you would like to ask a question, press star 1 on your telephone keypad You have a follow-up question with James MacDonald.

A couple minor things. Could you talk about the average cost of living adjustments that you've been able to get this year?

It's probably varied between the 2 and 3% range as it normally has in prior years and that's been adequate for us to achieve our financial objectives in the growth rates and in often cases, negotiations with the client regarding realignment of services to help them achieve some cost savings on the operational side. So it's been consistently the range we've looked at. Remember, that percentage gets applied to the entire contract amount. The greatest area for financial exposure is on the labor side which generally consists of 50 to 55% of the overall contract amount.

Okay, and on equity income, the 500,00 strictly from South Africa has been excellent, will that continue at that rate?

We believe that on a go forward basis, it will be between 300,000 to 500,000, in that range.

And you mentioned that, I think I heard you say that you floated again effectively 50 million of the unsecured notes, is that right?

That's correct.

And just what was your thinking there?

I think we were basically looking at just a balanced mix between fixed and floating rate and we made the judgment that that type of swap was appropriate.

And what was the term of the swap again?

Five years.

What was that?

10 years. It parallels the notes.

Okay and just two other balance sheet items. Shareholders equity, just given all that is going on and shareholders equity, please?

Shareholders equity is sitting at just over $82 million and the receivables are just over $100 million.

Okay, thanks very much.

You have another follow-up question from Andrew May of Jefferies & Company.

An earlier questioner asked about Arizona and just to refresh your memory, I think you mentioned that you might be up for rebid a competitor's federal prison in Arizona. I think that was the direction of the question and I was curious about that as well?

Well, we've heard that upon the expiration of existing contracts in Arizona, that competitors have, that the agency may look to rebid those as they always have the right. So, if they do rebid those, we remain open to the process, we do still have some property in Arizona where we could design a facility, given the right procurement parameters.

Right, I only know of one competitor that has federal prisoners in Arizona, am I missing something or are we talking about the same thing?

Probably talking about the same thing.

Good, thanks.

You have a follow-up question from Brad Evans of High Rock Capital.

Just curious as to what the share count was at the end of the quarter, please?

10.9 million.

And I just was curious, I might be paddling up river, but with respect to the contracts up for renewal here in Florida and Texas, would you be willing to hazard a guess as to what percentage of your EBITDA is up for grabs here, in terms of the contracts you may or may not renew?

We haven't done that calculation. It's not something we've analyzed.

Brad, your question on the shares was that the weighted shares you are asking or the actual shares outstanding?

The share count at the end of the quarter, the number that will show up on the 10-Q.

The weighted average shares used to calculate the EPS is about 10.9 million. The actual shares outstanding at the end of the quarter is about 9.6 million.

That is what I thought, okay, thank you very much.

At this time, there are no further questions. Mr. Zoley, are there any closing remarks?

We'd like to thank our listeners and hope they join us for the next conference call. Thank you very much.

This concludes Wackenhut Corrections third quarter earnings conference call, you may now disconnect.