UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-K
 
   
þ
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended January 3, 20102, 2011
OR
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to          
 
Commission file number: 1-14260
 
 
 
 
The GEO Group, Inc.
(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, Suite 700,
621 Northwest 53rd Street
Boca Raton, Florida
(Address of principal executive offices)		 33487-8242
(Zip Code)
 
Registrant’s telephone number (including area code):

(561) 893-0101

Securities registered pursuant to Section 12(b) of the Act:
 
   
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, $0.01 Par Value New York Stock Exchange
 
Indicate by a check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  oþ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þAccelerated filer oNon-accelerated filer oSmaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act).  Yes  o     No þ
 
The aggregate market value of the 51,019,51147,864,477 voting and non-voting shares of common stock held by non-affiliates of the registrant as of June 28, 2009July 2, 2010 (based on the last reported sales price of such stock on the New York Stock Exchange on such date of $18.56$20.69 per share) was approximately $946,922,124.$990,316,029.
 
As of February 16, 2010,24, 2011, the registrant had 51,629,40864,441,459 shares of common stock outstanding.
 
Certain portions of the registrant’s annual report to security holders for fiscal year ended January 3, 20102, 2011 are incorporated by reference into Part III of this report. Certain portions of the registrant’s definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 for its 20102011 annual meeting of shareholders are incorporated by reference into Part III of this report.
 

 

 
TABLE OF CONTENTS
 
         
    Page
 
PART I
 Item 1.  Business  3 
 Item 1A.  Risk Factors  1927 
 Item 1B.  Unresolved Staff Comments  3445 
 Item 2.  Properties  3445 
 Item 3.  Legal Proceedings  3445 
 Item 4.  Submission of Matters to a Vote of Security Holders(Removed and Reserved)  3546
 
PART II
 Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  3647 
 Item 6.  Selected Financial Data  3849 
 Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations  3849 
 Item 7A.  Quantitative and Qualitative Disclosures About Market Risk  6378 
 Item 8.  Financial Statements and Supplementary Data  6480 
 Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  124150 
 Item 9A.  Controls and Procedures  124150 
 Item 9B.  Other Information  124151
 
PART III
 Item 10.  Directors, Executive Officers and Corporate Governance  125151 
 Item 11.  Executive Compensation  125151 
 Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  125151 
 Item 13.  Certain Relationships and Related Transactions, and Director Independence  125151 
 Item 14.  Principal Accountant Fees and Services  125151
 
PART IV
 Item 15.  Exhibits and Financial Statement Schedules  125151 
Signatures  129156 
EX-10.13
EX-10.23
EX-10.27
EX-10.28
EX-10.29
EX-10.30
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


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PART I
 
Item 1.  Business
 
As used in this report, the terms “we,” “us,” “our,” “GEO” and the “Company” refer to The GEO Group, Inc., its consolidated subsidiaries and its unconsolidated affiliates, unless otherwise expressly stated or the context otherwise requires.
 
General
 
We are a leading provider of government-outsourced services specializing in the management of correctional, detention, and mental health, and residential treatment and re-entry facilities, and the provision of community based services and youth services in the United States, Canada, Australia, South Africa, and the United Kingdom.Kingdom and Canada. We operate a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers, and mental health, and residential treatment and community based re-entry facilities. We also provide secure transportation services for offenderoffer counseling, educationand/or treatment to inmates with alcohol and detainee populations as contracted. Our correctional and detention management services involvedrug abuse problems at most of the provision of security, administrative, rehabilitation, education, health and food services, primarily at adult male correctional and detention facilities. Our mental health and residential treatment services, which are operated through our wholly-owned subsidiary GEO Care, Inc., whichdomestic facilities we refer to as GEO Care, involve the delivery of quality care, innovative programming and active patient treatment, primarily at privatized state mental health facilities.manage. We also develop new facilities based on contract awards, using our project development expertise and experience to design, construct and finance what we believe arestate-of-the-art facilities that maximize security and efficiency. We also provide secure transportation services for offender and detainee populations as contracted.
 
Our acquisition of Cornell Companies, Inc., which we refer to as Cornell and we refer to this transaction as the Cornell Acquisition, in August 2010 added scale to our presence in the U.S. correctional and detention market, and combined Cornell’s adult community-based and youth treatment services into GEO Care’s behavioral healthcare services platform to create a leadership position in this growing market. As of January 2, 2011, our worldwide operations included the fiscal year ended January 3,managementand/or ownership of approximately 81,000 beds at 118 correctional, detention and residential treatment facilities, including projects under development. On December 21, 2010, we managed 57 facilities totaling approximately 52,800 beds worldwideentered into a Merger Agreement to acquire BII Holding Corporation, which we refer to as BII Holding and we had an additional 4,325 beds under development at three facilities, including an expansion and renovationrefer to this transaction as the BI Acquisition. On February 10, 2011, we completed our acquisition of one vacant facilityBII Holding, the indirect owner of 100% of the equity interests of B.I. Incorporated, which we currently own, the expansionrefer to as BI, for $415.0 million in cash, subject to adjustments. BI is a provider of one facility we currently owninnovative compliance technologies, industry-leading monitoring services, and operateevidence-based supervision and a new 2,000-bed facilitytreatment programs for community-based parolees, probationers and pretrial defendants. Additionally, BI has an exclusive contract with U.S. Immigration and Customs Enforcement, which we refer to as ICE, to provide supervision and reporting services designed to improve the participation of non-detained aliens in the immigration court system. We believe the addition of BI will manage upon completion. provide us with the ability to offer turn-key solutions to our customers in managing the full lifecycle of an offender from arraignment to reintegration into the community, which we refer to as the corrections lifecycle.
We provide a diversified scope of services on behalf of our government clients:
• our correctional and detention management services involve the provision of security, administrative, rehabilitation, education, health and food services, primarily at adult male correctional and detention facilities;
• our mental health and residential treatment services involve working with governments to deliver quality care, innovative programming and active patient treatment, primarily in state-owned mental healthcare facilities;
• our community-based services involve supervision of adult parolees and probationers and the provision of temporary housing, programming, employment assistance and other services with the intention of the successful reintegration of residents into the community;
• our youth services include residential, detention and shelter care and community-based services along with rehabilitative, educational and treatment programs;


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• we develop new facilities, using our project development experience to design, construct and finance what we believe arestate-of-the-art facilities that maximize security and efficiency;
• we provide secure transportation services for offender and detainee populations as contracted; and
• as a result of the BI Acquisition, we also provide comprehensive electronic monitoring and supervision services.
We maintained an average companywide facility occupancy rate of 94.6%94.5% for the fiscal year ended January 3, 2010,2, 2011, excluding facilities that are either idle or under development. As a result of our merger with Cornell and our acquisition of BI on February 10, 2011, we will benefit from the combined company’s increased scale and diversification of service offerings.
 
At our correctional and detention facilities in the U.S. and internationally, we offer services that go beyond simply housing offenders in a safe and secure manner. The services we offer to inmates at most of our managed facilities include a wide array of in-facility rehabilitative and educational programs. Such programs include basic education through academic programs designed to improve inmates’ literacy levels and enhance the opportunity to acquire General Education Development certificates and also include vocational training for in-demand occupations to inmates who lack marketable job skills. We offer life skills/transition planning programs that provide job search training and employment skills, anger management skills, health education, financial responsibility training, parenting skills and other skills associated with becoming productive citizens. We also offer counseling, educationand/or treatment to inmates with alcohol and drug abuse problems at most of the domestic facilities we manage.
Our mental health facilities and residential treatment services primarily involve the provision of acute mental health and related administrative services to mentally ill patients that have been placed under public sector supervision and care. At these mental health facilities we employ psychiatrists, physicians, nurses, counselors, social workers and other trained personnel to deliver active psychiatric treatment designed to diagnose, treat and rehabilitate patients for community reintegration.
Business Segments
 
We conduct our business through four reportable business segments: our U.S. correctionsDetention & Corrections segment; our International servicesServices segment; our GEO Care segment;segment and our Facility construction and designConstruction & Design segment. We have identified these four reportable segments to reflect our current view that we operate four distinct business lines, each of which constitutes a material part of our overall business. TheOur U.S. correctionsDetention & Corrections segment primarily encompasses ourU.S.-based privatized corrections and detention business. TheOur International servicesServices segment primarily consists of our privatized corrections and detention operations in South Africa, Australia and the


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United Kingdom. International services reviews opportunities to further diversify into related foreign-based governmental-outsourced services on an ongoing basis. Our GEO Care segment which is operated by our wholly-owned subsidiary GEO Care, comprises our privatized mental health and residential treatment services business, our community-based services business and our youth services business, all of which isare currently conducted in the U.S. Following the BI Acquisition, our GEO Care segment also comprises electronic monitoring and supervision services. Our Facility construction and designConstruction & Design segment primarily consists of contracts with various state, local and federal agencies for the design and construction of facilities for which we generally have been, or expect to be, awarded management contracts. Financial information about these segments for fiscal years 2010, 2009 2008 and 20072008 is contained in “Note 1718 — Business Segments and Geographic Information” of the “Notes to Consolidated Financial Statements” included in thisForm 10-K and is incorporated herein by this reference.
 
Recent Developments
 
On February 12, 2009, we announced the retirementAcquisition of John G. O’Rourke, our Chief Financial Officer. He retired effective August 2, 2009 and was succeeded by Brian R. Evans, our then current Vice President, Finance, Treasurer and Chief Accounting Officer. On July 31, 2009, Mr. Ronald A. Brack was appointed as our Vice President, Chief Accounting Officer and Controller effective August 3, 2009. Mr. Brack joined us in May 2005 and has held the positions of Assistant Controller and Vice President and Controller during his four year tenure.
Just Care Inc. Acquisition
Our mental health subsidiary, GEO Care, acquired Just Care, Inc. which we refer to as Just Care, a provider of detention healthcare focusing on the delivery of medical and mental health services. Just Care manages the 354-bed Columbia Regional Care Center located in Columbia, South Carolina. This facility houses medical and mental health residents for the State of South Carolina and the State of Georgia as well as special needs detainees under custody of the U.S. Marshals Service and U.S. Immigration and Customs Enforcement. This facility is operated by Just Care under a long-term lease with the State of South Carolina. We paid $38.4 million, net of cash acquired, at closing on September 30, 2009.
Liquidity and capital resourcesBII Holding
 
On October 20, 2009,February 10, 2011, GEO completed its previously announced acquisition of BI, a Colorado corporation, pursuant to an Agreement and Plan of Merger, dated as of December 21, 2010 (the “Merger Agreement”), with BII Holding, a Delaware corporation, which owns BI, GEO Acquisition IV, Inc., a Delaware corporation and wholly-owned subsidiary of GEO (“Merger Sub”), BII Investors IF LP, in its capacity as the stockholders’ representative, and AEA Investors 2006 Fund L.P. Under the terms of the Merger Agreement, Merger Sub merged with and into BII Holding (the “Merger”), with BII Holding emerging as the surviving corporation of the merger. As a result of the Merger, GEO paid merger consideration of $415.0 million in cash excluding transaction related expenses and subject to certain adjustments. Under the Merger Agreement, $12.5 million of the merger consideration was placed in an escrow account for a one-year period to satisfy any applicable indemnification claims pursuant to the terms of the Merger Agreement by GEO, the Merger Sub or its affiliates. At the time of the BI Acquisition, approximately $78.4 million, including accrued interest was outstanding under BI’s senior term loan and $107.5 million, including accrued interest was outstanding under its senior subordinated note purchase agreement, excluding the unamortized debt discount. All indebtedness of BI under its senior term loan and senior subordinated note purchase agreement were repaid by BI with a portion of the $415.0 million of merger consideration. BI will be integrated into our wholly-owned subsidiary, GEO Care.
Senior Notes due 2021
On February 10, 2011, we completed a private offeringthe issuance of $250.0$300.0 million in aggregate principal amount of our 73ten-year,/4% Senior Notes 6.625% senior unsecured notes due 20172021, which we refer to as the 73/4% Senior Notes. These senior unsecured notes pay interest semi-annually in cash in arrears on April 15 and October 15 of each year, beginning on April 15, 2010. In connection with the issuance of the 73/4%6.625% Senior Notes, we also executed three interest swap agreements effective November 3, 2009 for an aggregate notional amount of $75.0 million andin a fourth interest rate swap with a $25.0 million notional amount effective January 6, 2010. We realized proceeds of $246.4 million at the close of the private offering netunder an Indenture dated as of the discount on the notes of $3.6 million. A portion of these proceeds was used to fund the repurchaseFebruary 10, 2011 among us, certain of our $150.0 million aggregate principal amount of 81/4% Senior Notes due 2013 which we refer todomestic subsidiaries, as the 81/4% Senior Notes for which we commenced a cash tender offer announced on October 5, 2009. As of November 19, 2009, all of the 81/4% Senior Notes had been redeemed.
In October 2009, and again in December 2009, we completed amendments to our Third Amended and Restated Credit Agreement through the execution of Amendment No’s. 5, 6 and 7, which we collectively refer to as the Senior Credit Facility. These amendments, among other things, allowed us to issue up to $300.0 million of unsecured debt without having to repay outstanding borrowings on our Senior Credit Facility, modified the aggregate size of the credit facility from $240.0 million to $330.0 million, extended the maturity of the revolving portion of the Senior Credit Facility, which we refer to as the Revolver, to 2012, modified the permitted maximum total leverage and maximum senior secured leverage financial ratios, eliminated the annual capital expenditures limitation and made several technical revisions to certain definitions therein. As of January 3, 2010 we had the ability to borrow approximately $217 million from the excess capacity on the Revolver after considering our debt covenants. Upon the execution of Amendment No. 6, we also had the ability to increase our borrowing capacity under the Senior Credit Facility by another $200.0 million subject to lender demand, market conditions and existing borrowings.


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guarantors, and Wells Fargo Bank, National Association, as trustee. The 6.625% Senior Notes were offered and sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended, and outside the United States in accordance with Regulation S under the Securities Act. The 6.625% Senior Notes were issued at a coupon rate and yield to maturity of 6.625%. Interest on the 6.625% Senior Notes will accrue at the rate of 6.625% per annum and will be payable semi-annually in arrears on February 15 and August 15, commencing on August 15, 2011. The 6.625% Senior Notes mature on February 15, 2021. We used the net proceeds from this offering along with $150.0 million of borrowings under our senior credit facility to finance the acquisition of BI and to pay related fees, costs, and expenses. We used the remaining net proceeds for general corporate purposes.
Acquisition of Cornell
On August 12, 2010, we completed our acquisition of Cornell, a Houston-based provider of correctional, detention, educational, rehabilitation and treatment services outsourced by federal, state, county and local government agencies for adults and juveniles. The acquisition was completed pursuant to a definitive merger agreement entered into on April 18, 2010, and amended on July 22, 2010, between us, GEO Acquisition III, Inc., and Cornell. Under the terms of the merger agreement, we acquired 100% of the outstanding common stock of Cornell for aggregate consideration of $618.3 million, excluding cash acquired of $12.9 million and including: (i) cash payments for Cornell’s outstanding common stock of $84.9 million, (ii) payments made on behalf of Cornell related to Cornell’s transaction costs accrued prior to the acquisition of $6.4 million, (iii) cash payments for the settlement of certain of Cornell’s debt plus accrued interest of $181.9 million using proceeds from our senior credit facility, (iv) common stock consideration of $357.8 million, and (v) the fair value of stock option replacement awards of $0.2 million. The value of the equity consideration was based on the closing price of the Company’s common stock on August 12, 2010 of $22.70.
Senior Credit Facility
On August 4, 2010, we entered into a new Credit Agreement, between us, as Borrower, certain of our subsidiaries as Guarantors, and BNP Paribas, as Lender and Administrative Agent, which we refer to as our “Senior Credit Facility”, comprised of (i) a $150.0 million Term Loan A, referred to as “Term Loan A”, initially bearing interest at LIBOR plus 2.5% and maturing August 4, 2015, (ii) a $200.0 million Term Loan B referred to as “Term Loan B”, initially bearing interest at LIBOR plus 3.25% with a LIBOR floor of 1.50% and maturing August 4, 2016 and (iii) a Revolving Credit Facility, referred to as “Revolving Credit Facility” or “Revolver”, of $400.0 million initially bearing interest at LIBOR plus 2.5% and maturing August 4, 2015. On August 4, 2010, we used proceeds from borrowings under the Senior Credit Facility primarily to repay existing borrowings and accrued interest under the Third Amended and Restated Credit Agreement, which we refer to as the “Prior Senior Credit Agreement”, of $267.7 million and to pay $6.7 million for financing fees related to the Senior Credit Facility. On August 4, 2010, the Prior Senior Credit Agreement was terminated. On August 12, 2010, in connection with the Cornell merger, we primarily used aggregate proceeds of $290.0 million from the Term Loan A and from the Revolver under the Senior Credit Facility to repay Cornell’s obligations plus accrued interest under its revolving line of credit due December 2011 of $67.5 million, to repay its obligations plus accrued interest under the existing 10.75% Senior Notes due July 2012 of $114.4 million, to pay $14.0 million in transaction costs and to pay the cash component of the Cornell merger consideration of $84.9 million.
Amendment of Senior Credit Facility
On February 8, 2011, we entered into Amendment No. 1, dated as of February 8, 2011, to the Credit Agreement dated as of August 4, 2010, by and among us, the Guarantors party thereto, the lenders party thereto and BNP Paribas, as administrative agent, which we refer to as Amendment No. 1. Amendment No. 1, among other things amended certain definitions and covenants relating to the total leverage ratios and the senior secured leverage ratios set forth in the Credit Agreement. Effective February 10, 2011, the revolving credit commitments under the Senior Credit Facility were increased by an aggregate principal amount equal to


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$100.0 million, resulting in an aggregate of $500.0 million of revolving credit commitments. Also effective February 10, 2011, GEO obtained an additional $150.0 million of term loans under the Senior Credit Facility, specifically under a new $150.0 million incremental Term LoanA-2, initially bearing interest at LIBOR plus 2.75%. Following the execution of Amendment No. 1, the Senior Credit Facility is now comprised of: a $150.0 million Term Loan A due August 2015; a $150.0 million Term LoanA-2 due August 2015; a $200.0 million Term Loan B due August 2016; and a $500.0 million Revolving Credit Facility due August 2015. Incremental borrowings of $150.0 million under our amended Senior Credit Facility along with proceeds from our $300.0 million 6.625% Senior Notes were used to finance the acquisition of BI. As of February 10, 2011 and following the BI acquisition, the Company had $493.4 million in borrowings, net of discount, outstanding under the term loans, approximately $210.0 million in borrowings under the Revolving Credit Facility, approximately $56.2 million in letters of credit and approximately $233.8 million in additional borrowing capacity under the Revolving Credit Facility.
Retirement of Wayne H. Calabrese
Wayne H. Calabrese, our former Vice Chairman, President and Chief Operating Officer retired effective December 31, 2010, as previously announced on August 26, 2010. Mr. Calabrese’s business development and oversight responsibilities have been reassigned throughout our senior management team and existing corporate structure. Mr. Calabrese will continue to work with us in a consulting capacity pursuant to a consulting agreement, dated as of August 26, 2010 (the “Consulting Agreement”) providing for a minimum term of one year. Under the terms of the Consulting Agreement, which began on January 3, 2011, Mr. Calabrese provides services to us and our subsidiaries for a monthly consulting fee. Services provided include business development and contract administration assistance relative to new and existing contracts.
Stock Repurchase Program
On February 22, 2010, we announced that our Board of Directors approved a stock repurchase program for up to $80.0 million of our common stock which was effective through March 31, 2011. The stock repurchase program was implemented through purchases made from time to time in the open market or in privately negotiated transactions, in accordance with applicable Securities and Exchange Commission requirements. The program also included repurchases from time to time from executive officers or directors of vested restricted stockand/or vested stock options. The stock repurchase program did not obligate us to purchase any specific amount of our common stock and could be suspended or extended at any time at our discretion. During the fiscal year ended January 2 2011, we completed the program and purchased 4.0 million shares of our common stock at a cost of $80.0 million using cash on hand and cash flow from operating activities. Of the aggregate 4.0 million shares repurchased during the fiscal year ended January 2, 2011, 1.1 million shares were repurchased from executive officers at an aggregate cost of $22.3 million. Also during the fiscal year ended January 2, 2011, we repurchased 0.3 million shares of common stock from certain directors and executives for an aggregate cost of $7.1 million. These shares were retired immediately upon repurchase.
Facility activations
 
The following table sets forth new projects that were activated during the fiscal year ended January 3, 2010:2, 2011:
 
           
      Total
   
Facility
 
Location
 
Activation
 BedsBeds(1)  
Start date
 
Robert A. Deyton Detention FacilityLovejoy, GA192-bed Expansion768First Quarter 2009
Broward TransitionAurora ICE Processing Center Deerfield Beach, FLAurora, Colorado 100-bed Expansion and New contract700Second Quarter 2009
Florida Civil Commitment Center(1)Arcadia, FL40-bed Expansion and Replacement facility  720N/A(2) SecondThird Quarter 20092010
Harmondsworth Immigration Removal Centre(2)Centre London, England360-bed Expansion620Third Quarter 2010
Blackwater River Correctional FacilityMilton, FL New contract  2602,000  ThirdFourth Quarter 20092010
GracevilleD. Ray James Correctional Facility Graceville, FL384-bed Expansion1,884Third Quarter 2009
Parklea Correctional CentreParklea, NSW, AustraliaFolkston, GA New contract  8232,847  Fourth Quarter 2009
Northwest Detention CenterTacoma, WA545-bed Expansion and New contract1,575Fourth Quarter 2009
Columbia Care Regional CenterColumbia, SC354-bed New contract354Fourth Quarter 20092010
 
 
(1)This 720-bed facility replacedTotal Beds represents design capacity of the adjacent 680-bed facility.
 
(2)The Harmondsworth Immigration and Removal Centre will be expanded by 360 beds bringing its capacityWe began transferring detainees from the 432-bed Aurora Detention Facility to 620 beds when the expansion is completed in Junenewly constructed 1,100-bed ICE Processing Center on July 17, 2010.


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In addition to the activations in the table above, we also announced an asset acquisition and several contract awards during the fiscal year 2009 and 2010 as follows:
 
In April 2009, The GEO Group Australia Pty. Ltd.,On June 7, 2010, we announced the acquisition of a 650-bed Correctional Facility in Adelanto, California, the Desert Sands Facility, for approximately $28.0 million financed with free cash flow and borrowings available under our wholly owned subsidiary whichPrior Senior Credit Agreement. During 2010, we referbegan a project to as GEO Australia, was awardedretrofit this facility. We will market this facility to local, state and federal correctional and detention agencies.
On June 16, 2010, we announced the award of a new contract byfrom the New South Wales, DepartmentFederal Bureau of Corrective ServicesPrisons (“BOP”) for the continued management and operation of the 790-bed Juneecompany-owned Rivers Correctional Centre. GEO Australia has managed theminimum-to-medium security Centre since its opening in 1993. The new contract has a term of 15 years, inclusive of renewal options.
On May 4, 2009, we announced that we executed a contract with Bexar County, Texas Commissioners’ Court for the continued operation of the 688-bed Central Texas Detention FacilityInstitution (“Rivers”) located in San Antonio, Texas. This facility, which is owned by Bexar County, houses detainees predominately for the U.S. Marshals Service. We have managed this facility since 1988.Winton, North Carolina. The new contract will have a term of ten years, effective April 29, 2009.inclusive of renewal options. Under the terms of the new contract, Rivers will house up to 1,450 BOP inmates with an occupancy guaranteed level of 90 percent, or 1,135 beds.
 
In Georgia, the Department of Corrections issued an RFP for 1,000 in-state beds. On FebruaryJune 22, 2010, we announced thatthe signing of a new contract with the Louisiana Department of Public Safety and Corrections for the continued management of the 1,538-bed Allen Correctional Center located in Kinder, Louisiana. The new managed-only contract has a term of ten years effective July 1, 2010. We have managed this facility since December 2009.
On June 22, 2010, we announced the signing of a contract with the Mississippi Department of Corrections for the continued management of the 1,000-bed Marshall County Correctional Facility located in Holly Springs, Mississippi. The new managed-only contract has a term of five years effective September 1, 2010. We have managed this facility since June 1996.
On July 21, 2010, we announced the execution of a new contract with the State of Georgia, issued a noticeDepartment of intent to award a contract to our companyCorrections for the development and operation of a new 1,000-bed1,500-bed correctional facility which is expandable to 2,500 beds.be located in Milledgeville, Georgia. Under the terms of the intended award, GEO wouldcontract, we will finance, build,develop, and operate the new $601,500-bed Facility on state-owned land pursuant to a40-year ground lease. This facility is expected to cost $80.0 million dollarand open in the first quarter of 2012.
On July 26, 2010, we announced our signing of a contract amendment with the East Mississippi Correctional Facility Authority (“the Authority”) for the continued management of the 1,500-bed East Mississippi Correctional Facility located in Meridian, Mississippi. The amendment extends our management contract with the Authority through March 15, 2015. The Authority in turn has a concurrent contract with the Mississippi Department of Corrections for the housing of Mississippi inmates at this facility.
On November 4, 2010, we announced our signing of a contract with the State of California, Department of Corrections and Rehabilitation for theout-of-state housing of up to 2,580 California inmates at our North Lake Correctional Facility located in Baldwin, Michigan. GEO will undertake a $60.0 million renovation and expansion project to convert this facility’s existing dormitory housing units to cells and to increase the capacity of the 1,748-bed facility to 2,580 beds. We expect to complete the cell conversion of the existing dormitory housing units in the second quarter of 2011 and the new 832-bed expansion in the fourth quarter of 2011.
On November 5, 2010, we announced we were selected by the California Department of Corrections and Rehabilitation for contract awards for the housing of 650 female inmates at our owned 250-bed McFarland Community Correctional Facility and our 400-bed Mesa Verde Community Correctional Facility located in California. We were subsequently informed by the state that these contract awards have been put on hold, pending further review regarding the state’s needs.
On November 18, 2010, we announced we were selected by the State of Indiana, Department of Correction, which we refer to as IDOC, for the management of the Short Term Offender Program at an existing state-owned facility in Plainfield, Indiana pending the completion of contract negotiations which were finalized in February 2011. GEO expects this facility to initially house approximately 300 inmates and ramp up to 1,066 inmates over time. We will manage the facility under a long-term ground lease. The award is subjectfour-year contract with up to obtaining approvala four-year renewal option period.


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On November 23, 2010, we announced that our wholly-owned subsidiary, GEO Care, signed a contract with Montgomery County, Texas for the management of the proposed ground lease fromcounty-owned, 100-bed Montgomery County Mental Health Treatment Facility to be located in Conroe, Texas. The management contract between GEO Care and Montgomery County will have an initial term effective through August 31, 2011 with unlimited two-year renewal option periods. Montgomery County in turn has signed an Intergovernmental Agreement with the General Assembly.State of Texas for the housing of a mental health forensic population at this facility. We expect this new 1,000-bed facility to generateopen in March 2011.
On December 8, 2010, we announced that Karnes County, Texas was awarded an Intergovernmental Services Agreement by ICE for the housing of up to 600 immigration detainees in a new 600-bed Civil Detention Center to be located in Karnes City, Texas. This center will be developed and operated by us pursuant to our subcontract with Karnes County and will be the first facility designed and operated for low risk detainees. We will finance, develop and manage the company-owned facility, which is expected to cost $32.0 million and be completed during the fourth quarter of 2011.
On December 15, 2010, we announced a 512-bed expansion of the 2,524-bed New Castle Correctional Facility in New Castle, Indiana managed by GEO under a contract with IDOC. We will fund and develop the high-security expansion, which is estimated to cost approximately $19$23.0 million, dollarsunder a development agreement with the Indiana Finance Authority and will manage the expansion under an amendment to our existing management contract with IDOC. The amendment extends the management contract term, previously due to expire in annualized operating revenues once completed.September 2015, through June 30, 2030, including all renewal option periods.
 
Contract terminations
 
Effective June 15, 2009, our management contract with Fort Worth Community Corrections Facility located in Fort Worth, Texas was assigned to another party. Prior to this termination, we leased this facility (lease was due to expire August 2009) andThe following contracts were terminated during the customer was the Texas Department of Criminal Justice.
On September 8, 2009, we exercised our contractual right to terminate our contracts for the operation and management of the Newton County Correctional Center, referred to as Newton County, located in Newton, Texas and the Jefferson County Downtown Jail, referred to as Jefferson County, located in Beaumont, Texas.


5

We managed Newton County and Jefferson County until the contracts terminated effective on November 2, 2009 and November 9, 2009, respectively.
In October 2009, we received a60-day notice from the California Department of Corrections and Rehabilitation of its intent to terminate the management contract between us and them for the management of our company-owned McFarland Community Correctional Facility.
fiscal year 2010. We do not expect that the termination of these contracts will have a material adverse impact, individually or in the aggregate, on our financial condition, results of operations or cash flows.
 
On April 4, 2010, our wholly-owned Australian subsidiary completed the transition of its management of the Melbourne Custody Center (the “Center”) to another service provider. The Center was operated on behalf of the Victoria Police to house prisoners, escort and guard prisoners for the Melbourne Magistrate Courts and to provide primary healthcare.
On April 14, 2010, we announced the results of the re-bids of two of our managed-only contracts. The State of Florida issued a Notice of Intent to Award contracts for the 1,884-bed Graceville Correctional Facility located in Graceville, Florida and the 985-bed Moore Haven Correctional Facility located in Moore Haven, Florida to another operator. These contracts terminated effective September 26, 2010 and August 1, 2010, respectively.
On June 22, 2010, we announced the discontinuation of our managed-only contract for the 520-bed Bridgeport Correctional Center in Texas following a competitive re-bid process conducted by the State of Texas. The contract terminated effective August 31, 2010.
Effective September 1, 2010, our management contract for the operation of the 450-bed South Texas Intermediate Sanction Facility terminated. This facility was not owned by us.
Effective May 29, 2011, our subsidiary in the United Kingdom will no longer manage the 215-bed Campsfield House Immigration Removal Centre in Kidlington, England.
Quality of Operations
 
We operate each facility in accordance with our company-wide policies and procedures and with the standards and guidelines required under the relevant management contract. For many facilities, the standards and guidelines include those established by the American Correctional Association, or ACA. The ACA is an independent organization of corrections professionals, which establishes correctional facility standards and guidelines that are generally acknowledged as a benchmark by governmental agencies responsible for correctional facilities. Many of our contracts in the United States require us to seek and maintain ACA


8

accreditation of the facility. We have sought and received ACA accreditation and re-accreditation for all such facilities. We achieved a median re-accreditation score of 99.4% taking into consideration our most recent accreditation hearing in99.6% as of January 2010.2, 2011. Approximately 70.5%, excluding discontinued operations,71.8% of our 20092010 U.S. correctionsDetention & Corrections revenue was derived from ACA accredited facilities.facilities for the year ended January 2, 2011. We have also achieved and maintained certificationaccreditation by theThe Joint Commission (TJC), at three of our correctional facilities, at our forensic unit in South Carolina and at three of our other adult treatment facilities. In addition, our managed-only 720-bed Florida Civil Commitment Center in Arcadia, Florida obtained successful Commission on Accreditation for Healthcare Organizations, or JCAHO, for our mental health facilities and two of our correctional facilities.Rehabilitation Facilities, CARF, accreditation within 18 months of operation. We have been successful in achieving and maintaining accreditation under the National Commission on Correctional Health Care, or NCCHC, in a majority of the facilities that we currently operate. The NCCHC accreditation is a voluntary process which we have used to establish comprehensive health care policies and procedures to meet and adhere to the ACA standards. The NCCHC standards, in most cases, exceed ACA Health Care Standards.
 
Business Development Overview
 
We intend to pursue a diversified growth strategy by winning new clients and contracts, expanding our government services portfolio and pursuing selective acquisition opportunities. Our primary potential customers are governmental agencies responsible for local, state and federal correctional facilities in the United States and governmental agencies responsible for correctional facilities in Australia, South Africa and the United Kingdom. Other primary customers include state agencies in the United States responsible for mental health facilities, juvenile offenders and other adult parolees and probationers as well as foreign governmental agencies. We achieve organic growth through competitive bidding that begins with the issuance by a government agency of a request for proposal, or RFP. We primarily rely on the RFP process for organic growth in our U.S. and international corrections operations as well as in our mental health and residential treatment, youth services, and community based re-entry services business.
 
Our state and local experience has been that a period of approximately sixty to ninety days is generally required from the issuance of a request for proposal to the submission of our response to the request for proposal; that between one and four months elapse between the submission of our response and the agency’s award for a contract; and that between one and four months elapse between the award of a contract and the commencement of facility construction or management of the facility, as applicable.
 
Our federal experience has been that a period of approximately sixty to ninety days is generally required from the issuance of a request for proposal to the submission of our response to the request for proposal; that between twelve and eighteen months elapse between the submission of our response and the agency’s award for a contract; and that between four and eighteen weeks elapse between the award of a contract and the commencement of facility construction or management of the facility, as applicable.
 
If the state, local or federal facility for which an award has been made must be constructed, our experience is that construction usually takes between nine and twenty-four months to complete, depending on


6

the size and complexity of the project. Therefore, management of a newly constructed facility typically commences between ten and twenty-eight months after the governmental agency’s award.
 
We believe that our long operating history and reputation have earned us credibility with both existing and prospective customers when bidding on new facility management contracts or when renewing existing contracts. Our success in the RFP process has resulted in a pipeline of new projects with significant revenue potential. During 2009,2010, we activated eightfour new or expansion projects representing an aggregate of 2,6984,867 additional beds compared to the activation of eight new or expansion projects representing an aggregate of 6,1202,698 beds during 2008.2009. Also in 2010, we received awards for 7,846 beds out of the aggregate total of 19,849 beds awarded by governmental agencies during the year.
 
In addition to pursuing organic growth through the RFP process, we will from time to time selectively consider the financing and construction of new facilities or expansions to existing facilities on a speculative basis without having a signed contract with a known customer. We also plan to leverage our experience to expand the range of government-outsourced services that we provide. We will continue to pursue selected acquisition opportunities in our core services and other government services areas that meet our criteria for


9

growth and profitability. We have engaged and intend in the future to engage independent consultants to assist us in developing privatization opportunities and in responding to requests for proposals, monitoring the legislative and business climate, and maintaining relationships with existing customers.
 
Facility Design, Construction and Finance
 
We offer governmental agencies consultation and management services relating to the design and construction of new correctional and detention facilities and the redesign and renovation of older facilities. AsDomestically, as of January 3, 2010,2, 2011, we had provided services for the design and construction of forty-fiveapproximately forty-six facilities and for the redesign and renovation and expansion of twenty-eightapproximately thirty-three facilities. Internationally, as of January 2, 2011, we had provided services for the design and construction of ten facilities and for the redesign, renovation and expansion of one facility.
 
Contracts to design and construct or to redesign and renovate facilities may be financed in a variety of ways. Governmental agencies may finance the construction of such facilities through any of the following:following methods:
 
 • a one time general revenue appropriation by the governmental agency for the cost of the new facility;
 
 • general obligation bonds that are secured by either a limited or unlimited tax levy by the issuing governmental entity; or
 
 • revenue bonds or certificates of participation secured by an annual lease payment that is subject to annual or bi-annual legislative appropriations.
 
We may also act as a source of financing or as a facilitator with respect to the financing of the construction of a facility. In these cases, the construction of such facilities may be financed through various methods including the following:
 
 • funds from equity offerings of our stock;
 
 • cash on handand/or cash flows from our operations;
 
 • borrowings by us from banks or other institutions (which may or may not be subject to government guarantees in the event of contract termination); or
 
 • lease arrangements with third parties.
 
If the project is financed using direct governmental appropriations, with proceeds of the sale of bonds or other obligations issued prior to the award of the project, then financing is in place when the contract relating to the construction or renovation project is executed. If the project is financed using project-specific tax-exempt bonds or other obligations, the construction contract is generally subject to the sale of such bonds or obligations. Generally, substantial expenditures for construction will not be made on such a project until the tax-exempt bonds or other obligations are sold; and, if such bonds or obligations are not sold, construction and therefore, management of the facility, may either be delayed until alternative financing is procured or the development of the project will be suspended or entirely cancelled. If the project is self-financed by us, then financing is generally in place prior to the commencement of construction.


7

Under our construction and design management contracts, we generally agree to be responsible for overall project development and completion. We typically act as the primary developer on construction contracts for facilities and subcontract with bonded Nationaland/or Regional Design Build Contractors. Where possible, we subcontract with construction companies that we have worked with previously. We make use of an in-house staff of architects and operational experts from various correctional disciplines (e.g. security, medical service, food service, inmate programs and facility maintenance) as part of the team that participates from conceptual design through final construction of the project. This staff coordinates all aspects of the development with subcontractors and provides site-specific services.
 
When designing a facility, our architects use, with appropriate modifications, prototype designs we have used in developing prior projects. We believe that the use of these designs allows us to reduce the potential of


10

cost overruns and construction delays and to reduce the number of correctional officers required to provide security at a facility, thus controlling costs both to construct and to manage the facility. Our facility designs also maintain security because they increase the area under direct surveillance by correctional officers and make use of additional electronic surveillance.
 
The following table sets forth current expansion and development projects at January 3, 2010:various stages of completion:
 
                 
     Capacity
        
     Following
  Estimated
     
  Additional
  Expansion/
  Completion
     
Facilities Under Construction
 Beds  Construction  Date  
Customer
 
Financing
 
North Lake Correctional Facility, Michigan(1)  1,225   1,755   Q2 2010  Federal or
Various States		 GEO
Northwest Detention Center, Washington(2)  n/a   1,575   Q2 2010  Federal GEO
Aurora ICE Processing Center, Colorado(3)  1,100   1,532   Q2 2010  Federal GEO
Broward Transition Center, Florida(4)  n/a   n/a   Q3 2010  Federal GEO
Blackwater River Correctional Facility, Florida(5)  2,000   2,000   Q2 2010  DMS Third party
                 
Total  4,325             
                 
     Capacity
        
     Following
  Estimated
     
  Additional
  Expansion/
  Completion
     
Facilities Under Construction Beds  Construction  Date  Customer Financing
 
Adelanto Facility, California  n/a   650   Q1 2011  (1) GEO
                 
North Lake Correctional Facility, Michigan  832   2,580   Q4 2011  CDCR(2) GEO
Riverbend Correctional Facility, Georgia  1,500   1,500   Q1 2012  GDOC(3) GEO
Karnes County Civil Detention Facility, Texas  600   600   Q4 2011  ICE(4) GEO
New Castle Correctional Facility, Indiana  512   3,196   Q1 2012  IDOC GEO
                 
Total  3,444             
 
 
(1)We currently do not have a customer for this facility but are marketing these beds to various federallocal, state and statefederal agencies.
 
(2)ConstructionOn November 4, 2010, we announced our signing of a contract with the additional 545 beds was completedState of California, Department of Corrections and Rehabilitation for the out-of-state housing of California inmates at the North Lake Correctional Facility. As a result of this new contract, we will complete a cell conversion on the existing 1,748-bed facility in Q2 2011 and expect to complete the fourth quarter 2009. The ongoing construction atexpansion of this facility is to renovateby 832 beds by the existing building and expand space available for administrative and medical offices as well as court rooms.end of Q4 2011.
 
(3)We do not yet have customers for these expansion beds.On July 21, 2010, we announced the execution of our contract to develop and operate this facility under a contract with the Georgia Department of Corrections, which we refer to as “GDOC”.
 
(4)We are currently operating this facility and have a management contract for 700 beds. The ongoing constructionwill provide services at this facility is for a new administration building and other renovations to the existing structure.
(5)We do not yet have a signed management contract for this facility but we expect to have one in place prior to the facility’s estimated completion date.through an Inter-Governmental Agreement, or IGA, through Karnes County.
 
Competitive Strengths
 
Long-Term Relationships with High-Quality Government CustomersLeading Corrections Provider Uniquely Positioned to Offer a Continuum of Care
 
We have developed long-term relationships with our government customers and have been successful at retaining our facility management contracts. We have providedare the second largest provider of privatized correctional and detention managementfacilities worldwide, the largest provider of community-based re-entry services toand youth services in the United States Federal Government for 23 years,U.S. and, following the StateBI Acquisition, we are the largest provider of California for 22 years,electronic monitoring services in the State of Texas for approximately 22 years, various Australian state government entities for 18 yearsU.S. corrections industry. We believe these leading market positions and the State of Florida for approximately 16 years. These customers accounted for 63.5% of our consolidated revenues for the fiscal year ended January 3, 2010. Our strong operating track record has enableddiverse and complimentary service offerings enable us to achievemeet the growing demand from our clients for comprehensive services throughout the entire corrections lifecycle. Our continuum of care enables us to provide consistency and continuity in case management, which we believe results in a high renewal ratehigher quality of care for contracts, thereby providing us with a stable sourceoffenders, reduces recidivism, lowers overall costs for our clients, improves public safety and facilitates successful reintegration of revenue. Our government customers typically satisfy their payment obligations to us through budgetary appropriations.offenders back into society.


8

Diverse, Full-Service Facility Developer andLarge Scale Operator with National Presence
 
We have developed comprehensive expertiseoperate the sixth largest correctional system in the design, constructionU.S. by number of beds, including the federal government and financing of high quality correctional, detentionall 50 states. We currently have operations in 24 states and, mental health facilities.following the BI Acquisition, we will offer electronic monitoring services in every state. In addition, we have extensive experience in overall facility operations, including staff recruitment, administration, facility maintenance, food service, healthcare, security, and in the supervision, treatment and education of inmates. We believe that theour size and breadth of our service offerings givesenable us to generate economies of scale which maximize our efficiencies and allows us to pass along cost savings to our clients. Our national presence also positions us to bid on and develop new facilities across the flexibilityU.S.


11

Long-Term Relationships with High-Quality Government Customers
We have developed long-term relationships with our federal, state and resourcesother governmental customers, which we believe enhance our ability to respond to customers’ needs as they develop. We believe that the relationships we foster when offering these additional services also help us win new contracts and renewretain existing contracts.business. We have provided correctional and detention management services to the United States Federal Government for 24 years, the State of California for 23 years, the State of Texas for approximately 23 years, various Australian state government entities for 19 years and the State of Florida for approximately 17 years. These customers accounted for approximately 65.9% of our consolidated revenues for the fiscal year ended January 2, 2011. The acquisitions of Cornell and BI have increased our business with our three largest federal clients, the Federal Bureau of Prisons, U.S. Marshals Service and ICE. The BI Acquisition also provides us with a new service offering for ICE, our largest client.
Recurring Revenue with Strong Cash Flow
Our revenue base is derived from our long-term customer relationships, with contract renewal rates and facility occupancy rates both in excess of 90% over the past five years. We have been able to expand our revenue base by continuing to reinvest our strong operating cash flow into expansionary projects and through strategic acquisitions that provide scale and further enhance our service offerings. Our consolidated revenues have grown from $565.5 million in 2004 to $1.3 billion in 2010. Additionally, we expect to achieve annual cost savings of $12-$15 million from the Cornell Acquisition and $3-$5 million from the BI Acquisition. We expect our operating cash flow to be well in excess of our anticipated annual maintenance capital expenditure needs, which would provide us significant flexibility for growth capital expenditures, acquisitionsand/or the repayment of indebtedness.
 
Unique Privatized Mental Health, Residential Treatment and Community-Based Services Growth Platform
 
We areWith the only publicly-traded U.S. corrections company currently operating inacquisitions of Cornell and BI, we have significantly expanded the service offerings of GEO Care’s privatized mental health and residential treatment services business. We believe that our target market of statebusiness by adding substantial adult community-based residential operations, as well as new operations in community-based youth behavioral treatment services, electronic monitoring services and county mental health hospitals represents a significant opportunity.community re-entry and immigration related supervision services. Through our GEO Care subsidiary,both organic growth and acquisitions we have been able to grow thisGEO Care’s business to approximately 1,9006,500 beds and $121.8$213.8 million inof revenues for the fiscal year ended January 2, 2011 from 325 beds and $31.7 million inof revenues infor the fiscal year ended 2004. We believe that GEO Care’s core competency of providing diversified mental health, residential treatment, and community-based services uniquely position us to meet client demands for solutions that improve successful society re-integration rates for offenders throughout the corrections system.
 
Sizeable International Business
 
We believe that ourOur international presence gives us a unique competitive advantage that has contributed to our growth. Leveraginginfrastructure, which leverages our operational excellence in the U.S., our international infrastructure allows us to aggressively target foreign opportunities that ourU.S.-based U.S. based competitors without overseas operations may have difficulty pursuing. We currently have international operations in Australia, Canada, South Africa and the United Kingdom. Our International services business generated $137.2$190.5 million revenue in 2009,of revenues, representing 12.0%15.0% of our consolidated 2009 revenues.revenues, for the year ended January 2, 2011. We believe we are well positioned to continue benefiting from foreign governments’ initiatives to outsource correctional services.
 
Experienced, Proven Senior Management Team
 
Our Chief Executive Officer and the Founder, George C. Zoley, andhas led our President, Wayne H. Calabrese, have worked together at our companyCompany for more than 2026 years and havehas established a track record of growth and profitability. Under theirhis leadership, our annual consolidated revenues from continuing operations have grown from $40.0 million in 1991 to $1.1$1.3 billion in 2009.2010. Dr. Zoley is one of the pioneers of the industry, having developed and opened what we believe to be one of the first privatized detention facilities in the U.S. in 1986. In addition to senior management, our operational and facility level management has significant operational experience.Our Chief Financial Officer, Brian R. Evans, who recently became our Chief Financial Officer, has been with


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our company for over eightten years mostly serving as our Chief Accounting Officer and Vice President-Finance during a period of significant growth.
Regional Operating Structure
We operate three regional U.S. offices and three international offices that provide administrative oversight and support to our correctional and detention facilities and allow us to maintain close relationships with our customers and suppliers. Each of our three regional U.S. offices is responsible forhas led the facilities located within a defined geographic area. We believe that our regional operating structure is unique within the U.S. private corrections industry and provides us with the competitive advantage of having close proximity and direct access to our customers and our facilities. We believe this proximity increases our responsiveness and the quality of our contacts with our customers. We believe that this regional structure has facilitated the rapid integration of our priorrecent acquisitions and we also believe thatfinancing activities. Our top six senior executives have an average tenure with our regional structure and international offices will help with the integrationcompany of any future acquisitions.over ten years.
 
Business Strategies
 
Provide High Quality, EssentialComprehensive Services at Lower Costsand Cost Savings Throughout the Corrections Lifecycle
 
Our objective is to provide federal, state and local governmental agencies with a comprehensive offering of high quality, essential services at a lower cost than they themselves could achieve. We have developed considerable expertise in the managementbelieve government agencies facing budgetary constraints will increasingly seek to outsource a greater proportion of facility security, administration, rehabilitation, education, healththeir correctional needs to reliable providers that can enhance quality of service at a reduced cost. We believe our expanded and food services. Ourdiversified service offerings uniquely position us to bundle our high quality


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is recognized through many accreditations including that services and provide a comprehensive continuum of the American Correctional Association,care for our clients, which has certified facilities representing approximately 70.5% ofwe believe will lead to lower cost outcomes for our U.S. corrections revenue as of year-end 2009.clients and larger scale business opportunities for us.
 
Maintain Disciplined Operating Approach
 
We manage our business on a contract by contract basis in order to maximize our operating margins. We typically refrain from pursuing contracts that we do not believe will yield attractive profit margins in relation to the associated operational risks. In addition, although we generally have notengage in the past engaged in extensive facility development from time to time without having a corresponding management contract award in place although we have increasingly begunendeavor to do so more recentlyonly where we have determined that there is medium to long-term client demand for a facility in select situations to pursue what we believe are attractive business development opportunities.that geographical area. We have also elected not to enter certain international markets with a history of economic and political instability. We believe that our strategy of emphasizing lower risk, higher profit opportunities helps us to consistently deliver strong operational performance, lower our costs and increase our overall profitability.
 
Expand Into Complementary Government-Outsourced Services
We intend to capitalize on our long term relationships with governmental agencies to become a more diversified provider of government-outsourced services. These opportunities may include services which leverage our existing competencies and expertise, including the design, construction and management of large facilities, the training and management of a large workforce and our ability to service the needs and meet the requirements of government customers. We believe that government outsourcing of currently internalized functions will increase largely as a result of the public sector’s desire to maintain quality service levels amid governmental budgetary constraints. We believe that our successful expansion into the mental health and residential treatment services sector through GEO Care is an example of our ability to deliver higher quality services at lower costs in new areas of privatization.
Pursue International Growth Opportunities
 
As a global provider of privatized correctional services, we are able to capitalize on opportunities to operate existing or new facilities on behalf of foreign governments. We currently have seen increased business development opportunities in recent years in the international operationsmarkets in Australia, Canada, South Africa and the United Kingdom. On January 28, 2009which we announced that our wholly-owned U.K. subsidiary, The GEO Group UK Ltd., referred to as GEO UK, signed a contract with the United Kingdom Border Agency for the management and operation of the Harmondsworth Immigration Removal Centre in London, England. We began operating the Harmondsworth Immigration Removal Centre in June 2009. On October 1, 2009, our wholly-owned Australian subsidiary announced that it had been selected by Corrective Services New South Wales to operate and manage the 823-bed Parklea Correctional Centreare currently bidding on several new projects. We will continue to actively bid on new international projects in Australia.our current markets and in new markets that fit our target profile for profitability and operational risk. We began operating the Parkela Correctional Centre in October 2009. Wealso intend to further penetratecross sell our expanded service offerings into these markets, including the current markets we operate inelectronic monitoring and to expand into new international marketssupervision services which we deem attractive.acquired in the BI Acquisition.
 
Selectively Pursue Acquisition Opportunities
 
We consider acquisitionsintend to continue to supplement our organic growth by selectively identifying, acquiring and integrating businesses that arefit our strategic in natureobjectives and enhance our geographic platform on an ongoing basis. In Novemberand service offerings. Since 2005, and including the BI Acquisition, we acquired Correctional Services Corporation, or CSC, bringing over 8,000 additional adult correctionalwill have successfully completed six acquisitions for total consideration, including debt assumed, in excess of $1.7 billion. Our management team utilizes a disciplined approach to analyze and detention beds under our management. In January 2007, we acquired CentraCore Properties Trust, or CPT, bringing the 7,743 beds we had been leasing from CPT, as well as an additional 1,126 beds leased to third parties, under our ownership. In September 2009, our wholly-owned mental health subsidiary, GEO Care, acquired Just Care, a provider of detention healthcare focusing on the delivery of medical and mental health services. Just Care manages the 354-bed Columbia Regional Care Center in Columbia, South Carolina. We plan to continue to reviewevaluate acquisition opportunities, that may become availablewhich we believe has contributed to our success in the future, both in the privatized corrections, detention, mental healthcompleting and residential treatment services sectors, and in complementary government-outsourced services areas.integrating our acquisitions.


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Facilities
 
The following table summarizes certain information as of January 3, 20102, 2011 with respect to U.S. and international facilities that GEO (or a subsidiary or joint venture of GEO) owned, operated under a


13

management contract, had an agreement to provide services, had an award to manage or was in the process of constructing or expanding:
 
                 
          Commenc
ementCommencement
      
Facility Name
     Facility
 Security
 of Current
   Renewal
 Manage Only
& Location(1)
Location		 
Capacity
Capacity(1)		 
Customer
 
Type
 
Level
 
Contract
Contract(7)		 
Base Period
 
Options
 
Lease/ Own
 
                 
Domestic Contracts:Western Region
                
                 
Allen CorrectionalAdelanto Processing Center Kinder, LAEast 1,538650 LA DPS&CUnder construction State Correctional Facility— Medium/ Maximum— October———Own
Alhambra City Jail, Los Angeles, CA67City of AlhambraCity JailAll LevelsJuly 2008 2.53 years One,Two,
Two-yearOne-year		 Manage
only Only
                 
Arizona State PrisonState-Prison Florence West Florence, AZ 750 ADCAZ DOC State DUI/RTC Correctional Facility Minimum October 2002 10 years Two,
Five-year		 Lease
Arizona State-Prison Phoenix West Phoenix, AZ450AZ DOCState DWI Correctional FacilityMinimumJuly 200210 yearsTwo, Five-yearLease
Aurora Detention Facility432Idle—————Own
Aurora ICE Processing Center Aurora, CO1,100ICEFederal Detention FacilityMinimum/MediumOctober 20068 monthsFour,
One-year		Own
Baker Community Correctional Facility Baker, CA262Idle—————Own
Baldwin Park City Jail, Los Angeles, CA32City of Baldwin ParkCity JailAll LevelsJuly 20033 yearsThree,
Three-year		Manage Only
Bell Gardens City Jail Los Angeles, CA15City of Bell GardenCity JailAll LevelsMarch 20084 monthsTwo,
Three-year		Manage Only
                 
Central Arizona Correctional Facility Florence, AZ 1,280 ADCAZ DOC State Sex Offender Correctional Facility Minimum/ Medium December 2006 10 years Two,
Five-year		Lease
Arizona State Prison Phoenix West Phoenix, AZ450ADCState DWI Correctional FacilityMinimumJuly 200210 yearsTwo,Five-yearLease
Aurora ICE Processing Center Aurora, CO432 + 1,100 expansionICEFederal Detention FacilityMinimum/ MediumOctober 20068 monthsFour,One-yearOwn
Bridgeport Correctional Center Bridgeport, TX520TDCJState Correctional FacilityMinimumSeptember 20053 yearsTwo,
One-year		Manage
Only
Bronx Community Re-entry Center Bronx, NY110BOPFederal Halfway HouseMinimumOctober 20072 yearsThree,One-yearLease
Brooklyn Community Re-entry Center Brooklyn, NY177BOPFederal Halfway HouseMinimumFebruary 20052 yearsThree,One-yearLease
Broward Transition Center Deerfield Beach, FL700ICEFederal Detention FacilityMinimumOctober 200311 monthsFour,
One-year		Own
Central Texas Detention Facility San Antonio, TX(2)688Bexar County/ICE & USMSLocal & Federal Detention FacilityMinimum/ MediumApril 200910 yearsN/A Lease
                 
Central Valley MCCF McFarland, CA 625 CDCR State Correctional Facility Medium March 1997 10 years One,
Five year		 Own
                 
Cleveland Correctional Center Cleveland, TX520TDCJState Correctional FacilityMinimumJanuary 20092.6 yearsTwo,Two-yearManage
Only
Desert View MCCF Adelanto, CA 643 CDCR State Correctional Facility Medium March 1997 10 years One,
Five-year		 Own
                 
East Mississippi Correctional Facility Meridian, MSDowney City Jail Los Angeles, CA 1,50030 MDOC/IGACity of Downey State Mental Health Correctional FacilityCity Jail All Levels August 2006June 2003 23 years Three,One-year
Three-year		 Manage
only Only
                 
Frio County Detention Center Pearsall, TX(2)Fontana City Jail Los Angeles, CA 39139 Frio County/BOP/Other CountiesCity of Fontana Local Detention FacilityCity Jail All Levels November 1997February 2007 12 years5 months One,Five,
Five-yearOne-year		 LeaseManage Only


11

                 
Garden Grove City Jail Los Angeles, CA 16 City of Garden Grove City Jail All Levels Commenc
January 2010		 30 months Unlimited 
ement
Facility Name
Facility
Security
of Current
Renewal
Manage Only
& Location(1)
Capacity
Customer
Type
Level
Contract
Base Period
Options
Lease/ Own
                 
Golden State MCCF McFarland, CA 625 CDCR State Correctional Facility Medium March 1997 10 years One,
Five-year		 Own
                 
Graceville Correctional Facility Graceville, FL1,884DMSState Correctional FacilityMedium/
Close		September 20073 yearsUndefinedManage
Only
Guadalupe County Correctional Facility Santa Rosa, NM(2) 600 Guadalupe County/NMCD Local/State Correctional Facility Medium January 1999 3 years One,
Two-year
two-year and Five,
one-year		 Own
High Plains Correctional Facility Brush, CO272Idle—————Own


14

Commencement
Facility Name
Facility
Security
of Current
Renewal
Manage Only
& LocationCapacity(1)CustomerTypeLevelContract(7)Base PeriodOptionsLease/ Own
Hudson Correctional Facility Hudson, CO1,250CO DOC/ AK DOCState Correctional FacilityMediumNovember 20092.5 yearsThree,
One-year		Lease
Lea County Correctional Facility Hobbs, NM(2),(3)1,200Lea County/ NMCDLocal/State Correctional FacilityMediumSeptember 19985 yearsEight,
one-year		Own
Leo Chesney Community Correctional Facility Live Oak, CA305CDCRState Correctional FacilityMediumOctober 20055 yearsTwo,
Five-year		Lease
McFarland Community Correctional Facility McFarland, CA250Idle—————Own
Mesa Verde Community Correctional Facility Bakersfield, CA400Idle—————Own
Montebello City Jail Los Angeles, CA25City of MontebelloCity JailAll LevelsJanuary 19962 yearsUnlimited, One-yearManage Only
Northeast New
Mexico Detention Facility
Clayton, NM(2)		625Clayton/
NMCD		Local/
State
Correctional
Facility		MediumAugust 20085 yearsFive,
one-year		Manage Only
Northwest Detention Center Tacoma, WA1,575ICEFederal Detention FacilityAll LevelsOctober 20091 yearFour, one-yearOwn
Ontario City Jail Los Angeles, CA40City of OntarioCity JailAny LevelSeptember 20063 yearsUnlimited, One-yearManage Only
Regional Correctional Center Albuquerque, NM970USMS/BOP/ Bernalillo CountyFederal/Local Correctional FacilityMaximumMarch 20056 yearsN/ALease
Western Region Detention Facility San Diego, CA770OFDT/USMSFederal Detention FacilityMaximumJanuary 20065 yearsOne,
Five-year		Lease
Central Region:
Big Spring Correctional Center Big Spring, TX3,509BOPFederal Correctional FacilityMediumApril 20074 yearsThree, Two-year and One, six-monthLease (6)
Central Texas Detention Facility San Antonio, TX(2)688Bexar County/ ICE & USMSLocal & Federal Detention FacilityMinimum/ MediumApril 200910 yearsN/ALease
Cleveland Correctional Center Cleveland, TX520TDCJState Correctional FacilityMinimumJanuary 20092.6 yearsTwo,
Two-year		Manage Only
Frio County Detention Center Pearsall, TX(2)391Frio County/BOP/ Other CountiesLocal Detention FacilityAll LevelsNovember 199712 yearsOne,
Five-year		Lease
Great Plains Correctional Facility2,048Idle—————Lease (6)
Joe Corley Detention Facility Conroe, TX(2)1,287USMS/ICE/BOP Montgomery CountyLocal Correctional FacilityMediumAugust 20082 yearsUnlimited, two-yearManage Only

15

Commencement
Facility Name
Facility
Security
of Current
Renewal
Manage Only
& LocationCapacity(1)CustomerTypeLevelContract(7)Base PeriodOptionsLease/ Own
                 
Karnes Correctional Center Karnes City, TX(2) 679 Karnes County/ICE & USMS Local & Federal Detention Facility All Levels May 1998 30 years N/A Own
                 
LaSalleKarnes Civil Detention Facility Jena, LA(2)Center Karnes City, TX 1,160600 LEDD/ICEUnder construction Federal Detention Facility Minimum/ MediumAll Levels July 2007Continuous until terminatedN/AOwn
Lawrenceville Correctional Center Lawrenceville, VA1,536VDOCState Correctional FacilityMediumMarch 2003December 2010 5 years Ten,
One-yearN/A		 Manage
OnlyOwned
                 
Lawton Correctional Facility Lawton, OK 2,526 ODOCOK DOC State Correctional Facility Medium July 2008 1 year Five,
One-year		Own
Lea County Correctional Facility Hobbs, NM(2),(3)1,200Lea County/NMCDLocal/State Correctional FacilityAll LevelsSeptember 19985 yearsSix,
One-year one-year		 Own
                 
Lockhart Secure Work Program Facilities Lockhart, TX 1,000 TDCJ State Correctional Facility Minimum/ Medium January 2009 2.6 years Two,
One-year one-year		 Manage
Only
Marshall County Correctional Facility Holly Springs, MS1,000MDOCState Correctional FacilityMediumSeptember 20062 yearsTwo,
One-year		Manage
Only
                 
Maverick County Detention Facility Maverick, TX(2) 688 USMS/BOP Maverick County Local Detention Facility Medium December 2008 3 Years Unlimited, Two-year Manage
Only
Migrant Operations Center Guantanamo Bay NAS, Cuba130ICEFederal Migrant CenterMinimumNovember 200611 MonthsFour,
One-year		Manage
Only
Moore Haven Correctional Facility Moore Haven, FL985DMSState Correctional FacilityMediumJuly 20073 yearsUnlimited, Two-yearManage
Only
Joe Corley Detention Facility Conroe, TX(2)1,287USMS/ICE/BOP Montgomery CountyLocal Correctional FacilityMediumAugust 20082 yearsUnlimited 2 year optionsManage
Only
New Castle Correctional Facility New Castle, IN2,524IDOCState Correctional FacilityAllJanuary 20064 yearsThree,Two-yearManage
Only

12

Commenc
ement
Facility Name
Facility
Security
of Current
Renewal
Manage Only
& Location(1)
Capacity
Customer
Type
Level
Contract
Base Period
Options
Lease/ Own
Northeast New Mexico Detention Facility Clayton, NM(2)625Clayton/ NMCDLocal/State Correctional FacilityMediumAugust 20085 yearsFive,
One-year		Manage
Only
                 
North Texas ISF Fort Worth, TX 424 TDCJTDJC State Intermediate Sanction Facility MinimumMedium March 2004 3 yearsYears Four,
One-year one-year		 LeaseManage Only
                 
Northwest DetentionOak Creek Confinement Center Tacoma, WABronte, TX(8) 1,575200 ICEIdle Federal Detention Facility— All Levels— October 2009— 1 year— Four,
One-year—		 Own
Queens Detention Facility Jamaica, NY222OFDT/USMSFederal Detention FacilityMinimum/ MediumJanuary 20082 yearFour,
two-year		Own(7)
                 
Reeves County Detention Complex R1/R2 Pecos, TX(2) 1,7202,407 Reeves County/BOP Federal Correctional Facility Low FebFebruary 2007 10 years Unlimited
ten year		 Manage
Only
                 
Reeves County Detention Complex R3 Pecos, TX(2) 1,356 Reeves County/BOP Federal Correctional Facility Low January 2007 10 years Unlimited
ten year		 Manage
Only
                 
Rio Grande Detention Center Laredo, TX 1,500 OFDT/USMS Federal Detention Facility Medium October 2008 5 years Three,
Five-year		 Own
Rivers Correctional Institution Winton, NC1,380BOPFederal Correctional FacilityLowMarch 20013 yearsSeven,
One-year		Own
Robert A. Deyton Detention Facility Lovejoy, GA768Clayton County/ OFDT/USMSFederal Detention FacilityMediumFebruary 20085 yearsThree,
Five year		Lease
South Bay Correctional Facility South Bay, FL1,862DMSState Correctional FacilityMedium/closeJuly 20063 yearsUnlimited, Two-yearManage
Only
                 
South Texas Detention Complex Pearsall, TX 1,904 ICE Federal Detention Facility All Levels June 2005 1 year Four,
One-year		 Own
South Texas ISF Houston, TX450TDCJState Intermediate Sanction FacilityMediumMarch 200918 monthsN/ALease
                 
Val Verde Correctional Facility Del Rio, TX(2) 1,3441,407 Val Verde County/USMSUSMS/ Border Patrol Local & Federal Detention Facility All Levels January 2001 20 years Unlimited, Five-year Own
                 
Western Region Detention Facility at San Diego San Diego, CAEastern Region: 770
Allen Correctional Center Kinder, LA1,538LA DPS&CState Correctional FacilityMedium/ MaximumJuly 201010 yearsN/AManage only
Blackwater River Correctional Facility Milton, FL2,000FL DMSState Correctional FacilityMedium/ closeApril 20103 yearsTwo, two-yearManage Only
Broward Transition Center Deerfield Beach, FL700ICEFederal Detention FacilityMinimumApril 200911 monthsFour, One-year, Unlimited 6-monthOwn

16

Commencement
Facility Name
Facility
Security
of Current
Renewal
Manage Only
& LocationCapacity(1)CustomerTypeLevelContract(7)Base PeriodOptionsLease/ Own
D. Ray James Correctional Facility Folkston, GA2,847BOP/USMS/ Charlton CountyLocal & Federal Detention FacilityAll LevelsOctober 20104 yearsThree, two-yearLease (6)
East Mississippi Correctional Facility Meridian, MS1,500MS DOC/IGAState Mental Health Correctional FacilityAll LevelsAugust 20062 yearsThree, One-yearManage only
Indiana STOP Program Plainfield, IN(9)1,066IDOC—————Manage Only
LaSalle Detention Facility Jena, LA(2)1,160LEDD/ICEFederal Detention FacilityMinimum/ MediumJuly 2007Perpetual until termi natedN/AOwn
Lawrenceville Correctional Center Lawrenceville, VA1,536VA DOCState Correctional FacilityMediumMarch 20035 yearsTen, One-yearManage Only
Marshall County Correctional Facility Holly Springs, MS1,000MS DOCState Correctional FacilityMediumSeptember 20105 yearsN/AManage Only
Migrant Operations Center Guantanamo Bay NAS, Cuba130ICEFederal Migrant CenterMinimumNovember 200611 monthsFour, One-yearManage Only
Moshannon Valley Correctional Center1,495BOPFederal Correctional FacilityMediumApril 200636 monthsSeven, one-yearOwn
New Castle Correctional Facility New Castle, IN2,684+512
expansion		IDOCState Correctional FacilityAll LevelsJanuary 20064 yearsThree, two-yearManage Only
North Lake Correctional Facility(1)2,580CDCRState Correctional FacilityMedium/MaximumJune 20115 yearsTwo-year unspecifiedOwned
Queens Detention Facility Jamaica, NY222 OFDT/USMS Federal Detention Facility MaximumMinimum/ Medium January 200620082 yearFour, two-yearOwn
Riverbend Correctional Facility Milledgeville, GA1,500GDOCState Correctional FacilityMediumJuly 2010Partial 1 yearForty, One-year and one partial yearOwn
Rivers Correctional Institution Winton, NC1,450BOPFederal Correctional FacilityLowMarch 20013 yearsSeven, One-yearOwn
Robert A. Deyton Detention Facility Lovejoy, GA768OFDT/USMSFederal Detention FacilityMediumFebruary 2008 5 years One,
Five-yearThree, Five year		 Lease
                 
South Bay Correctional Facility South Bay, FL1,862DMSState Correctional FacilityMedium/ closeJuly 20093 yearsUnlimited, Two-yearManage Only
Walnut Grove Youth Correctional Facility Walnut Grove, MS1,450MS DOCState Correctional FacilityMaximumOctober 20063 yearsN/AManage Only

17

Commencement
Facility Name
Facility
Security
of Current
Renewal
Manage Only
& LocationCapacity(1)CustomerTypeLevelContract(7)Base PeriodOptionsLease/ Own
International Contracts:Services:
Australia:                
                 
Arthur Gorrie Correctional Centre Queensland, Australia 890 QLD DCS State Remand Prison High/ Maximum January 2008 5 years One,
Five-year		 Manage
Only

13

Commenc
ement
Facility Name
Facility
Security
of Current
Renewal
Manage Only
& Location(1)
Capacity
Customer
Type
Level
Contract
Base Period
Options
Lease/ Own
Campsfield House Immigration Removal Centre Kidlington, England215UK Home Office of ImmigrationDetention CentreMinimumMay 20063 yearsOne,
Two-year		Manage
Only
Harmondsworth Immigration Removal Centre London, England260 + 360 expansionUnited Kingdom Border AgencyDetention CentreMinimumJune 20093 yearsNoneManage
Only
                 
Fulham Correctional Centre & Nalu Challenge Community Victoria, Australia 785 VIC DOJ State Prison Minimum/ Medium April 1997October 1995 2022 years None Lease
                 
Junee Correctional Centre New South Wales, Australia 790 NSW State Prison Minimum/Medium April 2009 5 years Two,
Five-year		 Manage
Only
Pacific Shores Healthcare Victoria, Australia(5)N/AVIC CVHealth Care ServicesN/AJuly 200917 monthsTwo, six-monthManage Only
Parklea Correctional Centre Sydney, Australia823NSWState Remand PrisonAll LevelsOctober 20095 yearsOne, Three-yearManage Only
United Kingdom:
Campsfield House Immigration Removal Centre Kidlington, England215UK Home Office of ImmigrationDetention CentreMinimumMay 20063 yearsOne, Two-yearManage Only
Harmondsworth Immigration Removal Centre London, England620United Kingdom Border AgencyDetention CentreMinimumJune 20093 yearsNoneManage Only
South Africa:
                 
Kutama-Sinthumule Correctional Centre Limpopo Province, Republic of South Africa 3,024 RSA DCS National Prison Maximum February 2002 25 years None Manage
Only
                 
Melbourne Custody Centre Melbourne, AustraliaCanada: 67 VIC CC State Jail All Levels March 2005 3 years Two,
One-year		 Manage
Only
                 
New Brunswick Youth Centre Mirimachi, Canada(4) N/A PNB Provincial Juvenile Facility All Levels October 1997 25 years One,
Ten-year		 Manage
Only
                 
Pacific Shores Healthcare Victoria, Australia(5)GEO Care: N/A VIC CV Health Care Services N/A January 2002 3 years Four,
One-year
and One, 17 months		 Manage
Only
                 
Parklea Correctional Centre Sydney, Australia823NSWState Remand PrisonAll LevelsOctober 20095 yearsOne,
Three-year		Manage
Only
GEO Care:Residential Treatment Services:
                
                 
Columbia Regional Care Center Columbia, South Carolina(6)SC 354 SCDOH/GDOC ICE/USMS Correctional Health Care Hospital Medical and Mental Health July 2005 8 years None Lease
                 
Florida Civil Commitment Center Arcadia, FL 720 DCF State Civil Commitment All Levels July 2006April 2009 31 Months5 years Two,
One-yearThree, five-year		 Manage
Only
Montgomery County Mental Health Treatment Facility Montgomery, TX100MCMental Health Treatment FacilityMental HealthMarch 2011Partial six-monthUnlimited two-yearManage Only
                 
Palm Beach County Jail Palm Beach, FL N/A PBC as Subcontractor to Armor Healthcare Mental Health Services to County Jail All Levels May 2006 5 years N/A Manage
Only
                 
South Florida State Hospital Pembroke Pines, FL 335 DCF State Psychiatric Hospital Mental Health July 2008 5 years Three,
Five-year		 Manage Only

18

Commencement
Facility Name
Facility
Security
of Current
Renewal
Manage Only
& LocationCapacity(1)CustomerTypeLevelContract(7)Base PeriodOptionsLease/ Own
                 
South Florida Evaluation and Treatment Center Miami, FL 238 DCF State Forensic Hospital Mental Health July 2005January 2006 5 years Three,
Five-year		 Manage
Only
                 
Treasure Coast Forensic Treatment Center Stuart, FL 223 DCF State Forensic Hospital Mental Health April 2007 5 years One,
Five-year		 Manage
Only
Community Based Services:
Beaumont Transitional Treatment Center Beaumont, TX180TDCJCommunity Corrections FacilityCommunitySept 20032 yearsFive, Two-year and One, six-monthOwn
Bronx Community Re-entry Center Bronx, NY110BOPCommunity Corrections FacilityCommunityOctober 20072 yearsThree, One-yearLease
Brooklyn Community Re-entry Center Brooklyn, NY177BOPCommunity Corrections FacilityCommunityAugust 20106 monthsThree, two-monthLease
Cordova Center Anchorage, AK192AK DOCCommunity Corrections FacilityCommunitySeptember 20077 monthsFour, one-year, One five-monthLease (6)
El Monte Center El Monte, CA55BOPCommunity Corrections FacilityCommunityMarch 20087 monthsFour, one-yearLease
Grossman Center Leavenworth, KS150BOPCommunity Corrections FacilityCommunityOctober 20072 yearsThree, one-yearLease
Las Vegas Community Correctional Center Las Vegas, NV100BOP/USPOCommunity Corrections FacilityCommunityOctober 20102 yearsThree, one-yearOwn
Leidel Comprehensive Sanction Center Houston, TX190BOP/USPOCommunity Corrections FacilityCommunityJanuary 20112 yearsThree, one-yearLease(6)
Marvin Gardens Center Los Angeles, CA52BOPCommunity Corrections FacilityCommunityMay 20062 yearsThree, one-yearLease
McCabe Center Austin, TX90BOP/ Travis County/ Angelina CountyCommunity Corrections FacilityCommunityApril 20072 yearsThree, one-yearOwn
Mid Valley House Edinburg, TX96BOP/US ProbationCommunity Corrections FacilityCommunityDecember 20082 yearsThree, one-yearLease
Midtown Center Anchorage, AK32AK DOCCommunity Corrections FacilityCommunitySeptember 20077 monthsFour, one-year, One five-monthOwn
Northstar Center Fairbanks, AK135AK DOC/ BOPCommunity Corrections FacilityCommunityDecember 20057 monthsN/ALease
Oakland Center Oakland, CA61BOPCommunity Corrections FacilityCommunityNovember 20083 yearsSeven, one-yearOwn

19

                 
          Commencement
      
Facility Name
     Facility
 Security
 of Current
   Renewal
 Manage Only
& Location Capacity(1) Customer Type Level Contract(7) Base Period Options Lease/ Own
 
                 
Parkview Center Anchorage, AK 112 AK DOC Community Corrections Facility Community September 2007 7 months Four, one-year, One five-month Lease(6)
                 
Reality House Brownsville, TX 66 BOP/ US Probation Community Corrections Facility Community December 2005 2 years Three, one-year, One two-month Own
                 
Reid Community Residential Facility Houston, TX 500 TDCJ Community Corrections Facility Community September 2003 2 years Five, two-year Lease(6)
                 
Salt Lake City Center Salt Lake City, UT 78 BOP/ US Probation Community Corrections Facility Community December 2005 1 year Three, one-year, One two-month Lease
                 
Seaside Center Nome, AK 48 AK DOC Community Corrections Facility Community December 2007 1 year Five, one-year Lease
                 
Taylor Street Center San Francisco, CA 177 BOP/ CDCR Community Corrections Facility Community February 2006 3 years Seven, one-year Own
                 
Tundra Center Bethel, AK 85 AK DOC Community Corrections Facility Community December 2006 1 year Five, one-year Lease(6)
                 
Youth Services:                
                 
Residential Facilities                
                 
Abraxas Academy Morgantown, PA 214 Various Youth Residential Facility Secure 2006 N/A N/A Own
                 
Abraxas Center For Adolescent Females Pittsburg, PA 108 Various Youth Residential Facility Staff Secure 1989 N/A N/A Own
                 
Abraxas I Marienville, PA 274 Various Youth Residential Facility Staff Secure 1973 N/A N/A Lease(6)
                 
Abraxas Ohio Shelby, OH 108 Various Youth Residential Facility Staff Secure 1993 N/A N/A Lease(6)
                 
Abraxas III, Pittsburgh, PA 24 Idle — — — — — Own
                 
Abraxas Youth Center South Mountain, PA 72 Various Youth Residential Facility Secure/Staff Secure 1999 N/A N/A Lease
                 
Contact Interventions Wauconda, IL 32 IL DASA, Medicaid, Private Youth Residential Facility Staff Secure 1999 N/A N/A Own
                 
DuPage Interventions Hinsdale, IL 36 IL DASA, Medicaid, Private Youth Residential Facility Staff Secure 1999 N/A N/A Own
                 
Erie Residential Programs Erie, PA 40 Various Youth Residential Facility Staff Secure 1974 N/A N/A Own
                 
Hector Garza Center San Antonio, TX 122 TDFPS, TYC and County Probation Depts. Youth Residential Facility Staff Secure 2003 N/A N/A Lease(6)

20

                 
          Commencement
      
Facility Name
     Facility
 Security
 of Current
   Renewal
 Manage Only
& Location Capacity(1) Customer Type Level Contract(7) Base Period Options Lease/ Own
 
                 
Leadership Development Program South Mountain, PA 128 Various Youth Residential Facility Staff Secure 1994 N/A N/A Lease
                 
Schaffner Youth Center Steelton, PA 63 Dauphin County Youth Residential Facility Secure/ Staff Secure January 2009 2 years N/A Manage Only
                 
Southern Peaks Regional Treatment Center Canon City, CO 136 Various Youth Residential Facility Staff Secure 2004 N/A N/A Own
                 
Southwood Interventions Chicago, IL 128 IL DASA, City of Chicago, Medicaid, Private Youth Residential Facility Staff Secure 1999 N/A N/A Own
                 
Texas Adolescent Treatment Center San Antonio, TX 145 Idle — — — — — Own
                 
Washington DC Facility Washington, DC(8) 70 Idle — — — — — Own
                 
Woodridge Interventions Woodridge, IL 90 IL DASA, Medicaid, Private Youth Residential Facility Staff Secure 1999 N/A N/A Own
                 
Non-residential Facilities           N/A N/A  
                 
Abraxas Counseling Center Columbus, OH 78 Various Youth Non-residential Service Center Open 2008 N/A N/A Lease
                 
Delaware Community-Based Programs Milford, DE 66 State of Delaware Youth Non-residential Service Center Open 1994 N/A N/A Lease
                 
Harrisburg Community-Based Programs Harrisburg, PA 136 Dauphin or Cumberland Counties Youth Non-residential Service Center Open 1995 N/A N/A Lease
                 
Lehigh Valley Community-Based Programs Lehigh Valley, PA 60 Lehigh and Northampton Counties Youth Non-residential Service Center Open 1987 N/A N/A Lease
                 
LifeWorks Interventions J oliet, IL 231 IL DASA, Medicaid, Private Youth Non-residential Service Center Open 1999 N/A N/A Lease
                 
Philadelphia Community-Based Programs Philadelphia, PA 236 City of Philadelphia, Philadelphia School District Youth Non-residential Service Center Open 1994 N/A N/A Own
                 
WorkBridge Pittsburgh, PA 600 Allegheny County Youth Non-residential Service Center Open 1987 N/A N/A Lease
                 
York County Juvenile Drug Court Programs Harrisburg, PA 36 YCCYS Youth Non-residential Service Center Open 1995 N/A N/A Lease

1421

Customer Legend:
 
   
Abbreviation
 
Customer
 
AZ DOCArizona Department of Corrections
AK DOCAlaska Department of Corrections
BOPFederal Bureau of Prisons
CDCRCalifornia Department of Corrections & Rehabilitation
CDEColorado Department of Education
CO DHS DYCColorado Department of Human Services, Division of Youth Corrections
DCFFlorida Department of Children & Families
DMSFlorida Department of Management Services
GDOCGeorgia Department of Corrections
ICEU.S. Immigration & Customs Enforcement
IDOCIndiana Department of Correction
IGA Intergovernmental Agreement
IL DASAIllinois Department of Alcoholism and Substance Abuse
LA DPS&C Louisiana Department of Public Safety & Corrections
LEDD LaSalle Economic Development District
ADCMC Arizona Department of CorrectionsMontgomery County
ICEU.S. Immigration & Customs Enforcement
TDCJTexas Department of Criminal Justice
CDCRCalifornia Department of Corrections & Rehabilitation
MDOCMS DOC Mississippi Department of Corrections (East Mississippi & Marshall County)
NMCD New Mexico Corrections Department
VDOCNSW Virginia DepartmentCommissioner of CorrectionsCorrective Services for New South Wales
ODOCOK DOC Oklahoma Department of Corrections
DMSOFDT FloridaOffice of Federal Detention Trustee
PA BSCFPennsylvania Department of Management ServicesPublic Welfare, Bureau of State Children and Families
BOPPA DHS CY Federal BureauPennsylvania Department of PrisonsHuman Services, Children and Youth Division
USMSPA DPW United States Marshals ServicePennsylvania Department of Public Welfare
IDOCPBC Indiana DepartmentPalm Beach County
PNBProvince of CorrectionNew Brunswick
QLD DCS Department of Corrective Services of the State of Queensland
OFDTRSA DCS OfficeRepublic of Federal Detention TrusteeSouth Africa Department of Correctional Services
SCDOHSouth Carolina Department of Health
TDCJTexas Department of Criminal Justice
TDFPSTexas Department of Family and Protective Services
TYCTexas Youth Commission
USMSUnited States Marshals Service
USPOUnited States Probation Office
VA DOCVirginia Department of Corrections
VIC CCThe Chief Commissioner of the Victoria Police
VIC CVThe State of Victoria represented by Corrections Victoria
VIC DOJ Department of Justice of the State of Victoria
NSWYCCYS Commissioner of CorrectiveYork County Human Services for New South Wales
RSA DCSRepublic of South Africa Department of CorrectionalDivision, Children and Youth Services
VIC CCThe Chief Commissioner of the Victoria Police
PNBProvince of New Brunswick
VIC CVThe State of Victoria represented by Corrections Victoria
DCFFlorida Department of Children & Families
SCDOHSouth Carolina Department of Health
GDOCGeorgia Department of Corrections
PBCPalm Beach County
 
 
(1)GEO also owns a facilityCapacity as used in Baldwin, Michigan, North Lake Correctional Facility,the table refers to design capacity consisting of total beds for all facilities except for the eight Non-residential service centers under Youth Services for which we have provided service capacity which represents the number of juveniles that was not in use during fiscal year 2009. This 530-bed facility is undergoing a 1,225-bed expansion.can be serviced daily.
 
(2)GEO provides services at this facilitythese facilities through various Inter-Governmental Agreements, or IGAs, through the various counties and other jurisdictions.
 
(3)The full term of this contract expired in December 2009 and was extended until December 12, 2011.
 
(4)The contract for this facility only requires GEO to provide maintenance services.
 
(5)GEO provides comprehensive healthcare services to nine (9) government-operated prisons under this contract.


22

(6)GEO CareThese facilities are owned by Municipal Corrections Finance, L.P., our variable interest entity.
(7)For Youth Services Residential Facilities and Non-residential Service Centers, the contract commencement date represents either the program start date or the date that the facility operations were acquired by Cornell. The service agreements under these arrangements, with the exception of Schaffner Youth Center, provide for services on an as-contracted basis and there are no guaranteed minimum populations or management contracts with specified renewal dates. These arrangements are more perpetual in nature.
(8)This facility is classified as held for Columbia Regional Care Center on September 30, 2009 in connection withsale as of January 2, 2011.
(9)This contract was awarded during fiscal year 2010 and its business acquisition of Just Careterms are under negotiation.
 
Government Contracts — Terminations, Renewals and Competitive Re-bids
 
Generally, we may lose our facility management contracts due to one of three reasons: the termination by a government customer with or without cause at any time; the failure by a customer to renew a contract with us upon the expiration of the then current term; or our failure to win the right to continue to operate under a contract that has been competitively re-bid in a procurement process upon its termination or expiration. Our facility management contracts typically allow a contracting governmental agency to terminate a contract with or without cause at any time by giving us written notice ranging from 30 to 180 days. If government agencies were to use these provisions to terminate, or renegotiate the terms of their agreements with us, our financial condition and results of operations could be materially adversely affected. See “Risk Factors — “We are subject to the loss of our facility management contracts due to terminations, non-renewals or competitive re-


15

bids, which could adversely affect our results of operations and liquidity, including our ability to secure new facility management contracts from other government customers”.
 
Aside from our customers’ unilateral right to terminate our facility management contracts with them at any time for any reason, there are two points during the typical lifecycle of a contract which may result in the loss by us of a facility management contract with our customers. We refer to these points as contract “renewals” and contract “re-bids.” Many of our facility management contracts with our government customers have an initial fixed term and subsequent renewal rights for one or more additional periods at the unilateral option of the customer. Because most of our contracts for youth services do not guarantee placement or revenue, we do not consider these contracts to ever be in the renewal or re-bid stage since they are more perpetual in nature. As such, they are not considered in the table below. We count each government customer’s right to renew a particular facility management contract for an additional period as a separate “renewal.” For example, a five-year initial fixed term contract with customer options to renew for five separate additional one-year periods would, if fully exercised, be counted as five separate renewals, with one renewal coming in each of the five years following the initial term. As of January 3, 2010, eleven2, 2011, 32 of our facility management contracts representing 10,40719,450 beds are scheduled to expire on or before December 31, 2010,January 1, 2012, unless renewed by the customer at its sole option.option in certain cases, or unless renewed by mutual agreement in other cases. These contracts represented 19.3%21.5% of our consolidated revenues for the fiscal year ended January 3, 2010.2, 2011. We undertake substantial efforts to renew our facility management contracts. Our historical facility management contract renewal rate exceeds 90%. However, given their unilateral nature, we cannot assure you that our customers will in fact exercise their renewal options under existing contracts. In addition, in connection with contract renewals, either we or the contracting government agency have typically requested changes or adjustments to contractual terms. As a result, contract renewals may be made on terms that are more or less favorable to us than those in existence prior to the renewals.
 
We define competitive re-bids as contracts currently under our management which we believe, based on our experience with the customer and the facility involved, will be re-bid to us and other potential service providers in a competitive procurement process upon the expiration or termination of our contract, assuming all renewal options are exercised. Our determination of which contracts we believe will be competitively re-bid may in some cases be subjective and judgmental, based largely on our knowledge of the dynamics involving a particular contract, the customer and the facility involved. Competitive re-bids may result from the expiration of the term of a contract, including the initial fixed term plus any renewal periods, or the early termination of a contract by a customer. Competitive re-bids are often required by applicable federal or state procurement laws periodically in order to encourage competitive pricing and other terms for the government


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customer. Potential bidders in competitive re-bid situations include us, other private operators and other government entities. While we are pleased with our historical win rate on competitive re-bids and are committed to continuing to bid competitively on appropriate future competitive re-bid opportunities, we cannot in fact assure you that we will prevail in future competitive re-bid situations. Also, we cannot assure you that any competitive re-bids we win will be on terms more favorable to us than those in existence with respect to the expiring contract.
 
As of January 3, 2010, six2, 2011, 15 of our facility management contracts representing 9.1%7.6% and $103.4$96.3 million of our fiscal year 20092010 consolidated revenues are subject to competitive re-bid in 2010.2011. The following table sets forth the number of facility management contracts that we currently believe will be subject to competitive re-bid in each of the next five years and thereafter, and the total number of beds relating to those potential competitive re-bid situations during each period:
 
                
Year
 Re-bid Total Number of Beds up for Re-bid  Re-bid Total Number of Beds up for Re-bid 
2010  6   5,537 
2011  6   4,119   15   5,768 
2012  4   3,122   15   4,881 
2013  1   178   5   842 
2014  2   2,275   4   4,816 
2015  11   5,498 
Thereafter  22   21,334   29   34,263 
          
Total  41   36,565   79   56,068 
          


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Competition
 
We compete primarily on the basis of the quality and range of services we offer; our experience domestically and internationally in the design, construction, and management of privatized correctional and detention facilities; our reputation; and our pricing. We compete directly with the public sector, where governmental agencies responsible for the operation of correctional, detention, youth services, community based services, and mental health, and residential treatment and re-entry facilities are often seeking to retain projects that might otherwise be privatized. In the private sector, our U.S. correctionsDetention & Correction’s and International servicesServices business segments compete with a number of companies, including, but not limited to: Corrections Corporation of America; Cornell Companies, Inc.; Management and Training Corporation; Louisiana Corrections Services, Inc.; Emerald Companies; Community Education Centers; LaSalle Southwest Corrections; Group 4 Securicor; Kaylx;Sodexo Justice Services (formerly Kaylx); and Serco. Our GEO Care business segment competes with a number of differentsmall-to-medium sized companies, reflecting the highly fragmented nature of the youth services, community based services, and mental health and residential treatment services industry. BI’s electronic monitoring business segment competes with a number of companies, including, but not limited to: G4 Justice Services, LLC; Elmo-Tech, a 3M Company; and Pro-Tech, a 3M Company. Some of our competitors are larger and have more resources than we do. We also compete in some markets with small local companies that may have a better knowledge of the local conditions and may be better able to gain political and public acceptance.
 
Employees and Employee Training
 
At January 3, 2010,2, 2011, we had 13,02619,352 full-time employees. Of our full-time employees, 248433 were employed at our headquarters and regional offices and 12,77818,919 were employed at facilities and international offices. We employ personnel in positions of management, administrative and clerical, security, educational services, human services, health services and general maintenance personnel at our various locations. Approximately 6231,574 and 1,8601,669 employees are covered by collective bargaining agreements in the United States and at international offices, respectively. We believe that our relations with our employees are satisfactory.
 
Under the laws applicable to most of our operations, and internal company policies, our correctional officers are required to complete a minimum amount of training. We generally require at least 40 hours of pre-service training before an employee is allowed to assume their duties plus an additional 120 hours of training


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during their first year of employment in our domestic facilities, consistent with ACA standardsand/or applicable state laws. In addition to the usual 160 hours of training in the first year, most states require 40 or 80 hours ofon-the-job training. Florida law requires that correctional officers receive 520 hours of training. We believe that our training programs meet or exceed all applicable requirements.
 
Our training program for domestic facilities typically begins with approximately 40 hours of instruction regarding our policies, operational procedures and management philosophy. Training continues with an additional 120 hours of instruction covering legal issues, rights of inmates, techniques of communication and supervision, interpersonal skills and job training relating to the particular position to be held. Each of our employees who has contact with inmates receives a minimum of 40 hours of additional training each year, and each manager receives at least 24 hours of training each year.
 
At least 160 hours of training are required for our employees in Australia and South Africa before such employees are allowed to work in positions that will bring them into contact with inmates. Our employees in Australia and South Africa receive a minimum of 40 hours of refresher training each year. In the United Kingdom, our corrections employees also receive a minimum of 240 hours prior to coming in contact with inmates and receive additional training of approximately 25 hours annually.
 
Business Regulations and Legal Considerations
 
Many governmental agencies are required to enter into a competitive bidding procedure before awarding contracts for products or services. The laws of certain jurisdictions may also require us to award subcontracts on a competitive basis or to subcontract or partner with businesses owned by women or members of minority groups.


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Certain states, such as Florida, deem correctional officers to be peace officers and require our personnel to be licensed and subject to background investigation. State law also typically requires correctional officers to meet certain training standards.
 
The failure to comply with any applicable laws, rules or regulations or the loss of any required license could have a material adverse effect on our business, financial condition and results of operations. Furthermore, our current and future operations may be subject to additional regulations as a result of, among other factors, new statutes and regulations and changes in the manner in which existing statutes and regulations are or may be interpreted or applied. Any such additional regulations could have a material adverse effect on our business, financial condition and results of operations.
 
Insurance
 
The nature of our business exposes us to various types of third-party legal claims, including, but not limited to, civil rights claims relating to conditions of confinementand/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, product liability claims, intellectual property infringement claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, contractual claims and claims for personal injury or other damages resulting from contact with our facilities, programs, electronic monitoring products, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. In addition, our management contracts generally require us to indemnify the governmental agency against any damages to which the governmental agency may be subject in connection with such claims or litigation. We maintain a broad program of insurance coverage for these general types of claims, except for claims relating to employment matters, for which we carry no insurance. There can be no assurance that our insurance coverage will be adequate to cover all claims to which we may be exposed. It is our general practice to bring merged or acquired companies into our corporate master policies in order to take advantage of certain economies of scale.
 
We currently maintain a general liability policy and excess liability policy for all U.S. corrections operationsDetention & Corrections, GEO Care’s Community-Based Services, GEO Care’s Youth Services and BI, Inc. with limits of $62.0


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$62.0 million per occurrence and in the aggregate. A separate $35.0 million limit applies to medical professional liability claims arising out of correctional healthcare services. Our wholly owned subsidiary, GEO Care, is insured under their ownInc., has a separate insurance program for general liability and medical professional liabilitytheir residential services division, with a specific loss limit of $35.0 million per occurrence and in the aggregate.aggregate with respect to general liability and medical professional liability. We are uninsured for any claims in excess of these limits. We also maintain insurance to cover property and other casualty risks including, workers’ compensation, environmental liability and automobile liability.
For most casualty insurance policies, we carry substantial deductibles or self-insured retentions — $3.0 million per occurrence for general liability and hospital professional liability, $2.0 million per occurrence for workers’ compensation and $1.0 million per occurrence for automobile liability. We also maintain insurance to cover property and other casualty risks including, workers’ compensation, environmental liability and automobile liability.
With respect to our operations in South Africa, United Kingdom and Australia, we utilize a combination of locally-procured insurance and global policies to meet contractual insurance requirements and protect the Company. Our Australian subsidiary is required to carry tail insurance on a general liability policy providing an extended reporting period through 2011 related to a discontinued contract.
In addition, certain of our facilities located in Florida and determined by insurers to be inother high-risk hurricane areas carry substantial windstorm deductibles. Since hurricanes are considered unpredictable future events, no reserves have been established to pre-fund for potential windstorm damage. Limited commercial availability of certain types of insurance relating to windstorm exposure in coastal areas and earthquake exposure mainly in California may prevent us from insuring some of our facilities to full replacement value.
 
With respect to our operations in South Africa, the United Kingdom and Australia, we utilize a combination of locally-procured insurance and global policies to meet contractual insurance requirements and protect the Company. Our Australian subsidiary is required to carry tail insurance on a general liability policy providing an extended reporting period through 2011 related to a discontinued contract.
Of the reserves discussed above, our most significant insurance reserves relate to workers’ compensation and general liability claims. These reserves are undiscounted and were $27.2$40.2 million and $25.5$27.2 million as of January 2, 2011 and January 3, 2010, and December 28, 2008, respectively. We use statistical and actuarial methods to estimate amounts for claims that have been reported but not paid and claims incurred but not reported. In applying these methods and assessing their results, we consider such factors as historical frequency and severity of claims at each of our facilities, claim development, payment patterns and changes in the nature of our business, among other factors. Such factors are analyzed for each of our business segments. Our estimates may be impacted by such factors as increases in the market price for medical services and unpredictability of the


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size of jury awards. We also may experience variability between our estimates and the actual settlement due to limitations inherent in the estimation process, including our ability to estimate costs of processing and settling claims in a timely manner as well as our ability to accurately estimate our exposure at the onset of a claim. Because we have high deductible insurance policies, the amount of our insurance expense is dependent on our ability to control our claims experience. If actual losses related to insurance claims significantly differ from our estimates, our financial condition, results of operations and cash flows could be materially adversely impacted.
 
International Operations
 
Our international operations for fiscal years 20092010 and 20082009 consisted of the operations of our wholly-owned Australian subsidiaries, our wholly owned subsidiary in the United Kingdom, and South African Custodial Management Pty. Limited, our consolidated joint venture in South Africa, which we refer to as SACM. In Australia, our wholly-owned subsidiary, GEO Australia, currently manages fivefour facilities and provides comprehensive healthcare services to nine government operated prisons. We operate one facility in South Africa through SACM. During Fourth Quarter 2004, we opened an office in the United Kingdom to pursue new business opportunities throughout Europe. On March 6, 2006, we were awarded a contract to manage the operations of the 198-bed Campsfield House in Kidlington, England and on June 29, 2009, GEO UK assumed management functions of the 260-bed Harmondsworth Immigration Removal Centre in London, England. The Harmondsworth Immigration Removal Centre will bewas expanded by 360 beds during fiscal year 2010 and will beis managed by our subsidiary under a three-year contract. See Item 7 for more discussion related to the results of our international operations. Financial information about our operations in different geographic regions appears in “Item 8. Financial Statements — Note 1718 Business Segment and Geographic Information.”


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Business Concentration
 
Except for the major customers noted in the following table, no other single customer made up greater than 10% of our consolidated revenues, excluding discontinued operations, for these years.
 
             
Customer
 2009  2008  2007 
 
Various agencies of the U.S. Federal Government  31%  28%  27%
Various agencies of the State of Florida  16%  17%  16%
             
Customer 2010 2009 2008
 
Various agencies of the U.S Federal Government:  35%  31%  28%
Various agencies of the State of Florida:  14%  16%  17%
 
Available Information
 
Additional information about us can be found atwww.geogroup.com.We make available on our website, free of charge, access to our Annual Report onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K, our annual proxy statement on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as soon as reasonably practicable after we electronically submit such materials to the Securities and Exchange Commission, or the SEC. In addition, the SEC makes available on its website, free of charge, reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including GEO. The SEC’s website is located athttp://www.sec.gov. Information provided on our website or on the SEC’s website is not part of this Annual Report onForm Form��10-K.
 
Item 1A.  Risk Factors
 
The following are certain risks to which our business operations are subject. Any of these risks could materially adversely affect our business, financial condition, or results of operations. These risks could also cause our actual results to differ materially from those indicated in the forward-looking statements contained herein and elsewhere.The risks described below are not the only risks we face. Additional risks not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business operations.


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Risks Related to Our High Level of Indebtedness
 
Our significant level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt service obligations.
We have a significant amount of indebtedness. Our total consolidated indebtedness as of January 2, 2011 was $807.8 million, excluding non-recourse debt of $222.7 million and capital lease obligations of $14.5 million. As of January 2, 2011, we had $57.0 million outstanding in letters of credit and $212.0 million in borrowings outstanding under the Revolver. Our total consolidated indebtedness as of February 10, 2011, upon consummation of the BI Acquisition and following the execution of Amendment No. 1 to the Senior Credit Facility, which included an additional $150.0 million of term loans and an increase of $100.0 million revolving credit commitments, was $1,251.4 million, excluding non-recourse debt of $216.8 million and capital lease obligations of $14.3 million. As of February 10, 2011, we had $210.0 million in borrowings under the Revolver. Consequently, as of February 10, 2011, we had the ability to borrow $233.8 million under our Revolver.
Our substantial indebtedness could have important consequences. For example, it could:
• require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, and other general corporate purposes;
• limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
• increase our vulnerability to adverse economic and industry conditions;
• place us at a competitive disadvantage compared to competitors that may be less leveraged; and
• limit our ability to borrow additional funds or refinance existing indebtedness on favorable terms.


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If we are unable to meet our debt service obligations, we may need to reduce capital expenditures, restructure or refinance our indebtedness, obtain additional equity financing or sell assets. We may be unable to restructure or refinance our indebtedness, obtain additional equity financing or sell assets on satisfactory terms or at all. In addition, our ability to incur additional indebtedness will be restricted by the terms of our senior credit facility, the indenture governing the 73/4% senior notes and the indenture governing the 6.625% senior notes.
We are currently incurring significant indebtedness in connection with substantial ongoing capital expenditures. Capital expenditures for these existing and future projects may materially strain our liquidity.
 
As of January 3, 2010,2, 2011, we were developing a number of projects that we estimate will cost approximately $282.4 million, of which $54.9 million was spent through January 2, 2011. We estimate our remaining capital requirements to be approximately $227.5 million, which we anticipate will be spent in the process of constructing or expanding three facilities representing 4,325 total beds. We are providing the financing for two of the three facilities representing 2,325 beds. Remaining capitalfiscal years 2011 and 2012. Capital expenditures related to these and other projects under developmentfacility maintenance costs are expected to be $37.7range between $20.0 million all of which we expect to spend in 2010.and $25.0 million for fiscal year 2011. We intend to finance these and future projects using our own funds, including cash on hand, cash flow from operations and borrowings under the revolver portion of our $330.0 million Revolver.Senior Credit Facility. In addition to these current estimated capital requirements for 2011, we are currently in the process of bidding on, or evaluating potential bids for the design, construction and management of a number of new projects. In the event that we win bids for these projects and decide to self-finance their construction, our capital requirements in 2011 could materially increase. As of January 3, 2010, we had $47.5 million outstanding in letters of credit and $58.0 million in borrowings outstanding under the Revolver. Consequently,2, 2011, we had the ability to borrow approximately $217$131.0 million under the revolver portion of our Revolver after consideringSenior Credit Facility subject to our debt covenants.satisfying the relevant borrowing conditions under the Senior Credit Facility. As of February 10, 2011, upon consummation of the BI Acquisition and following the execution of Amendment No. 1 to the senior credit facility, our obtaining an additional $150.0 million of term loans and an increase of $100.0 million aggregate principal amount of revolving credit commitments under the Senior Credit Facility, we had the ability to borrow $233.8 million under the revolver portion of our Senior Credit Facility subject to our satisfying the relevant borrowing conditions thereunder. In addition, we have anthe ability to borrow $200.0$250.0 million under the accordion feature of our Senior Credit Facility subject to lender demand and prevailing market conditions.conditions and satisfying the relevant borrowing conditions thereunder. While we believe we currently have adequate borrowing capacity under our Senior Credit Facility to fund our operations and all of our committed capital expenditure projects, we may need additional borrowings or financing from other sources in order to complete potential capital expenditures related to new projects in the future. We cannot assure you that such borrowings or financing will be made available to us on satisfactory terms, or at all. In addition, the large capital commitments that these projects will require over the next12-18 month period may materially strain our liquidity and our borrowing capacity for other purposes. Capital constraints caused by these projects may also cause us to have to entirely refinance our existing indebtedness or incur more indebtedness. Such financing may have terms less favorable than those we currently have in place, or not be available to us at all. In addition, the concurrent development of these and other large capital projects exposes us to material risks. For example, we may not complete some or all of the projects on time or on budget, which could cause us to absorb any losses associated with any delays.
 
Our significant level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt service obligations.
We have a significant amount of indebtedness. Our total consolidated long-term indebtedness as of January 3, 2010 was $457.5 million, excluding non-recourse debt of $112.0 million and capital lease liability balances of $15.1 million. We had the ability to borrow approximately $217 million under the Revolver, after considering our debt covenants, subject to our satisfying the relevant borrowing conditions under the Senior Credit Facility with respect to the incurrence of additional indebtedness.
Our substantial indebtedness could have important consequences. For example, it could:
• require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, and other general corporate purposes;
• limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
• increase our vulnerability to adverse economic and industry conditions;
• place us at a competitive disadvantage compared to competitors that may be less leveraged; and
• limit our ability to borrow additional funds or refinance existing indebtedness on favorable terms.
If we are unable to meet our debt service obligations, we may need to reduce capital expenditures, restructure or refinance our indebtedness, obtain additional equity financing or sell assets. We may be unable to restructure or refinance our indebtedness, obtain additional equity financing or sell assets on satisfactory terms or at all. In addition, our ability to incur additional indebtedness will be restricted by the terms of our Senior Credit Facility and the indenture governing our outstanding 73/4% Senior Notes.


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Despite current indebtedness levels, we may still incur more indebtedness, which could further exacerbate the risks described above. Future indebtedness issued pursuant to our universal shelf registration statement could have rights superior to those of our existing or future indebtedness.
 
The terms of the indenture governing the 73/4% Senior Notessenior notes, the indenture governing the 6.625% senior notes and our Senior Credit Facility restrict our ability to incur but do not prohibit us from incurring significant additional indebtedness in the future. As of January 3, 2010,2, 2011, we had the ability to borrow approximately $217an additional $131.0 million under the Revolver,revolver portion of our Senior Credit Facility, subject to our satisfying the relevant borrowing conditions under the Senior Credit Facility. As of February 10, 2011, upon consummation of the BI Acquisition and following the execution of Amendment No. 1 to the Senior Credit Facility, our obtaining an additional $150.0 million of term loans and an increase of $100.0 million aggregate principal amount of revolving credit commitments under the indenture governingSenior Credit Facility, we had the 73/4%ability to borrow $233.8 million under the revolver portion of our Senior Notes.Credit Facility subject to our satisfying the relevant borrowing conditions thereunder. We also would have anhad the ability to borrow an additional $200.0$250.0 million under the accordion feature of our Senior Credit Facilitysenior credit facility subject to lender demand, prevailing market conditions and


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satisfying relevant borrowing conditions. Also, we may refinance all or a portion of our indebtedness, including borrowings under our Senior Credit Facility,and/or the 73/4% Senior Notesand/or the 6.625% Senior Notes. The terms of such refinancing may be less restrictive and permit us to incur more indebtedness than we can now. If new indebtedness is added to our and our subsidiaries’, current debt levels, the related risks that we and they wouldnow face related to our significant level of indebtedness could intensify.
 
The covenants in the indenture governing ourthe 73/4% Senior Notes, the indenture governing the 6.625% Senior Notes and our Senior Credit Facility impose significant operating and financial restrictions which may adversely affect our ability to operate our business.
 
The indenture governing the 73/4% Senior Notes, the indenture governing the 6.625% Senior Notes and our Senior Credit Facility impose significant operating and financial restrictions on us and certain of our subsidiaries, which we refer to as restricted subsidiaries. These restrictions limit our ability to, among other things:
 
 • incur additional indebtedness;
 
 • pay dividends and or distributions on our capital stock, repurchase, redeem or retire our capital stock, prepay subordinated indebtedness, make investments;
 
 • issue preferred stock of subsidiaries;
 
 • guarantee other indebtedness;
 
 • create liens on our assets;
 
 • transfer and sell assets;
 
 • make capital expenditures above certain limits;
 
 • create or permit restrictions on the ability of our restricted subsidiaries to make dividends or make other distributions to us;
 
 • enter into sale/leaseback transactions;
 
 • enter into transactions with affiliates; and
 
 • merge or consolidate with another company or sell all or substantially all of our assets.
 
These restrictions could limit our ability to finance our future operations or capital needs, make acquisitions or pursue available business opportunities. In addition, our Senior Credit Facility requires us to maintain specified financial ratios and satisfy certain financial covenants, including maintaining our total leverage ratio, maximum senior secured leverage ratio and total leverage ratios, and a minimum interest coverage ratio. Some of these financial ratios become more restrictive over the life of the Senior Credit Facility.senior credit facility. We may be required to take action to reduce our indebtedness or to act in a manner contrary to our business objectives to meet these ratios and satisfy these covenants. We could also incur additional indebtedness having even more restrictive covenants. Our failure to comply with any of the covenants under our Senior Credit Facility andsenior credit facility, the indenture governing the 73/4% Senior Notes and the indenture governing the 6.625% Senior Notes or any other indebtedness could prevent us from being able to draw on the revolver portion of our Revolver,senior credit facility, cause an event of default under such documents and result in an acceleration of all of our outstanding indebtedness. If all of our outstanding indebtedness were to be accelerated, we likely would not be


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able to simultaneously satisfy all of our obligations under such indebtedness, which would materially adversely affect our financial condition and results of operations.
 
Servicing our indebtedness will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.
 
Our ability to make payments on our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.


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Our business may not be able to generate sufficient cash flow from operations or future borrowings may not be available to us under our Senior Credit Facility or otherwise in an amount sufficient to enable us to pay our indebtedness or new debt securities, including the 73/4% Senior Notes and the 6.625% Senior Notes, or to fund our other liquidity needs. WeAs a result, we may need to refinance all or a portion of our indebtedness on or before maturity. However, we may not be able to complete such refinancing on commercially reasonable terms or at all.
 
Because portions of our senior indebtedness have floating interest rates, a general increase in interest rates will adversely affect cash flows.
 
Borrowings under our Senior Credit Facility bear interest at a variable rate. As a result, to the extent our exposure to increases in interest rates is not eliminated through interest rate protection agreements, such increases will result in higher debt service costs which will adversely affect our cash flows. We currently do not currently have any interest rate protection agreements in place to protect against interest rate fluctuations related toon borrowings under our Senior Credit Facility. Based on borrowingsAs of $213.0January 2, 2011 we had $557.8 million of indebtedness outstanding under theour Senior Credit Facility as(net of January 3, 2010,discount of $1.9 million), and a one percent increase in the interest rate applicable to the Senior Credit Facility would increase our annual interest expense by $2.1$5.6 million.
 
We depend on distributions from our subsidiaries to make payments on our indebtedness. These distributions may not be made.
 
We generate aA substantial portion of our revenues from distributions on the equity interests we hold inbusiness is conducted by our subsidiaries. Therefore, our ability to meet our payment obligations on our indebtedness is substantially dependent on the earnings of certain of our subsidiaries and the payment of funds to us by our subsidiaries as dividends, loans, advances or other payments. Our subsidiaries are separate and distinct legal entities and, unless they expressly guarantee any indebtedness of ours, they are not obligated to make funds available for payment of our other indebtedness in the form of loans, distributions or otherwise. Our subsidiaries’ ability to make any such loans, distributions or other payments to us will depend on their earnings, business results, the terms of their existing and any future indebtedness, tax considerations and legal or contractual restrictions to which they may be subject. If our subsidiaries do not make such payments to us, our ability to repay our indebtedness may be materially adversely affected. For the fiscal year ended January 3, 2010,2, 2011, our subsidiaries accounted for 50.1%58.9% of our consolidated revenue,revenues, and as of January 3, 2010,2, 2011, our subsidiaries accounted for 59.0%77.2% of our total segment assets.
 
Risks Related to Our Business and Industry
 
We doFrom time to time, we may not have a management contractscontract with clientsa client to operate existing beds at a facility or new beds at two facilitiesa facility that we are currently expanding and we cannot assure you that such contractsa contract will be obtained. Failure to obtain a management contractscontract for these new beds will subject us to carrying costs with no corresponding management revenue.
 
WeFrom time to time, we may not have a management contract with a client to operate existing beds or new beds at facilities that we are currently in the process of expanding two facilities to add additional beds that we do not yet have corresponding management contracts to operate.renovating and expanding. While we are workingwill always strive to work diligently with a number of different customers for the use of these remaining beds, we cannot in fact assure you that contractsa contract for the beds will be secured on a timely basis, or at all. While these facilitiesa facility or new beds at a facility are vacant, we estimate that we will incur carrying costs ranging from approximately $1.0 million to $1.5 million per facility, per fiscal quarter.costs. Failure to secure a management contractscontract for these projectsa facility or expansion project could have a material adverse impact on our financial condition,


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results of operationsand/or cash flows. In addition, in order to secure a management contractscontract for these expanded beds, we may need to incur significant capital expenditures to renovate or further expand these facilitiesthe facility to meet potential clients’ needs.
 
The prevailing negativeNegative conditions in the capital markets could prevent us from obtaining financing, which could materially harm our business.
 
Our ability to obtain additional financing is highly dependent on the conditions of the capital markets, among other things. The capital and credit markets have recently been experiencing significant volatility and disruption.disruption since 2008. The recent downturn in the equity and debt markets, the tightening of the credit markets, the general economic slowdown and other macroeconomic conditions, such as the current global recession economic environment


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could prevent us from raising additional capital or obtaining additional financing on satisfactory terms, or at all. If we need, but cannot obtain, adequate capital as a result of negative conditions in the capital markets or otherwise, our business, results of operations and financial condition could be materially adversely affected. Additionally, such inability to obtain capital could prevent us from pursuing attractive business development opportunities, including new facility constructions or expansions of existing facilities, and business or asset acquisitions.
 
We are subject to the loss of our facility management contracts, due to terminations, non-renewals or competitive re-bids, which could adversely affect our results of operations and liquidity, including our ability to secure new facility management contracts from other government customers.
 
We are exposed to the risk that we may lose our facility management contracts primarily due to one of three reasons: the termination by a government customer with or without cause at any time; the failure by a customer to exercise its unilateral option to renew a contract with us upon the expiration of the then current term; or our failure to win the right to continue to operate under a contract that has been competitively re-bid in a procurement process upon its termination or expiration. BI’s business is also subject to the risk that it may lose contracts as a result of termination by a government customer, non-renewal by a government customer or the failure to win a competitive re-bid of a contract. Our facility management contracts typically allow a contracting governmental agency to terminate a contract with or without cause at any time by giving us written notice ranging from 30 to 180 days. If government agencies were to use these provisions to terminate, or renegotiate the terms of their agreements with us, our financial condition and results of operations could be materially adversely affected.
 
Aside from our customers’ unilateral right to terminate our facility management contracts with them at any time for any reason, there are two points during the typical lifecycle of a contract which may result in the loss by us of a facility management contract with our customers. We refer to these points as contract “renewals” and contract “re-bids.” Many of our facility management contracts with our government customers have an initial fixed term and subsequent renewal rights for one or more additional periods at the unilateral option of the customer. Because most of our contracts for youth services do not guarantee placement or revenue, we have not considered youth services in the re-bid and renewal rates. We count each government customer’s right to renew a particular facility management contract for an additional period as a separate “renewal.” For example, a five-year initial fixed term contract with customer options to renew for five separate additional one-year periods would, if fully exercised, be counted as five separate renewals, with one renewal coming in each of the five years following the initial term. As of January 3, 2010, eleven2, 2011, 32 of our facility management contracts representing 10,40719,450 beds are scheduled to expire on or before December 31, 2010,January 1, 2012, unless renewed by the customer at its sole option.option in certain cases, or unless renewed by mutual agreement in other cases. These contracts represented 19.3%21.5% of our consolidated revenues for the fiscal year ended January 3, 2010.2, 2011. We undertake substantial efforts to renew our facility management contracts. Our historical facility management contract renewal rate exceeds 90%. However, given their unilateral nature, we cannot assure you that our customers will in fact exercise their renewal options under existing contracts. In addition, in connection with contract renewals, either we or the contracting government agency have typically requested changes or adjustments to contractual terms. As a result, contract renewals may be made on terms that are more or less favorable to us than those in existence prior to the renewals.
 
We define competitive re-bids as contracts currently under our management which we believe, based on our experience with the customer and the facility involved, will be re-bid to us and other potential service providers in a competitive procurement process upon the expiration or termination of our contract, assuming all renewal options are exercised. Our determination of which contracts we believe will be competitively re-


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bid may in some cases be subjective and judgmental, based largely on our knowledge of the dynamics involving a particular contract, the customer and the facility involved. Competitive re-bids may result from the expiration of the term of a contract, including the initial fixed term plus any renewal periods, or the early termination of a contract by a customer. Competitive re-bids are often required by applicable federal or state procurement laws periodically in order to further competitive pricing and other terms for the government


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customer. Potential bidders in competitive re-bid situations include us, other private operators and other government entities.
As of January 3, 2010, six2, 2011, 15 of our facility management contracts representing 9.1% and $103.4$96.3 million (or 7.6%) of our fiscalconsolidated revenues for the year 2009 consolidated revenuesended January 2, 2011 are subject to competitive re-bid in 2010.2011. While we are pleased with our historical win rate on competitive re-bids and are committed to continuing to bid competitively on appropriate future competitive re-bid opportunities, we cannot in fact assure you that we will prevail in future re-bid situations. Also, we cannot assure you that any competitive re-bids we win will be on terms more favorable to us than those in existence with respect to the expiring contract.
 
For additional information on facility management contracts that we currently believe will be competitively re-bid during each of the next five years and thereafter, please see “Business — Government Contracts — Terminations, Renewals and Competitive Re-bids”. The loss by us of facility management contracts due to terminations, non-renewals or competitive re-bids could materially adversely affect our financial condition, results of operations and liquidity, including our ability to secure new facility management contracts from other government customers. The loss by BI of contracts with government customers due to terminations, non-renewals or competitive re-bids could materially adversely affect our financial condition, results of operations and liquidity, including our ability to secure new contracts from other government customers.
We may not fully realize the anticipated synergies and related benefits of acquisitions or we may not fully realize the anticipated synergies within the anticipated timing.
We may not be able to achieve the anticipated operating and cost synergies or long-term strategic benefits of our acquisitions within the anticipated timing or at all. For example, elimination of duplicative costs may not be fully achieved or may take longer than anticipated. For at least the first year after a substantial acquisition, and possibly longer, the benefits from the acquisition will be offset by the costs incurred in integrating the businesses and operations. We anticipate annual synergies of approximately $12-$15 million as a result of the Cornell Acquisition and annual synergies of approximately $3-$5 million as a result of the BI Acquisition. An inability to realize the full extent of, or any of, the anticipated synergies or other benefits of the Cornell Acquisition, the BI Acquisition, or any other acquisition as well as any delays that may be encountered in the integration process, which may delay the timing of such synergies or other benefits, could have an adverse effect on our business and results of operations.
We will incur significant transaction- and integration-related costs in connection with the Cornell Acquisition and the BI Acquisition.
We expect to incur non-recurring costs associated with combining the operations of Cornell and BI with our operations, including charges and payments to be made to some of their employees pursuant to “change in control” contractual obligations. Although a substantial majority of non-recurring expenses are comprised of transaction costs related to the two acquisitions, there will be other costs related to facilities and systems consolidation costs, fees and costs related to formulating integration plans and costs to perform these activities. Additional unanticipated costs may be incurred in the integration of Cornell’s and BI’s businesses. The elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of Cornell’s and BI’s businesses discussed above, may not offset incremental transaction- and other integration-related costs in the near term.
As a result of our acquisitions, our company has recorded and will continue to record a significant amount of goodwill and other intangible assets. In the future, the company’s goodwill or other intangible assets may become impaired, which could result in material non-cash charges to its results of operations.
We have a substantial amount of goodwill and other intangible assets resulting from business acquisitions. As of January 2, 2011 we had $332.8 million of goodwill and other intangible assets. We expect that our acquisition of BI on February 10, 2011 will also generate a substantial amount of goodwill and other intangible assets. At least annually, or whenever events or changes in circumstances indicate a potential


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impairment in the carrying value as defined by GAAP, we will evaluate this goodwill for impairment based on the fair value of each reporting unit. Estimated fair values could change if there are changes in the company’s capital structure, cost of debt, interest rates, capital expenditure levels, operating cash flows, or market capitalization. Impairments of goodwill or other intangible assets could require material non-cash charges to our results of operations.
 
Our growth depends on our ability to secure contracts to develop and manage new correctional, detention and mental health facilities, the demand for which is outside our control.
 
Our growth is generally dependent upon our ability to obtain new contracts to develop and manage new correctional, detention and mental health facilities, because contracts to manage existing public facilities have not to date typically been offered to private operators. BI’s growth is generally dependent upon its ability to obtain new contracts to offer electronic monitoring services, provide community-based re-entry services and provide monitoring and supervision services. Public sector demand for new privatized facilities in our areas of operation may decrease and our potential for growth will depend on a number of factors we cannot control, including overall economic conditions, governmental and public acceptance of the concept of privatization, government budgetary constraints, and the number of facilities available for privatization.
 
In particular, the demand for our correctional and detention facilities and services and BI’s services could be adversely affected by changes in existing criminal or immigration laws, crime rates in jurisdictions in which we operate, the relaxation of criminal or immigration enforcement efforts, leniency in conviction, sentencing or deportation practices, and the decriminalization of certain activities that are currently proscribed by criminal laws or the loosening of immigration laws. For example, any changes with respect to the decriminalization of drugs and controlled substances could affect the number of persons arrested, convicted, sentenced and incarcerated, thereby potentially reducing demand for correctional facilities to house them. Similarly, reductions in crime rates could lead to reductions in arrests, convictions and sentences requiring incarceration at correctional facilities. Immigration reform laws which are currently a focus for legislators and politicians at the federal, state and local level also could materially adversely impact us. Various factors outside our control could adversely impact the growth of our GEO Care business, including government customer resistance to the privatization of mental health or residential treatment facilities, and changes to Medicare and Medicaid reimbursement programs.
 
We may not be able to meet state requirements for capital investment or locate land for the development of new facilities, which could adversely affect our results of operations and future growth.
 
Certain jurisdictions, including California, where we have a significant amount of operations, have in the past required successful bidders to make a significant capital investment in connection with the financing of a particular project. If this trend were to continue in the future, we may not be able to obtain sufficient capital resources when needed to compete effectively for facility management contacts.contracts. Additionally, our success in obtaining new awards and contracts may depend, in part, upon our ability to locate land that can be leased or acquired under favorable terms. Otherwise desirable locations may be in or near populated areas and, therefore, may generate legal action or other forms of opposition from residents in areas surrounding a


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proposed site. Our inability to secure financing and desirable locations for new facilities could adversely affect our results of operations and future growth.
 
We depend on a limited number of governmental customers for a significant portion of our revenues. The loss of, or a significant decrease in business from, these customers could seriously harm our financial condition and results of operations.
 
We currently derive, and expect to continue to derive, a significant portion of our revenues from a limited number of governmental agencies. Of our governmental clients, three customers accounted for over 50% of our consolidated revenues for the fiscal year ended January 3, 2010.2, 2011. In addition, the three federal governmental agencies with correctional and detention responsibilities, the Bureau of Prisons, U.S. Immigration and Customs Enforcement, which we refer to as ICE, and the U.S. Marshals Service, accounted for 30.9%35.2% of our total consolidated revenues for the fiscal year ended January 3, 2010,2, 2011, with the Bureau of Prisons accounting for 5.2%9.5% of our total consolidated revenues for such period, ICE accounting for 11.9%13.0% of


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our total consolidated revenues for such period, and the U.S. Marshals Service accounting for 13.8%12.8% of our total consolidated revenues for such period. Also, governmentGovernment agencies from the State of Florida accounted for 16.0%13.7% of our total consolidated revenues for the fiscal year ended January 3, 2010.2, 2011. The loss of, or a significant decrease in, business from the Bureau of Prisons, ICE, U.S. Marshals Service, the State of Florida or any other significant customers could seriously harm our financial condition and results of operations. We expect to continue to depend upon these federal and state agencies and a relatively small group of other governmental customers for a significant percentage of our revenues.
 
A decrease in occupancy levels could cause a decrease in revenues and profitability.
 
While a substantial portion of our cost structure is generally fixed, most of our revenues are generated under facility management contracts which provide for per diem payments based upon daily occupancy. Several of these contracts provide minimum revenue guarantees for us, regardless of occupancy levels, up to a specified maximum occupancy percentage. However, many of our contracts have no minimum revenue guarantees and simply provide for a fixed per diem payment for each inmate/detainee/patient actually housed. As a result, with respect to our contracts that have no minimum revenue guarantees and those that guarantee revenues only up to a certain specified occupancy percentage, we are highly dependent upon the governmental agencies with which we have contracts to provide inmates, detainees and patients for our managed facilities. Under a per diem rate structure, a decrease in our occupancy rates could cause a decrease in revenues and profitability. Recently, in California and Michigan for example, there have been recommendations for the early release of inmates to relieve overcrowding conditions. When combined with relatively fixed costs for operating each facility, regardless of the occupancy level, a material decrease in occupancy levels at one or more of our facilities could have a material adverse effect on our revenues and profitability, and consequently, on our financial condition and results of operations.
 
State budgetary constraints may have a material adverse impact on us.
 
While improving economic conditions have helped lower the number of states reporting new fiscal year 2011 budget gaps and have increased the number of states reporting stable revenue outlooks for the remainder of fiscal year 2011, several states still face ongoing budget shortfalls. According to the Center on Budget and Policy Priorities,National Conference of State Legislatures, fifteen states reported new gaps since fiscal year 2011 began with the imbalance between available revenues and the funding needed for services led mostsum of these budget imbalances totaling $26.7 billion as of November 2010. Additionally, 35 states to facecurrently project budget gaps in fiscal year 2009. The vast majority of states also faced or are facing additional shortfalls in fiscal year 2010.2012. At January 3, 2010,2, 2011, we had tentwelve state correctional clients: Florida, Georgia, Alaska, Mississippi, Louisiana, Virginia, Indiana, Texas, Oklahoma, New Mexico, Arizona, and California. In response to the budget crisis, the State of California issued payment deferrals, also called promissory notes or IOU’s, to pay its vendors, creditors, and employees. During our fiscal year ended 2009,Recently, we received IOU’s from the State of California that totaled $6.7 million, all of which were settledhave experienced a delay in cash by the end of our fiscal year. Although we received payment for these IOU’s, we cannot assure you that any payment deferrals received in the future will be repaid timely or at all.receipts from California and other states may follow suit. If state budgetary constraints persist or intensify, our tentwelve state customers’ ability to pay us may be impairedand/or we may be forced to renegotiate our management contracts with those customers on less favorable terms and our financial condition, results of operations or cash flows could be materially adversely impacted. In addition, budgetary constraints at states that are not our current customers could prevent those states from outsourcing correctional, detention or mental health service opportunities that we otherwise could have pursued.


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Competition for inmates may adversely affect the profitability of our business.
 
We compete with government entities and other private operators on the basis of cost, quality and range of services offered, experience in managing facilities, and reputation of management and personnel. Barriers to entering the market for the management of correctional and detention facilities may not be sufficient to limit additional competition in our industry. In addition, some of our government customers couldmay assume the management of a facility currently managed by us upon the termination of the corresponding management contract or, if such customers have capacity at the facilities which they operate, they may take inmates currently housed in our facilities and transfer them to government operated facilities. Since we are paid on a per diem basis with no minimum guaranteed occupancy under some of our contracts, the loss of such inmates and resulting decrease in occupancy could cause a decrease in both our revenues and our profitability.


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We are dependent on government appropriations, which may not be made on a timely basis or at all and may be adversely impacted by budgetary constraints at the federal, state and local levels.
 
Our cash flow is subject to the receipt of sufficient funding of and timely payment by contracting governmental entities. If the contracting governmental agency does not receive sufficient appropriations to cover its contractual obligations, it may terminate our contract or delay or reduce payment to us. Any delays in payment, or the termination of a contract, could have a material adverse effect on our cash flow and financial condition, which may make it difficult to satisfy our payment obligations on our indebtedness, including the 6.625% Senior Notes, the 73/4% Senior Notes and the Senior Credit Facility, in a timely manner. In addition, as a result of, among other things, recent economic developments, federal, state and local governments have encountered, and may continue to encounter, unusual budgetary constraints. As a result, a number of state and local governments are under pressure to control additional spending or reduce current levels of spending which could limit or eliminate appropriations for the facilities that we operate. Additionally, as a result of these factors, we may be requested in the future to reduce our existing per diem contract rates or forego prospective increases to those rates. Budgetary limitations may also make it more difficult for us to renew our existing contracts on favorable terms or at all. Further, a number of states in which we operate are experiencing significant budget deficits for fiscal year 2010.2011. We cannot assure that these deficits will not result in reductions in per diems, delays in payment for services rendered or unilateral termination of contracts.
 
Public resistance to privatization of correctional, detention, mental health and detentionresidential facilities could result in our inability to obtain new contracts or the loss of existing contracts, which could have a material adverse effect on our business, financial condition and results of operations.
 
The management and operation of correctional, detention, mental health and detentionresidential facilities by private entities has not achieved complete acceptance by either government agencies or the public. Some governmental agencies have limitations on their ability to delegate their traditional management responsibilities for such facilities to private companies and additional legislative changes or prohibitions could occur that further increase these limitations. In addition, the movement toward privatization of correctional and detentionsuch facilities has encountered resistance from groups, such as labor unions.unions, that believe that correctional, detention, mental health and residential facilities should only be operated by governmental agencies. Changes in governing political parties could also result in significant changes to previously established views of privatization. Increased public resistance to the privatization of correctional, detention, mental health and detentionresidential facilities in any of the markets in which we operate, as a result of these or other factors, could have a material adverse effect on our business, financial condition and results of operations.
 
Our GEO Care business, which has become a material part of our consolidated revenues, poses unique risks not associated with our other businesses.
 
Our wholly-owned subsidiary, GEO Care, Inc., operates our mental health and residential treatment services, division. Thisyouth services and community-based services divisions. The GEO Care business primarily involves the delivery of quality care, innovative programming and active patient treatment services at privatized statestate-owned mental health care facilities, jails, sexually violent offender facilities, community-based service facilities and long-term care facilities. GEO Care’s business has increased substantially over the last few years, both in general and as a percentage of our overall business. For the fiscal year ended January 3, 2010,2, 2011, GEO Care generated $121.8$213.8 million in revenues, representing 10.7%16.8% of our consolidated revenues from continuing operations. GEO Care’s business poses several material risks unique to theits operation of privatized mental


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health facilities and the delivery of mental health and residential treatment services that do not exist in our core business of correctional and detention facilities management, including, but not limited to, the following:
 
 • the concept of the privatization of the mental health and residential treatment services provided by GEO Care has not yet achieved general acceptance by either government agencies or the public, which could materially limit GEO Care’s growth prospects;
 
 • GEO Care’s business is highly dependent on the continuous recruitment, hiring and retention of a substantial pool of qualified psychiatrists, physicians, nurses and other medically trained personnel as


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well as counselors and social workers which may not be available in the quantities or locations sought, or on the employment terms offered;
 • GEO Care’s business model often involves taking over outdated or obsolete facilities and operating them while it supervises the construction and development of new, more updated facilities; during this transition period, GEO Care may be particularly vulnerable to operational difficulties primarily relating to or resulting from the deteriorating nature of the older existing facilities; and
 
 • the facilities operated by GEO Care are substantially dependent on government funding, including in some cases the receipt of Medicare and Medicaid funding; the loss of such government funding for any reason with respect to any facilities operated by GEO Care could have a material adverse impact on our business.
 
The Cornell Acquisition resulted in our re-entry into the market of operating juvenile correctional facilities which may pose certain unique or increased risks and difficulties compared to other facilities.
As a result of the Cornell Acquisition, we have re-entered the market of operating juvenile correctional facilities. We intentionally exited this market a number of years ago. Operating juvenile correctional facilities may pose increased operational risks and difficulties that may result in increased litigation, higher personnel costs, higher levels of turnover of personnel and reduced profitability. Additionally, juvenile services contracts related to educational services may provide for annual collection several months after a school year is completed. We cannot assure you that we will be successful in operating juvenile correctional facilities or that we will be able to minimize the risks and difficulties involved while yielding an attractive profit margin.
Adverse publicity may negatively impact our ability to retain existing contracts and obtain new contracts.
 
Any negative publicity about an escape, riot or other disturbance or perceived poor conditions at a privately managed facility may result in publicity adverse to us and the private corrections industry in general. Any of these occurrences or continued trends may make it more difficult for us to renew existing contracts or to obtain new contracts or could result in the termination of an existing contract or the closure of one or more of our facilities, which could have a material adverse effect on our business. Such negative events may also result in a significant increase in our liability insurance costs.
 
We may incur significantstart-up and operating costs on new contracts before receiving related revenues, which may impact our cash flows and not be recouped.
 
When we are awarded a contract to manage a facility, we may incur significantstart-up and operating expenses, including the cost of constructing the facility, purchasing equipment and staffing the facility, before we receive any payments under the contract. These expenditures could result in a significant reduction in our cash reserves and may make it more difficult for us to meet other cash obligations, including our payment obligations on the 6.625% Senior Notes, the 73/4% Senior Notes and the Senior Credit Facility. In addition, a contract may be terminated prior to its scheduled expiration and as a result we may not recover these expenditures or realize any return on our investment.
 
Failure to comply with extensive government regulation and applicable contractual requirements could have a material adverse effect on our business, financial condition or results of operations.
 
The industry in which we operate is subject to extensive federal, state and local regulation, including educational, environmental, health care and safety laws, rules and regulations, which are administered by many regulatory authorities. Some of the regulations are unique to the corrections industry, and the combination of regulations affects all areas of our operations. Corrections officers and juvenile care workers are customarily required to meet certain training standards and, in some instances, facility personnel are required to be licensed and are subject to background investigations. Certain jurisdictions also require us to award subcontracts on a competitive basis or to subcontract with businesses owned by members of minority groups. We may not always successfully comply with these and other regulations to which we are subject and failure to comply can result in material penalties or the non-renewal or termination of facility management contracts.


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In addition, changes in existing regulations could require us to substantially modify the manner in which we conduct our business and, therefore, could have a material adverse effect on us.
 
In addition, private prison managers are increasingly subject to government legislation and regulation attempting to restrict the ability of private prison managers to house certain types of inmates, such as inmates


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from other jurisdictions or inmates at medium or higher security levels. Legislation has been enacted in several states, and has previously been proposed in the United States House of Representatives, containing such restrictions. Although we do not believe that existing legislation will have a material adverse effect on us, future legislation may have such an effect on us.
 
Governmental agencies may investigate and audit our contracts and, if any improprieties are found, we may be required to refund amounts we have received, to forego anticipated revenues and we may be subject to penalties and sanctions, including prohibitions on our bidding in response to Requests for Proposals, or RFPs, from governmental agencies to manage correctional facilities. Governmental agencies we contract with have the authority to audit and investigate our contracts with them. As part of that process, governmental agencies may review our performance of the contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations and standards. For contracts that actually or effectively provide for certain reimbursement of expenses, if an agency determines that we have improperly allocated costs to a specific contract, we may not be reimbursed for those costs, and we could be required to refund the amount of any such costs that have been reimbursed. If a government audit assertswe are found to have engaged in improper or illegal activities, by us,including under the United States False Claims Act, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or disqualification from doing business with certain governmental entities. AnyFor example, on December 2, 2010, a complaint against BI was unsealed in the U.S. District Court for the District of New Jersey, alleging that BI submitted false claims to the New Jersey State Parole Board with respect to services rendered at certain day reporting centers in the amount of $2.4 million through June 30, 2006, and seeking damages under the United States False Claims Act, which could subject us to the penalties and other risks discussed above. Although there can be no assurance, we do not believe this claim has merit or standing under the False Claims Act, nor do we believe that this matter will have a material adverse effect on our financial condition, results of operations or cash flows. An adverse determination in an action alleging improper or illegal activities by us could also adversely impact our ability to bid in response to RFPs in one or more jurisdictions.
 
In addition to compliance with applicable laws and regulations, our facility management contracts typically have numerous requirements addressing all aspects of our operations which we may not be able to satisfy. For example, our contracts require us to maintain certain levels of coverage for general liability, workers’ compensation, vehicle liability, and property loss or damage. If we do not maintain the required categories and levels of coverage, the contracting governmental agency may be permitted to terminate the contract. In addition, we are required under our contracts to indemnify the contracting governmental agency for all claims and costs arising out of our management of facilities and, in some instances, we are required to maintain performance bonds relating to the construction, development and operation of facilities. Facility management contracts also typically include reporting requirements, supervision andon-site monitoring by representatives of the contracting governmental agencies. Failure to properly adhere to the various terms of our customer contracts could expose us to liability for damages relating to any breaches as well as the loss of such contracts, which could materially adversely impact us.
 
We may face community opposition to facility location, which may adversely affect our ability to obtain new contracts.
 
Our success in obtaining new awards and contracts sometimes depends, in part, upon our ability to locate land that can be leased or acquired, on economically favorable terms, by us or other entities working with us in conjunction with our proposal to constructand/or manage a facility. Some locations may be in or near populous areas and, therefore, may generate legal action or other forms of opposition from residents in areas surrounding a proposed site. When we select the intended project site, we attempt to conduct business in communities where local leaders and residents generally support the establishment of a privatized correctional


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or detention facility. Future efforts to find suitable host communities may not be successful. In many cases, the site selection is made by the contracting governmental entity. In such cases, site selection may be made for reasons related to politicaland/or economic development interests and may lead to the selection of sites that have less favorable environments.
 
Our business operations expose us to various liabilities for which we may not have adequate insurance.
 
The nature of our business exposes us to various types of third-party legal claims, including, but not limited to, civil rights claims relating to conditions of confinementand/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, product liability claims, intellectual property infringement claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, contractual claims and claims for personal injury or other damages resulting from contact with our facilities, programs, electronic monitoring products, personnel or prisoners,


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including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. In addition, our management contracts generally require us to indemnify the governmental agency against any damages to which the governmental agency may be subject in connection with such claims or litigation. We maintain insurance coverage for these general types of claims, except for claims relating to employment matters, for which we carry no insurance. However, we generally have high deductible payment requirements on our primary insurance policies, including our general liability insurance, and there are also varying limits on the maximum amount of our overall coverage. As a result, the insurance we maintain to cover the various liabilities to which we are exposed may not be adequate. Any losses relating to matters for which we are either uninsured or for which we do not have adequate insurance could have a material adverse effect on our business, financial condition or results of operations. In addition, any losses relating to employment matters could have a material adverse effect on our business, financial condition or results of operations.
 
We may not be able to obtain or maintain the insurance levels required by our government contracts.
 
Our government contracts require us to obtain and maintain specified insurance levels. The occurrence of any events specific to our company or to our industry, or a general rise in insurance rates, could substantially increase our costs of obtaining or maintaining the levels of insurance required under our government contracts, or prevent us from obtaining or maintaining such insurance altogether. If we are unable to obtain or maintain the required insurance levels, our ability to win new government contracts, renew government contracts that have expired and retain existing government contracts could be significantly impaired, which could have a material adverse affect on our business, financial condition and results of operations.
 
Our international operations expose us to risks which could materially adversely affect our financial condition and results of operations.
 
For the fiscal year ended January 3, 2010,2, 2011, our international operations accounted for 12.0%15.0% of our consolidated revenues from continuing operations. We face risks associated with our operations outside the United States. These risks include, among others, political and economic instability, exchange rate fluctuations, taxes, duties and the laws or regulations in those foreign jurisdictions in which we operate. In the event that we experience any difficulties arising from our operations in foreign markets, our business, financial condition and results of operations may be materially adversely affected.
 
We conduct certain of our operations through joint ventures, which may lead to disagreements with our joint venture partners and adversely affect our interest in the joint ventures.
 
We conduct our operations in South Africa through our consolidated joint venture, South African Custodial Management Pty. Limited, which we refer to as SACM, and through our 50% owned joint venture South African Custodial Services Pty. Limited, referred to as SACS. We may enter into additional joint ventures in the future. Although we have the majority vote in our consolidated joint venture, SACM, through our ownership of 62.5% of the voting shares, we share equal voting control on all significant matters to come before SACS. These joint venture partners, as well as any future partners, may have interests that are different


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from ours which may result in conflicting views as to the conduct of the business of the joint venture. In the event that we have a disagreement with a joint venture partner as to the resolution of a particular issue to come before the joint venture, or as to the management or conduct of the business of the joint venture in general, we may not be able to resolve such disagreement in our favor and such disagreement could have a material adverse effect on our interest in the joint venture or the business of the joint venture in general.
 
We are dependent upon our senior management and our ability to attract and retain sufficient qualified personnel.
 
We are dependent upon the continued service of each member of our senior management team, including George C. Zoley, our Chairman and Chief Executive Officer, Wayne H. Calabrese, our Vice Chairman and President, and Brian R. Evans, our Chief Financial Officer.Officer, and our six officers at the Senior Vice President level and above. The unexpected loss of Dr.Mr. Zoley, Mr. CalabreseEvans or Mr. Evansany other key member of our senior management team could materially adversely affect our business, financial condition or results of operations.


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In addition, the services we provide are labor-intensive. When we are awarded a facility management contract or open a new facility, depending on the service we have been contracted to provide, we may need to hire operating management, correctional officers, security staff, physicians, nurses and other qualified personnel. The success of our business requires that we attract, develop and retain these personnel. Our inability to hire sufficient qualified personnel on a timely basis or the loss of significant numbers of personnel at existing facilities could have a material effect on our business, financial condition or results of operations.
 
Our profitability may be materially adversely affected by inflation.
 
Many of our facility management contracts provide for fixed management fees or fees that increase by only small amounts during their terms. While a substantial portion of our cost structure is generally fixed, if, due to inflation or other causes, our operating expenses, such as costs relating to personnel, utilities, insurance, medical and food, increase at rates faster than increases, if any, in our facility management fees, then our profitability could be materially adversely affected.
 
Various risks associated with the ownership of real estate may increase costs, expose us to uninsured losses and adversely affect our financial condition and results of operations.
 
Our ownership of correctional and detention facilities subjects us to risks typically associated with investments in real estate. Investments in real estate, and in particular, correctional and detention facilities, are relatively illiquid and, therefore, our ability to divest ourselves of one or more of our facilities promptly in response to changed conditions is limited. Investments in correctional and detention facilities, in particular, subject us to risks involving potential exposure to environmental liability and uninsured loss. Our operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation. In addition, although we maintain insurance for many types of losses, there are certain types of losses, such as losses from earthquakes, riots and acts of terrorism, which may be either uninsurable or for which it may not be economically feasible to obtain insurance coverage, in light of the substantial costs associated with such insurance. As a result, we could lose both our capital invested in, and anticipated profits from, one or more of the facilities we own. Further, even if we have insurance for a particular loss, we may experience losses that may exceed the limits of our coverage.
 
Risks related to facility construction and development activities may increase our costs related to such activities.
 
When we are engaged to perform construction and design services for a facility, we typically act as the primary contractor and subcontract with other companies who act as the general contractors. As primary contractor, we are subject to the various risks associated with construction (including, without limitation, shortages of labor and materials, work stoppages, labor disputes and weather interference) which could cause construction delays. In addition, we are subject to the risk that the general contractor will be unable to


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complete construction at the budgeted costs or be unable to fund any excess construction costs, even though we typically require general contractors to post construction bonds and insurance. Under such contracts, we are ultimately liable for all late delivery penalties and cost overruns.
 
The rising cost and increasing difficulty of obtaining adequate levels of surety credit on favorable terms could adversely affect our operating results.
 
We are often required to post performance bonds issued by a surety company as a condition to bidding on or being awarded a facility development contract. Availability and pricing of these surety commitments is subject to general market and industry conditions, among other factors. Recent events in the economy have caused the surety market to become unsettled, causing many reinsurers and sureties to reevaluate their commitment levels and required returns. As a result, surety bond premiums generally are increasing. If we are unable to effectively pass along the higher surety costs to our customers, any increase in surety costs could adversely affect our operating results. In addition, we may not continue to have access to surety credit or be able to secure bonds economically, without additional collateral, or at the levels required for any potential


30

facility development or contract bids. If we are unable to obtain adequate levels of surety credit on favorable terms, we would have to rely upon letters of credit under our Senior Credit Facility,senior credit facility, which would entail higher costs even if such borrowing capacity was available when desired, and our ability to bid for or obtain new contracts could be impaired.
 
We may not be able to successfully identify, consummate or integrate acquisitions.
 
We have an active acquisition program, the objective of which is to identify suitable acquisition targets that will enhance our growth. The pursuit of acquisitions may pose certain risks to us. We may not be able to identify acquisition candidates that fit our criteria for growth and profitability. Even if we are able to identify such candidates, we may not be able to acquire them on terms satisfactory to us. We will incur expenses and dedicate attention and resources associated with the review of acquisition opportunities, whether or not we consummate such acquisitions.
Additionally, even if we are able to acquire suitable targets on agreeable terms, we may not be able to successfully integrate their operations with ours. We have substantially integrated Cornell’s business with our business and expect to fully integrate Cornell by the end of 2011. We expect to begin to integrate BI’s business with our business during 2011. Achieving the anticipated benefits of any acquisition, including the Cornell Acquisition and the BI Acquisition, will depend in significant part upon whether we integrate Cornell’s and BI’s businesses in an efficient and effective manner. The actual integration of any acquisition, including Cornell and BI, may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. We may not be able to accomplish the integration process smoothly, successfully or on a timely basis. Any inability of management to successfully and timely integrate the operations of acquisition, including Cornell and BI, could have a material adverse effect on our business and results of operations. We may also assume liabilities in connection with acquisitions that we would otherwise not be exposed to.
 
Adverse developments in our relationship with our employees could adversely affect our business, financial condition or results of operations.
 
At January 3, 2010,2, 2011, approximately 19%17% of our workforce was covered by collective bargaining agreements.agreements and, as of such date, collective bargaining agreements with approximately 7% of our employees were set to expire in less than one year. While only approximately 19%17% of our workforce schedule is covered by collective bargaining agreements, increases in organizational activity or any future work stoppages could have a material adverse effect on our business, financial condition, or results of operations.
Risks Related to the 73/4% Senior Notes
The notes and the related guarantees are effectively subordinated to our and the subsidiary guarantors’ senior secured indebtedness and the indebtedness of our subsidiaries that do not guarantee the notes.
The notes and the related guarantees are unsecured and therefore will be effectively subordinated to our secured indebtedness, including borrowings under our Senior Credit Facility, to the extent of the value of the assets securing such indebtedness. As of January 3, 2010, borrowings under our Senior Credit Facility were $213.0 million. In addition, the indenture governing the notes will allow us and the subsidiary guarantors to incur a significant amount of additional indebtedness and to secure indebtedness, including any indebtedness incurred under credit facilities. In the event we or the guarantors become the subject of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding, our assets and the assets of the guarantors securing indebtedness could not be used to pay you until after all secured claims against us and the guarantors have been fully paid. In addition, the notes and the related guarantees will be effectively subordinated to all existing and future liabilities of our subsidiaries that do not guarantee the notes, including the trade payables.
We may not be able to repurchase the notes in the event of a change of control because the terms of our indebtedness or lack of funds may prevent us from doing so.
Upon a change of control, each holder of the notes will have the right to require us to repurchase their notes at 101% of their principal amount, plus accrued and unpaid interest, and, liquidated damages, if any, to the date of repurchase. The terms of the Senior Credit Facility limit our ability to repurchase the notes in the event of a change of control. Any future agreement governing any of our indebtedness may contain similar restrictions and provisions. Accordingly, it is possible that restrictions in the Senior Credit Facility or other indebtedness that may be incurred in the future will not allow the required repurchase of notes upon a change of control. Even if such repurchase is permitted by the terms of our then existing indebtedness, we may not have sufficient funds available to satisfy our repurchase obligations.


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Risks Related to Our Acquisition of BI and BI’s Business
Fraudulent conveyance laws may permit courtsTechnological change could cause BI’s electronic monitoring products and technology to voidbecome obsolete or require the subsidiary guaranteesredesign of the notes in specific circumstances,BI’s electronic monitoring products, which would interfere with the payment of the subsidiary guarantees.could have a material adverse effect on BI’s business.
 
UnderTechnological changes within the federal bankruptcy lawselectronic monitoring business in which BI conducts business may require BI to expend substantial resources in an effort to developand/or utilize new electronic monitoring products and comparable provisionstechnology. BI may not be able to anticipate or respond to technological changes in a timely manner, and BI’s response may not result in successful electronic monitoring product development and timely product introductions. If BI is unable to anticipate or timely respond to technological changes, BI’s business could be adversely affected and could compromise BI’s competitive position, particularly if BI’s competitors announce or introduce new electronic monitoring products and services in advance of state fraudulent transfer laws, any guarantee madeBI. Additionally, new electronic monitoring products and technology face the uncertainty of customer acceptance and reaction from competitors.
Any negative changes in the level of acceptance of or resistance to the use of electronic monitoring products and services by governmental customers could have a material adverse effect on BI’s business, financial condition and results of operations.
Governmental customers use electronic monitoring products and services to monitor low risk offenders as a way to help reduce overcrowding in correctional facilities, as a monitoring and sanctioning tool, and to promote public safety by imposing restrictions on movement and serving as a deterrent for alcohol usage. If the level of acceptance of or resistance to the use of electronic monitoring products and services by governmental customers were to change over time in a negative manner so that governmental customers decide to decrease their usage levels and contracting for electronic monitoring products and services, this could have a material adverse effect on BI’s business, financial condition and results of operations.
BI depends on a limited number of third parties to manufacture and supply quality infrastructure components for its electronic monitoring products. If BI’s suppliers cannot provide the components or services BI requires and with such quality as BI expects, BI’s ability to market and sell its electronic monitoring products and services could be harmed.
If BI’s suppliers fail to supply components in a timely manner that meets BI’s quantity, quality, cost requirements, or technical specifications, BI may not be able to access alternative sources of these components within a reasonable period of time or at commercially reasonable rates. A reduction or interruption in the supply of components, or a significant increase in the price of components, could have a material adverse effect on BI’s marketing and sales initiatives, which could adversely affect its financial condition and results of operations.
As a result of our acquisition of BI, we may face new risks as we enter a new line of business.
As a result of our acquisition of BI, a company that provides electronic monitoring services, we will enter into a new line of business. We do not have prior experience in the electronic monitoring services industry and the success of BI will be subject to all of the uncertainties regarding the development of a new business. Although we intend to integrate BI’s products and services, there can be no assurance regarding the successful integration and market acceptance of the electronic monitoring services by our clients.
The interruption, delay or failure of the provision of BI’s services or information systems could adversely affect BI’s business.
Certain segments of BI’s business depend significantly on effective information systems. As with all companies that utilize information technology, BI is vulnerable to negative impacts if information is inadvertently interrupted, delayed, compromised or lost. BI routinely processes, stores and transmits large amounts of data for its clients. The interruption, delay or failure of BI’s services, information systems or client data could cost BI both monetarily and in terms of client good will and lost business. Such interruptions,


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delays or failures could damage BI’s brand and reputation. BI experienced such an issue in October 2010 with one of its offender monitoring servers that caused the server’s automatic notification system to be temporarily disabled resulting in delayed notifications to customers when a database exceeded its data storage capacity. The issue was resolved within approximately 12 hours. BI continually works to update and maintain effective information systems and while BI believes the issue encountered in October 2010 was an isolated issue that has been fully resolved, there can be no assurance that BI will not experience an interruption, delay or failure of its services, information systems or client data that would adversely impact its business.
An inability to acquire, protect or maintain BI’s intellectual property and patents could harm BI’s ability to compete or grow.
BI has numerous United States and foreign patents issued as well as a number of United States patents pending. There can be no assurance that the protection afforded by these patents will provide BI with a competitive advantage, prevent BI’s competitors from duplicating BI’s products, or that BI will be able to assert its intellectual property rights in infringement actions.
In addition, any of our subsidiariesBI’s patents may be challenged, invalidated, circumvented or rendered unenforceable. There can be no assurance that BI will be successful should one or more of BI’s patents be challenged for any reason. If BI’s patent claims are rendered invalid or unenforceable, or narrowed in scope, the patent coverage afforded to BI’s products could be voided,impaired, which could significantly impede BI’s ability to market its products, negatively affect its competitive position and harm its business and operating results.
There can be no assurance that any pending or future patent applications held by BI will result in an issued patent, or that if patents are issued to BI, that such patents will provide meaningful protection against competitors or against competitive technologies. The issuance of a patent is not conclusive as to its validity or its enforceability. The United States federal courts or equivalent national courts or patent offices elsewhere may invalidate BI’s patents or find them unenforceable. Competitors may also be able to design around BI’s patents. BI’s patents and patent applications cover particular aspects of its products. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. If these developments were to occur, it could have an adverse effect on BI’s sales. BI may not be able to prevent the unauthorized disclosure or use of its technical knowledge or trade secrets by consultants, vendors, former employees and current employees, despite the existence of nondisclosure and confidentiality agreements and other contractual restrictions. Furthermore, the laws of foreign countries may not protect BI’s intellectual property rights effectively or to the same extent as the laws of the United States. If BI’s intellectual property rights are not adequately protected, BI may not be able to commercialize its technologies, products or services and BI’s competitors could commercialize BI’s technologies, which could result in a decrease in BI’s sales and market share that would harm its business and operating results.
Additionally, the expiration of any of BI’s patents may reduce the barriers to entry into BI’s electronic monitoring line of business and may result in loss of market share and a decrease in BI’s competitive abilities, thus having a potential adverse effect on BI’s financial condition, results of operations and cash flows.
BI’s products could infringe on the intellectual property rights of others, which may lead to litigation that could itself be costly, could result in the payment of substantial damages or royalties, and/or prevent BI from using technology that is essential to its products.
There can be no assurance that BI’s current products or products under development will not infringe any patent or other intellectual property rights of third parties. If infringement claims are brought against BI, whether successfully or not, these assertions could distract management from other tasks important to the success of BI’s business, necessitate BI expending potentially significant funds and resources to defend or settle such claims and harm BI’s reputation. BI cannot be certain that it will have the financial resources to defend itself against any patent or other intellectual property litigation.


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In addition, intellectual property litigation or claims undercould force BI to do one or more of the guarantee made by any of our subsidiaries could be subordinated to all other obligations of any such subsidiary, if the subsidiary, at the time it incurred the obligations under any guarantee:following:
 
 • incurredcease selling or using any products that incorporate the obligations withasserted intellectual property, which would adversely affect BI’s revenue;
• pay substantial damages for past use of the intent to hinder, delay or defraud creditors;asserted intellectual property;
• obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; or
 
 • received less than reasonably equivalent value,redesign or didrename, in the case of trademark claims, BI’s products to avoid infringing the intellectual property rights of third parties, which may not receive fair consideration, in exchange for incurring those obligations;be possible and
(1) was insolvent or rendered insolvent by reason of that incurrence;
(2) was engaged in a business or transaction for which the subsidiary’s remaining assets constituted unreasonably small capital; or
(3) intended could be costly and time-consuming if it is possible to incur, or believed that it would incur, debts beyond its ability to pay those debts as they mature.do.
 
In addition, any payment bythe event of an adverse determination in an intellectual property suit or proceeding, or BI’s failure to license essential technology, BI’s sales could be harmedand/or its costs could be increased, which would harm BI’s financial condition.
BI licenses intellectual property rights, including patents, from third party owners. If such owners do not properly maintain or enforce the intellectual property underlying such licenses, BI’s competitive position and business prospects could be harmed. BI’s licensors may also seek to terminate its license.
BI is a party to a number of licenses that guarantor pursuantgive BI rights to third-party intellectual property that is necessary or useful to its guaranteebusiness. BI’s success will depend in part on the ability of its licensors to obtain, maintain and enforce its licensed intellectual property. BI’s licensors may not successfully prosecute any applications for or maintain intellectual property to which BI has licenses, may determine not to pursue litigation against other companies that are infringing such intellectual property, or may pursue such litigation less aggressively than BI would. Without protection for the intellectual property BI licenses, other companies might be able to offer similar products for sale, which could adversely affect BI’s competitive business position and harm its business prospects.
If BI loses any of its right to use third-party intellectual property, it could adversely affect its ability to commercialize its technologies, products or services, as well as harm its competitive business position and its business prospects.
BI may be subject to costly product liability claims from the use of its electronic monitoring products, which could damage BI’s reputation, impair the marketability of BI’s products and services and force BI to pay costs and damages that may not be covered by adequate insurance.
Manufacturing, marketing, selling, testing and the operation of BI’s electronic monitoring products and services entail a risk of product liability. BI could be voided and requiredsubject to be returnedproduct liability claims to the guarantor, orextent its electronic monitoring products fail to a fund for the benefit of the creditors of the guarantor. In any such case, your right to receive payments in respect of the notes from any such guarantor would be effectively subordinated to all indebtedness and other liabilities of that guarantor.
A legal challenge to the obligations under any guarantee on fraudulent conveyance groundsperform as intended. Even unsuccessful claims against BI could focus on any benefits received in exchange for the incurrence of those obligations. We believe that each of our subsidiaries making a guarantee received reasonably equivalent value for incurring the guarantee, but a court may disagree with our conclusion or elect to apply a different standard in making its determination. The measures of insolvency for purposes of the fraudulent transfer laws vary depending on the law appliedresult in the proceedingexpenditure of funds in litigation, the diversion of management time and resources, damage to determine whetherBI’s reputation and impairment in the marketability of BI’s electronic monitoring products and services. While BI maintains liability insurance, it is possible that a fraudulent transfer has occurred. Generally, however, an entitysuccessful claim could be made against BI, that the amount of BI’s insurance coverage would not be considered insolvent if:
• the sum of its debts, including contingent liabilities, is greater than the fair saleable value of all of its assets;
• the present fair saleable value of its assets is less than the amount that would be required to pay its probable liabilities on its existing debts, including contingent liabilities, as they become absolute and mature; or
• it cannot pay its debts as they become due.
We cannot assure you, however, asadequate to what standard a court would apply in making these determinations. If a guaranteecover the costs of the notes is voided as a fraudulent conveyancedefending against or is found to be unenforceable for any other reason, you will not havepaying such a claim, against the guarantor.or that damages payable by BI would harm its business.


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Risks Related to ourOur Common Stock
 
Fluctuations in the stock market as well as general economic, market and industry conditions may harm the market price of our common stock.
 
The market price of our common stock has been subject to significant fluctuation. The market price of our common stock may continue to be subject to significant fluctuations in response to operating results and other factors, including:
 
 • actual or anticipated quarterly fluctuations in our financial results, particularly if they differ from investors’ expectations;
 
 • changes in financial estimates and recommendations by securities analysts;


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 • general economic, market and political conditions, including war or acts of terrorism, not related to our business;
 
 • actions of our competitors and changes in the market valuations, strategy and capability of our competitors;
 
 • our ability to successfully integrate acquisitions and consolidations; and
 
 • changes in the prospects of the privatized corrections and detention industry.
 
In addition, the stock market in recent years has experienced price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These fluctuations may harm the market price of our common stock, regardless of our operating results.
 
Future sales of our common stock in the public market could adversely affect the trading price of our common stock that we may issue and our ability to raise funds in new securities offerings.
 
Future sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. We cannot predict the effect, if any, that future sales of shares of common stock or the availability of shares of common stock for future sale will have on the trading price of our common stock.
 
Various anti-takeover protections applicable to us may make an acquisition of us more difficult and reduce the market value of our common stock.
 
We are a Florida corporation and the anti-takeover provisions of Florida law impose various impediments to the ability of a third party to acquire control of our company, even if a change of control would be beneficial to our shareholders. In addition, provisions of our articles of incorporation may make an acquisition of us more difficult. Our articles of incorporation authorize the issuance by our Board of Directors of “blank check” preferred stock without shareholder approval. Such shares of preferred stock could be given voting rights, dividend rights, liquidation rights or other similar rights superior to those of our common stock, making a takeover of us more difficult and expensive. We also have adopted a shareholder rights plan, commonly known as a “poison pill,” which could result in the significant dilution of the proportionate ownership of any person that engages in an unsolicited attempt to take over our company and, accordingly, could discourage potential acquirers. In addition to discouraging takeovers, the anti-takeover provisions of Florida law and our articles of incorporation, as well as our shareholder rights plan, may have the impact of reducing the market value of our common stock.
 
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have an adverse effect on our business and the trading price of our common stock.
 
If we fail to maintain the adequacy of our internal controls, in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as such standards are modified, supplemented or amended from time to time, our exposure to fraud and errors in accounting and financial reporting could materially


44

increase. Also, inadequate internal controls would likely prevent us from concluding on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Such failure to achieve and maintain effective internal controls could adversely impact our business and the price of our common stock.
 
We may issue additional debt securities that could limit our operating flexibility and negatively affect the value of our common stock.
 
In the future, we may issue additional debt securities which may be governed by an indenture or other instrument containing covenants that could place restrictions on the operation of our business and the execution of our business strategy in addition to the restrictions on our business already contained in the agreements governing our existing debt. In addition, we may choose to issue debt that is convertible or


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exchangeable for other securities, including our common stock, or that has rights, preferences and privileges senior to our common stock. Because any decision to issue debt securities will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future debt financings and we may be required to accept unfavorable terms for any such financings. Accordingly, any future issuance of debt could dilute the interest of holders of our common stock and reduce the value of our common stock.
 
Because we have no current plans to pay dividends, shareholders will benefit from an investment in our common stock only if it appreciates in value.
 
We currently intend to retain our future earnings, if any, to finance the further expansion and continued growth of our business and do not have any current plans to pay any cash dividends. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which shareholders purchase their shares.
 
Item 1B.  Unresolved Staff Comments
 
None.
 
Item 2.  Properties
 
Our corporate offices are located in Boca Raton, Florida, under a 101/2 -year lease agreement which was renewedamended in October 2007.September 2010. The current lease expires March 2020 and has two5-year renewal options and expires infor a full term ending March 2018.2030. In addition, we lease office space for our eastern regional office in Charlotte, North Carolina; our central regional office in New Braunfels,San Antonio, Texas; and our western regional office in Carlsbad,Los Angeles, California. As a result of the Cornell acquisition in August 2010, we are also currently leasing office space in Houston, Texas and Pittsburgh, Pennsylvania. We also lease office space in Sydney, Australia, in Sandton, South Africa, and in Berkshire, England, through our overseas affiliates to support our Australian, South African, and UK operations, respectively. We consider our office space adequate for our current operations.
 
See the Facilities listing under Item 1 for a list of the correctional, detention and mental health properties we own or lease in connection with our operations.
 
Item 3.  Legal Proceedings
 
On September 15, 2006, a jury in an inmate wrongful death lawsuit in a Texas state court awarded a $47.5 million verdict against us. In October 2006, the verdict was entered as a judgment against us in the amount of $51.7 million. The lawsuit, captioned Gregorio de la Rosa, Sr., et al., v. Wackenhut Corrections Corporation, (causeno. 02-110) in the District Court, 404th Judicial District, Willacy County, Texas, is being administered under the insurance program established by The Wackenhut Corporation, our former parent company, in which we participated until October 2002. Policies secured by us under that program provide $55.0 million in aggregate annual coverage. In October 2009, this case was settled in an amount within the insurance coverage limits and the insurer has now paid the settlement amount. On February 8, 2010, the Court of Appeals, 13th District of Texas, entered judgment dismissing the appeal and the case has been concluded.
In June 2004, we received notice of a third-party claim for property damage incurred during 2001 and 2002 at several detention facilities thatformerly operated by our Australian subsidiary formerly operated.subsidiary. The claim (No. SC 656 of 2006 to be heard by the Supreme Court of the Australian Capital Territory) relates to property damage caused by detainees at the detention facilities. The notice was given by the Australian government’s insurance provider and did not specify the amount of damages being sought. In August 2007, legal proceedings in this matter were formally commenced when we were served with noticea lawsuit (Commonwealth of a complaintAustralia v. Australasian Connectional Services PTY, Limited No. SC 656) was filed against us byin the CommonwealthSupreme Court of Australiathe Australian Capital Territory seeking damages of up to approximately AUD 18 million or $16.2$18.4 million as of January 2, 2011, plus interest. We believe that we have several defenses to the allegations underlying the litigation and the amounts sought and intend to vigorously


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defend our rights with respect to this matter. We have established a reserve based on our estimate of the most probable loss based on the facts and circumstances known to date and the advice of our legal counsel in connection with this matter. Although the outcome of this matter cannot be


34

predicted with certainty, based on information known to date and our preliminary review of the claim and related reserve for loss, we believe that, if settled unfavorably, this matter could have a material adverse effect on our financial condition, results of operations andor cash flows. We are uninsured for any damages or costs that we may incur as a result of this claim, including the expenses of defending the claim.
During the fourth fiscal quarter of 2009, the Internal Revenue Service (“IRS”) completed its examination of our U.S. federal income tax returns for the years 2002 through 2005. Following the examination, the IRS notified us that it proposed to disallow a deduction that we realized during the 2005 tax year. In December of 2010 we reached an agreement with the office of IRS Appeals on the amount of the deduction, which is currently being reviewed at a higher level. As a result of the pending agreement, we reassessed the probability of potential settlement outcomes and reduced our income tax accrual of $4.9 million by $2.3 million during the fourth quarter of 2010. However, if the disallowed deduction were to be sustained in full, it could result in a potential tax exposure to us of $15.4 million. We believe in the merits of our position and intend to defend our rights vigorously, including our rights to litigate the matter if it cannot be resolved favorably with the office of IRS Appeals. If this matter is resolved unfavorably, it may have a material adverse effect on our financial position, results of operations and cash flows.
In October 2010, the IRS audit for our U.S. income tax returns for fiscal years 2006 through 2008 was concluded and resulted in no changes to our income tax positions.
Our South Africa joint venture has been in discussions with the South African Revenue Service (“SARS”) with respect to the deductibility of certain expenses for the tax periods 2002 through 2004. The joint venture operates the Kutama Sinthumule Correctional Centre and accepted inmates from the South African Department of Correctional Services in 2002. During 2009, SARS notified us that it proposed to disallow these deductions. We appealed these proposed disallowed deductions with SARS and in October 2010, received a notice of favorable ruling relative to these proceedings. If SARS should appeal, we believe we have defenses in these matters and intend to defend our rights vigorously. If resolved unfavorably, our maximum exposure would be $2.6 million.
On April 27, 2010, a putative stockholder class action was filed in the District Court for Harris County, Texas by Todd Shelby against Cornell, members of Cornell’s board of directors, individually, and GEO. The plaintiff filed an amended complaint on May 28, 2010, alleging, among other things, that the Cornell directors, aided and abetted by Cornell and GEO, breached their fiduciary duties in connection with the Cornell Acquisition. Among other things, the amended complaint sought to enjoin Cornell, its directors and GEO from completing the Cornell Acquisition and sought a constructive trust over any benefits improperly received by the defendants as a result of their alleged wrongful conduct. The parties reached a settlement which has been approved by the court and, as a result, the court dismissed the action with prejudice. The settlement of this matter did not have a material adverse impact on our financial condition, results of operations or cash flows.
 
The nature of our business exposes us to various types of claims or litigation against us, including, but not limited to, civil rights claims relating to conditions of confinementand/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, product liability claims, intellectual property infringement claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, indemnification claims by our customers and other third parties, contractual claims and claims for personal injury or other damages resulting from contact with our facilities, programs, electronic monitoring products, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. Except as otherwise disclosed above, we do not expect the outcome of any pending claims or legal proceedings to have a material adverse effect on our financial condition, results of operations or cash flows.
 
During the fourth fiscal quarter of 2009, the Internal Revenue Service (IRS) completed its examination of our U.S. federal income tax returns for the years 2002 through 2005. Following the examination, the IRS notified us that it proposes to disallow a deduction that we realized during the 2005 tax year. We have appealed this proposed disallowed deduction with the IRS’s appeals division and believe we have valid defenses to the IRS’s position. However, if the disallowed deduction were to be sustained on appeal, it could result in a potential tax exposure of up to $15.4 million. We believe in the merits of our position and intend to defend our rights vigorously, including our rights to litigate the matter if it cannot be resolved favorably at the IRS’s appeals level. If this matter is resolved unfavorably, it may have a material adverse effect on our financial position, results of operations and cash flows.
Item 4.  Submission of Matters to a Vote of Security Holders(Removed and Reserved)
No matters were submitted to a vote of our shareholders during the quarter ended January 3, 2010.


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PART II
 
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock trades on the New York Stock Exchange under the symbol “GEO.” The following table shows the high and low prices for our common stock, as reported by the New York Stock Exchange, for each of the four quarters of fiscal years 20092010 and 2008.2009. The prices shown have been rounded to the nearest $1/100. The approximate number of shareholders of record as of February 16, 201022, 2011 is 113, which includes shares held in street name.291.
 
                                
 2009 2008  2010 2009
Quarter
 High Low High Low  High Low High Low
First $19.25  $11.18  $28.71  $22.01  $23.18  $17.91  $19.25  $11.18 
Second  18.56   13.06   29.48   22.10   22.27   18.23   18.56   13.06 
Third  20.56   17.22   26.96   18.00   23.73   20.04   20.56   17.22 
Fourth  22.41   19.75   21.62   12.65   26.77   23.43   22.41   19.75 
 
We did not buy back anyOn February 22, 2010, we announced that our Board of Directors approved a stock repurchase program for up to $80.0 million of our common stock which was effective through March 31, 2011. The stock repurchase program was implemented through purchases made from time to time in the open market or in privately negotiated transactions, in accordance with applicable Securities and Exchange Commission requirements. The program also included repurchases from time to time from executive officers or directors of vested restricted stockand/or vested stock options. The stock repurchase program did not obligate us to purchase any specific amount of our common stock and could be extended or suspended at any time at our discretion. During the fiscal year ended January 2, 2011, we completed the program and purchased 4.0 million shares of our common stock at a cost of $80.0 million using cash on hand and cash flow from operating activities. Included in the 4.0 million shares repurchased were 1.1 million shares repurchased from executive officers at an aggregate cost of $22.3 million. Also during 2009 or 2008. the fiscal year ended January 2, 2011, we repurchased 0.3 million shares of common stock from certain directors and executives for an aggregate cost of $7.1 million. These purchases all occurred during our first, second and third fiscal quarters. There were no repurchases of common stock in the fourth fiscal quarter.
We did not pay any cash dividends on our common stock for fiscal years 20092010 and 2008.2009. Future dividends, if any, will depend, on our future earnings, our capital requirements, our financial condition and on such other factors as our Board of Directors may take into consideration. On February 22, 2010, we announced that our Board of Directors approved a stock repurchase program for up to $80.0 million of GEO common stock effective through March 31, 2011. See the Liquidity and Capital Resources section in “Item 7 of Management’s Discussion and Analysis” for further description of our stock repurchase program. In addition to these factors, the indenture governing our $250.0 million 73/4% Senior Notes, the indenture governing our 6.625% Senior Notes and our Senior Credit Facility also place material restrictions on our ability to pay dividends. See the Liquidity and Capital Resources section in “Item 7 of Management’s Discussion and Analysis” andNote 13-Debt14-Debt in “Item 8—8 — Financial Statements and Supplementary Data”, for further description of these restrictions.
Equity Compensation Plan Information
The following table sets forth information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our equity compensation plans as of January 3, 2010, including our 1994 Second Stock Option Plan, our 1999 Stock Option Plan, our 2006 Stock Incentive Plan and our 1995 Non-Employee Director Stock Option Plan. Our shareholders have approved all of these plans.
             
  (a)  (b)  (c) 
        Number of Securities
 
        Remaining Available for
 
  Number of Securities
     Future Issuance Under
 
  to be Issued Upon
  Weighted-Average
  Equity Compensation
 
  Exercise of
  Exercise Price of
  Plans (Excluding
 
  Outstanding Options,
  Outstanding Options,
  Securities Reflected in
 
Plan Category
 Warrants and Rights  Warrants and Rights  Column (a)) 
 
Equity compensation plans approved by security holders  2,806,957  $10.26   553,044 
Equity compensation plans not approved by security holders  —   —   — 
             
Total  2,806,957  $10.26   553,044 
             


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Performance Graph
 
The following performance graph compares the performance of our common stock to the New York Stock Exchange CompositeWilshire 5000 Total Market Index and to an index of peer companies we selected,the S&P 500 Commercial Services and Supplies Index and is provided in accordance with Item 201(e) ofRegulation S-K.
 
Comparison of Five-Year Cumulative Total Return*
The GEO Group, Inc., Wilshire 500 Equity, and
S&P 500 Commercial Services and Supplies Indexes
(Performance through January 3, 2010)2, 2011)
 
 
                        
        S&P 500
        S&P 500
        Commercial
        Commercial
  The GEO
  Wilshire 5000
  Services and
  The GEO
  Wilshire 5000
  Services and
Date  Group, Inc.  Equity  Supplies  Group, Inc.  Equity  Supplies
December 31, 2004  $100.00   $100.00   $100.00 
December 31, 2005  $86.27   $106.38   $103.49   $100.00   $100.00   $100.00 
December 31, 2006  $211.74   $123.16   $117.83   $245.55   $115.88   $113.86 
December 31, 2007  $316.03   $130.07   $117.71   $366.49   $122.52   $113.74 
December 31, 2008  $203.50   $81.64   $90.28   $235.99   $76.77   $87.24 
December 31, 2009  $246.95   $104.74   $100.08   $286.39   $99.36   $96.70 
December 31, 2010  $322.77   $117.11   $105.18 
                  
 
Assumes $100 invested on December 31, 20042005 in our common stock and the Index companies.
 
 
*Total return assumes reinvestment of dividends.


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Item 6.  Selected Financial Data
 
The selected consolidated financial data should be read in conjunction with our consolidated financial statements and the notes to the consolidated financial statements (in thousands, except per share data).
 
                                                                      
Fiscal Year Ended:(1)
 2009 2008 2007 2006 2005  2010 2009 2008 2007 2006 
Results of Continuing Operations:
                                                                                
Revenues $1,141,090   100.0% $1,043,006   100.0% $976,299   100.0% $818,439   100.0% $580,440   100.0% $1,269,968   100.0% $1,141,090   100.0% $1,043,006   100.0% $976,299   100.0% $818,439   100.0%
Operating income from continuing operations  135,188   11.8%  113,790   10.9%  90,086   9.2%  60,401   7.4%  5,742   1.2%  140,473   11.1%  135,445   11.9%  114,396   11.0%  90,727   9.3%  60,603   7.4%
Income from continuing operations $66,300   5.8% $61,453   5.9% $38,089   3.9% $28,000   3.4% $5,183   0.9% $62,790   4.9% $66,469   5.8% $61,829   5.9% $38,486   3.9% $28,125   3.4%
                                          
Income from continuing operations per common share:                                        
Income from continuing operations per common share attributable to The GEO Group, Inc.:                                        
Basic:
 $1.30      $1.22      $0.80      $0.81      $0.18      $1.15      $1.30      $1.22      $0.80      $0.81     
                      
Diluted:
 $1.28      $1.19      $0.77      $0.78      $0.17      $1.13      $1.28      $1.19      $0.77      $0.78     
                      
Weighted Average Shares Outstanding:
                                                                                
Basic  50,879       50,539       47,727       34,442       28,740       55,379       50,879       50,539       47,727       34,442     
Diluted  51,922       51,830       49,192       35,744       30,030       55,989       51,922       51,830       49,192       35,744     
Financial Condition:
                                                                                
Current assets $279,634      $281,920      $264,518      $322,754      $229,292      $425,134      $279,634      $281,920      $264,518      $322,754     
Current liabilities  177,448       185,926       186,432       173,703       136,519       270,462       177,448       185,926       186,432       173,703     
Total assets  1,447,818       1,288,621       1,192,634       743,453       639,511       2,423,776       1,447,818       1,288,621       1,192,634       743,453     
Long-term debt, including current portion (excluding non-recourse debt and capital leases)  457,538       382,126       309,273       154,259       220,004       807,837       457,538       382,126       309,273       154,259     
Total Shareholders’ equity $665,098      $579,597      $529,347      $249,907      $110,434      $1,039,490      $665,098      $579,597      $529,347      $249,907     
Operational Data:
                                                                                
Contracts/awards  72       76       73       69       56     
Facilities in operation  57       59       57       56       54       118       57       59       57       56     
Capacity of contracts  52,772       53,364       47,913       46,460       46,177       81,225       52,772       53,364       47,913       46,460     
Compensated mandays(2)  17,332,696       15,946,932       15,026,626       13,778,031       10,911,886       18,939,370       17,332,696       15,946,932       15,026,626       13,778,031     
 
 
(1)Our fiscal year ends on the Sunday closest to the calendar year end. The fiscal year ended January 3, 2010 contained 53 weeks. The fiscal year ends for all other periods presented contained 52 weeks.
 
(2)Compensated resident daysmandays are calculated as follows: (a) for per diem rate facilities — the number of beds occupied by residents on a daily basis during the fiscal year; and (b) for fixed rate facilities — the capacity of the facility multiplied by the number of days the facility was in operation during the fiscal year.
 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Introduction
 
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of numerous factors including, but not limited to, those described above under “Item 1A. Risk Factors,” and “Forward-Looking Statements — Safe Harbor” below. The discussion should be read in conjunction with the consolidated financial statements and notes thereto.
 
We are a leading provider of government-outsourced services specializing in the management of correctional, detention and mental health, and residential treatment and re-entry facilities, and the provision of community based services and youth services in the United States, Australia, South Africa, the United Kingdom and Canada. On August 12, 2010, we acquired Cornell and as of January 2, 2011, our worldwide operations included the managementand/or ownership of approximately 81,000 beds at 118 correctional, detention and residential treatment facilities including projects under development. We operate a broad range of correctional


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and detention facilities including maximum, medium and minimum security prisons, immigration detention centers,


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minimum security detention centers, and mental health, and residential treatment and community based re-entry facilities. Our correctional and detention management services involve the provision of security, administrative, rehabilitation, education, health and food services, primarily at adult male correctional and detention facilities. Our mental health and residential treatment services are operated through our wholly-owned subsidiary GEO Care Inc. and involve the delivery ofpartnering with governments to deliver quality care, innovative programming and active patient treatment primarily at privatizedin privately operated state mental health care facilities. Our Community Based Services, acquired from Cornell and also operated through GEO Care, involve supervision of adult parolees and probationers and provide temporary housing, programming, employment assistance and other services with the intention of the successful reintegration of residents into the community. Youth Services, also acquired from Cornell and operating under GEO Care, include residential, detention and shelter care and community based services along with rehabilitative, educational and treatment programs. We also develop new facilities based on contract awards, using our project development expertise and experienceexperiences to design facilities, construct and finance what we believe arestate-of-the-art facilities that maximize security and efficiency.
As of the fiscal year ended January 3, 2010, we managed 57 facilities totaling approximately 52,800 beds worldwide We also provide secure transportation services for offender and had an additional 4,325 beds under development at three facilities, including an expansion and renovation of one vacant facility which we own, the expansion of one facility we currently own and operate and a new 2,000-bed facility which we will manage upon completion.detainee populations as contracted. For the fiscal year ended January 3, 2010,2, 2011, we had consolidated revenues of $1.1$1.3 billion and we maintained an average companywide facility occupancy rate of 94.6%.94.5%, excluding facilities that are either idle or under development.
 
Contract Awards and Facility Activations
On March 29, 2009, we completed the intake of 192 detainees in the expansion of the 576-bed Robert A. Deyton Detention Facility in Lovejoy, Georgia. We manage this facility under a20-year contract, inclusive of three five-year option periods, with the Office of the Federal Detention Trustee. We lease this facility from Clayton County under a20-year agreement, with two five-year renewal options and house detainees under custody of the United States Marshals Service.
In April 2009, GEO Australia, our wholly owned subsidiary, was awarded a new contract by the New South Wales, Department of Corrective Services for the continued management and operation of the 790-bed Junee Correctional Centre. GEO Australia has managed thisminimum-to-medium security center since its opening in 1993. The new contract has a term of 15 years, inclusive of renewal options.
On April 23, 2009, we announced a contract award by ICE for the continued management of the Broward Transition Center, which we own, located in Deerfield Beach, Florida. The new contract has an initial term of one year, effective April 1, 2009, with four one-year renewal option periods. Under the terms of the new agreement, the contract capacity at this detention center was increased from 600 to 700 beds, and the transportation responsibilities will be expanded.
Also in April 2009, we opened the new $62.0 million Florida Civil Commitment Center replacement facility in Arcadia, Florida, which we refer to as FCCC. The new facility has a capacity of 720 residents, and it was specifically designed to provide treatment services to sexually violent predators in a highly secure facility. FCCC is operated by GEO Care, our wholly-owned subsidiary, under a management contract with the Florida Department of Children and Families.
On May 4, 2009, we announced that we executed a contract with Bexar County, Texas Commissioners’ Court for the continued operation of the 688-bed Central Texas Detention Facility located in San Antonio, Texas. This facility, which is owned by Bexar County, houses detainees predominately for the U.S. Marshals Service. We have managed this facility since 1988. The new contract will have a term of ten years and became effective April 29, 2009.
On June 29, 2009, we announced that our wholly owned U.K. subsidiary, GEO UK, assumed management functions at the 260-bed Harmondsworth Immigration Removal Centre located in London, England. Our subsidiary manages and operates this removal centre under a three-year contract with the United Kingdom Border Agency. Additionally, this removal centre will be expanded by 360 beds bringing its capacity to 620 beds when the expansion is completed in June 2010.
On July 1, 2009, we announced the opening of a 384-bed expansion of the 1,500-bed Graceville Correctional Facility in Graceville, Florida. We operate this correctional facility under a managed-only contract with the State of Florida Department of Management Services and completed intake of inmates during the third quarter of 2009.


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On October 1, 2009, our wholly-owned Australian subsidiary announced that it had been selected by Corrective Services New South Wales to operate and manage the 823-bed Parklea Correctional Centre in Australia. The contract has a term of five years with one three-year extension option. We began operating this facility on October 31, 2009.
On October 20, 2009, we announced a contract award by ICE for the continued management of our Northwest Detention Center located in Tacoma, Washington. This detention center houses immigration detainees for ICE. The new contract has an initial term of one year effective October 24, 2009, with four one-year renewal option periods. Under the terms of the new agreement, the contract capacity at this detention center was increased from 1,030 to 1,575 beds, and the transportation responsibilities will be expanded.
Critical Accounting Policies
 
We believe that the accounting policies described below are critical to understanding our business, results of operations and financial condition because they involve the more significant judgments and estimates used in the preparation of our consolidated financial statements. We have discussed the development, selection and application of our critical accounting policies with the audit committee of our Board of Directors, and our audit committee has reviewed our disclosure relating to our critical accounting policies in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We routinely evaluate our estimates based on historical experience and on various other assumptions that our management believes are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted.
 
Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed below, are also critical to understanding our consolidated financial statements. The notes to our consolidated financial statements contain additional information related to our accounting policies and should be read in conjunction with this discussion.
 
Reserves for Insurance Losses
The nature of our business exposes us to various types of third-party legal claims, including, but not limited to, civil rights claims relating to conditions of confinementand/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, product liability claims, intellectual property infringement claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, contractual claims and claims for personal injury or other damages resulting from contact with our facilities, programs, electronic monitoring products, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. In addition, our management contracts generally require us to indemnify the governmental agency against any damages to which the governmental agency may be subject in connection with such claims or litigation. We maintain a broad program of insurance coverage for these general


50

types of claims, except for claims relating to employment matters, for which we carry no insurance. There can be no assurance that our insurance coverage will be adequate to cover all claims to which we may be exposed. It is our general practice to bring merged or acquired companies into our corporate master policies in order to take advantage of certain economies of scale.
We currently maintain a general liability policy and excess liability policy for U.S. Detention & Corrections, GEO Care’s Community-Based Services, GEO Care’s Youth Services and BI, Inc. with limits of $62.0 million per occurrence and in the aggregate. A separate $35.0 million limit applies to medical professional liability claims arising out of correctional healthcare services. Our wholly owned subsidiary, GEO Care, Inc., has a separate insurance program for their residential services division, with a specific loss limit of $35.0 million per occurrence and in the aggregate with respect to general liability and medical professional liability. We are uninsured for any claims in excess of these limits. We also maintain insurance to cover property and other casualty risks including, workers’ compensation, environmental liability and automobile liability.
For most casualty insurance policies, we carry substantial deductibles or self-insured retentions — $3.0 million per occurrence for general liability and hospital professional liability, $2.0 million per occurrence for workers’ compensation and $1.0 million per occurrence for automobile liability. In addition, certain of our facilities located in Florida and other high-risk hurricane areas carry substantial windstorm deductibles. Since hurricanes are considered unpredictable future events, no reserves have been established to pre-fund for potential windstorm damage. Limited commercial availability of certain types of insurance relating to windstorm exposure in coastal areas and earthquake exposure mainly in California may prevent us from insuring some of our facilities to full replacement value.
With respect to our operations in South Africa, the United Kingdom and Australia, we utilize a combination of locally-procured insurance and global policies to meet contractual insurance requirements and protect the Company. Our Australian subsidiary is required to carry tail insurance on a general liability policy providing an extended reporting period through 2011 related to a discontinued contract.
Of the reserves discussed above, our most significant insurance reserves relate to workers’ compensation and general liability claims. These reserves are undiscounted and were $40.2 million and $27.2 million as of January 2, 2011 and January 3, 2010, respectively. We use statistical and actuarial methods to estimate amounts for claims that have been reported but not paid and claims incurred but not reported. In applying these methods and assessing their results, we consider such factors as historical frequency and severity of claims at each of our facilities, claim development, payment patterns and changes in the nature of our business, among other factors. Such factors are analyzed for each of our business segments. Our estimates may be impacted by such factors as increases in the market price for medical services and unpredictability of the size of jury awards. We also may experience variability between our estimates and the actual settlement due to limitations inherent in the estimation process, including our ability to estimate costs of processing and settling claims in a timely manner as well as our ability to accurately estimate our exposure at the onset of a claim. Because we have high deductible insurance policies, the amount of our insurance expense is dependent on our ability to control our claims experience. If actual losses related to insurance claims significantly differ from our estimates, our financial condition, results of operations and cash flows could be materially adversely impacted.
Income Taxes
Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Significant judgments are required to determine the consolidated provision for income taxes. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. Realization of our deferred tax assets is dependent upon many factors such as tax regulations applicable to the jurisdictions in which we operate, estimates of future taxable income and the character of such taxable income. Additionally, we must use significant judgment in addressing uncertainties in the application of complex tax laws and regulations. If actual circumstances differ from our assumptions, adjustments to the carrying value of deferred tax assets or liabilities may be required, which may result in an adverse impact on the results of our


51

operations and our effective tax rate. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria. Management has not made any significant changes to the way we account for our deferred tax assets and liabilities in any year presented in the consolidated financial statements. Based on our estimate of future earnings and our favorable earnings history, management currently expects full realization of the deferred tax assets net of any recorded valuation allowances. Furthermore, tax positions taken by us may not be fully sustained upon examination by the taxing authorities. In determining the adequacy of our provision (benefit) for income taxes, potential settlement outcomes resulting from income tax examinations are regularly assessed. As such, the final outcome of tax examinations, including the total amount payable or the timing of any such payments upon resolution of these issues, cannot be estimated with certainty. To the extent that the provision for income taxes increases/decreases by 1% of income before income taxes, equity in earnings of affiliate, discontinued operations, and consolidated income from continuing operations would have decreased/increased by $1.0 million, $1.0 million and $0.9 million, respectively, for the years ended January 2, 2011, January 3, 2010 and December 28, 2008.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Buildings and improvements are depreciated over 2 to 50 years. Equipment and furniture and fixtures are depreciated over 3 to 10 years. Accelerated methods of depreciation are generally used for income tax purposes. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. We perform ongoing assessments of the estimated useful lives of the property and equipment for depreciation purposes. The estimated useful lives are determined and continually evaluated based on the period over which services are expected to be rendered by the asset. If the assessment indicates that assets will be used for a longer or shorter period than previously anticipated, the useful lives of the assets are revised, resulting in a change in estimate. In our first fiscal quarter ended April 4, 2010, we completed a depreciation study on our owned correctional facilities. Based on the results of the depreciation study, we revised the estimated useful lives of certain of our buildings from our historical estimate of 40 years to a revised estimate of 50 years, effective January 4, 2010. Maintenance and repairs are expensed as incurred. Interest is capitalized in connection with the construction of correctional and detention facilities. Capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life.
We review long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. If a long-lived asset is part of a group that includes other assets, the unit of accounting for the long-lived asset is its group. Generally, we group our assets by facility for the purposes of considering whether any impairment exists. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset or asset group and its eventual disposition. When considering the future cash flows of a facility, we make assumptions based on historical experience with our customers, terminal growth rates and weighted average cost of capital. While these estimates do not generally have a material impact on the impairment charges associated with managed-only facilities, the sensitivity increases significantly when considering the impairment on facilities that are either owned or leased by us. Events that would trigger an impairment assessment include deterioration of profits for a business segment that has long-lived assets, or when other changes occur that might impair recovery of long-lived assets such as the termination of a management contract. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset.
Revenue Recognition
 
Facility management revenues are recognized as services are provided under facility management contracts with approved government appropriations based on a net rate per day per inmate or on a fixed monthly rate. CertainA limited number of our contracts have provisions upon which a small portion of the revenue for the contract is based on the performance of certain targets. Revenue based on the performance of certain


52

targets is less than 2% of our consolidated annual revenues. These performance targets are based on specific criteria to be met over specific periods of time. Such criteria includes our ability to achieve certain contractual benchmarks relative to the quality of service we provide, non-occurrence of certain disruptive events, effectiveness of our quality control programs and our responsiveness to customer requirements and concerns. For the limited number of contracts where revenue is based on the performance of certain targets, as defined in the specific contract. In these cases, we recognize revenue is either (i) recorded pro rata when the amounts arerevenue is fixed and determinable andor (ii) recorded when the specified time period over which the conditionslapses. In many instances, we are a party to more than one contract with a single entity. In these instances, each contract is accounted for separately. We have been satisfied has lapsed.not recorded any revenue that is at risk due to future performance contingencies.
 
Construction revenues are recognized from our contracts with certain customers to perform construction and design services (“(���project development services”) for various facilities. In these instances, we act as the primary developer and subcontract with bonded Nationaland/or Regional Design Build Contractors. These construction revenues are recognized as earned on a percentage of completion basis measured by the percentage of costs incurred to date as compared to the estimated total cost for each contract. Provisions for estimated losses on uncompleted contracts and changes to cost estimates are made in the period in which we determine that such losses and changes are probable. Typically, we enter into fixed price contracts and do not perform additional work unless approved change orders are in place. Costs attributable to unapproved change orders are expensed in the period in which the costs are incurred if we believe that it is not probable that the costs will be recovered through a change in the contract price. If we believe that it is probable that the costs will be recovered through a change in the contract price, costs related to unapproved change orders are expensed in the period in which they are incurred, and contract revenue is recognized to the extent of the costs


40

incurred. Revenue in excess of the costs attributable to unapproved change orders is not recognized until the change order is approved. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined. As the primary contractor, we are exposed to the various risks associated with construction, including the risk of cost overruns. Accordingly, we record our construction revenue on a gross basis and include the related cost of construction activities in Operating Expenses.
 
When evaluating multiple element arrangements for certain contracts where we provide project development services to our clients in addition to standard management services, we follow revenue recognition guidance for multiple element arrangements. This revenue recognition guidance related to multiple deliverables in an arrangement provides guidance on determining if separate contracts should be evaluated as a single arrangement and if an arrangement involves a single unit of accounting or separate units of accounting and if the arrangement is determined to have separate units, how to allocate amounts received in the arrangement for revenue recognition purposes. In instances where we provide these project development services and subsequent management services, we evaluate these arrangements to determine if there are multiple elements that require separate accounting treatment and could result in a deferral of revenues. Generally, our arrangements resultgenerally, the arrangement results in no delivered elements at the onset of the agreement but rather theseagreement. The elements are delivered over the contract period as the project development and management services are performed. Project development services are not provided separately to a customer without a management contract. We can determine the fair value of the undelivered management services contract and therefore, the value of the project development deliverable, is determined using the residual method.
 
Reserves for Insurance Losses
The nature of our business exposes us to various types of third-party legal claims, including, but not limited to, civil rights claims relating to conditions of confinementand/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, contractual claims and claims for personal injury or other damages resulting from contact with our facilities, programs, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. In addition, our management contracts generally require us to indemnify the governmental agency against any damages to which the governmental agency may be subject in connection with such claims or litigation. We maintain a broad program of insurance coverage for these general types of claims, except for claims relating to employment matters, for which we carry no insurance. There can be no assurance that our insurance coverage will be adequate to cover all claims to which we may be exposed.
We currently maintain a general liability policy and excess liability policy for all U.S. corrections operations with limits of $62.0 million per occurrence and in the aggregate. A separate $35.0 million limit applies to medical professional liability claims arising out of correctional healthcare services. Our wholly owned subsidiary, GEO Care, is insured under their own program for general liability and medical professional liability with a specific loss limit of $35.0 million per occurrence and in the aggregate. We are uninsured for any claims in excess of these limits. For most casualty insurance policies, we carry substantial deductibles or self-insured retentions — $3.0 million per occurrence for general liability and hospital professional liability, $2.0 million per occurrence for workers’ compensation and $1.0 million per occurrence for automobile liability. We also maintain insurance to cover property and other casualty risks including, workers’ compensation, environmental liability and automobile liability.
With respect to our operations in South Africa, the United Kingdom and Australia, we utilize a combination of locally-procured insurance and global policies to meet contractual insurance requirements and protect the Company. Our Australian subsidiary is required to carry tail insurance on a general liability policy providing an extended reporting period through 2011 related to a discontinued contract.
In addition, certain of our facilities located in Florida and determined by insurers to be in high-risk hurricane areas carry substantial windstorm deductibles. Since hurricanes are considered unpredictable future events, no reserves have been established to pre-fund for potential windstorm damage. Limited commercial availability of certain types of insurance relating to windstorm exposure in coastal areas and earthquake exposure mainly in California may prevent us from insuring some of our facilities to full replacement value.
Of the reserves discussed above, our most significant insurance reserves relate to workers’ compensation and general liability claims. These reserves are undiscounted and were $27.2 million and $25.5 million as of January 3, 2010 and December 28, 2008, respectively. We use statistical and actuarial methods to estimate


41

amounts for claims that have been reported but not paid and claims incurred but not reported. In applying these methods and assessing their results, we consider such factors as historical frequency and severity of claims at each of our facilities, claim development, payment patterns and changes in the nature of our business, among other factors. Such factors are analyzed for each of our business segments. Our estimates may be impacted by such factors as increases in the market price for medical services and unpredictability of the size of jury awards. We also may experience variability between our estimates and the actual settlement due to limitations inherent in the estimation process, including our ability to estimate costs of processing and settling claims in a timely manner as well as our ability to accurately estimate our exposure at the onset of a claim. Because we have high deductible insurance policies, the amount of our insurance expense is dependent on our ability to control our claims experience. If actual losses related to insurance claims significantly differ from our estimates, our financial condition, results of operations and cash flows could be materially impacted.
Income Taxes
Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Significant judgments are required to determine the consolidated provision for income taxes. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. Realization of our deferred tax assets is dependent upon many factors such as tax regulations applicable to the jurisdictions in which we operate, estimates of future taxable income and the character of such taxable income. Based on our estimate of future earnings and our favorable earnings history, management currently expects full realization of the deferred tax assets net of any recorded valuation allowances. Additionally, judgment must be made as to certain tax positions which may not be fully sustained upon review by tax authorities. If actual circumstances differ from our assumptions, adjustments to the carrying value of deferred tax assets or liabilities may be required, which may result in an adverse impact on the results of our operations and our effective tax rate. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria. Management has not made any significant changes to the way we account for our deferred tax assets and liabilities in any year presented in the consolidated financial statements. To the extent that the provision for income taxes increases/decreases by 1% of income before income taxes, equity in earnings of affiliate and discontinued operations, consolidated income from continuing operations would have decreased/increased by $1.0 million, $0.9 million and $0.6 million, respectively, for the years ended January 3, 2010, December 28, 2008 and December 30, 2007.
Property and Equipment
As of January 3, 2010, we had $998.6 million in long-lived property and equipment held for use. Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Buildings and improvements are depreciated over 2 to 40 years. Equipment and furniture and fixtures are depreciated over 3 to 10 years. Accelerated methods of depreciation are generally used for income tax purposes. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. We perform ongoing evaluations of the estimated useful lives of the property and equipment for depreciation purposes. The estimated useful lives are determined and continually evaluated based on the period over which services are expected to be rendered by the asset. Maintenance and repairs are expensed as incurred. Interest is capitalized in connection with the construction of correctional and detention facilities. Capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life.
We review long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. If a long-lived asset is part of a group that includes other assets, the unit of accounting for the long-lived asset is its group. Generally, we group our assets by facility for the purposes of considering whether any impairment exists. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset or asset group and its eventual disposition. When considering the future cash flows of a facility, we make assumptions based on historical experience with our customers, terminal growth rates and


42

weighted average cost of capital. While these estimates do not generally have a material impact on the impairment charges associated with managed-only facilities, the sensitivity increases significantly when considering the impairment on facilities that are either owned or leased by us. Events that would trigger an impairment assessment include deterioration of profits for a business segment that has long-lived assets, or when other changes occur that might impair recovery of long-lived assets such as the termination of a management contract. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset.
Impact of Future Accounting Pronouncements
 
The following accounting standards have an implementation datesdate subsequent to the fiscal year ended January 3, 20102, 2011 and as such, have not yet been adopted by us:us during the fiscal year ended January 2, 2011:
 
In October 2009, the FASB issued ASUNo. 2009-13 which provides amendments to revenue recognition criteria for separating consideration in multiple element arrangements. As a result of these amendments, multiple deliverable arrangements will be separated more frequently than under existing GAAP. The amendments, among other things, establish the selling price of a deliverable, replace the term fair value with selling price and eliminate the residual method so that consideration would be allocated to the deliverables using the relative selling price method. This amendment also significantly expands the disclosure requirements for multiple element arrangements. This guidance will become effective for us


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prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We do not anticipatebelieve that the adoptionimplementation of this standard will have a material impact on our financial position, results of operations oroperation and cash flows.
 
In December 2009,2010, the FASB issued ASUNo. 2009-17,2010-28 previously known as FAS No. 167, “Amendmentsrelated to FASB Interpretation No. FIN 46(R)” (SFAS No. 167)goodwill and intangible assets. Under current guidance, testing for goodwill impairment is a two-step test. When a goodwill impairment test is performed, an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). The objective of ASU NoNo. 2009-172010-28 amends the manneris to address circumstances in which entities evaluate whether consolidation is required for VIEs.have reporting units with zero or negative carrying amounts. The consolidation requirements under the revisedamendments in this guidance require us to consolidate a VIE if the entity has all threemodify Step 1 of the following characteristics (i) the power, through voting rightsgoodwill impairment test for reporting units with zero or similar rights,negative carrying amounts to direct the activities of a legalrequire an entity that most significantly impact the entity’s economic performance, (ii) the obligation to absorb the expected lossesperform Step 2 of the legal entity (iii) the right to receive the expected residual returns of the legal entity. Further,goodwill impairment test if it is more likely than not that a goodwill impairment exists after considering certain qualitative characteristics, as described in this guidance. This guidance requires that companies continually evaluate VIEs for consolidation, rather than assessing based upon the occurrence of triggering events. As a result of adoption, which becomeswill become effective for the Company in fiscal years, and interim and annual periods within those years, beginning after NovemberDecember 15, 2009, companies are required to enhance disclosures about how their involvement2010. We currently do not have any reporting units with a VIE affects its financial statementszero or negative carrying value and exposure to risks. Wewe do not anticipateexpect that the adoptionimpact of this accounting standard will have a material impact on our financial position, results of operationsand/or cash flows.
Also, in December 2010, the FASB issued ASUNo. 2010-29 related to financial statement disclosures for business combinations entered into after the beginning of the first annual reporting period beginning on or after December 15, 2010. The amendments in this guidance specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. These amendments also expand the supplemental pro forma disclosures under current guidance for business combinations to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We do not expect that the impact of this accounting standard will have a material impact on our financial position, results of operationsand/or cash flows.
 
Results of Operations
 
The following discussion should be read in conjunction with our consolidated financial statements and the notes to the consolidated financial statements accompanying this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those described under “Item 1A. Risk Factors” and those included in other portions of this report.
 
The discussion of our results of operations below excludes the results of our discontinued operations for all periods presented.reported in 2009 and 2008.
 
For the purposes of the discussion below, “2010” means the 52 weeks fiscal year ended January 2, 2011, “2009” means the 53 weeksweek fiscal year ended January 3, 2010, “2008” means the 52 week fiscal year ended December 28, 2008, and “2007”“2008” means the 52 weeks fiscal year ended December 30, 2007.28, 2008. Our fiscal quarters in the fiscal years discussed below are referred to as “First Quarter,” “Second Quarter,” “Third Quarter” and “Fourth Quarter.”


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20092010 versus 20082009
 
Revenues
 
                         
  2009  % of Revenue  2008  % of Revenue  $ Change  % Change 
  (Dollars in thousands) 
 
U.S. corrections
 $784,066   68.7% $711,038   68.2% $73,028   10.3%
International services
  137,171   12.0%  128,672   12.3%  8,499   6.6%
GEO Care
  121,818   10.7%  117,399   11.3%  4,419   3.8%
Facility construction and design
  98,035   8.6%  85,897   8.2%  12,138   14.1%
                         
Total
 $1,141,090   100.0% $1,043,006   100.0% $98,084   9.4%
                         
                         
  2010  % of Revenue  2009  % of Revenue  $ Change  % Change 
  (Dollars in thousands) 
 
U.S. Detention & Corrections
 $842,417   66.4% $772,497   67.7% $69,920   9.1%
International Services
  190,477   15.0%  137,171   12.0%  53,306   38.9%
GEO Care
  213,819   16.8%  133,387   11.7%  80,432   60.3%
Facility Construction & Design
  23,255   1.8%  98,035   8.6%  (74,780)  (76.3)%
                         
Total
 $1,269,968   100.0% $1,141,090   100.0% $128,878   11.3%
                         
 
U.S. correctionsDetention & Corrections
 
The increase in revenues for U.S. correctionsDetention & Corrections in 2010 compared to 2009 is primarily due to the acquisition of Cornell in August 2010 which contributed additional revenues of $85.5 million. Increases at other facilities in 2010 included: (i) $7.2 million from Blackwater River Correctional Facility located in Milton, Florida which we completed the construction and began intake of inmates in October 2010; and (ii) an aggregate increase of $13.3 million due to pre diem rate increases and increases in population. These increases were offset by: (i) an aggregate decrease of $9.1 million due to modest per diem reductions and lower populations at certain facilities; (ii) an aggregate decrease of $29.7 million due to our terminated contracts at the McFarland Community Correctional Facility (“McFarland”) in McFarland, California, Moore Haven Correctional Facility (“Moore Haven”) in Moore Haven, Florida, the Jefferson County Downtown Jail (“Jefferson County”) in Beaumont, Texas, Newton County Correctional Center (“Newton County”) in Newton, Texas, Graceville Correctional Facility (“Graceville”) in Graceville, Florida, South Texas Intermediate Sanction Facility (“South Texas ISF”) in Houston, Texas and Bridgeport Correctional Center (“Bridgeport”) in Bridgeport, Texas.
The number of compensated mandays in U.S. Detention & Corrections facilities increased by 0.7 million to 15.1 million mandays in 2010 from 14.4 million mandays in 2009 due to the acquisition of Cornell which resulted in an additional 1.4 million mandays. This increase in mandays was offset by a net decrease of 0.8 million mandays related to the terminated contracts previously discussed. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. Detention & Corrections facilities was 93.8% of capacity in 2010, excluding the terminated contracts discussed above and idle facilities. The average occupancy in our U.S. Detention & Corrections facilities was 93.6% in 2009 excluding idle facilities and taking into account the reclassification of our Bronx Community Re-entry Center and our Brooklyn Community Re-entry Center to GEO Care during 2010.
International Services
Revenues for our International Services segment during 2010 increased significantly due to several factors. Our new management contract for the operation of the Parklea Correctional Centre in Sydney, Australia (“Parklea”) which started in the fourth fiscal quarter of 2009 contributed an increase in revenues for fiscal year 2010 of $21.9 million. Our contract for the management of the Harmondsworth Immigration Removal Centre in London, England (“Harmondsworth”) experienced an increase in revenues of $11.4 million due to the activation of the 360-bed expansion in July 2010. In addition, we experienced increases at other international facilities due to contractual increases linked to the inflationary index at some facilities and additional services provided at other facilities. In the aggregate, these increases contributed revenues of $2.6 million in fiscal year 2010. We also experienced an increase in revenues of $21.3 million during fiscal year 2010 due to the fluctuation of foreign currencies. These increases were partially offset by a decrease in


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revenues of $3.7 million related to our terminated contract for the operation of the Melbourne Custody Centre in Melbourne, Australia.
GEO Care
The increase in revenues for GEO Care in 2010 compared to 2009 is primarily attributable to the acquisition of Cornell in August 2010, which contributed $65.7 million in additional revenues. Additionally, revenues from our operation of the Columbia Regional Care Center in Columbia, South Carolina, as a result of our acquisition of Just Care, Inc., which we refer to as Just Care, in September 2009, contributed an increase of $17.8 million compared to 2009. These increases were offset by aggregate decreases of $2.7 million at other GEO Care Residential Treatment Services facilities. These decreases were primarily the result of lower per diem rates and lower average daily populations. In Fourth Quarter 2010, we reclassified the Bronx Community Re-entry Center and Brooklyn Community Re-entry Center from U.S. Detention & Corrections to GEO Care. The segment data has been revised for all periods presented to reflect the approach used by management to evaluate the performance of the business.
The number of compensated mandays for GEO Care increased by 0.6 million to 1.3 million mandays in 2010 from 0.7 million mandays in 2009 primarily due to the acquisition of Cornell. The average occupancy at our GEO Care facilities was 92.4% of capacity in 2010, excluding idle facilities and taking into account the reclassification of our Bronx Community Re-entry Center and our Brooklyn Community Re-entry Center. The average occupancy at our GEO Care facilities was 99.5% in 2009. The decline in average occupancy is a result of the Cornell acquisition. We added 21 community-based facilities and 17 youth services facilities which are occupancy sensitive. In 2009, the residential treatment facilities were primarily fixed fee arrangements.
Facility Construction & Design
The decrease in revenues from the Facility Construction & Design segment in 2010 is primarily due to a decrease in construction activities at Blackwater River Correctional Facility in Milton, Florida which resulted in a decrease in revenues of $68.3 million. The Blackwater River Correctional Facility construction was completed in October 2010 and we began intake of inmates on October 5, 2010. In addition, there was $4.7 million decrease at the Florida Civil Commitment Center (“FCCC”) due to the completion of construction in Second Quarter 2009.
Operating Expenses
                         
     % of Segment
     % of Segment
       
  2010  Revenues  2009  Revenues  $ Change  % Change 
  (Dollars in thousands) 
 
U.S. Detention & Corrections
 $598,275   71.0% $558,313   72.3% $39,962   7.2%
International Services
  176,399   92.6%  127,706   93.1%  48,693   38.1%
GEO Care
  179,473   83.9%  113,426   85.0%  66,047   58.2%
Facility Construction & Design
  20,873   89.8%  97,654   99.6%  (76,781)  (78.6)%
                         
Total
 $975,020   76.8% $897,099   78.6% $77,921   8.7%
                         
Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and mental health and GEO Care facilities and expenses incurred in our Facility Construction & Design segment.
U.S. Detention & Corrections
The increase in operating expenses for U.S. Detention & Corrections reflects the impact of our acquisition of Cornell which resulted in an increase in operating expenses of $63.1 million. We also experienced increases to operating expenses due to the activation of new management contracts at D. Ray James Correctional Facility and


56

Blackwater River Correctional Facility. Certain of our other facilities also experienced increases in expenses associated with increases in populations and contract modifications resulting in additional services. These increases were offset by decreases in expenses of approximately $30 million as a result of terminated contracts at McFarland, Moore Haven, Jefferson County, Graceville, Newton County, South Texas ISF, Bridgeport and Fort Worth.
International Services
Expenses increased at all of our international subsidiaries consistent with the revenue increases and are slightly less as a percentage of segment revenues due to a decrease in start up costs in 2010 compared to 2009. The operating expenses associated with the new contracts in the United Kingdom and Australia for the operation of Harmondsworth and Parklea accounted for a combined increase over the fiscal year 2009 of $26.6 million since these facilities were in operation for the entire year in 2010. Changes in foreign currency translation rates contributed an increase in operating expenses of approximately $20.0 million.
GEO Care
Operating expenses increased by $66.0 million in 2010 compared to 2009 primarily due to an increase of $51.7 million in operating expenses related to the acquisition of Cornell. The remaining increase was primarily attributable to an increase of $16.4 million of operating expenses at the Columbia Regional Care Center in Columbia, South Carolina as a result of our acquisition of Just Care in Fourth Quarter 2009.
Facility Construction & Design
The decrease in operating expenses for Facility Construction & Design is primarily attributable to the completion of construction at Blackwater River Correctional Facility in October 2010 which resulted in a decrease of $70.3 million, and the completion of our expansion of FCCC in Second Quarter 2009 which decreased operating expenses by $5.1 million.
Depreciation and Amortization
                         
     % of Segment
     % of Segment
       
  2010  Revenue  2009  Revenue  $ Change  % Change 
  (Dollars in thousands) 
 
U.S. Detention & Corrections
 $39,744   4.7% $35,855   4.6% $3,889   10.8%
International Services
  1,767   0.9%  1,448   1.1%  319   22.0%
GEO Care
  6,600   3.1%  2,003   1.5%  4,597   229.5%
Facility Construction & Design
  —   —   —   —   —   — 
                         
Total
 $48,111   3.8% $39,306   3.4% $8,805   22.4%
                         
U.S. Detention & Corrections
U.S. Detention & Corrections depreciation and amortization expense increased by $6.4 million as a result of the tangible and intangible assets purchased in connection with our acquisition of Cornell. In addition, the completion of the Aurora ICE Processing Center and the Northwest Detention Center construction projects in Q2 2010 increased depreciation expense by $0.9 million and $0.8 million, respectively. These increases were partially offset by lower depreciation on existing facilities related to the depreciation study on our owned correctional facilities conducted in the first fiscal quarter of 2010. Based on the results of the depreciation study, we revised the estimated useful lives of certain of our buildings from our historical estimate of 40 years to a revised estimate of 50 years, effective January 4, 2010. For the fiscal year 2010, the change resulted in a reduction in depreciation expense of approximately $3.7 million.


57

International Services
Overall, depreciation and amortization expense increased slightly in the fiscal year 2010 over the fiscal year 2009 primarily due to our new management contracts for the operation of Parklea and the Harmondsworth expansion, as discussed above, and also from changes in the foreign exchange rates.
GEO Care
The increase in depreciation and amortization expense for GEO Care in the fiscal year 2010 compared to the fiscal year 2009 is primarily due to our acquisitions of Just Care and Cornell which contributed increases to depreciation and amortization expense of $0.7 million and $3.1 million, respectively.
Other Unallocated Operating Expenses
                         
  2010 % of Revenue 2009 % of Revenue $ Change % Change
  (Dollars in thousands)
 
General and Administrative Expenses
 $106,364   8.4% $69,240   6.1% $37,124   53.6%
General and administrative expenses comprise substantially all of our other unallocated operating expenses primarily including corporate management salaries and benefits, professional fees and other administrative expenses. These expenses increased significantly in 2010 compared to 2009. Increases in general and administrative expenses of $11.3 million are related to the general and administrative expenses of Cornell from August 12, 2010 to January 2, 2011. The remaining increase is primarily the result of acquisition related expenses incurred for both the acquisitions of Cornell and BI which resulted in nonrecurring charges of approximately $25 million. Excluding the impact of Cornell and the $25 million in acquisition related costs, general and administrative expenses as a percentage of revenue in 2010 would have been 6.3%. Acquisition related costs consisted primarily of advisory, legal, and bank fees. We also experienced increases related to normal compensation adjustments and professional fees.
Non Operating Income and Expense
Interest Income and Interest Expense
                         
  2010 % of Revenue 2009 % of Revenue $ Change % Change
  (Dollars in thousands)
 
Interest Income
 $6,271   0.5% $4,943   0.4% $1,328   26.9%
Interest Expense
 $40,707   3.2% $28,518   2.5% $12,189   42.7%
The majority of our interest income generated in 2010 and 2009 is from the cash balances at our Australian subsidiary. The increase in the current period over the same period last year is mainly attributable to currency exchange rates and to higher average cash balances.
The increase in interest expense of $12.2 million is primarily attributable to higher outstanding average borrowings under our Senior Credit Facility which increased interest expense by $6.5 million. In addition, our 73/4% Senior Notes, which were issued in October 2009 and were outstanding for the entire fiscal year 2010, resulted in an increase to interest expense of $3.3 million. We also had less capitalized interest which increased interest expense in 2010 by $0.8 million. Capitalized interest was $4.1 million and $4.9 million in 2010 and 2009, respectively. Total consolidated indebtedness at January 2, 2011 and January 3, 2010, excluding non-recourse debt and capital lease liabilities, was $807.8 million and $457.5 million, respectively.
We have interest rate swap agreements with respect to a notional amount of $100.0 million of the 73/4% Senior Notes which resulted in a savings in interest expense of $3.1 million and $0.5 million for the fiscal years ended January 2, 2011 and January 3, 2010, respectively.
Provision for Income Taxes
                 
  2010 Effective Rate 2009 Effective Rate
  (Dollars in thousands)
 
Income Tax Provision
 $39,532   40.3% $42,079   40.1%


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The effective tax rate during 2010 was 40.3%, compared to 40.1% in 2009. The 2010 effective tax rate increased due to the impact of nondeductible transaction costs, which was partially offset by a decrease in the reserve for unrecognized tax benefits of $2.3 million. In the absence of the transaction costs and the change in the reserve, the effective tax rate would be 39.4%. The effective tax rate in 2009 included an increase in the reserve for unrecognized tax benefits.
Equity in Earnings of Affiliate
                         
  2010 % of Revenue 2009 % of Revenue $ Change % Change
  (Dollars in thousands)
 
Equity in Earnings of Affiliate
 $4,218   0.3% $3,517   0.3% $701   19.9%
Equity in earnings of affiliates represent the earnings of SACS in 2010 and 2009 and reflects an overall increase in earnings in 2010 primarily related to foreign currency exchange rates and to a lesser extent contractual increases.
2009 versus 2008
Revenues
                         
  2009  % of Revenue  2008  % of Revenue  $ Change  % Change 
  (Dollars in thousands) 
 
U.S. Detention & Corrections
 $772,497   67.7% $700,587   67.2% $71,910   10.3%
International Services
  137,171   12.0%  128,672   12.3%  8,499   6.6%
GEO Care
  133,387   11.7%  127,850   12.3%  5,537   4.3%
Facility Construction & Design
  98,035   8.6%  85,897   8.2%  12,138   14.1%
                         
Total
 $1,141,090   100.0% $1,043,006   100.0% $98,084   9.4%
                         
U.S. Detention & Corrections
The increase in revenues for U.S. Detention & Corrections in 2009 compared to 2008 is primarily attributable to project activations, capacity increases and per diem rate increases at existing facilities and new management contracts. The most significant increases to revenue were as follows: (i) revenues increased $24.1 million in total due to the activation of three new contracts in Third and Fourth Quarter 2008 for the management of Joe Corley Detention Facility in Conroe, Texas, Northeast New Mexico Detention Facility in Clayton, New Mexico and Maverick County Detention Facility in Maverick, Texas; (ii) revenues increased $24.6 million in 2009 as a result of our opening of our Rio Grande Detention Center in Laredo, Texas in Fourth Quarter 2008; (iii) revenues increased $6.1 million as a result of the 500-bed expansion of East Mississippi Corrections Facility in Meridian, Mississippi, which was completed in October 2008; (iv) revenues increased $5.1 million at the Robert A. Deyton Detention Facility in Lovejoy, Georgia as a result of the 192-bed activation in January 2009; (v) revenues increased $6.1 million at the Broward Transition Center due to an increase in per diem rates and population; (vi) we experienced an increase of revenues of $9.9 million related to contract modifications and additional services at our South Texas Detention Complex in Pearsall, Texas; (vii) approximately $8.2 million of the increase is attributable to per diem increases, other contract modifications, award fees and population increases. Overall, we did experienceexperienced slight increases over the 52-week period ended December 28, 2008 related to the additional week in the 53-week period ended January 3, 2010. These increases were offset by a decrease in revenues of $20.6 million due to the termination of our management contract at the Sanders Estes Unit in Venus, Texas, Newton County Correctional Center in Newton, Texas, Jefferson County Downtown Jail in Beaumont, Texas, Fort Worth Community Corrections Facility in Fort Worth, Texas, and the Tri-County Justice & Detention Center in Ullin, Illinois.


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The number of compensated mandays in U.S. correctionsDetention & Corrections facilities increased by 1.2 million to 14.514.4 million mandays in 2009 from 13.313.2 million mandays in 2008 due to the addition of new facilities and capacity increases. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. correction and detentionDetention & Corrections facilities was 94.6%93.6% of capacity in 2009, excluding the terminated contract for Tri-County Justice & Detention Center which was terminated effective August 2008. The average occupancy in our U.S. correction and detentionDetention & Corrections facilities was 96.4% in 2008 not taking into account the 1,221 beds activated in 2009 at four facilities in our U.S. Detention & Corrections segment.
 
International servicesServices
 
Revenues for our international servicesInternational Services segment during 2009 increased over the prior year due to several reasons including: (i) new contracts in Australia and in the United Kingdom for the management of the Parklea Correctional Centre in Sydney, Australia and the Harmondsworth Immigration Removal Centre in London, England which contributed an incremental $4.1 million and $8.1 million of revenues, respectively, (ii) our contract in South Africa for the management of Kutama-Sinthumule Correcional Centre contributed an increase in revenues over the prior year of $1.2 million mainly due to contractual increases linked to the South African inflationary index, and (iii) we also experienced an increase in revenues of $4.8 million, in aggregate,


44

at certain facilities managed by our Australian subsidiary due to contractual increases linked to the inflationary index. These increases were offset by unfavorable fluctuations in foreign exchange currency rates for the Australian Dollar, South African Rand and British Pound. These unfavorable fluctuations in foreign exchange rates resulted in a decrease of revenues over 2008 of $9.9 million.
 
GEO Care
 
The increase in revenues for GEO Care in 2009 compared to 2008 is primarily attributable to the revenues from our newly acquired contract for the management of Columbia Regional Care Center in Columbia, South Carolina which generated $7.5 million of revenues. We also experienced combined increases of $3.1 million at South Florida Evaluation and Treatment in Miami, Florida and Treasure Coast Forensic Treatment Center in Stuart, Florida as a result of increases in population.populations. These increases were offset by the loss of revenues from the termination of our management contract with the South Florida Evaluation and Treatment Center — Annex in July 2008. This contract generated $7.5 million of revenues in 2008.
 
Facility construction and designConstruction & Design
 
The increase in revenues from the Facility construction and designConstruction & Design segment in 2009 compared to 2008 is mainly due to an increase of $91.3 million related to the construction of Blackwater River Correctional Facility, in Milton, Florida which commenced in First Quarter 2009. This increase over the same period in the prior year was offset by decreases in construction activities at four facilities: (i) the completion of construction for the South Florida Evaluation and Treatment Center in Miami, Florida in Third Quarter 2008 decreased revenues by $6.8 million; (ii) the completion of construction of our Northeast New Mexico Detention Facility in Clayton, New Mexico in Third Quarter 2008 decreased revenues by $15.4 million, (iii) the completion of Florida Civil Commitment Center in Second Quarter decreased revenues by $33.9 million and (iv) the completion of Graceville Correctional Facility in Third Quarter 2009 which decreased revenues by $21.9 million.


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Operating Expenses
 
                         
     % of Segment
     % of Segment
       
  2009  Revenues  2008  Revenues  $ Change  % Change 
  (Dollars in thousands) 
 
U.S. corrections
 $565,291   72.1% $516,963   72.7% $48,328   9.3%
International services
  127,964   93.3%  116,985   90.9%  10,979   9.4%
GEO Care
  106,447   87.4%  103,140   87.9%  3,307   3.2%
Facility construction and design
  97,654   99.6%  85,571   99.6%  12,083   14.1%
                         
Total
 $897,356   78.6% $822,659   78.9% $74,697   9.1%
                         
                         
     % of Segment
     % of Segment
       
  2009  Revenues  2008  Revenues  $ Change  % Change 
  (Dollars in thousands) 
 
U.S. Detention & Corrections
 $558,313   72.3% $510,500   72.9% $47,813   9.4%
International Services
  127,706   93.1%  116,379   90.4%  11,327   9.7%
GEO Care
  113,426   85.0%  109,603   85.7%  3,823   3.5%
Facility Construction & Design
  97,654   99.6%  85,571   99.6%  12,083   14.1%
                         
Total
 $897,099   78.6% $822,053   78.8% $75,046   9.1%
                         
 
Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and mental health and GEO Care facilities and expenses incurred in our Facility construction and designConstruction & Design segment.
 
U.S. correctionsDetention & Corrections
 
Overall, operating expenses remained fairly consistent with fiscal 2008 with slight decreases as a percentage of revenues due to decreases in travel costs of $3.3 million in fiscal 2009. The most significant increases to operating expense were related to new management contracts, new facility activations and increases in population from expansion beds which were activated during the fiscal year. Such projects include Joe Corley Detention Facility, Northeast New Mexico Detention Facility, Maverick County Detention Facility, Rio Grande Detention Center, East Mississippi Corrections Facility and Robert A. Deyton Detention Facility. These contracts contributed $40.8 million of the increase to our operating expenses. Certain of our other facilities also experienced increases in expenses associated with increases in population and contract modifications resulting in additional services. These increases were partially offset by decreases in expenses as a


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result of facility closures for Jefferson County Downtown Jail, Newton County Correctional Center, Fort Worth Community Corrections Facility, Sanders Estes Unit and Tri County Justice & Detention Center.
 
International servicesServices
 
Expenses increased at all of our international subsidiaries consistent with the revenue increases. The costs associated with the new contracts in the United Kingdom and Australia accounted for a combined increase of $15.1 million, including start up costs of $3.0 million. Start up costs are non-recurring costs for training, additional staffing requirements, overtime and other costs of transitioning a new management contract. The increase in expenses in 2009 was significantly offset by the impact of foreign exchange currency rates. Overall, operating expenses for international servicesInternational Services facilities increased slightly as a percentage of segment revenues in 2009 compared to 2008 mainly due to the start up costs in Australia and the United Kingdom.
 
GEO Care
 
Operating expenses for residential treatment increased $3.3 million in 2009 as compared to 2008. The increase in expenses in 2009 was primarily due to our acquisitionoperations of Columbia Regional Care Center as a result of our acquisition of Just Care in Fourth Quarter. We also experienced higher costs at Florida Civil Commitment Center due to start up costs associated with the transfer of patients into the new facility.
 
Facility construction and designConstruction & Design
 
Generally, the operating expenses from the Facility construction and designConstruction & Design segment are offset by a similar amount of revenues. Our overall increase in operating expenses relates to the construction of the Blackwater River Correctional Facility which increased expenses by $91.3 million. This increase was offset by decreases related to the completion of several facilities and expansions including South Florida Evaluation and Treatment


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Center, Northeast New Mexico Detention Facility, Florida Civil Commitment Center and Graceville Correctional Facility.
 
Depreciation and amortizationAmortization
 
                         
     % of Segment
     % of Segment
       
  2009  Revenue  2008  Revenue  $ Change  % Change 
  (Dollars in thousands) 
 
U.S. corrections
 $35,955   4.6% $34,010   4.8% $1,945   5.7%
International services
  1,448   1.1%  1,556   1.2%  (108)  (6.9)%
GEO Care
  1,903   1.6%  1,840   1.6%  63   3.4%
Facility construction and design
  —   —   —   —   —   — 
                         
Total
 $39,306   3.4% $37,406   3.6% $1,900   5.1%
                         
                         
     % of Segment
     % of Segment
       
  2009  Revenue  2008  Revenue  $ Change  % Change 
  (Dollars in thousands) 
 
U.S. Detention & Corrections
 $35,855   4.6% $33,770   4.8% $2,085   6.2%
International Services
  1,448   1.1%  1,556   1.2%  (108)  (6.9)%
GEO Care
  2,003   1.5%  2,080   1.6%  (77)  (3.7)%
Facility Construction & Design
  —   —   —   —   —   — 
                         
Total
 $39,306   3.4% $37,406   3.6% $1,900   5.1%
                         
 
US CorrectionsU.S. Detention & Correction’s
 
The increase in depreciation and amortization expense for U.S. correctionsDetention & Corrections in 2009 compared to 2008 is primarily attributable to the opening of our Rio Grande Detention Center in Fourth Quarter 2008 which increased depreciation expense by $1.9 million.
 
International Services
 
Depreciation and amortization expense as a percentage of segment revenue in 2009 was consistent with 2008.
 
GEO Care
 
The increase in depreciation and amortization expense for GEO Care in 2009 compared to 2008 is primarily due to our acquisition of Just Care.


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Other Unallocated Operating Expenses
General and Administrative Expenses
 
                         
  2009 % of Revenue 2008 % of Revenue $ Change % Change
  (Dollars in thousands)
 
General and Administrative Expenses
 $69,240   6.1% $69,151   6.6% $89   0.1%
 
General and administrative expenses comprise substantially all of our other unallocated expenses. General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees and other administrative expenses. General and administrative expenses remained consistent in the fiscal year ended January 3, 2010 as compared to the fiscal year ended December 28, 2008 but decreased as a percentage of revenues. The decrease as a percentage of revenues is primarily due to corporate cost savings initiatives including those to reduce travel costs which were $2.3 million less in 2009 and also by the increase in revenues which increased at a higher rate than general and administrative expenses. These savings were partially offset by increases in employee benefits and labor costs.


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Non Operating Income and Expense
 
Interest Income and Interest Expense
 
                         
  2009 % of Revenue 2008 % of Revenue $ Change % Change
  (Dollars in thousands)
 
Interest Income
 $4,943   0.4% $7,045   0.7% $(2,102)  (29.8)%
Interest Expense
 $28,518   2.5% $30,202   2.9% $(1,684)  (5.6)%
 
The majority of our interest income generated in 2009 and 2008 is from the cash balances at our Australian subsidiary. The decrease in the current period over the same period last year is mainly attributable to currency exchange rates and, to a lesser extent, lower interest rates.
 
The decrease in interest expense of $1.7 million is primarily attributable to a decrease in LIBOR rates which reduced the interest expense on our Prior Term Loan B by $4.0 million. This decrease was offset by increased expense related to the amortization of deferred financing fees associated with the amendments to our Prior Senior Credit Facility. This increase resulted in incremental amortization of $1.6 million. In addition, we also had more indebtedness outstanding in 2009 related to our 73/4% Senior Notes which resulted in an increase to interest expense of $1.9 million. Capitalized interest in 2009 and 2008 was $4.9 million and $4.3 million, respectively. Total borrowings at January 3, 2010 and December 28, 2008, excluding non-recourse debt and capital lease liabilities, were $457.5 million and $382.1 million, respectively.
 
In November 2009, we entered into interest rate swap agreements with respect to a notional amount of $75.0 million of the 73/4% Senior Notes which resulted in a savings in interest expense of approximately $0.5 million for the fiscal quarteryear ended January 3, 2010.
 
Provision for Income Taxes
 
                 
  2009  Effective Rate  2008  Effective Rate 
  (Dollars in thousands) 
 
Income Tax Provision
 $41,991   40.1% $33,803   37.3%
                 
  2009 Effective Rate 2008 Effective Rate
  (Dollars in thousands)
 
Income Tax Provision
 $42,079   40.1% $34,033   37.3%
 
The effective tax rate during 2009 was 40.1%, compared to 37.3% in 2008, due to an increase in the reserve for uncertain tax positions. The effective tax rate in 2008 included one-time state tax benefits.
 
Equity in Earnings of Affiliate
 
                         
  2009 % of Revenue 2008 % of Revenue $ Change % Change
  (Dollars in thousands)
 
Equity in Earnings of Affiliate
 $3,517   0.3% $4,623   0.4% $(1,106)  (23.9)%


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Equity in earnings of affiliates represent the earnings of SACS in 2009 and 2008 and reflects an overall decrease in earnings related to unfavorable foreign currency exchange rates partially offset by additional revenues due to contractual increases.
 
2008 versus 2007
Revenues
                         
  2008  % of Revenue  2007  % of Revenue  $ Change  % Change 
  (Dollars in thousands) 
 
U.S. corrections
 $711,038   68.2% $629,339   64.5% $81,699   13.0%
International services
  128,672   12.3%  127,991   13.1%  681   0.5%
GEO Care
  117,399   11.3%  110,165   11.3%  7,234   6.6%
Facility construction and design
  85,897   8.2%  108,804   11.1%  (22,907)  (21.1)%
                         
Total
 $1,043,006   100.0% $976,299   100.0% $66,707   6.8%
                         
U.S. corrections
The increase in revenues for U.S. corrections in 2008 compared to 2007 is primarily attributable to new facility openings, capacity increases at existing facilities and full year operations relative to recent openings and expansions from 2007. The most significant increases to revenue were as follows: (i) revenues increased $56.2 million in total due to the opening or expansion of seven facilities in 2008 which include activations at the Robert A. Deyton Detention Facility, Rio Grande Detention Center, Joe Corley Detention Facility and the Northeast New Mexico Detention Facility and expansions of the LaSalle Detention Facility, Central Arizona Correctional Facility and at the East Mississippi Correctional Facility; (ii) revenues increased $28.8 million in 2008 due to increases at our California facilities, South Texas Detention Complex, New Castle Correctional Facility and at the Northwest Detention Center related to contract modifications and enhanced services; (iii) revenues increased by $21.6 million due to the full year operation of 2007 activations and expansions that occurred at the Graceville Correctional Facility, Val Verde Correctional Facility and the Moore Haven Correctional Facility. These and other increases were offset by decreases in revenues of $34.8 million due to the termination of our management contracts at Taft Correctional Institution, Coke County Juvenile Justice Center and Dickens County Correctional Center.
The number of compensated mandays in U.S. corrections facilities increased by 805,200 to 13.3 million mandays in 2008 from 12.5 million mandays in 2007 due to the addition of new facilities and capacity increases. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. correction and detention facilities was 95.7% of capacity in 2008, excluding the terminated contracts for the Coke County Juvenile Justice Center, the Dickens County Correctional Center, and the Taft Correctional Institution. The average occupancy in our U.S. correction and detention facilities was 96.1% in 2007, excluding our new contracts at the Joe Corley Detention Facility, Rio Grande Detention Center, Robert A. Deyton Detention Facility and the Maverick County Detention Facility.
International services
Revenues for our International services segment during fiscal year 2008 increased by $4.8 million over fiscal year 2007 due to increases in contractual rates at some of our facilities in Australia and also in South Africa. We also experienced a favorable increase in revenues of $1.9 million over the prior year due to the overall strengthening of the Australian dollar during fiscal year 2008. This favorable variance was offset during fiscal year 2008 by a decrease in revenues of $2.9 million related to the expansion in 2007 of the Campsfield House Immigration Removal Centre which was completed in September 2008. We also experienced a decrease in revenues in fiscal year 2008 compared to fiscal year 2007 due to unfavorable foreign


48

exchange currency fluctuations in the South African Rand and the British Pound which resulted in a combined decrease of $3.2 million.
GEO Care
The increase in revenues for GEO Care in 2008 compared to 2007 is primarily attributable to two items: (i) the Treasure Coast Forensic Center in Stuart, Florida which commenced operation in March 2007, increased revenues by $7.5 million; and (ii) the Florida Civil Commitment Center in Arcadia, Florida contributed an increase of $2.6 million, both due to increases in population. This favorable increase was partially offset by $2.4 million due to the loss of the contract with the SFETC Annex.
Facility construction and design
The decrease in revenues from construction activities is primarily attributable to the completion of construction at two facilities: (i) the South Florida Evaluation and Treatment Center in Miami, Florida, which was completed in Second Quarter 2008, decreased revenues by $19.3 million; and (ii) the Northeast New Mexico Detention Facility in Clayton, New Mexico which was completed in Third Quarter 2008 and decreased revenues by $25.6 million. These decreases over the same period in the prior year were offset by increases in construction revenue for the expansion of the Graceville Correctional Facility in Graceville, Florida which commenced in First Quarter 2008 and increased revenues by $4.0 million and the construction of the Florida Civil Commitment Center in Arcadia, Florida which increased revenues by $22.1 million.
Operating Expenses
                         
     % of Segment
     % of Segment
       
  2008  Revenues  2007  Revenues  $ Change  % Change 
  (Dollars in thousands) 
 
U.S. corrections
 $516,963   72.7% $464,617   73.8% $52,346   11.3%
International services
  116,985   90.9%  116,259   90.8%  726   0.6%
GEO Care
  103,140   87.9%  98,557   89.5%  4,583   4.7%
Facility construction and design
  85,571   99.6%  109,070   100.2%  (23,499)  (21.5)%
                         
Total
 $822,659   78.9% $788,503   80.8% $34,156   4.3%
                         
Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and mental health and GEO Care facilities and expenses incurred in our Facility construction and design segment.
U.S. corrections
The increase U.S. corrections operating expenses in 2008 compared to 2007 is primarily attributable to new facility openings, capacity increases at existing facilities and the normalization of openings and expansions from 2007. The most significant increases to operating expenses were as follows: (i) operating expenses increased $43.3 million in total due to the opening or expansion of seven facilities in 2008 which include activations at the Robert A. Deyton Detention Facility, Rio Grande Detention Facility, Joe Corley Detention Facility and the Northeast New Mexico Detention Facility and expansions of the LaSalle Detention Center, Central Arizona Correctional Facility and at the East Mississippi Correctional Facility; (ii) operating expenses increased $19.2 million in 2008 due to increases at our California facilities, South Texas Detention Center, New Castle Correctional Facility and at the Northwest Detention Center related to contract modifications and enhanced services; (iii) operating expenses increased by $17.9 million due to the normalization of 2007 activations and expansions that occurred at the Graceville Correctional Facility, Val Verde Correctional Facility and the Moore Haven Correctional Facility; (iv) operating expenses increased by $3.6 million for the year ended December 28, 2008 due to changes in general liability and workers compensation reserves. The remaining increase in operating expenses is the result of increases in wages and employee benefits as well as general increases in operating costs. These increases were partially offset by decreases of $31.0 million related


49

to the termination of our management contracts at Coke County Juvenile Justice Center, Taft Correctional Institution and Dickens County Correctional Center which were terminated prior to fiscal 2008. Beginning 2008, we changed our vacation policy for certain employees allowing these employees to use their vacation regardless of their service period but within the fiscal year. The 2008 change in our vacation policy resulted in a $3.7 million decrease in vacation expense in the fiscal year ended 2008 compared to the fiscal year ended 2007.
International services
Operating expenses for international services facilities remained consistent as a percentage of segment revenues in 2008 compared to 2007. On December 22, 2008, we announced the closure of our U.K.-based transportation division, Recruitment Solutions International which we refer to as RSI. We purchased RSI, which provided transportation services to The Home Office Nationality and Immigration Directorate, for $2.3 million, including transaction costs, in 2006. The operating loss of this business are reported as discontinued operations and is not presented in the segment information above.
GEO Care
Operating expenses for residential treatment increased $4.6 million in 2008 as compared to 2007 primarily attributable to increased population at the Treasure Coast Forensic Center and Florida Civil Commitment Center as mentioned above. This positive variance was offset by a decrease due to the closure of our 100-bed South Florida Evaluation and Treatment Center Annex which was effective July 31, 2008. Overall, expenses as a percentage of revenue partly decreased as a result of a decrease in startup costs which were $0.6 million in 2008 compared to $1.9 million in 2007.
Facility construction and design
Operating expenses for facility construction and design decreased $23.5 million during fiscal year 2008 compared to fiscal year 2007 primarily due to a decrease in costs associated with our facilities under construction as a result of reduced activity as discussed above.
Depreciation and amortization
                         
     % of Segment
     % of Segment
       
  2008  Revenue  2007  Revenue  $ Change  % Change 
  (Dollars in thousands) 
 
U.S. corrections
 $34,010   4.8% $30,401   4.8% $3,609   11.9%
International services
  1,556   1.2%  1,351   1.1%  205   15.2%
GEO Care
  1,840   1.6%  1,466   1.3%  374   25.5%
Facility construction and design
  —   —   —   —   —   — 
                         
Total
 $37,406   3.6% $33,218   3.4% $4,188   12.6%
                         
US Corrections
The increase in depreciation and amortization for U.S. corrections in 2008 compared to 2007 is primarily attributable to the following items: (i) depreciation increased $0.9 million due to the reactivation and expansion of the LaSalle Detention Facility discussed above, (ii) depreciation increased $0.7 million related to the opening of the Rio Grande Detention Center discussed above and, (iii) depreciation increased $0.8 million due to the expansion of the Val Verde Correctional Facility discussed above.
International Services
Depreciation and amortization as a percentage of segment revenue in 2008 was consistent with 2007.


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GEO Care
The increase in depreciation and amortization for GEO Care in 2008 compared to 2007 is primarily due to the Treasure Coast Forensic Treatment Center expansion in September 2007.
Other Unallocated Operating Expenses
General and Administrative Expenses
                         
  2008  % of Revenue  2007  % of Revenue  $ Change  % Change 
  (Dollars in thousands) 
 
General and Administrative Expenses
 $69,151   6.6% $64,492   6.6% $4,659   7.2%
General and administrative expenses comprise substantially all of our other unallocated expenses. General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees and other administrative expenses. General and administrative expenses increased by $4.7 million in the fiscal year ended December 28, 2008 as compared to the fiscal year ended December 30, 2007, and remained consistent as a percentage of revenues. The increase in general and administrative costs is mainly due to increases in corporate travel and increases in direct labor costs as a result of increased wages and related increases in employee benefits.
Non Operating Income and Expense
Interest Income and Interest Expense
                         
  2008  % of Revenue  2007  % of Revenue  $ Change  % Change 
  (Dollars in thousands) 
 
Interest Income
 $7,045   0.7% $8,746   0.9% $(1,701)  (19.4)%
Interest Expense
 $30,202   2.9% $36,051   3.7% $(5,849)  (16.2)%
The decrease in interest income in 2008 compared to 2007 is primarily attributable to the decrease in interest rates for the period as well as the decrease in cash in 2008 as compared to 2007. In First Quarter 2009, one of the lenders elected to prepay its interest rate swap obligation to us at the call option price which approximated the fair value of the interest rate swap on the call dates.
The decrease in interest expense is primarily attributable to a significant decrease in LIBOR rates. We also experienced an increase in the amount of interest capitalized in connection with the construction of our correctional and detention facilities. Capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. During fiscal years ended 2008 and 2007, we capitalized $4.3 million and $2.9 million of interest expense, respectively. This was partially offset by an increase in debt in 2008 as compared to 2007.
Provision for Income Taxes
                 
  2008  Effective Rate  2007  Effective Rate 
  (Dollars in thousands) 
 
Income Tax Provision
 $33,803   37.3% $22,049   38.0%
The effective tax rate during 2008 was 37.3% as a result of one-time state tax benefits of $1.6 million. We expect our tax rate in the future to increase to 38.7% as these benefits are non-recurring in nature.
Equity in Earnings of Affiliate
                         
  2008  % of Revenue  2007  % of Revenue  $ Change  % Change 
  (Dollars in thousands) 
 
Equity in Earnings of Affiliate
 $4,623   0.4% $2,151   0.2% $2,472   114.9%


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Equity in earnings of affiliates represent the earnings of SACS in 2008 and 2007 and reflect contractual increases partially offset by unfavorable foreign currency translation. These results also include the impact of a one-time tax benefit of $1.9 million.
Financial Condition
 
Business Combination
On August 12, 2010, we completed our acquisition of Cornell, a Houston-based provider of correctional, detention, educational, rehabilitation and treatment services outsourced by federal, state, county and local government agencies for adults and juveniles. The acquisition was completed pursuant to a definitive merger agreement entered into on April 18, 2010, and amended on July 22, 2010, between us, GEO Acquisition III, Inc., and Cornell. Under the terms of the merger agreement, we acquired 100% of the outstanding common stock of Cornell for aggregate consideration of $618.3 million, excluding cash acquired of $12.9 million and including: (i) cash payments for Cornell’s outstanding common stock of $84.9 million, (ii) payments made on behalf of Cornell related to Cornell’s transaction costs accrued prior to the acquisition of $6.4 million, (iii) cash payments for the settlement of certain of Cornell’s debt plus accrued interest of $181.9 million using proceeds


63

from our senior credit facility, (iv) common stock consideration of $357.8 million, and (v) the fair value of stock option replacement awards of $0.2 million. The value of the equity consideration was based on the closing price of the Company’s common stock on August 12, 2010 of $22.70.
Capital Requirements
 
Our current cash requirements consist of amounts needed for working capital, debt service, supply purchases, investments in joint ventures, and capital expenditures related to either the development of new correctional, detention,and/or mental health, residential treatment and re-entry facilities, or the maintenance of existing facilities. In addition, some of our management contracts require us to make substantial initial expenditures of cash in connection with opening or renovating a facility. Generally, these initial expenditures are subsequently fully or partially recoverable as pass-through costs or are billable as a component of the per diem rates or monthly fixed fees to the contracting agency over the original term of the contract. Additional capital needs may also arise in the future with respect to possible acquisitions, other corporate transactions or other corporate purposes.
 
We are currently developing a number of projects using company financing. We estimate that the remaining capital expenditures related to these existing capital projects will cost approximately $282.4 million, of which $54.9 million was spent through the fiscal year ended January 2, 2011. We have future committed capital projects for which we estimate our remaining capital requirements to be $37.7approximately $227.5 million, towhich will be spent in 2010.fiscal years 2011 and 2012. Capital expenditures related to facility maintenance costs are expected to range between $10.0$20.0 million and $15.0 million.$25.0 million for fiscal year 2011. In addition to these current estimated capital requirements for 2010,2011 and 2012, we are currently in the process of bidding on, or evaluating potential bids for the design, construction and management of a number of new projects. In the event that we win bids for these projects and decide to self-finance their construction, our capital requirements in 20102011and/or 20112012 could materially increase.
 
Liquidity and Capital Resources
On August 4, 2010, we entered into a new Credit Agreement, which we refer to as our “Senior Credit Facility”, comprised of (i) a $150.0 million Term Loan A, referred to as “Term Loan A”, initially bearing interest at LIBOR plus 2.5% and maturing August 4, 2015, (ii) a $200.0 million Term Loan B, referred to as “Term Loan B”, initially bearing interest at LIBOR plus 3.25% with a LIBOR floor of 1.50% and maturing August 4, 2016 and (iii) a Revolving Credit Facility (“Revolver”) of $400.0 million initially bearing interest at LIBOR plus 2.5% and maturing August 4, 2015. On August 4, 2010, we used proceeds from borrowings under the Senior Credit Facility primarily to repay existing borrowings and accrued interest under the Third Amended and Restated Credit Agreement, which we refer to as our “Prior Senior Credit Agreement”, of $267.7 million and to pay $6.7 million for financing fees related to the Senior Credit Facility. On August 4, 2010, our Prior Senior Credit Agreement was terminated. On August 12, 2010, in connection with the Merger, we used aggregate proceeds of $290.0 million from the Term Loan A and the Revolver primarily to repay Cornell’s obligations plus accrued interest under its revolving line of credit due December 2011 of $67.5 million, to repay its obligations plus accrued interest under the existing 10.75% senior notes due July 2012 of $114.4 million, to pay $14.0 million in transaction costs and to pay the cash component of the merger consideration of $84.9 million. As of January 2, 2011, we had $148.1 million outstanding under the Term Loan A, $199.5 million outstanding under the Term Loan B, and our $400.0 million Revolving Credit Facility had $212.0 million outstanding in loans, $57.0 million outstanding in letters of credit and $131.0 million available for borrowings. We also had the ability to borrow $250.0 million under the accordion feature of our Senior Credit Facility subject to lender demand and market conditions. Our significant debt obligations could have material consequences. See “Risk Factors — Risks Related to Our High Level of Indebtedness”.
On February 8, 2011, we entered into Amendment No. 1 to the Credit Agreement, which we refer to as Amendment No. 1. Amendment No. 1, among other things, amended certain definitions and covenants relating to the total leverage ratio and the senior secured leverage ratios set forth in the Credit Agreement. Effective February 10, 2011, the revolving credit commitments under the Senior Credit Facility were increased by an aggregate principal amount equal to $100.0 million, resulting in an aggregate of $500.0 million of revolving


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credit commitments. Also effective February 10, 2011, GEO obtained an additional $150.0 million of term loans under the Senior Credit Facility, specifically under a new $150.0 million incremental Term LoanA-2, initially bearing interest at LIBOR plus 2.75%. Following the execution of Amendment No. 1 and our obtaining the additional $150.0 million incremental Term LoanA-2, the Senior Credit Facility is comprised of: a $150.0 million Term Loan A maturing August 4, 2015; a $150.0 million Term LoanA-2 maturing August 4, 2015; a $200.0 million Term Loan B maturing August 4, 2016; and a $500.0 million Revolving Credit Facility maturing August 4, 2015. We used the funds from the new $150.0 million incremental Term LoanA-2 along with the net cash proceeds from the offering of the 6.625% Senior Notes to finance the acquisition of BI. As of February 10, 2011, we had $146.3 million outstanding under the Term Loan A, $150.0 million outstanding under the Term LoanA-2, $199.0 million outstanding under the Term Loan B, and our $500.0 million Revolving Credit Facility had $210.0 million outstanding in loans, $56.2 million outstanding in letters of credit and $233.8 million available for borrowings. We also have the ability to borrow $250.0 million under the accordion feature of our Senior Credit Facility subject to lender demand and market conditions. Our significant debt obligations could have material consequences. See “Risk Factors — Risks Related to Our High Level of Indebtedness.”
 
We plan to fund all of our capital needs, including our capital expenditures, from cash on hand, cash from operations, borrowings under our Senior Credit Facility and any other financings which our management and Board of Directors, in their discretion, may consummate. OurCurrently, our primary source of liquidity to meet these requirements is cash flow from operations and borrowings from the $330.0$500.0 million Revolver under our Senior Credit Facility (see discussion below).
As of January 3, 2010, we had a total of $457.5 million of consolidated debt outstanding, excluding $112.0 million of non-recourse debt and capital lease liability balances of $15.1 million. As of January 3, 2010, we also had outstanding eight letters of guarantee totaling $8.9 million under separate international credit facilities. Based on our debt covenants and the amount of indebtedness we have outstanding, as of February 16, 2010, we had the ability to borrow an additional approximately $217 million under our Revolver after considering debt covenants. We also have the ability to borrow $200.0 million under the accordion feature of our Senior Credit Facility subject to lender demand and market conditions. Our significant debt service obligations could have material consequences. See “Risk Factors — Risks Related to Our High Level of Indebtedness.”Revolver.
 
Our management believes that cash on hand, cash flows from operations and borrowingsavailability under our Senior Credit Facility will be adequate to support our capital requirements for 2010 and 2011 disclosed in Capital Requirements above. However,In addition to additional capital requirements which will be required relative to the acquisitions of Cornell and BI, we are currentlyalso in the process of bidding on, or evaluating potential bids for, the design, construction and management of a number of new projects. In the event that we win bids for these projects and decide to self-finance their construction, our capital requirements in 20102011and/or 20112012 could materially increase. In that event, our cash on hand, cash flows from operations and borrowings under the existing Senior Credit Facility may not provide sufficient liquidity to meet our capital needs through 2010 and 2011 and we could be forced to seek additional financing or refinance our existing indebtedness. There can be no assurance that any such financing or refinancing would be available to us on terms equal to or more favorable than our current financing terms, or at all.
 
On February 22, 2010, our Board of Directors approved a stock repurchase program for up to $80.0 million of our common stock which was effective through March 31, 2011. The stock repurchase program was implemented through purchases made from time to time in the open market or in privately negotiated transactions, in accordance with applicable Securities and Exchange Commission requirements. The program also included repurchases from time to time from executive officers or directors of vested restricted stockand/or vested stock options. The stock repurchase program did not obligate us to purchase any specific amount of our common stock and could be suspended or extended at any time at our discretion. During the fiscal year ended January 2, 2011, we completed the program and purchased approximately 4.0 million shares of our common stock at a cost of $80.0 million using cash on hand and cash flow from operating activities. Also during the fiscal year ended January 2, 2011, we repurchased 0.3 million shares of common stock from certain directors and executives for an aggregate cost of $7.1 million.
In the future, our access to capital and ability to compete for future capital-intensive projects will also be dependent upon, among other things, our ability to meet certain financial covenants in the indenture governing


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the 73/4% Senior Notes, the indenture governing the 6.625% Senior Notes and in our Senior Credit Facility. A substantial decline in our financial performance could limit our access to capital pursuant to these covenants and have a material adverse affect on our liquidity and capital resources and, as a result, on our financial condition and results of operations. In addition to these foregoing potential constraints on our capital, a number of state government agencies have been suffering from budget deficits and liquidity issues. While the company expectswe expect to be in compliance with its debt covenants, if these constraints were to intensify, our liquidity could be materially adversely impacted as could our compliance with these debt covenants.


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Executive Retirement Agreements
 
We have entered into individual executive retirement agreementsAs of January 2, 2011, we had a non-qualified deferred compensation agreement with our two top executives. These agreements provide each executive withChief Executive Officer (“CEO”). The current agreement provides for a lump sum payment upon retirement. Underretirement, no sooner than age 55. As of January 2, 2011, the agreements,CEO had reached age 55 and was eligible to receive the executives may retire at any time after reaching the age of 55. Both of the executives reached the eligible retirement age of 55 in 2005. However, under the retirement agreements, retirement may be taken at any time at the individual executive’s discretion. In the event that both executives were to retire in the same year, we believe we will have funds available to pay the retirement obligations from various sources, including cash on hand, operating cash flows or borrowings under our Revolver.payment upon retirement. Based on our current capitalization, we do not believe that making these payments in any one period, whether in separate installments or in the aggregate,this payment would materially adversely impact our liquidity.
On February 22, Prior to his effective retirement date of December 31, 2010, Wayne H. Calabrese, our former Vice Chairman, President and Chief Operating Officer, also had a deferred compensation agreement under the non-qualified deferred compensation plan. As a result of his retirement, we announced that our Boardpaid $4.4 million in discounted retirement benefits under his non-qualified deferred compensation agreement, inclusive of Directors approved a stock repurchase program for up to $80.0 million of our common stock effective through March 31, 2011. The stock repurchase is intended to be implemented through purchases made from time to time in the open market or in privately negotiated transactions, in accordance with applicable Securities and Exchange requirements. The program may also include repurchases from time to time from executive officers or directors of vested restricted stockincome taxand/orgross-up vested stock options. The stock repurchase program does not obligate us to purchase any specific amount of our common stock and may be suspended or extended at any time at the our discretion. As of February 16, 2010, GEO had 51.6 million shares outstanding.payments.
 
We are also exposed to various commitments and contingencies which may have a material adverse effect on our liquidity. See Item 3. Legal Proceedings.
 
The Senior Credit Facility
 
On October 5, 2009, on October 15, 2009,August 4, 2010, we terminated our Prior Senior Credit Agreement and again on December 4, 2009, we completed certain amendments toexecuted our Senior Credit Facility. These amendments,Facility by and among other things, modified the aggregate size of the Revolver from $240.0 million to $330.0 million, extended the maturity of the Revolver to 2012, modified the permitted maximum total leverage and maximum senior secured leverage financial ratios, eliminated the annual capital expenditures limitation and made several technical revisions to certain definitions therein. Our Senior Credit Facility is now comprised of a $155.0 million Term Loan B bearing interest at LIBOR plus 2.00% and maturing in January 2014GEO, as Borrower, BNP Paribas, as Administrative Agent, and the $330.0 million Revolver which currently bears interest at LIBOR plus 3.25% and matures in September 2012. Also, upon the execution these amendmentslenders who are, or may from time to time become, a party thereto. On February 8, 2011, we have the abilityentered into Amendment No. 1 to increase our borrowing capacity under the Senior Credit facility by another $200.0 million subject to lender demand, market conditions and existing borrowings.
As of January 3, 2010, we had $155.0 million outstanding under the Term Loan B, and our $330.0 million Revolver had $58.0 million outstanding in loans, $47.5 million outstanding in letters of credit and approximately $217 million available for borrowings, which we refer to as our Unused Revolver, after considering our debt covenants. We intend to use future borrowings from the Revolver for the purposes permitted under the Senior Credit Facility, including for general corporate purposes.
Facility. Indebtedness under the Revolver, the Term Loan A and the Term Loan A-2 bears interest based on the Total Leverage Ratio as of the most recent determination date, as defined, in each of the instances below at the stated rate:
 
   
  Interest Rate under the Revolver,
Term Loan A and Term Loan A-2
 
LIBOR borrowings LIBOR plus 2.75%2.00% to 3.50%3.00%.
Base rate borrowings Prime Rate plus 1.75%1.00% to 2.50%2.00%.
Letters of credit 2.75%2.00% to 3.50%3.00%.
Unused Revolver 0.50%0.375% to 0.75%0.50%.


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The Senior Credit Facility contains certain customary representations and warranties, and certain customary covenants that restrict our ability to, among other things as permitted (i) create, incur or assume indebtedness, (ii) create, incur, assume or permit liens, (iii) make loans and investments, (iv) engage in mergers, acquisitions and asset sales, (v) make restricted payments, (vi) issue, sell or otherwise dispose of capital stock, (vii) engage in transactions with affiliates, (viii) allow the total leverage ratio or senior secured leverage ratio to exceed certain maximum ratios or allow the interest coverage ratio to be less than a certain ratio, (ix) cancel, forgive, make any voluntary or optional payment or prepayment on, or redeem or acquire for value any senior notes, (x) alter the business we conduct, and (xi) materially impair our lenders’ security interests in the collateral for our loans.
We are required to maintainmust not exceed the following Total Leverage Ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:
 
   
Period
 
Total Leverage Ratio —
PeriodMaximum Ratio
 
Through the penultimate day of fiscal year 2010≤ 4.00 to 1.00
Fromand including the last day of the fiscal year 2010 through the penultimate20115.25 to 1.00
First day of fiscal year 2011≤ 3.75 to 1.00
From2012 through and including the last day of the fiscal year 2011 through the penultimate day of fiscal year 2012 ≤ 3.255.00 to 1.00
First day of fiscal year 2013 through and including the last day of fiscal year 20134.75 to 1.00
Thereafter ≤ 3.004.25 to 1.00


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The Senior Credit AgreementFacility also requiresdoes not permit us to maintainexceed the following Senior Secured Leverage Ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:
 
   
Period
 
Senior Secured Leverage Ratio —
PeriodMaximum Ratio
 
Through the penultimate day of fiscal year 2011≤ 3.00 to 1.00
Fromand including the last day of the fiscal year 2011 throughsecond quarter of the penultimate day of fiscal year 2012 ≤ 2.503.25 to 1.00
FromFirst day of the third quarter of fiscal year 2012 through and including the last day of second quarter of the fiscal year 2012 through the penultimate day of fiscal year 2013 ≤ 2.253.00 to 1.00
Thereafter ≤ 2.002.75 to 1.00
 
The foregoing covenants replaceAdditionally, there is an Interest Coverage Ratio under which the corresponding covenants previously included in the credit agreement governing our Senior Credit Facility (referredlender will not permit a ratio of less than 3.00 to as the “Credit Agreement”).1.00 relative to (a) Adjusted EBITDA for any period of four consecutive fiscal quarters to (b) Interest Expense, less that attributable to non-recourse debt of unrestricted subsidiaries.
 
All of the obligations under the Senior Credit Facility are unconditionally guaranteed by each of our existing material domestic subsidiaries. The Senior Credit Facility and the related guarantees are secured by substantially all of our present and future tangible and intangible assets and all present and future tangible and intangible assets of each guarantor, as specified in the Credit Agreement. In addition, the Senior Credit Facility contains certain customary representations and warranties, and certain customary covenants that restrict our ability to be party to certain transactions, as further specified in the Credit Agreement. Events of default under the Senior Credit Facility include, but are not limited to, (i) our failure to pay principal or interest when due, (ii) our material breach of any representationrepresentations or warranty, (iii) covenant defaults, (iv) liquidation, reorganization or other relief relating to bankruptcy or insolvency, (v) cross default tounder certain other material indebtedness, (vi) unsatisfied final judgments over a specified threshold, (vii) material environmental state ofliability claims which arehave been asserted against it,us, and (viii) a change in control. All of control.the obligations under the Senior Credit Facility are unconditionally guaranteed by certain of our subsidiaries and secured by substantially all of our present and future tangible and intangible assets and all present and future tangible and intangible assets of each guarantor, including but not limited to (i) a first-priority pledge of substantially all of the outstanding capital stock owned by us and each guarantor, and (ii) perfected first-priority security interests in substantially all of our, and each guarantors, present and future tangible and intangible assets and the present and future tangible and intangible assets of each guarantor. Our failure to comply with any of the covenants under itsour Senior Credit Facility could cause an event of default under such documents and result in an acceleration of all of outstanding senior secured indebtedness. We believe we were in compliance with all of the covenants of the Senior Credit Facility as of January 3, 2010.
81/4% Senior Notes2, 2011.
 
On October 5, 2009,August 4, 2010, we announcedused approximately $280 million in aggregate proceeds from the commencementTerm Loan B and the Revolver primarily to repay existing borrowings and accrued interest under our Prior Senior Credit Facility Agreement of a$267.7 million and also used $6.7 million for financing fees related to the Senior Credit Facility. We received, as cash, tender offerthe remaining proceeds of $3.2 million. On August 12, 2010, we borrowed $290.0 million under our Senior Credit Facility and used the aggregate cash proceeds primarily for $84.9 million in cash consideration payments to Cornell’s stockholders in connection with the Merger, transaction costs of approximately $14.0 million, the repayment of $181.9 million for Cornell’s 10.75% Senior Notes due July 2012 plus accrued interest and Cornell’s Revolving Line of Credit due December 2011 plus accrued interest. As of January 2, 2011, we had $148.1 million outstanding under the Term Loan A, $199.5 million outstanding under the Term Loan B, and our $400.0 million Revolver had $212.0 million outstanding in loans, $57.0 million outstanding in letters of credit and $131.0 million available for borrowings. We intend to use future borrowings for the purposes permitted under the Senior Credit Facility, including for general corporate purposes.
On February 10, 2011, we used $150.0 million in aggregate principal amountproceeds from the Term LoanA-2 along with $293.3 million of 81/4% Senior Notes. Holders who validly tendered their Notes beforenet proceeds from the early tender date, which expired at 5:00 p.m. Eastern Standard time on October 19, 2009, received a 103% cash payment for their note which included an early tender premium of 3%. Holders who tendered their notes after the early tender date, but before the expiration date of 11:59 p.m., Eastern Standard time on November 2, 2009 which we refer to as the Early Expiration Date, received 100% cash payment for their note. Holdersoffering of the 81/4%6.625% Senior Notes acceptedto finance the cash consideration for purchase received accrued and unpaid interest up to, but not including, the applicable payment date. Valid early tenders received by us represented $130.2 million aggregate principal amountclosing of the 8BI Acquisition. As of February 10, 2011, we had $146.3 million outstanding under the Term Loan A, $150.0 million outstanding under the Term Loan1A-2,/4% $199.0 million outstanding under the Term Loan B, and our $500.0 million Revolving Credit Facility had $210.0 million outstanding in loans, $56.2 million outstanding in letters of credit and $233.8 million available for borrowings. We intend to use future borrowings for the purposes permitted under the Senior Notes which was 86.8%Credit Facility, including for general corporate purposes.
We have accounted for the termination of our Prior Senior Credit Agreement as an extinguishment of debt. In connection with repayment of all outstanding borrowings and the termination of the outstanding principal balance. We settled these notes on October 20, 2009 by paying $136.9Prior Senior Credit Agreement, we wrote-off $7.9 million to the trustee. Also on October 20, 2009, we announced the call for redemption for all notes not tendered by the Expiration Date. We financed the tender offer and redemption with a portion of the net cash proceeds from our offering of $250.0 million aggregate principal 73/4% Senior Notes, which closed on October 20, 2009. As of November 19, 2009, all of the 81/4% Senior Notes had been redeemed.associated deferred financing fees in Third Quarter 2010.


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73/4% Senior Notes
 
On October 20, 2009, we completed a private offering of $250.0 million in aggregate principal amount of our 73/4% senior notes due 2017, which we refer to as the 73/4% Senior Notes due 2017.Notes. These senior unsecured notes pay interest semi-annually in cash in arrears on April 15 and October 15 of each year, beginning on April 15, 2010. We realized net proceeds of $246.4 million at the close of the transaction, net of the discount on the notes of $3.6 million. We used the net proceeds of the offering to fund the repurchase of all of itsour 81/4% Senior Notes due 2013 and pay down part of the Revolver.Revolving Credit Facility under the Prior Senior Credit Agreement.
 
The 73/4% Senior Notes are guaranteed by certain subsidiaries and the guarantees will beare unsecured, unsubordinatedsenior obligations of GEO and the guarantors and willthese obligations rank as follows: pari passu with any unsecured, unsubordinatedsenior indebtedness of GEO and the guarantors; senior to any future indebtedness of GEO and the guarantors that is expressly subordinated to the notes and the guarantees; effectively junior to any secured indebtedness of GEO and the guarantors, including indebtedness under the our Senior Credit Facility, to the extent of the value of the assets securing such indebtedness; and effectivelystructurally junior to all obligations of our subsidiaries that are not guarantors Afterguarantors.
On or after October 15, 2013, we may, at our option, redeem all or a part of the 73/4% Senior Notes upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest and Liquidated Damages,liquidated damages, if any, on the 73/4% Senior Notes redeemed, to the applicable redemption date, if redeemed during the12-month period beginning on October 15 of the years indicated below:
 
   
Year Percentage
 
2013 103.875%
2014 101.938%
2015 and thereafter 100.000%
 
Before October 15, 2013, we may redeem some or all of the 73/4% Senior Notes at a redemption price equal to 100% of the principal amount of each note to be redeemed plus a make-whole premium described under “Description of Notes — Optional Redemption” together with accrued and unpaid interest.interest and liquidated damages, if any, to the date of redemption. In addition, at any time on or prior to October 15, 2012, we may redeem up to 35% of the aggregate principal amount of the notes with the net cash proceeds from specified equity offerings at a redemption price equal to 107.750% of the principal amount of each note to be redeemed, plus accrued and unpaid interest and liquidated damages, if any, to the date of redemption.
 
The indenture governing the notes contains certain covenants, including limitations and restrictions on us and our restricted subsidiaries’ ability to: incur additional indebtedness or issue preferred stock; make dividend payments or other restricted payments; create liens; sell assets; enter into transactions with affiliates; and enter into mergers, consolidations, or sales of all or substantially all of our assets. As of the date of the indenture, all of our subsidiaries, other than CSC of Tacoma, LLC, GEO International Holdings, Inc., certain dormant domestic subsidiaries and all foreign subsidiaries in existence on the date of the indenture, were restricted subsidiaries. Our unrestricted subsidiaries will not be subject to any of the restrictive covenants in the indenture. Our failure to comply with certain of the covenants under the indenture governing the 73/4% Notes could cause an event of default of any indebtedness and result in an acceleration of such indebtedness. In addition, there is a cross-default provision which becomes enforceable upon failure of payment of indebtedness at final maturity. We believe we were in compliance with all of the covenants of the Indenture governing the 73/4% Senior Notes as of January 2, 2011.
6.625% Senior Notes
On February 10, 2011, we completed a private offering of $300.0 million in aggregate principal amount of ten-year, 6.625% senior unsecured notes due 2021. These senior unsecured notes pay interest semi-annually in cash in arrears on February 15 and August 15, beginning on August 15, 2011. We realized net proceeds of $293.3 million at the close of the transaction. We used the net proceeds of the offering together with borrowings of $150.0 million under the Senior Credit Facility to finance the acquisition of B.I. The remaining net proceeds from the offering were used for general corporate purposes.
The 6.625% Senior Notes are guaranteed by certain subsidiaries and are unsecured, senior obligations of GEO and these obligations rank as follows: pari passu with any unsecured, senior indebtedness of GEO and


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the guarantors, including the 73/4% Senior Notes; senior to any future indebtedness of GEO and the guarantors that is expressly subordinated to the 6.625% Senior Notes and the guarantees; effectively junior to any secured indebtedness of GEO and the guarantors, including indebtedness under our Senior Credit Facility, to the extent of the value of the assets securing such indebtedness; and structurally junior to all obligations of our subsidiaries that are not guarantors.
On or after February 15, 2016, we may, at our option, redeem all or part of the 6.625% Senior Notes upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest and liquidated damages, if any, on the 6.625% Senior Notes redeemed, to the applicable redemption date, if redeemed during the12-month period beginning on February 15 of the years indicated below:
   
Year Percentage
 
2016 103.3125%
2017 102.2083%
2018 101.1042%
2019 and thereafter 100.0000%
Before February 15, 2016, we may redeem some or all of the 6.625% Senior Notes at a redemption price equal to 100% of the principal amount of each note to be redeemed plus a “make whole” premium, together with accrued and unpaid interest and liquidated damages, if any, to the date of redemption. In addition, at any time before February 15, 2014, we may redeem up to 35% of the aggregate principal amount of the 6.625% Senior Notes with the net cash proceeds from specified equity offerings at a redemption price equal to 106.625% of the principal amount of each note to be redeemed, plus accrued and unpaid interest and liquidated damages, if any, to the date of redemption.
The indenture governing the notes contains certain covenants, including limitations and restrictions on us and our restricted subsidiaries’ ability to: incur additional indebtedness or issue preferred stock; make dividend payments or other restricted payments; create liens; sell assets; enter into transactions with affiliates; and enter into mergers, consolidations or sales of all or substantially all of our assets. As of the date of the indenture, all of our subsidiaries, other than certain dormant domestic subsidiaries and all foreign subsidiaries in existence on the date of the indenture, were restricted subsidiaries. Our failure to comply with certain of the covenants under the indenture governing the 6.625% Notes could cause an event of default of any indebtedness and result in an acceleration of such indebtedness. In addition, there is a cross-default provision which becomes enforceable upon failure of payment of indebtedness at final maturity. Our unrestricted subsidiaries will not be subject to any of the restrictive covenants in the indenture. We believe we were in compliance with all of the covenants of the Indenture governing the 73/4% Senior Notes as of January 3, 2010.
 
Non-Recourse Debt
 
South Texas Detention Complex
 
We have a debt service requirement related to the development of the South Texas Detention Complex, a 1,904-bed detention complex in Frio County, Texas, acquired in November 2005 from CSC.Correctional Services Corporation (“CSC”). CSC was awarded the contract in February 2004 by the Department of Homeland Security, ICE for development and operation of the detention center. In order to finance itsthe construction of the complex, South Texas Local Development Corporation, which we referreferred to as STLDC, was created and issued $49.5 million in taxable revenue bonds. These bonds mature in February 2016 and have fixed coupon rates between 4.34% and 5.07%. Additionally, we have outstandingare owed $5.0 million in the form of subordinated notes by STLDC which represents the principal amount of financing provided to STLDC by CSC for initial development. These bonds mature in February 2016 and have fixed coupon rates between 4.11% and 5.07%.


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We have an operating agreement with STLDC, the owner of the complex, which provides us with the sole and exclusive right to operate and manage the detention center. The operating agreement and bond indenture require the revenue from ourthe contract with ICE be used to fund the periodic debt service requirements as they become due. The net revenues, if any, after various expenses such as trustee fees, property taxes and insurance premiums are distributed to us to cover operating expenses and management fees. We are responsible for the entire operations of the facility including the payment of all operating expenses and are required to pay all operating expenses


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whether or not there are sufficient revenues. STLDC has no liabilities resulting from its ownership. The bonds have a ten year term and are non-recourse to us.us and STLDC. The bonds are fully insured and the sole source of payment for the bonds is the operating revenues of the center. At the end of the ten year term of the bonds, title and ownership of the facility transfers from STLDC to us. We have determined that we are the primary beneficiary of STLDC and consolidate the entity as a result.
 
On February 2, 2009, we1, 2010, STLDC made a payment from its restricted cash account of $4.4$4.6 million for the current portion of our periodic debt service requirement in relation to STLDC operating agreement and bond indenture. As of January 3, 2010,2, 2011, the remaining balance of the debt service requirement under the STLDC financing agreement is $36.7$32.1 million, of which $4.6$4.8 million is due within the next twelve months. Also as of January 3, 2010,2, 2011, included in current restricted cash and non-current restricted cash is $6.2 million and $8.2$9.3 million, respectively, as funds held in trust with respect to the STLDC for debt service and other reserves.
 
Northwest Detention Center
 
On June 30, 2003, CSC arranged financing for the construction of the Northwest Detention Center in Tacoma, Washington, referred to as the Northwest Detention Center, which was completed and opened for operation in April 2004 and acquired by us2004. We began to operate this facility following our acquisition in November 2005. In connection with the original financing, CSC of Tacoma LLC, a wholly owned subsidiary of CSC, issued a $57.0 million note payable to the Washington Economic Development Finance Authority, which we refer to as WEDFA, an instrumentality of the State of Washington, which issued revenue bonds and subsequently loaned the proceeds of the bond issuance back to CSC for the purposes of constructing the Northwest Detention Center. The bonds are non-recourse to us and the loan from WEDFA to CSC is non-recourse to us. These bonds mature in February 2014 and have fixed coupon rates between 3.20%3.80% and 4.10%.
 
The proceeds of the loan were disbursed into escrow accounts held in trust to be used to pay the issuance costs for the revenue bonds, to construct the Northwest Detention Center and to establish debt service and other reserves. On October 1, 2009,2010, CSC of Tacoma LLC made a payment from its restricted cash account of $5.7$5.9 million for the current portion of its periodic debt service requirement in relation to the WEDFA bidbond indenture. As of January 3, 2010,2, 2011, the remaining balance of the debt service requirement is $31.6$25.7 million, of which $5.9$6.1 million is classified as current in the accompanying balance sheet.
 
As of January 3, 2010,2, 2011, included in current restricted cash and non-current restricted cash is $7.1 million and $2.2$1.8 million, respectively, of funds held in trust with respect to the Northwest Detention Center for debt service and other reserves.
 
Municipal Correctional Finance, L.P.
Municipal Correctional Finance, L.P., which we refer to as MCF, our consolidated variable interest entity, is obligated for the outstanding balance of the 8.47% Revenue Bonds. The bonds bear interest at a rate of 8.47% per annum and are payable in semi-annual installments of interest and annual installments of principal. All unpaid principal and accrued interest on the bonds is due on the earlier of August 1, 2016 (maturity) or as noted under the bond documents. The bonds are limited, nonrecourse obligations of MCF and are collateralized by the property and equipment, bond reserves, assignment of subleases and substantially all assets related to the facilities owned by MCF. The bonds are not guaranteed by us or our subsidiaries.
The 8.47% Revenue Bond indenture provides for the establishment and maintenance by MCF for the benefit of the trustee under the indenture of a debt service reserve fund. As of January 2, 2011, the debt service reserve fund has a balance of $23.4 million. The debt service reserve fund is available to the trustee to pay debt service on the 8.47% Revenue Bonds when needed, and to pay final debt service on the 8.47% Revenue Bonds. If MCF is in default in its obligation under the 8.47% Revenue Bonds indenture, the trustee may declare the principal outstanding and accrued interest immediately due and payable. MCF has the right to cure a default of non-payment obligations. The 8.47% Revenue Bonds are subject to extraordinary mandatory redemption in certain instances upon casualty or condemnation. The 8.47% Revenue Bonds may be redeemed at the option of MCF prior to their final scheduled payment dates at par plus accrued interest plus a make-whole premium.


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Australia
 
In connection with the financing and management of one Australian facility, our wholly owned Australian subsidiary financed the facility’s development and subsequent expansion in 2003 with long-term debt obligations, which are non-recourse to us and total $45.4$46.3 million and $38.1$45.4 million at January 2, 2011 and January 3, 2010, and December 28, 2008, respectively. As a condition of the loan, we are required to maintain a restricted cash balance of AUD 5.0 million, which, at January 3, 2010,2, 2011, was $4.5$5.1 million. The amount is included in restricted cash and the annual maturities of the future debt obligation are included in non-recourse debt. The term of the non-recourse debt is through 2017 and it bears interest at a variable rate quoted by certain Australian banks plus 140 basis points. Any obligations or liabilities of the subsidiary are matched by a similar or corresponding commitment from the government of the State of Victoria.


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Guarantees
 
In connection with the creation of SACS, we entered into certain guarantees related to the financing, construction and operation of the prison. We guaranteed certain obligations of SACS under its debt agreements up to a maximum amount of 60.0 million South African Rand, or $8.2$9.1 million, to SACS’ senior lenders through the issuance of letters of credit. Additionally, SACS is required to fund a restricted account for the payment of certain costs in the event of contract termination. We have guaranteed the payment of 60% of amounts which may be payable by SACS into the restricted account and provided a standby letter of credit of 8.4 million South African Rand, or $1.1$1.3 million, as security for our guarantee. Our obligations under this guarantee are indexed to the CPI and expire upon the release from SACS of its obligations in respect of the restricted account under its debt agreements. No amounts have been drawn against these letters of credit, which are included in our outstanding letters of credit under the Revolver.
 
We have agreed to provide a loan, if necessary, of up to 20.0 million South African Rand, or $2.7$3.0 million, referred to as the Standby Facility, to SACS for the purpose of financing theSACS’ obligations under theits contract between SACS andwith the South African government. No amounts have been funded under the Standby Facility, and we do not currently anticipate that such funding will be required by SACS in the future. Our obligations under the Standby Facility expire upon the earlier of full funding or release from SACS of its obligations under its debt agreements. The lenders’ ability to draw on the Standby Facility is limited to certain circumstances, including termination of the contract.
 
We have also guaranteed certain obligations of SACS to the security trustee for SACSSACS’ lenders. We have secured our guarantee to the security trustee by ceding our rights to claims against SACS in respect of any loans or other finance agreements, and by pledging our shares in SACS. Our liability under the guarantee is limited to the cession and pledge of shares. The guarantee expires upon expiration of the cession and pledge agreements.
 
In connection with a design, build, finance and maintenance contract for a facility in Canada, we guaranteed certain potential tax obligations of anot-for-profit entity. The potential estimated exposure of these obligations is CAD 2.5 million, or $2.4$2.5 million commencing in 2017. We have a liability of $1.5$1.8 million and $1.3$1.5 million related to this exposure as of January 2, 2011 and January 3, 2010, and December 28, 2008, respectively. To secure this guarantee, we purchased Canadian dollar denominated securities with maturities matched to the estimated tax obligations in 2017 to 2021. We have recorded an asset and a liability equal to the current fair market value of those securities on our balance sheet. We do not currently operate or manage this facility.
 
At January 3, 2010,2, 2011, we also had outstanding eightseven letters of guarantee outstanding totaling $8.9$9.4 million under separate international facilities.facilities relating to performance guarantee of our Australian subsidiary. We do not have any off balance sheet arrangements.
 
Derivatives
 
In November 2009, we executed three interest rate swap agreements (the “Agreements”) in the aggregate notional amount of $75.0 million. In January 2010, we executed a fourth interest rate swap agreement in the notional amount of $25.0 million. We have designated these interest rate swaps as hedges against changes in


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the fair value of a designated portion of the 73/4% Senior Notes due 2017 (“73/4% Senior Notes”) due to changes in underlying interest rates. These interest rate swaps,The Agreements, which have payment, expiration dates and call provisions that mirror the terms of the 73/4% Senior Notes, effectively convert $75.0$100.0 million of the 73/4% Senior Notes into variable rate obligations. Each of the swaps has a termination clause that gives the lendercounterparty the right to terminate the interest rate swaps at fair market value, if they are no longer a lender under the Credit Agreement.certain circumstances. In addition to the termination clause, these interest rate swapsthe Agreements also have call provisions which specify that the lender can elect to settle the swap for the call option price. Under these interest rates swaps, we receivethe Agreements, the Company receives a fixed interest rate payment from the financial counterparties to the agreements equal to 73/4% per year calculated on the notional $75.0$100.0 million amount, while we makeit makes a variable interest rate payment to the same counterparties equal to the three-month LIBOR plus a fixed margin of between 4.24%4.16% and 4.29%, also calculated on the notional $75.0$100.0 million amount. Changes in the fair value of the interest rate swaps are recorded in earnings along with related designated changes in the value of the Notes. Effective January 6, 2010, we executed a


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fourth swap agreement relative to a notional amount of $25.0 million of the 73/4% Senior Notes. (See Note 20).Total net gains (loss) recognized and recorded in earnings related to these fair value hedges was $5.2 million and $(1.9) million in the fiscal periods ended January 2, 2011 and January 3, 2010, respectively. As of January 2, 2011 and January 3, 2010, the fair value of the swap assets (liabilities) was $3.3 million and $(1.9) million, respectively. There was no material ineffectiveness of ourthese interest rate swaps forduring the fiscal years presented.periods ended January 2, 2011.
 
Our Australian subsidiary is a party to an interest rate swap agreement to fix the interest rate on the variable rate non-recourse debt to 9.7%. We have determined the swap to be an effective cash flow hedge. Accordingly, we record the value of the interest rate swap in accumulated other comprehensive income, net of applicable income taxes. There was no ineffectiveness of this interest rate swap for the fiscal years presented. The Company does not expect to enter into any transactions during the next twelve months which would result in the reclassification into earnings or losses associated with this swap currently reported in accumulated other comprehensive loss.income (loss).
 
Contractual Obligations and Off Balance Sheet Arrangements
 
The following is a table of certain of our contractual obligations, as of January 3, 2010,2, 2011, which requires us to make payments over the periods presented.
 
                                        
 Payments Due by Period    Payments Due by Period   
   Less Than
     More Than
    Less Than
     More Than
 
Contractual Obligations
 Total 1 Year 1-3 Years 3-5 Years 5 Years  Total 1 Year 1-3 Years 3-5 Years 5 Years 
 (In thousands)  (In thousands) 
Long-term debt obligations $250,028  $28  $—  $—  $250,000  $250,000  $—  $—  $—  $250,000 
Term Loan B  154,963   3,650   7,300   144,013   — 
Term Loans  347,625   9,500   32,125   163,500   142,500 
Revolver  58,000   —   58,000   —   —   212,000   —   —   212,000   — 
Capital lease obligations (includes imputed interest)  24,437   1,930   3,866   3,868   14,773   22,564   1,950   3,900   3,872   12,842 
Operating lease obligations  134,460   18,041   31,982   18,501   65,936   181,181   30,948   54,793   34,214   61,226 
Non-recourse debt  113,724   15,241   32,697   36,130   29,656   212,445   31,290   68,897   71,880   40,378 
Estimated interest payments on debt(a)  188,242   30,144   56,087   43,287   58,724   315,249   54,966   117,537   94,039   48,707 
Estimated funding of pension and other post retirement benefits  16,206   10,223   406   543   5,034   13,380   5,944   470   580   6,386 
Estimated construction commitments  37,700   37,700   —   —   —   227,500   202,300   25,200   —   — 
Estimated tax payments for uncertain tax positions(b)  5,116   —   5,116   —   —   4,035   2,243   1,792   —   — 
                      
Total $982,876  $116,957  $195,454  $246,342  $424,123  $1,785,979  $339,141  $304,714  $580,085  $562,039 
                      
 
 
(a)Due to the uncertainties of future LIBOR rates, the variable interest payments on our credit facilitySenior Credit Facility and swap agreements were calculated using aan average LIBOR rate of .30%2.87% based on our estimatedprojected interest rates forthrough fiscal 2010.2016.
(b)State income tax payments are reflected net of the federal income tax benefit.
 
We do not have any additional off balance sheet arrangements which would subject us to additional liabilities.


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On February 11, 2011, we announced the amendment of our Senior Credit Facility and also announced the closing of our offering of $300.0 million aggregate principal amounts of senior unsecured notes due 2021. The obligation related to these new debt arrangements is not included in the table above and is summarized below:
                     
  Payments Due by Period    
Contractual Obligations occurring after
    Less Than
        More Than
 
Fiscal Year Ended January 2, 2011 Total  1 Year  1-3 Years  3-5 Years  5 Years 
  (In thousands) 
 
Term LoanA-2
 $150,000  $5,625  $20,625  $123,750  $— 
6.625% Senior Notes due 2021  300,000   —   —   —   300,000 
Estimated interest payments on debt(c)  225,418   14,484   52,703   48,918   109,313 
                     
Total $675,418  $20,109  $73,328  $172,668  $409,313 
                     
(c)Due to the uncertainties of future LIBOR rates, the variable interest payments on our Senior Credit Facility, as amended, were calculated using an average LIBOR rate of 2.87% based on projected interest rates through fiscal 2016.
 
Cash Flow
 
Cash and cash equivalents as of January 3, 20102, 2011 was $33.9$39.7 million, compared to $31.7$33.9 million as of December 28, 2008.January 3, 2010. During Fiscal 2009Year 2010 we used cash flows from operations, to fund all of our operating expenses and used cash on hand, net cash proceeds from the issuance of our 73/4% Senior Notes and cash flowproceeds from operationsour Senior Credit Facility to fund $149.8our acquisition of Cornell in an amount of $260.3 million, to fund $97.1 million in capital expenditures, to fund $80.0 million for repurchases of common stock under our stock repurchase program and $7.1 million for shares of common stock purchased from certain directors and executives, and to fund our operations.
 
Cash provided by operating activities of continuing operations in 2010, 2009 and 2008 and 2007 was $125.1$126.2 million, $74.4$125.3 million, and $75.0$74.5 million, respectively. Cash provided by operating activities of continuing operations in 2010 was impacted by changes in balance sheet assets and liabilities such as the positive impact of the increase in deferred income tax liabilities of $17.9 million partially offset by the negative impact of an increase in accounts receivable, prepaid expenses and other current assets of $14.4 million. Cash flow from operations was also impacted by the effect of certain significant non-cash items such as: positive impacts of depreciation and amortization expense of $48.1 million and the write-off of deferred financing fees of $7.9 million associated with the termination of our Third Amended and Restated Credit Agreement in Third Quarter 2010. The increase in depreciation and amortization expense is primarily the result of the additional amortization of intangible assets and the depreciation of fixed assets acquired in connection with our acquisition of Cornell. In 2009, cash provided by operating activities of continuing operations was positively impacted by an increase in net income attributable to GEO of $7.1 million in addition to $39.3 millionover the prior year as well as the impact of certain non-cash items including depreciation and amortization expense. These increases reflectexpense of $39.3 million and the openingwrite-off of new facilities as previously discussed and improved financial performance at existing facilities.deferred financing fees of $6.8 million. Cash provided by operating activities of continuing operations in 2008 was positively impacted by an increaseprimarily the result of increases in net income of $17.1 million in


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additionattributable to $37.4 million ofGEO, increased by non-cash depreciation and amortization expense. Cash provided by operating activities of continuing operations in 2007 was positively impacted by an increase in net income of $11.8 million in addition to $33.2 million of depreciation and amortization expense.
Cash provided by operating activities of continuing operations was positively impacted in 2009 by a decrease in accounts receivable of $6.9 million, an increase in our deferred income tax benefits of $10.0 million, and non-cash expense of $6.8 million related to the write-off of deferred financing fees and the expenses associated with the tender offer for our 81/4% Senior Notes. Cash provided by operating activities of continuing operations was negatively impacted in 2008partially offset by an increase in accounts receivable, of $29.6 millionprepaid expenses and more non-cash earnings in the prior year attributable to our investment in our South Africa joint venture, SACS. Cash provided by operating activities of continuing operations was negatively impacted in 2007 by an increase in accounts receivable of $10.6 million and increases in our deferred income tax provision of $5.1 million.other current assets.
 
Cash used in investing activities in 2010 of continuing operations$368.3 million was primarily the result of our acquisition of Cornell in August 2010 for $260.3 million and capital expenditures of $97.1 million compared to cash used in investing activities during 2009 of $185.3 million consistswhich primarily consisted of our investment inacquisition of Just Care Inc, offor $38.4 million as well asand capital expenditures of $149.8 million. Of the aggregate $149.8 million in capital expenditures, $138.3 million related to development capital expenditures and approximately $11.5 million related to maintenance capital expenditures. We are currently developing a number of projects using company financing. We estimate our remaining capital requirements for these projects to be $37.7 million, which will be spent through 2010.
Cash used in investing activities of continuing operations induring 2008 primarily consisted of $131.6 million includes capital expenditures of $131.0 million.
Cash provided by financing activities in 2010 was $243.7 million and reflects cash proceeds from our new Credit Agreement consisting of $150.0 million in borrowings under the Term Loan A, $200.0 million of which $119.3 million related to development capital expenditures and approximately $11.7 million related maintenance capital expenditures. Cash used in investing activitiesborrowings under the Term Loan B with a total discount of continuing operations in 2007 was $518.9 million due to our cash investment in CPT of $410.5$2.0 million, and capital expenditures of $115.2 million.$378.0 million of borrowings under our Revolver. These proceeds were offset by payments of $155.0 million for the repayment of our Prior Term Loan B, payments of $224.0 million on our Revolver, and payments of $18.5 million on non-recourse debt, term loans and other debt. In addition, we paid $80.0 million for repurchases of common stock under our


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stock repurchase program and $7.1 million for shares of common stock which were purchased from certain directors and executives and retired immediately after purchase.
 
Cash provided by financing activities in 2009 was $52.0$51.9 million and reflects cash proceeds from the issuance of our 73/4% Senior Notes of $250.0 million and Prior Revolver borrowings of $83.0 million. These proceeds were offset by payments of $150.0 million for repayment of our 81/4% Senior Notes, payments of $99.0 million on our Prior Revolver and payments on non-recourse debt and Prior Term Loan B of $17.8 million. Cash proceeds from our 73/4% Senior Notes were primarily used to pay down our 81/4% Senior Notes and our Revolver and to pay down ourPrior Revolver. We intend to use cash flows from operations and future borrowings under our Revolver to fund the project discussed above and other projects we may announce during fiscal 2010. We believe the institutions and banks included in our lender group will be able to fund their commitment to our Revolver. However, we can provide no assurance regarding their solvency or ability to honor their commitments. Failure to honor a commitment could materially impact our ability to meet our future capital needs and complete the projects discussed above.
Cash provided by financing activities in 2008 was $53.7 million and reflects proceeds received from net borrowings of $74.0 million under our Revolver. Borrowings under our $240.0 million Revolver were primarily used to fund $119.3 million of development capital expenditures in fiscal 2008. Cash provided by financing activities in 2007 was $372.3 million and reflects proceeds received from the equity offering of $227.5 million as well as cash proceeds of $387.0 million from our Term Loan B and the Revolver. These cash flows from financing activities are offset by payments on the Term Loan B of $202.7 million, payments on the Revolver of $22.0 million and payments on other long term debt of $12.6 million.
 
Inflation
 
We believe that inflation, in general, did not have a material effect on our results of operations during 2010, 2009 2008 and 2007.2008. While some of our contracts include provisions for inflationary indexing, inflation could have a substantial adverse effect on our results of operations in the future to the extent that wages and salaries, which represent our largest expense, increase at a faster rate than the per diem or fixed rates received by us for our management services.
 
Outlook
 
The following discussion of our future performance contains statements that are not historical statements and, therefore, constitute forward-looking statements within the meaning of the Private Securities Litigation


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Reform Act of 1995. Our forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated or implied in the forward-looking statement. Please refer to “Item 1A. Risk Factors” in this Annual Report onForm 10-K, the “Forward-Looking Statements — Safe Harbor,” as well as the other disclosures contained in this Annual Report onForm 10-K, for further discussion on forward-looking statements and the risks and other factors that could prevent us from achieving our goals and cause the assumptions underlying the forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements.
 
With state and federal prison populations growing by approximately 16% since 2000, the private corrections industry has played an increasingly important role in addressing U.S. detention and correctional needs. The number of State and Federal prisoners housed in private facilities has increased by 47% since the year 2000 with the Federal government and states such as Arizona, Texas and Florida accounting for a significant portion of the increase. At year-end 2008,2009, 8.0% of the estimated 1.6 million State and Federal prisoners incarcerated in the United States were held in private facilities, up from 6.3% in 2000. In addition to our strong positions in TexasFederal and Florida andState markets in the U.S. market in general,, we believe we are the only publicly traded U.S. correctional company with international operations. With the existing operations in South Africa, Australia, and the United Kingdom, beginning, we believe that our international presence positions us to capitalize on growth opportunities within the private corrections and detention industry in new and established international markets.
 
We intend to pursue a diversified growth strategy by winning new customers and contracts, expanding our government services portfolio and pursuing selective acquisition opportunities. We achieve organic growth through competitive bidding that begins with the issuance by a government agency of a request for proposal, or RFP. We primarily rely on the RFP process for organic growth in our U.S. and international corrections operations as well as in our mental health and residential treatment services.GEO Care’s operations. We believe that our long operating history and reputation have earned us credibility with both existing and prospective clients when bidding on new facility management contracts or when renewing existing contracts. Our success in the RFP process has resulted in a pipeline of new projects with significant revenue potential. In 2009,2010, we activated eightfour new or expansion projects representing 2,698an aggregate of 4,867 additional beds. This compares to the eight new or expansion projects activated in 20082009 representing 6,1202,698 new beds. Also in 2010, we received awards for 7,846 beds out of the aggregate total of 19,849 beds awarded from governmental agencies under competitive bids during 2010, including competitive contract re-bids. As of January 3, 2010,2, 2011, we have threefive facilities under various stages of development or pending commencement of operations which represent 4,3253,444 beds. In addition to pursuing organic growth through the RFP process, we will from time to time selectively consider the financing and construction of new facilities or expansions to existing facilities on a speculative basis without having a signed contract with a known customer. We also plan to leverage our experience to expand the range of government-outsourcedgovernment-


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outsourced services that we provide. We will continue to pursue selected acquisition opportunities in our core services and other government services areas that meet our criteria for growth and profitability.
The strategic acquisitions of Cornell Companies and B.I. Incorporated have further diversified GEO, creating a stronger company with a full continuum of care service platform and leading competitive positions in key market segments in the corrections, detention, and rehabilitation treatment services industry. From the development of facilities, to the intake and housing of offenders, to the provision of transportation functions as well as comprehensive medical, mental health and rehabilitation services, to the reintegration and supervision of offenders in the community, we believe governmental clients are increasingly looking for full service, turnkey solutions that can deliver enhanced quality and cost savings across a comprehensive continuum of care. Following the completion of the Cornell and BI acquisitions, we are positioned to provide complementary, full service continuum of care solutions for our numerous government clients.
 
Revenue
 
Domestically, we continue to be encouraged by the number of opportunities that have recently developed in the privatized corrections and detention industry. Overcrowding at corrections facilities in various states most recently California and Arizona and increased demand for bed space at federal prisons and detention facilities are two of the factors that have contributed to the greater number of opportunities for privatization. However, these positive trends may in the future be impacted by government budgetary constraints. Recently, we have experienced a delay in cash receipts from California and other states may follow suit. While improving economic conditions have helped lower the number of states reporting new fiscal year 2011 budget gaps and have dramatically increased the number of states reporting stable revenue outlooks for the remaining of fiscal year 2011, several states still face ongoing budget shortfalls. According to the National Conference onof State Legislatures, fifteen states reported new gaps since fiscal year 2011 began with the sum of these budget imbalances totaling $26.7 billion as of November 30, 2009, thirty-nine states were projecting that general fund revenues in fiscal year 2010 will be lower than in fiscal year 2009 and2010. Additionally, 35 states projectedcurrently project budget gaps in fiscal year 2011 with the sum of those budget imbalances totaling $55.5 billion.2012. As a result of budgetary pressures, state correctional agencies may pursue a number of cost savings initiatives which may include the early release of inmates, changes to parole laws and sentencing guidelines, and reductions in per diem ratesand/or the scope of services provided by private operators. These potential cost savings initiatives could have a material adverse impact on our current operationsand/or our ability to pursue new business opportunities. Additionally, if state budgetary constraints, as discussed above, persist or intensify, our state customers’ ability to pay us may be impairedand/or we may be forced to renegotiate our management contracts on less favorable terms and our financial condition results of operations or cash flows could be


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materially adversely impacted. We plan to actively bid on any new projects that fit our target profile for profitability and operational risk. Although we are pleased with the overall industry outlook, positive trends in the industry may be offset by several factors, including budgetary constraints, unanticipated contract terminations, contract non-renewals,and/or contract re-bids. Additionally, several of our management contracts are up for renewaland/or re-bid in 2010. Although we have historically had a relative high contract renewal rate, there can be no assurance that we will be able to renew our expiring management contracts scheduled to expire in 2010 on favorable terms, or at all. Also, while we are pleased with our track record in re-bid situations, we cannot assure that we will prevail in any such future situations.
 
Internationally, during the second half of fiscal year 2009 our subsidiaries in the United Kingdom and in Australia we recently began the operation and management under two new contracts with an aggregate of 1,083 beds. These projects commenced operationsIn July 2010, our subsidiary in the second halfUnited Kingdom (referred to as the “UK”) began operating the 360-bed expansion at Harmondsworth increasing the capacity of fiscal year 2009.that facility to 620 beds from 260 beds. We believe there are additional opportunities in the UK such as the UK government’s solicitation of proposals for the management of five existing managed-only prisons totaling approximately 5,700 beds. Additionally, we expect to compete on large-scale transportation contracts in the UK where we have been short-listed to submit proposals as part of a new venture we have formed with a large UK-based fleet services company. Finally, the UK government had announced plans to develop five new 1,500-bed prisons to be financed, built and managed by the private sector. GEO had gone through the prequalification process for this procurement and had been invited to compete on these opportunities. We are currently awaiting a revised timeline from the governmental agency in the UK so we may continue to pursue this project. We are continuing to monitor this opportunity and, at this time, we believe the government in the UK is reviewing this plan to determine the best way to proceed. In South Africa, we have bid on projects for the design, construction and operation of four 3,000-bed


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prison projects totaling 12,000 beds. Requests for Proposalproposal were issued in December 2008 and we submitted our bids on the projects at the end of May 2009. We expect preferred biddersThe South African government has announced that it intends to be announced in the first halfcomplete its evaluation of 2010 and anticipate final close to occur within six months thereafter.four existing bids (including ours) by November 2011. No more than two prison projects can be awarded to any one bidder. The New Zealand government has also solicited expressions of interest for a new design, build, finance and management contract for a new correctional center for 960 beds, and our GEO Australia subsidiary has been short-listed for participation in this procurement. We believe that additional opportunities will become available in international markets and we plan to actively bid on any opportunities that fit our target profile for profitability and operational risk.
 
With respect to our mental health/health, residential treatment, youth services and re-entry services business conducted through our wholly-owned subsidiary, GEO Care, we are currently pursuing a number of business development opportunities. In September 2009,connection with our merger with Cornell in August 2010 and our acquisitions of BI in February 2011, we acquired Justhave significantly expanded our operations by adding 44 facilities and also the service offerings of GEO Care by adding electronic monitoring services and begancommunity re-entry and immigration related supervision services. Through both organic growth and acquisitions, and subsequent to our acquisition of BI in February 2011, we have been able to grow GEO Care’s business to approximately 6,500 beds and 60,000 offenders under community supervision.
GEO Care has also recently signed a contract for the management and operation of the 354-bed Columbia Care Regional Centernew 100-bed Montgomery County Mental Health Treatment Facility in the fourth fiscal quarter.Texas, which is scheduled to open in March 2011. In addition, we continue to expend resources on informing state and local governments about the benefits of privatization and we anticipate that there will be new opportunities in the future as those efforts begin to yield results. We believe we are well positioned to capitalize on any suitable opportunities that become available in this area.
 
Operating Expenses
 
Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and mental health facilities.contracts to provide services to our governmental clients. Labor and related cost represented 52.4%56.3% of our operating expenses in the fiscal year 2009.2010. Additional significant operating expenses include food, utilities and inmate medical costs. In 2009,2010, operating expenses totaled 78.6%76.8% of our consolidated revenues. Our operating expenses as a percentage of revenue in 20102011 will be impacted by the opening of any new facilities. We also expect our results in 2010 to reflect increases to interest expense due to higher rates related to incremental borrowings on our Senior Credit Facility, more average indebtedness and less capitalized interest due to a decrease in construction activity. We also expect increases to depreciation expense as a percentage of revenue due to the carrying costs we will incur for twoa newly constructed and expanded facilitiesfacility for which we have no corresponding management contract for the expansion beds. We expect thatbeds and potential carrying costs of certain facilities we acquired from Cornell with no corresponding management contract. Additionally, we will experience increases as a portion of these increases may be offset by a savings to depreciation expense. We are currently reviewing the useful lives for our owned facilities and expect that someresult of the livesamortization of theseintangible assets may increase as a result. Overall, excluding anystart-up expenses, depreciation expenseacquired in connection with our acquisitions of Cornell and interest expense,BI. In addition to the factors discussed relative to our current operations, we anticipate thatexpect to experience overall increases in operating expenses as a percentageresult of the acquisitions of Cornell and BI. As of January 2, 2011, our revenue will remain relatively flat, consistent with our fiscal year ended January 3, 2010.worldwide operations include the managementand/or ownership of approximately 81,000 beds at 118 correctional, detention and residential treatment, youth services and community-based facilities including projects under development. See discussion below relative to Synergies and Cost Savings.
 
General and Administrative Expenses
 
General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees and other administrative expenses. In 2009,2010, general and administrative expenses totaled 6.1%8.4% of our consolidated revenues. WeExcluding the impact of the merger with Cornell, we expect general and administrative expenses as a percentage of revenue in 20102011 to be generally consistent with our general and administrative expenses for 2009.2010. In connection with our merger with Cornell, we incurred approximately $25 million in transaction costs, including $7.9 million in debt extinguishment costs, during fiscal year ended 2010. In connection with our acquisition of BI, we incurred $7.7 million of acquisition related costs during fiscal year 2010 and expect to incur between $3 million and $4 million in the first fiscal quarter of 2011. We expect business development costs to remain consistent as we pursue additional business development opportunities in all of our business lines and build the corporate infrastructure necessary to support our mental health residential


76

treatment services business. We also plan to continue expending resources from time to time on the evaluation of potential acquisition targets.


61

Synergies and Cost Savings
Our management anticipates annual synergies of approximately $12-$15 million during the year following the completion of the merger with Cornell and approximately $3-$5 million during the year following our acquisition of BI. There may be potential to achieve additional synergies thereafter. We believe any such additional synergies would be achieved primarily from greater operating efficiencies, capturing inherent economies of scale and leveraging corporate resources. Any synergies achieved should further enhance cash provided by operations and return on invested capital of the combined company.
Forward-Looking Statements — Safe Harbor
 
This reportAnnual Report onForm 10-K and the documents incorporated by reference herein contain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. “Forward-looking” statements are any statements that are not based on historical information. Statements other than statements of historical facts included in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are “forward-looking” statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” or “continue” or the negative of such words or variations of such words and similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements and we can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements, or “cautionary statements,” include, but are not limited to:
 
 • our ability to timely buildand/or open facilities as planned, profitably manage such facilities and successfully integrate such facilities into our operations without substantial additional costs;
 
 • the instability of foreign exchange rates, exposing us to currency risks in Australia, the United Kingdom, and South Africa, or other countries in which we may choose to conduct our business;
 
 • our ability to reactivateactivate the North Lake Correctional Facility;inactive beds at our idle facilities;
 
 • an increase in unreimbursed labor rates;
 
 • our ability to expand, diversify and grow our correctional, and mental health and residential treatment services;services businesses;
 
 • our ability to win management contracts for which we have submitted proposals and to retain existing management contracts;
 
 • our ability to raise new project development capital given the often short-term nature of the customers’ commitment to use newly developed facilities;
 
 • our ability to estimate the government’s level of dependency on privatized correctional services;
 
 • our ability to accurately project the size and growth of the U.S. and international privatized corrections industry;
 
 • our ability to develop long-term earnings visibility;
 
 • our ability to identify suitable acquisitions and to successfully complete and integrate such acquisitions on satisfactory terms;


77

• our ability to successfully integrate Cornell and BI into our business within our expected time-frame and estimates regarding integration costs;
• our ability to accurately estimate the growth to our aggregate annual revenues and the amount of annual synergies we can achieve as a result of our acquisition of Cornell and BI;
• our ability to successfully address any difficulties encountered in maintaining relationships with customers, employees or suppliers as a result of our acquisition of Cornell and BI;
• our ability to obtain future financing on satisfactory terms or at competitive rates;all, including our ability to secure the funding we need to complete ongoing capital projects;
 
 • our exposure to rising general insurance costs;
 
 • our exposure to state and federal income tax law changes internationally and domestically;domestically and our exposure as a result of federal and international examinations of our tax returns or tax positions;
 
 • our exposure to claims for which we are uninsured;
 
 • our exposure to rising employee and inmate medical costs;
 
 • our ability to maintain occupancy rates at our facilities;
 
 • our ability to manage costs and expenses relating to ongoing litigation arising from our operations;
 
 • our ability to accurately estimate on an annual basis, loss reserves related to general liability, workersworkers’ compensation and automobile liability claims;
 
• our ability to identify suitable acquisitions, and to successfully complete and integrate such acquisitions on satisfactory terms;


62

 • the ability of our government customers to secure budgetary appropriations to fund their payment obligations to us; and
 
 • other factors contained in our filings with the Securities and Exchange Commission, or the SEC, including, but not limited to, those detailed in this annual reportAnnual Report onForm 10-K, our Quarterly Reports onForm 10-Qs10-Q and our Current Reports onForm 8-Ks8-K filed with the SEC.
 
We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements included in this report.
 
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
 
Interest Rate Risk
 
We are exposed to market risks related to changes in interest rates with respect to our Senior Credit Facility. Payments under the Senior Credit Facility are indexed to a variable interest rate. Based on borrowings outstanding under the Senior Credit Facility portion of $213.0$557.8 million (net of discount of $1.9 million) and $57.0 million in outstanding letters of credit, as of January 3, 20102, 2011 for every one percent increase in the interest rate applicable to the Senior Credit Facility, our total annual interest expense would increase by $2.1$5.6 million.
 
In November 2009, we executed three interest rate swap agreements in the aggregate notional amount of $75.0 million. These interest rate swaps, which have payment, expiration dates and call provisions that mirror the terms of the Notes, effectively convert $75.0 million of the Notes into variable rate obligations. Under these interest rate swaps, we receive a fixed interest rate payment from the financial counterparties to the agreements equal to 73/4% per year calculated on the notional $75.0 million amount, while we make a variable interest rate payment to the same counterparties equal to the three-month LIBOR plus a fixed margin of between 4.235%4.16% and 4.29%, also calculated on the notional $75.0 million amount. Effective January 6, 2010, we executed a fourth swap agreement relative to a notional amount of $25.0 million of our 73/4% Senior Notes (See Note 20)9). For every one percent increase in the interest rate applicable to our aggregate notional $100$100.0 million of swap agreements relative to the 73/4% Senior Notes, our annual interest expense would increase by $1.0 million.


78

We have entered into certain interest rate swap arrangements for hedging purposes, fixing the interest rate on our Australian non-recourse debt to 9.7%. The difference between the floating rate and the swap rate on these instruments is recognized in interest expense within the respective entity. Because the interest rates with respect to these instruments are fixed, a hypothetical 100 basis point change in the current interest rate would not have a material impact on our financial condition or results of operations.
 
Additionally, we invest our cash in a variety of short-term financial instruments to provide a return. These instruments generally consist of highly liquid investments with original maturities at the date of purchase of three months or less. While these instruments are subject to interest rate risk, a hypothetical 100 basis point increase or decrease in market interest rates would not have a material impact on our financial condition or results of operations.
 
Foreign Currency Exchange Rate Risk
 
We are exposed to market risks related to fluctuations in foreign currency exchange rates between the U.S. Dollar, the Australian Dollar, the Canadian Dollar, the South African Rand and the British Pound currency exchange rates. Based upon our foreign currency exchange rate exposure as of January 3, 20102, 2011 with respect to our international operations, every 10 percent change in historical currency rates would have a $5.0$6.5 million effect on our financial position and a $0.8$1.3 million impact on our results of operations over the next fiscal year.


6379

Item 8.  Financial Statements and Supplementary Data
 
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
 
To the Shareholders of
The GEO Group, Inc.:
 
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. They include amounts based on judgments and estimates.
 
Representation in the consolidated financial statements and the fairness and integrity of such statements are the responsibility of management. In order to meet management’s responsibility, the Company maintains a system of internal controls and procedures and a program of internal audits designed to provide reasonable assurance that our assets are controlled and safeguarded, that transactions are executed in accordance with management’s authorization and properly recorded, and that accounting records may be relied upon in the preparation of financial statements.
 
The consolidated financial statements have been audited by Grant Thornton LLP, independent registered public accountants, whose appointment by our Audit Committee was ratified by our shareholders. Their report expresses a professional opinion as to whether management’s consolidated financial statements considered in their entirety present fairly, in conformity with accounting principles generally accepted in the United States, the Company’s financial position and results of operations. Their audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States). The effectiveness of our internal control over financial reporting as of January 3, 20102, 2011 has been audited by Grant Thornton LLP, independent registered public accountants, as stated in their report which is included in thisForm 10-K.
 
The Audit Committee of the Board of Directors meets periodically with representatives of management, the independent registered public accountants and our internal auditors to review matters relating to financial reporting, internal accounting controls and auditing. Both the internal auditors and the independent registered certified public accountants have unrestricted access to the Audit Committee to discuss the results of their reviews.
 
George C. Zoley
Chairman and Chief Executive Officer
 
Wayne H. Calabrese
Vice Chairman, President
and Chief Operating Officer
Brian R. Evans
Senior Vice President and Chief Financial
Officer


6480

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined inRules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer that: (i) pertains to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provides reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements for external reporting in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures are being made only in accordance with authorization of the Company’s management and directors; and (iii) provides reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has assessed the effectiveness of the Company’s internal control over financial reporting as of January 3, 2010.2, 2011. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal Control — Integrated Framework.
 
TheOn August 12, 2010, we acquired Cornell Companies, Inc., which we refer to as Cornell, at which time Cornell became our subsidiary. We are currently in the process of assessing and integrating Cornell’s internal controls over financial reporting into our financial reporting systems. Management’s assessment of internal control over financial reporting at January 2, 2011, excludes the operations of Cornell as allowed by SEC guidance related to internal controls of recently acquired entities. Management will include the operations of Cornell in its assessment of internal control over financial reporting within one year from the date of acquisition. With the exception of Cornell Companies, Inc., the Company evaluated, with the participation of its Chief Executive Officer and Chief Financial Officer, its internal control over financial reporting as of January 3, 2010,2, 2011, based on the COSOInternal Control — Integrated Framework.Based on this evaluation, the Company’s management concluded that as of January 3, 2010,2, 2011, its internal control over financial reporting is effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
Grant Thornton LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report onForm 10-K, has issued an attestation report on our internal control over financial reporting.


6581

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors and Shareholders of
The GEO Group, Inc.
 
We have audited The GEO Group, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of January 3, 2010,2, 2011, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. Our audit of, and opinion on, the Company’s internal control over financial reporting does not include internal control over financial reporting of Cornell Companies, Inc., a wholly owned subsidiary, whose financial statements reflect total assets and revenues constituting 37 and 13 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended January 2, 2011. As indicated in Management’s Report, Cornell Companies, Inc. was acquired during 2010 and therefore, management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of Cornell Companies, Inc.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, The GEO Group, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of January 3, 2010,2, 2011, based on criteria established inInternal Control-Integrated Frameworkissued by COSO.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The GEO Group, Inc. and subsidiaries as of January 2, 2011 and January 3, 2010, and December 28, 2008, and the related consolidated statements of income, shareholders’ equity and comprehensive income and cash flows for each of the three years in the period ended January 3, 2010,2, 2011, and our report dated February 22, 2010March 2, 2011 expressed an unqualified opinion on those financial statements.
 
/s/  Grant Thornton LLP
 
Miami, Florida
February 22, 2010March 2, 2011


6682

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors and
Shareholders of The GEO Group, Inc.
 
We have audited the accompanying consolidated balance sheets of The GEO Group, Inc. and subsidiaries (the “Company”) as of January 2, 2011 and January 3, 2010, and December 28, 2008, and the related consolidated statements of income, shareholders’ equity and comprehensive income and cash flows for each of the three years in the period ended January 3, 2010.2, 2011. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The GEO Group, Inc. and subsidiaries as of January 2, 2011 and January 3, 2010, and December 28, 2008, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 20102, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
As discussed in Note 18, the Company adopted new accounting guidance on January 1, 2007 related to the accounting for uncertainty in income tax reporting.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The GEO Group, Inc. and subsidiaries’ internal control over financial reporting as of January 3, 2010,2, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 22, 2010March 2, 2011 expressed an unqualified opinion thereon.
 
/s/  Grant Thornton LLP
 
Miami, Florida
February 22, 2010March 2, 2011


6783

THE GEO GROUP, INC.
 
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended January 2, 2011, January 3, 2010, and December 28, 2008 and December 30, 2007
 
                        
 2009 2008 2007  2010 2009 2008 
 (In thousands, except per share data)  (In thousands, except per share data) 
Revenues
 $1,141,090  $1,043,006  $976,299  $1,269,968  $1,141,090  $1,043,006 
Operating Expenses
  897,356   822,659   788,503   975,020   897,099   822,053 
Depreciation and Amortization
  39,306   37,406   33,218   48,111   39,306   37,406 
General and Administrative Expenses
  69,240   69,151   64,492   106,364   69,240   69,151 
              
Operating Income
  135,188   113,790   90,086   140,473   135,445   114,396 
Interest Income
  4,943   7,045   8,746   6,271   4,943   7,045 
Interest Expense
  (28,518)  (30,202)  (36,051)  (40,707)  (28,518)  (30,202)
Loss on Extinguishment of Debt
  (6,839)  —   (4,794)  (7,933)  (6,839)  — 
              
Income Before Income Taxes, Equity in Earnings of Affiliates, and Discontinued Operations
  104,774   90,633   57,987   98,104   105,031   91,239 
Provision for Income Taxes
  41,991   33,803   22,049   39,532   42,079   34,033 
Equity in Earnings of Affiliates, net of income tax provision (benefit) of $1,368, ($805), and $1,030
  3,517   4,623   2,151 
Equity in Earnings of Affiliates, net of income tax provision (benefit) of $2,212, $1,368 and ($805)
  4,218   3,517   4,623 
              
Income from Continuing Operations
  66,300   61,453   38,089   62,790   66,469   61,829 
Income (loss) from Discontinued Operations, net of tax provision (benefit) of ($216), $236, and $2,310
  (346)  (2,551)  3,756 
Loss from Discontinued Operations, net of income tax provision (benefit) of $0, ($216), and $236
  —   (346)  (2,551)
              
Net Income
 $65,954  $58,902  $41,845  $62,790  $66,123  $59,278 
Loss (Earnings) Attributable to Noncontrolling Interests
  678   (169)  (376)
       
Net Income Attributable to The GEO Group, Inc.
 $63,468  $65,954  $58,902 
              
Weighted Average Common Shares Outstanding:
                        
Basic  50,879   50,539   47,727   55,379   50,879   50,539 
              
Diluted  51,922   51,830   49,192   55,989   51,922   51,830 
              
Earnings (loss) per Common Share:
            
Income per Common Share Attributable to The GEO Group, Inc.:
            
Basic:
                        
Income from continuing operations $1.30  $1.22  $0.80  $1.15  $1.30  $1.22 
Income (loss) from discontinued operations  —   (0.05)  0.08 
Loss from discontinued operations  —   —   (0.05)
              
Net income per share — basic $1.30  $1.17  $0.88  $1.15  $1.30  $1.17 
              
Diluted:
                        
Income from continuing operations $1.28  $1.19  $0.77  $1.13  $1.28  $1.19 
Income (loss)from discontinued operations
  (0.01)  (0.05)  0.08 
Loss from discontinued operations  —   (0.01)  (0.05)
              
Net income per share — diluted $1.27  $1.14  $0.85  $1.13  $1.27  $1.14 
              
Comprehensive Income (Loss):
            
Net income $62,790  $66,123  $59,278 
Total other comprehensive income (loss), net of tax  4,645   12,174   (14,361)
       
Total comprehensive income  67,435   78,297   44,917 
Comprehensive (income) loss attributable to noncontrolling interests  608   428   (210)
       
Comprehensive income attributable to The GEO Group, Inc.  $68,043  $78,725  $44,707 
       
 
The accompanying notes are an integral part of these consolidated financial statements.


6884

THE GEO GROUP, INC.
 
CONSOLIDATED BALANCE SHEETS
January 2, 2011 and January 3, 2010 and December 28, 2008
 
                
 2009 2008  2010 2009 
 (In thousands, except
  (In thousands, except
 
 share data)  share data) 
ASSETS
ASSETS
ASSETS
Current Assets
                
Cash and cash equivalents $33,856  $31,655  $39,664  $33,856 
Restricted cash  13,313   13,318 
Accounts receivable, less allowance for doubtful accounts of $429 and $625  200,756   199,665 
Deferred income tax asset, net  17,020   17,340 
Other current assets  14,689   12,911 
Current assets of discontinued operations  —   7,031 
Restricted cash and investments (including VIEs(1) of $34,049 and $6,212, respectively)  41,150   13,313 
Accounts receivable, less allowance for doubtful accounts of $1,308 and $429  275,484   200,756 
Deferred income tax assets, net  32,126   17,020 
Prepaid expenses and other current assets  36,710   14,689 
          
Total current assets  279,634   281,920   425,134   279,634 
          
Restricted Cash
  20,755   19,379 
Property and Equipment, Net
  998,560   878,616 
Restricted Cash and Investments(including VIEs of $33,266 and $8,182, respectively)
  49,492   20,755 
Property and Equipment, Net(including VIEs of $167,209 and $28,282, respectively)
  1,511,292   998,560 
Assets Held for Sale
  4,348   4,348   9,970   4,348 
Direct Finance Lease Receivable
  37,162   31,195   37,544   37,162 
Deferred Income Tax Assets, Net
  —   4,417   936   — 
Goodwill
  40,090   22,202   244,947   40,090 
Intangible Assets, Net
  17,579   12,393   87,813   17,579 
Other Non-Current Assets
  49,690   33,942   56,648   49,690 
Non-Current Assets of Discontinued Operations
  —   209 
          
 $1,447,818  $1,288,621 
Total Assets $2,423,776  $1,447,818 
          
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
                
Accounts payable $51,856  $56,143  $73,880  $51,856 
Accrued payroll and related taxes  25,209   27,957   33,361   25,209 
Accrued expenses  80,759   82,442   121,647   80,759 
Current portion of capital lease obligations, long-term debt and non-recourse debt  19,624   17,925 
Current liabilities of discontinued operations  —   1,459 
Current portion of capital lease obligations, long-term debt and non-recourse debt (including VIEs of $19,365 and $4,575, respectively)  41,574   19,624 
          
Total current liabilities  177,448   185,926   270,462   177,448 
          
Deferred Income Tax Liability
  7,060   14 
Deferred Income Tax Liabilities
  63,546   7,060 
Other Non-Current Liabilities
  33,142   28,876   46,862   33,142 
Capital Lease Obligations
  14,419   15,126   13,686   14,419 
Long-Term Debt
  453,860   378,448   798,336   453,860 
Non-Recourse Debt
  96,791   100,634 
Commitments and Contingencies(Note 14)
        
Non-Recourse Debt(including VIEs of $132,078 and $31,596, respectively)
  191,394   96,791 
Commitments and Contingencies(Note 15)
        
Shareholders’ Equity
                
Preferred stock, $0.01 par value, 30,000,000 shares authorized, none issued or outstanding  —   —   —   — 
Common stock, $0.01 par value, 90,000,000 shares authorized, 67,704,008 and 67,197,775 issued and 51,629,005 and 51,122,775 outstanding, respectively  516   511 
Common stock, $0.01 par value, 90,000,000 shares authorized, 84,506,772 and 67,704,008 issued and 64,432,459 and 51,629,005 outstanding, respectively  845   516 
Additional paid-in capital  351,550   344,175   718,489   351,550 
Retained earnings  365,927   299,973   428,545   365,927 
Accumulated other comprehensive income (loss)  5,496   (7,275)
Treasury stock 16,075,000 shares, at cost, at January 3, 2010 and December 28, 2008  (58,888)  (58,888)
Accumulated other comprehensive income  10,071   5,496 
Treasury stock 20,074,313 and 16,075,003 shares, at cost, at January 2, 2011 and January 3, 2010  (139,049)  (58,888)
          
Total shareholders’ equity attributable to The GEO Group, Inc.   664,601   578,496   1,018,901   664,601 
Noncontrolling interest  497   1,101   20,589   497 
          
Total shareholders’ equity  665,098   579,597   1,039,490   665,098 
          
Total Liabilities and Shareholders’ Equity $2,423,776  $1,447,818 
 $1,447,818  $1,288,621      
     
(1)Variable interest entities or “VIEs”
 
The accompanying notes are an integral part of these consolidated financial statements.


6985

THE GEO GROUP, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended January 2, 2011, January 3, 2010, and December 28, 2008 and December 30, 2007
 
                        
 2009 2008 2007  2010 2009 2008 
   (In thousands)      (In thousands)   
Cash Flow from Operating Activities:
                        
Net income $65,954  $58,902  $41,845  $62,790  $66,123  $59,278 
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:            
Amortization of restricted stock-based compensation  3,509   3,015   2,474 
Stock-based compensation expense  1,813   1,530   935 
Depreciation and amortization expenses  39,306   37,406   33,218 
Net (income) loss attributable to noncontrolling interests  678   (169)  (376)
       
Net income attributable to The GEO Group, Inc.   63,468   65,954   58,902 
Adjustments to reconcile net income attributable to The GEO Group, Inc. to net cash provided by operating activities:            
Restricted stock expense  3,261   3,509   3,015 
Stock option plan expense  1,378   1,813   1,530 
Depreciation and amortization expense  48,111   39,306   37,406 
Amortization of debt issuance costs and discount  3,412   3,042   2,524   3,209   3,412   3,042 
Deferred tax provision (benefit)  10,010   2,656   (5,077)
Provision (Recovery) for doubtful accounts  139   602   (176)
Deferred tax provision  17,941   10,010   2,656 
Provision for doubtful accounts  815   139   602 
Equity in earnings of affiliates, net of tax  (3,517)  (4,623)  (2,151)  (4,218)  (3,517)  (4,623)
Dividend to minority interest  (176)  (125)  (389)
Income tax benefit of equity compensation  (601)  (786)  (3,061)  (3,926)  (601)  (786)
Loss on sale of fixed assets  119   157   — 
(Gain) Loss on sale of property and equipment  (646)  119   157 
Loss on extinguishment of debt  6,839   —   4,794   7,933   6,839   — 
Changes in assets and liabilities, net of acquisition            
Accounts receivable  6,852   (29,599)  (10,604)
Other current assets  (2,678)  2,120   (57)
Other assets  (1,117)  (2,418)  3,211 
Accounts payable and accrued expenses  (4,089)  7,775   (2,457)
Accrued payroll and related taxes  (5,509)  (4,483)  1,517 
Deferred revenue  —   —   (152)
Other liabilities  4,845   (814)  8,583 
Changes in assets and liabilities, net of acquisition:            
Changes in accounts receivable, prepaid expenses and other assets  (14,350)  3,057   (29,897)
Changes in accounts payable, accrued expenses and other liabilities  3,226   (4,753)  2,478 
              
Net cash provided by operating activities of continuing operations  125,111   74,357   74,977   126,202   125,287   74,482 
Net cash (used in) provided by operating activities of discontinued operations  5,818   (3,013)  3,951   —   5,818   (3,013)
              
Net cash provided by operating activities  130,929   71,344   78,928   126,202   131,105   71,469 
              
Cash Flow from Investing Activities:
                        
Acquisitions, net of cash acquired  (38,386)  —   (410,473)
CSC purchase price adjustment  —   —   2,291 
Proceeds from sale of assets  179   1,136   4,476 
Acquisitions, cash consideration, net of cash acquired  (260,255)  (38,386)  — 
Just Care purchase price adjustment  (41)  —   — 
Proceeds from sale of property and equipment  528   179   1,136 
Purchase of shares in consolidated affiliate  —   (2,189)  —   —   —   (2,189)
Change in restricted cash  2,713   452   (20)  (11,432)  2,713   452 
Capital expenditures  (149,779)  (130,990)  (115,204)  (97,061)  (149,779)  (130,990)
              
Net cash used in investing activities  (185,273)  (131,591)  (518,930)  (368,261)  (185,273)  (131,591)
              
Cash Flow from Financing Activities:
                        
Proceeds from equity offering, net  —   —   227,485 
Cash dividends to noncontrolling interest  —   (176)  (125)
Proceeds from long-term debt  333,000   156,000   387,000   726,000   333,000   156,000 
Payments on long-term debt  (397,445)  (267,474)  (100,156)
Income tax benefit of equity compensation  601   786   3,061   3,926   601   786 
Debt issuance costs  (17,253)  (3,685)  (9,210)  (8,400)  (17,253)  (3,685)
Payments on long-term debt  (267,474)  (100,156)  (237,299)
Termination of interest rate swap agreements  1,719   —   —   —   1,719   — 
Payments for purchase of treasury shares  (80,000)  —   — 
Payments for retirement of common stock  (7,078)  —   — 
Proceeds from the exercise of stock options  1,457   753   1,239   6,695   1,457   753 
              
Net cash provided by financing activities  52,050   53,698   372,276   243,698   51,874   53,573 
              
Effect of Exchange Rate Changes on Cash and Cash Equivalents
  4,495   (6,199)  609   4,169   4,495   (6,199)
              
Net (Decrease) Increase in Cash and Cash Equivalents
  2,201   (12,748)  (67,117)
Net Increase (Decrease) in Cash and Cash Equivalents
  5,808   2,201   (12,748)
Cash and Cash Equivalents, beginning of period
  31,655   44,403   111,520   33,856   31,655   44,403 
              
Cash and Cash Equivalents, end of period
 $33,856  $31,655  $44,403  $39,664  $33,856  $31,655 
              
Supplemental Disclosures:
                        
Cash paid during the year for:
                        
Income taxes $34,185  $29,895  $26,413  $34,475  $34,185  $29,895 
              
Interest $32,075  $34,486  $28,470  $36,310  $32,075  $34,486 
              
Non-cash operating activities:
            
Proceeds receivable from insurance claim $—  $—  $2,118 
       
Non-cash investing and financing activities:
                        
Fair value of assets acquired, net of cash acquired $44,239  $—  $406,368  $680,378  $44,239  $— 
              
Extinguishment of pre-acquisition liabilities, net $—  $—  $6,663 
Acquisition, equity consideration $358,076  $—  $— 
              
Total liabilities assumed $5,853  $—  $2,558  $246,071  $5,853  $— 
              
Capital expenditures in accounts payable and accrued expenses $11,237  $10,418  $20,376 
 $38,386  $—  $410,473        
       
Short term borrowings for deposit on asset $—  $—  $5,000 
       
 
The accompanying notes are an integral part of these consolidated financial statements.


7086

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Fiscal Years Ended January 2, 2011, January 3, 2010, and December 28, 2008 and December 30, 2007
 
                                                                        
 GEO Group Inc. Shareholders      GEO Group Inc. Shareholders     
         Accumulated
                  Accumulated
         
 Common Stock Additional
   Other
 Treasury Stock   Total
  Common Stock Additional
   Other
 Treasury Stock   Total
 
 Number
   Paid-In
 Retained
 Comprehensive
 Number
   Noncontrolling
 Shareholders’
  Number
   Paid-In
 Retained
 Comprehensive
 Number
   Noncontrolling
 Shareholders’
 
 of Shares Amount Capital Earnings Income (Loss) of Shares Amount Interest Equity  of Shares Amount Capital Earnings Income (Loss) of Shares Amount Interest Equity 
         (In thousands)                (In thousands)       
Balance, December 31, 2006
  39,497  $395  $143,035  $201,697  $2,393   (27,000) $(98,910) $1,297  $249,907 
Adoption of FIN 48 January 1, 2007 (Note 18)      —   —   (2,471)  —       —   —   (2,471)
Balance, December 30, 2007
  50,976  $510  $338,092  $241,071  $6,920   (16,075) $(58,888) $1,642  $529,347 
Proceeds from stock options exercised  267   3   1,236   —   —       —   —   1,239   171   1   752   —   —       —   —   753 
Tax benefit related to equity compensation      —   3,061   —   —       —   —   3,061       —   786   —   —       —   —   786 
Stock based compensation expense      —   935   —   —       —   —   935       —   1,530   —   —       —   —   1,530 
Restricted stock granted  300   3   (3)  —   —       —   —   —   24   —   —   —   —       —   —   — 
Restricted stock cancelled  (13)  —   —   —   —       —   —   —   (48)  —   —   —   —       —   —   — 
Amortization of restricted stock      —   2,474   —   —       —   —   2,474       —   3,015   —   —       —   —   3,015 
Issuance of treasury stock in conjunction with offering  10,925   109   187,354   —   —   10,925   40,022   —   227,485 
Purchase of subsidiary shares from noncontrolling interest      —   —   —   —       —   (626)  (626)
Dividends paid to noncontrolling interest on subsidiary common stock      —   —   —   —       —   (389)  (389)      —   —   —   —       —   (125)  (125)
Comprehensive income:                                                                        
Net income      —   —   41,845   —       —   397           —   —   58,902   —       —   376     
Change in foreign currency translation, net of income tax expense of $180      —   —   —   2,898       —   337     
Pension liability adjustment, net of income tax benefit of $203      —   —   —   312       —   —     
Unrealized gain on derivative instruments, net of income tax expense of $807      —   —   —   1,317       —   —     
Total comprehensive income      —   —   —   —       —   —   47,106 
                   
Balance, December 30, 2007
  50,976   510   338,092   241,071   6,920   (16,075)  (58,888)  1,642   529,347 
                   
Proceeds from stock options exercised  171   1  ��752   —   —       —   —   753 
Tax benefit related to equity compensation      —   786   —   —       —   —   786 
Stock based compensation expense      —   1,530   —   —       —   —   1,530 
Restricted stock granted  24   —   —   —   —       —   —   — 
Restricted stock cancelled  (48)  —   —   —   —       —   —   — 
Amortization of restricted stock      —   3,015   —   —       —   —   3,015 
Purhcase of subsidiary shares from noncontrolling interest      —   —   —   —       —   (626)  (626)
Dividends paid to noncontrolling interest on subsidiary common stock      —   —   —   —       —   (125)  (125)
Comprehensive income:                                    
Net income      —   —   58,902   —       —   376     
Change in foreign currency translation, net of income tax benefit of $413      —   —   —   (10,742)      —   (166)    
Pension liability adjustment, net of income tax benefit of $17      —   —   —   27       —   —     
Unrealized loss on derivative instruments, net of income tax benefit of $2,113      —   —   —   (3,480)      —   —     
Other comprehensive loss (Note 3)      —   —   —   (14,195)      —   (166)    
Total comprehensive income      —   —   —   —       —   —   44,917       —   —   —   —       —   —   44,917 
                                      
Balance, December 28, 2008
  51,123   511   344,175   299,973   (7,275)  (16,075)  (58,888)  1,101   579,597   51,123   511   344,175   299,973   (7,275)  (16,075)  (58,888)  1,101   579,597 
                                      
Proceeds from stock options exercised  372   3   1,454   —   —       —   —   1,457   372   3   1,454   —   —       —   —   1,457 
Tax benefit related to equity compensation      —   601   —   —       —   —   601       —   601   —   —       —   —   601 
Stock based compensation expense      —   1,813   —   —       —   —   1,813       —   1,813   —   —       —   —   1,813 
Restricted stock granted  168   2   (2)  —   —       —   —   —   168   2   (2)  —   —       —   —   — 
Restricted stock cancelled  (34)  —   —   —   —       —   —   —   (34)  —   —   —   —       —   —   — 
Amortization of restricted stock      —   3,509   —   —       —   —   3,509       —   3,509   —   —       —   —   3,509 
Dividends paid to noncontrolling interest on subsidiary common stock      —   —   —   —       —   (176)  (176)      —   —   —   —       —   (176)  (176)
Comprehensive income:                                                                        
Net income      —   —   65,954   —       —   169           —   —   65,954   —       —   169     
Change in foreign currency translation, net of income tax benefit of $1,129      —   —   —   10,658       —   (597)    
Pension liability adjustment, net of income tax benefit of $636      —   —   —   942       —   —     
Unrealized gain on derivative instruments, net of income tax benefit of $645      —   —   —   1,171       —   —     
Other comprehensive income (Note 3)      —   —   —   12,771       —   (597)    
Total comprehensive income      —   —   —   —       —   —   78,297       —   —   —   —       —   —   78,297 
                                      
Balance, January 3, 2010
  51,629  $516  $351,550  $365,927  $5,496   (16,075) $(58,888) $497  $665,098   51,629   516   351,550   365,927   5,496   (16,075)  (58,888)  497   665,098 
                                      
Proceeds from stock options exercised  1,353   14   6,681   —   —       —   —   6,695 
Tax benefit related to equity compensation      —   3,926   —   —       —   —   3,926 
Stock based compensation expense      —   1,378   —   —       —   —   1,378 
Restricted stock granted  40   —   —   —   —       —   —   — 
Restricted stock cancelled  (41)  (1)  —   —   —       —   —   (1)
Amortization of restricted stock      —   3,261   —   —       —   —   3,261 
Common stock issued in business combination (Note 2)  15,764   158   357,918   —   —       —   —   358,076 
Noncontrolling interest acquired in business combination (Note 2)  —   —   —   —   —       —   20,700   20,700 
Retirement of common stock  (314)  158   (6,225)  (850)  —       (161)  —   (7,078)
Purchase of treasury shares  (3,999)  —   —   —   —   (3,999)  (80,000)  —   (80,000)
Comprehensive income:                                    
Net income      —   —   63,468   —       —   (678)    
Other comprehensive income (Note 3)      —   —   —   4,575       —   70     
Total comprehensive income      —   —   —   —       —   —   67,435 
                   
Balance, January 2, 2011
  64,432  $845  $718,489  $428,545  $10,071   (20,074) $(139,049) $20,589  $1,039,490 
                   
 
The accompanying notes are an integral part of these consolidated financial statements.


7187

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended January 2, 2011, January 3, 2010, and December 28, 2008 and December 30, 2007
 
1.  Summary of Business Operations and Significant Accounting Policies
 
The GEO Group, Inc., a Florida corporation, and subsidiaries (the “Company”, or “GEO”) is a leading developer and managerprovider of privatizedgovernment-outsourced services specializing in the management of correctional, detention and mental health residential treatment services facilities located in the United States, Australia, South Africa, the United Kingdom and Canada. On August 12, 2010, the Company acquired Cornell Companies Inc. (“Cornell”), pursuant to a definitive merger agreement (the “Merger”), and as of January 2, 2011, the Company’s worldwide operations included the managementand/or ownership of approximately 81,000 beds at 118 correctional, detention and residential treatment facilities including projects under development. The Company operates a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers, community based services, youth services and mental health and residential treatment facilities. We also provide secure transportation services for offender and detainee populations as contracted. As of the fiscal year ended January 3, 2010, GEO managed 57 facilities totaling approximately 52,800 beds worldwide and had an additional 4,325 beds under development at three facilities, including an expansion and renovation of one vacant facility which we own, the expansion of one facility we currently own and operate and a new 2,000-bed facility which we will manage upon completion.
 
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. The significant accounting policies of the Company are described below.
 
Fiscal Year
 
The Company’s fiscal year ends on the Sunday closest to the calendar year end. Fiscal year 2010 included 52 weeks. Fiscal year 2009 included 53 weeks. Fiscal yearsweeks and fiscal year 2008 and 2007 each included 52 weeks. The Company reports the results of its South African equity affiliate, South African Custodial Services Pty. Limited, (“SACS”), and its consolidated South African entity, South African Custodial Management Pty. Limited (“SACM”) and the activities of its consolidated special purpose entity, Municipal Correctional Finance, L.P. (“MCF”) on a calendar year end, due to the availability of information.
 
Basis of PresentationConsolidation
 
The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and all controlled subsidiaries. Investmentsthe Company’s activities relative to the financing of operating facilities (the Company’s variable interest entities are discussed further in 50% ownedNote 1 and also in Notes 3 and 10). The equity method of accounting is used for investments in non-controlled affiliates in which the Company’s ownership ranges from 20 to 50 percent, or in instances in which the Company doesis able to exercise significant influence but not control, are accounted forcontrol. The Company reports SACS under the equity method of accounting. IntercompanyNoncontrolling interests in consolidated entities represent equity that other investors have contributed to MCF and SACM. Non-controlling interests are adjusted for income and losses allocable to the other shareholders in these entities. All significant intercompany balances and transactions and balances have been eliminated in consolidation.eliminated.
 
Reclassifications
 
Certain prior year amounts related to theThe Company’s noncontrolling interest in consolidated subsidiary haveSACM has been reclassified from operating expenses to reflectnoncontrolling interest in the implementationconsolidated statements of recent accounting rules relatedincome as this item has become more significant due to the accountingpresentation of the noncontrolling interest of MCF acquired from Cornell in the Merger. Also, as a result of the acquisition of Cornell, management’s review of certain segment financial data was revised with regard to the Bronx Community Re-entry Center and the Brooklyn Community Re-entry Center. These facilities now report within the GEO Care segment and are no longer included with U.S. Detention & Corrections. The segment data has been revised for such interests in consolidated financial statements, which the Company adopted on December 29, 2008.all periods presented. All prior year amounts have been conformed to the current year presentation.


88

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Discontinued Operations
The termination of any of the Company’s management contracts, by expiration or otherwise, may result in the classification of the operating results of such management contract, net of taxes, as a discontinued operation. The Company reflects such events as discontinued operations so long as the financial results can be clearly identified, the operations and cash flows are completely eliminated from ongoing operations, and so long as the Company does not have any significant continuing involvement in the operations of the component after the disposal or termination transaction. The component unit for which cash flows are considered to be completely eliminated exists at the customer level. Historically, the Company has classified operations as discontinued in the period they are announced as normally all continuing cash flows cease within three to six months of that date.
 
Use of Estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s significant estimates include reserves for self-insured retention related to general liability insurance, workers’ compensation insurance, auto liability insurance, medical malpractice insurance, employer group health insurance, percentage of completion and estimated cost to complete for construction projects, estimated useful lives of property and equipment, stock based compensation and allowance for doubtful accounts. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While the Company believes that such estimates are reasonable when considered in conjunction with the consolidated financial statements taken as a


72

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
whole, the actual amounts of such estimates, when known, will vary from these estimates. If actual results significantly differ from the Company’s estimates, the Company’s financial condition and results of operations could be materially impacted.
During the first quarter of 2010, the Company completed a depreciation study on its owned correctional facilities. In evaluating useful lives of these assets, the Company considered how long the assets will remain functionally efficient and effective, given competitive factors, economic environment, technological advancements and quality of construction. Based on the results of the depreciation study, the Company revised the estimated useful lives of certain buildings from its historical estimate of 40 years to a revised estimate of 50 years, effective January 4, 2010. The basis for the change in the useful life of the Company’s owned correctional facilities is due to the expectation that these facilities are capable of being used for a longer period than previously anticipated based on quality of construction and effective building maintenance. The Company accounted for the change in the useful lives as a change in estimate which was accounted for prospectively beginning January 4, 2010 by depreciating the assets’ carrying values over their revised remaining useful lives. For fiscal year 2010, the change resulted in a reduction in depreciation and amortization expense of $3.7 million, an increase to net income of $2.2 million and an increase in diluted earnings per share of $0.04.
 
Cash and Cash Equivalents
 
Cash and cash equivalents include all interest-bearing deposits or investments with original maturities of three months or less. The Company maintains cash and cash equivalents with various financial institutions. These financial institutions are located throughout the United States, Australia, South Africa, Canada and the United Kingdom. A significant portion


89

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Concentration of the Company’s unrestrictedCredit Risk
The Company maintains deposits of cash held at the Company and its subsidiaries is maintainedin excess of federally insured limits with a small number of bankscertain financial institutions and accordingly, the Company is subject to credit risk. Other than cash, financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable, a direct finance lease receivable, long-term debt and financial instruments used in hedging activities. The Company’s cash management and investment policies restrict investments to low-risk, highly liquid securities, and the Company performs periodic evaluations of the credit standing of the financial institutions with which it deals.
 
Accounts Receivable
 
Accounts receivable consists primarily of trade accounts receivable due from federal, state, and local government agencies for operating and managing correctional facilities, providing youth and community based services, providing mental health and residential treatment services, providing construction and design services and providing inmate residential and prisoner transportation services. The Company extends credit to thegenerates receivables with its governmental agencies it contractsclients and with and other parties in the normal course of business as a result of billing and receiving payment for services thirty to sixty days in arrears. Further, thepayment. The Company regularly reviews outstanding receivables, and provides for estimated losses through an allowance for doubtful accounts. In evaluating the level of established loss reserves, the Company makes judgments regarding its customers’ ability to make required payments, economic events and other factors. As the financial condition of these parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. The Company also performs ongoing credit evaluations of customers’ financial condition and generally does not require collateral. Generally, the Company receives payment for these services thirty to sixty days in arrears. However, certain of the Company’s accounts receivable, some of which relate to receivables purchased in connection with the Cornell acquisition, are paid by customers after the completion of their program year and therefore can be aged in excess of one year. The Company maintains reserves for potential credit losses, and such losses traditionally have been within its expectations. Actual write-offs are charged against the allowance when collection efforts have been unsuccessful. As of January 2, 2011, $3.8 million of the Company’s trade receivables were considered to be long-term and are classified as Other Non-Current Assets in the accompanying Consolidated Balance Sheet.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include assets that are expected to be realized within the next fiscal year. Included in the balance at January 2, 2011 is $17.3 million of federal and state income tax overpayments that will be applied against tax payments due in 2011.
 
Notes Receivable
 
The Company has notes receivable from its former joint venture partner in the United Kingdom related to a subordinated loan extended to the joint venture partner while an active member of the partnership. The balance outstanding as of January 2, 2011 and January 3, 2010 was $3.2 million and December 28, 2008 was $3.5 million, respectively and $3.4 million, respectively.is included in other non-current assets in the accompanying balance sheets. The notes bear interest at a rate of 13%, have semi-annual payments due June 15 and December 15 through June 2018.
 
Restricted Cash and Investments
 
The Company’s restricted cash balances are attributable to: (i) amounts held in escrow or in trust in connection with the 1,904-bed South Texas Detention Complex in Frio County, Texas and the 1,545-bed1,575-bed Northwest Detention Center in Tacoma, Washington, (ii) certain cash restriction requirements at the Company’s wholly owned Australian subsidiary related to the non recoursenon-recourse debt and other guarantees, (iii) MCF’s bond fund payment account, debt servicing reserve fund and (iii)escrow fund primarily used to


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
segregate rental payments from Cornell to MCF for the purposes of servicing the non-recourse debt and making distributions to equity holders, and (iv) amounts restricted in December 2009 to fund the GEO Group Deferred Compensation Plan. See Notes 13The current portion of restricted cash represents the amount expected to be paid within the next twelve months for debt service and 16.amounts that may be paid as distributions to the equity holders of MCF under the Agreement of Limited Partnership.
Direct Finance Leases
The Company accounts for the portion of its contracts with certain governmental agencies that represent capitalized lease payments on buildings and equipment as investments in direct finance leases. Accordingly, the minimum lease payments to be received over the term of the leases less unearned income are capitalized as the Company’s investments in the leases. Unearned income is recognized as income over the term of the leases using the effective interest method.
 
Property and Equipment
 
Property and equipment isare stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Buildings and improvements are depreciated over 2 to 4050 years. Equipment and furniture and fixtures are depreciated over 3 to 10 years. Accelerated methods of depreciation are generally used for income tax purposes. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. The Company performs ongoing evaluations of the estimated useful lives of the property and equipment for depreciation purposes. The estimated useful lives are determined and continually evaluated based on the


73

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
period over which services are expected to be rendered by the asset. If the assessment indicates that assets will be used for a longer or shorter period than previously anticipated, the useful lives of the assets are revised, resulting in a change in estimate. Maintenance and repairs are expensed as incurred. Interest is capitalized in connection with the construction of correctional and detention facilities. Capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life.
 
The Company reviews long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. If a long-lived asset is part of a group that includes other assets, the unit of accounting for the long-lived asset is its group. Generally, the Company groups its assets by facility for the purposes of considering whether any impairment exists. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset or asset group and its eventual disposition. When considering the future cash flows of a facility, the Company makes assumptions based on historical experience with its customers, terminal growth rates and weighted average cost of capital. While these estimates do not generally have a material impact on the impairment charges associated with managed-only facilities, the sensitivity increases significantly when considering the impairment on facilities that are either owned or leased by the Company. Events that would trigger an impairment assessment include deterioration of profits for a business segment that has long-lived assets, or when other changes occur that might impair recovery of long-lived assets such as the termination of a management contract. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset.
 
Assets Held Under Capital Leases
 
Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Amortization expense is recognized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the related lease and is included in depreciation expense.


91

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill and Other Intangible Assets
 
AcquiredThe Company’s goodwill is not amortized and is tested for impairment annually and whenever events or circumstances arise that indicate impairment may have occurred. Impairment testing is performed for all reporting units that contain goodwill. For the purposes of impairment testing, the Company determines the recoverability of goodwill by comparing the carrying value of the reporting unit, including goodwill, to the fair value of the reporting unit. The reporting unit is the same as the operating segment for U.S. Detention & Corrections and is at a level below the operating segment for GEO Care. The Company has identified its reporting units based on the criteria management uses to make key decisions about the business. If the fair value is determined to be less than the carrying value, the Company computes the impairment charge as the excess of the carrying value of the reporting unit goodwill over the implied fair value of the reporting unit goodwill. For the purposes of the goodwill impairment test, the Company determined fair value of the reporting unit using a discounted cash flow model. Growth rates for sales and profits are determined using inputs from the Company’s long term planning process. The Company also makes estimates for discount rates and other factors based on market conditions, historical experience and other environmental factors. Changes in these forecasts could significantly impact the fair value of the reporting unit. During the year, management monitors the actual performance of the business relative to the fair value assumptions used during the annual impairment test. For the interim periods in the fiscal year ended January 2, 2011, the Company’s management did not identify any triggering events that would require an update to the annual impairment test. As such, the Company performed its annual impairment test, on the measurement date of October 4, 2010 which is on the first day of the Company’s fourth fiscal quarter and did not identify any impairment in the carrying value of its goodwill. The estimated fair value of the reporting units significantly exceeded the carrying value of the reporting units. A 10% decrease in the fair value of any of our reporting units as of October 4, 2010 would have had no impact on the carrying value of our goodwill. There were no impairment charges recorded in the fiscal year ended January 3, 2010. In the fiscal year ended December 28, 2008, the Company wrote off goodwill of $2.3 million associated with the termination of its transportation services business in the United Kingdom. There were no changes since the prior year to the methodology the Company applies to determine the fair value of the reporting units used in its goodwill test.
The Company has goodwill and other intangible assets as a result of business combinations and also in connection with the purchase of additional shares in the Company’s consolidated South African joint venture. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible assets and other intangible assets acquired. Other acquired intangible assets are recognized separately if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the Company’s intent to do so. The Company hasCompany’s other intangible assets as a result of business combinations in 2009have finite lives and in prior fiscal years and also in connection with the purchase of additional shares in the Company’s consolidated joint venture. The Company’s finite-lived intangible assets are primarily related to acquiredinclude facility management contracts and are amortized on a straight-line basis overnon-compete agreements. The facility management contracts represent customer relationships in the expected lifeform of management contracts acquired at the time of each contractual relationship. Thesebusiness combination and the non-compete agreements represent the estimated value of contractually restricting certain employees from competing with the Company. The Company currently amortizes its acquired intangible assets with finite lives over periods ranging from one to seventeen years considering the period and the pattern in which the economic benefits of the intangible asset are amortizedconsumed or otherwise used up; or, if that pattern cannot be reliably determined, using a straight-line method. The Company reviews finite-lived intangible assets for impairment whenever an event occurs or circumstances change which indicateamortization method over a period that may be shorter than the carrying amountultimate life of such assets may not be fully recoverable.
The Company’s goodwillintangible asset. There is subject to an annual impairment test. For the purposes of impairment testing, the Company determines the recoverability of goodwill by comparing its carryingno residual value to the fair value of the reporting unit, which is the same as the operating segment. The Company performed its annual impairment test, on the measurement date, for the fiscal year ended January 3, 2010 and did not identify any impairment in the carrying value of its goodwill. In the fiscal year ended December 28, 2008, the Company wrote off goodwill of $2.3 million associated with the terminationCompany’s finite-lived intangible assets. The Company records the costs associated with renewal and extension of its transportation services businessfacility management contracts as expenses in the United Kingdom. There were no impairment charges recorded in the fiscal year ended December 30, 2007. See Notes 4 and 9.period they are incurred.


7492

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Debt Issuance Costs
Debt issuance costs totaling $14.8 million and $17.9 million at January 2, 2011 and January 3, 2010, respectively, are included in other non-current assets in the consolidated balance sheets and are amortized to interest expense using the effective interest method, over the term of the related debt.
 
Variable Interest Entities
 
The Company evaluates its joint ventures and other entities in which it has a variable interest (a “VIE”), generally in the form of investments, loans, guarantees, or equity in order to determine if it has a controlling financial interest and is required to consolidate the primary beneficiaryentity as a result. The reporting entity with a variable interest that provides the entity with a controlling financial interest in the VIE will have both of the entity by considering qualitativefollowing characteristics: (i) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and quantitative factors. Qualitative factors include evaluating distribution terms, proportional voting rights, decision making ability, and(ii) the capital structure. Quantitatively,obligation to absorb the Company evaluates financial forecasts under various scenarios to determine which variable interest holders would absorb over 50% of the expected losses of the entity.VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
 
The Company does not consolidate its 50% owned South African joint venture in SACS, a VIE. SACS joint venture investors are GEO and Kensani Holdings, Pty. Ltd; each partner owns a 50% share. The Company has determined it is not the primary beneficiary of SACS since it does not absorb a majority of the entity’s estimated losses nor does it receive a majority of the entity’s expected returns. Additionally, the Company does not have the abilitypower to exercise significant influence over SACS.direct the activities of SACS that most significantly impact its performance. As such, this entity is accounted for as an equity affiliate. SACS was established in 2001 and was subsequently awarded a25-year contract to design, finance and build the Kutama Sinthumule Correctional Centre and was subsequently, awarded a 25 year contract to design, construct, manage and finance a facility in Louis Trichardt, South Africa. To fund the construction of the prison, SACS obtained long-term financing from its equity partners and lenders, the governmentrepayment of which is fully guaranteed by the South African government, except in the event of default, forin which case the government provides anguarantee is reduced to 80% guarantee.. The Company’s maximum exposure for loss under this contract is limited to its investment in joint venture of $12.2$27.6 million at January 3, 20102, 2011 and its guarantees related to SACS discussed in Note 13.14.
 
The Company consolidates South Texas Local Development Corporation (“STLDC”), a VIE. STLDC was created to finance construction for the development of a 1,904-bed facility in Frio County, Texas. STLDC, the owner of the complex, issued $49.5 million in taxable revenue bonds and has an operating agreement with STLDC, the owner of the complex,Company, which provides itthe Company with the sole and exclusive right to operate and manage the detention center. The operating agreement and bond indenture require the revenue from the contract be used to fund the periodic debt service requirements as they become due. The net revenues, if any, after various expenses such as trustee fees, property taxes and insurance premiums are distributed to the Company to cover operating expenses and management fees. The Company is responsible for the entire operations of the facility including all operating expenses and is required to paythe payment of all operating expenses whether or not there are sufficient revenues. The bonds have a ten-year term and are non-recourse to the Company. At the end of the ten-year term of the bonds, title and ownership of the facility transfers from STLDC to the Company. See Note 13.14.
As a result of the acquisition of Cornell in August 2010, the Company assumed the variable interest in MCF of which it is the primary beneficiary and consolidates the entity as a result. MCF was created in August 2001 as a special limited partnership for the purpose of acquiring, owning, leasing and operating low to medium security adult and juvenile correction and treatment facilities. At its inception, MCF purchased assets representing eleven facilities from Cornell and leased those assets back to Cornell under a Master Lease Agreement (the “Lease”). These assets were purchased from Cornell using proceeds from the 8.47% Taxable Revenue Bonds, Series 2001 (“8.47% Revenue Bonds”) due 2016, which are limited non-recourse obligations of MCF and collateralized by the bond reserves, assignment of subleases and substantially all assets related to the eleven facilities. Under the terms of the Lease with Cornell, assumed by the Company, the Company will lease the assets for the remainder of the20-year base term, which ends in 2021, and has options at its sole discretion to renew the Lease for up to approximately 25 additional years. MCF’s sole source of revenue is from the Company and as such the Company has the power to direct the activities of the VIE that most


93

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
significantly impact its performance. The Company’s risk is generally limited to the rental obligations under the operating leases. This entity is included in the accompanying consolidated financial statements and all intercompany transactions are eliminated in consolidation.
 
Noncontrolling interest in SubsidiaryInterests
 
On December 29, 2009,Noncontrolling interests in consolidated entities represent equity that other investors have contributed to MCF and the noncontrolling interest in SACM. Noncontrolling interests are adjusted for income and losses allocable to the other shareholders in these entities.
Upon acquisition of Cornell, the Company adopted new accounting standards related to the reporting of noncontrolling interests. These standards clarify the classification of noncontrolling interests in the consolidated statements of financial position and the accounting for and reporting of transactions between the reportingassumed MCF as a variable interest entity and allocated a portion of the holders of noncontrolling interests. The Company has applied these standards retrospectively in the presentation of its consolidated balance sheets for all periods presented by reflecting its noncontrolling interest, discussed further below, as a separate component of equity. The income attributablepurchase price to the noncontrolling interest is not material tobased on the Company’sestimated fair value of MCF as of August 12, 2010. The noncontrolling interest in MCF represents 100% of the equity in MCF which was contributed by its partners at inception in 2001. The Company includes the results of operations and is not presented separately.financial position of MCF, its variable interest entity, in its consolidated financial statements. MCF owns eleven facilities which it leases to the Company.
 
The Company includes the results of operations and financial position of South African Custodial Management Pty. Limited (“SACM” or the “joint venture”), its majority-owned subsidiary, in its consolidated financial statements. SACM was established in 2001 to operate correctional centers in South Africa. The joint venture currently provides security and other management services for the Kutama Sinthumule Correctional Centre in the Republic of South Africa under a25-year management contract which commenced in February 2002. On October 29, 2008,The Company’s and the Company, along with one othersecond joint venture partner, executed a Sale of Shares Agreement for the purchase of a portion of the remaining noncontrollingpartner’s shares of SACM which changed the Company’s share in the profits of the joint venture from 76.25% toare 88.75%. All of the


75

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
noncontrolling shares of the third joint venture partner were allocated between the Company and the second joint venture partner on a pro rata basis based on their respective ownership percentages.11.25%, respectively. There were no changes in the Company’s ownership percentage of the consolidated subsidiary during the fiscal year ended January 3, 2010.2, 2011.
 
Fair Value Measurements
 
The Company carries certain of its assets and liabilities at fair value, measured on a recurring basis, in the accompanying consolidated balance sheets. The Company also has certain assets and liabilities which are not carried at fair value in its accompanying balance sheets and discloses the fair value measurements for those assets and liabilities in Note 11. In fiscal 2009, the11 and Note 12. The Company adopted accounting standards which establishestablishes fair value of its assets and liabilities using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels which distinguish between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The level in the fair value hierarchy within which the respective fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities, Level 2 inputs are other than quotable market prices included in Level 1 that are observable for the asset or liability either directly or indirectly through corroboration with observable market data. Level 3 inputs are unobservable inputs for the assets or liabilities that reflect management’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
 
Revenue Recognition
 
Facility management revenues are recognized as services are provided under facility management contracts with approved government appropriations based on a net rate per day per inmate or on a fixed monthly rate. CertainA limited number of the Company’s contracts have provisions upon which a small portion of the revenue for the contract is based on the performance of certain targets. Revenue based on the performance of certain targets is less than 2% of the Company’s consolidated annual revenues. These performance targets are based on specific criteria to be met over specific periods of time. Such criteria includes the Company’s ability to achieve certain contractual benchmarks relative to the quality of service it provides, non-occurrence of certain disruptive events, effectiveness of its quality control programs and its responsiveness to customer


94

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
requirements and concerns. For the limited number of contracts where revenue is based on the performance of certain targets, as defined in the specific contract. In these cases, the Company recognizes revenue is either (i) recorded pro rata when the amounts arerevenue is fixed and determinable andor (ii) recorded when the specified time period over which the conditions have been satisfied has lapsed.lapses. In many instances, the Company is a party to more than one contract with a single entity. In these instances, each contract is accounted for separately. The Company has not recorded any revenue that is at risk due to future performance contingencies.
 
The Company earns construction revenueConstruction revenues are recognized from itsthe Company’s contracts with certain customers to perform construction and design services (“project development services”) for various facilities. In these instances, the Company acts as the primary developer and sub contractssubcontracts with bonded Nationaland/or Regional Design Build Contractors. These construction revenues are recognized as earned on a percentage of completion basis measured by the percentage of costs incurred to date as compared to the estimated total cost for each contract. This method is used because the Company considers costs incurred to date to be the best available measure of progress on these contracts. Provisions for estimated losses on uncompleted contracts and changes to cost estimates are made in the period in which the Company determines that such losses and changes are probable. Typically, the Company enters into fixed price contracts and does not perform additional work unless approved change orders are in place. Costs attributable to unapproved change orders are expensed in the period in which the costs are incurred if the Company believes that it is not probable that the costs will be recovered through a change in the contract price. If the Company believes that it is probable that the costs will be recovered through a change in the contract price, costs related to unapproved change orders are expensed in the period in which they are incurred, and contract revenue is recognized to the extent of the costs incurred. Revenue in excess of the costs attributable to unapproved change orders is not recognized until the change order is approved. Construction costs include all direct material and labor costs and those indirect costs related to contract performance. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined. As the primary contractor, the Company is exposed to the various risks associated with construction, including the risk of cost


76

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
overruns. Accordingly, the Company records its construction revenue on a gross basis. Thebasis and includes the related cost of construction activities is included in Operating Expenses.
 
When evaluating multiple element arrangements for certain contracts where the Company provides project development services to its clients in addition to standard management services, the Company follows provisions established by FASB ASC.revenue recognition guidance for multiple element arrangements. This revenue recognition guidance related to multiple deliverables in an arrangement provides guidance on determining if separate contracts should be evaluated as a single arrangement and if an arrangement involves a single unit of accounting or separate units of accounting and if the arrangement is determined to have separate units, how to allocate amounts received in the arrangement for revenue recognition purposes. In instances where the Company provides these project development services and subsequent management services, generally, the arrangement results in no delivered elements at the onset of the agreement. The elements are delivered over the contract period as the project development and management services are performed. Project development services are not provided separately to a customer without a management contract. The Company can determine the fair value of the undelivered management services contract and therefore, the value of the project development deliverable, is determined using the residual method.
 
Lease RevenueDebt Issuance Costs
Debt issuance costs totaling $14.8 million and $17.9 million at January 2, 2011 and January 3, 2010, respectively, are included in other non-current assets in the consolidated balance sheets and are amortized to interest expense using the effective interest method, over the term of the related debt.
Variable Interest Entities
 
The Company evaluates its joint ventures and other entities in which it has a variable interest (a “VIE”), generally in the form of investments, loans, guarantees, or equity in order to determine if it has a controlling financial interest and is required to consolidate the entity as a result. The reporting entity with a variable interest that provides the entity with a controlling financial interest in the VIE will have both of the following characteristics: (i) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company does not consolidate its 50% owned South African joint venture in SACS, a VIE. SACS joint venture investors are GEO and Kensani Holdings, Pty. Ltd; each partner owns two facilitiesa 50% share. The Company has determined it is not the primary beneficiary of SACS since it does not have the power to direct the activities of SACS that are leasedmost significantly impact its performance. As such, this entity is accounted for as an equity affiliate. SACS was established in 2001 and was subsequently awarded a25-year contract to unrelated third parties.design, finance and build the Kutama Sinthumule Correctional Centre in Louis Trichardt, South Africa. To fund the construction of the prison, SACS obtained long-term financing from its equity partners and lenders, the repayment of which is fully guaranteed by the South African government, except in the event of default, in which case the government guarantee is reduced to 80%. The first leaseCompany’s maximum exposure for loss under this contract is limited to its investment in joint venture of $27.6 million at January 2, 2011 and its guarantees related to SACS discussed in Note 14.
The Company consolidates South Texas Local Development Corporation (“STLDC”), a VIE. STLDC was created to finance construction for the development of a 1,904-bed facility in Frio County, Texas. STLDC, the owner of the complex, issued $49.5 million in taxable revenue bonds and has an initialoperating agreement with the Company, which provides the Company with the sole and exclusive right to operate and manage the detention center. The operating agreement and bond indenture require the revenue from the contract be used to fund the periodic debt service requirements as they become due. The net revenues, if any, after various expenses such as trustee fees, property taxes and insurance premiums are distributed to the Company to cover operating expenses and management fees. The Company is responsible for the entire operations of the facility including the payment of all operating expenses whether or not there are sufficient revenues. The bonds have a ten-year term and are non-recourse to the Company. At the end of the ten-year term of the bonds, title and ownership of the facility transfers from STLDC to the Company. See Note 14.
As a result of the acquisition of Cornell in August 2010, the Company assumed the variable interest in MCF of which it is the primary beneficiary and consolidates the entity as a result. MCF was created in August 2001 as a special limited partnership for the purpose of acquiring, owning, leasing and operating low to medium security adult and juvenile correction and treatment facilities. At its inception, MCF purchased assets representing eleven facilities from Cornell and leased those assets back to Cornell under a Master Lease Agreement (the “Lease”). These assets were purchased from Cornell using proceeds from the 8.47% Taxable Revenue Bonds, Series 2001 (“8.47% Revenue Bonds”) due 2016, which are limited non-recourse obligations of MCF and collateralized by the bond reserves, assignment of subleases and substantially all assets related to the eleven facilities. Under the terms of the Lease with Cornell, assumed by the Company, the Company will lease the assets for the remainder of the20-year base term, which expiresends in July 2013 with an option2021, and has options at its sole discretion to terminate in July 2010. The second lease has a term of ten years and expires in January 2018. Both of these leases have options to extendrenew the Lease for up to threeapproximately 25 additional five-year terms. The carrying valueyears. MCF’s sole source of these assets included in propertyrevenue is from the Company and equipment at January 3, 2010 and December 28, 2008 was $51.8 million and $53.0 million, respectively, net of accumulated depreciation of $3.4 million and $2.2 million, respectively. Theas such the Company also receives a small amount of rental income relatedhas the power to direct the sublease of an office space for which both the sublease and the Company’s obligation under the original lease expire November 2010. Rental income received on these leases for the fiscal years ended January 3, 2010, December 28, 2008 and December 30, 2007 was $5.9 million, $5.7 million and $4.0 million, respectively.
     
Fiscal Year
 Annual Rental 
  (In thousands) 
 
2010 $6,151 
2011  6,321 
2012  6,452 
2013  6,586 
2014  6,725 
Thereafter  16,740 
     
  $48,975 
     
Income Taxes
Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Significant judgments are required to determine the consolidated provision for income taxes. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. Realizationactivities of the Company’s deferred tax assets is dependent upon many factors such as tax regulations applicable to the jurisdictions in which it operates, estimates of future taxable income and the character of such taxable income. Based on the Company’s estimate of future earnings and its favorable earnings history, management currently expects full realization of the deferred tax assets net of any recorded valuation allowances. Additionally, judgment must be made as to certain tax positions which may not be fully sustained upon review by taxVIE that most


7793

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
authorities. If actual circumstances differ from thesignificantly impact its performance. The Company’s assumptions, adjustmentsrisk is generally limited to the carryingrental obligations under the operating leases. This entity is included in the accompanying consolidated financial statements and all intercompany transactions are eliminated in consolidation.
Noncontrolling Interests
Noncontrolling interests in consolidated entities represent equity that other investors have contributed to MCF and the noncontrolling interest in SACM. Noncontrolling interests are adjusted for income and losses allocable to the other shareholders in these entities.
Upon acquisition of Cornell, the Company assumed MCF as a variable interest entity and allocated a portion of the purchase price to the noncontrolling interest based on the estimated fair value of deferred tax assets or liabilities may be required,MCF as of August 12, 2010. The noncontrolling interest in MCF represents 100% of the equity in MCF which may resultwas contributed by its partners at inception in an adverse impact on2001. The Company includes the results of operations and the Company’s effective tax rate. Valuation allowances are recorded related to deferred tax assets based on “more likely than not” criteria. Management has not made any significant changes to the way the Company accounts forfinancial position of MCF, its deferred tax assets and liabilitiesvariable interest entity, in any year presented in theits consolidated financial statements. MCF owns eleven facilities which it leases to the Company.
The Company includes the results of operations and financial position of South African Custodial Management Pty. Limited (“SACM” or the “joint venture”), its majority-owned subsidiary, in its consolidated financial statements. SACM was established in 2001 to operate correctional centers in South Africa. The joint venture currently provides security and other management services for the Kutama Sinthumule Correctional Centre in the Republic of South Africa under a25-year management contract which commenced in February 2002. The Company’s and the second joint venture partner’s shares in the profits of the joint venture are 88.75% and 11.25%, respectively. There were no changes in the Company’s ownership percentage of the consolidated subsidiary during the fiscal year ended January 2, 2011.
 
Earnings Per Share
Basic earnings per share is computed by dividing income from continuing operations by the weighted-average number of common shares outstanding. The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator includes dilutive common share equivalents such as share options and restricted shares.
Direct Finance LeasesFair Value Measurements
 
The Company accountscarries certain of its assets and liabilities at fair value, measured on a recurring basis, in the accompanying consolidated balance sheets. The Company also has certain assets and liabilities which are not carried at fair value in its accompanying balance sheets and discloses the fair value measurements for those assets and liabilities in Note 11 and Note 12. The Company establishes fair value of its assets and liabilities using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels which distinguish between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The level in the fair value hierarchy within which the respective fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities, Level 2 inputs are other than quotable market prices included in Level 1 that are observable for the portion of its contractsasset or liability either directly or indirectly through corroboration with certain governmental agenciesobservable market data. Level 3 inputs are unobservable inputs for the assets or liabilities that represent capitalized lease payments on buildings and equipment as investmentsreflect management’s own assumptions about the assumptions market participants would use in direct finance leases. Accordingly,pricing the minimum lease payments to be received over the term of the leases less unearned income are capitalized as the Company’s investments in the leases. Unearned income is recognized as income over the term of the leases using the effective interest method.asset or liability.
 
Reserves for Insurance LossesRevenue Recognition
 
The natureFacility management revenues are recognized as services are provided under facility management contracts with approved government appropriations based on a net rate per day per inmate or on a fixed monthly rate. A limited number of the Company’s business exposes it to various typescontracts have provisions upon which a small portion of third-party legal claims, including, but not limited to, civil rights claims relating to conditionsthe revenue for the contract is based on the performance of confinementand/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, contractual claims and claims for personal injury or other damages resulting from contact withcertain targets. Revenue based on the performance of certain targets is less than 2% of the Company’s facilities, programs, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. In addition,consolidated annual revenues. These performance targets are based on specific criteria to be met over specific periods of time. Such criteria includes the Company’s management contracts generally requireability to achieve certain contractual benchmarks relative to the quality of service it provides, non-occurrence of certain disruptive events, effectiveness of its quality control programs and its responsiveness to indemnify the governmental agency against any damages to which the governmental agency may be subject in connection with such claims or litigation. The Company maintains a broad program of insurance coverage for these general types of claims, except for claims relating to employment matters, for which the Company carries no insurance. There can be no assurance that the Company’s insurance coverage will be adequate to cover all claims to which it may be exposed. The Company currently maintains a general liability policy and excess liability policy for all U.S. corrections operations with limits of $62.0 million per occurrence and in the aggregate. A separate $35.0 million limit applies to medical professional liability claims arising out of correctional healthcare services. The Company’s wholly owned subsidiary, GEO Care, Inc., is insured under their own program for general liability and medical professional liability with a specific loss limit of $35.0 million per occurrence and in the aggregate. The Company is uninsured for any claims in excess of these limits. For most casualty insurance policies, the Company carries substantial deductibles or self-insured retentions — $3.0 million per occurrence for general liability and hospital professional liability, $2.0 million per occurrence for workers’ compensation and $1.0 million per occurrence for automobile liability. The Company also maintains insurance to cover property and other casualty risks including workers’ compensation, environmental liability and automobile liability.
With respect to its operations in South Africa, United Kingdom and Australia, the Company utilizes a combination of locally-procured insurance and global policies to meet contractual insurance requirements andcustomer


7894

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
protectrequirements and concerns. For the Company.limited number of contracts where revenue is based on the performance of certain targets, revenue is either (i) recorded pro rata when revenue is fixed and determinable or (ii) recorded when the specified time period lapses. In many instances, the Company is a party to more than one contract with a single entity. In these instances, each contract is accounted for separately. The Company has not recorded any revenue that is at risk due to future performance contingencies.
Construction revenues are recognized from the Company’s Australian subsidiary is requiredcontracts with certain customers to carry tail insuranceperform construction and design services (“project development services”) for various facilities. In these instances, the Company acts as the primary developer and subcontracts with bonded Nationaland/or Regional Design Build Contractors. These construction revenues are recognized as earned on a general liability policy providing an extended reportingpercentage of completion basis measured by the percentage of costs incurred to date as compared to the estimated total cost for each contract. Provisions for estimated losses on uncompleted contracts and changes to cost estimates are made in the period in which the Company determines that such losses and changes are probable. Typically, the Company enters into fixed price contracts and does not perform additional work unless approved change orders are in place. Costs attributable to unapproved change orders are expensed in the period in which the costs are incurred if the Company believes that it is not probable that the costs will be recovered through 2011a change in the contract price. If the Company believes that it is probable that the costs will be recovered through a change in the contract price, costs related to unapproved change orders are expensed in the period in which they are incurred, and contract revenue is recognized to the extent of the costs incurred. Revenue in excess of the costs attributable to unapproved change orders is not recognized until the change order is approved. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined. As the primary contractor, the Company is exposed to the various risks associated with construction, including the risk of cost overruns. Accordingly, the Company records its construction revenue on a discontinued contract.gross basis and includes the related cost of construction activities in Operating Expenses.
 
In addition,When evaluating multiple element arrangements for certain of the Company’s facilities located in Florida and determined by insurers to be in high-risk hurricane areas carry substantial windstorm deductibles. Since hurricanes are considered unpredictable future events, no reserves have been established to pre-fund for potential windstorm damage. Limited commercial availability of certain types of insurance relating to windstorm exposure in coastal areas and earthquake exposure mainly in California may preventcontracts where the Company from insuring some ofprovides project development services to its facilitiesclients in addition to full replacement value.
Of the reserves discussed above, the Company’s most significant insurance reserves relate to workers’ compensation and general liability claims. These reserves are undiscounted and were $27.2 million and $25.5 million as of January 3, 2010 and December 28, 2008, respectively. The Company uses statistical and actuarial methods to estimate amounts for claims that have been reported but not paid and claims incurred but not reported. In applying these methods and assessing their results,standard management services, the Company considers such factorsfollows revenue recognition guidance for multiple element arrangements. This revenue recognition guidance related to multiple deliverables in an arrangement provides guidance on determining if separate contracts should be evaluated as historical frequencya single arrangement and severityif an arrangement involves a single unit of claims at eachaccounting or separate units of its facilities, claim development, payment patternsaccounting and changesif the arrangement is determined to have separate units, how to allocate amounts received in the nature of its business, among other factors. Such factors are analyzedarrangement for each ofrevenue recognition purposes. In instances where the Company’s business segments. The Company’s estimates may be impacted by such factors as increases in the market price for medicalCompany provides these project development services and unpredictability ofsubsequent management services, generally, the size of jury awards. The Company also may experience variability between its estimates and the actual settlement due to limitations inherentarrangement results in the estimation process, including the Company’s ability to estimate costs of processing and settling claims in a timely manner as well as its ability to accurately estimate its exposureno delivered elements at the onset of the agreement. The elements are delivered over the contract period as the project development and management services are performed. Project development services are not provided separately to a claim. Becausecustomer without a management contract. The Company can determine the Company has high deductible insurance policies,fair value of the amountundelivered management services contract and therefore, the value of its insurance expensethe project development deliverable, is dependent on its ability to control claims experience. If actual losses related to insurance claims significantly differ from estimates,determined using the Company’s financial condition, results of operations and cash flows could be materially impacted.residual method.
 
Debt Issuance Costs
 
Debt issuance costs totaling $17.9$14.8 million and $9.6$17.9 million at January 2, 2011 and January 3, 2010, and December 28, 2008, respectively, are included in other non-current assets in the consolidated balance sheets and are amortized to interest expense using the effective interest method, over the term of the related debt.
 
Variable Interest Entities
The Company evaluates its joint ventures and other entities in which it has a variable interest (a “VIE”), generally in the form of investments, loans, guarantees, or equity in order to determine if it has a controlling financial interest and is required to consolidate the entity as a result. The reporting entity with a variable interest that provides the entity with a controlling financial interest in the VIE will have both of the following characteristics: (i) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company does not consolidate its 50% owned South African joint venture in SACS, a VIE. SACS joint venture investors are GEO and Kensani Holdings, Pty. Ltd; each partner owns a 50% share. The Company has determined it is not the primary beneficiary of SACS since it does not have the power to direct the activities of SACS that most significantly impact its performance. As such, this entity is accounted for as an equity affiliate. SACS was established in 2001 and was subsequently awarded a25-year contract to design, finance and build the Kutama Sinthumule Correctional Centre in Louis Trichardt, South Africa. To fund the construction of the prison, SACS obtained long-term financing from its equity partners and lenders, the repayment of which is fully guaranteed by the South African government, except in the event of default, in which case the government guarantee is reduced to 80%. The Company’s maximum exposure for loss under this contract is limited to its investment in joint venture of $27.6 million at January 2, 2011 and its guarantees related to SACS discussed in Note 14.
The Company consolidates South Texas Local Development Corporation (“STLDC”), a VIE. STLDC was created to finance construction for the development of a 1,904-bed facility in Frio County, Texas. STLDC, the owner of the complex, issued $49.5 million in taxable revenue bonds and has an operating agreement with the Company, which provides the Company with the sole and exclusive right to operate and manage the detention center. The operating agreement and bond indenture require the revenue from the contract be used to fund the periodic debt service requirements as they become due. The net revenues, if any, after various expenses such as trustee fees, property taxes and insurance premiums are distributed to the Company to cover operating expenses and management fees. The Company is responsible for the entire operations of the facility including the payment of all operating expenses whether or not there are sufficient revenues. The bonds have a ten-year term and are non-recourse to the Company. At the end of the ten-year term of the bonds, title and ownership of the facility transfers from STLDC to the Company. See Note 14.
As a result of the acquisition of Cornell in August 2010, the Company assumed the variable interest in MCF of which it is the primary beneficiary and consolidates the entity as a result. MCF was created in August 2001 as a special limited partnership for the purpose of acquiring, owning, leasing and operating low to medium security adult and juvenile correction and treatment facilities. At its inception, MCF purchased assets representing eleven facilities from Cornell and leased those assets back to Cornell under a Master Lease Agreement (the “Lease”). These assets were purchased from Cornell using proceeds from the 8.47% Taxable Revenue Bonds, Series 2001 (“8.47% Revenue Bonds”) due 2016, which are limited non-recourse obligations of MCF and collateralized by the bond reserves, assignment of subleases and substantially all assets related to the eleven facilities. Under the terms of the Lease with Cornell, assumed by the Company, the Company will lease the assets for the remainder of the20-year base term, which ends in 2021, and has options at its sole discretion to renew the Lease for up to approximately 25 additional years. MCF’s sole source of revenue is from the Company and as such the Company has the power to direct the activities of the VIE that most


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
significantly impact its performance. The Company’s risk is generally limited to the rental obligations under the operating leases. This entity is included in the accompanying consolidated financial statements and all intercompany transactions are eliminated in consolidation.
Noncontrolling Interests
Noncontrolling interests in consolidated entities represent equity that other investors have contributed to MCF and the noncontrolling interest in SACM. Noncontrolling interests are adjusted for income and losses allocable to the other shareholders in these entities.
Upon acquisition of Cornell, the Company assumed MCF as a variable interest entity and allocated a portion of the purchase price to the noncontrolling interest based on the estimated fair value of MCF as of August 12, 2010. The noncontrolling interest in MCF represents 100% of the equity in MCF which was contributed by its partners at inception in 2001. The Company includes the results of operations and financial position of MCF, its variable interest entity, in its consolidated financial statements. MCF owns eleven facilities which it leases to the Company.
The Company includes the results of operations and financial position of South African Custodial Management Pty. Limited (“SACM” or the “joint venture”), its majority-owned subsidiary, in its consolidated financial statements. SACM was established in 2001 to operate correctional centers in South Africa. The joint venture currently provides security and other management services for the Kutama Sinthumule Correctional Centre in the Republic of South Africa under a25-year management contract which commenced in February 2002. The Company’s and the second joint venture partner’s shares in the profits of the joint venture are 88.75% and 11.25%, respectively. There were no changes in the Company’s ownership percentage of the consolidated subsidiary during the fiscal year ended January 2, 2011.
Fair Value Measurements
The Company carries certain of its assets and liabilities at fair value, measured on a recurring basis, in the accompanying consolidated balance sheets. The Company also has certain assets and liabilities which are not carried at fair value in its accompanying balance sheets and discloses the fair value measurements for those assets and liabilities in Note 11 and Note 12. The Company establishes fair value of its assets and liabilities using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels which distinguish between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The level in the fair value hierarchy within which the respective fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities, Level 2 inputs are other than quotable market prices included in Level 1 that are observable for the asset or liability either directly or indirectly through corroboration with observable market data. Level 3 inputs are unobservable inputs for the assets or liabilities that reflect management’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
Revenue Recognition
Facility management revenues are recognized as services are provided under facility management contracts with approved government appropriations based on a net rate per day per inmate or on a fixed monthly rate. A limited number of the Company’s contracts have provisions upon which a small portion of the revenue for the contract is based on the performance of certain targets. Revenue based on the performance of certain targets is less than 2% of the Company’s consolidated annual revenues. These performance targets are based on specific criteria to be met over specific periods of time. Such criteria includes the Company’s ability to achieve certain contractual benchmarks relative to the quality of service it provides, non-occurrence of certain disruptive events, effectiveness of its quality control programs and its responsiveness to customer


94

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
requirements and concerns. For the limited number of contracts where revenue is based on the performance of certain targets, revenue is either (i) recorded pro rata when revenue is fixed and determinable or (ii) recorded when the specified time period lapses. In many instances, the Company is a party to more than one contract with a single entity. In these instances, each contract is accounted for separately. The Company has not recorded any revenue that is at risk due to future performance contingencies.
Construction revenues are recognized from the Company’s contracts with certain customers to perform construction and design services (“project development services”) for various facilities. In these instances, the Company acts as the primary developer and subcontracts with bonded Nationaland/or Regional Design Build Contractors. These construction revenues are recognized as earned on a percentage of completion basis measured by the percentage of costs incurred to date as compared to the estimated total cost for each contract. Provisions for estimated losses on uncompleted contracts and changes to cost estimates are made in the period in which the Company determines that such losses and changes are probable. Typically, the Company enters into fixed price contracts and does not perform additional work unless approved change orders are in place. Costs attributable to unapproved change orders are expensed in the period in which the costs are incurred if the Company believes that it is not probable that the costs will be recovered through a change in the contract price. If the Company believes that it is probable that the costs will be recovered through a change in the contract price, costs related to unapproved change orders are expensed in the period in which they are incurred, and contract revenue is recognized to the extent of the costs incurred. Revenue in excess of the costs attributable to unapproved change orders is not recognized until the change order is approved. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined. As the primary contractor, the Company is exposed to the various risks associated with construction, including the risk of cost overruns. Accordingly, the Company records its construction revenue on a gross basis and includes the related cost of construction activities in Operating Expenses.
When evaluating multiple element arrangements for certain contracts where the Company provides project development services to its clients in addition to standard management services, the Company follows revenue recognition guidance for multiple element arrangements. This revenue recognition guidance related to multiple deliverables in an arrangement provides guidance on determining if separate contracts should be evaluated as a single arrangement and if an arrangement involves a single unit of accounting or separate units of accounting and if the arrangement is determined to have separate units, how to allocate amounts received in the arrangement for revenue recognition purposes. In instances where the Company provides these project development services and subsequent management services, generally, the arrangement results in no delivered elements at the onset of the agreement. The elements are delivered over the contract period as the project development and management services are performed. Project development services are not provided separately to a customer without a management contract. The Company can determine the fair value of the undelivered management services contract and therefore, the value of the project development deliverable, is determined using the residual method.
Lease Revenue
Prior to the acquisition of Cornell in August 2010, the Company leased two of its owned facilities to the third parties, one of which was Cornell. There is now only one owned facility that the Company leases to an unrelated third party. The lease has a term of ten years and expires in January 2018 with an option to extend for up to three additional five-year terms. The carrying value of this leased facility as of January 2, 2011 and January 3, 2010 was $36.1 million and $36.9 million, respectively, net of accumulated depreciation of $3.2 million and $2.3 million, respectively. Rental income received on this lease for the fiscal years ended


95

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
January 2, 2011, January 3, 2010 and December 28, 2008 was $4.5 million, $4.5 million and $4.4 million, respectively. Future minimum rentals on this lease are as follows:
     
Fiscal Year Annual Rental 
  (In thousands) 
 
2011 $4,477 
2012  4,489 
2013  4,623 
2014  4,762 
2015  4,905 
Thereafter  10,690 
     
  $33,946 
     
Income Taxes
Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Significant judgments are required to determine the consolidated provision for income taxes. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. Realization of the Company’s deferred tax assets is dependent upon many factors such as tax regulations applicable to the jurisdictions in which the Company operates, estimates of future taxable income and the character of such taxable income. Additionally, the Company must use significant judgment in addressing uncertainties in the application of complex tax laws and regulations. If actual circumstances differ from the Company’s assumptions, adjustments to the carrying value of deferred tax assets or liabilities may be required, which may result in an adverse impact on the results of its operations and its effective tax rate. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria. The Company has not made any significant changes to the way it accounts for its deferred tax assets and liabilities in any year presented in the consolidated financial statements. Based on its estimate of future earnings and its favorable earnings history, the Company currently expects full realization of the deferred tax assets net of any recorded valuation allowances. Furthermore, tax positions taken by the Company may not be fully sustained upon examination by the taxing authorities. In determining the adequacy of our provision (benefit) for income taxes, potential settlement outcomes resulting from income tax examinations are regularly assessed. As such, the final outcome of tax examinations, including the total amount payable or the timing of any such payments upon resolution of these issues, cannot be estimated with certainty.
Reserves for Insurance Losses
The nature of the Company’s business exposes it to various types of third-party legal claims, including, but not limited to, civil rights claims relating to conditions of confinementand/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, product liability claims, intellectual property infringement claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, contractual claims and claims for personal injury or other damages resulting from contact with our facilities, programs, electronic monitoring products, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. In addition, the Company’s management contracts generally require it to indemnify the governmental agency against any damages to which the governmental agency may be subject in connection with such claims or litigation. The Company maintains a broad program of insurance coverage for these general types of claims, except for claims relating to employment matters, for which the Company carries no insurance. There can be no assurance that the Company’s insurance coverage will be adequate to cover all claims to which it may be exposed. It is the Company’s general practice to bring merged or acquired companies into its corporate master policies in order to take advantage of certain economies of scale.


96

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company currently maintains a general liability policy and excess liability policy for U.S. Detention & Corrections, GEO Care’s Community-Based Services, GEO Care’s Youth Services and BI, Inc. with limits of $62.0 million per occurrence and in the aggregate. A separate $35.0 million limit applies to medical professional liability claims arising out of correctional healthcare services. The Company’s wholly owned subsidiary, GEO Care, Inc., has a separate insurance program for its residential services division, with a specific loss limit of $35.0 million per occurrence and in the aggregate with respect to general liability and medical professional liability. The Company is uninsured for any claims in excess of these limits. The Company also maintains insurance to cover property and other casualty risks including, workers’ compensation, environmental liability and automobile liability.
For most casualty insurance policies, the Company carries substantial deductibles or self-insured retentions — $3.0 million per occurrence for general liability and hospital professional liability, $2.0 million per occurrence for workers’ compensation and $1.0 million per occurrence for automobile liability. In addition, certain of the Company’s facilities located in Florida and other high-risk hurricane areas carry substantial windstorm deductibles. Since hurricanes are considered unpredictable future events, no reserves have been established to pre-fund for potential windstorm damage. Limited commercial availability of certain types of insurance relating to windstorm exposure in coastal areas and earthquake exposure mainly in California may prevent the Company from insuring some of its facilities to full replacement value.
With respect to operations in South Africa, the United Kingdom and Australia, the Company utilizes a combination of locally-procured insurance and global policies to meet contractual insurance requirements and protect the Company. The Company’s Australian subsidiary is required to carry tail insurance on a general liability policy providing an extended reporting period through 2011 related to a discontinued contract.
Of the reserves discussed above, the Company’s most significant insurance reserves relate to workers’ compensation and general liability claims. These reserves are undiscounted and were $40.2 million and $27.2 million as of January 2, 2011 and January 3, 2010, respectively. The Company uses statistical and actuarial methods to estimate amounts for claims that have been reported but not paid and claims incurred but not reported. In applying these methods and assessing their results, the Company considers such factors as historical frequency and severity of claims at each of its facilities, claim development, payment patterns and changes in the nature of its business, among other factors. Such factors are analyzed for each of the Company’s business segments. The Company estimates may be impacted by such factors as increases in the market price for medical services and unpredictability of the size of jury awards. The Company also may experience variability between its estimates and the actual settlement due to limitations inherent in the estimation process, including its ability to estimate costs of processing and settling claims in a timely manner as well as its ability to accurately estimate the Company’s exposure at the onset of a claim. Because the Company has high deductible insurance policies, the amount of its insurance expense is dependent on its ability to control its claims experience. If actual losses related to insurance claims significantly differ from the Company’s estimates, its financial condition, results of operations and cash flows could be materially adversely impacted.
Comprehensive Income
 
The Company’s total comprehensive income is comprised of net income attributable to The GEO Group, Inc., net income attributable to noncontrolling interests, foreign currency translation adjustments, net unrealized loss on derivative instruments, and pension liability adjustments in the Consolidated Statements of Shareholders’ Equity and Comprehensive Income.
Concentration of Credit Risk
At times the Company may have significant amounts of cash and cash equivalents at financial institutions that are in excess of federally insured limits. Other than cash, financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable, a direct finance lease receivable, long-term debt and financial instruments used in hedging activities. The Company’s cash management and investment policies restrict investments to low-risk, highly liquid securities, and the Company performs periodic evaluations of the credit standing of the financial institutions with which it deals.
 
Foreign Currency Translation
 
The Company’s foreign operations use their local currencies as their functional currencies. Assets and liabilities of the operations are translated at the exchange rates in effect on the balance sheet date and


79

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
shareholders’ equity is translated at historical rates. Income statement items are translated at the average exchange rates for the year. The positive (negative) impact of foreign currency fluctuation is included in


97

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
shareholders’ equity as a component of accumulated other comprehensive income, net of income tax, and totaled $5.1 million, $10.7 million $(10.7) million and $2.9($10.7) million for the fiscal years ended January 3, 2010, December 28, 2008 and December 30, 2007, respectively. The cumulative income (loss) on foreign currency translation recorded as a component of shareholders’ equity as of2, 2011, January 3, 2010 and December 28, 2008, was $4.8 million and ($5.8) million, respectively.
 
Derivatives
 
The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in interest rates. The Company measures its derivative financial instruments at fair value and records derivatives as either assets or liabilities on the balance sheet. For derivatives that are designed as and qualify as effective cash flow hedges, the portion of gain or loss on the derivative instrument effective at offsetting changes in the hedged item is reported as a component of accumulated other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. For derivative instruments that are designated as and qualify as effective fair value hedges, the gain or loss on the derivative instrumentinstruments as well as the offsetting gain or loss on the hedged itemitems attributable to the hedged risk is recognized in current earnings as interest income (expense) during the period of the change in fair values.
 
The Company formally documents all relationships between hedging instruments and hedge items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes attributing all derivatives that are designated as cash flow hedges to floating rate liabilities and attributing all derivatives that are designated as fair value hedges to fixed rate liabilities. The Company also assesses whether each derivative is highly effective in offsetting changes in the cash flows of the hedged item. Fluctuations in the value of the derivative instruments are generally offset by changes in the hedged item; however, if it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively for the affected derivative.
 
Stock-Based Compensation Expense
 
The Company recognizes the cost of stock based compensation awards based upon the grant date fair value of those awards. The Company uses a Black-Scholes option valuation model to estimate the fair value of each option awarded. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized.
 
The fair value of stock-based awards was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions for fiscal years ending 2010, 2009 2008 and 2007,2008, respectively:
 
                        
 2009 2008 2007  2010 2009 2008
Risk free interest rates  2.00%  2.87%  4.80%  0.16%  2.00%  2.87%
Expected term  4-5years   4-5years   4-5years   3 months   4-5years   4-5years 
Expected volatility  41%  41%  40%  43%  41%  41%
Expected dividend  —   —   —   —   —   — 
 
The options granted in 2010 were the replacement options granted to former Cornell employees. Expected volatilities are based on the historical and implied volatility of the Company’s common stock. The Company uses historical data to estimate award exercises and employee terminations within the valuation model. The expected term of the awards represents the period of time that awards granted are expected to be outstanding and is based on historical data and expected holding periods. TheFor awards granted as replacement stock options in 2010, the risk-free rate is based on the rate for three-month U.S. Treasury Bonds, which is consistent with the expected term of the award. For awards granted in 2009 and 2008, the risk-free rate is based on the rate for five year U.S. Treasury Bonds, which is consistent with the expected term of the awards. See Note 3.


8098

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Treasury Stock
We account for repurchases of our common stock, if any, using the cost method with common stock in treasury classified in our consolidated balance sheets as a reduction of shareholders’ equity.
On February 22, 2010, the Company announced that its Board of Directors approved a stock repurchase program for up to $80.0 million of the Company’s common stock which was effective through March 31, 2011. During the fiscal year ended January 2, 2011, the Company completed repurchases of shares of its common stock under the share repurchase program. The stock repurchase program was implemented through purchases made from time to time in the open market or in privately negotiated transactions, in accordance with applicable Securities and Exchange Commission requirements. The program also included repurchases from time to time from executive officers or directors of vested restricted stockand/or vested stock options. The stock repurchase program did not obligate the Company to purchase any specific amount of its common stock and could be extended or suspended at any time at the Company’s discretion. During the fiscal year ended January 2, 2011, the Company completed the program and purchased 4.0 million shares of its common stock, at an aggregate cost of $80.0 million, using cash on hand and cash flow from operating activities. Included in the shares repurchased for the fiscal year ended January 2, 2011 were 1.1 million shares repurchased from executive officers at an aggregate cost of $22.3 million.
Earnings Per Share
Basic earnings per share is computed by dividing income from continuing operations by the weighted-average number of common shares outstanding. The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator includes dilutive common share equivalents such as share options and restricted shares.
Recent Accounting Pronouncements
Effective in July 2009, any changes to the source of authoritative U.S. GAAP promulgated by the Financial Accounting Standards Board (“FASB”) are communicated through Accounting Standards Updates (“ASU”). ASU’s are published for all authoritative U.S. GAAP promulgated by the FASB, regardless of the form in which such guidance may have been issued prior to release of the FASB ASC (e.g., FASB Statements, EITF Abstracts, FASB Staff Positions, etc.). FASB ASU’s are also issued for amendments to the SEC content in the FASB ASC as well as for editorial changes.
 
The Company implemented the following accounting standards in the fiscal year ended January 3, 2010:2, 2011:
 
In December 2007, the FASB issued new guidance for the accounting of business combinations. This updated guidance clarifies the initial and subsequent recognition, subsequent accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value at the acquisition date if it can be determined during the measurement period. If the acquisition-date fair value of an asset or liability cannot be determined during the measurement period, the asset or liability will only be recognized at the acquisition date if it is both probable that an asset existed or liability has been incurred at the acquisition date, and if the amount of the asset or liability can be reasonably estimated. This requirement became effective for the Company as of December 29, 2008, the first day of its fiscal year. Additionally, this guidance,applies the concept of fair value and “more likely than not” criteria to accounting for contingent consideration, and pre-acquisition contingencies. The impact from the adoption of this change did not have a material effect on the Company’s financial condition, results of operations or cash flows.
In April 2008, the FASB issued guidance relative to goodwill and other intangible assets which amends the factors that must be considered when developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset. This amendment requires an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset. This statement is effective for financial statements in fiscal years beginning after December 15, 2008 and as such, became effective for the Company on December 29, 2008. The impact from the adoption of this change did not have a material effect on the Company’s financial condition, results of operations or cash flows.
In March 2008, the FASB issued guidance to companies relative to disclosures about its derivative and hedging activities which requires entities to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments are accounted for, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. This guidance was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 and as such, became effective for the Company on December 29, 2008. The impact from the adoption of this change did not have a material effect on the Company’s financial condition, results of operations or cash flows.
In August 2009, the FASB issued ASUNo. 2009-5,2009-17, whichpreviously known as FAS No. 167, “Amendments to FASB Interpretation No. FIN 46(R)” (SFAS No. 167). ASUNo. 2009-17 amends guidance relative to fair value measurements and disclosures to provide clarification that in circumstancesthe manner in which a quoted price in an active market for the identical liability is not available, an entityentities evaluate whether consolidation is required for VIEs. The consolidation requirements under the revised guidance require a company to measure fair value utilizing one or moreconsolidate a VIE if the entity has all three of the following techniques: (1) a valuation technique that usescharacteristics (i) the quoted market price of an identical liabilitypower, through voting rights or similar liabilities when traded as assets; or (2) another valuation techniquerights, to direct the activities of a legal entity that is consistent withmost significantly impact the principles set forth inentity’s economic performance, (ii) the obligation to absorb the expected losses of the legal entity, and (iii) the right to receive the expected residual returns of the legal entity. Further, this topic, such asguidance requires that companies continually evaluate VIEs for consolidation, rather than assessing based upon the occurrence of triggering events. As a present value technique. This revised guidanceresult of adoption, which was effective for the Company’s first reporting periodinterim and annual periods beginning after AugustNovember 15, 2009, which forcompanies are required to enhance disclosures about how their involvement with a VIE affects the Company was September 28, 2009.financial statements and exposure to risks. The adoptionimplementation of ASUNo. 2009-5this standard did not have a material impact on the Company’s financial position, results of operations orand cash flows.
 
In additionJanuary 2010, the FASB issued ASUNo. 2010-2 which addresses implementation issues related to these standards,changes in ownership provisions of consolidated subsidiaries, investees and joint ventures. The amendment clarifies that the Companyscope of the decrease in ownership provisions outlined in the current consolidation guidance apply to (i) a subsidiary or group of assets that is a business or nonprofit activity, (ii) a subsidiary that is a business or nonprofit activity and is transferred to an equity method investee or joint venture and (iii) to an exchange of a group of assets that constitute a business or nonprofit activity for a noncontrolling interest in an entity. The amendment also adopted standards as discussed in Note 1makes certain other clarifications and Note 20.expands disclosures about the deconsolidation of a subsidiary or derecognition of a group of assets within the scope of the current consolidation guidance. These amendments became effective for the Company’s interim and annual reporting periods


8199

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
beginning after December 15, 2009. The implementation of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.
In January 2010, the FASB issued ASUNo. 2010-6 which requires additional disclosures relative to transfers of assets and liabilities between Levels 1 and 2 of the fair value hierarchy. Additionally, the amendment requires companies to present activity in the reconciliation for Level 3 fair value measurements on a gross basis rather than on a net basis. This update also provides clarification to existing disclosures relative to the level of disaggregation and disclosure of inputs and valuation techniques for fair value measurements that fall into either Level 2 or Level 3. This amendment became effective for the Company’s interim and annual reporting period after December 15, 2009, except for disclosures related to activity in Level 3 fair value measurements which are effective for the Company’s first reporting period beginning after December 15, 2010. The implementation of this standard, relative to Levels 1 and 2 of the fair value hierarchy, did not have a material impact on the Company’s financial position, results of operations and cash flows. The Company does not expect the adoption of the standard relative to Level 3 investments to have a material impact on the Company’s financial position, results of operations and cash flows.
In July 2010, the FASB issued ASUNo. 2010-20 which affects all entities with financing receivables, excluding short-term trade accounts receivable or receivables measured at fair value or lower of cost or fair value. The objective of the amendments in this update is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the following: (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses, (iii) the changes and reasons for those changes in the allowance for credit losses. These disclosures are effective for the Company for interim and annual reporting periods ending on or after December 15, 2010. The implementation of this standard did not have a material adverse impact on the Company’s financial position, results of operation and cash flows.
The following accounting standards have implementation dates subsequent to the fiscal year ended January 3, 2010 and as such, have not yet beenwill be adopted by the Company:in future periods:
 
In October 2009, the FASB issued ASUNo. 2009-13 which provides amendments to revenue recognition criteria for separating consideration in multiple element arrangements. As a result of these amendments, multiple deliverable arrangements will be separated more frequently than under existing GAAP. The amendments, among other things, establish the selling price of a deliverable, replace the term fair value with selling price and eliminate the residual method so that consideration would be allocated to the deliverables using the relative selling price method. This amendment also significantly expands the disclosure requirements for multiple element arrangements. This guidance will become effective for the Company prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company does not anticipatebelieve that the adoptionimplementation of this standard will have a material adverse impact on its financial position, results of operations oroperation and cash flows.
 
In December 2009,2010, the FASB issued ASUNo. 2009-17,2010-28 previously known as FAS No. 167, “Amendmentsrelated to FASB Interpretation No. FIN 46(R)” (SFAS No. 167)goodwill and intangible assets. Under current guidance, testing for goodwill impairment is a two-step test. When a goodwill impairment test is performed, an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). The objective of ASU NoNo. 2009-172010-28 amends the manneris to address circumstances in which entities evaluate whether consolidation is required for VIEs.have reporting units with zero or negative carrying amounts. The consolidation requirements under the revisedamendments in this guidance require a company to consolidate a VIE if the entity has all threemodify Step 1 of the following characteristics (i) the power, through voting rightsgoodwill impairment test for reporting units with zero or similar rights,negative carrying amounts to direct the activities of a legalrequire an entity that most significantly impact the entity’s economic performance, (ii) the obligation to absorb the expected lossesperform Step 2 of the legal entity (iii) the right to receive the expected residual returns of the legal entity. Further,goodwill impairment test if it is more likely than not that a goodwill impairment exists after considering certain qualitative characteristics, as described in this guidance. This guidance requires that companies continually evaluate VIEs for consolidation, rather than assessing based upon the occurrence of triggering events. As a result of adoption, which becomeswill become effective for the Company in fiscal years, and interim and annual periods within those years, beginning after NovemberDecember 15, 2009, companies are required to enhance disclosures about how their involvement2010. The Company currently does not have any reporting units with a VIE affects its financial statementszero or negative carrying value and exposure to risks. The Company does not anticipateexpect that the adoptionimpact of this accounting standard will have a material impact on itsthe Company’s financial position, results of operations andand/or cash flows.


82100

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Also, in December 2010, the FASB issued ASUNo. 2010-29 related to financial statement disclosures for business combinations entered into after the beginning of the first annual reporting period beginning on or after December 15, 2010. The amendments in this guidance specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. These amendments also expand the supplemental pro forma disclosures under current guidance for business combinations to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company does not expect that the impact of this accounting standard will have a material impact on the Company’s financial position, results of operationsand/or cash flows.
 
2.  Business AcquisitionCombinations
 
Acquisition of Cornell Companies, Inc.
On September 30, 2009,August 12, 2010, the Company’s wholly-owned mental health subsidiary,Company completed its acquisition of Cornell pursuant to a definitive merger agreement entered into on April 18, 2010, and amended on July 22, 2010, between the Company, GEO Care,Acquisition III, Inc. (“GEO Care”), and Cornell. Under the terms of the merger agreement, the Company acquired Just Care, Inc. (“Just Care”), a provider100% of detention healthcare focusingthe outstanding common stock of Cornell for aggregate consideration of $618.3 million, excluding cash acquired of $12.9 million and including: (i) cash payments for Cornell’s outstanding common stock of $84.9 million, (ii) payments made on behalf of Cornell related to Cornell’s transaction costs accrued prior to the acquisition of $6.4 million, (iii) cash payments for the settlement of certain of Cornell’s debt plus accrued interest of $181.9 million using proceeds from GEO’s senior credit facility, (iv) common stock consideration of $357.8 million, and (v) the fair value of stock option replacement awards of $0.2 million. The value of the equity consideration was based on the delivery of medical and mental health services. Just Care manages the 354-bed Columbia Regional Care Center located in Columbia, South Carolina. This facility houses medical and mental health residents for the State of South Carolina and the State of Georgia as well as special needs detainees under custody of the U.S. Marshals Service and U.S. Immigration and Customs Enforcement. This facility is operated by Just Care under a long-term lease with the State of South Carolina. The Company paid $38.4 million, net cash acquired, which was funded by available borrowings from the revolving loan portion (the “Revolver”)closing price of the Company’s Third Amended and restated Credit Agreement (the “Senior Credit Facility”). Thecommon stock on August 12, 2010 of $22.70.
Purchase price allocation
GEO is identified as the acquiring company for US GAAP accounting purposes. Under the purchase method of accounting, the aggregate purchase price wasis allocated to the identifiableCornell’s net tangible and intangible assets acquired and liabilities assumed based on their estimated fair values withas of August 12, 2010, the excessdate of closing and the date that GEO obtained control over Cornell. In order to determine the fair values of a significant portion of the assets acquired and liabilities assumed, the Company engaged third party independent valuation specialists. The preliminary work performed by the third party independent valuation specialists has been considered in management’s estimates of certain of the fair values reflected in the purchase price recorded as goodwill,noneallocation below. For any other assets acquired and liabilities assumed for which the Company is not considering the work of third party independent valuation specialists, the fair value determined by the Company’s management represents the price management believes would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. For long term assets, liabilities and the noncontrolling interest in MCF for which is deductiblethere was no active market price available for Federal Income Tax purposes. valuation, the Company used Level 3 inputs to estimate the fair market value.
The allocation of the purchase price is summarized below:
     
Current assets, net of cash acquired $3,774 
Property and equipment  15,781 
Facility management contracts  6,600 
Goodwill  17,729 
Deferred tax asset  286 
Other non-current assets  69 
     
Total assets acquired $44,239 
     
Current liabilities $(4,699)
Deferred tax liability  (731)
Non current liabilities  (423)
     
Total liabilities assumed $(5,853)
     
Net assets acquired $38,386 
     
In connection with itsfor this transaction at August 12, 2010 has not been finalized. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair values of Just Care, the Company recorded certain tangible assets and liabilities based on information available up through February 22, 2010,acquired, the date these financial statements were issued.valuation of certain intangible assets acquired and income taxes. The Company expects that additionalto continue to obtain information about facts and circumstances surroundingto assist in determining the fair value of certain of thesethe net assets and liabilities will be finalized during 2010. As a result, the provisional amounts recorded may be adjusted retrospectively to reflect the new information about facts and circumstances existingacquired at the acquisition date during the measurement period. Measurement period adjustments that the Company determines to be material will be applied retrospectively to the period of acquisition. The


101

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
purchase price of $618.3 million has been preliminarily allocated to the estimated fair values of the assets acquired and liabilities assumed as of August 12, 2010 as follows (in ’000’s):
     
  Preliminary
 
  Purchase Price
 
  Allocation 
 
Accounts receivable $55,142 
Prepaid and other current assets  13,314 
Deferred income tax assets  21,273 
Restricted assets  44,096 
Property and equipment  462,771 
Intangible assets  75,800 
Out of market lease assets  472 
Other long-term assets  7,510 
     
Total assets acquired $680,378 
     
Accounts payable and accrued expenses  (56,918)
Fair value of non-recourse debt  (120,943)
Out of market lease liabilities  (24,071)
Deferred income tax liabilities  (42,771)
Other long-term liabilities  (1,368)
     
Total liabilities assumed  (246,071)
     
Total identifiable net assets  434,307 
Goodwill  204,724 
     
Fair value of Cornell’s net assets  639,031 
Noncontrolling interest  (20,700)
     
Total consideration for Cornell, net of cash acquired $618,331 
     
As shown above, the Company recorded $204.7 million of goodwill related to the purchase of Cornell. The strategic benefits of the Merger include the combined Company’s increased scale and the diversification of service offerings. These factors contributed to the goodwill that was recorded upon consummation of the transaction. Of the goodwill recorded in relation to the Merger, only $1.5 million of goodwill resulting from a previous Cornell acquisition is deductible for federal income tax purposes; the remainder of goodwill is not deductible. Included in net assets acquired is gross contractual accounts receivable of approximately $62.8 million, of which approximately $7.7 million is expected to be uncollectible. Identifiable intangible assets purchased in the acquisition and their weighted average amortization periods in total and by major intangible asset class, as applicable, are included in the table below (in thousands):
         
  Weighted Average
  Fair Value
 
  Amortization Period  as of August 12, 2010 
 
Goodwill  n/a  $204,724 
Identifiable intangible assets        
Facility Management contracts  12.5 years  $70,100 
Covenants not to compete  1.8 years   5,700 
         
Total identifiable intangible assets  11.7 years  $75,800 
         


102

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of January 2, 2011 the weighted average period before the next contract renewal or extension for acquired Cornell contracts was approximately one year. Although the contracts have renewal and extension terms in the near future, Cornell has historically maintained these relationships beyond the contractual periods.
The following table sets forth amortization expense for each of the five succeeding years and thereafter related to the finite-lived intangible assets acquired during the fiscal year ended January 2, 2011:
             
  U.S. Detention &
       
Fiscal Year Corrections  GEO Care  Total 
 
2011 $4,448  $4,137  $8,585 
2012  3,680   3,385   7,065 
2013  2,950   2,669   5,619 
2014  2,950   2,669   5,619 
2015  2,950   2,669   5,619 
Thereafter  19,517   20,328   39,845 
             
Net carrying value as of January 2, 2011 $36,495  $35,857  $72,352 
             
Pro forma financial information
The results of operations of Cornell are included in the Company’s results of operations from August 12, 2010. The following unaudited pro forma information combines the consolidated results of operations of the Company and Cornell as if the acquisition had occurred at the beginning of fiscal year 2009. The pro forma financial information below has been calculated after adjusting primarily for the following: (i) depreciation and amortization expense that would have affected amountsbeen charged assuming the fair value adjustments to property and equipment and intangible assets had been applied at the beginning of fiscal year 2009; (ii) the impact of the Company’s $750.0 million Senior Credit Facility which closed on August 4, 2010; (iii) the elimination of $15.7 million in acquisition related expenses recognized in goodwill.the fiscal year ended January 2, 2011; and (iv) the related tax effects at the estimated statutory income tax rate. The Company doespro forma amounts are included for comparative purposes and may not expect these adjustments, if required, will have a material impact on itsnecessarily reflect the results of operations or financial position.that would have resulted had the acquisition been completed at a date other than as specified and may not be indicative of the results that will be attained in the future. For the purposes of the table and disclosure below, earnings is the same as net income attributable to the GEO Group Inc., shareholders (in ’000’s):
         
  Fiscal Year Ended
  January 2, 2011 January 3, 2010
 
Pro forma revenues $1,517.6  $1,551.8 
Pro forma net income attributable to the GEO Group Inc., shareholders $90.5  $92.8 
The Company has included revenue and earnings of $151.1 million and $9.8 million, respectively, in its consolidated statement of income for fiscal year ended January 2, 2011 for Cornell activity since August 12, 2010, the date of acquisition.
Acquisition of BII Holding
On December 21, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with BII Holding, GEO Acquisition IV, Inc., a Delaware corporation and wholly-owned subsidiary of GEO (“Merger Sub”), BII Investors IF LP, in its capacity as the stockholders’ representative, and AEA Investors 2006 Fund L.P. (“AEA”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into BII Holding (the “Merger”), with BII Holding (“BI”) continuing as the surviving corporation and a wholly-owned subsidiary of


103

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
GEO. Pursuant to the Merger Agreement, the Company paid merger consideration of $415.0 million in cash, subject to certain adjustments, including an adjustment for working capital. All indebtedness of BI under its senior term loan and senior subordinated note purchase agreement was repaid by BI with a portion of the $415.0 million of merger consideration. Refer to Note 21.
 
3.Shareholders’ Equity
Common Stock
Each holder of the Company’s common stock is entitled to one vote per share on all matters to be voted upon by the Company’s shareholders. Upon any liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share equally in all assets available for distribution after payment of all liabilities, subject to the liquidation preference of shares of preferred stock, if any, then outstanding. The Company did not pay any cash dividends on its common stock for fiscal years 2010, 2009 or 2008. Future dividends, if any, will depend, on the Company’s future earnings, its capital requirements, its financial condition and on such other factors as the Board of Directors may take into consideration.
Preferred Stock
In April 1994, the Company’s Board of Directors authorized 30 million shares of “blank check” preferred stock. The Board of Directors is authorized to determine the rights and privileges of any future issuance of preferred stock such as voting and dividend rights, liquidation privileges, redemption rights and conversion privileges.
Rights Agreement
On October 9, 2003, the Company entered into a rights agreement with EquiServe Trust Company, N.A., as rights agent. Under the terms of the rights agreement, each share of the Company’s common stock carries with it one preferred share purchase right. If the rights become exercisable pursuant to the rights agreement, each right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock at a fixed price, subject to adjustment. Until a right is exercised, the holder of the right has no right to vote or receive dividends or any other rights as a shareholder as a result of holding the right. The rights trade automatically with shares of our common stock, and may only be exercised in connection with certain attempts to acquire the Company. The rights are designed to protect the interests of the Company and its shareholders against coercive acquisition tactics and encourage potential acquirers to negotiate with our Board of Directors before attempting an acquisition. The rights may, but are not intended to, deter acquisition proposals that may be in the interests of the Company’s shareholders.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) represents the change in shareholders’ equity from transactions and other events and circumstances arising from non-shareholder sources. The Company’s comprehensive income (loss) includes net income, effect of foreign currency translation adjustments that arise from consolidating foreign operations that do not impact cash flows, projected benefit obligation recognized in other comprehensive


104

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
income and the change in net unrealized gains or losses on derivative instruments. The components of accumulated other comprehensive income (loss) are as follows:
                 
     Projected Beneftt
       
     Obligation
     Accumulated
 
     Recognized in Other
  Gains and Losses
  Other
 
  Foreign Currency
  Comprehensive
  on Derivative
  Comprehensive
 
  Translation, Net  Income (Loss)  Instruments  Income (Loss) 
 
Balance December 30, 2007 $4,930  $(1,621) $3,611  $6,920 
Change in foreign currency translation, net of tax benefit of $413  (10,742)  —   —   (10,742)
Pension liabiltiy adjustment, net of tax expense of $17  —   27   —   27 
Unrealized loss on derivative instruments, net of tax benefit of $2,113  —   —   (3,480)  (3,480)
                 
Balance December 28, 2008  (5,812)  (1,594)  131   (7,275)
                 
Change in foreign currency translation, net of tax expense of $1,129  10,658   —   —   10,658 
Pension liabiltiy adjustment, net of tax expense of $636  —   942   —   942 
Unrealized gain on derivative instruments, net of income tax benefit of $645  —   —   1,171   1,171 
                 
Balance January 3, 2010  4,846   (652)  1,302   5,496 
                 
Change in foreign currency translation, net of tax expense of $1,313  5,084   —   —   5,084 
Pension liabilty adjustment, net of tax benefit of $232  —   (383)  —   (383)
Unrealized gain on derivative instruments, net of income tax benefit of $69  —   —   (126)  (126)
                 
Balance January 2, 2011 $9,930  $(1,035) $1,176  $10,071 
                 
Stock repurchases
On February 22, 2010, the Company announced that its Board of Directors approved a stock repurchase program for up to $80.0 million of the Company’s common stock which was effective through March 31, 2011. The stock repurchase program was implemented through purchases made from time to time in the open market or in privately negotiated transactions, in accordance with applicable Securities and Exchange Commission requirements. The program also included repurchases from time to time from executive officers or directors of vested restricted stockand/or vested stock options. The stock repurchase program did not obligate the Company to purchase any specific amount of its common stock and could be suspended or extended at any time at the Company’s discretion. During the fiscal year ended January 2 2011, the Company completed the program and purchased 4.0 million shares of its common stock at a cost of $80.0 million using cash on hand and cash flow from operating activities. Of the aggregate 4.0 million shares repurchased during the fiscal year ended January 2, 2011, 1.1 million shares were repurchased from executive officers at an aggregate cost of $22.3 million.
Also during the fiscal year ended January 2, 2011, the Company repurchased 0.3 million shares of common stock from certain directors and executives for an aggregate cost of $7.1 million. These shares were retired by the Company immediately upon repurchase.


105

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Noncontrolling Interests
Upon acquisition of Cornell, the Company assumed MCF as a variable interest entity and allocated a portion of the purchase price to the noncontrolling interest based on the estimated fair value of MCF as of August 12, 2010. The noncontrolling interest in MCF represents 100% of the equity in MCF which was contributed by its partners at inception in 2001. The Company includes the results of operations and financial position of MCF, its variable interest entity, in its consolidated financial statements. MCF owns eleven facilities which it leases to the Company.
The Company includes the results of operations and financial position of South African Custodial Management Pty. Limited (“SACM” or the “joint venture”), its majority-owned subsidiary, in its consolidated financial statements. SACM was established in 2001 to operate correctional centers in South Africa. The joint venture currently provides security and other management services for the Kutama Sinthumule Correctional Centre in the Republic of South Africa under a25-year management contract which commenced in February 2002. The Company’s and the second joint venture partner’s shares in the profits of the joint venture are 88.75% and 11.25%, respectively. There were no changes in the Company’s ownership percentage of the consolidated subsidiary during the fiscal year ended January 2, 2011. The noncontrolling interest as of January 2, 2011 and January 3, 2010 is included in Total Shareholders’ Equity in the accompanying Consolidated Balance Sheets. There were no contributions from owners or distributions to owners in the fiscal year ended January 2, 2011 or January 3, 2010.
4.  Equity Incentive Plans
 
The Company had awards outstanding under four equity compensation plans at January 3, 2010:2, 2011: The Wackenhut Corrections Corporation 1994 Stock Option Plan (the “1994 Plan”); the 1995 Non-Employee Director Stock Option Plan (the “1995 Plan”); the Wackenhut Corrections Corporation 1999 Stock Option Plan (the “1999 Plan”); and The GEO Group, Inc. 2006 Stock Incentive Plan (the “2006 Plan” and, together with the 1994 Plan, the 1995 Plan and the 1999 Plan, the “Company Plans”).
 
On April 29, 2009,August 12, 2010, the Company’s Board of Directors adopted and its shareholders approved several amendmentsan amendment to the 2006 Plan including an amendment providing forto increase the issuance of an additional 1,000,000 shares of the Company’s common stock which increased the total amountnumber of shares of common stock issuable pursuantsubject to awards granted under the plan2006 Plan by 2,000,000 shares from 2,400,000 to 2,400,000 and specifying4,400,000 shares of common stock. The 2006 Plan specifies that up to 1,083,000 of such total shares pursuant to awards granted under the plan may constitute awards other than stock options


83

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and stock appreciation rights, including shares of restricted stock. See “Restricted Stock” below for further discussion. On June 26, 2009, the Company’s Compensation Committee of the Board of Directors approved a grant of 163,000 restricted stock awards to certain employees. Additionally, on October 28, 2009, the Company’s Compensation Committee of the Board of Directors approved a grant of 439,500 stock option awards. As of January 3, 2010,2, 2011, the Company had 553,044952,850 shares of common stock available for issuance pursuant to future awards that may be granted under the plan of which up to 236,344351,722 were available for the issuance of awards other than stock options. As a result of the acquisition of Cornell, the Company issued 35,750 replacement stock option awards with an aggregate fair value as of August 12, 2010 of $0.2 million which is included in the purchase price consideration. These awards were fully vested at the grant date and had a term of 90 days.
 
Except for 846,656846,186 shares of restricted stock issued under the 2006 Plan as of January 3, 2010,2, 2011, all of the awards previously issued under the Company Plans consisted of stock options. Although awards are currently outstanding under all of the Company Plans, the Company may only grant new awards under the 2006 Plan.
 
Under the terms of the Company Plans, the vesting period and, in the case of stock options, the exercise price per share, are determined by the terms of each plan. All stock options that have been granted under the Company Plans are exercisable at the fair market value of the common stock at the date of the grant. Generally, the stock options vest and become exercisable ratably over a four-year period, beginning immediately on the date of the grant. However, the Board of Directors has exercised its discretion to grant stock options that vest 100% immediately for the Chief Executive Officer. In addition, stock options granted to non-employee directors under the 1995 Plan became exercisable immediately. All stock options awarded under the


106

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company Plans expire no later than ten years after the date of the grant.grant, except for the replacement awards issued in connection with the Cornell acquisition discussed above.
 
Stock Options
Stock Options
 
A summary of the activity of the Company’s stock options plans is presented below:
 
                                
   Wtd. Avg.
 Wtd. Avg.
 Aggregate
    Wtd. Avg.
 Wtd. Avg.
 Aggregate
 
   Exercise
 Remaining
 Intrinsic
    Exercise
 Remaining
 Intrinsic
 
 Shares Price Contractual Term Value  Shares Price Contractual Term Value 
 (In thousands)     (In thousands)  (In thousands)     (In thousands) 
Options outstanding at December 28, 2008  2,808  $8.03   4.60  $29,751 
Options outstanding at January 3, 2010  2,807  $10.26   4.80  $32,592 
Granted  448   21.00           36   16.33         
Exercised  (372)  3.92           (1,353)  4.95         
Forfeited/Canceled  (77)  21.86           (89)  19.73         
      
Options outstanding at January 3, 2010  2,807  $10.26   4.80  $32,592 
Options outstanding at January 2, 2011  1,401  $15.01   5.84  $13,517 
      
Options exercisable at January 3, 2010  2,211  $7.62   3.67  $31,538 
Options exercisable at January 2, 2011  1,044  $13.22   5.04  $11,942 
      
 
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of fiscal year 20092010 and the exercise price, times the number of shares that are “in the money”) that would have been received by the option holders had all option holders exercised their options on January 3, 2010.2, 2011. This amount changes based on the fair value of the company’s stock. The total intrinsic value of options exercised during the fiscal years ended January 2, 2011, January 3, 2010, and December 28, 2008 and December 30, 2007 was $21.1 million, $6.2 million, and $2.9 million, and $6.2 million respectively.


84

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table summarizes information about the exercise prices and related information of stock options outstanding under the Company Plans at January 3, 2010:2, 2011:
 
                                        
 Options Outstanding Options Exercisable  Options Outstanding Options Exercisable 
   Wtd. Avg.
 Wtd. Avg.
   Wtd. Avg.
    Wtd. Avg.
 Wtd. Avg.
   Wtd. Avg.
 
 Number
 Remaining
 Exercise
 Number
 Exercise
  Number
 Remaining
 Exercise
 Number
 Exercise
 
Exercise Prices
 Outstanding Contractual Life Price Exercisable Price  Outstanding Contractual Life Price Exercisable Price 
2.63 — 2.81  6,000   0.3  $2.63   6,000  $2.63 
3.10 — 3.10  367,500   1.1   3.10   367,500   3.10 
3.17 — 3.98  149,892   3.0   3.20   149,892   3.20   37,527   1.8   3.30   37,527   3.30 
4.67 — 4.90  415,638   3.3   4.67   415,638   4.67   77,454   2.3   4.67   77,454   4.67 
5.13 — 5.13  567,000   2.1   5.13   567,000   5.13   132,000   1.1   5.13   132,000   5.13 
5.30 — 7.70  233,627   4.6   6.94   230,669   6.93   210,297   4.7   6.96   210,297   6.96 
7.83 — 20.63  335,800   6.9   15.32   188,200   14.03   294,600   6.4   15.62   214,000   15.07 
21.07 — 21.56  728,500   8.1   21.27   284,900   21.37   647,700   7.6   21.26   372,600   21.34 
21.64 — 28.24  3,000   7.5   21.66   1,400   21.65   1,000   8.8   21.70   400   21.70 
          
Total  2,806,957   4.8  $10.26   2,211,199  $7.62   1,400,578   5.8  $15.01   1,044,278  $13.22 
          
 
For the years ended January 2, 2011, January 3, 2010 and December 28, 2008, and December 30, 2007, the amount of stock-based compensation expense related to stock options was $1.4 million, $1.8 million $1.5 million and $0.9$1.5 million, respectively. The weighted average grant date fair value of options granted during the fiscal years ended January 2, 2011 and January 3, 2010 and December 28, 2008 was $6.73, $7.41 and December 30, 2007 was $7.41, $6.58 and $8.73 per share, respectively.


107

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table summarizes the status of the Company’s non-vested sharesstock options as of January 3, 20102, 2011 and changes during the fiscal year ending January 3, 2010:2, 2011:
 
                
   Wtd. Avg. Grant
    Wtd. Avg. Grant
 
 Number of Shares Date Fair Value  Number of Shares Date Fair Value 
Options non-vested at December 28, 2008  426,716  $7.58 
Options non-vested at January 3, 2010  595,758  $7.39 
Granted(a)  447,500   7.41   35,750   6.73 
Vested  (234,058)  7.54   (227,408)  7.32 
Forfeited  (44,400)  8.61   (47,800)  7.30 
      
Options non-vested at January 3, 2010  595,758  $7.39 
Options non-vested at January 2, 2011  356,300  $7.37 
      
(a)These options were granted as replacement awards to former Cornell option holders. The options were fully vested at the acquisition date and the fair value of the awards was included in purchase price consideration.
 
As of January 3, 2010,2, 2011, the Company had $3.8$1.9 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 3.12.5 years. The total fair value of shares vested during the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, and December 30, 2007, was $1.8$2.1 million, $1.2$1.8 million and $1.2 million, respectively. Proceeds received from stock options exercises for 2010, 2009 and 2008 and 2007 was $6.7 million, $1.5 million and $0.8 million, and $1.2 million, respectively. TaxAdditional tax benefits realized from tax deductions associated with option exercisesthe exercise of stock options and the vesting of restricted stock activity for 2010, 2009 and 2008 and 2007 totaled $3.9 million, $0.6 million $0.8 million and $3.1$0.8 million, respectively.
 
Restricted Stock
 
Shares of restricted stock become unrestricted shares of common stock upon vesting on aone-for-one basis. The cost of these awards is determined using the fair value of the Company’s common stock on the date of the grant and compensation expense is recognized over the vesting period. The shares of restricted stock


85

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
granted under the 2006 Plan vest in equal 25% increments on each of the four anniversary dates immediately following the date of grant. A summary of the activity of restricted stock is as follows:
 
                
   Wtd. Avg.
    Wtd. Avg.
 
   Grant date
    Grant date
 
 Shares Fair value  Shares Fair value 
Restricted stock outstanding at December 28, 2008  425,684  $19.54 
Restricted stock outstanding at January 3, 2010  383,100  $19.66 
Granted  168,000   18.66   40,280   22.70 
Vested  (176,597)  18.27   (222,100)  18.84 
Forfeited/Canceled  (33,987)  20.45   (40,750)  21.38 
      
Restricted stock outstanding at January 3, 2010  383,100  $19.66 
Restricted stock outstanding at January 2, 2011  160,530  $21.12 
      
 
During the fiscal year ended January 2, 2011, January 3, 2010 and December 28, 2008, and December 30, 2007, the Company recognized $3.3 million, $3.5 million $3.0 million and $2.5$3.0 million, respectively, of compensation expense related to its outstanding shares of restricted stock. As of January 3, 2010,2, 2011, the Company had $5.2$2.2 million of unrecognized compensation expense that is expected to be recognized over a weighted average period of 2.42.0 years.
 
4.5.  Discontinued Operations
 
The termination of any of the Company’s management contracts by expiration or otherwise, may result in the classification of the operating results of such management contract, net of taxes, as a discontinued operation. The Company presents such events as discontinued operations so long as the financial results can be clearly identified, the operations and cash flows are completely eliminated from ongoing operations, and so long as the Company does not have any significant continuing involvement in the operations of the component after the disposal or termination transaction. Historically, the Company has classified operations as discontinued in the period they are announced as normally all continuing cash flows cease within three to six months of that date. During the fiscal year 2008, the Company discontinued operations at certain of its domestic and international subsidiaries. TheWhere significant, the results of operations, net of taxes, and the assets and liabilities of these operations, each as further described below, have been reflected in the accompanying consolidated financial statements as discontinued operationssuch for all periods presented. Assets, primarily consisting of accounts receivable, and liabilities have been presented separately in the accompanying consolidated balance sheets for all periods presented.


108

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
U.S. corrections.Detention & Corrections.  On November 7, 2008, the Company announced its receipt of notice for the discontinuation of its contract with the State of Idaho, Department of Correction (“Idaho DOC”) for the housing of approximately 305out-of-state inmates at the managed-only Bill Clayton Detention Center (the “Detention Center”) effective January 5, 2009. On August 29, 2008, the Company announced its discontinuation of its contract with Delaware County, Pennsylvania for the management of the county-owned 1,883-bed George W. Hill Correctional Facility effective December 31, 2008.
 
International services.Services.  On December 22, 2008, the Company announced the closure of its U.K.-based transportation division, Recruitment Solutions International (“RSI”). As a result of the termination of its transportation business in the United Kingdom, the Company wrote off assets of $2.6 million including goodwill of $2.3 million.
 
GEO Care.  On June 16, 2008, the Company announced the discontinuation by mutual agreement of its contract with the State of New Mexico Department of Health for the management of the Fort Bayard Medical Center effective June 30, 2008.


86

 
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
There were no continuing cash flows from the operations in the fiscal year ended January 2, 2011 and as such, there are no amounts reclassified to discontinued operations for this period. The following are the revenues related to discontinued operations for the periods presentedfiscal years ended December 28, 2008 and January 3, 2010 (in thousands):
 
             
  2009  2008  2007 
  (In thousands) 
 
Revenues — International services $—  $1,806  $2,326 
Revenues — U.S. corrections  210   43,784   42,617 
Revenues — GEO Care  —   1,806   4,546 
             
  2010  2009  2008 
  (In thousands) 
 
Revenues — International Services $—  $—  $1,806 
Revenues — U.S. Detention & Corrections $—  $210  $43,784 
Revenues — GEO Care $—  $—  $1,806 
 
5.6.  Property and Equipment
 
Property and equipment consist of the following at fiscal year end:
 
                        
 Useful
      Useful
     
 Life 2009 2008  Life 2010 2009 
 (Years) (In thousands)  (Years) (In thousands) 
Land  —  $60,331  $49,686   —  $97,393  $60,331 
Buildings and improvements  2 to 40   797,185   765,103   2 to 50   1,131,895   797,185 
Leasehold improvements  1 to 29   95,696   68,845   1 to 29   260,167   95,696 
Equipment  3 to 10   63,382   55,007   3 to 10   77,906   63,382 
Furniture and fixtures  3 to 7   11,731   9,033   3 to 7   18,453   11,731 
Facility construction in progress      129,956   56,574       120,584   129,956 
          
     $1,158,281  $1,004,248 
Total     $1,706,398  $1,158,281 
Less accumulated depreciation and amortization      (159,721)  (125,632)      (195,106)  (159,721)
          
Property and equipment, net     $1,511,292  $998,560 
     $998,560  $878,616      
     
 
The Company depreciates its leasehold improvements over the shorter of their estimated useful lives or the terms of the leases including renewal periods that are reasonably assured. The Company’s construction in progress primarily consists of development costs associated with the Facility construction and designConstruction & Design segment for contracts with various federal, state and local agencies for which we have management contracts. Interest capitalized in property and equipment was $4.9$4.1 million and $4.3$4.9 million for the fiscal years ended January 3, 20102, 2011 and December 28, 2008, respectively.
Depreciation expense was $36.3 million, $31.9 million and $29.8 million for the fiscal years ended January 3, 2010, December 28, 2008 and December 30, 2007, respectively.
At both January 3, 2010 and December 28, 2008, the Company had $18.2 million of assets recorded under capital leases including $17.5 million related to buildings and improvements, $0.6 million related to equipment and $0.1 million related to leasehold improvements. Capital leases are recorded net of accumulated amortization of $3.9 million and $3.1 million, at January 3, 2010 and December 28, 2008, respectively. Depreciation expense related to capital leases for the fiscal years ended January 3, 2010, December 28, 2008 and December 30, 2007 was $0.8 million, $0.9 million and $1.0 million, respectively and is included in Depreciation and Amortization in the accompanying statements of income.


87109

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Depreciation expense was $41.4 million, $36.3 million and $31.9 million for the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, respectively.
At January 2, 2011 and January 3, 2010, the Company had $18.2 million and $18.2 million of assets recorded under capital leases including $17.5 million related to buildings and improvements, $0.7 million related to equipment. Capital leases are recorded net of accumulated amortization of $4.7 million and $3.9 million, at January 2, 2011 and January 3, 2010, respectively. Depreciation expense related to capital leases for the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008 was $0.8 million, $0.8 million and $0.9 million, respectively and is included in Depreciation and Amortization in the accompanying statements of income.
 
6.7.  Assets Held for Sale
 
The Company records its assets held for sale at the lower of cost or estimated fair value. The Company estimates fair value by using third party appraisers or other valuation techniques. The Company does not record depreciation for its assets held for sale.
As of January 3, 2010 and December 28, 2008,2, 2011, the Company’s assets held for sale consisted of the following:
     
Fiscal Year
 Carrying Value 
  (In thousands) 
 
Buildings and improvements $3,083 
Land  1,265 
     
Assets held for sale $4,348 
     
two assets:
 
The Company’s assets held for sale consist of two assets. On March 17, 2008, the Company purchased its former Coke County Juvenile Justice Center (the “Center”) at a cost of $3.1 million. In October 2008, the Company established a formal plan to sell the asset and began active discussions with certain parties interested in purchasing the Center. The Company has identified a buyer in 2010 and expects to sell the facility in 20102011; however, this sale is subject to the buyer obtaining financing.financingand/or government appropriation. If the buyer is unable to obtain financing,the funds necessary to purchase the Center, the Company will need to locate another buyer for the Center.buyer. There can be no assurance that the prospective buyer can obtain the financing, no assurance that the Company will be able to locate another buyer in the event that this buyer is not able to obtain the financing and no assurance that the Center will be sold for its carrying value. The Center is included in the segment assets of U.S. Detention & Corrections and was recorded at its net realizable value of $3.1 million at January 2, 2011 and at January 3, 2010.
On August 12, 2010, the Company acquired the Washington D.C. Facility in connection with its purchase of Cornell. This facility met the criteria as held for sale during the Company’s fiscal year ended January 2, 2011 and has been designated as such. The carrying value of this asset as of January 2, 2011 was $6.9 million. Secondly,The Company believes it has found a third party buyer and expects to close on the sale in early 2011. The sale of this property, which is recorded as an asset held for sale with GEO Care segment assets, will not result in a gain or loss.
In conjunction with the acquisition of CSC in November 2005, the Company acquired land associated with a program that had been discontinued by CSC in October 2003. The land, with a corresponding carrying value of $1.3 million, was sold in October 2010 for $2.1 million, net of sales costs. The Company recognized a gain on the sale of the land of $0.8 million which is $1.3 million. These assets are included withinin operating expenses in the segment assetsaccompanying statement of income. The gain on the sale is reported in the Company’s U.S. Detention & Corrections and are recorded at their net realizable value of $4.3 million at January 3, 2010. Since these assets are held for sale, no depreciation has been recorded during the fiscal year ended January 3, 2010.reportable segment.
 
7.8.  Investment in Direct Finance Leases
 
The Company’s investment in direct finance leases relates to the financing and management of one Australian facility. The Company’s wholly-owned Australian subsidiary financed the facility’s development with long-term debt obligations, which are non-recourse to the Company.
The future minimum rentals to be received are as follows:
     
  Annual
 
Fiscal Year
 Repayment 
  (In thousands) 
 
2010 $7,475 
2011  7,503 
2012  7,538 
2013  7,726 
2014  7,882 
Thereafter  19,436 
     
Total minimum obligation $57,560 
Less unearned interest income  (16,641)
Less current portion of direct finance lease  (3,757)
     
Investment in direct finance lease $37,162 
     


88110

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The future minimum rentals to be received are as follows:
     
  Annual
 
Fiscal Year Repayment 
  (In thousands) 
 
2011 $8,548 
2012  8,652 
2013  8,792 
2014  8,968 
2015  9,560 
Thereafter  12,544 
     
Total minimum obligation $57,064 
Less unearned interest income  (14,724)
Less current portion of direct finance lease  (4,796)
     
Investment in direct finance lease $37,544 
     
 
8.9.  Derivative Financial Instruments
The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in interest rates. The Company measures its derivative financial instruments at fair value.
 
In November 2009, the Company executed three interest rate swap agreements (the “Agreements”) in the aggregate notional amount of $75.0 million. In January 2010, the Company executed a fourth interest rate swap agreement in the notional amount of $25.0 million. The Company has designated these interest rate swaps as hedges against changes in the fair value of a designated portion of the 73/4% Senior Notes due 2017 (“73/4% Senior Notes”) due to changes in underlying interest rates. The Agreements, which have payment, expiration dates and call provisions that mirror the terms of the Notes, effectively convert $75.0$100.0 million of the Notes into variable rate obligations. Each of the swaps has a termination clause that gives the lendercounterparty the right to terminate the interest rate swaps at fair market value, if they are no longer a lender under the Credit Agreement.certain circumstances. In addition to the termination clause, the Agreements also have call provisions which specify that the lender can elect to settle the swap for the call option price. Under the Agreements, the Company receives a fixed interest rate payment from the financial counterparties to the agreements equal to 73/4% per year calculated on the notional $75.0$100.0 million amount, while it makes a variable interest rate payment to the same counterparties equal to the three-month LIBOR plus a fixed margin of between 4.24%4.16% and 4.29%, also calculated on the notional $75.0$100.0 million amount. Changes in the fair value of the interest rate swaps are recorded in earnings along with related designated changes in the value of the Notes. EffectiveTotal net gains (loss) recognized and recorded in earnings related to these fair value hedges was $5.2 million and $(1.9) million in the fiscal periods ended January 6,2, 2011 and January 3, 2010, respectively. As of January 2, 2011 and January 3, 2010, the Company executed a fourthfair value of the swap agreement in the notional amount of $25.0assets (liabilities) was $3.3 million (See Note 20).and $(1.9) million, respectively. There was no material ineffectiveness of these interest rate swaps forduring the fiscal yearperiods ended January 3, 2010.2, 2011.
 
The Company’s Australian subsidiary is a party to an interest rate swap agreement to fix the interest rate on the variable rate non-recourse debt to 9.7%. The Company has determined the swap, which has a notional amount of $50.9 million, payment and expiration dates, and call provisions that coincide with the terms of the non-recourse debt to be an effective cash flow hedge. Accordingly, the Company records the change in the value of the interest rate swap in accumulated other comprehensive income, net of applicable income taxes. Total net unrealized gain (loss) recognized in the periods and recorded in accumulated other comprehensive income, net of tax, related to these cash flow hedges was $(0.1) million, $1.2 million and ($3.5) million and $1.3 million for the fiscal years ended January 3, 2010, December 28, 2008 and December 30, 2007, respectively. The total value of the swap asset as of2, 2011, January 3, 2010 and December 28, 2008, respectively. The total value of the Australia swap asset as of January 2, 2011 and January 3, 2010 was $2.0$1.8 million and $0.2$2.0 million, respectively, and is recorded as a component of other assets in the accompanying consolidated balance sheets. There was no material ineffectiveness of this interest rate swap for the fiscal periods presented. The Company


111

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
does not expect to enter into any transactions during the next twelve months which would result in the reclassification into earnings or losses associated with this swap currently reported in accumulated other comprehensive income (loss).
 
During the fiscal year ended January 3, 2010, the Company received proceeds of $1.7 million for the settlement of an aggregate notional amount of $50.0 million of interest rate swaps related to its $150.0 million 81/4% Senior Notes due 2013 (“81/4% Senior Notes”). The lenders to these swap agreements elected to prepay their obligations at the call option price which equaled the fair value at the respective call dates.
10.  Goodwill and Other Intangible Assets, Net
Changes in the Company’s goodwill balances for 2010 were as follows (in thousands):
                     
        Purchase price
  Foreign
    
        allocation
  currency
    
  January 3, 2010  Acquisitions  adjustment  translation  January 2, 2011 
 
U.S. Detention & Corrections $21,692  $153,882  $1,126  $—  $176,700 
GEO Care  17,729   50,500   (744)  —   67,485 
International Services  669   —   —   93   762 
                     
Total Goodwill $40,090  $204,382  $382  $93  $244,947 
                     
On August 12, 2010, the Company acquired Cornell and recorded $204.7 million in goodwill representing the strategic benefits of the Merger including the combined Company’s increased scale and the diversification of service offerings. During the fiscal year ended January 2, 2011, the Company made adjustments to its purchase accounting in the amount of $0.4 million, net, primarily related to Cornell. Among other adjustments, this change in allocation resulted from the Company’s analyses primarily related to certain receivables, intangible assets, insurance liabilities and certain income and non-income tax items.


89112

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
9.  Goodwill and Other Intangible Assets, Net
Changes in the Company’s goodwill balances for 2009 were as follows (in thousands):
                 
  Balance as of
  Goodwill Resulting
  Foreign
  Balance as of
 
  December 28,
  from Business
  Currency
  January 3,
 
  2008  Combination  Translation  2010 
 
U.S. corrections $21,692  $—  $—  $21,692 
International services  510   —   159   669 
GEO Care  —   17,729   —   17,729 
                 
Total Segments $22,202  $17,729  $159  $40,090 
                 
Intangible assets consisted of the following (in thousands):
 
                                        
 Useful Life
   International
      Useful Life
 U.S. Detention &
 International
     
 in Years U.S. Corrections Services GEO Care Total  in Years Corrections Services GEO Care Total 
Facility management contracts  7-17  $14,450  $1,875  $—  $16,325   1-17  $14,450  $2,468  $6,600  $23,518 
Covanents not to compete  4   1,470   —   —   1,470 
Covenants not to compete  4   1,470   —   —   1,470 
                  
Gross carrying value of December 28, 2008     $15,920  $1,875  $—  $17,795 
Gross carrying value as of January 3, 2010      15,920   2,468   6,600   24,988 
                  
Changes during fiscal year ended January 2, 2011 due to:                    
Facility management contracts acquired  1-13   —       6,600   6,600   12-13   35,400   —   34,700   70,100 
Covenants not to compete related to Cornell acquisition  1-2   2,879   —   2,821   5,700 
Foreign currency translation      —   593   —   593       —   286   —   286 
                  
Gross carrying value as of January 3, 2010      15,920   2,468   6,600   24,988 
Gross carrying value at January 2, 2011      54,199   2,754   44,121   101,074 
Accumulated amortization expense      (7,026)  (157)  (226)  (7,409)      (10,146)  (325)  (2,790)  (13,261)
                  
Net carrying value at January 3, 2010      8,894   2,311   6,374   17,579 
Net carrying value at January 2, 2011     $44,053  $2,429  $41,331  $87,813 
                  
As of January 2, 2011, the weighted average period before the next contract renewal or extension for all of the Company’s the facility management contracts was approximately 1.5 years. Although the facility management contracts acquired have renewal and extension terms in the near term, the Company has historically maintained these relationships beyond the contractual periods.
Accumulated amortization expense in total and by asset class is as follows (in thousands):
                 
  U.S. Detention &
  International
       
  Corrections  Services  GEO Care  Total 
 
Facility management contracts $9,496  $325  $2,153  $11,974 
Covenants not to compete  650   —   637   1,287 
                 
Total accumulated amortization expense $10,146  $325  $2,790  $13,261 
                 
 
Amortization expense was $5.7 million, $2.0 million $1.8 million and $2.2$1.8 million for the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, and December 30, 2007, respectively, and primarily related to the U.S. correctionsDetention & Corrections amortization of intangible assets for acquired management contracts. The Company’s weighted average useful life related to the acquired facility management contracts is 12.46 years.


113

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Estimated amortization expense related to the Company’s finite-lived intangible assets for fiscal year 20102011 through fiscal year 20142015 and thereafter areis as follows (in thousands):
 
                                
   International
      U.S. Detention &
 International
     
 U.S. Corrections -
 Services -
 GEO Care -
    Corrections -
 Services -
 GEO Care -
   
 Expense
 Expense
 Expense
 Total Expense
  Expense
 Expense
 Expense
 Total Expense
 
Fiscal Year
 Amortization Amortization Amortization Amortization  Amortization Amortization Amortization Amortization 
2010 $1,335  $135  $901  $2,371 
2011  1,335   135   847   2,317  $5,783  $151  $4,984  $10,918 
2012  1,217   135   799   2,151   4,894   151   4,185   9,230 
2013  606   135   566   1,307   3,556   151   3,236   6,943 
2014  606   135   427   1,168   3,556   151   3,096   6,803 
2015  3,556   151   3,065   6,772 
Thereafter  3,795   1,636   2,834   8,265   22,708   1,674   22,765   47,147 
                  
 $8,894  $2,311  $6,374  $17,579  $44,053  $2,429  $41,331  $87,813 
                  
 
10.11.  Fair Value of Assets and Liabilities
 
The Company is required to measure certain of its financial assets and liabilities at fair value on a recurring basis. The Company does not have any financial assets and liabilities which it carries and measures


90

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
at fair value using Level 1 techniques, as defined above. The investments included in the Company’s Level 2 fair value measurements consist of an interest rate swap held by ourthe Company’s Australian subsidiary, and also an investment in Canadian dollar denominated fixed income securities.securities and a guaranteed investment contract which is a restricted investment related to CSC of Tacoma LLC discussed further in Note 14. The Company does not have any Level 3 financial assets or liabilities upon which the value is basedit measures on unobservable inputs reflecting the Company’s assumptions.a recurring basis.
 
The following table provides a summary of the Company’s significant financial assets (there are no suchand liabilities for any period presented) carried at fair value and measured on a recurring basis as of January 3, 2010 (in thousands):
 
                                
   Fair Value Measurements at January 3, 2010    Fair Value Measurements at January 2, 2011
 Carrying
 Quoted Prices in
 Significant Other
 Significant
  Carrying
 Quoted Prices in
 Significant Other
 Significant
 Value at
 Active Markets
 Observable Inputs
 Unobservable
  Value at
 Active Markets
 Observable Inputs
 Unobservable
 January 3, 2010 (Level 1) (Level 2) Inputs (Level 3)  January 2, 2011 (Level 1) (Level 2) Inputs (Level 3)
Assets:                            
Interest rate swap derivative assets $2,020  $—  $2,020  $—  $5,131  $—  $5,131  $— 
Investments other than derivatives  1,527   —   1,527   —  $7,533  $—   7,533  $— 
Liabilities:                
Interest rate swap derivative liabilities $1,887  $—  $1,887  $— 
                 
    Fair Value Measurements at January 3, 2010
  Carrying
 Quoted Prices in
 Significant Other
 Significant
  Value at
 Active Markets
 Observable Inputs
 Unobservable
  January 3, 2010 (Level 1) (Level 2) Inputs (Level 3)
 
Assets:                
Interest rate swap derivative assets $2,020  $—  $2,020  $— 
Investments other than derivatives $7,269  $—  $7,269  $— 
Liabilities:                
Interest rate swap derivative liabilities $1,887  $—  $1,887  $— 


114

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
11.12.  Financial Instruments
 
The CompanyCompany’s balance sheet reflects certain financial instruments at carrying value. The following table presents the carrying values of those instruments and the corresponding fair values at January 3, 2010:(in thousands):
 
                
 January 3, 2010  January 2, 2011
 Carrying
 Estimated
  Carrying
 Estimated
 Value Fair Value  Value Fair Value
Assets:              
Cash and cash equivalents $33,856  $33,856  $39,664  $39,664 
Restricted cash  34,068   34,068 
Restricted cash and investments, including current portion  90,642   90,642 
Liabilities:              
Borrowings under the Senior Credit Facility $212,963  $203,769  $557,758  $562,610 
73/4% Senior Notes
  250,000   255,000   250,078   265,000 
Non-recourse debt  113,724   113,360 
Non-recourse debt, Australian subsidiary  46,300   46,178 
Other non-recourse debt, including current portion  176,384   180,340 
         
  January 3, 2010
  Carrying
 Estimated
  Value Fair Value
 
Assets:        
Cash and cash equivalents $33,856  $33,856 
Cash, Restricted, including current portion  34,068   34,068 
Liabilities:        
Borrowings under the Senior Credit Facility $212,963  $203,769 
73/4% Senior Notes
  250,000   255,000 
Non-recourse debt, including current portion  113,724   113,360 
 
The fair values of the Company’s Cash and cash equivalents, and Restricted cash and investments approximate the carrying values of these assets at January 2, 2011 and January 3, 2010.2010 due to the short-term nature of these instruments. The fair values of publicly traded debt73/4% Senior Notes and otherOther non-recourse debt are based on market prices, where available. The fair value of the non-recourse debt related to the Company’s Australian subsidiary is estimated using a discounted cash flow model based on current Australian borrowing rates for similar instruments. The fair value of the borrowings under the Senior Credit Facility is based on an estimate of trading value considering the company’s borrowing rate, the undrawn spread and similar trades.market instruments.
13.  Accrued Expenses
Accrued expenses consisted of the following (in thousands):
         
  2010  2009 
 
Accrued interest $12,153  $5,913 
Accrued bonus  12,825   8,567 
Accrued insurance  44,237   30,661 
Accrued property and other taxes  15,723   5,219 
Construction retainage  2,012   8,250 
Other  34,697   22,149 
         
Total $121,647  $80,759 
         


91115

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14.  Debt
Debt consisted of the following (in thousands):
         
  2010  2009 
 
Capital Lease Obligations $14,470  $15,124 
Senior Credit Facility:
        
Term loans  347,625   — 
Discount on term loan  (1,867)  154,963 
Revolver  212,000   58,000 
         
Total Senior Credit Facility $557,758  $212,963 
73/4% Senior Notes
        
Notes Due in 2017  250,000   250,000 
Discount on Notes  (3,227)  (3,566)
Swap on Notes  3,305   (1,887)
         
Total 73/4% Senior Notes
 $250,078  $244,547 
Non-Recourse Debt :
        
Non-recourse debt $212,445  $113,724 
Premium on non-recourse debt  11,403   — 
Discount on non-recourse debt  (1,164)  (1,692)
         
Total non recourse debt  222,684   112,032 
Other debt  —   28 
         
Total debt $1,044,990  $584,694 
         
Current portion of capital lease obligations, long-term debt and non-recourse debt  (41,574)  (19,624)
Capital lease obligations, long-term portion  (13,686)  (14,419)
Non-recourse debt  (191,394)  (96,791)
         
Long-term debt $798,336  $453,860 
         
Senior Credit Facility
On August 4, 2010, the Company executed a new $750.0 million senior credit facility (the “Senior Credit Facility”), through the execution of a Credit Agreement, by and among GEO, as Borrower, BNP Paribas, as Administrative Agent, and the lenders who are, or may from time to time become, a party thereto. The Senior Credit Facility is comprised of (i) a $150.0 million Term Loan A (“Term Loan A”), initially bearing interest at LIBOR plus 2.5% and maturing August 4, 2015, (ii) a $200.0 million Term Loan B (“Term Loan B”) initially bearing interest at LIBOR plus 3.25% with a LIBOR floor of 1.50% and maturing August 4, 2016 and (iii) a Revolving Credit Facility (“Revolver”) of $400.0 million initially bearing interest at LIBOR plus 2.5% and maturing August 4, 2015.


116

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
12.  Accrued Expenses
Accrued expenses consisted of the following (dollars in thousands):
         
  2009  2008 
 
Accrued interest $5,913  $8,539 
Accrued bonus  8,567   7,838 
Accrued insurance  30,661   30,261 
Accrued taxes  5,219   8,783 
Construction retainage  8,250   7,866 
Other  22,149   19,155 
         
Total $80,759  $82,442 
         
13.  Debt
Debt consisted of the following (dollars in thousands):
         
  2009  2008 
 
Capital Lease Obligations $15,124  $15,800 
Senior Credit Facility:
        
Term loan B  154,963   158,613 
Revolver  58,000   74,000 
         
Total Senior Credit Facility $212,963  $232,613 
81/4% Senior Notes:
        
Notes Due in 2013  —   150,000 
Discount on Notes  —   (2,553)
Swap on Notes  —   2,010 
         
Total 81/4% Senior Notes
 $—  $149,457 
73/4% Senior Notes
        
Notes Due in 2017  250,000   — 
Discount on Notes  (3,566)  — 
Swap on Notes  (1,887)  — 
         
Total 73/4% Senior Notes
 $244,547  $— 
Non Recourse Debt :
        
Non recourse debt $113,724  $116,505 
Discount on non recourse debt  (1,692)  (2,298)
         
Total non recourse debt  112,032   114,207 
Other debt  28   56 
         
Total debt $584,694  $512,133 
         
Current portion of capital lease obligations, long-term debt and non-recourse debt  (19,624)  (17,925)
Capital lease obligations, long term portion  (14,419)  (15,126)
Non recourse debt  (96,791)  (100,634)
         
Long term debt $453,860  $378,448 
         


92

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Senior Credit Facility
On October 5, 2009, on October 15, 2009, and again on December 4, 2009, the Company completed amendments to the Senior Credit Facility through the execution of Amendment Nos. 5, 6, and 7, respectively, to the Amended and Restated Credit Agreement (“Amendment No. 5” , “Amendment No. 6”, and/ or “Amendment No. 7”) between the Company, as Borrower, certain of its subsidiaries, as Grantors, and BNP Paribas, as Lender and as Administrative Agent. Amendment No. 5 to the Credit Agreement, among other things, effectively permitted the Company to issue up to $300.0 million of unsecured debt without having to repay outstanding borrowings on our Senior Credit Facility. Amendment No. 6 to the Credit Agreement, among other things, modified the aggregate size of the Revolver from $240.0 million to $330.0 million, extended the maturity of the Revolver to 2012, modified the permitted maximum total leverage and maximum senior secured leverage financial ratios and eliminated the annual capital expenditures limitation. With the execution of Amendment No. 6, the Senior Credit Facility is now comprised of a $155.0 million Term Loan B bearing interest at LIBOR plus 2.00% and maturing in January 2014 and the $330.0 million Revolver which currently bears interest at LIBOR plus 3.25% and matures in September 2012. Also, upon the execution of Amendment No. 6, we have the ability to increase our borrowing capacity under the Senior Credit Facility by another $200.0 million subject to lender demand, market conditions and existing borrowings. Amendment No. 7 to the Credit Agreement made several technical revisions to certain definitions therein.
As of January 3, 2010, the Company had $155.0 million outstanding under the Term Loan B, and the Company’s $330.0 million Revolver had $58.0 million outstanding in loans, $47.5 million outstanding in letters of credit, and as of November 30, 2009, we had the ability to borrow approximately $217 million from the excess capacity on the Revolver after considering our debt covenants. The Company intends to use future borrowings from the Revolver for the purposes permitted under the Senior Credit Facility, including for general corporate purposes. The weighted average interest rates on outstanding borrowings under the Senior Credit Facility as of January 3, 2010 and December 28, 2008 were 2.62% and 3.24%, respectively.
Indebtedness under the Revolver and the Term Loan A bears interest based on the Total Leverage Ratio as of the most recent determination date, as defined, in each of the instances below at the stated rate:
 
   
  
Interest Rate under the Revolver
and Term Loan A
 
LIBOR borrowings LIBOR plus 2.75%2.00% to 3.50%3.00%.
Base rate borrowings Prime Rate plus 1.75%1.00% to 2.50%2.00%.
Letters of credit 2.75%2.00% to 3.50%3.00%.
Unused Revolver 0.50%0.375% to 0.75%0.50%.
 
InThe Senior Credit Facility contains certain customary representations and warranties, and certain customary covenants that restrict the fiscal year ended January 3, 2010,Company’s ability to, among other things as permitted (i) create, incur or assume indebtedness, (ii) create, incur, assume or permit liens, (iii) make loans and investments, (iv) engage in mergers, acquisitions and asset sales, (v) make restricted payments, (vi) issue, sell or otherwise dispose of capital stock, (vii) engage in transactions with affiliates, (viii) allow the total leverage ratio or senior secured leverage ratio to exceed certain maximum ratios or allow the interest coverage ratio to be less than 3.00 to 1.00, (ix) cancel, forgive, make any voluntary or optional payment or prepayment on, or redeem or acquire for value any senior notes, (x) alter the business the Company capitalized $5.5 million of debt issuance costs related toconducts, and (xi) materially impair the amendments discussed above which will be amortized overCompany’s lenders’ security interests in the remaining term of the Revolver.collateral for its loans.
 
The Company is required to maintainmust not exceed the following Total Leverage Ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:
 
     
Period
 Total Leverage Ratio -
PeriodMaximum Ratio 
 
Through the penultimate day of fiscal year 2010≤ 4.00 to 1.00
From the last day of the fiscal yearAugust 4, 2010 through the penultimate day of fiscal year 2011≤ 3.75 to 1.00
Fromand including the last day of the fiscal year 20114.50 to 1.00
First day of fiscal year 2012 through the penultimateand including that last day of fiscal year 2012  ≤ 3.254.25 to 1.00 
Thereafter  ≤ 3.004.00 to 1.00 


93

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Senior Credit AgreementFacility also requiresdoes not permit the Company to maintainexceed the following Senior Secured Leverage Ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:
 
     
Period
 Senior Secured Leverage Ratio -
PeriodMaximum Ratio 
 
Through the penultimate day of fiscal year 2011≤ 3.00 to 1.00
FromAugust 4, 2010 through and including the last day of the fiscal year 20113.25 to 1.00
First day of fiscal year 2012 through the penultimateand including that last day of fiscal year 2012  ≤ 2.50 to 1.00
From the last day of the fiscal year 2012 through the penultimate day of fiscal year 2013≤ 2.253.00 to 1.00 
Thereafter  ≤ 2.002.75 to 1.00 
 
The foregoing covenants replaceAdditionally, there is an Interest Coverage Ratio under which the corresponding covenants previously included in the Credit Agreement.lender will not permit a ratio of less than 3.00 to 1.00 relative to (a) Adjusted EBITDA for any period of four consecutive fiscal quarters to (b) Interest Expense, less that attributable to non-recourse debt of unrestricted subsidiaries.
 
All of the obligations under the Senior Credit Facility are unconditionally guaranteed by each of the Company’s existing material domestic subsidiaries. The Senior Credit Facility and the related guarantees are secured by substantially all of the Company’s present and future tangible and intangible assets and all present and future tangible and intangible assets of each guarantor, as specified in the Credit Agreement. In addition, the Senior Credit Facility contains certain customary representations and warranties, and certain customary covenants that restrict the Company’s ability to be party to certain transactions, as further specified in the Credit Agreement. Events of default under the Senior Credit Facility include, but are not limited to, (i) the Company’s failure to pay principal or interest when due, (ii) the Company’s material breach of any representationrepresentations or warranty, (iii) covenant defaults, (iv) liquidation, reorganization or other relief relating to bankruptcy or insolvency, (v) cross default tounder certain other material indebtedness, (vi) unsatisfied final judgments over a specified threshold, (vii) material environmental state ofliability claims which arehave been asserted against it,the Company, and (viii) a change in control. All of control.the obligations under the Senior Credit Facility are unconditionally guaranteed by certain of the Company’s subsidiaries and secured by substantially all of the Company’s present and future tangible and intangible assets and all present and future tangible and intangible


117

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assets of each guarantor, including but not limited to (i) a first-priority pledge of substantially all of the outstanding capital stock owned by the Company and each guarantor, and (ii) perfected first-priority security interests in substantially all of the Company’s, and each guarantors, present and future tangible and intangible assets and the present and future tangible and intangible assets of each guarantor. The Company’s failure to comply with any of the covenants under its Senior Credit Facility could cause an event of default under such documents and result in an acceleration of all of outstanding senior secured indebtedness. The Company believes it was in compliance with all of the covenants of the Senior Credit Facility as of January 3, 2010.
81/4% Senior Notes2, 2011.
 
On October 5, 2009,August 4, 2010 in connection with its entry into the $750.0 million Senior Credit Facility, the Company announcedterminated its prior senior credit facility, the commencementThird Amended and Restated Credit Agreement (the “Prior Senior Credit Agreement”), dated as of January 24, 2007, as amended. The Prior Senior Credit Agreement, as of August 4, 2010, consisted of a cash tender offer for its $150.0$152.2 million aggregate principal amountterm loan B (“Prior Term Loan B”) and a $330.0 million revolver (“Prior Revolver”) with outstanding borrowings on August 4, 2010 of 81/4%$115.0 million. The Prior Term Loan B bore interest at LIBOR plus 2.00% and the Prior Revolver bore interest at LIBOR plus 3.25% at the time of terminating the Prior Senior Notes. Holders who validly tendered their 81/4%Credit Agreement. The Prior Term Loan B component was scheduled to mature in January 2014 and the Prior Revolver component was scheduled to mature in September 2012. The weighed average interest rate on outstanding borrowings under the Senior Notes beforeCredit Facility, as amended, as of January 2, 2011 was 3.5%. The weighed average interest rate on outstanding borrowings under the, early tender date, which expired at 5:00 p.m. Eastern Standard time on October 19, 2009, received a 103% cash payment for their note which included an early tender premiumPrior Senior Credit Agreement as of 3%January 3, 2010 was 2.62%. Holders who tendered their notes after the early tender date, but before the expiration date of 11:59 p.m., Eastern Standard time on November 2, 2009 (“Early Expiration Date”), received 100% cash payment for their note. Holders of the 81/
On August 4,% Senior Notes accepted for purchase received accrued and unpaid interest up to, but not including, the applicable payment date. Valid early tenders received by 2010, the Company represented $130.2used approximately $280 million in aggregate principal amount of the 81/4% Senior Notes which was 86.8% of the outstanding principal balance. The Company settled these notes on October 20, 2009 by paying $136.9 million to the trustee. Also on October 20, 2009, GEO announced the call for redemption for all notes not tendered by the Expiration Date. The Company financed the tender offer and redemption with a portion of the net cash proceeds from the Term Loan B and the Revolver primarily to repay existing borrowings and accrued interest under its offeringPrior Senior Credit Agreement of $250.0$267.7 million aggregate principal 73/4% Senior Notes, which closed on October 20, 2009. As of November 19, 2009, all of the 81/4% Senior Notes had been redeemed. As a result of the tender offer and redemption, the Company incurred a loss of $6.8also used $6.7 million for financing fees related to the tender premiumSenior Credit Facility. The Company received, as cash, the remaining proceeds of $3.2 million. On August 12, 2010, the Company borrowed $290.0 million under its Senior Credit Facility and deferred costs associatedused the aggregate cash proceeds primarily for $84.9 million in cash consideration payments to Cornell’s stockholders in connection with the 81/4%Merger, transaction costs of approximately $14.0 million, the repayment of $181.9 million for Cornell’s 10.75% Senior Notes.


94

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Notes due July 2012 plus accrued interest and Cornell’s Revolving Line of Credit due December 2011 plus accrued interest. As of January 2, 2011, the Company had $148.1 million outstanding under the Term Loan A, $199.5 million outstanding under the Term Loan B, and its $400.0 million Revolver had $212.0 million outstanding in loans, $57.0 million outstanding in letters of credit and $131.0 million available for borrowings. The Company intends to use future borrowings for the purposes permitted under the Senior Credit Facility, including for general corporate purposes. The Company wrote off $7.9 million in deferred financing costs related to the termination of the Prior Senior Credit Agreement.
 
73/4% Senior Notes
 
On October 20, 2009, the Company completed a private offering of $250.0 million in aggregate principal amount of its 73/4% Senior Notes due 2017. These senior unsecured notes pay interest semi-annually in cash in arrears on April 15 and October 15 of each year, beginning on April 15, 2010. The Company realized net proceeds of $246.4 million at the close of the transaction, net of the discount on the notes of $3.6 million. The Company used the net proceeds of the offering to fund the repurchase of all of its 81/4% Senior Notes due 2013 and pay down part of the Revolver.Revolving Credit Facility under our Prior Senior Credit Agreement.
 
The 73/4% Senior Notes and the guarantees will be unsecured, unsubordinated obligations of The GEO Group Inc., and the guarantors and will rank as follows: pari passu with any unsecured, unsubordinated indebtedness of GEO and the guarantors; senior to any future indebtedness of GEO and the guarantors that is expressly subordinated to the notes and the guarantees; effectively junior to any secured indebtedness of GEO and the guarantors, including indebtedness under the Company’s Senior Credit Facility, to the extent of the value of the assets securing such indebtedness; and effectively junior to all obligations of the Company’s subsidiaries that are not guarantors. After October 15, 2013, the Company may, at its option, redeem all or a part of the 73/4% Senior Notes upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed


118

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest and liquidated damages, if any, on the 73/4% Senior Notes redeemed, to the applicable redemption date, if redeemed during the12-month period beginning on October 15 of the years indicated below:
 
     
Year Percentage 
 
2013  103.875%
2014  101.938%
2015 and thereafter  100.000%
 
Before October 15, 2013, the Company may redeem some or all of the 73/4% Senior Notes at a redemption price equal to 100% of the principal amount of each note to be redeemed plus a make-whole premium described under “Description of Notes — Optional Redemption” together with accrued and unpaid interest. In addition, at any time prior to October 15, 2012, the Company may redeem up to 35% of the notes with the net cash proceeds from specified equity offerings at a redemption price equal to 107.750% of the principal amount of each note to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption.
 
The indenture governing the notes contains certain covenants, including limitations and restrictions on the Company’s and its restricted subsidiaries’ ability to: incur additional indebtedness or issue preferred stock; make dividend payments or other restricted payments; create liens; sell assets; enter into transactions with affiliates; and enter into mergers, consolidations, or sales of all or substantially all of the Company’s assets. As of the date of the indenture, all of the Company’s subsidiaries, other than CSC of Tacoma, LLC, GEO International Holdings, Inc., certain dormant domestic subsidiaries and all foreign subsidiaries in existence on the date of the indenture, were restricted subsidiaries. The Company’s unrestricted subsidiaries will not be subject to any of the restrictive covenants in the indenture. The Company’s failure to comply with certain of the covenants under the indenture governing the 73/4% Notes could cause an event of default of any indebtedness and result in an acceleration of such indebtedness. In addition, there is a cross-default provision which becomes enforceable upon failure of payment of indebtedness at final maturity. The Company’s unrestricted subsidiaries will not be subject to any of the restrictive covenants in the indenture. The Company believes it was in compliance with all of the covenants of the Indenture governing the 73/4% Senior Notes as of January 3, 2010.2, 2011.
 
Non-Recourse Debt
 
South Texas Detention Complex:
 
The Company has a debt service requirement related to the development of the South Texas Detention Complex, a 1,904-bed detention complex in Frio County, Texas, acquired in November 2005 from Correctional


95

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Services Corporation (“CSC”). CSC was awarded the contract in February 2004 by the Department of Homeland Security, U.S. Immigration and Customs Enforcement (“ICE”) for development and operation of the detention center. In order to finance its construction South Texas Local Development Corporationof the complex, STLDC was created and issued $49.5 million in taxable revenue bonds. These bonds mature in February 2016 and have fixed coupon rates between 4.11%4.34% and 5.07%. Additionally, the Company is owed $5.0 million of subordinated notes by STLDC which represents the principal amount of financing provided to STLDC by CSC for initial development.
 
The Company has an operating agreement with STLDC, the owner of the complex, which provides it with the sole and exclusive right to operate and manage the detention center. The operating agreement and bond indenture require the revenue from the contract with ICE be used to fund the periodic debt service requirements as they become due. The net revenues, if any, after various expenses such as trustee fees, property taxes and insurance premiums are distributed to the Company to cover operating expenses and management fees. The Company is responsible for the entire operation of the facility including all operating expenses and is required to paythe payment of all operating expenses whether or not there are sufficient revenues. STLDC has no liabilities resulting from its ownership. The bonds have a ten-year term and are non-recourse to the Company.Company and STLDC. The bonds are fully insured and the sole source of payment for the bonds is the operating revenues of the center. At the end of the ten-year term of the bonds, title and ownership of the facility transfers from STLDC to the Company. The Company has determined that it is the primary beneficiary of STLDC and consolidates the entity as a


119

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
result. The carrying value of the facility as of January 2, 2011 and January 3, 2010 and December 28, 2008 was $27.2$27.0 million and $27.9$27.2 million, respectively, and is included in property and equipment in the accompanying balance sheets.
 
On February 2, 2009,1, 2010, STLDC made a payment from its restricted cash account of $4.4$4.6 million for the current portion of its periodic debt service requirement in relation to the STLDC operating agreement and bond indenture. As of January 3, 2010,2, 2011, the remaining balance of the debt service requirement under the STLDC financing agreement is $36.7$32.1 million, of which $4.6$4.8 million is due within the next twelve months. Also, as of January 3, 2010,2, 2011, included in current restricted cash and non-current restricted cash is $6.2 million and $8.2$9.3 million, respectively, of funds held in trust with respect to the STLDC for debt service and other reserves.
 
Northwest Detention Center
 
On June 30, 2003, CSC arranged financing for the construction of the Northwest Detention Center in Tacoma, Washington, referred to as the Northwest Detention Center, which was completed and opened for operation in April 2004. The Company began to operate this facility following its acquisition in November 2005. In connection with the original financing, CSC of Tacoma LLC, a wholly owned subsidiary of CSC, issued a $57.0 million note payable to the Washington Economic Development Finance Authority referred to as WEDFA,(“WEDFA”), an instrumentality of the State of Washington, which issued revenue bonds and subsequently loaned the proceeds of the bond issuance back to CSC of Tacoma LLC for the purposes of constructing the Northwest Detention Center. The bonds are non-recourse to the Company and the loan from WEDFA to CSC is non-recourse to the Company. These bonds mature in February 2014 and have fixed coupon rates between 3.20%3.80% and 4.10%.
 
The proceeds of the loan were disbursed into escrow accounts held in trust to be used to pay the issuance costs for the revenue bonds, to construct the Northwest Detention Center and to establish debt service and other reserves. On October 1, 2009,2010, CSC of Tacoma LLC made a payment from its restricted cash account of


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$5.7 $5.9 million for the current portion of its periodic debt service requirement in relation to the WEDFA bond indenture. As of January 3, 2010,2, 2011, the remaining balance of the debt service requirement is $31.6$25.7 million, of which $5.9$6.1 million is classified as current in the accompanying balance sheet.
 
As of January 3, 2010,2, 2011, included in current restricted cash and non-current restricted cash is $7.1 million and $2.2$1.8 million, respectively, of funds held in trust with respect to the Northwest Detention Center for debt service and other reserves.
MCF
Upon completion of the acquisition of Cornell, the obligations of MCF under its 8.47% Revenue Bonds remained outstanding. These bonds bear interest at a rate of 8.47% per annum and are payable in semi-annual installments of interest and annual installments of principal. All unpaid principal and accrued interest on the bonds is due on the earlier of August 1, 2016 (maturity) or as noted under the bond documents. The bonds are limited, nonrecourse obligations of MCF and are collateralized by the property and equipment, bond reserves, assignment of subleases and substantially all assets related to the facilities owned by MCF. The bonds are not guaranteed by the Company or its subsidiaries.
The 8.47% Revenue Bond indenture provides for the establishment and maintenance by MCF for the benefit of the trustee under the indenture of a debt service reserve fund. As of January 2, 2011, the debt service reserve fund has a balance of $23.4 million. The debt service reserve fund is available to the trustee to pay debt service on the 8.47% Revenue Bonds when needed, and to pay final debt service on the 8.47% Revenue Bonds. If MCF is in default in its obligation under the 8.47% Revenue Bonds indenture, the trustee may declare the principal outstanding and accrued interest immediately due and payable. MCF has the right to cure a default of non-payment obligations. The 8.47% Revenue Bonds are subject to extraordinary mandatory redemption in certain instances upon casualty or condemnation. The 8.47% Revenue Bonds may be redeemed at the option of MCF prior to their final scheduled payment dates at par plus accrued interest plus a make-whole premium.


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THE GEO GROUP, INC.
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Australia
 
The Company’s wholly-owned Australian subsidiary financed the development of a facility and subsequent expansion in 2003 with long-term debt obligations. These obligations are non-recourse to the Company and total $45.4$46.3 million and $38.1$45.4 million at January 2, 2011 and January 3, 2010, and December 28, 2008, respectively. The term of the non-recourse debt is through 2017 and it bears interest at a variable rate quoted by certain Australian banks plus 140 basis points. Any obligations or liabilities of the subsidiary are matched by a similar or corresponding commitment from the government of the State of Victoria. As a condition of the loan, the Company is required to maintain a restricted cash balance of AUD 5.0 million, which, at January 3, 2010,2, 2011, was $4.5$5.1 million. This amount is included in non-current restricted cash and the annual maturities of the future debt obligation isare included in non-recourse debt.
Debt Repayment
 
Debt repayment schedules under capital lease obligations, long-term debt and non-recourse debt are as follows:
 
                                                
 Capital
 Long -Term
 Non-
   Term
 Total Annual
  Capital
 Long-Term
 Non-
   Term
 Total Annual
 
Fiscal Year
 Leases Debt Recourse Revolver Loan Repayment  Leases Debt Recourse Revolver Loan Repayment 
 (In thousands)      (In thousands)     
2010 $1,930  $28  $15,241  $—  $3,650  $20,849 
2011  1,933       15,975   —   3,650   21,558  $1,950  $—  $31,290  $—  $9,500  $42,740 
2012  1,933   —   16,722   58,000   3,650   80,305   1,950   —   33,281   —   11,375   46,606 
2013  1,933   —   17,600   —   144,013   163,546   1,950   —   35,616   —   20,750   58,316 
2014  1,935       18,530   —   —   20,465   1,940   —   38,002   —   47,000   86,942 
2015  1,932   —   33,878   212,000   116,500   364,310 
Thereafter  14,773   250,000   29,656   —   —   294,429   12,842   250,000   40,378   —   142,500   445,720 
                          
 $24,437  $250,028  $113,724  $58,000  $154,963  $601,152  $22,564  $250,000  $212,445  $212,000  $347,625  $1,044,634 
                          
Original issuer’s discount  —   (3,566)  (1,692)  —   —   (5,258)  —   (3,227)  (1,164)  —   (1,867)  (6,258)
Current portion  (705)  (28)  (15,241)  —   (3,650)  (19,624)  (784)  —   (31,290)  —   (9,500)  (41,574)
Interest imputed on Capital Leases  (9,313)  —   —   —   —   (9,313)  (8,094)  —   —   —   —   (8,094)
Fair value premium on non-recourse debt  —   —   11,403   —   —   11,403 
Interest rate swap  —   (1,887)  —   —   —   (1,887)  —   3,305   —   —   —   3,305 
                          
Non-current portion $14,419  $244,547  $96,791  $58,000  $151,313  $565,070  $13,686  $250,078  $191,394  $212,000  $336,258  $1,003,416 
                          
 
Guarantees
 
In connection with the creation SACS, the Company entered into certain guarantees related to the financing, construction and operation of the prison. The Company guaranteed certain obligations of SACS under its debt agreements up to a maximum amount of 60.0 million South African Rand, or $8.2$9.1 million, to SACS’ senior lenders through the issuance of letters of credit. Additionally, SACS is required to fund a restricted account for the payment of certain costs in the event of contract termination. The Company has guaranteed the payment of 60% of amounts which may be payable by SACS into the restricted account and provided a standby letter of credit of 8.4 million South African Rand, or $1.1$1.3 million, as security for its guarantee. The Company’s obligations under this guarantee are indexed to the CPI and expire upon SACS’ release from its obligations in


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
respect of the restricted account under its debt agreements. No amounts have been drawn against these letters of credit, which are included in the Company’s outstanding letters of credit under its Revolver.


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company has agreed to provide a loan, of up to 20.0 million South African Rand, or $2.7$3.0 million (the “Standby Facility”), to SACS for the purpose of financing SACS’ obligations under its contract with the South African government. No amounts have been funded under this guarantee,the Standby Facility, and the Company does not currently anticipate that such funding will be required by SACS in the future. The Company’s obligations relative to this guaranteeunder the Standby Facility expire upon the earlier of full funding or SACS’ fulfillmentrelease from its obligations under its debt agreements. The lenders’ ability to draw on the Standby Facility is limited to certain circumstances, including termination of its contractual obligations.the contract.
 
The Company has also guaranteed certain obligations of SACS to the security trustee for SACS’ lenders. The Company secured its guarantee to the security trustee by ceding its rights to claims against SACS in respect of any loans or other finance agreements, and by pledging the Company’s shares in SACS. The Company’s liability under the guarantee is limited to the cession and pledge of shares. The guarantee expires upon expiration of the cession and pledge agreements.
 
In connection with a design, build, finance and maintenance contract for a facility in Canada, the Company guaranteed certain potential tax obligations of anot-for-profit entity. The potential estimated exposure of these obligations is Canadian Dollar (“CAD”) 2.5 million, or $2.4$2.5 million, commencing in 2017. The Company has a liability of $1.5$1.8 million and $1.3$1.5 million related to this exposure as of January 2, 2011 and January 3, 2010, and December 28, 2008, respectively. To secure this guarantee, the Company has purchased Canadian dollar denominated securities with maturities matched to the estimated tax obligations in 2017 to 2021. The Company has recorded an asset and a liability equal to the current fair market value of those securities on its consolidated balance sheet. The Company does not currently operate or manage this facility.
 
At January 3, 2010,2, 2011, the Company also had eightseven letters of guarantee outstanding under separate international facilities relating to performance guarantees of its Australian subsidiary totaling $8.9$9.4 million. The Company does not have any off balance sheet arrangements other than those previously disclosed.arrangements.
 
14.15.  Commitments and Contingencies
 
Operating Leases
 
The Company leases correctional facilities, office space, computers and transportation equipment under non-cancelable operating leases expiring between 20102011 and 2028.2046. The future minimum commitments under these leases are as follows:
 
        
Fiscal Year
 Annual Rental  Annual Rental 
 (In thousands)  (In thousands) 
2010 $18,041 
2011  17,618  $30,948 
2012  14,364   29,774 
2013  10,916   25,019 
2014  7,585   17,798 
2015  16,416 
Thereafter  65,936   61,226 
      
 $134,460  $181,181 
      
 
The Company’s corporate offices are located in Boca Raton, Florida, under a 101/2 -year lease agreement which was renewedamended in October 2007.September 2010. The current lease expires in March 2020 and has two5-year renewal options and expires infor a full term ending March 2018.2030. In addition, Thethe Company leases office space for its regional offices in Charlotte, North Carolina; New Braunfels,San Antonio, Texas; and Carlsbad,Los Angeles, California. As a result of the Company’s acquisition of Cornell in August 2010, the Company is also currently leasing office space in Houston, Texas and Pittsburg, Pennsylvania. The Company also leases office space in Sydney, Australia, Sandton, South Africa, and Berkshire, England through its overseas affiliates to support its Australian, South African, and UK


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THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Africa, and Berkshire, England through its overseas affiliates to support its Australian, South African, and UK operations, respectively. These rental commitments are included in the table above. Certain of these leases contain escalation clausesleasehold improvement incentives, rent holidays, and as such,scheduled rent increases which are included in the Company hasCompany’s rent expense recognized the rental expense on a straight-line basis related to those leases.basis. Minimum rent expense associated with the Company’s leases having initial or remaining non-cancelable lease terms in excess of one year was $25.4 million, $18.7 million $18.5 million and $15.2$18.5 million for fiscal years 2010, 2009 2008 and 2007,2008, respectively.
 
Litigation, Claims and Assessments
On September 15, 2006, a jury in an inmate wrongful death lawsuit in a Texas state court awarded a $47.5 million verdict against the Company. In October 2006, the verdict was entered as a judgment against the Company in the amount of $51.7 million. The lawsuit, captioned Gregorio de la Rosa, Sr., et al., v. Wackenhut Corrections Corporation, (causeno. 02-110) in the District Court, 404th Judicial District, Willacy County, Texas, is being administered under the insurance program established by The Wackenhut Corporation, the Company’s former parent company, in which the Company participated until October 2002. Policies secured by the Company under that program provide $55.0 million in aggregate annual coverage. In October 2009, this case was settled in an amount within the insurance coverage limits and the insurer will pay the full settlement amount.
 
In June 2004, the Company received notice of a third-party claim for property damage incurred during 2001 and 2002 at several detention facilities thatformerly operated by its Australian subsidiary formerly operated.subsidiary. The claim (No. SC 656 of 2006 to be heard by the Supreme Court of the Australian Capital Territory) relates to property damage caused by detainees at the detention facilities. The notice was given by the Australian government’s insurance provider and did not specify the amount of damages being sought. In August 2007, legal proceedings in this matter were formally commenced whena lawsuit (Commonwealth of Australia v. Australasian Connectional Services PTY, Limited No. SC 656) was filed against the Company was served with noticein the Supreme Court of a complaint filed against it by the Commonwealth of AustraliaAustralian Capital Territory seeking damages of up to approximately AUD 18 million, as of January 2, 2011, or $16.2$18.4 million, plus interest. The Company believes that it has several defenses to the allegations underlying the litigation and the amounts sought and intends to vigorously defend its rights with respect to this matter. The Company has established a reserve based on its estimate of the most probable loss based on the facts and circumstances known to date and the advice of legal counsel in connection with this matter. Although the outcome of this matter cannot be predicted with certainty, based on information known to date and the Company’s preliminary review of the claim and related reserve for loss, the Company believes that, if settled unfavorably, this matter could have a material adverse effect on its financial condition, results of operations or cash flows. The Company is uninsured for any damages or costs that it may incur as a result of this claim, including the expenses of defending the claim.
 
During the fourth fiscal quarter of 2009, the Internal Revenue Service (IRS)(“IRS”) completed its examination of the Company’s U.S. federal income tax returns for the years 2002 through 2005. Following the examination, the IRS notified the CompanyCompany’s management that it proposesproposed to disallow a deduction that the Company realized during the 2005 tax year. TheIn December of 2010, the Company has appealed this proposed disallowed deductionreached an agreement with the IRS’s appeals divisionoffice of IRS Appeals on the amount of the deduction, which is currently being reviewed at a higher level. As a result of the pending agreement, the Company reassessed the probability of potential settlement outcomes and believes it has valid defenses toreduced its income tax accrual of $4.9 million by $2.3 million during the IRS’s position.fourth quarter of 2010. However, if the disallowed deduction were to be sustained on appeal,in full, it could result in a potential tax exposure to the Company of up to $15.4 million. The Company believes in the merits of its position and intends to defend its rights vigorously, including its rights to litigate the matter if it cannot be resolved favorably atwith the IRS’s appeals level.office of IRS Appeals. If this matter is resolved unfavorably, it may have a material adverse effect on the Company’s financial position, results of operations and cash flows.
In October 2010, the IRS audit for the Company’s U.S. income tax returns for fiscal years 2006 through 2008 was concluded and resulted in no changes to the Company’s income tax positions.
The Company’s South Africa joint venture had been in discussions with the South African Revenue Service (“SARS”) with respect to the deductibility of certain expenses for the tax periods 2002 through 2004. The joint venture operates the Kutama Sinthumule Correctional Centre and accepted inmates from the South African Department of Correctional Services in 2002. During 2009, SARS notified the Company that it proposed to disallow these deductions. The Company appealed these proposed disallowed deductions with SARS and in October 2010, received a notice of favorable ruling relative to these proceedings. If SARS should appeal, the Company believes it has defenses in these matters and intends to defend its rights vigorously. If resolved unfavorably, the Company’s maximum exposure would be $2.6 million.
On April 27, 2010, a putative stockholder class action was filed in the District Court for Harris County, Texas by Todd Shelby against Cornell, members of Cornell’s board of directors, individually, and the


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company. The plaintiff filed an amended complaint on May 28, 2010, alleging, among other things, that the Cornell directors, aided and abetted by Cornell and the Company, breached their fiduciary duties in connection with the Cornell Acquisition. Among other things, the amended complaint sought to enjoin Cornell, its directors and the Company from completing the Cornell Acquisition and sought a constructive trust over any benefits improperly received by the defendants as a result of their alleged wrongful conduct. The parties reached a settlement which has been approved by the court and, as a result, the court dismissed the action with prejudice. The settlement of this matter did not have a material adverse impact on our financial condition, results of operations or cash flows.
 
The nature of the Company’s business exposes it to various types of claims or litigation against the Company, including, but not limited to, civil rights claims relating to conditions of confinementand/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims,


99

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
indemnification claims by its customers and other third parties, contractual claims and claims for personal injury or other damages resulting from contact with the Company’s facilities, programs, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. Except as otherwise disclosed above, the Company does not expect the outcome of any pending claims or legal proceedings to have a material adverse effect on its financial condition, results of operations or cash flows.
 
Collective Bargaining AgreementsPreferred Stock
 
In April 1994, the Company’s Board of Directors authorized 30 million shares of “blank check” preferred stock. The Company had approximately 19%Board of its workforce covered by collective bargaining agreements at January 3, 2010. Collective bargaining agreements with four percentDirectors is authorized to determine the rights and privileges of employees are set to expire in less than one year.any future issuance of preferred stock such as voting and dividend rights, liquidation privileges, redemption rights and conversion privileges.
 
Contract TerminationsRights Agreement
 
Effective June 15, 2009,On October 9, 2003, the Company entered into a rights agreement with EquiServe Trust Company, N.A., as rights agent. Under the terms of the rights agreement, each share of the Company’s management contractcommon stock carries with Fort Worth Community Corrections Facility located in Fort Worth, Texas was assignedit one preferred share purchase right. If the rights become exercisable pursuant to another party. Priorthe rights agreement, each right entitles the registered holder to this termination,purchase from the Company leased this facility (lease was dueone one-thousandth of a share of Series A Junior Participating Preferred Stock at a fixed price, subject to expire August 2009) andadjustment. Until a right is exercised, the customer washolder of the Texas Department of Criminal Justice (“TDCJ”).
On September 8, 2009, the Company exercised its contractualright has no right to terminate its contracts forvote or receive dividends or any other rights as a shareholder as a result of holding the operationright. The rights trade automatically with shares of our common stock, and managementmay only be exercised in connection with certain attempts to acquire the Company. The rights are designed to protect the interests of the Newton County Correctional Center (“Newton County”) located in Newton, Texas and the Jefferson County Downtown Jail (“Jefferson County”) located in Beaumont, Texas. The Company managed Newton County and Jefferson County until the contracts terminated effective on November 2, 2009 and November 9, 2009, respectively.
In October 2009, the Company received a60-day notice from the California Department of Corrections and Rehabilitation (“CDCR”) of its intent to terminate the management contract between the Company and its shareholders against coercive acquisition tactics and encourage potential acquirers to negotiate with our Board of Directors before attempting an acquisition. The rights may, but are not intended to, deter acquisition proposals that may be in the CDCR forinterests of the management of its company-owned McFarland Community Correctional Facility.
The Company does not expect that the termination of these contracts will have a material adverse impact, individually or in aggregate, on its financial condition, results of operations or cash flows.Company’s shareholders.
 
CommitmentsAccumulated Other Comprehensive Income (Loss)
 
As of January 3, 2010,Comprehensive income (loss) represents the Company waschange in the process of constructing or expanding three facilities representing 4,325 total beds. The Company is providing the financing for two of the three facilities, representing 2,325 beds. Remaining capital expenditures related to theseshareholders’ equity from transactions and other projects are expected to be $37.7 million through 2010.events and circumstances arising from non-shareholder sources. The financing for the 2,000-bed facility is being provided for by a third party for state ownership. GEO is managing the constructionCompany’s comprehensive income (loss) includes net income, effect of this project with total construction costs of $113.8 million, of which $90.2 million has been completed through 2009, and $23.6 million of which remains to be completed through the first quarter of 2011.foreign currency translation adjustments that arise from consolidating foreign operations that do not impact cash flows, projected benefit obligation recognized in other comprehensive


100104

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
income and the change in net unrealized gains or losses on derivative instruments. The components of accumulated other comprehensive income (loss) are as follows:
                 
     Projected Beneftt
       
     Obligation
     Accumulated
 
     Recognized in Other
  Gains and Losses
  Other
 
  Foreign Currency
  Comprehensive
  on Derivative
  Comprehensive
 
  Translation, Net  Income (Loss)  Instruments  Income (Loss) 
 
Balance December 30, 2007 $4,930  $(1,621) $3,611  $6,920 
Change in foreign currency translation, net of tax benefit of $413  (10,742)  —   —   (10,742)
Pension liabiltiy adjustment, net of tax expense of $17  —   27   —   27 
Unrealized loss on derivative instruments, net of tax benefit of $2,113  —   —   (3,480)  (3,480)
                 
Balance December 28, 2008  (5,812)  (1,594)  131   (7,275)
                 
Change in foreign currency translation, net of tax expense of $1,129  10,658   —   —   10,658 
Pension liabiltiy adjustment, net of tax expense of $636  —   942   —   942 
Unrealized gain on derivative instruments, net of income tax benefit of $645  —   —   1,171   1,171 
                 
Balance January 3, 2010  4,846   (652)  1,302   5,496 
                 
Change in foreign currency translation, net of tax expense of $1,313  5,084   —   —   5,084 
Pension liabilty adjustment, net of tax benefit of $232  —   (383)  —   (383)
Unrealized gain on derivative instruments, net of income tax benefit of $69  —   —   (126)  (126)
                 
Balance January 2, 2011 $9,930  $(1,035) $1,176  $10,071 
                 
Stock repurchases
On February 22, 2010, the Company announced that its Board of Directors approved a stock repurchase program for up to $80.0 million of the Company’s common stock which was effective through March 31, 2011. The stock repurchase program was implemented through purchases made from time to time in the open market or in privately negotiated transactions, in accordance with applicable Securities and Exchange Commission requirements. The program also included repurchases from time to time from executive officers or directors of vested restricted stockand/or vested stock options. The stock repurchase program did not obligate the Company to purchase any specific amount of its common stock and could be suspended or extended at any time at the Company’s discretion. During the fiscal year ended January 2 2011, the Company completed the program and purchased 4.0 million shares of its common stock at a cost of $80.0 million using cash on hand and cash flow from operating activities. Of the aggregate 4.0 million shares repurchased during the fiscal year ended January 2, 2011, 1.1 million shares were repurchased from executive officers at an aggregate cost of $22.3 million.
Also during the fiscal year ended January 2, 2011, the Company repurchased 0.3 million shares of common stock from certain directors and executives for an aggregate cost of $7.1 million. These shares were retired by the Company immediately upon repurchase.


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THE GEO GROUP, INC.
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Noncontrolling Interests
Upon acquisition of Cornell, the Company assumed MCF as a variable interest entity and allocated a portion of the purchase price to the noncontrolling interest based on the estimated fair value of MCF as of August 12, 2010. The noncontrolling interest in MCF represents 100% of the equity in MCF which was contributed by its partners at inception in 2001. The Company includes the results of operations and financial position of MCF, its variable interest entity, in its consolidated financial statements. MCF owns eleven facilities which it leases to the Company.
The Company includes the results of operations and financial position of South African Custodial Management Pty. Limited (“SACM” or the “joint venture”), its majority-owned subsidiary, in its consolidated financial statements. SACM was established in 2001 to operate correctional centers in South Africa. The joint venture currently provides security and other management services for the Kutama Sinthumule Correctional Centre in the Republic of South Africa under a25-year management contract which commenced in February 2002. The Company’s and the second joint venture partner’s shares in the profits of the joint venture are 88.75% and 11.25%, respectively. There were no changes in the Company’s ownership percentage of the consolidated subsidiary during the fiscal year ended January 2, 2011. The noncontrolling interest as of January 2, 2011 and January 3, 2010 is included in Total Shareholders’ Equity in the accompanying Consolidated Balance Sheets. There were no contributions from owners or distributions to owners in the fiscal year ended January 2, 2011 or January 3, 2010.
4.  Equity Incentive Plans
The Company had awards outstanding under four equity compensation plans at January 2, 2011: The Wackenhut Corrections Corporation 1994 Stock Option Plan (the “1994 Plan”); the 1995 Non-Employee Director Stock Option Plan (the “1995 Plan”); the Wackenhut Corrections Corporation 1999 Stock Option Plan (the “1999 Plan”); and The GEO Group, Inc. 2006 Stock Incentive Plan (the “2006 Plan” and, together with the 1994 Plan, the 1995 Plan and the 1999 Plan, the “Company Plans”).
On August 12, 2010, the Company’s Board of Directors adopted and its shareholders approved an amendment to the 2006 Plan to increase the number of shares of common stock subject to awards under the 2006 Plan by 2,000,000 shares from 2,400,000 to 4,400,000 shares of common stock. The 2006 Plan specifies that up to 1,083,000 of such total shares pursuant to awards granted under the plan may constitute awards other than stock options and stock appreciation rights, including shares of restricted stock. See “Restricted Stock” below for further discussion. As of January 2, 2011, the Company had 952,850 shares of common stock available for issuance pursuant to future awards that may be granted under the plan of which up to 351,722 were available for the issuance of awards other than stock options. As a result of the acquisition of Cornell, the Company issued 35,750 replacement stock option awards with an aggregate fair value as of August 12, 2010 of $0.2 million which is included in the purchase price consideration. These awards were fully vested at the grant date and had a term of 90 days.
Except for 846,186 shares of restricted stock issued under the 2006 Plan as of January 2, 2011, all of the awards previously issued under the Company Plans consisted of stock options. Although awards are currently outstanding under all of the Company Plans, the Company may only grant new awards under the 2006 Plan.
Under the terms of the Company Plans, the vesting period and, in the case of stock options, the exercise price per share, are determined by the terms of each plan. All stock options that have been granted under the Company Plans are exercisable at the fair market value of the common stock at the date of the grant. Generally, the stock options vest and become exercisable ratably over a four-year period, beginning immediately on the date of the grant. However, the Board of Directors has exercised its discretion to grant stock options that vest 100% immediately for the Chief Executive Officer. In addition, stock options granted to non-employee directors under the 1995 Plan became exercisable immediately. All stock options awarded under the


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company Plans expire no later than ten years after the date of the grant, except for the replacement awards issued in connection with the Cornell acquisition discussed above.
Stock Options
A summary of the activity of the Company’s stock options plans is presented below:
                 
     Wtd. Avg.
  Wtd. Avg.
  Aggregate
 
     Exercise
  Remaining
  Intrinsic
 
  Shares  Price  Contractual Term  Value 
  (In thousands)        (In thousands) 
 
Options outstanding at January 3, 2010  2,807  $10.26   4.80  $32,592 
Granted  36   16.33         
Exercised  (1,353)  4.95         
Forfeited/Canceled  (89)  19.73         
                 
Options outstanding at January 2, 2011  1,401  $15.01   5.84  $13,517 
                 
Options exercisable at January 2, 2011  1,044  $13.22   5.04  $11,942 
                 
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of fiscal year 2010 and the exercise price, times the number of shares that are “in the money”) that would have been received by the option holders had all option holders exercised their options on January 2, 2011. This amount changes based on the fair value of the company’s stock. The total intrinsic value of options exercised during the fiscal years ended January 2, 2011, January 3, 2010, and December 28, 2008 was $21.1 million, $6.2 million, and $2.9 million, respectively.
The following table summarizes information about the exercise prices and related information of stock options outstanding under the Company Plans at January 2, 2011:
                     
  Options Outstanding  Options Exercisable 
     Wtd. Avg.
  Wtd. Avg.
     Wtd. Avg.
 
  Number
  Remaining
  Exercise
  Number
  Exercise
 
Exercise Prices Outstanding  Contractual Life  Price  Exercisable  Price 
 
3.17 — 3.98  37,527   1.8   3.30   37,527   3.30 
4.67 — 4.90  77,454   2.3   4.67   77,454   4.67 
5.13 — 5.13  132,000   1.1   5.13   132,000   5.13 
5.30 — 7.70  210,297   4.7   6.96   210,297   6.96 
7.83 — 20.63  294,600   6.4   15.62   214,000   15.07 
21.07 — 21.56  647,700   7.6   21.26   372,600   21.34 
21.64 — 28.24  1,000   8.8   21.70   400   21.70 
                     
Total  1,400,578   5.8  $15.01   1,044,278  $13.22 
                     
For the years ended January 2, 2011, January 3, 2010 and December 28, 2008, the amount of stock-based compensation expense related to stock options was $1.4 million, $1.8 million and $1.5 million, respectively. The weighted average grant date fair value of options granted during the fiscal years ended January 2, 2011 and January 3, 2010 and December 28, 2008 was $6.73, $7.41 and $6.58 per share, respectively.


107

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the status of non-vested stock options as of January 2, 2011 and changes during the fiscal year ending January 2, 2011:
         
     Wtd. Avg. Grant
 
  Number of Shares  Date Fair Value 
 
Options non-vested at January 3, 2010  595,758  $7.39 
Granted(a)  35,750   6.73 
Vested  (227,408)  7.32 
Forfeited  (47,800)  7.30 
         
Options non-vested at January 2, 2011  356,300  $7.37 
         
(a)These options were granted as replacement awards to former Cornell option holders. The options were fully vested at the acquisition date and the fair value of the awards was included in purchase price consideration.
As of January 2, 2011, the Company had $1.9 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 2.5 years. The total fair value of shares vested during the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, was $2.1 million, $1.8 million and $1.2 million, respectively. Proceeds received from stock options exercises for 2010, 2009 and 2008 was $6.7 million, $1.5 million and $0.8 million, respectively. Additional tax benefits realized from tax deductions associated with the exercise of stock options and the vesting of restricted stock activity for 2010, 2009 and 2008 totaled $3.9 million, $0.6 million and $0.8 million, respectively.
Restricted Stock
Shares of restricted stock become unrestricted shares of common stock upon vesting on aone-for-one basis. The cost of these awards is determined using the fair value of the Company’s common stock on the date of the grant and compensation expense is recognized over the vesting period. The shares of restricted stock granted under the 2006 Plan vest in equal 25% increments on each of the four anniversary dates immediately following the date of grant. A summary of the activity of restricted stock is as follows:
         
     Wtd. Avg.
 
     Grant date
 
  Shares  Fair value 
 
Restricted stock outstanding at January 3, 2010  383,100  $19.66 
Granted  40,280   22.70 
Vested  (222,100)  18.84 
Forfeited/Canceled  (40,750)  21.38 
         
Restricted stock outstanding at January 2, 2011  160,530  $21.12 
         
During the fiscal year ended January 2, 2011, January 3, 2010 and December 28, 2008, the Company recognized $3.3 million, $3.5 million and $3.0 million, respectively, of compensation expense related to its outstanding shares of restricted stock. As of January 2, 2011, the Company had $2.2 million of unrecognized compensation expense that is expected to be recognized over a weighted average period of 2.0 years.
5.  Discontinued Operations
During the fiscal year 2008, the Company discontinued operations at certain of its domestic and international subsidiaries. Where significant, the results of operations, net of taxes, as further described below, have been reflected in the accompanying consolidated financial statements as such for all periods presented.


108

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
U.S. Detention & Corrections.  On November 7, 2008, the Company announced its receipt of notice for the discontinuation of its contract with the State of Idaho, Department of Correction (“Idaho DOC”) for the housing of approximately 305out-of-state inmates at the managed-only Bill Clayton Detention Center (the “Detention Center”) effective January 5, 2009. On August 29, 2008, the Company announced its discontinuation of its contract with Delaware County, Pennsylvania for the management of the county-owned 1,883-bed George W. Hill Correctional Facility effective December 31, 2008.
International Services.  On December 22, 2008, the Company announced the closure of its U.K.-based transportation division, Recruitment Solutions International (“RSI”). As a result of the termination of its transportation business in the United Kingdom, the Company wrote off assets of $2.6 million including goodwill of $2.3 million.
GEO Care.  On June 16, 2008, the Company announced the discontinuation by mutual agreement of its contract with the State of New Mexico Department of Health for the management of the Fort Bayard Medical Center effective June 30, 2008.
There were no continuing cash flows from the operations in the fiscal year ended January 2, 2011 and as such, there are no amounts reclassified to discontinued operations for this period. The following are the revenues related to discontinued operations for the fiscal years ended December 28, 2008 and January 3, 2010 (in thousands):
             
  2010  2009  2008 
  (In thousands) 
 
Revenues — International Services $—  $—  $1,806 
Revenues — U.S. Detention & Corrections $—  $210  $43,784 
Revenues — GEO Care $—  $—  $1,806 
6.  Property and Equipment
Property and equipment consist of the following at fiscal year end:
             
  Useful
       
  Life  2010  2009 
  (Years)  (In thousands) 
 
Land  —  $97,393  $60,331 
Buildings and improvements  2 to 50   1,131,895   797,185 
Leasehold improvements  1 to 29   260,167   95,696 
Equipment  3 to 10   77,906   63,382 
Furniture and fixtures  3 to 7   18,453   11,731 
Facility construction in progress      120,584   129,956 
             
Total     $1,706,398  $1,158,281 
Less accumulated depreciation and amortization      (195,106)  (159,721)
             
Property and equipment, net     $1,511,292  $998,560 
             
The Company depreciates its leasehold improvements over the shorter of their estimated useful lives or the terms of the leases including renewal periods that are reasonably assured. The Company’s construction in progress primarily consists of development costs associated with the Facility Construction & Design segment for contracts with various federal, state and local agencies for which we have management contracts. Interest capitalized in property and equipment was $4.1 million and $4.9 million for the fiscal years ended January 2, 2011 and January 3, 2010, respectively.


109

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Depreciation expense was $41.4 million, $36.3 million and $31.9 million for the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, respectively.
At January 2, 2011 and January 3, 2010, the Company had $18.2 million and $18.2 million of assets recorded under capital leases including $17.5 million related to buildings and improvements, $0.7 million related to equipment. Capital leases are recorded net of accumulated amortization of $4.7 million and $3.9 million, at January 2, 2011 and January 3, 2010, respectively. Depreciation expense related to capital leases for the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008 was $0.8 million, $0.8 million and $0.9 million, respectively and is included in Depreciation and Amortization in the accompanying statements of income.
7.  Assets Held for Sale
The Company records its assets held for sale at the lower of cost or estimated fair value. The Company estimates fair value by using third party appraisers or other valuation techniques. The Company does not record depreciation for its assets held for sale.
As of January 2, 2011, the Company’s assets held for sale consisted of two assets:
On March 17, 2008, the Company purchased its former Coke County Juvenile Justice Center (the “Center”) at a cost of $3.1 million. In October 2008, the Company established a formal plan to sell the asset and began active discussions with certain parties interested in purchasing the Center. The Company identified a buyer in 2010 and expects to sell the facility in 2011; however, this sale is subject to the buyer obtaining financingand/or government appropriation. If the buyer is unable to obtain the funds necessary to purchase the Center, the Company will need to locate another buyer. There can be no assurance that the prospective buyer can obtain the financing, no assurance that the Company will be able to locate another buyer in the event that this buyer is not able to obtain the financing and no assurance that the Center will be sold for its carrying value. The Center is included in the segment assets of U.S. Detention & Corrections and was recorded at its net realizable value of $3.1 million at January 2, 2011 and at January 3, 2010.
On August 12, 2010, the Company acquired the Washington D.C. Facility in connection with its purchase of Cornell. This facility met the criteria as held for sale during the Company’s fiscal year ended January 2, 2011 and has been designated as such. The carrying value of this asset as of January 2, 2011 was $6.9 million. The Company believes it has found a third party buyer and expects to close on the sale in early 2011. The sale of this property, which is recorded as an asset held for sale with GEO Care segment assets, will not result in a gain or loss.
In conjunction with the acquisition of CSC in November 2005, the Company acquired land associated with a program that had been discontinued by CSC in October 2003. The land, with a corresponding carrying value of $1.3 million, was sold in October 2010 for $2.1 million, net of sales costs. The Company recognized a gain on the sale of the land of $0.8 million which is included in operating expenses in the accompanying statement of income. The gain on the sale is reported in the Company’s U.S. Detention & Corrections reportable segment.
8.  Investment in Direct Finance Leases
The Company’s investment in direct finance leases relates to the financing and management of one Australian facility. The Company’s wholly-owned Australian subsidiary financed the facility’s development with long-term debt obligations, which are non-recourse to the Company.


110

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The future minimum rentals to be received are as follows:
     
  Annual
 
Fiscal Year Repayment 
  (In thousands) 
 
2011 $8,548 
2012  8,652 
2013  8,792 
2014  8,968 
2015  9,560 
Thereafter  12,544 
     
Total minimum obligation $57,064 
Less unearned interest income  (14,724)
Less current portion of direct finance lease  (4,796)
     
Investment in direct finance lease $37,544 
     
9.  Derivative Financial Instruments
In November 2009, the Company executed three interest rate swap agreements (the “Agreements”) in the aggregate notional amount of $75.0 million. In January 2010, the Company executed a fourth interest rate swap agreement in the notional amount of $25.0 million. The Company has designated these interest rate swaps as hedges against changes in the fair value of a designated portion of the 73/4% Senior Notes due 2017 (“73/4% Senior Notes”) due to changes in underlying interest rates. The Agreements, which have payment, expiration dates and call provisions that mirror the terms of the Notes, effectively convert $100.0 million of the Notes into variable rate obligations. Each of the swaps has a termination clause that gives the counterparty the right to terminate the interest rate swaps at fair market value, under certain circumstances. In addition to the termination clause, the Agreements also have call provisions which specify that the lender can elect to settle the swap for the call option price. Under the Agreements, the Company receives a fixed interest rate payment from the financial counterparties to the agreements equal to 73/4% per year calculated on the notional $100.0 million amount, while it makes a variable interest rate payment to the same counterparties equal to the three-month LIBOR plus a fixed margin of between 4.16% and 4.29%, also calculated on the notional $100.0 million amount. Changes in the fair value of the interest rate swaps are recorded in earnings along with related designated changes in the value of the Notes. Total net gains (loss) recognized and recorded in earnings related to these fair value hedges was $5.2 million and $(1.9) million in the fiscal periods ended January 2, 2011 and January 3, 2010, respectively. As of January 2, 2011 and January 3, 2010, the fair value of the swap assets (liabilities) was $3.3 million and $(1.9) million, respectively. There was no material ineffectiveness of these interest rate swaps during the fiscal periods ended January 2, 2011.
The Company’s Australian subsidiary is a party to an interest rate swap agreement to fix the interest rate on the variable rate non-recourse debt to 9.7%. The Company has determined the swap, which has a notional amount of $50.9 million, payment and expiration dates, and call provisions that coincide with the terms of the non-recourse debt to be an effective cash flow hedge. Accordingly, the Company records the change in the value of the interest rate swap in accumulated other comprehensive income, net of applicable income taxes. Total net unrealized gain (loss) recognized in the periods and recorded in accumulated other comprehensive income, net of tax, related to these cash flow hedges was $(0.1) million, $1.2 million and ($3.5) million for the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, respectively. The total value of the Australia swap asset as of January 2, 2011 and January 3, 2010 was $1.8 million and $2.0 million, respectively, and is recorded as a component of other assets in the accompanying consolidated balance sheets. There was no material ineffectiveness of this interest rate swap for the fiscal periods presented. The Company


111

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
does not expect to enter into any transactions during the next twelve months which would result in the reclassification into earnings or losses associated with this swap currently reported in accumulated other comprehensive income (loss).
During the fiscal year ended January 3, 2010, the Company received proceeds of $1.7 million for the settlement of an aggregate notional amount of $50.0 million of interest rate swaps related to its $150.0 million 81/4% Senior Notes due 2013 (“81/4% Senior Notes”). The lenders to these swap agreements elected to prepay their obligations at the call option price which equaled the fair value at the respective call dates.
10.  Goodwill and Other Intangible Assets, Net
Changes in the Company’s goodwill balances for 2010 were as follows (in thousands):
                     
        Purchase price
  Foreign
    
        allocation
  currency
    
  January 3, 2010  Acquisitions  adjustment  translation  January 2, 2011 
 
U.S. Detention & Corrections $21,692  $153,882  $1,126  $—  $176,700 
GEO Care  17,729   50,500   (744)  —   67,485 
International Services  669   —   —   93   762 
                     
Total Goodwill $40,090  $204,382  $382  $93  $244,947 
                     
On August 12, 2010, the Company acquired Cornell and recorded $204.7 million in goodwill representing the strategic benefits of the Merger including the combined Company’s increased scale and the diversification of service offerings. During the fiscal year ended January 2, 2011, the Company made adjustments to its purchase accounting in the amount of $0.4 million, net, primarily related to Cornell. Among other adjustments, this change in allocation resulted from the Company’s analyses primarily related to certain receivables, intangible assets, insurance liabilities and certain income and non-income tax items.


112

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Intangible assets consisted of the following (in thousands):
                     
  Useful Life
  U.S. Detention &
  International
       
  in Years  Corrections  Services  GEO Care  Total 
 
Facility management contracts  1-17  $14,450  $2,468  $6,600  $23,518 
Covenants not to compete  4   1,470   —   —   1,470 
                     
Gross carrying value as of January 3, 2010      15,920   2,468   6,600   24,988 
                     
Changes during fiscal year ended January 2, 2011 due to:                    
Facility management contracts acquired  12-13   35,400   —   34,700   70,100 
Covenants not to compete related to Cornell acquisition  1-2   2,879   —   2,821   5,700 
Foreign currency translation      —   286   —   286 
                     
Gross carrying value at January 2, 2011      54,199   2,754   44,121   101,074 
Accumulated amortization expense      (10,146)  (325)  (2,790)  (13,261)
                     
Net carrying value at January 2, 2011     $44,053  $2,429  $41,331  $87,813 
                     
As of January 2, 2011, the weighted average period before the next contract renewal or extension for all of the Company’s the facility management contracts was approximately 1.5 years. Although the facility management contracts acquired have renewal and extension terms in the near term, the Company has historically maintained these relationships beyond the contractual periods.
Accumulated amortization expense in total and by asset class is as follows (in thousands):
                 
  U.S. Detention &
  International
       
  Corrections  Services  GEO Care  Total 
 
Facility management contracts $9,496  $325  $2,153  $11,974 
Covenants not to compete  650   —   637   1,287 
                 
Total accumulated amortization expense $10,146  $325  $2,790  $13,261 
                 
Amortization expense was $5.7 million, $2.0 million and $1.8 million for the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, respectively, and primarily related to the U.S. Detention & Corrections amortization of intangible assets for acquired management contracts.


113

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Estimated amortization expense related to the Company’s finite-lived intangible assets for fiscal year 2011 through fiscal year 2015 and thereafter is as follows (in thousands):
                 
  U.S. Detention &
  International
       
  Corrections -
  Services -
  GEO Care -
    
  Expense
  Expense
  Expense
  Total Expense
 
Fiscal Year Amortization  Amortization  Amortization  Amortization 
 
2011 $5,783  $151  $4,984  $10,918 
2012  4,894   151   4,185   9,230 
2013  3,556   151   3,236   6,943 
2014  3,556   151   3,096   6,803 
2015  3,556   151   3,065   6,772 
Thereafter  22,708   1,674   22,765   47,147 
                 
  $44,053  $2,429  $41,331  $87,813 
                 
11.  Fair Value of Assets and Liabilities
The Company is required to measure certain of its financial assets and liabilities at fair value on a recurring basis. The Company does not have any financial assets and liabilities which it carries and measures at fair value using Level 1 techniques, as defined above. The investments included in the Company’s Level 2 fair value measurements consist of an interest rate swap held by the Company’s Australian subsidiary, an investment in Canadian dollar denominated fixed income securities and a guaranteed investment contract which is a restricted investment related to CSC of Tacoma LLC discussed further in Note 14. The Company does not have any Level 3 financial assets or liabilities it measures on a recurring basis.
The following table provides a summary of the Company’s significant financial assets and liabilities carried at fair value and measured on a recurring basis (in thousands):
                 
    Fair Value Measurements at January 2, 2011
  Carrying
 Quoted Prices in
 Significant Other
 Significant
  Value at
 Active Markets
 Observable Inputs
 Unobservable
  January 2, 2011 (Level 1) (Level 2) Inputs (Level 3)
 
Assets:                
Interest rate swap derivative assets $5,131  $—  $5,131  $— 
Investments other than derivatives $7,533  $—   7,533  $— 
                 
    Fair Value Measurements at January 3, 2010
  Carrying
 Quoted Prices in
 Significant Other
 Significant
  Value at
 Active Markets
 Observable Inputs
 Unobservable
  January 3, 2010 (Level 1) (Level 2) Inputs (Level 3)
 
Assets:                
Interest rate swap derivative assets $2,020  $—  $2,020  $— 
Investments other than derivatives $7,269  $—  $7,269  $— 
Liabilities:                
Interest rate swap derivative liabilities $1,887  $—  $1,887  $— 


114

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12.  Financial Instruments
The Company’s balance sheet reflects certain financial instruments at carrying value. The following table presents the carrying values of those instruments and the corresponding fair values (in thousands):
         
  January 2, 2011
  Carrying
 Estimated
  Value Fair Value
 
Assets:        
Cash and cash equivalents $39,664  $39,664 
Restricted cash and investments, including current portion  90,642   90,642 
Liabilities:        
Borrowings under the Senior Credit Facility $557,758  $562,610 
73/4% Senior Notes
  250,078   265,000 
Non-recourse debt, Australian subsidiary  46,300   46,178 
Other non-recourse debt, including current portion  176,384   180,340 
         
  January 3, 2010
  Carrying
 Estimated
  Value Fair Value
 
Assets:        
Cash and cash equivalents $33,856  $33,856 
Cash, Restricted, including current portion  34,068   34,068 
Liabilities:        
Borrowings under the Senior Credit Facility $212,963  $203,769 
73/4% Senior Notes
  250,000   255,000 
Non-recourse debt, including current portion  113,724   113,360 
The fair values of the Company’s Cash and cash equivalents, and Restricted cash and investments approximate the carrying values of these assets at January 2, 2011 and January 3, 2010 due to the short-term nature of these instruments. The fair values of 73/4% Senior Notes and Other non-recourse debt are based on market prices, where available. The fair value of the non-recourse debt related to the Company’s Australian subsidiary is estimated using a discounted cash flow model based on current Australian borrowing rates for similar instruments. The fair value of the borrowings under the Senior Credit Facility is based on an estimate of trading value considering the company’s borrowing rate, the undrawn spread and similar market instruments.
13.  Accrued Expenses
Accrued expenses consisted of the following (in thousands):
         
  2010  2009 
 
Accrued interest $12,153  $5,913 
Accrued bonus  12,825   8,567 
Accrued insurance  44,237   30,661 
Accrued property and other taxes  15,723   5,219 
Construction retainage  2,012   8,250 
Other  34,697   22,149 
         
Total $121,647  $80,759 
         


115

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14.  Debt
Debt consisted of the following (in thousands):
         
  2010  2009 
 
Capital Lease Obligations $14,470  $15,124 
Senior Credit Facility:
        
Term loans  347,625   — 
Discount on term loan  (1,867)  154,963 
Revolver  212,000   58,000 
         
Total Senior Credit Facility $557,758  $212,963 
73/4% Senior Notes
        
Notes Due in 2017  250,000   250,000 
Discount on Notes  (3,227)  (3,566)
Swap on Notes  3,305   (1,887)
         
Total 73/4% Senior Notes
 $250,078  $244,547 
Non-Recourse Debt :
        
Non-recourse debt $212,445  $113,724 
Premium on non-recourse debt  11,403   — 
Discount on non-recourse debt  (1,164)  (1,692)
         
Total non recourse debt  222,684   112,032 
Other debt  —   28 
         
Total debt $1,044,990  $584,694 
         
Current portion of capital lease obligations, long-term debt and non-recourse debt  (41,574)  (19,624)
Capital lease obligations, long-term portion  (13,686)  (14,419)
Non-recourse debt  (191,394)  (96,791)
         
Long-term debt $798,336  $453,860 
         
Senior Credit Facility
On August 4, 2010, the Company executed a new $750.0 million senior credit facility (the “Senior Credit Facility”), through the execution of a Credit Agreement, by and among GEO, as Borrower, BNP Paribas, as Administrative Agent, and the lenders who are, or may from time to time become, a party thereto. The Senior Credit Facility is comprised of (i) a $150.0 million Term Loan A (“Term Loan A”), initially bearing interest at LIBOR plus 2.5% and maturing August 4, 2015, (ii) a $200.0 million Term Loan B (“Term Loan B”) initially bearing interest at LIBOR plus 3.25% with a LIBOR floor of 1.50% and maturing August 4, 2016 and (iii) a Revolving Credit Facility (“Revolver”) of $400.0 million initially bearing interest at LIBOR plus 2.5% and maturing August 4, 2015.


116

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Indebtedness under the Revolver and the Term Loan A bears interest based on the Total Leverage Ratio as of the most recent determination date, as defined, in each of the instances below at the stated rate:
Interest Rate under the Revolver and Term Loan A
LIBOR borrowingsLIBOR plus 2.00% to 3.00%.
Base rate borrowingsPrime Rate plus 1.00% to 2.00%.
Letters of credit2.00% to 3.00%.
Unused Revolver0.375% to 0.50%.
The Senior Credit Facility contains certain customary representations and warranties, and certain customary covenants that restrict the Company’s ability to, among other things as permitted (i) create, incur or assume indebtedness, (ii) create, incur, assume or permit liens, (iii) make loans and investments, (iv) engage in mergers, acquisitions and asset sales, (v) make restricted payments, (vi) issue, sell or otherwise dispose of capital stock, (vii) engage in transactions with affiliates, (viii) allow the total leverage ratio or senior secured leverage ratio to exceed certain maximum ratios or allow the interest coverage ratio to be less than 3.00 to 1.00, (ix) cancel, forgive, make any voluntary or optional payment or prepayment on, or redeem or acquire for value any senior notes, (x) alter the business the Company conducts, and (xi) materially impair the Company’s lenders’ security interests in the collateral for its loans.
The Company must not exceed the following Total Leverage Ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:
Total Leverage Ratio -
PeriodMaximum Ratio
August 4, 2010 through and including the last day of the fiscal year 20114.50 to 1.00
First day of fiscal year 2012 through and including that last day of fiscal year 20124.25 to 1.00
Thereafter4.00 to 1.00
The Senior Credit Facility also does not permit the Company to exceed the following Senior Secured Leverage Ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:
Senior Secured Leverage Ratio -
PeriodMaximum Ratio
August 4, 2010 through and including the last day of the fiscal year 20113.25 to 1.00
First day of fiscal year 2012 through and including that last day of fiscal year 20123.00 to 1.00
Thereafter2.75 to 1.00
Additionally, there is an Interest Coverage Ratio under which the lender will not permit a ratio of less than 3.00 to 1.00 relative to (a) Adjusted EBITDA for any period of four consecutive fiscal quarters to (b) Interest Expense, less that attributable to non-recourse debt of unrestricted subsidiaries.
Events of default under the Senior Credit Facility include, but are not limited to, (i) the Company’s failure to pay principal or interest when due, (ii) the Company’s material breach of any representations or warranty, (iii) covenant defaults, (iv) liquidation, reorganization or other relief relating to bankruptcy or insolvency, (v) cross default under certain other material indebtedness, (vi) unsatisfied final judgments over a specified threshold, (vii) material environmental liability claims which have been asserted against the Company, and (viii) a change in control. All of the obligations under the Senior Credit Facility are unconditionally guaranteed by certain of the Company’s subsidiaries and secured by substantially all of the Company’s present and future tangible and intangible assets and all present and future tangible and intangible


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assets of each guarantor, including but not limited to (i) a first-priority pledge of substantially all of the outstanding capital stock owned by the Company and each guarantor, and (ii) perfected first-priority security interests in substantially all of the Company’s, and each guarantors, present and future tangible and intangible assets and the present and future tangible and intangible assets of each guarantor. The Company’s failure to comply with any of the covenants under its Senior Credit Facility could cause an event of default under such documents and result in an acceleration of all of outstanding senior secured indebtedness. The Company believes it was in compliance with all of the covenants of the Senior Credit Facility as of January 2, 2011.
On August 4, 2010 in connection with its entry into the $750.0 million Senior Credit Facility, the Company terminated its prior senior credit facility, the Third Amended and Restated Credit Agreement (the “Prior Senior Credit Agreement”), dated as of January 24, 2007, as amended. The Prior Senior Credit Agreement, as of August 4, 2010, consisted of a $152.2 million term loan B (“Prior Term Loan B”) and a $330.0 million revolver (“Prior Revolver”) with outstanding borrowings on August 4, 2010 of $115.0 million. The Prior Term Loan B bore interest at LIBOR plus 2.00% and the Prior Revolver bore interest at LIBOR plus 3.25% at the time of terminating the Prior Senior Credit Agreement. The Prior Term Loan B component was scheduled to mature in January 2014 and the Prior Revolver component was scheduled to mature in September 2012. The weighed average interest rate on outstanding borrowings under the Senior Credit Facility, as amended, as of January 2, 2011 was 3.5%. The weighed average interest rate on outstanding borrowings under the, Prior Senior Credit Agreement as of January 3, 2010 was 2.62%.
On August 4, 2010, the Company used approximately $280 million in aggregate proceeds from the Term Loan B and the Revolver primarily to repay existing borrowings and accrued interest under its Prior Senior Credit Agreement of $267.7 million and also used $6.7 million for financing fees related to the Senior Credit Facility. The Company received, as cash, the remaining proceeds of $3.2 million. On August 12, 2010, the Company borrowed $290.0 million under its Senior Credit Facility and used the aggregate cash proceeds primarily for $84.9 million in cash consideration payments to Cornell’s stockholders in connection with the Merger, transaction costs of approximately $14.0 million, the repayment of $181.9 million for Cornell’s 10.75% Senior Notes due July 2012 plus accrued interest and Cornell’s Revolving Line of Credit due December 2011 plus accrued interest. As of January 2, 2011, the Company had $148.1 million outstanding under the Term Loan A, $199.5 million outstanding under the Term Loan B, and its $400.0 million Revolver had $212.0 million outstanding in loans, $57.0 million outstanding in letters of credit and $131.0 million available for borrowings. The Company intends to use future borrowings for the purposes permitted under the Senior Credit Facility, including for general corporate purposes. The Company wrote off $7.9 million in deferred financing costs related to the termination of the Prior Senior Credit Agreement.
73/4% Senior Notes
On October 20, 2009, the Company completed a private offering of $250.0 million in aggregate principal amount of its 73/4% Senior Notes due 2017. These senior unsecured notes pay interest semi-annually in cash in arrears on April 15 and October 15 of each year, beginning on April 15, 2010. The Company realized net proceeds of $246.4 million at the close of the transaction, net of the discount on the notes of $3.6 million. The Company used the net proceeds of the offering to fund the repurchase of all of its 81/4% Senior Notes due 2013 and pay down part of the Revolving Credit Facility under our Prior Senior Credit Agreement.
The 73/4% Senior Notes and the guarantees will be unsecured, unsubordinated obligations of The GEO Group Inc., and the guarantors and will rank as follows: pari passu with any unsecured, unsubordinated indebtedness of GEO and the guarantors; senior to any future indebtedness of GEO and the guarantors that is expressly subordinated to the notes and the guarantees; effectively junior to any secured indebtedness of GEO and the guarantors, including indebtedness under the Company’s Senior Credit Facility, to the extent of the value of the assets securing such indebtedness; and effectively junior to all obligations of the Company’s subsidiaries that are not guarantors. After October 15, 2013, the Company may, at its option, redeem all or a part of the 73/4% Senior Notes upon not less than 30 nor more than 60 days’ notice, at the redemption prices


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest and liquidated damages, if any, on the 73/4% Senior Notes redeemed, to the applicable redemption date, if redeemed during the12-month period beginning on October 15 of the years indicated below:
     
Year Percentage 
 
2013  103.875%
2014  101.938%
2015 and thereafter  100.000%
Before October 15, 2013, the Company may redeem some or all of the 73/4% Senior Notes at a redemption price equal to 100% of the principal amount of each note to be redeemed plus a make-whole premium described under “Description of Notes — Optional Redemption” together with accrued and unpaid interest. In addition, at any time prior to October 15, 2012, the Company may redeem up to 35% of the notes with the net cash proceeds from specified equity offerings at a redemption price equal to 107.750% of the principal amount of each note to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption.
The indenture governing the notes contains certain covenants, including limitations and restrictions on the Company’s and its restricted subsidiaries’ ability to: incur additional indebtedness or issue preferred stock; make dividend payments or other restricted payments; create liens; sell assets; enter into transactions with affiliates; and enter into mergers, consolidations, or sales of all or substantially all of the Company’s assets. As of the date of the indenture, all of the Company’s subsidiaries, other than certain dormant domestic subsidiaries and all foreign subsidiaries in existence on the date of the indenture, were restricted subsidiaries. The Company’s unrestricted subsidiaries will not be subject to any of the restrictive covenants in the indenture. The Company’s failure to comply with certain of the covenants under the indenture governing the 73/4% Notes could cause an event of default of any indebtedness and result in an acceleration of such indebtedness. In addition, there is a cross-default provision which becomes enforceable upon failure of payment of indebtedness at final maturity. The Company believes it was in compliance with all of the covenants of the Indenture governing the 73/4% Senior Notes as of January 2, 2011.
Non-Recourse Debt
South Texas Detention Complex:
The Company has a debt service requirement related to the development of the South Texas Detention Complex, a 1,904-bed detention complex in Frio County, Texas, acquired in November 2005 from Correctional Services Corporation (“CSC”). CSC was awarded the contract in February 2004 by the Department of Homeland Security, U.S. Immigration and Customs Enforcement (“ICE”) for development and operation of the detention center. In order to finance its construction of the complex, STLDC was created and issued $49.5 million in taxable revenue bonds. These bonds mature in February 2016 and have fixed coupon rates between 4.34% and 5.07%. Additionally, the Company is owed $5.0 million of subordinated notes by STLDC which represents the principal amount of financing provided to STLDC by CSC for initial development.
The Company has an operating agreement with STLDC, the owner of the complex, which provides it with the sole and exclusive right to operate and manage the detention center. The operating agreement and bond indenture require the revenue from the contract with ICE be used to fund the periodic debt service requirements as they become due. The net revenues, if any, after various expenses such as trustee fees, property taxes and insurance premiums are distributed to the Company to cover operating expenses and management fees. The Company is responsible for the entire operation of the facility including the payment of all operating expenses whether or not there are sufficient revenues. STLDC has no liabilities resulting from its ownership. The bonds have a ten-year term and are non-recourse to the Company and STLDC. The bonds are fully insured and the sole source of payment for the bonds is the operating revenues of the center. At the end of the ten-year term of the bonds, title and ownership of the facility transfers from STLDC to the Company. The Company has determined that it is the primary beneficiary of STLDC and consolidates the entity as a


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
result. The carrying value of the facility as of January 2, 2011 and January 3, 2010 was $27.0 million and $27.2 million, respectively, and is included in property and equipment in the accompanying balance sheets.
On February 1, 2010, STLDC made a payment from its restricted cash account of $4.6 million for the current portion of its periodic debt service requirement in relation to the STLDC operating agreement and bond indenture. As of January 2, 2011, the remaining balance of the debt service requirement under the STLDC financing agreement is $32.1 million, of which $4.8 million is due within the next twelve months. Also, as of January 2, 2011, included in current restricted cash and non-current restricted cash is $6.2 million and $9.3 million, respectively, of funds held in trust with respect to the STLDC for debt service and other reserves.
Northwest Detention Center
On June 30, 2003, CSC arranged financing for the construction of the Northwest Detention Center in Tacoma, Washington, referred to as the Northwest Detention Center, which was completed and opened for operation in April 2004. The Company began to operate this facility following its acquisition in November 2005. In connection with the original financing, CSC of Tacoma LLC, a wholly owned subsidiary of CSC, issued a $57.0 million note payable to the Washington Economic Development Finance Authority (“WEDFA”), an instrumentality of the State of Washington, which issued revenue bonds and subsequently loaned the proceeds of the bond issuance back to CSC for the purposes of constructing the Northwest Detention Center. The bonds are non-recourse to the Company and the loan from WEDFA to CSC is non-recourse to the Company. These bonds mature in February 2014 and have fixed coupon rates between 3.80% and 4.10%.
The proceeds of the loan were disbursed into escrow accounts held in trust to be used to pay the issuance costs for the revenue bonds, to construct the Northwest Detention Center and to establish debt service and other reserves. On October 1, 2010, CSC of Tacoma LLC made a payment from its restricted cash account of $5.9 million for the current portion of its periodic debt service requirement in relation to the WEDFA bond indenture. As of January 2, 2011, the remaining balance of the debt service requirement is $25.7 million, of which $6.1 million is classified as current in the accompanying balance sheet.
As of January 2, 2011, included in current restricted cash and non-current restricted cash is $7.1 million and $1.8 million, respectively, of funds held in trust with respect to the Northwest Detention Center for debt service and other reserves.
MCF
Upon completion of the acquisition of Cornell, the obligations of MCF under its 8.47% Revenue Bonds remained outstanding. These bonds bear interest at a rate of 8.47% per annum and are payable in semi-annual installments of interest and annual installments of principal. All unpaid principal and accrued interest on the bonds is due on the earlier of August 1, 2016 (maturity) or as noted under the bond documents. The bonds are limited, nonrecourse obligations of MCF and are collateralized by the property and equipment, bond reserves, assignment of subleases and substantially all assets related to the facilities owned by MCF. The bonds are not guaranteed by the Company or its subsidiaries.
The 8.47% Revenue Bond indenture provides for the establishment and maintenance by MCF for the benefit of the trustee under the indenture of a debt service reserve fund. As of January 2, 2011, the debt service reserve fund has a balance of $23.4 million. The debt service reserve fund is available to the trustee to pay debt service on the 8.47% Revenue Bonds when needed, and to pay final debt service on the 8.47% Revenue Bonds. If MCF is in default in its obligation under the 8.47% Revenue Bonds indenture, the trustee may declare the principal outstanding and accrued interest immediately due and payable. MCF has the right to cure a default of non-payment obligations. The 8.47% Revenue Bonds are subject to extraordinary mandatory redemption in certain instances upon casualty or condemnation. The 8.47% Revenue Bonds may be redeemed at the option of MCF prior to their final scheduled payment dates at par plus accrued interest plus a make-whole premium.


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Australia
The Company’s wholly-owned Australian subsidiary financed the development of a facility and subsequent expansion in 2003 with long-term debt obligations. These obligations are non-recourse to the Company and total $46.3 million and $45.4 million at January 2, 2011 and January 3, 2010, respectively. The term of the non-recourse debt is through 2017 and it bears interest at a variable rate quoted by certain Australian banks plus 140 basis points. Any obligations or liabilities of the subsidiary are matched by a similar or corresponding commitment from the government of the State of Victoria. As a condition of the loan, the Company is required to maintain a restricted cash balance of AUD 5.0 million, which, at January 2, 2011, was $5.1 million. This amount is included in non-current restricted cash and the annual maturities of the future debt obligation are included in non-recourse debt.
Debt Repayment
Debt repayment schedules under capital lease obligations, long-term debt and non-recourse debt are as follows:
                         
  Capital
  Long-Term
  Non-
     Term
  Total Annual
 
Fiscal Year Leases  Debt  Recourse  Revolver  Loan  Repayment 
        (In thousands)       
 
2011 $1,950  $—  $31,290  $—  $9,500  $42,740 
2012  1,950   —   33,281   —   11,375   46,606 
2013  1,950   —   35,616   —   20,750   58,316 
2014  1,940   —   38,002   —   47,000   86,942 
2015  1,932   —   33,878   212,000   116,500   364,310 
Thereafter  12,842   250,000   40,378   —   142,500   445,720 
                         
  $22,564  $250,000  $212,445  $212,000  $347,625  $1,044,634 
                         
Original issuer’s discount  —   (3,227)  (1,164)  —   (1,867)  (6,258)
Current portion  (784)  —   (31,290)  —   (9,500)  (41,574)
Interest imputed on Capital Leases  (8,094)  —   —   —   —   (8,094)
Fair value premium on non-recourse debt  —   —   11,403   —   —   11,403 
Interest rate swap  —   3,305   —   —   —   3,305 
                         
Non-current portion $13,686  $250,078  $191,394  $212,000  $336,258  $1,003,416 
                         
Guarantees
In connection with the creation SACS, the Company entered into certain guarantees related to the financing, construction and operation of the prison. The Company guaranteed certain obligations of SACS under its debt agreements up to a maximum amount of 60.0 million South African Rand, or $9.1 million, to SACS’ senior lenders through the issuance of letters of credit. Additionally, SACS is required to fund a restricted account for the payment of certain costs in the event of contract termination. The Company has guaranteed the payment of 60% of amounts which may be payable by SACS into the restricted account and provided a standby letter of credit of 8.4 million South African Rand, or $1.3 million, as security for its guarantee. The Company’s obligations under this guarantee are indexed to the CPI and expire upon SACS’ release from its obligations in respect of the restricted account under its debt agreements. No amounts have been drawn against these letters of credit, which are included in the Company’s outstanding letters of credit under its Revolver.


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has agreed to provide a loan, of up to 20.0 million South African Rand, or $3.0 million (the “Standby Facility”), to SACS for the purpose of financing SACS’ obligations under its contract with the South African government. No amounts have been funded under the Standby Facility, and the Company does not currently anticipate that such funding will be required by SACS in the future. The Company’s obligations under the Standby Facility expire upon the earlier of full funding or SACS’ release from its obligations under its debt agreements. The lenders’ ability to draw on the Standby Facility is limited to certain circumstances, including termination of the contract.
The Company has also guaranteed certain obligations of SACS to the security trustee for SACS’ lenders. The Company secured its guarantee to the security trustee by ceding its rights to claims against SACS in respect of any loans or other finance agreements, and by pledging the Company’s shares in SACS. The Company’s liability under the guarantee is limited to the cession and pledge of shares. The guarantee expires upon expiration of the cession and pledge agreements.
In connection with a design, build, finance and maintenance contract for a facility in Canada, the Company guaranteed certain potential tax obligations of anot-for-profit entity. The potential estimated exposure of these obligations is Canadian Dollar (“CAD”) 2.5 million, or $2.5 million, commencing in 2017. The Company has a liability of $1.8 million and $1.5 million related to this exposure as of January 2, 2011 and January 3, 2010, respectively. To secure this guarantee, the Company purchased Canadian dollar denominated securities with maturities matched to the estimated tax obligations in 2017 to 2021. The Company has recorded an asset and a liability equal to the current fair market value of those securities on its consolidated balance sheet. The Company does not currently operate or manage this facility.
At January 2, 2011, the Company also had seven letters of guarantee outstanding under separate international facilities relating to performance guarantees of its Australian subsidiary totaling $9.4 million. The Company does not have any off balance sheet arrangements.
 
15.  Shareholders’ EquityCommitments and Contingencies
 
Earnings Per ShareOperating Leases
 
BasicThe Company leases correctional facilities, office space, computers and diluted earnings per share (“EPS”) were calculated for the fiscal years ended January 3, 2010, December 28, 2008transportation equipment under non-cancelable operating leases expiring between 2011 and December 30, 20072046. The future minimum commitments under these leases are as follows (in thousands, except per share data):follows:
 
             
Fiscal Year
 2009  2008  2007 
  (In thousands, except per share data) 
 
Income from continuing operations $66,300  $61,453  $38,089 
Basic earnings per share:            
Weighted average shares outstanding  50,879   50,539   47,727 
             
Per share amount $1.30  $1.22  $0.80 
             
Diluted earnings per share:            
Weighted average shares outstanding  50,879   50,539   47,727 
Effect of dilutive securities:            
Employee and director stock options and restricted stock $1,043  $1,291  $1,465 
             
Weighted average shares assuming dilution  51,922   51,830   49,192 
             
Per share amount $1.28  $1.19  $0.77 
             
     
Fiscal Year Annual Rental 
  (In thousands) 
 
2011 $30,948 
2012  29,774 
2013  25,019 
2014  17,798 
2015  16,416 
Thereafter  61,226 
     
  $181,181 
     
 
ForThe Company’s corporate offices are located in Boca Raton, Florida, under a lease agreement which was amended in September 2010. The current lease expires in March 2020 and has two5-year renewal options for a full term ending March 2030. In addition, the fiscal year ended January 3,Company leases office space for its regional offices in Charlotte, North Carolina; San Antonio, Texas; and Los Angeles, California. As a result of the Company’s acquisition of Cornell in August 2010, 69,492 weighted average shares of stock underlying optionsthe Company is also currently leasing office space in Houston, Texas and 107 weighted average shares of restricted stock were excluded from the computation of diluted EPS because the effect would be anti-dilutive.Pittsburg, Pennsylvania. The Company also leases office space in Sydney, Australia, Sandton, South


122

For the fiscal year December 28, 2008, 372,725 weighted average shares of stock underlying options and 8,986 weighted average shares of restricted stock were excluded from the computation of diluted EPS because the effect would be anti-dilutive.
For the fiscal year December 30, 2007, no shares of stock underlying options or shares of restricted stock were excluded from the computation of diluted EPS because their effect would have been anti-dilutive.THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Africa, and Berkshire, England through its overseas affiliates to support its Australian, South African, and UK operations, respectively. These rental commitments are included in the table above. Certain of these leases contain leasehold improvement incentives, rent holidays, and scheduled rent increases which are included in the Company’s rent expense recognized on a straight-line basis. Minimum rent expense associated with the Company’s leases having initial or remaining non-cancelable lease terms in excess of one year was $25.4 million, $18.7 million and $18.5 million for fiscal years 2010, 2009 and 2008, respectively.
Litigation, Claims and Assessments
In June 2004, the Company received notice of a third-party claim for property damage incurred during 2001 and 2002 at several detention facilities formerly operated by its Australian subsidiary. The claim relates to property damage caused by detainees at the detention facilities. The notice was given by the Australian government’s insurance provider and did not specify the amount of damages being sought. In August 2007, a lawsuit (Commonwealth of Australia v. Australasian Connectional Services PTY, Limited No. SC 656) was filed against the Company in the Supreme Court of the Australian Capital Territory seeking damages of up to approximately AUD 18 million, as of January 2, 2011, or $18.4 million, plus interest. The Company believes that it has several defenses to the allegations underlying the litigation and the amounts sought and intends to vigorously defend its rights with respect to this matter. The Company has established a reserve based on its estimate of the most probable loss based on the facts and circumstances known to date and the advice of legal counsel in connection with this matter. Although the outcome of this matter cannot be predicted with certainty, based on information known to date and the Company’s preliminary review of the claim and related reserve for loss, the Company believes that, if settled unfavorably, this matter could have a material adverse effect on its financial condition, results of operations or cash flows. The Company is uninsured for any damages or costs that it may incur as a result of this claim, including the expenses of defending the claim.
During the fourth fiscal quarter of 2009, the Internal Revenue Service (“IRS”) completed its examination of the Company’s U.S. federal income tax returns for the years 2002 through 2005. Following the examination, the IRS notified the Company’s management that it proposed to disallow a deduction that the Company realized during the 2005 tax year. In December of 2010, the Company reached an agreement with the office of IRS Appeals on the amount of the deduction, which is currently being reviewed at a higher level. As a result of the pending agreement, the Company reassessed the probability of potential settlement outcomes and reduced its income tax accrual of $4.9 million by $2.3 million during the fourth quarter of 2010. However, if the disallowed deduction were to be sustained in full, it could result in a potential tax exposure to the Company of $15.4 million. The Company believes in the merits of its position and intends to defend its rights vigorously, including its rights to litigate the matter if it cannot be resolved favorably with the office of IRS Appeals. If this matter is resolved unfavorably, it may have a material adverse effect on the Company’s financial position, results of operations and cash flows.
In October 2010, the IRS audit for the Company’s U.S. income tax returns for fiscal years 2006 through 2008 was concluded and resulted in no changes to the Company’s income tax positions.
The Company’s South Africa joint venture had been in discussions with the South African Revenue Service (“SARS”) with respect to the deductibility of certain expenses for the tax periods 2002 through 2004. The joint venture operates the Kutama Sinthumule Correctional Centre and accepted inmates from the South African Department of Correctional Services in 2002. During 2009, SARS notified the Company that it proposed to disallow these deductions. The Company appealed these proposed disallowed deductions with SARS and in October 2010, received a notice of favorable ruling relative to these proceedings. If SARS should appeal, the Company believes it has defenses in these matters and intends to defend its rights vigorously. If resolved unfavorably, the Company’s maximum exposure would be $2.6 million.
On April 27, 2010, a putative stockholder class action was filed in the District Court for Harris County, Texas by Todd Shelby against Cornell, members of Cornell’s board of directors, individually, and the


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company. The plaintiff filed an amended complaint on May 28, 2010, alleging, among other things, that the Cornell directors, aided and abetted by Cornell and the Company, breached their fiduciary duties in connection with the Cornell Acquisition. Among other things, the amended complaint sought to enjoin Cornell, its directors and the Company from completing the Cornell Acquisition and sought a constructive trust over any benefits improperly received by the defendants as a result of their alleged wrongful conduct. The parties reached a settlement which has been approved by the court and, as a result, the court dismissed the action with prejudice. The settlement of this matter did not have a material adverse impact on our financial condition, results of operations or cash flows.
The nature of the Company’s business exposes it to various types of claims or litigation against the Company, including, but not limited to, civil rights claims relating to conditions of confinementand/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, indemnification claims by its customers and other third parties, contractual claims and claims for personal injury or other damages resulting from contact with the Company’s facilities, programs, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. Except as otherwise disclosed above, the Company does not expect the outcome of any pending claims or legal proceedings to have a material adverse effect on its financial condition, results of operations or cash flows.
Preferred Stock
 
In April 1994, the Company’s Board of Directors authorized 30 million shares of “blank check” preferred stock. The Board of Directors is authorized to determine the rights and privileges of any future issuance of preferred stock such as voting and dividend rights, liquidation privileges, redemption rights and conversion privileges.
 
Rights Agreement
 
On October 9, 2003, the Company entered into a rights agreement with EquiServe Trust Company, N.A., as rights agent. Under the terms of the rights agreement, each share of the Company’s common stock carries with it one preferred share purchase right. If the rights become exercisable pursuant to the rights agreement, each right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock at a fixed price, subject to adjustment. Until a right is exercised, the holder of the right has no right to vote or receive dividends or any other rights as a shareholder as a result of holding the right. The rights trade automatically with shares of our common stock, and may only be exercised in connection with certain attempts to acquire the Company. The rights are designed to protect the interests of the Company and its shareholders against coercive acquisition tactics and encourage potential acquirers to negotiate with our Board of Directors before attempting an acquisition. The rights may, but are not intended to, deter acquisition proposals that may be in the interests of the Company’s shareholders.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) represents the change in shareholders’ equity from transactions and other events and circumstances arising from non-shareholder sources. The Company’s comprehensive income (loss) includes net income, effect of foreign currency translation adjustments that arise from consolidating foreign operations that do not impact cash flows, projected benefit obligation recognized in other comprehensive


101104

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
income and the change in net unrealized gains or losses on derivative instruments. The components of accumulated other comprehensive income (loss) are as follows:
                 
     Projected Beneftt
       
     Obligation
     Accumulated
 
     Recognized in Other
  Gains and Losses
  Other
 
  Foreign Currency
  Comprehensive
  on Derivative
  Comprehensive
 
  Translation, Net  Income (Loss)  Instruments  Income (Loss) 
 
Balance December 30, 2007 $4,930  $(1,621) $3,611  $6,920 
Change in foreign currency translation, net of tax benefit of $413  (10,742)  —   —   (10,742)
Pension liabiltiy adjustment, net of tax expense of $17  —   27   —   27 
Unrealized loss on derivative instruments, net of tax benefit of $2,113  —   —   (3,480)  (3,480)
                 
Balance December 28, 2008  (5,812)  (1,594)  131   (7,275)
                 
Change in foreign currency translation, net of tax expense of $1,129  10,658   —   —   10,658 
Pension liabiltiy adjustment, net of tax expense of $636  —   942   —   942 
Unrealized gain on derivative instruments, net of income tax benefit of $645  —   —   1,171   1,171 
                 
Balance January 3, 2010  4,846   (652)  1,302   5,496 
                 
Change in foreign currency translation, net of tax expense of $1,313  5,084   —   —   5,084 
Pension liabilty adjustment, net of tax benefit of $232  —   (383)  —   (383)
Unrealized gain on derivative instruments, net of income tax benefit of $69  —   —   (126)  (126)
                 
Balance January 2, 2011 $9,930  $(1,035) $1,176  $10,071 
                 
Stock repurchases
On February 22, 2010, the Company announced that its Board of Directors approved a stock repurchase program for up to $80.0 million of the Company’s common stock which was effective through March 31, 2011. The stock repurchase program was implemented through purchases made from time to time in the open market or in privately negotiated transactions, in accordance with applicable Securities and Exchange Commission requirements. The program also included repurchases from time to time from executive officers or directors of vested restricted stockand/or vested stock options. The stock repurchase program did not obligate the Company to purchase any specific amount of its common stock and could be suspended or extended at any time at the Company’s discretion. During the fiscal year ended January 2 2011, the Company completed the program and purchased 4.0 million shares of its common stock at a cost of $80.0 million using cash on hand and cash flow from operating activities. Of the aggregate 4.0 million shares repurchased during the fiscal year ended January 2, 2011, 1.1 million shares were repurchased from executive officers at an aggregate cost of $22.3 million.
Also during the fiscal year ended January 2, 2011, the Company repurchased 0.3 million shares of common stock from certain directors and executives for an aggregate cost of $7.1 million. These shares were retired by the Company immediately upon repurchase.


105

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Noncontrolling Interests
Upon acquisition of Cornell, the Company assumed MCF as a variable interest entity and allocated a portion of the purchase price to the noncontrolling interest based on the estimated fair value of MCF as of August 12, 2010. The noncontrolling interest in MCF represents 100% of the equity in MCF which was contributed by its partners at inception in 2001. The Company includes the results of operations and financial position of MCF, its variable interest entity, in its consolidated financial statements. MCF owns eleven facilities which it leases to the Company.
The Company includes the results of operations and financial position of South African Custodial Management Pty. Limited (“SACM” or the “joint venture”), its majority-owned subsidiary, in its consolidated financial statements. SACM was established in 2001 to operate correctional centers in South Africa. The joint venture currently provides security and other management services for the Kutama Sinthumule Correctional Centre in the Republic of South Africa under a25-year management contract which commenced in February 2002. The Company’s and the second joint venture partner’s shares in the profits of the joint venture are 88.75% and 11.25%, respectively. There were no changes in the Company’s ownership percentage of the consolidated subsidiary during the fiscal year ended January 2, 2011. The noncontrolling interest as of January 2, 2011 and January 3, 2010 is included in Total Shareholders’ Equity in the accompanying Consolidated Balance Sheets. There were no contributions from owners or distributions to owners in the fiscal year ended January 2, 2011 or January 3, 2010.
4.  Equity Incentive Plans
The Company had awards outstanding under four equity compensation plans at January 2, 2011: The Wackenhut Corrections Corporation 1994 Stock Option Plan (the “1994 Plan”); the 1995 Non-Employee Director Stock Option Plan (the “1995 Plan”); the Wackenhut Corrections Corporation 1999 Stock Option Plan (the “1999 Plan”); and The GEO Group, Inc. 2006 Stock Incentive Plan (the “2006 Plan” and, together with the 1994 Plan, the 1995 Plan and the 1999 Plan, the “Company Plans”).
On August 12, 2010, the Company’s Board of Directors adopted and its shareholders approved an amendment to the 2006 Plan to increase the number of shares of common stock subject to awards under the 2006 Plan by 2,000,000 shares from 2,400,000 to 4,400,000 shares of common stock. The 2006 Plan specifies that up to 1,083,000 of such total shares pursuant to awards granted under the plan may constitute awards other than stock options and stock appreciation rights, including shares of restricted stock. See “Restricted Stock” below for further discussion. As of January 2, 2011, the Company had 952,850 shares of common stock available for issuance pursuant to future awards that may be granted under the plan of which up to 351,722 were available for the issuance of awards other than stock options. As a result of the acquisition of Cornell, the Company issued 35,750 replacement stock option awards with an aggregate fair value as of August 12, 2010 of $0.2 million which is included in the purchase price consideration. These awards were fully vested at the grant date and had a term of 90 days.
Except for 846,186 shares of restricted stock issued under the 2006 Plan as of January 2, 2011, all of the awards previously issued under the Company Plans consisted of stock options. Although awards are currently outstanding under all of the Company Plans, the Company may only grant new awards under the 2006 Plan.
Under the terms of the Company Plans, the vesting period and, in the case of stock options, the exercise price per share, are determined by the terms of each plan. All stock options that have been granted under the Company Plans are exercisable at the fair market value of the common stock at the date of the grant. Generally, the stock options vest and become exercisable ratably over a four-year period, beginning immediately on the date of the grant. However, the Board of Directors has exercised its discretion to grant stock options that vest 100% immediately for the Chief Executive Officer. In addition, stock options granted to non-employee directors under the 1995 Plan became exercisable immediately. All stock options awarded under the


106

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company Plans expire no later than ten years after the date of the grant, except for the replacement awards issued in connection with the Cornell acquisition discussed above.
Stock Options
A summary of the activity of the Company’s stock options plans is presented below:
                 
     Wtd. Avg.
  Wtd. Avg.
  Aggregate
 
     Exercise
  Remaining
  Intrinsic
 
  Shares  Price  Contractual Term  Value 
  (In thousands)        (In thousands) 
 
Options outstanding at January 3, 2010  2,807  $10.26   4.80  $32,592 
Granted  36   16.33         
Exercised  (1,353)  4.95         
Forfeited/Canceled  (89)  19.73         
                 
Options outstanding at January 2, 2011  1,401  $15.01   5.84  $13,517 
                 
Options exercisable at January 2, 2011  1,044  $13.22   5.04  $11,942 
                 
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of fiscal year 2010 and the exercise price, times the number of shares that are “in the money”) that would have been received by the option holders had all option holders exercised their options on January 2, 2011. This amount changes based on the fair value of the company’s stock. The total intrinsic value of options exercised during the fiscal years ended January 2, 2011, January 3, 2010, and December 28, 2008 was $21.1 million, $6.2 million, and $2.9 million, respectively.
The following table summarizes information about the exercise prices and related information of stock options outstanding under the Company Plans at January 2, 2011:
                     
  Options Outstanding  Options Exercisable 
     Wtd. Avg.
  Wtd. Avg.
     Wtd. Avg.
 
  Number
  Remaining
  Exercise
  Number
  Exercise
 
Exercise Prices Outstanding  Contractual Life  Price  Exercisable  Price 
 
3.17 — 3.98  37,527   1.8   3.30   37,527   3.30 
4.67 — 4.90  77,454   2.3   4.67   77,454   4.67 
5.13 — 5.13  132,000   1.1   5.13   132,000   5.13 
5.30 — 7.70  210,297   4.7   6.96   210,297   6.96 
7.83 — 20.63  294,600   6.4   15.62   214,000   15.07 
21.07 — 21.56  647,700   7.6   21.26   372,600   21.34 
21.64 — 28.24  1,000   8.8   21.70   400   21.70 
                     
Total  1,400,578   5.8  $15.01   1,044,278  $13.22 
                     
For the years ended January 2, 2011, January 3, 2010 and December 28, 2008, the amount of stock-based compensation expense related to stock options was $1.4 million, $1.8 million and $1.5 million, respectively. The weighted average grant date fair value of options granted during the fiscal years ended January 2, 2011 and January 3, 2010 and December 28, 2008 was $6.73, $7.41 and $6.58 per share, respectively.


107

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the status of non-vested stock options as of January 2, 2011 and changes during the fiscal year ending January 2, 2011:
         
     Wtd. Avg. Grant
 
  Number of Shares  Date Fair Value 
 
Options non-vested at January 3, 2010  595,758  $7.39 
Granted(a)  35,750   6.73 
Vested  (227,408)  7.32 
Forfeited  (47,800)  7.30 
         
Options non-vested at January 2, 2011  356,300  $7.37 
         
(a)These options were granted as replacement awards to former Cornell option holders. The options were fully vested at the acquisition date and the fair value of the awards was included in purchase price consideration.
As of January 2, 2011, the Company had $1.9 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 2.5 years. The total fair value of shares vested during the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, was $2.1 million, $1.8 million and $1.2 million, respectively. Proceeds received from stock options exercises for 2010, 2009 and 2008 was $6.7 million, $1.5 million and $0.8 million, respectively. Additional tax benefits realized from tax deductions associated with the exercise of stock options and the vesting of restricted stock activity for 2010, 2009 and 2008 totaled $3.9 million, $0.6 million and $0.8 million, respectively.
Restricted Stock
Shares of restricted stock become unrestricted shares of common stock upon vesting on aone-for-one basis. The cost of these awards is determined using the fair value of the Company’s common stock on the date of the grant and compensation expense is recognized over the vesting period. The shares of restricted stock granted under the 2006 Plan vest in equal 25% increments on each of the four anniversary dates immediately following the date of grant. A summary of the activity of restricted stock is as follows:
         
     Wtd. Avg.
 
     Grant date
 
  Shares  Fair value 
 
Restricted stock outstanding at January 3, 2010  383,100  $19.66 
Granted  40,280   22.70 
Vested  (222,100)  18.84 
Forfeited/Canceled  (40,750)  21.38 
         
Restricted stock outstanding at January 2, 2011  160,530  $21.12 
         
During the fiscal year ended January 2, 2011, January 3, 2010 and December 28, 2008, the Company recognized $3.3 million, $3.5 million and $3.0 million, respectively, of compensation expense related to its outstanding shares of restricted stock. As of January 2, 2011, the Company had $2.2 million of unrecognized compensation expense that is expected to be recognized over a weighted average period of 2.0 years.
5.  Discontinued Operations
During the fiscal year 2008, the Company discontinued operations at certain of its domestic and international subsidiaries. Where significant, the results of operations, net of taxes, as further described below, have been reflected in the accompanying consolidated financial statements as such for all periods presented.


108

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
U.S. Detention & Corrections.  On November 7, 2008, the Company announced its receipt of notice for the discontinuation of its contract with the State of Idaho, Department of Correction (“Idaho DOC”) for the housing of approximately 305out-of-state inmates at the managed-only Bill Clayton Detention Center (the “Detention Center”) effective January 5, 2009. On August 29, 2008, the Company announced its discontinuation of its contract with Delaware County, Pennsylvania for the management of the county-owned 1,883-bed George W. Hill Correctional Facility effective December 31, 2008.
International Services.  On December 22, 2008, the Company announced the closure of its U.K.-based transportation division, Recruitment Solutions International (“RSI”). As a result of the termination of its transportation business in the United Kingdom, the Company wrote off assets of $2.6 million including goodwill of $2.3 million.
GEO Care.  On June 16, 2008, the Company announced the discontinuation by mutual agreement of its contract with the State of New Mexico Department of Health for the management of the Fort Bayard Medical Center effective June 30, 2008.
There were no continuing cash flows from the operations in the fiscal year ended January 2, 2011 and as such, there are no amounts reclassified to discontinued operations for this period. The following are the revenues related to discontinued operations for the fiscal years ended December 28, 2008 and January 3, 2010 (in thousands):
             
  2010  2009  2008 
  (In thousands) 
 
Revenues — International Services $—  $—  $1,806 
Revenues — U.S. Detention & Corrections $—  $210  $43,784 
Revenues — GEO Care $—  $—  $1,806 
6.  Property and Equipment
Property and equipment consist of the following at fiscal year end:
             
  Useful
       
  Life  2010  2009 
  (Years)  (In thousands) 
 
Land  —  $97,393  $60,331 
Buildings and improvements  2 to 50   1,131,895   797,185 
Leasehold improvements  1 to 29   260,167   95,696 
Equipment  3 to 10   77,906   63,382 
Furniture and fixtures  3 to 7   18,453   11,731 
Facility construction in progress      120,584   129,956 
             
Total     $1,706,398  $1,158,281 
Less accumulated depreciation and amortization      (195,106)  (159,721)
             
Property and equipment, net     $1,511,292  $998,560 
             
The Company depreciates its leasehold improvements over the shorter of their estimated useful lives or the terms of the leases including renewal periods that are reasonably assured. The Company’s construction in progress primarily consists of development costs associated with the Facility Construction & Design segment for contracts with various federal, state and local agencies for which we have management contracts. Interest capitalized in property and equipment was $4.1 million and $4.9 million for the fiscal years ended January 2, 2011 and January 3, 2010, respectively.


109

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Depreciation expense was $41.4 million, $36.3 million and $31.9 million for the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, respectively.
At January 2, 2011 and January 3, 2010, the Company had $18.2 million and $18.2 million of assets recorded under capital leases including $17.5 million related to buildings and improvements, $0.7 million related to equipment. Capital leases are recorded net of accumulated amortization of $4.7 million and $3.9 million, at January 2, 2011 and January 3, 2010, respectively. Depreciation expense related to capital leases for the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008 was $0.8 million, $0.8 million and $0.9 million, respectively and is included in Depreciation and Amortization in the accompanying statements of income.
7.  Assets Held for Sale
The Company records its assets held for sale at the lower of cost or estimated fair value. The Company estimates fair value by using third party appraisers or other valuation techniques. The Company does not record depreciation for its assets held for sale.
As of January 2, 2011, the Company’s assets held for sale consisted of two assets:
On March 17, 2008, the Company purchased its former Coke County Juvenile Justice Center (the “Center”) at a cost of $3.1 million. In October 2008, the Company established a formal plan to sell the asset and began active discussions with certain parties interested in purchasing the Center. The Company identified a buyer in 2010 and expects to sell the facility in 2011; however, this sale is subject to the buyer obtaining financingand/or government appropriation. If the buyer is unable to obtain the funds necessary to purchase the Center, the Company will need to locate another buyer. There can be no assurance that the prospective buyer can obtain the financing, no assurance that the Company will be able to locate another buyer in the event that this buyer is not able to obtain the financing and no assurance that the Center will be sold for its carrying value. The Center is included in the segment assets of U.S. Detention & Corrections and was recorded at its net realizable value of $3.1 million at January 2, 2011 and at January 3, 2010.
On August 12, 2010, the Company acquired the Washington D.C. Facility in connection with its purchase of Cornell. This facility met the criteria as held for sale during the Company’s fiscal year ended January 2, 2011 and has been designated as such. The carrying value of this asset as of January 2, 2011 was $6.9 million. The Company believes it has found a third party buyer and expects to close on the sale in early 2011. The sale of this property, which is recorded as an asset held for sale with GEO Care segment assets, will not result in a gain or loss.
In conjunction with the acquisition of CSC in November 2005, the Company acquired land associated with a program that had been discontinued by CSC in October 2003. The land, with a corresponding carrying value of $1.3 million, was sold in October 2010 for $2.1 million, net of sales costs. The Company recognized a gain on the sale of the land of $0.8 million which is included in operating expenses in the accompanying statement of income. The gain on the sale is reported in the Company’s U.S. Detention & Corrections reportable segment.
8.  Investment in Direct Finance Leases
The Company’s investment in direct finance leases relates to the financing and management of one Australian facility. The Company’s wholly-owned Australian subsidiary financed the facility’s development with long-term debt obligations, which are non-recourse to the Company.


110

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The future minimum rentals to be received are as follows:
     
  Annual
 
Fiscal Year Repayment 
  (In thousands) 
 
2011 $8,548 
2012  8,652 
2013  8,792 
2014  8,968 
2015  9,560 
Thereafter  12,544 
     
Total minimum obligation $57,064 
Less unearned interest income  (14,724)
Less current portion of direct finance lease  (4,796)
     
Investment in direct finance lease $37,544 
     
9.  Derivative Financial Instruments
In November 2009, the Company executed three interest rate swap agreements (the “Agreements”) in the aggregate notional amount of $75.0 million. In January 2010, the Company executed a fourth interest rate swap agreement in the notional amount of $25.0 million. The Company has designated these interest rate swaps as hedges against changes in the fair value of a designated portion of the 73/4% Senior Notes due 2017 (“73/4% Senior Notes”) due to changes in underlying interest rates. The Agreements, which have payment, expiration dates and call provisions that mirror the terms of the Notes, effectively convert $100.0 million of the Notes into variable rate obligations. Each of the swaps has a termination clause that gives the counterparty the right to terminate the interest rate swaps at fair market value, under certain circumstances. In addition to the termination clause, the Agreements also have call provisions which specify that the lender can elect to settle the swap for the call option price. Under the Agreements, the Company receives a fixed interest rate payment from the financial counterparties to the agreements equal to 73/4% per year calculated on the notional $100.0 million amount, while it makes a variable interest rate payment to the same counterparties equal to the three-month LIBOR plus a fixed margin of between 4.16% and 4.29%, also calculated on the notional $100.0 million amount. Changes in the fair value of the interest rate swaps are recorded in earnings along with related designated changes in the value of the Notes. Total net gains (loss) recognized and recorded in earnings related to these fair value hedges was $5.2 million and $(1.9) million in the fiscal periods ended January 2, 2011 and January 3, 2010, respectively. As of January 2, 2011 and January 3, 2010, the fair value of the swap assets (liabilities) was $3.3 million and $(1.9) million, respectively. There was no material ineffectiveness of these interest rate swaps during the fiscal periods ended January 2, 2011.
The Company’s Australian subsidiary is a party to an interest rate swap agreement to fix the interest rate on the variable rate non-recourse debt to 9.7%. The Company has determined the swap, which has a notional amount of $50.9 million, payment and expiration dates, and call provisions that coincide with the terms of the non-recourse debt to be an effective cash flow hedge. Accordingly, the Company records the change in the value of the interest rate swap in accumulated other comprehensive income, net of applicable income taxes. Total net unrealized gain (loss) recognized in the periods and recorded in accumulated other comprehensive income, net of tax, related to these cash flow hedges was $(0.1) million, $1.2 million and ($3.5) million for the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, respectively. The total value of the Australia swap asset as of January 2, 2011 and January 3, 2010 was $1.8 million and $2.0 million, respectively, and is recorded as a component of other assets in the accompanying consolidated balance sheets. There was no material ineffectiveness of this interest rate swap for the fiscal periods presented. The Company


111

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
does not expect to enter into any transactions during the next twelve months which would result in the reclassification into earnings or losses associated with this swap currently reported in accumulated other comprehensive income (loss).
During the fiscal year ended January 3, 2010, the Company received proceeds of $1.7 million for the settlement of an aggregate notional amount of $50.0 million of interest rate swaps related to its $150.0 million 81/4% Senior Notes due 2013 (“81/4% Senior Notes”). The lenders to these swap agreements elected to prepay their obligations at the call option price which equaled the fair value at the respective call dates.
10.  Goodwill and Other Intangible Assets, Net
Changes in the Company’s goodwill balances for 2010 were as follows (in thousands):
                     
        Purchase price
  Foreign
    
        allocation
  currency
    
  January 3, 2010  Acquisitions  adjustment  translation  January 2, 2011 
 
U.S. Detention & Corrections $21,692  $153,882  $1,126  $—  $176,700 
GEO Care  17,729   50,500   (744)  —   67,485 
International Services  669   —   —   93   762 
                     
Total Goodwill $40,090  $204,382  $382  $93  $244,947 
                     
On August 12, 2010, the Company acquired Cornell and recorded $204.7 million in goodwill representing the strategic benefits of the Merger including the combined Company’s increased scale and the diversification of service offerings. During the fiscal year ended January 2, 2011, the Company made adjustments to its purchase accounting in the amount of $0.4 million, net, primarily related to Cornell. Among other adjustments, this change in allocation resulted from the Company’s analyses primarily related to certain receivables, intangible assets, insurance liabilities and certain income and non-income tax items.


112

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Intangible assets consisted of the following (in thousands):
                     
  Useful Life
  U.S. Detention &
  International
       
  in Years  Corrections  Services  GEO Care  Total 
 
Facility management contracts  1-17  $14,450  $2,468  $6,600  $23,518 
Covenants not to compete  4   1,470   —   —   1,470 
                     
Gross carrying value as of January 3, 2010      15,920   2,468   6,600   24,988 
                     
Changes during fiscal year ended January 2, 2011 due to:                    
Facility management contracts acquired  12-13   35,400   —   34,700   70,100 
Covenants not to compete related to Cornell acquisition  1-2   2,879   —   2,821   5,700 
Foreign currency translation      —   286   —   286 
                     
Gross carrying value at January 2, 2011      54,199   2,754   44,121   101,074 
Accumulated amortization expense      (10,146)  (325)  (2,790)  (13,261)
                     
Net carrying value at January 2, 2011     $44,053  $2,429  $41,331  $87,813 
                     
As of January 2, 2011, the weighted average period before the next contract renewal or extension for all of the Company’s the facility management contracts was approximately 1.5 years. Although the facility management contracts acquired have renewal and extension terms in the near term, the Company has historically maintained these relationships beyond the contractual periods.
Accumulated amortization expense in total and by asset class is as follows (in thousands):
                 
  U.S. Detention &
  International
       
  Corrections  Services  GEO Care  Total 
 
Facility management contracts $9,496  $325  $2,153  $11,974 
Covenants not to compete  650   —   637   1,287 
                 
Total accumulated amortization expense $10,146  $325  $2,790  $13,261 
                 
Amortization expense was $5.7 million, $2.0 million and $1.8 million for the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, respectively, and primarily related to the U.S. Detention & Corrections amortization of intangible assets for acquired management contracts.


113

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Estimated amortization expense related to the Company’s finite-lived intangible assets for fiscal year 2011 through fiscal year 2015 and thereafter is as follows (in thousands):
                 
  U.S. Detention &
  International
       
  Corrections -
  Services -
  GEO Care -
    
  Expense
  Expense
  Expense
  Total Expense
 
Fiscal Year Amortization  Amortization  Amortization  Amortization 
 
2011 $5,783  $151  $4,984  $10,918 
2012  4,894   151   4,185   9,230 
2013  3,556   151   3,236   6,943 
2014  3,556   151   3,096   6,803 
2015  3,556   151   3,065   6,772 
Thereafter  22,708   1,674   22,765   47,147 
                 
  $44,053  $2,429  $41,331  $87,813 
                 
11.  Fair Value of Assets and Liabilities
The Company is required to measure certain of its financial assets and liabilities at fair value on a recurring basis. The Company does not have any financial assets and liabilities which it carries and measures at fair value using Level 1 techniques, as defined above. The investments included in the Company’s Level 2 fair value measurements consist of an interest rate swap held by the Company’s Australian subsidiary, an investment in Canadian dollar denominated fixed income securities and a guaranteed investment contract which is a restricted investment related to CSC of Tacoma LLC discussed further in Note 14. The Company does not have any Level 3 financial assets or liabilities it measures on a recurring basis.
The following table provides a summary of the Company’s significant financial assets and liabilities carried at fair value and measured on a recurring basis (in thousands):
                 
    Fair Value Measurements at January 2, 2011
  Carrying
 Quoted Prices in
 Significant Other
 Significant
  Value at
 Active Markets
 Observable Inputs
 Unobservable
  January 2, 2011 (Level 1) (Level 2) Inputs (Level 3)
 
Assets:                
Interest rate swap derivative assets $5,131  $—  $5,131  $— 
Investments other than derivatives $7,533  $—   7,533  $— 
                 
    Fair Value Measurements at January 3, 2010
  Carrying
 Quoted Prices in
 Significant Other
 Significant
  Value at
 Active Markets
 Observable Inputs
 Unobservable
  January 3, 2010 (Level 1) (Level 2) Inputs (Level 3)
 
Assets:                
Interest rate swap derivative assets $2,020  $—  $2,020  $— 
Investments other than derivatives $7,269  $—  $7,269  $— 
Liabilities:                
Interest rate swap derivative liabilities $1,887  $—  $1,887  $— 


114

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12.  Financial Instruments
The Company’s balance sheet reflects certain financial instruments at carrying value. The following table presents the carrying values of those instruments and the corresponding fair values (in thousands):
         
  January 2, 2011
  Carrying
 Estimated
  Value Fair Value
 
Assets:        
Cash and cash equivalents $39,664  $39,664 
Restricted cash and investments, including current portion  90,642   90,642 
Liabilities:        
Borrowings under the Senior Credit Facility $557,758  $562,610 
73/4% Senior Notes
  250,078   265,000 
Non-recourse debt, Australian subsidiary  46,300   46,178 
Other non-recourse debt, including current portion  176,384   180,340 
         
  January 3, 2010
  Carrying
 Estimated
  Value Fair Value
 
Assets:        
Cash and cash equivalents $33,856  $33,856 
Cash, Restricted, including current portion  34,068   34,068 
Liabilities:        
Borrowings under the Senior Credit Facility $212,963  $203,769 
73/4% Senior Notes
  250,000   255,000 
Non-recourse debt, including current portion  113,724   113,360 
The fair values of the Company’s Cash and cash equivalents, and Restricted cash and investments approximate the carrying values of these assets at January 2, 2011 and January 3, 2010 due to the short-term nature of these instruments. The fair values of 73/4% Senior Notes and Other non-recourse debt are based on market prices, where available. The fair value of the non-recourse debt related to the Company’s Australian subsidiary is estimated using a discounted cash flow model based on current Australian borrowing rates for similar instruments. The fair value of the borrowings under the Senior Credit Facility is based on an estimate of trading value considering the company’s borrowing rate, the undrawn spread and similar market instruments.
13.  Accrued Expenses
Accrued expenses consisted of the following (in thousands):
         
  2010  2009 
 
Accrued interest $12,153  $5,913 
Accrued bonus  12,825   8,567 
Accrued insurance  44,237   30,661 
Accrued property and other taxes  15,723   5,219 
Construction retainage  2,012   8,250 
Other  34,697   22,149 
         
Total $121,647  $80,759 
         


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14.  Debt
Debt consisted of the following (in thousands):
         
  2010  2009 
 
Capital Lease Obligations $14,470  $15,124 
Senior Credit Facility:
        
Term loans  347,625   — 
Discount on term loan  (1,867)  154,963 
Revolver  212,000   58,000 
         
Total Senior Credit Facility $557,758  $212,963 
73/4% Senior Notes
        
Notes Due in 2017  250,000   250,000 
Discount on Notes  (3,227)  (3,566)
Swap on Notes  3,305   (1,887)
         
Total 73/4% Senior Notes
 $250,078  $244,547 
Non-Recourse Debt :
        
Non-recourse debt $212,445  $113,724 
Premium on non-recourse debt  11,403   — 
Discount on non-recourse debt  (1,164)  (1,692)
         
Total non recourse debt  222,684   112,032 
Other debt  —   28 
         
Total debt $1,044,990  $584,694 
         
Current portion of capital lease obligations, long-term debt and non-recourse debt  (41,574)  (19,624)
Capital lease obligations, long-term portion  (13,686)  (14,419)
Non-recourse debt  (191,394)  (96,791)
         
Long-term debt $798,336  $453,860 
         
Senior Credit Facility
On August 4, 2010, the Company executed a new $750.0 million senior credit facility (the “Senior Credit Facility”), through the execution of a Credit Agreement, by and among GEO, as Borrower, BNP Paribas, as Administrative Agent, and the lenders who are, or may from time to time become, a party thereto. The Senior Credit Facility is comprised of (i) a $150.0 million Term Loan A (“Term Loan A”), initially bearing interest at LIBOR plus 2.5% and maturing August 4, 2015, (ii) a $200.0 million Term Loan B (“Term Loan B”) initially bearing interest at LIBOR plus 3.25% with a LIBOR floor of 1.50% and maturing August 4, 2016 and (iii) a Revolving Credit Facility (“Revolver”) of $400.0 million initially bearing interest at LIBOR plus 2.5% and maturing August 4, 2015.


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THE GEO GROUP, INC.
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Indebtedness under the Revolver and the Term Loan A bears interest based on the Total Leverage Ratio as of the most recent determination date, as defined, in each of the instances below at the stated rate:
Interest Rate under the Revolver and Term Loan A
LIBOR borrowingsLIBOR plus 2.00% to 3.00%.
Base rate borrowingsPrime Rate plus 1.00% to 2.00%.
Letters of credit2.00% to 3.00%.
Unused Revolver0.375% to 0.50%.
The Senior Credit Facility contains certain customary representations and warranties, and certain customary covenants that restrict the Company’s ability to, among other things as permitted (i) create, incur or assume indebtedness, (ii) create, incur, assume or permit liens, (iii) make loans and investments, (iv) engage in mergers, acquisitions and asset sales, (v) make restricted payments, (vi) issue, sell or otherwise dispose of capital stock, (vii) engage in transactions with affiliates, (viii) allow the total leverage ratio or senior secured leverage ratio to exceed certain maximum ratios or allow the interest coverage ratio to be less than 3.00 to 1.00, (ix) cancel, forgive, make any voluntary or optional payment or prepayment on, or redeem or acquire for value any senior notes, (x) alter the business the Company conducts, and (xi) materially impair the Company’s lenders’ security interests in the collateral for its loans.
The Company must not exceed the following Total Leverage Ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:
Total Leverage Ratio -
PeriodMaximum Ratio
August 4, 2010 through and including the last day of the fiscal year 20114.50 to 1.00
First day of fiscal year 2012 through and including that last day of fiscal year 20124.25 to 1.00
Thereafter4.00 to 1.00
The Senior Credit Facility also does not permit the Company to exceed the following Senior Secured Leverage Ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:
Senior Secured Leverage Ratio -
PeriodMaximum Ratio
August 4, 2010 through and including the last day of the fiscal year 20113.25 to 1.00
First day of fiscal year 2012 through and including that last day of fiscal year 20123.00 to 1.00
Thereafter2.75 to 1.00
Additionally, there is an Interest Coverage Ratio under which the lender will not permit a ratio of less than 3.00 to 1.00 relative to (a) Adjusted EBITDA for any period of four consecutive fiscal quarters to (b) Interest Expense, less that attributable to non-recourse debt of unrestricted subsidiaries.
Events of default under the Senior Credit Facility include, but are not limited to, (i) the Company’s failure to pay principal or interest when due, (ii) the Company’s material breach of any representations or warranty, (iii) covenant defaults, (iv) liquidation, reorganization or other relief relating to bankruptcy or insolvency, (v) cross default under certain other material indebtedness, (vi) unsatisfied final judgments over a specified threshold, (vii) material environmental liability claims which have been asserted against the Company, and (viii) a change in control. All of the obligations under the Senior Credit Facility are unconditionally guaranteed by certain of the Company’s subsidiaries and secured by substantially all of the Company’s present and future tangible and intangible assets and all present and future tangible and intangible


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assets of each guarantor, including but not limited to (i) a first-priority pledge of substantially all of the outstanding capital stock owned by the Company and each guarantor, and (ii) perfected first-priority security interests in substantially all of the Company’s, and each guarantors, present and future tangible and intangible assets and the present and future tangible and intangible assets of each guarantor. The Company’s failure to comply with any of the covenants under its Senior Credit Facility could cause an event of default under such documents and result in an acceleration of all of outstanding senior secured indebtedness. The Company believes it was in compliance with all of the covenants of the Senior Credit Facility as of January 2, 2011.
On August 4, 2010 in connection with its entry into the $750.0 million Senior Credit Facility, the Company terminated its prior senior credit facility, the Third Amended and Restated Credit Agreement (the “Prior Senior Credit Agreement”), dated as of January 24, 2007, as amended. The Prior Senior Credit Agreement, as of August 4, 2010, consisted of a $152.2 million term loan B (“Prior Term Loan B”) and a $330.0 million revolver (“Prior Revolver”) with outstanding borrowings on August 4, 2010 of $115.0 million. The Prior Term Loan B bore interest at LIBOR plus 2.00% and the Prior Revolver bore interest at LIBOR plus 3.25% at the time of terminating the Prior Senior Credit Agreement. The Prior Term Loan B component was scheduled to mature in January 2014 and the Prior Revolver component was scheduled to mature in September 2012. The weighed average interest rate on outstanding borrowings under the Senior Credit Facility, as amended, as of January 2, 2011 was 3.5%. The weighed average interest rate on outstanding borrowings under the, Prior Senior Credit Agreement as of January 3, 2010 was 2.62%.
On August 4, 2010, the Company used approximately $280 million in aggregate proceeds from the Term Loan B and the Revolver primarily to repay existing borrowings and accrued interest under its Prior Senior Credit Agreement of $267.7 million and also used $6.7 million for financing fees related to the Senior Credit Facility. The Company received, as cash, the remaining proceeds of $3.2 million. On August 12, 2010, the Company borrowed $290.0 million under its Senior Credit Facility and used the aggregate cash proceeds primarily for $84.9 million in cash consideration payments to Cornell’s stockholders in connection with the Merger, transaction costs of approximately $14.0 million, the repayment of $181.9 million for Cornell’s 10.75% Senior Notes due July 2012 plus accrued interest and Cornell’s Revolving Line of Credit due December 2011 plus accrued interest. As of January 2, 2011, the Company had $148.1 million outstanding under the Term Loan A, $199.5 million outstanding under the Term Loan B, and its $400.0 million Revolver had $212.0 million outstanding in loans, $57.0 million outstanding in letters of credit and $131.0 million available for borrowings. The Company intends to use future borrowings for the purposes permitted under the Senior Credit Facility, including for general corporate purposes. The Company wrote off $7.9 million in deferred financing costs related to the termination of the Prior Senior Credit Agreement.
73/4% Senior Notes
On October 20, 2009, the Company completed a private offering of $250.0 million in aggregate principal amount of its 73/4% Senior Notes due 2017. These senior unsecured notes pay interest semi-annually in cash in arrears on April 15 and October 15 of each year, beginning on April 15, 2010. The Company realized net proceeds of $246.4 million at the close of the transaction, net of the discount on the notes of $3.6 million. The Company used the net proceeds of the offering to fund the repurchase of all of its 81/4% Senior Notes due 2013 and pay down part of the Revolving Credit Facility under our Prior Senior Credit Agreement.
The 73/4% Senior Notes and the guarantees will be unsecured, unsubordinated obligations of The GEO Group Inc., and the guarantors and will rank as follows: pari passu with any unsecured, unsubordinated indebtedness of GEO and the guarantors; senior to any future indebtedness of GEO and the guarantors that is expressly subordinated to the notes and the guarantees; effectively junior to any secured indebtedness of GEO and the guarantors, including indebtedness under the Company’s Senior Credit Facility, to the extent of the value of the assets securing such indebtedness; and effectively junior to all obligations of the Company’s subsidiaries that are not guarantors. After October 15, 2013, the Company may, at its option, redeem all or a part of the 73/4% Senior Notes upon not less than 30 nor more than 60 days’ notice, at the redemption prices


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest and liquidated damages, if any, on the 73/4% Senior Notes redeemed, to the applicable redemption date, if redeemed during the12-month period beginning on October 15 of the years indicated below:
     
Year Percentage 
 
2013  103.875%
2014  101.938%
2015 and thereafter  100.000%
Before October 15, 2013, the Company may redeem some or all of the 73/4% Senior Notes at a redemption price equal to 100% of the principal amount of each note to be redeemed plus a make-whole premium described under “Description of Notes — Optional Redemption” together with accrued and unpaid interest. In addition, at any time prior to October 15, 2012, the Company may redeem up to 35% of the notes with the net cash proceeds from specified equity offerings at a redemption price equal to 107.750% of the principal amount of each note to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption.
The indenture governing the notes contains certain covenants, including limitations and restrictions on the Company’s and its restricted subsidiaries’ ability to: incur additional indebtedness or issue preferred stock; make dividend payments or other restricted payments; create liens; sell assets; enter into transactions with affiliates; and enter into mergers, consolidations, or sales of all or substantially all of the Company’s assets. As of the date of the indenture, all of the Company’s subsidiaries, other than certain dormant domestic subsidiaries and all foreign subsidiaries in existence on the date of the indenture, were restricted subsidiaries. The Company’s unrestricted subsidiaries will not be subject to any of the restrictive covenants in the indenture. The Company’s failure to comply with certain of the covenants under the indenture governing the 73/4% Notes could cause an event of default of any indebtedness and result in an acceleration of such indebtedness. In addition, there is a cross-default provision which becomes enforceable upon failure of payment of indebtedness at final maturity. The Company believes it was in compliance with all of the covenants of the Indenture governing the 73/4% Senior Notes as of January 2, 2011.
Non-Recourse Debt
South Texas Detention Complex:
The Company has a debt service requirement related to the development of the South Texas Detention Complex, a 1,904-bed detention complex in Frio County, Texas, acquired in November 2005 from Correctional Services Corporation (“CSC”). CSC was awarded the contract in February 2004 by the Department of Homeland Security, U.S. Immigration and Customs Enforcement (“ICE”) for development and operation of the detention center. In order to finance its construction of the complex, STLDC was created and issued $49.5 million in taxable revenue bonds. These bonds mature in February 2016 and have fixed coupon rates between 4.34% and 5.07%. Additionally, the Company is owed $5.0 million of subordinated notes by STLDC which represents the principal amount of financing provided to STLDC by CSC for initial development.
The Company has an operating agreement with STLDC, the owner of the complex, which provides it with the sole and exclusive right to operate and manage the detention center. The operating agreement and bond indenture require the revenue from the contract with ICE be used to fund the periodic debt service requirements as they become due. The net revenues, if any, after various expenses such as trustee fees, property taxes and insurance premiums are distributed to the Company to cover operating expenses and management fees. The Company is responsible for the entire operation of the facility including the payment of all operating expenses whether or not there are sufficient revenues. STLDC has no liabilities resulting from its ownership. The bonds have a ten-year term and are non-recourse to the Company and STLDC. The bonds are fully insured and the sole source of payment for the bonds is the operating revenues of the center. At the end of the ten-year term of the bonds, title and ownership of the facility transfers from STLDC to the Company. The Company has determined that it is the primary beneficiary of STLDC and consolidates the entity as a


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
result. The carrying value of the facility as of January 2, 2011 and January 3, 2010 was $27.0 million and $27.2 million, respectively, and is included in property and equipment in the accompanying balance sheets.
On February 1, 2010, STLDC made a payment from its restricted cash account of $4.6 million for the current portion of its periodic debt service requirement in relation to the STLDC operating agreement and bond indenture. As of January 2, 2011, the remaining balance of the debt service requirement under the STLDC financing agreement is $32.1 million, of which $4.8 million is due within the next twelve months. Also, as of January 2, 2011, included in current restricted cash and non-current restricted cash is $6.2 million and $9.3 million, respectively, of funds held in trust with respect to the STLDC for debt service and other reserves.
Northwest Detention Center
On June 30, 2003, CSC arranged financing for the construction of the Northwest Detention Center in Tacoma, Washington, referred to as the Northwest Detention Center, which was completed and opened for operation in April 2004. The Company began to operate this facility following its acquisition in November 2005. In connection with the original financing, CSC of Tacoma LLC, a wholly owned subsidiary of CSC, issued a $57.0 million note payable to the Washington Economic Development Finance Authority (“WEDFA”), an instrumentality of the State of Washington, which issued revenue bonds and subsequently loaned the proceeds of the bond issuance back to CSC for the purposes of constructing the Northwest Detention Center. The bonds are non-recourse to the Company and the loan from WEDFA to CSC is non-recourse to the Company. These bonds mature in February 2014 and have fixed coupon rates between 3.80% and 4.10%.
The proceeds of the loan were disbursed into escrow accounts held in trust to be used to pay the issuance costs for the revenue bonds, to construct the Northwest Detention Center and to establish debt service and other reserves. On October 1, 2010, CSC of Tacoma LLC made a payment from its restricted cash account of $5.9 million for the current portion of its periodic debt service requirement in relation to the WEDFA bond indenture. As of January 2, 2011, the remaining balance of the debt service requirement is $25.7 million, of which $6.1 million is classified as current in the accompanying balance sheet.
As of January 2, 2011, included in current restricted cash and non-current restricted cash is $7.1 million and $1.8 million, respectively, of funds held in trust with respect to the Northwest Detention Center for debt service and other reserves.
MCF
Upon completion of the acquisition of Cornell, the obligations of MCF under its 8.47% Revenue Bonds remained outstanding. These bonds bear interest at a rate of 8.47% per annum and are payable in semi-annual installments of interest and annual installments of principal. All unpaid principal and accrued interest on the bonds is due on the earlier of August 1, 2016 (maturity) or as noted under the bond documents. The bonds are limited, nonrecourse obligations of MCF and are collateralized by the property and equipment, bond reserves, assignment of subleases and substantially all assets related to the facilities owned by MCF. The bonds are not guaranteed by the Company or its subsidiaries.
The 8.47% Revenue Bond indenture provides for the establishment and maintenance by MCF for the benefit of the trustee under the indenture of a debt service reserve fund. As of January 2, 2011, the debt service reserve fund has a balance of $23.4 million. The debt service reserve fund is available to the trustee to pay debt service on the 8.47% Revenue Bonds when needed, and to pay final debt service on the 8.47% Revenue Bonds. If MCF is in default in its obligation under the 8.47% Revenue Bonds indenture, the trustee may declare the principal outstanding and accrued interest immediately due and payable. MCF has the right to cure a default of non-payment obligations. The 8.47% Revenue Bonds are subject to extraordinary mandatory redemption in certain instances upon casualty or condemnation. The 8.47% Revenue Bonds may be redeemed at the option of MCF prior to their final scheduled payment dates at par plus accrued interest plus a make-whole premium.


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Australia
The Company’s wholly-owned Australian subsidiary financed the development of a facility and subsequent expansion in 2003 with long-term debt obligations. These obligations are non-recourse to the Company and total $46.3 million and $45.4 million at January 2, 2011 and January 3, 2010, respectively. The term of the non-recourse debt is through 2017 and it bears interest at a variable rate quoted by certain Australian banks plus 140 basis points. Any obligations or liabilities of the subsidiary are matched by a similar or corresponding commitment from the government of the State of Victoria. As a condition of the loan, the Company is required to maintain a restricted cash balance of AUD 5.0 million, which, at January 2, 2011, was $5.1 million. This amount is included in non-current restricted cash and the annual maturities of the future debt obligation are included in non-recourse debt.
Debt Repayment
Debt repayment schedules under capital lease obligations, long-term debt and non-recourse debt are as follows:
                         
  Capital
  Long-Term
  Non-
     Term
  Total Annual
 
Fiscal Year Leases  Debt  Recourse  Revolver  Loan  Repayment 
        (In thousands)       
 
2011 $1,950  $—  $31,290  $—  $9,500  $42,740 
2012  1,950   —   33,281   —   11,375   46,606 
2013  1,950   —   35,616   —   20,750   58,316 
2014  1,940   —   38,002   —   47,000   86,942 
2015  1,932   —   33,878   212,000   116,500   364,310 
Thereafter  12,842   250,000   40,378   —   142,500   445,720 
                         
  $22,564  $250,000  $212,445  $212,000  $347,625  $1,044,634 
                         
Original issuer’s discount  —   (3,227)  (1,164)  —   (1,867)  (6,258)
Current portion  (784)  —   (31,290)  —   (9,500)  (41,574)
Interest imputed on Capital Leases  (8,094)  —   —   —   —   (8,094)
Fair value premium on non-recourse debt  —   —   11,403   —   —   11,403 
Interest rate swap  —   3,305   —   —   —   3,305 
                         
Non-current portion $13,686  $250,078  $191,394  $212,000  $336,258  $1,003,416 
                         
Guarantees
In connection with the creation SACS, the Company entered into certain guarantees related to the financing, construction and operation of the prison. The Company guaranteed certain obligations of SACS under its debt agreements up to a maximum amount of 60.0 million South African Rand, or $9.1 million, to SACS’ senior lenders through the issuance of letters of credit. Additionally, SACS is required to fund a restricted account for the payment of certain costs in the event of contract termination. The Company has guaranteed the payment of 60% of amounts which may be payable by SACS into the restricted account and provided a standby letter of credit of 8.4 million South African Rand, or $1.3 million, as security for its guarantee. The Company’s obligations under this guarantee are indexed to the CPI and expire upon SACS’ release from its obligations in respect of the restricted account under its debt agreements. No amounts have been drawn against these letters of credit, which are included in the Company’s outstanding letters of credit under its Revolver.


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has agreed to provide a loan, of up to 20.0 million South African Rand, or $3.0 million (the “Standby Facility”), to SACS for the purpose of financing SACS’ obligations under its contract with the South African government. No amounts have been funded under the Standby Facility, and the Company does not currently anticipate that such funding will be required by SACS in the future. The Company’s obligations under the Standby Facility expire upon the earlier of full funding or SACS’ release from its obligations under its debt agreements. The lenders’ ability to draw on the Standby Facility is limited to certain circumstances, including termination of the contract.
The Company has also guaranteed certain obligations of SACS to the security trustee for SACS’ lenders. The Company secured its guarantee to the security trustee by ceding its rights to claims against SACS in respect of any loans or other finance agreements, and by pledging the Company’s shares in SACS. The Company’s liability under the guarantee is limited to the cession and pledge of shares. The guarantee expires upon expiration of the cession and pledge agreements.
In connection with a design, build, finance and maintenance contract for a facility in Canada, the Company guaranteed certain potential tax obligations of anot-for-profit entity. The potential estimated exposure of these obligations is Canadian Dollar (“CAD”) 2.5 million, or $2.5 million, commencing in 2017. The Company has a liability of $1.8 million and $1.5 million related to this exposure as of January 2, 2011 and January 3, 2010, respectively. To secure this guarantee, the Company purchased Canadian dollar denominated securities with maturities matched to the estimated tax obligations in 2017 to 2021. The Company has recorded an asset and a liability equal to the current fair market value of those securities on its consolidated balance sheet. The Company does not currently operate or manage this facility.
At January 2, 2011, the Company also had seven letters of guarantee outstanding under separate international facilities relating to performance guarantees of its Australian subsidiary totaling $9.4 million. The Company does not have any off balance sheet arrangements.
15.  Commitments and Contingencies
Operating Leases
The Company leases correctional facilities, office space, computers and transportation equipment under non-cancelable operating leases expiring between 2011 and 2046. The future minimum commitments under these leases are as follows:
     
Fiscal Year Annual Rental 
  (In thousands) 
 
2011 $30,948 
2012  29,774 
2013  25,019 
2014  17,798 
2015  16,416 
Thereafter  61,226 
     
  $181,181 
     
The Company’s corporate offices are located in Boca Raton, Florida, under a lease agreement which was amended in September 2010. The current lease expires in March 2020 and has two5-year renewal options for a full term ending March 2030. In addition, the Company leases office space for its regional offices in Charlotte, North Carolina; San Antonio, Texas; and Los Angeles, California. As a result of the Company’s acquisition of Cornell in August 2010, the Company is also currently leasing office space in Houston, Texas and Pittsburg, Pennsylvania. The Company also leases office space in Sydney, Australia, Sandton, South


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Africa, and Berkshire, England through its overseas affiliates to support its Australian, South African, and UK operations, respectively. These rental commitments are included in the table above. Certain of these leases contain leasehold improvement incentives, rent holidays, and scheduled rent increases which are included in the Company’s rent expense recognized on a straight-line basis. Minimum rent expense associated with the Company’s leases having initial or remaining non-cancelable lease terms in excess of one year was $25.4 million, $18.7 million and $18.5 million for fiscal years 2010, 2009 and 2008, respectively.
Litigation, Claims and Assessments
In June 2004, the Company received notice of a third-party claim for property damage incurred during 2001 and 2002 at several detention facilities formerly operated by its Australian subsidiary. The claim relates to property damage caused by detainees at the detention facilities. The notice was given by the Australian government’s insurance provider and did not specify the amount of damages being sought. In August 2007, a lawsuit (Commonwealth of Australia v. Australasian Connectional Services PTY, Limited No. SC 656) was filed against the Company in the Supreme Court of the Australian Capital Territory seeking damages of up to approximately AUD 18 million, as of January 2, 2011, or $18.4 million, plus interest. The Company believes that it has several defenses to the allegations underlying the litigation and the amounts sought and intends to vigorously defend its rights with respect to this matter. The Company has established a reserve based on its estimate of the most probable loss based on the facts and circumstances known to date and the advice of legal counsel in connection with this matter. Although the outcome of this matter cannot be predicted with certainty, based on information known to date and the Company’s preliminary review of the claim and related reserve for loss, the Company believes that, if settled unfavorably, this matter could have a material adverse effect on its financial condition, results of operations or cash flows. The Company is uninsured for any damages or costs that it may incur as a result of this claim, including the expenses of defending the claim.
During the fourth fiscal quarter of 2009, the Internal Revenue Service (“IRS”) completed its examination of the Company’s U.S. federal income tax returns for the years 2002 through 2005. Following the examination, the IRS notified the Company’s management that it proposed to disallow a deduction that the Company realized during the 2005 tax year. In December of 2010, the Company reached an agreement with the office of IRS Appeals on the amount of the deduction, which is currently being reviewed at a higher level. As a result of the pending agreement, the Company reassessed the probability of potential settlement outcomes and reduced its income tax accrual of $4.9 million by $2.3 million during the fourth quarter of 2010. However, if the disallowed deduction were to be sustained in full, it could result in a potential tax exposure to the Company of $15.4 million. The Company believes in the merits of its position and intends to defend its rights vigorously, including its rights to litigate the matter if it cannot be resolved favorably with the office of IRS Appeals. If this matter is resolved unfavorably, it may have a material adverse effect on the Company’s financial position, results of operations and cash flows.
In October 2010, the IRS audit for the Company’s U.S. income tax returns for fiscal years 2006 through 2008 was concluded and resulted in no changes to the Company’s income tax positions.
The Company’s South Africa joint venture had been in discussions with the South African Revenue Service (“SARS”) with respect to the deductibility of certain expenses for the tax periods 2002 through 2004. The joint venture operates the Kutama Sinthumule Correctional Centre and accepted inmates from the South African Department of Correctional Services in 2002. During 2009, SARS notified the Company that it proposed to disallow these deductions. The Company appealed these proposed disallowed deductions with SARS and in October 2010, received a notice of favorable ruling relative to these proceedings. If SARS should appeal, the Company believes it has defenses in these matters and intends to defend its rights vigorously. If resolved unfavorably, the Company’s maximum exposure would be $2.6 million.
On April 27, 2010, a putative stockholder class action was filed in the District Court for Harris County, Texas by Todd Shelby against Cornell, members of Cornell’s board of directors, individually, and the


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company. The plaintiff filed an amended complaint on May 28, 2010, alleging, among other things, that the Cornell directors, aided and abetted by Cornell and the Company, breached their fiduciary duties in connection with the Cornell Acquisition. Among other things, the amended complaint sought to enjoin Cornell, its directors and the Company from completing the Cornell Acquisition and sought a constructive trust over any benefits improperly received by the defendants as a result of their alleged wrongful conduct. The parties reached a settlement which has been approved by the court and, as a result, the court dismissed the action with prejudice. The settlement of this matter did not have a material adverse impact on our financial condition, results of operations or cash flows.
The nature of the Company’s business exposes it to various types of claims or litigation against the Company, including, but not limited to, civil rights claims relating to conditions of confinementand/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, indemnification claims by its customers and other third parties, contractual claims and claims for personal injury or other damages resulting from contact with the Company’s facilities, programs, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. Except as otherwise disclosed above, the Company does not expect the outcome of any pending claims or legal proceedings to have a material adverse effect on its financial condition, results of operations or cash flows.
Collective Bargaining Agreements
The Company had approximately 17% of its workforce covered by collective bargaining agreements at January 2, 2011. Collective bargaining agreements with four percent of employees are set to expire in less than one year.
Contract Terminations
The following contracts were terminated during the fiscal year ended January 2, 2011. The Company does not expect that the termination of these contracts will have a material adverse impact, individually or in aggregate, on its financial condition, results of operations or cash flows.
On April 4, 2010, the Company’s wholly-owned Australian subsidiary completed the transition of its management of the Melbourne Custody Center (the “Center”) to another service provider. The Center was operated on behalf of the Victoria Police to house prisoners, escort and guard prisoners for the Melbourne Magistrate Courts and to provide primary healthcare.
On April 14, 2010, the Company announced the results of the re-bids of two of its managed-only contracts. The State of Florida has issued a Notice of Intent to Award contracts for the 1,884-bed Graceville Correctional Facility located in Graceville, Florida and the 985-bed Moore Haven Correctional Facility located in Moore Haven, Florida to another operator. These contracts terminated effective September 26, 2010 and August 1, 2010, respectively.
On June 22, 2010, the Company announced the discontinuation of its managed-only contract for the 520-bed Bridgeport Correctional Center in Texas following a competitive re-bid process conducted by the State of Texas. The contract was terminated effective August 31, 2010.
Effective September 1, 2010, the Company’s management contract for the operation of the 450-bed South Texas Intermediate Sanction Facility terminated. This facility was not owned by the Company.
Effective May 29, 2011, the Company’s subsidiary in the United Kingdom will no longer manage the 215-bed Campsfield House Immigration Removal Centre in Kidlington, England.


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Commitments
The Company is currently developing a number of projects using company financing. The Company’s management estimates that these existing capital projects will cost approximately $282.4 million, of which $54.9 million was spent through the end of 2010. The Company estimates the remaining capital requirements related to these capital projects to be approximately $227.5 million, which will be spent through fiscal years 2011 and 2012. Capital expenditures related to facility maintenance costs are expected to range between $20.0 million and $25.0 million for fiscal year 2010. In addition to these current estimated capital requirements for 2011 and 2010, the Company is currently in the process of bidding on, or evaluating potential bids for the design, construction and management of a number of new projects. In the event that the Company wins bids for these projects and decides to self-finance their construction, its capital requirements in 2011 could materially increase.
Consulting agreement with Wayne H. Calabrese
Wayne H. Calabrese, the Company’s former Vice Chairman, President and Chief Operating Officer retired effective December 31, 2010. Mr. Calabrese’s business development and oversight responsibilities were reassigned throughout the Company’s senior management team and existing corporate structure. Mr. Calabrese will continue to work with the Company in a consulting capacity pursuant to a consulting agreement, dated as of August 26, 2010 for a minimum term of one year. Under the terms of the Consulting Agreement, which began on January 3, 2011, Mr. Calabrese provides services to the Company and its subsidiaries for a monthly consulting fee. Services provided include business development and contract administration assistance relative to new and existing contracts.
 
16.  Retirement and Deferred CompensationEarnings Per Share
Basic earnings per share is computed by dividing the income from continuing operations attributable to The GEO Group Inc., shareholders by the weighted average number of outstanding shares of common stock. The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator includes dilutive common stock equivalents such as stock options and shares of restricted stock.


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Basic and diluted earnings per share (“EPS”) were calculated for the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008 as follows (in thousands, except per share data):
             
Fiscal Year 2010  2009  2008 
  (In thousands, except per share data) 
 
Income from continuing operations $62,790  $66,469  $61,829 
Net (income) loss attributable to noncontrolling interests  678   (169)  (376)
             
Income from continuing operations attributable to The GEO Group, Inc.  $63,468  $66,300  $61,453 
Basic earnings per share from continuing operations attributable to The GEO Group, Inc.:            
Weighted average shares outstanding  55,379   50,879   50,539 
             
Per share amount $1.15  $1.30  $1.22 
             
Diluted earnings per share from continuing operations attributable to The GEO Group, Inc.:            
Weighted average shares outstanding  55,379   50,879   50,539 
Effect of dilutive securities:            
Employee and director stock options and restricted stock  610   1,043   1,291 
             
Weighted average shares assuming dilution  55,989   51,922   51,830 
             
Per share amount $1.13  $1.28  $1.19 
             
For the fiscal year ended January 2, 2011, 25,570 weighted average shares of stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. No shares of restricted stock were anti-dilutive.
For the fiscal year ended January 3, 2010, 69,492 weighted average shares of stock underlying options and 107 weighted average shares of restricted stock were excluded from the computation of diluted EPS because the effect would be anti-dilutive.
For the fiscal year December 28, 2008, 372,725 weighted average shares of stock underlying options and 8,986 weighted average shares of restricted stock were excluded from the computation of diluted EPS because the effect would be anti-dilutive.
17.  Benefit Plans
 
The Company has two noncontributorynon-contributory defined benefit pension plans covering certain of the Company’s executives. Retirement benefits are based on years of service, employees’ average compensation for the last five years prior to retirement and social security benefits. Currently, the plans are not funded. The Company purchased and is the beneficiary of life insurance policies for certain participants enrolled in the plans. There were no significant transactions between the employer or related parties and the plan during the periods presented.
 
As of January 2, 2011, the Company had a non-qualified deferred compensation agreement with its Chief Executive Officer (“CEO”) which was modified in 2002, and again in 2003. The current agreement provides for a lump sum payment upon retirement, no sooner than age 55. As of January 2, 2011, the CEO had reached age 55 and was eligible to receive the payment upon retirement. Prior to the effective retirement date of December 31, 2010, Wayne H. Calabrese, the Company’s former Vice Chairman, President and Chief FinancialOperating Officer, John G. O’Rourke retired in August 2009.also had a deferred compensation agreement under the non-qualified deferred compensation plan. As a result of his retirement, the Company paid $3.2$4.4 million representing 100% of thein discounted value of the benefit as ofretirement benefits under his retirement date andnon-qualified deferred compensation agreement, including a gross up of $1.2$1.6 million for certain taxes as specified in the deferred compensation agreement. Including the benefits paid toAs a result of Mr. O’Rourke in August 2009,Calabrese’s retirement, the Company paid a total of $3.3 million in the fiscal year ended January 3, 2010 related to its defined benefit pension plans.
As of January 3, 2010, the Company had non-qualified deferred compensation agreements with two key executives. These agreements were modified in 2002, and again in 2003. The current agreements provide for a lump sum payment when the executives retire, no sooner than age 55. As of January 3, 2010, both executives had reached age 55 and are eligible to receive the payments upon retirement.


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THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recognized $0.3 million in settlement charges. During the fiscal year ended January 2, 2011, the Company repurchased 358,126 shares from Mr. Calabrese under the stock repurchase program for $7.5 million. The Company also purchased 268,475 shares from Mr. Calabrese for $6.1 million which were retired by the Company immediately upon repurchase.
 
The following table summarizes key information related to the Company’s pension plans and retirement agreements. The table illustrates the reconciliation of the beginning and ending balances of the benefit obligation showing the effects during the periods presented attributable to each of the following: service cost, interest cost, plan amendments, termination benefits, actuarial gains and losses. The Company’s liability relative to its pension plans and retirement agreements was $16.2$13.8 million and $19.3$16.2 million as of January 2, 2011 and January 3, 2010, respectively. The long-term portion of the pension liability as of January 2, 2011 and December 28, 2008January 3, 2010 was $13.6 million and $16.0 million, respectively, and is included in Other Non-Current liabilities in the accompanying balance sheets. The assumptions used in the Company’s calculation of accrued pension costs are based on market information and the Company’s historical rates for employment compensation and discount rates, respectively.
 
                
 2009 2008  2010 2009 
Change in Projected Benefit Obligation
                
Projected Benefit Obligation, Beginning of Year $19,320  $17,938  $16,206  $19,320 
Service Cost  563   530   525   563 
Interest Cost  717   654   746   717 
Plan Amendments  —   —   —   — 
Actuarial (Gain) Loss  (1,047)  246   986   (1,047)
Benefits Paid  (3,347)  (48)  (4,633)  (3,347)
          
Projected Benefit Obligation, End of Year $16,206  $19,320  $13,830  $16,206 
          
Change in Plan Assets
                
Plan Assets at Fair Value, Beginning of Year $—  $—  $—  $— 
Company Contributions  3,347   48   4,633   3,347 
Benefits Paid  (3,347)  (48)  (4,633)  (3,347)
          
Plan Assets at Fair Value, End of Year $—  $—  $—  $— 
          
Unfunded Status of the Plan
 $(16,206) $(19,320) $(13,830) $(16,206)
          
Amounts Recognized in Accumulated Other Comprehensive Income
                
Prior Service Cost  41   82   —   41 
Net Loss  1,014   2,551   1,671   1,014 
          
Total Pension Cost $1,055  $2,633  $1,671  $1,055 
          
 
         
  Fiscal 2009  Fiscal 2008 
 
Components of Net Periodic Benefit Cost
        
Service Cost $563  $530 
Interest Cost  717   654 
Amortization of:        
Prior Service Cost  41   41 
Net Loss  249   249 
Settlements  241   — 
         
Net Periodic Pension Cost $1,811  $1,474 
         
Weighted Average Assumptions for Expense
        
Discount Rate  5.75%  5.75%
Expected Return on Plan Assets  N/A   N/A 
Rate of Compensation Increase  4.50%  5.50%


103127

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
         
  Fiscal 2010  Fiscal 2009 
 
Components of Net Periodic Benefit Cost
        
Service Cost $525  $563 
Interest Cost  746   717 
Amortization of:        
Prior Service Cost  41   41 
Net Loss  33   249 
Settlements  297   241 
         
Net Periodic Pension Cost $1,642  $1,811 
         
Weighted Average Assumptions for Expense
        
Discount Rate  5.75%  5.75%
Expected Return on Plan Assets  N/A   N/A 
Rate of Compensation Increase  4.50%  4.50%
The amount included in other accumulated comprehensive income as of January 3, 20102, 2011 that is expected to be recognized as a component of net periodic benefit cost in fiscal year 20102011 is $0.1$0.2 million.
 
The benefit payments reflected in the table below represent the Company’s obligations to employees that are eligible for retirement or have already retired and are receiving deferred compensation benefits:
 
        
 Pension
  Pension
 
Fiscal Year
 Benefits  Benefits 
 (In thousands)  (In thousands) 
2010 $10,223 
2011  166  $5,944 
2012  240   236 
2013  237   234 
2014  306   284 
2015  296 
Thereafter  5,034   6,836 
      
 $16,206  $13,830 
      
 
The Company also maintains the GEO Group Inc., Deferred Compensation Plan (“Deferred Compensation Plan”), a non-qualified deferred compensation plan for employees who are ineligible to participate in its qualified 401(k) plan. Eligible employees may defer a fixed percentage of their salary and the Company matches employee contributions up to a certain amount based on the employee’s years of service. Payments will be made at retirement age of 65, at termination of employment or earlier depending on the employees’ elections. Effective December 18, 2009, the Company established a rabbi trust; the purpose of which is to segregate the assets of the Deferred Compensation Plan from the Company’s cash balances. The funds in the rabbi trust will not be available to the Company for any purpose other than to fund the Deferred Compensation Plan; however, these funds may be available to the Company’s creditors in the event the Company becomes insolvent. On December 28, 2009,All employee and employer contributions relative to the Deferred Compensation Plan are made directly to the rabbi trust. As of January 2, 2011, the Company has transferred $2.9an aggregate of $5.8 million in cash to the rabbi trust to fund the Deferred Compensation Plan, all of which is reflected as restricted cash in the accompanying balance sheet as of January 3, 2010. All future employee and employer contributions relative to the Deferred Compensation Plan will be made directly to the rabbi trust.sheet. The Company recognized expense related to its contributions of $0.1$0.2 million, $0.1 million and $0.3$0.1 million in fiscal years 2010, 2009 2008 and 2007,2008, respectively. The total liability, including the current portion, for this plan at January 2, 2011 and January 3, 2010 was $6.2 million and December 28, 2008 was $4.7 million, respectively. The liability, excluding current portion of $0.2 million and $4.0$0.4 million respectively.as of January 2, 2011 and

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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
January 3, 2010, respectively, is included in other non-current liabilities in the accompanying consolidated balance sheets.
 
17.18.  Business Segment and Geographic Information
 
Operating and Reporting Segments
 
The Company conducts its business through four reportable business segments: U.S. correctionsDetention & Corrections segment; International servicesServices segment; GEO Care segment; and Facility construction and designConstruction & Design segment. The Company has identified these four reportable segments to reflect the current view that the Company operates four distinct business lines, each of which constitutes a material part of its overall business. The U.S. correctionsDetention & Corrections segment primarily encompassesU.S.-based privatized corrections and detention business. The International servicesServices segment primarily consists of privatized corrections and detention operations in South Africa, Australia and the United Kingdom. The GEO Care segment, which is operated by the Company’s wholly-owned subsidiary GEO Care, Inc., comprises privatizedrepresents services provided to adult offenders and juveniles for mental health, residential and residentialnon-residential treatment, services business,educational and community based programs and pre-release and half-way house programs, all of which is currently conducted in the U.S. The Facility construction and designConstruction & Design segment consists of contracts with various state, local and federal agencies for the design and construction of facilities for which the Company has management contracts. Generally, the assets and revenues from the Facility construction and designConstruction & Design segment are offset by a similar amount of liabilities and expenses. DisclosuresAs a result of the acquisition of Cornell, management’s review of certain segment financial data was revised with regards to the Bronx Community Re-entry Center and the Brooklyn Community Re-entry Center. These facilities now report within the GEO Care segment and are no longer included with U.S. Detention & Corrections. Segment disclosures reflect these reclassifications for business segments are as follows (in thousands).all periods presented.


104129

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The segment information presented in the prior periods has been reclassified to conform to the current presentation:presentation (in thousands):
 
                        
Fiscal Year
 2009 2008 2007  2010 2009 2008 
 (In thousands) 
Revenues:                        
U.S. corrections $784,066  $711,038  $629,339 
International services  137,171   128,672   127,991 
U.S. Detention & Corrections $842,417  $772,497  $700,587 
International Services  190,477   137,171   128,672 
GEO Care  121,818   117,399   110,165   213,819   133,387   127,850 
Facility construction and design  98,035   85,897   108,804 
Facility Construction & Design  23,255   98,035   85,897 
              
Total revenues $1,141,090  $1,043,006  $976,299  $1,269,968  $1,141,090  $1,043,006 
              
Depreciation and amortization:                        
U.S. corrections $35,955  $34,010  $30,401 
International services  1,448   1,556   1,351 
U.S. Detention & Corrections $39,744  $35,855  $33,770 
International Services  1,767   1,448   1,556 
GEO Care  1,903   1,840   1,466   6,600   2,003   2,080 
Facility construction and design  —   —   — 
Facility Construction & Design  —   —   — 
              
Total depreciation and amortization $39,306  $37,406  $33,218  $48,111  $39,306  $37,406 
              
Operating Income (loss):            
U.S. corrections $182,820  $160,065  $134,321 
International services  7,759   10,131   10,381 
Operating Income:            
U.S. Detention & Corrections $204,398  $178,329  $156,317 
International Services  12,311   8,017   10,737 
GEO Care  13,468   12,419   10,142   27,746   17,958   16,167 
Facility construction and design  381   326   (266)
Facility Construction & Design  2,382   381   326 
              
Operating income from segments  204,428   182,941   154,578   246,837   204,685   183,547 
General and Administrative Expenses  (69,240)  (69,151)  (64,492)  (106,364)  (69,240)  (69,151)
              
Total operating income $135,188  $113,790  $90,086  $140,473  $135,445  $114,396 
              
         
  2009  2008 
 
Segment assets:        
U.S. corrections $1,145,571  $1,093,880 
International services  95,659   69,937 
GEO Care  107,908   21,169 
Facility construction and design  13,736   10,286 
         
Total segment assets $1,362,874  $1,195,272 
         
Fiscal year 2009 U.S. corrections segment operating income includes the $1.7 million increase in the Company’s insurance reserve compared to $2.7 million increase in fiscal year 2008 and a $0.9 million reduction in 2007.
 
The increase in operating incomerevenues for U.S. Detention & Corrections and GEO Care in 2010 compared to 2009 is primarily due to the acquisition of Cornell in August 2010 which contributed additional revenues to these segments of $85.5 million and $65.7 million, respectively. The increase in revenues for U.S. corrections segment over each of the fiscal years endedDetention & Corrections in 2009 compared to 2008 and 2007 is primarily attributable to newproject activations, capacity increases and per diem rate increases at existing facilities and expansions of existing facilities. The decrease in operating revenues over those same periods in the International services segment was due to overall unfavorable foreign exchange currency fluctuations as well as significant start up costs incurred to transition new management contracts. The Company experienced increases in revenues from International Services in 2010 as a result of positive fluctuations in foreign currency translation as well as from its new management contracts for the operation of the Parklea Correctional Centre in Sydney, Australia (“Parklea”) and the Harmondsworth Immigration Removal Centre in London, England (“Harmondsworth”). The Company provided services under these contracts for the full year in 2010 compared to a partial period during 2009. In 2010, the Company experienced significant decreases in revenues reported in its Facility Construction & Design segment as a result of the completion of Blackwater River Correctional Facility in Milton Florida (“Blackwater River”).
In 2010, a significant increase in operating income for the operating revenues in theU.S. Detention & Corrections and GEO Care segmentreporting segments was the result of the Company’s acquisition of Cornell in August 2010 which resulted in additional operating income of $15.9 million and $10.9 million, respectively. Additional increases related to GEO Care in 2010, and to a lesser extent in 2009, are associated with the Company’s acquisition of Just Care, Inc., September 30, 2009. In 2010, the Company experienced significant decreases in operating income reported in its Facility Construction & Design segment as a result of the completion of Blackwater River.


105130

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
         
  2010  2009 
 
Segment assets:        
U.S. Detention & Corrections $1,855,777  $1,143,248 
International Services  103,004   95,659 
GEO Care  301,601   110,231 
Facility Construction & Design  26   13,736 
         
Total segment assets $2,260,408  $1,362,874 
         
the 2009 acquisition of Just Care, Inc., in 2009 and increases in population and capacity at other facilities during 2008 and 2009.
 
Assets in the Company’s Facility construction and designConstruction & Design segment are primarily made up of accounts receivable, which includes trade receivables and construction retainage receivable. Accounts receivable balances were $13.7 million and $10.3 million as of January 3, 2010 and December 28, 2008, respectively.
 
Pre-Tax Income Reconciliation of Segments
 
The following is a reconciliation of the Company’s total operating income from its reportable segments to the Company’s income before income taxes, equity in earnings of affiliates and discontinued operations, in each case, during the fiscal years ended January 2, 2011, January 3, 2010, and December 28, 2008, and December 30, 2007, respectively.
 
                        
Fiscal Year Ended
 2009 2008 2007  2010 2009 2008 
 (In thousands)  (In thousands) 
Operating income from segments $204,428  $182,941  $154,578  $246,837  $204,685  $183,547 
Unallocated amounts:                        
General and administrative expense  (69,240)  (69,151)  (64,492)  (106,364)  (69,240)  (69,151)
Net interest expense  (23,575)  (23,157)  (27,305)  (34,436)  (23,575)  (23,157)
Costs related to early extinguishment of debt  (6,839)  —   (4,794)  (7,933)  (6,839)  — 
              
Income before income taxes, equity in earnings of affiliates and discontinued operations $104,774  $90,633  $57,987  $98,104  $105,031  $91,239 
              
 
Asset Reconciliation
 
The following is a reconciliation of the Company’s reportable segment assets to the Company’s total assets as of January 2, 2011 and January 3, 2010, and December 28, 2008, respectively.
 
                
 2009 2008  2010 2009 
Reportable segment assets $1,362,874  $1,195,272  $2,260,408  $1,362,874 
Cash  33,856   31,655   39,664   33,856 
Deferred income tax  17,020   21,757   33,062   17,020 
Restricted cash  34,068   32,697 
Assets of discontinued operations  —   7,240 
Restricted cash and investments  90,642   34,068 
          
Total assets $1,447,818  $1,288,621  $2,423,776  $1,447,818 
          
 
Geographic Information
 
TheDuring each of the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, the Company’s international operations arewere conducted through (i) the Company’s wholly owned Australian subsidiary, The GEO Group Australia Pty. Ltd., through which the Company has management contracts for four correctional facilities two police custody centers and also provides comprehensive healthcare services to eightnine government-operated prisons; (ii) the Company’s consolidated joint venture in South Africa, SACM, through which the Company manages one correctional facility; and (iii) the Company’s wholly-owned subsidiary in the United Kingdom,

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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The GEO Group UK Ltd., through which the Company manages two facilities including the Campsfield House Immigration Removal Centre and the Harmondsworth Immigration Removal Centre.
 


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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                        
Fiscal Year
 2009 2008 2007  2010 2009 2008 
 (In thousands)  (In thousands) 
Revenues:                        
U.S. operations $1,003,919  $914,334  $848,308  $1,079,491  $1,003,919  $914,334 
Australia operations  103,197   101,995   97,116   142,648   103,197   101,995 
South African operations  16,843   15,316   15,915   19,231   16,843   15,316 
United Kingdom  17,131   11,361   14,960   28,598   17,131   11,361 
              
Total revenues $1,141,090  $1,043,006  $976,299  $1,269,968  $1,141,090  $1,043,006 
              
Long-lived assets:                        
U.S. operations $994,328  $875,703  $779,905  $1,506,666  $994,327  $875,703 
Australia operations  2,887   2,000   2,187   3,603   2,887   2,000 
South African operations  447   492   590   439   447   492 
United Kingdom  899   421   681   584   899   421 
              
Total long-lived assets $998,560  $878,616  $783,363  $1,511,292  $998,560  $878,616 
              
 
Sources of Revenue
 
The Company derives most of its revenue from the management of privatized correction and detention facilities. The Company also derives revenue from the management of GEO Care facilities and from the construction and expansion of new and existing correctional, detention and GEO Care facilities. All of the Company’s revenue is generated from external customers.
 
                        
Fiscal Year
 2009 2008 2007  2010 2009 2008 
 (In thousands)  (In thousands) 
Revenues:                        
Correction and detention $921,237  $839,710  $757,330 
Detention & Corrections $1,032,894  $909,668  $829,259 
GEO Care  121,818   117,399   110,165   213,819   133,387   127,850 
Facility construction and design  98,035   85,897   108,804 
Facility Construction & Design  23,255   98,035   85,897 
              
Total revenues $1,141,090  $1,043,006  $976,299  $1,269,968  $1,141,090  $1,043,006 
              
 
Equity in Earnings of Affiliates
 
Equity in earnings of affiliates for 2010, 2009 and 2008 and 2007 includeincludes the operating results from one of the Company’s joint ventures in South Africa, SACS. This entityjoint venture is accounted for under the equity method and the Company’s investment in SACS is presented as a component of other non-current assets in the accompanying consolidated balance sheets.

107
132

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
A summary of financial data for SACS is as follows:
 
                        
Fiscal Year
 2009 2008 2007  2010 2009 2008
 (In thousands)  (In thousands)
Statement of Operations Data                     
Revenues $37,736  $35,558  $36,720  $46,005  $37,736  $35,558 
Operating income  14,958   13,688   14,976   18,350   14,958   13,688 
Net income  7,034   9,247   4,240   8,435   7,034   9,247 
Balance Sheet Data                     
Current assets  33,808   18,421   21,608   40,624   33,808   18,421 
Noncurrent assets  47,453   37,722   53,816   50,613   47,453   37,722 
Current liabilities  2,888   2,245   6,120   3,552   2,888   2,245 
Non-current liabilities  53,877   41,321   62,401   60,129   53,877   41,321 
Shareholders’ equity  24,496   12,577   6,903   27,556   24,496   12,577 
 
As of January 2, 2011 and January 3, 2010, and December 28, 2008, the Company’s investment in SACS was $12.2$13.8 million and $6.2$12.2 million, respectively. The investment is included in other non-current assets in the accompanying consolidated balance sheets.
 
Business Concentration
 
Except for the major customers noted in the following table, no other single customer made up greater than 10% of the Company’s consolidated revenues for the following fiscal years.
 
             
Customer
 2009  2008  2007 
 
Various agencies of the U.S. Federal Government  31%  28%  27%
Various agencies of the State of Florida  16%  17%  16%
             
Customer 2010 2009 2008
 
Various agencies of the U.S Federal Government:  35%  31%  28%
Various agencies of the State of Florida:  14%  16%  17%
 
Credit risk related to accounts receivable is reflective of the related revenues.
 
18.19.  Income Taxes
 
The United States and foreign components of income (loss) before income taxes and equity income from affiliates are as follows:
 
                        
 2009 2008 2007  2010 2009 2008 
 (In thousands)  (In thousands) 
Income (loss) before income taxes, equity earnings in affiliates, and discontinued operations                        
United States $96,651  $78,542  $45,875  $84,531  $96,651  $78,542 
Foreign  8,123   12,091   12,112   13,573   8,380   12,697 
              
  104,774   90,633   57,987   98,104   105,031   91,239 
              
Discontinued operations:                        
Income (loss) from operation of discontinued business  (562)  (2,316)  6,066   —   (562)  (2,316)
              
Total $104,212  $88,317  $64,053  $98,104  $104,469  $88,923 
              


108133

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Taxes on income (loss) consist of the following components:
 
                        
 2009 2008 2007  2010 2009 2008 
 (In thousands)  (In thousands) 
Federal income taxes:                        
Current $24,443  $24,164  $19,211  $13,316  $24,443  $24,164 
Deferred  10,734   2,621   (4,546)  16,070   10,734   2,621 
              
  35,177   26,785   14,665   29,386   35,177   26,785 
              
State income taxes:                        
Current  2,889   2,626   3,579   2,713   2,889   2,626 
Deferred  310   (558)  (399)  3,136   310   (558)
              
  3,199   2,068   3,180   5,849   3,199   2,068 
              
Foreign:                        
Current  4,649   4,357   4,336   5,562   4,737   4,587 
Deferred  (1,034)  593   (132)  (1,265)  (1,034)  593 
              
  3,615   4,950   4,204   4,297   3,703   5,180 
              
Total U.S. and foreign  41,991   33,803   22,049   39,532   42,079   34,033 
              
Discontinued operations:                        
Taxes (benefit) from operations of discontinued business  (216)  236   2,310   —   (216)  236 
              
Total $41,775  $34,039  $24,359  $39,532  $41,863  $34,269 
              
 
A reconciliation of the statutory U.S. federal tax rate (35.0%) and the effective income tax rate is as follows:
 
             
  2009  2008  2007 
  (In thousands) 
 
Continuing operations:            
Provisions using statutory federal income tax rate $36,671  $31,722  $20,295 
State income taxes, net of federal tax benefit  2,949   2,635   1,965 
Other, net  2,371   (554)  (211)
             
Total continuing operations  41,991   33,803   22,049 
             
Discontinued operations:            
Taxes (benefit) from operations of discontinued business  (216)  236   2,310 
             
Provision (benefit) for income taxes $41,775  $34,039  $24,359 
             
The components of the net current deferred income tax asset as of January 3, 2010 are as follows:
         
  2009  2008 
  (In thousands) 
 
Accrued liabilities $11,938  $11,847 
Accrued compensation  4,438   4,658 
Other, net  644   835 
         
Total asset $17,020  $17,340 
         
             
  2010  2009  2008 
  (In thousands) 
 
Continuing operations:            
Provisions using statutory federal income tax rate $34,336  $36,761  $31,934 
State income taxes, net of federal tax benefit  3,671   2,949   2,635 
Change in contingent tax liabilities  (2,366)  1,591   — 
Impact of nondeductible transaction costs  3,230   283   — 
Other, net  661   495   (536)
             
Total continuing operations  39,532   42,079   34,033 
             
Discontinued operations:            
Taxes (benefit) from operations of discontinued business  —   (216)  236 
             
Provision (benefit) for income taxes $39,532  $41,863  $34,269 
             


109134

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The components of the net current deferred income tax asset as of January 2, 2011 and January 3, 2010 are as follows:
         
  2010  2009 
  (In thousands) 
 
Accrued liabilities $20,277  $11,938 
Accrued compensation  8,805   4,438 
Other, net  3,044   644 
         
Total asset $32,126  $17,020 
         
The components of the net non-current deferred income tax asset as of January 2, 2011 and January 3, 2010 are as follows:
 
         
  2009  2008 
  (In thousands) 
 
Deferred compensation  —  $7,923 
Other, net  —   3,787 
Net operating losses  —   3,484 
Tax credits  —   2,961 
Deferred loan costs  —   2,360 
Bond discount  —   (1,094)
Residual U.S. tax liability on un-repatriated foreign earnings  —   (1,915)
Intangible assets  —   (3,740)
Valuation allowance  —   (4.577)
Depreciation  —   (4,772)
         
Total asset  —  $4,417 
         
         
  2010  2009 
  (In thousands) 
 
Depreciation $936  $— 
         
Total asset $936  $— 
         
 
The components of the net non-current deferred income tax liability as of January 2, 2011 and January 3, 2010 are as follows:
 
                
 2009 2008  2010 2009 
 (In thousands)  (In thousands) 
Deferred compensation $7,955   —  $7,628  $7,955 
Net operating losses  6,150   —   7,988   6,150 
Tax credits  4,203   —   4,414   4,203 
Deferred loan costs  2,143   2,211 
Equity Awards  2,047   1,638 
Other, net  2,654   —   223   1,700 
Deferred loan costs  2,211   — 
Bond discount  (916)  —   (780)  (916)
Residual U.S. tax liability on unrepatriated foreign earnings  (1,775)  —   (3,052)  (1,775)
Valuation allowance  (5,587)  —   (7,793)  (5,587)
Deferred Rent  (10,630)  ( 684)
Intangible assets  (5,521)  —   (28,657)  (5,521)
Depreciation  (16,434)  (14)  (37,077)  (16,434)
          
Total liability $(7,060) $(14) $(63,546) $(7,060)
          
 
Deferred income taxes should be reduced by a valuation allowance if it is not more likely than not that some portion or all of the deferred tax assets will be realized. On a periodic basis, management evaluates and determines the amount of the valuation allowance required and adjusts such valuation allowance accordingly. At fiscal year end 20092010 and 2008,2009, the Company has a valuation allowance of $6.0$7.9 million and $4.8$6.0 million, respectively related to deferred tax assets for foreign net operating losses, state net operating losses and state tax credits. The valuation allowance increased by $1.2$1.9 million during the fiscal year ended January 3, 20102, 2011 primarily due to additional state net operating losses at an international subsidiary that will likely not be realized.acquired as part of the merger with Cornell. In the fiscal year ended January 3, 2010, the Company implemented new guidance relative to the accounting for business combinations and as such, for years beginning after December 15, 2008, the Company records the reduction of a valuation allowance related to business acquisitions as a reduction of income tax expense.
 
The Company provides income taxes on the undistributed earnings ofnon-U.S. subsidiaries except to the extent that such earnings are indefinitely invested outside the United States. At January 3, 2010, $8.42, 2011, $13.1 million of accumulated undistributed earnings ofnon-U.S. subsidiaries were indefinitely invested. At the existing U.S. federal income tax rate, additional taxes (net of foreign tax credits) of $3.0 million would have to be provided if such earnings were remitted currently.


110135

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
U.S. federal income tax rate, additional taxes (net of foreign tax credits) of $4.1 million would have to be provided if such earnings were remitted currently.
At fiscal year end 2009,2010, the Company had $4.9$3.9 million of Federal net operating loss carryforwards which begin to expire in 2020 and $4.8$50.3 million of combined net operating loss carryforwards in various states which begin to expire in 2015.2011.
 
Also at fiscal year end 20092010, the Company had $14.0$11.8 million of foreign operating losses which carry forward indefinitely and $6.3$6.8 million of state tax credits which begin to expire in 2010.2011. The Company has recorded a full and partial valuation allowance against the deferred tax assets related to the foreign operating losses and state tax credits, respectively.
 
In fiscal 2008, the Company’s equity affiliate SACS recognized a one time tax benefit of $1.9 million related to a change in the tax treatment applicable to the affiliate with retroactive effect. Under the tax treatment, expenses which were previously disallowed are now deductible for South African tax purposes. The one time tax benefit relates to an increase in the deferred tax assets of the affiliate as a result of the change in tax treatment.
 
The Company recognizes the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards. The exercise of non-qualified stock options which have been granted under the Company’s stock option plans give rise to compensation income which is includable in the taxable income of the applicable employees and deducted by the Company for federal and state income tax purposes. Such compensation income results from increases in the fair market value of the Company’s common stock subsequent to the date of grant. At fiscal year end 20092010, the deferred tax asset net of a valuation allowance related to unexercised stock options and restricted stock grants for which the company has recorded a book expense was $2.2$2.5 million.
 
The Company implemented guidance relative to accounting for uncertainties in income taxes, effective at the beginning of the Company’s fiscal year ended December 30, 2007. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
 
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows in (dollars in(in thousands):
 
                    
 2009 2008  2010 2009 2008 
 (In thousands)  (In thousands) 
Balance at Beginning of Period $5,889  $5,417  $5,947  $5,889  $5,417 
Additions based on tax positions related to the current year  479   1,877   3,251   479   1,877 
Additions for tax positions of prior years  4,854   659   200   4,854   659 
Additions from current year acquisitions  2,928   —   — 
Reductions for tax positions of prior years  (1,877)  (1,809)  (2,891)  (1,877)  (1,809)
Reductions as result of a lapse of applicable statutes of limitations  —   (169)  —   —   (169)
Settlements  (3,398)  (86)  (173)  (3,398)  (86)
            
Balance at End of Period $5,947  $5,889  $9,262  $5,947  $5,889 
            
 
All amounts in the reconciliation are reported on a gross basis and do not reflect a federal tax benefit on state income taxes. Inclusive of the federal tax benefit on state income taxes the ending balance as of January 3, 20102, 2011 is $5.6$8.0 million. Included in the balance at January 3, 20102, 2011 is $0.5$3.2 million related to tax


136

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Under deferred tax accounting, the timing of a deduction does not affect the annual effective tax rate but does affect the timing of tax payments. AbsentIn addition to a decrease in the unrecognized tax benefits related to the reversal of these timing related tax positions, the Company does not anticipate anyalso anticipates a significant increase or decrease in the unrecognized tax benefits within 12 months of the reporting date.


111

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additionsdate of approximately $2.3 million. Reductions for tax positions of prior years reported in the reconciliation for 20092010 include amounts related to proposed federal audit adjustments for the years 2002 through 2005, for which the Company has appealed.company reached an agreement with the office of IRS Appeals which is currently being reviewed at a higher level. The balance at January 3, 20102, 2011 includes $5.1$4.0 million of unrecognized tax benefits which, if ultimately recognized, will reduce the Company’s annual effective tax rate.
 
The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, ornon-U.S. income tax examinations by tax authorities for the years before 2002. TheIn the fourth quarter of 2009 the U.S. Internal Revenue Service (IRS) commenced an examination of the Company’s U.S. income tax returns for 2006 through 20082008. In October 2010, the audit was concluded and resulted in no changes to the fourth quarter of 2009 that is anticipated to be completed by the end of 2011.Company’s income tax positions.
 
During the fourth fiscal quarter of 2009, the Internal Revenue Service (IRS)IRS completed its examination of the Company’s U.S. federal income tax returns for the years 2002 through 2005. Following the examination, the IRS notified the Company that it proposesproposed to disallow a deduction that the Company realized during the 2005 tax year. The Company has appealed this proposed disallowed deduction with the IRS’s appeals division and believes it has valid defenses todivision. In December 2010, the IRS’s position. However,Company reached an agreement with the office of IRS Appeals on the amount of the deduction which is currently being reviewed at a higher level. The Company previously reported that if the disallowed deduction were to be sustained on appeal, it could result in a potential tax exposure to the Company of up to $15.4 million. The Company believes in the merits of its position and intends to defend its rights vigorously, including its rights to litigate the matter if it cannot be resolved favorably at the IRS’s appeals level. If this matter is resolved unfavorably, it may have a material adverse effect on the Company’s financial position, results of operations and cash flows.
 
The calculation of the Company’s provision (benefit) for income taxes requires the use of significant judgment and involves dealing with uncertainties in the application of complex tax laws and regulations. In determining the adequacy of the Company’s provision (benefit) for income taxes, potential settlement outcomes resulting from income tax examinations are regularly assessed. As such, the final outcome of tax examinations, including the total amount payable or the timing of any such payments upon resolution of these issues, cannot be estimated with certainty.
During the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, and December 30, 2007, the Company recognized $(0.8) million, $0.1 million $0.4 million and $0.6$0.4 million in interest and penalties.penalties, respectively. The Company had accrued $2.0$1.5 million and $1.9$2.0 million for the payment of interest and penalties at January 2, 2011, and January 3, 2010, and December 28, 2008, respectively. The Company classifies interest and penalties as interest expense and other expense, respectively.


137

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
19.20.  Selected Quarterly Financial Data (Unaudited)
 
The Company’s selected quarterly financial data is as follows (in thousands, except per share data):
 
                                
 First
 Second
 Third
 Fourth
  First
 Second
 Third
 Fourth
 
 Quarter Quarter Quarter Quarter  Quarter Quarter Quarter Quarter(4) 
2009
                
2010
                
Revenues(1) $259,061  $276,379  $294,865  $310,785  $287,542  $280,095  $327,933  $374,398 
Operating income(1),(4)  29,682   30,877   35,156   39,473 
Operating income(2)  34,524   33,050   29,524   43,375 
Income from continuing operations(2)(3)  15,071   16,491   19,258   15,480   17,708   17,025   5,010   23,047 
Income (loss) from discontinued operations, net of tax  (366)  20   —   —   —   —   —   — 
Basic earnings per share:                                
Income from continuing operations $0.30  $0.32  $0.38  $0.30  $0.35  $0.35  $0.09  $0.37 
Income (loss) from discontinued operations  (0.01)  0.01   0.00   0.00   —   —   —   — 
                  
Net income per share $0.29  $0.33  $0.38  $0.30  $0.35  $0.35  $0.09  $0.37 
Diluted earnings per share:                                
Income from continuing operations $0.29  $0.32  $0.37  $0.30  $0.34  $0.35  $0.09  $0.36 
Income (loss) from discontinued operations  (0.01)  0.00   0.00   0.00   —   —   —   — 
                  
Net income per share $0.28  $0.32  $0.37  $0.30  $0.34  $0.35  $0.09  $0.36 
                 
  First
  Second
  Third
  Fourth
 
  Quarter  Quarter  Quarter  Quarter(4) 
 
2009
                
Revenues(1) $259,061  $276,379  $294,865  $310,785 
Operating income(2)  29,723   30,954   35,217   39,551 
Income from continuing operations(3)  15,096   16,551   19,302   15,520 
Income (loss) from discontinued operations, net of tax  (366)  20   —   — 
Basic earnings per share:                
Income from continuing operations $0.30  $0.32  $0.38  $0.30 
Income (loss) from discontinued operations  (0.01)  0.01   0.00   0.00 
                 
Net income per share $0.29  $0.33  $0.38  $0.30 
Diluted earnings per share:                
Income from continuing operations $0.29  $0.32  $0.37  $0.30 
Income (loss) from discontinued operations  (0.01)  0.00   0.00   0.00 
                 
Net income per share $0.28  $0.32  $0.37  $0.30 
(1)Revenues increased in First and Second Quarters of 2010 compared to 2009 primarily as a result of contributions from the International Services segment which benefited from changes in foreign currency translation rates and new contracts for the operation of Parklea Correctional Centre in Australia and Harmondsworth Immigration Removal Centre in the United Kingdom. The Company also experienced increases in its GEO Care segment during these same periods due to the operation of the Columbia Regional Care Center in Columbia, South Carolina. The primary increases in the Third and Fourth Quarters of 2010 compared to the same periods in 2009 were primarily attributable to the Company’s acquisition of Cornell in August 2010. Revenues in Third Quarter 2010 and Fourth Quarter 2010 include $53.6 million and $97.6 million, respectively, in Cornell revenues. Second Quarter 2010, Third Quarter 2010, and Fourth Quarter 2010 revenues for the Facility Construction & Design segment were significantly


112138

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                 
  First
  Second
  Third
  Fourth
 
  Quarter  Quarter  Quarter  Quarter 
 
2008
                
Revenues $262,454  $269,994  $254,105  $256,453 
Operating income(1),(3)  23,523   26,828   28,580   34,859 
Income from continuing operations  11,888   13,852   15,497   20,216 
Income (loss) from discontinued operations, net of tax  519   347   362   (3,779)
Basic earnings per share:                
Income from continuing operations $0.24  $0.27  $0.31  $0.40 
Income (loss) from discontinued operations  0.01   0.01   0.00   (0.08)
                 
Net income per share $0.25  $0.28  $0.31  $0.32 
Diluted earnings per share:                
Income from continuing operations $0.23  $0.27  $0.30  $0.39 
Income (loss) from discontinued operations  0.01   —   0.01   (0.07)
                 
Net income per share $0.24  $0.27  $0.31  $0.32 
(1)lower than revenues generated in these same periods during 2009 primarily due to the completion of Blackwater River Correctional Facility. The decrease in revenues related to this segment for these periods was $20.1 million, $36.2 million and $19.9 million, respectively.
(2)Operating income for Third Quarter 2010 and Fourth Quarter 2010 includes the impact of non-recurring transaction expenses of $15.7 million and $9.7 million, respectively, associated with the Company’s acquisition of Cornell in August 2010 and its acquisition of BI completed in February 2011. Operating income for approximately half of Third Quarter 2010 and for the entire Fourth Quarter 2010 includes $7.6 million and $19.2 million, respectively, of Cornell’s results. Operating income for First, Second, Third and Fourth Quarters 2009 includes start up costs of $1.2 million, $0.6 million, $1.0 million and $2.1 million, respectively for new facility management contracts. Start up costs in fiscal 2008 were $1.7 million, $2.3 million, $2.8 million and $1.4 million in First, Second, Third and Fourth Quarters, respectively.
(2)Income from continuing operations for 2009 includes a loss of $6.8 million on extinguishment of debt related to the tender premium and write off of deferred financing costs associated with the tender call of the company’s 81/4% Senior Notes.
 
(3)Operating income for ThirdIncome from continuing operations in Fourth Quarter 2010 and Fourth Quarters 2008Quarter 2009 includes losses of $7.9 million and $6.8 million, respectively, associated with the effectsextinguishment of debt. In October 2010, the Company terminated its Third Amended and Restated Credit Agreement and entered into a change in our vacation policy for certain employees which conformed to a fiscal year-end based policy. The new policy allows employees to use vacation regardless of service period but withinSenior Credit Facility. In October 2009, the fiscal year. Our results for fiscal Fourth Quarter ended December 28, 2008 include a one-time tax benefitCompany repaid its 81/4% Senior Notes and wrote off the related to our equity affiliate of $1.9 million.deferred financing costs.
 
(4)ThirdFourth Quarter results reflect increases to insurance reserves2009 was a fourteen-week fiscal period in the fifty-three week fiscal year ended January 3, 2010. All of $1.7 million, and $2.7 million 2009 and 2008 respectively.the other fiscal quarters presented had thirteen-week reporting periods.
 
20.21.  Subsequent eventevents
 
EvaluationAcquisition of subsequent eventsB.I. Incorporated
 
In May 2009,On February 10, 2011, the FASB issued guidanceCompany completed its previously announced acquisition of B.I., a Colorado corporation, pursuant to an Agreement and Plan of Merger, dated as of December 21, 2010 (the “Merger Agreement”), with BII Holding, a Delaware corporation, which introducesowns BI, GEO Acquisition IV, Inc., a Delaware corporation and wholly-owned subsidiary of GEO (“Merger Sub”), BII Investors IF LP, in its capacity as the concept of financial statements beingavailable to be issuedstockholders’ representative, and requiresAEA Investors 2006 Fund L.P. Under the disclosureterms of the Merger Agreement, Merger Sub merged with and into BII Holding (the “Merger”), with BII Holding emerging as the surviving corporation of the merger. As a result of the Merger, the Company paid merger consideration of $415.0 million in cash excluding transaction related expenses and subject to certain adjustments. Under the Merger Agreement, $12.5 million of the merger consideration was placed in an escrow account for a one-year period to satisfy any applicable indemnification claims pursuant to the terms of the Merger Agreement by GEO, the Merger Sub or its affiliates. At the time of the BI Acquisition, approximately $78.4 million, including accrued interest was outstanding under BI’s senior term loan and $107.5 million, including accrued interest was outstanding under its senior subordinated note purchase agreement, excluding the unamortized debt discount. All indebtedness of BI under its senior term loan and senior subordinated note purchase agreement were repaid by BI with a portion of the $415.0 million of merger consideration. BI will be integrated into the Company’s wholly-owned subsidiary, GEO Care.
The Company is identified as the acquiring company for US GAAP accounting purposes. Under the purchase method of accounting, the purchase price for BI will be allocated to BI’s net tangible and intangible assets based on their estimated fair values as of February 10, 2011, the date through which an entity has evaluated subsequent eventsof closing and the basisdate that the Company obtained control over BI. In order to determine the fair values of a significant portion of the assets acquired and liabilities assumed, the Company will likely engage a third party independent valuation specialist. For any other assets acquired and liabilities assumed for which the Company is not obtaining an independent valuation, the fair value determined by the Company’s management will represent the price that date as eitherwould be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. With the dateexception of any adjustments which may occur during the financial statements were issued or were availableone-year measurement period proscribed by GAAP, the Company expects to beestablish a preliminary purchase price allocation with respect to the acquisition of BI by the end of the first quarter of the fiscal year 2011. The accounting for this acquisition was


113139

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
issued. This standard became effectivenot complete at the time of this filing and accordingly, the Company has not presented the required business combination disclosures. The Company expects to record goodwill in connection with this transaction however, due to the timing of the closing of the transaction and the filing date of the Company’s Annual Report onForm 10-K, it was impracticable for the Company into determine the value of any goodwill. As of the date of this filing, several significant inputs to the purchase accounting model had not been completed such as valuations for: (i) intangible assets related to acquired service contracts, (ii) property and equipment acquired, (iii) intangible assets related to any research and development projectsand/or technology, (iv) intangible assets relative to trade names and patents, (vi) income taxes, (vii) other assets and liabilities for which the Company has not yet determined fair value. Additionally, it was impracticable to include meaningful pro forma financial results for the Company and BI on a combined basis as BI has a different fiscal year ended January 3, 2010.end than the Company and has not yet completed the close process around its quarterly financial information or its compilation for financial statements for a twelve-month period. The Company evaluated all events and transactions that occurred after January 3, 2010 up through February 22, 2010,expects the datepro forma adjustments to primarily consist of incremental interest expense related to the Company issued these financial statements. During this period,cash paid to the Company did not have any material recognizable subsequent events; however,BI shareholders, estimates for the Company did have unrecognizable subsequent events as discussed further below. The implementationamortization of this standard did not have a significant impactacquisition intangible assets, depreciation expense based on the Company’s financial condition, resultsfair value of operations or cash flows.property and equipment acquired, income tax effects, and other expenses which will result from the purchase price allocation and determination of fair value for assets acquired and liabilities assumed.
 
Interest rate swapStock-Based
Effective January 6, 2010, the Company executed an interest rate swap agreement (the “Agreement”) in the notional amount of $25.0 million. The Company has designated this interest rate swap as a hedge against changes in the fair value of a designated portion of the 73/4% Senior Notes due to changes in underlying interest rates. The Agreement, which has payments, expiration dates and call provisions that mirror the terms of the 73/4% Senior Notes, effectively converts $25.0 million of the principal into variable rate obligations. The Swap has a termination clause that gives the lender the right to terminate the interest rate swap at fair market value if the lender is no longer a party to the Credit Agreement. In addition to the termination clause, the Agreement also has call provisions which specify that the lender can elect to settle the swap for the call option price. Under the Agreement, the Company receives a fixed interest rate payment from the financial counterparty to the agreement equal to 73/4% per year calculated on the notional $25.0 million amount, while it makes a variable interest rate payment to the same counterparty equal to the three-month LIBOR plus a fixed margin of 4.16%, also calculated on the notional $25.0 million amount. Changes in the fair value of the interest rate swap are recorded in earnings along with related designated changes in the value of the 73/4% Senior Notes.
Stock repurchase program Awards
 
On February 22, 2010,28, 2011, the Company announced that itsCompany’s Board of Directors approved a stock repurchase program for upthe award of 205,000 performance based shares to $80.0 million of the Company’s common stock effective through March 31, 2011. The stock repurchase is intended toChief Executive Officer and Senior Vice Presidents which will vest over a3-year period. These awards will be implemented through purchases made from time to time inforfeited if the open market or in privately negotiated transactions, in accordance with applicable Securities and Exchange requirements. The program may also include repurchases from time to time from executive officers or directors of vested restricted stockand/or vested stock options. The stock repurchase programCompany does not obligate GEO to purchase any specific amount ofachieve certain targeted revenue in its common stock and may be suspended or extended at any time at the company’s discretion.fiscal year ended January 1, 2012.
 
Contract awardSenior Notes due 2021
 
In Georgia, the Department of Corrections issued an RFP for 1,000 in-state beds. On February 22, 2010,10, 2011, the Company announced thatcompleted the Stateissuance of Georgia$300.0 million in aggregate principal amount of ten-year, 6.625% senior unsecured notes due 2021 (the “6.625% Senior Notes”) in a private offering under an Indenture dated as of February 10, 2011 among the Company, certain of its domestic subsidiaries, as guarantors, and Wells Fargo Bank, National Association, as trustee. The 2021 Notes were offered and sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended, and outside the United States in accordance with Regulations S under the Securities Act. The 6.625% Senior Notes were issued at a noticecoupon rate and yield to maturity of intent6.625%. Interest on the 6.625% Senior Notes will accrue at the rate of 6.625% per annum and will be payable semi-annually in arrears on February 15 and August 15, commencing on August 15, 2011. The 6.625% Senior Notes mature on February 15, 2021. The Company used the net proceeds from this offering along with $150.0 million of borrowings under its Senior Credit Facility to award a contractfinance the acquisition of BI and to pay related fees, costs, and expenses. The Company used the remaining net proceeds for general corporate purposes.
Amendment to Senior Credit Facility
On February 8, 2011, the Company entered into Amendment No. 1, dated as of February 8, 2011, to the Credit Agreement dated as of August 4, 2010, by and among the Company, for the developmentGuarantors party thereto, the lenders party thereto and operationBNP Paribas, as administrative agent, (“Amendment No. 1”). Amendment No. 1, among other things amended certain definitions and covenants relating to the total leverage ratios and the senior secured leverage ratios set forth in the Credit Agreement. This amendment increased the Company’s borrowing capacity by $250.0 million and is comprised of $150.0 million in borrowings under a new 1,000-bed facility, whichTerm LoanA-2 due August 2015, initially bearing interest at LIBOR plus 2.75%, and an incremental $100.0 million in borrowing capacity under the existing Revolver. Following the amendment, the Senior Credit Facility is expandable to 2,500 beds. Under the termsnow comprised of: $150.0 million Term Loan A due August 2015; $150.0 million Term LoanA-2 due August 2015; $200.0 million Term Loan B due August 2016; and $500.0 million Revolving Credit Facility due August


140

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2015. Incremental borrowings of $150.0 million under our amended Senior Credit Facility along with proceeds from our $300.0 million offering of the intended award,6.625% Senior Notes were used to finance the acquisition of BI. As of February 10, 2011 and following the BI acquisition, the Company would finance, build,had $493.4 million in borrowings outstanding, net of discount, under the Term Loans, $210.0 million in borrowings under the Revolving Credit Facility, approximately $56.2 million in letters of credit and operate$233.8 million in additional borrowing capacity under the new $60 million dollar facility under a long-term ground lease. The award is subject to obtaining approval of the proposed ground lease from the General Assembly. The Company expects this new 1,000-bed facility to generate approximately $19 million dollars in annualized operating revenues once completed.Revolving Credit Facility.
 
21.22.  Condensed Consolidating Financial Information
 
On October 20, 2009, the Company completed an offering of $250.0 million aggregate principal amount of its 73/4% Senior Notes due 2017 (the “Original Notes”). The Original Notes were sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States only tonon-U.S. persons in accordance with Regulation S


114

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
promulgated under the Securities Act. In connection with the sale of the Original Notes, the Company entered into a Registration Rights Agreement with the initial purchasers of the Original Notes party thereto, pursuant to which the Company and its Subsidiary Guarantors (as defined below) agreed to file a registration statement with respect to an offer to exchange the Original Notes for a new issue of substantially identical notes registered under the Securities Act (the “Exchange Notes”, and together with the Original Notes, the “73/4% Senior Notes”). The 73/4% Senior Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by the Company and certain of its wholly-owned domestic subsidiaries (the “Subsidiary Guarantors”).
 
The following condensed consolidating financial information, which has been prepared in accordance with the requirements for presentation ofRule 3-10(d) ofRegulation S-X promulgated under the Securities Act, presents the condensed consolidating financial information separately for:
 
(i) The GEO Group, Inc., as the issuer of the 73/4% Senior Notes;
 
(ii) The Subsidiary Guarantors, on a combined basis, which are 100% owned by The Geo Group, Inc., and which are guarantors of the 73/4% Senior Notes;
 
(iii) The Company’s other subsidiaries, on a combined basis, which are not guarantors of the 73/4% Senior Notes (the “Subsidiary Non-Guarantors”);
 
(iv) Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among the Company, the Subsidiary Guarantors and the Subsidiary Non-Guarantors and (b) eliminate the investments in the Company’s subsidiaries; and
 
(v) The Company and its subsidiaries on a consolidated basis.


115141

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
 
                                        
 As of January 3, 2010  As of January 2, 2011 
   Combined
 Combined
        Combined
 Combined
     
   Subsidiary
 Non-Guarantor
        Subsidiary
 Non-Guarantor
     
 The GEO Group Inc. Guarantors Subsidiaries Eliminations Consolidated  The GEO Group Inc. Guarantors Subsidiaries Eliminations Consolidated 
 (Dollars in thousands)  (Dollars in thousands) 
ASSETS
                    
ASSETS
Cash and cash equivalents $12,376  $5,333  $16,147  $—  $33,856  $2,614  $221  $36,829   —  $39,664 
Restricted cash  —   —   13,313   —   13,313 
Accounts receivable, net  110,643   53,457   36,656   —   200,756 
Deferred income tax asset, net  12,197   1,354   3,469   —   17,020 
Other current assets, net  4,428   2,311   7,950   —   14,689 
Restricted cash and investments  —   —   41,150   —   41,150 
Accounts receivable, less allowance for doubtful accounts  121,749   129,903   23,832   —   275,484 
Deferred income tax assets, net  15,191   12,808   4,127   —   32,126 
Prepaid expenses and other current assets  12,325   23,555   9,256   (8,426)  36,710 
                      
Total current assets  139,644   62,455   77,535   —   279,634   151,879   166,487   115,194   (8,426)  425,134 
                      
Restricted Cash  2,900   —   17,855   —   20,755 
Restricted Cash and Investments  6,168   —   43,324   —   49,492 
Property and Equipment, Net  438,504   489,586   70,470   —   998,560   433,219   867,046   211,027   —   1,511,292 
Assets Held for Sale  3,083   1,265   —   —   4,348   3,083   6,887   —   —   9,970 
Direct Finance Lease Receivable  —   —   37,162   —   37,162   —   —   37,544   —   37,544 
Intercompany Receivable  3,324   13,000   1,712   (18,036)  —   203,703   14,380   1,805   (219,888)  — 
Deferred Income Tax Assets, Net  —       936       936 
Goodwill  34   39,387   669   —   40,090   34   244,151   762   —   244,947 
Intangible Assets, net  —   15,268   2,311   —   17,579 
Intangible Assets, Net  —   85,384   2,429   —   87,813 
Investment in Subsidiaries  650,605   —   —   (650,605)  —   1,184,297   —   —   (1,184,297)  — 
Other Non-Current Assets  23,431   —   26,259   —   49,690   24,020   45,820   28,558   (41,750)  56,648 
                      
 $1,261,525  $620,961  $233,973  $(668,641) $1,447,818  $2,006,403  $1,430,155  $441,579  $(1,454,361) $2,423,776 
                      
Current Liabilities
                    
LIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable $35,949  $6,622  $9,285  $—  $51,856  $57,015  $13,254  $3,611   —  $73,880 
Accrued payroll and related taxes  6,729   5,414   13,066   —   25,209   6,535   10,965   15,861   —   33,361 
Accrued expenses  55,720   2,890   22,149   —   80,759   55,081   41,368   33,624   (8,426)  121,647 
Current portion of debt  3,678   705   15,241   —   19,624 
Current portion of capital lease obligations, long-term debt and non-recourse debt  9,500   782   31,292   —   41,574 
                      
Total current liabilites  102,076   15,631   59,741   —   177,448 
Total current liabilities  128,131   66,369   84,388   (8,426)  270,462 
                      
Deferred Income Tax Liability  6,652   —   408   —   7,060 
Deferred Income Tax Liabilities  15,874   47,652   20   —   63,546 
Intercompany Payable  1,712   —   16,324   (18,036)  —   1,805   199,994   18,089   (219,888)  — 
Other Non-Current Liabilities  32,127   1,015   —   —   33,142   22,767   25,839   40,006   (41,750)  46,862 
Capital Lease Obligations  —   14,419   —   —   14,419   —   13,686   —   —   13,686 
Long-Term Debt  453,860   —   —   —   453,860   798,336   —   —   —   798,336 
Non-Recourse Debt  —   —   96,791   —   96,791   —   —   191,394   —   191,394 
Commitments & Contingencies (Note 12)                    
Commitments & Contingencies                    
Total Shareholders’ Equity  665,098   589,896   60,709   (650,605)  665,098   1,039,490   1,076,615   107,682   (1,184,297)  1,039,490 
                      
 $1,261,525  $620,961  $233,973  $(668,641) $1,447,818  $2,006,403  $1,430,155  $441,579  $(1,454,361) $2,423,776 
                      


116142

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
CONDENSED CONSOLIDATING BALANCE SHEET — (Continued)
 
                                        
 As of December 28, 2008  As of January 3, 2010 
   Combined
 Combined
        Combined
 Combined
     
   Subsidiary
 Non-Guarantor
        Subsidiary
 Non-Guarantor
     
 The GEO Group Inc. Guarantors Subsidiaries Eliminations Consolidated  The GEO Group Inc. Guarantors Subsidiaries Eliminations Consolidated 
 (Dollars in thousands)  (Dollars in thousands) 
ASSETS
                    
ASSETS
Cash and cash equivalents $15,807  $130  $15,718  $—  $31,655  $12,376  $5,333  $16,147   —  $33,856 
Restricted cash  —   —   13,318   —   13,318 
Accounts receivable, net  135,441   39,683   24,541   —   199,665 
Deferred income tax asset, net  13,332   1,286   2,722   —   17,340 
Other current assets  6,256   1,985   4,670   —   12,911 
Current assets of discontinued operations  6,213   788   30   —   7,031 
Restricted cash and investments  —   —   13,313   —   13,313 
Accounts receivable, less allowance for doubtful accounts  110,643   53,457   36,656   —   200,756 
Deferred income tax assets, net  12,197   1,354   3,469   —   17,020 
Prepaid expenses and other current assets  4,428   2,311   7,950   —   14,689 
                      
Total current assets  177,049   43,872   60,999   —   281,920   139,644   62,455   77,535   —   279,634 
                      
Restricted Cash  —   —   19,379   —   19,379 
Restricted Cash and Investments  2,900   —   17,855   —   20,755 
Property and Equipment, Net  393,931   408,124   76,561   —   878,616   438,504   489,586   70,470   —   998,560 
Assets Held for Sale  3,083   1,265   —   —   4,348   3,083   1,265   —   —   4,348 
Direct Finance Lease Receivable  —   —   31,195   —   31,195   —   —   37,162   —   37,162 
Intercompany Receivable  2,755   —   1,474   (4,229)  —   3,324   13,000   1,712   (18,036)  — 
Deferred Income Tax Assets, Net  2,083   2,298   36   —   4,417 
Goodwill  34   21,658   510   —   22,202   34   39,387   669   —   40,090 
Intangible Assets, net  —   10,535   1,858   —   12,393 
Intangible Assets, Net  —   15,268   2,311   —   17,579 
Investment in Subsidiaries  521,960   —   —   (521,960)  —   650,605   —   —   (650,605)  — 
Other Non-Current Assets  16,719   13,009   4,214   —   33,942   23,431   —   26,259   —   49,690 
Non-Current Assets of Discontinued Operations  133   14   62   —   209 
                      
 $1,117,747  $500,775  $196,288  $(526,189) $1,288,621  $1,261,525  $620,961  $233,973  $(668,641) $1,447,818 
                      
Current Liabilities
                    
LIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable $45,099  $3,163  $7,881  $—  $56,143  $35,949  $6,622  $9,285   —  $51,856 
Accrued payroll and related taxes  17,400   2,446   8,111   —   27,957   6,729   5,414   13,066   —   25,209 
Accrued expenses  62,500   2,012   17,930   —   82,442   55,720   2,890   22,149   —   80,759 
Current portion of debt  3,678   674   13,573   —   17,925 
Intercompany payable  1,474   —   2,455   (3,929)  — 
Current liabilities of discontinued operations  1,141   102   216   —   1,459 
Current portion of capital lease obligations, long-term debt and non-recourse debt  3,678   705   15,241   —   19,624 
                      
Total current liabilites  131,292   8,397   50,166   (3,929)  185,926 
Total current liabilities  102,076   15,631   59,741   —   177,448 
                      
Deferred Income Tax Liability  —   —   14   —   14 
Deferred Income Tax Liabilities  6,652   —   408   —   7,060 
Intercompany Payable  1,712   —   16,324   (18,036)  — 
Other Non-Current Liabilities  28,410   466   —   —   28,876   32,127   1,015   —   —   33,142 
Capital Lease Obligations  —   15,126   —   —   15,126   —   14,419   —   —   14,419 
Long-Term Debt  378,448   —   300   (300)  378,448   453,860   —   —   —   453,860 
Non-Recourse Debt  —   —   100,634   —   100,634   —   —   96,791   —   96,791 
Commitments & Contingencies (Note 12)                    
Commitments & Contingencies                    
Total Shareholders’ Equity  579,597   476,786   45,174   (521,960)  579,597   665,098   589,896   60,709   (650,605)  665,098 
                      
 $1,117,747  $500,775  $196,288  $(526,189) $1,288,621  $1,261,525  $620,961  $233,973  $(668,641) $1,447,818 
                      


117143

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONSTHE GEO GROUP, INC.
 
                     
  For the Fiscal Year Ended Janaury 3, 2010 
     Combined
  Combined
       
     Subsidiary
  Non-Guarantor
       
  The GEO Group Inc.  Guarantors  Subsidiaries  Eliminations  Consolidated 
  (Dollars in thousands) 
 
Revenues $620,271  $335,588  $235,747  $(50,516) $1,141,090 
Operating Expenses  523,820   218,679   205,373   (50,516)  897,356 
Depreciation and Amortization  17,877   17,128   4,301   —   39,306 
General and Administrative Expenses  36,042   19,500   13,698   —   69,240 
                     
Operating Income  42,532   80,281   12,375   —   135,188 
Interest Income  202   12   4,729   —   4,943 
Interest Expense  (19,709)  —   (8,809)  —   (28,518)
Loss on Extinguishment of Debt  (6,839)  —   —   —   (6,839)
                     
Income Before Income Taxes, Equity in Earnings of Affliates, and Discontinued Operations  16,186   80,293   8,295   —   104,774 
Provision for Income Taxes  6,439   31,937   3,615   —   41,991 
Equity in Earnings of Affiliates, net of income tax  —   —   3,517   —   3,517 
                     
Income from Continuing Operations Before Equity Income of Consolidated Subsidiaries  9,747   48,356   8,197   —   66,300 
Income in Consolidated Subsidiaries, net of income tax  56,553   —   —   (56,553)  — 
                     
Income from Continuing Operations  66,300   48,356   8,197   (56,553)  66,300 
Loss from Discontinued Operations, net of income tax  (346)  (193)  —   193   (346)
                     
Net Income $65,954  $48,163  $8,197  $(56,360) $65,954 
                     
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                     
  For the Fiscal Year Ended January 2, 2011 
     Combined
  Combined
       
     Subsidiary
  Non-Guarantor
       
  The GEO Group, Inc.  Guarantors  Subsidiaries  Eliminations  Consolidated 
 
Revenues $589,009  $522,526  $226,005  $(67,572) $1,269,968 
Operating Expenses  518,387   344,046   180,159   (67,572)  975,020 
Depreciation and Amortization  17,011   25,787   5,313   —   48,111 
General and Administrative Expenses  46,840   41,552   17,972   —   106,364 
                     
Operating Income  6,771   111,141   22,561   —   140,473 
Interest Income  5,309   1,326   5,836   (6,200)  6,271 
Interest Expense  (29,484)  (6,126)  (11,297)  6,200   (40,707)
Loss on Extinguishment of Debt  (7,933)  —   —   —   (7,933)
                     
Income (Loss) Before Income Taxes, Equity in Earnings of Affiliates, and Discontinued Operations  (25,337)  106,341   17,100   —   98,104 
Provision for Income Taxes  (6,775)  41,090   5,217   —   39,532 
Equity in Earnings of Affiliates, net of income tax provision  —   —   4,218   —   4,218 
                     
Income from Continuing Operations Before Equity Income of Consolidated Subsidiaries  (18,562)  65,251   16,101   —   62,790 
Income from Consolidated Subsidiaries, net of income tax provision  81,352           (81,352)  — 
                     
Income from Continuing Operations  62,790   65,251   16,101   (81,352)  62,790 
Add (Subtract): Loss (Earnings) Attributable to Noncontrolling Interests  —   —   —   678   678 
                     
Net Income Attributable to The GEO Group, Inc.  $62,790  $65,251  $16,101  $(80,674) $63,468 
                     


118144

THE GEO GROUP, INC.
 
CONDENSED CONSOLIDATINGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF OPERATIONS — (Continued)
 
                    
 For the Fiscal Year Ended December 28, 2008                     
   Combined
 Combined
      For the Fiscal Year Ended January 3, 2010 
   Subsidiary
 Non-Guarantor
        Combined
 Combined
     
 The GEO Group Inc. Guarantors Subsidiaries Eliminations Consolidated    Subsidiary
 Non-Guarantor
     
 (Dollars in thousands)  The GEO Group Inc. Guarantors Subsidiaries Eliminations Consolidated 
Revenues $545,590  $327,079  $215,157  $(44,820) $1,043,006  $620,271  $335,588  $235,747  $(50,516) $1,141,090 
Operating Expenses  469,903   216,380   181,196   (44,820)  822,659   523,820   218,679   205,116   (50,516)  897,099 
Depreciation and Amortization  16,284   16,120   5,002   —   37,406   17,877   17,128   4,301   —   39,306 
General and Administrative Expenses  34,682   20,792   13,677   —   69,151   36,042   19,500   13,698   —   69,240 
                      
Operating Income  24,721   73,787   15,282   —   113,790   42,532   80,281   12,632   —   135,445 
Interest Income  323   84   6,638   —   7,045   202   12   4,729   —   4,943 
Interest Expense  (20,505)  —   (9,697)  —   (30,202)  (19,709)  —   (8,809)  —   (28,518)
Loss on Extinguishment of Debt  (6,839)  —   —   —   (6,839)
                      
Income Before Income Taxes, Equity in Earnings of Affliates, and Discontinued Operations  4,539   73,871   12,223   —   90,633 
Income (Loss) Before Income Taxes, Equity in Earnings of Affiliates, and Discontinued Operations  16,186   80,293   8,552   —   105,031 
Provision for Income Taxes  1,670   27,183   4,950   —   33,803   6,439   31,937   3,703   —   42,079 
Equity in Earnings of Affiliates, net of income tax  —   —   4,623   —   4,623 
Equity in Earnings of Affiliates, net of income tax provision  —   —   3,517       3,517 
                      
Income from Continuing Operations Before Equity Income of Consolidated Subsidiaries  2,869   46,688   11,896   —   61,453   9,747   48,356   8,366   —   66,469 
Equity in Income of Consolidated Subsidiaries  58,584   —   —   (58,584)  — 
Income from Consolidated Subsidiaries, net of income tax provision  56,722           (56,722)  — 
                      
Income from Continuing Operations  61,453   46,688   11,896   (58,584)  61,453   66,469   48,356   8,366   (56,722)  66,469 
Loss from Discontinued Operations, net of income tax  (2,551)  (628)  (2,929)  3,557   (2,551)
Loss from Discontinued Operations, net of income tax provision  (346)  (193)  —   193   (346)
                      
Net Income $58,902  $46,060  $8,967  $(55,027) $58,902   66,123   48,163   8,366   (56,529)  66,123 
Add (Subtract): Loss (Earnings) Attributable to Noncontrolling Interests  —   —   —   (169)  (169)
                      
Net Income Attributable to The GEO Group, Inc.  $66,123  $48,163  $8,366  $(56,698) $65,954 
           


119145

THE GEO GROUP, INC.
 
CONDENSED CONSOLIDATINGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF OPERATIONS — (Continued)
 
                    
 For the Fiscal Year Ended December 30, 2007                     
   Combined
 Combined
      For the Fiscal Year Ended December 28, 2008 
   Subsidiary
 Non-Guarantor
        Combined
 Combined
     
 The GEO Group Inc. Guarantors Subsidiaries Eliminations Consolidated    Subsidiary
 Non-Guarantor
     
 (Dollars in thousands)  The GEO Group Inc. Guarantors Subsidiaries Eliminations Consolidated 
Revenues $472,517  $299,420  $237,257  $(32,895) $976,299  $545,590  $327,079  $215,157  $(44,820) $1,043,006 
Operating Expenses  414,108   204,608   202,682   (32,895)  788,503   469,903   216,380   180,590   (44,820)  822,053 
Depreciation and Amortization  13,281   15,140   4,797   —   33,218   16,284   16,120   5,002   —   37,406 
General and Administrative Expenses  30,196   19,134   15,162   —   64,492   34,682   20,792   13,677   —   69,151 
                      
Operating Income  14,932   60,538   14,616   —   90,086   24,721   73,787   15,888   —   114,396 
Interest Income  1,540   222   6,984   —   8,746   323   84   6,638   —   7,045 
Interest Expense  (26,402)  —   (9,649)  —   (36,051)  (20,505)  —   (9,697)  —   (30,202)
Loss on Extinguishment of Debt  (4,794)  —   —   —   (4,794)  —   —   —   —   — 
                      
Income Before Income Taxes, Equity in Earnings of Affliates, and Discontinued Operations  (14,724)  60,760   11,951   —   57,987 
Income (Loss) Before Income Taxes, Equity in Earnings of Affiliates, and Discontinued Operations  4,539   73,871   12,829   —   91,239 
Provision for Income Taxes  (5,629)  23,230   4,448   —   22,049   1,670   27,183   5,180   —   34,033 
Equity in Earnings of Affiliates, net of income tax  —   —   2,151   —   2,151 
Equity in Earnings of Affiliates, net of income tax provision  —   —   4,623   —   4,623 
                      
Income (loss) from Continuing Operations Before Equity Income of Consolidated Subsidiaries  (9,095)  37,530   9,654   —   38,089 
Equity in Income of Consolidated Subsidiaries  47,184   —   —   (47,184)  — 
Income from Continuing Operations Before Equity Income of Consolidated Subsidiaries  2,869   46,688   12,272   —   61,829 
Income from Consolidated Subsidiaries, net of income tax provision  58,960           (58,960)  — 
                      
Income from Continuing Operations  38,089   37,530   9,654   (47,184)  38,089   61,829   46,688   12,272   (58,960)  61,829 
Loss from Discontinued Operations, net of income tax  3,756   1,864   24   (1,888)  3,756 
Loss from Discontinued Operations, net of income tax provision  (2,551)  (628)  (2,929)  3,557   (2,551)
                      
Net Income $41,845  $39,394  $9,678  $(49,072) $41,845   59,278   46,060   9,343   (55,403)  59,278 
Add (Subtract): Loss (Earnings) Attributable to Noncontrolling Interests  —   —   —   (376)  (376)
                      
Net Income Attributable to The GEO Group, Inc.  $59,278  $46,060  $9,343  $(55,779) $58,902 
           


120146

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 
                                
 For the Fiscal Year Ended January 3, 2010  For the Fiscal Year Ended January 2, 2011 
   Combined
 Combined
      Combined
 Combined
   
   Subsidiary
 Non-Guarantor
      Subsidiary
 Non-Guarantor
   
 The GEO Group Inc. Guarantors Subsidiaries Consolidated  The GEO Group Inc. Guarantors Subsidiaries Consolidated 
 (Dollars in thousands)  (Dollars in thousands)
 
Operating Activities:                
Cash Flow From Operating Activities:                
Net cash provided by operating activities $(5,448) $119,792  $16,585  $130,929  $75,651  $10,922  $39,629  $126,202 
                  
Cash Flow from Investing Activities:                                
Acquisitions, net of cash acquired  —   (38,386)  —   (38,386)
Proceeds from sale of assets  150   29   —   179 
Dividend from subsidiary  7,400   —   (7,400)  — 
Acquisition, cash consideration, net of cash acquired  (260,255)  —   —   (260,255)
Just Care purchase price adjustment  —   (41)  —   (41)
Proceeds from sale of property and equipment  —   528   —   528 
Change in restricted cash  —   —   2,713   2,713   —   —   (11,432)  (11,432)
Capital expenditures  (72,379)  (75,556)  (1,844)  (149,779)  (80,016)  (15,801)  (1,244)  (97,061)
                  
Net cash used in investing activities  (64,829)  (113,913)  (6,531)  (185,273)  (340,271)  (15,314)  (12,676)  (368,261)
                  
Cash Flow from Financing Activities:                                
Proceeds from long-term debt  333,000   —   —   333,000   726,000   —   —   726,000 
Payments on long-term debt  (386,285)  (720)  (10,440)  (397,445)
Income tax benefit of equity compensation  601   —   —   601   3,926   —   —   3,926 
Debt issuance costs  (17,253)  —   —   (17,253)  (8,400)  —   —   (8,400)
Termination of interest rate swap agreements  1,719   —   —   1,719 
Payments on long-term debt  (252,678)  (676)  (14,120)  (267,474)
Payments for purchase of treasury shares  (80,000)  —   —   (80,000)
Payments on retirement of common stock  (7,078)  —   —   (7,078)
Proceeds from the exercise of stock options  1,457   —   —   1,457   6,695   —   —   6,695 
                  
Net cash provided by (used in) financing activities  66,846   (676)  (14,120)  52,050   254,858   (720)  (10,440)  243,698 
                  
Effect of Exchange Rate Changes on Cash and Cash Equivalents  —   —   4,495   4,495   —   —   4,169   4,169 
                  
Net Increase (Decrease) in Cash and Cash Equivalents  (3,431)  5,203   429   2,201   (9,762)  (5,112)  20,682   5,808 
Cash and Cash Equivalents, beginning of period  15,807   130   15,718   31,655   12,376   5,333   16,147   33,856 
                  
Cash and Cash Equivalents, end of period $12,376  $5,333  $16,147  $33,856  $2,614  $221  $36,829  $39,664 
                  


121147

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS — (Continued)
 
                                
 For the Fiscal Year Ended December 28, 2008  For the Fiscal Year Ended January 3, 2010 
   Combined
 Combined
      Combined
 Combined
   
   Subsidiary
 Non-Guarantor
      Subsidiary
 Non-Guarantor
   
 The GEO Group Inc. Guarantors Subsidiaries Consolidated  The GEO Group Inc. Guarantors Subsidiaries Consolidated 
 (Dollars in thousands)  (Dollars in thousands) 
Operating Activities:                
Cash Flow From Operating Activities:                
Net cash provided by operating activities $42,322  $3,374  $25,648  $71,344  $(5,448) $119,792  $16,761  $131,105 
                  
Cash Flow from Investing Activities:                                
Proceeds from sale of assets  —   1,029   107   1,136 
Purchase of shares in consolidated affiliate  —   —   (2,189)  (2,189)
Dividend from subsidiary  2,676   —   (2,676)  — 
Acquisition, cash consideration, net of cash acquired  —   (38,386)  —   (38,386)
Proceeds from sale of property and equipment  150   29   —   179 
Dividends from subsidiary  7,400   —   (7,400)  — 
Change in restricted cash  —   29   423   452   —   —   2,713   2,713 
Capital expenditures  (123,401)  (3,615)  (3,974)  (130,990)  (72,379)  (75,556)  (1,844)  (149,779)
                  
Net cash used in investing activities  (120,725)  (2,557)  (8,309)  (131,591)  (64,829)  (113,913)  (6,531)  (185,273)
                  
Cash Flow from Financing Activities:                                
Cash dividends to noncontrolling interests  —   —   (176)  (176)
Proceeds from long-term debt  156,000   —   —   156,000   333,000   —   —   333,000 
Payments on long-term debt  (252,678)  (676)  (14,120)  (267,474)
Income tax benefit of equity compensation  786   —   —   786   601   —   —   601 
Debt issuance costs  (3,685)  —   —   (3,685)  (17,253)  —   —   (17,253)
Payments on long-term debt  (85,678)  (822)  (13,656)  (100,156)
Termination of interest rate swap agreements  1,719   —   —   1,719 
Proceeds from the exercise of stock options  753   —   —   753   1,457   —   —   1,457 
                  
Net cash provided by (used in) financing activities  68,176   (822)  (13,656)  53,698   66,846   (676)  (14,296)  51,874 
                  
Effect of Exchange Rate Changes on Cash and Cash Equivalents  —   —   (6,199)  (6,199)  —   —   4,495   4,495 
                  
Net Decrease in Cash and Cash Equivalents  (10,227)  (5)  (2,516)  (12,748)
Net Increase (Decrease) in Cash and Cash Equivalents  (3,431)  5,203   429   2,201 
Cash and Cash Equivalents, beginning of period  26,034   135   18,234   44,403   15,807   130   15,718   31,655 
                  
Cash and Cash Equivalents, end of period $15,807  $130  $15,718  $31,655  $12,376  $5,333  $16,147  $33,856 
                  


122148

THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS — (Continued)
 
                                
 For the Fiscal Year Ended December 30, 2007  For the Fiscal Year Ended December 28, 2008 
   Combined
 Combined
      Combined
 Combined
   
   Subsidiary
 Non-Guarantor
      Subsidiary
 Non-Guarantor
   
 The GEO Group Inc. Guarantors Subsidiaries Consolidated  The GEO Group Inc. Guarantors Subsidiaries Consolidated 
 (Dollars in thousands)  (Dollars in thousands) 
Operating Activities:                
Cash Flow From Operating Activities:                
Net cash provided by operating activities $44,764  $14,127  $20,037  $78,928  $42,322  $3,374  $25,773  $71,469 
                  
Cash Flow from Investing Activities:                                
Acquisitions, net of cash acquired  (410,473)  —   —   (410,473)
CSC purchase price adjustment  —   2,291   —   2,291 
Proceeds from sale of assets  1,174   3,185   117   4,476 
Proceeds from sale of property and equipment  —   1,029   107   1,136 
Purchase of shares in consolidated affiliate  —   —   (2,189)  (2,189)
Dividend from subsidiary  12,418   —   (12,418)  —   2,676   —   (2,676)  — 
Change in restricted cash  —   (1)  (19)  (20)  —   29   423   452 
Capital expenditures  (94,107)  (19,079)  (2,018)  (115,204)  (123,401)  (3,615)  (3,974)  (130,990)
                  
Net cash used in investing activities  (490,988)  (13,604)  (14,338)  (518,930)  (120,725)  (2,557)  (8,309)  (131,591)
                  
Cash Flow from Financing Activities:                                
Proceeds from equity offering, net  227,485   —   —   227,485 
Cash dividends to noncontrolling interests  —   —   (125)  (125)
Proceeds from long-term debt  387,000   —   —   387,000   156,000   —   —   156,000 
Payments on long-term debt  (85,678)  (822)  (13,656)  (100,156)
Income tax benefit of equity compensation  3,061   —   —   3,061   786   —   —   786 
Debt issuance costs  (9,210)  —   —   (9,210)  (3,685)  —   —   (3,685)
Payments on long-term debt  (224,765)  (784)  (11,750)  (237,299)
Proceeds from the exercise of stock options  1,239   —   —   1,239   753   —   —   753 
                  
Net cash provided by (used in) financing activities  384,810   (784)  (11,750)  372,276   68,176   (822)  (13,781)  53,573 
��         
         
Effect of Exchange Rate Changes on Cash and Cash Equivalents  —   —   609   609   —   —   (6,199)  (6,199)
                  
Net Decrease in Cash and Cash Equivalents  (61,414)  (261)  (5,442)  (67,117)
Net Increase (Decrease) in Cash and Cash Equivalents  (10,227)  (5)  (2,516)  (12,748)
Cash and Cash Equivalents, beginning of period  87,448   396   23,676   111,520   26,034   135   18,234   44,403 
                  
Cash and Cash Equivalents, end of period $26,034  $135  $18,234  $44,403  $15,807  $130  $15,718  $31,655 
                  


123149

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.  Controls and Procedures
 
Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined inRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, referred to as the Exchange Act), as of the end of the period covered by this report. On the basis of this review, our management, including our Chief Executive Officer and our Chief Financial Officer, has concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to give reasonable assurance that the information required to be disclosed in our reports filed with the Securities and Exchange Commission, or the SEC, under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and to ensure that the information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
 
On August 12, 2010, we acquired Cornell, at which time Cornell became our subsidiary. See Note 2 to the condensed consolidated financial statements contained in this Annual Report for further details of the transaction. We are currently in the process of assessing and integrating Cornell’s internal controls over financial reporting into our financial reporting systems. Management’s assessment of internal controls over financial reporting at January 2, 2011, excludes the operations of Cornell as allowed by SEC guidance related to internal controls of recently acquired entities. Management will include the operations of Cornell in its assessment of internal controls over financial reporting within one year from the date of acquisition.
It should be noted that the effectiveness of our system of disclosure controls and procedures is subject to certain limitations inherent in any system of disclosure controls and procedures, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. Accordingly, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud. As a result, by its nature, our system of disclosure controls and procedures can provide only reasonable assurance regarding management’s control objectives.
 
Internal Control Over Financial Reporting
 
(a)  Management’s Annual Report on Internal Control Over Financial Reporting
 
See “Item 8. — Financial Statements and Supplemental Data — Management’s Report on Internal Control over Financial Reporting” for management’s report on the effectiveness of our internal control over financial reporting as of January 3, 2010.2, 2011.
 
(b)  Attestation Report of the Registered Public Accounting Firm
 
See “Item 8. — Financial Statements and Supplemental Data — Report of Independent Registered
Certified Public Accountants” for the report of our independent registered public accounting firm
on the effectiveness of our internal control over financial reporting as of January 3, 2010.2, 2011.
 
(c)  Changes in Internal Control over Financial Reporting
 
Our management is responsible for reporting any changes in our internal control over financial reporting (as such terms is defined inRules 13a-15(f) and15d-15(f) under the Exchange Act) during the period to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management believes that there have not been any changes in our internal


150

control over financial reporting (as such term is defined inRules 13a-15(f) and15d-15(f) under the Exchange Act) during the period to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B.  Other Information
 
None.Effective March 1, 2011, we amended the following executive employment agreements with our named executive officers, as determined as of the end of fiscal year 2009 and reflected in our proxy statement for the 2010 annual meeting of shareholders filed on March 24, 2010:


124

• Second Amended and Restated Executive Employment Agreement, effective December 31, 2008, by and between GEO and George C. Zoley;
• Senior Officer Employment Agreement, effective August 3, 2009, by and between GEO and Brian R. Evans;
• Senior Officer Employment Agreement, dated March 23, 2005, by and between GEO and John M. Hurley; and
• Amended and Restated Senior Officer Employment Agreement, effective December 31, 2008, by and between GEO and John J. Bulfin.

We amended the above executive employment agreements to reflect the new 2011 annual base salaries approved by the Compensation Committee for Messrs. Zoley, Evans, Hurley and Bulfin of $1,145,000, $500,000, $500,000 and $435,000, respectively. Additionally, we amended the above executive employment agreements to add a provision that all outstanding unvested stock options and restricted stock granted to each of Messrs. Zoley, Evans, Hurley and Bulfin fully vest immediately upon a “termination without cause” as such term is defined in each of their employment agreements, as approved by the Compensation Committee.
The foregoing description of the amendments to each of the executive employment agreements does not purport to be complete and is qualified in its entirety by reference to the full text of the amendments, copies of which are filed herewith as Exhibits 10.33, 10.34, 10.35 and 10.36, respectively, and are incorporated herein by reference.
 
PART III
 
Items 10, 11, 12, 13 and 14
 
The information required by Items 10, 11, 12, (except for the information required by Item 201(d) ofRegulation S-K which is included in Part II, Item 5 of this report), 13 and 14 ofForm 10-K will be contained in, and is incorporated by reference from, the proxy statement for our 20102011 annual meeting of shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report.
 
PART IV
 
Item 15.  Exhibits and Financial Statement Schedules
 
(a)(1)Financial Statements.
 
The consolidated financial statements of GEO are filed under Item 8 of Part II of this report.
 
(2) Financial Statement Schedules.
 
Schedule II — Valuation and Qualifying Accounts — Page 130154
 
All other schedules specified in the accounting regulations of the Securities and Exchange Commission have been omitted because they are either inapplicable or not required.


151

(3) Exhibits Required by Item 601 ofRegulation S-K. The following exhibits are filed as part of this Annual Report:
 
            
Exhibit
Exhibit
    Exhibit
    
Number
Number
   
Description
Number   Description
2.1 — Agreement and Plan of Merger, dated as of September 19, 2006, among the Company, GEO Acquisition II, Inc. and CentraCore Properties Trust (incorporated herein by reference to Exhibit 2.1 of the Company’s report onForm 8-K, filed on September 21, 2006)2.1 — Agreement and Plan of Merger, dated as of September 19, 2006, among the Company, GEO Acquisition II, Inc. and CentraCore Properties Trust (incorporated herein by reference to Exhibit 2.1 of the Company’s report onForm 8-K, filed on September 21, 2006)
2.2 — Agreement and Plan of Merger, dated as of August 28, 2009 by and among Just Care, Inc., GEO Care, Inc. and GEO Care Acquisition, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s report onForm 8-K, filed on September 3, 2009)2.2 — Agreement and Plan of Merger, dated as of August 28, 2009 by and among Just Care, Inc., GEO Care, Inc. and GEO Care Acquisition, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s report onForm 8-K, filed on September 3, 2009)
3.1 — Amended and Restated Articles of Incorporation of the Company, dated May 16, 1994 (incorporated herein by reference to Exhibit 3.1 to the Company’s registration statement onForm S-1, filed on May 24, 1994)2.3 — Agreement and Plan of Merger, dated as of April 18, 2010, by and among The GEO Group, Inc., GEO Acquisition III, Inc. and Cornell Companies, Inc. (incorporated herein by reference to Exhibit 2.1 of the Company’s report onForm 8-K, filed on April 20, 2010)
3.2 — Articles of Amendment to the Amended and Restated Articles of Incorporation, dated October 30, 2003 (incorporated herein by reference to Exhibit 3.2 to the Company’s report onForm 10-K, filed on February 15, 2008)2.3A — Amendment to Agreement and Plan of Merger, dated as of July 22, 2010, by and among The GEO Group, Inc., GEO Acquisition III, Inc. and Cornell Companies, Inc. (incorporated herein by reference to Exhibit 2.1A of the Company’s report onForm 8-K, filed on July 22, 2010).
3.3 — Articles of Amendment to the Amended and Restated Articles of Incorporation, dated November 25, 2003 (incorporated herein by reference to Exhibit 3.3 to the Company’s report onForm 10-K, filed on February 15, 2008)2.4 — Agreement and Plan of Merger, dated as of December 21, 2010, by and among The GEO Group, Inc., GEO Acquisition IV, Inc., BII Holding Corporation, BII Investors IF LP, in its capacity as the stockholders’ representative, and AEA Investors 2006 Fund L.P. (incorporated by reference to Exhibit 2.1 to the Company’s report onForm 8-K, filed on December 28, 2010)
3.4 — Articles of Amendment to the Amended and Restated Articles of Incorporation, dated September 29, 2006 (incorporated herein by reference to Exhibit 3.4 to the Company’s report onForm 10-K, filed on February 15, 2008)3.1 — Amended and Restated Articles of Incorporation of the Company, dated May 16, 1994 (incorporated herein by reference to Exhibit 3.1 to the Company’s registration statement onForm S-1, filed on May 24, 1994)
3.5 — Articles of Amendment to the Amended and Restated Articles of Incorporation, dated May 30, 2007 (incorporated herein by reference to Exhibit 3.5 to the Company’s report onForm 10-K, filed on February 15, 2008)3.2 — Articles of Amendment to the Amended and Restated Articles of Incorporation, dated October 30, 2003 (incorporated herein by reference to Exhibit 3.2 to the Company’s report onForm 10-K, filed on February 15, 2008)
3.6 — Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s report onForm 8-K, filed on April 2, 2008)3.3 — Articles of Amendment to the Amended and Restated Articles of Incorporation, dated November 25, 2003 (incorporated herein by reference to Exhibit 3.3 to the Company’s report onForm 10-K, filed on February 15, 2008)
4.1 — Indenture, dated July 9, 2003, by and between the Company and The Bank of New York, as Trustee, relating to 81/4% Senior Notes Due 2013 (incorporated herein by reference to Exhibit 4.1 to the Company’s report onForm 8-K, filed on July 29, 2003)3.4 — Articles of Amendment to the Amended and Restated Articles of Incorporation, dated September 29, 2006 (incorporated herein by reference to Exhibit 3.4 to the Company’s report onForm 10-K, filed on February 15, 2008)
3.5 — Articles of Amendment to the Amended and Restated Articles of Incorporation, dated May 30, 2007 (incorporated herein by reference to Exhibit 3.5 to the Company’s report onForm 10-K, filed on February 15, 2008)
3.6 — Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s report onForm 8-K, filed on April 2, 2008)
4.1 — Rights Agreement, dated as of October 9, 2003, between the Company and EquiServe Trust Company, N.A., as the Rights Agent (incorporated herein by reference to Exhibit 4.3 to the Company’s report onForm 8-K, filed on July 29, 2003)
4.2 — Indenture dated as of October 20, 2009 among the Company, the Guarantors party thereto and Wells Fargo Bank, National Association, as Trustee, relating to 73/4% Senior Notes Due 2017 (incorporated by reference to Exhibit 4.1 to the Company’s report onForm 8-K, filed on October 20, 2009)
4.3 — Indenture, dated as of February 10, 2011, by and among the Company, the Guarantors party thereto, and Wells Fargo Bank, National Association as Trustee relating to the 65/8% Senior Notes due 2021 (incorporated by reference to Exhibit 4.1 to the Company’s report onForm 8-K, filed on February 16, 2011)
10.1 — Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s registration statement onForm S-1, filed on May 24, 1994)†
10.2 — 1994 Stock Option Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s registration statement onForm S-1, filed on May 24, 1994)†


125152

            
Exhibit
Exhibit
    Exhibit
    
Number
Number
   
Description
Number   Description
4.2 — Registration Rights Agreement, dated July 9, 2003, by and among the Company Corporation and BNP Paribas Securities Corp., Lehman Brothers Inc., First Analysis Securities Corporation, SouthTrust Securities, Inc. and Comerica Securities, Inc. (incorporated herein by reference to Exhibit 4.2 to the Company’s report onForm 8-K, filed on July 29, 2003)10.3 — Form of Indemnification Agreement between the Company and its Officers and Directors (incorporated herein by reference to Exhibit 10.3 to the Company’s registration statement onForm S-1, filed on May 24, 1994)†
4.3 — Rights Agreement, dated as of October 9, 2003, between the Company and EquiServe Trust Company, N.A., as the Rights Agent (incorporated herein by reference to Exhibit 4.3 to the Company’s report onForm 8-K, filed on July 29, 2003)10.4 — Senior Officer Retirement Plan (incorporated herein by reference to Exhibit 10.4 to the Company’s registration statement onForm S-1/A, filed on December 22, 1995)†
4.4 — Indenture dated as of October 20, 2009 among the Company, the Guarantors party thereto and Wells Fargo Bank, National Association, as Trustee, relating to 73/4% Senior Notes Due 2017 (incorporated by reference to Exhibit 4.1 to the Company’s report onForm 8-K, filed on October 20, 2009)10.5 — Amendment to the Company’s Senior Officer Retirement Plan (incorporated herein by reference to Exhibit 10.5 to the Company’s report onForm 10-K, filed on March 23, 2005)†
10.1 — Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s registration statement onForm S-1, filed on May 24, 1994)†10.6 — 1999 Stock Option Plan (incorporated herein by reference to Exhibit 10.12 to the Company’s report onForm 10-K, filed on March 30, 2000)†
10.2 — 1994 Stock Option Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s registration statement onForm S-1, filed on May 24, 1994)†10.7 — Executive Retirement Agreement, dated March 7, 2002, between the Company and Dr. George C. Zoley (incorporated herein by reference to Exhibit 10.18 to the Company’s report onForm 10-Q, filed on May 15, 2002)†
10.3 — Form of Indemnification Agreement between the Company and its Officers and Directors (incorporated herein by reference to Exhibit 10.3 to the Company’s registration statement onForm S-1, filed on May 24, 1994)†10.8 — Executive Retirement Agreement, dated March 7, 2002, between the Company and Wayne H. Calabrese (incorporated herein by reference to Exhibit 10.19 to the Company’s report onForm 10-Q, filed on May 15, 2002)†
10.4 — Senior Officer Retirement Plan (incorporated herein by reference to Exhibit 10.4 to the Company’s registration statement onForm S-1/A, filed on December 22, 1995)†10.9 — Amended Executive Retirement Agreement, dated January 17, 2003, by and between the Company and George C. Zoley (incorporated herein by reference to Exhibit 10.18 to the Company’s report onForm 10-K, filed on March 20, 2003)†
10.5 — Amendment to the Company’s Senior Officer Retirement Plan (incorporated herein by reference to Exhibit 10.5 to the Company’s report onForm 10-K, filed on March 23, 2005)†10.10 — Amended Executive Retirement Agreement, dated January 17, 2003, by and between the Company and Wayne H. Calabrese (incorporated herein by reference to Exhibit 10.19 to the Company’s report onForm 10-K, filed on March 20, 2003)†
10.6 — 1999 Stock Option Plan (incorporated herein by reference to Exhibit 10.12 to the Company’s report onForm 10-K, filed on March 30, 2000)†10.11 — Senior Officer Employment Agreement, dated March 23, 2005, by and between the Company and John M. Hurley (incorporated herein by reference to Exhibit 10.24 to the Company’s report onForm 10-K, filed on March 23, 2005)†
10.7 — Amended and Restated Employment Agreement, dated November 4, 2004, between the Company and Dr. George C. Zoley (incorporated herein by reference to Exhibit 10.1 to the Company’s report onForm 10-Q, filed on November 4, 2004)†10.12 — Office Lease, dated September 12, 2002, by and between the Company and Canpro Investments Ltd. (incorporated herein by reference to Exhibit 10.22 to the Company’s report onForm 10-K, filed on March 20, 2003)
10.8 — Amended and Restated Employment Agreement, dated November 4, 2004, between the Company and Wayne H. Calabrese (incorporated herein by reference to Exhibit 10.2 to the Company’s report onForm 10-Q, filed on November 5, 2004)†10.13 — The Geo Group, Inc. Senior Management Performance Award Plan.*†
10.9 — Executive Employment Agreement, dated March 7, 2002, between the Company and Brian R. Evans (incorporated herein by reference to Exhibit 10.17 to the Company’s report onForm 10-Q, filed on May 15, 2002)†10.14 — Second Amended and Restated Executive Employment Agreement, effective December 31, 2008, by and between The GEO Group, Inc. and George C. Zoley (incorporated by reference to Exhibit 10.1 to the Company’s report onForm 8-K January 7, 2009)†
10.10 — Executive Retirement Agreement, dated March 7, 2002, between the Company and Dr. George C. Zoley (incorporated herein by reference to Exhibit 10.18 to the Company’s report onForm 10-Q, filed on May 15, 2002)†10.15 — Second Amended and Restated Executive Employment Agreement, effective December 31, 2008, by and between The GEO Group, Inc. and Wayne H. Calabrese (incorporated by reference to Exhibit 10.2 to the Company’s report onForm 8-K January 7, 2009)†
10.11 — Executive Retirement Agreement, dated March 7, 2002, between the Company and Wayne H. Calabrese (incorporated herein by reference to Exhibit 10.19 to the Company’s report onForm 10-Q, filed on May 15, 2002)†10.16 — Amended and Restated Senior Officer Employment Agreement, effective December 31, 2008, by and between The GEO Group, Inc. and John J. Bulfin (incorporated by reference to Exhibit 10.4 to the Company’s report onForm 8-K January 7, 2009)†
10.12 — Executive Retirement Agreement, dated March 7, 2002, between the Company and Brian R. Evans (incorporated herein by reference to Exhibit 10.20 to the Company’s report onForm 10-Q, filed on May 15, 2002)†10.17 — Amended and Restated The GEO Group, Inc. Senior Officer Retirement Plan, effective December 31, 2008 (incorporated by reference to Exhibit 10.8 to the Company’s report onForm 8-K January 7, 2009)†
10.13 — Amended Executive Retirement Agreement, dated January 17, 2003, by and between the Company and George C. Zoley (incorporated herein by reference to Exhibit 10.18 to the Company’s report onForm 10-K, filed on March 20, 2003)†10.18 — Senior Officer Employment Agreement, dated August 3, 2009, by and between the Company and Brian Evans (incorporated by reference to Exhibit 10.1 to the Company’s report onForm 10-Q, filed on August 3, 2009)†
10.14 — Amended Executive Retirement Agreement, dated January 17, 2003, by and between the Company and Wayne H. Calabrese (incorporated herein by reference to Exhibit 10.19 to the Company’s report onForm 10-K, filed on March 20, 2003)†10.19 — Registration Rights Agreement dated as of October 20, 2009 by and among the Company, the Guarantors party thereto and Banc of America Securities LLC, on behalf of itself and the other Initial Purchasers party thereto (incorporated by reference to Exhibit 10.1 to the Company’s report onForm 8-K, filed on October 20, 2009)
10.15 — Amended Executive Retirement Agreement, dated January 17, 2003, by and between the Company and Brian R. Evans (incorporated herein by reference to Exhibit 10.20 to the Company’s report onForm 10-K, filed on March 20, 2003)†10.20 — Credit Agreement dated as of August 4, 2010 between the Company, as Borrower, certain of GEO’s subsidiaries, as Grantors and BNP Paribas, as Lender and as Administrative Agent (incorporated by reference to Exhibit 10.44 to the Company’s report onForm 8-K/A, filed on December 27, 2010)

126153

       
Exhibit
    
Number
   
Description
 
 10.16 — Senior Officer Employment Agreement, dated March 23, 2005, by and between the Company and John J. Bulfin (incorporated herein by reference to Exhibit 10.22 to the Company’s report onForm 10-K, filed on March 23, 2005)†
 10.17 — Senior Officer Employment Agreement, dated March 23, 2005, by and between the Company and Jorge A. Dominicis (incorporated herein by reference to Exhibit 10.23 to the Company’s report onForm 10-K, filed on March 23, 2005)†
 10.18 — Senior Officer Employment Agreement, dated March 23, 2005, by and between the Company and John M. Hurley (incorporated herein by reference to Exhibit 10.24 to the Company’s report onForm 10-K, filed on March 23, 2005)†
 10.19 — Office Lease, dated September 12, 2002, by and between the Company and Canpro Investments Ltd. (incorporated herein by reference to Exhibit 10.22 to the Company’s report onForm 10-K, filed on March 20, 2003)
 10.20 — The Geo Group, Inc. Senior Management Performance Award Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s report onForm 10-Q, filed on May 13, 2005)
 10.21 — The GEO Group, Inc. 2006 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.21 to the Company’s report onForm 10-K, filed on February 15, 2008)†
 10.22 — Amendment to The Geo Group, Inc. 2006 Stock Incentive Plan (incorporated herein by reference to the Company’s report onForm 10-Q, filed on August 9, 2007)
 10.23 — Third Amended and Restated Credit Agreement, dated as of January 24, 2007, by and among The GEO Group, Inc., as Borrower, BNP Paribas, as Administrative Agent, BNP Paribas Securities Corp. as Lead Arranger and Syndication Agent, and the lenders who are, or may from time to time become, a party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s report onForm 8-K, filed on January 30, 2007)
 10.24 — Amendment No. 1 to the Third Amended and Restated Credit Agreement, dated as of January 31, 2007, between The GEO Group, Inc., as Borrower, and BNP Paribas, as Lender and as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s report onForm 8-K, filed on February 6, 2007)
 10.25 — Amendment No. 2 to the Third Amended and Restated Credit Agreement, dated as of January 31, 2007, between The GEO Group, Inc., as Borrower, and BNP Paribas, as Lender and as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s report onForm 8-K, filed on February 20, 2007)
 10.26 — Amendment No. 3 to the Third Amended and Restated Credit Agreement dated as of May 2, 2007, between The Geo Group, Inc., as Borrower, and BNP Paribas, as Lender and as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s report onForm 8-K, dated May 8, 2007)
 10.27 — Amendment No. 4 to the Third Amended and Restated Credit Agreement, dated effective as of August 26, 2008, between The GEO Group Inc., as Borrower, certain of GEO’s subsidiaries, as Grantors, and BNP Paribas, as Lender and as Administrative Agent (incorporated by reference to Exhibit 10.1 of the Company’s report onForm 8-K, filed on September 2, 2008)
 10.28 — Form of Lender Addendum, dated as of October 29, 2008, by and among The GEO Group, Inc. as Borrower, BNP Paribas as Administrative Agent and the Lender parties thereto (incorporated by reference to Exhibit 10.2 to the Company’s report onForm 10-Q, filed November 5, 2008)
 10.29 — Second Amended and Restated Executive Employment Agreement, effective December 31, 2008, by and between The GEO Group, Inc. and George C. Zoley (incorporated by reference to Exhibit 10.1 to the Company’s report onForm 8-K January 7, 2009)†
 10.30 — Second Amended and Restated Executive Employment Agreement, effective December 31, 2008, by and between The GEO Group, Inc. and Wayne H. Calabrese (incorporated by reference to Exhibit 10.2 to the Company’s report onForm 8-K January 7, 2009)†
 10.31 — Amended and Restated Executive Employment Agreement, effective December 31, 2008, by and between The GEO Group, Inc. and Brian R. Evans (incorporated by reference to Exhibit 10.3 to the Company’s report onForm 8-K January 7, 2009)†

127

            
Exhibit
Exhibit
    Exhibit
    
Number
Number
   
Description
Number   Description
10.32 — Amended and Restated Senior Officer Employment Agreement, effective December 31, 2008, by and between The GEO Group, Inc. and John J. Bulfin (incorporated by reference to Exhibit 10.4 to the Company’s report onForm 8-K January 7, 2009)†10.21 — Voting Agreement, dated as of April 18, 2010, by and among The Company, Inc. and certain stockholders of Cornell Companies, Inc. named therein (incorporated by reference to Exhibit 10.43 to the Company’s report onForm 8-K, filed on April 20, 2010)
10.33 — Amended and Restated Senior Officer Employment Agreement, effective December 31, 2008, by and between The GEO Group, Inc. and Jorge A. Dominicis (incorporated by reference to Exhibit 10.5 to the Company’s report onForm 8-K January 7, 2009)†10.22 — Amended and Restated The GEO Group, Inc. 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.45 to the Company’s Registration Statement on Form S-8 (FileNo. 333-169198)).†
10.34 — Amended and Restated Senior Officer Employment Agreement, effective December 31, 2008, by and between The GEO Group, Inc. and Thomas M. Wierdsma (incorporated by reference to Exhibit 10.6 to the Company’s report onForm 8-K January 7, 2009)†10.23 — Amendment No. 1 to the Amended and Restated The GEO Group, Inc. 2006 Stock Incentive Plan.*†
10.35 — Amended and Restated The GEO Group, Inc. Senior Management Performance Award Plan, effective December 31, 2008 (incorporated by reference to Exhibit 10.7 to the Company’s report onForm 8-K January 7, 2009)†10.24 — Voting Agreement, dated as of December 21, 2010, by and among the Company, Inc., GEO Acquisition IV, Inc. and certain stockholders of BII Holding Corporation (incorporated by reference to Exhibit 10.47 to the Company’s report onForm 8-K, filed on December 28, 2010)
10.36 — Amended and Restated The GEO Group, Inc. Senior Officer Retirement Plan, effective December 31, 2008 (incorporated by reference to Exhibit 10.8 to the Company’s report onForm 8-K January 7, 2009)†10.25 — Registration Rights Agreement, dated as of February 10, 2011, by and among the Company, the Guarantors party thereto, and Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc., J.P. Morgan Securities LLC and SunTrust Robinson Humphrey, Inc. as representatives of the Initial Purchasers (incorporated by reference to Exhibit 10.1 to the Company’s report onForm 8-K, filed on February 16, 2011).
10.37 — Amended and Restated The GEO Group, Inc. 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s report onForm 8-K May 5, 2009)†10.26 — Cornell Companies, Inc. Amended and Restated 2006 Incentive Plan (incorporated by reference to Exhibit 10.46 to the Company’s Registration Statement onForm S-8 (FileNo. 333-169199), filed on September 3, 2010).†
10.38 — Senior Officer Employment Agreement, dated August 3, 2009, by and between the Company and Brian Evans (incorporated by reference to Exhibit 10.1 to the Company’s report onForm 10-Q, filed on August 3, 2009)†10.27 — First Amendment to Second Amended and Restated Executive Employment Agreement, effective March 1, 2011, by and between the Company and George C. Zoley*†
10.39 — Registration Rights Agreement dated as of October 20, 2009 by and among the Company, the Guarantors party thereto and Banc of America Securities LLC, on behalf of itself and the other Initial Purchasers party thereto (incorporated by reference to Exhibit 10.1 to the Company’s report onForm 8-K, filed on October 20, 2009)10.28 — First Amendment to Senior Officer Employment Agreement, effective March 1, 2011, by and between the Company and Brian R. Evans*†
10.40 — Amendment No. 5 to the Third Amended and Restated Credit Agreement dated as of October 5, 2009 between the Company, as Borrower, and BNP Paribas, as Lender and as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company’s report onForm 8-K, filed on October 20, 2009)10.29 — First Amendment to Senior Officer Employment Agreement, effective March 1, 2011, by and between the Company and John M. Hurley*†
10.41 — Amendment No. 6 to the Third Amended and Restated Credit Agreement dated as of October 14, 2009 between the Company, as Borrower, and BNP Paribas, as Lender and as Administrative Agent (incorporated by reference to Exhibit 10.3 to the Company’s report onForm 8-K, filed on October 20, 2009)10.30 — First Amendment to Amended and Restated Senior Officer Employment Agreement, effective March 1, 2011, by and between the Company and John J. Bulfin*†
10.42 — Amendment No. 7 to the Third Amended and Restated Credit Agreement dated as of December 4, 2009 between the Company, as Borrower, certain of GEO’s subsidiaries, as Grantors, and BNP Paribas, as Lender and as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s report onForm 8-K, filed on December 10, 2009)21.1 — Subsidiaries of the Company*
21.1 — Subsidiaries of the Company*23.1 — Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm*
23.1 — Consent of Grant Thornton LLP, independent registered certified public accountants*31.1 — Rule 13a-14(a) Certification in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.*
31.1 — Rule 13a-14(a) Certification in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.*31.2 — Rule 13a-14(a) Certification in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 — Rule 13a-14(a) Certification in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.*32.1 — Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.1 — Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2 — Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2 — Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*101.INS — XBRL Instance Document
101.SCH — XBRL Taxonomy Extension Schema
101.CAL — XBRL Taxonomy Extension Calculation Linkbase
101.DEF — XBRL Taxonomy Extension Definition Linkbase
101.LAB — XBRL Taxonomy Extension Label Linkbase
101.PRE — XBRL Taxonomy Extension Presentation Linkbase
 
 
*Filed herewith.
 
†Management contract or compensatory plan, contract or agreement as defined in Item 402 (a)(3) ofRegulation S-K.

128154

 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
THE GEO GROUP, INC.
 
  
/s/  BRIAN R. EVANS
Brian R. Evans
Senior Vice President &
Chief Financial Officer
 
Date: February 22, 2010March 2, 2011
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
 
       
Signature
 
Title
 
Date
 
     
/s/  GEORGE C. ZOLEY

George C. Zoley		 Chairman of the Board & Chief Executive Officer
(principal executive officer)		 February 22, 2010
/s/  WAYNE H. CALABRESE

Wayne H. Calabrese		Vice Chairman of the Board, President & Chief Operating OfficerFebruary 22, 2010March 2, 2011
     
/s/  BRIAN R. EVANS

Brian R. Evans		 Senior Vice President &
Chief Financial Officer
(principal financial officer)		 February 22, 2010March 2, 2011
     
/s/  RONALD A. BRACK

Ronald A. Brack		 Vice President, Chief Accounting Officer
and Controller
(principal accounting officer)		 February 22, 2010March 2, 2011
/s/  CLARENCE E. ANTHONY

Clarence E. Anthony		DirectorMarch 2, 2011
     
/s/  NORMAN A. CARLSON

Norman A. Carlson		 Director February 22, 2010March 2, 2011
     
/s/  ANNE N. FOREMAN

Anne N. Foreman		 Director February 22, 2010
/s/  JOHN M. PALMS

John M. Palms		DirectorFebruary 22, 2010March 2, 2011
     
/s/  RICHARD H. GLANTON

Richard H. Glanton		 Director February 22, 2010March 2, 2011
     
/s/  CHRISTOPHER C. WHEELER

Christopher C. Wheeler		 Director February 22, 2010March 2, 2011


129156

Schedule

THE GEO GROUP, INC.

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years Ended January 2, 2011, January 3, 2010, and December 28, 2008 and December 30, 2007
 
                                        
 Balance at
 Charged to
 Charged
 Deductions,
 Balance at
  Balance at
 Charged to
 Charged
 Deductions,
 Balance at
 Beginning
 Cost and
 to Other
 Actual
 End of
  Beginning
 Cost and
 to Other
 Actual
 End of
Description
 of Period Expenses Accounts Charge-Offs Period  of Period Expenses Accounts Charge-Offs Period
     (In thousands)      (In thousands)
YEAR ENDED JANUARY 2, 2011:               
Allowance for doubtful accounts $429  $932  $—  $(53) $1,308 
YEAR ENDED JANUARY 3, 2010:                                   
Allowance for doubtful accounts $625  $485  $(346) $(335) $429  $625  $485  $(346) $(335) $429 
YEAR ENDED DECEMBER 28, 2008:                                   
Allowance for doubtful accounts $445  $602  $(302) $(120) $625  $445  $602  $(302) $(120) $625 
YEAR ENDED DECEMBER 30, 2007:                    
Allowance for doubtful accounts $926  $(176) $(130) $(120) $445 
YEAR ENDED JANUARY 2, 2011:               
Asset Replacement Reserve $—  $—  $—  $—  $— 
YEAR ENDED JANUARY 3, 2010:                                   
Asset Replacement Reserve $623  $(613) $—  $(10) $—  $623  $(613) $—  $(10) $— 
YEAR ENDED DECEMBER 28, 2008:                                   
Asset Replacement Reserve $885  $54  $—  $(316) $623  $885  $54  $—  $(316) $623 
YEAR ENDED DECEMBER 30, 2007:                    
Asset Replacement Reserve $768  $328  $—  $(211) $885 


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