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 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
60
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:
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| • | 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; |
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| • | 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; |
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| • | our ability to reactivateactivate the North Lake Correctional Facility;inactive beds at our idle facilities; |
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| • | an increase in unreimbursed labor rates; |
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| • | our ability to expand, diversify and grow our correctional, and mental health and residential treatment services;services businesses; |
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| • | our ability to win management contracts for which we have submitted proposals and to retain existing management contracts; |
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| • | our ability to raise new project development capital given the often short-term nature of the customers’ commitment to use newly developed facilities; |
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| • | our ability to estimate the government’s level of dependency on privatized correctional services; |
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| • | our ability to accurately project the size and growth of the U.S. and international privatized corrections industry; |
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| • | our ability to develop long-term earnings visibility; |
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| • | our ability to identify suitable acquisitions and to successfully complete and integrate such acquisitions on satisfactory terms; |
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| | |
| • | our ability to successfully integrate Cornell and BI into our business within our expected time-frame and estimates regarding integration costs; |
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| • | 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; |
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| • | 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; |
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| • | 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; |
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| • | our exposure to rising general insurance costs; |
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| • | 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; |
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| • | our exposure to claims for which we are uninsured; |
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| • | our exposure to rising employee and inmate medical costs; |
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| • | our ability to maintain occupancy rates at our facilities; |
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| • | our ability to manage costs and expenses relating to ongoing litigation arising from our operations; |
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| • | our ability to accurately estimate on an annual basis, loss reserves related to general liability, workersworkers’ compensation and automobile liability claims; |
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| • | our ability to identify suitable acquisitions, and to successfully complete and integrate such acquisitions on satisfactory terms; |
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| • | the ability of our government customers to secure budgetary appropriations to fund their payment obligations to us; and |
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| • | 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.
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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.
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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
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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.
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.
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
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| | 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 | |
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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 | ) |
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Net Income | | $ | 65,954 | | | $ | 58,902 | | | $ | 41,845 | | | $ | 62,790 | | | $ | 66,123 | | | $ | 59,278 | |
Loss (Earnings) Attributable to Noncontrolling Interests | | | | 678 | | | | (169 | ) | | | (376 | ) |
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Net Income Attributable to The GEO Group, Inc. | | | $ | 63,468 | | | $ | 65,954 | | | $ | 58,902 | |
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Weighted Average Common Shares Outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 50,879 | | | | 50,539 | | | | 47,727 | | | | 55,379 | | | | 50,879 | | | | 50,539 | |
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Diluted | | | 51,922 | | | | 51,830 | | | | 49,192 | | | | 55,989 | | | | 51,922 | | | | 51,830 | |
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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
90
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.
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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
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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 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
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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
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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
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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
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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
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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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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
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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
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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.
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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
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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
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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.
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THE GEO GROUP, INC.
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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
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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.
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
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.
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)
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)
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 | |
| | | | | | | | |
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 -
| |
Period | | Maximum 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 2011 | | | 4.50 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 -
| |
Period | | Maximum 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 2011 | | | 3.25 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
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THE GEO GROUP, INC.
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(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
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THE GEO GROUP, INC.
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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
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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 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.
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 $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.
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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.
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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,
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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
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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.
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.
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)
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 borrowings | | LIBOR plus 2.00% to 3.00%. |
Base rate borrowings | | Prime Rate plus 1.00% to 2.00%. |
Letters of credit | | 2.00% to 3.00%. |
Unused Revolver | | 0.375% 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 -
| |
Period | | Maximum Ratio | |
|
August 4, 2010 through and including the last day of the fiscal year 2011 | | | 4.50 to 1.00 | |
First day of fiscal year 2012 through and including that last day of fiscal year 2012 | | | 4.25 to 1.00 | |
Thereafter | | | 4.00 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 -
| |
Period | | Maximum Ratio | |
|
August 4, 2010 through and including the last day of the fiscal year 2011 | | | 3.25 to 1.00 | |
First day of fiscal year 2012 through and including that last day of fiscal year 2012 | | | 3.00 to 1.00 | |
Thereafter | | | 2.75 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
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 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
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 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
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 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.
120
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.
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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
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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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