UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| | | |
þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | For the fiscal year ended December 31, 200630, 2007 |
Commission filenumber: 1-14260
The GEO Group, Inc.
(Exact name of registrant as specified in its charter)
| | | |
Florida | | 65-0043078 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
| | | |
One Park Place, Suite 700,
621 Northwest 53rd Street
Boca Raton, Florida
(Address of principal executive offices) | | 33487-8242
(Zip Code) |
Registrant’s telephone number (including area code):
(561) 893-0101
Securities registered pursuant to Section 12(b) of the Act:
| | | | | |
Title of Each Class | | Name of Each Exchange on Which Registered |
| |
| Common Stock, $0.01 Par Value | | | New York Stock Exchange | |
Indicate by a check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. þ
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filerfiler” and larger accelerated filer”“smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filerþ
| | | | | | |
Large accelerated filer þ | | Accelerated filer o | | Non-accelerated filer o
(Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). Yes o No þ
The aggregate market value of the 8,159,81250,766,973 shares of common stock held by non-affiliates of the registrant as of June 30, 200629, 2007 (based on the last reported sales price of such stock on the New York Stock Exchange on such date of $35.05$29.10 per share) was approximately $286,001,411.$1,477,318,914.
As of February 23, 200711, 2008 the registrant had 19,753,08450,951,368 shares of common stock outstanding.
Certain portions of the registrant’s annual report to security holders for fiscal year ended December 31, 200630, 2007 are incorporated by reference into Part III of this report. Certain portions of the registrant’s definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 for its 2007 annual meeting of shareholders are incorporated by reference into Part III of this report.
PART I
As used in this report, the terms “we,” “us,” “our,” “GEO” and the “Company” refer to The GEO Group, Inc., its consolidated subsidiaries and its unconsolidated affiliates, unless otherwise expressly stated or the context otherwise requires.
General
We are a leading provider of government-outsourced services specializing in the management of correctional, detention and mental health and residential treatment facilities in the United States, Canada, Australia, South Africa and the United Kingdom and Canada.Kingdom. We operate a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers and mental health and residential treatment facilities. Our correctional and detention management services involve the provision of security, administrative, rehabilitation, education, health and food services, primarily at adult male correctional and detention facilities. Our mental health and residential treatment services, which are operated through our wholly-owned subsidiary GEO Care, Inc., involve the delivery of quality care, innovative programming and active patient treatment, primarily at privatized state mental health.health facilities. We also develop new facilities based on contract awards, using our project development expertise and experience to design, construct and finance what we believe arestate-of-the-art facilities that maximize security and efficiency.
Our business was founded in 1984 as a division of The Wackenhut Corporation, or TWC, a multinational provider of global security services. We were incorporated in 1988 as a wholly-owned subsidiary of TWC. In July 1994, we became a publicly-traded company. In 2002, TWC was acquired by Group 4 Falck A/S, which became our new parent company. In July 2003, we purchased all of our common stock owned by Group 4 Falck A/S and became an independent company. In November 2003, we changed our corporate name to ”The GEO Group, Inc.” We currently trade on the New York Stock Exchange under the ticker symbol “GEO.”
As of December 31, 2006, we operated a total of 62 correctional, detention and mental health and residential treatment facilities and had over 54,000 beds under management or for which we had been awarded contracts. We maintained an average facility occupancy rate of 96.1% for the fiscal year ended December 31, 2006.30, 2007, we managed 59 facilities totaling approximately 50,400 beds worldwide and had an additional 6,800 beds under development at 10 facilities, including the expansion of five facilities we currently operate and five new facilities under construction. We also had approximately 730 additional inactive beds available to meet our customers’ potential future demand for bed space. For the fiscal year ended December 31, 2006,30, 2007, we had consolidated revenues of $860.9 million$1.02 billion and consolidated operating incomewe maintained an average companywide facility occupancy rate of $64.2 million.96.8%.
WeAt our correctional and detention facilities in the U.S. and internationally, we offer services that go beyond simply housing offenders in a safe and secure manner formanner. The services we offer to inmates at most of our correctional and detention facilities. We offermanaged facilities include a wide array of in-facility rehabilitative and educational programs. Inmates at most of our facilities can also receiveprograms such as basic education through academic programs designed to improve inmates’ literacy levels and enhance the opportunity to acquire General Education Development certificates. Most of our managed facilities also offercertificates and vocational training for in-demand occupations to inmates who lack marketable job skills. In addition, most of our managed facilitiesWe offer life skills/transition planning programs that provide inmates job search training and employment skills, anger management skills, health education, financial responsibility training, parenting skills and other skills associated with becoming productive citizens. We also offer counseling, educationand/or treatment to inmates with alcohol and drug abuse problems at most of the domestic facilities we manage.
Our mental health facilities and residential treatment services primarily involve the provision of acute mental health and related administrative services to mentally ill patients that have been placed under public sector supervision and care. At these mental health facilities, we employ psychiatrists, physicians, nurses, counselors, social workers and other trained personnel to deliver active psychiatric treatment designed to diagnose, treat and rehabilitate patients for community reintegration.
Business Segments
We conduct our business through threefour reportable business segments: our U.S. corrections segment; our internationalInternational services segment; our GEO Care segment; and our GEO CareFacility construction and design segment. We have identified these threefour reportable segments
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to reflect our current view that we operate threefour distinct business lines, each of which constitutes a material part of our overall business. This treatment also reflects how we have discussed our business with investors and analysts. The U.S. corrections segment primarily encompasses ourU.S.-based privatized corrections and detention business. The International services segment primarily consists of our privatized corrections and detention operations in South Africa, Australia and the United Kingdom. This segment also operates our recently acquired United Kingdom-based prisoner transportation business andInternational services reviews opportunities to further diversify into related foreign-based
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governmental-outsourced services on an ongoing basis. Our GEO Care segment, which is operated by our wholly-owned subsidiary GEO Care, Inc., comprises our privatized mental health and residential treatment services business, all of which is currently conducted in the U.S. Our facility construction and design segment primarily consists of contracts with various state, local and federal agencies for the design and construction of facilities for which we have management contracts. Financial information about these segments for fiscal years 2004,2007, 2006 and 2005 and 2006 is contained in“Note 16- Business Segments and Geographic Information” of the “Notes to Consolidated Financial Statements” included in thisForm 10-K and is incorporated herein by this reference.
Recent Developments
Stock Split
On May 1, 2007, our Board of Directors declared a two-for-one stock split of our common stock. The stock split took effect on June 12, 2006,1, 2007 with respect to stockholders of record on May 15, 2007. Following the stock split, our shares outstanding increased from 25.4 million to 50.8 million. All share and per share data included in this annual report onForm 10-K have been adjusted to reflect the stock split.
Public Equity Offering
On March 23, 2007, we sold in a follow-on public equity offering 3,000,0005,462,500 shares of our common stock at a price of $35.46$43.99 per share, (4,500,000(10,925,000 shares of itsour common stock at a price of $23.64 reflecting$22.00 per share after giving effect to the 3 for 2two-for-one stock split). All shares were issued from treasury. The aggregate net proceeds to us from the offering (after deducting underwriter’s discounts and expenses) was approximately $100expenses of $12.8 million) were $227.5 million. On June 13, 2006,March 26, 2007, we utilized approximately $74.6$200.0 million of the net proceeds from the offering to repay all outstanding debt under the term loanTerm Loan B portion of our Seniorthe Third Amended and Restated Credit Facility. In addition, on August 11, 2006, weAgreement (the “Senior Credit Facility”). We used $4.0 millionthe balance of the proceeds offrom the offering to purchase from certain directors, executive officers and employees stock options that were currently outstanding and exercisable, and which were due to expire within the next three years. The balance of the net proceeds was used for general corporate purposes, includingwhich included working capital, capital expenditures and the acquisitionpotential acquisitions of CPT.complementary businesses and other assets.
On August 10, 2006, our boardAcquisition of directors declared a3-for-2CentraCore Properties Trust stock split of our common stock. The stock split took effect on October 2, 2006 with respect to shareholders of record on September 15, 2006. Following the stock split, the shares outstanding increased from 13.0 million to 19.5 million. All relevant share and per share data has been adjusted to reflect the stock split.
On September 20, 2006, we entered into an Agreement and Plan of Merger by and among us and CentraCore Properties Trust, which we refer to as CPT. On January 24, 2007, we completed the acquisition of CPT pursuant to an Agreement and Plan of Merger, dated as of September 19, 2006, referred to as the Merger Agreement, by and among us, GEO Acquisition II, Inc.acquired CentraCore Properties Trust (“CPT”), a direct wholly-owned subsidiarypublicly traded real estate investment trust focused on the corrections industry, for aggregate consideration of GEO, and CPT. Under the terms of the Merger Agreement, CPT merged with and into GEO Acquisition II, Inc., referred to as the Merger, with GEO Acquisition II, Inc., being the surviving corporation of the Merger.
As a result of the Merger, each share of common stock of CPT was converted into the right to receive $32.5826 in cash, inclusive of a pro-rated dividend for all quarters or partial quarters for which CPT’s dividend had not yet been paid as of the closing date. In addition, each outstanding option to purchase CPT common stock having an exercise price less than $32.00 per share was converted into the right to receive the difference between $32.00 per share and the exercise price per share of the option, multiplied by the total number of shares of CPT common stock subject to the option. We paid an aggregate purchase price of approximately $427.6$421.6 million, for the acquisition of CPT, inclusive of the payment of approximately $367.6$368.3 million in exchange for the common stock and the options, the repayment of approximately $40.0 million in pre-existing CPT debt and the payment of approximately $20.0$13.3 million in transaction related fees and expenses. As a result of the acquisition, we gained ownership of the 7,743 beds we formerly leased from CPT, as well as an additional 1,126 beds leased to third parties. We financed the acquisition through the use of $365.0 million in new borrowings under a new Term Loan Bterm loan and approximately $62.6$65.7 million in cash on hand.
On October 13, 2006, We recognized $9.1 million in deferred financing costs in connection with the refinancing of the debt. In the first quarter, we acquired United Kingdom based Recruitment Solutions International (RSI) for approximately $2.3used $200.0 million plus transactionfrom the proceeds of our March 2007 equity offering to repay a portion of the debt and also wrote off $4.8 million of the related expenses. RSI is a privately-held provider of transportation services to The Home Office Nationality and Immigration Directorate. The acquisition of RSI did not materially impact our 2006 result of operations.deferred financing fees.
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Additional information regarding significant events affecting us during the fiscal year ended December 31, 200630, 2007 is set forth in Item 7 below under Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Quality of Operations
We operate each facility in accordance with our company-wide policies and procedures and with the standards and guidelines required under the relevant management contract. For many facilities, the standards and guidelines include those established by the American Correctional Association, or ACA. The ACA is an independent organization of corrections professionals, which establishes correctional facility standards and guidelines that are generally acknowledged as a benchmark by governmental agencies responsible for correctional facilities. Many of our contracts in the United States require us to seek and maintain ACA accreditation of the facility. We have sought and received ACA accreditation and re-accreditation for all such
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facilities. We achieved a median re-accreditation score of 97.9%99.2% in fiscal year 2006.2007. Approximately 66%67.7% of our 2006 U.S. corrections2007 U.S.corrections revenue was derived from ACA accredited facilities. We have also achieved and maintained certification by the Joint Commission on Accreditation for Healthcare Organizations, or JCAHO, for our mental health facilities and two of our correctional facilities. We have been successful in achieving and maintaining accreditation under the National Commission on Correctional Health Care, or NCCHC, in a majority of the facilities that we currently operate. The NCCHC accreditation is a voluntary process which we have used to establish comprehensive health care policies and procedures to meet and adhere to the ACA standards. The NCCHC standards, in most cases, exceed ACA Health Care Standards.
Marketing and Business Proposals
We intend to pursue a diversified growth strategy by winning new clients and contracts, expanding our government services portfolio and pursuing selective acquisition opportunities. Our primary potential customers are governmental agencies responsible for local, state and federal correctional facilities in the United States and governmental agencies responsible for correctional facilities in Australia, South Africa and the United Kingdom. Other primary customers include state agencies in the U.S. responsible for mental health facilities, and other foreign governmental agencies.
Governmental agencies responsible for correctional and detention facilities generally procure goods and services We achieve organic growth through requests for proposals. A typicalcompetitive bidding that begins with the issuance by a government agency of a request for proposal, requires bidders to provide detailed information, including, but not limited to, descriptions ofor RFP. We primarily rely on the following: theRFP process for organic growth in our U.S. and international corrections operations as well as in our mental health and residential treatment services to be provided by the bidder, its experience and qualifications, and the price at which the bidder is willing to provide the services, which services may include the renovation, improvement or expansion of an existing facility, or the planning, design and construction of a new facility.
If the project meets our profile for new projects, we then will submit a written response to the request for proposal. We estimate that we typically spend between $100,000 and $200,000 when responding to a request for proposal. We have engaged and intend in the future to engage independent consultants to assist us in developing privatization opportunities and in responding to requests for proposals, monitoring the legislative and business climate, and maintaining relationships with existing customers.business.
Our state and local experience has been that a period of approximately 60sixty to 90ninety days is generally required from the issuance of a request for proposal to the submission of our response to the request for proposals;proposal; that between one and four months elapse between the submission of our response and the agency’s award for a contract; and that between one and four months elapse between the award of a contract and the commencement of construction of the facility, in the case of a new facility, or the management of the facility, in the case of an existing facility. If the facility for which an award has been made must be constructed, our experience is that construction usually takes between nine and 24 months, depending on the size and complexity of the project; therefore, management of a newly constructed facility typically commences between 10 and 28 months after the governmental agency’s award.
Our federal experience has been that a period of approximately 60sixty to 90ninety days is generally required from the issuance of a request for proposal to the submission of our response to the request for proposal; that between 12twelve and 18eighteen months elapse between the submission of our response and the agency’s award for a contract; and that between four and 18eighteen weeks elapse between the award of a contract and the commencement
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of construction of the facility, in the case of a new facility, or the management of the facility in the case of an existing facility.
If the state, local or federal facility for which an award has been made must be constructed, our experience is that construction usually takes between nine and 24twenty-four months to complete construction, depending on the size and complexity of the project; therefore, management of a newly constructed facility typically commences between 10ten and 28twenty-eight months after the governmental agency’s award.
We believe that our long operating history and reputation have earned us credibility with both existing and prospective customers when bidding on new facility management contracts or when renewing existing contracts. Our success in the RFP process has resulted in a pipeline of new projects with significant revenue potential. During 2007, we announced eleven new projects representing 8,751 beds compared to the announcement of ten new projects representing 4,934 beds during 2006.
In addition to pursuing organic growth through the RFP process, we will from time to time selectively consider the financing and construction of new facilities or expansions to existing facilities on a speculative basis without having a signed contract with a known customer. We also plan to leverage our experience to expand the range of government-outsourced services that we provide. We will continue to pursue selected acquisition opportunities in our core services and other government services areas that meet our criteria for growth and profitability. We have engaged and intend in the future to engage independent consultants to assist us in developing privatization opportunities and in responding to requests for proposals, monitoring the legislative and business climate, and maintaining relationships with existing customers.
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Facility Design, Construction and Finance
We offer governmental agencies consultation and management services relating to the design and construction of new correctional and detention facilities and the redesign and renovation of older facilities. As of December 31, 2006,30, 2007, we had provided services for the design and construction of forty-three facilities and for the redesign and renovation and expansion of thirteentwenty-two facilities.
Contracts to design and construct or to redesign and renovate facilities may be financed in a variety of ways. Governmental agencies may finance the construction of such facilities through the following:
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| | • | a one time general revenue appropriation by the governmental agency for the cost of the new facility; |
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| | • | general obligation bonds that are secured by either a limited or unlimited tax levy by the issuing governmental entity; or |
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| | • | revenue bonds or certificates of participation secured by an annual lease payment that is subject to annual or bi-annual legislative appropriations. |
We may also act as a source of financing or as a facilitator with respect to the financing of the construction of a facility. In these cases, the construction of such facilities may be financed through various methods including the following:
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| | • | funds from equity offerings of our stock; |
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| | • | cash flows from our operations; |
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| | • | borrowings by us from banks or other institutions (which may or may not be subject to government guarantees in the event of contract termination); or |
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| | • | lease arrangements with third parties. |
If the project is financed using direct governmental appropriations, with proceeds of the sale of bonds or other obligations issued prior to the award of the project or by us directly, then financing is in place when the contract relating to the construction or renovation project is executed. If the project is financed using project-specific tax-exempt bonds or other obligations, the construction contract is generally subject to the sale of such bonds or obligations. Generally, substantial expenditures for construction will not be made on such a project until the tax-exempt bonds or other obligations are sold; and, if such bonds or obligations are not sold, construction and therefore, management of the facility, may either be delayed until alternative financing is procured or the development of the project will be suspended or entirely cancelled. If the project is self-financed by us, then financing is generally in place prior to the commencement of construction.
Under our construction and design management contracts, we generally agree to be responsible for overall project development and completion. We typically act as the primary developer on construction contracts for facilities and subcontract with national general contractors. Where possible, we subcontract with construction companies that we have worked with previously. We make use of an in-house staff of architects and operational experts from various correctional disciplines (e.g. security, medical service, food service, inmate programs and facility maintenance) as part of the team that participates from conceptual design through final construction of the project. This staff coordinates all aspects of the development with subcontractors and provides site-specific services.
When designing a facility, our architects use, with appropriate modifications, prototype designs we have used in developing prior projects. We believe that the use of these designs allows us to reduce cost overruns and construction delays and to reduce the number of correctional officers required to provide security at a
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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.
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Competitive Strengths
Regional Operating Structure
We operate three regional U.S. offices and three international offices that provide administrative oversight and support to our correctional and detention facilities and allow us to maintain close relationships with our customers and suppliers. Each of our three regional U.S. offices is responsible for the facilities located within a defined geographic area. The regional offices perform regular internal audits of the facilities in order to ensure continued compliance with the underlying contracts, applicable accreditation standards, governmental regulations and our internal policies and procedures.
Long-Term Relationships with High-Quality Government Customers
We have developed long-term relationships with our government customers and have been successful at retaining our facility management contracts. We have provided correctional and detention management services to the United States Federal Government for 1921 years, the State of California for 1820 years, the State of Texas for 18approximately 20 years, various Australian state government entities for 1416 years and the State of Florida for 12approximately 14 years. These customers accounted for approximately 54.9%60.6% of our consolidated revenues for the fiscal year ended December 31, 2006.30, 2007. Our strong operating track record has enabled us to achieve a high renewal rate for contracts.contracts, thereby providing us with a stable source of revenue. Our government customers typically satisfy their payment obligations to us through budgetary appropriations.
Diverse, Full-Service Facility Developer and Operator
We have developed comprehensive expertise in the design, construction and financing of high quality correctional, detention and mental health facilities. In addition, we have extensive experience in overall facility operations, including staff recruitment, administration, facility maintenance, food service, healthcare, security, supervision, treatment and education of inmates. We believe that the breadth of our service offerings gives us the flexibility and resources to respond to customers’ needs as they develop. We believe that the relationships we foster when offering these additional services also help us win new contracts and renew existing contracts.
Unique Privatized Mental Health Growth Platform.
We are the only publicly traded U.S. corrections company currently operating in the privatized mental health and residential treatment services business. We believe that our target market of state and county mental health hospitals represents a significant opportunity. Through our GEO Care subsidiary, we have been able to grow this business to 1,700 beds, representing seven contracts and $113.8 million in revenues in 2007, from 325 beds, representing one contract and $31.7 million in revenues in 2004.
Sizeable International Business.
We believe that our international presence gives us a unique competitive advantage that has contributed to our growth. Leveraging our operational excellence in the U.S., our international infrastructure allows us to aggressively target foreign opportunities that ourU.S.-based competitors without overseas operations may have difficulty pursuing. Our International service business generated $130.3 million revenue in 2007, representing 12.7% of our consolidated 2007 revenues. We believe we are well positioned to continue benefiting from foreign governments’ initiatives to outsource corrections facilities.
Experienced, Proven Senior Management Team
Our top three senior executives have over 5760 years of combined industry experience, have worked together at our company for more than 15 years and have established a track record of growth and profitability. Under their leadership, our annual consolidated revenues have grown from $40.0 million in 1991 to $860.9 million$1.02 billion in 2006.2007. Our Chief Executive Officer, George C. Zoley, is one of the pioneers of the industry, having developed and opened what we believe was one of the first privatized detention facilities in the U.S. in 1986. In addition to senior management, our operational and facility level management has significant operational experience and expertise.expertise in both the public and private sector.
Regional Operating Structure
We operate three regional U.S. offices and three international offices that provide administrative oversight and support to our correctional and detention facilities and allow us to maintain close relationships with our customers and suppliers. Each of our three regional U.S. offices is responsible for the facilities located within a defined geographic area. We believe that our regional operating structure is unique within the U.S. private corrections industry and provides us with the competitive advantage of having close proximity and direct
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access to our customers and our facilities. We believe this proximity increases our responsiveness and the quality of our contacts with our customers. We believe that this regional structure has facilitated the rapid integration of our prior acquisitions, and we also believe that our regional structure and international offices will help with the integration of any future acquisitions.
Business Strategies
Provide High Quality, Essential Services at Lower Costs
Our objective is to provide federal, state and local governmental agencies with high quality, essential services at a lower cost than they themselves could achieve. We have developed considerable expertise in the management of facility security, administration, rehabilitation, education, health and food services. Our quality is recognized through many accreditations including that of the American Correctional Association, which has certified facilities representing approximately 67.7% of our U.S. corrections revenue as of year-end 2007.
Maintain Disciplined Operating Approach
We manage our business on a contract by contract basis in order to maximize our operating margins. We typically refrain from pursuing contracts that we do not believe will yield attractive profit margins in relation to the associated operational risks. Generally,In addition, we generally do not engage in speculativefacility development and do not build
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facilities without having a corresponding management contract award in place, although we may opt to do so in select situations when we believe attractive business development opportunities may become available. In addition, weavailable at a given location. We have also elected not to enter certain international markets with a history of economic and political instability. We believe that our strategy of emphasizing lower risk, higher profit opportunities helps us to consistently deliver strong operational performance, lower our costs and increase our overall profitability.
Expand Into Complementary Government-Outsourced Services
We intend to capitalize on our long-termlong term relationships with governmental agencies to continue to grow our correctional, detention and mental health facilities management services and to become a preferredmore diversified provider of complementary government-outsourced services. These opportunities may include services which leverage our existing competencies and expertise, including the design, construction and management of large facilities, the training and management of a large workforce and our ability to service the needs and meet the requirements of government clients.customers. We believe that government outsourcing of currently internalized functions will increase largely as a result of the public sector’s desire to maintain quality service levels amid governmental budgetary constraints. We believe that our successful expansion into the mental health and residential treatment services sector through GEO Care is an example of our ability to deliver higher quality services at lower costs in new areas of privatization.
Pursue International Growth Opportunities
As a global international provider of privatized correctional services, we are able to capitalize on opportunities to operate existing or new facilities on behalf of foreign governments. We currently have international operations in Australia, the United Kingdom,Canada, South Africa and Canada.the United Kingdom. We intend to further penetrate the current markets we operate in and to expand into new international markets which we deem attractive. For example, during the fourth quarter of 2004, we opened an office in the United Kingdom to vigorously pursue new business opportunities in England, Wales and Scotland. In March 2006, we entered into a contract to manage the operations of the 198-bed Campsfield House in Kidlington, United Kingdom. We began operations under this contract in the second quarter of 2006.
Selectively Pursue Acquisition Opportunities
We consider acquisitions that are strategic in nature and enhance our geographic platform on an ongoing basis. On November 4, 2005, we acquired Correctional Services Corporation, or CSC, bringing over 8,000 additional adult correctional and detention beds under our management. On January 24, 2007, we acquired CentraCore Properties Trust, or CPT, bringing the 7,743 beds we had been leasing from CPT, as well as an additional 1,126 beds leased to third parties, under our ownership. We willplan to continue to review acquisition opportunities that may become available in the future, both in the privatized corrections, detention, mental health and residential treatment services sectors, and in complementary government outsourcedgovernment-outsourced services areas.
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Facilities
The following table summarizes certain information with respect to facilities that GEO (or a subsidiary or joint venture of GEO) operated under a management contract or had an award to manage as of December 31, 2006:30, 2007:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Commencement
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Facility Name
| | Design
| | | | Facility
| | Security
| | of Current
| | | | Renewal
| | Type of
|
& Location(1) | | Capacity | | Customer | | Type | | Level | | Term, Respectively | | Duration | | Option | | Ownership |
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Domestic Contracts:
| | | | | | | | | | | | | | | | |
Allen Correctional Center | | | | | | | | | | | | | | | | |
Kinder, LA | | 1,538 | | LA DPS&C | | State
Correctional
Facility | | Medium/
Maximum | | October 2003 | | 3 years | | One,
Two-year | | Manage
only |
Arizona State Prison Florence West | | | | | | | | | | | | | | | | |
Florence, AZ | | 750 | | ADC | | State DUI/RTC
Correctional
Facility | | Minimum/
Medium | | October 2002 | | 10 years | | Two,
Five-year | | Lease |
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Domestic Contracts:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | Commencement
| | | | | | |
Facility Name
Allen Correctional Center Kinder, LA | | Design
1,538 | | LA DPS&C | | State Correctional Facility
| | Security
Medium/ Maximum | | of Current
October 2003 | | 3 years | | RenewalOne,
Two-year | | Type ofManage
|
& Location(1)
| | Capacity | | Customer | | Type | | Level | | Term | | Duration | | Option | | Ownershiponly |
| |
Central Arizona Correctional Facility | | | | | | | | | | | | | | | | |
| Arizona State Prison Florence West Florence, AZ | | 1,000750 | | ADC | | State Sex
Offender
DUI/RTC Correctional
Facility | | Minimum/
MediumMinimum | | December 2006October 2002 | | 10 years | | Two,
Five-year | | Lease |
Arizona State Prison Phoenix West | | | | | | | | | | | | | | | | |
| Central Arizona Correctional Facility Florence, AZ | | 1,000 | | ADC | | State Sex Offender Correctional Facility | | Minimum/ Medium | | December 2006 | | 10 years | | Two,
Five-year | | Lease |
| | | | | | | | | | | | | | | | |
| Arizona State Prison Phoenix West Phoenix, AZ | | 450 | | ADC | | State DWI
Correctional
Facility | | Minimum/
MediumMinimum | | July 2002 | | 10 years | | Two,
Five-year | | Lease |
Aurora ICE Processing Center | | | | | | | | | | | | | | | | |
| Aurora ICE Processing Center Aurora, CO | | 400 +1,100 expansion | | ICE | | Federal
Detention
Facility | | Minimum/
Medium | | October 2006 | | 8 months | | Four,
One-year | | Own(7)Own |
Bill Clayton Detention Center | | | | | | | | | | | | | | | | |
| Bill Clayton Detention Center Littlefield, TX | | 310370 | | Littlefield, TX/
IDOC Idaho DOC | | Local/State
Correctional/
Detention
Facility | | Minimum/
Medium | | January 2004
2004/ July 2006 | | 10 years
2 years | | Two,
Five-year
Unlimited
One-year | | Manage
Only |
Bridgeport Correctional Center | | | | | | | | | | | | | | | | |
| Bridgeport Correctional Center Bridgeport, TX | | 520 | | TDCJ | | State
Correctional
Facility | | Minimum/
MediumMinimum | | September 2005 | | 3 year | | Two,
One-year | | Manage
Only |
Bronx Community Re-entry Center | | | | | | | | | | | | | | | | |
| Bronx Community Re-entry Center Bronx, NY | �� | 130120 | | BOP | | Federal
Halfway
House | | Minimum | | April 2002October 2007 | | 2 years | | Three,
One-year | | Lease |
Brooklyn Community Corrections Center | | | | | | | | | | | | | | | | |
| Brooklyn Community Corrections Center Brooklyn, NY | | 174 | | BOP | | Federal
Halfway
House | | Minimum | | February 2005 | | 2 years | | Three,
One-year | | Lease |
Broward Transition Center | | | | | | | | | | | | | | | | |
| Broward Transition Center Deerfield Beach, FL | | 600 | | ICE | | Federal
Detention
Facility | | Minimum | | October 2003 | | 1 year | | Four,
One-year | | Own(7)Own |
Central Texas Detention Facility | | | | | | | | | | | | | | | | |
| Central Texas Detention Facility San Antonio, TX(2) | | 688 | | Bexar
County/ICE &
USMS | | Local &
Federal
Detention
Facility | | All LevelsMinimum/ Medium | | October 1996/ June 1993/ January 20021983 | | 3 years | | One,
Two-year One, One-year | | Lease-
County |
Central Valley MCCF | | | | | | | | | | | | | | | | |
| Central Valley MCCF McFarland, CA | | 625 | | CDCR | | State
Correctional
Facility | | Medium | | DecemberMarch 1997 | | 1015 years (revised term) | | N/A | | Own(7)Own |
Cleveland Correctional Center | | | | | | | | | | | | | | | | |
| Cleveland Correctional Center Cleveland, TX | | 520 | | TDCJ | | State
Correctional
Facility | | Minimum/
MediumMinimum | | January 2004 | | 3 year | | Two,
One-year | | Manage
Only |
Coke County JJC | | | | | | | | | | | | | | | | |
Bronte, TX | | 200 | | TYC | | State
Juvenile
Correctional
Facility | | Medium/
Maximum | | September 2004 | | 2 year | | One,
Two-year | | Lease |
Colorado Medium Custody Prison(6) | | | | | | | | | | | | | | | | |
TBD | | 1,504 | | | | State
Correctional
Facility | | | | | | | | | | |
| Desert View MCCF | | | | | | | | | | | | | | | | |
| Adelanto, CA | | 643 | | CDCR | | State
Correctional
Facility | | Medium | | DecemberMarch 1997 | | 1015 years (revised term) | | N/A | | Own(7)Own |
9
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Commencement
| | | | | | |
Facility Name
| | Design
| | | | Facility
| | Security
| | of Current
| | | | Renewal
| | Type of
|
& Location(1) | | Capacity | | Customer | | Type | | Level | | Term, Respectively | | Duration | | Option | | Ownership |
| |
Dickens County Correctional Center | | | | | | | | | | | | | | | | |
Spur, TXEast Mississippi Correctional Facility Meridian, MS | | 4891,000 + 500 expansion | | Dickens
County/
IDOC/
ICE/Other
CountiesMDOC/IGA | | Local/State
Federal
Correctional
Facility | | All Levels | | August 2001
(IDOC)
July 2006 | | 15 years
2 years | | N/A
Unlimited
One-year | | Manage
Only |
East Mississippi Correctional Facility | | | | | | | | | | | | | | | | |
Meridian, MS | | 1,000 | | MDOC | | State
Correctional
Facility | | Mental
Health
All Levels | | AugustSeptember 2006 | | 2 years | | Two,
One-year | | Manage
only |
Fort Worth Community Corrections Facility | | | | | | | | | | | | | | | | |
| Fort Worth Community Corrections Facility Fort Worth, TX | | 225 | | TDCJ | | State
Halfway
House | | Minimum | | September 2003 | | 2 years | | Two,
Two-year | | Leased |
Frio County Detention Center | | | | | | | | | | | | | | | | |
Frio County Detention Center Pearsall, TXTX(2) | | 391 | | Frio County/
Other
Counties | | Local
Detention
Facility | | All Levels | | DecemberNovember 1997 | | 12 years | | One,
Five-year | | Part
Leased/
Part
Owned |
George W. Hill Correctional Facility | | | | | | | | | | | | | | | | |
| George W. Hill Correctional Facility Thornton, PA | | 1,883 | | Delaware
County | | Local
Detention
Facility | | All Levels | | June 2006 | | 1918 months | | Successive,
Two-year | | Manage
Only |
Golden State MCCF | | | | | | | | | | | | | | | | |
| Golden State MCCF McFarland, CA | | 625 | | CDCR | | State
Correctional
Facility | | Medium | | DecemberMarch 1997 | | 1015 years (revised term) | | N/A | | Own(7)Own |
Graceville Correctional Facility | | | | | | | | | | | | | | | | |
| Graceville Correctional Facility Graceville, FL | | 1,500 + 384 expansion | | DMS | | State
Correctional
Facility | | Medium/
Close | | N/ASeptember 2007 | | 3 years | | Successive,
Two-year | | N/AManage Only |
Guadalupe County Correctional Facility | | | | | | | | | | | | | | | | |
| Guadalupe County Correctional Facility Santa Rosa, NM(3) | | 600 | | Guadalupe
County/NMCD | | Local/State
Correctional
Facility | | Medium | | September 1998January 1999 | | 3 years (revised
term) | | Five,
one-year
extensions
beginning
2004 | | Own |
Jefferson County Downtown Jail | | | | | | | | | | | | | | | | |
Jefferson County Downtown Jail Beaumont, TXTX(2) | | 500 | | Jefferson
County/
TDCJ/
ICE/USMS | | Local/State
Federal
Detention
Facility | | All Levels | | SeptemberMay 1998 August 2005 April 2001 | | Various Month to Monthmonth/ Perpetual | | Unlimited,
One-month | | Manage
Only |
Karnes Correctional Center | | | | | | | | | | | | | | | | |
| Karnes Correctional Center Karnes City, TX(2) | | 679 | | Karnes
County/
ICE &
USMS | | Local &
Federal
Detention
Facility | | All Levels | | JanuaryMay 1998 Feb 1998 | | 30 yearsPerpetual | | N/A | | Own(7)Own |
Lawrenceville Correctional Center | | | | | | | | | | | | | | | | |
| LaSalle Detention Facility Jena, LA(2) | | 416 + 744 expansion | | LEDD/ ICE | | Federal Detention Facility | | Minimum/ Medium | | July 2007 | | Perpetual until terminated | | N/A | | Own |
| | | | | | | | | | | | | | | | |
| Lawrenceville Correctional Center Lawrenceville, VA | | 1,536 | | VDOC | | State
Correctional
Facility | | Medium | | March 2003 | | 5 years | | Ten,
One-year | | Manage
Only |
Lawton Correctional Facility | | | | | | | | | | | | | | | | |
| Lawton Correctional Facility Lawton, OK | | 2,518 | | ODOC | | State
Correctional
Facility | | Medium | | July 2003 | | 1 year | | Four,
One-year | | Own(7)Own |
Lea County Correctional Facility | | | | | | | | | | | | | | | | |
| Lea County Correctional Facility Hobbs, NM(3) | | 1,200 | | Lea
County/
NMCD | | Local/State
Correctional
Facility | | All Levels | | September 1998 /May 1998 | | 5 years | | Five,
One-year beginning 2003 | | Own |
| | | | | | | | | | | | | | | | |
| Lockhart Secure Work Program Facilities Lockhart, TX | | 1,000 | | TDCJ | | State Correctional Facility | | Minimum/ Medium | | January 2004 | | 3 years | | Five,Two,
One-year
beginning
2003 | | Own(7)Manage
Only |
| | | | | | | | | | | | | | | | |
| Marshall County Correctional Facility Holly Springs, MS | | 1,000 | | MDOC | | State Correctional Facility | | Medium | | September 2006 | | 2 years | | Two,
One-year | | Manage
Only |
10
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Commencement
| | | | | | |
Facility Name
| | Design
| | | | Facility
| | Security
| | of Current
| | | | Renewal
| | Type of
|
& Location(1) | | Capacity | | Customer | | Type | | Level | | Term, Respectively | | Duration | | Option | | Ownership |
| |
Lockhart Secure Work Program Facilities | | | | | | | | | | | | | | | | |
Lockhart, TXMaverick County Detention Facility Maverick, TX(2) | | 1,000654 | | TDCJMaverick County | | State
Local Correctional
Facility | | MinimumMedium | | January 2004TBD | | 3 yearsYears | | Two,
One-yearUnlimited, Two-year | | Manage
Only |
Marshall County Correctional | | | | | | | | | | | | | | | | |
Holly Springs, MS | | 1,000 | | MDOC | | State
Correctional
Facility | | Medium | | September 2006 | | 2 years | | Two,
One-year | | Manage
Only |
McFarland CCF | | | | | | | | | | | | | | | | |
| McFarland CCF McFarland, CA | | 224 | | CDCR | | State
Correctional
Facility | | Minimum | | January 2006 | | 5 years | | Two,
Five-year | | Own(7)Own |
Migrant Operations Center | | | | | | | | | | | | | | | | |
| Migrant Operations Center Guantanamo Bay NAS, Cuba | | 130 | | ICE | | Federal
Migrant
Center | | Minimum | | November 2006 | | 11 Months | | Four,
One-year | | Manage
Only |
Moore Haven Correctional Facility | | | | | | | | | | | | | | | | |
| Moore Haven Correctional Facility Moore Haven, FL | | 750 +
235 exp.985 | | DMS | | State
Correctional
Facility | | Medium | | January 2000July 2007 | | 3 years | | Unlimited, Two-year | | Manage
Only |
| | | | | | | | | | | | | | | | |
| Montgomery County Detention Facility Montgomery, TX(2) | | 1,100 | | Montgomery County | | Local Correctional Facility | | Medium | | TBD | | 2 years | | Unlimited,
Two-yearUnspecified number of 2 year options | | Manage
Only |
New Castle Correctional Facility | | | | | | | | | | | | | | | | |
New Castle INCorrectional Facility New Castle, IN(2) | | 2,416 | | IDOC | | State
Correctional
Facility | | MediumAll | | January 2006 | | 4 years | | Three,
Two-year | | Manage
Only |
Newton County Correctional Center | | | | | | | | | | | | | | | | |
| Newton County Correctional Center Newton, TX | | 872 | | Newton
County/
TDCJ | | Local/State
Correctional
Facility | | All Levels | | February 2002 | | 5 years
init term thru 8/31/07 | | Two,
Five-year | | Manage
Only |
Northeast New Mexico Detention Facility | | | | | | | | | | | | | | | | |
| Northeast New Mexico Detention Facility Clayton, NM | | 625 | | Clayton/
NMCD | | Local/State
Correctional
Facility | | Medium | | openTBD | | 22 years/ 5 years | | Five,
One-year | | openManage
Only |
North Texas ISF | | | | | | | | | | | | | | | | |
| North Texas ISF Fort Worth, TX | | 400 | | TDCJ | | State
Intermediate
Sanction
Facility | | Minimum | | March 2004 | | 3 years | | Four,
One-year | | Lease |
Northwest Detention Center | | | | | | | | | | | | | | | | |
| Northwest Detention Center Tacoma, WA | | 1,000 | | ICE | | Federal
Detention
Facility | | Minimum/
MediumAll Levels | | April 2004 | | 1 year | | Four,
One-year | | Own |
Queens Detention Facility | | | | | | | | | | | | | | | | |
| Queens Detention Facility Jamaica, NY | | 229222 | | OFDT/USMS | | Federal
Detention
Facility | | Minimum/
Medium | | April 20021/08 (new) | | 12 year | | Four,
One-year 2-year | | Own(7) |
Reeves County Detention Complex R1/R2 | | | | | | | | | | | | | | | | |
| Reeves County Detention Complex R1/R2 Pecos, TX(2) | | 2,2002,407 | | Reeves
County/
BOP | | Federal
Correctional
Facility | | Low | | April 2005Feb 2007 BOP 2007 | | 9CO - 10 years 4 yr | | Unlimited,
Ten-year Co ten yr 32-yr op | | Manage
Only |
Reeves County Detention Complex R3 | | | | | | | | | | | | | | | | |
| Reeves County Detention Complex R3 Pecos, TX(2) | | 1,356 | | Reeves
County/BOP | | Federal
Correctional
Facility | | Low | | April 2005Co January 2007 BOP Jan 2007 | | 910 years 4 yr | | Unlimited,
Ten-year 32- yr op | | Manage
Only |
Rivers Correctional Institution | | | | | | | | | | | | | | | | |
| Rio Grande Detention Center Laredo, TX | | 1,500 | | OFDT/ USMS | | Federal Correctional Facility | | Medium | | N/A | | 5 years | | Three,
Five-year | | Own |
| | | | | | | | | | | | | | | | |
| Rivers Correctional Institution Winton, NC | | 1,200 | | BOP | | Federal
Correctional
Facility | | Low | | March 2001 | | 3 years | | Seven,
One-year | | Own |
| | | | | | | | | | | | | | | | |
| Robert A. Deyton Detention Facility Lovejoy, GA | | 576 | | Clayton County | | Detention Facility | | Medium | | April 2007 | | 20 years | | Two,
Five year | | Lease & Manage |
11
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Commencement
| | | | | | |
Facility Name
| | Design
| | | | Facility
| | Security
| | of Current
| | | | Renewal
| | Type of
|
& Location(1) | | Capacity | | Customer | | Type | | Level | | Term, Respectively | | Duration | | Option | | Ownership |
| |
Sanders Estes Unit | | | | | | | | | | | | | | | | |
| Sanders Estes Unit Venus, TX | | 1,0001,040 | | TDCJ | | State
Correctional
Facility | | Minimum/
MediumMinimum | | January 2004 | | 3 years | | Two,
One-year | | Manage
Only |
South Bay Correctional Facility | | | | | | | | | | | | | | | | |
| South Bay Correctional Facility South Bay, FL | | 1,862 | | DMS | | State
Correctional
Facility | | Medium/
Close close | | July 2006 | | 3 years | | Unlimited,
Two-year | | Manage
Only |
South Texas Detention Complex | | | | | | | | | | | | | | | | |
| South Texas Detention Complex Pearsall, TX | | 1,904 | | ICE | | Federal
Detention
Facility | | Minimum/
MediumAll | | June 2005 | | 1 year | | Four,
One-year | | LeaseOwn |
South Texas ISF | | | | | | | | | | | | | | | | |
| South Texas ISF Houston, TX | | 450 | | TDCJ | | State
Intermediate
Sanction
Facility | | MinimumMedium | | March 2004 | | 3 years | | Two,
One-year | | Manage
OnlyLease |
Taft Correctional Institution | | | | | | | | | | | | | | | | |
Taft, CATri-County Justice & Detention Center Ullin, IL(2) | | 2,048226 | | BOPPulaski County/ ICE/USMS | | Local & Federal
Correctional
Detention Facility | | Low/
MinimumAll Levels | | December 1997Co - July 2004 USMS
4/1999 | | 36 years perpetual | | Seven,Two,
One-yearFive-year | | Manage
Only |
Tri-County Justice & Detention Center | | | | | | | | | | | | | | | | |
Ullin, ILVal Verde Correctional Facility Del Rio, TX(2) | | 2261,451 | | Pulaski
Val Verde County/
USMS/ ICE | | Local &
Federal
Detention
Facility | | All Levels | | July 2004January 2001 | | 620 years | | Two,
Unlimited, Five-year | | Manage
OnlyOwn |
Val Verde Correctional Facility | | | | | | | | | | | | | | | | |
Del Rio, TX(2) | | 784 +
576 exp | | Val Verde
County/
USMS/
ICE | | Local &
Federal
Detention
Facility | | All Levels | | January 2001 | | 20 years | | Unlimited,
Five-year | | Own |
| Western Region Detention Facility at San Diego San Diego, CA | | 700 | | OFDT/ USMS | | Federal Detention Facility | | Maximum | | January 2006 | | 5 years | | One,
Five-year | | Lease |
| | | | | | | | | | | | | | | | |
San Diego, CAInternational Contracts: Arthur Gorrie Correctional Centre Wacol, Australia | | 700890 | | USMSQLD DCS | | Federal
Detention
FacilityReception & Remand Centre | | High/ Maximum | | January 20062008 | | 5 years | | One,
Five-year | | LeaseManage
Only |
International Contracts: | | | | | | | | | | | | | | | | |
Arthur Gorrie Correctional Centre | | | | | | | | | | | | | | | | |
Wacol, Australia | | 710 +
180 exp | | QLD DCS | | Reception &
Remand
Centre | | High/
Maximum | | December 2002 | | 5 years | | One,
Five-year | | Manage
Only |
| Fulham Correctional Centre | | | | | | | | | | | | | | | | |
| & Nalu Challenge Community Victoria, Australia | | 717717/ 68 | | VIC MOC | | State
Prison | | Minimum/
Medium | | September 2005 | | 3 years | | Four,
Three-year | | Manage
OnlyLease |
Junee Correctional Centre | | | | | | | | | | | | | | | | |
| Junee Correctional Centre Junee, Australia | | 790 | | NSW | | State
Prison | | Minimum/
Medium | | April 2001 | | 5 years | | One
Three-year | | Manage
Only |
Kutama-Sinthumule Correctional Centre
Northern Province, | | | | | | | | | | | | | | | | |
| Kutama-Sinthumule Correctional Centre Limpopo Province, Republic of South Africa | | 3,024 | | RSA DCS | | National
Prison | | Maximum | | July 1999 | | 25 years | | None | | Manage
Only |
Melbourne Custody Centre | | | | | | | | | | | | | | | | |
| Melbourne Custody Centre Melbourne, Australia | | 67 | | VIC CC | | State
Jail | | All Levels | | March 2005 | | 3 years | | Two,
One-year | | Manage
Only |
New Brunswick Youth Centre | | | | | | | | | | | | | | | | |
| New Brunswick Youth Centre Mirimachi, Canada(4) | | N/A | | PNB | | Provincial
Juvenile
Facility | | All Levels | | October 1997 | | 25 years | | One,
Ten-year | | Manage
Only |
| | | | | | | | | | | | | | | | |
| Pacific Shores Healthcare Victoria, Australia(5) | | N/A | | VIC CV | | Health Care Services | | N/A | | December 2003 | | 3 years | | Four,
Six-months | | Manage
Only |
| | | | | | | | | | | | | | | | |
| Campsfield House Immigration Removal Centre Kidlington, England | | 215 | | UK Home Office of Immigration | | Detention Centre | | Minimum | | May 2006 | | 3 years | | One,
Two-year | | Manage
Only |
| | | | | | | | | | | | | | | | |
GEO Care:
Florida Civil Commitment Center Arcadia, FL | | 680 | | DCF | | State Civil Commitment | | All Levels | | July 2006 | | 5 years | | Three,
Five-year | | Manage
Only |
12
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Commencement
| | | | | | |
Facility Name
| | Design
| | | | Facility
| | Security
| | of Current
| | | | Renewal
| | Type of
|
& Location(1) | | Capacity | | Customer | | Type | | Level | | Term, Respectively | | Duration | | Option | | Ownership |
| |
Pacific Shores Healthcare | | | | | | | | | | | | | | | | |
Victoria, Australia(5) | | N/A | | VIC CV | | Health
Care
Services | | N/A | | December 2003 | | 3 years | | Four,
Six-months | | Manage
Only |
Campsfield House Immigration Removal Centre | | | | | | | | | | | | | | | | |
Kidlington, England | | 198 | | UK Home
Office of
Immigration | | Detention
Centre | | Minimum | | May 2006 | | 3 years | | One,
Two-year | | Manage
Only |
GEO Care Services: | | | | | | | | | | | | | | | | |
Florida Civil Commitment Center | | | | | | | | | | | | | | | | |
Arcadia, FL | | 680/40 | | FL — DCF | | State
Civil
Commitment | | All Levels | | July 2006 | | 5 years | | Three,
Five-year | | Manage
Only |
Palm Beach County Jail | | | | | | | | | | | | | | | | |
| Palm Beach County Jail Palm Beach, FL | | N/A | | PBC as
Subcontractor
To to Healthcare
Armor | | Mental
Health
Services to
County Jail | | All Levels | | May 2006 | | 5 years | | N/A | | Manage
Only |
South Florida State Hospital | | | | | | | | | | | | | | | | |
| South Florida State Hospital Pembroke Pines, FL | | 335 | | FL- DCF | | State
Psychiatric
Hospital | | Mental
Health | | July 2003 | | 5 years | | Two,Three,
Five-year | | Manage
Only |
Fort Bayard Medical Center | | | | | | | | | | | | | | | | |
Fort Bayard Medical Center Ft. Bayard, NMNM(6) | | 230 | | State of NM,
Department of
Health | | Special
Needs
Long-Term
Care
Facility | | Special Needs &
Long-Term Care | | November 2005 | | 32 years | | Four,
Five-year | | Manage
Only |
South Florida Evaluation and Treatment Center | | | | | | | | | | | | | | | | |
| South Florida Evaluation and Treatment Center Miami, FL | | 213 | | FL — DCF | | State
Forensic
Hospital | | Mental
Health | | July 2005 | | 5 years | | Two,Three,
Five-year | | Manage
Only |
South Florida Evaluation and Treatment Center — Annex | | | | | | | | | | | | | | | | |
| South Florida Evaluation and Treatment Center - Annex Miami, FL | | 100 | | FL — DCF | | State
Forensic
Hospital | | Mental
Health | | March 2007 | | 5 years | | One,
Four-yearFive-year | | Manage
Only |
| | | | | | | | | | | | | | | | |
| Treasure Coast Forensic Treatment Center Stuart, FL | | 175 | | DCF | | State Forensic Hospital | | Mental
Health | | April 2007 | | 5 years | | One,
Five-year | | Manage
Only |
Customer Legend:
| | | |
Abbreviation | | Customer |
| |
| LA DPS&C | | Louisiana Department of Public Safety & Corrections |
ADOCADC | | Arizona Department of Corrections |
| ICE | | U.S. Immigration & Customs Enforcement |
WDOC | | Wyoming Department of Corrections |
| TDCJ | | Texas Department of Criminal Justice |
| CDCR | | California Department of Corrections |
CDOC | | Colorado Department of Corrections |
TYC | | Texas Youth Commission & Rehabilitation |
| MDOC | | Mississippi Department of Corrections (East Mississippi & Marshall County) |
| NMCD | | New Mexico Corrections Department |
| VDOC | | Virginia Department of Corrections |
| ODOC | | Oklahoma Department of Corrections |
| DMS | | Florida Department of Management Services |
| BOP | | Federal Bureau of Prisons |
| USMS | | United States Marshals Service |
| IDOC | | Indiana Department of Corrections |
13
| | |
Abbreviation
| | Customer
|
| Correction |
| QLD DCS | | Department of Corrective Services of the State of Queensland |
| OFDT | | Office of Federal Detention TrusteesTrustee |
| VIC MOC | | Minister of Corrections of the State of Victoria |
| NSW | | Commissioner of Corrective Services for New South Wales |
| RSA DCS | | Republic of South Africa Department of Correctional Services |
| VIC CC | | The Chief Commissioner of the Victoria Police |
| PNB | | Province of New Brunswick |
| VIC CV | | The State of Victoria represented by Corrections Victoria |
| DCF | | Florida Department of Children & Families |
| Idaho DOC | | Idaho Department of Corrections |
| | |
| (1) | | GEO also owns facilitiesa facility in Jena, LA and Baldwin, MI that werewas not in use during fiscal year 2006. Both of these facilities remain2007. This facility remains inactive. See Note 121 of the Financial Statements. |
| |
| (2) | | GEO provides services at this facility through various Inter-Governmental Agreements, or IGAs, forthrough the county, USMS, ICE, BOP,various counties and other state jurisdictions. |
13
| | |
| (3) | | GEO has a five-year contract with four one-year options to operate this facility on behalf of thea county. The county, in turn, has a one-year contract, subject to annual renewal, with the state to house state prisoners at the facility. In the event that the relationship between the county and the state is terminated, our contract to operate the respective facility may be terminated. |
| |
| (4) | | The contract for this facility only requires GEO to provide maintenance services. |
| |
| (5) | | GEO provides comprehensive healthcare services to 9nine (9) government-operated prisons under this contract. |
| |
| (6) | | GEO provided noticeThis contract had expired by December 30, 2007 and is currently under negotiation. We are still providing services under this contract and are undertaking efforts to renew our agreement in the first quarter of award from CDOC for medium security prison. No contracts have been signed as of this date. |
|
(7) | | GEO acquired these facilities from CPT on January 24, 2007. Prior to this date these facilities were leased by GEO from CPT.2008. |
Government Contracts — RebidsNew Project Activations
The following table sets forthshows new projects that were activated during the number of contracts that are subject to renewal or re-bid in each of the next five years:
| | | | | | | | | |
Year | | Re-bid(1) | | | Total Number of Beds up for Renewal | |
| |
| 2007 | | | 9 | | | | 6,260 | |
| 2008 | | | 7 | | | | 6,744 | |
| 2009 | | | 12 | | | | 8,381 | |
| 2010 | | | 5 | | | | 3,665 | |
| 2011 | | | 7 | | | | 6,979 | |
| Thereafter | | | 21 | | | | 17,117 | |
| | | | | | | | | |
| | | | 61 | | | | 49,146 | |
| | | | | | | | | |
fiscal year ended December 30, 2007:
| | | | | | | | | | |
(1)Facility | | ManyLocation | | Beds | | | Client | | Start Date |
|
| Reeves County Detention Complex Expansions | | Pecos, Texas | | | 803 | | | Federal Bureau of our contracts with our government customers have an initial fixed term and are thereafter subject to periodic renewals at the unilateral optionPrisons | | Jan-07 |
| Northwest Detention Center | | Tacoma, Washington | | | 200 | | | U.S. Immigration & Customs Enforcement | | Jan-07 |
| Broward Transition Center | | Deerfield Beach, Florida | | | 150 | | | U.S. Immigration & Customs Enforcement | | Jan-07 |
| South Florida Evaluation & Treatment Center Annex | | Miami, Florida | | | 100 | | | Florida Department of the customer. This table assumes that allChildren & Families | | Mar-07 |
| New Castle Correctional Facility Inmate Contract | | New Castle, Indiana | | | 1,260 | | | Arizona Department of our government customers will exercise their unilateral renewal options under each existing facility management contract and, accordingly, that each contract will not be up for renewal or re-bid, as the case may be, until the full stated termCorrections | | Mar-07 |
| Treasure Coast Forensic Treatment Center | | Indiantown, Florida | | | 175 | | | Florida Department of the contract, including the exerciseChildren & Families | | Apr-07 |
| Moore Haven Correctional Facility Expansion | | Moore Haven, Florida | | | 235 | | | Florida Department of all applicable renewal options, has run. Although our historical contract renewal rate exceeds 90%, we cannot assure you that our customers will in fact exercise allManagement Services | | Jul-07 |
| Graceville Correctional Facility | | Graceville, Florida | | | 1,500 | | | Florida Department of their unilateral renewal options under existing contracts. In addition, our government contracts can generally be terminated by our government customers at any time without cause. See “Risk Factors — We are subject to the termination or non-renewal of our government contracts, which could adversely affect our results of operations and liquidity, and our ability to secure new facility management contracts from other government customers.”Management Services | | Sep-07 |
| LaSalle Detention Facility | | Jena, Louisiana | | | 416 | | | U.S. Immigration & Customs Enforcement | | Oct-07 |
| Val Verde Correctional Facility Expansion | | Del Rio, Texas | | | 576 | | | U.S. Marshals Service | | Dec-07 |
| | | | | | | | | | |
| Total | | | | | 5,415 | | | | | |
| | | | | | | | | | |
Contract Terminations
Taft Correctional Institution
On April 26, 2007, we announced that the Federal Bureau of Prisons awarded a contract for the management of the 2,048-bed Taft Correctional Institution, which we have managed since 1997, to another private operator. The management contract, which was competitively re-bid, was transitioned to the alternative operator effective August 20, 2007. We do not expect the loss of this contract to have a material adverse effect on our financial condition or results of operations.
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Dickens County Correctional Center
In July 2007, we cancelled the Operations and Management contract with Dickens County for the management of the 489-bed facility located in Spur, Texas. The cancellation became effective on December 28, 2007. We undertake substantial effortshave operated the management contract since the acquisition of CSC in November 2005. We do not expect that the termination of this contract to have a material adverse effect on our financial condition or results of operations.
Coke County Juvenile Justice Center
On October 2, 2007, we received notice of the termination of our contract with the Texas Youth Commission for the housing of juvenile inmates at the 200-bed Coke County Juvenile Justice Center located in Bronte, Texas. We are in the preliminary stages of reviewing the termination of this contract. However, we do not expect the termination, or any liability that may arise with respect to such termination, to have a material adverse effect on our financial condition or results of operations.
Government Contracts — Terminations, Renewals and Competitive Re-bids
Generally, we may lose our facility management contracts due to one of three reasons: the termination by a government customer with or without cause at any time; the failure by a customer to renew a contract with us upon the expiration of the then current term; or our contractsfailure to win the right to continue to operate under a contract that has been competitively re-bid in a procurement process upon their expiration but we can provide no assurance that we will in fact be able to do so. Previously, in connection with our contract renewals, either weits termination or the contracting government agency have typically requested changes or adjustments to contractual terms. As a result, contract renewals may be made on terms that are more or less favorable to us than in prior contractual terms.
expiration. Our facility management contracts typically allow a contracting governmental agency to terminate a contract with or without cause at any time by giving us written notice ranging from 30 to 180 days. If government agencies were to use these provisions to terminate, or renegotiate the terms of their agreements with us, our financial condition and results of operations could be materially adversely affected. See “Risk Factors — “We are subject to the loss of our facility management contracts due to terminations, non-renewals or re-bids, which could adversely affect our results of operations and liquidity, including our ability to secure new facility management contracts from other government customers”.
Aside from our customers’ unilateral right to terminate our facility management contracts with them at any time for any reason, there are two points during the typical lifecycle of a contract which may result in the loss by us of a facility management contract with our customers. We refer to these points as contract “renewals” and contract “re-bids.” Many of our facility management contracts with our government customers have an initial fixed term and subsequent renewal rights for one or more additional periods at the unilateral option of the customer. We count each government customer’s right to renew a particular facility management contract for an additional period as a separate “renewal.” For example, a five-year initial fixed term contract with customer options to renew for five separate additional one-year periods would, if fully exercised, be counted as five separate renewals, with one renewal coming in each of the five years following the initial term. As of December 30, 2007, 18 of our facility management contracts representing 14,896 beds are scheduled to expire on or before December 31, 2008, unless renewed by the customer at its sole option. These contracts represented 24% of our consolidated revenues for the fiscal year ended December 31, 2007. We undertake substantial efforts to renew our facility management contracts. Our historical facility management contract renewal rate exceeds 90%. However, given their unilateral nature, we cannot assure you that our customers will in fact exercise their renewal options under existing contracts. In addition, in connection with contract renewals, either we or the contracting government agency have typically requested changes or adjustments to contractual terms. As a result, contract renewals may be made on terms that are more or less favorable to us than in those in existence prior to the renewals.
We define competitive re-bids as contracts currently under our management which we believe, based on our experience with the customer and the facility involved, will be re-bid to us and other potential service providers in a competitive procurement process upon the expiration or termination of such facilities,our contract, assuming all renewal options are exercised. Our determination of which contracts we believe will be competitively re-bid may in some cases be subjective and judgmental, based largely on our knowledge of the dynamics involving a particular contract, the customer and the facility involved. Competitive re-bids may result from the
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expiration of the term of a contract, including the initial fixed term plus any renewal periods, or the early termination of a contract by a customer. Competitive re-bids are often required by applicable federal or state procurement laws periodically in order to further continuous competitive pricing and other terms for the government customer. Potential bidders in competitive re-bid situations include us, other private operators and other government entities. While we are requiredpleased with our historical win rate on competitive re-bids and are committed to complycontinuing to bid competitively on appropriate future competitive re-bid opportunities, we cannot in fact assure you that we will prevail in future competitive re-bid situations. Also, we cannot assure that any competitive re-bids we win will be on terms more favorable to us than those in existence with all applicable local, staterespect to the expiring contract.
The following table sets forth the number of facility management contracts that we currently believe will be subject to competitive re-bid in each of the next five years and federal lawsthereafter, and related rules and regulations. Our contracts typically require us to maintain certain levelsthe total number of coverage for general liability, workers’ compensation, vehicle liability, and property loss or damage. If we do not maintain the required categories and levels of coverage, the contracting governmental agency may be permitted to terminate the contract. In addition, we are required under our contracts to indemnify the contracting governmental agency for all claims and costs arising out of our management of facilities and, in some instances, we are required to maintain performance bondsbeds relating to the construction, development and operation of facilities.those potential competitive re-bid situations during each period:
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Year | | Re-bid | | | Total Number of Beds up for Re-bid | |
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| 2008 | | | 4 | | | | 5,856 | |
| 2009 | | | 7 | | | | 5,400 | |
| 2010 | | | 5 | | | | 3,665 | |
| 2011 | | | 6 | | | | 3,345 | |
| 2012 | | | 5 | | | | 2,903 | |
| Thereafter | | | 24 | | | | 18,877 | |
| | | | | | | | | |
| | | | 51 | | | | 40,046 | |
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Competition
We compete primarily on the basis of the quality and range of services we offer; our experience domestically and internationally in the design, construction, and management of privatized correctional and detention facilities; our reputation; and our pricing. We compete directly with the public sector, where governmental agencies that are responsible for the operation of correctional, detention and mental health and residential treatment facilities are often seeking to retain projects that might otherwise be privatized. In the private sector, our U.S. corrections and internationalInternational services business segments compete with a number of companies, including, but not limited to: Corrections Corporation of America; Cornell Companies, Inc.; Management and Training Corporation; Group 4 Securicor, Global Solutions, and Serco. Our GEO Care business segment competes with a number of different small-to-medium sized companies, reflecting the highly fragmented nature of the mental health and residential treatment services industry. Some of our competitors are larger and have more resources than we do. We also compete in some markets with small local companies that may have a better knowledge of the local conditions and may be better able to gain political and public acceptance.
Employees and Employee Training
At December 31, 2006,30, 2007, we had 10,25311,037 full-time employees. Of such full-time employees, 195222 were employed at our headquarters and regional offices and 10,05810,815 were employed at facilities and international offices. We employ management, administrative and clerical, security, educational services, health services and general maintenance personnel at our various locations. Approximately 535561 and 9161,024 employees are covered by collective bargaining agreements in the United States and at international offices, respectively. We believe that our relations with our employees are satisfactory.
Under the laws applicable to most of our operations, and internal company policies, our correctional officers are required to complete a minimum amount of training. We generally require at least 160 hours of pre-service training before an employee is allowed to work in a position that will bring the employee in contact with inmates in our domestic facilities, consistent with ACA standardsand/or applicable state laws. In addition to a minimum of 160 hours of pre-service training, most states require 40 or 80 hours ofon-the-job
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training. Florida law requires that correctional officers receive 520 hours of training. We believe that our training programs meet or exceed all applicable requirements.
Our training program for domestic facilities begins with approximately 40 hours of instruction regarding our policies, operational procedures and management philosophy. Training continues with an additional 120 hours of instruction covering legal issues, rights of inmates, techniques of communication and supervision,
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interpersonal skills and job training relating to the particular position to be held. Each of our employees, who has contact with inmates receives a minimum of 40 hours of additional training each year, and each manager receives at least 24 hours of training each year.
At least 240 and 160 hours of training are required for our employees in Australia and South Africa, respectively, before such employees are allowed to work in positions that will bring them into contact with inmates. Our employees in Australia and South Africa receive a minimum of 40 hours of additional training each year. In the United Kingdom, our corrections employees also receive a minimum of 240 hours prior to coming in contact with inmates and receive additional training of approximately 25 hours annually.
Business Regulations and Legal Considerations
Many governmental agencies are required to enter into a competitive bidding procedure before awarding contracts for products or services. The laws of certain jurisdictions may also require us to award subcontracts on a competitive basis or to subcontract or partner with businesses owned by women or members of minority groups.
Certain states, such as Florida, deem correctional officers to be peace officers and require our personnel to be licensed and subject to background investigation. State law also typically requires correctional officers to meet certain training standards.
The failure to comply with any applicable laws, rules or regulations or the loss of any required license could have a material adverse effect on our business, financial condition and results of operations. Furthermore, our current and future operations may be subject to additional regulations as a result of, among other factors, new statutes and regulations and changes in the manner in which existing statutes and regulations are or may be interpreted or applied. Any such additional regulations could have a material adverse effect on our business, financial condition and results of operations.
Insurance
The nature of our business exposes us to various types of third-party legal claims, including, but not limited to, civil rights claims relating to conditions of confinementand/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, contractual claims and claims for personal injury or other damages resulting from contact with our facilities, programs, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. In addition, our management contracts generally require us to indemnify the governmental agency against any damages to which the governmental agency may be subject in connection with such claims or litigation. We maintain insurance coverage for these general types of claims, except for claims relating to employment matters, for which we carry no insurance.
Claims for which we are insured arising from our U.S. operations that have an occurrence date of October 1, 2002 or earlier are handled by TWC and are commercially insured up to an aggregate limit of between $25.0 million and $50.0 million, depending on the nature of the claim and the applicable policy terms and conditions. With respect to claims for which we are insured arising after October 1, 2002, weWe currently maintain a general liability policy for all U.S. corrections operations with $52.0limits of $62.0 million per occurrence and in the aggregate. On October 1, 2004, we increased our deductible on this general liability policy from $1.0 million to $3.0 million for each claim which occursoccurring after October 1, 2004. GEO Care, Inc. is separately insured for general and professional liability. Coverage is maintained with limits of $10.0 million per occurrence and in the aggregate subject to a $3.0 million self-insured retention. We also maintain various levels of insurance to cover property and casualty risks, workers’ compensation, medical malpractice, environmental liability and automobile liability. Our Australian subsidiary is required to carry tail insurance on a general liability policy providing an extended reporting period through 2011 related to a discontinued
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contract. We also carry various types of insurance with respect to our operations in South Africa, AustraliaUnited Kingdom and the United Kingdom.Australia. There can be no assurance that our insurance coverage will be adequate to cover all claims to which we may be exposed.
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In addition, certain of our facilities located in Florida and determined by insurers to be in high-risk hurricane areas carry substantial windstorm deductibles. Since hurricanes are considered unpredictable future events, no reserves have been established to pre-fund for potential windstorm damage. Limited commercial availability of certain types of insurance relating to windstorm exposure in coastal areas and earthquake exposure mainly in California may prevent us from insuring our facilities to full replacement value.
Since our insurance policies generally have high deductible amounts, losses are recorded when reported and a further provision is made to cover losses incurred but not reported. Loss reserves are undiscounted and are computed based on independent actuarial studies. Because we are significantly self-insured, the amount of our insurance expense is dependent on our claims experience and our ability to control our claims experience. If actual losses related to insurance claims significantly differ from our estimates, our financial condition and results of operations could be materially impacted.
In April 2007, we incurred significant damages at one of our managed-only facilities in New Castle, Indiana. The total amount of impairments, losses recognized and expenses incurred has been recorded in the accompanying statements of income as operating expenses and is offset by $2.1 million of insurance proceeds we received from our insurance carriers in January 2008.
International Operations
Our international operations for fiscal years 20062007 and 20052006 consisted of the operations of our wholly-owned Australian subsidiaries, and of our consolidated joint venture in South Africa (South African Custodial Management Pty. Limited, or SACM). Through our wholly-owned subsidiary, GEO Group Australia Pty. Limited, we currently manage five facilities in Australia. We operate one facility in South Africa through SACM. During the fourth quarter of 2004, we opened an office in the United Kingdom to pursue new business opportunities throughout Europe. On March 6, 2006, we were awarded a contract to manage the operations of the 198 bed Campsfield House in Kidlington, United Kingdom. We began operations under this contract in the second quarter of 2006. Also in October 2006, we acquired United Kingdom based Recruitment Solutions International (“RSI”) which operated during the fiscal year ended December 30, 2007. See Item 7 for more information on SACM.discussion related to the results of our international operations. Financial information about our operations in different geographic regions appears in “Item 8. Financial Statements — Note 16 Business Segment and Geographic Information.”
Business Concentration
Except for the major customers noted in the following table, no other single customer provided morecustomers that made up greater than 10% of our consolidated revenues during fiscal years 2006, 2005 or 2004:for these years.
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Customer | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 |
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| Various agencies of the U.S. Federal Government | | | 30 | % | | | 27 | % | | | 27 | % | | | 26 | % | | | 30 | % | | | 27 | % |
| Various agencies of the State of Florida | | | 5 | % | | | 7 | % | | | 12 | % | | | 15 | % | | | 5 | % | | | 7 | % |
Concentration of credit risk related to accounts receivable is reflective of the related revenues.
Available Information
Additional information about us can be found atwww.thegeogroupinc.com.We make available on our website, free of charge, access to our Annual Report onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K, our annual proxy statement on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as soon as reasonably practicable after we electronically submit such materials to the Securities and Exchange Commission, or the SEC. In addition, the SEC makes available on its website, free of charge, reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including
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GEO. The SEC’s website is located athttp://www.sec.gov. Information provided on our website or on the SEC’s website is not part of this Annual Report onForm 10-K.
Item 1A. Risk Factors
The following are certain of the risks to which our business operations are subject. Any of these risks could materially adversely affect our business, financial condition, or results of operations. These risks could also cause our actual results to differ materially from those indicated in the forward-looking statements contained herein and elsewhere. The risks described below are not the only risks facing us. Additional risks not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business operations.
Risks Related to Our High Level of Indebtedness
Our significant level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt service obligations.
We have a significant amount of indebtedness. Our total consolidated long-term indebtedness as of December 31, 200630, 2007 was $145.0$309.3 million, including the current portion of $3.7 million and excluding non recourse debt of $131.7$138.0 million and capital lease liability balances of $16.6 million. In addition, as of December 31, 2006,30, 2007, we had $54.5$63.5 million outstanding in letters of credit under the revolving loan portion of our senior secured credit facility. As a result, as of that date, we would have had the ability to borrow an additional approximately $45.5$86.5 million under the revolving loan portion of our Senior Credit Facility, subject to our satisfying the relevant borrowing conditions under the Senior Credit Facility with respect to the incurrence of additional indebtedness.
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Additionally, on January 24, 2007, we completed the refinancing of our senior secured credit facility, referred to as the Senior Credit Facility through the execution of a Third Amended and Restated Credit Agreement, referred to as the Amended Senior Credit Facility. The Amended Senior Credit Facility consists of a $365 million7-year term loan referred to as the Term Loan B and a $150 million5-year revolver, expiring September 14, 2010, referred to as the Revolver. The initial interest rate for the Term Loan B is LIBOR plus 1.5% and the Revolver would bear interest at LIBOR plus 2.25% or at the base rate plus 1.25%. On January 24, 2007, we used the $365 million in borrowings under the Term Loan B to finance our acquisition of CPT. After giving effect to these borrowings, we currently have approximately $515 million in total consolidated long-term indebtedness, excluding non recourse debt of $131.7 million and capital lease liability balances of $16.6 million. Based on our debt covenants and the amount of indebtedness we have outstanding, we currently have the ability to borrow an additional approximately $55 million under our Amended Senior Credit Facility.
Our substantial indebtedness could have important consequences. For example, it could:
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| | • | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, and other general corporate purposes; |
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| | • | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
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| | • | increase our vulnerability to adverse economic and industry conditions; |
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| | • | place us at a competitive disadvantage compared to competitors that may be less leveraged; and |
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| | • | limit our ability to borrow additional funds or refinance existing indebtedness on favorable terms. |
If we are unable to meet our debt service obligations, we may need to reduce capital expenditures, restructure or refinance our indebtedness, obtain additional equity financing or sell assets. We may be unable to restructure or refinance our indebtedness, obtain additional equity financing or sell assets on satisfactory terms or at all. In addition, our ability to incur additional indebtedness will be restricted by the terms of our Amended Senior Credit Facility and the indenture governing our outstanding 81/4% Senior Unsecured Notes, referred to as the Notes.
Despite current indebtedness levels, we may still incur more indebtedness, which could further exacerbate the risks described above. Future indebtedness issued pursuant to our universal shelf registration statement could have rights superior to those of our existing or future indebtedness.
The terms of the indenture governing the Notes and our Amended Senior Credit Facility restrict our ability to incur but do not prohibit us from incurring significant additional indebtedness in the future. As of December 30, 2007, we would have had the ability to borrow an additional $86.5 million under the revolving loan portion of our Senior Credit Facility, subject to our satisfying the relevant borrowing conditions under the Senior Credit Facility and the indenture governing the Notes. In addition, we may refinance all or a portion of our indebtedness, including borrowings under our Amended Senior Credit Facilityand/or the Notes. The terms of such
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refinancing may be less restrictive and permit us to incur more indebtedness as a result.than we can now. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify. Additionally, on January 28, 2004, ourMarch 13, 2007, we filed a universal shelf registration statement onForm S-3 was declaredwith the SEC, which became effective by the SEC.immediately upon filing. The universal shelf registration statement provides for the offer and sale by us, from time to time, on a delayed basis of up to $200.0 millionan indeterminate aggregate amount of certain of our securities, including our debt securities. On June 12, 2006 we completed a public offering of 4.5 million shares of our common stock (reflecting our recent 3-for-2 stock split) for approximately $110 million under the universal shelf registration statement. As a result, we have approximately $90 million remaining for the offer and sale by us of certain of our securities including our debt securities. Such debt securities could have rights superior to those of our existing indebtedness.
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The covenants in the indenture governing the Notes and our Amended Senior Credit Facility impose significant operating and financial restrictions which may adversely affect our ability to operate our business.
The indenture governing the Notes and our Amended Senior Credit Facility impose significant operating and financial restrictions on us and certain of our subsidiaries, which we refer to as restricted subsidiaries. These restrictions limit our ability to, among other things:
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| | • | incur additional indebtedness; |
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| | • | pay dividends and or distributions on our capital stock, repurchase, redeem or retire our capital stock, prepay subordinated indebtedness, make investments; |
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| | • | issue preferred stock of subsidiaries; |
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| | • | make certain types of investments; |
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| | • | guarantee other indebtedness; |
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| | • | create liens on our assets; |
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| | • | transfer and sell assets; |
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| | • | create or permit restrictions on the ability of our restricted subsidiaries to make dividends or make other distributions to us; |
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| | • | enter into sale/leaseback transactions; |
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| | • | enter into transactions with affiliates; and |
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| | • | merge or consolidate with another company or sell all or substantially all of our assets. |
These restrictions could limit our ability to finance our future operations or capital needs, make acquisitions or pursue available business opportunities. In addition, our Amended Senior Credit Facility requires us to maintain specified financial ratios and satisfy certain financial covenants, including maintaining maximum senior and total leverage ratios, a minimum fixed charge coverage ratio, a minimum net worth and a limit on the amount of our annual capital expenditures. Some of these financial ratios become more restrictive over the life of the Amended Senior Credit Facility. We may be required to take action to reduce our indebtedness or to act in a manner contrary to our business objectives to meet these ratios and satisfy these covenants. Our failure to comply with any of the covenants under our Amended Senior Credit Facility and the indenture governing the Notes could cause an event of default under such documents and result in an acceleration of all of our outstanding indebtedness. If all of our outstanding indebtedness were to be accelerated, we likely would not be able to simultaneously satisfy all of our obligations under such indebtedness, which would materially adversely affect our financial condition and results of operations.
Servicing our indebtedness will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.
Our ability to make payments on our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
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Our business may not be able to generate sufficient cash flow from operations or future borrowings may not be available to us under our Amended Senior Credit Facility or otherwise in an amount sufficient to enable us to pay our indebtedness or new debt securities, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. However, we may not be able to complete such refinancing on commercially reasonable terms or at all.
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Because portions of our senior indebtedness have floating interest rates, a general increase in interest rates will adversely affect cash flows.
Our AmendedBorrowings under our Senior Credit Facility bearsbear interest at a variable rate. ToAs a result, to the extent our exposure to increases in interest rates is not eliminated through interest rate protection agreements, such increases will result in higher debt service costs which will adversely affect our cash flows. We do not currently have any interest rate protection agreements in place to protect against interest rate fluctuations related to our Amended Senior Credit Facility. Our estimated total annual interest expense based on borrowings outstanding as of January 24, 2007 reflecting the acquisition of CPT is approximately $25.1 million. Based on estimated borrowings of $365$162.3 million outstanding under the Amended Senior Credit Facility as of December 30, 2007, a one percent increase in the interest rate applicable to the Senior Credit Facility, willwould increase our annual interest expense by $3.7$1.6 million.
In addition, effective September 18, 2003, we entered into interest rate swap agreements in the aggregate notional amount of $50.0 million. The agreements, which have payment and expiration dates that coincide with the payment and expiration terms of the Notes, effectively convert $50.0 million of the Notes into variable rate obligations. Under the agreements, we receive a fixed interest rate payment from the financial counterparties to the agreements equal to 8.25% per year calculated on the notional $50.0 million amount, while we make a variable interest rate payment to the same counterparties equal to the six-month London Interbank Offered Rate plus a fixed margin of 3.45%, also calculated on the notional $50.0 million amount. As a result, for every one percent increase in the interest rate applicable to the swap agreements, our total annual interest expense willwould increase by $0.5 million.
We depend on distributions from our subsidiaries to make payments on our indebtedness. These distributions may not be made.
We generate a substantial portion of our revenues from distributions on the equity interests we hold in our subsidiaries. Therefore, our ability to meet our payment obligations on our indebtedness is substantially dependent on the earnings of our subsidiaries and the payment of funds to us by our subsidiaries as dividends, loans, advances or other payments. Our subsidiaries are separate and distinct legal entities and are not obligated to make funds available for payment of our other indebtedness in the form of loans, distributions or otherwise. Our subsidiaries’ ability to make any such loans, distributions or other payments to us will depend on their earnings, business results, the terms of their existing and any future indebtedness, tax considerations and legal or contractual restrictions to which they may be subject. If our subsidiaries do not make such payments to us, our ability to repay our indebtedness may be materially adversely affected. For the fiscal year ended December 31, 2006,30, 2007, our subsidiaries accounted for 28.8%34.4% of our consolidated revenues,revenue, and, as of December 31, 200630, 2007, our subsidiaries accounted for 20.3%11.4% of our consolidated total segment assets.
Risks Related to Our Business and Industry
We are subject to the termination or non-renewalloss of our governmentfacility management contracts, due to terminations, non-renewals or competitive rebids, which could adversely affect our results of operations and liquidity, including our ability to secure new facility management contracts from other government customers.
Governmental agenciesWe are exposed to the risk that we may lose our facility management contracts primarily due to one of three reasons: the termination by a government customer with or without cause at any time; the failure by a customer to exercise its unilateral option to renew a contract with us upon the expiration of the then current term; or our failure to win the right to continue to operate under a contract that has been competitively re-bid in a procurement process upon its termination or expiration. Our facility management contracts typically allow a contracting governmental agency to terminate a facility contract with or without cause at any time without cause by giving us written notice ranging from 30 to 180 days. If government agencies were to use these provisions to terminate,
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or userenegotiate the possibilityterms of termination to negotiate a lower fee for per diem rates. They also generally have thetheir agreements with us, our financial condition and results of operations could be materially adversely affected.
Aside from our customers’ unilateral right to renewterminate our facility management contracts with them at their option. Notwithstanding any contractual renewal option,time for any reason, there are two points during the typical lifecycle of a contract which may result in the loss by us of a facility management contract with our customers. We refer to these points as of December 31, 2006, ninecontract “renewals” and contract “re-bids.” Many of our facility management contracts with our government customers have an initial fixed term and subsequent renewal rights for one or more additional periods at the unilateral option of the customer. We count each government customer’s right to renew a particular facility management contract for an additional period as a separate “renewal.” For example, a five-year initial fixed term contract with customer options to renew for five separate additional one-year periods would, if fully exercised, be counted as five separate renewals, with one renewal coming in each of the five years following the initial term. As of December 30, 2007, 18 of our facility management contracts representing 14,896 beds are scheduled to expire on or before December 31, 2007.2008, unless renewed by the customer at its sole option. These contracts represented 14.5%24% of our consolidated revenues for the fiscal year ended December 31, 2006. Some2007. We undertake substantial efforts to renew our facility management contracts. Our historical facility management contract renewal rate exceeds 90%. However, given their unilateral nature, we cannot assure you that our customers will in fact exercise their renewal options under existing contracts. In addition, in connection with contract renewals, either we or the contracting government agency have typically requested changes or adjustments to contractual terms. As a result, contract renewals may be made on terms that are more or less favorable to us than in those in existence prior to the renewals.
We define competitive as re-bids contracts currently under our management which we believe, based on our experience with the customer and the facility involved, will be re-bid to us and other potential service providers in a competitive procurement process upon the expiration or termination of our contract, assuming all renewal options are exercised. Our determination of thesewhich contracts we believe will be competitively re-bid may notin some cases be renewedsubjective and judgmental, based largely on our knowledge of the dynamics involving a particular contract, the customer and the facility involved. Competitive re-bids may result from the expiration of the term of a contract, including the initial fixed term plus any renewal periods, or the early termination of a contract by a customer. competitive re-bids are often required by applicable federal or state procurement laws periodically in order to further continuous competitive pricing and other terms for the corresponding governmental agency. Seegovernment customer. Potential bidders in competitive re-bid situations include us, other private operators and other government entities. While we are pleased with our historical win rate on competitive re-bids and are committed to continuing to bid competitively on appropriate future competitive re-bid opportunities, we cannot in fact assure you that we will prevail in future re-bid situations. Also, we cannot assure that any competitive re-bids we win will be on terms more favorable to us than those in existence with respect to the expiring contract.
For additional information on facility management contracts that we currently believe will be competitively re-bid during each of the next five years and thereafter, please see “Business — Government Contracts — Rebids.” In addition, governmental agencies may determine not to exercise renewal options with respect to anyTerminations, Renewals and Re-bids”. The loss by us of our contracts in the future. In the event any of ourfacility management contracts are terminateddue to terminations, non-renewals or are not renewed on favorable terms or otherwise, we may not be able to obtain additional replacement contracts. The non-renewal or termination of any of our contracts with governmental agenciescompetitive re-bids could materially adversely affect our financial condition, results of operations and liquidity, including our ability to secure new facility management contracts from other government customers.
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Our growth depends on our ability to secure contracts to develop and manage new correctional, detention and detentionmental health facilities, the demand for which is outside our control.
Our growth is generally dependent upon our ability to obtain new contracts to develop and manage new correctional, detention and detentionmental health facilities, because contracts to manage existing public facilities have not to date typically been offered to private operators. Public sector demand for new privatized facilities in our areas of operation lines may decrease and our potential for growth will depend on a number of factors we cannot control, including overall economic conditions, crime rates and sentencing patterns in jurisdictions in which we operate, governmental and public acceptance of the concept of privatization, government budgetary constraints, and the number of facilities available for privatization.
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TheIn particular, the demand for our correctional and detention facilities and services could be adversely affected by changes in existing criminal or immigration laws, crime rates in jurisdictions in which we operate, the relaxation of criminal or immigration enforcement efforts, leniency in conviction, and sentencing or deportation practices, or throughand the decriminalization of certain activities that are currently proscribed by criminal laws or the loosening of immigration laws. For instance,example, any changes with respect to the decriminalization of drugs and controlled substances or a loosening of immigration laws could affect the number of persons arrested, convicted, sentenced and incarcerated, thereby potentially reducing demand for correctional facilities to house them. Similarly, reductions in crime rates could lead to reductions in arrests, convictions and sentences requiring incarceration at correctional facilities. Immigration reform laws which are currently a focus for legislators and politicians at the federal, state and local level also could materially adversely impact us. Various factors outside our control could adversely impact the growth our GEO Care business, including government customer resistance to the privatization of mental health or residential treatment facilities, and changes to Medicare and Medicaid reimbursement programs.
We may not be able to secure financing and land for new facilities, which could adversely affect our results of operations and future growth.
In certain cases, the development and construction of facilities by us is subject to obtaining construction financing. Such financing may be obtained through a variety of means, including without limitation, the sale of tax-exempt or taxable bonds or other obligations or direct governmental appropriations. The sale of tax-exempt or taxable bonds or other obligations may be adversely affected by changes in applicable tax laws or adverse changes in the market for tax-exempt or taxable bonds or other obligations.
Moreover, certain jurisdictions, including California, where we have a significant amount of operations, have in the past required successful bidders to make a significant capital investment in connection with the financing of a particular project. If this trend were to continue in the future, we may not be able to obtain sufficient capital resources when needed to compete effectively for facility management contacts. Additionally, our success in obtaining new awards and contracts may depend, in part, upon our ability to locate land that can be leased or acquired under favorable terms. Otherwise desirable locations may be in or near populated areas and, therefore, may generate legal action or other forms of opposition from residents in areas surrounding a proposed site. Our inability to secure financing and desirable locations for new facilities could adversely affect our results of operations and future growth.
We depend on a limited number of governmental customers for a significant portion of our revenues. The loss of, or a significant decrease in business from, these customers could seriously harm our financial condition and results of operations.
We currently derive, and expect to continue to derive, a significant portion of our revenues from a limited number of governmental agencies. Of our 3240 governmental clients, sixfour customers accounted for over 50% of our consolidated revenues for the fiscal year ended December 31, 2006.30, 2007. In addition, the three federal governmental agencies with correctional and detention responsibilities, the Bureau of Prisons, the Bureau ofU.S. Immigration and Customs Enforcement, which we refer to as ICE, and the Marshals Service, accounted for approximately 29.5%25.8% of our total consolidated revenues for the fiscal year ended December 31, 2006,30, 2007, with the Bureau of Prisons accounting for approximately 9.8%7.4% of our total consolidated revenues for such period, the Marshals ServiceICE accounting for approximately 9.6%10.1% of our total consolidated revenues for such period, and ICEthe Marshals Service accounting for approximately 10.1%8.3% of our total consolidated revenues for such period. Also, government agencies from the State of Florida accounted for 15.4% of our total consolidated revenues for the fiscal year ended December 30, 2007. The loss of, or a significant decrease in, business from the Bureau of Prisons, ICE, or the U.S. Marshals Service, the State of Florida or any other significant customers could seriously harm our financial condition and results of operations. We expect to continue to depend upon these federal agencies and a relatively small group of other governmental customers for a significant percentage of our revenues.
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A decrease in occupancy levels could cause a decrease in revenues and profitability.
While a substantial portion of our cost structure is generally fixed, a significant portionmost of our revenues are generated under facility management contracts which provide for per diem payments based upon daily occupancy. WeSeveral of these contracts provide minimum revenue guarantees for us, regardless of occupancy levels, up to a specified maximum occupancy percentage. However, many of our contracts have no minimum revenue guarantees and simply provide for a fixed per diem payment for each inmate/detainee/patient actually housed. As a result, with respect to our contracts that have no minimum revenue guarantees and those that guarantee revenues only up to a certain specified occupancy percentage, we are highly dependent upon the governmental agencies with which we have contracts to provide inmates, detainees and patients for our managed facilities. WeGenerally, absent the surfacing concerns regarding the quality of our services, we cannot control occupancy levels at our managed facilities. Under a per diem rate structure, a decrease in our occupancy rates could cause a decrease in revenues and profitability. When combined with relatively fixed costs for operating each facility, regardless of the occupancy level, a material decrease in occupancy levels at one or more of our facilities could have a material adverse effect on our profitability.revenues and profitability, and consequently, on our financial condition and results of operations.
Competition for inmates may adversely affect the profitability of our business.
We compete with government entities and other private operators on the basis of cost, quality and range of services offered, experience in managing facilities, and reputation of management and personnel. Barriers to entering the market for the management of correctional and detention facilities may not be sufficient to limit additional competition in our industry. In addition, our government customers may assume the management of a facility currently managed by us upon the termination of the corresponding management contract or, if such customers have capacity at the facilities which they operate, they may take inmates currently housed in our facilities and transfer them to government operated facilities. Since we are paid on a per diem basis with no minimum guaranteed occupancy under most of our contracts, the loss of such inmates and resulting decrease in occupancy would cause a decrease in both our revenues and our profitability.
We are dependent on government appropriations, which may not be made on a timely basis or at all.all and may be adversely impacted by budgetary constraints at the federal, state and local levels.
Our cash flow is subject to the receipt of sufficient funding of and timely payment by contracting governmental entities. If the contracting governmental agency does not receive sufficient appropriations to cover its contractual obligations, it may terminate our contract or delay or reduce payment to us. Any delays in payment, or the termination of a contract, could have a material adverse effect on our cash flow and financial condition, which may make it difficult to satisfy our payment obligations on our indebtedness, including the Notes and the Senior Credit Facility, in a timely manner. The Governor of the State of Michigan’s veto in October 2005 of appropriations for our Michigan Correctional Facility in October 2005 is an example of this risk. See Item 3. Legal Proceedings. In addition, as a result of, among other things, recent economic developments, federal, state and local governments have encountered, and may continue to encounter, unusual budgetary constraints. As a result, a number of state and local governments are under pressure to control additional spending or reduce current levels of spending. Accordingly,spending which could limit or eliminate appropriations for the facilities that we operate. Additionally, as a result of these factors, we may be requested in the future to reduce our existing per diem contract rates or forego prospective increases to those rates. In addition,Budgetary limitations may also make it may become more difficult for us to renew our existing contracts on favorable terms or at all.
Public resistance to privatization of correctional and detention facilities could result in our inability to obtain new contracts or the loss of existing contracts, which could have a material adverse effect on our business, financial condition and results of operations.
The management and operation of correctional and detention facilities by private entities has not achieved complete acceptance by either governments or the public. Some governmental agencies have limitations on their ability to delegate their traditional management responsibilities for correctional and detention facilities to private companies and additional legislative changes or prohibitions could occur that further increase these limitations. In addition, the movement toward privatization of correctional and detention facilities has
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encountered resistance from groups, such as labor unions, that believe that correctional and detention facilities should only be operated by governmental agencies. Changes in dominant political parties could also result in significant changes to previously established views of privatization. Increased public resistance to the privatization of correctional and detention facilities in any of the markets in which we operate, as a result of these or other factors, could have a material adverse effect on our business, financial condition and results of operations.
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Our GEO Care business, which has become a material part of our consolidated revenues, poses unique risks not associated with our other businesses.
Our wholly-owned subsidiary, GEO Care, Inc., operates our mental health and residential treatment services division. This business primarily involves the delivery of quality care, innovative programming and active patient treatment at privatized state mental health facilities, jails, sexually violent offender facilities and long-term care facilities. GEO Care’s business has increased substantially over the last few years, both in general and as a percentage of our overall business. For the fiscal year ended December 30, 2007, GEO Care generated approximately $113.8 million in revenues, representing 11.1% of our consolidated revenues. GEO Care’s business poses several material risks unique to the operation of privatized mental health facilities and the delivery of mental health and residential treatment services that do not exist in our core business of correctional and detention facilities management, including, but not limited to, the following:
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| • | the concept of the privatization of the mental health and residential treatment services provided by GEO Care has not yet achieved general acceptance by either governments or the public, which could materially limit GEO Care’s growth prospects; |
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| • | GEO Care’s business is highly dependent on the continuous recruitment, hiring and retention of a substantial pool of qualified physicians, nurses and other medically trained personnel which may not be available in the quantities or locations sought, or on the employment terms offered; |
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| • | GEO Care’s business model often involves taking over outdated or obsolete facilities and operating them while it supervises the construction and development of new, more updated facilities; during this transition period, GEO Care may be particularly vulnerable to operational difficulties primarily relating to or resulting from the deteriorating nature of the older existing facilities; and |
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| • | the facilities operated by GEO Care are substantially dependent on government funding, including in some cases the receipt of Medicare and Medicaid funding; the loss of such government funding for any reason with respect to any facilities operated by GEO Care could have a material adverse impact on our business. |
Adverse publicity may negatively impact our ability to retain existing contracts and obtain new contracts. Our business is subject to public scrutiny.
Any negative publicity about an escape, riot or other disturbance or perceived poor conditions at a privately managed facility may result in publicity adverse to us and the private corrections industry in general. Any of these occurrences or continued trends may make it more difficult for us to renew existing contracts or to obtain new contracts or could result in the termination of an existing contract or the closure of one or more of our facilities, which could have a material adverse effect on our business.
We may incur significantstart-up and operating costs on new contracts before receiving related revenues, which may impact our cash flows and not be recouped.
When we are awarded a contract to manage a facility, we may incur significantstart-up and operating expenses, including the cost of constructing the facility, purchasing equipment and staffing the facility, before we receive any payments under the contract. These expenditures could result in a significant reduction in our cash reserves and may make it more difficult for us to meet other cash obligations, including our payment obligations on the Notes and the Amended Senior Credit Facility. In addition, a contract may be terminated prior to its
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scheduled expiration and as a result we may not recover these expenditures or realize any return on our investment.
Failure to comply with extensive government regulation and applicable contractual requirements could have a material adverse effect on our business, financial condition or results of operations.
The industry in which we operate is subject to extensive federal, state and local regulations,regulation, including educational, environmental, health care and safety laws, rules and regulations, which are administered by many regulatory authorities. Some of the regulations are unique to the corrections industry, and the combination of regulations affects all areas of our operations. Facility management contracts typically include reporting requirements, supervision andon-site monitoring by representatives of the contracting governmental agencies. Corrections officers and juvenile care workers are customarily required to meet certain training standards and, in some instances, facility personnel are required to be licensed and are subject to background investigations. Certain jurisdictions also require us to award subcontracts on a competitive basis or to subcontract with businesses owned by members of minority groups. We may not always successfully comply with these and other regulations to which we are subject and failure to comply can result in material penalties or the non-renewal or termination of facility management contracts. In addition, changes in existing regulations could require us to substantially modify the manner in which we conduct our business and, therefore, could have a material adverse effect on us.
In addition, private prison managers are increasingly subject to government legislation and regulation attempting to restrict the ability of private prison managers to house certain types of inmates, such as inmates from other jurisdictions or inmates at medium or higher security levels. Legislation has been enacted in several states, and has previously been proposed in the United States House of Representatives, containing such restrictions. Although we do not believe that existing legislation will have a material adverse effect on us, future legislation may have such an effect on us.
Governmental agencies may investigate and audit our contracts and, if any improprieties are found, we may be required to refund amounts we have received, to forego anticipated revenues and we may be subject to penalties and sanctions, including prohibitions on our bidding in response to Requests for Proposals, or RFPs, from governmental agencies to manage correctional facilities. Governmental agencies we contract with have the authority to audit and investigate our contracts with them. As part of that process, governmental agencies may review our performance of the contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations and standards. For contracts that actually or effectively provide for certain reimbursement of expenses, if an agency determines that we have improperly allocated costs to a specific contract, we may not be reimbursed for those costs, and we could be required to refund the amount of any such costs that have been reimbursed. If a government audit asserts improper or illegal activities by us, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts,
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forfeitures of profits, suspension of payments, fines and suspension or disqualification from doing business with certain governmental entities. Any adverse determination could adversely impact our ability to bid in response to RFPs in one or more jurisdictions.
In addition to compliance with applicable laws and regulations, our facility management contracts typically have numerous requirements addressing all aspects of our operations which we may not all be able to satisfy. For example, our contracts require us to maintain certain levels of coverage for general liability, workers’ compensation, vehicle liability, and property loss or damage. If we do not maintain the required categories and levels of coverage, the contracting governmental agency may be permitted to terminate the contract. In addition, we are required under our contracts to indemnify the contracting governmental agency for all claims and costs arising out of our management of facilities and, in some instances, we are required to maintain performance bonds relating to the construction, development and operation of facilities. Facility management contracts also typically include reporting requirements, supervision andon-site monitoring by representatives of the contracting governmental agencies. Failure to properly adhere to the various terms of our customer contracts could expose us to liability for damages relating to any breaches as well as the loss of such contracts, which could materially adversely impact us.
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We may face community opposition to facility location, which may adversely affect our ability to obtain new contracts.
Our success in obtaining new awards and contracts sometimes depends, in part, upon our ability to locate land that can be leased or acquired, on economically favorable terms, by us or other entities working with us in conjunction with our proposal to constructand/or manage a facility. Some locations may be in or near populous areas and, therefore, may generate legal action or other forms of opposition from residents in areas surrounding a proposed site. When we select the intended project site, we attempt to conduct business in communities where local leaders and residents generally support the establishment of a privatized correctional or detention facility. Future efforts to find suitable host communities may not be successful. In many cases, the site selection is made by the contracting governmental entity. In such cases, site selection may be made for reasons related to politicaland/or economic development interests and may lead to the selection of sites that have less favorable environments.
Our business operations expose us to various liabilities for which we may not have adequate insurance.
The nature of our business exposes us to various types of third-party legal claims, including, but not limited to, civil rights claims relating to conditions of confinementand/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, contractual claims and claims for personal injury or other damages resulting from contact with our facilities, programs, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. In addition, our management contracts generally require us to indemnify the governmental agency against any damages to which the governmental agency may be subject in connection with such claims or litigation. We maintain insurance coverage for these general types of claims, except for claims relating to employment matters, for which we carry no insurance. However, we generally have high deductible payment requirements on our primary insurance policies, including our general liability insurance, and there are also varying limits on the maximum amount of our overall coverage. As a result, the insurance we maintain to cover the various liabilities to which we are exposed may not be adequate. Any losses relating to matters for which we are either uninsured or for which we do not have adequate insurance could have a material adverse effect on our business, financial condition or results of operations. In addition, any losses relating to employment matters could have a material adverse effect on our business, financial condition or results of operations.
Claims for which we are insured arising from our U.S. operations that have an occurrence date of October 1, 2002 or earlier are handled by TWC and are commercially insured up to an aggregate limit of between $25.0 million and $50.0 million, depending on the nature of the claim and the applicable policy terms and conditions. With respect to claims for which we are insured arising after October 1, 2002, we maintain a general liability policy for all U.S. corrections operations with $52.0 million per occurrence and in the aggregate. On October 1, 2004, we increased our deductible on this general liability policy from $1.0 million to $3.0 million for each claim which occurs after October 1, 2004. We also maintain insurance to cover property and casualty risks, workers’ compensation, medical malpractice, environmental liability and automobile liability. Our Australian subsidiary is required to carry tail insurance on a general liability policy providing an extended reporting period through 2011 related to a discontinued contract. We also carry various types of insurance with respect to our operations in South Africa, the United Kingdom and Australia. There can be no assurance that our insurance coverage will be adequate to cover all claims to which we may be exposed.
Since our insurance policies generally have high deductible amounts (including a $3.0 million per claim deductible under our general liability and auto liability policies and a $2.0 million per claim deductible under our workers’ compensation policy), losses are recorded as reported and a provision is made to cover losses incurred but not reported. Loss reserves are undiscounted and are computed based on independent actuarial studies. Our management uses judgments in assessing loss estimates based on actuarial studies, which include actual claim amounts and loss development based on both GEO’s own historical experience and industry
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experience. If actual losses related to insurance claims significantly differ from our estimates, our financial condition and results of operations could be materially impacted.
Certain GEO facilities located in Florida and determined by insurers to be in high-risk hurricane areas carry substantial windstorm deductibles of up to $3.0 million. Since hurricanes are considered unpredictable future events, no reserves have been established to pre-fund for potential windstorm damage. Limited commercial availability of certain types of insurance relating to windstorm exposure in coastal areas and earthquake exposure mainly in California may prevent us from insuring our facilities to full replacement value.
We may not be able to obtain or maintain the insurance levels required by our government contracts.
Our government contracts require us to obtain and maintain specified insurance levels. The occurrence of any events specific to our company or to our industry, or a general rise in insurance rates, could substantially increase our costs of obtaining or maintaining the levels of insurance required under our government contracts, or prevent us from obtaining or maintaining such insurance altogether. If we are unable to obtain or maintain the required insurance levels, our ability to win new government contracts, renew government contracts that have expired and retain existing government contracts could be significantly impaired, which could have a material adverse affect on our business, financial condition and results of operations.
Our international operations expose us to risks which could materially adversely affect our financial condition and results of operations.
For the fiscal year ended December 31, 2006,30, 2007, our international operations accounted for approximately 12%12.7% of our consolidated revenues. We face risks associated with our operations outside the U.S. These risks include, among others, political and economic instability, exchange rate fluctuations, taxes, duties and the laws or regulations in those foreign jurisdictions in which we operate. In the event that we experience any difficulties arising from our operations in foreign markets, our business, financial condition and results of operations may be materially adversely affected.
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We conduct certain of our operations through joint ventures, which may lead to disagreements with our joint venture partners and adversely affect our interest in the joint ventures.
We conduct substantially all of our operations in South Africa through joint ventures with third parties and may enter into additional joint ventures in the future. Our joint venture agreements generally provide that the joint venture partners will equally share voting control on all significant matters to come before the joint venture. Our joint venture partners may have interests that are different from ours which may result in conflicting views as to the conduct of the business of the joint venture. In the event that we have a disagreement with a joint venture partner as to the resolution of a particular issue to come before the joint venture, or as to the management or conduct of the business of the joint venture in general, we may not be able to resolve such disagreement in our favor and such disagreement could have a material adverse effect on our interest in the joint venture or the business of the joint venture in general.
We are dependent upon our senior management and our ability to attract and retain sufficient qualified personnel.
We are dependent upon the continued service of each member of our senior management team, including George C. Zoley, our Chairman and Chief Executive Officer, Wayne H. Calabrese, our Vice Chairman and President, and John G. O’Rourke, our Chief Financial Officer. Under the terms of their retirement agreements, each of these executives is currently eligible to retire at any time from GEO and receive significant lump sum retirement payments. The unexpected loss of any of these individuals could materially adversely affect our business, financial condition or results of operations. We do not maintain key-man life insurance to protect against the loss of any of these individuals.
In addition, the services we provide are labor-intensive. When we are awarded a facility management contract or open a new facility, depending on the service we musthave been contracted to provide, we may need to hire operating management, correctional officers, security staff, physicians, nurses and other qualified personnel. The success of our business requires that we attract, develop and retain these personnel. Our inability to hire
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sufficient qualified personnel on a timely basis or the loss of significant numbers of personnel at existing facilities could have a material effect on our business, financial condition or results of operations.
Our profitability may be materially adversely affected by inflation.
Many of our facility management contracts provide for fixed management fees or fees that increase by only small amounts during their terms. While a substantial portion of our cost structure is generally fixed, if, due to inflation or other causes, our operating expenses, such as costs relating to personnel, utilities, insurance, medical and food, increase at rates faster than increases, if any, in our facility management fees, then our profitability could be materially adversely affected.
Various risks associated with the ownership of real estate may increase costs, expose us to uninsured losses and adversely affect our financial condition and results of operations.
Our ownership of correctional and detention facilities subjects us to risks typically associated with investments in real estate. Investments in real estate, and in particular, correctional and detention facilities, are relatively illiquid and, therefore, our ability to divest ourselves of one or more of our facilities promptly in response to changed conditions is limited. Investments in correctional and detention facilities, in particular, subject us to risks involving potential exposure to environmental liability and uninsured loss. Our operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation. In addition, although we maintain insurance for many types of losses, there are certain types of losses, such as losses from earthquakes, riots and acts of terrorism, which may be either uninsurable or for which it may not be economically feasible to obtain insurance coverage, in light of the substantial costs associated with such insurance. As a result, we could lose both our capital invested in, and anticipated profits from, one or more of the facilities we own. Further, even if we have insurance for a particular loss, we may experience losses that may exceed the limits of our coverage.
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We are currently self-financing a number of large capital projects simultaneously, which exposes us to several material risks.
We are currently self-financing the simultaneous construction or expansion of several correctional and detention facilities in multiple jurisdictions. As of December 30, 2007, we were in the process of constructing or expanding 13 facilities representing 8,000 total beds, one of which we will lease to another party and 12 of which we will operate. We are providing the financing for six of the 13 facilities, representing 4,700 beds. Total capital expenditures related to these projects is expected to be $249.4 million, of which $102.1 million was completed through year end 2007. We expect to incur at least another approximately $93.8 million in capital expenditures relating to these owned projects through the fiscal year 2009. Additionally, financing for the remaining seven facilities representing 3,300 beds is being provided for by state or counties for their ownership. We are managing the construction of these projects with total costs of $188.4 million, of which $94.8 million has been completed through year end 2007 and $93.6 million remains to be completed through 2009. The concurrent development of these various large capital projects exposes us to material risks. For example, we may not complete some or all of the projects on time or on budget, which could cause us to lose a facility management contract with our customer relating to any such project, or to absorb any losses associated with any delays. Also, with respect to the six owned facilities under development or expansion, we have facility management contracts with respect to 3,600 beds but do not have a contracted user/agency with respect to the remaining 1,100 beds. With respect to the seven facilities under development, which will be managed only facilities, we have facility management contracts with respect to 1,000 beds but do not have a contracted user/agency with respect to the remaining 2,300 beds. While we are working diligently with a number of different customers for the use of these remaining beds and believe that the overall demand for bed space in our industry remains strong, we cannot in fact assure you that contracts for the beds will be secured on a timely basis, or at all. Additionally, we have used our cash from operations to fund owned projects and may in the future finance owned projects with borrowings under our Senior Credit Facility. The large capital commitments that these projects will require over the next12-18 month period may materially strain our liquidity and our borrowing capacity for other purposes. Capital constraints caused by these projects may also cause us to have to refinance our existing indebtedness or incur more indebtedness on terms less favorable than those we currently have in place.
Risks related to facility construction and development activities may increase our costs related to such activities.
When we are engaged to perform construction and design services for a facility, we typically act as the primary contractor and subcontract with other companies who act as the general contractors. As primary contractor, we are subject to the various risks associated with construction (including, without limitation, shortages of labor and materials, work stoppages, labor disputes and weather interference) which could cause construction delays. In addition, we are subject to the risk that the general contractor will be unable to complete construction at the budgeted costs or be unable to fund any excess construction costs, even though we typically require general contractors to post construction bonds and insurance. Under such contracts, we are ultimately liable for all late delivery penalties and cost overruns.
The rising cost and increasing difficulty of obtaining adequate levels of surety credit on favorable terms could adversely affect our operating results.
We are often required to post performance bonds issued by a surety company as a condition to bidding on or being awarded a facility development contract. Availability and pricing of these surety commitments is subject to general market and industry conditions, among other factors. Recent events in the economy have caused the surety market to become unsettled, causing many reinsurers and sureties to reevaluate their commitment levels and required returns. As a result, surety bond premiums generally are increasing. If we are unable to effectively pass along the higher surety costs to our customers, any increase in surety costs could adversely affect our operating results. In addition, we may not continue to have access to surety credit or be able to secure bonds economically, without additional collateral, or at the levels required for any potential facility development or contract bids. If we are unable to obtain adequate levels of surety credit on favorable
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terms, we would have to rely upon letters of credit under our Senior Credit Facility, which would entail higher costs even if such borrowing capacity was available when desired, and our ability to bid for or obtain new contracts could be impaired.
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We may not be able to successfully identify, consummate or integrate acquisitions.
We have an active acquisition program, the objective of which is to identify suitable acquisition targets that will enhance our growth. The pursuit of acquisitions may pose certain risks to us. We may not be able to identify acquisition candidates that fit our criteria for growth and profitability. Even if we are able to identify such candidates, we may not be able to acquire them on terms satisfactory to us. We will incur expenses and dedicate attention and resources associated with the review of acquisition opportunities, whether or not we consummate such acquisitions. Additionally, even if we are able to acquire suitable targets on agreeable terms, we may not be able to successfully integrate their operations with ours. We may also assume liabilities in connection with acquisitions that we would otherwise not be exposed to.
Risks Related to our Common Stock
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| Fluctuations in the stock market as well as general economic, market and industry conditions may harm the market price of our common stock. |
Fluctuations in the stock market as well as general economic, market and industry conditions may harm the market price of our common stock.
The market price of our common stock has been subject to significant fluctuation. The market price of our common stock may continue to be subject to significant fluctuations in response to operating results and other factors, including:
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| | • | actual or anticipated quarterly fluctuations in our financial results, particularly if they differ from investors’ expectations; |
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| | • | changes in financial estimates and recommendations by securities analysts; |
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| | • | general economic, market and political conditions, including war or acts of terrorism, not related to our business; |
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| | • | actions of our competitors and changes in the market valuations, strategy and capability of our competitors; |
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| | • | our ability to successfully integrate acquisitions and consolidations; and |
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| | • | changes in the prospects of the privatized corrections and detention industry. |
In addition, the stock market in recent years has experienced price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These fluctuations, may harm the market price of our common stock, regardless of our operating results.
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| Future sales of our common stock in the public market could adversely affect the trading price of our common stock that we may issue and our ability to raise funds in new securities offerings. |
Future sales of our common stock in the public market could adversely affect the trading price of our common stock that we may issue and our ability to raise funds in new securities offerings.
Future sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. We cannot predict the effect, if any, that future sales of shares of common stock or the availability of shares of common stock for future sale will have on the trading price of our common stock.
| |
| Various anti-takeover protections applicable to us may make an acquisition of us more difficult and reduce the market value of our common stock. |
Various anti-takeover protections applicable to us may make an acquisition of us more difficult and reduce the market value of our common stock.
We are a Florida corporation and the anti-takeover provisions of Florida law impose various impediments to the ability of a third party to acquire control of our company, even if a change of control would be beneficial to our shareholders. In addition, provisions of our articles of incorporation may make an acquisition of us more difficult. Our articles of incorporation authorize the issuance by our board of directors of “blank
30
check” preferred stock without shareholder approval. Such shares of preferred stock could be given voting rights, dividend rights, liquidation rights or other similar rights superior to those of our common stock, making a takeover of us more difficult and expensive. We also have adopted a shareholder rights plan, commonly known as a “poison pill,” which could result in the significant dilution of the proportionate ownership of any
27
person that engages in an unsolicited attempt to take over our company and, accordingly, could discourage potential acquirors. In addition to discouraging takeovers, the anti-takeover provisions of Florida law and our articles of incorporation, as well as our shareholder rights plan, may have the impact of reducing the market value of our common stock.
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| Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have an adverse effect on our business and the trading price of our common stock. |
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have an adverse effect on our business and the trading price of our common stock.
If we fail to maintain the adequacy of our internal controls, in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, and as such standards are modified, supplemented or amended from time to time, we may not be ableour exposure to ensure that we can concludefraud and errors in accounting and financial reporting could materially increase. Also, inadequate internal controls would likely prevent us from concluding on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. FailureSuch failure to achieve and maintain effective internal controls could have an adverse effect onadversly impact our business and the price of our common stock.
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| We may issue additional debt securities that could limit our operating flexibility and negatively affect the value of our common stock. |
We may issue additional debt securities that could limit our operating flexibility and negatively affect the value of our common stock.
In the future, we may issue additional debt securities which may be governed by an indenture or other instrument containing covenants that could place restrictions on the operation of our business and the execution of our business strategy in addition to the restrictions on our business already contained in the agreements governing our existing debt. In addition, we may choose to issue debt that is convertible or exchangeable for other securities, including our common stock, or that has rights, preferences and privileges senior to our common stock. Because any decision to issue debt securities will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future debt financings and we may be required to accept unfavorable terms for any such financings. Accordingly, any future issuance of debt could dilute the interest of holders of our common stock and reduce the value of our common stock.
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| Because we do not intend to pay dividends, shareholders will benefit from an investment in our common stock only if it appreciates in value. |
Because we do not intend to pay dividends, shareholders will benefit from an investment in our common stock only if it appreciates in value.
We currently intend to retain our future earnings, if any, to finance the further expansion and continued growth of our business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which shareholders purchase their shares.
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| Item 1B. | Unresolved Staff Comments |
None.
Our corporate offices are located in Boca Raton, Florida, under a 1010-year1/2 -year lease expiring 2013.which was renewed in October 2007. The current lease has two5-year renewal options and expires in March of 2018. In addition, we lease office space for our eastern regional office in Palm Beach Gardens, Florida;Charlotte, North Carolina; our central regional office in New Braunfels, Texas; and our western regional office in Carlsbad, California. We also lease office space in Sydney, Australia, through our overseas affiliates, in Sandton, South Africa, and in Theale,Berkshire, England through our overseas affiliates to support our Australian, South African, and UK operations, respectively.
31
See “Facilities” listing under Item 1 for a list of the correctional, detention and mental health properties we own or lease in connection with our operations.
28
| |
| Item 3. | Legal Proceedings |
On May 19, 2006, we, along with Corrections Corporation of America, referred to as CCA, were sued by an individual plaintiff in the Circuit Court of the Second Judicial Circuit for Leon County, Florida (Case No. 2005CA001884). The complaint alleges that, during the period from 1995 to 2004, we and CCA overbilled the State of Florida by an amount of at least $12.7 million by submitting to the State false claims for various items relating to (i) repairs, maintenance and improvements to certain facilities which we operate in Florida, (ii) our staffing patterns in filling vacant security positions at those facilities, and (iii) our alleged failure to meet the conditions of certain waivers granted to us by the State of Florida from the payment of liquidated damages penalties relating to our staffing patterns at those facilities. The portion of the complaint relating to us arises out of our operations at our South Bay and Moore Haven, Florida correctional facilities. The complaint appears to be based largely on the same set of issues raised by a Florida Inspector General’s Evaluation Report released in late June 2005, referred to as the IG Report, which alleged that us and CCA overbilled the State of Florida by over $12 million.
Subsequently, the Florida Department of Management Services, referred to as the DMS, which is responsible for administering our correctional contracts with the State of Florida, conducted a detailed analysis of the allegations raised by the IG Report which included a comprehensive written response to the IG Report which we had prepared and delivered to the DMS. In September 2005, the DMS provided a letter to us stating that, although its review had not yet been fully completed, it did not find any indication of any improper conduct by us. On October 17, 2006, DMS provided a letter to us stating that its review had been completed. We and DMS then agreed to settle this matter for $0.3 million. Although this determination is not dispositive of the recently initiated litigation, we believe it supports our position that we have valid defenses in this matter. We will continue to investigate this matter and intend to defend our rights vigorously. However, given the amounts claimed by the plaintiff and the fact that the nature of the allegations could cause adverse publicity to us, we believe that this matter, if settled unfavorably to us, could have a material adverse effect on our financial condition and results of operations.
On September 15, 2006, a jury in an inmate wrongful death lawsuit in a Texas state court awarded a $47.5 million verdict against us. Recently,In October 2006, the verdict was entered as a judgment against us in the amount of $51.7 million. On December 9, 2006, the trial court denied our post trial motions and we filed a notice of appeal on December 18, 2006. The lawsuit is being administered under anthe insurance program established by The Wackenhut Corporation, our former parent company, in which we participated until October 2002. Policies secured by us under that program provide $55$55.0 million in aggregate annual coverage. As a result, we believe we are fully insured for all damages, costs and expenses associated with the lawsuit and as such we have not taken any reserves in connection with the matter. The lawsuit stems from an inmate death which occurred at our former Willacy County State Jail in Raymondville, Texas, in April 2001, when two inmates at the facility attacked another inmate. Separate investigations conducted internally by us, The Texas Rangers and the Texas Office of the Inspector General exonerated us and our employees of any culpability with respect to the incident. We believe that the verdict in the lawsuit is contrary to law and unsubstantiated by the evidence. Our insurance carrier has posted a supersedessupersedeas bond in the amount atof approximately $60.0 million to cover the judgment.
We own the 480-bed Michigan Correctional Facility in Baldwin, Michigan, referred to as the Michigan Facility. We operated the Michigan Facility from 1999 until October 2005 pursuant to a management contract with the Michigan Department of Corrections, or the MDOC. Separately, we leased the Michigan Facility, as lessor, to the State, as lessee, under a lease with an initial term of 20 years followed by two five-year options. In September 2005, the Governor of the State of Michigan closed the Michigan Facility and terminated the our management contract with the MDOC. In October 2005, the State of Michigan also sought to terminate its lease for the Michigan Facility. We believe that the State did not have the right to unilaterally terminate the Michigan Facility lease. As a result, in November 2005, we filed a lawsuit against the State to enforce our rights under the lease. On February 24, 2006, the Ingham County Circuit Court, the trial court with jurisdiction over the case, granted summary judgment in favor of the State and against us and granted us leave to amend the complaint. We filed an amended complaint and on September 13,December 9, 2006, the trial court granted summary judgment on the amended complaint in favor of the Statedenied our post trial motions and against us. We havewe filed a notice of appeal and
29
are proceeding with the appeal. We reviewed the Michigan Facility for impairment in accordance with FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, and recorded an impairment charge in the fourth quarter of 2005 for $20.9 million based on an independent appraisal of fair market value.December 18, 2006. The appeal is proceeding.
In June 2004, we received notice of a third-party claim for property damage incurred during 20022001 and 20012002 at several detention facilities that our Australian subsidiary formerly operated pursuant to its discontinued operation.operated. 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 May 2005, we received additional correspondence indicating thatAugust 2007, legal proceedings in this matter were formally commenced when the insurance provider still intendsCompany was served with notice of a complaint filed against it by the Commonwealth of Australia (the “Plaintiff”) seeking damages of up to pursue the claim against our Australian subsidiary. Although the claim is in the initial stages and we are still in the processapproximately AUS 18.0 million or $15.8 million as of fully evaluating its merits, weDecember 30, 2007. We believe that we have several defenses to the allegations underlying the claimlitigation and the amounts sought and intend to vigorously defend our rights with respect to this matter. While the insurance provider has not quantified its damage claim andAlthough the outcome of this matter discussed above cannot be predicted with certainty, based on information known to date and management’sour preliminary review of the claim, we believe that, if settled unfavorably, this matter could have a material adverse effect on our financial condition, results of operations and cash flows. Furthermore, we are unable to determine the losses, if any, that we will incur under the litigation should the matter be resolved unfavorably to us. We are uninsured for any damages or costs that itwe may incur as a result of this claim, including the expenses of defending the claim. We have accruedestablished a reserve related to this claim based on our estimate of the most probable costs that may be incurredloss based on the facts and circumstances known to date and the advice of our legal counsel.counsel in connection with this matter.
On January 30, 2008, a lawsuit seeking class action certification was filed against us by an inmate at one of our jails. The case is entitled Bussy v. The GEO Group, Inc. (Civil ActionNo. 08-467)) and is pending in the U.S. District Court for the Eastern District of Pennsylvania. The lawsuit alleges that we have a companywide blanket policy at our immigration/detention facilities and jails that requires all new inmates and detainees to undergo a strip search upon intake into each facility. The plaintiff alleges that this practice, to the extent implemented, violates the civil rights of the affected inmates and detainees. The lawsuit seeks monetary damages for all purported class members, a declaratory judgment and an injunction barring the alleged policy from being implemented in the future. We are in the initial stages of investigating this claim. However, following our preliminary review, we believe we have several defenses to the allegations underlying this litigation and intend to vigorously defend our rights in this matter. Nevertheless, we believe that, if resolved unfavorably, this matter could have a material adverse effect on our financial condition and results of operations.
The nature of the our business exposes us to various types of claims or litigation against us, including, but not limited to, civil rights claims relating to conditions of confinementand/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, indemnification claims by our
32
customers and other third parties, contractual claims and claims for personal injury or other damages resulting from contact with the our 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, we do not expect the outcome of any pending claims or legal proceedings to have a material adverse effect on our financial condition, results of operations or cash flows.
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| Item 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of our shareholders during the thirteen weeks ended December 31, 2006.30, 2007.
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PART II
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| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Securities |
Our common stock trades on the New York Stock Exchange under the symbol “GEO.” The following table shows the high and low prices for our common stock, as reported by the New York Stock Exchange, for each of the four quarters of fiscal years 20062007 and 20052006 and reflects the effect of the October 2, 2006June 1, 2007 stock split. The prices shown have been rounded to the nearest $1/100. The approximate number of shareholders of record as of February 23, 2007,11, 2008, was 130124 which includes shares held in street name.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | | 2007 | | 2006 | |
Quarter | | High | | Low | | High | | Low | | | High | | Low | | High | | Low | |
| |
| First | | $ | 22.23 | | | $ | 14.74 | | | $ | 21.47 | | | $ | 17.07 | | | $ | 25.00 | | | $ | 18.73 | | | $ | 11.11 | | | $ | 7.37 | |
| Second | | | 26.44 | | | | 21.53 | | | | 19.15 | | | | 15.35 | | | | 29.29 | | | | 23.08 | | | | 13.22 | | | | 10.77 | |
| Third | | | 30.68 | | | | 21.92 | | | | 19.30 | | | | 16.77 | | | | 32.21 | | | | 26.55 | | | | 15.34 | | | | 10.96 | |
| Fourth | | | 40.00 | | | | 28.21 | | | | 17.07 | | | | 13.81 | | | | 31.63 | | | | 23.10 | | | | 20.00 | | | | 14.11 | |
We did not pay any cash dividends on our common stock for fiscal years 20062007 and 2005.2006. We intend to retain our earnings to finance the growth and development of our business and do not anticipate paying cash dividends on our capital stock in the foreseeable future. Future dividends, if any, will depend, on our future earnings, our capital requirements, our financial condition and on such other factors as our Board of Directors may consider relevant.take into consideration. In addition, the indenture governing our $150.0 million 81/4% senior notes due in 2013, and our $175.0$365.0 million senior credit facility, of which $162.3 was outstanding as of December 30, 2007, also place material restrictions on our ability to pay dividends. See “Item 7. Management’s Discussion and Analysis, Cash Flow and Liquidity” and “Item 8. Financial Statements —Note 10-Debt”11-Debt” for further description of these restrictions.
We did not buy back any of our common stock during 2006 and 2005.2007 or 2006. On August 10, 2006,May 1, 2007, our Board of Directors declared a3-for-2 two-for-one stock split of our common stock. The stock split took effect on October 2, 2006June 1, 2007 with respect to stockholders of record on SeptemberMay 15, 2006.2007. Following the stock split, our shares outstanding increased from 13.025.4 million to 19.550.8 million. All per share amounts have been retro-actively restated to reflect the3-for-22-for-1 stock split.
Equity Compensation Plan Information
The following table sets forth information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our equity compensation plans as of December 31, 2006,30, 2007, including our 1994 Second Stock Option Plan, our 1999 Stock Option Plan, our 2006 Stock Incentive Plan and our 1995 Non-Employee Director Stock Option Plan. Our shareholders have approved all of these plans.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (a) | | (b) | | (c) | | | (a) | | (b) | | (c) | |
| | | | | | | Number of Securities
| | | | | | | Number of Securities
| |
| | | | | | | Remaining Available for
| | | | | | | Remaining Available for
| |
| | | Number of Securities
| | | | Future Issuance Under
| | | Number of Securities
| | | | Future Issuance Under
| |
| | | to be Issued Upon
| | Weighted-Average
| | Equity Compensation
| | | to be Issued Upon
| | Weighted-Average
| | Equity Compensation
| |
| | | Exercise of
| | Exercise Price of
| | Plans (Excluding
| | | Exercise of
| | Exercise Price of
| | Plans (Excluding
| |
| | | Outstanding Options,
| | Outstanding Options,
| | Securities Reflected in
| | | Outstanding Options,
| | Outstanding Options,
| | Securities Reflected in
| |
Plan Category | | Warrants and Rights | | Warrants and Rights | | Column (a)) | | | Warrants and Rights | | Warrants and Rights | | Column (a)) | |
| |
| Equity compensation plans approved by security holders | | | 1,538,819 | | | $ | 9.22 | | | | 225,300 | | | | 2,770,082 | | | $ | 7.15 | | | | 225,028 | |
| | | | | | | | | | | | | | | |
| Equity compensation plans not approved by security holders | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | |
| Total | | | 1,538,819 | | | $ | 9.22 | | | | 225,300 | | | | 2,770,082 | | | $ | 7.15 | | | | 225,028 | |
| | | | | | | | | | | | | | | |
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Performance Graph
The following performance graph compares the performance of our common stock to the New York Stock Exchange Composite Index and to an index of peer companies we selected, and is provided in accordance with Item 201(e) ofRegulation S-K.
Comparison of Five-Year Cumulative Total Return*
The GEO Group, Inc., Wilshire 500 Equity, and
S&P 500 Commercial Services and Supplies Indexes
(Performance through December 31, 2006)30, 2007)
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | S&P 500
|
| | | | | | | | | | S&P 500 Commercial
| | | | | | | | | Commercial
|
| | | | The GEO
| | | Wilshire 5000
| | | Services and
| | | The GEO
| | | Wilshire 5000
| | | Services and
|
| Date | | | Group, Inc. | | | Equity | | | Supplies | | | Group, Inc. | | | Equity | | | Supplies |
| December 31, 2001 | | | $ | 100.00 | | | | $ | 100.00 | | | | $ | 100.00 | | |
| December 31, 2002 | | | $ | 80.16 | | | | $ | 79.14 | | | | $ | 78.81 | | | | $ | 100.00 | | | | $ | 100.00 | | | | $ | 100.00 | |
| December 31, 2003 | | | $ | 164.50 | | | | $ | 104.19 | | | | $ | 97.45 | | | | $ | 205.22 | | | | $ | 131.65 | | | | $ | 123.66 | |
| December 31, 2004 | | | $ | 191.77 | | | | $ | 117.20 | | | | $ | 104.95 | | | | $ | 239.24 | | | | $ | 148.09 | | | | $ | 133.17 | |
| December 31, 2005 | | | $ | 165.44 | | | | $ | 124.69 | | | | $ | 109.59 | | | | $ | 206.39 | | | | $ | 157.53 | | | | $ | 139.07 | |
| December 31, 2006 | | | $ | 406.06 | | | | $ | 144.36 | | | | $ | 125.04 | | | | $ | 506.57 | | | | $ | 182.38 | | | | $ | 158.67 | |
| December 31, 2007 | | | | $ | 756.08 | | | | $ | 192.62 | | | | $ | 138.23 | |
| | | | | | | | | | | | | | | | | | | |
Assumes $100 invested on December 31, 20012002 in The GEO Group, Inc. common stock and the Index companies.
| | |
| * | | Total return assumes reinvestment of dividends. |
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| Item 6. | Selected Financial Data |
The selected consolidated financial data should be read in conjunction with our consolidated financial statements and the notes to the consolidated financial statements (in thousands, except per share data).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal Year Ended:(1) | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| |
Results of Continuing Operations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | $ | 860,882 | | | | 100.0 | % | | $ | 612,900 | | | | 100.0 | % | | $ | 593,994 | | | | 100.0 | % | | $ | 549,238 | | | | 100.0 | % | | $ | 501,982 | | | | 100.0 | % | | $ | 1,024,832 | | | | 100.0 | % | | $ | 860,882 | | | | 100.0 | % | | $ | 612,900 | | | | 100.0 | % | | $ | 593,994 | | | | 100.0 | % | | $ | 549,238 | | | | 100.0 | % |
| Operating income from continuing operations | | | 64,201 | | | | 7.5 | % | | | 7,938 | | | | 1.3 | % | | | 38,991 | | | | 6.6 | % | | | 29,500 | | | | 5.4 | % | | | 23,195 | | | | 4.6 | % | | | 95,836 | | | | 9.4 | % | | | 64,201 | | | | 7.5 | % | | | 7,938 | | | | 1.3 | % | | | 38,991 | | | | 6.6 | % | | | 29,500 | | | | 5.4 | % |
| Income from continuing operations | | $ | 30,308 | | | | 3.5 | % | | $ | 5,879 | | | | 1.0 | % | | $ | 17,163 | | | | 2.9 | % | | $ | 36,375 | | | | 6.6 | % | | $ | 17,617 | | | | 3.5 | % | | $ | 41,265 | | | | 4.0 | % | | $ | 30,308 | | | | 3.5 | % | | $ | 5,879 | | | | 1.0 | % | | $ | 17,163 | | | | 2.9 | % | | $ | 36,375 | | | | 6.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations per common share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic: | | $ | 1.76 | | | | | | | $ | 0.41 | | | | | | | $ | 1.22 | | | | | | | $ | 1.55 | | | | | | | $ | 0.56 | | | | | | | $ | .0.87 | | | | | | | $ | 0.88 | | | | | | | $ | 0.20 | | | | | | | $ | 0.61 | | | | | | | $ | 0.78 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Diluted: | | $ | 1.70 | | | | | | | $ | 0.39 | | | | | | | $ | 1.17 | | | | | | | $ | 1.53 | | | | | | | $ | 0.55 | | | | | | | $ | 0.84 | | | | | | | $ | 0.85 | | | | | | | $ | 0.19 | | | | | | | $ | 0.59 | | | | | | | $ | 0.77 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Weighted Average Shares Outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 17,221 | | | | | | | | 14,370 | | | | | | | | 14,076 | | | | | | | | 23,427 | | | | | | | | 31,722 | | | | | | | | 47,727 | | | | | | | | 34,442 | | | | | | | | 28,740 | | | | | | | | 28,152 | | | | | | | | 46,854 | | | | | |
| Diluted | | | 17,872 | | | | | | | | 15,015 | | | | | | | | 14,607 | | | | | | | | 23,744 | | | | | | | | 32,046 | | | | | | | | 49,192 | | | | | | | | 35,744 | | | | | | | | 30,030 | | | | | | | | 29,214 | | | | | | | | 47,488 | | | | | |
Financial Condition: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current assets | | $ | 322,754 | | | | | | | $ | 229,292 | | | | | | | $ | 222,766 | | | | | | | $ | 191,811 | | | | | | | $ | 142,839 | | | | | | | $ | 264,518 | | | | | | | $ | 322,754 | | | | | | | $ | 229,292 | | | | | | | $ | 222,766 | | | | | | | $ | 191,811 | | | | | |
| Current liabilities | | | 173,703 | | | | | | | | 136,519 | | | | | | | | 117,478 | | | | | | | | 118,704 | | | | | | | | 79,360 | | | | | | | | 186,432 | | | | | | | | 173,703 | | | | | | | | 136,519 | | | | | | | | 117,478 | | | | | | | | 118,704 | | | | | |
| Total assets | | | 743,453 | | | | | | | | 639,511 | | | | | | | | 480,326 | | | | | | | | 505,341 | | | | | | | | 405,378 | | | | | | | | 1,192,634 | | | | | | | | 743,453 | | | | | | | | 639,511 | | | | | | | | 480,326 | | | | | | | | 505,341 | | | | | |
| Long-term debt, including current portion (excluding non-recourse debt and capital leases) | | | 154,259 | | | | | | | | 220,004 | | | | | | | | 198,204 | | | | | | | | 245,086 | | | | | | | | 125,000 | | | | | | | | 309,273 | | | | | | | | 154,259 | | | | | | | | 220,004 | | | | | | | | 198,204 | | | | | | | | 245,086 | | | | | |
| Shareholders’ equity | | $ | 248,610 | | | | | | | $ | 108,594 | | | | | | | $ | 99,739 | | | | | | | $ | 77,325 | | | | | | | $ | 150,215 | | | | | | | $ | 527,705 | | | | | | | $ | 248,610 | | | | | | | $ | 108,594 | | | | | | | $ | 99,739 | | | | | | | $ | 77,325 | | | | | |
Operational Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contracts/awards | | | 73 | | | | | | | | 59 | | | | | | | | 47 | | | | | | | | 43 | | | | | | | | 50 | | | | | | | | 77 | | | | | | | | 73 | | | | | | | | 59 | | | | | | | | 47 | | | | | | | | 43 | | | | | |
| Facilities in operation | | | 62 | | | | | | | | 56 | | | | | | | | 41 | | | | | | | | 38 | | | | | | | | 50 | | | | | | | | 59 | | | | | | | | 62 | | | | | | | | 56 | | | | | | | | 41 | | | | | | | | 38 | | | | | |
| Design capacity of contracts | | | 54,548 | | | | | | | | 48,370 | | | | | | | | 34,813 | | | | | | | | 38,287 | | | | | | | | 40,757 | | | | | | | | 57,965 | | | | | | | | 54,548 | | | | | | | | 48,370 | | | | | | | | 34,813 | | | | | | | | 38,287 | | | | | |
| Compensated resident days(2) | | | 15,788,208 | | | | | | | | 12,607,525 | | | | | | | | 12,458,102 | | | | | | | | 11,389,821 | | | | | | | | 10,591,019 | | | | | | | | 16,982,518 | | | | | | | | 15,788,208 | | | | | | | | 12,607,525 | | | | | | | | 12,458,102 | | | | | | | | 11,389,821 | | | | | |
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| (1) | | Our fiscal year ends on the Sunday closest to the calendar year end. The fiscal year ended January 2, 2005 contained 53 weeks. Discontinued Operations have not been included with Selected Financial Data. Information related to Discontinued Operations is listed in “Item 8. Financial Statements — Note 34 Discontinued Operations.” |
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| (2) | | Compensated resident days are calculated as follows: (a) for per diem rate facilities — the number of beds occupied by residents on a daily basis during the fiscal year; and (b) for fixed rate facilities — the design capacity of the facility multiplied by the number of days the facility was in operation during the fiscal year. Amounts exclude compensated resident days for United Kingdom for fiscal years 20022003 to 2005. |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Introduction
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of numerous factors including, but not limited to, those described belowabove under “Item 1A. Risk Factors,” and Forward-Looking Statements.“Forward-Looking Statements — Safe Harbor” below. The discussion should be read in conjunction with the consolidated financial statements and notes thereto.
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We are a leading provider of government-outsourced services specializing in the management of correctional, detention and mental health and residential treatment facilities in the United States, Australia,
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South Africa, the United Kingdom and Canada. We operate a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers and mental health and residential treatment facilities. Our correctional and detention management services involve the provision of security, administrative, rehabilitation, education, health and food services, primarily at adult male correctional and detention facilities. Our mental health and residential treatment services involve the delivery of quality care, innovative programming and active patient treatment, primarily at privatized state mental health. We also develop new facilities based on contract awards, using our project development expertise and experience to design, construct and finance what we believe arestate-of-the-art facilities that maximize security and efficiency.
Our business was founded in 1984 as a division of The Wackenhut Corporation, or TWC, a multinational provider of global security services. We were incorporated in 1988 as a wholly-owned subsidiary of TWC. In July 1994, we became a publicly-traded company. In 2002, TWC was acquired by Group 4 Falck A/S, which became our new parent company. In July 2003, we purchased all of our common stock owned by Group 4 Falck A/S and became an independent company. In November 2003, we changed our corporate name to ”The GEO Group, Inc.” We currently trade on the New York Stock Exchange under the ticker symbol “GEO.”
As of December 31, 2006, we operated a total of 62 correctional, detention and mental health and residential treatment facilities and had over 54,000 beds under management or for which we had been awarded contracts. We maintained an average facility occupancy rate of 96.1% for the fiscal year ended December 31, 2006.30, 2007, we managed 59 facilities totaling approximately 50,400 beds worldwide and had an additional 6,800 beds under development at 10 facilities, including the expansion of five facilities we currently operate and five new facilities under construction. We also had approximately 730 additional inactive beds available to meet our customers’ potential future demand for bed space. For the fiscal year ended December 31, 2006,30, 2007, we had consolidated revenues of $860.9 million$1.02 billion and consolidated operating incomewe maintained an average companywide facility occupancy rate of $64.2 million.96.8%.
Recent Developments
On September 20, 2006, we entered into an Agreement and PlanAcquisition of Merger by and among us and CentraCore Properties Trust which we refer to as CPT.
On January 24, 2007, we completed the acquisition of CPT pursuant to the Agreement and Plan of Merger, dated as of September 19, 2006, referred to as the Merger Agreement, by and among us, GEO Acquisition II, Inc., a direct wholly-owned subsidiary of GEO, and CPT. Under the terms of the Merger Agreement, CPT merged with and into GEO Acquisition II, Inc., referred to as the Merger, with GEO Acquisition II, Inc., being the surviving corporation of the Merger.
As a result of the Merger, each share of common stock of CPT was converted into the right to receive $32.5826 in cash, inclusive of a pro-rated dividend for all quarters or partial quarters for which CPT’s dividend had not yet been paid as of the closing date. In addition, each outstanding option to purchase CPT common stock having an exercise price less than $32.00 per share was converted into the right to receive the difference between $32.00 per share and the exercise price per share of the option, multiplied by the total number of shares of CPT common stock subject to the option. We paid an aggregate purchase price of approximately $427.6$421.6 million for the acquisition of CPT, inclusive of the payment of approximately $367.6$368.3 million in exchange for the common stock and the options, the repayment of approximately $40.0 million in CPT debt and the payment of approximately $20.0$13.3 million in transaction related fees and expenses. We financed the acquisition through the use of $365.0 million in new borrowings under a new Term Loan B and approximately $62.6$65.7 million in cash on hand. We deferred debt issuance costs of $9.1 million related to the new $365 million term loan. These costs are being amortized over the life of the term loan. As a result of the acquisition we will no longer have ongoing lease expense related to the properties we previously leased from CPT. However, we will have increasedhad an increase in depreciation expense reflecting our ownership of the properties and also have higher interest expense as a result of borrowings used to fund the acquisition. We expect any future adjustments to goodwill as a result of tax elections to be finalized in the first quarter of 2008. Such changes, if any, may result in additional adjustments to goodwill.
RSI AcquisitionStock Split
On October 13, 2006, we acquired United Kingdom based Recruitment Solutions International (RSI) for approximately $2.3May 1, 2007, our Board of Directors declared a two-for-one stock split of our common stock. The stock split took effect on June 1, 2007 with respect to stockholders of record on May 15, 2007. Following the stock split, our shares outstanding increased from 25.4 million plus transaction related expenses. RSI is a privately-held provider of transportation services to The Home Office Nationality50.8 million. All share and Immigration Directorate. The acquisition of RSI did not materially impact 2006 results of operations.per share data included in this annual report onForm 10-K have been adjusted to reflect the stock split.
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CSC AcquisitionPublic Offering
On November 4, 2005, we completed the acquisition of Correctional Services Corporation, or CSC, a Florida-based provider of privatized corrections/detention, community corrections and alternative sentencing services. The acquisition was completed through the merger of CSC into GEO Acquisition, Inc., a wholly owned subsidiary of GEO, referred to as the Merger. Under the terms of the Merger, we acquired 100% of the 10.2 million outstanding shares of CSC common stock for $6.00 per share, or approximately $62.1 million in cash. As a result of the Merger, we became responsible for supervising the operation of the 16 adult correctional/detention facilities, totaling 8,037 beds, formerly run by CSC. Immediately following the purchase of CSC, we sold Youth Services International, Inc., (YSI) the former juvenile services division of CSC, for $3.75 million, $1.75 million of which was paid in cash and the remaining $2.0 million of which will be paid in the form of a promissory note accruing interest at a rate of 6% per annum. During 2006, in connection with the CSC acquisition and related sale of YSI, we received approximately $2.0 million in additional sales proceeds, $1.5 million in cash and $0.5 million as additional promissory note, based on an unresolved matter relating to the closing balance sheet of YSI. This reduced goodwill by $2.0 million. The financial information included in the discussion below for fiscal year 2005 reflects the operations of CSC from November 4, 2005 through January 1, 2006.
Recent Financings
On January 24,March 23, 2007, we completed the refinancing of our Senior Credit Facility through the execution of the Amended Senior Credit Facility. The Amended Senior Credit Facility consists of a $365 million7-year term loan referred to as the Term Loan B and a $150 million5-year revolver, referred to as the Revolver. The initial interest rate for the Term Loan B is LIBOR plus 1.50% and the Revolver would bear interest at LIBOR plus 2.25% or at the base rate plus 1.25%. On January 24, 2007, GEO used the $365 million in borrowings under the Term Loan B to finance GEO’s acquisition of CPT. See Item 7 Management’s Discussion and Analysis, Financial Condition — Cash and Liquidity for further discussion of the Amended Senior Credit facility.
On June 12, 2006, we sold in a follow-on public equity offering 3,000,0005,462,500 shares of our common stock at a price of $35.46$43.99 per share, (4,500,000(10,925,000 shares of itsour common stock at a price of $23.64 $22.00 per share
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reflecting the 3 for 2two-for-one stock split). All shares were issued from treasury. The aggregate net proceeds to us from the offering (after deducting underwriter’s discounts and expenses) was approximately $100expenses of $12.8 million) were $227.5 million. On June 13, 2006,March 26, 2007, we utilized approximately $74.6$200.0 million of the net proceeds from the offering to repay all outstanding debt under the term loanTerm Loan B portion of ourthe Senior Credit Facility. In addition, on August 11, 2006, weWe used $4.0 milliona portion of the proceeds offrom the offering to purchase from certain directors, executive officers and employees stock options that were currently outstanding and exercisable, and which were due to expire within the next three years. The balance of the net proceeds was used for general corporate purposes, includingwhich included working capital, capital expenditures and the acquisitionpotential acquisitions of CPT.complementary businesses and other assets.
Stock Split
On August 10, 2006, our board of directors declared a3-for-2 stock split of our common stock. The stock split took effect on October 2, 2006 with respect to shareholders of record on September 15, 2006. Following the stock split, our shares outstanding increased from 13.0 million to 19.5 million.
Discontinued Operations
Through our Australian subsidiary, we previously had a contract with the Department of Immigration, Multicultural and Indigenous Affairs, or DIMIA, for the management and operation of Australia’s immigration centers. In 2003, the contract was not renewed, and effective February 29, 2004, we completed the transition of the contract and exited the management and operation of the DIMIA centers.
In early 2005, the New Zealand Parliament repealed the law that permitted private prison operation resulting in the termination of our contract for the management and operation of the Auckland Central Remand Prison or Auckland. We have operated this facility since July 2000. We ceased operating the facility upon the expiration of the contract on July 13, 2005.
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On January 1, 2006, the last day of our 2005 fiscal year, we completed the sale of Atlantic Shores Hospital, a 72 bed private mental health hospital which we owned and operated since 1997 for approximately $11.5 million. We recognized a gain on the sale of this transaction of approximately $1.6 million or $1.0 million net of tax.
The accompanying consolidated financial statements and notes reflect the operations of DIMIA, Auckland and Atlantic Shores Hospital as discontinued operations.
Variable Interest Entities
In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” which addressed consolidation by a business of variable interest entities in which it is the primary beneficiary. In December 2003, the FASB issued FIN No. 46R which replaced FIN No. 46. Our 50% owned South African joint venture in South African Custodial Services Pty. Limited, which we refer to as SACS, is a variable interest entity. We determined that we are not the primary beneficiary of SACS and as a result are not required to consolidate SACS under FIN 46R. We account for SACS as an equity affiliate. SACS was established in 2001, to design, finance and build the Kutama Sinthumule Correctional Center. Subsequently, SACS was awarded a 25 year contract to design, construct, manage and finance a facility in Louis Trichardt, South Africa. SACS, based on the terms of the contract with government, was able to obtain long term financing to build the prison. The financing is fully guaranteed by the government, except in the event of default, for which it provides an 80% guarantee. “See Item 7. Financial Condition — Guarantees” for a discussion of our guarantees related to SACS. Separately, SACS entered into a long term operating contract with South African Custodial Management (Pty) Limited, which we refer to as SACM, to provide security and other management services and with SACS’s joint venture partner to provide purchasing, programs and maintenance services upon completion of the construction phase, which concluded in February 2002. Our maximum exposure for loss under this contract is $15.6 million, which represents our initial investment and the guarantees discussed in Item 7. Management’s Discussion and Analysis of Financial Condition.
In February 2004, CSC was awarded a contract by the Department of Homeland Security, Immigration and Customs Enforcement, or ICE, to develop and operate a 1,020 bed detention complex in Frio County, Texas. South Texas Local Development Corporation, referred to as STLDC, a non profit corporation, was created and issued $49.5 million in taxable revenue bonds to finance the construction of the detention complex. Additionally, CSC provided a $5 million subordinated note to STLDC for initial development costs. We determined that we are the primary beneficiary of STLDC and consolidate the entity as a result. STLDC is the owner of the complex and entered into a development agreement with CSC to oversee the development of the complex. In addition, STLDC entered into an operating agreement providing CSC the sole and exclusive right to operate and manage the complex. The operating agreement and bond indenture require that the revenue from CSC’s 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 CSC to cover CSC’s operating expenses and management fee. CSC is responsible for the entire operations of the facility including all operating expenses and is required to pay 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 CSC and STLDC. The bonds are fully insured and the sole source of payment for the bonds is the operating revenues of the center.
Shelf Registration Statement
On January 28, 2004, our universal shelf registration statement onForm S-3 was declared effective by the Securities and Exchange Commission, which we refer to as the SEC. The universal shelf registration statement provides for the offer and sale by us, from time to time, on a delayed basis, of up to $200.0 million aggregate amount of our common stock, preferred stock, debt securities, warrants,and/or depositary shares. These securities, which may be offered in one or more offerings and in any combination, will in each case be offered pursuant to a separate prospectus supplement issued at the time of the particular offering that will describe the specific types, amounts, prices and terms of the offered securities. Unless otherwise described in the applicable prospectus supplement relating to the offered securities, we anticipate using the net proceeds of each offering
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for general corporate purposes, including debt repayment, capital expenditures, acquisitions, business expansion, investments in subsidiaries or affiliates,and/or working capital.
On June 12, 2006 we completed a public offering of 4.5 million shares of our common stock for approximately $110 million under the universal shelf registration statement. As a result, we have approximately $90 million remaining for the offer and sale by us of certain of our securities including our debt securities.
Rights Agreement
On October 9, 2003, we entered into a rights agreement with EquiServe Trust Company, N.A., as rights agent. Under the terms of the rights agreement, each share of our 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 us 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 our company. The rights are designed to protect the interests of our company and our 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 our shareholders.
Critical Accounting Policies
We believe that the accounting policies described below are critical to understanding our business, results of operations and financial condition because they involve the more significant judgments and estimates used in the preparation of our consolidated financial statements. We have discussed the development, selection and application of our critical accounting policies with the audit committee of our board of directors, and our audit committee has reviewed our disclosure relating to our critical accounting policies in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We routinely evaluate our estimates based on historical experience and on various other assumptions that our management believes are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted.
Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed below, are also critical to understanding our consolidated financial statements. The notes to our consolidated financial statements contain additional information related to our accounting policies and should be read in conjunction with this discussion.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin, or SAB, No. 101, “Revenue Recognition in Financial Statements”, as amended by SAB No. 104, “Revenue Recognition”, and related interpretations. 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. Certain of our contracts have provisions upon which a portion of the revenue is based on our performance of certain targets, as defined in the specific contract. In these cases, we recognize revenue when the amounts are fixed and determinable and the time period over which the conditions have been satisfied has lapsed. In many instances, we are a party to more than one contract with a single entity. In these instances, each contract is accounted for separately.
Project development and design revenues are recognized as earned on a percentage of completion basis measured by the percentage of costs incurred to date as compared to estimated total cost for each contract.
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This method is used because we consider 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 we determine that such losses and changes are probable. Typically, we enter into fixed price contracts and do not perform additional work unless approved change orders are in place. Costs attributable to unapproved change orders are expensed in the period in which the costs are incurred if we believe that it is not probable that the costs will be recovered through a change in the contract price. If we believe that it is probable that the costs will be recovered through a change in the contract price, costs related to unapproved change orders are expensed in the period in which they are incurred, and contract revenue is recognized to the extent of the cost incurred. Revenue in excess of the costs attributable to unapproved change orders is not recognized until the change order is approved. Contract costs include all direct material and labor
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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. When evaluating multiple element arrangements, we follow the provisions of Emerging Issues Task Force (EITF) Issue00-21, Revenue Arrangements with Multiple Deliverables(EITF 00-21).EITF 00-21 provides guidance on determining if separate contracts should be evaluated as a single arrangement and if an arrangement involves a single unit of accounting or separate units of accounting and if the arrangement is determined to have separate units, how to allocate amounts received in the arrangement for revenue recognition purposes.
In instances where we provide project development services and subsequent management services, the amount of the consideration from an arrangement is allocated to the delivered element based on the residual method and the elements are recognized as revenue when revenue recognition criteria for each element is met. The fair value of the undelivered elements of an arrangement is based on specific objective evidence.
We extend credit to the governmental agencies we contract 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, we regularly review outstanding receivables, and provide estimated losses through an allowance for doubtful accounts. In evaluating the level of established loss reserves, we make judgments regarding our 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. We also perform ongoing credit evaluations of our customers’ financial condition and generally do not require collateral. We maintain reserves for potential credit losses, and such losses traditionally have been within our expectations.
Reserves for Insurance Losses
ClaimsThe nature of our business exposes us to various types of third-party legal claims, including, but not limited to, civil rights claims relating to conditions of confinementand/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, contractual claims and claims for personal injury or other damages resulting from contact with our facilities, programs, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. In addition, our management contracts generally require us to indemnify the governmental agency against any damages to which the governmental agency may be subject in connection with such claims or litigation. We maintain insurance coverage for these general types of claims, except for claims relating to employment matters, for which we are insured arising from our U.S. operations that have an occurrence date of October 1, 2002 or earlier are handled by TWC and are commercially insured up to an aggregate limit of between $25.0 million and $50.0 million, depending on the nature of the claim and the applicable policy terms and conditions. With respect to claims for which we are insured arising after October 1, 2002, wecarry no insurance.
We currently maintain a general liability policy for all U.S. corrections operations with $52.0limits of $62.0 million per occurrence and in the aggregate. On October 1, 2004, we increased our deductible on this general liability policy from $1.0 million to $3.0 million for each claim which occursoccurring after October 1, 2004. GEO Care, Inc. is separately insured for general and professional liability. Coverage is maintained with limits of $10.0 million per occurrence and in the aggregate subject to a $3.0 million self-insured retention. We also maintain insurance to cover property and casualty risks, workers’ compensation, medical malpractice, environmental liability and automobile liability. Our Australian subsidiary is required to carry tail insurance on a general liability policy providing an extended reporting period through 2011 related to a discontinued contract. We also carry various types of insurance with respect to our operations in South Africa, the United Kingdom and Australia. There can be no assurance that our insurance coverage will be adequate to cover all claims to which we may be exposed.
SinceIn addition, certain of our insurance policies generally have high deductible amounts (including a $3.0 million per claim deductible under our general liability and auto liability policies and a $2.0 million per claim deductible under our workers’ compensation policy), losses are recorded as reported and a provision is made to cover losses incurred but not reported. Loss reserves are undiscounted and are computed based on independent actuarial studies. Our management uses judgments in assessing loss estimates based on actuarial studies, which include actual claim amounts and loss development based on both GEO’s own historical experience and industry experience. If actual losses related to insurance claims significantly differ from our estimates, our financial condition and results of operations could be materially impacted.
Certain GEO facilities located in Florida and determined by insurers to be in high-risk hurricane areas carry substantial windstorm deductibles of up to $3.0 million.deductibles. Since hurricanes are considered unpredictable future events, no reserves have been established to pre-fund for potential windstorm damage. Limited commercial
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commercial availability of certain types of insurance relating to windstorm exposure in coastal areas and earthquake exposure mainly in California may prevent us from insuring our facilities to full replacement value.
Since our insurance policies generally have high deductible amounts, losses are recorded when reported and a further provision is made to cover losses incurred but not reported. Loss reserves are undiscounted and are computed based on independent actuarial studies. Because we are significantly self-insured, the amount of our insurance expense is dependent on our claims experience and our ability to control our claims experience. If actual losses related to insurance claims significantly differ from our estimates, our financial condition and results of operations could be materially impacted.
In April 2007, we incurred significant damages at one of our managed-only facilities in New Castle, Indiana. The total amount of impairments, losses recognized and expenses incurred has been recorded in the accompanying consolidated statement of income as operating expenses and is offset by $2.1 million of insurance proceeds we received from our insurance carriers in the first quarter of 2008.
Income Taxes
We account for income taxes in accordance with Statement of Financial Accounting Standards,Standard No. 109, or FAS No. 109, “AccountingAccounting for Income Taxes.”Taxes, as clarified by FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”). Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basesbasis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of FAS No. 109.
In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, and estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of FAS No. 109.
FIN 48 requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the “more-likely-than-not “ threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
Property and Equipment
As of December 31, 2006,30, 2007, we had approximately $287.4$783.6 million in long-lived property and equipment. Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Buildings and improvements are depreciated over 2 to 40 years. Equipment and furniture and fixtures are depreciated over 3 to 10 years. Accelerated methods of depreciation are generally used for income tax purposes. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. We perform ongoing evaluations of the estimated useful lives of our property and equipment for depreciation purposes. The estimated useful lives are determined and continually evaluated based on the period over which services are expected to be rendered by the asset. Maintenance and repairs are expensed as incurred.
We review long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable in accordance with FAS No. 144 “Accounting for the Impairment of Disposal of Long-Lived Assets”. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. 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. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Management has reviewed our long-lived assets and determined that there are no events requiring impairment loss recognition for the period ended December 31, 2006. 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 which might impair recovery of long-lived assets. In July 2007, we terminated our contract with Dickens County for the operation of the Dickens County Correctional Center. As a result, we wrote-off our intangible asset related to the facility of $0.4 million (net of accumulated amortization of $0.1 million). The impairment
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charge is included in depreciation and amortization expense in the accompanying consolidated statements of income for the fiscal year ended December 30, 2007. Management has reviewed its long-lived assets and determined that there are no other events requiring impairment loss recognition for the period ended December 30, 2007.
Stock-Based Compensation Expense
We account for stock-based compensation in accordance with the provisions of SFASFAS 123R. Under the fair value recognition provisions of FAS 123R, stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of the stock-based awards, which includes estimates of stock price volatility, forfeiture rates and expected lives, requires judgment that could materially impact our operating results.
Recent Accounting Pronouncements
See Note 1 of the Consolidated Financial Statements for a description of certain other recent accounting pronouncements including the expected dates of adoption and effects on our results of operations and financial condition.
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Contract Terminations
On April 26, 2007, we announced that the Federal Bureau of Prisons awarded a contract for the management of the 2,048-bed Taft Correctional Institution, which we have managed since 1997, to another private operator. The management contract, which was competitively re-bid, was transitioned to the alternative operator effective August 20, 2007. We do not expect the loss of this contract to have a material adverse effect on our financial condition or results of operations.
In July 2007, we cancelled the Operations and Management contract with Dickens County for the management of the 489-bed facility located in Spur, Texas. The cancellation became effective on December 28, 2007. We have operated the management contract since the acquisition of CSC in November 2005. We do not expect the termination of this contract to have a material adverse effect on our financial condition or results of operations.
On October 2, 2007, we received notice of the termination of our contract with the Texas Youth Commission for the housing of juvenile inmates at the 200-bed Coke County Juvenile Justice Center located in Bronte, Texas. We are in the preliminary stages of reviewing the termination of this contract. However, we do not expect the termination, or any liability that may arise with respect to such termination, to have a material adverse effect on our financial condition or results of operations.
Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and the notes to the consolidated financial statements accompanying this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those described under “Item 1A. Risk Factors” and those included in other portions of this report.
As further discussed above, theThe discussion of our results of operations below excludes the results of our discontinued operations resulting from the termination of our management contract with DIMIA, Auckland, and Atlantic Shores Hospital for all periods presented.
For the purposes of the discussion below, “2007” means the 52 week fiscal year ended December 30, 2007, “2006” means the 52 week fiscal year ended December 31, 2006, and “2005” means the 52 week fiscal year ended January 1, 2006, and “2004” means the 53 week fiscal year ended January 2, 2005.2006.
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Overview
2007 versus 2006 versus 2005
Revenues and Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | | % of Revenue | | | 2005 | | | % of Revenue | | | $ Change | | | % Change | |
| | | (Dollars in thousands) | |
| |
Revenue | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Corrections | | $ | 612,810 | | | | 71.2 | % | | $ | 473,280 | | | | 77.3 | % | | $ | 139,530 | | | | 29.5 | % |
International Services | | $ | 103,553 | | | | 12.0 | % | | $ | 98,829 | | | | 16.1 | % | | $ | 4,724 | | | | 4.8 | % |
GEO Care | | $ | 70,379 | | | | 8.2 | % | | $ | 32,616 | | | | 5.3 | % | | $ | 37,763 | | | | 115.8 | % |
Other | | $ | 74,140 | | | | 8.6 | % | | $ | 8,175 | | | | 1.3 | % | | $ | 65,965 | | | | 806.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 860,882 | | | | 100.0 | % | | $ | 612,900 | | | | 100.0 | % | | $ | 247,982 | | | | 40.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | | % of Revenue | | | 2006 | | | % of Revenue | | | $ Change | | | % Change | |
| | | (Dollars in thousands) | |
| |
U.S. corrections | | $ | 671,957 | | | | 65.6 | % | | $ | 612,810 | | | | 71.2 | % | | $ | 59,147 | | | | 9.7 | % |
International services | | | 130,317 | | | | 12.7 | % | | | 103,553 | | | | 12.0 | % | | | 26,764 | | | | 25.8 | % |
GEO Care | | | 113,754 | | | | 11.1 | % | | | 70,379 | | | | 8.2 | % | | | 43,375 | | | | 61.6 | % |
Facility construction and design | | | 108,804 | | | | 10.6 | % | | | 74,140 | | | | 8.6 | % | | | 34,664 | | | | 46.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,024,832 | | | | 100.0 | % | | $ | 860,882 | | | | 100.0 | % | | $ | 163,950 | | | | 19.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Corrections Servicescorrections
The increase in revenues for U.S. corrections facilities in 20062007 compared to 20052006 is primarily attributable to fivesix items: (i) revenues increased $104.5$21.3 million in 2007 due to the completion of the Central Arizona Correctional Facility at the end of 2006 in Florence, Arizona; (ii) revenues increased $16.9 million in 2007 as a result of the acquisition ofcapacity increase in September 2006 in our Lawton Correctional Services Corporation, referred to as CSC, in November 2005; (ii)Facility located at Lawton, Oklahoma; (iii) revenues increased $12.1$5.3 and $5.0 million in 20062007, respectively, as a result of the New Castle Correctional Facilitycapacity increases in August 2006 in our South Texas Detention Complex and in December 2006 in our Northwest Detention Center, located at Tacoma, Washington; (iv) revenues increased $6.6 million due to the commencement of our contract with the Arizona Department of Corrections (“ADC”) located in New Castle, Indiana which we began managing in January 2006; (iii)March 2007; (v) revenues increased approximately $12.6by $5.4 million due to the opening of our Graceville facility in 2006 as a result of improved contractual terms at the San Diego facility; (iv) revenues decreased approximately $13.8 million in 2006 as a result of the Michigan Correctional Facility contract termination in October 2005;September 2007; and (v)(vi) revenues increased due to contractual adjustments for inflation, and improved terms negotiated into a number of contracts.
The number of compensated resident daysmandays in U.S. corrections facilities increased to 14.6 million in 2007 from 13.4 million in 2006 from 10.7 million in 2005 due to the additionaladdition of new facilities and capacity of the acquired CSC facilities of 2.0 million.increases. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. correctionscorrection and detention facilities was 96.0%96.5% of capacity in 20062007 compared to 95.7%96.0% in 2005,2006, excluding our vacant Northlake Correctional Facility in Baldwin, Michigan, referred to as the “Michigan” facility in 2007 and 2006 and our vacant Jena facilities.facility in 2006 (reactivated June 2007).
International Servicesservices
RevenuesThe increase in revenues for internationalInternational services facilities remained consistent in 20062007 compared to 2005. Revenues2006 was primarily due to the following items: (i) South African revenues increased by $4.7approximately $1.3 million asdue to a resultcontractual adjustment for inflation; (ii) Australian revenues increased approximately $15.0 million due to favorable fluctuations in foreign currency exchange rates during the period, contractual adjustments for inflation and improved terms and an increase of 50 beds at the June 2006 commencement ofJunee Correctional Centre; and (iii) United Kingdom revenues increased approximately $10.4 million primarily due to the operations at Campsfield House contractwhich began in the United Kingdom. However, this increase was offsetsecond quarter of 2006, a construction project which began in the Fourth Quarter 2006, the acquisition by our U.K. subsidiary of Recruitment Solutions International also occurring in the weakening of the Australian dollarFourth Quarter 2006, and South African Rand, which resultedfavorable fluctuations in a decrease of $1.0 million and $0.8 million, respectively, while lower
40
occupancy rates in Australia and South Africa accounted for a decrease in $0.2 million and $0.5 million, respectively for 2006.foreign currency exchange rates.
The number of compensated resident daysmandays in internationalInternational services facilities remained consistentconstant at 2.0 million during 20062007 and 2005.2006. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our international serviceInternational services facilities was 98.1%98.2% of capacity in 20062007 compared to 99.6%98.1% in 2005.2006.
42
GEO Care
The increase in revenues for GEO Care in 20062007 compared to 20052006 is primarily attributable to three items: (i) the Florida Civil Commitment Center in Arcadia, Florida, which commenced in July 2006 and increased revenues by $14.2 million; (ii) the Treasure Coast Forensic Treatment Center in Martin County, Florida, which commenced operations in First Quarter 2007 and increased revenues by $14.7 million and (iii) the South Florida Evaluation and Treatment Center — Annex in Miami, Florida which commenced operation in January 2007 and increased revenues by $9.9 million.
Facility Construction and Design
The increase in revenues from construction activities is primarily attributable to four new contractsitems: (i) the renovation of Treasure Coast Forensic Treatment Center located in Martin County, Florida, in March, 2007 increased revenues by $2.3 million; (ii) the construction of the Clayton Correctional facility located in Clayton County, New Mexico, which commenced operationconstruction in 2006. In January 2006, the South Florida Evaluation & Treatment Center in Miami, Florida and the Fort Bayard Medical Center in Fort Bayard, New Mexico commenced operations increasing revenues by $23.9 million and $3.3 million, respectively. The Palm Beach County Jail in Palm Beach County, Florida commenced operations in MaySeptember 2006 and increased revenues $1.7 million. Annual revenues are expected to be approximately $2.7 million. In July 2006, we commenced operationsby $36.9 million; (iii) the construction of the Florida Civil Commitment Center in Arcadia, Florida increased revenues by $15.7 million and (iv) the construction of the new South Florida Evaluation and Treatment Center in Miami, Florida, which contributedcommenced construction in November 2005 and increased revenues by $20.2 million, offset by decreases in construction revenue for the Graceville Correctional Facility in Graceville, Florida which commenced construction in February 2006 and for which construction was complete in September 2007 and also decreases related to the Moore Haven Correctional Facility in Moore Haven, Florida which commenced construction in February 2006 and was completed in May 2007. These two facilities represented $32.0 million and $10.0 million, respectively, of $8.3 million. Annual revenues are expected to be approximately $20 million.the decrease.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | | % of Revenue | | | 2005 | | | % of Revenue | | | $ Change | | | % Change | |
| | | (Dollars in thousands) | |
| |
Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Corrections | | $ | 485,583 | | | | 56.4 | % | | $ | 415,978 | | | | 67.9 | % | | $ | 69,605 | | | | 16.7 | % |
International Services | | $ | 94,068 | | | | 10.9 | % | | $ | 85,634 | | | | 14.0 | % | | $ | 8,434 | | | | 9.8 | % |
GEO Care | | $ | 63,799 | | | | 7.4 | % | | $ | 30,203 | | | | 4.9 | % | | $ | 33,596 | | | | 111.2 | % |
Other | | $ | 74,728 | | | | 8.7 | % | | $ | 8,313 | | | | 1.4 | % | | $ | 66,415 | | | | 798.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 718,178 | | | | 83.4 | % | | $ | 540,128 | | | | 88.2 | % | | $ | 178,050 | | | | 33.0 | % |
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | % of Segment
| | | | | | % of Segment
| | | | | | | |
| | | 2007 | | | Revenues | | | 2006 | | | Revenues | | | $ Change | | | % Change | |
| | | (Dollars in thousands) | |
| |
U.S. corrections | | $ | 501,199 | | | | 74.6 | % | | $ | 485,583 | | | | 79.2 | % | | $ | 15,616 | | | | 3.2 | % |
International services | | | 119,021 | | | | 91.3 | % | | | 94,068 | | | | 90.8 | % | | | 24,953 | | | | 26.5 | % |
GEO Care | | | 101,344 | | | | 89.1 | % | | | 63,799 | | | | 90.7 | % | | | 37,545 | | | | 58.8 | % |
Facility construction and design | | | 109,070 | | | | 100.2 | % | | | 74,728 | | | | 100.8 | % | | | 34,342 | | | | 46.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 830,634 | | | | 81.1 | % | | $ | 718,178 | | | | 83.4 | % | | $ | 112,456 | | | | 15.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and mental health and GEO Care facilities. Expenses also include construction costs which are included in “Other”.Facility construction and design.
U.S. Correctionscorrections
The increase in U.S. corrections operating expenses primarily reflects the acquisition of CSC (which increased operating expenses by $71.1 million in fiscal 2006), the New Castle Correctional Facility, opened in January 2006,new openings and expansions discussed above as well as general increases in labor costs and utilities. Operating expenses as a percentage of revenues decreased in 20062007 compared to 2005 primarily2006 which is partially a reflection of higher margins at certain new facilities. Fiscal year 2007 operating expense was reduced $29.3 million as a result of $20.9the CPT acquisition and subsequent elimination of our leases and the related expense. Also reflected in 2007 operating expenses are the proceeds from the insurance settlement of $2.1 million impairment charge related to the Michigan facilitydamages in New Castle, Indiana and a $4.3 million chargerecognized as an offset to those related to the Jena lease.
expenditures. Operating expenses in 20062007 were favorably impacted by a $4.0$0.9 million overall reduction in our reserves for general liability, auto liability, and workers compensation insurance. Theinsurance compared to a $4.0 million reduction in 2006. These reductions in insurance reserves related to general liability, autoprimarily resulted from our continued improved claims experience. Our savings in the fiscal years ended 2007 and workers compensation was2006 were the result of revised actuarial projections related to loss estimates for the initial five and four years, respectively, of our insurance program which was established on October 2, 2002. Prior to October 2, 2002, our insurance coverage was provided through an insurance program established by TWC, our former parent company. We experienced significant adverse claims development in general liability and workers’
43
compensation in the late 1990’s. Beginning in approximately 1999, we made significant operational changes and began to aggressively manage our risk in a proactive manner. These changes have resulted in improved claims experience and loss development, which we are realizing in our actuarial projections. As a result of improving loss trends, our independent actuary reduced its expected losses for claims arising since October 2, 2002. We have adjusted our reserve at October 1, 20062007 and October 2, 20051, 2006 to reflect the actuary’s expected loss. Similarly, 2005 operating expenses were favorably impactedWe expect future actuarial projections will result in smaller annual adjustments as our improved claims experience represents a more significant component of the historical losses used by a $3.4 million reductionour actuary in our reserves for general liability, auto liability,calculating annual loss projections and workers’ compensation insurance. Fiscal year 2005 operating expense reflect an additional operating charge on the Jena
41
lease of $4.3 million, representing the remaining obligation on the lease through the contractual term of January 2010. Fiscal year 2005 operating expenses were also effected by higher than anticipated employee health insurance costs of approximately $1.7 million as well asstart-up expenses of approximately $0.8 million associated with transitioning customers at our Queens, New York Facility.related reserve requirements.
International Servicesservices
Operating expenses for internationalInternational services facilities increased in 20062007 compared to 20052006 largely as a result of the June 2006 commencement of the Campsfield House contract in the United Kingdom. AustralianThe operating expenses decreased slightly during 2006 due to a 2005 insurance reserve adjustment whichin the United Kingdom increased expenses by approximately $0.4$10.7 million in 2005. South African operating expenses remained consistent overall for 2006 and 2005.
International services segment operating expenses were impacted by reductionsthe fiscal year ended December 30, 2007 as a result of increases in operations at the reserves related to the contract with DIMIA that was discontinued in February 2004. The company has exposure to general liability claims under the previous contract for seven years following the discontinuation of the contract. The Company reduced its reserves for this exposure $0.5 million and $0.9 millionCampsfield House which began in the second quarter of 2006. Australian operating expenses also increased by $13.1 million due to fluctuations in foreign currency exchange rates during the period as well as additional staffing and expenses related to contract variations. Margins in Australia were consistent with margins for the same period in 2006 and second quarter 2005, respectively. The remaining reserve balance at December 31, 2006 is approximately $1.2 million and approximately 4 years remain untilwhile margins in South Africa improved due to certain non-recurring costs incurred in the tailcomparable period expires.of the prior year.
GEO Care
Operating expenses for GEO Careresidential treatment increased approximately $33.6$37.5 million during 20062007 from 20052006 primarily due to the activationnew contracts discussed above. Operating expenses as a percentage of segment revenues in 2007 increased in 2007 due to certain expenditures required for newly opened facilities such as employee training costs and professional fees.
Facility Construction and Design
Expenses for construction and design increased $34.3 million during 2007 compared to 2006 primarily due to the newfour construction contracts discussed above.
Other RevenueDepreciation and Operating Expenseamortization
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | % of Segment
| | | | | | % of Segment
| | | | | | | |
| | | 2007 | | | Revenue | | | 2006 | | | Revenue | | | $ Change | | | % Change | |
| | | (Dollars in thousands) | |
| |
U.S. corrections | | $ | 31,039 | | | | 4.6 | % | | $ | 20,848 | | | | 3.4 | % | | $ | 10,191 | | | | 48.9 | % |
International services | | | 1,359 | | | | 1.0 | % | | | 803 | | | | 0.8 | % | | | 556 | | | | 69.2 | % |
GEO Care | | | 1,472 | | | | 1.3 | % | | | 584 | | | | 0.8 | % | | | 888 | | | | 152.1 | % |
Facility construction and design | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 33,870 | | | | 3.3 | % | | $ | 22,235 | | | | 2.6 | % | | $ | 11,635 | | | | 52.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
“Other” primarily consists of revenues
Depreciation and related operating expenses associated with our construction business. There was anAmortization
The increase in revenuedepreciation is attributable to the U.S. corrections segment and is primarily a result of the purchase of CPT in January 2007. Also included in depreciation for the U.S. corrections segment is our construction businesswrite-off of approximately $66.0$0.4 million in 2006 as compared to 2005. The construction revenue isfor the intangible asset related to our expansioncancellation of the Moore Haven Facility, which we currently manage, and the new construction of the Graceville Facility, which we will manage upon completionmanagement contract to operate our former 489-bed Dickens County Correctional Center in the third quarter ofJuly 2007. Furthermore, operating expenses relating to the construction of both the Graceville Facility and Moore Haven Facility were approximately $50.4 and $11.9 million, respectively. Offsetting this increase was the completion of the expansion of South Bay at the end of the third quarter of 2005, which represented $7.1 million of construction revenue in 2005.
44
Other Unallocated Operating Expenses
General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | | % of Revenue | | | 2005 | | | % of Revenue | | | $ Change | | | % Change | |
| | | (Dollars in thousands) | |
| |
General and Administrative Expenses | | $ | 56,268 | | | | 6.5 | % | | $ | 48,958 | | | | 8.0 | % | | $ | 7,310 | | | | 14.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | % of Revenue | | 2006 | | % of Revenue | | $ Change | | % Change |
| | | (Dollars in thousands) |
| |
General and Administrative Expenses | | $ | 64,492 | | | | 6.3 | % | | $ | 56,268 | | | | 6.5 | % | | $ | 8,224 | | | | 14.6 | % |
General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees and other administrative expenses. General and administrative expenses increased by $7.3 million in 2006 compared to 2005, however decreased slightly as a percentage of revenues due to the overall increase in revenue during 2006. The increase in general and administrative costs is mainly due to increases in direct labor costs and related taxes of approximately $4.8 millionincreases in rent expense as a result of increased headcount of administrative staff and higher estimated annual bonus payments under the Company’s incentive compensation plans due to an increase in earnings. Amortization of deferred compensation and expense related to stock options increased general and administrative expenses $1.4 million. Administrative costs as well as general increases in travel expense increased approximately $1.7 million.additional leased space.
42
Non Operating Expenses
Interest Income and Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | % of Revenue | | 2005 | | % of Revenue | | $ Change | | % Change | | | 2007 | | % of Revenue | | 2006 | | % of Revenue | | $ Change | | % Change |
| | | (Dollars in thousands) | | | (Dollars in thousands) |
| |
Interest Income | | $ | 10,687 | | | | 1.2 | % | | $ | 9,154 | | | | 1.5 | % | | $ | 1,533 | | | | 16.8 | % | | $ | 8,746 | | | | 0.9 | % | | $ | 10,687 | | | | 1.2 | % | | $ | (1,941 | ) | | | (18.2 | )% |
Interest Expense | | $ | 28,231 | | | | 3.3 | % | | $ | 23,016 | | | | 3.8 | % | | $ | 5,215 | | | | 22.7 | % | | $ | 36,051 | | | | 3.5 | % | | $ | 28,231 | | | | 3.3 | % | | $ | 7,820 | | | | 27.7 | % |
The increasedecrease in interest income is primarily due to higherlower average invested cash balances.
The increase in interest expense is primarily attributable to the increase in our debt during the period as a result of the CSC acquisition,CPT acquisition.
Interest is capitalized in connection with the construction of correctional and detention facilities. Capitalized interest is recorded as well aspart of the increase in LIBOR rates.asset to which it relates and is amortized over the asset’s estimated useful life. During fiscal years ended 2007 and 2006, the Company capitalized $1.2 million and $0.2 million of interest cost, respectively.
Provision for Income Taxes
| | | | | | | | | | | | | | | | | |
| | | 2006 | | | Effective Rate | | | 2005 | | | Effective Rate | |
| | | | | | (Dollars in thousands) | | | | |
| |
Income Taxes | | $ | 16,505 | | | | 36.4 | % | | $ | (11,826 | ) | | | N/A | |
| | | | | | | | | | | | | | | | | |
| | | 2007 | | Effective Rate | | 2006 | | Effective Rate |
| | | (Dollars in thousands) |
| |
Income Tax Provision | | $ | 24,226 | | | | 38.0 | % | | $ | 16,505 | | | | 36.4 | % |
Income taxes for 2007 and 2006 include certain one time items of $0.4 million and $0.7 million, resulting in an effective tax rate of 36.4%.respectively. Without such items, theour effective tax rate would have been approximately38.6% and 38%.
Income taxes for 2005 reflect a benefit as a result of the loss before income taxes which primarily resulted from the $20.9 million impairment charge for the Michigan Facility and the $4.3 million charge to record the remaining lease obligation for the Jena lease with CPT. The income tax benefit for 2005 reflects a benefit of $6.5 million in the fourth quarter 2005 related to a step up in tax basis for an asset in Australia which resulted in a decreased deferred tax liability. The income tax benefit for 2005 also reflects a benefit of $1.7 million in the second quarter 2005 related to the American Jobs Creation Act of 2004, or the AJCA. A key provision of the AJCA creates a temporary incentive for U.S. corporations to repatriate undistributed income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations., respectively.
Minority Interest
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | | % of Revenue | | | 2005 | | | % of Revenue | | | $ Change | | | % Change | |
| | | | | | | | | (Dollars in thousands) | | | | | | | |
| |
Minority Interest | | $ | (125 | ) | | | (0.0 | )% | | $ | (742 | ) | | | (0.1 | )% | | $ | 617 | | | | (83.2 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | % of Revenue | | 2006 | | % of Revenue | | $ Change | | % Change |
| | | (Dollars in thousands) |
| |
Minority Interest | | $ | (397 | ) | | | (0.0 | )% | | $ | (125 | ) | | | (0.0 | )% | | $ | (272 | ) | | | 217.6 | % |
DecreaseIncrease in minority interest reflects reducedincreased performance duringin 2007 due to contractual increases. During 2006, as a result ofour joint venture experienced lower revenues during the first and second quarter of 2006 related to facility modifications which resulted in reduced capacity and related billings.
Equity in Earnings of Affiliate
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | | % of Revenue | | | 2005 | | | % of Revenue | | | $ Change | | | % Change | |
| | | | | | | | | (Dollars in thousands) | | | | | | | |
| |
Equity in Earnings of Affiliate | | $ | 1,576 | | | | 0.2 | % | | $ | 2,079 | | | | 0.3 | % | | $ | (503 | ) | | | (24.2 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | % of Revenue | | 2006 | | % of Revenue | | $ Change | | % Change |
| | | (Dollars in thousands) |
| |
Equity in Earnings of Affiliate | | $ | 2,151 | | | | 0.2 | % | | $ | 1,576 | | | | 0.2 | % | | $ | 575 | | | | 36.5 | % |
45
Equity in earnings of affiliates in 2007 and 2006 reflects the normal operations of South African Custodial Services Pty. Limited (“SACS”). In 2007, the facility was operating at full capacity compared to the prior year average capacity of 97%. We also experienced contractual increases as well as favorable foreign currency translation.
Equity in earnings of affiliate in 2005 reflects a one time tax benefit of $2.1 million related to a change in South African tax law.
In 2005, our equity affiliate, SACS, recognized a one time tax benefit of $2.1 million related to a change in South African Tax law applicable to companies in a qualified Public Private Partnership (“PPP”) with the South African Government. The tax law change has the effect that beginning in 2005 government revenues earned under the PPP are exempt from South African taxation. The one time tax benefit in part related to
43
deferred tax liabilities that were eliminated during 2005 as a result of the change in the tax law. In February 2007, the South African legislature passed legislation that has the effect of removing the exemption from taxation on government revenue. The law change will impact the equity in earnings of affiliate beginning in 2007. The Company is in the process of fully assessing the impact of the new legislation. However, asrevenues. As a result of the new legislation, deferred tax liabilitiesSACS will havebe subject to be establishedSouth African taxation going forward at the applicable tax rate of 29%. This is estimated to result in a one time tax charge of up to $2.3 millionThe increase in the first quarterapplicable income tax rate results in an increase in net deferred tax liabilities which were calculated at a rate of 2007.0% during the period the government revenues were exempt. The effect of the increase in the deferred tax liability of the equity affiliate is a charge to equity in earnings of affiliate in the amount of $2.4 million. The law change also has the effect of reducing a previously recorded liability for unrecognized tax benefits as provided under FIN 48, Accounting for Uncertainty in Income Taxes, resulting in an increase to equity in earnings of affiliate. The respective decrease and increase to equity in earnings of affiliate are substantially offsetting in nature.
20052006 versus 20042005
Revenues and Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | % of Revenue | | | 2004 | | | % of Revenue | | | $ Change | | | % Change | |
| | | | | | | | | (Dollars in thousands) | | | | | | | |
| |
Revenue | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Corrections | | $ | 473,280 | | | | 77.3 | % | | $ | 455,947 | | | | 76.8 | % | | $ | 17,333 | | | | 3.8 | % |
International Services | | $ | 98,829 | | | | 16.1 | % | | $ | 91,005 | | | | 15.3 | % | | $ | 7,824 | | | | 8.6 | % |
GEO Care | | $ | 32,616 | | | | 5.3 | % | | $ | 31,704 | | | | 5.3 | % | | $ | 912 | | | | 2.9 | % |
Other | | $ | 8,175 | | | | 1.3 | % | | $ | 15,338 | | | | 2.6 | % | | $ | (7,163 | ) | | | (46.7 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 612,900 | | | | 100.0 | % | | $ | 593,994 | | | | 100.0 | % | | $ | 18,906 | | | | 3.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | | % of Revenue | | | 2005 | | | % of Revenue | | | $ Change | | | % Change | |
| | | (Dollars in thousands) | |
| |
U.S. corrections | | $ | 612,810 | | | | 71.2 | % | | $ | 473,280 | | | | 77.3 | % | | $ | 139,530 | | | | 29.5 | % |
International services | | | 103,553 | | | | 12.0 | % | | | 98,829 | | | | 16.1 | % | | | 4,724 | | | | 4.8 | % |
GEO Care | | | 70,379 | | | | 8.2 | % | | | 32,616 | | | | 5.3 | % | | | 37,763 | | | | 115.8 | % |
Facility construction and design | | | 74,140 | | | | 8.6 | % | | | 8,175 | | | | 1.3 | % | | | 65,965 | | | | 806.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 860,882 | | | | 100.0 | % | | $ | 612,900 | | | | 100.0 | % | | $ | 247,982 | | | | 40.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Correctionscorrections
The increase in revenues for U.S. corrections facilities in 20052006 compared to 20042005 is primarily attributable to fourfive items: (i) revenues increased $104.5 million as a result of the acquisition of Correctional Services Corporation, referred to as CSC, in November 20052005; (ii) revenues increased revenues $17.3 million; (ii)$12.1 million in 2006 as a result of the McFarland facility was idle for all of 2004 and was re-openedNew Castle Correctional Facility in New Castle, Indiana, which we began managing in January 2005 resulting2006; (iii) revenues increased approximately $12.6 million in an increase2006 as a result of improved contractual terms at the Western Region Detention Facility — San Diego facility; (iv) revenues decreased approximately $13.8 million in revenues2006 as a result of approximately $3.1 million; (iii) domesticthe Northlake Correctional Facility (Michigan) contract termination in October 2005; and (v) revenues also increased due to contractual adjustments for inflation, slightly higher occupancy rates and improved terms negotiated into a number of contracts. These increases offset a decrease in revenues due to the transition of the Queens contract from ICE to USMS, the closure of the Michigan Correctional Facility on October 14, 2005, the expiration of our operating contract for the Kyle Facility on August 31, 2005, and lower populations in our Val Verde, and San Diego Facilities; and revenues decreased in 2005 because it contained 52 weeks compared to 2004, which contained 53 weeks.
The number of compensated resident days in U.S. corrections facilities increased to 13.4 million in 2006 from 10.7 million in 2005 from 10.5 million in 2004.due to the additional capacity of the acquired CSC facilities of 2.0 million. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. corrections facilities was 97.5%96.0% of capacity in 20052006 compared to 99.3%95.7% in 2004. The decrease in the average occupancy is due to an increase in the number of beds made available to us under2005, excluding our contractsvacant Michigan and lower populations in our Val Verde and San DiegoJena facilities.
International Servicesservices
Revenues for internationalInternational services facilities remained consistent in 20052006 compared to 20042005. Revenues increased approximately $7.8by $4.7 million $2.6 million and $0.2 millionas a result of whichthe June 2006 commencement of the Campsfield House contract in the United Kingdom. However, this increase was due tooffset by the strengtheningweakening of the Australian dollar and South African Rand, which resulted in a decrease of $1.0 million and $0.8 million, respectively, and $5.0 million of which was due to higher while lower
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occupancy rates in Australia and contractual adjustmentsSouth Africa accounted for inflation.a decrease in $0.2 million and $0.5 million, respectively for 2006.
The number of compensated resident days in internationalInternational services facilities remained consistent at 2.0 million during 20052006 and 2004.2005. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our international servicesInternational service facilities was 99.6%98.1% of capacity in 20052006 compared to 100.0%99.6% in 2004, excluding the Auckland facility.2005.
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GEO Care
The increase in revenues for GEO Care in 20052006 compared to 2004 remained consistent at $302005 is primarily attributable to four new contracts which commenced operation in 2006. In January 2006, the South Florida Evaluation & Treatment Center in Miami, Florida and the Fort Bayard Medical Center in Fort Bayard, New Mexico commenced operations, increasing revenues by $23.9 million and $3.3 million, respectively. The Palm Beach County Jail in Palm Beach County, Florida commenced operations in May 2006 and increased revenues by $1.7 million. The revenues in 2005 and 2004 primarily reflect theIn July 2006, we commenced operations of a single facility.the Florida Civil Commitment Center in Arcadia, Florida, which contributed revenues of $8.3 million.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | % of Revenue | | | 2004 | | | % of Revenue | | | $ Change | | | % Change | |
| | | | | | | | | (Dollars in thousands) | | | | | | | |
| |
Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Corrections | | $ | 415,978 | | | | 67.9 | % | | $ | 375,590 | | | | 63.2 | % | | $ | 40,388 | | | | 10.8 | % |
International Services | | $ | 85,634 | | | | 14.0 | % | | $ | 75,043 | | | | 12.6 | % | | $ | 10,591 | | | | 14.1 | % |
GEO Care | | $ | 30,203 | | | | 4.9 | % | | $ | 29,567 | | | | 5.0 | % | | $ | 636 | | | | 2.2 | % |
Other | | $ | 8,313 | | | | 1.4 | % | | $ | 15,026 | | | | 2.5 | % | | $ | (6,713 | ) | | | (44.7 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 540,128 | | | | 88.2 | % | | $ | 495,226 | | | | 83.3 | % | | $ | 44,902 | | | | 9.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | % of Segment
| | | | | | % of Segment
| | | | | | | |
| | | 2006 | | | Revenue | | | 2005 | | | Revenue | | | $ Change | | | % Change | |
| | | (Dollars in thousands) | |
| |
U.S. corrections | | $ | 485,583 | | | | 79.2 | % | | $ | 415,978 | | | | 87.9 | % | | $ | 69,605 | | | | 16.7 | % |
International services | | | 94,068 | | | | 90.8 | % | | | 85,634 | | | | 86.6 | % | | | 8,434 | | | | 9.8 | % |
GEO Care | | | 63,799 | | | | 90.7 | % | | | 30,203 | | | | 92.6 | % | | | 33,596 | | | | 111.2 | % |
Facility construction and Design | | | 74,728 | | | | 100.8 | % | | | 8,313 | | | | 101.7 | % | | | 66,415 | | | | 798.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 718,178 | | | | 83.4 | % | | $ | 540,128 | | | | 88.1 | % | | $ | 178,050 | | | | 33.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and GEO Care facilities. Expenses also include construction costs which are included in Facility construction and design.
U.S. Correctionscorrections
The increase in U.S. corrections operating expenses forprimarily reflects the acquisition of CSC (which increased operating expenses by $71.1 million in fiscal year2006), the New Castle Correctional Facility, opened in January 2006, as well as general increases in labor costs and utilities. Operating expenses as a percentage of revenues decreased in 2006 compared to 2005 reflect an impairment chargeprimarily as a result of $20.9 million forimpairment charge related to the Michigan Correctional Facility. We own the 480-bed Michigan Correctional Facility and operated the facility from 1999 until October 2005 pursuant to a management contract with the Michigan Department of Corrections, or the MDOC. On September 30, 2005, the Governor of the State of Michigan announced her decision to close the facility and as a result our management contract with the MDOC was terminated. Additionally, 2005 operating expenses reflect an operating$4.3 million charge onrelated to the Jena lease of $4.3 million, representing the remaining obligation on the lease through the contractual term of January 2010.lease.
Operating expenses in 20052006 were favorably impacted by a $3.4$4.0 million reduction in our reserves for general liability, auto liability, and workers’workers compensation insurance. This favorable reduction was largely offset by higher than anticipated U.S. employee health insurance costs of approximately $1.7 million, transition expenses of approximately $0.8 million associated with our Queens, New York Facility, andstart-up expenses at certain domestic facilities of approximately $0.6 million.
The $3.4$4.0 million reduction in insurance reserves related to general liability, auto and workers compensation was the result of revised actuarial projections related to loss estimates for the initial threefour years of our insurance program which was established on October 2, 2002. Prior to October 2, 2002, our insurance coverage was provided through an insurance program established by TWC, our former parent company. We experienced significant adverse claims development in general liability and workers’ compensation in the late 1990’s. Beginning in approximately 1999, we made significant operational changes and began to aggressively manage our risk in a proactive manner. These changes have resulted in improved claims experience and loss development, which we are realizing in our actuarial projections. As a result of improving loss trends, our independent actuary reduced its expected losses for claims arising since October 2, 2002. We adjusted our reserves in the third quarter ofreserve at October 1, 2006 and October 2, 2005 to reflect the actuary’s improved expected loss projections. There can be no assurance that our improved claims experience and loss developments will continue. Similarly, 2004loss. In addition, 2005 operating expenses reflectwere favorably impacted by a $4.2$3.4 million reduction in insuranceour reserves also attributable to improved actuarial loss projections.
Duringfor general liability, auto liability, and workers’ compensation insurance. Fiscal year 2005 we experienced an adverse development in our employee health program. Since we are self-insured for employee healthcare, this adverse development resulted in additional claimsoperating expense and increased reserve requirements. During the third quarter of 2005, we completed a review of our employee health program and made adjustments to the plan to reduce future costs. The revised plan was effective November 1, 2005. There can be no assurance that these modifications will improve our claims experience.
Operating expenses in 2004 reflect an additional provision for operating losses of approximately $3.0 million related to our inactive facility incharge on the Jena Louisiana.
The remaining increase in operating expenses is consistent with and proportional to the increase in revenues discussed above as a result of the CSC acquisition, thestart-up of new facilities and the expansion of existing facilities.
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lease of $4.3 million, representing the remaining obligation on the lease through the contractual term of January 2010. Fiscal year 2005 operating expenses were also effected by higher than anticipated employee health insurance costs of approximately $1.7 million as well asstart-up expenses of approximately $0.8 million associated with transitioning customers at our Queens, New York Facility.
International Servicesservices
Operating expenses for internationalInternational services facilities increased in 20052006 compared to 20042005 largely as a result of the strengtheningJune 2006 commencement of the Australian dollar and South African Rand.Campsfield House contract in the United Kingdom. Australian operating expenses increaseddecreased slightly during 20052006 due to a 2005 insurance reserve adjustment which increased expenses by approximately $0.4 million in 2005. South African operating expenses remained consistent overall for 20052006 and 2004.2005.
International services segment operating expenses were impacted by reductions in the reserves related to the contract with DIMIA that was discontinued in February 2004. The company has exposure to general liability claims under the previous contract for seven years following the discontinuation of the contract. The Company reduced its reserves for this exposure $0.9$0.5 million and $0.9 million in the second quarter 20052006 and second quarter 2004,2005, respectively. The remaining reserve balance at December 31, 2006 is approximately $1.2 million and approximately 4 years remain until the tail period expires.
GEO Care
The operatingOperating expenses for GEO Care inincreased approximately $33.6 million during 2006 from 2005 comparedprimarily due to 2004 remained consistent and primarily reflect the operationsactivation of a single facility.the new contracts discussed above.
Other RevenueFacility construction and Operating Expensedesign
“Other” primarily consists of revenues and related operating expenses associated withThere was an increase in revenue in our construction business. The decreasebusiness of approximately $66.0 million in 2005 primarily relates to approximately $7.2 million less construction revenue2006 as compared to 2004.2005. The construction revenue is related to our expansion of the South BayMoore Haven Facility, onewhich we currently manage, and the new construction of the facilities thatGraceville Facility, which we manage. Thecompleted in the third quarter of 2007. Furthermore, operating expenses relating to the construction of both the Graceville Facility and Moore Haven Facility were approximately $50.4 and $11.9 million, respectively. Offsetting this increase was the completion of the expansion was completedof South Bay at the end of the secondthird quarter of 2005, which represented $7.1 million of construction revenue in 2005.
Other Unallocated Operating Expenses
General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | % of Revenue | | | 2004 | | | % of Revenue | | | $ Change | | | % Change | |
| | | | | | | | | (Dollars in thousands) | | | | | | | |
| |
General and Administrative Expenses | | $ | 48,958 | | | | 8.0 | % | | $ | 45,879 | | | | 7.7 | % | | $ | 3,079 | | | | 6.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | % of Revenue | | 2005 | | % of Revenue | | $ Change | | % Change |
| | | (Dollars in thousands) |
| |
General and Administrative Expenses | | $ | 56,268 | | | | 6.5 | % | | $ | 48,958 | | | | 8.0 | % | | $ | 7,310 | | | | 14.9 | % |
General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees and other administrative expenses. TheGeneral and administrative expenses increased by $7.3 million in 2006 compared to 2005, however decreased slightly as a percentage of revenues due to the overall increase in expense reflects increased personnel and business development costs associated with the expansion of our mental health business.revenue during 2006. The increase also reflects costs associated with compliance with Sarbanes-Oxley requirements for management’s assessment over internal controls, which resulted in an increase in professional fees in 2005 of $0.9 million. The remaining increase in general and administrative costs relatesis mainly due to other increases in professional fees,direct labor costs and related taxes of approximately $4.8 million as a result of increased headcount of administrative staff and higher estimated annual bonus payments under our incentive compensation plans due to an increase in earnings. Amortization of deferred compensation and expense related to stock options increased general and administrative expenses $1.4 million. Administrative costs as well as general increases in travel expenses associated with our acquisition program and rent expense for our corporate offices.increased approximately $1.7 million.
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Non Operating Expenses
Interest Income and Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | % of Revenue | | 2004 | | % of Revenue | | $ Change | | % Change | | | 2006 | | % of Revenue | | 2005 | | % of Revenue | | $ Change | | % Change |
| | | | | | | (Dollars in thousands) | | | | | | | (Dollars in thousands) |
| |
Interest Income | | $ | 9,154 | | | | 1.5 | % | | $ | 9,568 | | | | 1.6 | % | | $ | (414 | ) | | | (4.3 | )% | | $ | 10,687 | | | | 1.2 | % | | $ | 9,154 | | | | 1.5 | % | | $ | 1,533 | | | | 16.7 | % |
Interest Expense | | $ | 23,016 | | | | 3.8 | % | | $ | 22,138 | | | | 3.7 | % | | $ | 878 | | | | 4.0 | % | | $ | 28,231 | | | | 3.3 | % | | $ | 23,016 | | | | 3.8 | % | | $ | 5,215 | | | | 22.7 | % |
The decreaseincrease in interest income is primarily due to lowerhigher average invested cash balances. Interest income for 2005 and 2004 reflects income from interest rate swap agreements entered into September 2003 for our domestic operations, which increased interest income. The interest rate swap agreements in the aggregate notional amounts of $50.0 million are hedges against the change in the fair value of a designated portion of the Notes due to changes in the underlying interest rates. The interest rate swap agreements have payment and expiration dates and call provisions that coincide with the terms of the Notes.
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The increase in interest expense is primarily attributable to the refinancingincrease in our debt as a result of the term loan portion of our Senior Credit Facility.
Costs Associated with Debt Refinancing
Deferred financing fees of $1.4 million were written offCSC acquisition, as well as the increase in 2005 in connection with the refinancing of the term loan portion of the Senior Credit Facility. In 2004, $0.3 million was written off in connection with the $43.0 million payment related to the term loan portion of the Senior Credit Facility.LIBOR rates.
Provision for Income Taxes
| | | | | | | | | | | | | | | | | |
| | | 2005 | | | Effective Rate | | | 2004 | | | Effective Rate | |
| | | | | | (Dollars in thousands) | | | | |
| |
Income Taxes | | $ | (11,826 | ) | | | N/A | | | $ | 8,231 | | | | 31.5 | % |
| | | | | | | | | | | | | | | | | |
| | | 2006 | | Effective Rate | | 2005 | | Effective Rate |
| | | (Dollars in thousands) |
| |
Income Tax Provision (Benefit) | | $ | 16,505 | | | | 36.4 | % | | $ | (11,826 | ) | | | N/A | |
Income taxes for 2006 include certain one time items of $0.7 million resulting in an effective tax rate of 36.4%. Without such items the rate would have been approximately 38%.
Income taxes for 2005 reflect a benefit as a result of the loss before income taxes which primarily resulted from the $20.9 million impairment charge for the Michigan Facility and the $4.3 million charge to record the remaining lease obligation for our former lease with CPT relating to the Jena lease with CPT.
facility. The income tax benefit for 2005 reflects a benefit of $6.5 million in the fourth quarter 2005 related to a step up in tax basis for an asset in Australia which resulted in a decreased deferred tax liability.
The income tax benefit for 2005 also reflects a benefit of $1.7 million in the second quarter 2005 related to the American Jobs Creation Act of 2004, or the AJCA. A key provision of the AJCA creates a temporary incentive for U.S. corporations to repatriate undistributed income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations.
Minority Interest
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | % of Revenue | | 2005 | | % of Revenue | | $ Change | | % Change |
| | | (Dollars in thousands) |
| |
Minority Interest | | $ | (125 | ) | | | (0.0 | )% | | $ | (742 | ) | | | (0.1 | )% | | $ | 617 | | | | (83.2 | )% |
Decrease in minority interest reflects reduced performance during 2006 as a result of lower revenues during the first and second quarter of 2006 related to facility modifications which resulted in reduced capacity and related billings.
Equity in Earnings of Affiliate
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | % of Revenue | | | 2004 | | | % of Revenue | | | $ Change | | | % Change | |
| | | | | | | | | (Dollars in thousands) | | | | | | | |
| |
Equity in Earnings of Affiliate | | $ | 2,079 | | | | 0.3 | % | | $ | — | | | | 0.0 | % | | $ | 2,079 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | % of Revenue | | 2005 | | % of Revenue | | $ Change | | % Change |
| | | (Dollars in thousands) |
| |
Equity in Earnings of Affiliate | | $ | 1,576 | | | | 0.2 | % | | $ | 2,079 | | | | 0.3 | % | | $ | (503 | ) | | | (24.2 | )% |
Equity in earnings of affiliates in 2006 reflects the normal operations of South African Custodial Services Pty. Limited (“SACS”).
Equity in earnings of affiliate in 2005 reflects a one time tax benefit of $2.1 million related to a change in South African tax law.
In 2005, our equity affiliate, SACS, recognized a one time tax benefit of $2.1 million related to a change in South African Tax law applicable to companies in a qualified Public Private Partnership (“PPP”) with the South African Government. The tax law change has the effect that beginning in 2005 government revenues earned under the PPP are exempt from South African taxation. The one time tax benefit in part related to
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deferred tax liabilities that were eliminated during 2005 as a result of the change in the tax law. In February 2007, the South African legislature passed legislation that has the effect of removing the exemption from taxation on government revenue. The law change began to impact the equity in earnings of affiliate beginning in 2007.
Financial Condition
Liquidity and Capital ResourcesRequirements
On January 24, 2007, we completed the refinancing of our Senior Credit Facility through the execution of the Amended Senior Credit Facility, by and among GEO, as Borrower, BNP Paribas, as Administrative Agent, BNP Paribas Securities Corp, as Lead Arranger and Syndication Agent, and the lenders who are, or may from time to time become, a party thereto. The Amended Senior Credit Facility consists of a $365 million7-year term loan referred to as the Term Loan B and a $150 million5-year revolver, expiring September 14, 2010, referred to as the Revolver. The initial interest rate for the Term Loan B is LIBOR plus 1.50%. The Revolver would bear interest at LIBOR plus 2.25% or at the base rate plus 1.25%. On January 24, 2007, GEO used the $365 million in borrowings under the Term Loan B to finance GEO’s acquisition of CPT.
CurrentOur current cash requirements consist of amounts needed for working capital, debt service, capital expenditures, supply purchases, and investments in joint ventures. Our primary source of liquidity to meet these requirements is cash flow from operationsventures, and after January 24, 2007, borrowings from the $150 million Revolver under our Amended Senior Credit Facility. As of December 31, 2006, we had $45.5 million available for borrowing under the revolving portion of the Senior Credit Facility.
We incurred substantial indebtedness in connection with the acquisition CPT on January 24, 2007, CSC on November 4, 2005 and the share purchase in 2003. As of December 31, 2006, we had $150.0 million of consolidated debt outstanding, excluding $147.3 million of non-recourse debt. As of December 31, 2006, we also had outstanding seven letters of guarantee totaling approximately $6.1 million under separate international
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credit facilities. As a result of the refinancing of our Senior Credit Facility we have $515 million consolidated debt outstanding, excluding non-recourse debt. After giving effect to these borrowings, we currently have approximately $515 million in total consolidated long-term indebtedness, excluding non recourse debt of $131.7 million and capital lease liability balances of $16.6 million. Based on our debt covenants and the amount of indebtedness we have outstanding, we currently have the ability to borrow an additional approximately $55 million under our Amended Senior Credit Facility. Our significant debt service obligations could have material consequences. See “Risk Factors — Risks Related to Our High Level of Indebtedness.” However, our management believes that cash on hand, cash flows from operations and our Senior Credit Facility will be adequate to support currently planned business expansion and various obligations incurred in the operation of our business, both on a near and long-term basis.
In the future, our access to capital and ability to compete for future capital-intensive projects will be dependent upon, among other things, our ability to meet certain financial covenants in the indenture governing the Notes and in our Senior Credit Facility. A substantial decline in our financial performance could limit our access to capital and have a material adverse affect on our liquidity and capital resources and, as a result, on our financial condition and results of operations.
Our business requires us to make various capital expenditures from time to time, including expenditures related to the development of new correctional, detentionand/or mental health facilities. In addition, some of our management contracts require us to make substantial initial expenditures of cash in connection with opening or renovating a facility. Generally, these initial expenditures are subsequently fully or partially recoverable as pass-through costs or are billable as a component of the per diem rates or monthly fixed fees to the contracting agency over the original term of the contract. However, we cannot assure youAdditional capital needs may also arise in the future with respect to possible acquisitions, other corporate transactions or other corporate purposes.
We are currently developing a number of projects using company financing. We estimate that anythese existing capital projects will cost approximately $249.4 million through the end of these expenditures will, if made, be recovered. Based on current estimates2009, of which $102.1 million was complete at fiscal year end 2007. We estimate our capital needs,requirements for 2008 to be approximately $93.8 million, of which we anticipate that our capitalestimate $44 million of expenditures will range from $50 million to $150 million during the next 12 months. We are in the process of a 576 bed expansion of Val Verde Correctional Facilityfirst quarter, $21.8 million in Del Rio, Texas for approximately $20 million. The expansion is expected to be completedthe second quarter, $14 million in the third quarter of 2007. Additionally, as a resultand $14 million in the fourth quarter. These capital expenditures are related to the following projects: (i) our renovation and expansion of the acquisition576-bed Robert A. Deyton Detention Facility in Clayton County, GA for approximately $18.5 million, which was completed in the first quarter 2008; (ii) our funding of CPT, we will fund anthe expansion of Delaney Hall, a facility which we own as a result of the CPT acquisition but do not operate, for approximately $10$13.0 million, withwhich is expected completionto be complete in the first quarter 2008.of 2008; (iii) our construction of the 1500-bed Rio Grande Detention Center for approximately $85.9 million which is expected to be complete in the third quarter of 2008; (iv) our 744-bed expansion of the 416-bed LaSalle Detention Facility for approximately $32.4 million which is also expected to be complete in the third quarter of 2008; and (v) our construction of the 1,100-bed expansion at the Aurora Processing Center in Aurora, Colorado for approximately $68.8 million, which is expected to be complete in 2009. Capital expenditures related to other facility expansions and normal operating activitiesmaintenance costs are expected to range between $20$10.0 million and $40$15.0 million. Our rangeIn addition to these current estimated capital requirements for 2008 and 2009, we are currently in the process of $50 millionbidding on, or evaluating potential bids for, the design, construction and management of a number of new projects. In the event that we win bids for these projects and decide to $150 million forself-finance their construction, our capital needs includes potential capital expenditures related to expansion of existing facilities if we receive new contracts requirements in 2008and/or contract modifications. 2009 could materially increase.
Liquidity and Capital Resources
We plan to fund theseall of our capital needs, including our capital expenditures, from cash on hand, cash from operations, borrowings under the Amendedour Senior Credit Facility and any other financings which our management and board of directors, in their discretion, may consummate. Our primary source of liquidity to meet these requirements is cash flow from operations and borrowings from the $150.0 million Revolver under our Third Amended and Restated Credit Agreement referred to as our Senior Credit Facility (see discussion below). As of December 30, 2007, we had $86.5 million available for borrowing under the revolving portion of the Senior Credit Facility.
We incurred substantial indebtedness in connection with the acquisition CPT in January 2007, CSC in November 2005 and the share purchase in 2003. As of December 30, 2007, we had $309.3 million of consolidated debt outstanding, excluding $138.0 million of non-recourse debt and capital lease liability balances of $16.6 million. As of December 30, 2007, we also had outstanding six letters of guarantee totaling approximately $6.4 million under separate international credit facilities. Based on our debt covenants and the amount of indebtedness we have outstanding, we currently have the ability to borrow an additional
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approximately $86.5 million under our Senior Credit Facility. Our significant debt service obligations could have material consequences. See “Risk Factors — Risks Related to Our High Level of Indebtedness.”
Our management believes that cash on hand, cash flows from operations and borrowings under our Senior Credit Facility will be adequate to support our capital requirements for 2008 and 2009 disclosed above. However, we are currently in the process of bidding on, or evaluating potential bids for, the design, construction and management of a number of new projects. In the event that we win bids for these projects and decide to self-finance their construction, our capital requirements in 2008and/or 2009 could materially increase. In that event, our cash on hand, cash flows from operations and borrowings under the Senior Credit Facility may not provide sufficient liquidity to meet our capital needs through 2008 and 2009 and we could be forced to seek additional financing or refinance our existing indebtedness. There can be no assurance that any such financing or refinancing would be available to us on terms equal to or more favorable than our current financing terms, or at all.
In the future, our access to capital and ability to compete for future capital-intensive projects will also be dependent upon, among other financings.things, our ability to meet certain financial covenants in the indenture governing the 81/4% Senior Unsecured Notes (the “Notes”) and in our Senior Credit Facility. A substantial decline in our financial performance could limit our access to capital pursuant to these covenants and have a material adverse affect on our liquidity and capital resources and, as a result, on our financial condition and results of operations.
We have entered into individual executive retirement agreements with our CEO and Chairman, President and Vice Chairman, and Chief Financial Officer. These agreements provide each executive with a lump sum payment upon retirement. Under the agreements, each executive may retire at any time after reaching the age of 55. Each of the executives reached the eligible retirement age of 55 in 2005. None of the executives have indicated their intent to retire as of this time. However, under the retirement agreements, retirement may be taken at any time at the individual executive’s discretion. In the event that all three executives were to retire in the same year, we believe we will have funds available to pay the retirement obligations from various sources, including cash on hand, operating cash flows or borrowings under our revolving credit facility. Based on our current capitalization, we do not believe that making these payments in any one period, whether in separate installments or in the aggregate, would materially adversely impact our liquidity.
We are also exposed to various commitments and contingencies which may have a material adverse effect on our financial condition and results of operations.liquidity. See Item 3. Legal Proceedings.
The Amended Senior Credit Facility
On January 24, 2007, we completed the Amendedrefinancing of our Senior Credit Facility through the execution of the Senior Credit Facility, by and among GEO, as Borrower, BNP Paribas, as Administrative Agent, BNP Paribas Securities Corp, as Lead Arranger and Syndication Agent, and the lenders who are, or may from time to time become, a party thereto. The Senior Credit Facility consists of a $365.0 million7-year term loan referred to as the Term Loan B and a $150.0 million5-year revolver, expiring September 14, 2010, referred to as the Revolver. The initial interest rate for the Term Loan B is LIBOR plus 1.5% and the Revolver bears interest at LIBOR plus 1.50% (our weighted average rate on outstanding borrowings under the Term Loan portion of the facility as of December 30, 2007 was 6.38%) or at the base rate (prime rate) plus 0.5%. Also on January 24, 2007, we used the $365$365.0 million in borrowings under the Term Loan B to financeas financing for the acquisition of CPT. During Second Quarter 2007, we used $200.0 million of the net proceeds from the follow on equity offering to repay a portion of the debt outstanding under the Term Loan B. GEO has no current borrowings under the Revolver and intends to use future borrowings thereunder for the purposes permitted under the Amended seniorSenior Credit Facility, including to fund general corporate purposes.
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All of the obligations under the Amended Senior Credit Facility are unconditionally guaranteed by each of GEO’s existing material domestic subsidiaries. The Amended Senior Credit Facility and the related guarantees are secured by substantially all of GEO’s present and future tangible and intangible assets and all present and future tangible and intangible assets of each guarantor, including but not limited to (i) a first-priority pledge of all of the outstanding capital stock owned by GEO and each guarantor, and (ii) perfected first-priority security interests
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in all of GEO’s present and future tangible and intangible assets and the present and future tangible and intangible assets of each guarantor.
Indebtedness under the Revolver bears interest in each of the instances below at the stated rate:
| | | |
| | | Interest Rate under the Revolver |
| |
| LIBOR Borrowings | | LIBOR plus 2.25% or base1.50% to 2.50%. |
| Base rate borrowings | | Prime rate plus 1.25%0.5% to 1.50%. |
| Letters of Credit | | 1.50% to 2.50%. |
| Available Borrowings | | 0.38% to 0.5%. |
The Amended Senior Credit Facility contains financial covenants which require us to maintain the following ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:
| | | |
Period | | Leverage Ratio |
| |
| Through December 30, 2008 | | Total leverage ratio£ 5.50 ≤5.50 to 1.00 |
| From December 31, 2008 through December 31, 2011 | | Reduces from 4.75 to 1.00, to 3.00 to 1.00 |
| Through December 30, 2008 | | Senior secured leverage ratio£ ≤ 4.00 to 1.00 |
| From December 31, 2008 through December 31, 2011 | | Reduces from 3.25 to 1.00, to 2.00 to 1.00 |
| Four quarters ending June 29, 2008, to December 30, 2009 | | Fixed charge coverage ratio of 1.00, thereafter increases to 1.10 to 1.00 |
In addition, the Amended Senior Credit Facility prohibits us from making capital expenditures greater than $55.0 million in the aggregate during fiscal year 2007 and $25.0 million during each of the fiscal years thereafter, provided that to the extent that our capital expenditures during any fiscal year are less than the limit, such amount will be added to the maximum amount of capital expenditures that we can make in the following year. In addition, certain capital expenditures, including those made with the proceeds of any future equity offerings, are not subject to numerical limitations.
All of the obligations under the Senior Credit Facility are unconditionally guaranteed by each of our existing material domestic subsidiaries. The AmendedSenior Credit Facility and the related guarantees are secured by substantially all of our present and future tangible and intangible assets and all present and future tangible and intangible assets of each guarantor, including but not limited to (i) a first-priority pledge of all of the outstanding capital stock owned by us and each guarantor, and (ii) perfected first-priority security interests in all of our present and future tangible and intangible assets and the present and future tangible and intangible assets of each guarantor.
The Senior Credit Facility contains certain customary representations and warranties, and certain customary covenants that restrict GEO’s ability to, among other things (i) create, incur or assume any indebtedness, (ii) incur liens, (iii) make loans and investments, (iv) engage in mergers, acquisitions and asset sales, (v) sell its assets, (vi) make certain restricted payments, including declaring any cash dividends or redeem or repurchase capital stock, except as otherwise permitted, (vii) issue, sell or otherwise dispose of capital stock, (viii) transact with affiliates, (ix) make changes in accounting treatment, (x) amend or modify the terms of any subordinated indebtedness, (xi) enter into debt agreements that contain negative pledges on its assets or covenants more restrictive than contained in the Amended Senior Credit Facility, (xii) alter the business GEO conducts, and (xiii) materially impair GEO’s lenders’ security interests in the collateral for its loans.
Events of default under the Amended Senior Credit Facility include, but are not limited to, (i) GEO’s failure to pay principal or interest when due, (ii) GEO’s material breach of any representations or warranty, (iii) covenant defaults, (iv) bankruptcy, (v) cross default to certain other indebtedness, (vi) unsatisfied final judgments over a specified threshold, (vii) material environmental claims which are asserted against GEO, and (viii) a change of control.
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The covenants governing our Amended Senior Credit Facility, including the covenants described above, impose significant operating and financial restrictions which may substantially restrict, and materially adversely affect, our ability to operate our business.
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See “Risk Factors — Risks Related to Our High Level of Indebtedness — The covenants in the indenture governing the Notes and our Senior Credit Facility impose significant operating and financial restrictions which may adversely affect our ability to operate our business.” We believe we were in compliance with all of the covenants in the Senior Credit Facility as of December 30, 2007.
Senior 81/4% Notes
ToIn July 2003, to facilitate the completion of the purchase of the 1212.0 million shares from Group 4 Falck, our former majority shareholder, we issued $150.0 million aggregate principal amount, ten-year, 81/4% senior unsecured notes, which we refer to as the Notes. The Notes are general, unsecured, senior obligations of ours. Interest is payable semi-annually on January 15 and July 15 at 81/4%. The Notes are governed by the terms of an Indenture, dated July 9, 2003, between us and the Bank of New York, as trustee, referred to as the Indenture. Additionally, after July 15, 2008, we may redeem, at our option, all or a portion of the Notes plus accrued and unpaid interest at various redemption prices ranging from 104.125% to 100.000% of the principal amount to be redeemed, depending on when the redemption occurs. The Indenture contains certain covenants that limit our ability to incur additional indebtedness, pay dividends or distributions on our common stock, repurchase our common stock, and prepay subordinated indebtedness. The Indenture also limits our ability to issue preferred stock, make certain types of investments, merge or consolidate with another company, guarantee other indebtedness, create liens and transfer and sell assets.
The covenants governing the Notes impose significant operating and financial restrictions which may substantially restrict and adversely affect our ability to operate our business. See “Risk Factors — Risks Related to Our High Level of Indebtedness — The covenants in the indenture governing the Notes and our Senior Credit Facility impose significant operating and financial restrictions which may adversely affect our ability to operate our business.” We arebelieve we were in compliance with all of the covenants ofin the Indenture governing the Notes as of December 31, 2006.30, 2007.
Non-Recourse Debt
South Texas Detention Complex:Complex
In February 2004, CSC was awardedWe have a contract by ICEdebt service requirement related to develop and operatethe development of the South Texas Detention Complex, a 1,020 bed1,904-bed detention complex in Frio County, Texas. STLDCTexas acquired in November 2005 from Correctional Services Corporation, referred to as “CSC”. CSC was awarded the contract in February 2004 by the Department of Homeland Security, U.S. Immigration and Customs Enforcement, referred to as “ICE”, for development and operation of the detention center. In order to finance its construction, South Texas Local Development Corporation, referred to as “STLDC”, was created and issued $49.5 million in taxable revenue bondsbonds. Additionally, we have outstanding $5.0 million of subordinated notes which represents the principal amount of financing provided to finance the construction of the detention center. Additionally,STLDC by CSC provided a $5 million subordinated note to STLDC for initial development. These bonds mature in February 2016 and have fixed coupon rates between 3.47% and 5.07%.
We determined that we are the primary beneficiary ofhave an operating agreement with STLDC, and consolidate the entity as a result. STLDC is the owner of the complex, and entered into a development agreementwhich provides us with CSC to oversee the development of the complex. In addition, STLDC entered into an operating agreement providing CSC the sole and exclusive right to operate and manage the complex.detention center. The operating agreement and bond indenture require the revenue from CSC’sour 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 CSCus to cover CSC’s operating expenses and management fee. CSC isfees. We are responsible for the entire operations of the facility including all operating expenses and isare required to pay all operating expenses whether or not there are sufficient revenues. STLDC has no liabilities for the operation of the facility resulting from its ownership. The bonds have a ten year term and are non-recourse to CSCus 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.
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IncludedOn February 1, 2007, we made a payment of $4.1 million for the current portion of our periodic debt service requirement in currentrelation to STLDC operating agreement and bond indenture. As of December 30, 2007, the remaining balance of the debt service requirement is $45.3 million, of which $4.3 million is due within the next twelve months. Also as of December 30, 2007, $14.2 million is included in non-current restricted cash is $18.6 million as of December 31, 2006 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, (the “Northwestreferred to as the Northwest Detention Center”),Center, which CSCwas completed and opened for operation in April 2004.2004 and acquired by us in November 2005. In connection with thisthe original financing, CSC of Tacoma LLC, a wholly owned subsidiary of CSC, issued a $57$57.0 million note payable to the Washington Economic Development Finance Authority, (“WEDFA”),referred to as WEDFA, an instrumentality of the State of Washington, which issued revenue bonds and subsequently loaned the
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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 CSCus and the loan from WEDFA to CSC of Tacoma, LLC is non-recourse to CSC. us. These bonds mature in February 2014 and have fixed coupon rates between 2.90% 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. No payments were made during the fiscal December 30, 2007 in relation to the WEDFA bond indenture. As of December 30, 2007, the remaining balance of the debt service requirement is $42.7 million, of which $5.4 is due within the next 12 months.
Included in current and non-current restricted cash equivalents and investments is $11.1$2.3 million as of December 31, 200630, 2007 as funds held in trust with respect to the Northwest Detention Center for debt service and other reserves.
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. As a condition of the loan, we are required to maintain a restricted cash balance of AUD 5.0 million, which, at December 31, 2006,30, 2007, was approximately $3.9$4.4 million. 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.
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 approximately $8.6$8.8 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 50% of amounts which may be payable by SACS into the restricted account and provided a standby letter of credit of 7.07.5 million South African Rand, or approximately $1.0$1.1 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 revolving loan portion of our Senior Credit Facility.
We have agreed to provide a loan, if necessary, of up to 20.0 million South African Rand, or approximately $2.9$3.0 million, referred to as the Standby Facility, to SACS for the purpose of financing the obligations under the contract between SACS and 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
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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 SACS 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 approximately $2.2$2.5 million commencing in 2017. We have a liability of $0.7$1.5 million and $0.6$0.7 million related to this exposure as of December 31, 200630, 2007 and January 1,December 31, 2006, 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 facilityfacility.
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At December 31, 2006,30, 2007, we also had outstanding sevensix letters of guarantee totaling approximately $6.1$6.4 million under separate international facilities. We do not have any off balance sheet arrangements.
Derivatives
Effective September 18, 2003, we entered into interest rate swap agreements in the aggregate notional amount of $50.0 million. We have designated the swaps as hedges against changes in the fair value of a designated portion of the Notes due to changes in underlying interest rates. 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. The agreements, which have payment and expiration dates and call provisions that coincide with the terms of the Notes, effectively convert $50.0 million of the Notes into variable rate obligations. Under the agreements, we receive a fixed interest rate payment from the financial counterparties to the agreements equal to 8.25% per year calculated on the notional $50.0 million amount, while we make a variable interest rate payment to the same counterparties equal to the six-month LIBOR plus a fixed margin of 3.45%, also calculated on the notional $50.0 million amount. As of December 31, 200630, 2007 and January 1,December 31, 2006, the fair value of the swapsswap liability totaled approximately $(1.7) million$0 and $(1.1)$1.7 million, respectively, and is included in other non-current liabilities in the accompanying consolidated balance sheets. The decrease in our swap liability is due to favorable changes in the interest rates during 2007. There was no material ineffectiveness of our interest rate swaps for the years ended December 31, 200630, 2007 or January 1,December 31, 2006.
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. The total value of the swap as of December 31, 200630, 2007 and January 1,December 31, 2006 was approximately $3.2$5.8 million and ($0.4)$3.2 million, respectively, and is recorded as a component of other non-current assets and of other non-current liabilities in the accompanying consolidated financial statements.
There was no material ineffectiveness of the Company’s interest rate swaps for the fiscal years presented. We doThe Company does not expect to enter into any transactions during the next twelve months which willwould result in the reclassification into earnings of gains or losses associated with this swap that are currently reported in accumulated other comprehensive loss.income (loss).
Cash Flow
Cash and cash equivalents as of December 31, 200630, 2007 were $44.4 million, compared to $111.5 million an increaseas of $54.4 million from January 1,December 31, 2006.
Cash provided by operating activities of continuing operations in 2007, 2006 and 2005 and 2004 was $80.2 million, $45.8 million, $31.4 million, and $31.5$31.4 million, respectively. Cash provided by operating activities of continuing operations in 2007 was positively impacted by an increase in net income of $11.0 million in addition to $33.9 million of depreciation and amortization expense. Cash provided by operating activities of continuing operations in 2006
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was positively impacted by $22.2 million of depreciation and amortization expense as well as an increase in accounts payable and accrued expenses. Cash provided by operating activities of continuing operations in 2005 was positively impacted by impairment charges of $20.9 million for our Michigan Correctional Facility and $4.3 million related to our Jena facility.
Cash provided by operating activities of continuing operations was negatively impacted in 2004 was positively impacted2007 by an increase in accrued payrollaccounts receivable of $7.3 million, increases in our deferred income tax benefits of $5.1 million, and related taxes and other liabilities as well as a $3.0 million charge relatedmore earnings in the current year attributable to our Jena facility.
investment in our South Africa joint venture, SACS. Cash provided by operating activities of continuing operations in 2006 was negatively impacted by an increase in accounts receivable. The increase in accounts receivable iswas attributable to the increase in value of our Australian subsidiary’s accounts receivable due to an increase in foreign exchange rates, the addition of CSC for the entire year, new contracts at New Castle, the South Florida Evaluation and Treatment Center, Fort Bayard Medical Center and Campsfield House as well as slightly higher billings reflecting a general increase in facility occupancy levels.
Cash used in investing activities of continuing operations in 2007 was $518.9 million due to our cash investment in CPT of $410.5 million and capital expenditures of $115.2 million. Cash used in investing activities of continuing operations in 2006 was $16.9 million. Cash used by investing activities of continuing operations in 2005 was $104.5 million and cash provided by investing activities in 2004 was $42.1 million, respectively.million. Cash used in investing activities in 2006 relate to capital expenditures partially offset by purchase price adjustments related to the sale of YSI. Cash used in investing activities in 2005 reflect the acquisition of CSC. In 2004, there
Cash provided by financing activities in 2007 was a decrease in$372.3 million and reflects proceeds received from the restrictedequity offering of $227.5 million as well as cash balance of $52.0 million due to the
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payment of $43.0 million of the term loan portion of the Senior Credit Facility with the net proceeds of the sale of PCG. This payment satisfied the restriction on cash imposed by the terms of the Senior Credit Facility$387.0 million from our Term Loan B and the remainder was reclassified to cash.
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. Cash provided by financing activities in 2006 was $21.7 million and reflects proceeds received from the equity offering of $99.9 million and proceeds received from the exercise of stock options of $5.4 million offset by payments of debt of $82.6 million. Cash provided by financing activities in 2005 was $24.6 million. Cash used in financing activities in 2004 was $47.1 million. Cash provided by financing activities in 2005 reflects the payoff of $53.4 million and the refinancing of $75.0 million of the term loan portion of the Senior Credit Facility. Cash used in financing activities in 2004 reflects payments of $10.0 million on borrowings under the Revolving Credit Facility, $4.0 million in scheduled payments on the Term Loan Facility, and a one-time $43.0 million payment on the Term Loan Facility from the net proceeds from the sale of our interest in PCG.
Contractual Obligations and Off Balance Sheet Arrangements
The following is a table of certain of our contractual obligations, as of December 31, 2006,30, 2007, 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 | | $ | 150,111 | | | $ | 28 | | | $ | 56 | | | $ | 27 | | | $ | 150,000 | | | $ | 150,083 | | | $ | 28 | | | $ | 55 | | | $ | — | | | $ | 150,000 | |
| Term Loan B | | | | 162,263 | | | | 3,650 | | | | 7,300 | | | | 7,300 | | | | 144,013 | |
| Capital lease obligations (includes imputed interest) | | | 30,757 | | | | 2,195 | | | | 4,123 | | | | 3,864 | | | | 20,575 | | | | 28,561 | | | | 2,167 | | | | 3,888 | | | | 3,865 | | | | 18,641 | |
| Operating lease obligations | | | 42,908 | | | | 10,112 | | | | 17,130 | | | | 7,629 | | | | 8,037 | | | | 93,794 | | | | 13,240 | | | | 20,748 | | | | 11,397 | | | | 48,409 | |
| Non-recourse debt | | | 147,260 | | | | 11,873 | | | | 25,930 | | | | 29,049 | | | | 80,408 | | | | 140,926 | | | | 12,978 | | | | 28,264 | | | | 31,782 | | | | 67,902 | |
| Estimated interest payments on debt (a) | | | 133,213 | | | | 20,116 | | | | 38,721 | | | | 36,183 | | | | 38,193 | | | | 166,830 | | | | 31,127 | | | | 60,051 | | | | 55,575 | | | | 20,077 | |
| Estimated payments on interest rate swaps (a) | | | (2,054 | ) | | | (316 | ) | | | (632 | ) | | | (632 | ) | | | (474 | ) | | | (1,401 | ) | | | 30 | | | | (636 | ) | | | (636 | ) | | | (159 | ) |
| Other long-term liabilities | | | 14,297 | | | | 11,947 | | | | 220 | | | | 301 | | | | 1,829 | | |
| Estimated funding of pension and other post retirement benefits | | | | 17,938 | | | | 12,474 | | | | 274 | | | | 320 | | | | 4,870 | |
| Estimated construction commitments | | | | 147,300 | | | | 93,800 | | | | 53,500 | | | | — | | | | — | |
| Estimated tax payments for uncertain tax positions | | | | 3,283 | | | | — | | | | 3,283 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 516,492 | | | $ | 55,955 | | | $ | 85,548 | | | $ | 76,421 | | | $ | 298,568 | | | $ | 909,577 | | | | 169,494 | | | $ | 176,727 | | | $ | 109,603 | | | $ | 453,753 | |
| | | | | | | | | | | | | |
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| | |
| (a) | | Due to the uncertainties of future LIBOR rates, the variable interest payments on our credit facility and swap agreements were calculated using a LIBOR ratesrate of 5.30% and 5.38%4.08% based on our bank rates as of February 15, 2007 and January 12, 2007, respectively.11, 2008. |
We do not have any additional off balance sheet arrangements which would subject us to additional liabilities.
Inflation
We believe that inflation, in general, did not have a material effect on our results of operations during 2007, 2006 2005 and 2004.2005. 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 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
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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.
TheWith prison populations growing at 3% to 5% a year, the private corrections industry has played an increasingly important role in addressing U.S. detention and correctional needs over the past five years. Since year-end 2000, theneeds. The number of federal inmates held atState and Federal prisoners housed in private correctionalfacilities increased 10.1% since mid-year 2005 with states such as Texas, Indiana, Colorado and detention facilities has increased over 50 percent.Florida accounting for more than half of the increase. At midyear 2005, the private sector housedJune 2006, approximately 14.4% of federal inmates. Approximately 57%7.2% of the estimated 2.21.6 million individualsState and Federal prisoners incarcerated in the United States at year-end 2004 were held in state prisons. At midyear 2005, the private sector housed approximately 5.6% of all state inmates.facilities, up from 6.5% in 2000. In addition to our strong positionpositions in Texas and Florida and in the U.S. market in general, we believe we are the only publicly traded U.S. correctional company with international operations. WeWith the existing operations in South Africa and Australia and the management of the 198-bed Campsfield House Immigration Removal Centre in the United Kingdom beginning in the Second Quarter of 2006, we believe that our existing 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 clientscustomers 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. 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 2006,2007, we announced 11 new contracts including a contract to reactivate the LaSalle Detention Facility in Jena, Louisiana. The new contracts represent 8,751 new beds. This compares to the 10 new projects announced in 2006 representing 4,934 new beds. As of December 30, 2007, we have 10 facilities under development or pending commencement of operations which represent approximately 6,800 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 client.customer. We also plan to leverage our experience to expand the range of government-outsourced
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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.
Revenue
Domestically, we continue to be encouraged by the number of opportunities that have recently developed in the privatized corrections and detention industry. The need for additional bed space at the federal, state atand local levels has been as strong as it has been at any time during the last decade,recent years, and we currently expect that trend to continue for the foreseeable future. Overcrowding at corrections facilities in various states, most recently California and Arizona and increased demand for bed space at federal prisons and detention facilities primarily resulting from government initiatives to improve immigration security are two of the factors that have contributed to the greater number of opportunities for privatization. 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 contract non-renewals.re-bids. In Michigan, the State cancelled our BaldwinMichigan Youth Correctional Facility management contract in 2005 based upon the Governor’s veto of funding for the project. Although we do not expect this termination to represent a trend, any future unexpected terminations of our existing management contracts could have a material adverse impact on our revenues. Additionally, several of our management contracts are up for renewaland/or re-bid in 2007.2008. Although we have historically had a relative high contract renewal rate, there can be no assurance that we will be able to renew our management contracts scheduled to expire in 20072008 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, in the United Kingdom, we recently won our first contract since re-establishing operations. We believe that additional opportunities will become available in that market and plan to actively bid on any opportunities that fit our target profile for profitability and operational risk. In South Africa, we anticipate thatcontinue to promote government procurements for the government will seek to outsource theprivate development and operation of one or more correctional facilities in the near future. We expect to bid on any suitable opportunities.
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With respect to our mental health health/residential treatment services business conducted through our wholly-owned subsidiary, GEO Care, Inc., we are currently pursuing a number of business development opportunities. 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.
We currently have ten projects under various stages of construction with approximately 6,800 beds that will become available upon completion. Subject to achieving our occupancy targets these projects are expected to generate approximately $143.0 million dollars in combined annual operating revenues when opened between the first quarter of 2008 and the third quarter of 2009. We believe that these projects comprise the largest and most diversified organic growth pipeline in our industry. In addition, we have approximately 730 additional empty beds available at two of our facilities to meet our customers’ potential future needs for bed space.
Operating Expenses
Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and mental health facilities. In 2006,2007, operating expenses totaled approximately 83.4%81.0% of our consolidated revenues. Our operating expenses as a percentage of revenue in 20072008 will be impacted by several factors. We could experience continued savings under our general liability, auto liability and workers’ compensation insurance program, although the amount of these potential savings cannot be predicted. These savings, which totaled $0.9 million, $4.0 million and $3.4 million in fiscal yearyears 2007, 2006 and 2005, respectively, are now reflected in our current actuarial projections and are a result of improved claims experience and loss development as compared to our results under our prior insurance program. Prior to October 2, 2002, our insurance coverage was provided through an insurance program established by TWC, our
58
former parent company. We experienced significant adverse claims development in general liability and workers’ compensation in the late 1990’s. Beginning in approximately 1999, we made significant operational changes and began to aggressively manage our risk in a proactive manner. These changes have resulted in improved claims experience and loss development, which we are realizing in our actuarial projections. As a result of improving loss trends, our independent actuary reduced its expected losses for claims arising since October 2, 2002. We expect future actuarial projections will result in smaller annual adjustments as our improved claims experience represents a more significant component of the historical losses used by our actuary in calculating annual loss projections and related reserve requirements. In the event our actual claims experience worsens, we could experience increased reserve requirements resulting in additional charges to operating income. In addition, as a result of our CPT acquisition, we will no longer incur lease expense relating to ten of the eleven facilities that we purchased in that transaction which we formerly leased from CPT. As a result,During 2007, our operating expenses will decreasedecreased by the aggregate amount of that lease expense which totaled $23.0 millionby $28.2 million. The savings in fiscal year 2006. These potentialfacility usage fees was offset by an increase in depreciation and amortization expense in the U.S. corrections segment by $10.2 million. In the future, these reductions in operating expenses may be offset by increasedstart-up expenses relating to a number of new projects, which we are developing, including our newRobert A. Deyton Detention Facility in Georgia, Montgomery County Detention Center and Rio Grande Correctional Facility projects in Texas, Graceville prison and Moore Haven expansion projectCorrectional Facility in Florida, our Clayton facilityNortheast New Mexico Detention Facility in New Mexico, our Lawton, Oklahoma prison expansion and our Florence West expansion projectMaverick County Detention Center in Arizona.Texas. Overall, excludingstart-up expenses, and the elimination of lease expense as a result of the CPT acquisition, we anticipate that operating expenses as a percentage of our revenue will remain relatively flat, consistent with our historical performance.fiscal year ended December 30, 2007.
General and Administrative Expenses
General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees and other administrative expenses. We have recently incurred increasing general and administrative costs including increased costs associated with increases in business development costs, professional fees and travel costs, primarily relating to our mental health residential treatment services business. We expect this trend to continue 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 treatment services business. We also plan to continue expending resources on the evaluation of potential acquisition targets.
Forward-Looking Statements — Safe Harbor
This report 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
55
prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements, or “cautionary statements,” include, but are not limited to:
| | |
| | • | our ability to timely buildand/or open facilities as planned, profitably manage such facilities and successfully integrate such facilities into our operations without substantial additional costs; |
| |
| | • | the instability of foreign exchange rates, exposing us to currency risks in Australia, the United Kingdom, and South Africa, or other countries in which we may choose to conduct our business; |
59
| | |
| | • | our ability to reactivate the Michigan Correctional Facility; |
| |
| | • | an increase in unreimbursed labor rates; |
| |
| | • | our ability to expand, diversify and grow our correctional and mental health and residential treatment services; |
| |
| | • | our ability to win management contracts for which we have submitted proposals and to retain existing management contracts; |
| |
| | • | our ability to raise new project development capital given the often short-term nature of the customers’ commitment to use newly developed facilities; |
| |
| | • | our ability to estimate the government’s level of dependency on privatized correctional services; |
|
| • | our ability to grow our mental health and residential treatment services; |
| |
| | • | our ability to accurately project the size and growth of the U.S. and international privatized corrections industry; |
| |
| | • | our ability to develop long-term earnings visibility; |
| |
| | • | our ability to obtain future financing at competitive rates; |
| |
| | • | our exposure to rising general insurance costs; |
| |
| | • | our exposure to claims for which we are uninsured; |
| |
| | • | our exposure to rising employee and inmate medical costs; |
| |
| | • | our ability to maintain occupancy rates at our facilities; |
| |
| | • | our ability to manage costs and expenses relating to ongoing litigation arising from our operations; |
| |
| | • | our ability to accurately estimate on an annual basis, loss reserves related to general liability, workers compensation and automobile liability claims; |
| |
| | • | our ability to identify suitable acquisitions, and to successfully complete and integrate such acquisitions on satisfactory terms; |
| |
| | • | the ability of our government customers to secure budgetary appropriations to fund their payment obligations to us; and |
| |
| | • | other factors contained in our filings with the Securities and Exchange Commission, or the SEC, including, but not limited to, those detailed in this annual report onForm 10-K, ourForm 10-Qs and our Form8-Ks 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.
56
| |
| 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 Term Loan B of our Amended Senior Credit Facility of $365.0$162.3 million as of January 24,December 30, 2007, immediately following the acquisition of CPT, for every one percent increase in the interest rate applicable to the Amended Senior Credit Facility, our total annual interest expense would increase by $3.7$1.6 million.
Effective September 18, 2003, we entered into interest rate swap agreements in the aggregate notional amount of $50.0 million. We have designated the swaps as hedges against changes in the fair value of a designated portion of the Notes due to changes in underlying interest rates. Changes in the fair value of the
60
interest rate swaps are recorded in earnings along with related designated changes in the value of the Notes. The agreements, which have payment and expiration dates and call provisions that coincide with the terms of the Notes, effectively convert $50.0 million of the Notes into variable rate obligations. Under the agreements, we receive a fixed interest rate payment from the financial counterparties to the agreements equal to 8.25% per year calculated on the notional $50.0 million amount, while we make a variable interest rate payment to the same counterparties equal to the six-month LIBOR plus a fixed margin of 3.45%, also calculated on the notional $50.0 million amount. For every one percent increase in the interest rate applicable to the $50.0 million swap agreements on the Notes described above, our total annual interest expense would increase by $0.5 million.
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. As of December 30, 2007 and December 31, 2006 the fair value of the swap liability totaled $(0) and $(1.7) million and is included in other non-current assets or liabilities and as an adjustment to the carrying value of the Notes in the accompanying consolidated balance sheets.
Foreign Currency Exchange Rate Risk
We are exposed to market risks related to fluctuations in foreign currency exchange rates between the U.S. dollar andDollar, the Australian dollar andDollar, the Canadian Dollar, the South African Rand and the U.K. poundBritish Pound currency exchange rates. Based upon our foreign currency exchange rate exposure as of December 31, 200630, 2007 with respect to our international operations, every 10 percent change in historical currency rates would have approximately a $3.3 million effect on our financial position and approximately a $1.1$1.0 million impact on our results of operations over the next fiscal year.
5761
| |
| 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. As part of this audit, Grant Thornton LLP considered the Company’s system of internal controls to the degree they deemed necessary to determine the nature, timing, and extent of their audit tests which support their opinion on the consolidated financial statements.
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
John G. O’Rourke
Senior Vice President of Finance
and Chief Financial
Officer
5862
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 procedure may deteriorate. Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006.30, 2007. 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 inInternal Control — Integrated Framework.
The Company evaluated, with the participation of its Chief Executive Officer and Chief Financial Officer, its internal control over financial reporting as of December 31, 2006,30, 2007, based on the COSOInternal Control — Integrated Framework.Based on this evaluation, the Company’s management concluded that as of December 31, 2006,30, 2007, 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.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report which appears on page 61.
5963
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders of The GEO Group, Inc.
We have audited the accompanying consolidated balance sheet of The GEO Group Inc. (a Florida corporation) and Subsidiaries (the “Company”) as of December 31, 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
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 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The GEO Group, Inc. and subsidiaries as of December 31, 2006, and the consolidated results of their operations and their consolidated cash flows for the year ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
As described in Note 1 to the consolidated financial statements, effective January 2, 2006, the Company changed its method of accounting for share-based compensation to adopt Statement of Financial Accounting Standards No. 123R, Share-Based Payment. As described in Notes 1 and 16, to the consolidated financial statements, the Company recognized the funded status of its benefit plans in accordance with the provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132R, as of December 31, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of The GEO Group, Inc. and subsidiaries’ (“the Company”) internal control over financial reporting as of December 31, 2006,30, 2007, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 27, 2007 expressed an unqualified opinion thereon.
Miami, FL
February 27, 2007
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders of The GEO Group, Inc.
We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, that The GEO Group, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The GEO Group, Inc.’sCompany’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.reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’sCompany’s internal control over financial reporting based on our audit.
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, evaluating management’s assessment,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 opinions.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, management’s assessment that The GEO Group, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, The GEO Group, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006,30, 2007, based on the COSO criteria.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 sheetsheets of The GEO Group, Inc. and subsidiaries as of December 30, 2007 and December 31, 2006, and the related consolidated statements of income, cash flow, and shareholders’ equity and cash flowscomprehensive income for each of the yeartwo years then ended, December 31, 2006 and our report dated February 27, 200714, 2008 expressed an unqualified opinion on those financial statements.
Miami, FL
February 27, 200714, 2008
6164
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTANTSACCOUNTING FIRM
The Board of Directors and
Shareholders of The GEO Group, Inc.
We have audited the accompanying consolidated balance sheetsheets of The GEO Group, Inc. and subsidiaries (the “Company”) as of January 1,December 30, 2007 and December 31, 2006, and the related consolidated statements of income, cash flows, and shareholders’ equity and comprehensive income and cash flows for each of the two years in the period ended January 1, 2006.then ended. Our audits alsoof the basic financial statements included the financial statement schedule for each of the two years in the period ended January 1, 2006 listed in the index at item 15(a).appearing under Item 15. These financial statements and this financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and this 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of The GEO Group, Inc. at January 1,and subsidiaries as of December 30, 2007 and December 31, 2006, and the consolidated results of itstheir operations and itstheir consolidated cash flows for each of the two years then ended in conformity with accounting principles generally accepted in the periodUnited 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 described in Note 1 to the consolidated financial statements, effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” and effective January 2, 2006, the Company changed its method of accounting for share-based compensation to adopt Statement of Financial Accounting Standards No. 123R, Share-Based Payment. As described in Note 15 to the consolidated financial statements, the Company recognized the funded status of its benefit plans in accordance with the provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132R, as of December 31, 2006.
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 December 30, 2007, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 14, 2008 expressed an unqualified opinion thereon.
Miami, FL
February 14, 2008
65
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of The GEO Group, Inc.
We have audited the accompanying consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows of The Geo Group, Inc., for the year ended January 1, 2006. Our audit also included the financial statement schedule for the year ended January 1, 2006 listed in the index at item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
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 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of The GEO Group, Inc.’s operations and its cash flows for the year ended January 1, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein for each of the two years in the periodyear ended January 1, 2006.
West Palm Beach, Florida
March 14, 2006
6266
THE GEO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended December 30, 2007, December 31, 2006, and January 1, 2006 and January 2, 2005
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
| | | (In thousands, except per share data) | | | (In thousands, except per share data) | |
| |
Revenues | | $ | 860,882 | | | $ | 612,900 | | | $ | 593,994 | | | $ | 1,024,832 | | | $ | 860,882 | | | $ | 612,900 | |
Operating Expenses | | | 718,178 | | | | 540,128 | | | | 495,226 | | | | 830,634 | | | | 718,178 | | | | 540,128 | |
Depreciation and Amortization | | | 22,235 | | | | 15,876 | | | | 13,898 | | | | 33,870 | | | | 22,235 | | | | 15,876 | |
General and Administrative Expenses | | | 56,268 | | | | 48,958 | | | | 45,879 | | | | 64,492 | | | | 56,268 | | | | 48,958 | |
| | | | | | | | | | | | | | | |
Operating Income | | | 64,201 | | | | 7,938 | | | | 38,991 | | | | 95,836 | | | | 64,201 | | | | 7,938 | |
Interest Income | | | 10,687 | | | | 9,154 | | | | 9,568 | | | | 8,746 | | | | 10,687 | | | | 9,154 | |
Interest Expense | | | (28,231 | ) | | | (23,016 | ) | | | (22,138 | ) | | | (36,051 | ) | | | (28,231 | ) | | | (23,016 | ) |
Write-off of Deferred Financing Fees from Extinguishment of Debt | | | (1,295 | ) | | | (1,360 | ) | | | (317 | ) | | | (4,794 | ) | | | (1,295 | ) | | | (1,360 | ) |
| | | | | | | | | | | | | | | |
Income (loss) Before Income Taxes, Minority Interest, Equity in Earnings of Affiliates, and Discontinued Operations | | | 45,362 | | | | (7,284 | ) | | | 26,104 | | | | 63,737 | | | | 45,362 | | | | (7,284 | ) |
Provision (benefit) for Income Taxes | | | 16,505 | | | | (11,826 | ) | | | 8,231 | | | | 24,226 | | | | 16,505 | | | | (11,826 | ) |
Minority Interest | | | (125 | ) | | | (742 | ) | | | (710 | ) | | | (397 | ) | | | (125 | ) | | | (742 | ) |
Equity in Earnings of Affiliates,(net of income tax provision (benefit) of $56, $(2,016), and $0) | | | 1,576 | | | | 2,079 | | | | — | | |
Equity in Earnings of Affiliates, net of income tax provision (benefit) of $1,030, $56, and $(2,016) | | | | 2,151 | | | | 1,576 | | | | 2,079 | |
| | | | | | | | | | | | | | | |
Income from Continuing Operations | | | 30,308 | | | | 5,879 | | | | 17,163 | | | | 41,265 | | | | 30,308 | | | | 5,879 | |
Income (loss) from discontinued operations, (net of tax (benefit) provision of $(151), $895, and $(181)) | | | (277 | ) | | | 1,127 | | | | (348 | ) | |
Income (loss) from Discontinued Operations, net of tax provision (benefit) of $377, $(151), and $895 | | | | 580 | | | | (277 | ) | | | 1,127 | |
| | | | | | | | | | | | | | | |
Net Income | | $ | 30,031 | | | $ | 7,006 | | | $ | 16,815 | | | $ | 41,845 | | | $ | 30,031 | | | $ | 7,006 | |
| | | | | | | | | | | | | | | |
Weighted Average Common Shares Outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 17,221 | | | | 14,370 | | | | 14,076 | | | | 47,727 | | | | 34,442 | | | | 28,740 | |
| | | | | | | | | | | | | | | |
| Diluted | | | 17,872 | | | | 15,015 | | | | 14,607 | | | | 49,192 | | | | 35,744 | | | | 30,030 | |
| | | | | | | | | | | | | | | |
Earnings (loss) per Common Share: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 1.76 | | | $ | 0.41 | | | $ | 1.22 | | | $ | 0.87 | | | $ | 0.88 | | | $ | 0.20 | |
| Income (loss) from discontinued operations | | | (0.02 | ) | | | 0.08 | | | | (0.03 | ) | | | 0.01 | | | | (0.01 | ) | | | 0.04 | |
| | | | | | | | | | | | | | | |
| Net income per share — basic | | $ | 1.74 | | | $ | 0.49 | | | $ | 1.19 | | | $ | 0.88 | | | $ | 0.87 | | | $ | 0.24 | |
| | | | | | | | | | | | | | | |
Diluted: | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 1.70 | | | $ | 0.39 | | | $ | 1.17 | | | $ | 0.84 | | | $ | 0.85 | | | $ | 0.19 | |
| Income (loss) from discontinued operations | | | (0.02 | ) | | | 0.08 | | | | (0.02 | ) | | | 0.01 | | | | (0.01 | ) | | | 0.04 | |
| | | | | | | | | | | | | | | |
| Net income per share — diluted | | $ | 1.68 | | | $ | 0.47 | | | $ | 1.15 | | | $ | 0.85 | | | $ | 0.84 | | | $ | 0.23 | |
| | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
6367
THE GEO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 200630, 2007 and January 1,December 31, 2006
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | | 2007 | | 2006 | |
| | | (In thousands, except share data) | | | (In thousands, except share data) | |
| |
ASSETS | ASSETS | ASSETS |
Current Assets | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 111,520 | | | $ | 57,094 | | | $ | 44,403 | | | $ | 111,520 | |
| Restricted cash | | | 13,953 | | | | 8,882 | | | | 13,227 | | | | 13,953 | |
| Accounts receivable, less allowance for doubtful accounts of $926 and $224 | | | 162,867 | | | | 127,612 | | |
| Deferred income tax asset | | | 19,492 | | | | 19,755 | | |
| Accounts receivable, less allowance for doubtful accounts of $445 and $926 | | | | 172,291 | | | | 162,867 | |
| Deferred income tax asset, net | | | | 19,705 | | | | 19,492 | |
| Other current assets | | | 14,922 | | | | 15,826 | | | | 14,892 | | | | 14,922 | |
| Current assets of discontinued operations | | | — | | | | 123 | | |
| | | | | | | | | | | |
| Total current assets | | | 322,754 | | | | 229,292 | | | | 264,518 | | | | 322,754 | |
| | | | | | | | | | | |
Restricted Cash | | | 19,698 | | | | 17,484 | | | | 20,880 | | | | 19,698 | |
Property and Equipment, Net | | | 287,374 | | | | 282,236 | | | | 783,612 | | | | 287,374 | |
Assets Held for Sale | | | 1,610 | | | | 5,000 | | | | 1,265 | | | | 1,610 | |
Direct Finance Lease Receivable | | | 39,271 | | | | 38,492 | | | | 43,213 | | | | 39,271 | |
Deferred Income Tax Assets | | | 4,941 | | | | — | | |
Deferred Income Tax Assets, Net | | | | 4,918 | | | | 4,941 | |
Goodwill and Other Intangible Assets, Net | | | 41,554 | | | | 52,127 | | | | 37,230 | | | | 41,554 | |
Other Non Current Assets | | | 26,251 | | | | 14,880 | | |
Other Non-Current Assets | | | | 36,998 | | | | 26,251 | |
| | | | | | | | | | | |
| | | $ | 743,453 | | | $ | 639,511 | | | $ | 1,192,634 | | | $ | 743,453 | |
| | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY |
Current Liabilities | | | | | | | | | | | | | | | | |
| Accounts payable | | $ | 48,890 | | | $ | 27,762 | | | $ | 48,661 | | | $ | 45,345 | |
| Accrued payroll and related taxes | | | 31,320 | | | | 26,985 | | | | 34,766 | | | | 31,320 | |
| Accrued expenses | | | 77,675 | | | | 70,177 | | | | 85,528 | | | | 81,220 | |
| Current portion of deferred revenue | | | 1,830 | | | | 1,894 | | | | — | | | | 1,830 | |
| Current portion of capital lease obligations, long-term debt and non-recourse debt | | | 12,685 | | | | 8,441 | | | | 17,477 | | | | 12,685 | |
| Current liabilities of discontinued operations | | | 1,303 | | | | 1,260 | | | | — | | | | 1,303 | |
| | | | | | | | | | | |
| Total current liabilities | | | 173,703 | | | | 136,519 | | | | 186,432 | | | | 173,703 | |
| | | | | | | | | | | |
Deferred Revenue | | | 1,755 | | | | 3,267 | | | | — | | | | 1,755 | |
Deferred Tax Liability | | | — | | | | 2,085 | | |
Deferred Income Tax Liability | | | | 223 | | | | — | |
Minority Interest | | | 1,297 | | | | 1,840 | | | | 1,642 | | | | 1,297 | |
Other Non Current Liabilities | | | 24,816 | | | | 19,601 | | |
Other Non-Current Liabilities | | | | 30,179 | | | | 24,816 | |
Capital Lease Obligations | | | 16,621 | | | | 17,072 | | | | 15,800 | | | | 16,621 | |
Long-Term Debt | | | 144,971 | | | | 219,254 | | | | 305,678 | | | | 144,971 | |
Non-Recourse Debt | | | 131,680 | | | | 131,279 | | | | 124,975 | | | | 131,680 | |
Commitments and Contingencies | | | | | | | | | |
Commitments and Contingencies(Note 13) | | | | | | | | | |
Shareholders’ Equity | | | | | | | | | | | | | | | | |
| Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued or outstanding | | | — | | | | — | | |
| Common stock, $0.01 par value, 45,000,000 shares authorized, 33,248,584 and 32,536,715 issued and 19,748,584 and 14,536,715 outstanding | | | 197 | | | | 145 | | |
| 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, 67,050,596 and 66,497,168 issued and 50,975,596 and 39,497,168 outstanding | | | | 510 | | | | 395 | |
| Additional paid-in capital | | | 143,233 | | | | 70,736 | | | | 338,092 | | | | 143,035 | |
| Retained earnings | | | 201,697 | | | | 171,666 | | | | 241,071 | | | | 201,697 | |
| Accumulated other comprehensive income (loss) | | | 2,393 | | | | (2,073 | ) | |
| Treasury stock 13,500,000 and 18,000,000 shares | | | (98,910 | ) | | | (131,880 | ) | |
| Accumulated other comprehensive income | | | | 6,920 | | | | 2,393 | |
| Treasury stock 16,075,000 and 27,000,000 shares | | | | (58,888 | ) | | | (98,910 | ) |
| | | | | | | | | | | |
| Total shareholders’ equity | | | 248,610 | | | | 108,594 | | | | 527,705 | | | | 248,610 | |
| | | | | | | | | | | |
| | | $ | 743,453 | | | $ | 639,511 | | | $ | 1,192,634 | | | $ | 743,453 | |
| | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
6468
THE GEO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended December 30, 2007, December 31, 2006, and January 1, 2006 and January 2, 2005
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
| | | | | (In thousands) | | | | | (In thousands) | |
Cash Flow from Operating Activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 30,308 | | | $ | 5,879 | | | $ | 17,163 | | | $ | 41,265 | | | $ | 30,308 | | | $ | 5,879 | |
| Adjustments to reconcile income from continuing operations to net cash provided by operating activities | | | | | | | | | | | | | |
| Adjustments to reconcile income from continuing operations to net cash provided by operating activities: | | | | | | | | | | | | | |
| Impairment charge | | | — | | | | 20,859 | | | | — | | | | — | | | | — | | | | 20,859 | |
| Idle facility charge | | | — | | | | 4,255 | | | | 3,000 | | | | — | | | | — | | | | 4,255 | |
| Amortization of unearned compensation | | | 966 | | | | — | | | | — | | |
| Amortization of unearned stock-based compensation | | | | 2,474 | | | | 966 | | | | — | |
| Stock-based compensation expense | | | 374 | | | | — | | | | — | | | | 935 | | | | 374 | | | | — | |
| Depreciation and amortization expenses | | | 22,235 | | | | 15,876 | | | | 13,898 | | | | 33,870 | | | | 22,235 | | | | 15,876 | |
| Amortization of debt issuance costs | | | 1,089 | | | | 449 | | | | 303 | | |
| Deferred tax liability (benefit) | | | (5,080 | ) | | | (10,614 | ) | | | 3,433 | | |
| Provision for doubtful accounts | | | 762 | | | | — | | | | 229 | | |
| Major maintenance reserve | | | 193 | | | | 290 | | | | 465 | | |
| Equity in earnings (losses) of affiliates, net of tax | | | (1,576 | ) | | | (2,079 | ) | | | — | | |
| Minority interests in earnings (losses) of consolidated entity | | | 125 | | | | 742 | | | | 710 | | |
| Amortization of debt issuance costs and discount | | | | 2,524 | | | | 1,089 | | | | 449 | |
| Deferred tax benefit | | | | (5,077 | ) | | | (5,080 | ) | | | (10,614 | ) |
| (Recovery) Provision for doubtful accounts | | | | (176 | ) | | | 762 | | | | — | |
| Equity in earnings of affiliates, net of tax | | | | (2,151 | ) | | | (1,576 | ) | | | (2,079 | ) |
| Minority interests in earnings of consolidated entity | | | | 397 | | | | 125 | | | | 742 | |
| Dividend to minority interest | | | (757 | ) | | | — | | | | — | | | | (389 | ) | | | (757 | ) | | | — | |
| Other non-cash charges | | | — | | | | — | | | | 141 | | |
| Income tax benefit of equity compensation | | | (2,793 | ) | | | 731 | | | | 773 | | |
| Income tax (benefit) provision of equity compensation | | | | (3,061 | ) | | | (2,793 | ) | | | 731 | |
| Write-off of deferred financing fees from extinguishment of debt | | | 1,295 | | | | 1,360 | | | | 317 | | | | 4,794 | | | | 1,295 | | | | 1,360 | |
| Changes in assets and liabilities, net of acquisition | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts receivable | | | (35,733 | ) | | | (7,238 | ) | | | (6,688 | ) | | | (7,262 | ) | | | (35,733 | ) | | | (7,238 | ) |
| Other current assets | | | 36 | | | | (3,235 | ) | | | (1,283 | ) | | | (310 | ) | | | 36 | | | | (3,235 | ) |
| Other assets | | | (366 | ) | | | (564 | ) | | | 1,442 | | | | 4,911 | | | | (366 | ) | | | (564 | ) |
| Accounts payable and accrued expenses | | | 30,688 | | | | 4,918 | | | | (12,558 | ) | | | (2,083 | ) | | | 30,881 | | | | 5,208 | |
| Accrued payroll and related taxes | | | 3,797 | | | | (996 | ) | | | 6,699 | | | | 1,517 | | | | 3,797 | | | | (996 | ) |
| Deferred revenue | | | (1,576 | ) | | | (1,003 | ) | | | (1,844 | ) | | | (152 | ) | | | (1,576 | ) | | | (1,003 | ) |
| Other liabilities | | | 1,799 | | | | 1,763 | | | | 5,282 | | | | 8,186 | | | | 1,799 | | | | 1,763 | |
| | | | | | | | | | | | | | | |
| Net cash provided by operating activities of continuing operations | | | 45,786 | | | | 31,393 | | | | 31,482 | | | | 80,212 | | | | 45,786 | | | | 31,393 | |
| Net cash provided by operating activities of discontinued operations | | | 166 | | | | 3,420 | | | | 14,024 | | |
| Net cash (used in) provided by operating activities of discontinued operations | | | | (1,284 | ) | | | 166 | | | | 3,420 | |
| | | | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 45,952 | | | | 34,813 | | | | 45,506 | | | | 78,928 | | | | 45,952 | | | | 34,813 | |
| | | | | | | | | | | | | | | |
Cash Flow from Investing Activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisitions, net of cash acquired | | | (2,578 | ) | | | (79,290 | ) | | | — | | | | (410,473 | ) | | | (2,578 | ) | | | (79,290 | ) |
| YSI purchase price adjustment | | | 15,080 | | | | — | | | | — | | | | — | | | | 15,080 | | | | — | |
| CSC purchase price adjustment | | | | 2,291 | | | | — | | | | — | |
| Proceeds from sale of assets | | | 20,246 | | | | 707 | | | | 315 | | | | 4,476 | | | | 20,246 | | | | 707 | |
| Proceeds from sales of short-term investments | | | — | | | | 39,000 | | | | 56,835 | | | | — | | | | — | | | | 39,000 | |
| Change in restricted cash | | | | (20 | ) | | | (7,285 | ) | | | (4,406 | ) |
| Purchases of short-term investments | | | — | | | | (29,000 | ) | | | (56,835 | ) | | | — | | | | — | | | | (29,000 | ) |
| Change in restricted cash | | | (7,285 | ) | | | (4,406 | ) | | | 52,000 | | |
| Insurance proceeds related to hurricane demage | | | 781 | | | | — | | | | — | | |
| Insurance proceeds related to hurricane damages | | | | — | | | | 781 | | | | — | |
| Capital expenditures | | | (43,165 | ) | | | (31,465 | ) | | | (10,235 | ) | | | (115,204 | ) | | | (43,165 | ) | | | (31,465 | ) |
| | | | | | | | | | | | | | | |
| Net cash provided by (used in) investing activities of continuing operations | | | (16,921 | ) | | | (104,454 | ) | | | 42,080 | | |
| Net cash used in investing activities of continuing operations | | | | (518,930 | ) | | | (16,921 | ) | | | (104,454 | ) |
| | | | | | | | | | | | | | | |
| Net cash provided by investing activities of discontinued operations | | | — | | | | 11,500 | | | | — | | | | — | | | | — | | | | 11,500 | |
| | | | | | | | | | | | | | | |
| Net cash provided by (used in) investing activities | | | (16,921 | ) | | | (92,954 | ) | | | 42,080 | | |
| Net cash used in investing activities | | | | (518,930 | ) | | | (16,921 | ) | | | (92,954 | ) |
Cash Flow from Financing Activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Proceeds from equity offering, net | | | 99,936 | | | | — | | | | — | | | | 227,485 | | | | 99,936 | | | | — | |
| Proceeds from long-term debt | | | 111 | | | | 75,000 | | | | 10,000 | | | | 387,000 | | | | 111 | | | | 75,000 | |
| Income tax benefit of equity compensation | | | 2,793 | | | | — | | | | — | | | | 3,061 | | | | 2,793 | | | | — | |
| Debt issuance costs | | | | (9,210 | ) | | | — | | | | — | |
| Repurchase of stock options from employees and directors | | | (3,955 | ) | | | — | | | | — | | | | — | | | | (3,955 | ) | | | — | |
| Payments on long-term debt | | | (82,627 | ) | | | (53,398 | ) | | | (58,704 | ) | | | (237,299 | ) | | | (82,627 | ) | | | (53,398 | ) |
| Proceeds from the exercise of stock options | | | 5,405 | | | | 2,999 | | | | 1,589 | | | | 1,239 | | | | 5,405 | | | | 2,999 | |
| | | | | | | | | | | | | | | |
| Net cash provided by (used in) financing activities | | | 21,663 | | | | 24,601 | | | | (47,115 | ) | |
| Net cash provided by financing activities | | | | 372,276 | | | | 21,663 | | | | 24,601 | |
| | | | | | | | | | | | | | | |
Effect of Exchange Rate Changes on Cash and Cash Equivalents | | | 3,732 | | | | (1,371 | ) | | | 1,575 | | | | 609 | | | | 3,732 | | | | (1,371 | ) |
| | | | | | | | | | | | | | | |
Net Increase (Decrease) in Cash and Cash Equivalents | | | 54,426 | | | | (34,911 | ) | | | 42,046 | | |
Net (Decrease) Increase in Cash and Cash Equivalents | | | | (67,117 | ) | | | 54,426 | | | | (34,911 | ) |
Cash and Cash Equivalents, beginning of period | | | 57,094 | | | | 92,005 | | | | 49,959 | | | | 111,520 | | | | 57,094 | | | | 92,005 | |
| | | | | | | | | | | | | | | |
Cash and Cash Equivalents, end of period | | $ | 111,520 | | | $ | 57,094 | | | $ | 92,005 | | | $ | 44,403 | | | $ | 111,520 | | | $ | 57,094 | |
| | | | | | | | | | | | | | | |
Supplemental Disclosures: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash paid (received) during the year for: | | | | | | | | | | | | | | | | | | | | | | | | |
| Income taxes | | $ | (853 | ) | | $ | (636 | ) | | $ | 8,906 | | | $ | 26,413 | | | $ | (853 | ) | | $ | (636 | ) |
| | | | | | | | | | | | | | | |
| Interest | | $ | 25,740 | | | $ | 21,181 | | | $ | 20,158 | | | $ | 28,470 | | | $ | 25,740 | | | $ | 21,181 | |
| | | | | | | | | | | | | | | |
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 | | $ | 2,578 | | | $ | 223,934 | | | $ | — | | | $ | 406,368 | | | $ | 2,578 | | | $ | 223,934 | |
| | | | | | | | | |
| Extinguishment of pre-acquisition liabilities, net | | | $ | 6,663 | | | $ | — | | | $ | — | |
| | | | | | | | | |
| Total liabilities assumed | | | — | | | | 144,644 | | | | — | | | $ | 2,558 | | | | — | | | $ | 144,644 | |
| | | | | | | | | | | | | | | |
| | | $ | — | | | $ | 79,290 | | | $ | — | | | $ | 410,473 | | | $ | — | | | $ | 79,290 | |
| | | | | | | | | | | | | | | |
| Short term borrowings for deposit on asset | | | $ | 5,000 | | | | — | | | | — | |
| | | | | | | | | |
| Sale of assets in exchange for note receivable | | $ | — | | | | 2,000 | | | | — | | | $ | — | | | $ | — | | | $ | 2,000 | |
| | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
6569
THE GEO GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Fiscal Years Ended December 30, 2007, December 31, 2006, and January 1, 2006 and January 2, 2005
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated
| | | | | | | | | | | | | | | | | Accumulated
| | | | | | | |
| | | Common Stock | | Additional
| | | | Other
| | Treasury Stock | | Total
| | | Common Stock | | Additional
| | | | Other
| | Treasury Stock | | Total
| |
| | | Number
| | | | Paid-In
| | Retained
| | Comprehensive
| | Number
| | | | Shareholders’
| | | Number
| | | | Paid-In
| | Retained
| | Comprehensive
| | Number
| | | | Shareholders’
| |
| | | of Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | of Shares | | Amount | | Equity | | | of Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | of Shares | | Amount | | Equity | |
| | | | | | | | | (In thousands) | | | | | | | | | (In thousands) | |
| | |
Balance, December 28, 2003 | | | 14,000 | | | $ | 140 | | | $ | 64,558 | | | $ | 147,845 | | | $ | (3,338 | ) | | | (18,000 | ) | | $ | (131,880 | ) | | $ | 77,325 | | |
| Proceeds from stock options exercised | | | 261 | | | | 3 | | | | 1,588 | | | | — | | | | — | | | | — | | | | — | | | | 1,591 | | |
| Tax benefit related to employee stock options | | | — | | | | — | | | | 773 | | | | — | | | | — | | | | — | | | | — | | | | 773 | | |
| Acceleration of vesting on employee stock options | | | — | | | | — | | | | 38 | | | | — | | | | — | | | | — | | | | — | | | | 38 | | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | 16,815 | | | | — | | | | — | | | | — | | | | — | | |
| Change in foreign currency translation, net of income tax expense of $384 | | | — | | | | — | | | | — | | | | — | | | | 600 | | | | — | | | | — | | | | — | | |
| Minimum pension liability adjustment, net of income tax expense of $480 | | | — | | | | — | | | | — | | | | — | | | | 661 | | | | — | | | | — | | | | — | | |
| Unrealized gain on derivative instruments, net of income tax expense of $815 | | | — | | | | — | | | | — | | | | — | | | | 1,936 | | | | — | | | | — | | | | — | | |
| Total comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 20,012 | | |
| | | | | | | | | | | | | | | | | | |
Balance, January 2, 2005 | | | 14,261 | | | | 143 | | | | 66,957 | | | | 164,660 | | | | (141 | ) | | | (18,000 | ) | | | (131,880 | ) | | | 99,739 | | | | 28,522 | | | $ | 285 | | | $ | 66,815 | | | $ | 164,660 | | | $ | (141 | ) | | | (36,000 | ) | | $ | (131,880 | ) | | $ | 99,739 | |
| Proceeds from stock options exercised | | | 276 | | | | 2 | | | | 2,997 | | | | — | | | | — | | | | — | | | | — | | | | 2,999 | | | | 552 | | | | 6 | | | | 2,993 | | | | — | | | | — | | | | — | | | | — | | | | 2,999 | |
| Tax benefit related to employee stock options | | | — | | | | — | | | | 731 | | | | — | | | | — | | | | — | | | | — | | | | 731 | | | | — | | | | — | | | | 731 | | | | — | | | | — | | | | — | | | | — | | | | 731 | |
| Acceleration of vesting on employee stock options | | | — | | | | — | | | | 51 | | | | — | | | | — | | | | — | | | | — | | | | 51 | | | | — | | | | — | | | | 51 | | | | — | | | | — | | | | — | | | | — | | | | 51 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | 7,006 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 7,006 | | | | — | | | | — | | | | — | | | | — | |
| Change in foreign currency translation, net of income tax benefit of $2,158 | | | — | | | | — | | | | — | | | | — | | | | (3,375 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3,375 | ) | | | — | | | | — | | | | — | |
| Minimum pension liability adjustment, net of income tax expense of $8 | | | — | | | | — | | | | — | | | | — | | | | 12 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 12 | | | | — | | | | — | | | | — | |
| Unrealized gain on derivative instruments, net of income tax expense of $625 | | | — | | | | — | | | | — | | | | — | | | | 1,431 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,431 | | | | — | | | | — | | | | — | |
| Total comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5,074 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5,074 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, January 1, 2006 | | | 14,537 | | | | 145 | | | | 70,736 | | | | 171,666 | | | | (2,073 | ) | | | (18,000 | ) | | | (131,880 | ) | | | 108,594 | | | | 29,074 | | | | 291 | | | | 70,590 | | | | 171,666 | | | | (2,073 | ) | | | (36,000 | ) | | | (131,880 | ) | | | 108,594 | |
| Proceeds from stock options exercised | | | 487 | | | | 5 | | | | 5,400 | | | | — | | | | — | | | | — | | | | — | | | | 5,405 | | | | 973 | | | | 10 | | | | 5,395 | | | | — | | | | — | | | | — | | | | — | | | | 5,405 | |
| Tax benefit related to employee stock options | | | — | | | | — | | | | 2,793 | | | | — | | | | — | | | | — | | | | — | | | | 2,793 | | | | — | | | | — | | | | 2,793 | | | | — | | | | — | | | | — | | | | — | | | | 2,793 | |
| Stock based compensation expense | | | — | | | | — | | | | 374 | | | | — | | | | — | | | | — | | | | — | | | | 374 | | | | — | | | | — | | | | 374 | | | | — | | | | — | | | | — | | | | — | | | | 374 | |
| Restricted stock granted | | | 225 | | | | 2 | | | | (2 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | 450 | | | | 4 | | | | (4 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Amortization of restricted stock | | | — | | | | — | | | | 966 | | | | — | | | | — | | | | — | | | | — | | | | 966 | | | | — | | | | — | | | | 966 | | | | — | | | | — | | | | — | | | | — | | | | 966 | |
| Issuance of treasury stock in conjunction with offering | | | 4,500 | | | | 45 | | | | 66,921 | | | | — | | | | — | | | | 4,500 | | | | 32,970 | | | | 99,936 | | | | 9,000 | | | | 90 | | | | 66,876 | | | | — | | | | — | | | | 9,000 | | | | 32,970 | | | | 99,936 | |
| Buyout of stock options | | | — | | | | — | | | | (3,955 | ) | | | — | | | | — | | | | — | | | | — | | | | (3,955 | ) | | | | | | | | | | | (3,955 | ) | | | | | | | | | | | | | | | | | | | (3,955 | ) |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | 30,031 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 30,031 | | | | — | | | | — | | | | — | | | | — | |
| Change in foreign currency translation, net of income tax expense of $2,356 | | | — | | | | — | | | | — | | | | — | | | | 3,846 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,846 | | | | — | | | | — | | | | — | |
| Minimum pension liability adjustment, net of income tax benefit of $1,259 | | | — | | | | — | | | | — | | | | — | | | | (1,933 | ) | | | — | | | | — | | | | — | | |
| Unrealized gain on derivative instruments, net of income tax expense of $1,121 | | | — | | | | — | | | | — | | | | — | | | | 2,553 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,553 | | | | — | | | | — | | | | — | |
| Total comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 34,497 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 36,430 | |
| Adoption of FAS 158 (Note 15) | | | | — | | | | — | | | | — | | | | — | | | | (1,933 | ) | | | — | | | | — | | | | (1,933 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2006 | | | 19,749 | | | $ | 197 | | | $ | 143,233 | | | $ | 201,697 | | | $ | 2,393 | | | | (13,500 | ) | | $ | (98,910 | ) | | $ | 248,610 | | | | 39,497 | | | | 395 | | | | 143,035 | | | | 201,697 | | | | 2,393 | | | | (27,000 | ) | | | (98,910 | ) | | | 248,610 | |
| Adoption of FIN 48 January 1, 2007 (Note 17) | | | | | | | | | | | | | | | | (2,471 | ) | | | | | | | | | | | | | | | (2,471 | ) |
| Proceeds from stock options exercised | | | | 267 | | | | 3 | | | | 1,236 | | | | — | | | | — | | | | — | | | | — | | | | 1,239 | |
| Tax benefit related to employee stock options | | | | — | | | | — | | | | 3,061 | | | | — | | | | — | | | | — | | | | — | | | | 3,061 | |
| Stock based compensation expense | | | | — | | | | — | | | | 935 | | | | — | | | | — | | | | — | | | | — | | | | 935 | |
| Restricted stock granted | | | | 300 | | | | 3 | | | | (3 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Restricted stock cancelled | | | | (13 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Amortization of restricted stock | | | | — | | | | — | | | | 2,474 | | | | — | | | | — | | | | — | | | | — | | | | 2,474 | |
| Issuance of treasury stock in conjunction with offering | | | | 10,925 | | | | 109 | | | | 187,354 | | | | — | | | | — | | | | 10,925 | | | | 40,022 | | | | 227,485 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | — | | | | — | | | | — | | | | 41,845 | | | | — | | | | — | | | | — | | | | — | |
| Change in foreign currency translation, net of income tax expense of $180 | | | | — | | | | — | | | | — | | | | — | | | | 2,898 | | | | — | | | | — | | | | — | |
| 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 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 46,372 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 30, 2007 | | | | 50,976 | | | $ | 510 | | | $ | 338,092 | | | $ | 241,071 | | | $ | 6,920 | | | | (16,075 | ) | | $ | (58,888 | ) | | $ | 527,705 | |
| | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
6670
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended December 30, 2007, December 31, 2006, and January 1, 2006 and January 2, 2005
| |
| 1. | Summary of Business Operations and Significant Accounting Policies |
The GEO Group, Inc., a Florida corporation, and subsidiaries (the “Company”) is a leading developer and manager of privatized correctional, detention and mental health residential treatment services facilities located in the United States, Australia, South Africa, the United Kingdom and Canada. Until July 9, 2003,
On March 23, 2007, the Company wassold in a majority owned subsidiary of The Wackenhut Corporation, (“TWC”). TWC previously owned 12 millionfollow-on public equity offering 5,462,500 shares of its common stock at a price of $43.99 per share, (10,925,000 shares of its common stock at a price of $22.00 per share reflecting the Company’s common stock.two-for-one stock split). All shares were issued from treasury. The aggregate net proceeds to the Company from the offering (after deducting underwriter’s discounts and expenses of $12.8 million) were $227.5 million. On March 26, 2007, the Company utilized $200.0 million of the net proceeds from the offering to repay outstanding debt under the Term Loan B portion of the Third Amended and Restated Credit Agreement, refered to as the Senior Credit Facility (Note 11). The Company used the balance of the proceeds from the offering for general corporate purposes, which included working capital, capital expenditures and potential acquisitions of complementary businesses and other assets.
On January 24, 2007, the Company completed its previously announced acquisition of CentraCore Properties Trust (“CPT”), a Maryland real estate investment trust, pursuant to an Agreement and Plan of Merger, dated as of September 19, 2006 (the “Merger Agreement”), by and among the Company, GEO Acquisition II, Inc., a direct wholly-owned subsidiary of the Company (“Merger Sub”) and CPT. Under the terms of the Merger Agreement, CPT merged with and into Merger Sub (the “Merger”), with Merger Sub being the surviving corporation of the Merger.
As a result of the Merger, each share of common stock of CPT (collectively, the “Shares”) was converted into the right to receive $32.5826 in cash, inclusive of a pro-rated dividend for all quarters or partial quarters for which CPT’s dividend had not yet been paid as of the closing date. In addition, each outstanding option to purchase CPT common stock (collectively, the “Options”) having an exercise price less than $32.00 per share was converted into the right to receive the difference between $32.00 per share and the exercise price per share of the option, multiplied by the total number of shares of CPT common stock subject to the option. The Company paid an aggregate purchase price of approximately $427.6$421.6 million for the acquisition of CPT, inclusive of the payment of approximately $367.6$368.3 million in exchange for the Sharescommon stock and the Options,options, the repayment of approximately $40.0 million in CPT debt and the payment of approximately $20.0$13.3 million in transaction related fees and expenses. The Company financed the acquisition through the use of $365.0 million in new borrowings under a new Term Loan B and approximately $62.6$65.7 million in cash on hand. The Company deferred debt issuance costs of $9.1 million related to the new $365 million term loan. These costs are being amortized over the life of the term loan. As a result of the Acquisition,acquisition, the Company will no longer havehas ongoing lease expense related to the properties the Company previously leased from CPT. However, the Company will have increased depreciation expense reflecting its ownership of the properties and higher interest expense as a result of borrowings used to fund the acquisition.
On June 12, 2006, the Company sold in a follow-on public offering 3,000,000 shares of its common stock at a price of $35.46 per share (4,500,000(9,000,000 shares of its common stock at a price of $23.64$11.82 reflecting the 3 forstock splits effective October 2, stock split)2006 and June 1, 2007). All shares were issued from treasury. The aggregate net proceeds (after deducting underwriter’s discounts and expenses)expenses of $6.4 million) was approximately $100$100.0 million. On June 13, 2006, the Company utilized approximately $74.6 million of the proceeds to repay all outstanding debt under the term loan portion of the Company’s Senior Credit Facility. In addition, on August 11, 2006, the Company used $4.0 million of the proceeds of the offering to purchase from certain directors, executive officers and employees stock options that were currently outstanding and exercisable, and which were due to expire within the next three years. The balance of the net proceeds was used for general corporate purposes including working capital, capital expenditures and the acquisition of CPT.
On August 10, 2006, the Board of Directors declared a3-for-2 stock split of the Company’s common stock. The stock split took effect on October 2, 2006 with respect to stockholders of record on September 15, 2006. Following the stock split, the shares outstanding increased from 13.0 million to 19.5 million. All share and per share data has been adjusted to reflect the stock split.
On November 4, 2005, the Company completed the acquisition of Correctional Services Corporation (CSC), a Florida-based provider of privatized jail, community corrections and alternative sentencing services. Under the terms of the merger, the Company acquired for cash, 100% of the 10.2 million outstanding shares of CSC common stock for $6.00 per share or approximately $62.1 million. As a result of the merger, the
67
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company became responsible for supervising the operation of the sixteen adult correctional and detention facilities, totaling 8,037 beds, formerly run by CSC. Immediately following the purchase of CSC, the Company sold Youth Services International, Inc., the former juvenile services division of CSC, for $3.75 million, $1.75 million of which was paid in cash and the remaining $2.0 million of which was paid in the form of a promissory note accruing interest at a rate of 6% per annum. Principal and interest are due quarterly. The annual maturities are $0.7 million in 2007, and $0.7 million in 2008.
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 years 2007, 2006 and 2005 each included 52 weeks. Fiscal year 2004 included 53 weeks. The Company reports the results of its South African equity affiliate, South
71
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
African Custodial Services Pty. Limited, (“SACS”), and its consolidated South African entity, South African Custodial Management Pty. Limited (“SACM”) on a calendar year end, due to the availability of information.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and all controlled subsidiaries. Investments in 50% owned affiliates, which the Company does not control, are accounted for under the equity method of accounting. Intercompany transactions and balances have been eliminated.eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation. These prior year amounts reclassified include: (i) Facility construction and design, which was classified in fiscal year ended 2006 as “other” in the Operating and Reporting Segment (Note 16); (ii) construction retainage payable, included in accrued expenses in the accompanying balance sheets for the fiscal years ended 2007 and 2006, was reclassified from accounts payable in fiscal 2006; (iii) facility construction in progress has been reclassified in 2006 from buildings and improvements (Note 5); and (iv) certain amounts have been reclassified from Accrued expenses — Other (Note 10).
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, employer group health insurance, percentage of completion and estimated cost to complete for construction projects, stock based compensation, allowance for doubtful accounts and accrued vacation. 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 fair when considered in conjunction with the consolidated financial statements taken as a 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.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of these items. The carrying value of the Company’s long-term debt related to its Senior Credit Facility (See Note 10)11) and non-recourse debt approximates fair value based on the variable interest rates on the debt. For the Company’s 81/4% Senior Unsecured Notes, the stated value and fair value based on quoted market rates was $150.0 million and $153.8$151.5 million, respectively, at December 31, 2006.30, 2007. For the Company’s non-recourse debt related to the South Texas Detention Complex and Northwest Detention Center, the combined stated value and fair value based on quoted market rates was $97.3$88.0 million and $93.2$85.7 million, respectively, at December 31, 2006.30, 2007.
68
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash and Cash Equivalents
Cash and cash equivalents include all interest-bearing deposits or investments with original maturities of three months or less.
72
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounts Receivable
The Company extends credit to the governmental agencies it contracts 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, the Company regularly reviews outstanding receivables, and provides 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. The Company maintains reserves for potential credit losses, and such losses traditionally have been within its expectations.
Notes Receivable
Immediately following the purchase of CSC in November 2005, the Company sold Youth Services International, Inc., the former juvenile services division of CSC, for $3.75 million, $1.75 million of which was paid in cash and the remaining $2.0 million of which was paid in the form of a promissory note accruing interest at a rate of 6% per annum. Subsequently, during 2006, the Company received approximately $2.0 million in additional sales proceeds, consisting of approximately $1.5 million in cash and a $0.5 million increase in the promissory note related to the final purchase price of YSI. Principal and interest are due quarterly, and the remaining balance of $1.0 million is due in November 2008. The balance of $1.0 million and $1.4 million are included in accounts receivable in the consolidated balance sheets as of December 30, 2007 and December 31, 2006, respectively.
The Company has notes receivable from its former joint venture partner in the United Kingdom related to a subordinated loan made to various projects while an active member of the partnership. The balances of $5.1 million and $5.0 million are included in other current assets and other non current assets in the consolidated balance sheets as of December 30, 2007 and December 31, 2006, respectively. The notes bear interest at a rate of 13%, have semi-annual payments due June 15 and December 15 through June 2018.
Inventories
Food and supplies inventories are carried at the lower of cost or market, on afirst-in first-out basis and are included in “otherother current assets”assets in the accompanying consolidated balance sheets. Uniform inventories are carried at amortized cost and are amortized over a period of eighteen months. The current portion of unamortized uniforms is included in “otherother current assets’’assets and the long-term portion is included in “other non currentnon-current assets” in the accompanying consolidated balance sheets.
Restricted Cash
The Company had $14.0 million inhas current restricted cash and cash equivalents and $19.7 million in long-term restricted cash equivalents atas of December 30, 2007 and December 31, 2006. The2006, presented as such in the accompanying balance sheets. These balances in those accounts are primarily attributable primarily to amounts held in escrow or in trust in connection with the 1,020-bed1,904-bed South Texas Detention Complex in Frio County, Texas and the 890-bed1000-bed Northwest Detention Center in Tacoma, Washington.
Additionally, the Company’s wholly owned Australian subsidiary financed a facility’s development and subsequent expansion in 2003 with long-term debt obligations, which are non-recourse to the Company. As a condition of the loan, the Company is required to maintain a restricted cash balance of AUD 5.0 million, approximately $3.9 million at December 31, 2006. The term of the non-recourse debt is through 2017.(Note ll).
Costs of Acquisition Opportunities
Internal costs associated with a business combination are expensed as incurred. Direct and incremental costs related to successful negotiations where the Company is the acquiring company are capitalized as part of
73
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the cost of the acquisition. AsThe Company wrote off $1.4 million, $0 and $0 of December 31, 2006 the Company had $1.1 million of capitalized costs. Costscosts associated with unsuccessful negotiations are expensed when itrelated to acquisition opportunities for the fiscal years ended December 30, 2007, December 31, 2006, and January 1, 2006, respectively, which is probable thatincluded in General and Administrative expenses in the acquisition will not occur. During 2004, the Company wrote off approximately $1.3 millionaccompanying consolidated statements of costs.income.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Buildings and improvements are depreciated over 2 to 40 years. Equipment and furniture and fixtures are depreciated over 3 to 10 years. Accelerated methods of depreciation are generally used for income tax purposes. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the
69
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 period over which services are expected to be rendered by the asset. Maintenance and repairs are expensed as incurred. Interest is capitalized in connection with the construction of correctional and detention facilities. Capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. ApproximatelyDuring fiscal years ended 2007 and 2006, the Company capitalized $1.2 million and $0.2 million of interest cost, was capitalized in 2006 related to the expansion of an existing facility. No interest cost was capitalized in 2005 and 2004.respectively.
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.
Long-Lived Assets
The Company reviews long-lived assets to be held and used and amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. 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. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Management has reviewed the Company’s long-lived assets and determined that there are no events requiring impairment loss recognition. In 2005, the Company recorded a charge of $20.9 million related to the Michigan Facility. See Note 12. 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 which might impair recovery of long-lived assets. In 2005, the Company recorded an impairment charge of $20.9 million related to the cancellation of its contract for the Michigan Correctional Facility (“Michigan”) which is included in operating expenses in the accompanying consolidated statement of income for the fiscal year ended January 1, 2006. There have been no other impairment charges recorded on the asset. The book value of the Michigan Facility at December 31, 200630, 2007 is $12.6$12.3 million.
Goodwill and Other Intangible Assets
The Company’s goodwill at December 31, 2006 consisted of $24.0 million related to the November 4, 2005 acquisition of CSC (See Note 2: Acquisition), $2.5 million related to the October 12, 2006 acquisition of RSI and $0.6 million related to its Australian subsidiary and at January 1, 2006 consisted of $35.3 million related to the November 4, 2005 acquisition of CSC and $0.6 million associated with its Australian subsidiary. Goodwill related to CSC is included in the U.S. corrections segment and goodwill related to RSI and Australia is included in the International Services segment. With the adoption of Financial Accounting Standard (“FAS”) No. 142, the Company’s goodwill is no longer amortized, but is subject to an annual impairment test. There was no impairment of goodwill as a result of the annual impairment test completed during the fourth quarter of 2006 and 2005 related to goodwill associated with CSC or the Company’s Australian subsidiary. The annual impairment test for the goodwill related to the acquisition of RSI will be on the first day of the fourth quarter of 2007.
Acquired intangible assets are separately recognized 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’s intangible assets were recorded in connection with the acquisition of CSC andCorrectional Services Corporation (“CSC”), have finite lives ranging from4-17 years and are amortized using a straight-line method. The Company reviews finite-lived intangible assets for impairment whenever an event occurs or circumstances change which indicate that the carrying amount of such assets may not be fully recoverable. See Note 8.
7074
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
for impairment whenever an event occurs or circumstances change which indicate that the carrying amount of such assets may not be fully recoverable.
With the adoption of Financial Accounting Standard (“FAS”) No. 142, the Company’s goodwill is no longer amortized, but is subject to an annual impairment test. There was no impairment of goodwill associated with CSC or the Company’s Australian subsidiary as a result of the annual impairment tests completed as of the beginning of the fourth quarters of 2007 and 2006. The annual impairment test for the goodwill related to the acquisition of RSI was performed in the fourth quarter of 2007 and no impairments were recognized as a result. See Note 9.
Variable Interest Entities
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation FIN No. 46, “Consolidation of Variable Interest Entities,” which addressed consolidation by a business of variable interest entities in which it is the primary beneficiary. In December 2003, the FASB issued FIN No. 46R which replaced FIN No. 46. The Company’sCompany has determined its 50% owned South African joint venture in South African Custodial Services Pty. Limited, which the Company refers to as SACS, is a variable interest entity.entity (“VIE”) in accordance with Financial Interpretation No. 46 Revised, “Consolidation of Variable Interest Entities,” (“FIN 46R”) which addressed consolidation by a business of variable interest entities in which it is the primary beneficiary. The Company determined that it is not the primary beneficiary of SACS and as a result it is not required to consolidate SACS under FIN 46R. The Company accounts for SACS as an equity affiliate. SACS was established in 2001, to design, finance and build the Kutama Sinthumule Correctional Center. Subsequently, SACS was awarded a 25 year contract to design, construct, manage and finance a facility in Louis Trichardt, South Africa. SACS, based on the terms of the contract with the government, was able to obtain long-term financing to build the prison. The financing is fully guaranteed by the government, except in the event of default, for which it provides an 80% guarantee. Separately, SACS entered into a long-term operating contract with South African Custodial Management (Pty) Limited (“SACM”) to provide security and other management services and with SACS’ joint venture partner to provide purchasing, programs and maintenance services upon completion of the construction phase, which concluded in February 2002. The Company’s maximum exposure for loss under this contract is $15.6$16.6 million, which represents the Company’s initial investment and the guarantees discussed in Note 10.
In February 2004, CSC was awarded a contract by the Department of Homeland Security, Bureau of Immigration and Customs Enforcement (“ICE”) to develop and operate a 1,020 bed detention center in Frio County Texas. South Texas Local Development Corporation (“STLDC”) was created and issued $49.5 million in taxable revenue bonds to finance the construction of the detention complex. Additionally, CSC provided a $5 million subordinated note to STLDC for initial development. The Company determined that it is the primary beneficiary of STLDC and consolidates the entity as a result. STLDC is the owner of the complex and entered into a development agreement with CSC to oversee the development of the complex. In addition, STLDC entered into an operating agreement providing CSC the sole and exclusive right to operate and manage the complex. The operating agreement and bond indenture require the revenue from CSC’s 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 CSC to cover CSC’s operating expenses and management fee. CSC is responsible for the entire operations of the facility including all operating expenses and is required to pay 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 CSC and STLDC. The bonds are fully insured and the sole source of payment for the bonds is the operating revenues of the complex.
Deferred Revenue
Deferred revenue primarily represents the unamortized net gain on the development of properties and on the sale and leaseback of properties by the Company. The Company leases these properties back from CPT under operating leases. Deferred revenue is being amortized over the lives of the leases and is recognized in income as a reduction of rental expenses.11.
Revenue Recognition
In accordance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”, as amended by SAB No. 104, “Revenue Recognition”, and related interpretations, 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. Certain of the Company’s contracts have provisions upon which a portion of the revenue is based on its performance of certain targets, as defined in the specific contract. In these cases, the Company recognizes revenue when the amounts are fixed and determinable and the time period over which the conditions have been satisfied has lapsed. In many instances, the Company is party to more than one contract with a single entity. In these instances, each contract is accounted for separately.
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THE GEO GROUP, INC.
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Project development and design revenues are recognized as earned on a percentage of completion basis measured by the percentage of costs incurred to date as compared to 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 contract price, costs related to unapproved change orders are expensed in the period in
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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. Contract 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. When evaluating multiple element arrangements, the Company follows the provisions of Emerging Issues Task Force (EITF) Issue00-21, Revenue Arrangements with Multiple Deliverables(EITF 00-21).EITF 00-21 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 project development services and subsequent management services, the amount of the consideration from an arrangement is allocated to the delivered element based on the residual method and the elements are recognized as revenue when revenue recognition criteria for each element is met. The fair value of the undelivered elements of an arrangement is based on specific objective evidence.
We extend credit to the governmental agencies we contract 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, we regularly review outstanding receivables, and provide estimated losses through an allowance for doubtful accounts. In evaluating the level of established loss reserves, we make judgments regarding our 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. We also perform ongoing credit evaluations of our customers’ financial condition and generally do not require collateral. We maintain reserves for potential credit losses, and such losses traditionally have been within our expectations.
Lease Revenue
In connection with the CPT acquisition in January 2007, the Company took ownership of two facilities that had existing leases with unrelated third parties. As a result of the ownership in these two leased facilities, the Company acts as the lessor relative to these two properties. The first lease has an initial term which expires in July 2013 with an option to terminate in July 2010. The second lease has a term of ten years and expires in May 2013. Both of these leases have options to extend for up to three additional five year terms. Rental income received on these leases for the fiscal year ended December 30, 2007 was $4.0 million and the carrying value of these assets included in property and equipment at December 30, 2007 was $41.4 million, net of accumulated depreciation of $1.1 million.
| | | | | |
Fiscal Year | | Annual Rental | |
| | | (In thousands) | |
| |
| 2008 | | $ | 4,354 | |
| 2009 | | | 4,434 | |
| 2010 | | | 3,804 | |
| 2011 | | | 2,892 | |
| 2012 | | | 2,978 | |
| Thereafter | | | 1,231 | |
| | | | | |
| | | $ | 19,693 | |
| | | | | |
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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred Revenue
Deferred revenue as of December 31, 2006 primarily represented the unamortized net gain on development of properties and was accounted for as a sale and leaseback of properties by the Company to CPT. Previously, the Company leased these properties from CPT under operating leases and deferred the related gain. The unamortized deferred revenue was recognized as a reduction of the net assets acquired in the business combination with CPT. The balance as of December 30, 2007 was $0.
Income Taxes
The Company accounts for income taxes in accordance with FAS No. 109, “Accounting for Income Taxes.”Taxes” (“FAS 109”) as clarified by FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN 48”). Under this method, 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. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which it operates, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies varies, adjustments to the carrying value of the deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of FAS 109.
FIN 48 requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding. On October 1, 2006 the Company initiated a3-for-2 stock split. All earnings per share amounts and common shares amounts have been restated to reflect the stock split. 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.
On May 1, 2007, the Company’s Board of Directors declared a two-for-one stock split of the Company’s common stock. The stock split took effect on June 1, 2007 with respect to stockholders of record on May 15, 2007. Following the stock split, the Company’s shares outstanding increased from 25.4 million to 50.8 million. All share and per share data has been adjusted to reflect these stock splits.
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.
Reserves for Insurance Losses
Claims for which the Company is insured arising from its U.S. operations that have an occurrence date of October 1, 2002 or earlier are handled by TWC and are commercially insured up to an aggregate limit of between $25.0 million and $50.0 million, depending on theThe nature of the claimCompany’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, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and the applicable policy termswage and conditions. With respect to
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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
hour claims), property loss claims, environmental claims, automobile liability claims, 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. 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 is insured arising after October 1, 2002, themaintains insurance coverage for these general types of claims, except for claims relating to employment matters, for which it carries no insurance.
The Company currently maintains a general liability policy for all U.S. corrections operations with $52.0limits of $62.0 million per occurrence and in the aggregate. On October 1, 2004, the Company increased its deductible on this general liability policy from $1.0 million to $3.0 million for each claim that occursoccurring after October 1, 2004. GEO Care,
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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inc. is separately insured for general and professional liability. Coverage is maintained with limits of $10.0 million per occurrence and in the aggregate subject to a $3.0 million self-insured retention. The Company also maintains insurance to cover property and casualty risks, workers’ compensation, medical malpractice, environmental liability and automobile liability. 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. The Company also carries various types of insurance with respect to its operations in South Africa, the United Kingdom and Australia. There can be no assurance that the Company’s insurance coverage will be adequate to cover all claims to which the Companyit may be exposed.
Since the Company’s insurance policies generally have high deductible amounts (including a $3.0 million per claim deductible under the general liability and auto liability policies and a $2.0 million per claim deductible under the workers’ compensation policy), losses are recorded as reported and a provision is made to cover losses incurred but not reported. Loss reserves are undiscounted and are computed based on independent actuarial studies. The Company’s management uses judgments in assessing loss estimates based on actuarial studies, which include actual claim amounts and loss development based on both the Company’s own historical experience and industry experience. If actual losses related to insurance claims significantly differ from the estimates, the Company’s financial condition and results of operations could be materially impacted.
CertainIn addition, certain of the Company’s facilities located in Florida and determined by insurers to be in high-risk hurricane areas carry substantial windstorm deductibles of up to $3.0 million.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 allour facilities to full replacement value.
Since the Company’s insurance policies generally have high deductible amounts, losses are recorded when reported and a further provision is made to cover losses incurred but not reported. Loss reserves are undiscounted and are computed based on independent actuarial studies. Because the Company is significantly self-insured, the amount of its insurance expense is dependent on its claims experience and its ability to control claims experience. If actual losses related to insurance claims significantly differ from management’s estimates, the Company’s financial condition and results of operations could be materially impacted.
Debt Issuance Costs
Debt issuance costs totaling $4.8$7.8 million and $7.0$4.8 million at December 31, 2006,30, 2007, and January 1,December 31, 2006, respectively, are included in other non currentnon-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.
Comprehensive Income
The Company’s comprehensive income is comprised of net income, foreign currency translation adjustments, unrealized gain (loss) on derivative instruments, and minimum pension liability adjustments in the Consolidated Statements of Shareholders’ Equity and Comprehensive Income.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, trade accounts receivable, short-term investments, 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
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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
evaluations of the credit standing of the financial institutions with which it deals. As of December 31, 2006,30, 2007, and January 1,December 31, 2006, the Company had no significant concentrations of credit risk except as disclosed in Note 16.
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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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
shareholders’ equity is translated at historical rates. Income statement items are translated at the average exchange rates for the year. The impact of foreign currency fluctuation is included in shareholders’ equity as a component of accumulated other comprehensive income (loss) and totaled $2.2$2.4 million at December 31, 200630, 2007 and $(0.9)$2.2 million as of January 1,December 31, 2006.
Financial Instruments
In accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related interpretations and amendments, the Company records derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value. 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 (loss) and reclassified into earnings when the hedged transaction affects earnings. Total accumulated other comprehensive income, (loss)net of tax, related to these cash flow hedges was $2.2$5.0 million and $(0.3)$2.2 million as of December 31, 200630, 2007 and January 1,December 31, 2006, respectively. For derivative instruments that are designated as and qualify as effective fair value hedges, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item 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
On January 2, 2006, the Company adopted FAS No. 123R, “Share-Based Payment” (FAS 123R), which revises FAS 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB25). FAS 123R requires companies to recognizeAccordingly, the Company recognizes the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards. The Company adopted FAS 123R using the modified prospective method. Under this method the Company recognizesrecognized compensation cost for all share-based payments granted after January 2, 2006, plus any awards granted to employees prior to January 1, 2006 that remainwere outstanding but unvested at that time.the adoption date. Under this method of adoption, no restatement of prior periods iswas made. 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 impact of the adoption of FAS 123R on the Company’s Consolidated Statement of Income for fiscal year 2006 is as follows (in thousands, except per share data):
| | | | | |
| | | 2006 | |
| |
| Stock-based compensation expense included in general and administrative expenses | | $ | 374 | |
| Tax benefit | | | (148 | ) |
| | | | | |
| Stock-based compensation expense related to employee stock options, net of tax | | $ | 226 | |
| | | | | |
| Effect of FAS 123R on basic earnings per share | | $ | (0.01 | ) |
| Effect of FAS 123R on diluted earnings per share | | $ | (0.01 | ) |
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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Prior to January 2, 2006, the Company recognized the cost of employee services received in exchange for equity instruments under the intrinsic value method in accordance with APB 25 and its related interpretations, which measured compensation cost as the excess, if any, of the quoted market price of the stock over the
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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
amount the employee must pay for the stock. Compensation expense for all of the Company’s equity-based awards was measured on the date the shares were granted. Accordingly, in accordance with APB 25 compensation expense for stock option awards was not recognized in the Consolidated Statementsconsolidated statement of Incomeincome for fiscal years 2005 and 2004.year 2005.
The following table reflects pro forma net income and earnings per share for the fiscal years ended January 1, 2006 and January 2,year 2005 had the Company elected to recognize the cost of employee services received in exchange for equity instruments based on the grant date fair value of those instruments in accordance with FAS 123 (in thousands, except per share data).
| | | | | | | | | | | | | |
| | | 2005 | | 2004 | | | 2005 | |
| |
| Net income — as reported | | $ | 7,006 | | | $ | 16,815 | | | $ | 7,006 | |
| Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (397 | ) | | | (765 | ) | | | (397 | ) |
| | | | | | | | | |
| Net income — pro forma | | $ | 6,609 | | | $ | 16,050 | | | $ | 6,609 | |
| | | | | | | | | |
| Basic earnings per share: | | | | | | | | | | | | |
| As reported | | $ | 0.49 | | | $ | 1.19 | | | $ | 0.24 | |
| | | | | | | | | |
| Pro forma | | $ | 0.46 | | | $ | 1.14 | | | $ | 0.23 | |
| | | | | | | | | |
| Diluted earnings per share: | | | | | | | | | | | | |
| As reported | | $ | 0.47 | | | $ | 1.15 | | | $ | 0.23 | |
| | | | | | | | | |
| Pro forma | | $ | 0.44 | | | $ | 1.10 | | | $ | 0.22 | |
| | | | | | | | | |
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 2007, 2006 2005 and 2004,2005, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
| |
| Risk free interest rates | | | 4.65 | % | | | 3.96 | % | | | 3.25 | % | | | 4.80 | % | | | 4.65 | % | | | 3.96 | % |
| Expected lives | | | 3-4 years | | | | 3-7 years | | | | 3-7 years | | | | 4-5 years | | | | 3-4 years | | | | 3-7 years | |
| Expected volatility | | | 41 | % | | | 39 | % | | | 40 | % | | | 40 | % | | | 41 | % | | | 39 | % |
| Expected dividend | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
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 lives 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. The risk-free rate for the periods within the contractual life of the award is based on the rate for tenfive year U.S. Treasury Bonds. See Note 14.Bonds, which is consistent with the expected term of the awards (Note 3).
Recent Accounting Pronouncements
In December 2007, the FASB issued FAS No. 141(R) “Applying the Acquisition Method”, which is effective for fiscal years beginning after December 15, 2008. This statement retains the fundamental requirements in FAS 141 that the acquisition method be used for all business combinations and for an acquirer to be identified for each business combination. FAS 141(R) broadens the scope of FAS 141 by requiring application of the purchase method of accounting to transactions in which one entity establishes control over another entity without necessarily transferring consideration, even if the acquirer has not acquired 100% of its target. Among other changes, FAS 141(R) applies the concept of fair value and “more likely than not” criteria to accounting for contingent consideration, and preacquisition contingencies. As a result of implementing the new standard, since transaction costs would not be an element of fair value of the target, they will not be
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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
considered part of the fair value of the acquirer’s interest and will be expensed as incurred. The Company does not expect that the impact of this standard will have a significant effect on the its financial condition and results of operations.
In December 2007, the FASB also issued FAS No. 160, “Accounting for Noncontrolling Interests”, which is effective for fiscal years beginning after December 15, 2008. This statement clarifies the classification of noncontolling interests in the consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and the holders of non-controlling interests. The Company does not expect that the adoption of this standard will have a significant impact on its financial condition, results or operations, cash flows or disclosures.
In February 2007, the FASB issued FAS No. 159, “Fair Value Option” which provides companies an irrevocable option to report selected financial assets and liabilities at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. FAS 159 is effective for entities as of the beginning of the first fiscal year that begins after November 15, 2007. The Company does not expect that the adoption of this standard will have a significant impact on its financial condition, results or operations, cash flows or disclosures.
In September 2006, the Financial Accounting Standards Board (FASB) issued FAS No. 157, (FAS 157), “Fair Value Measurements” (“FAS 157”), which establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. FAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. FAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currentlydoes not expect that the adoption of this standard will have a significant impact on its financial condition, results or operations, cash flows or disclosures.
On January 24, 2007, the Company completed the acquisition of CentraCore Properties Trust (“CPT”), a Maryland real estate investment trust, pursuant to an Agreement and Plan of Merger, dated as of September 19, 2006 (the “Merger Agreement”), by and among the Company, GEO Acquisition II, Inc., a direct wholly-owned subsidiary of the Company (“Merger Sub”) and CPT. Under the terms of the Merger Agreement, CPT merged with and into Merger Sub (the “Merger”), with Merger Sub being the surviving corporation of the Merger. The Company acquired CPT to ensure its long-term ownership, control, and utilization of the acquired facilities, while reducing its exposure to escalating facility useage costs. Prior to the acquisition, the Company leased eleven of the thirteen facilities acquired from CPT in connection with various management contracts with governmental agencies.
The Company paid an aggregate purchase price of $421.6 million for the acquisition of CPT, payment of approximately $368.3 million in exchange for the common stock and the options, the repayment of $40.0 million in CPT debt and the payment of $13.3 million in transaction related fees and expenses. The Company financed the acquisition through the use of $365.0 million in new borrowings under a new Term Loan B and $65.7 million in cash on hand. The Company deferred debt issuance costs of $9.1 million related to the new $365 million term loan. These costs are being amortized over the life of the term loan. As a result of the Acquisition, the Company no longer has ongoing lease expense related to the properties the Company previously leased from CPT. However, the Company did experience an increase in depreciation expense reflecting its ownership of the properties and higher interest expense as a result of borrowings used to fund the acquisition.
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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
evaluating the impact this standard will have on its financial condition, results
The allocation of operations, cash flows or disclosures.purchase price is summarized below (in thousands):
| | | | | |
| Current assets, net of cash acquired of $11,125 | | $ | 1,365 | |
| Property and equipment | | | 404,994 | |
| Other non-current assets | | | 9 | |
| | | | | |
| Total assets acquired | | | 406,368 | |
| | | | | |
| Other non-current liabilities | | | 2,558 | |
| | | | | |
| Total liabilities assumed | | | 2,558 | |
| | | | | |
| Net assets acquired, including direct transaction costs | | $ | 403,810 | |
| | | | | |
In September 2006, the FASB issued FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88 106, and 132(R)” (FAS 158). FAS 158 requires that the funded status of defined benefit postretirement plans be recognized on the Company’s balance sheet, and changes in the funded status be reflected in comprehensive income, effective for fiscal years ending after December 15, 2006. The funded status is measured as the difference between plan assets at fair value and the benefit obligation (the projected benefit obligation for pension plans or the accumulated benefit obligation for other post-retirement benefit plans). The Company was requiredWe expect any future adjustments to recognize the funded status of its defined benefit post-retirement benefit plans in its financial statements for its fiscal year ended December 31, 2006. The adoption of this standard reduced comprehensive income by $1.9 million as of December 31, 2006. FAS 158 also requires an entity to measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year, and recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. Since the Company currently has a measurement date of December 31 for all plans, this provision will not have a material impact in the year of adoption.
In June, 2006 the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies, among other things, the accounting for uncertain income tax positions by prescribing a minimum probability threshold that a tax position must meet before a financial statement income tax benefit is recognized. The minimum threshold is defined as a tax position that based solely on its technical merits is more likely than not to be sustained upon examination by the relevant taxing authority. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. FIN 48 must be applied to all existing tax positions upon adoption. The cumulative effect of applying FIN 48 at adoption is required to be reported separately as an adjustment to the opening balance of retained earnings in the year of adoption. FIN 48 is required to be implemented at the beginning of a fiscal year and is effective for the Company for fiscal 2007. The Company is finalizing, but has not yet determined, the impact of adopting FIN 48 on the financial statements for fiscal 2007.
In September 2006, the SEC Office of the Chief Accountant and Divisions of Corporation Finance and Investment Management released Staff Accounting Bulletin Number 108 (SAB 108), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The transition provisions of SAB 108 permit a registrant to adjust retained earnings for the cumulative effect of immaterial errors relating to prior years. The Company was required to adopt SAB 108 in its current fiscal year and there was no impact to its financial statementsgoodwill as a result of adoption.tax elections to be finalized in the first quarter of 2008. Such changes, if any, may result in additional adjustments to goodwill.
On November 4, 2005,Also included in the Company completed the acquisition of CSC, a Florida-based provider of privatized corrections/detention, community corrections and alternative sentencing services. The allocation of the purchase price is the $7.0 million reserve for this transactionthe termination of the management contract at January 1, 2006the 276-bed Jena Juvenile Justice Center which was preliminary. During 2006, the Company received information from its independent valuation specialists and finalizeddiscontinued in 2000. The fair values used in determining the purchase price allocation for the tangible assets were based on independent appraisal. The fair market value of the identifiable net assets acquired exceeds the cost of the acquisition by approximately $11.6 million. The excess over cost was allocated on a pro rata basis to reduce the amounts assigned related to property and equipment, other assetsequipment.
The results of operations of CPT are included in the Company’s results of operations beginning after January 24, 2007. Pro forma results are not presented for the fiscal year ended December 30, 2007 as the acquisition was completed at or near the beginning of the year and capital lease obligations. Thisthe results would be immaterial. CPT is included in the Company’s U.S. corrections reportable segment. See Note 16 for segment information. The following unaudited pro forma information resulted in an increase in goodwillcombines the consolidated results of $3.8 million netoperations of tax. Additionally during 2006 the Company completed certain tax elections and finalizedCPT as if the purchase price allocation related to taxes for these elections. The Company is continuing toacquisition had occurred at the beginning of fiscal year 2006 (in thousands except per share data):
Selected Unaudited Pro Forma
Consolidated Condensed Financial
Information
| | | | | |
| | | Fiscal Year Ended
| |
| | | December 31,
| |
| | | 2006 | |
| |
| Revenues | | $ | 866,155 | |
| Income from continuing operations | | | 21,278 | |
| Loss from discontinued operations | | | (277 | ) |
| | | | | |
| Net income | | $ | 21,001 | |
| | | | | |
| Net income per share — basic | | | | |
| Income from continuing operations | | $ | 0.62 | |
| Loss from discontinued operations | | | (0.01 | ) |
| | | | | |
| Net income per share — basic | | $ | 0.61 | |
| | | | | |
| Net income per share — diluted Income from continuing operations | | $ | 0.60 | |
| Loss from discontinued operations | | | (0.01 | ) |
| | | | | |
| Net income per share — diluted | | $ | 0.59 | |
| | | | | |
7682
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
review additional tax matters related to the acquisition that, when finalized, may result in additional purchase price adjustments.
In addition, during 2006, in connection with the CSC acquisition and related sale of Youth Services International (“YSI”), the Company received approximately $2.0 million in additional sales proceeds, consisting of approximately $1.5 million in cash and a $0.5 million increase in the promissory note related to the final purchase price of YSI. This reduced goodwill by $2.0 million. Finally, in 2006, the completion of certain tax elections related to the CSC acquisition decreased goodwill $13.2 million. The Company expects to finalize additional tax elections related to a CSC subsidiary during first quarter 2007 which may result in additional adjustments to goodwill.
On October 13, 2006, the Company acquired United Kingdom based Recruitment Solutions International (RSI) for approximately $2.3 million plus transaction related expenses. RSI is a privately-held provider of transportation services to The Home Office Nationality and Immigration Directorate. The acquisition of RSI did not materially impact 2006 results of operations.
As discussed in Note 1 above, the Company completed the acquisition of CPT on January 24, 2007. In connection with the acquisition, the Company acquired all of CPT’s assets and liabilities. Total assets at December 31, 2006 for CPT were approximately $252.1 million consisting primarily of net property and equipment with a net book value of $240.8 million. Total liabilities acquired were approximately $42.4 million at December 31, 2006.
| |
| 3. | Discontinued OperationsEquity Incentive Plans |
In January 2006, the Company adopted Financial Accounting Standard (“FAS”) No. 123(R), (“FAS 123R”), “Share-Based Payment” using the modified prospective method. Under the modified prospective method of adopting FAS No. 123(R), the Company recognizes compensation cost for all share-based payments granted after January 1, 2006, plus any prior awards granted to employees that remained unvested at that time. The Company formerlyuses a Black-Scholes option valuation model to estimate the fair value of each option awarded. The assumptions used to value options granted during the interim period were comparable to those used at December 31, 2006. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized.
As of December 30, 2007, the Company had through its Australian subsidiary, a contractawards outstanding under four equity compensation plans at December 30, 2007: 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 Department1994 Plan, the 1995 Plan and the 1999 Plan, the “Company Plans”).
The 2006 Plan was approved by the Board of Immigration, MulticulturalDirectors and Indigenous Affairs (“DIMIA”)by the Company’s shareholders on May 4, 2006. On May 1, 2007, the Company’s Board of Directors adopted and its shareholders approved several amendments to the 2006 Plan, including an amendment providing for the managementissuance of an additional 500,000 shares of the Company’s common stock which increased the total amount available for grant to 1,400,000 shares pursuant to awards granted under the plan and operationspecifying that up to 300,000 of Australia’s immigration centers. In 2003,such additional shares may constitute awards other than stock options and stock appreciation rights, including shares of restricted stock. See Restricted Stock for further discussion.
Except for 750,000 shares of restricted stock issued under the contract was not renewed, and effective February 29, 2004,2006 Plan as of December 30, 2007, all of the foregoing awards previously issued under the Company completed the transitionPlans consist of stock options. Although awards are currently outstanding under all of the contract and exitedCompany Plans, the management and operationCompany may only grant new awards under the 2006 Plan. As of December 30, 2007, the Company had the ability to issue awards with respect to 243,328 shares of common stock pursuant to the 2006 Plan.
Under the terms of the DIMIA centers.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 accordance withaddition, stock options granted to non-employee directors under the provisions1995 Plan become exercisable immediately. All stock options awarded under the Company Plans expire no later than ten years after the date of the grant.
83
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 2, 2005 | | | 4,774 | | | $ | 5.17 | | | | 5.7 | | | $ | 17,647 | |
| Granted | | | 42 | | | | 10.74 | | | | | | | | | |
| Exercised | | | (552 | ) | | | 5.44 | | | | | | | | | |
| Forfeited/Canceled | | | (44 | ) | | | 5.57 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Options outstanding at January 1, 2006 | | | 4,220 | | | $ | 5.18 | | | | 4.9 | | | $ | 10,778 | |
| Granted | | | 52 | | | | 7.71 | | | | | | | | | |
| Exercised | | | (974 | ) | | | 5.55 | | | | | | | | | |
| Forfeited/Canceled | | | (666 | ) | | | 7.07 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Options outstanding at December 31, 2006 | | | 2,632 | | | $ | 4.61 | | | | 5.3 | | | $ | 37,241 | |
| Granted | | | 431 | | | | 21.47 | | | | | | | | | |
| Exercised | | | (267 | ) | | | 4.65 | | | | | | | | | |
| Forfeited/Cancelled | | | (26 | ) | | | 13.04 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Options outstanding at December 30, 2007 | | | 2,770 | | | $ | 7.15 | | | | 5.0 | | | $ | 58,698 | |
| | | | | | | | | | | | | | | | | |
| Options exercisable at December 30, 2007 | | | 2,372 | | | $ | 5.14 | | | | 4.4 | | | $ | 55,044 | |
| | | | | | | | | | | | | | | | | |
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 2007 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 December 30, 2007. 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 December 30, 2007, December 31, 2006, and January 1, 2006 was $6.2 million, $9.5 million, and $1.9 million respectively.
For the years ended December 30, 2007 and December 31, 2006, the amount of stock-based compensation expense was $0.9 million and $0.4 million, respectively. The weighted average grant date fair value of options granted during the fiscal years ended December 30, 2007, December 31, 2006 and January 1, 2006 was $8.73, $3.22 and $3.47 per share, respectively.
84
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the status of the Company’s nonvested shares as of December 30, 2007 and changes during the fiscal year ending December 30, 2007:
| | | | | | | | | |
| | | | | | Wtd. Avg. Grant
| |
| | | Number of Shares | | | Date Fair Value | |
| |
| Option nonvested at January 1, 2007 | | | 242,308 | | | | 3.11 | |
| Granted | | | 431,000 | | | | 8.73 | |
| Vested | | | (259,946 | ) | | | 4.79 | |
| Forfeited | | | (15,700 | ) | | | 7.46 | |
| | | | | | | | | |
| Option nonvested at December 30, 2007 | | | 397,662 | | | | 7.94 | |
| | | | | | | | | |
As of December 30, 2007, the Company had $2.8 million of unrecognized compensation costs related to discontinued operations specified within FAS No. 144, “Accountingnon-vested stock option awards that are expected to be recognized over a weighted average period of 2.7 years. The total fair value of shares vested during the fiscal years ended December 30, 2007 and December 31, 2006 was $1.2 million and $0.6 million, respectively. Proceeds received from stock options exercises for 2007, 2006 and 2005 was $1.2 million, $5.4 million and $3.0 million, respectively. Tax benefits realized from tax deductions associated with option exercises and restricted stock activity for 2007, 2006 and 2005 totaled $3.1 million, $2.8 million and $0.7 million, respectively.
The following table summarizes information about the Impairment or Disposalstock options outstanding at December 30, 2007:
| | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | | Options Exercisable | |
| | | | | | Wtd. Avg.
| | | Wtd. Avg.
| | | | | | Wtd. Avg.
| |
| | | Number
| | | Remaining
| | | Exercise
| | | Number
| | | Exercise
| |
Exercise Prices | | Outstanding | | | Contractual Life | | | Price | | | Exercisable | | | Price | |
| |
| $2.63 — $2.63 | | | 6,000 | | | | 2.3 | | | $ | 2.63 | | | | 6,000 | | | $ | 2.63 | |
| $2.81 — $2.81 | | | 317,250 | | | | 2.1 | | | | 2.81 | | | | 317,250 | | | | 2.81 | |
| $3.10 — $3.10 | | | 372,000 | | | | 3.1 | | | | 3.10 | | | | 372,000 | | | | 3.10 | |
| $3.17 — $3.98 | | | 181,723 | | | | 5.1 | | | | 3.20 | | | | 181,723 | | | | 3.20 | |
| $4.67 — $4.67 | | | 428,728 | | | | 5.3 | | | | 4.67 | | | | 428,728 | | | | 4.67 | |
| $5.13 — $5.13 | | | 657,000 | | | | 4.1 | | | | 5.13 | | | | 657,000 | | | | 5.13 | |
| $5.30 — $7.70 | | | 297,381 | | | | 6.0 | | | | 6.84 | | | | 245,519 | | | | 6.77 | |
| $7.83 — $13.74 | | | 95,400 | | | | 6.7 | | | | 9.00 | | | | 81,600 | | | | 9.07 | |
| $20.63 — $20.63 | | | 40,000 | | | | 9.1 | | | | 20.63 | | | | 8,000 | | | | 20.63 | |
| $21.56 — $21.56 | | | 374,600 | | | | 9.1 | | | | 21.56 | | | | 74,600 | | | | 21.56 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 2,770,082 | | | | 5.0 | | | $ | 7.15 | | | | 2,372,420 | | | $ | 5.14 | |
| | | | | | | | | | | | | | | | | | | | | |
Restricted Stock
On May 9, 2007, the Company granted 300,000 shares of Long-Lived Assets”,restricted stock under the accompanying consolidated financial statements2006 Plan to key employees and notes reflectnon-employee directors. Restricted shares are converted into shares of common stock upon vesting on a one-for-one basis. The cost of these awards is determined using the operationsfair value of DIMIAthe Company’s common stock on the date of the grant and compensation expense is recognized over the vesting period. The
85
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
restricted shares that were granted during the year have a vesting period of four years, which begins one year from 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 1, 2006 | | | — | | | | — | |
| Granted | | | 450,000 | | | | 13.07 | |
| Vested | | | — | | | | — | |
| Forfeited/Canceled | | | (4,500 | ) | | | 13.07 | |
| | | | | | | | | |
| Restricted stock outstanding at December 31, 2006 | | | 445,500 | | | $ | 13.07 | |
| Granted | | | 300,000 | | | | 25.75 | |
| Vested | | | (110,360 | ) | | | 13.07 | |
| Forfeited/Canceled | | | (8,628 | ) | | | 13.07 | |
| | | | | | | | | |
| Restricted stock outstanding at December 30, 2007 | | | 626,512 | | | | 19.14 | |
| | | | | | | | | |
As of December 30, 2007, there was $9.2 million of unrecognized compensation cost related to unvested restricted shares that are expected to be recognized over a discontinued operationweighted average period of 2.8 years. The Company recognized $2.5 million and $1.0 million, respectively, in all periods presented.compensation expense related to the restricted shares during its fiscal year ended December 30, 2007 and December 31, 2006.
| |
| 4. | Discontinued Operations |
In New Zealand, the New Zealand Parliament in early 2005 repealed the law that permitted private prison operation resulting in the termination of the Company’s contract for the management and operation of the Auckland Central Remand Prison (“Auckland”). The Company hashad operated this facility since July 2000. The Company ceased operating the facility upon the expiration of the contract on July 13, 2005. The accompanying consolidated financial statements and notes reflect the operations of Auckland as a discontinued operation.
On January 1, 2006, the Company completed the sale of Atlantic Shores Hospital, a 72 bed private mental health hospital which the Company owned and operated since 1997, for approximately $11.5 million. The Company recognized a gain on the sale of this transaction of approximately $1.6 million or $1.0 million net of tax. Pre-tax profit related to the 72 bed private mental health hospital was $0.1 million, and $(0.2) million in 2005 and 2004, respectively. The accompanying consolidated financial statements and notes reflect the operations of the hospital and the related sale as a discontinued operation.
The Company no longer has any involvement in these entities and does not expect material future impacts related to these discontinued operations.
The following are the revenues related to Auckland and Atlantic Shores Hospital for the periods presented (in thousands):
| | | | | | | | | | | | | |
| | | 2007 | | 2006 | | 2005 |
| | | | | (In thousands) | | |
| |
| Revenues — Auckland | | | — | | | | — | | | | 7,256 | |
| Revenues — Atlantic Shores | | | 957 | | | | — | | | | 8,602 | |
7786
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following are the revenues related to DIMIA, Auckland and Atlantic Shores Hospital for the periods presented (in thousands):
| | | | | | | | | | | | | |
| | | 2006 | | | 2005 | | | 2004 | |
| | | | | | (In thousands) | | | | |
| |
| Revenues — DIMIA | | $ | — | | | $ | 20 | | | $ | 6,040 | |
| Revenues — Auckland | | | — | | | | 7,256 | | | | 12,940 | |
| Revenues — Atlantic Shores | | | — | | | | 8,602 | | | | 7,614 | |
| |
4.5. | Property and Equipment |
Property and equipment consist of the following at fiscal year end:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Useful
| | | | | | | Useful
| | | | | |
| | | Life | | 2006 | | 2005 | | | Life | | 2007 | | 2006 | |
| | | (Years) | | (In thousands) | | | (Years) | | (In thousands) | |
| |
| Land | | | — | | | $ | 12,911 | | | $ | 6,195 | | | | — | | | $ | 43,340 | | | $ | 12,911 | |
| Buildings and improvements | | | 2 to 40 | | | | 249,079 | | | | 258,008 | | | | 2 to 40 | | | | 637,532 | | | | 238,452 | |
| Leasehold improvements | | | 1 to 15 | | | | 54,000 | | | | 45,356 | | | | 1 to 15 | | | | 57,831 | | | | 51,604 | |
| Equipment | | | 3 to 10 | | | | 42,243 | | | | 32,541 | | | | 3 to 10 | | | | 45,527 | | | | 39,424 | |
| Furniture and fixtures | | | 3 to 7 | | | | 7,326 | | | | 9,309 | | | | 3 to 7 | | | | 7,668 | | | | 7,970 | |
| Facility construction in progress | | | | | | | | 87,987 | | | | 15,198 | |
| | | | | | | | | | | |
| | | | | | | $ | 365,559 | | | $ | 351,409 | | | | | | | $ | 879,885 | | | $ | 365,559 | |
| Less accumulated depreciation and amortization | | | | | | | (78,185 | ) | | | (69,173 | ) | | | | | | | (96,273 | ) | | | (78,185 | ) |
| | | | | | | | | | | |
| | | | | | | $ | 287,374 | | | $ | 282,236 | | | | | | | $ | 783,612 | | | $ | 287,374 | |
| | | | | | | | | | | |
The Company’s construction in progress primarily consists of development costs associated with the Facility construction and design segment for contracts with various federal, state and local agencies for which we have management contracts. Interest capitalized in property and equipment was $1.2 million and $0.2 million for the fiscal years ended December 30, 2007 and December 31, 2006, respectively.
Depreciation expense was $30.4 million, $19.7 million and $15.6 million for the fiscal years ended December 30, 2007, December 31, 2006 and January 1, 2006, respectively.
At December 30, 2007, 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 with accumulated amortization of $1.9 million. At December 31, 2006, 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 with accumulated amortization of $1.3 million. At January 1, 2006, the Company had $17.3 millionDepreciation of assets recorded under capital leases including $16.6for the fiscal years ended December 30, 2007 and December 31, 2006 was $0.9 million related to buildings and improvements, $0.6$1.2 million, related to equipmentrespectively, and $0.1 million related to leasehold improvements with accumulated amortizationis included in Depreciation and Amortization in the accompanying consolidated statements of $0.1 million.income.
| |
5.6. | Assets Held for Sale |
During Second Quarter 2007, the Company sold land in Australia that was previously classified as Held for Sale. The land was sold at a price that approximated the carrying value.
In conjunction with the acquisition of CSC, the Company acquired land and a building and assets associated with a program that had been discontinued by CSC in October 2003. The Company also owns land in Australia that it intends to sell. These assets meet the criteria to be classified as held for sale per the guidance of FASFinancial Accounting Standard No. 144 (“FAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets”, and have been recorded at their net realizable value of approximately $1.6$1.3 million at December 31, 2006.30, 2007. No depreciation has been recorded related to these assets in accordance with FAS No. 144.
| |
6.7. | 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.
7887
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The future minimum rentals to be received are as follows:
| | | | | | | | | |
| | | Annual
| | | Annual
| |
Fiscal Year | | Repayment | | | Repayment | |
| | | (In thousands) | | | (In thousands) | |
| |
| 2007 | | $ | 6,093 | | |
| 2008 | | | 6,142 | | | $ | 6,977 | |
| 2009 | | | 6,184 | | | | 7,131 | |
| 2010 | | | 6,235 | | | | 7,217 | |
| 2011 | | | 6,300 | | | | 7,320 | |
| 2012 | | | | 7,408 | |
| Thereafter | | | 36,150 | | | | 34,205 | |
| | | | | | | |
| Total minimum obligation | | $ | 67,104 | | | $ | 70,258 | |
| Less unearned interest income | | | (25,667 | ) | | | (24,144 | ) |
| Less current portion of direct finance lease | | | (2,166 | ) | | | (2,901 | ) |
| | | | | | | |
| Investment in direct finance lease | | $ | 39,271 | | | $ | 43,213 | |
| | | | | | | |
| |
7.8. | Derivative Financial Instruments |
The Company uses derivative instruments to manage interest rate risk. The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in interest rates. Effective September 18, 2003, the Company entered into interest rate swap agreements in the aggregate notional amount of $50.0 million. The Company has designated the swaps as hedges against changes in the fair value of a designated portion of the Notes due to changes in underlying interest rates. Changes in the fair value of the interest rate swaps are recorded in earningsinterest expense along with related designated changes in the value of the Notes. The agreements, which have payment and expiration dates and call provisions that coincide with the terms of the Notes, effectively convert $50.0 million of the Notes into variable rate obligations. Under the agreements, the Company receives a fixed interest rate payment from the financial counterparties to the agreements equal to 8.25% per year calculated on the notional $50.0 million amount, while the Company makes a variable interest rate payment to the same counterparties equal to the six-month London Interbank Offered Rate, (“LIBOR”) plus a fixed margin of 3.45%, also calculated on the notional $50.0 million amount. As of December 31, 200630, 2007 and January 1,December 31, 2006 the fair value of the swapsswap liability totaled approximately $(1.7) million$0 and $(1.1)$1.7 million and is included in other non-current assets or liabilities and as an adjustment to the carrying value of the Notes in the accompanying consolidated balance sheets. There was no material ineffectiveness ofThe decrease in the Company’s swap liability is due to favorable changes in the interest rate swaps for the fiscal year ended December 31, 2006.rates during 2007.
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, call provisions that coincide with the terms of the Notes, to be an effective cash flow hedge. Accordingly, the Company records changes in the value of the interest rate swap in accumulated other comprehensive income (loss), net of applicable income taxes. The total value of the swap liability as of December 30, 2007 and December 31, 2006 and January 1, 2006 was approximately $3.2$5.8 million and $(0.4)$3.2 million, respectively, and is recorded as a component of other non-current assets and other non-current liabilities in the accompanying consolidated financial statements. balance sheets.
There was no material ineffectiveness of the Company’s interest rate swaps 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 income (loss).
| |
8. | Goodwill and Other Intangible Assets, Net |
As of December 31, 2006 and January 1, 2006, the Company had $27.1 million and $35.9 million of goodwill, respectively.
7988
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 2007 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Balance as of
| | | Goodwill Resulting
| | | Foreign
| | | Balance as of
| |
| | | January 1,
| | | from Business
| | | Currency
| | | December 30,
| |
| | | 2007 | | | Combination | | | Translation | | | 2007 | |
| |
| U.S. corrections | | $ | 23,999 | | | $ | (2,290 | ) | | $ | — | | | $ | 21,709 | |
| International services | | | 3,075 | | | | — | | | | 131 | | | | 3,206 | |
| | | | | | | | | | | | | | | | | |
| Total Segments | | $ | 27,074 | | | $ | (2,290 | ) | | $ | 131 | | | $ | 24,915 | |
| | | | | | | | | | | | | | | | | |
U.S. corrections goodwill decreased by $2.3 million as a result of an increase in the tax basis of loss carryforwards related to the purchase of CSC in November 2005. International services goodwill increased $0.1 million as a result of favorable fluctuations in foreign currency translation.
Changes in the Company’s goodwill balances for 2006 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Balance as of
| | Goodwill resulting
| | Foreign
| | Balance as of
| | | Balance as of
| | Goodwill Resulting
| | Foreign
| | Balance as of
| |
| | | January 1,
| | from Business
| | Currency
| | December 31,
| | | January 1,
| | from Business
| | Currency
| | December 31,
| |
| | | 2006 | | Combinations | | Translation | | 2006 | | | 2006 | | Combination | | Translation | | 2006 | |
| |
| U.S. corrections | | $ | 35,350 | | | $ | (11,351 | ) | | $ | — | | | $ | 23,999 | | | $ | 35,350 | | | $ | (11,351 | ) | | $ | — | | | $ | 23,999 | |
| International services | | | 546 | | | | 2,487 | | | | 42 | | | | 3,075 | | | | 546 | | | | 2,487 | | | | 42 | | | | 3,075 | |
| | | | | | | | | | | | | | | | | | | |
| Total Segments | | $ | 35,896 | | | $ | (8,864 | ) | | $ | 42 | | | $ | 27,074 | | | $ | 35,896 | | | $ | (8,864 | ) | | $ | 42 | | | $ | 27,074 | |
| | | | | | | | | | | | | | | | | | | |
The U.S. corrections’ goodwill decreased $11.4 million during 2006 as a result of (i) a $3.8 million increase in goodwill as a result of the finalization of purchase price allocation related to property and equipment, other assets and capital lease obligations of the CSC acquisition during the first quarter of 2006; (ii) $2.0 million decrease in goodwill relating to additional cash proceeds and an increase in the promissory note related to the sale of YSI; (iii) a $13.2 million decrease in goodwill due to the completion of certain tax elections related to the CSC acquisition and related sale of YSI.
International services goodwill increased $2.5 million as a result of the completion of the RSI acquisition in October 2006. The Company has not finalized its purchase price allocation related to the RSI acquisition related to intangible assets, other assets, accrued liabilities and income taxes.
Intangible assets are related to the U.S. corrections segment and consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Useful Life
| | | | | | | Useful Life
| | | | | |
| | | in Years | | 2006 | | 2005 | | | in Years | | 2007 | | 2006 | |
| |
| Facility Management Contracts | | | 7-17 | | | $ | 15,050 | | | $ | 15,050 | | | | 7-17 | | | $ | 14,550 | | | $ | 15,050 | |
| Covenants not to compete | | | 4 | | | | 1,470 | | | | 1,470 | | | | 4 | | | | 1,470 | | | | 1,470 | |
| | | | | | | | | | | |
| | | | | | | $ | 16,520 | | | $ | 16,520 | | | | | | | $ | 16,020 | | | $ | 16,520 | |
| Less Accumulated Amortization | | | | | | | (2,040 | ) | | | (289 | ) | | | | | | | (3,705 | ) | | | (2,040 | ) |
| | | | | | | | | | | |
| | | | | | | $ | 14,480 | | | $ | 16,231 | | | | | | | $ | 12,315 | | | $ | 14,480 | |
| | | | | | | | | | | |
Amortization expense was $1.8 million, $1.4 million and $0.2 million for facility management contracts for the fiscal yearyears ended 2006.2007, 2006 and 2005, respectively. Amortization expense was $0.4 million, $0.4 million, and $0.1 million for covenants not to compete for the fiscal years ended 2007, 2006 and 2005, respectively. Amortization expense is recognized on a straight-line basis over the estimated useful life of the intangible assets. EstimatedThe Company’s weighted average useful life related to its intangible assets 11.86 years. In July 2007, the Company cancelled the Operating and Management contract with Dickens County for the management of the 489-bed facility located in Spur, Texas. As a result, the Company wrote off its intangible asset related to the facility of $0.4 million (net of accumulated amortization expense for fiscal 2007 through fiscal 2011 and thereafter are as follows:of $0.1 million). The impairment
| | | | | |
| | | Expense
| |
Fiscal Year | | Amortization | |
| | | (In thousands) | |
| |
| 2007 | | $ | 1,754 | |
| 2008 | | | 1,754 | |
| 2009 | | | 1,693 | |
| 2010 | | | 1,387 | |
| 2011 | | | 1,387 | |
| Thereafter | | | 6,505 | |
| | | | | |
| | | $ | 14,480 | |
| | | | | |
8089
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
charge is included in depreciation and amortization expense in the accompanying consolidated statement of income for the fiscal year ended December 30, 2007.
Estimated amortization expense for fiscal 2008 through fiscal 2012 and thereafter are as follows:
| | | | | |
| | | Expense
| |
Fiscal Year | | Amortization | |
| | | (In thousands) | |
| |
| 2008 | | $ | 1,712 | |
| 2009 | | | 1,651 | |
| 2010 | | | 1,345 | |
| 2011 | | | 1,345 | |
| 2012 | | | 1,224 | |
| Thereafter | | | 5,038 | |
| | | | | |
| | | $ | 12,315 | |
| | | | | |
Accrued expenses consisted of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | | 2007 | | 2006 | |
| |
| Accrued interest | | $ | 7,224 | | | $ | 7,193 | | | $ | 8,586 | | | $ | 7,802 | |
| Accrued bonus | | | 8,504 | | | | 4,369 | | | | 8,687 | | | | 8,504 | |
| Accrued insurance | | | 24,430 | | | | 25,923 | | | | 29,099 | | | | 26,901 | |
| Accrued income taxes | | | 7,792 | | | | 882 | | |
| Accrued taxes | | | | 8,368 | | | | 13,574 | |
Jena idle facility lease reserve | | | 6,971 | | | | 8,257 | | | | — | | | | 6,971 | |
| Construction retainage | | | | 11,897 | | | | 3,545 | |
| Other | | | 22,754 | | | | 23,553 | | | | 18,891 | | | | 13,923 | |
| | | | | | | | | | | |
| Total | | $ | 77,675 | | | $ | 70,177 | | | $ | 85,528 | | | $ | 81,220 | |
| | | | | | | | | | | |
| | |
| (a) | | Eliminated in purchase accounting (Note 2) |
90
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Debt consisted of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | | 2007 | | 2006 | |
| |
Capital Lease Obligations | | $ | 17,405 | | | $ | 17,755 | | | $ | 16,621 | | | $ | 17,405 | |
Senior Credit Facility: | | | | | | | | | | | | | | | | |
| Term loan | | $ | — | | | $ | 74,813 | | | | 162,263 | | | | — | |
Senior 81/4% Notes: | | | | | | | | | | | | | | | | |
| Notes Due in 2013 | | $ | 150,000 | | | $ | 150,000 | | | | 150,000 | | | | 150,000 | |
| Discount on Notes | | | (3,376 | ) | | | (3,735 | ) | | | (2,984 | ) | | | (3,376 | ) |
| Swap on Notes | | | (1,736 | ) | | | (1,074 | ) | | | (6 | ) | | | (1,736 | ) |
| | | | | | | | | | | |
Total Senior 81/4% Notes | | $ | 144,888 | | | $ | 145,191 | | | $ | 147,010 | | | $ | 144,888 | |
Non Recourse Debt: | | | | | | | | | |
Non Recourse Debt : | | | | | | | | | |
| Non recourse debt | | $ | 147,260 | | | $ | 142,479 | | | $ | 140,926 | | | $ | 147,260 | |
| Discount on bonds | | | (3,707 | ) | | | (4,493 | ) | | | (2,973 | ) | | | (3,707 | ) |
| | | | | | | | | | | |
| Total non recourse debt | | | 143,553 | | | | 137,986 | | | | 137,953 | | | | 143,553 | |
| Other debt | | | 111 | | | | 301 | | | | 83 | | | | 111 | |
| | | | | | | | | | | |
| Total debt | | $ | 305,957 | | | $ | 376,046 | | | $ | 463,930 | | | $ | 305,957 | |
| | | | | | | | | | | |
| Current portion of capital lease obligations, long-term debt and non-recourse debt | | | (12,685 | ) | | | (8,441 | ) | | | (17,477 | ) | | | (12,685 | ) |
| Capital lease obligations | | | (16,621 | ) | | | (17,072 | ) | |
| Capital lease obligations, long term portion | | | | (15,800 | ) | | | (16,621 | ) |
| Non recourse debt | | | (131,680 | ) | | | (131,279 | ) | | | (124,975 | ) | | | (131,680 | ) |
| | | | | | | | | | | |
| Long term debt | | $ | 144,971 | | | $ | 219,254 | | | $ | 305,678 | | | $ | 144,971 | |
| | | | | | | | | | | |
The Amended Senior Credit Facility
On January 24, 2007, the Company completed the refinancing of its senior secured credit facility through the execution of a Third Amended and Restated Credit Agreement (the “Amended Senior“Senior Credit Facility”), by and among the Company, as Borrower, BNP Paribas, as Administrative Agent, BNP Paribas Securities Corp. as Lead Arranger and Syndication Agent, and the lenders who are, or may from time to time become, a party thereto. Previously, on September 14, 2005, the Company amended its senior secured credit facility to consistThe Senior Credit Facility consisted of a $75$365.0 million six-year term-loan bearing7-year term loan (the “Term Loan B”) and a $150.0 million5-year revolver (the “Revolver”). The interest rate for the Term Loan B is LIBOR plus 1.50% (the Company’s weighted average interest rate on borrowings outstanding under the Term Loan portion of the facility as of December 31, 2007 was 6.38%) and the Revolver bears interest at LIBOR plus 2.00%,1.50% or at the base rate (prime rate) plus 0.5%. The Company used the $365.0 million in borrowings under the Term Loan B to finance its acquisition of CPT in January of 2007. In connection with the Term Loan B and the refinancing of the Senior Credit Facility, the Company recorded $9.1 million in deferred financing costs. In March 2007, the Company utilized $200.0 million of the net proceeds from the follow on equity offering to repay a $100portion of the outstanding debt under the Term Loan B. The Company wrote off $4.8 million five-yearin deferred financing costs in connection with this repayment of outstanding debt.
As of December 30, 2007, the Company had $162.3 million outstanding under the Term Loan B, no amounts outstanding under the Revolver, and $63.5 million outstanding in letters of credit under the Revolver. As of December 30, 2007 the Company had $86.5 million available for borrowings under the Revolver. The Company intends to use future borrowings from the Revolver for the purposes permitted under the Senior Credit Facility, including to fund general corporate purposes.
8191
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
revolving credit facility bearing interest at LIBOR plus 2.00%.
The Company used theCompany’s weighted average rate on outstanding borrowings under the Senior Credit Facility to fund general corporate purposes and to finance the acquisition of CSC for approximately $62 million plus transaction-related costs. The acquisition of CSC closed in the fourth quarter of 2005. As of December 31, 2006, the Company had no borrowings outstanding under the term loan portion of the Senior Credit Facility, no amounts outstanding under the revolving portion of the Senior Credit Facility, and $54.5 million outstanding in letters of credit under the revolving portion of the Senior Credit Facility. Asfacility as of December 31, 2006 the Company had $45.5 million available for borrowings under the revolving portion of the Senior Credit Facility.
The Amended Senior Credit Facility consists of a $365 million7-year term loan (the “Term Loan B”) and a $150 million5-year revolver (the “Revolver”)30, 2007 was 6.38%. The initial interest rate for the Term Loan B is LIBOR plus 1.5% and the Revolver bears interest at LIBOR plus 2.25% or at the base rate plus 1.25%. On January 24, 2007, the Company used the $365 million in borrowings under the Term Loan B to finance its acquisition of CPT, as further discussed below. The Company has no current borrowings under the Revolver and intends to use future borrowings thereunder for the purposes permitted under the Amended Senior Credit Facility, including to fund general corporate purposes.
Indebtedness under the Revolver bears interest in each of the instances below at the stated rate:
| | | |
| | | Interest Rate under the Revolver |
| |
| LIBOR Borrowings | | LIBOR plus 2.25% or base1.50% to 2.50%. |
| Base rate borrowings | | Prime rate plus 1.25%0.5% to 1.50%. |
| Letters of Credit | | 1.50% to 2.50%. |
| Available Borrowings | | 0.38% to 0.5%. |
The Amended Senior Credit Facility contains financial covenants which require us to maintain the following ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:
| | | |
Period | | Leverage Ratio |
| |
| Through December 30, 2008 | | Total leverage ratio£ ≤ 5.50 to 1.00 |
| From December 31, 2008 through December 31, 2011 | | Reduces from 4.75 to 1.00, to 3.00 to 1.00 |
| Through December 30, 2008 | | Senior secured leverage ratio£ ≤ 4.00 to 1.00 |
| From December 31, 2008 through December 31, 2011 | | Reduces from 3.25 to 1.00, to 2.00 to 1.00 |
| Four quarters ending June 29, 2008, to December 30, 2009 | | Fixed charge coverage ratio of 1.00, thereafter increases to 1.10 to 1.00 |
In addition, the Senior Credit Facility prohibits us from making capital expenditures greater than $55.0 million in the aggregate during fiscal year 2007 and $25.0 million during each of the fiscal years thereafter, provided that to the extent that our capital expenditures during any fiscal year are less than the limit, such amount will be added to the maximum amount of capital expenditures that we can make in the following year. In addition, certain capital expenditures, including those made with the proceeds of any future equity offerings, are not subject to numerical limitations.
All of the obligations under the Amended Senior Credit Facility are unconditionally guaranteed by each of the Company’s existing material domestic subsidiaries. The Amended 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, including but not limited to (i) a first-priority pledge of all of the outstanding capital stock owned by the Company and each guarantor, and (ii) perfected first-priority security interests in all of the Company’s present and future tangible and intangible assets and the present and future tangible and intangible assets of each guarantor.
The Amended Senior Credit Facility contains certain customary representations and warranties, and certain customary covenants that restrict the Company’s ability to, among other things (i) create, incur or assume any indebtedness, (ii) incur liens, (iii) make loans and investments, (iv) engage in mergers, acquisitions and asset sales, (v) sell its assets, (vi) make certain restricted payments, including declaring any cash dividends or redeem or repurchase capital stock, except as otherwise permitted, (vii) issue, sell or otherwise dispose of capital stock, (viii) transact with affiliates, (ix) make changes in accounting treatment, (x) amend or modify
82
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the terms of any subordinated indebtedness, (xi) enter into debt agreements that contain negative pledges on its assets or covenants more restrictive than contained in the Amended Senior Credit Facility, (xii) alter the business it conducts, and (xiii) materially impair the Company’s lenders’ security interests in the collateral for its loans.
Events of default under the Amended 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) bankruptcy, (v) cross default to certain other indebtedness, (vi) unsatisfied
92
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
final judgments over a specified threshold, (vii) material environmental claims which are asserted against it, and (viii) a change of control.
Senior 81/4% Notes
ToIn July 2003, to facilitate the completion of the purchase of the 1212.0 million shares from Group 4 Falck, the Company amendedCompany’s former majority shareholder, the Senior Credit Facility andCompany issued $150.0 million aggregate principal amount,ten-year, 81/4% senior unsecured notes, (“the Notes”), in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended.. The Notes are general, unsecured, senior obligations. Interest is payable semi-annually on January 15 and July 15 at 81/4%. The Notes are governed by the terms of an Indenture, dated July 9, 2003, between the Company and the Bank of New York, as trustee, referred to as the Indenture. Additionally, after July 15, 2008, the Company may redeem, at the Company’s option, all or a portion of the Notes plus accrued and unpaid interest at various redemption prices ranging from 104.125% to 100.000%100.0% of the principal amount to be redeemed, depending on when the redemption occurs. The Indenture contains covenants that limit the Company’s ability to incur additional indebtedness, pay dividends or distributions on its common stock, repurchase its common stock, and prepay subordinated indebtedness. The Indenture also limits the Company’s ability to issue preferred stock, make certain types of investments, merge or consolidate with another company, guarantee other indebtedness, create liens and transfer and sell assets.
The Company is in compliance with all of the covenants of the Indenture governing the notes as of December 31, 2006. As of December 31, 2006,30, 2007, the Notes are reflected net of the original issuer’s discount of approximately $3.4$3.0 million which is being amortized over the ten yearten-year term of the Notes using the effective interest method.
Non-Recourse Debt
South Texas Detention Complex:
In February 2004,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 CSC. CSC was awarded athe contract in February 2004 by the Department of Homeland Security, Bureau ofU.S. Immigration and Customs Enforcement (“ICE”) for development and operation of the detention center. In order to develop and operate a 1,020 bed detention complex in Frio County Texas.finance its construction, South Texas Local Development Corporation (“STLDC”) was created and issued $49.5 million in taxable revenue bondsbonds. Additionally, the Company has outstanding $5.0 million of subordinated notes which represents the principal amount of financing provided to finance the construction of the detention center. Additionally,STLDC by CSC provided a $5 million subordinated note to STLDC for initial development. These bonds mature in February 2016 and have fixed coupon rates between 3.47% and 5.07%.
The Company determined that it is the primary beneficiary ofhas an operating agreement with STLDC, and consolidates the entity as a result. STLDC is the owner of the complex, and entered into a development agreementwhich provides it with CSC to oversee the development of the complex. In addition, STLDC entered into an operating agreement providing CSC the sole and exclusive right to operate and manage the complex.detention center. The operating agreement and bond indenture require the revenue from CSC’sthe 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 CSCthe Company to cover CSC’s operating expenses and management fee.fees. The bonds have a ten year term and are non-recourse to CSC and STLDC. CSCCompany is responsible for the entire operations of the facility including all operating expenses and is required to pay 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 result.
On February 1, 2007, the Company made a payment of $4.1 million for the current portion of its periodic debt service requirement in relation to STLDC operating agreement and bond indenture. As of December 30, 2007, the remaining balance of the debt service requirement is $45.3 million, of which $4.3 million is due within next twelve months. Also as of December 30, 2007, $14.2 million is included in non-current restricted cash as funds held in trust with respect to the STLDC for debt service and other reserves.
8393
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Included in current and non-current restricted cash is $18.6 million as of December 31, 2006 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, (the “Northwestreferred to as the Northwest Detention Center”),Center, which CSCwas completed and opened for operation in April 2004.2004 and acquired by the Company in November 2005. In connection with thisthe original financing, CSC of Tacoma LLC, a wholly owned subsidiary of CSC, issued a $57$57.0 million note payable to the Washington Economic Development Finance Authority, (“WEDFA”),referred 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 of Tacoma LLC for the purposes of constructing the Northwest Detention Center. The bonds are non-recourse to CSCthe Company and the loan from WEDFA to CSC of Tacoma, LLC is non-recourse to CSC. the Company. These bonds mature in February 2014 and have fixed coupon rates between 2.90% 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. No payments were made during the fiscal year ended December 30, 2007 in relation to the WEDFA bond indenture. As of December 30, 2007, the remaining balance of the debt service requirement is $42.7 million, of which $5.4 is due within the next 12 months.
Included in current and non-current restricted cash is $11.1$2.3 million as of December 31, 200630, 2007 as funds held in trust with respect to the Northwest Detention Center for debt service and other reserves.
Australia
In connection with the financing and management of one Australian facility, thea wholly owned Australian subsidiary financed thea facility’s development and subsequent expansion in 2003 with long-term debt obligations, which are non-recourse to us.the Company. As a condition of the loan, the Company is required to maintain a restricted cash balance of AUD 5.0 million, which, at December 31, 2006,30, 2007, was approximately $3.9$4.4 million. This amount is included in restricted cash and the annual maturities of the future debt obligation is 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.
Debt repayment schedules under capital lease obligations, long-term debt and non-recourse debt are as follows:
| | | | | | | | | | | | | | | | | |
| | | Capital
| | | Long Term
| | | Non
| | | Total Annual
| |
Fiscal Year | | Leases | | | Debt | | | Recourse | | | Repayment | |
| | | | | | (In thousands) | | | | |
| |
| 2007 | | $ | 2,195 | | | $ | 28 | | | $ | 11,873 | | | $ | 14,096 | |
| 2008 | | | 2,167 | | | | 28 | | | | 12,571 | | | | 14,766 | |
| 2009 | | | 1,956 | | | | 28 | | | | 13,359 | | | | 15,343 | |
| 2010 | | | 1,932 | | | | 27 | | | | 14,104 | | | | 16,063 | |
| 2011 | | | 1,932 | | | | — | | | | 14,945 | | | | 16,877 | |
| Thereafter | | | 20,575 | | | | 150,000 | | | | 80,408 | | | | 250,983 | |
| | | | | | | | | | | | | | | | | |
| | | $ | 30,757 | | | $ | 150,111 | | | $ | 147,260 | | | $ | 328,128 | |
| | | | | | | | | | | | | | | | | |
| Original issuer’s discount | | | — | | | | (3,376 | ) | | | (3,707 | ) | | | (7,083 | ) |
| Current portion | | | (784 | ) | | | (28 | ) | | | (11,873 | ) | | | (12,685 | ) |
| Interest imputed on Capital Leases | | | (13,352 | ) | | | — | | | | — | | | | (13,352 | ) |
| Swap | | | — | | | | (1,736 | ) | | | — | | | | (1,736 | ) |
| | | | | | | | | | | | | | | | | |
| Non current portion | | $ | 16,621 | | | $ | 144,971 | | | $ | 131,680 | | | $ | 293,272 | |
| | | | | | | | | | | | | | | | | |
At December 31, 2006 the Company also had outstanding seven letters of guarantee totaling approximately $6.1 million under separate international facilities.
8494
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 | | | Loan | | | Repayment | |
| | | | | | (In thousands) | | | | | | | |
| |
| 2008 | | $ | 2,167 | | | $ | 28 | | | $ | 12,978 | | | $ | 3,650 | | | $ | 18,823 | |
| 2009 | | | 1,956 | | | | 28 | | | | 13,737 | | | | 3,650 | | | | 19,371 | |
| 2010 | | | 1,932 | | | | 27 | | | | 14,527 | | | | 3,650 | | | | 20,136 | |
| 2011 | | | 1,932 | | | | — | | | | 15,419 | | | | 3,650 | | | | 21,001 | |
| 2012 | | | 1,933 | | | | — | | | | 16,363 | | | | 3,650 | | | | 21,946 | |
| Thereafter | | | 18,641 | | | | 150,000 | | | | 67,902 | | | | 144,013 | | | | 380,556 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | $ | 28,561 | | | $ | 150,083 | | | $ | 140,926 | | | $ | 162,263 | | | $ | 481,833 | |
| | | | | | | | | | | | | | | | | | | | | |
| Original issuer’s discount | | | — | | | | (2,984 | ) | | | (2,973 | ) | | | — | | | | (5,957 | ) |
| Current portion | | | (821 | ) | | | (28 | ) | | | (12,978 | ) | | | (3,650 | ) | | | (17,477 | ) |
| Interest imputed on Capital Leases | | | (11,940 | ) | | | — | | | | — | | | | — | | | | (11,940 | ) |
| Swap | | | — | | | | (6 | ) | | | — | | | | — | | | | (6 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Non-current portion | | $ | 15,800 | | | $ | 147,065 | | | $ | 124,975 | | | $ | 158,613 | | | $ | 446,453 | |
| | | | | | | | | | | | | | | | | | | | | |
Guarantees
In connection with the creation of 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 approximately $8.6$8.9 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 50% of amounts which may be payable by SACS into the restricted account and provided a standby letter of credit of 7.07.5 million South African Rand, or approximately $1.0$1.1 million as security for the Company’s guarantee. The Company’s obligations under this guarantee 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 Revolving Credit Facility.
The Company has agreed to provide a loan of up to 20.0 million South African Rand, or approximately $2.9$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 anticipate that such funding will ever be required by SACS. 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, the Company guaranteed certain potential tax obligations of a special purpose entity. The potential estimated exposure of these obligations is
95
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CAD 2.5 million, or approximately $2.2$2.5 million commencing in 2017. We haveThe Company has a liability of $0.7$1.5 million and $0.6$0.7 million related to this exposure as of December 31, 200630, 2007 and January 1,December 31, 2006, 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 in its consolidated balance sheet. The Company does not currently operate or manage this facility.
The Company’s wholly-owned Australian subsidiary financed the development of a facility and subsequent expansion in 2003, with long-term debt obligations, which are non-recourse toAt December 30, 2007, the Company and total $50.0also had outstanding six letters of guarantee totaling approximately $6.4 million and $40.3 million at December 31, 2006 and January 1, 2006, respectively.under separate international facilities. 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 cashdoes not have any off balance of AUD 5.0 million, which, at December 31, 2006, was approximately $3.9 million. This amount is included in restricted cash and the annual maturities of the future debt obligation is included in non recourse debt.sheet arrangements.
| |
11.12. | Transactions with CentraCore Properties Trust (“CPT”) |
On January 24, 2007, the Company completed its previously announced acquisition of CPT. As a result of the acquisition of CPT, the Company has no on going rent commitment for the facilities acquired as part of the Merger.
85
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During fiscal 1998, 1999 and 2000, CPT acquired 11 correctional and detention facilities operated by Prior to the Company. In 2006, CPT financedacquisition, the 600-bed expansion of the Lawton Correctional Facility in Lawton Oklahoma for approximately $20.0 million.
Simultaneous with the purchases, the Company entered into ten-year operating leases of these facilities from CPT. As the lease agreements are subject to contractual lease increases, the Company recorded operating lease expense for these leases on a straight-line basis over the term of the leases. Additionally, the lease contains three five-year renewal options based on fair market rental rates. The deferred unamortized net gain related to sales of the facilities to CPT at December 31, 2006, which is included in “Deferred Revenue” in the accompanying consolidated balance sheets is $3.6 million with $1.8 million short-term and $1.8 million long-term. The balance of the deferred revenue as of December 31, 2006 will be accounted for in the purchase price allocation of the acquisition. Previously the gain was amortized over the ten-year lease terms. The Company recorded net rental expense related to the CPT leases of $23.0 million $21.6 million and $21.0$21.6 million in 2006 and 2005, and 2004, respectively, excluding the Jena rental expense (See Note 12).respectively.
| |
12.13. | Commitments and Contingencies |
The Company owns the 480-bed Michigan Correctional Facility in Baldwin, Michigan, referred to as the Michigan Facility. The Company operated the Michigan Facility from 1999 until October 2005 pursuant to a management contract with the Michigan Department of Corrections, or the MDOC. Separately, the Company leased the Michigan Facility, as lessor, to the State, as lessee, under a lease with an initial term of 20 years followed by two five-year options. In September 2005, the Governor of the State of Michigan closed the Michigan Facility and terminated the Company’s management contract with the MDOC. In October 2005, the State of Michigan also sought to terminate its lease for the Michigan Facility. The Company believes that the State did not have the right to unilaterally terminate the Michigan Facility lease. As a result, in November 2005, the Company filed a lawsuit against the State to enforce the Company’s rights under the lease. On February 24, 2006, the Ingham County Circuit Court, the trial court with jurisdiction over the case, granted summary judgment in favor of the State and against the Company and granted the Company leave to amend the complaint. The Company filed an amended complaint and on September 13, 2006, the trial court granted summary judgment on the amended complaint in favor of the State and against the Company. The Company has filed a notice of appeal and is proceeding with the appeal. The Company reviewed the Michigan Facility for impairment in accordance with FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, and recorded an impairment charge in the fourth quarter of 2005 for $20.9 million based on an independent appraisal of fair market value. The book value of the Michigan Facility at December 31, 2006 is $12.6 million.
In 2005, the Company’s equity affiliate, SACS, recognized a one time tax benefit of $2.1 million related to a change in South African Tax law applicable to companies in a qualified Public Private Partnership (“PPP”) with the South African Government. The tax law change had the effect that beginning in 2005 government revenues earned under the PPP are exempt from South African taxation. The one time tax benefit in part related to deferred tax liabilities that were eliminated during 2005 as a result of the change in the tax law. In February 2007 the South African legislature passed legislation that has the effect of removing the exemption from taxation on government revenues. The law change will impact the equity in earnings of affiliate beginning in 2007. The Company is in the process of fully assessing the impact of the new legislation. However, as a result of the new legislation, deferred tax liabilities will have to be established at the applicable tax rate of 29%. This is estimated to result in a one time tax charge of up to $2.3 million in the first quarter of 2007.
During 2000, the Company’s management contract at the 276-bed Jena Juvenile Justice Center in Jena, Louisiana, which is included in the U.S. corrections segment, was discontinued by the mutual agreement of the parties. Despite the discontinuation of the management contract, the Company remains responsible for
86
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
payments on the Company’s underlying lease of the inactive facility with CPT through January 2010. During the third quarter of 2005, the Company determined that the alternative uses being pursued were no longer probable and as a result revised its estimated sublease income and recorded an operating charge of $4.3 million, representing the remaining obligation on the lease through the contractual term of January 2010 for a total reserve of $8.6 million. This $4.3 million charge is included in the caption “Operating Expenses” in the Consolidated Statement of Income for the fiscal year ended January 1, 2006. The balance of the reserve at December 31, 2006 of $7.0 million will be included in the purchase price allocation of the acquisition of CPT.
Operating Leases
The Company leases correctional facilities, office space, computers and vehiclestransportation equipment under non-cancelable operating leases expiring between 20072008 and 2013.2028. The future minimum commitments under these leases exclusive of lease commitments related to CPT, are as follows:
| | | | | | | | | |
Fiscal Year | | Annual Rental | | | Annual Rental | |
| | | (In thousands) | | | (In thousands) | |
| |
| 2007 | | $ | 10,112 | | |
| 2008 | | | 9,805 | | | $ | 13,240 | |
| 2009 | | | 7,325 | | | | 11,989 | |
| 2010 | | | 4,645 | | | | 8,759 | |
| 2011 | | | 2,984 | | | | 5,857 | |
| 2012 | | | | 5,540 | |
| Thereafter | | | 8,037 | | | | 48,409 | |
| | | | | | | |
| | | $ | 42,908 | | | $ | 93,794 | |
| | | | | | | |
Rent expense was approximately$22.5 million, $25.7 million, $24.9 million, and $14.4$24.9 million for fiscal 2007, 2006 2005, and 20042005, respectively.
Litigation, Claims and Assessments
On May 19, 2006, the Company, along with Corrections Corporation of America, referred to as CCA, were sued by an individual plaintiff in the Circuit Court of the Second Judicial Circuit for Leon County, Florida (Case No. 2005CA001884). The complaint alleges that, during the period from 1995 to 2004, the Company and CCA overbilled the State of Florida by an amount of at least $12.7 million by submitting to the State false claims for various items relating to (i) repairs, maintenance and improvements to certain facilities which the Company operates in Florida, (ii) the Company’s staffing patterns in filling vacant security positions at those facilities, and (iii) the Company’s alleged failure to meet the conditions of certain waivers granted to the Company by the State of Florida from the payment of liquidated damages penalties relating to the Company’s staffing patterns at those facilities. The portion of the complaint relating to the Company arises out of the Company’s operations at the Company’s South Bay and Moore Haven, Florida correctional facilities. The complaint appears to be based largely on the same set of issues raised by a Florida Inspector General’s Evaluation Report released in late June 2005, referred to as the IG Report, which alleged that the Company and CCA overbilled the State of Florida by over $12 million.
Subsequently, the Florida Department of Management Services, referred to as the DMS, which is responsible for administering the Company’s correctional contracts with the State of Florida, conducted a detailed analysis of the allegations raised by the IG Report which included a comprehensive written response to the IG Report which the Company’s had prepared and delivered to the DMS. In September 2005, the DMS provided a letter to the Company stating that, although its review had not yet been fully completed, it did not find any indication of any improper conduct by the Company. On October 17, 2006, DMS provided a letter to the Company stating that its review had been completed. The Company and DMS then agreed to settle this
87
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
matter for $0.3 million. This amount is included in accrued expenses as of December 31, 2006. Although this determination is not dispositive of the recently initiated litigation, the Company believes it supports the Company’s position that the Company has valid defenses in this matter. The Company will continue to investigate this matter and intends to defend the Company’s rights vigorously. However, given the amounts claimed by the plaintiff and the fact that the nature of the allegations could cause adverse publicity to the Company, the Company believes that this matter, if settled unfavorably to the Company, could have a material adverse effect on the Company’s financial condition and results of operations.
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. Recently,In October 2006, the verdict was entered as a judgment against the Company in the amount of $51.7 million. The lawsuit 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$55.0 million in aggregate annual coverage. As a result, the Company believes it is fully insured for all damages, costs and expenses associated with the lawsuit and as such the Company has not taken any reserves in connection with the matter. The lawsuit stems from an inmate death which occurred at the Company’s former Willacy County State Jail in Raymondville, Texas, in April 2001, when two inmates at the facility attacked another inmate. Separate investigations conducted internally by the Company, The Texas Rangers and the Texas Office of the Inspector
96
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
General exonerated the Company and its employees of any culpability with respect to the incident. The Company believes that the verdict is contrary to law and unsubstantiated by the evidence. The Company’s insurance carrier has posted a supersedessupersedeas bond in the amount atof approximately $60.0 million to cover the judgment. On December 9, 2006, the trial court denied the Company’s post trial motions and the Companyit filed a notice of appeal on December 18, 2006. The appeal is proceeding.
In June 2004, the Company received notice of a third-party claim for property damage incurred during 20022001 and 20012002 at several detention facilities that the Company’sits Australian subsidiary formerly operated. 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 May 2005,August 2007, legal proceedings in this matter were formally commenced when the Company received additional correspondence indicating thatwas served with notice of a complaint filed against it by the insurance provider still intendsCommonwealth of Australia (the “Plaintiff”) seeking damages of up to pursue the claim against the Company’s Australian subsidiary. Although the claim is in the initial stages and the Company is still in the processapproximately AUS 18.0 million or $15.8 million as of fully evaluating its merits, theDecember 30, 2007. The Company believes that it has several defenses to the allegations underlying the claimlitigation and the amounts sought and intends to vigorously defend the Company’sits rights with respect to this matter. While the insurance provider has not quantified its damage claim andAlthough the outcome of this matter discussed above cannot be predicted with certainty, based on information known to date and management’sthe Company’s preliminary review of the claim, the Company believes that, if settled unfavorably, this matter could have a material adverse effect on the Company’sits financial condition, results of operations and cash flows. Furthermore, the Company is unable to determine the losses, if any, that it will incur under the litigation should the matter be resolved unfavorably to it. 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. The Company has accruedestablished a reserve related to this claim based on its estimate of the most probable costs that may be incurredloss based on the facts and circumstances known to date and the advice of legal counsel in connection with this matter. The Company has provided no further reserves for any potential losses since it is not possible at this time to estimate the likelihood of loss or amount of potential exposure based on the uncertainties with respect to this matter.
On January 30, 2008, a lawsuit seeking class action certification was filed against the Company by an inmate at one of its legal counsel.jails. The case is entitled Bussy v. The GEO Group, Inc. (Civil ActionNo. 08-467)) and is pending in the U.S. District Court for the Eastern District of Pennsylvania. The lawsuit alleges that the Company has a companywide blanket policy at its immigration/detention facilities and jails that requires all new inmates and detainees to undergo a strip search upon intake into each facility. The plaintiff alleges that this practice, to the extent implemented, violates the civil rights of the affected inmates and detainees. The lawsuit seeks monetary damages for all purported class members, a declaratory judgment and an injunction barring the alleged policy from being implemented in the future. The Company is in the initial stages of investigating this claim. However, following its preliminary review, the Company believes it has several defenses to the allegations underlying this litigation, and the Company intends to vigorously defend its rights in this matter. Nevertheless, the Company believes that, if resolved unfavorably, this matter could have a material adverse effect on its financial condition and results of operations.
The nature of the Company’s business exposes itthe Company to various types of claims or litigation against the Company,it, including, but not limited to, civil rights claims relating to conditions of confinementand/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, indemnification claims by the 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.
8897
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
proceedings net
The Company is currently self-financing the simultaneous construction or expansion of applicable insurance,several correctional and detention facilities in multiple jurisdictions. As of December 30, 2007, the Company was in the process of constructing or expanding 13 facilities representing 8,000 total beds, one of which it will lease to have a material adverse effect on its financial condition, resultsanother party and twelve of operationswhich it will operate. The Company is providing the financing for six of the 13 facilities, representing 4,700 beds. Total capital expenditures related to these projects is expected to be $249.4 million, of which $102.1 million was completed through year end 2007. The Company expects to incur at least another approximately $93.8 million in capital expenditures relating to these owned projects during the fiscal year 2008. Additionally, financing for the remaining seven facilities representing 3,300 beds is being provided for by state or cash flows.counties for their ownership. The Company is managing the construction of these projects with total costs of $188.4 million, of which $94.8 million has been completed through year end 2007 and $93.6 million remains to be completed through 2009.
Collective Bargaining Agreements
The Company had approximately 14% of its workforce covered by collective bargaining agreements at December 31, 2006.30, 2007. Collective bargaining agreements with ninesix percent of employees are set to expire in less than one year.
Contract Terminations
On April 26, 2007, the Company announced that the Federal Bureau of Prisons awarded a contract for the management of the 2,048-bed Taft Correctional Institution, which the Company managed since 1997, to another private operator. The management contract, which was competitively re-bid, was transitioned to the alternative operator effective August 20, 2007. The Company does not expect the loss of this contract to have a material adverse effect on its financial condition or results of operations.
In July 2007, the Company cancelled the Operations and Management contract with Dickens County for the management of the 489-bed facility located in Spur, Texas. The cancellation became effective on December 28, 2007. The Company has operated the management contract since the acquisition of CSC in November 2005. The Company does not expect the termination of this contract to have a material adverse effect on its financial condition or results of operations.
On October 2, 2007, the Company received notice of the termination of its contract with the Texas Youth Commission for the housing of juvenile inmates at the 200-bed Coke County Juvenile Justice Center located in Bronte, Texas. The Company is in the preliminary stages of reviewing the termination of this contract. However, the Company does not expect the termination, or any liability that may arise with respect to such termination, to have a material adverse effect on its financial condition or results of operations.
Insurance claims
The Company maintains general liability insurance for property damages incurred, property operating costs during downtimes, business interruption and incremental costs incurred during inmate disturbances. In April 2007, the Company incurred significant damages at one of its managed-only facilities in New Castle, Indiana. The total amount of impairments, insurance losses recognized and expenses to repair damages incurred has been recorded in the accompanying consolidated statements of income as operating expenses and is offset by $2.1 million of insurance proceeds the Company received from insurance carriers in the first quarter of 2008.
98
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
13.14. | Shareholders’ Equity |
Earnings Per Share
The table below shows the amounts used in computing earnings per share (“EPS”) in accordance with FAS No. 128 and the effects on income and the weighted average number of shares of potential dilutive common stock.
| | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal Year | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
| | | (In thousands, except
| | |
| | | per share data) | | | (In thousands, except per share data) | |
| |
| Net income | | $ | 30,031 | | | $ | 7,006 | | | $ | 16,815 | | | $ | 41,845 | | | $ | 30,031 | | | $ | 7,006 | |
| Basic earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding | | | 17,221 | | | | 14,370 | | | | 14,076 | | | | 47,727 | | | | 34,442 | | | | 28,740 | |
| | | | | | | | | | | | | | | |
| Per share amount | | $ | 1.74 | | | $ | 0.49 | | | $ | 1.19 | | | $ | 0.88 | | | $ | 0.87 | | | $ | 0.24 | |
| | | | | | | | | | | | | | | |
| Diluted earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding | | | 17,221 | | | | 14,370 | | | | 14,076 | | | | 47,727 | | | | 34,442 | | | | 28,740 | |
| Effect of dilutive securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Employee and director stock options and restricted stock | | | 651 | | | | 645 | | | | 531 | | | | 1,465 | | | | 1,302 | | | | 1,290 | |
| | | | | | | | | | | | | | | |
| Weighted average shares assuming dilution | | | 17,872 | | | | 15,015 | | | | 14,607 | | | | 49,192 | | | | 35,744 | | | | 30,030 | |
| | | | | | | | | | | | | | | |
| Per share amount | | $ | 1.68 | | | $ | 0.47 | | | $ | 1.15 | | | $ | 0.85 | | | $ | 0.84 | | | $ | 0.23 | |
| | | | | | | | | | | | | | | |
For fiscal 2007, no options or shares of restricted stock were excluded from the computation of diluted EPS because their effect would be anti-dilutive.
For fiscal 2006, options to purchase 1,5003,000 shares of the Company’s common stock with an exercise price of $27.48$13.74 per share and an expiration date of July 2016 were outstanding at December 31, 2006, but were not included in the computation of diluted EPS because their effect would be anti-dilutive.
Of 222,750the 626,512 restricted shares outstanding at December 31, 2006, 35,37330, 2007, 182,388 were included in the computation of diluted EPS because their effect would bewas dilutive. Of the 445,500 restricted shares outstanding at December 31, 2006, 70,746 were included in the computation of diluted EPS because their effect was dilutive.
For fiscal 2005, options to purchase 24,00048,000 shares of the Company’s common stock with exercise prices ranging from $17.92$8.96 to $21.47$10.74 per share and expiration dates between 2006 and 2014 were outstanding at January 1, 2006, but were not included in the computation of diluted EPS because their effect would be anti-dilutive.
For fiscal 2004, options to purchase 543,671 shares of the Company’s common stock with exercise prices ranging from $14.33 to $17.92 per share and expiration dates between 2006 and 2014 were outstanding at January 2, 2005, but were not included in the computation of diluted EPS because their effect would be anti-dilutive.
89
THE GEO GROUP, INC.
Preferred Stock
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In April 1994, the Company’s Board of Directors authorized 1030 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
99
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
| |
14. | Equity Incentive Plans |
The Company has three stock option plans in force at December 31, 2006: The Wackenhut Corrections Corporation 1994 Stock Option Plan (Second Plan), the 1995 Non-Employee Director Stock Option Plan (Third Plan) and the Wackenhut Corrections Corporation 1999 Stock Option Plan (Fourth Plan).
Under the Second Plan and Fourth Plan, the Company may grant options to key employees for up to 2,250,000 and 1,725,000 shares of common stock, respectively. Under the terms of these plans, the exercise price per share and vesting period is determined by the language of the plan. All options that have been granted under these plans are exercisable at the fair market value of the common stock at the date of the grant. Generally, the 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 and has granted options that vest 100% immediately. All options under the Second Plan and Fourth Plan expire no later than ten years after the date of the grant. The Company had 300 options available to be granted at December 31, 2006 under the Fourth Plan.
Under the Third Plan, the Company may grant up to 165,000 shares of common stock to non-employee directors of the Company. Under the terms of this plan, options are granted at the fair market value of the common stock at the date of the grant, become exercisable immediately, and expire ten years after the date of the grant.
On May 4, 2006, the Board of Directors adopted and the shareholders approved The GEO Group, Inc. 2006 Stock Incentive Plan (the “2006 Plan”). Under the 2006 Plan, the Company may grant options or restricted shares to key employees and non-employee directors for up to 450,000 shares.
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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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) | |
| |
| Outstanding at December 28, 2003 | | | 2,422 | | | $ | 9.47 | | | | | | | | | |
| Granted | | | 240 | | | | 14.67 | | | | | | | | | |
| Exercised | | | (262 | ) | | | 6.07 | | | | | | | | | |
| Forfeited/Canceled | | | (13 | ) | | | 15.29 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Options outstanding at January 2, 2005 | | | 2,387 | | | $ | 10.33 | | | | 5.7 | | | $ | 17,647 | |
| Granted | | | 21 | | | | 21.47 | | | | | | | | | |
| Exercised | | | (276 | ) | | | 10.88 | | | | | | | | | |
| Forfeited/Canceled | | | (22 | ) | | | 11.13 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Options outstanding at January 1, 2006 | | | 2,110 | | | $ | 10.35 | | | | 4.9 | | | $ | 10,778 | |
| Granted | | | 26 | | | | 15.42 | | | | | | | | | |
| Exercised | | | (487 | ) | | | 11.10 | | | | | | | | | |
| Forfeited/Cancelled | | | (333 | ) | | | 14.13 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Options outstanding at December 31, 2006 | | | 1,316 | | | $ | 9.22 | | | | 5.3 | | | $ | 37,241 | |
| | | | | | | | | | | | | | | | | |
| Options exercisable at December 31, 2006 | | | 1,195 | | | $ | 8.95 | | | | 5.1 | | | $ | 34,141 | |
| | | | | | | | | | | | | | | | | |
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 2006 and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options on December 31, 2006. This amount changes based on the fair value of the company’s stock. The total intrinsic value of options exercised during the year ended December 31, 2006 was $9.5 million.
Cash received from stock options exercises for 2006, 2005 and 2004 was $5.4 million, $3.0 million and $1.6 million, respectively. Tax benefits realized from tax deductions associated with option exercises and restricted stock activity for 2006, 2005 and 2004 totaled $2.8 million, $0.7 million and $0.8 million, respectively.
The weighted average grant date fair value of stock options granted during the year ended December 31, 2006, was $0.1 million.
At December 31, 2006, the Company had $1.4 million of unrecognized compensation costs related to non-vested stock option awards that is expected to be recognized over a weighted average period of 6.95 years.
91
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes information about the stock options outstanding at December 31, 2006:
| | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | | Options Exercisable | |
| | | | | | Wtd. Avg.
| | | Wtd. Avg.
| | | | | | Wtd. Avg.
| |
| | | Number
| | | Remaining
| | | Exercise
| | | Number
| | | Exercise
| |
Exercise Prices | | Outstanding | | | Contractual Life | | | Price | | | Exercisable | | | Price | |
| |
| $5.25 — $5.25 | | | 3,000 | | | | 3.3 | | | $ | 5.25 | | | | 3,000 | | | $ | 5.25 | |
| $5.62 — $5.62 | | | 188,625 | | | | 3.1 | | | | 5.62 | | | | 188,625 | | | | 5.62 | |
| $6.20 — $6.20 | | | 223,500 | | | | 4.1 | | | | 6.20 | | | | 223,500 | | | | 6.20 | |
| $6.34 — $7.97 | | | 95,213 | | | | 6.1 | | | | 6.39 | | | | 77,753 | | | | 6.40 | |
| $9.33 — $9.33 | | | 247,091 | | | | 6.3 | | | | 9.33 | | | | 210,001 | | | | 9.33 | |
| $10.27 — $10.27 | | | 328,500 | | | | 5.1 | | | | 10.27 | | | | 328,500 | | | | 10.27 | |
| $10.60 — $15.29 | | | 154,540 | | | | 6.5 | | | | 13.43 | | | | 104,737 | | | | 13.02 | |
| $15.39 — $15.66 | | | 53,850 | | | | 7.3 | | | | 15.54 | | | | 38,250 | | | | 15.52 | |
| $21.47 — $21.47 | | | 20,250 | | | | 8.1 | | | | 21.47 | | | | 20,250 | | | | 21.47 | |
| $27.48 — $27.48 | | | 1,500 | | | | 9.6 | | | | 27.48 | | | | 300 | | | | 27.48 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 1,316,069 | | | | | | | | | | | | 1,194,916 | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Restricted Stock
On May 4, 2006, the Company granted 225,000 shares of non-vested restricted stock under the 2006 Plan to key employees and non-employee directors. Restricted shares are converted into 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 restricted shares that were granted during the year have a vesting period of four years, which begins one year from the date of grant. A summary of the activity of restricted stock during the fiscal year ended December 31, 2006 is as follows:
| | | | | | | | | |
| | | | | | Wtd. Avg.
| |
| | | | | | Grant date
| |
| | | Shares | | | Fair value | |
| |
| Restricted stock outstanding at January 1, 2006 | | | — | | | $ | — | |
| Granted | | | 225,000 | | | | 26.13 | |
| Vested | | | — | | | | — | |
| Forfeited/Canceled | | | (2,250 | ) | | | 26.13 | |
| | | | | | | | | |
| Restricted stock outstanding at December 31, 2006 | | | 222,750 | | | | 26.13 | |
| | | | | | | | | |
As of December 31, 2006, there was $4.9 million of unrecognized compensation cost related to unvested restricted shares. The Company recognized $1.0 million in compensation expense related to the restricted shares during its fiscal year ended December 31, 2006.
| |
| 15. | Retirement and Deferred Compensation Plans |
The Company has two noncontributory defined benefit pension plans covering certain of the Company’s executives. Retirement benefits are based on years of service, employees’ average compensation for the last five years prior to retirement and social security benefits. Currently, the plans are not funded. The Company purchased and is the beneficiary of life insurance policies for certain participants enrolled in the plans.
92
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In 2001, the Company established non-qualified deferred compensation agreements with three key executives. These agreements were modified in 2002, and again in 2003. The current agreements provide for a lump sum payment when the executives retire, no sooner than age 55. All three executives have reached age 55 and are eligible to receive the payments upon retirement.
In September, 2006 the FASB issued FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R),” (“SFASFAS No. 158”), which requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability on its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. FAS No. 158 requires an employer to measure the funded status of a plan as of its year-end date and is first effective for fiscal 2006 for the Company and is reflected in the following presentation of the Company’s defined benefit plans. Upon adoption of this standard the Company recorded a charge of $1.9 million, net of tax, to otherthe opening balance of comprehensive income and a $3.3 million credit to non-current liabilities. The unamortized portion of these costs as of December 30, 2007 included in other comprehensive income is $1.6 million, net of tax.
FAS 158 also requires an entity to measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year, and recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. Since the Company currently has a measurement date of December 31 for all plans, this provision willdid not have a material impact in the year of adoption.
In fiscal 2006, the Company reported total comprehensive income of approximately $34.5 million which included the effect of the adoption of FAS 158 of approximately ($1.9) million. The effect of the adoption of FAS 158 should not have been reported as an adjustment to comprehensive income which, if excluded, would have resulted in total comprehensive income in 2006 of approximately $36.4 million. The ending accumulated other comprehensive income balance of approximately $2.4 million and total stockholders’ equity of approximately $248.6 million reported in the statements of stockholders’ equity at December 31, 2006 are correct as reported. The Company has adjusted the presentation of the 2006 comprehensive income amounts in the accompanying statements of shareholders’ equity and comprehensive income.
The following table summarizes key information related to these pension plans and retirement agreements which includes information as required by FAS 158. The table illustrates the reconciliation of the beginning and ending balances of the benefit obligation showing the effects during the period attributable to each of the following: service cost, interest cost, plan amendments, termination benefits, actuarial gains and losses. The
100
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assumptions used in the Company’s calculation of accrued pension costs are based on market information and the Company’s historical rates for employment compensation and discount rates, respectively.
In accordance with FAS 158, the Company has also disclosed contributions and payment of benefits related to the plans. There were no assets in the plan at December 31, 200630, 2007 or January 1,December 31, 2006. All changes as a result of the adjustments to the accumulated benefit obligation are included below and shown net of tax in the Consolidated Statementconsolidated statements of Shareholders’ Equityshareholders’ equity and Comprehensive Income.comprehensive income. There were no significant transactions between the employer or related parties and the plan during the period.
| | | | | | | | | |
| | | 2006 | | | 2005 | |
| |
Change in Projected Benefit Obligation | | | | | | | | |
| Projected Benefit Obligation, Beginning of Year | | $ | 15,702 | | | $ | 14,423 | |
| Service Cost | | | 671 | | | | 437 | |
| Interest Cost | | | 546 | | | | 542 | |
| Plan Amendments | | | — | | | | — | |
| Actuarial Gain | | | 215 | | | | 332 | |
| Benefits Paid | | | (36 | ) | | | (32 | ) |
| | | | | | | | | |
| Projected Benefit Obligation, End of Year | | $ | 17,098 | | | $ | 15,702 | |
| | | | | | | | | |
Change in Plan Assets | | | | | | | | |
| Plan Assets at Fair Value, Beginning of Year | | $ | — | | | $ | — | |
| Company Contributions | | | 36 | | | | 32 | |
| Benefits Paid | | | (36 | ) | | | (32 | ) |
| | | | | | | | | |
| Plan Assets at Fair Value, End of Year | | $ | — | | | $ | — | |
| | | | | | | | | |
Unfunded Status of the Plan | | $ | (17,098 | ) | | $ | (15,702 | ) |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | 2007 | | | 2006 | |
| |
Change in Projected Benefit Obligation | | | | | | | | |
| Projected Benefit Obligation, Beginning of Year | | $ | 17,098 | | | $ | 15,702 | |
| Service Cost | | | 551 | | | | 671 | |
| Interest Cost | | | 619 | | | | 546 | |
| Plan Amendments | | | — | | | | — | |
| Actuarial (Gain) Loss | | | (287 | ) | | | 215 | |
| Benefits Paid | | | (43 | ) | | | (36 | ) |
| | | | | | | | | |
| Projected Benefit Obligation, End of Year | | $ | 17,938 | | | $ | 17,098 | |
| | | | | | | | | |
Change in Plan Assets | | | | | | | | |
| Plan Assets at Fair Value, Beginning of Year | | $ | — | | | $ | — | |
| Company Contributions | | | 43 | | | | 36 | |
| Benefits Paid | | | (43 | ) | | | (36 | ) |
| | | | | | | | | |
| Plan Assets at Fair Value, End of Year | | $ | — | | | $ | — | |
| | | | | | | | | |
Unfunded Status of the Plan | | $ | (17,938 | ) | | $ | (17,098 | ) |
| | | | | | | | | |
Amounts Recognized in Accumulated Other Comprehensive Income | | | | | | | | |
| Prior Service Cost | | | 123 | | | | 164 | |
| Net Loss | | | 2,554 | | | | 3,028 | |
| | | | | | | | | |
| Accrued Pension Cost | | $ | 2,677 | | | $ | 3,192 | |
| | | | | | | | | |
| | | | | | | | | |
| | | Fiscal 2007 | | | Fiscal 2006 | |
| |
Components of Net Periodic Benefit Cost | | | | | | | | |
| Service Cost | | $ | 551 | | | $ | 671 | |
| Interest Cost | | | 619 | | | | 546 | |
| Amortization of: | | | | | | | | |
| Prior Service Cost | | | 41 | | | | 39 | |
| Net Loss | | | 302 | | | | 144 | |
| | | | | | | | | |
| Net Periodic Pension Cost | | $ | 1,513 | | | $ | 1,400 | |
| | | | | | | | | |
Weighted Average Assumptions for Expense | | | | | | | | |
| Discount Rate | | | 5.75 | % | | | 5.75 | % |
| Expected Return on Plan Assets | | | N/A | | | | N/A | |
| Rate of Compensation Increase | | | 5.50 | % | | | 5.50 | % |
93101
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | |
| | | 2006 | | | 2005 | |
| |
Amounts Recognized in Accumulated Other Comprehensive Income | | | | | | | | |
| Unrecognized Prior Service Cost | | | 164 | | | | N/A | |
| Unrecognized Net Loss | | | 3,028 | | | | N/A | |
| | | | | | | | | |
| Accrued Pension Cost | | $ | 3,192 | | | $ | N/A | |
| | | | | | | | | |
| | | Fiscal 2006 | | | Fiscal 2005 | |
| |
Components of Net Periodic Benefit Cost | | | | | | | | |
| Service Cost | | $ | 671 | | | $ | 437 | |
| Interest Cost | | | 546 | | | | 542 | |
| Amortization of: | | | | | | | | |
| Unrecognized Prior Service Cost | | | 39 | | | | 936 | |
| Unrecognized Net Loss | | | 144 | | | | 121 | |
| | | | | | | | | |
| Net Periodic Pension Cost | | $ | 1,400 | | | $ | 2,036 | |
| | | | | | | | | |
Weighted Average Assumptions for Expense | | | | | | | | |
| Discount Rate | | | 5.75 | % | | | 5.50 | % |
| Expected Return on Plan Assets | | | N/A | | | | N/A | |
| Rate of Compensation Increase | | | 5.50 | % | | | 5.50 | % |
The projected benefit liability for the three plans at December 31, 200630, 2007 are as follows, $4.1$4.7 million for the executive retirement plan, $1.4$1.2 million for the officer retirement plan and $11.6$12.0 million for the three key executives’ plans. Although these individuals have reached the eligible age for retirement, the liabilities for the plans at year-endDecember 30, 2007 and December 31, 2006 and 2005 isare included in other long-term liabilities based on actuarial assumption and expected retirement payments.
The amount included in other comprehensive income as of December 30, 2007 that is expected to be recognized as a component of net periodic benefit cost in fiscal 2008 is $0.3 million.
The Company has established a deferred compensation agreement for non-employee directors, which allow eligible directors to defer their compensation. Participants may elect lump sum or monthly payments to be made at least one year after the deferral is made or at the time the participant ceases to be a director. The Company recognized total compensation expense under this plan of $0.4 million, $0.6 million,and $(0.1) and $0.1 million for fiscal 2007, 2006, 2005, and 2004,2005, respectively. There were no payouts under the plan in fiscal 2006 and 2005. The liability for the deferred compensation was $1.1 million and $0.5 million at year-endDecember 31, 2006, and 2005, respectively, and iswas included in “Other non currentnon-current liabilities” in the accompanying consolidated balance sheets.sheet. Subsequent to December 31, 2006 the Company terminated the plan and paid the participants a lump sum amount.
The Company also has a non-qualified deferred compensation plan for employees who are ineligible to participate in its qualified 401(k) plan. Eligible employees may defer a fixed percentage of their salary, which earns interest at a rate equal to the prime rate less 0.75%. The Company matches employee contributions up to $400 each year based on the employee’s years of service. Payments will be made at retirement age of 65 or at termination of employment. The Company recognized expense of $0.2$0.3 million, $0.1$0.2 million and $0.1 million in fiscal 2007, 2006 2005, and 2004,2005, respectively. The liability for this plan at year-endDecember 30, 2007 and December 31, 2006 and 2005 was $2.5$3.2 million and $2.3$2.5 million, respectively, and is included in “Other non currentnon-current liabilities” in the accompanying consolidated balance sheets.
94
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company expects to make the following benefit payments based on eligible retirement dates:
| | | | | | | | | |
| | | Pension
| | | Pension
| |
Fiscal Year | | Benefits | | | Benefits | |
| | | (In thousands) | | | (In thousands) | |
| |
| 2007 | | $ | 11,947 | | |
| 2008 | | | 82 | | | $ | 12,474 | |
| 2009 | | | 138 | | | | 137 | |
| 2010 | | | 149 | | | | 137 | |
| 2011 | | | 152 | | | | 138 | |
| 2012-2016 | | | 1,829 | | |
| 2012 | | | | 182 | |
| Thereafter | | | | 4,870 | |
| | | | | | | |
| | | $ | 14,297 | | | $ | 17,938 | |
| | | | | | | |
| |
| 16. | Business Segment and Geographic Information |
Operating and Reporting Segments
The Company conducts its business through threefour reportable business segments: U.S. corrections segment; internationalInternational services segment; and GEO Care segment; and Facility construction and design segment. The Company has identified these threefour reportable segments to reflect the current view that the Company operates threefour distinct business lines, each of which constitutes a material part of its overall business. This treatment also reflects how the Company has discussed its business with investors and analysts. The U.S. corrections segment primarily encompassesU.S.-based privatized corrections and detention business. The International services segment primarily consists of privatized corrections and detention operations in South Africa, Australia and the United Kingdom. This segment also operates a recently acquired United Kingdom-based prisoner transportation business and reviews opportunities to further diversify into related foreign-based governmental-outsourced services on an ongoing basis. GEO Care segment, which is operated by the Company’s wholly-owned subsidiary GEO Care, Inc., comprises privatized mental health and residential treatment services business, all of which is currently conducted in the U.S.
“Other” primarily consists of activities associated with the Company’s construction business. The segment information presented in the prior periods has been reclassified to conform to the current presentation.
| | | | | | | | | | | | | |
Fiscal Year | | 2006 | | | 2005 | | | 2004 | |
| | | (In thousands) | |
| |
| Revenues: | | | | | | | | | | | | |
| U.S. corrections | | $ | 612,810 | | | $ | 473,280 | | | $ | 455,947 | |
| International services | | | 103,553 | | | | 98,829 | | | | 91,005 | |
| GEO Care | | | 70,379 | | | | 32,616 | | | | 31,704 | |
| Other | | | 74,140 | | | | 8,175 | | | | 15,338 | |
| | | | | | | | | | | | | |
| Total revenues | | $ | 860,882 | | | $ | 612,900 | | | $ | 593,994 | |
| | | | | | | | | | | | | |
| Depreciation and amortization: | | | | | | | | | | | | |
| U.S. corrections | | $ | 20,848 | | | $ | 12,980 | | | $ | 11,298 | |
| International services | | | 803 | | | | 2,601 | | | | 2,374 | |
| GEO Care | | | 584 | | | | 295 | | | | 226 | |
| Other | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total depreciation and amortization | | $ | 22,235 | | | $ | 15,876 | | | $ | 13,898 | |
| | | | | | | | | | | | | |
95102
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | |
Fiscal Year | | 2006 | | | 2005 | | | 2004 | |
| | | (In thousands) | |
| |
| Operating Income: | | | | | | | | | | | | |
| U.S. corrections | | $ | 106,380 | | | $ | 44,122 | | | $ | 70,384 | |
| International services | | | 8,682 | | | | 10,595 | | | | 13,587 | |
| GEO Care | | | 5,996 | | | | 2,317 | | | | 588 | |
| | | | | | | | | | | | | |
| Operating income from segments | | | 121,058 | | | | 57,034 | | | | 84,559 | |
| Corporate Expenses | | | (56,268 | ) | | | (48,958 | ) | | | (45,879 | ) |
| Other | | | (589 | ) | | | (138 | ) | | | 311 | |
| | | | | | | | | | | | | |
| Total operating income | | $ | 64,201 | | | $ | 7,938 | | | $ | 38,991 | |
| | | | | | | | | | | | | |
| Segment assets: | | | | | | | | | | | | |
| U.S. corrections | | $ | 457,545 | | | $ | 464,813 | | | | | |
| International services | | | 79,641 | | | | 60,827 | | | | | |
| GEO Care | | | 15,606 | | | | 10,028 | | | | | |
| Other | | | 21,057 | | | | 627 | | | | | |
| | | | | | | | | | | | | |
| Total segment assets | | $ | 573,849 | | | $ | 536,295 | | | | | |
| | | | | | | | | | | | | |
of which is currently conducted in the U.S. The Facility construction and design segment consists of contracts with various state, local and federal agencies for the design and construction of facilities for which the Company has management contracts.
The segment information presented in the prior periods has been reclassified to conform to the current presentation:
| | | | | | | | | | | | | |
Fiscal Year | | 2007 | | | 2006 | | | 2005 | |
| | | (In thousands) | |
| |
| Revenues: | | | | | | | | | | | | |
| U.S. corrections | | $ | 671,957 | | | $ | 612,810 | | | $ | 473,280 | |
| International services | | | 130,317 | | | | 103,553 | | | | 98,829 | |
| GEO Care | | | 113,754 | | | | 70,379 | | | | 32,616 | |
| Facility construction and design | | | 108,804 | | | | 74,140 | | | | 8,175 | |
| | | | | | | | | | | | | |
| Total revenues | | $ | 1,024,832 | | | $ | 860,882 | | | $ | 612,900 | |
| | | | | | | | | | | | | |
| Depreciation and amortization: | | | | | | | | | | | | |
| U.S. corrections | | $ | 31,039 | | | $ | 20,848 | | | $ | 12,980 | |
| International services | | | 1,359 | | | | 803 | | | | 2,601 | |
| GEO Care | | | 1,472 | | | | 584 | | | | 295 | |
| Facility construction and design | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total depreciation and amortization | | $ | 33,870 | | | $ | 22,235 | | | $ | 15,876 | |
| | | | | | | | | | | | | |
| Operating Income: | | | | | | | | | | | | |
| U.S. corrections | | $ | 138,609 | | | $ | 106,380 | | | $ | 44,122 | |
| International services | | | 11,046 | | | | 8,682 | | | | 10,595 | |
| GEO Care | | | 10,939 | | | | 5,996 | | | | 2,317 | |
| Facility construction and design | | | (266 | ) | | | (589 | ) | | | (138 | ) |
| | | | | | | | | | | | | |
| Operating income from segments | | | 160,328 | | | | 120,469 | | | | 56,896 | |
| General and Administrative Expenses | | | (64,492 | ) | | | (56,268 | ) | | | (48,958 | ) |
| | | | | | | | | | | | | |
| Total operating income | | $ | 95,836 | | | $ | 64,201 | | | $ | 7,938 | |
| | | | | | | | | | | | | |
| Segment assets: | | | | | | | | | | | | |
| U.S. corrections | | $ | 962,090 | | | $ | 457,545 | | | $ | 464,813 | |
| International services | | | 91,692 | | | | 79,641 | | | | 60,827 | |
| GEO Care | | | 19,334 | | | | 15,606 | | | | 10,028 | |
| Facility construction and design | | | 16,385 | | | | 21,057 | | | | 627 | |
| | | | | | | | | | | | | |
| Total segment assets | | $ | 1,089,501 | | | $ | 573,849 | | | $ | 536,295 | |
| | | | | | | | | | | | | |
Fiscal 2007 U.S. corrections segment operating expenses includes non-cash deferred compensation costs of $2.5 million associated with the Company’s 2006 Stock Incentive Plan compared to a charge of $1.0 million in the fiscal year ended December 30, 2006. Also included as a reduction to operating income is an increase of depreciation expense of $10.2 million for U.S. corrections primarily associated with the assets acquired from CPT. This depreciation charge is offset by a decrease in facility usage fees of $29.3 million also included in operating income. Fiscal 2007 U.S. Corrections operating expense includes a $0.9 million reduction in general liability, auto and workers’ compensation insurance reserves. Fiscal 2006 U.S. corrections operating expenses include a $4.0 million reduction in general liability and workers compensation reserves offset by $1.7
103
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$1.7 million in unbudgetedcharges for employee insurance reserve adjustments.reserves. Fiscal 2005 U.S. corrections segment operating expenses include net non cashnon-cash charges of $23.8 million consisting of a $20.9 million impairment charge for the Michigan Correctional Facility and a $4.3 million charge for the remaining obligation for the inactive Jena Facility offset by a $1.3$3.4 million reduction in insurance reserves. Fiscal 2004 U.S. corrections segment operating expenses includes a net non cash credit of $1.2 million, consisting of a $4.2 million reduction
Assets in the Company’s general liability, auto liabilityFacility construction and workers’ compensation insurance reserves offset by an additional provisiondesign segment include trade accounts receivable, construction retainage receivable and other miscellaneous deposits and prepaid insurance. Trade accounts receivable balances were $10.2 million and $15.7 million as of December 30, 2007 and December 31, 2006, respectively. Construction retainage receivable balances were $4.7 million and $3.6 million as of December 30, 2007 and December 31, 2006, respectively. Other assets were $1.5 million and $1.8 million as of December 30, 2007 and December 31, 2006, respectively. During fiscal 2007 and 2006, the Company wrote-off $0.5 million and $1.0 million, respectively, for operating lossesconstruction over-runs. Such items were not significant as of approximately $3.0 million related toor for the inactive facility in Jena, Louisiana.periods ended December 30, 2007 and December 31, 2006, respectively.
Pre-Tax Income Reconciliation
| | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended | | 2006 | | 2005 | | 2004 | | |
Fiscal Year Ended | | | 2007 | | 2006 | | 2005 | |
| | | (In thousands) | | | (In thousands) | |
| |
| Operating income from segments | | $ | 121,058 | | | $ | 57,034 | | | $ | 84,559 | | | $ | 160,328 | | | $ | 120,469 | | | $ | 56,896 | |
| Unallocated amounts: | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate Expenses | | | (56,268 | ) | | | (48,958 | ) | | | (45,879 | ) | |
| General and Administrative Expense | | | | (64,492 | ) | | | (56,268 | ) | | | (48,958 | ) |
| Net Interest Expense | | | (17,544 | ) | | | (13,862 | ) | | | (12,570 | ) | | | (27,305 | ) | | | (17,544 | ) | | | (13,862 | ) |
| Costs related to early extinguishment of debt | | | (1,295 | ) | | | (1,360 | ) | | | (317 | ) | | | (4,794 | ) | | | (1,295 | ) | | | (1,360 | ) |
| Other | | | (589 | ) | | | (138 | ) | | | 311 | | |
| | | | | | | | | | | | | | | |
| Income (loss) before income taxes, equity in earnings of affiliates, Discontinued operations and Minority interest | | $ | 45,362 | | | $ | (7,284 | ) | | $ | 26,104 | | |
| Income (loss) before income taxes, equity in earnings of affiliates, Discontinued Operations and Minority Interest | | | $ | 63,737 | | | $ | 45,362 | | | $ | (7,284 | ) |
| | | | | | | | | | | | | | | |
Asset Reconciliation
| | | | | | | | | |
| | | 2007 | | | 2006 | |
| |
| Reportable segment assets | | $ | 1,089,501 | | | $ | 573,849 | |
| Cash | | | 44,403 | | | | 111,520 | |
| Deferred income tax | | | 24,623 | | | | 24,433 | |
| Restricted cash | | | 34,107 | | | | 33,651 | |
| | | | | | | | | |
| Total Assets | | $ | 1,192,634 | | | $ | 743,453 | |
| | | | | | | | | |
96
104
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Asset Reconciliation
| | | | | | | | | |
| | | 2006 | | | 2005 | |
| |
| Reportable segment assets | | $ | 552,792 | | | $ | 535,669 | |
| Cash | | | 111,520 | | | | 57,094 | |
| Deferred income tax | | | 24,433 | | | | 19,755 | |
| Restricted cash | | | 33,651 | | | | 26,366 | |
| Other | | | 21,057 | | | | 627 | |
| | | | | | | | | |
| Total Assets | | $ | 743,453 | | | $ | 639,511 | |
| | | | | | | | | |
Geographic Information
The Company’s international operations are conducted through (i) the Company’s wholly owned Australian subsidiaries, and one of the Company’s joint ventures in South Africa, SACM. Through the Company’s wholly owned subsidiary, The GEO Group Australia Pty. Limited,Ltd., through which the Company currently manages five correctional facilities, including one police custody center. Throughcenter; (ii) the Company’s consolidated joint venture in South Africa, SACM, through which the Company currently manages one facility.correctional facility; and (iii) the Company’s wholly-owned subsidiary in the United Kingdom, The GEO Group UK Ltd., through which the Company manages the Campsfield House Immigration Removal Centre.
| | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal Year | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
| | | | | (In thousands) | | | | | (In thousands) | |
| |
| Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. operations | | $ | 757,329 | | | $ | 514,071 | | | $ | 502,989 | | | $ | 894,515 | | | $ | 757,329 | | | $ | 514,071 | |
| Australia operations | | | 82,156 | | | | 83,335 | | | | 75,947 | | | | 97,116 | | | | 82,156 | | | | 83,335 | |
| South African operations | | | 14,569 | | | | 15,494 | | | | 15,058 | | | | 17,286 | | | | 14,569 | | | | 15,494 | |
| United Kingdom | | | 6,828 | | | | — | | | | — | | | | 15,915 | | | | 6,828 | | | | — | |
| | | | | | | | | | | | | | | |
| Total revenues | | $ | 860,882 | | | $ | 612,900 | | | $ | 593,994 | | | $ | 1,024,832 | | | $ | 860,882 | | | $ | 612,900 | |
| | | | | | | | | | | | | | | |
| Long-lived assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. operations | | $ | 279,685 | | | $ | 275,415 | | | | | | | $ | 780,067 | | | $ | 279,685 | | | $ | 275,415 | |
| Australia operations | | | 6,445 | | | | 6,243 | | | | | | | | 2,187 | | | | 6,445 | | | | 6,243 | |
| South African operations | | | 642 | | | | 578 | | | | | | | | 590 | | | | 642 | | | | 578 | |
| United Kingdom | | | 602 | | | | — | | | | | | | | 768 | | | | 602 | | | | — | |
| | | | | | | | | | | | | |
| Total long-lived assets | | $ | 287,374 | | | $ | 282,236 | | | | | | | $ | 783,612 | | | $ | 287,374 | | | $ | 282,236 | |
| | | | | | | | | | | | | |
Sources of Revenue
The Company’sCompany derives most of its revenue from the management of privatized correction and detention facilities. The Company also derives revenue from the management of GEO Care facilities and from the construction and expansion of new and existing correctional, detention and GEO Care facilities. All of the Company’s revenue is generated from external customers.
| | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal Year | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
| | | | | (In thousands) | | | | | (In thousands) | |
| |
| Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
| Correction and detention | | $ | 716,363 | | | $ | 572,109 | | | $ | 546,952 | | | $ | 802,274 | | | $ | 716,363 | | | $ | 572,109 | |
| GEO Care | | | 70,379 | | | | 32,616 | | | | 31,704 | | | | 113,754 | | | | 70,379 | | | | 32,616 | |
| Construction | | | 74,140 | | | | 8,175 | | | | 15,338 | | |
| Facility construction and design | | | | 108,804 | | | | 74,140 | | | | 8,175 | |
| | | | | | | | | | | | | | | |
| Total revenues | | $ | 860,882 | | | $ | 612,900 | | | $ | 593,994 | | | $ | 1,024,832 | | | $ | 860,882 | | | $ | 612,900 | |
| | | | | | | | | | | | | | | |
Equity in Earnings of Affiliates
Equity in earnings of affiliates for 2007, 2006 and 2005 include one of the joint ventures in South Africa, SACS. This entity is accounted for under the equity method and the Company’s investment in SACS is presented as a component of other non-current assets in the accompanying consolidated balance sheets.
97105
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Equity in Earnings of Affiliates
Equity in earnings of affiliates for 2006, 2005 and 2004 include one of the joint ventures in South Africa, SACS. This entity is accounted for under the equity method.
A summary of financial data for SACS is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal Year | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
| | | | | (In thousands) | | | | | (In thousands) | |
| |
| Statement of Operations Data | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | $ | 34,152 | | | $ | 33,179 | | | $ | 31,175 | | | $ | 36,720 | | | $ | 34,152 | | | $ | 33,179 | |
| Operating income | | | 13,301 | | | | 11,969 | | | | 11,118 | | | | 14,976 | | | | 13,301 | | | | 11,969 | |
| Net income | | | 3,124 | | | | 2,866 | | | | — | | | | 4,240 | | | | 3,124 | | | | 2,866 | |
| Balance Sheet Data | | | | | | | | | | | | | | | | | | | | | | | | |
| Current assets | | | 15,396 | | | | 13,212 | | | | 14,250 | | | | 21,608 | | | | 15,396 | | | | 13,212 | |
| Noncurrent assets | | | 60,023 | | | | 68,149 | | | | 74,648 | | | | 53,816 | | | | 60,023 | | | | 68,149 | |
| Current liabilities | | | 5,282 | | | | 4,187 | | | | 5,094 | | | | 6,120 | | | | 5,282 | | | | 4,187 | |
| Non current liabilities | | | 63,919 | | | | 73,645 | | | | 83,474 | | |
| Non-current liabilities | | | | 62,401 | | | | 63,919 | | | | 73,645 | |
| Shareholders’ equity | | | 6,217 | | | | 3,529 | | | | 330 | | | | 6,903 | | | | 6,217 | | | | 3,529 | |
As of December 30, 2007 and December 31, 2006, the Company’s investment in SACS commenced operation in fiscal 2002. Total equity in undistributed income/(loss) for SACS before income taxes, for fiscal 2006, 2005 and 2004 was $3.3 million, $0.9$3.5 million and $(0.1)$3.1 million, respectively. The investment is included in other non-current assets in the accompanying consolidated balance sheets.
Business Concentration
Except for the major customers noted in the following table, no other single customer provided morecustomers that made up greater than 10% of the Company’s consolidated revenues duringfor the following fiscal 2006, 2005 and 2004:years.
| | | | | | | | | | | | | | | | | | | |
Customer | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 |
| |
| Various agencies of the U.S. Federal Government | | | 30 | % | | | 27 | % | | | 27 | % | | | 26 | % | | | 30 | % | | | 27 | % |
| Various agencies of the State of Florida | | | 5 | % | | | 7 | % | | | 12 | % | | | 15 | % | | | 5 | % | | | 7 | % |
Concentration of creditCredit risk related to accounts receivable is reflective of the related revenues.
The United States and foreign components of income (loss) before income taxes, minority interest and equity income from affiliates are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
| | | | | (In thousands) | | | | | | | (In thousands) | | | |
| |
| Income (loss) before income taxes, minority interest, equity earnings in affiliates, and discontinued operations | | | | | | | | | | | | | | | | | | | | | | | | |
| United States | | $ | 32,968 | | | $ | (20,395 | ) | | $ | 9,627 | | | $ | 50,960 | | | $ | 32,968 | | | $ | (20,395 | ) |
| Foreign | | | 12,394 | | | | 13,111 | | | | 16,477 | | | | 12,777 | | | | 12,394 | | | | 13,111 | |
| | | | | | | | | | | | | | | |
| | | | 45,362 | | | | (7,284 | ) | | | 26,104 | | | | 63,737 | | | | 45,362 | | | | (7,284 | ) |
| | | | | | | | | | | | | | | |
| Discontinued operations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from operation of discontinued business | | | (428 | ) | | | 2,022 | | | | (529 | ) | | | 957 | | | | (428 | ) | | | 2,022 | |
| | | | | | | | | | | | | | | |
| Total | | $ | 44,934 | | | $ | (5,262 | ) | | $ | 25,575 | | | $ | 64,694 | | | $ | 44,934 | | | $ | (5,262 | ) |
| | | | | | | | | | | | | | | |
98106
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Taxes on income (loss) consist of the following components:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
| | | (In thousands) | | | (In thousands) | |
| |
| Federal income taxes: | | | | | | | | | | | | | | | | | | | | | | | | |
| Current | | $ | 15,876 | | | $ | (4,146 | ) | | $ | (72 | ) | | $ | 20,909 | | | $ | 15,876 | | | $ | (4,146 | ) |
| Deferred | | | (4,635 | ) | | | (4,151 | ) | | | 2,050 | | | | (4,546 | ) | | | (4,635 | ) | | | (4,151 | ) |
| | | | | | | | | | | | | | | |
| | | | 11,241 | | | | (8,297 | ) | | | 1,978 | | | | 16,363 | | | | 11,241 | | | | (8,297 | ) |
| | | | | | | | | | | | | | | |
| State income taxes: | | | | | | | | | | | | | | | | | | | | | | | | |
| Current | | | 2,667 | | | | (714 | ) | | | 643 | | | | 3,814 | | | | 2,667 | | | | (714 | ) |
| Deferred | | | (36 | ) | | | (756 | ) | | | 469 | | | | (399 | ) | | | (36 | ) | | | (756 | ) |
| | | | | | | | | | | | | | | |
| | | | 2,631 | | | | (1,470 | ) | | | 1,112 | | | | 3,415 | | | | 2,631 | | | | (1,470 | ) |
| | | | | | | | | | | | | | | |
| Foreign: | | | | | | | | | | | | | | | | | | | | | | | | |
| Current | | | 3,042 | | | | (3,304 | ) | | | 4,226 | | | | 4,580 | | | | 3,042 | | | | (3,304 | ) |
| Deferred | | | (409 | ) | | | 1,245 | | | | 915 | | | | (132 | ) | | | (409 | ) | | | 1,245 | |
| | | | | | | | | | | | | | | |
| | | | 2,633 | | | | (2,059 | ) | | | 5,141 | | | | 4,448 | | | | 2,633 | | | | (2,059 | ) |
| | | | | | | | | | | | | | | |
| Total U.S. and foreign | | | 16,505 | | | | (11,826 | ) | | | 8,231 | | | | 24,226 | | | | 16,505 | | | | (11,826 | ) |
| | | | | | | | | | | | | | | |
| Discontinued operations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from operations of discontinued business | | | (151 | ) | | | 895 | | | | (181 | ) | |
| Taxes (benefit) from operations of discontinued business | | | | 377 | | | | (151 | ) | | | 895 | |
| | | | | | | | | | | | | | | |
| Total | | $ | 16,354 | | | $ | (10,931 | ) | | $ | 8,050 | | | $ | 24,603 | | | $ | 16,354 | | | $ | (10,931 | ) |
| | | | | | | | | | | | | | | |
A reconciliation of the statutory U.S. federal tax rate (35.0%) and the effective income tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
| | | | | (In thousands) | | | | | (In thousands) | |
| |
| Continuing operations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Provisions using statutory federal income tax rate | | $ | 15,877 | | | $ | (2,549 | ) | | $ | 9,136 | | | $ | 22,308 | | | $ | 15,877 | | | $ | (2,549 | ) |
| State income taxes, net of federal tax benefit | | | 1,466 | | | | (907 | ) | | | 723 | | | | 2,147 | | | | 1,466 | | | | (907 | ) |
| Australia consolidation benefit | | | (228 | ) | | | (6,460 | ) | | | — | | | | — | | | | (228 | ) | | | (6,460 | ) |
| Basis difference PCG stock | | | — | | | | — | | | | (3,351 | ) | |
| UK Tax Benefit | | | (977 | ) | | | — | | | | — | | | | — | | | | (977 | ) | | | — | |
| Section 965 benefit | | | — | | | | (1,704 | ) | | | (197 | ) | | | — | | | | — | | | | (1,704 | ) |
| Non-performance based compensation | | | — | | | | — | | | | 1,417 | | |
| Other, net | | | 367 | | | | (206 | ) | | | 503 | | | | (229 | ) | | | 367 | | | | (206 | ) |
| | | | | | | | | | | | | | | |
| Total continuing operations | | | 16,505 | | | | (11,826 | ) | | | 8,231 | | | | 24,226 | | | | 16,505 | | | | (11,826 | ) |
| | | | | | | | | | | | | | | |
| Discontinued operations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxes from operations of discontinued business | | | (151 | ) | | | 895 | | | | (181 | ) | |
| Taxes (benefit) from operations of discontinued business | | | | 377 | | | | (151 | ) | | | 895 | |
| | | | | | | | | | | | | | | |
| Provision (benefit) for income taxes | | $ | 16,354 | | | $ | (10,931 | ) | | $ | 8,050 | | | $ | 24,603 | | | $ | 16,354 | | | $ | (10,931 | ) |
| | | | | | | | | | | | | | | |
99107
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of the net current deferred income tax asset (liability) at fiscal year end are as follows:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | | 2007 | | 2006 | |
| | | (In thousands) | | | (In thousands) | |
| |
| Book revenue not yet taxed | | $ | (284 | ) | | $ | (260 | ) | | $ | (213 | ) | | $ | (284 | ) |
| Deferred revenue | | | 706 | | | | 574 | | | | — | | | | 706 | |
| Uniforms | | | (337 | ) | | | (158 | ) | | | (396 | ) | | | (337 | ) |
| Deferred loan costs | | | 301 | | | | 945 | | | | 227 | | | | 301 | |
| Other, net | | | (26 | ) | | | 6 | | | | 682 | | | | (26 | ) |
| Allowance for doubtful accounts | | | 357 | | | | 211 | | | | 172 | | | | 357 | |
| Accrued vacation | | | 4,938 | | | | 4,753 | | |
| Accrued compensation | | | | 7,484 | | | | 4,938 | |
| Accrued liabilities | | | 13,837 | | | | 13,684 | | | | 11,749 | | | | 13,837 | |
| | | | | | | | | | | |
| Total asset (liability) | | $ | 19,492 | | | $ | 19,755 | | |
| Total asset | | | $ | 19,705 | | | $ | 19,492 | |
| | | | | | | | | | | |
The components of the net non-current deferred income tax asset (liability) at fiscal year end are as follows:
| | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | | 2007 | | 2006 | |
| | | (In thousands) | | | (In thousands) | |
| |
| Capital losses | | $ | — | | | $ | 5,945 | | |
| Depreciation | | | 109 | | | | (2,241 | ) | | $ | (391 | ) | | $ | 109 | |
| Deferred loan costs | | | 2,774 | | | | 2,568 | | | | 2,546 | | | | 2,774 | |
| Deferred revenue | | | 1,000 | | | | 1,841 | | |
| Deferred rent | | | | 944 | | | | 1,000 | |
| Bond Discount | | | (1,431 | ) | | | (1,746 | ) | | | (1,293 | ) | | | (1,431 | ) |
| Net operating losses | | | 3,162 | | | | 3,499 | | | | 3,283 | | | | 3,162 | |
| Tax credits | | | 625 | | | | 815 | | | | 1,088 | | | | 625 | |
| Intangible assets | | | (5,232 | ) | | | (6,013 | ) | | | (4,421 | ) | | | (5,232 | ) |
| Accrued liabilities | | | 651 | | | | 762 | | | | 765 | | | | 651 | |
| Deferred compensation | | | 7,003 | | | | 6,031 | | | | 5,955 | | | | 7,003 | |
| Residual U.S. tax liability on unrepatriated foreign earnings | | | (2,026 | ) | | | (4,754 | ) | | | (1,640 | ) | | | (2,026 | ) |
| Prepaid Lease | | | 880 | | | | — | | | | 681 | | | | 880 | |
| Other, net | | | 409 | | | | 261 | | | | 554 | | | | 409 | |
| Valuation allowance | | | (2,983 | ) | | | (9,053 | ) | | | (3,153 | ) | | | (2,983 | ) |
| | | | | | | | | | | |
| Total asset (liability) | | $ | 4,941 | | | $ | (2,085 | ) | | $ | 4,918 | | | $ | 4,941 | |
| | | | | | | | | | | |
The components of the net non-current deferred income tax liability as of fiscal year:
| | | | | | | | | |
| | | 2007 | | 2006 |
| | | (In thousands) |
| |
| Depreciation | | $ | (223 | ) | | $ | — | |
| | | | | | | | | |
| Total Asset (Liability) | | $ | (223 | ) | | $ | — | |
| | | | | | | | | |
In accordance with SFASFAS No. 109, Accounting for Income Taxes, deferred income taxes should be reduced by a valuation allowance if it is not more likely than not that some portion or all of the deferred tax assets will be realized. On a periodic basis, management evaluates and determines the amount of the valuation allowance required and adjusts such valuation allowance accordingly. At fiscal year end 20062007 and 2005,2006, the Company has recorded a valuation allowance of approximately $3.2 million and $3.0 million, and $9.1 million, respectively. The valuation allowance increased by $0.2 during the fiscal year ended December 30, 2007. At the fiscal year end 20062007 and 2005,2006, the valuation allowance includesincluded $0.1 million and $6.9$0.1 million, respectively reported as
108
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
part of purchase accounting relating to deferred tax assets for capital losses, federal and state net operating losses and charitable contribution carryforwards from the CSC acquisition. Current accounting pronouncements provide that a reduction of a valuation allowance related to tax assets recorded as part of purchase accounting are to reduce goodwill. At fiscal year end 2005 a full valuation allowance was provided against capital losses. Certain tax elections made during the 3rd quarter of2007 and 2006 in connection with the CSC acquisition and related sale of Youth Services International, Inc. “YSI” changed the character of tax losses
100
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
associated with the transactions. As a result tax losses were carried back and resulted in a federal tax refund of $13.2 million which reduced goodwill. At fiscal year end 2006 there are no capital loss carryforwards and consequently the related valuation allowance was reduced by $5.9 million. At fiscal year end 2006 and 2005 a partial valuation allowance was provided against net operating losses from the acquisition. At fiscal year end 2005 a partial valuation allowance was also provided against certain charitable loss carryforwards that required further investigation. The remaining valuation allowance of $3.1 million and $2.9 million, for 2007 and $2.2 million, for 2006, and 2005, respectively, relates to deferred tax assets for foreign net operating losses and state tax credits unrelated to the CSC acquisition.
At fiscal year end 2006,2007, the Company had $2.2$11.2 million of combined net operating loss carryforwards in various states from the CSC acquisition, which begin to expire in 2020. The utilization of these capital and net operating loss carryforwards are subject to annual usage limitations pursuant to Internal Revenue Code Section 382.2015.
Also at fiscal year end 20062007 the Company had $7.5$8.6 million of foreign operating losses which carry forward indefinitely and $1.7 million of state tax credits which begin to expire in 2007.2009. The Company has recorded a full and partial valuation allowance against thesethe deferred tax assets.assets related to the foreign operating losses and state tax credits, respectively.
During the fourth quarter the Company’s Australian South African and UK subsidiariessubsidiary made a dividend distributionsdistribution in excess of their 2006 earnings in anticipation of the completion of the CPT acquisition which was consummated on January 24th, 2007.its 2007 earnings. Residual US taxes in excess of foreign tax credits related to the dividend distributionsdistribution of prior year foreign earnings are now currently due and to that extent are no longer reflected as part of the deferred tax liability for residual US taxes on unrepatriated foreign earnings.
During fiscal 2006, the Company’s UK subsidiary received UK income tax refunds related to several tax years ending prior to 2003 totaling $1$1.0 million. The Company provides for residual US taxes on unrepatriated foreign earnings when earned. The Company studied the impact of the UK tax refund on its foreign tax credit position under US tax law for the prior tax years at issue and concluded that it does not give rise to additional incremental US taxes that would work to offset the benefit of the UK tax refund.
As a result of tax legislation in Australia, the Company realized an income tax benefit of $6.5 million in the fourth quarter 2005 and $0.2 million in the third quarter 2006. The benefit is due to an elective taxstep-up that in effect reestablishes tax basis that had previously been depreciated on an accelerated methodology. The permanent taxstep-up was exempt from taxation and results in a decrease in the same amount in the deferred tax liability associated with the depreciable asset. Equity in earnings of affiliate in 2005 reflects a one time tax benefit of $2.1 million related to a change in South African tax law applicable to companies in a qualified Public Private Partnership (“PPP”) with the South African Government. The tax law change had the effect that beginning in 2005 Government revenues earned under the PPP are exempt from South African taxation. The one time tax benefit in part related to deferred tax liabilities that were eliminated during 2005 as a result of the change in the tax law. In February 2007 the South African legislature passed legislation that has the effect of removing the exemption from taxation on government revenues. The law change will impact the equity in earnings of affiliate beginning in 2007. The Company is in the process of fully assessing the impact of the new legislation. However, as a result of the new legislation, deferred tax liabilities will have to be established at the applicable rate of 29%. This is estimated to result in a one time tax charge of up to $2.3 million in the first quarter of 2007.
On January 2, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, “Share-Based payment” (FAS 123R), which revises FAS 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB25). SFASFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards. The Company adopted FAS 123R using the modified prospective method. Under this method the Company recognizes compensation cost for all share-based payments granted after January 1, 2006, plus any awards granted to employees prior to
101
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
January 2, 2006 that remain unvested at that time. The exercise of non-qualified stock options which have been granted under the Company’s stock option plans give rise to compensation income which is includable in the taxable income of the applicable employees and deducted by the Company for federal and state income tax purposes. Such compensation income results from increases in the fair market value of the Company’s common stock subsequent to the date of grant. The Company has elected to use the transition method described in FASB Staff Position123(R)-3 (“FSPFAS 123(R)-3”.) In accordance with FSP FAS123(R)-3, the tax benefit on awards that vested prior to January 2, 2006 but that were exercised on or after January 2, 2006 “Fully Vested Awards” are credited directly to additionalpaid-in-capital. On awards that vested on or after January 2, 2006 and that were exercised on or after January 2, 2006, “Partially vested Awards” the total tax benefit first reduces the related deferred tax asset associated with the compensation cost recognized under 123(R) and any excess tax benefit, if any, is credited to additional paid-in capital. Special considerations apply and which are addressed in the FSPFAS 123(R)-3, if the ultimate tax benefit upon exercise is less than the related deferred tax asset underlying the award. At fiscal year end 20062007 the deferred tax asset related to unexercised stock options and restricted stock grants was $0.1$1.2 million.
In fiscal 2005, the ordinary courseCompany’s equity affiliate, SACS, recognized a one time tax benefit of global business, there$2.1 million related to a change in South African Tax law applicable to companies in a qualified Public Private Partnership (“PPP”) with the South African Government. The tax law change had the effect that beginning in 2005 government revenues earned under the PPP are transactionsexempt from South African taxation. The one time tax benefit
109
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
in part related to deferred tax liabilities that were eliminated during 2005 as a result of the change in the tax law. In February 2007, the South African legislature passed legislation that has the effect of removing the exemption from taxation on government revenues. As a result of the new legislation, SACS will be subject to South African taxation going forward at the applicable tax rate of 29%. The increase in the applicable income tax rate results in an increase in net deferred tax liabilities which were calculated at a rate of 0% during the period the government revenues were exempt. The effect of the increase in the deferred tax liability of the equity affiliate is a charge to equity in earnings of affiliate in the amount of $2.4 million. The law change also has the effect of reducing a previously recorded liability for unrecognized tax benefits as provided under FIN 48, Accounting for Uncertainty in Income Taxes, resulting in an increase to equity in earnings of affiliate. The respective decrease and increase to equity in earnings of affiliate are substantially offsetting in nature.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). The Company adopted the provisions of FIN 48,on January 1, 2007. Previously, the Company had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards 5,Accounting for Contingencies.As required by FIN 48, which clarifies Statement 109,Accounting for Income Taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied FIN 48 to all tax positions for which the statute of limitations remained open. As a result of the implementation of FIN 48, the Company recognized an increase of approximately a $2.5 million in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007, balance of retained earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows in (dollars in thousands):
| | | | | |
| | | (In thousands) | |
| |
| Balance at January 1, 2007 | | $ | 6,101 | |
| Additions based on tax positions related to the current year | | | 1,809 | |
| Additions for tax positions of prior years | | | 1,845 | |
| Reductions for tax positions of prior years | | | (4,213 | ) |
| Settlements | | | (125 | ) |
| | | | | |
| Balance at December 30, 2007 | | $ | 5,417 | |
| | | | | |
All amounts in the reconciliation are reported on a gross basis and do not reflect a federal tax benefit on state income taxes. Inclusive of the federal tax benefit on state income taxes, the beginning balance as of January 1, 2007 is $5.7 million. Included in the balance at December 30, 2007 is $1.8 million related to tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Under deferred tax outcomeaccounting, the timing of a deduction does not affect the annual effective tax rate but does affect the timing of tax payments. Absent a decrease in the unrecognized tax benefits related to the reversal of these timing related tax positions, the Company does not anticipate any significant increase or decrease in the unrecognized tax benefits within 12 months of the reporting date. The balance at December 30, 2007 includes $3.3 million of unrecognized tax benefits which, if ultimately recognized, will reduce the Company’s annual effective tax rate.
As a result of a South African tax law change enacted in February 2007, a liability for unrecognized tax benefits in the amount of $2.4 million is uncertain, thus judgment isno longer required resulting in determininga material change in unrecognized tax benefits during the worldwide provision for income taxes. first quarter of 2007. The reduction in the liability resulted in an increase to equity in earnings of affiliate.
110
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company provides foris subject to income taxes on transactions based on its estimatein the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the probable liability. related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, ornon-U.S. income tax examinations by tax authorities for the years before 2002.
The Company adjustsis currently under examination by the Internal Revenue Service for its provisionU.S. income tax returns for fiscal years 2002 through 2005. The Company expects this examination to be concluded in 2009.
In adopting FIN 48, the Company changed its previous method of classifying interest and penalties related to unrecognized tax benefits as appropriateincome tax expense to classifying interest accrued as interest expense and penalties as operating expenses. Because the transition rules of FIN 48 do not permit the retroactive restatement of prior period financial statements, the Company’s 2006 financial statements continue to reflect interest and penalties on unrecognized tax benefits as income tax expense. During the fiscal year ended December 30, 2007 the Company recognized $.6 million in interest and penalties. The Company had accrued approximately $1.5 million and $0.9 million for changes that impact its underlying judgments. Changes that impact provision estimates include such items as jurisdictional interpretations onthe payment of interest and penalties at December 30, 2007, and December 31, 2006, respectively.
In May 2007, the FASB published FSPFIN 48-1. FSPFIN 48-1 is an amendment to FIN 48. It clarifies how an enterprise should determine whether a tax filing positions based onposition is effectively settled for the resultpurpose of recognizing previously unrecognized tax audits and general tax authority rulings.benefits. As of our adoption date of FIN 48, our accounting is consistent with the guidance in FSPFIN 48-1.
New contracts
In January 2008, the Company executed a20-year contract, inclusive of three five-year option periods, effective January 2, 2008 with the Office of the Federal Detention Trustee (“OFDT”) for the housing of up to 768 U.S. Marshals Service (“USMS”) detainees at the Robert A. Deyton Detention Facility (the “Facility”) located in Clayton County, Georgia (the “County”). GEO leases the Facility from the County under a20-year agreement, with two five-year renewal options. The Facility currently has a capacity of 576 beds, and GEO has begun construction on a 192-bed expansion.
GEO expects to commence the intake of 576 detainees in February of 2008. At the 576-bed occupancy level, the Facility is expected to generate approximately $16 million in annualized operating revenues with an 80 percent occupancy guarantee. GEO expects the 192-bed expansion to be completed in the fourth quarter of 2008. At full occupancy of 768 beds, the Facility is expected to generate approximately $20 million in annualized operating revenues with an 80 percent occupancy guarantee.
Litigation
On January 30, 2008, a lawsuit seeking class action certification was filed against the Company by an inmate at its of our jails. The case is entitled Bussy v. The GEO Group, Inc. (Civil ActionNo. 08-467)) and is pending in the U.S. District Court for the Eastern District of Pennsylvania. The lawsuit alleges that the Company has a company-wide blanket policy at its immigration/detention facilities and jails that requires all new inmates and detainees to undergo a strip search upon intake into each facility. The plaintiff alleges that this practice, to the extent implemented, violates the civil rights of the affected inmates and detainees. The lawsuit seeks monetary damages for all purported class members, a declaratory judgment and an injunction barring the alleged policy from being implemented in the future. The Company is in the initial stages of investigating this claim. However, following its preliminary review, the Company believes it has several defenses to the allegations underlying this litigation and intends to vigorously defend its rights in this matter.
111
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Nevertheless, the Company believes that, if resolved unfavorably, this matter could have a material adverse effect on its financial condition and results of operations.
| |
| 19. | Selected Quarterly Financial Data (Unaudited) |
The Company’s selected quarterly financial data is as follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | |
| | | First Quarter | | Second Quarter | | | First Quarter | | Second Quarter | |
| |
2006 | | | | | | | | | |
2007 | | | | | | | | | |
| Revenues | | $ | 185,881 | | | $ | 208,668 | | | $ | 237,004 | | | $ | 258,182 | |
| Operating income | | $ | 12,462 | | | $ | 15,957 | | | | 20,565 | (1) | | | 26,597 | |
| Income from continuing operations | | $ | 4,674 | | | $ | 6,431 | | | | 5,097 | | | | 12,366 | |
| Loss from discontinued operations, net of tax | | $ | (118 | ) | | $ | (113 | ) | |
| Income from discontinued operations, net of tax | | | | 167 | | | | — | |
| Basic earnings per share: | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 0.32 | | | $ | 0.41 | | | $ | 0.12 | | | $ | 0.25 | |
| Loss from discontinued operations | | $ | (0.01 | ) | | $ | (0.01 | ) | |
| Income from discontinued operations | | | | 0.01 | | | | 0.00 | |
| | | | | | | | | | | |
| Net income per share | | $ | 0.31 | | | $ | 0.40 | | | $ | 0.13 | | | $ | 0.25 | |
| Diluted earnings per share: | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 0.31 | | | $ | 0.39 | | | $ | 0.12 | | | $ | 0.24 | |
| Loss from discontinued operations | | $ | (0.01 | ) | | $ | (0.01 | ) | |
| Income from discontinued operations | | | | 0.00 | | | | 0.00 | |
| | | | | | | | | | | |
| Net income per share | | $ | 0.30 | | | $ | 0.39 | | | $ | 0.12 | | | $ | 0.24 | |
102
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | |
| | | Third Quarter | | Fourth Quarter | | | Third Quarter | | Fourth Quarter | |
| |
| Revenues | | $ | 218,909 | | | $ | 247,404 | | | $ | 267,009 | | | $ | 262,637 | |
| Operating income | | $ | 16,985 | | | $ | 18,797 | | | | 25,264 | (2) | | | 23,410 | (3) |
| Income from continuing operations | | $ | 8,666 | | | $ | 10,537 | | | | 12,325 | | | | 11,477 | |
| Loss from discontinued operations, net of tax | | $ | (24 | ) | | $ | (22 | ) | |
| Income from discontinued operations, net of tax | | | | 413 | | | | — | |
| Basic earnings per share: | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 0.45 | | | $ | 0.54 | | | $ | 0.24 | | | $ | 0.23 | |
| Loss from discontinued operations | | $ | 0.00 | | | $ | 0.00 | | |
| Income from discontinued operations | | | | 0.01 | | | | 0.00 | |
| | | | | | | | | | | |
| Net income per share | | $ | 0.45 | | | $ | 0.54 | | | $ | 0.25 | | | $ | 0.23 | |
| Diluted earnings per share: | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 0.43 | | | $ | 0.52 | | | $ | 0.24 | | | $ | 0.22 | |
| Loss from discontinued operations | | $ | 0.00 | | | $ | 0.00 | | |
| Income from discontinued operations | | | | 0.01 | | | | 0.00 | |
| | | | | | | | | | | |
| Net income per share | | $ | 0.43 | | | $ | 0.52 | | | $ | 0.25 | | | $ | 0.22 | |
| | | | | | | | | |
| | | First Quarter | | | Second Quarter | |
| |
2005 | | | | | | | | |
| Revenues | | $ | 148,255 | | | $ | 152,623 | |
| Operating income | | $ | 7,373 | | | $ | 7,588 | |
| Income from continuing operations | | $ | 2,391 | | | $ | 4,301 | |
| Income from discontinued operations, net of tax | | $ | 505 | | | $ | 173 | |
| Basic earnings per share: | | | | | | | | |
| Income from continuing operations | | $ | 0.17 | | | $ | 0.30 | |
| Income from discontinued operations | | $ | 0.03 | | | $ | 0.01 | |
| | | | | | | | | |
| Net income per share | | $ | 0.20 | | | $ | 0.31 | |
| Diluted earnings per share: | | | | | | | | |
| Income from continuing operations | | $ | 0.16 | | | $ | 0.29 | |
| Income from discontinued operations | | $ | 0.03 | | | $ | 0.01 | |
| | | | | | | | | |
| Net income per share | | $ | 0.19 | | | $ | 0.30 | |
| | | | | | | | | |
| | | Third Quarter | | | Fourth Quarter(b) | |
| |
| Revenues | | $ | 147,148 | | | $ | 164,874 | |
| Operating income (loss) | | $ | 5,444 | | | $ | (12,467 | ) |
| Income (loss) from continuing operations | | $ | 510 | (a) | | $ | (1,323 | )(c) |
| Income (loss) from discontinued operations, net of tax | | $ | (67 | ) | | $ | 516 | |
| Basic earnings per share: | | | | | | | | |
| Income (loss) from continuing operations | | $ | 0.04 | | | $ | (0.09 | ) |
| Income (loss) from discontinued operations | | $ | (0.01 | ) | | $ | 0.03 | |
| | | | | | | | | |
| Net income (loss) per share | | $ | 0.03 | | | $ | (0.06 | ) |
| Diluted earnings per share: | | | | | | | | |
| Income (loss) from continuing operations | | $ | 0.03 | | | $ | (0.09 | ) |
| Income (loss) from discontinued operations | | $ | (0.00 | ) | | $ | 0.04 | |
| | | | | | | | | |
| Net income (loss) per share | | $ | 0.03 | | | $ | (0.05 | ) |
103
112
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | |
| | | First Quarter | | | Second Quarter | |
| |
2006 | | | | | | | | |
| Revenues | | $ | 185,881 | | | $ | 208,668 | |
| Operating income | | $ | 12,462 | | | $ | 15,957 | |
| Income from continuing operations | | $ | 4,674 | | | $ | 6,431 | |
| Loss from discontinued operations, net of tax benefit | | $ | (118 | ) | | $ | (113 | ) |
| Basic earnings per share: | | | | | | | | |
| Income from continuing operations | | $ | 0.16 | | | $ | 0.21 | |
| Loss from discontinued operations | | $ | (0.01 | ) | | $ | (0.01 | ) |
| | | | | | | | | |
| Net income per share | | $ | 0.15 | | | $ | 0.20 | |
| Diluted earnings per share: | | | | | | | | |
| Income from continuing operations | | $ | 0.16 | | | $ | 0.20 | |
| Loss from discontinued operations | | $ | (0.01 | ) | | $ | (0.01 | ) |
| | | | | | | | | |
| Net income per share | | $ | 0.15 | | | $ | 0.19 | |
| | | | | | | | | |
| | | Third Quarter | | | Fourth Quarter | |
| |
| Revenues | | $ | 218,909 | | | $ | 247,404 | |
| Operating income | | $ | 16,985 | (2) | | $ | 18,797 | |
| Income from continuing operations | | $ | 8,666 | | | $ | 10,537 | |
| Loss from discontinued operations, net of tax benefit | | $ | (24 | ) | | $ | (22 | ) |
| Basic earnings per share: | | | | | | | | |
| Income from continuing operations | | $ | 0.22 | | | $ | 0.27 | |
| Loss from discontinued operations | | $ | 0.00 | | | $ | 0.00 | |
| | | | | | | | | |
| Net income per share | | $ | 0.22 | | | $ | 0.27 | |
| Diluted earnings per share: | | | | | | | | |
| Income from continuing operations | | $ | 0.22 | | | $ | 0.26 | |
| Loss from discontinued operations | | $ | 0.00 | | | $ | 0.00 | |
| | | | | | | | | |
| Net income per share | | $ | 0.22 | | | $ | 0.26 | |
| | |
(a)(1) | | IncludesReflects a $4.3 million write-off for the Jena, Louisiana facility and a charge of approximately $1.4debt issuance costs of $4.8 million related to the write-offrepayment of deferred financing fees from$200.0 million in the extinguishment of debt.Term Loan B. |
| |
(b)(2) | | Includes operationsReflects adjustments to insurance reserves of CSC from November 4, 2005 through January$0.9 million and $4.0 million in the thirteen weeks ended September 30, 2007 and October 1, 2006.2006, respectively. |
| |
(c)(3) | | IncludesReflects a $20.9$1.0 million impairment charge for Michigan facility,adjustment to the New Castle, Indiana insurance claim offset by a $6.5write-off of $1.4 million tax benefit in Australia and $2.0 million tax benefit in South Africa related to changes in law.deferred acquisition costs. |
104113
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| |
| Item 9A. | Controls and Procedures |
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined inRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, referred to as the Exchange Act), as of the end of the period covered by this report. On the basis of this review, our management, including our Chief Executive Officer and our Chief Financial Officer, has concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to give reasonable assurance that the information required to be disclosed in our reports filed with the Securities and Exchange Commission, or the SEC, under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and to ensure that the information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
It should be noted that the effectiveness of our system of disclosure controls and procedures is subject to certain limitations inherent in any system of disclosure controls and procedures, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. Accordingly, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud. As a result, by its nature, our system of disclosure controls and procedures can provide only reasonable assurance regarding management’s control objectives.
Internal Control Over Financial Reporting
(a) Management’s Annual Report on Internal Control Over Financial Reporting
| |
| (a) | Management’s Annual Report on Internal Control Over Financial Reporting |
See “Item 8. — Financial Statements and Supplemental Data — Management’s Report on Internal Control over Financial Reporting” for management’s report on the effectiveness of our internal control over financial reporting as of December 31, 2006.30, 2007.
(b) Attestation Report of the Registered Public Accounting Firm
| |
| (b) | Attestation Report of the Registered Public Accounting Firm |
See “Item 8. — Financial Statements and Supplemental Data — Report of Independent Registered Certified Public Accountants” for the report of our independent registered public accounting firm on the effectiveness of our internal control over financial reporting as of December 31, 2006.30, 2007.
(c) Changes in Internal Control over Financial Reporting
| |
| (c) | Changes in Internal Control over Financial Reporting |
Our management is responsible for reporting any changes in our internal control over financial reporting (as such terms is defined inRules 13a-15(f) and15d-15(f) under the Exchange Act) during the period to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management believes that there have not been any changes in our internal control over financial reporting (as such term is defined inRules 13a-15(f) and15d-15(f) under the Exchange Act) during the period to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| |
| Item 9B. | Other Information |
None.
105114
PART III
Items 10, 11, 12, 13 and 14
The information required by Items 10, 11, 12 (except for the information required by Item 201(d) ofRegulation S-K which is included in Part II, Item 5 of this report), 13 and 14 ofForm 10-K will be contained in, and is incorporated by reference from, the proxy statement for our 20072008 annual meeting of shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report.
PART IV
| |
| Item 15. | Exhibits, and Financial Statement Schedules |
(a)(1)Financial Statements.
The following consolidated financial statements of GEO are filed under Item 8 of Part II of this report:
Reports of Independent Registered Certified Public Accountants — Page 60
Consolidated Balance Sheets — December 31, 2006 and January 1, 2006 — Page 64
Consolidated Statements of Income — Fiscal years ended December 31, 2006, January 1, 2006 and January 2, 2005 — Page 63
Consolidated Statements of Cash Flows — Fiscal years ended December 31, 2006, January 1, 2006 and January 1, 2005 — Page 65
Consolidated Statements of Shareholders’ Equity and Comprehensive Income — Fiscal years ended December 31, 2006, January 1, 2006, and January 2, 2005 — Page 66
Notes to Consolidated Financial Statements — Pages 67 through 104report.
(2) Financial Statement Schedules.
Schedule II — Valuation and Qualifying Accounts — Page 110119
All other schedules specified in the accounting regulations of the Securities and Exchange Commission have been omitted because they are either inapplicable or not required.
(3) Exhibits Required by Item 601 ofRegulation S-K. The following exhibits are filed as part of this Annual Report:
| | | | | | | | | | | | | |
Exhibit
| Exhibit
| | | | | Exhibit
| | | | |
Number | Number | | | | Description | Number | | | | Description |
| |
| | 2 | .1 | | — | | Agreement and Plan of Merger, dated as of September 19, 2006, among the Company, GEO Acquisition II, Inc. and CentraCore Properties Trust (incorporated herein by reference to Exhibit 2.1 of the Company’s report onForm 8-K, filed on September 21, 2006) | 2 | .1 | | — | | Agreement and Plan of Merger, dated as of September 19, 2006, among the Company, GEO Acquisition II, Inc. and CentraCore Properties Trust (incorporated herein by reference to Exhibit 2.1 of the Company’s report onForm 8-K, filed on September 21, 2006) |
| | 3 | .1 | | — | | Amended and Restated Articles of Incorporation of the Company, dated May 16, 1994 (incorporated herein by reference to Exhibit 3.1 to the Company’s registration statement onForm S-1, filed on May 24, 1994) | 3 | .1 | | — | | Amended and Restated Articles of Incorporation of the Company, dated May 16, 1994 (incorporated herein by reference to Exhibit 3.1 to the Company’s registration statement onForm S-1, filed on May 24, 1994) |
| | 3 | .2 | | — | | Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s registration statement onForm S-1, filed on May 24, 1994) | 3 | .2 | | — | | Articles of Amendment to the Amended and Restated Articles of Incorporation, dated October 30, 2003* |
| | 4 | .1 | | — | | Indenture, dated July 9, 2003, by and between the Company and The Bank of New York, as Trustee, relating to 81/4% Senior Notes Due 2013 (incorporated herein by reference to Exhibit 4.1 to the Company’s report onForm 8-K, filed on July 29, 2003) | 3 | .3 | | — | | Articles of Amendment to the Amended and Restated Articles of Incorporation, dated November 25, 2003* |
| | 4 | .2 | | — | | Registration Rights Agreement, dated July 9, 2003, by and among the Company Corporation and BNP Paribas Securities Corp., Lehman Brothers Inc., First Analysis Securities Corporation, SouthTrust Securities, Inc. and Comerica Securities, Inc. (incorporated herein by reference to Exhibit 4.2 to the Company’s report onForm 8-K, filed on July 29, 2003) | 3 | .4 | | — | | Articles of Amendment to the Amended and Restated Articles of Incorporation, dated September 29, 2006* |
| | | 3 | .5 | | — | | Articles of Amendment to the Amended and Restated Articles of Incorporation, dated May 30, 2007* |
| | | 3 | .6 | | — | | Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s report on Form 8-K, filed on August 13, 2007) |
| | | 4 | .1 | | — | | Indenture, dated July 9, 2003, by and between the Company and The Bank of New York, as Trustee, relating to 81/4% Senior Notes Due 2013 (incorporated herein by reference to Exhibit 4.1 to the Company’s report onForm 8-K, filed on July 29, 2003) |
| | | 4 | .2 | | — | | Registration Rights Agreement, dated July 9, 2003, by and among the Company Corporation and BNP Paribas Securities Corp., Lehman Brothers Inc., First Analysis Securities Corporation, SouthTrust Securities, Inc. and Comerica Securities, Inc. (incorporated herein by reference to Exhibit 4.2 to the Company’s report onForm 8-K, filed on July 29, 2003) |
| | | 4 | .3 | | — | | Rights Agreement, dated as of October 9, 2003, between the Company and EquiServe Trust Company, N.A., as the Rights Agent (incorporated herein by reference to Exhibit 4.3 to the Company’s report onForm 8-K, filed on July 29, 2003) |
| | | 10 | .1 | | — | | Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s registration statement onForm S-1, filed on May 24, 1994)† |
| | | 10 | .2 | | — | | 1994 Stock Option Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s registration statement onForm S-1, filed on May 24, 1994)† |
106115
| | | | | | | | | | | | | |
Exhibit
| Exhibit
| | | | | Exhibit
| | | | |
Number | Number | | | | Description | Number | | | | Description |
| |
| | 4 | .3 | | — | | Rights Agreement, dated as of October 9, 2003, between the Company and EquiServe Trust Company, N.A., as the Rights Agent (incorporated herein by reference to Exhibit 4.3 to the Company’s report onForm 8-K, filed on July 29, 2003) | 10 | .3 | | — | | Form of Indemnification Agreement between the Company and its Officers and Directors (incorporated herein by reference to Exhibit 10.3 to the Company’s registration statement onForm S-1, filed on May 24, 1994)† |
| | 10 | .1 | | — | | Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s registration statement onForm S-1, filed on May 24, 1994)† | 10 | .4 | | — | | Senior Officer Retirement Plan (incorporated herein by reference to Exhibit 10.4 to the Company’s registration statement onForm S-1/A, filed on December 22, 1995)† |
| | 10 | .2 | | — | | 1994 Stock Option Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s registration statement onForm S-1, filed on May 24, 1994)† | 10 | .5 | | — | | Amendment to the Company’s Senior Officer Retirement Plan (incorporated herein by reference to Exhibit 10.5 to the Company’s report onForm 10-K, filed on March 23, 2005)† |
| | 10 | .3 | | — | | Form of Indemnification Agreement between the Company and its Officers and Directors (incorporated herein by reference to Exhibit 10.3 to the Company’s registration statement onForm S-1, filed on May 24, 1994)† | 10 | .6 | | — | | 1999 Stock Option Plan (incorporated herein by reference to Exhibit 10.12 to the Company’s report onForm 10-K, filed on March 30, 2000)† |
| | 10 | .4 | | — | | Senior Officer Retirement Plan (incorporated herein by reference to Exhibit 10.4 to the Company’s registration statement onForm S-1/A, filed on December 22, 1995)† | 10 | .7 | | — | | Amended and Restated Employment Agreement, dated November 4, 2004, between the Company and Dr. George C. Zoley (incorporated herein by reference to Exhibit 10.1 to the Company’s report onForm 10-Q, filed on November 4, 2004)† |
| | 10 | .5 | | — | | Amendment to the Company’s Senior Officer Retirement Plan (incorporated herein by reference to Exhibit 10.5 to the Company’s report onForm 10-K, filed on March 23, 2005)† | 10 | .8 | | — | | Amended and Restated Employment Agreement, dated November 4, 2004, between the Company and Wayne H. Calabrese (incorporated herein by reference to Exhibit 10.2 to the Company’s report onForm 10-Q, filed on November 5, 2004)† |
| | 10 | .6 | | — | | Director Deferral Plan (incorporated herein by reference to Exhibit 10.5 to the Company’s registration statement onForm S-1/A, filed on December 22, 1995)† | 10 | .9 | | — | | Executive Employment Agreement, dated March 7, 2002, between the Company and John G. O’Rourke (incorporated herein by reference to Exhibit 10.17 to the Company’s report onForm 10-Q, filed on May 15, 2002)† |
| | 10 | .7 | | — | | Senior Officer Incentive Plan (incorporated herein by reference to Exhibit 10.6 to the Company’s registration statement onForm S-1/A, filed on December 22, 1995)† | 10 | .10 | | — | | Executive Retirement Agreement, dated March 7, 2002, between the Company and Dr. George C. Zoley (incorporated herein by reference to Exhibit 10.18 to the Company’s report onForm 10-Q, filed on May 15, 2002)† |
| | 10 | .8 | | — | | Form of Master Agreement to Lease between the Company and CPT Operating Partnership L.P. (incorporated herein by reference to Exhibit 10.2 to the Company’s registration statement onForm S-11/A, filed on March 20, 1998) | 10 | .11 | | — | | Executive Retirement Agreement, dated March 7, 2002, between the Company and Wayne H. Calabrese (incorporated herein by reference to Exhibit 10.19 to the Company’s report onForm 10-Q, filed on May 15, 2002)† |
| | 10 | .9 | | — | | Form of Lease Agreement between CPT Operating Partnership L.P. and the Company (incorporated herein by reference to Exhibit 10.3 to the Company’s registration statement onForm S-11/A, filed on March 20, 1998) | 10 | .12 | | — | | Executive Retirement Agreement, dated March 7, 2002, between the Company and John G. O’Rourke (incorporated herein by reference to Exhibit 10.20 to the Company’s report onForm 10-Q, filed on May 15, 2002)† |
| | 10 | .10 | | — | | Form of Right to Purchase Agreement between the Company and CPT Operating Partnership L.P. (incorporated herein by reference to Exhibit 10.4 to the Company’s registration statement onForm S-11/A, filed on March 20, 1998) | 10 | .13 | | — | | Amended Executive Retirement Agreement, dated January 17, 2003, by and between the Company and George C. Zoley (incorporated herein by reference to Exhibit 10.18 to the Company’s report onForm 10-K, filed on March 20, 2003)† |
| | 10 | .11 | | — | | Form of Option Agreement between the Company and CPT Operating Partnership L.P (incorporated herein by reference to Exhibit 10.5 to the Company’s registration statement onForm S-11/A, filed on March 20, 1998) | 10 | .14 | | — | | Amended Executive Retirement Agreement, dated January 17, 2003, by and between the Company and Wayne H. Calabrese (incorporated herein by reference to Exhibit 10.19 to the Company’s report onForm 10-K, filed on March 20, 2003)† |
| | 10 | .12 | | — | | 1999 Stock Option Plan (incorporated herein by reference to Exhibit 10.12 to the Company’s report onForm 10-K, filed on March 30, 2000)† | 10 | .15 | | — | | Amended Executive Retirement Agreement, dated January 17, 2003, by and between the Company and John G. O’Rourke (incorporated herein by reference to Exhibit 10.20 to the Company’s report onForm 10-K, filed on March 20, 2003)† |
| | 10 | .13 | | — | | Amended and Restated Employment Agreement, dated November 4, 2004, between the Company and Dr. George C. Zoley (incorporated herein by reference to Exhibit 10.1 to the Company’s report onForm 10-Q, filed on November 4, 2004)† | 10 | .16 | | — | | Senior Officer Employment Agreement, dated March 23, 2005, by and between the Company and John J. Bulfin (incorporated herein by reference to Exhibit 10.22 to the Company’s report onForm 10-K, filed on March 23, 2005)† |
| | 10 | .14 | | — | | Amended and Restated Employment Agreement, dated November 4, 2004, between the Company and Wayne H. Calabrese (incorporated herein by reference to Exhibit 10.2 to the Company’s report onForm 10-Q, filed on November 5, 2004)† | 10 | .17 | | — | | Senior Officer Employment Agreement, dated March 23, 2005, by and between the Company and Jorge A. Dominicis (incorporated herein by reference to Exhibit 10.23 to the Company’s report onForm 10-K, filed on March 23, 2005)† |
| | 10 | .15 | | — | | Executive Employment Agreement, dated March 7, 2002, between the Company and John G. O’Rourke (incorporated herein by reference to Exhibit 10.17 to the Company’s report onForm 10-Q, filed on May 15, 2002)† | 10 | .18 | | — | | Senior Officer Employment Agreement, dated March 23, 2005, by and between the Company and John M. Hurley (incorporated herein by reference to Exhibit 10.24 to the Company’s report onForm 10-K, filed on March 23, 2005)† |
| | 10 | .16 | | — | | Executive Retirement Agreement, dated March 7, 2002, between the Company and Dr. George C. Zoley (incorporated herein by reference to Exhibit 10.18 to the Company’s report onForm 10-Q, filed on May 15, 2002)† | 10 | .19 | | — | | Office Lease, dated September 12, 2002, by and between the Company and Canpro Investments Ltd. (incorporated herein by reference to Exhibit 10.22 to the Company’s report onForm 10-K, filed on March 20, 2003) |
| | 10 | .17 | | — | | Executive Retirement Agreement, dated March 7, 2002, between the Company and Wayne H. Calabrese (incorporated herein by reference to Exhibit 10.19 to the Company’s report onForm 10-Q, filed on May 15, 2002)† | 10 | .20 | | — | | The Geo Group, Inc. Senior Management Performance Award Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 10-Q, filed on May 13, 2005) |
| | 10 | .18 | | — | | Executive Retirement Agreement, dated March 7, 2002, between the Company and John G. O’Rourke (incorporated herein by reference to Exhibit 10.20 to the Company’s report onForm 10-Q, filed on May 15, 2002)† | 10 | .21 | | — | | The GEO Group, Inc. 2006 Stock Incentive Plan*† |
| | 10 | .19 | | — | | Amended Executive Retirement Agreement, dated January 17, 2003, by and between the Company and George C. Zoley (incorporated herein by reference to Exhibit 10.18 to the Company’s report onForm 10-K, filed on March 20, 2003)† | 10 | .22 | | — | | Amendment to The Geo Group, Inc. 2006 Stock Incentive Plan (incorporated herein by reference to the Company’s report on Form 10-Q, filed on August 9, 2007). |
107116
| | | | | | | | | | | | | |
Exhibit
| Exhibit
| | | | | Exhibit
| | | | |
Number | Number | | | | Description | Number | | | | Description |
| |
| | 10 | .20 | | — | | Amended Executive Retirement Agreement, dated January 17, 2003, by and between the Company and Wayne H. Calabrese (incorporated herein by reference to Exhibit 10.19 to the Company’s report onForm 10-K, filed on March 20, 2003)† | 10 | .23 | | — | | Third Amended and Restated Credit Agreement, dated as of January 24, 2007, by and among The GEO Group, Inc., as Borrower, BNP Paribas, as Administrative Agent, BNP Paribas Securities Corp. as Lead Arranger and Syndication Agent, and the lenders who are, or may from time to time become, a party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s report onForm 8-K, filed on January 30, 2007) |
| | 10 | .21 | | — | | Amended Executive Retirement Agreement, dated January 17, 2003, by and between the Company and John G. O’Rourke (incorporated herein by reference to Exhibit 10.20 to the Company’s report onForm 10-K, filed on March 20, 2003)† | 10 | .24 | | — | | Amendment No. 1 to the Third Amended and Restated Credit Agreement, dated as of January 31, 2007, between The GEO Group, Inc., as Borrower, and BNP Paribas, as Lender and as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s report onForm 8-K, filed on February 6, 2007) |
| | 10 | .22 | | — | | Senior Officer Employment Agreement, dated March 23, 2005, by and between the Company and John J. Bulfin (incorporated herein by reference to Exhibit 10.22 to the Company’s report onForm 10-K, filed on March 23, 2005)*† | 10 | .25 | | — | | Amendment No. 2 to the Third Amended and Restated Credit Agreement, dated as of January 31, 2007, between The GEO Group, Inc., as Borrower, and BNP Paribas, as Lender and as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s report onForm 8-K, filed on February 20, 2007) |
| | 10 | .23 | | — | | Senior Officer Employment Agreement, dated March 23, 2005, by and between the Company and Jorge A. Dominicis (incorporated herein by reference to Exhibit 10.23 to the Company’s report onForm 10-K, filed on March 23, 2005)*† | 10 | .26 | | — | | Amendment No. 3 to the Third Amended and Restated Credit Agreement dated as of May 2, 2007, between The Geo Group, Inc., as Borrower, and BNP Paribas, as Lender and as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 8-K, dated May 8, 2007) |
| | 10 | .24 | | — | | Senior Officer Employment Agreement, dated March 23, 2005, by and between the Company and John M. Hurley (incorporated herein by reference to Exhibit 10.24 to the Company’s report onForm 10-K, filed on March 23, 2005)*† | 21 | .1 | | — | | Subsidiaries of the Company* |
| | 10 | .25 | | — | | Senior Officer Employment Agreement, dated March 23, 2005, by and between the Company and Donald H. Keens (incorporated herein by reference to Exhibit 10.25 to the Company’s report onForm 10-K, filed on March 23, 2005)*† | 23 | .1 | | — | | Consent of Grant Thornton LLP, independent registered certified public accountants* |
| | 10 | .26 | | — | | Office Lease, dated September 12, 2002, by and between the Company and Canpro Investments Ltd. (incorporated herein by reference to Exhibit 10.22 to the Company’s report onForm 10-K, filed on March 20, 2003) | 23 | .2 | | — | | Consent of Ernst & Young LLP, independent registered certified public accountants* |
| | 10 | .27 | | — | | Asset Purchase Agreement, December 9, 2005, by and between GEO Care, Inc., a Florida corporation and Atlantic Shores Hospital, LLC (incorporated herein by reference to Exhibit 10.28 to the Company’s report on Form 10-K, filed on March 17, 2006) | 31 | .1 | | — | | Rule 13a-14(a) Certification in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.* |
| | 10 | .28 | | — | | The GEO Group, Inc. 2006 Stock Incentive Plan*† | 31 | .2 | | — | | Rule 13a-14(a) Certification in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.* |
| | 10 | .29 | | — | | Third Amended and Restated Credit Agreement, dated as of January 24, 2007, by and among The GEO Group, Inc., as Borrower, BNP Paribas, as Administrative Agent, BNP Paribas Securities Corp. as Lead Arranger and Syndication Agent, and the lenders who are, or may from time to time become, a party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s report onForm 8-K, filed on January 30, 2007) | 32 | .1 | | — | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| | 10 | .30 | | — | | Amendment No. 1 to the Third Amended and Restated Credit Agreement, dated as of January 31, 2007, between The GEO Group, Inc., as Borrower, and BNP Paribas, as Lender and as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s report onForm 8-K, filed on February 6, 2007) | 32 | .2 | | — | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| | 10 | .31 | | — | | Amendment No. 2 to the Third Amended and Restated Credit Agreement, dated as of January 31, 2007, between The GEO Group, Inc., as Borrower, and BNP Paribas, as Lender and as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s report onForm 8-K, filed on February 20, 2007) | |
| | 21 | .1 | | — | | Subsidiaries of the Company* | |
| | 23 | .1 | | — | | Consent of Grant Thornton LLP, independent registered certified public accountants | |
| | 23 | .2 | | — | | Consent of Ernst & Young LLP, independent registered certified public accountants* | |
| | 31 | .1 | | — | | Rule 13a-14(a) Certification in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.* | |
| | 31 | .2 | | — | | Rule 13a-14(a) Certification in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.* | |
| | 32 | .1 | | — | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | |
| | 32 | .2 | | — | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | |
| | |
| * | | Filed herewith. |
| |
| † | | Management contract or compensatory plan, contract or agreement as defined in Item 402(a)(3) ofRegulation S-K. |
108117
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE GEO GROUP, INC.
John G. O’RourkeSenior Vice President of Finance &
Chief Financial Officer
Date: March 2, 2007February 15, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
| | | | | | | |
Signature | | Title | | Date |
| |
| | | | |
/s/ George C. Zoley
George C. Zoley | | Chairman of the Board & Chief Executive Officer
(principal executive officer) | | March 2, 2007February 15, 2008 |
| | | | | |
/s/ John G. O’Rourke
John G. O’Rourke | | Senior Vice President of Finance &
Chief Financial Officer
(principal financial officer) | | March 2, 2007February 15, 2008 |
| | | | | |
/s/ Brian R. Evans
Brian R. Evans | | Vice President of Finance, Treasurer & Chief Accounting Officer & Controller (principal
(principal accounting officer) | | March 2, 2007February 15, 2008 |
| | | | | |
/s/ Wayne H. Calabrese
Wayne H. Calabrese | | Vice Chairman of the Board,
President & DirectorChief Operating Officer | | March 2, 2007February 15, 2008 |
| | | | | |
/s/ Norman A. Carlson
Norman A. Carlson | | Director | | March 2, 2007February 15, 2008 |
| | | | | |
/s/ Anne N. Foreman
Anne N. Foreman | | Director | | March 2, 2007February 15, 2008 |
| | | | | |
/s/ John M. Palms
John M. Palms | | Director | | March 2, 2007February 15, 2008 |
| | | | | |
/s/ Richard H. Glanton
Richard H. Glanton | | Director | | March 2, 2007February 15, 2008 |
| | | | | |
/s/ John M. Perzel
John M. Perzel | | Director | | March 2, 2007February 15, 2008 |
109118
THE GEO GROUP, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years Ended December 30, 2007, December 31, 2006, and January 1, 2006 and January 2, 2005
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Balance at
| | Charged to
| | Charged
| | Deductions,
| | Balance at
| | | Balance at
| | Charged to
| | Charged
| | Deductions,
| | Balance at
| |
| | | Beginning
| | Cost and
| | to Other
| | Actual
| | End of
| | | Beginning
| | Cost and
| | to Other
| | Actual
| | End of
| |
Description | | of Period | | Expenses | | Accounts | | Charge-Offs | | Period | | | of Period | | Expenses | | Accounts | | Charge-Offs | | Period | |
| | | (In thousands) | | | (In thousands) | |
| |
| YEAR ENDED DECEMBER 30, 2007: | | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | | $ | 926 | | | $ | 26 | | | $ | 190 | | | $ | (317 | ) | | $ | 445 | |
| YEAR ENDED DECEMBER 31, 2006: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 224 | | | $ | 762 | | | $ | — | | | $ | (60 | ) | | $ | 926 | | | $ | 224 | | | $ | 762 | | | $ | — | | | $ | (60 | ) | | $ | 926 | |
| YEAR ENDED JANUARY 1, 2006: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 907 | | | $ | — | | | $ | — | | | $ | (683 | ) | | $ | 224 | | | $ | 907 | | | $ | — | | | $ | — | | | $ | (683 | ) | | $ | 224 | |
| YEAR ENDED JANUARY 2, 2005: | | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 954 | | | $ | 229 | | | $ | — | | | $ | (276 | ) | | $ | 907 | | |
| YEAR ENDED DECEMBER 30, 2007: | | | | | | | | | | | | | | | | | | | | | |
| Asset Replacement Reserve | | | $ | 768 | | | $ | 328 | | | $ | — | | | $ | (211 | ) | | $ | 885 | |
| YEAR ENDED DECEMBER 31, 2006: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Replacement Reserve | | $ | 723 | | | $ | 258 | | | $ | — | | | $ | (213 | ) | | $ | 768 | | | $ | 723 | | | $ | 258 | | | $ | — | | | $ | (213 | ) | | $ | 768 | |
| YEAR ENDED JANUARY 1, 2006: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Replacement Reserve | | $ | 614 | | | $ | 290 | | | $ | — | | | $ | (181 | ) | | $ | 723 | | | $ | 614 | | | $ | 290 | | | $ | — | | | $ | (181 | ) | | $ | 723 | |
| YEAR ENDED JANUARY 2, 2005: | | | | | | | | | | | | | | | | | | | | | |
| Asset Replacement Reserve | | $ | 417 | | | $ | 465 | | | $ | — | | | $ | (268 | ) | | $ | 614 | | |
110119
