10-K 1 g17712e10vk.htm 10-K 10-K
Table of Contents

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 28, 2008
 
Commission file number: 1-14260
 
 
 
 
The GEO Group, Inc.
(Exact name of registrant as specified in its charter)
 
     
Florida   65-0043078
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
One Park Place, Suite 700,
621 Northwest 53rd Street
Boca Raton, Florida
(Address of principal executive offices)
  33487-8242
(Zip Code)
 
Registrant’s telephone number (including area code):
(561) 893-0101
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, $0.01 Par Value   New York Stock Exchange
 
Indicate by a check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, 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 of Regulation 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 this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
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 in Rule 12b-2 of the Act).  Yes o     No þ
 
The aggregate market value of the 50,980,497 shares of common stock held by non-affiliates of the registrant as of June 27, 2008 (based on the last reported sales price of such stock on the New York Stock Exchange on such date of $22.43 per share) was approximately $1,143,492,547.
 
As of Friday, February 13, 2009 the registrant had 51,122,775 shares of common stock outstanding.
 
Certain portions of the registrant’s annual report to security holders for fiscal year ended December 28, 2008 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 2009 annual meeting of shareholders are incorporated by reference into Part III of this report.
 


 

 
TABLE OF CONTENTS
 
                 
        Page
 
      Business     3  
      Risk Factors     20  
      Unresolved Staff Comments     34  
      Properties     34  
      Legal Proceedings     34  
      Submission of Matters to a Vote of Security Holders     36  
 
      Market for Registrant’s Common Equity, Related Stockholder Matter and Issuer Purchases of Equity Securities     36  
      Selected Financial Data     39  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     39  
      Quantitative and Qualitative Disclosures About Market Risk     65  
      Financial Statements and Supplementary Data     66  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     118  
      Controls and Procedures     118  
      Other Information     118  
 
      Directors, Executive Officers and Corporate Governance     119  
      Executive Compensation     119  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     119  
      Certain Relationships and Related Transactions, and Director Independence     119  
      Principal Accountant and Fees and Services     119  
 
      Exhibits and Financial Statement Schedules     119  
    123  
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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PART I
 
Item 1.   Business
 
As used in this report, the terms “we,” “us,” “our,” “GEO” and the “Company” refer to The GEO Group, Inc., its consolidated subsidiaries and its unconsolidated affiliates, unless otherwise expressly stated or the context otherwise requires.
 
General
 
We are a leading provider of government-outsourced services specializing in the management of correctional, detention and mental health and residential treatment facilities in the United States, Canada, Australia, South Africa and the United 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 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 are state-of-the-art facilities that maximize security and efficiency.
 
In 1988, we were incorporated as Wackenhut Corrections Corporation and in 2003 our Board of Directors approved our name change to The GEO Group, Inc. As of the fiscal year ended December 28, 2008, we managed 59 facilities totaling approximately 53,400 beds worldwide and had an additional 3,586 beds under development at seven facilities, including an expansion and renovation of one vacant facility which we own and the expansion of six facilities which we currently operate, of which we own three. Excluding our 200-bed Oak Creek Confinement Center, which is a facility held for sale at December 28, 2008, we maintained an average companywide facility occupancy rate of 96.6%.
 
At our correctional and detention facilities in the U.S. and internationally, we offer services that go beyond simply housing offenders in a safe and secure manner. The services we offer to inmates at most of our managed facilities include a wide array of in-facility rehabilitative and educational programs. Such programs include basic education through academic programs designed to improve inmates’ literacy levels and enhance the opportunity to acquire General Education Development certificates and also include vocational training for in-demand occupations to inmates who lack marketable job skills. We offer life skills/transition planning programs that provide job search training and employment skills, anger management skills, health education, financial responsibility training, parenting skills and other skills associated with becoming productive citizens. We also offer counseling, education and/or treatment to inmates with alcohol and drug abuse problems at most of the domestic facilities we manage.
 
Our mental health facilities and residential treatment services primarily involve the provision of acute mental health and related administrative services to mentally ill patients that have been placed under public sector supervision and care. At these mental health facilities, we employ psychiatrists, physicians, nurses, counselors, social workers and other trained personnel to deliver active psychiatric treatment designed to diagnose, treat and rehabilitate patients for community reintegration.
 
Business Segments
 
We conduct our business through four reportable business segments: our U.S. corrections segment; our International services segment; our GEO Care segment; and our Facility construction and design segment. We have identified these four reportable segments to reflect our current view that we operate four distinct business lines, each of which constitutes a material part of our overall business. The U.S. corrections segment primarily encompasses our U.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


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United Kingdom. International services reviews opportunities to further diversify into related foreign-based governmental-outsourced services on an ongoing basis. Our GEO Care segment, which is operated by our wholly-owned subsidiary GEO Care, 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 been awarded management contracts. Financial information about these segments for fiscal years 2008, 2007 and 2006 is contained in “Note 15- Business Segments and Geographic Information” of the “Notes to Consolidated Financial Statements” included in this Form 10-K and is incorporated herein by this reference.
 
Recent Developments
 
On February 12, 2009, we announced the retirement of John G. O’Rourke, our Chief Financial Officer. He will retire effective August 2, 2009 and will be succeeded by Brian R. Evans, our current Vice President, Finance and Treasurer.
 
On October 29, 2008, we, along with one other joint venture partner, executed a Sale of Shares Agreement for the purchase of a portion of the remaining non-controlling shares of our consolidated South African Custodial Management Services Pty. Limited (“SACM”) which changed our profit sharing percentage from 76.25% to 88.75%. All of the non-controlling shares of the third joint venture partner were allocated between us and the second joint venture partner on a pro rata basis based on our respective ownership percentages. As a result of the share purchase, we recognized an increase in amortizable intangible assets of $1.9 million. See Note 1 to the Consolidated Financial Statements.
 
Facility activations
 
The following table shows new facilities that were activated during the fiscal year 2008:
 
                     
Facility
 
Location
 
Activation
 
Beds
   
Start date
 
Robert A. Deyton Detention Facility
  Lovejoy, GA   New contract     576     First Quarter 2008
Central Arizona Correctional Facility
  Florence, AZ   200-bed Expansion     1,200     First Quarter 2008
LaSalle Detention Facility
  Jena, LA   744-bed Expansion     1,160     Second Quarter 2008
Joe Corley Detention Facility
  Conroe, TX   New contract     1,100     Third Quarter 2008
Northeast New Mexico Detention Facility
  Clayton, NM   New contract     625     Third Quarter 2008
Rio Grande Detention Center
  Laredo, TX   New contract     1,500     Fourth Quarter 2008
Maverick County Detention Facility
  Maverick, TX   New contract     688     Fourth Quarter 2008
East Mississippi Correctional Facility
  Meridian, MS   500-bed Expansion     1,500     Fourth Quarter 2008
 
Projects under development
 
In January 2009, we announced that our wholly owned U.K. subsidiary, GEO UK Ltd., has signed a contract with the United Kingdom Border Agency for the management and operation of the Harmondsworth Immigration Removal Centre (the “Centre”) located in London, England. Our contract for the management and operation of the Centre will have a term of three years and is expected to generate approximately $14.0 million in annual revenues for us. Under the terms of the contract, we will take over management of the existing Centre, which has a current capacity of 260 beds, on June 29, 2009. Additionally, the Centre will be expanded by 360 beds bringing its capacity to 620 beds when the expansion is completed in June 2010. Upon completion of the expansion, our management contract is expected to generate approximately $19.5 million in annual revenues.
 
On October 21, 2008, we announced that we have received a Notice of Intent to Award contracts from the State of Florida, Department of Management Services for the design, construction, and operation of a new 2,000-bed special needs prison to be located in Santa Rosa County, Florida. The new 2,000-bed prison will house medium and close-custody security adult male inmates, the majority of whom will require chronic medical and mental health treatment. Under the award, we will begin the design and construction, through tax-


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exempt bonds, of a new $120.0 million, 2,000-bed prison that will be lease-purchase financed and owned by the State of Florida. We expect to begin management and operation of the prison upon its completion by the end of Second Quarter 2010. This management contract is expected to generate approximately $48.0 million in annualized revenues.
 
In August 2008, we announced plans to expand our Broward Transition Center by 100 beds which will increase the capacity of this facility to 700 beds. This expansion is expected to cost approximately $7.0 million and is scheduled to be completed in First Quarter 2010. We do not currently have a contract with a government client to operate this expansion.
 
On August 7, 2008, we announced the expansion of one of our company-owned facilities. We have begun the expansion of our Northwest Detention Center, which currently houses immigration detainees, to increase its total capacity to 1,575 beds. We expect the 545-bed expansion to cost approximately $40.0 million and to be completed by December 2009. We do not currently have a management contract with a government client to operate this expansion but plan to market the new beds to the U.S. Immigration and Customs Enforcement, our existing client at this facility and, if necessary, to other federal and state agencies around the country.
 
On May 1, 2008, we announced plans to complete a 1,225-bed expansion of our existing 500-bed North Lake Correctional Facility located in Baldwin, Michigan. We estimate the expansion of this company-owned facility, which is currently idle, to cost approximately $60.0 million. We have started construction on this facility and expect the project to be completed by Fourth Quarter 2009. We do not currently have a management contract with a government client to operate the North Lake Correctional Facility following its expansion and are currently marketing the beds to federal and state agencies around the country.
 
On October 15, 2007, we announced the expansion of our 400-bed Aurora ICE Processing Center (the “Center”) located in Aurora, Colorado. We began a 1,100-bed expansion of the company-owned Center in Second Quarter 2008 and expect to complete construction in First Quarter 2010. The expansion is expected to cost approximately $67.5 million. Once completed, GEO expects the 1,100 expansion beds to be used by federal detention agencies. The expansion will increase the Center’s capacity to 1,500 beds.
 
Contract terminations
 
On December 22, 2008, we announced the closure of our U.K.-based transportation division, Recruitment Solutions International (“RSI”). We purchased RSI, which provided transportation services to The Home Office Nationality and Immigration Directorate, for approximately $2.0 million in 2006. As a result of the termination of our transportation business in the United Kingdom, we wrote off assets of $2.6 million including goodwill of $2.3 million. The operating results of this business are reported as discontinued operations for all periods presented.
 
On November 7, 2008, we announced we received a notice of discontinuation of our contract with the State of Idaho, Department of Correction (“Idaho DOC”) for the housing of approximately 305 out-of-state inmates at the managed-only Bill Clayton Detention Center (the “Detention Center”) effective January 5, 2009. This contract generated $5.9 million in revenues in the fiscal year ended December 28, 2008. The operating results of this business are reported as discontinued operations for all periods presented.
 
On October 1, 2008, we announced that our management contract for the continued management and operation of the 1,040-bed Sanders Estes Unit in Venus, Texas, was awarded to a competitor. The Sanders Estes Unit generated approximately $11.0 million in annual operating revenues for us in 2008 under a managed-only contract with TDJC. This contract terminated effective as of the beginning of First Quarter 2009.
 
On August 29, 2008, we announced our discontinuation of our contract with Delaware County, Pennsylvania for the management of the county-owned 1,883-bed George W. Hill Correctional Facility effective December 31, 2008. This facility had previously been the only local county jail managed by us and was generating approximately $38.0 million in annualized operating revenues. We do not expect the discontinuation of the Delaware County, Pennsylvania contract to have a material adverse impact on our


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financial condition, results of operations or cash flows. The operating results of this business are reported as discontinued operations for all periods presented.
 
On June 16, 2008, we announced the discontinuation by mutual agreement of our contract with the State of New Mexico Department of Health for the management of Fort Bayard Medical Center effective June 30, 2008. This contract generated approximately $3.5 million in annualized revenues. We do not expect that the termination of this contract will have a material adverse impact on our financial condition, results of operations or cash flows. The operating results of this business are reported as discontinued operations for all periods presented.
 
As we previously disclosed on May 1, 2008, GEO Care Inc., recently activated the new 238-bed South Florida Evaluation and Treatment Center, which we refer to as SFETC, in Florida City, Florida which replaced the old SFETC center located in downtown Miami, Florida. Following the opening of the new SFETC center, the State of Florida approved budget language providing for the closure of the 100-bed South Florida Evaluation and Treatment Center Annex, referred to as the Annex, effective July 31, 2008. The Annex generated approximately $7.5 million in revenues for GEO Care in 2008. This closure was partially offset by an increase in the capacity of two GEO Care facilities: the new SFETC center and the Treasure Coast Forensic Treatment Center located in Stuart, Florida, for a total of 73 beds. The closure of the Annex did not have a material adverse impact on our financial condition, results of operations or cash flows.
 
On April 30 2008, we exercised our contractual right to terminate our contract for the operation and management of the Tri-County Justice and Detention Center located in Ullin, Illinois. We managed the facility through August 28, 2008. The termination of this contract did not have a material adverse impact on our financial condition, results of operations or cash flows.
 
Senior Credit Facility
 
On August 26, 2008, we completed a fourth amendment to our senior secured credit facility through the execution of Amendment No. 4 to the Amended and Restated Credit Agreement. Amendment No. 4 revises certain leverage ratios, eliminates the fixed charge coverage ratio, adds a new interest coverage ratio and sets forth new capital expenditure limits under the Credit Agreement. Additionally, Amendment No. 4 permits us to add incremental borrowings under the accordion feature of our Senior Credit Facility of up to $150.0 million on or prior to December 31, 2008 and up to an additional $150.0 million after December 31, 2008. On October 29, 2008 and again on November 20, 2008, we exercised this accordion feature of our Senior Secured Credit Facility to add $85.0 million and $5.0 million, respectively, for a total of $90.0 million in additional borrowing capacity under the revolving portion of our Senior Credit Facility. As of December 28, 2008, the Senior Credit Facility consisted of a $365.0 million, seven-year term loan (“Term Loan B”), and a $240.0 million five-year revolver which expires September 14, 2010 (the “Revolver”).
 
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 facilities. We achieved a median re-accreditation score of 99.5% in fiscal year 2008. Approximately 64.2%, excluding discontinued operations, of our 2008 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


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procedures to meet and adhere to the ACA standards. The NCCHC standards, in most cases, exceed ACA Health Care Standards.
 
Business Development Overview
 
We intend to pursue a diversified growth strategy by winning new clients and contracts, expanding our government services portfolio and pursuing selective acquisition opportunities. Our primary potential customers are governmental agencies responsible for local, state and federal correctional facilities in the United States and governmental agencies responsible for correctional facilities in Australia, South Africa and the United Kingdom. Other primary customers include state agencies in the U.S. responsible for mental health facilities, and other foreign governmental agencies. We achieve organic growth through competitive bidding that begins with the issuance by a government agency of a request for proposal, or RFP. We primarily rely on the RFP process for organic growth in our U.S. and international corrections operations as well as in our mental health and residential treatment services business.
 
Our state and local experience has been that a period of approximately sixty to ninety days is generally required from the issuance of a request for proposal to the submission of our response to the request for proposal; that between one and four months elapse between the submission of our response and the agency’s award for a contract; and that between one and four months elapse between the award of a contract and the commencement of facility construction or management of the facility, as applicable.
 
Our federal experience has been that a period of approximately sixty to ninety days is generally required from the issuance of a request for proposal to the submission of our response to the request for proposal; that between twelve and eighteen months elapse between the submission of our response and the agency’s award for a contract; and that between four and eighteen weeks elapse between the award of a contract and the commencement of facility construction, management of the facility, as applicable.
 
If the state, local or federal facility for which an award has been made must be constructed, our experience is that construction usually takes between nine and twenty-four months to complete, depending on the size and complexity of the project. Therefore, management of a newly constructed facility typically commences between ten and twenty-eight months after the governmental agency’s award.
 
We believe that our long operating history and reputation have earned us credibility with both existing and prospective customers when bidding on new facility management contracts or when renewing existing contracts. Our success in the RFP process has resulted in a pipeline of new projects with significant revenue potential. During 2008, we announced six new projects and corresponding management contracts representing 5,042 beds compared to the announcement of seven new projects and corresponding management contracts representing 4,499 beds during 2007.
 
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.
 
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 28, 2008, we had provided services for the design and construction of forty-four facilities and for the redesign and renovation and expansion of twenty-five facilities.


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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:
 
  •  a one time general revenue appropriation by the governmental agency for the cost of the new facility;
 
  •  general obligation bonds that are secured by either a limited or unlimited tax levy by the issuing governmental entity; or
 
  •  revenue bonds or certificates of participation secured by an annual lease payment that is subject to annual or bi-annual legislative appropriations.
 
We may also act as a source of financing or as a facilitator with respect to the financing of the construction of a facility. In these cases, the construction of such facilities may be financed through various methods including the following:
 
  •  funds from equity offerings of our stock;
 
  •  cash on hand and/or cash flows from our operations;
 
  •  borrowings by us from banks or other institutions (which may or may not be subject to government guarantees in the event of contract termination); or
 
  •  lease arrangements with third parties.
 
If the project is financed using direct governmental appropriations, with proceeds of the sale of bonds or other obligations issued prior to the award of the project, then financing is in place when the contract relating to the construction or renovation project is executed. If the project is financed using project-specific tax-exempt bonds or other obligations, the construction contract is generally subject to the sale of such bonds or obligations. Generally, substantial expenditures for construction will not be made on such a project until the tax-exempt bonds or other obligations are sold; and, if such bonds or obligations are not sold, construction and therefore, management of the facility, may either be delayed until alternative financing is procured or the development of the project will be suspended or entirely cancelled. If the project is self-financed by us, then financing is generally in place prior to the commencement of construction.
 
Under our construction and design management contracts, we generally agree to be responsible for overall project development and completion. We typically act as the primary developer on construction contracts for facilities and subcontract with bonded National and/ or Regional Design Build Contractors. Where possible, we subcontract with construction companies that we have worked with previously. We make use of an in-house staff of architects and operational experts from various correctional disciplines (e.g. security, medical service, food service, inmate programs and facility maintenance) as part of the team that participates from conceptual design through final construction of the project. This staff coordinates all aspects of the development with subcontractors and provides site-specific services.
 
When designing a facility, our architects use, with appropriate modifications, prototype designs we have used in developing prior projects. We believe that the use of these designs allows us to reduce the potential of cost overruns and construction delays and to reduce the number of correctional officers required to provide security at a facility, thus controlling costs both to construct and to manage the facility. Our facility designs also maintain security because they increase the area under direct surveillance by correctional officers and make use of additional electronic surveillance.


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The following table sets forth current expansion and development projects at December 28, 2008:
 
                                         
          Capacity
    Estimated
         
    Additional
    Following
    Completion
         
Facilities Under Construction
  Beds     Expansion     Date    
Customer
  Financing
 
Robert A. Deyton Detention Facility(1)
    192       768       Q1       2009     Clayton County   GEO
Florida Civil Commitment Center, Florida(2)
    40       720       Q1       2009     DCF   Third party
Graceville Correctional Facility, Florida
    384       1,884       Q1       2009     DMS   Third party
North Lake Correctional Facility, Michigan(3)
    1,225       1,725       Q4       2009     Federal or
Various States
  GEO
Northwest Detention Center, Washington(4)
    545       1,575       Q4       2009     Federal   GEO
Aurora ICE Processing Center, Colorado(4)
    1,100       1,500       Q1       2010     Federal   GEO
Broward Transition Center, Florida(4)
    100       700       Q1       2010     Federal   GEO
                                         
      3,586                                  
 
 
(1) This facility was activated in January 2009.
 
(2) This facility will replace the adjacent existing 680-bed facility.
 
(3) We did not have a customer for this facility at December 28, 2008 but are currently marketing this facility to various federal and state agencies.
 
(4) We do not yet have a customer for the expansion beds.
 
Competitive Strengths
 
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 22 years, the State of California for 21 years, the State of Texas for approximately 21 years, various Australian state government entities for 17 years and the State of Florida for approximately 15 years. These customers accounted for 64.9% of our consolidated revenues for the fiscal year ended December 28, 2008. Our strong operating track record has enabled us to achieve a high renewal rate for 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 approximately 1,500 beds, representing five contracts and $109.9 million in revenues, excluding our contract revenues for South Florida Evaluation and Treatment Center-Annex for 2008, from 325 beds, representing one contract and $31.7 million in revenues in 2004.


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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 our U.S.-based competitors without overseas operations may have difficulty pursuing. Our International services business generated $128.7 million revenue in 2008, representing 12.3% of our consolidated 2008 revenues. We believe we are well positioned to continue benefiting from foreign governments’ initiatives to outsource correctional services.
 
Experienced, Proven Senior Management Team
 
Our top three senior executives have over 61 years of combined industry experience, have worked together at our company for more than 16 years and have established a track record of growth and profitability. Under their leadership, our annual consolidated revenues from continuing operations have grown from $40.0 million in 1991 to $1.04 billion in 2008. 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 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 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 64.2% of our U.S. corrections revenue as of year-end 2008.
 
Maintain Disciplined Operating Approach
 
We manage our business on a contract by contract basis in order to maximize our operating margins. We typically refrain from pursuing contracts that we do not believe will yield attractive profit margins in relation to the associated operational risks. In addition, we generally have not in the past engaged in extensive facility development without having a corresponding management contract award in place, although we have increasingly begun to do so more recently in select situations to pursue what we believe are attractive business development opportunities. 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.


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Table of Contents

Expand Into Complementary Government-Outsourced Services
 
We intend to capitalize on our long term relationships with governmental agencies to become a more diversified provider of government-outsourced services. These opportunities may include services which leverage our existing competencies and expertise, including the design, construction and management of large facilities, the training and management of a large workforce and our ability to service the needs and meet the requirements of government customers. We believe that government outsourcing of currently internalized functions will increase largely as a result of the public sector’s desire to maintain quality service levels amid governmental budgetary constraints. We believe that our successful expansion into the mental health and residential treatment services sector through GEO Care is an example of our ability to deliver higher quality services at lower costs in new areas of privatization.
 
Pursue International Growth Opportunities
 
As a global provider of privatized correctional services, we are able to capitalize on opportunities to operate existing or new facilities on behalf of foreign governments. We currently have international operations in Australia, Canada, South Africa and the United Kingdom. On January 28, 2009 we announced that one wholly-owned U.K. subsidiary, GEO UK Ltd., signed a contract with the United Kingdom Border Agency for the management and operation of the Harmondsworth Immigration Removal Centre in London, England. We intend to further penetrate the current markets we operate in and to expand into new international markets which we deem attractive.
 
Selectively Pursue Acquisition Opportunities
 
We consider acquisitions that are strategic in nature and enhance our geographic platform on an ongoing basis. In November 2005, we acquired Correctional Services Corporation, or CSC, bringing over 8,000 additional adult correctional and detention beds under our management. In January 2007, we acquired CentraCore Properties Trust, or CPT, bringing the 7,743 beds we had been leasing from CPT, as well as an additional 1,126 beds leased to third parties, under our ownership. We plan 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-outsourced services areas.
 
Facilities
 
The following table summarizes certain information as of December 28, 2008 with respect to facilities that GEO (or a subsidiary or joint venture of GEO) operated under a management contract, had an award to manage or was in the process of expanding:
 
                                 
                    Commencement
           
Facility Name
  Design
      Facility
  Security
  of Current
      Renewal
  Managed Only
& Location(1),(7)
 
Capacity
 
Customer
 
Type
 
Level
 
Contract
 
Base Period
 
Options
 
Leased/ Owned
 
Domestic Contracts:
                               
                                 
Allen Correctional Center Kinder, LA   1,538   LA DPS&C   State Correctional
Facility
  Medium/
Maximum
  October 2008   6 months   One,
Two-year
  Manage
only
                                 
Arizona State Prison Florence West Florence, AZ   750   ADC   State DUI/RTC
Correctional
Facility
  Minimum   October 2002   10 years   Two,
Five-year
  Lease
                                 
Central Arizona Correctional Facility Florence, AZ   1,200   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   July 2002   10 years   Two,
Five-year
  Lease


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                    Commencement
           
Facility Name
  Design
      Facility
  Security
  of Current
      Renewal
  Managed Only
& Location(1),(7)
 
Capacity
 
Customer
 
Type
 
Level
 
Contract
 
Base Period
 
Options
 
Leased/ Owned
 
                                 
Aurora ICE Processing Center Aurora, CO   400 +1,100 expansion   ICE   Federal Detention
Facility
  Minimum/
Medium
  October 2006   8 months   Four,
One-year
  Own
                                 
Bridgeport Correctional Center Bridgeport, TX   520   TDCJ   State Correctional
Facility
  Minimum   September 2005   3 years   Two,
One-year
  Manage
Only
                                 
Bronx Community Re-entry Center Bronx, NY   110   BOP   Federal Halfway
House
  Minimum   October 2007   2 years   Three,
One-year
  Lease
                                 
Brooklyn Community Corrections Center Brooklyn, NY   177   BOP   Federal Halfway
House
  Minimum   February 2005   2 years   Three,
One-year
  Lease
                                 
Broward Transition Center Deerfield Beach, FL(6)   600 + 100 expansion   ICE   Federal Detention
Facility
  Minimum   October 2003   1 year   Four,
One-year
  Own
                                 
Central Texas Detention Facility San Antonio, TX(2)   688   Bexar County/ICE &
USMS
  Local & Federal
Detention Facility
  Minimum/
Medium
  January 2009   6 months   N/A   Lease
                                 
Central Valley MCCF McFarland, CA   625   CDCR   State Correctional
Facility
  Medium   March 1997   10 years   One,
Five year
  Own
                                 
Cleveland Correctional Center Cleveland, TX   520   TDCJ   State Correctional
Facility
  Minimum   January 2009   3 years   Two,
Two-year
  Manage
Only
                                 
Desert View MCCF Adelanto, CA   643   CDCR   State Correctional
Facility
  Medium   March 1997   10 years   One,
Five-year
  Own
                                 
East Mississippi Correctional Facility Meridian, MS   1,500   MDOC/IGA   State Mental
Health Correctional
Facility
  All Levels   August 2006   2 years   Three,
One-year
  Manage
only
                                 
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 Pearsall, TX(2)   391   Frio County/Other
Counties
  Local Detention
Facility
  All Levels   November 1997   12 years   One,
Five-year
  Leased
                                 
Golden State MCCF McFarland, CA   625   CDCR   State Correctional
Facility
  Medium   March 1997   10 years   One,
Five-year
  Own
                                 
Graceville Correctional Facility Graceville, FL   1,500 + 384
expansion
  DMS   State Correctional
Facility
  Medium/Close   September 2007   3 years   Two-year   Manage
Only
                                 
Guadalupe County Correctional Facility Santa Rosa, NM(2)   600   Guadalupe
County/NMCD
  Local/State
Correctional
Facility
  Medium   January 1999   3 years   One,
Two-year
and
Five, one-year
  Own

12


Table of Contents

                                 
                    Commencement
           
Facility Name
  Design
      Facility
  Security
  of Current
      Renewal
  Managed Only
& Location(1),(7)
 
Capacity
 
Customer
 
Type
 
Level
 
Contract
 
Base Period
 
Options
 
Leased/ Owned
 
                                 
Jefferson County Downtown Jail Beaumont, TX(2)   500   Jefferson
County/TDCJ/ICE/
USMS
  Local/State Federal
Detention Facility
  All Levels   May 1998   Month to month/   Continuous
until
terminated
  Manage
Only
                                 
Karnes Correctional Center Karnes City, TX(2)   679   Karnes County/ICE &
USMS
  Local & Federal
Detention Facility
  All Levels   May 1998   30 years   N/A   Own
                                 
LaSalle Detention Facility Jena, LA(2)   1,160   LEDD/ICE   Federal Detention
Facility
  Minimum/
Medium
  July 2007   Continuous 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, OK   2,518   ODOC   State Correctional
Facility
  Medium   July 2008   1 year   Four,
One-year
  Own
                                 
Lea County Correctional Facility Hobbs, NM(2),(3)   1,200   Lea County/NMCD   Local/State
Correctional
Facility
  All Levels   September 1998   5 years   Six,
One-year
  Own
                                 
Lockhart Secure Work Program Facilities Lockhart, TX   1,000   TDCJ   State Correctional
Facility
  Minimum/
Medium
  January 2009   3 years   Two,
One-year
  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
                                 
Maverick County Detention Facility Maverick, TX(2)   688   USMS/ BOP Maverick
County
  Local Detention
Facility
  Medium   December 2008   3 Years   Unlimited, Two-year   Manage
Only
                                 
McFarland CCF McFarland, CA   224   CDCR   State Correctional
Facility
  Minimum   January 2006   4.5 years   Two,
Five-year
  Own
                                 
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, FL   985   DMS   State Correctional
Facility
  Medium   July 2007   3 years   Unlimited, Two-year   Manage Only
                                 
Joe Corley Detention Facility Conroe, TX(2)   1,100   USMS/ ICE/ BOP
Montgomery County
  Local Correctional
Facility
  Medium   August 2008   2 years   Unlimited
2 year options
  Manage Only
                                 
New Castle Correctional Facility New Castle, IN   2,524   IDOC   State Correctional
Facility
  All   January 2006   4 years   Three,
Two-year
  Manage
Only
                                 
Newton County Correctional Center Newton, TX(2)   872   Newton County/TDCJ   Local/State
Correctional
Facility
  All Levels   February 2002   5 years   Two,
Five-year
  Manage
Only

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Table of Contents

                                 
                    Commencement
           
Facility Name
  Design
      Facility
  Security
  of Current
      Renewal
  Managed Only
& Location(1),(7)
 
Capacity
 
Customer
 
Type
 
Level
 
Contract
 
Base Period
 
Options
 
Leased/ Owned
 
                                 
Northeast New Mexico Detention Facility Clayton, NM(2)   625   Clayton/
NMCD
  Local/State
Correctional
Facility
  Medium   August 2008   5 years   Five,
One-year
  Manage
Only
                                 
North Texas ISF Fort Worth, TX   424   TDCJ   State Intermediate
Sanction Facility
  Minimum   March 2004   3 years   Four,
One-year
  Lease
                                 
Northwest Detention Center Tacoma, WA   1,030 + 545
expansion
  ICE   Federal Detention
Facility
  All Levels   April 2004   1 year   Four,
One-year
  Own
                                 
Queens Detention Facility Jamaica, NY   222   OFDT/USMS   Federal Detention
Facility
  Minimum/
Medium
  January 2008   2 year   Four,
two-year
  Own(7)
                                 
Reeves County Detention Complex R1/R2 Pecos, TX(2)   2,407   Reeves County/BOP   Federal
Correctional
Facility
  Low   Feb 2007   10 years   Unlimited
ten year
  Manage Only
                                 
Reeves County Detention Complex R3 Pecos, TX(2)   1,356   Reeves County/BOP   Federal
Correctional
Facility
  Low   January 2007   10 years   Unlimited ten
year
  Manage Only
                                 
Rio Grande Detention Center Laredo, TX   1,500   OFDT/USMS   Federal
Correctional
Facility
  Medium   October 2008   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   768   Clayton County/
OFDT/ USMS
  Federal Detention
Facility
  Medium   February 2008   5 years   Three,
Five year
  Lease & Manage
                                 
South Bay Correctional Facility South Bay, FL   1,862   DMS   State Correctional
Facility
  Medium/close   July 2006   3 years   Unlimited, Two-year   Manage Only
                                 
South Texas Detention Complex Pearsall, TX   1,904   ICE   Federal Detention
Facility
  All   June 2005   1 year   Four,
One-year
  Own
                                 
South Texas ISF Houston, TX   450   TDCJ   State Intermediate
Sanction Facility
  Medium   March 2004   3 years   Two,
One-year
  Lease
                                 
Val Verde Correctional Facility Del Rio, TX(2)   1,451   Val Verde
County/USMS
  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

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Table of Contents

                                 
                    Commencement
           
Facility Name
  Design
      Facility
  Security
  of Current
      Renewal
  Managed Only
& Location(1),(7)
 
Capacity
 
Customer
 
Type
 
Level
 
Contract
 
Base Period
 
Options
 
Leased/ Owned
 
                                 
International Contracts:                                
                                 
Arthur Gorrie Correctional Centre Queensland, Australia   890   QLD DCS   Reception & Remand
Centre
  High/
Maximum
  January 2008   5 years   One,
Five-year
  Manage
Only
                                 
Fulham Correctional Centre & Nalu Challenge Community Victoria, Australia   785   VIC DOJ   State Prison   Minimum/
Medium
  September 2005   3 years   Four,
Three-year
  Lease
                                 
Junee Correctional Centre New South Wales, Australia   790   NSW   State Prison   Minimum/
Medium
  April 2001   5 years   One
Three-year
  Manage
Only
                                 
Kutama-Sinthumule Correctional Centre Limpopo Province, Republic of South Africa   3,024   RSA DCS   National Prison   Maximum   February 2002   25 years   None   Manage
Only
                                 
Melbourne Custody Centre Melbourne, Australia   67   VIC CC   State Jail   All Levels   March 2005   3 years   Two,
One-year
  Manage
Only
                                 
New Brunswick Youth Centre Mirimachi, Canada(4)   N/A   PNB   Provincial Juvenile
Facility
  All Levels   October 1997   25 years   One,
Ten-year
  Manage
Only
                                 
Pacific Shores Healthcare Victoria, Australia(5)   N/A   VIC CV   Health Care Services   N/A   December 2003   3 years   Three, Six-month
One single-year
  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(8)
  680 + 40 expansion   DCF   State Civil
Commitment
  All Levels   July 2006   31 Months   Two,
One-year
  Manage
Only
                                 
Palm Beach County Jail Palm Beach, FL   N/A   PBC as
Subcontractor to Armor
Healthcare
  Mental Health
Services to County
Jail
  All Levels   May 2006   5 years   N/A   Manage
Only
                                 
South Florida State Hospital Pembroke Pines, FL   335   DCF   State Psychiatric
Hospital
  Mental Health   July 2008   5 years   Three,
Five-year
  Manage
Only
                                 
South Florida Evaluation and Treatment Center Miami, FL   238   DCF   State Forensic
Hospital
  Mental Health   July 2005   5 years   Three,
Five-year
  Manage
Only
                                 
Treasure Coast Forensic Treatment Center Stuart, FL   223   DCF   State Forensic
Hospital
  Mental Health   April 2007   5 years   One,
Five-year
  Manage
Only

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Table of Contents

Customer Legend:
 
     
Abbreviation
 
Customer
 
LA DPS&C
  Louisiana Department of Public Safety & Corrections
ADC   Arizona Department of Corrections
ICE
  U.S. Immigration & Customs Enforcement
TDCJ
  Texas Department of Criminal Justice
CDCR
  California Department of Corrections & 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 Correction
QLD DCS
  Department of Corrective Services of the State of Queensland
OFDT
  Office of Federal Detention Trustee
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
 
 
(1) GEO also owns a facility in Baldwin, Michigan, North Lake Correctional Facility, that was not in use during fiscal year 2008. This 500-bed facility is undergoing a 1,225-bed expansion.
 
(2) GEO provides services at this facility through various Inter-Governmental Agreements, or IGAs, through the various counties and other jurisdictions.
 
(3) The full term of this contract expired in December 2008 and was extended until December 12, 2009.
 
(4) The contract for this facility only requires GEO to provide maintenance services.
 
(5) GEO provides comprehensive healthcare services to eight (8) government-operated prisons under this contract.
 
(6) This contract was extended through March 31, 2009. Currently this contract is up for re-bid.
 
(7) On January 28, 2009, we signed a contract to manage and operate the Harmondsworth Immigration Removal Centre located in London, England, which has a capacity of 260 beds.
 
(8) The new contract for the adjacent facility begins April 2009 and has a term of five years.
 
Government Contracts — Terminations, Renewals and Competitive Re-bids
 
Generally, we may lose our facility management contracts due to one of three reasons: the termination by a government customer with or without cause at any time; the failure by a customer to renew a contract with us upon the expiration of the then current term; or our failure to win the right to continue to operate under a contract that has been competitively re-bid in a procurement process upon its termination or expiration. Our facility management contracts typically allow a contracting governmental agency to terminate a contract with or without cause at any time by giving us written notice ranging from 30 to 180 days. If government agencies were to use these provisions to terminate, or renegotiate the terms of their agreements with us, our financial condition and results of operations could be materially adversely affected. See “Risk Factors — “We are subject to the loss of our facility management contracts due to terminations, non-renewals or competitive


16


Table of Contents

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 28, 2008, 16 of our facility management contracts representing 13,761 beds are scheduled to expire on or before December 31, 2009, unless renewed by the customer at its sole option. These contracts represented 23.9% of our consolidated revenues for the fiscal year ended December 28, 2008. We undertake substantial efforts to renew our facility management contracts. Our historical facility management contract renewal rate exceeds 90%. However, given their unilateral nature, we cannot assure you that our customers will in fact exercise their renewal options under existing contracts. In addition, in connection with contract renewals, either we or the contracting government agency have typically requested changes or adjustments to contractual terms. As a result, contract renewals may be made on terms that are more or less favorable to us than those in existence prior to the renewals.
 
We define competitive re-bids as contracts currently under our management which we believe, based on our experience with the customer and the facility involved, will be re-bid to us and other potential service providers in a competitive procurement process upon the expiration or termination of our contract, assuming all renewal options are exercised. Our determination of which contracts we believe will be competitively re-bid may in some cases be subjective and judgmental, based largely on our knowledge of the dynamics involving a particular contract, the customer and the facility involved. Competitive re-bids may result from the expiration of the term of a contract, including the initial fixed term plus any renewal periods, or the early termination of a contract by a customer. Competitive re-bids are often required by applicable federal or state procurement laws periodically in order to encourage competitive pricing and other terms for the government customer. Potential bidders in competitive re-bid situations include us, other private operators and other government entities. While we are pleased with our historical win rate on competitive re-bids and are committed to continuing to bid competitively on appropriate future competitive re-bid opportunities, we cannot in fact assure you that we will prevail in future competitive re-bid situations. Also, we cannot assure you that any competitive re-bids we win will be on terms more favorable to us than those in existence with respect to the expiring contract.
 
As of December 28, 2008, three of our facility management contracts representing 7.2% and approximately $75.1 million of our fiscal year 2008 consolidated revenues are subject to competitive re-bid in 2009. The following table sets forth the number of facility management contracts that we currently believe will be subject to competitive re-bid in each of the next five years and thereafter, and the total number of beds relating to those potential competitive re-bid situations during each period:
 
                 
Year
  Re-bid     Total Number of Beds up for Re-bid  
 
2009
    3       3,492  
2010
    6       5,537  
2011
    5       3,089  
2012
    2       1,000  
2013
           
Thereafter
    20       20,258  
                 
      36       33,376  
                 


17


Table of Contents

Competition
 
We compete primarily on the basis of the quality and range of services we offer; our experience domestically and internationally in the design, construction, and management of privatized correctional and detention facilities; our reputation; and our pricing. We compete directly with the public sector, where governmental agencies responsible for the operation of correctional, detention 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 International 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; Louisiana Corrections Services, Inc.; Emerald Companies; Group 4 Securicor; Kaylx; 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 28, 2008, we had 12,378 full-time employees. Of our full-time employees, 286 were employed at our headquarters and regional offices and 12,092 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 676 and 1,333 employees are covered by collective bargaining agreements in the United States and at international offices, respectively. We believe that our relations with our employees are satisfactory.
 
Under the laws applicable to most of our operations, and internal company policies, our correctional officers are required to complete a minimum amount of training. We generally require at least 40 hours of pre-service training before an employee is allowed to assume their duties plus an additional 120 hours of training during their first year of employment in our domestic facilities, consistent with ACA standards and/or applicable state laws. In addition to the usual 160 hours of training in the first year, most states require 40 or 80 hours of on-the-job training. Florida law requires that correctional officers receive 520 hours of training. We believe that our training programs meet or exceed all applicable requirements.
 
Our training program for domestic facilities typically begins with approximately 40 hours of instruction regarding our policies, operational procedures and management philosophy. Training continues with an additional 120 hours of instruction covering legal issues, rights of inmates, techniques of communication and supervision, interpersonal skills and job training relating to the particular position to be held. Each of our employees who has contact with inmates receives a minimum of 40 hours of additional training each year, and each manager receives at least 24 hours of training each year.
 
At least 160 hours of training are required for our employees in Australia and South Africa before such employees are allowed to work in positions that will bring them into contact with inmates. Our employees in Australia and South Africa receive a minimum of 40 hours of refresher training each year. In the United Kingdom, our corrections employees also receive a minimum of 240 hours prior to coming in contact with inmates and receive additional training of approximately 25 hours annually.
 
Business Regulations and Legal Considerations
 
Many governmental agencies are required to enter into a competitive bidding procedure before awarding contracts for products or services. The laws of certain jurisdictions may also require us to award subcontracts on a competitive basis or to subcontract or partner with businesses owned by women or members of minority groups.
 
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.


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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 confinement and/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.
 
We currently maintain a general liability policy for all U.S. corrections operations with limits 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 occurring 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, 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.
 
In addition, certain of our facilities located in Florida and determined by insurers to be in high-risk hurricane areas carry substantial windstorm deductibles. Since hurricanes are considered unpredictable future events, no reserves have been established to pre-fund for potential windstorm damage. Limited commercial availability of certain types of insurance relating to windstorm exposure in coastal areas and earthquake exposure mainly in California may prevent us from insuring some of our facilities to full replacement value.
 
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 adversely impacted.
 
International Operations
 
Our international operations for fiscal years 2008 and 2007 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 Fourth Quarter 2004, we opened an office in the United Kingdom to pursue new business opportunities throughout Europe. On March 6, 2006, we were awarded a contract to manage the operations of the 198-bed Campsfield House in Kidlington, United Kingdom and on December 22, 2008, we announced our


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award by the United Kingdom Border Agency for the management of Harmondsworth Immigration Removal Centre in London, England. Also in October 2006, we acquired United Kingdom based Recruitment Solutions International (“RSI”). The operations of RSI were terminated in fiscal Fourth Quarter 2008. See Item 7 for more discussion related to the results of our international operations. Financial information about our operations in different geographic regions appears in “Item 8. Financial Statements — Note 15 Business Segment and Geographic Information.”
 
Business Concentration
 
Except for the major customers noted in the following table, no other single customers made up greater than 10% of our consolidated revenues, excluding discontinued operations, for these years.
 
                         
Customer
  2008     2007     2006  
 
Various agencies of the U.S. Federal Government
    28 %     27 %     31 %
Various agencies of the State of Florida
    17 %     16 %     13 %
 
Available Information
 
Additional information about us can be found at www.thegeogroupinc.com. We make available on our website, free of charge, access to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, our annual proxy statement on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as soon as reasonably practicable after we electronically submit such materials to the Securities and Exchange Commission, or the SEC. In addition, the SEC makes available on its website, free of charge, reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including GEO. The SEC’s website is located at http://www.sec.gov. Information provided on our website or on the SEC’s website is not part of this Annual Report on Form 10-K.
 
Item 1A.   Risk Factors
 
The following are certain risks to which our business operations are subject. Any of these risks could materially adversely affect our business, financial condition, or results of operations. These risks could also cause our actual results to differ materially from those indicated in the forward-looking statements contained herein and elsewhere. The risks described below are not the only risks we face. Additional risks not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business operations.
 
Risks Related to Our High Level of Indebtedness
 
We are incurring significant indebtedness in connection with substantial ongoing capital expenditures, which may require us to access additional borrowings under the accordion feature of our Senior Credit Facility or refinance our senior secured debt entirely. Such financing may not be available to us on satisfactory terms, or at all.
 
We are currently self-financing the simultaneous construction or expansion of several correctional and detention facilities in multiple jurisdictions. As of December 28, 2008, we were in the process of constructing or expanding seven facilities representing 4,266 total beds. We are providing the financing for five of the seven facilities, representing 3,162 beds. These facilities are the North Lake Correctional Facility, the Northwest Detention Center, the Aurora ICE Processing Center, the Broward Transition Center, and the Robert A. Deyton Detention Facility, all of which were in the process of being expanded at fiscal year end 2008. Total capital expenditures related to these five projects and the other miscellaneous approved projects is expected to be $202.0 million, of which $36.8 million was spent in the fiscal year 2008. We expect to incur at least another approximately $155 million in capital expenditures relating to these owned projects through the fiscal year 2009 and the remaining $10 million in the fiscal first quarter of 2010. We expect to fund our capital expenditures from operating cash flows and additional borrowings under the $240.0 million revolving credit facility portion of our Senior Credit Facility. As of January 30, 2009, we had $46.3 million outstanding


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in letters of credit and $84.0 million in borrowings under the revolving credit facility. Consequently, we had the ability to borrow an additional $109.7 million under our Senior Credit Facility. In addition, we have an ability to borrow $150.0 million under the accordion feature of our Senior Credit Facility subject to lender demand and prevailing market conditions. While we believe we currently have adequate borrowing capacity under our Senior Credit Facility to fund all of our committed capital expenditure projects, we will need additional borrowings or financing from other sources in order to complete potential capital expenditures related to new projects. We cannot assure you that such borrowings or financing will be made available to us on satisfactory terms, or at all. In addition, the large capital commitments that these projects will require over the next 12-18 month period may materially strain our liquidity and our borrowing capacity for other purposes. Capital constraints caused by these projects may also cause us to have to entirely refinance our existing indebtedness or incur more indebtedness. Such financing may have terms less favorable than those we currently have in place, or not be available to us at all.
 
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 28, 2008 was $378.4 million, excluding the current portion of $17.9 million and excluding non-recourse debt of $100.6 million and capital lease liability balances of $15.1 million. In addition, as of December 28, 2008, we had $44.7 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 $121.3 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.
 
Our substantial indebtedness could have important consequences. For example, it could:
 
  •  require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, and other general corporate purposes;
 
  •  limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
 
  •  increase our vulnerability to adverse economic and industry conditions;
 
  •  place us at a competitive disadvantage compared to competitors that may be less leveraged; and
 
  •  limit our ability to borrow additional funds or refinance existing indebtedness on favorable terms.
 
If we are unable to meet our debt service obligations, we may need to reduce capital expenditures, restructure or refinance our indebtedness, obtain additional equity financing or sell assets. We may be unable to restructure or refinance our indebtedness, obtain additional equity financing or sell assets on satisfactory terms or at all. In addition, our ability to incur additional indebtedness will be restricted by the terms of our Senior Credit Facility and the indenture governing our outstanding 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 Senior Credit Facility restrict our ability to incur but do not prohibit us from incurring significant additional indebtedness in the future. As of December 28, 2008, we would have had the ability to borrow an additional $121.3 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. We have an ability to borrow an additional $150.0 million under the accordion feature of our Senior Credit Facility subject to lender demand and prevailing market conditions. Also,


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we may refinance all or a portion of our indebtedness, including borrowings under our Senior Credit Facility and/or the Notes. The terms of such refinancing may be less restrictive and permit us to incur more indebtedness than we can now. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify. Additionally, on March 13, 2007, we filed a universal shelf registration statement with the SEC, which became effective 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 an indeterminate aggregate amount of certain of our securities, including debt securities. Such debt securities could have rights superior to those of our existing 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.
 
The indenture governing the Notes and our Senior Credit Facility impose significant operating and financial restrictions on us and certain of our subsidiaries, which we refer to as restricted subsidiaries. These restrictions limit our ability to, among other things:
 
  •  incur additional indebtedness;
 
  •  pay dividends and or distributions on our capital stock, repurchase, redeem or retire our capital stock, prepay subordinated indebtedness, make investments;
 
  •  issue preferred stock of subsidiaries;
 
  •  make certain types of investments;
 
  •  guarantee other indebtedness;
 
  •  create liens on our assets;
 
  •  transfer and sell assets;
 
  •  make capital expenditures above certain limits;
 
  •  create or permit restrictions on the ability of our restricted subsidiaries to make dividends or make other distributions to us;
 
  •  enter into sale/leaseback transactions;
 
  •  enter into transactions with affiliates; and
 
  •  merge or consolidate with another company or sell all or substantially all of our assets.
 
These restrictions could limit our ability to finance our future operations or capital needs, make acquisitions or pursue available business opportunities. In addition, our Senior Credit Facility requires us to maintain specified financial ratios and satisfy certain financial covenants, including maintaining maximum senior secured leverage ratio and total leverage ratios, a minimum interest coverage ratio and a limit on the amount of our annual capital expenditures. Some of these financial ratios become more restrictive over the life of the 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 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.


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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.
 
Our business may not be able to generate sufficient cash flow from operations or future borrowings may not be available to us under our Senior Credit Facility or otherwise in an amount sufficient to enable us to pay our indebtedness or new debt securities, 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.
 
Because portions of our senior indebtedness have floating interest rates, a general increase in interest rates will adversely affect cash flows.
 
Borrowings under our Senior Credit Facility bear interest at a variable rate. As a result, to the extent our exposure to increases in interest rates is not eliminated through interest rate protection agreements, such increases will result in higher debt service costs which will adversely affect our cash flows. We do not currently have any interest rate protection agreements in place to protect against interest rate fluctuations related to our Senior Credit Facility. Based on estimated borrowings of $232.6 million outstanding under the Senior Credit Facility as of December 28, 2008, a one percent increase in the interest rate applicable to the Senior Credit Facility, would increase our annual interest expense by $2.3 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 28, 2008, our subsidiaries accounted for 23.6% of our consolidated revenue, and, as of December 28, 2008, our subsidiaries accounted for 7.6% of our total segment assets.
 
Risks Related to Our Business and Industry
 
We are currently using significant capital to build or expand several facilities that we do not have corresponding management contracts with clients to operate. We cannot assure you that such contracts will be obtained.
 
We are currently in the process of building or expanding four facilities that we do not have corresponding management contracts with clients to operate these additional beds. These projects will, upon completion, represent an aggregate of 2,970 potential new beds. We estimate that the total costs for the completion of these projects will be $174.6 million, of which $28.6 million was completed during fiscal year 2008 and $146.0 million is expected to be completed through fiscal year 2010. We intend to finance these projects using our own funds, including cash on hand, cash flow from operations and borrowings under our Senior Credit Facility. We believe that these facilities, as built or expanded, will be more attractive to clients seeking economies of scale and therefore better position us to help meet the increased demand for correctional and detention beds by federal and state agencies around the country. However, we do not yet have management contracts with clients for the operation of these projects and we cannot assure you that such contracts will be


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obtained. Any failure to secure management contracts for these projects could have a material adverse impact on our financial condition, results of operations and/or cash flows.
 
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 28, 2008, we were in the process of constructing or expanding seven facilities representing 4,266 total beds. We are providing the financing for five of the seven facilities, representing 3,162 beds. Total capital expenditures related to these projects, and other miscellaneous projects, is expected to be approximately $202.0 million, of which $36.8 million was spent in fiscal year end 2008. We expect to incur the remaining $165.2 million in capital expenditures relating to these projects through fiscal First Quarter 2010. Additionally, financing for the remaining two facilities representing 1,104 beds is being provided for by third party sources for state or county ownership. We are managing the construction of these two projects with total costs of $85.1 million, of which $76.8 million has been completed through year end 2008 and $8.3 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 four owned facilities under development or expansion, we do not have a contracted user/agency with respect to these 2,970 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 next 12-18 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.
 
The prevailing negative conditions in the capital markets could prevent us from obtaining financing, which could materially harm our business.
 
Our ability to obtain additional financing is highly dependent on the conditions of the capital markets, among other things. The capital and credit markets have recently been experiencing significant volatility and disruption. In recent months, the volatility and disruption have reached extreme levels. The recent downturn in the equity and debt markets, the tightening of the credit markets, the general economic slowdown and other macroeconomic conditions, such as the current global recession could prevent us from raising additional capital or obtaining additional financing on satisfactory terms, or at all. If we need but cannot obtain adequate capital as a result of negative conditions in the capital markets or otherwise, our business, results of operations and financial condition could be materially adversely affected. Additionally, such inability to obtain capital could prevent us from pursuing attractive business development opportunities, including new facility constructions or expansions of existing facilities, and business or asset acquisitions.
 
We are subject to the loss of our facility management contracts, due to terminations, non-renewals or competitive re-bids, which could adversely affect our results of operations and liquidity, including our ability to secure new facility management contracts from other government customers.
 
We are exposed to the risk that we may lose our facility management contracts primarily due to one of three reasons: the termination by a government customer with or without cause at any time; the failure by a customer to exercise its unilateral option to renew a contract with us upon the expiration of the then current term; or our failure to win the right to continue to operate under a contract that has been competitively re-bid in a procurement process upon its termination or expiration. 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,


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or renegotiate the terms of their agreements with us, our financial condition and results of operations could be materially adversely affected.
 
Aside from our customers’ unilateral right to terminate our facility management contracts with them at any time for any reason, there are two points during the typical lifecycle of a contract which may result in the loss by us of a facility management contract with our customers. We refer to these points as contract “renewals” and contract “re-bids.” Many of our facility management contracts with our government customers have an initial fixed term and subsequent renewal rights for one or more additional periods at the unilateral option of the customer. 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 28, 2008, 16 of our facility management contracts representing 13,761 beds are scheduled to expire on or before December 31, 2009, unless renewed by the customer at its sole option. These contracts represented 23.9% of our consolidated revenues for the fiscal year ended December 28, 2008. We undertake substantial efforts to renew our facility management contracts. Our historical facility management contract renewal rate exceeds 90%. However, given their unilateral nature, we cannot assure you that our customers will in fact exercise their renewal options under existing contracts. In addition, in connection with contract renewals, either we or the contracting government agency have typically requested changes or adjustments to contractual terms. As a result, contract renewals may be made on terms that are more or less favorable to us than those in existence prior to the renewals.
 
We define competitive re-bids as contracts currently under our management which we believe, based on our experience with the customer and the facility involved, will be re-bid to us and other potential service providers in a competitive procurement process upon the expiration or termination of our contract, assuming all renewal options are exercised. Our determination of which contracts we believe will be competitively re-bid may in some cases be subjective and judgmental, based largely on our knowledge of the dynamics involving a particular contract, the customer and the facility involved. Competitive re-bids may result from the expiration of the term of a contract, including the initial fixed term plus any renewal periods, or the early termination of a contract by a customer. Competitive re-bids are often required by applicable federal or state procurement laws periodically in order to further 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. As of December 28, 2008, three of our facility management contracts representing 7.2% and $75.1 million of our fiscal year 2008 consolidated revenues are subject to competitive re-bid in 2009. While we are pleased with our historical win rate on competitive re-bids and are committed to continuing to bid competitively on appropriate future competitive re-bid opportunities, we cannot in fact assure you that we will prevail in future re-bid situations. Also, we cannot assure you that any competitive re-bids we win will be on terms more favorable to us than those in existence with respect to the expiring contract.
 
For additional information on facility management contracts that we currently believe will be competitively re-bid during each of the next five years and thereafter, please see “Business — Government Contracts — Terminations, Renewals and Re-bids”. The loss by us of facility management contracts due to terminations, non-renewals or competitive re-bids could materially adversely affect our financial condition, results of operations and liquidity, including our ability to secure new facility management contracts from other government customers.
 
Our growth depends on our ability to secure contracts to develop and manage new correctional, detention and mental health facilities, the demand for which is outside our control.
 
Our growth is generally dependent upon our ability to obtain new contracts to develop and manage new correctional, detention and mental health facilities, because contracts to manage existing public facilities have not to date typically been offered to private operators. 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, governmental and public acceptance of the concept of privatization, government budgetary constraints, and the number of facilities available for privatization.


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In 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, sentencing or deportation practices, and the decriminalization of certain activities that are currently proscribed by criminal laws or the loosening of immigration laws. For example, any changes with respect to the decriminalization of drugs and controlled substances could affect the number of persons arrested, convicted, sentenced and incarcerated, thereby potentially reducing demand for correctional facilities to house them. Similarly, reductions in crime rates could lead to reductions in arrests, convictions and sentences requiring incarceration at correctional facilities. Immigration reform laws which are currently a focus for legislators and politicians at the federal, state and local level also could materially adversely impact us. Various factors outside our control could adversely impact the growth our GEO Care business, including government customer resistance to the privatization of mental health or residential treatment facilities, and changes to Medicare and Medicaid reimbursement programs.
 
We may not be able to meet state requirements for capital investment or locate land for the development of new facilities, which could adversely affect our results of operations and future growth.
 
Certain jurisdictions, including California, where we have a significant amount of operations, have in the past required successful bidders to make a significant capital investment in connection with the financing of a particular project. If this trend were to continue in the future, we may not be able to obtain sufficient capital resources when needed to compete effectively for facility management contacts. 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 45 governmental clients, four customers accounted for over 50% of our consolidated revenues for the fiscal year ended December 28, 2008. In addition, the three federal governmental agencies with correctional and detention responsibilities, the Bureau of Prisons, U.S. Immigration and Customs Enforcement, which we refer to as ICE, and the U.S. Marshals Service, accounted for 27.7% of our total consolidated revenues for the fiscal year ended December 28, 2008, with the Bureau of Prisons accounting for 5.3% of our total consolidated revenues for such period, ICE accounting for 10.8% of our total consolidated revenues for such period, and the U.S. Marshals Service accounting for 11.6% of our total consolidated revenues for such period. Also, government agencies from the State of Florida accounted for 17.4% of our total consolidated revenues for the fiscal year ended December 28, 2008. The loss of, or a significant decrease in, business from the Bureau of Prisons, ICE, U.S. Marshals Service, the State of Florida or any other significant customers could seriously harm our financial condition and results of operations. We expect to continue to depend upon these federal and state agencies and a relatively small group of other governmental customers for a significant percentage of our revenues.
 
A decrease in occupancy levels could cause a decrease in revenues and profitability.
 
While a substantial portion of our cost structure is generally fixed, most of our revenues are generated under facility management contracts which provide for per diem payments based upon daily occupancy. Several of these contracts provide minimum revenue guarantees for us, regardless of occupancy levels, up to a specified maximum occupancy percentage. However, many of our contracts have no minimum revenue guarantees and simply provide for a fixed per diem payment for each inmate/detainee/patient actually housed. As a result, with respect to our contracts that have no minimum revenue guarantees and those that guarantee


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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. Recently, in the State of California, a three Federal judge panel issued a tentative ruling recommending the early release of inmates over a two to three year period to relieve overcrowding conditions. California has indicated strong opposition to the ruling and has stated it will appeal this ruling to the United States Supreme Court. 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 revenues and profitability, and consequently, on our financial condition and results of operations.
 
State budgetary constraints may have a material adverse impact on us.
 
According to the Center on Budget and Policy Priorities, at least 46 states are facing budget shortfalls of $99.0 billion and $96.0 billion for the fiscal years 2009 and 2010, respectively. At December 28, 2008, we had ten state correctional clients: Florida, Mississippi, Louisiana, Virginia, Indiana, Texas, Oklahoma, New Mexico, Arizona, and California. The Center on Budget and Policy Priorities reports that the combined mid-year 2009 budget shortfalls for these ten state clients totaled $21.8 billion and will total $42.4 billion in fiscal year 2010. In 2008, we generated 38% of our consolidated revenues from these ten state correctional clients. Also, the State of California is expected to face a budget shortfall of approximately $25.9 billion in 2010, or 25.6% of the State’s general revenue fund, and the State recently announced that it may have to begin issuing payment deferrals or promissory notes to pay its vendors, creditors, and employees. We generated approximately 4% of our consolidated revenues in 2008 from the State of California. If state budgetary constraints persist or intensify, our ten state customers’ ability to pay us may be impaired and/or we may be forced to renegotiate our management contracts with those customers on less favorable terms and our financial condition, results of operations or cash flows could be materially adversely impacted. In addition, budgetary constraints at states that are not our current customers could prevent those states from outsourcing correctional, detention or mental health service opportunities that we otherwise could have pursued.
 
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 many of our contracts, the loss of such inmates and resulting decrease in occupancy could 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 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. In addition, as a result of, among other things, recent economic developments, federal, state and local governments have encountered, and may continue to encounter, unusual budgetary constraints. As a result, a number of state and local governments are under pressure to control additional spending or reduce current levels of spending which could limit or eliminate appropriations for the facilities that we operate. Additionally, as a result of these factors, we may be


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requested in the future to reduce our existing per diem contract rates or forego prospective increases to those rates. Budgetary limitations may also make it more difficult for us to renew our existing contracts on favorable terms or at all. Further, a number of states in which we operate are experiencing significant budget deficits for fiscal year 2009. We cannot assure that these deficits will not result in reductions in per diems, delays in payment for services rendered or unilateral termination of contracts. Recently, the State of California has notified vendors providing services to the state that it will temporarily issue IOU’s. We have not received notice that our services will be subject to such IOU’s and our outstanding receivables related to California are consistent with normal payment practices for the State.
 
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 government agencies 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 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.
 
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 28, 2008, GEO Care generated approximately $117.4 million in revenues, representing 11.3% of our consolidated revenues from continuing operations. 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:
 
  •  the concept of the privatization of the mental health and residential treatment services provided by GEO Care has not yet achieved general acceptance by either government agencies or the public, which could materially limit GEO Care’s growth prospects;
 
  •  GEO Care’s business is highly dependent on the continuous recruitment, hiring and retention of a substantial pool of qualified physicians, nurses and other medically trained personnel which may not be available in the quantities or locations sought, or on the employment terms offered;
 
  •  GEO Care’s business model often involves taking over outdated or obsolete facilities and operating them while it supervises the construction and development of new, more updated facilities; during this transition period, GEO Care may be particularly vulnerable to operational difficulties primarily relating to or resulting from the deteriorating nature of the older existing facilities; and
 
  •  the facilities operated by GEO Care are substantially dependent on government funding, including in some cases the receipt of Medicare and Medicaid funding; the loss of such government funding for any reason with respect to any facilities operated by GEO Care could have a material adverse impact on our business.


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Adverse publicity may negatively impact our ability to retain existing contracts and obtain new contracts.
 
Any negative publicity about an escape, riot or other disturbance or perceived poor conditions at a privately managed facility may result in publicity adverse to us and the private corrections industry in general. Any of these occurrences or continued trends may make it more difficult for us to renew existing contracts or to obtain new contracts or could result in the termination of an existing contract or the closure of one or more of our facilities, which could have a material adverse effect on our business.
 
We may incur significant start-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 significant start-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 Senior Credit Facility. In addition, a contract may be terminated prior to its scheduled expiration and as a result we may not recover these expenditures or realize any return on our investment.
 
Failure to comply with extensive government regulation and applicable contractual requirements could have a material adverse effect on our business, financial condition or results of operations.
 
The industry in which we operate is subject to extensive federal, state and local regulation, including educational, environmental, health care and safety laws, rules and regulations, which are administered by many regulatory authorities. Some of the regulations are unique to the corrections industry, and the combination of regulations affects all areas of our operations. Corrections officers and juvenile care workers are customarily required to meet certain training standards and, in some instances, facility personnel are required to be licensed and are subject to background investigations. Certain jurisdictions also require us to award subcontracts on a competitive basis or to subcontract with businesses owned by members of minority groups. We may not always successfully comply with these and other regulations to which we are subject and failure to comply can result in material penalties or the non-renewal or termination of facility management contracts. 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, 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.


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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 and on-site monitoring by representatives of the contracting governmental agencies. Failure to properly adhere to the various terms of our customer contracts could expose us to liability for damages relating to any breaches as well as the loss of such contracts, which could materially adversely impact us.
 
We may face community opposition to facility location, which may adversely affect our ability to obtain new contracts.
 
Our success in obtaining new awards and contracts sometimes depends, in part, upon our ability to locate land that can be leased or acquired, on economically favorable terms, by us or other entities working with us in conjunction with our proposal to construct and/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 political and/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 confinement and/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.
 
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


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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 28, 2008, our international operations accounted for approximately 12.0% of our consolidated revenues from continuing operations. 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.
 
We conduct certain of our operations through joint ventures, which may lead to disagreements with our joint venture partners and adversely affect our interest in the joint ventures.
 
We conduct our operations in South Africa through our consolidated joint venture, South African Custodial Management Services Pty. Limited (“SACM”) and through our 50% owned joint venture South African Custodial Services Pty. Limited (“SACS”). We may enter into additional joint ventures in the future. Although we have the majority vote in our consolidated joint venture, SACM, through our ownership of 62.5% of the voting shares, we share equal voting control on all significant matters to come before SACS. These joint venture partners, as well as any future partners, may have interests that are different 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. On February 12, 2009, we announced that Mr. O’Rourke will retire as Chief Financial Officer effective August 2, 2009. We have appointed Brian R. Evans to replace Mr. O’Rourke as Chief Financial Officer beginning August 2, 2009. The unexpected loss of Dr. Zoley, Mr. Calabrese or Mr. Evans could materially adversely affect our business, financial condition or results of operations.
 
In addition, the services we provide are labor-intensive. When we are awarded a facility management contract or open a new facility, depending on the service we have been contracted to provide, we may need to hire operating management, correctional officers, security staff, physicians, nurses and other qualified personnel. The success of our business requires that we attract, develop and retain these personnel. Our inability to hire sufficient qualified personnel on a timely basis or the loss of significant numbers of personnel at existing facilities could have a material effect on our business, financial condition or results of operations.
 
Our profitability may be materially adversely affected by inflation.
 
Many of our facility management contracts provide for fixed management fees or fees that increase by only small amounts during their terms. While a substantial portion of our cost structure is generally fixed, if, due to inflation or other causes, our operating expenses, such as costs relating to personnel, utilities, insurance, medical and food, increase at rates faster than increases, if any, in our facility management fees, then our profitability could be materially adversely affected.


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Various risks associated with the ownership of real estate may increase costs, expose us to uninsured losses and adversely affect our financial condition and results of operations.
 
Our ownership of correctional and detention facilities subjects us to risks typically associated with investments in real estate. Investments in real estate, and in particular, correctional and detention facilities, are relatively illiquid and, therefore, our ability to divest ourselves of one or more of our facilities promptly in response to changed conditions is limited. Investments in correctional and detention facilities, in particular, subject us to risks involving potential exposure to environmental liability and uninsured loss. Our operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation. In addition, although we maintain insurance for many types of losses, there are certain types of losses, such as losses from earthquakes, riots and acts of terrorism, which may be either uninsurable or for which it may not be economically feasible to obtain insurance coverage, in light of the substantial costs associated with such insurance. As a result, we could lose both our capital invested in, and anticipated profits from, one or more of the facilities we own. Further, even if we have insurance for a particular loss, we may experience losses that may exceed the limits of our coverage.
 
Risks related to facility construction and development activities may increase our costs related to such activities.
 
When we are engaged to perform construction and design services for a facility, we typically act as the primary contractor and subcontract with other companies who act as the general contractors. As primary contractor, we are subject to the various risks associated with construction (including, without limitation, shortages of labor and materials, work stoppages, labor disputes and weather interference) which could cause construction delays. In addition, we are subject to the risk that the general contractor will be unable to 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 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.
 
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.


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


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increase. Also, inadequate internal controls would likely prevent us from concluding on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Such failure to achieve and maintain effective internal controls could adversely impact our business and the price of our common stock.
 
We may issue additional debt securities that could limit our operating flexibility and negatively affect the value of our common stock.
 
In the future, we may issue additional debt securities which may be governed by an indenture or other instrument containing covenants that could place restrictions on the operation of our business and the execution of our business strategy in addition to the restrictions on our business already contained in the agreements governing our existing debt. In addition, we may choose to issue debt that is convertible or exchangeable for other securities, including our common stock, or that has rights, preferences and privileges senior to our common stock. Because any decision to issue debt securities will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future debt financings and we may be required to accept unfavorable terms for any such financings. Accordingly, any future issuance of debt could dilute the interest of holders of our common stock and reduce the value of our common stock.
 
Because we 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.
 
Item 1B.   Unresolved Staff Comments
 
None.
 
Item 2.   Properties
 
Our corporate offices are located in Boca Raton, Florida, under a 101/2 -year lease which was renewed in October 2007. The current lease has two 5-year renewal options and expires in March 2018. In addition, we lease office space for our eastern regional office in 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, in Sandton, South Africa, and in Berkshire, England, through our overseas affiliates to support our Australian, South African, and UK operations, respectively.
 
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.
 
Item 3.   Legal Proceedings
 
On September 15, 2006, a jury in an inmate wrongful death lawsuit in a Texas state court awarded a $47.5 million verdict against us. In October 2006, the verdict was entered as a judgment against us in the amount of $51.7 million. The lawsuit is being administered under the insurance program established by The Wackenhut Corporation, our former parent company, in which we participated until October 2002. Policies secured by us under that program provide $55.0 million in aggregate annual coverage. 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 recorded 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


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the incident. We believe that the verdict is contrary to law and unsubstantiated by the evidence. Our insurance carrier has posted a supersedeas bond in the amount of approximately $60.0 million to cover the judgment. On December 9, 2006, the trial court denied our post trial motions and we filed a notice of appeal on December 18, 2006. The appeal is proceeding. On March 26, 2008, oral arguments were made before the Thirteenth Court of Appeals, Corpus Christi, Texas (No. 13-06-00692 — CV) which took the matter under advisement pending the issuance of its ruling. Currently, the appeal is still under review by the Thirteenth Court of Appeals and no ruling has yet been made.
 
In June 2004, we received notice of a third-party claim for property damage incurred during 2001 and 2002 at several detention facilities that our 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 August 2007, legal proceedings in this matter were formally commenced when we were served with notice of a complaint filed against us by the Commonwealth of Australia seeking damages of up to approximately AUD 18.0 million or $12.3 million, plus interest. We believe that we have several defenses to the allegations underlying the litigation and the amounts sought and intend to vigorously defend our rights with respect to this matter. Although the outcome of this matter cannot be predicted with certainty, based on information known to date and our 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. We are uninsured for any damages or costs that we may incur as a result of this claim, including the expenses of defending the claim. We have established a reserve based on our estimate of the most probable loss based on the facts and circumstances known to date and the advice of our legal counsel in connection with this matter.
 
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 now entitled Allison and Hocevar v. The GEO Group, Inc. (Civil Action No. 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 believe we have several defenses to the allegations underlying this litigation and intend to vigorously defend our rights in this matter. In September 2008, we filed a motion for judgment on pleadings which may be dispositive of this matter as a result of a recent but significant development in the law regarding similar strip search practices. The District Court has, in the interim, stayed further discovery. Nevertheless, we believe that, if resolved unfavorably, this matter could have a material adverse effect on our financial condition and results of operations. Discovery has recently commenced in connection with this matter.
 
On October 23, 2008, a wage and hour claim seeking potential class action certification was served against us. The case is styled Mayes v. The GEO Group Inc. (Civil Action No. 08-0248) and it is pending in the U.S. District Court for the Northern District of Florida, Panama City Division. The plaintiffs in this case have alleged that we violated the Fair Labor Standards Act by failing to pay certain employees for work performed before and after their scheduled shifts. We are in the preliminary stages of evaluating this claim but have preliminarily denied the plaintiffs’ assertions. Nevertheless, we cannot assure you that, if resolved unfavorably, this matter would not have a material adverse effect on our financial condition, results of operations and cash flows.
 
The nature of our business exposes us to various types of claims or litigation against us, including, but not limited to, civil rights claims relating to conditions of confinement and/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 customers and other third parties, 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. Except as otherwise disclosed above, we do not expect the


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outcome of any pending claims or legal proceedings to have a material adverse effect on our financial condition, results of operations or cash flows.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
No matters were submitted to a vote of our shareholders during the quarter ended December 28, 2008.
 
PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock trades on the New York Stock Exchange under the symbol “GEO.” The following table shows the high and low prices for our common stock, as reported by the New York Stock Exchange, for each of the four quarters of fiscal years 2008 and 2007 and reflects the effect of the June 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 13, 2009 is 119, which includes shares held in street name.
 
                                 
    2008     2007  
Quarter
  High     Low     High     Low  
 
First
  $ 28.71     $ 22.01     $ 25.00     $ 18.73  
Second
    29.48       22.10       29.29       23.08  
Third
    26.96       18.00       32.21       26.55  
Fourth
    21.62       12.65       31.63       23.10  
 
We did not pay any cash dividends on our common stock for fiscal years 2008 and 2007. 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 take into consideration. In addition to these factors, the indenture governing our $150.0 million 81/4% senior notes due in 2013, and our Senior Credit Facility 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 11-Debt” for further description of these restrictions.
 
We did not buy back any of our common stock during 2008 or 2007. 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 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 per share amounts have been retro-actively restated to reflect the 2-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 28, 2008, including


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our 1994 Second Stock Option Plan, our 1999 Stock Option Plan, our 2006 Stock Incentive Plan and our 1995 Non-Employee Director Stock Option Plan. Our shareholders have approved all of these plans.
 
                         
    (a)     (b)     (c)  
                Number of Securities
 
                Remaining Available for
 
    Number of Securities
          Future Issuance Under
 
    to be Issued Upon
    Weighted-Average
    Equity Compensation
 
    Exercise of
    Exercise Price of
    Plans (Excluding
 
    Outstanding Options,
    Outstanding Options,
    Securities Reflected in
 
Plan Category
  Warrants and Rights     Warrants and Rights     Column (a))  
 
Equity compensation plans approved by security holders
    2,808,074     $ 8.03       58,157  
Equity compensation plans not approved by security holders
                 
                         
Total
    2,808,074     $ 8.03       58,157  
                         


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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) of Regulation 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 28, 2008)
 
(PERFORMANCE GRAPH)
 
                               
                  S&P 500
                  Commercial
      The GEO
    Wilshire 5000
    Services and
  Date     Group, Inc.     Equity     Supplies
December 31, 2003
    $ 100.00       $ 100.00       $ 100.00  
December 31, 2004
    $ 116.58       $ 112.49       $ 108.30  
December 31, 2005
    $ 100.57       $ 119.66       $ 109.35  
December 31, 2006
    $ 246.84       $ 138.53       $ 126.30  
December 31, 2007
    $ 368.42       $ 146.31       $ 122.02  
December 31, 2008
    $ 237.24       $ 91.84       $ 95.15  
                               
 
Assumes $100 invested on December 31, 2003 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)
  2008     2007     2006     2005     2004  
 
Results of Continuing Operations:
                                                                               
Revenues
  $ 1,043,006       100.0 %   $ 976,299       100.0 %   $ 818,439       100.0 %   $ 580,440       100.0 %   $ 565,508       100.0 %
Operating income from continuing operations
    114,396       11.0 %     90,727       9.3 %     60,603       7.4 %     6,787       1.2 %     37,896       6.7 %
Income from continuing operations
  $ 61,453       5.9 %   $ 38,089       3.9 %   $ 28,000       3.4 %   $ 5,183       0.9 %   $ 16,501       2.9 %
                                                                                 
Income from continuing operations per common share:
                                                                               
Basic:
  $ 1.22             $ 0.80             $ 0.81             $ 0.18             $ 0.59          
                                                                                 
Diluted:
  $ 1.19             $ 0.77             $ 0.78             $ 0.17             $ 0.56          
                                                                                 
Weighted Average Shares Outstanding:
                                                                               
Basic
    50,539               47,727               34,442               28,740               28,152          
Diluted
    51,830               49,192               35,744               30,030               29,214          
Financial Condition(2):
                                                                               
Current assets
  $ 281,920             $ 264,518             $ 322,754             $ 229,292             $ 222,766          
Current liabilities
    185,926               186,432               173,703               136,519               117,478          
Total assets
    1,288,621               1,192,634               743,453               639,511               480,326          
Long-term debt, including current portion (excluding non-recourse debt and capital leases)
    382,126               309,273               154,259               220,004               198,204          
Shareholders’ equity
  $ 578,496             $ 527,705             $ 248,610             $ 108,594             $ 99,739          
Operational Data:
                                                                               
Contracts/awards
    76               73               69               56               46          
Facilities in operation
    59               56               59               54               40          
Design capacity of contracts
    61,608               55,542               52,035               46,177               32,930          
Compensated mandays(3)
    17,293,193               16,370,641               14,941,178               11,916,381               11,938,237          
 
 
(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 been included with Selected Financial Data. Information related to Discontinued Operations is listed in “Item 8. Financial Statements — Note 3 Discontinued Operations.”
 
(2) Current assets and current liabilities include activities of discontinued operations
 
(3) 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.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Introduction
 
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of numerous factors including, but not limited to, those described above under “Item 1A. Risk Factors,” and “Forward-Looking Statements — Safe Harbor” below. The discussion should be read in conjunction with the consolidated financial statements and notes thereto.


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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, 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 facilities. We also develop new facilities based on contract awards, using our project development expertise and experience to design facilities, construct and finance what we believe are state-of-the-art facilities that maximize security and efficiency.
 
As of the fiscal year ended December 28, 2008, we managed 59 facilities totaling approximately 53,400 beds worldwide and had an additional 3,586 beds under development at seven facilities, including the expansion and renovation of one facility which we own and the expansions of six facilities we currently operate. For the fiscal year ended December 28, 2008, we had consolidated revenues of $1.04 billion and we maintained an average companywide facility occupancy rate of 96.6%.
 
Fiscal year 2008
 
Facility Activations
 
The following table shows new projects that were activated during the fiscal year 2008:
 
                     
Facility
 
Location
 
Activation
 
Beds
   
Start date
 
Robert A. Deyton Detention Facility
  Lovejoy, GA   New contract     576     First Quarter 2008
Central Arizona Correctional Facility
  Florence, AZ   200-bed Expansion     1,200     First Quarter 2008
LaSalle Detention Facility
  Jena, LA   744-bed Expansion     1,160     Second Quarter 2008
Joe Corley Detention Facility
  Conroe, TX   New contract     1,100     Third Quarter 2008
Northeast New Mexico Detention Facility
  Clayton, NM   New contract     625     Third Quarter 2008
Rio Grande Detention Center
  Laredo, TX   New contract     1,500     Fourth Quarter 2008
Maverick County Detention Facility
  Maverick, TX   New contract     688     Fourth Quarter 2008
East Mississippi Correctional Facility
  Meridian, MS   500-bed Expansion     1,500     Fourth Quarter 2008
 
Fiscal year 2007 Developments
 
Acquisition of CentraCore Properties Trust
 
On January 24, 2007, we completed the acquisition of CentraCore Properties Trust (“CPT”). We paid an aggregate purchase price of approximately $421.6 million for the acquisition of CPT, inclusive of the payment of approximately $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 $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 $65.7 million in cash on hand. We deferred debt issuance costs of $9.1 million related to the new $365.0 million term loan. These costs are being amortized over the life of the term loan. As a result of the acquisition we no longer have ongoing lease expense related to the properties we previously leased from CPT. However, we have had 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.
 
Public Offering
 
On March 23, 2007, we sold in a follow-on public equity offering 5,462,500 shares of our common stock at a price of $43.99 per share, (10,925,000 shares of our common stock at a price of $22.00 per share reflecting the two-for-one stock split). All shares were issued from treasury. The aggregate net proceeds to us


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from the offering (after deducting underwriter’s discounts and expenses of $12.8 million) were $227.5 million. On March 26, 2007, we utilized $200.0 million of the net proceeds from the offering to repay outstanding debt under the Term Loan B portion of the Senior Credit Facility. We used a portion of the proceeds from the offering for general corporate purposes, which included working capital, capital expenditures and other assets.
 
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. 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 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,


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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) Issue 00-21, 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
 
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 confinement and/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.
 
We currently maintain a general liability policy and excess liability coverage policy for all U.S. corrections operations with limits of $62.0 million per occurrence and in the aggregate, including a specific loss limit for medical professional liability of $35.0 million. Our wholly owned subsidiary, GEO Care, Inc., is separately insured for general liability and medical professional liability with a specific loss limit of $35.0 million per occurrence and in the aggregate. We also maintain insurance to cover property and other casualty risks including, workers’ compensation, medical malpractice, environmental liability and automobile liability. For most casualty insurance policies, we carry substantial deductibles or self-insured retentions — $3.0 million per occurrence for general liability and hospital professional liability, $2.0 million per occurrence for workers’ compensation and $1.0 million per occurrence for automobile liability. 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 its operations in South Africa, United Kingdom and Australia. There can be no assurance that the our insurance coverage will be adequate to cover all claims to which we may be exposed.
 
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


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availability of certain types of insurance relating to windstorm exposure in coastal areas and earthquake exposure mainly in California may prevent us from insuring some of our facilities to full replacement value.
 
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.
 
Income Taxes
 
We account for income taxes in accordance with Statement of Financial Accounting Standard No. 109, or FAS 109, Accounting for Income 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 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, we consider tax regulations of the jurisdictions in which we operate, 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. The recognized tax benefit could change in the future as statute of limitations expire, tax authorities ultimately settle on an item, or if new items are identified.
 
Property and Equipment
 
As of December 28, 2008, we had $878.6 million in long-lived property and equipment held for use. Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Buildings and improvements are depreciated over 2 to 40 years. Equipment and furniture and fixtures are depreciated over 3 to 10 years. Accelerated methods of depreciation are generally used for income tax purposes. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. We perform ongoing evaluations of the estimated useful lives of 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. Interest is capitalized in connection with the construction of correctional and detention facilities. Capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life.
 
We review long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable in accordance with FAS 144 “Accounting for the Impairment or 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. 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 2008, we announced the termination of our contracts with Delaware County, Pennsylvania for the management of the county-owned George W. Hill Correctional Facility


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and the State of Idaho for the housing of inmates at the Bill Clayton Correctional Center. We also announced the closure of our transportation division in the United Kingdom, Recruitment Services International as well as the termination of our contract to manage the Tri-County Justice and Detention Center. There were no significant impairments of long-lived assets accounted for under FAS 144 relative to these contract terminations. Management has reviewed its long-lived assets and determined that there are no events requiring impairment loss recognition for the period ended December 28, 2008.
 
Stock-Based Compensation Expense
 
We account for stock-based compensation in accordance with the provisions of FAS 123R, “Shared-Based Payment”. 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.
 
Results of Operations
 
The following discussion should be read in conjunction with our consolidated financial statements and the notes to the consolidated financial statements accompanying this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those described under “Item 1A. Risk Factors” and those included in other portions of this report.
 
The discussion of our results of operations below excludes the results of our discontinued operations for all periods presented.
 
For the purposes of the discussion below, “2008” means the 52 week fiscal year ended December 28, 2008, “2007” means the 52 week fiscal year ended December 30, 2007, and “2006” means the 52 week fiscal year ended December 31, 2006. Our fiscal quarters in the 52-week fiscal years discussed below are referred to as “First Quarter,” “Second Quarter,” “Third Quarter” and “Fourth Quarter.”
 
2008 versus 2007
 
Revenues
 
                                                 
    2008     % of Revenue     2007     % of Revenue     $ Change     % Change  
    (Dollars in thousands)  
 
U.S. corrections
  $ 711,038       68.2 %   $ 629,339       64.5 %   $ 81,699       13.0 %
International services
    128,672       12.3 %     127,991       13.1 %     681       0.5 %
GEO Care
    117,399       11.3 %     110,165       11.3 %     7,234       6.6 %
Facility construction and design
    85,897       8.2 %     108,804       11.1 %     (22,907 )     (21.1 )%
                                                 
Total
  $ 1,043,006       100.0 %   $ 976,299       100.0 %   $ 66,707       6.8 %
                                                 


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U.S. corrections
 
The increase in revenues for U.S. corrections in 2008 compared to 2007 is primarily attributable to new facility openings, capacity increases at existing facilities and full year operations relative to recent openings and expansions from 2007. The most significant increases to revenue were as follows: (i) revenues increased $56.2 million in total due to the opening or expansion of seven facilities in 2008 which include activations at the Robert A. Deyton Detention Facility, Rio Grande Detention Facility, Joe Corley Detention Facility and the Northeast New Mexico Detention Facility and expansions of the LaSalle Detention Facility, Central Arizona Correctional Facility and at the East Mississippi Correctional Facility; (ii) revenues increased $28.8 million in 2008 due to increases at our California facilities, South Texas Detention Center, New Castle Correctional Facility and at the Northwest Detention Facility related to contract modifications and enhanced services; (iii) revenues increased by $21.6 million due to the full year operation of 2007 activations and expansions that occurred at the Graceville Correctional Facility, Val Verde Correctional Facility and the Moore Haven Correctional Facility. These and other increases were offset by decreases in revenues of $34.8 million due to the termination of our management contracts at Taft Correctional Institution, Coke County Juvenile Justice Center and Dickens County Correctional Center.
 
The number of compensated mandays in U.S. corrections facilities increased by approximately 807,000 to 14.7 million mandays in 2008 from 13.8 million mandays in 2007 due to the addition of new facilities and capacity increases. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. correction and detention facilities was 96.0% of capacity in 2008, excluding the terminated contracts for the Coke County Juvenile Justice Center, the Dickens County Correctional Center, and the Taft Correctional Institution. The average occupancy in our U.S. correction and detention facilities was 96.3% in 2007, excluding our new contracts at the Joe Corley Detention Facility, Rio Grande Detention Center, Robert A. Deyton Detention Facility and the Maverick County Detention Facility.
 
International services
 
Revenues for our International services segment during fiscal year 2008 increased by $4.8 million over fiscal year 2007 due to increases in contractual rates at some of our facilities in Australia and also in South Africa. We also experienced a favorable increase in revenues of $1.9 million over the prior year due to the overall strengthening of the Australian dollar during fiscal year 2008. This favorable variance was offset during fiscal year 2008 by a decrease in revenues of $2.9 million related to the expansion in 2007 of the Campsfield House Immigration Removal Centre which was completed in September 2008. We also experienced a decrease in revenues in fiscal year 2008 compared to fiscal year 2007 due to unfavorable foreign exchange currency fluctuations in the South African Rand and the British Pound which resulted in a combined decrease of $3.2 million.
 
GEO Care
 
The increase in revenues for GEO Care in 2008 compared to 2007 is primarily attributable to two items: (i) the Treasure Coast Forensic Center in Stuart, Florida which commenced operation in March 2007, increased revenues by $7.5 million; and (ii) the Florida Civil Commitment Center in Arcadia, Florida contributed an increase of $2.6 million both due to increases in population. This favorable increase was partially offset by $2.4 million due to the loss of the contract with the SFETC Annex.
 
Facility Construction and Design
 
The decrease in revenues from construction activities is primarily attributable to the completion of construction at two facilities: (i) the South Florida Evaluation and Treatment Center in Miami, Florida, which was completed in Second Quarter 2008, decreased revenues by $19.3 million; and (ii) the Northeast New Mexico Detention Facility in Clayton, New Mexico which was completed in Third Quarter 2008 and decreased revenues by $25.6 million. These decreases over the same period in the prior year were offset by increases in construction revenue for the expansion of the Graceville Correctional Facility in Graceville, Florida which


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commenced in First Quarter 2008 and increased revenues by $4.0 million and the construction of the Florida Civil Commitment Center in Arcadia, Florida which increased revenues by $22.1 million.
 
Operating Expenses
 
                                                 
          % of Segment
          % of Segment
             
    2008     Revenues     2007     Revenues     $ Change     % Change  
    (Dollars in thousands)  
 
U.S. corrections
  $ 516,963       72.7 %   $ 464,617       73.8 %   $ 52,346       11.3 %
International services
    116,379       90.4 %     115,618       90.3 %     761       0.7 %
GEO Care
    103,140       87.9 %     98,557       89.5 %     4,583       4.7 %
Facility construction and design
    85,571       99.6 %     109,070       100.2 %     (23,499 )     (21.5 )%
                                                 
Total
  $ 822,053       78.8 %   $ 787,862       80.7 %   $ 34,191       4.3 %
                                                 
 
Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and mental health and GEO Care facilities and expenses incurred in our Facility construction and design segment.
 
U.S. corrections
 
The increase U.S. corrections operating expenses in 2008 compared to 2007 is primarily attributable to new facility openings, capacity increases at existing facilities and the normalization of openings and expansions from 2007. The most significant increases to operating expenses were as follows: (i) operating expenses increased $43.3 million in total due to the opening or expansion of seven facilities in 2008 which include activations at the Robert A. Deyton Detention Facility, Rio Grande Detention Facility, Joe Corley Detention Facility and the Northeast New Mexico Detention Facility and expansions of the LaSalle Detention Facility, Central Arizona Correctional Facility and at the East Mississippi Correctional Facility; (ii) operating expenses increased $19.2 million in 2008 due to increases at our California facilities, South Texas Detention Center, New Castle Correctional Facility and at the Northwest Detention Facility related to contract modifications and enhanced services; (iii) operating expenses increased by $17.9 million due to the normalization of 2007 activations and expansions that occurred at the Graceville Correctional Facility, Val Verde Correctional Facility and the Moore Haven Correctional Facility. (iv) operating expenses increased by $3.6 million for the year ended December 28, 2008 due to changes in general liability and workers compensation reserves. The remaining increase in operating expenses is the result of increases in wages and employee benefits as well as general increases in operating costs. These increases were partially offset by decreases of $31.0 million related to the termination of our management contracts at Coke County Juvenile Justice Center, Taft Correctional Institution and Dickens County Correctional Center which were terminated prior to fiscal 2008. Beginning 2008, we changed our vacation policy for certain employees allowing these employees to use their vacation regardless of their service period but within the fiscal year. The 2008 change in our vacation policy resulted in a $3.7 million decrease in vacation expense in the fiscal year ended 2008 compared to the fiscal year ended 2007.
 
International services
 
Operating expenses for international services facilities remained consistent as a percentage of segment revenues in 2008 compared to 2007. On December 22, 2008, we announced the closure of our U.K.-based transportation division, Recruitment Solutions International (“RSI”). We purchased RSI, which provided transportation services to The Home Office Nationality and Immigration Directorate, for $2.3 million, including transaction costs, in 2006. The operating loss of this business are reported as discontinued operations and is not presented in the segment information above.


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GEO Care
 
Operating expenses for residential treatment increased approximately $4.6 million in 2008 as compared to 2007 primarily attributable to increased population at the Treasure Coast Forensic Center and Florida Civil Commitment Center as mentioned above. This positive variance was offset by a decrease due to the closure of our 100-bed South Florida Evaluation and Treatment Center Annex which was effective July 31, 2008. Overall, expenses as a percentage of revenue partly decreased as a result of a decrease in startup costs which were $0.6 million in 2008 compared to $1.9 million in 2007.
 
Facility Construction and Design
 
Operating expenses for facility construction and design decreased $23.5 million during fiscal year 2008 compared to fiscal year 2007 primarily due to a decrease in costs associated with our facilities under construction as a result of reduced activity as discussed above.
 
Depreciation and amortization
                                                 
          % of Segment
          % of Segment
             
    2008     Revenue     2007     Revenue     $ Change     % Change  
    (Dollars in thousands)  
 
U.S. corrections
  $ 34,010       4.8 %   $ 30,401       4.8 %   $ 3,609       11.9 %
International services
    1,556       1.2 %     1,351       1.1 %     205       15.2 %
GEO Care
    1,840       1.6 %     1,466       1.3 %     374       25.5 %
Facility construction and design
                                   
                                                 
Total
  $ 37,406       3.6 %   $ 33,218       3.4 %   $ 4,188       12.6 %
                                                 
 
Depreciation and Amortization
 
US Corrections
 
The increase in depreciation and amortization for U.S. corrections in 2008 compared to 2007 is primarily attributable to the following items: (i) depreciation increased $0.9 million due to the reactivation and expansion of the LaSalle Detention Facility discussed above, (ii) depreciation increased $0.7 million related to the opening of the Rio Grande Detention Center discussed above and, (iii) depreciation increased $0.8 million due to the expansion of the Val Verde Correctional Facility discussed above.
 
International Services
 
Depreciation and amortization as a percentage of segment revenue in 2008 was consistent with 2007.
 
GEO Care
 
The increase in depreciation and amortization for GEO Care in 2008 compared to 2007 is primarily due to the Treasure Coast Forensic Treatment Center expansion in September 2007.
 
Other Unallocated Operating Expenses
 
General and Administrative Expenses
 
                                                 
    2008     % of Revenue     2007     % of Revenue     $ Change     % Change  
    (Dollars in thousands)  
 
General and Administrative Expenses
  $ 69,151       6.6 %   $ 64,492       6.6 %   $ 4,659       7.2 %
 
General and administrative expenses comprise substantially all of our other unallocated expenses. General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees and other administrative expenses. General and administrative expenses increased by $4.7 million in the fiscal year ended December 28, 2008 as compared to the fiscal year ended December 30, 2007, and remained consistent as a percentage of revenues. The increase in general and administrative costs is mainly due to


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increases in corporate travel and increases in direct labor costs as a result of increased wages and related increases in employee benefits.
 
Non Operating Expenses
 
Interest Income and Interest Expense
 
                                                 
    2008     % of Revenue     2007     % of Revenue     $ Change     % Change  
    (Dollars in thousands)  
 
Interest Income
  $ 7,045       0.7 %   $ 8,746       0.9 %   $ (1,701 )     (19.4 )%
Interest Expense
  $ 30,202       2.9 %   $ 36,051       3.7 %   $ (5,849 )     (16.2 )%
 
The decrease in interest income in 2008 compared to 2007 is primarily attributable to the decrease in interest rates for the period as well as the decrease in cash in 2008 as compared to 2007. In First Quarter 2009, one of the lenders elected to prepay its interest rate swap obligation to us at the call option price which approximated the fair value of the interest rate swap on the call dates. We expect our interest expense to increase in fiscal 2009 of approximately one million dollars as a result of the termination of this swap agreement.
 
The decrease in interest expense is primarily attributable to a significant decrease in LIBOR rates. We also experienced an increase in the amount of interest capitalized in connection with the construction of our correctional and detention facilities. Capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. During fiscal years ended 2008 and 2007, we capitalized $4.3 million and $2.9 million of interest expense, respectively. This was partially offset by an increase in debt in 2008 as compared to 2007.
 
Provision for Income Taxes
 
                                 
    2008     Effective Rate     2007     Effective Rate  
    (Dollars in thousands)  
 
Income Tax Provision
  $ 34,033       37.3 %   $ 22,293       38.0 %
 
The effective tax rate during 2008 was 37.3% as a result of one-time state tax benefits of $1.6 million. We expect our tax rate in the future to increase to 38.7% as these benefits are non-recurring in nature.
 
Minority Interest
 
                                                 
    2008     % of Revenue     2007     % of Revenue     $ Change     % Change  
    (Dollars in thousands)  
 
Minority Interest
  $ (376 )     (0.0 )%   $ (397 )     (0.0 )%   $ 21       5.3 %
 
Our minority interest expense is related to the non-controlling interest in our consolidated joint venture in South Africa. On October 29, 2008, we, along with one other joint venture partner, executed a Sale of Shares Agreement for the purchase of a portion of the remaining non-controlling shares of our consolidated South African Custodial Management Services Pty. Limited (“SACM”) which changed our profit sharing percentage from 76.25% to 88.75%. All of the non-controlling shares of the third joint venture partner were allocated between us and the second joint venture partner on a pro rata basis based on our respective ownership percentages. As a result of the purchase we recognized $1.9 million in amortizable intangible assets. See Note 1 to the Consolidated Financial Statements. This decrease in the minority interest share was partially offset by an increase in overall earnings of the joint venture.
 
Equity in Earnings of Affiliate
 
                                                 
    2008     % of Revenue     2007     % of Revenue     $ Change     % Change  
    (Dollars in thousands)  
 
Equity in Earnings of Affiliate
  $ 4,623       0.4 %   $ 2,151       0.2 %   $ 2,502       116.3 %


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Equity in earnings of affiliates represent the earnings of SACS in 2008 and 2007 and reflect contractual increases partially offset by unfavorable foreign currency translation. These results also include the impact of a one-time tax benefit of $1.9 million.
 
2007 versus 2006
 
Revenues
 
                                                 
    2007     % of Revenue     2006     % of Revenue     $ Change     % Change  
    (Dollars in thousands)  
 
U.S. corrections
  $ 629,339       64.5 %   $ 574,126       70.1 %   $ 55,213       9.6 %
International services
    127,991       13.1 %     103,139       12.6 %     24,852       24.1 %
GEO Care
    110,165       11.3 %     67,034       8.2 %     43,131       64.3 %
Facility construction and design
    108,804       11.1 %     74,140       9.1 %     34,664       46.8 %
                                                 
Total
  $ 976,299       100.0 %   $ 818,439       100.0 %   $ 157,860       19.3 %
                                                 
 
U.S. corrections
 
The increase in revenues for U.S. corrections in 2007 compared to 2006 is primarily attributable to six items: (i) revenues increased $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 capacity increase in September 2006 in our Lawton Correctional Facility located at Lawton, Oklahoma; (iii) revenues increased $5.3 million and $5.0 million in 2007, respectively, as a result of the capacity 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 in March 2007; (v) revenues increased by $5.4 million due to the opening of our Graceville Correctional Facility in September 2007; and (vi) revenues increased due to contractual adjustments for inflation, and improved terms negotiated into a number of contracts.
 
The number of compensated mandays in U.S. corrections facilities increased to 13.8 million in 2007 from 12.7 million in 2006 due to the addition of new facilities and capacity increases. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. correction and detention facilities was 96.3% of capacity in 2007 compared to 97.0% in 2006, excluding our vacant North Lake Correctional Facility in Baldwin, Michigan, referred to as the “Michigan” facility in 2007 and 2006 and our vacant LaSalle Detention Facility in 2006 (reactivated June 2007).
 
International services
 
The increase in revenues for International services facilities in 2007 compared to 2006 was primarily due to the following items: (i) South African revenues increased by approximately $1.3 million due to a contractual 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 Junee Correctional Centre; and (iii) United Kingdom revenues increased approximately $10.4 million primarily due to the operations at the Campsfield House which began in Second Quarter 2006, a construction project which began in Fourth Quarter 2006, and favorable fluctuations in foreign currency exchange rates.


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GEO Care
 
The increase in revenues for GEO Care in 2007 compared to 2006 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 Stuart, 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 items: (i) the renovation of the Treasure Coast Forensic Treatment Center located in Martin County, Florida, in March, 2007 increased revenues by $2.3 million; (ii) the construction of the Northeast New Mexico Detention Facility located in Clayton County, New Mexico, which commenced construction in September 2006 and increased revenues by $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 commenced 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 the decrease.
 
Operating Expenses
 
                                                 
          % of Segment
          % of Segment
             
    2007     Revenues     2006     Revenues     $ Change     % Change  
    (Dollars in thousands)  
 
U.S. corrections
  $ 464,617       73.8 %   $ 450,187       78.4 %   $ 14,430       3.2 %
International services
    115,618       90.3 %     93,706       90.9 %     21,912       23.4 %
GEO Care
    98,557       89.5 %     61,264       91.4 %     37,293       60.9 %
Facility construction and design
    109,070       100.2 %     74,729       100.8 %     34,341       46.0 %
                                                 
Total
  $ 787,862       80.7 %   $ 679,886       83.1 %   $ 107,976       15.9 %
                                                 
 
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. corrections
 
The increase in U.S. corrections operating expenses reflects the 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 2007 compared to 2006 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 the 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 related to the damages in New Castle, Indiana and recognized as an offset to those related expenditures. Operating expenses in 2007 were favorably impacted by a $0.9 million overall reduction in our reserves for general liability, auto liability, and workers compensation insurance compared to a $4.0 million reduction in 2006. These reductions in insurance reserves primarily resulted from our continued improved claims experience. Our savings in the fiscal years ended 2007 and 2006 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,


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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 reserve at October 1, 2007 and October 1, 2006 to reflect the actuary’s expected loss. 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.
 
International services
 
Operating expenses for International services facilities increased in 2007 compared to 2006 largely as a result of the June 2006 commencement of the Campsfield House Immigration and Removal Centre contract in the United Kingdom. The operating expenses in the United Kingdom increased by $10.7 million in the fiscal year ended December 28, 2008 as a result of increases in operations at the Campsfield House Immigration and Removal Centre which began in Second Quarter 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 while margins in South Africa improved due to certain non-recurring costs incurred in the comparable period of the prior year.
 
GEO Care
 
Operating expenses for residential treatment increased approximately $37.3 million during 2007 from 2006 primarily due to the new 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 four construction contracts discussed above.
 
Depreciation and amortization
 
                                                 
          % of Segment
          % of Segment
             
    2007     Revenue     2006     Revenue     $ Change     % Change  
    (Dollars in thousands)  
 
U.S. corrections
  $ 30,401       4.8 %   $ 20,298       3.5 %   $ 10,102       49.8 %
International services
    1,351       1.1 %     803       0.8 %     548       68.2 %
GEO Care
    1,466       1.3 %     581       0.9 %     885       152.3 %
Facility construction and design
                                   
                                                 
Total
  $ 33,218       3.4 %   $ 21,682       2.6 %   $ 11,535       53.2 %
                                                 
 
Depreciation and Amortization
 
The increase in depreciation and amortization 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 and amortization for the U.S. corrections segment is our write-off of $0.4 million for the intangible asset related to our cancellation of the management contract to operate the 489-bed Dickens County Correctional Center in July 2007.


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Other Unallocated Operating Expenses
 
General and Administrative Expenses
 
                                                 
    2007     % of Revenue     2006     % of Revenue     $ Change     % Change  
    (Dollars in thousands)  
 
General and Administrative Expenses
  $ 64,492       6.6 %   $ 56,268       6.9 %   $ 8,224       14.6 %
 
General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees and other administrative expenses. The increase in general and administrative costs is mainly due to increases in direct labor costs and increases in rent expense as a result of increased administrative staff and additional leased space.
 
Non Operating Expenses
 
Interest Income and Interest Expense
 
                                                 
    2007     % of Revenue     2006     % of Revenue     $ Change     % Change  
    (Dollars in thousands)  
 
Interest Income
  $ 8,746       0.9 %   $ 10,687       1.3 %   $ (1,941 )     (18.2 )%
Interest Expense
  $ 36,051       3.7 %   $ 28,231       3.4 %   $ 7,820       27.7 %
 
The decrease in interest income is primarily due to lower 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 CPT acquisition.
 
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. During fiscal years ended 2007 and 2006, the Company capitalized $2.9 million and $0.2 million of interest expense, respectively.
 
Provision for Income Taxes
 
                                 
    2007     Effective Rate     2006     Effective Rate  
    (Dollars in thousands)  
 
Income Tax Provision
  $ 22,293       38.0 %   $ 15,215       36.4 %
 
Income taxes for 2007 and 2006 include certain one time items of $0.4 million and $0.7 million, respectively. Without such items, our effective tax rate would have been 38.6% and 38.0%, respectively.
 
Minority Interest
 
                                                 
    2007     % of Revenue     2006     % of Revenue     $ Change     % Change  
    (Dollars in thousands)  
 
Minority Interest
  $ (397 )     (0.0 )%   $ (125 )     (0.0 )%   $ (272 )     (217.6 %)
 
Increase in minority interest reflects increased performance in 2007 due to contractual increases. During 2006, our joint venture experienced lower revenues during First Quarter and Second Quarter 2006 related to facility modifications which resulted in reduced capacity and related billings.
 
Equity in Earnings of Affiliate
 
                                                 
    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 %


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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.
 
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.
 
Financial Condition
 
Capital Requirements
 
Our current cash requirements consist of amounts needed for working capital, debt service, supply purchases, investments in joint ventures, and capital expenditures related to the development of new correctional, detention and/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. Additional capital needs may also arise in the future with respect to possible acquisitions, other corporate transactions or other corporate purposes.
 
We are currently developing a number of projects using company financing. We estimate that these existing capital projects will cost approximately $202.0 million, of which $36.8 million was spent during fiscal year 2008. We have future committed capital projects for which we estimate our remaining capital requirements to be approximately $165.2 million, which will be spent through Fiscal First Quarter 2010. Capital expenditures related to facility maintenance costs are expected to range between $10.0 million and $15.0 million. In addition to these current estimated capital requirements for 2009 and 2010, 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 2009 and/or 2010 could materially increase.
 
Liquidity and Capital Resources
 
We plan to fund all of our capital needs, including our capital expenditures, from cash on hand, cash from operations, borrowings under our Senior Credit Facility and any other financings which our management and Board of Directors, in their discretion, may consummate. Our primary source of liquidity to meet these requirements is cash flow from operations and borrowings from the $240.0 million Revolver under our Third Amended and Restated Credit Agreement referred to as our Senior Credit Facility (see discussion below). As of December 28, 2008, we had $121.3 million available for borrowing under the revolving portion of the Senior Credit Facility.
 
As of December 28, 2008, we had a total of $382.1 million of consolidated debt outstanding, excluding $114.2 million of non-recourse debt and capital lease liability balances of $15.8 million. As of December 28, 2008, we also had outstanding seven letters of guarantee totaling approximately $5.3 million under separate international credit facilities. Based on our debt covenants and the amount of indebtedness we have outstanding, as of January 30, 2009, we had the ability to borrow an additional approximately $109.7 million under our Senior Credit Facility. We also have the ability to borrow $150.0 million under the accordion feature of our Senior Credit Facility subject to lender demand and market conditions. Our significant debt service


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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 2009 and 2010 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 2009 and/or 2010 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 2009 and 2010 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 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. In addition to these foregoing potential constraints on our capital, a number of state government agencies have been suffering from budget deficits and liquidity issues. While the company expects to be in compliance with its debt covenants, if these constraints were to intensify, our liquidity could be materially adversely impacted as could our compliance with these debt covenants.
 
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. 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. On February 12, 2009, we announced that Mr. John G. O’Rourke, Chief Financial Officer, will retire effective August 2, 2009. As a result of his retirement, we have an obligation to make a one-time payment of $3.2 million to Mr. O’Rourke in August 2009 under the terms of his retirement agreement. This amount is recorded in accrued expenses in the accompanying balance sheet as of December 28, 2008.
 
We are also exposed to various commitments and contingencies which may have a material adverse effect on our liquidity. See Item 3. Legal Proceedings.
 
The Senior Credit Facility
 
On October 29, 2008 and again on November 20, 2008, we exercised the accordion feature of our Senior Secured Credit Facility, which was amended on August 26, 2008 (see discussion below), to add $85.0 million and an additional $5.0 million, respectively, for a total of $90.0 million in additional borrowing capacity under the revolving portion of our Senior Credit Facility. As of December 28, 2008, the Senior Credit Facility consisted of a $365.0 million, seven-year term loan (“Term Loan B”), and a $240.0 million five-year revolver which expires September 14, 2010 (the “Revolver”). The interest rate for the Term Loan B is LIBOR plus 1.5% (the weighted average rate on outstanding borrowings under the Senior Credit Facility as of December 28, 2008 was 3.24%). The Revolver currently bears interest at LIBOR plus 2.0% or at the base rate (prime rate) plus 1.0%.
 
As of December 28, 2008, we had $158.6 million outstanding under the Term Loan B, and our $240.0 million Revolver had $74.0 million outstanding in loans, $44.7 million outstanding in letters of credit


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and $121.3 million available for borrowings. We intend to use future borrowings from the Revolver for the purposes permitted under the Senior Credit Facility, including for 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 1.50% to 2.50%.
Base rate borrowings
  Prime rate plus 0.50% to 1.50%.
Letters of credit
  1.50% to 2.50%.
Available borrowings
  0.38% to 0.50%.
 
On August 26, 2008, we completed a fourth amendment to our Senior Credit Facility through the execution of Amendment No. 4 to the Amended and Restated Credit Agreement (“Amendment No. 4”) between the us, as Borrower, certain of the our subsidiaries, as Grantors, and BNP Paribas, as Lender and as Administrative Agent (collectively, the “Senior Credit Facility” or the “Credit Agreement”). As further described below, Amendment No. 4 revises certain leverage ratios, eliminates the fixed charge coverage ratio, adds a new interest coverage ratio and sets forth new capital expenditure limits under the Credit Agreement. Additionally, Amendment No. 4 permits us to add incremental borrowings under the accordion feature of our Senior Credit Facility of up to $150.0 million on or prior to December 31, 2008 and up to an additional $150.0 million after December 31, 2008. Amendment No. 4 does not require any lenders to make any new borrowings under the accordion feature but simply provides a mechanism under the Senior Credit Facility after December 31, 2008 for us to incur such borrowings without requiring further lender consent. Any additional borrowings by us under the accordion feature of the Senior Credit Facility, whether as revolving borrowings or incremental term loans as permitted in the Amendment No. 4, would be subject to lender demand and market conditions and may not be available to us on satisfactory terms, or at all. We believe that this amendment may provide additional flexibility if and when we should decide to activate the accordion feature of the Senior Credit Facility beginning on January 1, 2009.
 
In 2008, we paid $1.0 million and $2.6 million of debt issuance costs related to the Amendment No. 4 and the exercise of the accordion feature, respectively, which will be amortized over the remaining term of the Revolver portion of the Senior Credit Facility.
 
Amendment No. 4 to the Credit Agreement requires us to maintain the following Total Leverage Ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:
 
     
Period
 
Total Leverage Ratio
 
Through the penultimate day of fiscal year 2009
  ≤ 4.50 to 1.00
From the last day of the fiscal year 2009 through the penultimate day of fiscal year 2010
  ≤ 4.25 to 1.00
From the last day of the fiscal year 2010 through the penultimate day of fiscal year 2011
  ≤ 3.25 to 1.00
Thereafter
  ≤ 3.00 to 1.00
 
Amendment No. 4 to the Credit Agreement also requires us to maintain the following Senior Secured Leverage Ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:
 
     
Period
 
Senior Secured Leverage Ratio
 
Through the penultimate day of fiscal year 2010
  ≤ 3.25 to 1.00
From the last day of the fiscal year 2010 through the penultimate day of fiscal year 2011
  ≤ 2.25 to 1.00
Thereafter
  ≤ 2.00 to 1.00
 
In addition, Amendment No. 4 to the Credit Agreement adds a new Interest Coverage Ratio which requires us to maintain a ratio of EBITDA (as such term is defined in the Credit Agreement) to Interest Expense (as such term is defined in the Credit Agreement) payable in cash of no less than 3.00 to 1.00, as


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computed at the end of each fiscal quarter for the immediately preceding four quarter-period. The foregoing covenants replace the corresponding covenants previously included in the Credit Agreement, and eliminate the fixed charge coverage ratio formerly incorporated in the Credit Agreement.
 
Amendment No. 4 also amends the capital expenditure limits applicable to us under the Credit Agreement as follows:
 
     
Period
 
Capital Expenditure Limit
 
Fiscal year 2008
  $200.0 million
Fiscal year 2009
  $275.0 million
Each fiscal year thereafter
  $50.0 million
 
The foregoing limits are subject to the provision that to the extent that our capital expenditures during any fiscal year are less than the limit permitted for such fiscal year, the following maximum amounts will be added to the maximum capital expenditures that we can make in the following fiscal year: (i) up to $30.0 million may be added to the fiscal year 2009 limit from unused amounts in fiscal year 2008; (ii) up to $50.0 million may be added to the fiscal year 2010 limit from unused amounts in fiscal year 2009; or (iii) up to $20.0 million may be added to the fiscal year 2011 limit, and to fiscal years thereafter, from unused amounts in the immediately prior fiscal years.
 
All of our obligations under the Senior Credit Facility are unconditionally guaranteed by each of our existing material domestic subsidiaries. The Senior Credit Facility and the related guarantees are secured by substantially all of the our present and future tangible and intangible assets and all present and future tangible and intangible assets of each guarantor, as specified in the Credit Agreement. In addition, the Senior Credit Facility contains certain customary representations and warranties, and certain customary covenants that restrict our ability to be party to certain transactions, as further specified in the Credit Agreement. Events of default under the Senior Credit Facility include, but are not limited to, (i) our failure to pay principal or interest when due, (ii) our material breach of any representation 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 state of claims which are asserted against us, and (viii) a change of control. We believe we were in compliance with all of the covenants in the Senior Credit Facility as of December 28, 2008.
 
Senior 81/4% Notes
 
In July 2003, to facilitate the completion of the purchase of 12.0 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 all or a portion of the Notes plus accrued and unpaid interest at various redemption prices ranging from 100.000% to 104.125% 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 believe we were in compliance with all of the covenants in the Indenture as of December 28, 2008.


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Non-Recourse Debt
 
South Texas Detention Complex
 
We have a debt service requirement related to the development of the South Texas Detention Complex, a 1,904-bed detention complex in Frio County, Texas acquired in November 2005 from 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 bonds. Additionally, we have outstanding $5.0 million of subordinated notes which represents the principal amount of financing provided to STLDC by CSC for initial development. These bonds mature in February 2016 and have fixed coupon rates between 3.84% and 5.07%.
 
We have an operating agreement with STLDC, the owner of the complex, which provides us with the sole and exclusive right to operate and manage the detention center. The operating agreement and bond indenture require the revenue from our contract with ICE be used to fund the periodic debt service requirements as they become due. The net revenues, if any, after various expenses such as trustee fees, property taxes and insurance premiums are distributed to us to cover operating expenses and management fees. We are responsible for the entire operations of the facility including all operating expenses and are 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 us and STLDC. The bonds are fully insured and the sole source of payment for the bonds is the operating revenues of the center. At the end of the ten year term of the bonds, title and ownership of the facility transfers from STLDC to us. We have determined that we are the primary beneficiary of STLDC and consolidate the entity as a result.
 
On February 1, 2008, we made a payment of $4.3 million for the current portion of our periodic debt service requirement in relation to STLDC operating agreement and bond indenture. As of December 28, 2008, the remaining balance of the debt service requirement is $41.1 million, of which $4.4 million is due within the next twelve months. Also as of December 28, 2008, included in current restricted cash and non-current restricted cash is $6.2 million and $10.9 million, respectively, as funds held in trust with respect to the STLDC for debt service and other reserves.
 
Northwest Detention Center
 
On June 30, 2003, CSC arranged financing for the construction of the Northwest Detention Center in Tacoma, Washington, referred to as the Northwest Detention Center, which was completed and opened for operation in April 2004 and acquired by us in November 2005. In connection with the original financing, CSC of Tacoma LLC, a wholly owned subsidiary of CSC, issued a $57.0 million note payable to the Washington Economic Development Finance Authority, referred to as WEDFA, an instrumentality of the State of Washington, which issued revenue bonds and subsequently loaned the proceeds of the bond issuance back to CSC for the purposes of constructing the Northwest Detention Center. The bonds are non-recourse to us and the loan from WEDFA to CSC is non-recourse to us. These bonds mature in February 2014 and have fixed coupon rates between 3.20% and 4.10%.
 
The proceeds of the loan were disbursed into escrow accounts held in trust to be used to pay the issuance costs for the revenue bonds, to construct the Northwest Detention Center and to establish debt service and other reserves. On October 1, 2008, CSC of Tacoma LLC made a payment from its restricted cash account of $5.4 million for the current portion of its periodic debt service requirement in relation to the WEDFA bid indenture. As of December 28, 2008, the remaining balance of the debt service requirement is $37.3 million, of which $5.7 million is classified as current in the accompanying balance sheet.
 
As of December 28, 2008, included in current restricted cash and non-current restricted cash is $7.1 million and $5.1 million, respectively, of funds held in trust with respect to the Northwest Detention Center for debt service and other reserves.


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Australia
 
In connection with the financing and management of one Australian facility, our wholly owned Australian subsidiary financed the facility’s development and subsequent expansion in 2003 with long-term debt obligations, which are non-recourse to us and total $38.1 million and $52.9 million at December 28, 2008 and December 30, 2007, respectively. As a condition of the loan, we are required to maintain a restricted cash balance of AUD 5.0 million, which, at December 28, 2008, was approximately $3.4 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 $6.2 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 8.4 million South African Rand, or $0.9 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 $2.1 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 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 a not-for-profit entity. The potential estimated exposure of these obligations is CAD 2.5 million, or approximately $2.0 million commencing in 2017. We have a liability of $1.3 million and $1.5 million related to this exposure as of December 28, 2008 and December 30, 2007, respectively. To secure this guarantee, we purchased Canadian dollar denominated securities with maturities matched to the estimated tax obligations in 2017 to 2021. We have recorded an asset and a liability equal to the current fair market value of those securities on our balance sheet. We do not currently operate or manage this facility.
 
At December 28, 2008, we also had outstanding seven letters of guarantee totaling approximately $5.3 million under separate international facilities. We do not have any off balance sheet arrangements.
 
Derivatives
 
Effective September 18, 2003, we entered into two interest rate swap agreements in the aggregate notional amount of $50.0 million (referred to as “Swaps”). 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. The agreements,


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which have payment, expiration dates and call provisions that mirror the terms of the Notes, effectively convert $50.0 million of the Notes into variable rate obligations. Each of the Swaps has a termination clause that gives the lender the right to terminate the interest rate Swap at fair market value if they are no longer a lender under the Credit Agreement. In addition to the termination clause, the Swaps also have call provisions which specify that the lender can elect to settle the Swap for the call option price, as specified in the Swap agreement. 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 3.55%, also calculated on the notional $50.0 million amount. Changes in the fair value of the interest rate Swaps are recorded in earnings along with related designated changes in the value of the Notes. As of December 28, 2008 and December 30, 2007, the fair value of the Swap assets totaled $2.0 million and $0.0 million, respectively, and is included in other non-current assets in the accompanying consolidated balance sheets. The increase in our Swap assets is due to favorable changes in the interest rates during 2008. There was no ineffectiveness of our interest rate Swaps for the years ended December 28, 2008 or December 30, 2007.
 
In First Quarter 2009, one of the lenders elected to prepay its Swap obligation to us at the call option price which approximated the fair value of the Swap on the call dates. Since we did not elect to call any portion of the Notes, we will amortize the value of the call option over the remaining life of the Notes. We expect that the termination of this Swap agreement will result in approximately one million dollars in additional interest expense for fiscal 2009.
 
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 28, 2008 and December 30, 2007 was approximately $0.2 million and $5.8 million, respectively, and is recorded as a component of other non-current assets in the accompanying consolidated financial statements. There was no ineffectiveness of this interest rate Swap for the fiscal years presented. The Company does not expect to enter into any transactions during the next twelve months which would result in the reclassification into earnings or losses associated with this Swap currently reported in accumulated other comprehensive loss.
 
Cash Flow
 
Cash and cash equivalents as of December 28, 2008 was $31.7 million, compared to $44.4 million as of December 30, 2007. During Fiscal 2008 we used cash flows from operations to fund all of our operating expenses and used cash on hand, $74.0 million in borrowings under our Revolver and cash flow from operations to fund $131.0 million in capital expenditures
 
Cash provided by operating activities of continuing operations in 2008, 2007 and 2006 was $76.9 million, $71.2 million, and $48.5 million, respectively. Cash provided by operating activities of continuing operations in 2008 was positively impacted by an increase in income from continuing operations of $23.4 million in addition to $37.4 million of depreciation and amortization expense. These increases reflect the opening of new facilities as previously discussed and improved financial performance at existing facilities. Cash provided by operating activities of continuing operations in 2007 was positively impacted by an increase in net income of $10.1 million in addition to $33.2 million of depreciation and amortization expense. Cash provided by operating activities of continuing operations in 2006 was positively impacted by $21.7 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 was negatively impacted in 2008 by an increase in accounts receivable of $29.6 million and more earnings in the current year attributable to our investment in our South Africa joint venture, SACS. Cash provided by operating activities of continuing operations was negatively impacted in 2007 by an increase in accounts receivable of $10.6 million, increases in our deferred income tax benefits of $5.1 million, and more earnings in the current year attributable to our investment in our South Africa joint venture, SACS. Cash provided by operating activities of continuing


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operations in 2006 was negatively impacted by an increase in accounts receivable. The increase in accounts receivable was 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 the New Castle Correctional Facility, the South Florida Evaluation and Treatment Center, the Fort Bayard Medical Center and the Campsfield House Immigration and Removal Centre as well as slightly higher billings reflecting a general increase in facility occupancy levels.
 
Cash used in investing activities of continuing operations in 2008 of $131.6 million includes capital expenditures of $131.0 million, of which $119.3 million related to development capital expenditures and approximately $11.7 million related maintenance capital expenditures. We are currently developing a number of projects using company financing. We estimate that these existing capital projects will cost approximately $202.0 million, of which $36.8 million was spent in fiscal year 2008. We estimate our remaining capital requirements for these projects to be approximately $165.2 million, which will be spent through Fiscal First Quarter 2010.
 
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 provided by financing activities in 2008 was $53.7 million and reflects proceeds received from net borrowings of $74.0 million under our Revolver. Borrowings under our $240.0 million Revolver were primarily used to fund $119.3 million of development capital expenditures in fiscal 2008. We intend to use cash flows from operations and future borrowings under our Revolver to fund the projects discussed above. Upon completion of these projects we expect to have drawn approximately $137.1 million under our Revolver, have outstanding letters of credit of $45.1 million and approximately $57.9 of remaining available unused capacity. We believe the institutions and banks included in our lender group will be able to fund their commitment to our Revolver. However, we can provide no assurance regarding their solvency or ability to honor their commitments. Failure to honor a commitment could materially impact our ability to meet our future capital needs and complete the projects discussed above.
 
Cash provided by financing activities in 2007 was $372.3 million and reflects proceeds received from the equity offering of $227.5 million as well as cash proceeds of $387.0 million from our Term Loan B and the Revolver. These cash flows from financing activities are offset by payments on the Term Loan B of $202.7 million, payments on the Revolver of $22.0 million and payments on other long term debt of $12.6 million. 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.


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Contractual Obligations and Off Balance Sheet Arrangements
 
The following is a table of certain of our contractual obligations, as of December 28, 2008, which requires us to make payments over the periods presented.
 
                                         
    Payments Due by Period        
          Less Than
                More Than
 
Contractual Obligations
  Total     1 Year     1-3 Years     3-5 Years     5 Years  
    (In thousands)  
 
Long-term debt obligations
  $ 150,056     $ 28     $ 28     $ 150,000     $  
Term Loan B
    158,613       3,650       7,300       147,663        
Revolver
    74,000             74,000              
Capital lease obligations (includes imputed interest)
    26,395       1,957       3,865       3,866       16,707  
Operating lease obligations
    116,204       16,510       29,511       20,777       49,406  
Non-recourse debt
    116,505       13,573       28,855       31,638       42,439  
Estimated interest payments on debt(a)
    112,335       25,433       43,242       39,204       4,456  
Estimated funding of pension and other post retirement benefits
    19,320       12,953       333       426       5,608  
Estimated construction commitments
    165,200       155,100       10,100              
Estimated tax payments for uncertain tax positions
    3,738             3,738              
                                         
Total
  $ 942,366     $ 229,204     $ 200,972     $ 393,574     $ 118,616  
                                         
 
 
(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 rate of 4.08% based on our bank rates as of January 15, 2009.
 
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 2008, 2007 and 2006. 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 on Form 10-K, the “Forward-Looking Statements — Safe Harbor,” as well as the other disclosures contained in this Annual Report on Form 10-K, for further discussion on forward-looking statements and the risks and other factors that could prevent us from achieving our goals and cause the assumptions underlying the forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements.
 
With 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. The number of State and Federal prisoners housed in private facilities increased 10.1% since mid-year 2005 with states such as Texas, Indiana, Colorado and Florida accounting for more than half of the increase. At June 2006, approximately


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7.2% of the estimated 1.6 million State and Federal prisoners incarcerated in the United States were held in private facilities, up from 6.5% in 2000. In addition to our strong positions 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. With 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 Second Quarter 2006, we believe that our international presence positions us to capitalize on growth opportunities within the private corrections and detention industry in new and established international markets.
 
We intend to pursue a diversified growth strategy by winning new customers and contracts, expanding our government services portfolio and pursuing selective acquisition opportunities. We achieve organic growth through competitive bidding that begins with the issuance by a government agency of a request for proposal, or RFP. We primarily rely on the RFP process for organic growth in our U.S. and international corrections operations as well as in our mental health and residential treatment services. 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 2008, we announced six new management contracts. The new contracts represent 5,042 new beds. This compares to the seven new management projects announced in 2007 representing 4,499 new beds. As of December 28, 2008, we have ten facilities under various stages of development or pending commencement of operations which represent approximately 8,200 beds. In addition to pursuing organic growth through the RFP process, we will from time to time selectively consider the financing and construction of new facilities or expansions to existing facilities on a speculative basis without having a signed contract with a known customer. We also plan to leverage our experience to expand the range of government-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.
 
Revenue
 
Domestically, we continue to be encouraged by the number of opportunities that have recently developed in the privatized corrections and detention industry. Overcrowding at corrections facilities in various states, most recently California and Arizona and increased demand for bed space at federal prisons and detention facilities 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. However, these positive trends may in the future be impacted by government budgetary constraints. According to the Center on Budget and Policy Priorities, at least 46 states are facing budget shortfalls, including our ten state customers. If state budgetary constraints persist or intensify, our state customers’ ability to pay us may be impaired and/or we may be forced to renegotiate our management contracts on less favorable terms and our financial condition results of operations or cash flows could be materially adversely impacted. We plan to actively bid on any new projects that fit our target profile for profitability and operational risk. Although we are pleased with the overall industry outlook, positive trends in the industry may be offset by several factors, including budgetary constraints, unanticipated contract terminations contract non-renewals and contract re-bids. Additionally, several of our management contracts are up for renewal and/or re-bid in 2009. 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 2009 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 second contract since re-establishing operations to operate the Harmondsworth Immigration Removal Centre. This project will commence operations in Third Quarter 2009. 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, the government has issued a procurement for the design, build, finance and manage of four 3,000-bed prisons. Bids are to be submitted in April 2009 with awards expected to be announced in late 2009.
 
With respect to our mental health/residential treatment services business conducted through our wholly-owned subsidiary, GEO Care, Inc., we are currently pursuing a number of business development opportunities.


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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.
 
In addition to our seven facilities under construction at December 28, 2008, we also have three additional facilities in the planning and design phase which brings our total projects to ten with approximately 8,200 beds that will become available upon completion. Subject to achieving our occupancy targets, five of these projects have associated management contracts and are expected to generate a total of approximately $77.0 million in combined annual operating revenues when opened between First Quarter 2009 and Fourth Quarter 2010. We do not have customers for the five remaining projects. Three of these projects relate to expansions of existing facilities for which we have associated management contracts, while one of these facilities is being marketed to state and federal government agencies. We believe that these projects comprise the largest and most diversified organic growth pipeline in our industry.
 
Operating Expenses
 
Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and mental health facilities. Labor and related cost represented approximately 56.3% of our operating expenses in the fiscal year 2008. Additional significant operating expenses include food, utilities and inmate medical costs. In 2008, operating expenses totaled approximately 78.8% of our consolidated revenues. Our operating expenses as a percentage of revenue in 2009 will be impacted by the opening of new facilities including the expansion at the Robert A. Deyton Detention Facility in Georgia and the expansion at the Graceville Correctional Facility in Florida. Overall, excluding start-up expenses, we anticipate that operating expenses as a percentage of our revenue will remain relatively flat, consistent with our fiscal year ended December 28, 2008.
 
General and Administrative Expenses
 
General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees and other administrative expenses. In 2008, general and administrative expenses totaled approximately 6.6% of our consolidated revenues. We expect operating expenses as a percentage of revenue in 2009 to be generally consistent with our operating expenses for 2008. 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 from time to time 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


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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 build and/or open facilities as planned, profitably manage such facilities and successfully integrate such facilities into our operations without substantial additional costs;
 
  •  the instability of foreign exchange rates, exposing us to currency risks in Australia, the United Kingdom, and South Africa, or other countries in which we may choose to conduct our business;
 
  •  our ability to reactivate the North Lake 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 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 state and federal income tax law changes internationally and domestically;
 
  •  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 on Form 10-K, our Form 10-Qs and our Form 8-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.


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Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
Interest Rate Risk
 
We are exposed to market risks related to changes in interest rates with respect to our Senior Credit Facility. Payments under the Senior Credit Facility are indexed to a variable interest rate. Based on borrowings outstanding under the Senior Credit Facility portion of $232.6 million as of December 28, 2008 for every one percent increase in the interest rate applicable to the Senior Credit Facility, our total annual interest expense would increase by $2.3 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 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. Each of the Swaps has a termination clause that gives the lender the right to terminate the interest rate swap at fair market value if they are no longer a lender under the Credit Agreement. In addition to the termination clause, the interest rate swaps also have call provisions which specify that the lender can elect to settle the swap for the call option price, as specified in the swap agreement. 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 3.55%, as of January 15, 2009, 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. In First Quarter 2009, one of our lenders elected to prepay its interest rate swap obligations to us at the call option price which approximated or was greater than the fair value of the interest rate swaps on the respective call dates. We expect that the termination of this swap will result in approximately one million dollars in additional interest expense for fiscal 2009.
 
We have entered into certain interest rate swap arrangements for hedging purposes, fixing the interest rate on our Australian non-recourse debt to 9.7%. The difference between the floating rate and the swap rate on these instruments is recognized in interest expense within the respective entity. Because the interest rates with respect to these instruments are fixed, a hypothetical 100 basis point change in the current interest rate would not have a material impact on our financial condition or results of operations.
 
Additionally, we invest our cash in a variety of short-term financial instruments to provide a return. These instruments generally consist of highly liquid investments with original maturities at the date of purchase of three months or less. While these instruments are subject to interest rate risk, a hypothetical 100 basis point increase or decrease in market interest rates would not have a material impact on our financial condition or results of operations.
 
Foreign Currency Exchange Rate Risk
 
We are exposed to market risks related to fluctuations in foreign currency exchange rates between the U.S. Dollar, the Australian Dollar, the Canadian Dollar, the South African Rand and the British Pound currency exchange rates. Based upon our foreign currency exchange rate exposure as of December 28, 2008 with respect to our international operations, every 10 percent change in historical currency rates would have approximately a $3.4 million effect on our financial position and approximately a $1.2 million impact on our results of operations over the next fiscal year.


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Item 8.   Financial Statements and Supplementary Data
 
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
 
To the Shareholders of
The GEO Group, Inc.:
 
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. They include amounts based on judgments and estimates.
 
Representation in the consolidated financial statements and the fairness and integrity of such statements are the responsibility of management. In order to meet management’s responsibility, the Company maintains a system of internal controls and procedures and a program of internal audits designed to provide reasonable assurance that our assets are controlled and safeguarded, that transactions are executed in accordance with management’s authorization and properly recorded, and that accounting records may be relied upon in the preparation of financial statements.
 
The consolidated financial statements have been audited by Grant Thornton LLP, independent registered public accountants, whose appointment by our Audit Committee was ratified by our shareholders. Their report expresses a professional opinion as to whether management’s consolidated financial statements considered in their entirety present fairly, in conformity with accounting principles generally accepted in the United States, the Company’s financial position and results of operations. Their audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States). The effectiveness of our internal control over financial reporting as of December 28, 2008 has been audited by Grant Thornton LLP, independent registered public accountants, as stated in their report which is included in this Form 10-K.
 
The Audit Committee of the Board of Directors meets periodically with representatives of management, the independent registered public accountants and our internal auditors to review matters relating to financial reporting, internal accounting controls and auditing. Both the internal auditors and the independent registered certified public accountants have unrestricted access to the Audit Committee to discuss the results of their reviews.
 
George C. Zoley
Chairman and Chief Executive Officer
 
Wayne H. Calabrese
Vice Chairman, President
and Chief Operating Officer
 
John G. O’Rourke
Senior Vice President and Chief Financial
Officer


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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 in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer that: (i) pertains to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provides reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements for external reporting in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures are being made only in accordance with authorization of the Company’s management and directors; and (iii) provides reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 28, 2008. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal Control — Integrated Framework.
 
The Company evaluated, with the participation of its Chief Executive Officer and Chief Financial Officer, its internal control over financial reporting as of December 28, 2008, based on the COSO Internal Control — Integrated Framework. Based on this evaluation, the Company’s management concluded that as of December 28, 2008, its internal control over financial reporting is effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
Grant Thornton LLP, the registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors and
Shareholders of The GEO Group, Inc.
 
We have audited The GEO Group, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 28, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, The GEO Group, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 28, 2008, based on criteria established in Internal Control-Integrated Framework issued by COSO.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The GEO Group, Inc. and subsidiaries as of December 28, 2008 and December 30, 2007, and the related consolidated statements of income, cash flow, and shareholders’ equity and comprehensive income for each of the three years in the period ended December 28, 2008, and our report dated February 17, 2009 expressed an unqualified opinion on those financial statements.
 
/s/  Grant Thornton LLP
 
Miami, Florida
February 17, 2009


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors and
Shareholders of The GEO Group, Inc.
 
We have audited the accompanying consolidated balance sheets of The GEO Group, Inc. and subsidiaries (the “Company”) as of December 28, 2008 and December 30, 2007, and the related consolidated statements of income, cash flows, and shareholders’ equity and comprehensive income for each of three years in the period ended December 28, 2008. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the 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 28, 2008 and December 30, 2007, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 28, 2008 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
As 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”. As described in Note 14 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 28, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 17, 2009 expressed an unqualified opinion thereon.
 
/s/  Grant Thornton LLP
 
Miami, Florida
February 17, 2009


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THE GEO GROUP, INC.
 
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended December 28, 2008, December 30, 2007, and December 31, 2006
 
                         
    2008     2007     2006  
    (In thousands, except per share data)  
 
Revenues
  $ 1,043,006     $ 976,299     $ 818,439  
Operating Expenses
    822,053       787,862       679,886  
Depreciation and Amortization
    37,406       33,218       21,682  
General and Administrative Expenses
    69,151       64,492       56,268  
                         
Operating Income
    114,396       90,727       60,603  
Interest Income
    7,045       8,746       10,687  
Interest Expense
    (30,202 )     (36,051 )     (28,231 )
Write-off of Deferred Financing Fees from Extinguishment of Debt
          (4,794 )     (1,295 )
                         
Income Before Income Taxes, Minority Interest, Equity in Earnings of Affiliates, and Discontinued Operations
    91,239       58,628       41,764  
Provision for Income Taxes
    34,033       22,293       15,215  
Minority Interest
    (376 )     (397 )     (125 )
Equity in Earnings of Affiliates, net of income tax (benefit) provision of ($805), $1,030, and $56
    4,623       2,151       1,576  
                         
Income from Continuing Operations
    61,453       38,089       28,000  
Income (loss) from Discontinued Operations, net of tax provision of $236, $2,310, and $1,139
    (2,551 )     3,756       2,031  
                         
Net Income
  $ 58,902     $ 41,845     $ 30,031  
                         
Weighted Average Common Shares Outstanding:
                       
Basic
    50,539       47,727       34,442  
                         
Diluted
    51,830       49,192       35,744  
                         
Earnings (loss) per Common Share:
                       
Basic:
                       
Income from continuing operations
  $ 1.22     $ 0.80     $ 0.81  
Income (loss) from discontinued operations
    (0.05 )     0.08       0.06  
                         
Net income per share — basic
  $ 1.17     $ 0.88     $ 0.87  
                         
Diluted:
                       
Income from continuing operations
  $ 1.19     $ 0.77     $ 0.78  
Income (loss) from discontinued operations
    (0.05 )     0.08       0.06  
                         
Net income per share — diluted
  $ 1.14     $ 0.85     $ 0.84  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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THE GEO GROUP, INC.
 
CONSOLIDATED BALANCE SHEETS
December 28, 2008 and December 30, 2007
 
                 
    2008     2007  
    (In thousands, except
 
    share data)  
 
ASSETS
Current Assets
               
Cash and cash equivalents
  $ 31,655     $ 44,403  
Restricted cash
    13,318       13,227  
Accounts receivable, less allowance for doubtful accounts of $625 and $445
    199,665       164,773  
Deferred income tax asset, net
    17,340       19,705  
Other current assets
    12,911       14,638  
Current assets of discontinued operations
    7,031       7,772  
                 
Total current assets
    281,920       264,518  
                 
Restricted Cash
    19,379       20,880  
Property and Equipment, Net
    878,616       783,363  
Assets Held for Sale
    4,348       1,265  
Direct Finance Lease Receivable
    31,195       43,213  
Deferred Income Tax Assets, Net
    4,417       4,918  
Goodwill
    22,202       22,361  
Intangible Assets, Net
    12,393       12,315  
Other Non-Current Assets
    33,942       36,998  
Non-Current Assets of Discontinued Operations
    209       2,803  
                 
    $ 1,288,621     $ 1,192,634  
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
               
Accounts payable
  $ 56,143     $ 47,068  
Accrued payroll and related taxes
    27,957       34,718  
Accrued expenses
    82,442       85,498  
Current portion of capital lease obligations, long-term debt and non-recourse debt
    17,925       17,477  
Current liabilities of discontinued operations
    1,459       1,671  
                 
Total current liabilities
    185,926       186,432  
                 
Deferred Income Tax Liability
    14       223  
Minority Interest
    1,101       1,642  
Other Non-Current Liabilities
    28,876       30,179  
Capital Lease Obligations
    15,126       15,800  
Long-Term Debt
    378,448       305,678  
Non-Recourse Debt
    100,634       124,975  
Commitments and Contingencies (Note 12)
               
Shareholders’ Equity
               
Preferred stock, $0.01 par value, 30,000,000 shares authorized, none issued or outstanding
           
Common stock, $0.01 par value, 90,000,000 shares authorized, 67,197,775 and 67,050,596 issued and 51,122,775 and 50,975,596 outstanding
    511       510  
Additional paid-in capital
    344,175       338,092  
Retained earnings
    299,973       241,071  
Accumulated other comprehensive (loss) income
    (7,275 )     6,920  
Treasury stock 16,075,000 shares
    (58,888 )     (58,888 )
                 
Total shareholders’ equity
    578,496       527,705  
                 
    $ 1,288,621     $ 1,192,634  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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THE GEO GROUP, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended December 28, 2008, December 30, 2007, and December 31, 2006
 
                         
    2008     2007     2006  
    (In thousands)  
 
Cash Flow from Operating Activities:
                       
Income from continuing operations
  $ 61,453     $ 38,089     $ 28,000  
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
                       
Amortization of restricted stock-based compensation
    3,015       2,474       966  
Stock-based compensation expense
    1,530       935       374  
Depreciation and amortization expenses
    37,406       33,218       21,682  
Amortization of debt issuance costs and discount
    3,042       2,524       1,089  
Deferred tax benefit (provision)
    2,656       (5,077 )     (5,080 )
Provision (Recovery) for doubtful accounts
    602       (176 )     762  
Equity in earnings of affiliates, net of tax
    (4,623 )     (2,151 )     (1,576 )
Minority interests in earnings of consolidated entity
    376       397       125  
Dividend to minority interest
    (125 )     (389 )     (757 )
Income tax (benefit) provision of equity compensation
    (786 )     (3,061 )     (2,793 )
Loss on sale of fixed assets
    157              
Write-off of deferred financing fees from extinguishment of debt
          4,794       1,295  
Changes in assets and liabilities, net of acquisition
                       
Accounts receivable
    (29,599 )     (10,604 )     (32,165 )
Other current assets
    2,120       (57 )     36  
Other assets
    (2,418 )     3,211       1,868  
Accounts payable and accrued expenses
    7,775       (2,457 )     30,694  
Accrued payroll and related taxes
    (4,483 )     1,517       3,797  
Deferred revenue
          (152 )     (1,576 )
Other liabilities
    (1,190 )     8,186       1,799  
                         
Net cash provided by operating activities of continuing operations
    76,908       71,221       48,540  
Net cash (used in) provided by operating activities of discontinued operations
    (5,564 )     7,707       (2,588 )
                         
Net cash provided by operating activities
    71,344       78,928       45,952  
                         
Cash Flow from Investing Activities:
                       
Acquisitions, net of cash acquired
          (410,473 )     (2,578 )
YSI purchase price adjustment
                15,080  
CSC purchase price adjustment
          2,291        
Proceeds from sale of assets
    1,136       4,476       20,246  
Purchase of shares in consolidated affiliate
    (2,189 )            
Change in restricted cash
    452       (20 )     (7,285 )
Insurance proceeds related to hurricane damages
                781  
Capital expenditures
    (130,990 )     (115,204 )     (43,165 )
                         
Net cash used in investing activities
    (131,591 )     (518,930 )     (16,921 )
                         
Cash Flow from Financing Activities:
                       
Proceeds from equity offering, net
          227,485       99,936  
Proceeds from long-term debt
    156,000       387,000       111  
Income tax benefit of equity compensation
    786       3,061       2,793  
Debt issuance costs
    (3,685 )     (9,210 )      
Payments on long-term debt
    (100,156 )     (237,299 )     (82,627 )
Repurchase of stock options from employee and directors
                (3,955 )
Proceeds from the exercise of stock options
    753       1,239       5,405  
                         
Net cash provided by financing activities
    53,698       372,276       21,663  
                         
Effect of Exchange Rate Changes on Cash and Cash Equivalents
    (6,199 )     609       3,732  
                         
Net (Decrease) Increase in Cash and Cash Equivalents
    (12,748 )     (67,117 )     54,426  
Cash and Cash Equivalents, beginning of period
    44,403       111,520       57,094  
                         
Cash and Cash Equivalents, end of period
  $ 31,655     $ 44,403     $ 111,520  
                         
Supplemental Disclosures:
                       
Cash paid during the year for:
                       
Income taxes
  $ 29,895     $ 26,413     $ (853 )
                         
Interest
  $ 34,486     $ 28,470     $ 25,740  
                         
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
  $     $ 406,368     $ 2,578  
                         
Extinguishment of pre-acquisition liabilities, net
  $     $ 6,663     $  
                         
Total liabilities assumed
  $     $ 2,558        
                         
    $     $ 410,473     $  
                         
Short term borrowings for deposit on asset
  $     $ 5,000        
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Fiscal Years Ended December 28, 2008, December 30, 2007, and December 31, 2006
 
                                                                 
                            Accumulated
                   
    Common Stock     Additional
          Other
    Treasury Stock     Total
 
    Number
          Paid-In
    Retained
    Comprehensive
    Number
          Shareholders’
 
    of Shares     Amount     Capital     Earnings     Income (Loss)     of Shares     Amount     Equity  
    (In thousands)  
 
Balance, January 1, 2006
    29,074       291       70,590       171,666       (2,073 )     (36,000 )     (131,880 )     108,594  
Proceeds from stock options exercised
    973       10       5,395                               5,405  
Tax benefit related to employee stock options
                2,793                               2,793  
Stock based compensation expense
                374                               374  
Restricted stock granted
    450       4       (4 )                              
Amortization of restricted stock
                966                               966  
Issuance of treasury stock in conjunction with offering
    9,000       90       66,876                   9,000       32,970       99,936  
Buyout of stock options
                    (3,955 )                                     (3,955 )
Comprehensive income:
                                                               
Net income
                      30,031                          
Change in foreign currency translation, net of income tax expense of $2,356
                            3,846                    
Unrealized gain on derivative instruments, net of income tax expense of $1,121
                            2,553                    
Total comprehensive income
                                              36,430  
Adoption of FAS 158 (Note 14)
                            (1,933 )                 (1,933 )
                                                                 
Balance, December 31, 2006
    39,497       395       143,035       201,697       2,393       (27,000 )     (98,910 )     248,610  
Adoption of FIN 48 January 1, 2007 (Note 16)
                            (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  
                                                                 
Proceeds from stock options exercised
    171       1       752                               753  
Tax benefit related to employee stock options
                786                               786  
Stock based compensation expense
                1,530                               1,530  
Restricted stock granted
    24                                            
Restricted stock cancelled
    (48 )                                          
Amortization of restricted stock
                3,015                               3,015  
Comprehensive income:
                                                               
Net income
                      58,902                          
Change in foreign currency translation, net of income tax benefit of $413
                            (10,742 )                  
Pension liability adjustment, net of income tax benefit of $17
                            27                    
Unrealized loss on derivative instruments, net of income tax benefit of $2,113
                            (3,480 )                  
Total comprehensive income
                                              44,707  
                                                                 
Balance, December 28, 2008
    51,123     $ 511     $ 344,175     $ 299,973     $ (7,275 )     (16,075 )   $ (58,888 )   $ 578,496  
                                                                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents

THE GEO GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended December 28, 2008, December 30, 2007, and December 31, 2006
 
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. The Company operates a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers and mental health and residential treatment facilities. As of the fiscal year ended December 28, 2008, GEO managed 59 facilities totaling approximately 53,400 beds worldwide and had an additional 3,586 beds under development at seven facilities, including an expansion and renovation of one vacant facility which is Company owned and the expansions of six facilities which it currently operates.
 
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 2008, 2007 and 2006 each included 52 weeks. The Company reports the results of its South African equity affiliate, South African Custodial Services Pty. Limited, (“SACS”), and its consolidated South African entity, South African Custodial Management Pty. Limited (“SACM”) 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 in consolidation.
 
Reclassifications
 
Certain prior year amounts related to discontinued operations have been reclassified to conform to current year presentation. See Note 3.
 
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’ compensat