10-Q 1 d247088d10q.htm FORM 10-Q FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended October 2, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from              to             

Commission file number 1-14260

 

 

The GEO Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Florida   65-0043078

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

One Park Place, 621 NW 53rd Street, Suite 700,

Boca Raton, Florida

  33487
(Address of Principal Executive Offices)   (Zip Code)

(561) 893-0101

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by a 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   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

As of November 4, 2011, the registrant had 62,612,179 shares of common stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

     3   

ITEM 1. FINANCIAL STATEMENTS

     3   

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED OCTOBER 2, 2011 AND OCTOBER 3, 2010 (UNAUDITED)

     3   

CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 2, 2011 (UNAUDITED) AND JANUARY 2, 2011

     4   

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 2, 2011 AND OCTOBER 3, 2010 (UNAUDITED)

     5   

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

     6   

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     36   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     62   

ITEM 4. CONTROLS AND PROCEDURES

     62   

PART II - OTHER INFORMATION

     63   

ITEM 1. LEGAL PROCEEDINGS

     63   

ITEM 1A. RISK FACTORS

     64   

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     64   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     64   

ITEM 4. REMOVED AND RESERVED

     64   

ITEM 5. OTHER INFORMATION

     64   

ITEM 6. EXHIBITS

     64   

SIGNATURES

     65   

 

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED

OCTOBER 2, 2011 AND OCTOBER 3, 2010

(In thousands, except per share data)

(UNAUDITED)

 

     Thirteen Weeks Ended     Thirty-nine Weeks Ended  
     October 2, 2011     October 3, 2010     October 2, 2011     October 3, 2010  

Revenues

   $ 406,847      $ 327,933      $ 1,206,430      $ 895,570   

Operating expenses

     307,721        251,100        915,651        694,348   

Depreciation and amortization

     21,974        13,384        61,832        32,096   

General and administrative expenses

     25,922        33,925        86,420        72,028   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     51,230        29,524        142,527        97,098   

Interest income

     1,767        1,734        4,965        4,448   

Interest expense

     (19,327     (11,917     (55,700     (28,178

Loss on extinguishment of debt

     —          (7,933     —          (7,933
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in earnings of affiliates

     33,670        11,408        91,792        65,435   

Provision for income taxes

     12,649        7,547        35,308        28,560   

Equity in earnings of affiliates, net of income tax provision of $118, $449, $1,705 and $1,672

     272        1,149        2,352        2,868   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     21,293        5,010        58,836        39,743   

Net loss attributable to noncontrolling interests

     225        271        1,050        227   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 21,518      $ 5,281      $ 59,886      $ 39,970   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     63,340        57,799        64,028        52,428   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     63,555        58,198        64,388        53,044   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income per Common Share Attributable to The GEO Group, Inc. — Basic

   $ 0.34      $ 0.09      $ 0.94      $ 0.76   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income per Common Share Attributable to The GEO Group, Inc. — Diluted

   $ 0.34      $ 0.09      $ 0.93      $ 0.75   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income:

        

Net income

   $ 21,293      $ 5,010      $ 58,836      $ 39,743   

Total other comprehensive income (loss), net of tax

     (7,521     5,208        (6,719     2,308   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     13,772        10,218        52,117        42,051   

Comprehensive loss attributable to noncontrolling interests

     325        214        1,160        185   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 14,097      $ 10,432      $ 53,277      $ 42,236   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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THE GEO GROUP, INC.

CONSOLIDATED BALANCE SHEETS

OCTOBER 2, 2011 AND JANUARY 2, 2011

(In thousands, except share data)

 

     October 2, 2011     January 2, 2011  
     (Unaudited)        
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 43,956      $ 39,664   

Restricted cash and investments (including VIEs1 of $34,048 and $34,049, respectively)

     41,033        41,150   

Accounts receivable, less allowance for doubtful accounts of $2,410 and $1,308

     274,294        275,778   

Deferred income tax assets, net

     44,972        29,115   

Prepaid expenses and other current assets

     21,611        36,377   
  

 

 

   

 

 

 

Total current assets

     425,866        422,084   
  

 

 

   

 

 

 

Restricted Cash and Investments (including VIEs of $30,078 and $33,266, respectively)

     53,274        49,492   

Property and Equipment, Net (including VIEs of $163,801 and $167,209, respectively)

     1,673,851        1,511,292   

Assets Held for Sale

     3,998        9,970   

Direct Finance Lease Receivable

     31,673        37,544   

Deferred Income Tax Assets, Net

     936        936   

Goodwill

     512,669        236,594   

Intangible Assets, Net

     205,131        87,813   

Other Non-Current Assets

     83,192        56,648   
  

 

 

   

 

 

 

Total Assets

   $ 2,990,590      $ 2,412,373   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current Liabilities

    

Accounts payable

   $ 72,216      $ 73,880   

Accrued payroll and related taxes

     47,772        33,361   

Accrued expenses

     129,534        118,472   

Current portion of capital lease obligations, long-term debt and non-recourse debt (including VIEs of $20,770 and $19,365, respectively)

     51,204        41,574   
  

 

 

   

 

 

 

Total current liabilities

     300,726        267,287   
  

 

 

   

 

 

 

Deferred Income Tax Liabilities

     99,142        55,318   

Other Non-Current Liabilities

     59,322        46,862   

Capital Lease Obligations

     13,363        13,686   

Long-Term Debt

     1,310,771        798,336   

Non-Recourse Debt (including VIEs of $109,001 and $132,078, respectively)

     162,033        191,394   

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, 85,180,188 and 84,506,772 issued and 62,612,179 and 64,432,459 outstanding, respectively

     852        845   

Additional paid-in capital

     726,107        718,489   

Retained earnings

     488,431        428,545   

Accumulated other comprehensive income

     3,462        10,071   

Treasury stock 22,568,009 and 20,074,313 shares, at cost, at October 2, 2011 and January 2, 2011, respectively

     (189,036     (139,049
  

 

 

   

 

 

 

Total shareholders’ equity attributable to The GEO Group, Inc.

     1,029,816        1,018,901   

Noncontrolling interests

     15,417        20,589   
  

 

 

   

 

 

 

Total shareholders’ equity

     1,045,233        1,039,490   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,990,590      $ 2,412,373   
  

 

 

   

 

 

 

 

1 

Variable interest entities or “VIEs”

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THIRTY-NINE WEEKS ENDED

OCTOBER 2, 2011 AND OCTOBER 3, 2010

(In thousands)

(UNAUDITED)

 

     Thirty-nine Weeks Ended  
     October 2, 2011     October 3, 2010  

Cash Flow from Operating Activities:

    

Net Income

   $ 58,836      $ 39,743   

Net loss attributable to noncontrolling interests

     1,050        227   
  

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

     59,886        39,970   

Adjustments to reconcile net income attributable to The GEO Group, Inc. to net cash provided by operating activities:

    

Depreciation and amortization expense

     61,832        32,096   

Amortization of debt issuance costs, discount and/or premium

     1,148        3,022   

Restricted stock expense

     2,642        2,529   

Stock option plan expense

     2,201        1,004   

Provision for doubtful accounts

     1,235        140   

Equity in earnings of affiliates, net of tax

     (2,352     (2,868

Income tax benefit of equity compensation

     (536     (786

Loss on extinguishment of debt

     —          7,933   

Loss on sale of property and equipment

     205        —     

Dividends received from unconsolidated joint venture

     5,402        3,909   

Changes in assets and liabilities, net of acquisition:

    

Changes in accounts receivable, prepaid expenses and other assets

     28,836        2,711   

Changes in accounts payable, accrued expenses and other liabilities

     3,625        13,944   
  

 

 

   

 

 

 

Net cash provided by operating activities

     164,124        103,604   
  

 

 

   

 

 

 

Cash Flow from Investing Activities:

    

Cornell Acquisition, cash consideration

     —          (260,239

BI acquisition, cash consideration, net of cash acquired

     (409,607     —     

Just Care purchase price adjustment

     —          (41

Proceeds from sale of property and equipment

     795        334   

Proceeds from sale of assets held for sale

     7,121        —     

Change in restricted cash

     (4,126     (2,070

Capital expenditures

     (177,656     (68,284
  

 

 

   

 

 

 

Net cash used in investing activities

     (583,473     (330,300
  

 

 

   

 

 

 

Cash Flow from Financing Activities:

    

Payments on long-term debt

     (127,544     (342,460

Proceeds from long-term debt

     617,247        673,000   

Distribution to MCF partners

     (4,012     —     

Payments for purchase of treasury shares

     (49,987     (80,000

Payments for retirement of common stock

     —          (7,078

Proceeds from the exercise of stock options

     2,446        5,747   

Income tax benefit of equity compensation

     536        786   

Debt issuance costs

     (11,192     (5,750
  

 

 

   

 

 

 

Net cash provided by financing activities

     427,494        244,245   

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     (3,853     2,361   
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     4,292        19,910   

Cash and Cash Equivalents, beginning of period

     39,664        33,856   
  

 

 

   

 

 

 

Cash and Cash Equivalents, end of period

   $ 43,956      $ 53,766   
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Non-cash Investing and Financing activities:

    

Capital expenditures in accounts payable and accrued expenses

   $ 21,886      $ 8,565   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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THE GEO GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The unaudited consolidated financial statements of The GEO Group, Inc., a Florida corporation, and subsidiaries (the “Company”, or “GEO”), included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States and the instructions to Form 10-Q and consequently do not include all disclosures required by Form 10-K. Additional information may be obtained by referring to the Company’s Annual Report on Form 10-K for the year ended January 2, 2011. In the opinion of management, all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the financial information for the interim periods reported in this Quarterly Report on Form 10-Q have been made. Results of operations for the thirty-nine weeks ended October 2, 2011 are not necessarily indicative of the results for the entire fiscal year ending January 1, 2012.

The GEO Group, Inc. is a leading provider of government-outsourced services specializing in the management of correctional, detention, mental health, residential treatment and re-entry facilities, and the provision of community based services and youth services in the United States, Australia, South Africa, the United Kingdom and Canada. 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, mental health, residential treatment and community based re-entry facilities. The Company offers counseling, education and/or treatment to inmates with alcohol and drug abuse problems at most of the domestic facilities it manages. In February 2011, the Company acquired BII Holding Corporation (“BII Holding”), the indirect owner of 100% of the equity interests of B.I. Incorporated (“BI”). The Company, through its acquisition of BI, is also a provider of innovative compliance technologies, industry-leading monitoring services, and evidence-based supervision and treatment programs for community-based parolees, probationers and pretrial defendants. Additionally, BII Holding has an exclusive contract with the U.S. Immigration and Customs Enforcement (“ICE”) to provide supervision and reporting services designed to improve the participation of non-detained aliens in the immigration court system. The Company develops new facilities based on contract awards, using its project development expertise and experience to design, construct and finance what it believes are state-of-the-art facilities that maximize security and efficiency. The Company also provides secure transportation services for offender and detainee populations as contracted.

On August 12, 2010, the Company acquired Cornell Companies, Inc., (“Cornell”) and on February 10, 2011, the Company acquired BII Holding. As of October 2, 2011, the Company’s worldwide operations included the management and/or ownership of approximately 79,600 beds at 116 correctional, detention and residential treatment facilities, including projects under development, and also included the provision of monitoring of more than 67,000 offenders in a community-based environment on behalf of approximately 900 federal, state and local correctional agencies located in all 50 states.

Except as discussed in Note 15, the accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2011 for the fiscal year ended January 2, 2011. As discussed in Note 15, during the thirty-nine weeks ended October 2, 2011, the Company implemented Accounting Standards Update (ASU) No. 2009-13 which provides amendments to revenue recognition criteria for separating consideration in multiple element arrangements. The amendments, among other things, establish the selling price of a deliverable, replace the term fair value with selling price and eliminate the residual method such that consideration can be allocated to the deliverables using the relative selling price method based on GEO’s specific assumptions. At this time, the Company has not identified any differences in accounting policies that would have a material impact on the consolidated financial statements as of October 2, 2011.

As discussed in Note 2, relative to our acquisition of Cornell, the Company recognized adjustments primarily to certain tax assets and liabilities, which was one of the areas of purchase accounting not finalized as of January 2, 2011. According to United States Generally Accepted Accounting Principles (“US GAAP”) business combination accounting, an acquirer is required to recognize adjustments to provisional amounts retrospectively and as if the accounting for the business combination had been completed at the acquisition date. As such, the Company has revised comparative information in its consolidated balance sheet for the year ended January 2, 2011 to reflect these adjustments as if the purchase price allocation had been complete at the acquisition date.

 

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Discontinued operations

The termination of any of the Company’s management contracts, by expiration or otherwise, may result in the classification of the operating results of such management contract, net of taxes, as a discontinued operation. When material, the Company reflects such events as discontinued operations so long as the financial results can be clearly identified, the operations and cash flows are completely eliminated from ongoing operations, and so long as the Company does not have any significant continuing involvement in the operations of the component after the disposal or termination transaction. The component unit for which cash flows are considered to be completely eliminated exists at the customer level. Historically, the Company has classified operations as discontinued in the period they are announced as normally all continuing cash flows cease within three to six months of that date.

2. BUSINESS COMBINATIONS

Acquisition of BII Holding

On February 10, 2011, the Company completed its acquisition of B.I. Incorporated (“BI”), a Colorado corporation, pursuant to an Agreement and Plan of Merger, dated as of December 21, 2010 (the “Merger Agreement”), among GEO, BII Holding, a Delaware corporation, which owns BI, GEO Acquisition IV, Inc., a Delaware corporation and wholly-owned subsidiary of GEO (“Merger Sub”), BII Investors IF LP, in its capacity as the stockholders’ representative, and AEA Investors 2006 Fund L.P (the “BI Acquisition”). Under the terms of the Merger Agreement, Merger Sub merged with and into BII Holding, with BII Holding emerging as the surviving corporation of the merger. As a result of the BI Acquisition, the Company paid merger consideration of $409.6 million in cash, net of cash acquired of $9.7 million, excluding transaction related expenses and any potential adjustments, for 100% of BI’s outstanding common stock. Under the Merger Agreement, $12.5 million of the merger consideration was placed in an escrow account for a one-year period to satisfy any applicable indemnification claims pursuant to the terms of the Merger Agreement by GEO, the Merger Sub or its affiliates. At the time of the BI Acquisition, approximately $78.4 million, including accrued interest, was outstanding under BI’s senior term loan and $107.5 million, including accrued interest, was outstanding under its senior subordinated note purchase agreement, excluding the unamortized debt discount. All indebtedness of BI under its senior term loan and senior subordinated note purchase agreement were repaid by BI with a portion of the $409.6 million of merger consideration. In connection with the BI Acquisition and included in general and administrative expenses, the Company incurred $4.3 million in non-recurring transaction costs for the thirty-nine weeks ended October 2, 2011.

The Company is identified as the acquiring company for US GAAP accounting purposes and believes its acquisition of BI provides it with the ability to offer turn-key solutions to its customers in managing the full lifecycle of an offender from arraignment to reintegration into the community, which the Company refers to as the corrections lifecycle. Under the acquisition method of accounting, the purchase price for BI was allocated to BI’s net tangible and intangible assets based on their estimated fair values as of February 10, 2011, the date of closing and the date that the Company obtained control over BI. In order to determine the fair values of certain tangible and intangible assets acquired, the Company has engaged a third party independent valuation specialist. For all other assets acquired and liabilities assumed, the recorded fair value was determined by the Company’s management and represents an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

The allocation of the purchase price had not been finalized as of October 2, 2011. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to: (i) final agreement of the adjustment to the purchase price based upon the level of net working capital, and the fair value of certain components thereof, transferred at closing; and (ii) deferred tax assets and liabilities. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired at the acquisition date during the measurement period. Measurement period adjustments that the Company determines to be material will be applied retrospectively to the period of acquisition. The Company does not believe that any of the goodwill recorded as a result of the BI Acquisition will be deductible for federal income tax purposes. At this time, the Company has not identified any differences in accounting policies that would have a material impact on the consolidated financial statements as of October 2, 2011. The preliminary purchase price consideration of $409.6 million, net of cash acquired of $9.7 million, excluding transaction related expenses and any potential adjustments, was allocated to the assets acquired and liabilities assumed, based on management’s estimates at the time of this Quarterly Report.

 

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The Company has retrospectively adjusted provisional amounts with respect to the BI Acquisition that were recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. These adjustments relate to the Company’s valuation of accounts receivable, property and equipment, intangible assets and other non-current assets and resulted in a net decrease to goodwill of $7.0 million. The increase in amortization expense for the adjustment to intangible assets was not significant for any quarterly or fiscal year to date period within the thirty-nine weeks ended October 2, 2011. The preliminary purchase price allocation as of April 3, 2011 and as of October 2, 2011 is as follows (in thousands):

 

     Acquisition Date
Estimated  Fair Value as
of April 3, 2011
    Measurement  Period
Adjustments
    Adjusted Acquisition
Date Estimated Fair
Value as of October 2, 2011
 

Accounts receivable

   $ 18,321      $ 1,298      $ 19,619   

Prepaid expenses and other current assets

     3,896        —          3,896   

Deferred income tax assets

     15,857        —          15,857   

Property and equipment

     22,359        901        23,260   

Intangible assets

     126,900        4,900        131,800   

Other non-current assets

     8,884        (119     8,765   
  

 

 

   

 

 

   

 

 

 

Total assets acquired

   $ 196,217      $ 6,980      $ 203,197   
  

 

 

   

 

 

   

 

 

 

Accounts payable

     (3,977     —          (3,977

Accrued expenses

     (8,461     —          (8,461

Deferred income tax liabilities

     (43,824     —          (43,824

Other non-current liabilities

     (11,431     —          (11,431

Long-term debt

     (2,014     —          (2,014
  

 

 

   

 

 

   

 

 

 

Total liabilities assumed

     (69,707     —          (69,707
  

 

 

   

 

 

   

 

 

 

Total identifiable net assets

     126,510        6,980        133,490   

Goodwill

     283,097        (6,980     276,117   
  

 

 

   

 

 

   

 

 

 

Total cash consideration

   $ 409,607      $ —        $ 409,607   
  

 

 

   

 

 

   

 

 

 

For the thirteen weeks ended October 2, 2011, the Company has included revenue and earnings, excluding intercompany transactions, of $31.1 million and $4.6 million, respectively, in its consolidated statement of income. For the thirty-nine weeks ended October 2, 2011, the Company has included revenue and earnings, excluding intercompany transactions, of approximately $79.8 million and $9.4 million, respectively, in its consolidated statement of income which represents revenue and earnings since February 10, 2011, the date BI was acquired.

Acquisition of Cornell Companies, Inc.

On August 12, 2010, the Company completed its acquisition of Cornell pursuant to a definitive merger agreement entered into on April 18, 2010, and amended on July 22, 2010, among the Company, GEO Acquisition III, Inc., and Cornell. Under the terms of the merger agreement, the Company acquired 100% of the outstanding common stock of Cornell for aggregate consideration of $618.3 million. The measurement period for certain tax assets and liabilities, which was the only area of the purchase price not yet finalized, ended on August 12, 2011.

During the measurement period, the Company retrospectively adjusted provisional amounts with respect to the Cornell acquisition that were recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Those changes are reflected in the table below. The Company made a measurement period adjustment for income taxes in the thirteen weeks ended October 2, 2011 which reduced goodwill by $7.4 million. The purchase price allocation as of January 2, 2011 and as of October 2, 2011 and adjustments made to the estimated acquisition date fair values during the thirty-nine weeks ended October 2, 2011 are as follows (in thousands):

 

     Acquisition Date
Estimated  Fair Value as
of January 2, 2011
    Measurement  Period
Adjustments
    Final Acquisition
Date Fair Value
as of October 2, 2011
 

Accounts receivable

   $ 55,142      $ 294      $ 55,436   

Prepaid and other current assets

     13,314        (333     12,981   

Deferred income tax assets

     21,273        (3,011     18,262   

Restricted assets

     44,096        —          44,096   

Property and equipment

     462,771        —          462,771   

Intangible assets

     75,800        —          75,800   

Out of market lease assets

     472        —          472   

Other long-term assets

     7,510        —          7,510   
  

 

 

   

 

 

   

 

 

 

Total assets acquired

     680,378        (3,050     677,328   
  

 

 

   

 

 

   

 

 

 

Accounts payable and accrued expenses

     (56,918     3,175        (53,743

Fair value of non-recourse debt

     (120,943     —          (120,943

Out of market lease liabilities

     (24,071     —          (24,071

Deferred income tax liabilities

     (42,771     8,228        (34,543

Other long-term liabilities

     (1,368     —          (1,368
  

 

 

   

 

 

   

 

 

 

Total liabilities assumed

     (246,071     11,403        (234,668
  

 

 

   

 

 

   

 

 

 

Total identifiable net assets

     434,307        8,353        442,660   

Goodwill

     204,724        (8,353     196,371   
  

 

 

   

 

 

   

 

 

 

Fair value of Cornell’s net assets

     639,031        —          639,031   

Noncontrolling interest

     (20,700     —          (20,700
  

 

 

   

 

 

   

 

 

 

Total consideration for Cornell, net of cash acquired

   $ 618,331      $ —        $ 618,331   
  

 

 

   

 

 

   

 

 

 

 

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The Company recognized a reduction of operating expenses of $1.4 million and $3.9 million, respectively, in the thirteen and thirty-nine weeks ended October 2, 2011 for items related to Cornell that occurred after the measurement period or purchase price allocation period had ended. These adjustments to operating expenses were the result of a recovery of accounts receivable and an insurance settlement for property damage at one of Cornell’s facilities.

Pro forma financial information

The pro forma financial statement information set forth in the table below is provided for informational purposes only and presents comparative revenue and earnings for the Company as if the acquisitions of BI and Cornell and the financing of these transactions had occurred on January 4, 2010, which is the beginning of the first period presented. The pro forma information provided below is compiled from the financial statements of the combined companies and includes pro forma adjustments for: (i) estimated changes in depreciation expense, interest expense and amortization expense, (ii) adjustments to eliminate intercompany transactions, (iii) adjustments to remove $0.1 million and $6.8 million, respectively, for the thirteen and thirty-nine weeks ended October 2, 2011 in non-recurring charges directly related to these acquisitions that are included in the combined Companies’ financial results, and (iv) the income tax impact of the adjustments. For the purposes of the table and disclosure below, earnings is the same as net income attributable to The GEO Group, Inc. shareholders (in thousands):

 

     Thirteen Weeks Ended      Thirty-nine Weeks Ended  
     October 2, 2011      October 3, 2010      October 2, 2011      October 3, 2010  

Pro forma revenues

   $ 406,847       $ 401,042       $ 1,220,021       $ 1,225,780   

Pro forma net income attributable to The GEO Group, Inc. shareholders

   $ 21,567       $ 21,091       $ 63,172       $ 63,676   

3. SHAREHOLDERS’ EQUITY

The following table presents the changes in shareholders’ equity that are attributable to the Company’s shareholders and to noncontrolling interests (in thousands):

 

    Common shares     Additional
Paid-In
    Retained     Accumulated
Other
Comprehensive
    Treasury shares     Noncontrolling     Total
Shareholder’s
 
    Shares     Amount     Capital     Earnings     Income (Loss)     Shares     Amount     Interests     Equity  

Balance January 2, 2011

    64,432      $ 845      $ 718,489      $ 428,545      $ 10,071        20,074      $ (139,049   $ 20,589      $ 1,039,490   

Stock option and restricted stock award transactions

    674        7        2,439                  2,446   

Tax benefit related to equity compensation

        536                  536   

Stock based compensation expense

        4,843                  4,843   

Purchase of treasury shares

    (2,494             2,494        (49,987       (49,987

Other adjustments to Additional Paid-In Capital

        (200               (200

Distribution to noncontrolling interest

                  (4,012     (4,012

Comprehensive income (loss):

                 

Net income (loss):

          59,886              (1,050     58,836   

Change in foreign currency translation, net

            (5,608         (110     (5,718

Pension liability, net

            28              28   

Unrealized loss on derivative instruments, net

            (1,029           (1,029
       

 

 

   

 

 

       

 

 

   

 

 

 

Total comprehensive income (loss)

          59,886        (6,609         (1,160     52,117   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance October 2, 2011

    62,612      $ 852      $ 726,107      $ 488,431      $ 3,462        22,568      $ (189,036   $ 15,417      $ 1,045,233   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncontrolling interests

Noncontrolling interests in consolidated entities represent equity that other investors have contributed to Municipal Correctional Finance, L.P. (“MCF”) and the noncontrolling interest in South African Custodial Management Pty. Limited (“SACM”). Noncontrolling interests are adjusted for income and losses allocable to the other shareholders in these entities.

 

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Upon acquisition of Cornell in August 2010, the Company assumed MCF as a variable interest entity and allocated a portion of the purchase price to the noncontrolling interest based on the estimated fair value of MCF as of August 12, 2010. The noncontrolling interest in MCF represents 100% of the equity in MCF which was contributed by its partners at inception in 2001. The Company includes the results of operations and financial position of MCF in its consolidated financial statements. MCF owns eleven facilities which it leases to the Company. In the thirty-nine weeks ended October 2, 2011, there was a cash distribution to the partners of MCF of $4.0 million.

The Company includes the results of operations and financial position of SACM, its majority-owned subsidiary, in its consolidated financial statements. SACM was established in 2001 to operate correctional centers in South Africa. SACM currently provides security and other management services for the Kutama Sinthumule Correctional Centre in the Republic of South Africa under a 25-year management contract which commenced in February 2002. The Company’s and the second joint venture partner’s shares in the profits of SACM are 88.75% and 11.25%, respectively. There were no changes in the Company’s ownership percentage of the consolidated subsidiary during the thirty-nine weeks ended October 2, 2011. The noncontrolling interest as of October 2, 2011 and January 2, 2011 is included in Total Shareholders’ Equity in the accompanying Consolidated Balance Sheets. There were no contributions from owners or distributions to owners in the thirty-nine weeks ended October 2, 2011.

4. EQUITY INCENTIVE PLANS

The Company had awards outstanding under four equity compensation plans at October 2, 2011: The Wackenhut Corrections Corporation 1994 Stock Option Plan (the “1994 Plan”); the 1995 Non-Employee Director Stock Option Plan (the “1995 Plan”); the Wackenhut Corrections Corporation 1999 Stock Option Plan (the “1999 Plan”); and The GEO Group, Inc. 2006 Stock Incentive Plan (the “2006 Plan” and, together with the 1994 Plan, the 1995 Plan and the 1999 Plan, the “Company Plans”).

On August 12, 2010, the Company’s Board of Directors adopted and its shareholders approved an amendment to the 2006 Plan to increase the number of shares of common stock subject to awards under the 2006 Plan by 2,000,000 shares from 2,400,000 to 4,400,000 shares of common stock. On February 16, 2011, the Company’s Board of Directors approved Amendment No. 1 to the 2006 Plan to provide that of the 2,000,000 additional shares of Common Stock that were authorized to be issued pursuant to awards granted under the 2006 Plan, up to 1,083,000 of such shares may be issued in connection with awards, other than stock options and stock appreciation rights, that are settled in common stock. The 2006 Plan, as amended, specifies that up to 2,166,000 of such total shares pursuant to awards granted under the plan may constitute awards other than stock options and stock appreciation rights, including shares of restricted stock. As of October 2, 2011, under the 2006 Plan, the Company had 1,707,484 shares of common stock available for issuance pursuant to future awards that may be granted under the plan of which up to 943,804 shares were available for the issuance of awards other than stock options. See “Restricted Stock” below for further discussion.

Stock Options

The Company uses a Black-Scholes option valuation model to estimate the fair value of each option awarded. During the thirty-nine weeks ended October 2, 2011, the Company’s Board of Directors approved the issuance of 529,350 stock option awards to employees of the Company and 25,000 stock option awards to the Company’s directors. These awards vested 20% on the date of grant and will vest in 20% increments annually through 2015. A summary of the activity of stock option awards issued and outstanding under Company Plans is presented below.

 

Fiscal Year

   Shares     Wtd. Avg.
Exercise
Price
     Wtd. Avg.
Remaining
Contractual Term
     Aggregate
Intrinsic
Value
 
     (in thousands)                        (in thousands)  

Options outstanding at January 2, 2011

     1,401      $ 15.01            5.84       $ 13,517   

Options granted

     554        24.71            

Options exercised

     (297     8.22            

Options forfeited/canceled/expired

     (43     19.71            
  

 

 

            

Options outstanding at October 2, 2011

     1,615        19.47            6.97       $ 3,561   
  

 

 

            

Options exercisable at October 2, 2011

     901        16.80            5.53       $ 3,429   
  

 

 

            

The fair value of each option awarded on March 1, 2011 and April 15, 2011 was $9.72 and $10.06, respectively. For the thirty-nine weeks ended October 2, 2011 and October 3, 2010, the amount of stock-based compensation expense related to stock options was $2.2 million and $1.0 million, respectively. As of October 2, 2011, the Company had $4.6 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 3.0 years.

 

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Restricted Stock

Shares of restricted stock become unrestricted shares of common stock upon vesting on a one-for-one basis. The cost of these awards is determined using the fair value of the Company’s common stock on the date of the grant and compensation expense is recognized over the vesting period. A summary of the activity of restricted stock outstanding is as follows:

 

     Shares     Wtd. Avg.
Grant  Date
Fair Value
 
     (in thousands)        

Restricted stock outstanding at January 2, 2011

     161      $ 21.12   

Granted

     376        24.57   

Vested

     (84     22.85   

Forfeited/canceled

     —       
  

 

 

   

Restricted stock outstanding at October 2, 2011

     453      $ 23.66   
  

 

 

   

The shares of restricted stock granted under the 2006 Plan prior to our fiscal year beginning January 3, 2011 vest in equal 25% increments on each of the four anniversary dates immediately following the date of grant. During the thirty-nine weeks ended October 2, 2011, the Company issued 205,000 performance based shares to the Company’s Chief Executive Officer and Senior Vice Presidents which will vest in equal increments annually over a 3-year period. These performance based shares will be forfeited if the Company does not achieve certain targeted revenue in its fiscal year ended January 1, 2012. Also during the thirty-nine weeks ended October 2, 2011, the Company issued awards for 171,010 shares of restricted stock to certain other employees and directors. Of these restricted stock awards, 49,010 of these shares vest in equal increments annually over three years while the remaining 122,000 vest in equal increments annually over four years. The aggregate fair value of all of these awards, based on the closing price of the Company’s common stock on the respective grant dates, was $9.2 million. During the thirty-nine weeks ended October 2, 2011 and October 3, 2010, the Company recognized $2.6 million and $2.5 million, respectively, of compensation expense related to its outstanding shares of restricted stock. As of October 2, 2011, the Company had $8.4 million of unrecognized compensation expense related to restricted stock awards that is expected to be recognized over a weighted average period of 2.6 years.

Employee Stock Purchase Plan

On July 9, 2011, the Company adopted The GEO Group Inc. 2011 Employee Stock Purchase Plan (the “Plan”). The Plan was approved by the Company’s Compensation Committee and its Board of Directors on May 4, 2011. The purpose of the Plan, which is qualified under Section 423 of the Internal Revenue Service Code of 1986, as amended, is to encourage stock ownership through payroll deductions by the employees of GEO and designated subsidiaries of GEO in order to increase their identification with the Company’s goals and secure a proprietary interest in the Company’s success. These deductions will be used to purchase shares of the Company’s Common Stock at a 5% discount from the then current market price. The Plan is subject to approval by the Company’s shareholders on or before June 29, 2012 and, as such, no shares will be issued until such time as the Plan is approved by our shareholders. If the Plan is approved by the Company’s shareholders, the Company will offer up to 500,000 shares of its common stock for sale to eligible employees.

5. EARNINGS PER SHARE

Stock repurchase program

On July 14, 2011, the Company announced that its Board of Directors approved a stock repurchase program of up to $100.0 million of our common stock effective through December 31, 2012. The stock repurchase program will be funded primarily with cash on hand, free cash flow, and borrowings under the Company’s Revolving Credit Facility. The stock repurchase program is intended to be implemented through purchases made from time to time in the open market or in privately negotiated transactions, in accordance with applicable securities and stock exchange requirements. The program may also include repurchases from time to time from executive officers or directors of vested restricted stock and/or vested stock options. The stock repurchase program does not obligate the Company to purchase any specific amount of its common stock and may be suspended or extended at any time at the Company’s discretion. During the thirteen weeks ended October 2, 2011, the Company purchased 2.5 million shares of its common stock at a cost of $50.0 million primarily purchased with proceeds from the Company’s Revolving Credit Facility. The Company believes it has the ability to continue to fund the stock repurchase program, its working capital, its debt service requirements, and its maintenance and growth capital expenditure requirements, while maintaining sufficient liquidity for other corporate purposes.

 

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Table of Contents

Earnings per share

Basic earnings per share is computed by dividing the net income attributable to The GEO Group, Inc. shareholders by the weighted average number of outstanding shares of common stock. The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator includes dilutive common stock equivalents such as stock options and shares of restricted stock. Basic and diluted earnings per share (“EPS”) were calculated for the thirteen and thirty-nine weeks ended October 2, 2011 and October 3, 2010 as follows (in thousands, except per share data):

 

     Thirteen Weeks Ended      Thirty-nine Weeks Ended  
     October 2, 2011      October 3, 2010      October 2, 2011      October 3, 2010  

Net income

   $ 21,293       $ 5,010       $ 58,836       $ 39,743   

Net loss attributable to noncontrolling interests

     225         271         1,050         227   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income attributable to The GEO Group, Inc.

   $ 21,518       $ 5,281       $ 59,886       $ 39,970   

Basic earnings per share attributable to The GEO Group, Inc.:

           

Weighted average shares outstanding

     63,340         57,799         64,028         52,428   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share amount

   $ 0.34       $ 0.09       $ 0.94       $ 0.76   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share attributable to The GEO Group, Inc.:

           

Weighted average shares outstanding

     63,340         57,799         64,028         52,428   

Effect of dilutive securities: Stock options and restricted stock

     215         399         360         616   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares assuming dilution

     63,555         58,198         64,388         53,044   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share amount

   $ 0.34       $ 0.09       $ 0.93       $ 0.75   
  

 

 

    

 

 

    

 

 

    

 

 

 

Thirteen Weeks

For the thirteen weeks ended October 2, 2011, 123,738 weighted average shares of stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. 106 shares of restricted stock were anti-dilutive.

For the thirteen weeks ended October 3, 2010, 23,807 weighted average shares of stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. No shares of restricted stock were anti-dilutive.

Thirty-nine Weeks

For the thirty-nine weeks ended October 2, 2011, 79,466 weighted average shares of stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. No shares of restricted stock were anti-dilutive.

For the thirty-nine weeks ended October 3, 2010, 21,655 weighted average shares of stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. No shares of restricted stock were anti-dilutive.

6. DERIVATIVE FINANCIAL INSTRUMENTS

The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in interest rates. The Company measures its derivative financial instruments at fair value.

As of October 2, 2011, the Company had four interest rate swap agreements in the aggregate notional amount of $100.0 million. The Company has designated these interest rate swaps as hedges against changes in the fair value of a designated portion of the 7 3/4% Senior Notes due 2017 (“7 3/4% Senior Notes”) due to changes in underlying interest rates. These swap agreements, which have payment, expiration dates and call provisions that mirror the terms of the 7 3/4% Senior Notes, effectively convert $100.0 million of the 7 3/4% Senior Notes into variable rate obligations. Each of the swaps has a termination clause that gives the counterparty the right to terminate the interest rate swaps at fair market value, under certain circumstances. In addition to the termination clause, the Agreements also have call provisions which specify that the lender can elect to settle the swap for the call option price. Under the Agreements, the Company receives a fixed interest rate payment from the financial counterparties to the agreements equal to 7 3/4% per year calculated on the notional $100.0 million amount, while it makes a variable interest rate payment to the same counterparties equal to the three-month LIBOR plus a fixed margin of between 4.16% and 4.29%, also calculated on the notional $100.0 million amount. Changes in the fair value of the interest rate swaps are recorded in earnings along with related designated changes in the value of the 7 3/4% Senior Notes. Total net gains, entirely offset by a corresponding increase in the fair value of the variable rate portion of the 7 3/4% Senior Notes, recognized and recorded in earnings related to these fair value hedges was $3.7 million and $4.8 million in the thirteen and thirty-nine weeks ended October 2, 2011, respectively. Total net gains, entirely offset by a corresponding increase in the fair value of the variable rate portion of the 7 3/4% Senior Notes, recognized and recorded in earnings related to these fair value hedges was $3.3 million and $9.2 million in the thirteen and thirty-nine weeks ended October 3, 2010, respectively. As of October 2, 2011 and January 2, 2011, the swap assets’ fair values were $8.1 million and $3.3 million, respectively and are included as Other Non-Current Assets in the accompanying balance sheets. There was no material ineffectiveness of these interest rate swaps during the fiscal periods ended October 2, 2011 or October 3, 2010.

 

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Table of Contents

The Company’s Australian subsidiary is a party to an interest rate swap agreement to fix the interest rate on its variable rate non-recourse debt to 9.7%. The Company has determined the swap, which has a notional amount of $50.9 million, payment and expiration dates, and call provisions that coincide with the terms of the non-recourse debt to be an effective cash flow hedge. Accordingly, the Company records the change in the value of the interest rate swap in accumulated other comprehensive income, net of applicable income taxes. Total unrealized loss, net of tax, recognized in the periods and recorded in accumulated other comprehensive income, net of tax, related to this cash flow hedge was $0.7 million and $1.0 million for the thirteen and thirty-nine weeks ended October 2, 2011, respectively. Total net unrealized gain (loss) recognized in the periods and recorded in accumulated other comprehensive income, net of tax, related to these cash flow hedges was $0.2 million and $(0.3) million for the thirteen and thirty-nine weeks ended October 3, 2010, respectively. The total value of the swap asset as of October 2, 2011 and January 2, 2011 was $0.2 million and $1.8 million, respectively, and is recorded as a component of other assets within the accompanying consolidated balance sheets. There was no material ineffectiveness of this interest rate swap for the fiscal periods presented. The Company does not expect to enter into any transactions during the next twelve months which would result in the reclassification into earnings or losses associated with this swap currently reported in accumulated other comprehensive income (loss).

7. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Adjustments to goodwill

During the thirteen weeks ended October 2, 2011, the Company retrospectively adjusted a portion of its goodwill with respect to the BI Acquisition to reflect changes in provisional amounts recognized at February 10, 2011 based on new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Refer to Note 2. Such adjustments resulted in a net decrease to goodwill of $6.8 million and $7.0 million for the thirteen and thirty-nine weeks ended October 2, 2011, respectively. These adjustments are included in total Acquisitions for the thirty-nine weeks ended October 2, 2011 in the table below.

During the thirteen weeks ended October 2, 2011, the Company completed its purchase accounting relative to the Cornell Acquisition after making adjustments to taxes, which was the only area of the purchase price allocation not yet finalized. As a result of these adjustments, the Company has retrospectively adjusted a portion of its goodwill with respect to the Cornell acquisition to reflect changes in the provisional amounts recognized at January 2, 2011 based on new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Refer to Note 2. Such adjustments resulted in a net decrease to goodwill of $7.5 million and $8.4 million for the thirteen and thirty-nine weeks ended October 2, 2011, respectively. These adjustments are included in the balance as of January 2, 2011 in the table below.

Changes in the Company’s goodwill balances for the thirty-nine weeks ended October 2, 2011 were primarily related to the BI Acquisition and are as follows (in thousands):

     January 2, 2011      Acquisitions      Foreign
currency
translation
    October 2, 2011  

U.S. Detention & Corrections

   $ 170,376       $ —         $ —        $ 170,376   

GEO Care

     65,456         276,117         —          341,573   

International Services

     762         —           (42     720   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Goodwill

   $ 236,594       $ 276,117       $ (42   $ 512,669   
  

 

 

    

 

 

    

 

 

   

 

 

 

On February 10, 2011, the Company acquired BI and recorded goodwill representing the strategic benefits of the Acquisition including the combined Company’s increased scale and the diversification of service offerings. Goodwill resulting from business combinations includes the excess of the Company’s purchase price over net assets of BI acquired of $276.1 million.

 

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Identifiable intangible assets

Intangible assets consisted of the following (in thousands):

 

     Useful Life
in Years
   U.S. Detention  &
Corrections
    International
Services
    GEO Care     Total  

Finite-lived intangible assets:

           

Management contracts

   1-17    $ 49,850      $ 2,754      $ 41,300      $ 93,904   

Covenants not to compete

   1-4      4,349        —          2,821        7,170   
     

 

 

   

 

 

   

 

 

   

 

 

 

Gross carrying value of January 2, 2011

        54,199        2,754        44,121        101,074   
     

 

 

   

 

 

   

 

 

   

 

 

 

Changes to gross carrying value during the thirty-nine weeks ended October 2, 2011:

           

Finite-lived intangible assets:

           

Management contracts - BI Acquisition

   11-14      —          —          65,200        65,200   

Covenants not to compete - BI Acquisition

   2      —          —          1,400        1,400   

Technology - BI Acquisition

   7      —          —          21,200        21,200   

Foreign currency translation

        —          (501     —          (501

Indefinite-lived intangible assets:

           

Trade names - BI Acquisition

   Indefinite      —            44,000        44,000   
     

 

 

   

 

 

   

 

 

   

 

 

 

Gross carrying value as of October 2, 2011

        54,199        2,253        175,921        232,373   

Accumulated amortization expense

        (14,561     (358     (12,323     (27,242
     

 

 

   

 

 

   

 

 

   

 

 

 

Net carrying value at October 2, 2011

      $ 39,638      $ 1,895      $ 163,598      $ 205,131   
     

 

 

   

 

 

   

 

 

   

 

 

 

On February 10, 2011, the Company acquired BI and recorded identifiable intangible assets related to management contracts, existing technology, non-compete agreements for certain former BI executives and for the trade name associated with BI’s business which is now part of the Company’s GEO Care reportable segment. The weighted average amortization period in total for these acquired intangible assets is 11.4 years and for the acquired management contracts is 13.0 years. As of October 2, 2011, the weighted average period before the next contract renewal or extension for the intangible assets acquired from BI was approximately 1.4 years.

Accumulated amortization expense for the Company’s finite-lived intangible assets in total and by asset class as of October 2, 2011 is as follows (in thousands):

 

     U.S. Detention  &
Corrections
     International
Services
     GEO Care      Total  

Management contracts

   $ 12,710       $ 358       $ 8,117       $ 21,185   

Technology

     —           —           1,943         1,943   

Covenants not to compete

     1,851         —           2,263         4,114   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total accumulated amortization expense

   $ 14,561       $ 358       $ 12,323       $ 27,242   
  

 

 

    

 

 

    

 

 

    

 

 

 

Amortization expense was $5.0 million and $14.1 million for the thirteen and thirty-nine weeks ended October 2, 2011, respectively and primarily related to the amortization of intangible assets for acquired management contracts. Amortization expense was $1.8 million and $2.9 million for the thirteen and thirty-nine weeks ended October 3, 2010, respectively and primarily related to the amortization of intangible assets for acquired management contracts. As of October 2, 2011, the weighted average period before the next contract renewal or extension for all of the Company’s facility management contracts was approximately 1.4 years. Although the facility management contracts acquired have renewal and extension terms in the near term, the Company has historically maintained these relationships beyond the contractual periods.

Estimated amortization expense related to the Company’s finite-lived intangible assets for the remainder of fiscal year 2011 through fiscal year 2015 and thereafter is as follows (in thousands):

 

Fiscal Year

   U.S. Detention  &
Corrections -
Expense
Amortization
     International
Services -
Expense
Amortization
     GEO Care -
Expense
Amortization
     Total  Expense
Amortization
 

Remainder of 2011

   $ 1,368       $ 63       $ 3,392       $ 4,823   

2012

     4,894         123         13,090         18,107   

2013

     3,556         123         11,517         15,196   

2014

     3,556         123         11,301         14,980   

2015

     3,556         123         11,270         14,949   

Thereafter

     22,708         1,340         69,028         93,076   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 39,638       $ 1,895       $ 119,598       $ 161,131   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The table above includes the estimated amortization of the finite-lived intangible assets acquired from BI on February 10, 2011. As discussed in Note 2, the preliminary allocation of the purchase price is based on the best information available and is provisional pending, among other things, the finalization of the valuation of intangible assets, including the estimated useful lives of the finite-lived intangible assets. The finalization of fair value assessments relative to the finite-lived intangible assets may have an impact on the Company’s estimated future amortization expense.

8. FINANCIAL INSTRUMENTS

The Company is required to measure certain of its financial instruments at fair value on a recurring basis. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (“exit price”). The Company classifies and discloses its fair value measurements in one of the following categories: Level 1-unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2-quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3- prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). The Company recognizes transfers between Levels 1, 2 and 3 as of the actual date of the event or change in circumstances that cause the transfer.

All of the Company’s interest rate swap derivatives were in the Company’s favor as of October 2, 2011 and are presented as assets in the table below and in the accompanying balance sheets. The following tables provide a summary of the Company’s significant financial assets and liabilities carried at fair value and measured on a recurring basis as of October 2, 2011 and January 2, 2011 (in thousands):

 

            Fair Value Measurements at October 2, 2011  
     Total Carrying
Value at
October 2, 2011
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable  Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets:

           

Interest rate swap derivative assets

   $ 8,337       $ —         $ 8,337       $ —     

Restricted investments

     40,952         7,454         33,498         —     

Fixed income securities

     1,915         —           1,915         —     

 

            Fair Value Measurements at January 2, 2011  
     Total Carrying
Value at
January 2, 2011
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable  Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets:

           

Interest rate swap derivative assets

   $ 5,131       $ —         $ 5,131       $ —     

Restricted investments

     11,910         6,168         5,742         —     

Fixed income securities

     1,791         —           1,791         —     

The Company’s Level 1 investment relates to its rabbi trust established for GEO employee and employer contributions to The GEO Group Inc. Non-qualified Deferred Compensation Plan. These contributions are invested in mutual funds for which quoted market prices in active markets are available. The Company’s restricted investment in the rabbi trust is measured at fair value on a recurring basis and is disclosed in “Restricted investments” in the table above. Previously, these investments were disclosed in Note 9 at fair value as of January 2, 2011.

The Company’s Level 2 financial instruments included in the table above as of October 2, 2011 and January 2, 2011 consist of an interest rate swap asset held by our Australian subsidiary, other interest rate swap assets of the Company, an investment in Canadian dollar denominated fixed income securities, a guaranteed investment contract which is a restricted investment related to CSC of Tacoma LLC and, as of October 2, 2011, an Investment Repurchase Agreement (“Repo Agreement”) relative to MCF, the Company’s consolidated VIE. During the thirteen weeks ended October 2, 2011, MCF entered into the Repo Agreement to establish an investment for its debt service reserve fund and bond fund payment account. The Repo Agreement consists of a guaranteed investment in the principal amount of $23.8 million related to the debt service reserve fund and a second guaranteed investment related to the bond fund payment account which was $4.0 million as of October 2, 2011. Both of these investments are restricted to eligible investments as defined in 8.47% Revenue Bond indenture (refer to Note 11) and mature on August 1, 2016. As of October 2, 2011, the Repo Agreement is included above as a Level 2 restricted investment since its fair value is based using market interest rates for similar securities. The Australian subsidiary’s interest rate swap asset is valued using a discounted cash flow model based on projected Australian borrowing rates. The Company’s other interest rate swap assets and liabilities are based on pricing models which consider prevailing interest rates, credit risk and similar instruments. The Canadian dollar denominated securities, not actively traded, are valued using quoted rates for these and similar securities. The restricted investment in the guaranteed investment contract is valued using quoted rates for these and similar securities.

 

 

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9. FAIR VALUE OF ASSETS AND LIABILITIES

The Company’s balance sheet reflects certain financial assets and liabilities at carrying value. The following tables present the carrying values of those instruments and the corresponding fair values at October 2, 2011 and January 2, 2011 (in thousands):

 

     October 2, 2011  
     Carrying
Value
     Estimated
Fair Value
 

Assets:

     

Cash and cash equivalents

   $ 43,956       $ 43,956   

Restricted cash

     53,355         53,355   

Liabilities:

     

Borrowings under the Senior Credit Facility

   $ 722,129       $ 766,071   

7 3/4% Senior Notes

     247,046         259,245   

6.625% Senior Notes

     300,000         295,875   

Non-recourse debt, Australian subsidiary

     39,708         39,125   

Other non-recourse debt, including current portion

     155,782         155,986   

 

     January 2, 2011  
     Carrying
Value
     Estimated
Fair Value
 

Assets:

     

Cash and cash equivalents

   $ 39,664       $ 39,664   

Restricted cash

     78,732         78,732   

Liabilities:

     

Borrowings under the Senior Credit Facility

   $ 557,758       $ 562,610   

7 3/4% Senior Notes

     250,078         265,000   

Non-recourse debt, Australian subsidiary

     46,300         46,178   

Other non-recourse debt, including current portion

     176,384         180,340   

The fair values of the Company’s Cash and cash equivalents, and restricted cash approximates the carrying values of these assets at October 2, 2011 and January 2, 2011. Restricted cash consists of debt service funds used for payments on the Company’s non-recourse debt. The fair values of our 7 3/4% Senior Notes, our 6.625% senior unsecured notes due 2021 (“6.625% Senior Notes”), and certain non-recourse debt are based on market prices, where available, or similar instruments. The fair value of the non-recourse debt related to the Company’s Australian subsidiary is estimated using a discounted cash flow model based on current Australian borrowing rates for similar instruments. The fair value of the non-recourse debt related to MCF is estimated using a discounted cash flow model based on the Company’s current borrowing rates for similar instruments. The fair value of the borrowings under the Credit Agreement is based on an estimate of trading value considering the Company’s borrowing rate, the undrawn spread and similar instruments.

10. VARIABLE INTEREST ENTITIES

The Company evaluates its joint ventures and other entities in which it has a variable interest (a “VIE”), generally in the form of investments, loans, guarantees, or equity in order to determine if it has a controlling financial interest and is required to consolidate the entity as a result. The reporting entity with a variable interest that provides the entity with a controlling financial interest in the VIE will have both of the following characteristics: (i) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company consolidates South Texas Local Development Corporation (“STLDC”), a VIE. STLDC was created to finance construction for the development of a 1,904-bed facility in Frio County, Texas. STLDC, the owner of the complex, issued $49.5 million in taxable revenue bonds and has an operating agreement with the Company, which provides the Company with the sole and exclusive right to operate and manage the detention center. The operating agreement and bond indenture require the revenue from the contract to be used to fund the periodic debt service requirements as they become due. The net revenues, if any, after various expenses such as trustee fees, property taxes and insurance premiums are distributed to the Company to cover operating expenses and management fees. The Company is responsible for the entire operations of the facility including the payment of all operating expenses whether or not there are sufficient revenues. The bonds have a ten-year term and are non-recourse to the Company. At the end of the ten-year term of the bonds, title and ownership of the facility transfers from STLDC to the Company. See Note 11.

As a result of the acquisition of Cornell in August 2010, the Company assumed the variable interest in MCF of which it is the primary beneficiary and consolidates the entity as a result. MCF was created in August 2001 as a special limited partnership for the purpose of acquiring, owning, leasing and operating low to medium security adult and juvenile correction and treatment facilities. At its inception, MCF purchased assets representing eleven facilities from Cornell and leased those assets back to Cornell under a Master Lease Agreement (the “Lease”). These assets were purchased from Cornell using proceeds from the 8.47% Revenue Bonds due 2016,

 

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which are limited non-recourse obligations of MCF and collateralized by the bond reserves, assignment of subleases and substantially all assets related to the eleven facilities. Under the terms of the Lease with Cornell, assumed by the Company, the Company will lease the assets for the remainder of the 20-year base term, which ends in 2021, and has options at its sole discretion to renew the Lease for up to approximately 25 additional years. MCF’s sole source of revenue is from the Company and as such the Company has the power to direct the activities of the VIE that most significantly impact its performance. The Company’s risk is generally limited to the rental obligations under the operating leases. This entity is included in the accompanying consolidated financial statements and all intercompany transactions are eliminated in consolidation. MCF maintains separate financial statements and all of the assets to which MCF has title are included therein. It should be noted that even though the Company consolidates MCF for accounting purposes, this VIE is a separate entity owned by unrelated third parties. MCF’s assets and credit are not available to satisfy the debts and other obligations of the Company.

The Company does not consolidate its 50% owned South African joint venture in South African Custodial Services Pty. Limited (“SACS”), a VIE. SACS joint venture investors are GEO and Kensani Corrections, Pty. Ltd; each partner owns a 50% share. The Company has determined it is not the primary beneficiary of SACS since it does not have the power to direct the activities of SACS that most significantly impact its performance. As such, this entity is reported as an equity affiliate. SACS was established and subsequently, in 2001, was awarded a 25-year contract to design, finance and build the Kutama Sinthumule Correctional Centre in Louis Trichardt, South Africa. To fund the construction of the prison, SACS obtained long-term financing from its equity partners and lenders, the repayment of which is fully guaranteed by the South African government, except in the event of default, in which case the government guarantee is reduced to 80%. The Company’s maximum exposure for loss under this contract is limited to its investment in the joint venture of $9.4 million at October 2, 2011 and its guarantees related to SACS discussed in Note 11.

The Company does not consolidate its 50% owned joint venture in the United Kingdom. In February 2011, The GEO Group Limited, the Company’s wholly-owned subsidiary in the United Kingdom (“GEO UK”), executed a Shareholders Agreement (the “Shareholders Agreement”) with Amey Community Limited (“Amey”), GEO Amey PECS Limited (“GEOAmey”) and Amey UK PLC (“Amey Guarantor”) to form a private company limited by shares incorporated in England and Wales. GEOAmey was formed by GEO UK and Amey for the purpose of performing prisoner escort and related custody services in the United Kingdom and Wales. In order to form this private company, GEOAmey issued share capital of £100 divided into 100 shares of £1 each and allocated the shares 50/50 to GEO UK and Amey. GEO UK and Amey each have three directors appointed to the Board of Directors and neither party has the power to direct the activities that most significantly impact the performance of GEOAmey. Both parties provide lines of credit of £12 million, or $18.7 million as of October 2, 2011, to ensure that GEOAmey can comply with future contractual commitments related to the performance of its operations. As of October 2, 2011, $9.9 million, including accrued interest, was owed to the Company by GEOAmey under the line of credit. GEOAmey commenced operations on August 29, 2011. The Company has recorded $1.1 million and $1.1 million in losses, net of tax impact, for GEOAmey’s operations during the thirteen and thirty-nine weeks ended October 2, 2011, which is included in Equity in earnings of affiliates in the accompanying consolidated statement of income and comprehensive income.

11. DEBT

Senior Credit Facility

On August 4, 2010, the Company terminated its Third Amended and Restated Credit Agreement (“Prior Senior Credit Agreement”) and entered into a new Credit Agreement (the “Senior Credit Facility”), by and among GEO, as Borrower, BNP Paribas, as Administrative Agent, and the lenders who are, or may from time to time become, a party thereto. On February 8, 2011, the Company entered into Amendment No. 1 (“Amendment No. 1”), to the Senior Credit Facility. Amendment No. 1, among other things amended certain definitions and covenants relating to the total leverage ratios and the senior secured leverage ratios set forth in the Senior Credit Facility. This amendment increased the Company’s borrowing capacity by $250.0 million. On May 2, 2011, the Company executed Amendment No. 2 to its Senior Credit Facility (“Amendment No. 2”). As a result of this amendment, relative to the Company’s Term Loan B, the Applicable Rate, as defined in the Credit Agreement dated August 4, 2011, was reduced to 2.75% per annum from 3.25% per annum in the case of Eurodollar loans and to 1.75% per annum from 2.25% per annum in the case of ABR loans and the LIBOR floor was reduced to 1.00% from 1.50%. As of October 2, 2011, the Senior Credit Facility, as amended, was comprised of: (i) a $150.0 million Term Loan A due August 2015 (“Term Loan A”), currently bearing interest at LIBOR plus 2.75% and maturing August 4, 2015, (ii) a $150.0 million Term Loan A-2 due August 2015 (“Term Loan A-2”), currently bearing interest at LIBOR plus 2.75% and maturing August 4, 2015, (iii) a $200.0 million Term Loan B due August 2016 (“Term Loan B”) currently bearing interest at LIBOR plus 2.75% with a LIBOR floor of 1.00% and maturing August 4, 2016, and (iv) a $500.0 million Revolving Credit Facility due August 2015 (“Revolver”) currently bearing interest at LIBOR plus 2.75% and maturing August 4, 2015.

 

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Incremental borrowings of $150.0 million under the Company’s amended Senior Credit Facility along with proceeds from the Company’s $300.0 million offering of the 6.625% Senior Notes were used to finance the acquisition of BI. In connection with these borrowings, as of October 2, 2011, the Company has $10.4 million of deferred financing fees, net of accumulated amortization, included in Other Non-Current Assets in the accompanying consolidated balance sheet. Also, as of October 2, 2011, the Company had $485.1 million in aggregate borrowings outstanding, net of discount, under the Term Loan A, Term Loan A-2 and Term Loan B, $287.0 million in borrowings under the Revolver, approximately $56.8 million in letters of credit and $156.2 million in additional borrowing capacity under the Revolver. The weighted average interest rate on outstanding borrowings under the Senior Credit Facility, as amended, as of October 2, 2011 was 3.2%.

Indebtedness under the Revolver, the Term Loan A and the Term Loan A-2 bears interest based on the Total Leverage Ratio as of the most recent determination date, as defined, in each of the instances below at the stated rate:

 

     Interest Rate under the  Revolver,
Term Loan A and Term Loan A-2

LIBOR borrowings

   LIBOR plus 2.00% to 3.00%.

Base rate borrowings

   Prime Rate plus 1.00% to 2.00%.

Letters of credit

   2.00% to 3.00%.

Unused Revolver

   0.375% to 0.50%.

The Senior Credit Facility contains certain customary representations and warranties, and certain customary covenants that restrict the Company’s ability to, among other things as permitted (i) create, incur or assume indebtedness, (ii) create, incur, assume or permit liens, (iii) make loans and investments, (iv) engage in mergers, acquisitions and asset sales, (v) make restricted payments, (vi) issue, sell or otherwise dispose of capital stock, (vii) engage in transactions with affiliates, (viii) allow the total leverage ratio or senior secured leverage ratio to exceed certain maximum ratios or allow the interest coverage ratio to be less than a certain ratio, (ix) cancel, forgive, make any voluntary or optional payment or prepayment on, or redeem or acquire for value any senior notes, (x) alter the business the Company conducts, and (xi) materially impair the Company’s lenders’ security interests in the collateral for its loans.

The Company must not exceed the following Total Leverage Ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:

 

Period

   Total Leverage Ratio -
Maximum Ratio

Through and including the last day of the fiscal year 2011

   5.25 to 1.00

First day of fiscal year 2012 through and including the last day of fiscal year 2012

   5.00 to 1.00

First day of fiscal year 2013 through and including the last day of fiscal year 2013

   4.75 to 1.00

Thereafter

   4.25 to 1.00

The Senior Credit Facility also does not permit the Company to exceed the following Senior Secured Leverage Ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:

 

 

Period

   Senior Secured
Leverage Ratio  -
Maximum Ratio

Through and including the last day of the Third Quarter of the fiscal year 2012

   3.25 to 1.00

First day of the Third Quarter of fiscal year 2012 through and including the last day of the Third Quarter of the fiscal year 2013

   3.00 to 1.00

Thereafter

   2.75 to 1.00

Additionally, there is an Interest Coverage Ratio under which the lenders will not permit a ratio of less than 3.00 to 1.00 relative to (a) Adjusted EBITDA for any period of four consecutive fiscal quarters to (b) Interest Expense, less that attributable to non-recourse debt of unrestricted subsidiaries.

Events of default under the Senior Credit Facility include, but are not limited to, (i) the Company’s failure to pay principal or interest when due, (ii) the Company’s material breach of any representations or warranty, (iii) covenant defaults, (iv) liquidation, reorganization or other relief relating to bankruptcy or insolvency, (v) cross default under certain other material indebtedness, (vi) unsatisfied final judgments over a specified threshold, (vii) material environmental liability claims which have been asserted against the Company, and (viii) a change in control. All of the obligations under the Senior Credit Facility are unconditionally guaranteed by certain of the Company’s subsidiaries and secured by substantially all of the Company’s present and future tangible and intangible assets and all present and future tangible and intangible assets of each guarantor, including but not limited to (i) a first-priority pledge

 

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of substantially all of the outstanding capital stock owned by the Company and each guarantor, and (ii) perfected first-priority security interests in substantially all of the Company’s, and each guarantors, present and future tangible and intangible assets and the present and future tangible and intangible assets of each guarantor. The Company’s failure to comply with any of the covenants under its Senior Credit Facility could cause an event of default under such documents and result in an acceleration of all outstanding senior secured indebtedness. The Company believes it was in compliance with all of the covenants of the Senior Credit Facility as of October 2, 2011.

6.625% Senior Notes

On February 10, 2011, the Company completed a private offering of $300.0 million in aggregate principal amount of 6.625% senior unsecured notes due 2021. These senior unsecured notes pay interest semi-annually in cash in arrears on February 15 and August 15, beginning on August 15, 2011. The Company realized net proceeds of $293.3 million upon the closing of the transaction and used the net proceeds of the offering, together with borrowings of $150.0 million under the Senior Credit Facility, to finance the BI Acquisition. The remaining net proceeds from the offering were used for general corporate purposes. On August 22, 2011, the Company completed its exchange offer for the full $300,000,000 aggregate principal amount of its 6.625% Senior Notes Due 2021, and the guarantees thereof, which were registered under the Securities Act of 1933, as amended, for a like amount of the outstanding 6.625% Senior Notes. The terms of the notes exchanged are identical to the notes originally issued in the private offering, except that the transfer restrictions, registration rights and additional interest provisions relating to a registration rights default will not apply to the registered notes exchanged. The Company did not receive any proceeds from the exchange offer.

The 6.625% Senior Notes are guaranteed by certain subsidiaries and are unsecured, senior obligations of the Company and these obligations rank as follows: pari passu with any unsecured, senior indebtedness of the Company and the guarantors, including the 7 3/4% Senior Notes (see below); senior to any future indebtedness of the Company and the guarantors that is expressly subordinated to the 6.625% Senior Notes and the guarantees; effectively junior to any secured indebtedness of the Company and the guarantors, including indebtedness under its Senior Credit Facility, to the extent of the value of the assets securing such indebtedness; and structurally junior to all obligations of the Company’s subsidiaries that are not guarantors.

On or after February 15, 2016, the Company may, at its option, redeem all or part of the 6.625% Senior Notes upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest and liquidated damages, if any, on the 6.625% Senior Notes redeemed, to the applicable redemption date, if redeemed during the 12-month period beginning on February 15 of the years indicated below:

 

Year

   Percentage  

2016

     103.3125

2017

     102.2083

2018

     101.1042

2019 and thereafter

     100.0000

Before February 15, 2016, the Company may redeem some or all of the 6.625% Senior Notes at a redemption price equal to 100% of the principal amount of each note to be redeemed plus a “make whole” premium, together with accrued and unpaid interest and liquidated damages, if any, to the date of redemption. In addition, at any time before February 15, 2014, the Company may redeem up to 35% of the aggregate principal amount of the 6.625% Senior Notes with the net cash proceeds from specified equity offerings at a redemption price equal to 106.625% of the principal amount of each note to be redeemed, plus accrued and unpaid interest and liquidated damages, if any, to the date of redemption.

The indenture governing the notes contains certain covenants, including limitations and restrictions on the Company and its restricted subsidiaries’ ability to: incur additional indebtedness or issue preferred stock; make dividend payments or other restricted payments; create liens; sell assets; enter into transactions with affiliates; and enter into mergers, consolidations or sales of all or substantially all of the Company’s assets. As of the date of the indenture, all of the Company’s subsidiaries, other than certain dormant domestic and other subsidiaries and all foreign subsidiaries in existence on the date of the indenture, were restricted subsidiaries. The Company’s failure to comply with certain of the covenants under the indenture governing the 6.625% Senior Notes could cause an event of default of any indebtedness and result in an acceleration of such indebtedness. In addition, there is a cross-default provision which becomes enforceable upon failure of payment of indebtedness at final maturity. The Company’s unrestricted subsidiaries will not be subject to any of the restrictive covenants in the indenture. The Company believes it was in compliance with all of the covenants of the indenture governing the 6.625% Senior Notes as of October 2, 2011.

 

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7 3/4% Senior Notes

On October 20, 2009, the Company completed a private offering of $250.0 million in aggregate principal amount of its 7 3/4% Senior Notes due 2017 (“7 3/4% Senior Notes”). These senior unsecured notes pay interest semi-annually in cash in arrears on April 15 and

October 15 of each year, beginning on April 15, 2010. The Company realized net proceeds of $246.4 million at the close of the transaction, net of the discount on the notes of $3.6 million. The Company used the net proceeds of the offering to fund the repurchase of all of its 8 1/4% Senior Notes due 2013 and pay down part of the Revolving Credit Facility under our Prior Senior Credit Agreement. On October 21, 2010, the Company completed its exchange offer for the full $250,000,000 aggregate principal amount of its 7 3/4% Senior Notes Due 2021, and the guarantees thereof, which were registered under the Securities Act of 1933, as amended, for a like amount of the outstanding 7 3/4% Senior Notes. The terms of the notes exchanged are identical to the notes originally issued in the private offering, except that the transfer restrictions, registration rights and additional interest provisions relating to a registration rights default will not apply to the registered notes exchanged. The Company did not receive any proceeds from the exchange offer.

The 7 3/4% Senior Notes are guaranteed by certain subsidiaries and are unsecured, senior obligations of GEO and these obligations rank as follows: pari passu with any unsecured, senior indebtedness of GEO and the guarantors, including the 6.625% Senior Notes; senior to any future indebtedness of GEO and the guarantors that is expressly subordinated to the notes and the guarantees; effectively junior to any secured indebtedness of GEO and the guarantors, including indebtedness under the Company’s Senior Credit Facility, to the extent of the value of the assets securing such indebtedness; and effectively junior to all obligations of the Company’s subsidiaries that are not guarantors.

On or after October 15, 2013, the Company may, at its option, redeem all or a part of the 7 3/4% Senior Notes upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest and liquidated damages, if any, on the 7 3/4% Senior Notes redeemed, to the applicable redemption date, if redeemed during the 12-month period beginning on October 15 of the years indicated below:

 

Year

   Percentage  

2013

     103.875

2014

     101.938

2015 and thereafter

     100.000

Before October 15, 2013, the Company may redeem some or all of the 7 3/4% Senior Notes at a redemption price equal to 100% of the principal amount of each note to be redeemed plus a make-whole premium together with accrued and unpaid interest and liquidated damages, if any. In addition, at any time on or prior to October 15, 2012, the Company may redeem up to 35% of the notes with the net cash proceeds from specified equity offerings at a redemption price equal to 107.750% of the aggregate principal amount of the notes to be redeemed, plus accrued and unpaid interest and liquidated damages, if any, to the date of redemption.

The indenture governing the notes contains certain covenants, including limitations and restrictions on the Company and its restricted subsidiaries’ ability to: incur additional indebtedness or issue preferred stock; make dividend payments or other restricted payments; create liens; sell assets; enter into transactions with affiliates; and enter into mergers, consolidations, or sales of all or substantially all of our assets. As of the date of the indenture, all of the Company’s subsidiaries, other than certain dormant and other domestic subsidiaries and all foreign subsidiaries in existence on the date of the indenture, were restricted subsidiaries. The Company’s failure to comply with certain of the covenants under the indenture governing the 7 3/4% Senior Notes could cause an event of default of any indebtedness and result in an acceleration of such indebtedness. In addition, there is a cross-default provision which becomes enforceable upon failure of payment of indebtedness at final maturity. The Company’s unrestricted subsidiaries will not be subject to any of the restrictive covenants in the indenture. The Company believes it was in compliance with all of the covenants of the indenture governing the 7 3/4% Senior Notes as of October 2, 2011.

Non-Recourse Debt

South Texas Detention Complex

The Company has a debt service requirement related to the development of the South Texas Detention Complex, a 1,904-bed detention complex in Frio County, Texas acquired in November 2005 from Correctional Services Corporation (“CSC”). CSC was awarded the contract in February 2004 by the Department of Homeland Security, U.S. Immigration and Customs Enforcement (“ICE”) for development and operation of the detention center. In order to finance the construction of the complex, STLDC was created and issued $49.5 million in taxable revenue bonds. These bonds mature in February 2016 and have fixed coupon rates between 4.63% and 5.07%. Additionally, the Company is owed $5.0 million in the form of subordinated notes by STLDC which represents the principal amount of financing provided to STLDC by CSC for initial development.

The Company has an operating agreement with STLDC, the owner of the complex, which provides it with the sole and exclusive right to operate and manage the detention center. The operating agreement and bond indenture require the revenue from the contract with ICE to be used to fund the periodic debt service requirements as they become due. The net revenues, if any, after various expenses such as trustee fees, property taxes and insurance premiums are distributed to the Company to cover operating expenses and

 

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management fees. The Company is responsible for the entire operations of the facility including the payment of all operating expenses whether or not there are sufficient revenues. STLDC has no liabilities resulting from its ownership. The bonds have a ten-year term and are non-recourse to the Company and STLDC. The bonds are fully insured and the sole source of payment for the bonds is the operating revenues of the center. At the end of the ten-year term of the bonds, title and ownership of the facility transfers from STLDC to the Company. The Company has determined that it is the primary beneficiary of STLDC and consolidates the entity as a result. The carrying value of the facility as of October 2, 2011 and January 2, 2011 was $26.1 million and $27.0 million, respectively, and is included in property and equipment in the accompanying balance sheets.

On February 1, 2011, STLDC made a payment from its restricted cash account of $4.8 million for the current portion of its periodic debt service requirement in relation to the STLDC operating agreement and bond indenture. As of October 2, 2011, the remaining balance of the debt service requirement under the STLDC financing agreement is $27.3 million, of which $5.0 million is due within the next twelve months. Also, as of October 2, 2011, included in current restricted cash and non-current restricted cash is $6.2 million and $15.6 million, respectively, of funds held in trust with respect to the STLDC for debt service and other reserves.

Northwest Detention Center

On June 30, 2003, CSC arranged financing for the construction of a detention center in Tacoma, Washington, known as the Northwest Detention Center, which was completed and opened for operation in April 2004. The Company began to operate this facility following its acquisition of CSC in November 2005. In connection with this financing, CSC formed a special purpose entity, CSC of Tacoma LLC, of which CSC is the only member, the sole purposes of which are to own, operate, mortgage, lease, finance, refinance and otherwise deal with this facility. CSC of Tacoma LLC owns the facility, as well as all of its other assets; the Company provides detention, transportation and related services for the United States Government from this facility pursuant to a Use Agreement between the Company and CSC of Tacoma LLC. The assets of CSC of Tacoma LLC are owned by CSC of Tacoma LLC. They are included in the consolidated financial statements of the Company in accordance with generally accepted accounting principles. The assets and liabilities of CSC of Tacoma LLC are recognized on the CSC of Tacoma LLC balance sheet.

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 the Company and the loan from WEDFA to CSC is also non-recourse to the Company. These bonds mature in February 2014 and have fixed coupon rates between 3.80% and 4.10%. The proceeds of the loan were disbursed into escrow accounts held in trust to be used to pay the issuance costs for the revenue bonds, to construct the Northwest Detention Center and to establish debt service and other reserves. No payments were made during the thirty-nine weeks ended October 2, 2011. As of October 2, 2011, the remaining balance of the debt service requirement is $25.7 million, of which $6.1 million is classified as current in the accompanying balance sheet.

As of October 2, 2011, included in current restricted cash and non-current restricted cash is $7.0 million and $7.5 million, respectively, of funds held in trust with respect to the Northwest Detention Center for debt service and other reserves.

MCF

MCF, one of the Company’s consolidated variable interest entities, is obligated for the outstanding balance of the 8.47% Revenue Bonds. The bonds bear interest at a rate of 8.47% per annum and are payable in semi-annual installments of interest and annual installments of principal. All unpaid principal and accrued interest on the bonds is due on the earlier of August 1, 2016 (maturity) or as noted under the bond documents. The bonds are limited, non-recourse obligations of MCF and are collateralized by the property and equipment, bond reserves, assignment of subleases and substantially all assets related to the facilities owned by MCF. The bonds are not guaranteed by the Company or its subsidiaries. As of October 2, 2011, the aggregate principal amount of these bonds was $77.9 million, excluding premium of $9.0 million and net of the current portion of $15.8 million. As of January 2, 2011, the aggregate principal amount of these bonds was $93.7 million, excluding premium of $11.4 million and net of the current portion of $14.6 million. These balances are included as Non-Recourse Debt on the accompanying consolidated balance sheets.

The 8.47% Revenue Bond indenture provides for the establishment and maintenance by MCF for the benefit of the trustee under the indenture of a debt service reserve fund. As of October 2, 2011, the debt service reserve fund has a balance of $23.8 million. The debt service reserve fund is available to the trustee to pay debt service on the 8.47% Revenue Bonds when needed, and to pay final debt service on the 8.47% Revenue Bonds. If MCF is in default in its obligation under the 8.47% Revenue Bonds indenture, the trustee may declare the principal outstanding and accrued interest immediately due and payable. MCF has the right to cure a default of non-payment obligations. The 8.47% Revenue Bonds are subject to extraordinary mandatory redemption in certain instances upon casualty or condemnation. The 8.47% Revenue Bonds may be redeemed at the option of MCF prior to their final scheduled payment dates at par plus accrued interest plus a make-whole premium.

 

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Australia

The Company’s wholly-owned Australian subsidiary financed the development of a facility and subsequent expansion in 2003 with long-term debt obligations. These obligations are non-recourse to the Company and total $39.7 million (AUD 41.1 million) and $46.3 million (AUD 45.2 million), at October 2, 2011 and January 2, 2011, respectively. The term of the non-recourse debt is through 2017 and it bears interest at a variable rate quoted by certain Australian banks plus 140 basis points. Any obligations or liabilities of the subsidiary are matched by a similar or corresponding commitment from the government of the State of Victoria. As a condition of the loan, the Company is required to maintain a restricted cash balance of AUD 5.0 million, which, at October 2, 2011, was $4.8 million. This amount is included in restricted cash and the annual maturities of the future debt obligation are included in Non-Recourse Debt.

Guarantees

In connection with the creation of SACS, the Company entered into certain guarantees related to the financing, construction and operation of the prison. The Company guaranteed certain obligations of SACS under its debt agreements to SACS’ senior lenders through the issuance of letters of credit for 60.0 million South African Rand. During the thirteen weeks ended October 2, 2011, the Company was notified by SACS’ lenders that these guarantees were reduced from 60.0 million South African Rand to 34.8 million South African Rand, or $4.3 million. Additionally, SACS was required to fund a restricted account for the payment of certain costs in the event of contract termination. As such, the Company had guaranteed the payment of 60% of amounts which may be payable by SACS into the restricted account by providing a standby letter of credit of 8.4 million South African Rand, or $1.0 million as of October 2, 2011, as security for this guarantee. During the thirteen weeks ended October 2, 2011, SACS was released from its obligations in respect to the restricted account under its debt agreements and the letter of credit for 8.4 million South African Rand relative to this guarantee was not renewed. No amounts were drawn against these letters of credit. The remaining guarantee of 34.8 million South African Rand is included as part of the value of Company’s outstanding letters of credit under its Revolver as of October 2, 2011.

In addition to the above, the Company has also agreed to provide a loan, of up to 20.0 million South African Rand, or $2.5 million, referred to as the Standby Facility, to SACS for the purpose of financing SACS’ obligations under its contract with the South African government. No amounts have been funded under the Standby Facility, and the Company does not currently anticipate that such funding will be required by SACS in the future. The Company’s obligations under the Standby Facility expire upon the earlier of full funding or SACS’s release from its obligations under its debt agreements. The lenders’ ability to draw on the Standby Facility is limited to certain circumstances, including termination of the contract.

The Company has also guaranteed certain obligations of SACS to the security trustee for SACS’ lenders. The Company secured its guarantee to the security trustee by ceding its rights to claims against SACS in respect of any loans or other finance agreements, and by pledging the Company’s shares in SACS. The Company’s liability under the guarantee is limited to the cession and pledge of shares. The guarantee expires upon expiration of the cession and pledge agreements.

In connection with a design, build, finance and maintenance contract for a facility in Canada, the Company guaranteed certain potential tax obligations of a trust. The potential estimated exposure of these obligations is Canadian Dollar (“CAD”) 2.5 million, or $2.4 million, commencing in 2017. The Company has a liability of $1.9 million and $1.8 million related to this exposure as of October 2, 2011 and January 2, 2011, respectively. To secure this guarantee, the Company purchased Canadian dollar denominated securities with maturities matched to the estimated tax obligations in 2017 to 2021. The Company has recorded an asset and a liability equal to the current fair market value of those securities on its consolidated balance sheets. The Company does not currently operate or manage this facility.

At October 2, 2011, the Company also had eight letters of guarantee outstanding under separate international facilities relating to performance guarantees of its Australian subsidiary totaling $9.3 million. Except as discussed above, the Company does not have any off balance sheet arrangements.

12. COMMITMENTS AND CONTINGENCIES

Litigation, Claims and Assessments

On June 22, 2011, a jury verdict for $6.5 million was returned against the Company in a wrongful death action brought by the Personal Representative of the Estate of Ronald Sites, a former inmate at the Company’s Lawton Oklahoma Correctional Facility. On August 22, 2011, the court entered judgment against GEO in the amount of $8.4 million, which includes pre judgment interest on the amount of the verdict from January 26, 2007, the date of the filing of the lawsuit, through the date of the jury verdict. The lawsuit,

 

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Ronald L. Sites, as the administrator of the Estate of Ronald S. Sites, deceased v. The GEO Group, Inc. was filed on January 28, 2007 in the District Court of Comanche County, State of Oklahoma, Case No. CJ-2007-84. It was alleged that on January 29, 2005, Mr. Sites was harmed by his cellmate as a result of the Company’s negligence. The Company disagrees with the judgment and intends to pursue an appeal. The Company intends to vigorously defend its rights and believes its accrual relative to this judgment is adequate. Under its insurance plan, the Company is responsible for the first $3.0 million of liability. Aside from this amount, which the Company would pay directly from general corporate funds, the Company believes it has insurance coverage for this matter.

In June 2004, the Company received notice of a third-party claim for property damage incurred during 2001 and 2002 at several detention facilities formerly operated by its Australian subsidiary. The claim relates to property damage caused by detainees at the detention facilities. The notice was given by the Australian government’s insurance provider and did not specify the amount of damages being sought. In August 2007, a lawsuit (Commonwealth of Australia v. Australasian Correctional Services PTY, Limited No. SC 656) was filed against the Company in the Supreme Court of the Australian Capital Territory seeking damages of up to approximately AUD 18 million, as of October 2, 2011, or $17.4 million, plus interest. The Company believes that it has several defenses to the allegations underlying the litigation and the amounts sought and intends to vigorously defend its rights with respect to this matter. The Company has established a reserve based on its estimate of the most probable loss based on the facts and circumstances known to date and the advice of legal counsel in connection with this matter. Although the outcome of this matter cannot be predicted with certainty, based on information known to date and the Company’s preliminary review of the claim and related reserve for loss, the Company believes that, if settled unfavorably, this matter could have a material adverse effect on its financial condition, results of operations or cash flows. The Company is uninsured for any damages or costs that it may incur as a result of this claim, including the expenses of defending the claim.

The Company’s South Africa joint venture had been in discussions with the South African Revenue Service (“SARS”) with respect to the deductibility of certain expenses for the tax periods 2002 through 2004. The joint venture operates the Kutama Sinthumule Correctional Centre and accepted inmates from the South African Department of Correctional Services in 2002. During 2009, SARS notified the Company that it proposed to disallow these deductions. The Company appealed these proposed disallowed deductions with SARS and in October 2010 received a favorable Tax Court ruling relative to these deductions. On March 9, 2011, SARS filed a notice that it would appeal the lower court’s ruling. The case is scheduled to be heard by the Court of Appeals on November 7, 2011. The Company continues to believe in the merits of its position and will defend its rights vigorously as the case proceeds to the Court of Appeals. If resolved unfavorably, the Company’s maximum exposure would be $2.6 million.

The Company is a participant in the IRS Compliance Assurance Process (“CAP”) for the 2011 fiscal year. Under the IRS CAP transactions that meet certain materiality thresholds are reviewed on a real-time basis shortly after their completion. Additionally, all transactions that are part of certain IRS tier and similar initiatives are audited regardless of their materiality. The program also provides for the audit of transition years that have not previously been audited. The IRS will be reviewing the Company’s 2009 and 2010 years as transition years.

During the first quarter, following the Company’s acquisition of BI, BI received notice from the IRS that it will audit its 2008 tax year. The audit was completed on October 7, 2011 with no change.

The nature of the Company’s business exposes it to various types of claims or litigation against the Company, including, but not limited to, civil rights claims relating to conditions of 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 its customers and other third parties, contractual claims and claims for personal injury or other damages resulting from contact with the Company’s facilities, programs, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. Except as otherwise disclosed above, the Company does not expect the outcome of any pending claims or legal proceedings to have a material adverse effect on its financial condition, results of operations or cash flows.

Construction Commitments

The Company is currently developing a number of projects using company financing. The Company’s management estimates that these existing capital projects will cost approximately $232.8 million, of which $122.9 million was spent through the third quarter of 2011. The Company estimates the remaining capital requirements related to these capital projects to be approximately $109.9 million, which will be spent through fiscal years 2011 and 2012. Capital expenditures related to facility maintenance costs are expected to range between $30.0 million and $35.0 million for fiscal year 2011. In addition to these current estimated capital requirements for 2011 and 2012, the Company is currently in the process of bidding on, or evaluating potential bids for the design, construction and management of a number of new projects. In the event that the Company wins bids for these projects and decides to self-finance their construction, its capital requirements in 2011 and/or 2012 could materially increase.

 

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Contract Terminations

Effective February 28, 2011, the Company’s contract for the management of the 424-bed North Texas ISF, located in Fort Worth, Texas, terminated. The Company does not expect the termination of this contract to have a material adverse impact on its financial condition, results of operations or cash flows.

Effective April 30, 2011, the Company’s contract for the management of the 970-bed Regional Correctional Center, located in Albuquerque, New Mexico, terminated. The Company does not expect the termination of this contract to have a material adverse impact on its financial condition, results of operations or cash flows.

Effective May 29, 2011, the Company’s subsidiary in the United Kingdom no longer managed the 215-bed Campsfield House Immigration Removal Centre in Kidlington, England. The Company does not expect the termination of this contract to have a material adverse impact on its financial condition, results of operations or cash flows.

On July 11, 2011, the Company announced that the State of California decided to implement its Criminal Justice Realignment Plan, which is expected to delegate tens of thousands of low level state offenders to local county jurisdictions in California effective October 1, 2011. As a result of the implementation of the Realignment Plan, the State of California has decided to discontinue contracts with Community Correctional Facilities which currently house low level state offenders across the state. The Company received written notice from the California Department of Corrections and Rehabilitation regarding the cancellation of its agreements for the housing of low level state offenders at three of its facilities: (i) the company-leased 305-bed Leo Chesney Community Correctional Facility which was terminated effective September 30, 2011 and vacated September 20, 2011; (ii) the company-owned 625-bed Central Valley Modified Community Correctional Facility which was terminated effective October 12, 2011 and vacated October 5, 2011; and (iii) the company-owned 643-bed Desert View Modified Community Correctional Facility which will terminate effective November 30, 2011 . The Company is in the process of actively marketing these facilities to local county agencies in California. Given that most local county jurisdictions in California are presently operating at or above their correctional capacity, the Company is hopeful that it will be able to market these facilities to local county agencies for the housing of low level offenders who will be the responsibility of local county jurisdictions. Included in revenue for the thirty-nine weeks ended October 2, 2011 is $23.8 million of revenue related to these terminated contracts.

On July 31, 2011, the Company’s contract for the management of Brooklyn Community Re-entry Center located in Brooklyn, New York terminated. The Company does not expect the termination of this contract to have a material adverse impact on its financial condition, results of operations or cash flows.

On September 2, 2011, the Company initiated discussions with the California Department of Corrections & Rehabilitation (“CDCR”) to terminate its management agreement for the operation of the company-owned North Lake Correctional Facility. On September 26, 2011, CDCR notified the Company that its contract would terminate effective October 2, 2011. Included in revenue for the thirty-nine weeks ended October 2, 2011 is $2.4 million of revenue related to this terminated contract.

In an effort to consolidate existing Youth Services facilities and to maximize overall utilization, the Company terminated its contracts for the management of Contact Interventions, located in Wauconda, Illinois and the Abraxas Center for Adolescent Females located in Pittsburg, Pennsylvania. Additionally, the Company’s contract to manage Philadelphia Community-Based Programs located in Philadelphia, Pennsylvania terminated June 30, 2011 due to lack of funding. The Company does not expect that the termination of these contracts will have a material adverse impact on its financial condition, results of operations or cash flows.

The Company is currently marketing approximately 6,800 vacant beds at eight of its idle facilities to potential customers. The carrying values of these idle facilities totaled $276.4 million as of October 2, 2011, excluding equipment and other assets that can be easily transferred for use at other facilities.

 

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13. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

Operating and Reporting Segments

The Company conducts its business through four reportable business segments: the U.S. Detention & Corrections segment; the International Services segment; the GEO Care segment; and the Facility Construction & Design segment. The Company has identified these four reportable segments to reflect the current view that the Company operates four distinct business lines, each of which constitutes a material part of its overall business. The U.S. Detention & Corrections segment primarily encompasses U.S.-based privatized corrections and detention business. The International Services segment primarily consists of privatized corrections and detention operations in South Africa, Australia and the United Kingdom. The GEO Care segment, which conducts its services in the U.S., represents services provided for mental health, residential and non-residential treatment, educational and community based programs, pre-release and halfway house programs, compliance technologies, monitoring services, and evidence-based supervision and treatment programs for community-based parolees, probationers and pretrial defendants. The Facility Construction & Design segment consists of contracts with various state, local and federal agencies for the design and construction of facilities for which the Company has management contracts. As a result of the acquisition of Cornell, management’s review of certain segment financial data was revised with regards to the Bronx Community Re-entry Center and the Brooklyn Community Re-entry Center. These facilities now report within the GEO Care segment and are no longer included with U.S. Detention & Corrections. Disclosures for business segments reflect these reclassifications for all periods presented and are as follows (in thousands):

 

     Thirteen Weeks Ended     Thirty-nine Weeks Ended  
     October 2, 2011     October 3, 2010     October 2, 2011     October 3, 2010  

Revenues:

        

U.S. Detention & Corrections

   $ 243,952      $ 217,808      $ 727,256      $ 599,598   

GEO Care

     109,729        60,934        317,475        135,409   

International Services

     53,166        47,553        161,580        138,142   

Facility Construction & Design

     —          1,638        119        22,421   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 406,847      $ 327,933      $ 1,206,430      $ 895,570   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization:

        

U.S. Detention & Corrections

   $ 14,017      $ 11,048      $ 40,272      $ 27,131   

GEO Care

     7,429        1,905        19,956        3,679   

International Services

     528        431        1,604        1,286   

Facility Construction & Design

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total depreciation and amortization

   $ 21,974      $ 13,384      $ 61,832      $ 32,096   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income:

        

U.S. Detention & Corrections

   $ 54,206      $ 52,074      $ 164,353      $ 142,545   

GEO Care

     18,326        8,272        53,618        17,085   

International Services

     4,663        2,599        10,939        7,848   

Facility Construction & Design

     (43     504        37        1,648   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income from segments

     77,152        63,449        228,947        169,126   

General and administrative expenses

     (25,922     (33,925     (86,420     (72,028
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

   $ 51,230      $ 29,524      $ 142,527      $ 97,098   
  

 

 

   

 

 

   

 

 

   

 

 

 
                 October 2, 2011     January 2, 2011  

Segment assets:

        

U.S. Detention & Corrections

       $ 1,947,785      $ 1,849,423   

GEO Care

         759,078        299,563   

International Services

         99,399        103,004   

Facility Construction & Design

         157        26   
      

 

 

   

 

 

 

Total segment assets

       $ 2,806,419      $ 2,252,016   
      

 

 

   

 

 

 

Pre-Tax Income Reconciliation of Segments

The following is a reconciliation of the Company’s total operating income from its reportable segments to the Company’s income before income taxes, equity in earnings of affiliates, in each case, during the thirteen and thirty-nine weeks ended October 2, 2011 and October 3, 2010, respectively (in thousands):

 

     Thirteen Weeks Ended     Thirty-nine Weeks Ended  
     October 2, 2011     October 3, 2010     October 2, 2011     October 3, 2010  

Total operating income from segments

   $ 77,152      $ 63,449      $ 228,947      $ 169,126   

Unallocated amounts:

        

General and Administrative Expenses

     (25,922     (33,925     (86,420     (72,028

Net interest expense

     (17,560     (10,183     (50,735     (23,730

Loss on extinguishment of debt

     —          (7,933     —          (7,933
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in earnings of affiliates

   $ 33,670      $ 11,408      $ 91,792      $ 65,435   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Asset Reconciliation of Segments

The following is a reconciliation of the Company’s reportable segment assets to the Company’s total assets as of October 2, 2011 and January 2, 2011, respectively (in thousands).

 

     October 2, 2011      January 2, 2011  

Reportable segment assets

   $ 2,806,419       $ 2,252,016   

Cash

     43,956         39,664   

Deferred income tax

     45,908         30,051   

Restricted cash and investments

     94,307         90,642   
  

 

 

    

 

 

 

Total assets

   $ 2,990,590       $ 2,412,373   
  

 

 

    

 

 

 

Sources of Revenue

The Company derives most of its Detention & Corrections revenue from the management of privatized correctional and detention facilities and also receives revenue from related transportation services. GEO Care derives revenue from the management of residential treatment facilities and community based re-entry facilities and also from its electronic monitoring and evidence-based supervision and treatment services. Facility Construction & Design generates its revenue from the construction and expansion of new and existing correctional, detention and residential treatment facilities. All of the Company’s revenue is generated from external customers (in thousands).

 

     Thirteen Weeks Ended      Thirty-nine Weeks Ended  
     October 2, 2011      October 3, 2010      October 2, 2011      October 3, 2010  

Revenues:

           

Detention & Corrections

   $ 297,118       $ 265,361       $ 888,836       $ 737,740   

GEO Care

     109,729         60,934         317,475         135,409   

Facility Construction & Design

     —           1,638         119         22,421   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 406,847       $ 327,933       $ 1,206,430       $ 895,570   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity in Earnings of Affiliates

Equity in earnings of affiliates includes the Company’s 50% owned joint ventures in SACS, located in South Africa, and GEOAmey, located in the United Kingdom. These entities are accounted for under the equity method of accounting. The Company’s investments in these entities are presented as a component of other non-current assets in the accompanying consolidated balance sheets.

A summary of financial data for SACS is as follows (in thousands):

 

     Thirteen Weeks Ended      Thirty-nine Weeks Ended  
     October 2, 2011      October 3, 2010      October 2, 2011      October 3, 2010  

Statement of Operations Data

           

Revenues

   $ 12,580       $ 11,692       $ 37,581       $ 33,447   

Operating income

     4,994         4,571         15,123         13,171   

Net income

     2,688         2,298         6,848         5,735   
                   October 2, 2011      January 2, 2011  

Balance Sheet Data

           

Current assets

         $ 29,085       $ 40,624   

Non-current assets

           39,517         50,613   

Current liabilities

           3,188         3,552   

Non-current liabilities

           46,540         60,129   

Shareholders’ equity

           18,874         27,556   

During the thirty-nine weeks ended October 2, 2011, the Company’s consolidated South African subsidiary, South African Custodial Holdings Pty. Ltd. (“SACH”) received a dividend of $5.4 million from SACS which reduced the Company’s investment in its joint venture. As of October 2, 2011 and January 2, 2011, the Company’s investment in SACS was $9.4 million and $13.8 million, respectively.

 

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In February 2011, GEOAmey was formed by GEO UK and its 50% joint venture partner for the purpose of providing prisoner escort and custody services in the United Kingdom and Wales under contracts with the UK Ministry of Justice. GEOAmey commenced operations on August 29, 2011. The Company has recorded $1.1 million and $1.1 million in losses, net of tax impact, for GEOAmey’s operations during the thirteen and thirty-nine weeks ended October 2, 2011, respectively, which is included in Equity in earnings of affiliates in the accompanying consolidated statement of income and comprehensive income. As of October 2, 2011, the Company’s investment in GEOAmey was equal to its share of reported losses of $1.1 million.

14. BENEFIT PLANS

The Company has two non-contributory defined benefit pension plans covering certain of the Company’s executives. Retirement benefits are based on years of service, employees’ average compensation for the last five years prior to retirement and social security benefits. Currently, the plans are not funded. The Company purchased and is the beneficiary of life insurance policies for certain participants enrolled in the plans. There were no significant transactions between the employer or related parties and the plan during the period.

As of October 2, 2011, the Company had a non-qualified deferred compensation agreement with its Chief Executive Officer (“CEO”). The current agreement provides for a lump sum payment upon retirement, no sooner than age 55. As of October 2, 2011, the CEO had reached age 55 and was eligible to receive the payment upon retirement. If the Company’s CEO had retired as of October 2, 2011, the Company would have had to pay him $5.8 million including a tax gross-up relating to the retirement payment equal to $2.1 million. During the fiscal year ended January 2, 2011, the Company paid a former executive $4.4 million in discounted retirement benefits, including a gross up of $1.6 million for certain taxes, under the executive’s non-qualified deferred compensation agreement. The Company’s liability relative to its pension plans and retirement agreements was $14.7 million and $13.8 million as of October 2, 2011 and January 2, 2011, respectively. The long-term portion of the pension liability as of October 2, 2011 and January 2, 2011 was $14.5 million and $13.6 million, respectively, and is included in Other Non-Current liabilities in the accompanying balance sheets.

The following table summarizes key information related to the Company’s pension plans and retirement agreements. The table illustrates the reconciliation of the beginning and ending balances of the benefit obligation showing the effects during the periods presented attributable to service cost, interest cost, plan amendments, termination benefits, actuarial gains and losses. The assumptions used in the Company’s calculation of accrued pension costs are based on market information and the Company’s historical rates for employment compensation and discount rates, respectively.

 

     Thirty-nine
Weeks  Ended
October 2, 2011
    Fiscal Year Ended
January  2, 2011
 
     (in thousands)  

Change in Projected Benefit Obligation

    

Projected benefit obligation, beginning of period

   $ 13,830      $ 16,206   

Service cost

     483        525   

Interest cost

     501        746   

Actuarial gain

     —          986   

Benefits paid

     (137     (4,633
  

 

 

   

 

 

 

Projected benefit obligation, end of period

   $ 14,677      $ 13,830   
  

 

 

   

 

 

 

Change in Plan Assets

    

Plan assets at fair value, beginning of period

   $ —        $ —     

Company contributions

     137        4,633   

Benefits paid

     (137     (4,633
  

 

 

   

 

 

 

Plan assets at fair value, end of period

   $ —        $ —     
  

 

 

   

 

 

 

Unfunded Status of the Plan

   $ (14,677   $ (13,830
  

 

 

   

 

 

 

Amounts Recognized in Accumulated Other Comprehensive Income

    

Prior service cost

     —          —     

Net loss

     1,628        1,671   
  

 

 

   

 

 

 

Accrued pension cost

   $ 1,628      $ 1,671   
  

 

 

   

 

 

 

 

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Table of Contents
     Thirteen Weeks Ended     Thirty-nine Weeks Ended  
     October 2, 2011     October 3, 2010     October 2, 2011     October 3, 2010  

Components of Net Periodic Benefit Cost

        

Service cost

   $ 161      $ 131      $ 483      $ 393   

Interest cost

     167        187        501        560   

Amortization of: Prior service cost

     —          10        —          31   

Net loss

     16        8        48        25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 344      $ 336      $ 1,032      $ 1,009   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Assumptions for Expense

        

Discount rate

     5.50     5.75     5.50     5.75

Expected return on plan assets

     N/A        N/A        N/A        N/A   

Rate of compensation increase

     4.27     4.50     4.27     4.50

The Company expects to pay total benefits of $0.2 million during the fiscal year ending January 1, 2012.

15. RECENT ACCOUNTING STANDARDS

In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-05 which requires an entity to present all nonowner changes in stockholders’ equity either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This standard will become effective for the Company in fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. The Company does not believe that the implementation of this standard will have a material impact on its financial position, results of operation and cash flows.

In May 2011, the FASB issued ASU No. 2011-04 which provides a consistent definition of fair value in US GAAP and International Financial Reporting Standards (“IFRS”) and ensures that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style). The amendments change certain fair value measurement principles and enhance the disclosure requirements particularly for level 3 fair value measurements. The standard will become effective for the Company during interim and annual periods beginning after December 15, 2011 and should be applied prospectively. The Company does not believe that the implementation of this standard will have a material impact on its financial position, results of operation and cash flows.

In September 2011, the FASB issued ASU 2011-08 which is intended to simplify how an entity tests goodwill for impairment. Under the revised guidance, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. Under the amendments in this update, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company has elected to early adopt ASU 2011-08 for the purposes of performing its annual goodwill impairment test for its fiscal year ended January 1, 2012. The Company’s measurement date for the annual goodwill test is as of the first day of its fourth fiscal quarter. The implementation of this accounting standard will not have a material impact on the Company’s financial position, results of operations and/or cash flows.

The Company implemented the following accounting standards in the thirty-nine weeks ended October 2, 2011:

In October 2009, the FASB issued ASU No. 2009-13 which provides amendments to revenue recognition criteria for separating consideration in multiple element arrangements. As a result of these amendments, multiple deliverable arrangements will be separated more frequently than under existing GAAP. The amendments, among other things, establish the selling price of a deliverable, replace the term fair value with selling price and eliminate the residual method such that consideration can be allocated to the deliverables using the relative selling price method based on GEO’s specific assumptions. This amendment also significantly expands the disclosure requirements for multiple element arrangements. This guidance became effective for the Company prospectively for

 

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revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The implementation of this standard in the thirty-nine weeks ended October 2, 2011 did not have a material impact on the Company’s financial position, results of operations and cash flows. As a result of the BI Acquisition, the Company also periodically sells its monitoring equipment and other services together in multiple-element arrangements. In such cases, the Company allocates revenue on the basis of the relative selling price of the delivered and undelivered elements. The selling price for each of the elements is estimated based on the price charged by the Company when the elements are sold on a standalone basis.

In December 2010, the FASB issued ASU No. 2010-28 related to goodwill and intangible assets. Under current guidance, testing for goodwill impairment is a two-step test. When a goodwill impairment test is performed, an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). The objective of ASU No 2010-28 is to address circumstances in which entities have reporting units with zero or negative carrying amounts. The amendments in this guidance modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts to require an entity to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists after considering certain qualitative characteristics, as described in this guidance. This guidance became effective for the Company in fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company currently does not have any reporting units with a zero or negative carrying value. The implementation of this accounting standard did not have a material impact on the Company’s financial position, results of operations and/or cash flows.

Also, in December 2010, the FASB issued ASU No. 2010-29 related to financial statement disclosures for business combinations entered into after the beginning of the first annual reporting period beginning on or after December 15, 2010. The amendments in this guidance specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. These amendments also expand the supplemental pro forma disclosures under current guidance for business combinations to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company acquired BI during the thirty-nine weeks ended October 2, 2011 and has implemented this standard, as applicable, to the related business combination disclosures.

16. SUBSEQUENT EVENTS

On October 3, 2011, the Company exercised the termination clause in its contract for the management of the Frio County Detention Center. Effective December 2, 2011, the Company will no longer manage this facility. The Company does not believe that the termination of this contract will have a material adverse impact on its financial condition, results of operations or cash flows.

17. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

As discussed in Note 11, the Company completed a private offering of $300.0 million aggregate principal amount of 6.625% senior unsecured notes due 2021 (such 6.625% Senior Notes collectively with the 7 3/4% Senior Notes issued October 20, 2009, the “Notes”). The Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by the Company and certain of its wholly-owned domestic subsidiaries (the “Subsidiary Guarantors”). BII Holding has been classified in the Condensed Consolidating Financial Information as a guarantor to the Company’s Notes. On February 10, 2011, the 6.625% Senior Notes were sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States only to non-U.S. persons in accordance with Regulation S promulgated under the Securities Act. In connection with the sale of the 6.625% Senior Notes, the Company entered into a Registration Rights Agreement with the initial purchasers of the 6.625% Senior Notes party thereto, pursuant to which the Company and its Subsidiary Guarantors (as defined below) agreed to file a registration statement with respect to an offer to exchange the 6.625% Senior Notes for a new issue of substantially identical notes registered under the Securities Act. The Company filed a registration statement with respect to this offer to exchange the 6.625% Senior Notes which became effective on July 22, 2011.

The following condensed consolidating financial information, which has been prepared in accordance with the requirements for presentation of Rule 3-10(d) of Regulation S-X promulgated under the Securities Act, presents the condensed consolidating financial information separately for:

 

  (i) The GEO Group, Inc., as the issuer of the Notes;

 

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Table of Contents
  (ii) The Subsidiary Guarantors, on a combined basis, which are 100% owned by The GEO Group, Inc., and which are guarantors of the Notes;

 

  (iii) The Company’s other subsidiaries, on a combined basis, which are not guarantors of the Notes (the “Subsidiary Non-Guarantors”);

 

  (iv) Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among the Company, the Subsidiary Guarantors and the Subsidiary Non-Guarantors and (b) eliminate the investments in the Company’s subsidiaries; and

 

  (v) The Company and its subsidiaries on a consolidated basis.

 

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Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

(unaudited)

 

     As of October 2, 2011  
     The GEO Group, Inc.      Combined
Subsidiary
Guarantors
     Combined
Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  
     (Dollars in thousands)  
ASSETS              

Cash and cash equivalents

   $ 3,161       $ 3,794       $ 37,001       $ —        $ 43,956   

Restricted cash and investments

     —           —           41,033         —          41,033   

Accounts receivable, less allowance for doubtful accounts

     115,684         136,041         22,569         —          274,294   

Deferred income tax assets, net

     15,191         25,654         4,127         —          44,972   

Prepaid expenses and other current assets

     4,376         8,200         10,189         (1,154     21,611   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     138,412         173,689         114,919         (1,154     425,866   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Restricted Cash and Investments

     7,454         —           45,820         —          53,274   

Property and Equipment, Net

     584,276         882,274         207,301         —          1,673,851   

Assets Held for Sale

     3,083         915         —           —          3,998   

Direct Finance Lease Receivable

     —           —           31,673         —          31,673   

Intercompany Receivable

     401,879         14,212         1,718         (417,809     —     

Deferred Income Tax Assets, Net

     —           —           936         —          936   

Goodwill

     34         511,915         720         —          512,669   

Intangible Assets, Net

     —           203,236         1,895         —          205,131   

Investment in Subsidiaries

     1,372,562         —           —           (1,372,562     —     

Other Non-Current Assets

     41,702         73,013         29,715         (61,238     83,192   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 2,549,402       $ 1,859,254       $ 434,697       $ (1,852,763   $ 2,990,590   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY              

Accounts payable

   $ 30,346       $ 39,510       $ 2,360       $ —        $ 72,216   

Accrued payroll and related taxes

     18,271         14,431         15,070         —          47,772   

Accrued expenses

     85,326         23,640         21,722         (1,154     129,534   

Current portion of capital lease obligations, long-term debt and non-recourse debt

     17,197         1,366         32,641         —          51,204   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     151,140         78,947         71,793         (1,154     300,726   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Deferred Income Tax Liabilities

     15,874         83,248         20         —          99,142   

Intercompany Payable

     1,718         392,388         23,703         (417,809     —     

Other Non-Current Liabilities

     25,156         35,090         60,314         (61,238     59,322   

Capital Lease Obligations

     —           13,363         —           —          13,363   

Long-Term Debt

     1,310,281         490         —           —          1,310,771   

Non-Recourse Debt

     —           —           162,033         —          162,033   

Commitments & Contingencies

             

Total Shareholders’ Equity

     1,045,233         1,255,728         116,834         (1,372,562     1,045,233   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 2,549,402       $ 1,859,254       $ 434,697       $ (1,852,763   $ 2,990,590   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

 

     As of January 2, 2011  
     The GEO Group, Inc.      Combined
Subsidiary
Guarantors
     Combined
Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  
     (Dollars in thousands)  
ASSETS              

Cash and cash equivalents

   $ 2,614       $ 221       $ 36,829       $ —        $ 39,664   

Restricted cash and investments

     —           —           41,150         —          41,150   

Accounts receivable, less allowance for doubtful accounts

     121,749         130,197         23,832         —          275,778   

Deferred income tax assets, net

     15,191         9,797         4,127         —          29,115   

Prepaid expenses and other current assets

     12,325         23,222         9,256         (8,426     36,377   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     151,879         163,437         115,194         (8,426     422,084   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Restricted Cash and Investments

     6,168         —           43,324         —          49,492   

Property and Equipment, Net

     433,219         867,046         211,027         —          1,511,292   

Assets Held for Sale

     3,083         6,887         —           —          9,970   

Direct Finance Lease Receivable

     —           —           37,544         —          37,544   

Intercompany Receivable

     203,703         14,380         1,805         (219,888     —     

Deferred Income Tax Assets, Net

     —           —           936         —          936   

Goodwill

     34         235,798         762         —          236,594   

Intangible Assets, Net

     —           85,384         2,429         —          87,813   

Investment in Subsidiaries

     1,184,297         —           —           (1,184,297     —     

Other Non-Current Assets

     24,020         45,820         28,558         (41,750     56,648   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 2,006,403       $ 1,418,752       $ 441,579       $ (1,454,361   $ 2,412,373   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY              

Accounts payable

   $ 57,015       $ 13,254       $ 3,611       $ —        $ 73,880   

Accrued payroll and related taxes

     6,535         10,965         15,861         —          33,361   

Accrued expenses

     55,081         38,193         33,624         (8,426     118,472   

Current portion of capital lease obligations, long-term debt and non-recourse debt

     9,500         782         31,292         —          41,574   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     128,131         63,194         84,388         (8,426     267,287   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Deferred Income Tax Liabilities

     15,874         39,424         20         —          55,318   

Intercompany Payable

     1,805         199,994         18,089         (219,888     —     

Other Non-Current Liabilities

     22,767         25,839         40,006         (41,750     46,862   

Capital Lease Obligations

     —           13,686         —           —          13,686   

Long-Term Debt

     798,336         —           —           —          798,336   

Non-Recourse Debt

     —           —           191,394         —          191,394   

Commitments & Contingencies

             

Total Shareholders’ Equity

     1,039,490         1,076,615         107,682         (1,184,297     1,039,490   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 2,006,403       $ 1,418,752       $ 441,579       $ (1,454,361   $ 2,412,373   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(dollars in thousands)

(unaudited)

 

     For the Thirteen Weeks Ended October 2, 2011  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 149,413      $ 221,807      $ 55,389      $ (19,762   $ 406,847   

Operating expenses

     134,178        150,769        42,536        (19,762     307,721   

Depreciation and amortization

     5,502        14,616        1,856        —          21,974   

General and administrative expenses

     9,091        13,483        3,348        —          25,922   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     642        42,939        7,649        —          51,230   

Interest income

     7,754        405        1,648        (8,040     1,767   

Interest expense

     (15,805     (8,065     (3,497     8,040        (19,327
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and equity in earnings of affiliates

     (7,409     35,279        5,800        —          33,670   

Provision (benefit) for income taxes

     (2,863     13,632        1,880        —          12,649   

Equity in earnings of affiliates, net of income tax provision

     —          —          272        —          272   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity income of consolidated subsidiaries

     (4,546     21,647        4,192        —          21,293   

Income from consolidated subsidiaries, net of income tax provision

     25,839        —          —          (25,839     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     21,293        21,647        4,192        (25,839     21,293   

Net loss attributable to noncontrolling interests

     —          —          —          225        225   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to the GEO Group, Inc.

   $ 21,293      $ 21,647      $ 4,192      $ (25,614   $ 21,518   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(dollars in thousands)

(unaudited)

 

     For the Thirteen Weeks Ended October 3, 2010  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 151,656      $ 142,293      $ 53,209      $ (19,225   $ 327,933   

Operating expenses

     137,612        92,057        40,656        (19,225     251,100   

Depreciation and amortization

     4,503        7,370        1,511        —          13,384   

General and administrative expenses

     14,820        13,905        5,200        —          33,925   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (5,279     28,961        5,842        —          29,524   

Interest income

     302        343        1,608        (519     1,734   

Interest expense

     (8,793     (512     (3,131     519        (11,917

Loss on extinguishment of debt

     (7,933     —          —          —          (7,933
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and equity in earnings of affiliates

     (21,703     28,792        4,319        —          11,408   

Provision (benefit) for income taxes

     (4,663     10,486        1,724        —          7,547   

Equity in earnings of affiliates, net of income tax provision

     —          —          1,149        —          1,149   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity income of consolidated subsidiaries

     (17,040     18,306        3,744        —          5,010   

Income from consolidated subsidiaries, net of income tax provision

     22,050        —          —          (22,050     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     5,010        18,306        3,744        (22,050     5,010   

Net loss attributable to noncontrolling interests

     —          —          —          271        271   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 5,010      $ 18,306      $ 3,744      $ (21,779   $ 5,281   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(dollars in thousands)

(unaudited)

 

     For the Thirty-nine Weeks Ended October 2, 2011  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 439,537      $ 655,900      $ 168,404      $ (57,411   $ 1,206,430   

Operating expenses

     399,639        442,281        131,142        (57,411     915,651   

Depreciation and amortization

     14,501        41,743        5,588        —          61,832   

General and administrative expenses

     30,055        44,850        11,515        —          86,420   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (4,658     127,026        20,159        —          142,527   

Interest income

     21,258        1,142        4,673        (22,108     4,965   

Interest expense

     (45,044     (21,987     (10,777     22,108        (55,700
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and equity in earnings of affiliates

     (28,444     106,181        14,055        —          91,792   

Provision (benefit) for income taxes

     (10,904     41,029        5,183        —          35,308   

Equity in earnings of affiliates, net of income tax provision

     —          —          2,352        —          2,352   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity income of consolidated subsidiaries

     (17,540     65,152        11,224        —          58,836   

Income from consolidated subsidiaries, net of income tax provision

     76,376        —          —          (76,376     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     58,836        65,152        11,224        (76,376     58,836   

Net loss attributable to noncontrolling interests

     —          —          —          1,050        1,050   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to the GEO Group, Inc.

   $ 58,836      $ 65,152      $ 11,224      $ (75,326   $ 59,886   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(dollars in thousands)

(unaudited)

 

     For the Thirty-nine Weeks Ended October 3, 2010  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 459,271      $ 316,251      $ 168,186      $ (48,138   $ 895,570   

Operating expenses

     402,167        202,799        137,520        (48,138     694,348   

Depreciation and amortization

     12,953        15,698        3,445        —          32,096   

General and administrative expenses

     35,053        24,138        12,837        —          72,028   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     9,098        73,616        14,384        —          97,098   

Interest income

     912        1,008        4,226        (1,698     4,448   

Interest expense

     (20,728     (1,536     (7,612     1,698        (28,178

Loss on extinguishment of debt

     (7,933     —          —          —          (7,933
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and equity in earnings of affiliates

     (18,651     73,088        10,998        —          65,435   

Provision (benefit) for income taxes

     (3,445     27,864        4,141        —          28,560   

Equity in earnings of affiliates, net of income tax provision

     —          —          2,868        —          2,868   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity income of consolidated subsidiaries

     (15,206     45,224        9,725        —          39,743   

Income from consolidated subsidiaries, net of income tax provision

     54,949        —          —          (54,949     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     39,743        45,224        9,725        (54,949     39,743   

Net loss attributable to noncontrolling interests

     —          —          —          227        227   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 39,743      $ 45,224      $ 9,725      $ (54,722   $ 39,970   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34


Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

     For the Thirty-nine Weeks Ended October 2, 2011  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Consolidated  

Cash Flow from Operating Activities:

        

Net cash provided by operating activities

   $ 118,955      $ 7,802      $ 37,367      $ 164,124   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Investing Activities:

        

BI acquisition, cash consideration, net of cash acquired

     (409,607     —          —          (409,607

Proceeds from sale of property and equipment

     —          781        14        795   

Proceeds from sale of assets held for sale

     —          7,121        —          7,121   

Change in restricted cash

     —          —          (4,126     (4,126

Capital expenditures

     (164,926     (11,196     (1,534     (177,656
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (574,533     (3,294     (5,646     (583,473
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Financing Activities:

        

Payments on long-term debt

     (102,925     (935     (23,684     (127,544

Proceeds from long-term debt

     617,247        —          —          617,247   

Distribution to MCF partners

     —          —          (4,012     (4,012

Payments for purchases of treasury shares

     (49,987     —          —          (49,987

Proceeds from the exercise of stock options

     2,446        —          —          2,446   

Income tax benefit of equity compensation

     536        —          —          536   

Debt issuance costs

     (11,192     —          —          (11,192
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     456,125        (935     (27,696     427,494   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     —          —          (3,853     (3,853
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     547        3,573        172        4,292   

Cash and Cash Equivalents, beginning of period

     2,614        221        36,829        39,664   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents, end of period

   $ 3,161      $ 3,794      $ 37,001      $ 43,956   
  

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

     For the Thirty-nine Weeks Ended October 3, 2010  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors