The GEO Group, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. |
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For the quarterly period ended September 30, 2007 |
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OR |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. |
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For the transition period from to |
Commission file number 1-14260
The GEO Group, Inc.
(Exact name of registrant as specified in its charter)
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Florida
(State or other jurisdiction of
incorporation or organization)
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65-0043078
(I.R.S. Employer Identification No.) |
One Park Place, 621 NW 53rd Street, Suite 700,
Boca Raton, Florida
(Address of principal executive offices)
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33487
(Zip code) |
(561) 893-0101
(Registrants telephone number, including area code)
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 o
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated o Accelerated filer þ Non-accelerated filer filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
At
November 7, 2007, 50,973,596 shares of the registrants common stock were issued and
outstanding.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE GEO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED
SEPTEMBER 30, 2007 AND OCTOBER 1, 2006
(In thousands, except per share data)
(UNAUDITED)
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Thirteen Weeks Ended |
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Thirty-nine Weeks Ended |
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September 30, 2007 |
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October 1, 2006 |
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September 30, 2007 |
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October 1, 2006 |
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Revenues |
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$ |
267,009 |
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$ |
218,909 |
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$ |
762,195 |
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$ |
613,478 |
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Operating expenses |
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216,512 |
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181,771 |
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617,989 |
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507,932 |
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Depreciation and amortization |
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9,179 |
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6,080 |
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24,931 |
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17,768 |
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General and administrative expenses |
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16,054 |
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14,073 |
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46,849 |
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42,374 |
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Operating income |
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25,264 |
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16,985 |
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72,426 |
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45,404 |
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Interest income |
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2,296 |
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2,783 |
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6,536 |
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7,806 |
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Interest expense |
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(8,351 |
) |
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(6,587 |
) |
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(28,049 |
) |
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(21,995 |
) |
Write-off of deferred financing fees from
extinguishment of debt |
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(4,794 |
) |
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(1,295 |
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Income before income taxes, minority interest,
equity in earnings of affiliate and
discontinued operations |
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19,209 |
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13,181 |
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46,119 |
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29,920 |
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Provision for income taxes |
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7,385 |
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4,854 |
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17,530 |
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11,142 |
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Minority interest |
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(90 |
) |
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(71 |
) |
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(281 |
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(45 |
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Equity in earnings of affiliate, net of income
tax provision of $258, $15, $690 and $55 |
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591 |
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410 |
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1,480 |
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1,038 |
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Income from continuing operations |
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12,325 |
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8,666 |
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29,788 |
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19,771 |
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Income (loss) from discontinued operations, net
of tax provision (benefit) of $269, $(13), $378
and $(139) |
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413 |
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(24 |
) |
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580 |
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(255 |
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Net income |
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$ |
12,738 |
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$ |
8,642 |
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$ |
30,368 |
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$ |
19,516 |
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Weighted-average common shares outstanding: |
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Basic |
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50,331 |
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38,526 |
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46,853 |
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32,986 |
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Diluted |
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51,770 |
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40,020 |
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48,320 |
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34,248 |
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Income per common share: |
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Basic: |
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Income from continuing operations |
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$ |
0.24 |
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$ |
0.22 |
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$ |
0.64 |
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$ |
0.60 |
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Income (loss) from discontinued operations |
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0.01 |
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0.01 |
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(0.01 |
) |
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Net income per share-basic |
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$ |
0.25 |
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$ |
0.22 |
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$ |
0.65 |
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$ |
0.59 |
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Diluted: |
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Income from continuing operations |
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$ |
0.24 |
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$ |
0.22 |
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$ |
0.62 |
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$ |
0.58 |
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Income (loss) from discontinued operations |
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0.01 |
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0.01 |
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(0.01 |
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Net income per share-diluted |
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$ |
0.25 |
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$ |
0.22 |
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$ |
0.63 |
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$ |
0.57 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
THE GEO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(In thousands, except share data)
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September 30, 2007 |
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December 31, 2006 |
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(Unaudited) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
56,276 |
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$ |
111,520 |
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Restricted cash |
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13,095 |
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13,953 |
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Accounts receivable, less allowance for doubtful accounts of $806 and $926 |
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176,553 |
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162,867 |
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Deferred income tax asset, net |
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16,152 |
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19,492 |
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Other current assets |
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21,717 |
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14,922 |
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Total current assets |
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283,793 |
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322,754 |
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Restricted cash |
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26,480 |
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19,698 |
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Property and equipment, net |
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740,353 |
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287,374 |
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Assets held for sale |
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1,265 |
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1,610 |
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Direct finance lease receivable |
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44,597 |
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39,271 |
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Deferred income tax assets, net |
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2,858 |
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4,941 |
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Goodwill and other intangible assets, net |
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40,009 |
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41,554 |
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Other non-current assets |
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34,448 |
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26,251 |
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$ |
1,173,803 |
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$ |
743,453 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current Liabilities |
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Accounts payable |
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$ |
56,195 |
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$ |
48,890 |
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Accrued payroll and related taxes |
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26,485 |
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31,320 |
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Accrued expenses |
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75,260 |
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77,675 |
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Current portion of deferred revenue |
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142 |
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1,830 |
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Current portion of capital lease obligations, long-term debt and non-recourse debt |
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22,106 |
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12,685 |
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Current liabilities of discontinued operations |
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1,303 |
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Total current liabilities |
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180,188 |
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173,703 |
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Deferred revenue |
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|
1,755 |
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Minority interest |
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1,912 |
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1,297 |
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Other non-current liabilities |
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25,117 |
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24,816 |
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Capital lease obligations |
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16,005 |
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16,621 |
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Long-term debt |
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305,410 |
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144,971 |
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Non-recourse debt |
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131,996 |
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131,680 |
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Commitments and contingencies |
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Shareholders Equity |
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Preferred stock, $0.01 par value, 30,000,000 shares authorized, none issued or
outstanding |
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Common stock, $0.01 par value, 90,000,000 shares authorized, 67,048,596 and
66,497,168 issued and 50,973,596 and 39,497,168 outstanding |
|
|
510 |
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|
395 |
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Additional paid-in capital |
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|
336,374 |
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143,035 |
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Retained earnings |
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229,594 |
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201,697 |
|
Accumulated other comprehensive income |
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|
5,585 |
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|
2,393 |
|
Treasury stock 16,075,000 and 27,000,000 shares |
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(58,888 |
) |
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(98,910 |
) |
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Total shareholders equity |
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513,175 |
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248,610 |
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$ |
1,173,803 |
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$ |
743,453 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
THE GEO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED
SEPTEMBER 30, 2007 AND OCTOBER 1, 2006
(In thousands)
(UNAUDITED)
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Thirty-nine Weeks Ended |
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September 30, 2007 |
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October 1, 2006 |
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Cash Flow from Operating Activities: |
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Income from continuing operations |
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$ |
29,788 |
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$ |
19,771 |
|
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities: |
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Depreciation and amortization expense |
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|
24,931 |
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|
17,768 |
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Amortization of debt issuance costs |
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|
1,865 |
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|
880 |
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Amortization of unearned compensation |
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1,721 |
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|
601 |
|
Stock-based compensation expense |
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|
652 |
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|
317 |
|
Write-off of deferred financing fees |
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|
|
4,794 |
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|
|
1,295 |
|
Deferred tax expense (benefit) |
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|
|
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|
32 |
|
(Recovery) Provision for doubtful accounts |
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(120 |
) |
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|
262 |
|
Equity in earnings of affiliates, net of tax |
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|
(1,480 |
) |
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|
(1,038 |
) |
Minority interests in earnings (losses) of consolidated entity |
|
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|
281 |
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|
(45 |
) |
Dividend to minority interest |
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(564 |
) |
Income tax benefit of equity compensation |
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(2,421 |
) |
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(1,660 |
) |
Changes in assets and liabilities, net of acquisition: |
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Accounts receivable |
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(11,410 |
) |
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(23,178 |
) |
Other current assets |
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(6,635 |
) |
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|
500 |
|
Other assets |
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3,649 |
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(2,850 |
) |
Accounts payable and accrued expenses |
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|
1,472 |
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|
13,082 |
|
Accrued payroll and related taxes |
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(7,647 |
) |
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|
2,756 |
|
Deferred revenue |
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(10 |
) |
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|
(1,075 |
) |
Other liabilities |
|
|
|
|
|
|
1,990 |
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|
|
3,097 |
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Net cash provided by operating activities of continuing operations |
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|
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|
|
41,420 |
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|
|
29,951 |
|
Net cash (used in) provided by operating activities of discontinued operations |
|
|
|
|
|
|
(1,303 |
) |
|
|
114 |
|
|
|
|
|
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|
|
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|
Net cash provided by operating activities |
|
|
|
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|
40,117 |
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|
|
30,065 |
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Cash Flow from Investing Activities: |
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Acquisition, net of cash acquired |
|
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|
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|
(410,436 |
) |
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|
Increase in restricted cash |
|
|
|
|
|
|
(5,429 |
) |
|
|
(7,295 |
) |
YSI purchase price adjustment |
|
|
|
|
|
|
|
|
|
|
1,311 |
|
Proceeds from sale of assets |
|
|
|
|
|
|
2,447 |
|
|
|
19,345 |
|
Capital expenditures |
|
|
|
|
|
|
(67,955 |
) |
|
|
(25,812 |
) |
|
|
|
|
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|
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|
Net cash used in investing activities |
|
|
|
|
|
|
(481,373 |
) |
|
|
(12,451 |
) |
|
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|
|
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|
|
Cash Flow from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt |
|
|
|
|
|
|
(218,092 |
) |
|
|
(76,140 |
) |
Proceeds from the exercise of stock options |
|
|
|
|
|
|
1,195 |
|
|
|
3,759 |
|
Income tax benefit of equity compensation |
|
|
|
|
|
|
2,421 |
|
|
|
1,660 |
|
Proceeds from long-term debt |
|
|
|
|
|
|
380,000 |
|
|
|
111 |
|
Debt issuance costs |
|
|
|
|
|
|
(9,080 |
) |
|
|
|
|
Repurchase of stock options from employees and directors |
|
|
|
|
|
|
|
|
|
|
(3,955 |
) |
Proceeds from equity offering, net |
|
|
|
|
|
|
227,485 |
|
|
|
99,936 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
383,929 |
|
|
|
25,371 |
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
|
|
|
|
|
|
2,083 |
|
|
|
84 |
|
|
|
|
|
|
|
|
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|
|
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Net (Decrease) Increase in Cash and Cash Equivalents |
|
|
|
|
|
|
(55,244 |
) |
|
|
43,069 |
|
Cash and Cash Equivalents, beginning of period |
|
|
|
|
|
|
111,520 |
|
|
|
57,094 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, end of period |
|
|
|
|
|
$ |
56,276 |
|
|
$ |
100,163 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures: |
|
|
|
|
|
|
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|
|
|
Non-cash Investing and Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures in accounts payable and accrued expenses |
|
|
|
|
|
$ |
9,434 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Extinguishment of pre-acquisition liabilities, net |
|
|
|
|
|
$ |
6,663 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed in acquisition |
|
|
|
|
|
$ |
2,558 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
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 (the
Company), included in this 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 Companys Form 10-K for the year ended December 31, 2006. 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 Form 10-Q have been made. Results of
operations for the thirty-nine weeks ended September 30, 2007 are not necessarily indicative of the
results for the entire fiscal year ending December 30, 2007.
The accounting policies followed for quarterly financial reporting are the same as those disclosed
in the Notes to Consolidated Financial Statements included in the Companys Form 10-K filed with
the Securities and Exchange Commission on March 2, 2007 for the fiscal year ended December 31,
2006.
We have made certain reclassifications in the accompanying consolidated balance sheets, statements
of income and cash flows to prior period amounts to conform with current period classifications.
2. STOCK SPLIT
On May 1, 2007, the Companys Board of Directors declared a two-for-one stock split of the
Companys common stock. The stock split took effect on June 1, 2007 with respect to stockholders of
record on May 15, 2007. Following the stock split, the Companys shares outstanding increased from
25.4 million to 50.8 million. All share and per share data in this Form 10-Q has been adjusted to
reflect the stock split.
3. EQUITY OFFERING
On March 23, 2007, the Company sold in a follow-on public offering 5,462,500 shares of its common
stock at a price of $43.99 per share, (10,925,000 shares of its common stock at a price of $22.00
per share after giving effect to the two-for-one stock split). All shares were issued from
treasury. The aggregate net proceeds to the Company (after deducting underwriters discounts and
expenses of $12.8 million) were $227.5 million. On March 26, 2007, the Company utilized $200.0
million of the net proceeds from the offering to repay outstanding debt under the term loan portion
of its senior secured credit facility. The balance of the proceeds will be used for general
corporate purposes, which may include working capital, capital expenditures and potential
acquisitions of complementary businesses and other assets. See Note 9 Long-Term Debt and
Derivative Financial Instruments The Senior Credit Facility, for further discussion.
4. ACQUISITION
On January 24, 2007, the Company completed the acquisition of CentraCore Properties Trust (CPT),
a Maryland real estate investment trust, pursuant to an Agreement and Plan of Merger, dated as of
September 19, 2006 (the Merger Agreement), by and among the Company, GEO Acquisition II, Inc., a
direct wholly-owned subsidiary of the Company (Merger Sub) and CPT. Under the terms of the Merger
Agreement, CPT merged with and into Merger Sub (the Merger), with Merger Sub being the surviving
corporation of the Merger.
As a result of the Merger, each share of common stock of CPT (collectively, the Shares) was
converted into the right to receive $32.5826 in cash, inclusive of a pro-rated dividend for all
quarters or partial quarters for which CPTs dividend had not yet been paid as of the closing date.
In addition, each outstanding option to purchase CPT common stock (collectively, the Options)
having an exercise price less than $32.00 per share was converted into the right to receive the
difference between $32.00 per share and the exercise price per share of the option, multiplied by
the total number of shares of CPT common stock subject to the option. The Company paid an aggregate
purchase price of $421.6 million for the acquisition of CPT, inclusive of the payment of $368.3
million in exchange for the Shares and the Options, the repayment of $40.0 million in CPT debt and
the payment of $13.3 million in transaction related fees and expenses. The Company financed the
acquisition through the use of $365.0 million in new borrowings under a new
6
seven year term loan, referred to as Term Loan B, and approximately $65.6 million in cash on hand.
The Company deferred debt issuance costs of $9.1 million related to the new $365.0 million term
loan. These costs are being amortized over the life of the term loan. As a result of the merger,
the Company no longer has ongoing third party lease expense related to the properties the Company
previously leased from CPT. However the Company has increased depreciation expense reflecting its
ownership of the properties and higher interest expense as a result of borrowings used to fund the
acquisition.
During the first quarter of 2007, the Company performed a preliminary allocation of purchase price
for the CPT acquisition. During the thirty-nine weeks ended September 30, 2007, the Company
received additional information related to deal costs and information related to taxes that allowed
it to finalize the purchase accounting for this transaction. As a result, the Company reduced
deferred tax assets and increased the fair market value of assets acquired by approximately $4.8
million during the thirty-nine weeks ended September 30, 2007.
The results of operations of CPT are included in the Companys results of operations beginning
after January 24, 2007. CPT is included in the Companys U.S. Corrections reportable segment. See
Note 11 for segment information. The following unaudited pro forma information combines the
consolidated results of operations of the Company and CPT as if the acquisition had occurred at the
beginning of fiscal year 2006 (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
Selected Unaudited Pro Forma |
|
|
|
Consolidated Condensed Financial Information |
|
|
|
Thirteen |
|
|
Thirty-nine |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
October 1, 2006 |
|
|
October 1, 2006 |
|
Revenues |
|
$ |
220,343 |
|
|
$ |
617,068 |
|
Income from continuing operations |
|
|
6,307 |
|
|
|
13,594 |
|
Loss from discontinued operations |
|
|
(24 |
) |
|
|
(255 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
6,283 |
|
|
$ |
13,339 |
|
|
|
|
|
|
|
|
Net income per share basic |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.16 |
|
|
$ |
0.41 |
|
Loss from discontinued operations |
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
Net income per share basic |
|
$ |
0.16 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
Net income per share diluted
Income from continuing operations |
|
$ |
0.16 |
|
|
$ |
0.40 |
|
Loss from discontinued operations |
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
Net income per share diluted |
|
$ |
0.16 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
5. EQUITY INCENTIVE PLANS
In January 2006, the Company adopted Financial Accounting Standard (FAS) No. 123(R), (FAS
123R), Share-Based Payment using the modified prospective method. Under the modified prospective
method of adopting FAS No. 123(R), the Company recognizes compensation cost for all share-based
payments granted after January 1, 2006, plus any prior awards granted to employees that remained
unvested at that time. The Company uses a Black-Scholes option valuation model to estimate the fair
value of each option awarded. The assumptions used to value options granted during the interim
period were comparable to those used at December 31, 2006. The impact of forfeitures that may occur
prior to vesting is also estimated and considered in the amount recognized.
The Company had four equity compensation plans at September 30, 2007: The Wackenhut Corrections
Corporation 1994 Stock Option Plan (the 1994 Plan), the 1995 Non-Employee Director Stock Option
Plan (the 1995 Plan), the Wackenhut Corrections Corporation 1999 Stock Option Plan (the 1999
Plan) and the GEO Group, Inc. 2006 Stock Incentive Plan (the 2006 Plan and, together with the
1994 Plan, the 1995 Plan and the 1999 Plan, the Company Plans).
The 2006 Plan was approved by the Board of Directors and by the Companys shareholders on May 4,
2006. On May 1, 2007, the Companys Board of Directors adopted and its shareholders approved
several amendments to the 2006 Plan, including an amendment providing for the issuance of an
additional 500,000 shares of the Companys common stock which increased the total amount available
for grant to 1,400,000 shares pursuant to awards granted under the plan, and specifying that up to
300,000 of such additional shares may constitute awards other than stock options and stock
appreciation rights, including shares of restricted stock. See Restricted Stock for further
discussion.
7
Except for 750,000 shares of restricted stock issued under the 2006 Plan as of September 30, 2007,
all of the foregoing awards previously issued under the Company Plans consist of stock options.
Although awards are currently outstanding under all of the Company Plans, the Company may only
grant new awards under the 2006 Plan. As of September 30, 2007, the Company had the ability to
issue awards with respect to 243,328 shares of common stock pursuant to the 2006 Plan.
Under the terms of the Company Plans, the vesting period and, in the case of stock options, the
exercise price per share, are determined by the terms of each plan. All stock options that have
been granted under the Company Plans are exercisable at the fair market value of the common stock
at the date of the grant. Generally, the stock options vest and become exercisable ratably over a
four-year period, beginning immediately on the date of the grant. However, the Board of Directors
has exercised its discretion to grant stock options that vest 100% immediately for the Chief
Executive Officer. In addition, stock options granted to non-employee directors under the 1995 Plan
become exercisable immediately. All stock options awarded under the Company Plans expire no later
than ten years after the date of the grant.
A summary of the status of stock option awards issued and outstanding under the Companys Plans is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd. Avg. |
|
|
Wtd. Avg. |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Remaining |
|
|
Intrinsic |
|
Fiscal Year |
|
Shares |
|
|
Price |
|
|
Contractual Term |
|
|
Value |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Outstanding at December 31, 2006 |
|
|
2,632 |
|
|
$ |
4.61 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
431 |
|
|
|
21.47 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(265 |
) |
|
|
4.52 |
|
|
|
|
|
|
|
|
|
Forfeited/canceled |
|
|
(26 |
) |
|
|
13.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2007 |
|
|
2,772 |
|
|
$ |
7.16 |
|
|
|
5.29 |
|
|
$ |
62,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2007 |
|
|
2,373 |
|
|
$ |
5.14 |
|
|
|
4.67 |
|
|
$ |
58,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the thirteen week period and thirty-nine week period ending September 30, 2007, the amount of
stock-based compensation expense was $0.2 million and $0.7 million, respectively. The weighted
average grant date fair value of options granted during the thirty-nine weeks ended September 30,
2007 was $8.73 per share. The total intrinsic value of options exercised during the thirty-nine
weeks ended September 30, 2007 was $6.2 million.
The following table summarizes information about the exercise prices and related information of
stock options outstanding under the Company Plans at September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Wtd. Avg. |
|
Wtd. Avg. |
|
|
|
|
|
Wtd. Avg. |
|
|
Number |
|
Remaining |
|
Exercise |
|
Number |
|
Exercise |
Exercise Prices |
|
Outstanding |
|
Contractual Life |
|
Price |
|
Exercisable |
|
Price |
$2.63 $2.63
|
|
|
6,000 |
|
|
|
2.6 |
|
|
$ |
2.63 |
|
|
|
6,000 |
|
|
$ |
2.63 |
|
$2.81 $2.81
|
|
|
317,250 |
|
|
|
2.4 |
|
|
|
2.81 |
|
|
|
317,250 |
|
|
|
2.81 |
|
$3.10 $3.10
|
|
|
372,000 |
|
|
|
3.4 |
|
|
|
3.10 |
|
|
|
372,000 |
|
|
|
3.10 |
|
$3.17 $3.98
|
|
|
181,723 |
|
|
|
5.3 |
|
|
|
3.20 |
|
|
|
181,723 |
|
|
|
3.20 |
|
$4.67 $4.67
|
|
|
428,728 |
|
|
|
5.6 |
|
|
|
4.67 |
|
|
|
428,728 |
|
|
|
4.67 |
|
$5.13 $5.13
|
|
|
657,000 |
|
|
|
4.4 |
|
|
|
5.13 |
|
|
|
657,000 |
|
|
|
5.13 |
|
$5.30 $7.70
|
|
|
297,381 |
|
|
|
6.3 |
|
|
|
6.84 |
|
|
|
245,519 |
|
|
|
6.77 |
|
$7.83 $13.74
|
|
|
95,400 |
|
|
|
6.9 |
|
|
|
9.00 |
|
|
|
81,600 |
|
|
|
9.07 |
|
$20.63 $20.63
|
|
|
40,000 |
|
|
|
9.3 |
|
|
|
20.63 |
|
|
|
8,000 |
|
|
|
20.63 |
|
$21.56 $21.56
|
|
|
376,600 |
|
|
|
9.4 |
|
|
|
21.56 |
|
|
|
75,000 |
|
|
|
21.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.63 $21.56
|
|
|
2,772,082 |
|
|
|
5.3 |
|
|
$ |
7.16 |
|
|
|
2,372,820 |
|
|
$ |
5.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007, the Company had $3.0 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. Proceeds received from option exercises during the thirteen weeks and thirty-nine
weeks ended September 30, 2007 were $0.3 million and $1.2 million, respectively.
Restricted Stock
During the thirty-nine weeks ended September 30, 2007, the Company granted 300,000 shares of
non-vested restricted stock under the 2006 Plan to key employees and non-employee directors. Shares
of restricted stock become unrestricted shares of common stock upon
8
vesting on a one-for-one basis. The cost of these awards is determined using the fair value of the
Companys common stock on the date of the grant and compensation expense is recognized over the
vesting period. The shares of restricted stock that were granted under the 2006 Plan vest in equal
25% increments on each of the four anniversary dates immediately following the date of grant. The
following is a summary of restricted stock issued as of September 30, 2007 and changes during the
thirty-nine week period ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd. Avg. |
|
|
|
|
|
|
|
Grant date |
|
|
|
Shares |
|
|
Fair value |
|
Restricted stock outstanding at January 1, 2007 |
|
|
445,500 |
|
|
$ |
13.07 |
|
Granted |
|
|
300,000 |
|
|
|
25.75 |
|
Vested |
|
|
(110,360 |
) |
|
|
13.07 |
|
Forfeited/canceled |
|
|
(8,628 |
) |
|
|
13.07 |
|
|
|
|
|
|
|
|
|
Restricted stock outstanding at September 30, 2007 |
|
|
626,512 |
|
|
$ |
19.14 |
|
|
|
|
|
|
|
|
|
During the thirteen weeks and thirty-nine weeks ended September 30, 2007, the Company recognized
$0.8 million and $1.7 million of compensation expense respectively related to its outstanding
shares of restricted stock. As of September 30, 2007, the Company had $10.2 million of
unrecognized compensation expense.
6. COMPREHENSIVE INCOME
The components of the Companys comprehensive income, net of tax, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-nine Weeks Ended |
|
|
|
September 30, 2007 |
|
|
October 1, 2006 |
|
|
September 30, 2007 |
|
|
October 1, 2006 |
|
Net income |
|
$ |
12,738 |
|
|
$ |
8,642 |
|
|
$ |
30,368 |
|
|
$ |
19,516 |
|
Change in foreign
currency
translation, net of
income tax
(expense) benefit
of $(761) , $252,
$(1,160) and
$(704),
respectively |
|
|
1,367 |
|
|
|
(411 |
) |
|
|
2,083 |
|
|
|
1,148 |
|
Pension liability
adjustment, net of
income tax benefit
of $24, $0, $102
and $56,
respectively |
|
|
36 |
|
|
|
|
|
|
|
156 |
|
|
|
95 |
|
Unrealized gain on
derivative
instruments, net of
income tax expense
benefit of $16,
$1,068, $597 and
$578, respectively |
|
|
24 |
|
|
|
2,445 |
|
|
|
953 |
|
|
|
1,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
14,165 |
|
|
$ |
10,676 |
|
|
$ |
33,560 |
|
|
$ |
22,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. EARNINGS PER SHARE
Basic earnings per share is computed by dividing the net income available to shareholders by the
weighted average number of outstanding common shares. The calculation of diluted earnings per share
is similar to that of basic earnings per share, except that the denominator includes dilutive
common share equivalents such as stock options and shares of restricted stock.
Basic and diluted earnings per share (EPS) were calculated for the thirteen and thirty-nine weeks
ended September 30, 2007 and October 1, 2006 as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-nine Weeks Ended |
|
|
|
September 30, 2007 |
|
|
October 1, 2006 |
|
|
September 30, 2007 |
|
|
October 1, 2006 |
|
Net income |
|
$ |
12,738 |
|
|
$ |
8,642 |
|
|
$ |
30,368 |
|
|
$ |
19,516 |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
50,331 |
|
|
|
38,526 |
|
|
|
46,853 |
|
|
|
32,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amount |
|
$ |
0.25 |
|
|
$ |
0.22 |
|
|
$ |
0.65 |
|
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
50,331 |
|
|
|
38,526 |
|
|
|
46,853 |
|
|
|
32,986 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock |
|
|
1,439 |
|
|
|
1,494 |
|
|
|
1,467 |
|
|
|
1,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares assuming dilution |
|
|
51,770 |
|
|
|
40,020 |
|
|
|
48,320 |
|
|
|
34,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amount |
|
$ |
0.25 |
|
|
$ |
0.22 |
|
|
$ |
0.63 |
|
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Thirteen Weeks
No options or shares of restricted stock were excluded from the computation of diluted EPS for the
thirteen weeks ended September 30, 2007 and the thirteen weeks ended October 1, 2006 because their
effect would be anti-dilutive.
Thirty-nine Weeks
No options were excluded from the computation of diluted EPS for the thirty-nine weeks ended
September 30, 2007 because their effect would be anti-dilutive. Of 3,042,450 options outstanding at
October 1, 2006, options to purchase 3,000 shares of the Companys common stock, with an exercise
price of $13.74 per share and expiration year of 2016, were excluded from the computation of
diluted EPS because their effect would be anti-dilutive.
Of 626,512 shares of restricted stock outstanding at September 30, 2007, none of the shares of
common stock were excluded from the computation of diluted EPS because their effect would be
anti-dilutive. Of 448,500 restricted shares outstanding at October 1, 2006, 422,280 were excluded
in the computation of diluted EPS because their effect was anti-dilutive.
8. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Changes in the Companys goodwill balances for the thirty-nine weeks ended September 30, 2007 were
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
Balance as of |
|
|
Currency |
|
|
Balance as of |
|
|
|
December 31, 2006 |
|
|
Translation |
|
|
September 30, 2007 |
|
U.S. Corrections |
|
$ |
23,999 |
|
|
$ |
|
|
|
$ |
23,999 |
|
International Services |
|
|
3,075 |
|
|
|
191 |
|
|
|
3,266 |
|
|
|
|
|
|
|
|
|
|
|
Total Segments |
|
$ |
27,074 |
|
|
$ |
191 |
|
|
$ |
27,265 |
|
|
|
|
|
|
|
|
|
|
|
No goodwill resulted from the acquisition of CPT on January 24, 2007.
Intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Description |
|
|
Asset Life |
|
Facility management contracts |
|
$ |
14,550 |
|
|
7-17 years |
Covenants not to compete |
|
|
1,470 |
|
|
4 years |
|
|
|
|
|
|
|
|
|
|
|
16,020 |
|
|
|
|
|
Less accumulated amortization |
|
|
(3,276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $1.7 million and $1.3 million for the thirty-nine weeks ended September
30, 2007 and October 1, 2006, respectively. The expense for the thirty-nine weeks ended September
30, 2007 includes a write-off of $0.4 million (net of accumulated amortization of $0.1 million)
related to the termination of our contract with Dickens County Correctional Center in July 2007.
Amortization is recognized on a straight-line basis over the estimated useful life of the
intangible assets.
9. LONG-TERM DEBT AND DERIVATIVE FINANCIAL INSTRUMENTS
Senior Debt
The Senior Credit Facility
On January 24, 2007, the Company completed the refinancing of its senior secured credit facility
through the execution of a Third Amended and Restated Credit Agreement (the Senior Credit
Facility), by and among the Company, as Borrower, BNP Paribas, as Administrative Agent, BNP
Paribas Securities Corp., as Lead Arranger and Syndication Agent, and the lenders who are, or may
from time to time become, a party thereto. The Senior Credit Facility consists of a $365.0 million,
seven-year term loan (the Term Loan B) and a $150 million five-year revolver (the Revolver).
The initial interest rate for the Term Loan B is at the London Interbank Offered Rate, (LIBOR)
plus 1.5% and the Revolver bears interest at LIBOR plus 2.25% or at the base rate plus 1.25%. On
January 24, 2007, the Company used the $365.0 million in borrowings under the Term Loan B to
finance its acquisition of CPT, as discussed in Note 4 Acquisition.
10
On March 26, 2007, the Company used $200.0 million of the aggregate net proceeds of $227.5 million
from its recent equity offering
(see Note 3 Equity Offering) to repay debt outstanding under the
Term Loan B. As a result of the debt repayment, the Company wrote off approximately $4.8 million in
deferred financing fees during the quarter ended April 1, 2007. As of September 30, 2007, the
Company had $163.2 million outstanding under the Term Loan B, no amounts outstanding under the
Revolver and $69.0 million outstanding in letters of credit under the Revolver. Because amounts
outstanding under letters of credit reduce the availability of borrowings, as of September 30,
2007, the Company had $81.0 million available under the Revolver. The Company intends to use future
borrowings thereunder for general corporate purposes.
Indebtedness under the Revolver bears interest in each of the instances below at the stated rate:
|
|
|
|
|
Interest Rate Under the Revolver |
Borrowings
|
|
LIBOR plus 2.25% or base rate plus 1.25%. |
Letters of credit
|
|
1.50% to 2.50%. |
Available borrowings
|
|
0.38% to 0.05%. |
The Senior Credit Facility contains financial covenants which require us to maintain the following
ratios, as computed at the end of each fiscal quarter for the immediately preceding four
quarter-period:
|
|
|
Period |
|
Leverage Ratio |
Through December 30, 2008
|
|
Total leverage ratio £ 5.50 to 1.00 |
From December 31, 2008 through December 31, 2011
|
|
Reduces from 4.75 to 1.00, to 3.00 to 1.00 |
Through December 30, 2008
|
|
Senior secured leverage ratio £ 4.00 to 1.00 |
From December 31, 2008 through December 31, 2011
|
|
Reduces from 3.25 to 1.00, to 2.00 to 1.00 |
Four quarters ending June 29, 2008, to December 30, 2009
|
|
Fixed charge coverage ratio of 1.00, thereafter 1.10 to 1.00 |
All of the obligations under the Senior Credit Facility are unconditionally guaranteed by each of
the Companys existing material domestic subsidiaries. The Senior Credit Facility and the related
guarantees are secured by substantially all of the Companys present and future tangible and
intangible assets and all present and future tangible and intangible assets of each guarantor,
including but not limited to (i) a first-priority pledge of all of the outstanding capital stock
owned by the Company and each guarantor, and (ii) perfected first-priority security interests in
all of the Companys present and future tangible and intangible assets and the present and future
tangible and intangible assets of each guarantor.
The Senior Credit Facility contains certain customary representations and warranties, and certain
customary covenants that restrict the Companys ability to, among other things (i) create, incur or
assume any indebtedness, (ii) incur liens, (iii) make loans and investments, (iv) engage in
mergers, acquisitions and asset sales, (v) sell its assets, (vi) make certain restricted payments,
including declaring any cash dividends or redeem or repurchase capital stock, except as otherwise
permitted, (vii) issue, sell or otherwise dispose of capital stock, (viii) transact with
affiliates, (ix) make changes in accounting treatment, (x) amend or modify the terms of any
subordinated indebtedness, (xi) enter into debt agreements that contain negative pledges on its
assets or covenants more restrictive than those contained in the Senior Credit Facility, (xii)
alter the business it conducts, and (xiii) materially impair the Companys lenders security
interests in the collateral for its loans.
Events of default under the Senior Credit Facility include, but are not limited to, (i) the
Companys failure to pay principal or interest when due, (ii) the Companys material breach of any
representation or warranty, (iii) covenant defaults, (iv) bankruptcy, (v) cross default to certain
other indebtedness, (vi) unsatisfied final judgments over a specified threshold, (vii) material
environmental state of claims which are asserted against it, and (viii) a change of control.
Senior 8 1/4% Notes
To facilitate the completion of the purchase of the interest of the Companys former majority
shareholder in 2003, the Company issued $150.0 million aggregate principal amount, ten-year, 8 1/4%
senior unsecured notes (the Notes). The Notes are general, unsecured, senior obligations.
Interest is payable semi-annually on January 15 and July 15 at 8 1/4%. The Notes are governed by
the terms of an Indenture, dated July 9, 2003, between the Company and the Bank of New York, as
trustee, referred to as the Indenture. Additionally, after July 15, 2008, the Company may redeem,
at the Companys option, all or a portion of the Notes plus accrued and unpaid interest at various
redemption prices ranging from 104.125% to 100.000% of the principal amount to be redeemed,
depending on when the redemption occurs. The Indenture contains covenants that limit the Companys
ability to incur additional indebtedness,
pay dividends or distributions on its common stock, repurchase its common stock, and prepay
subordinated indebtedness. The Indenture also limits the Companys ability to issue preferred
stock, make certain types of investments, merge or consolidate with another company, guarantee
other indebtedness, create liens and transfer and sell assets.
11
Non-Recourse Debt
South Texas Detention Complex
The Company has a debt service requirement related to the development of the South Texas Detention
Complex. This detention center was acquired in November 2005 from Correctional Services
Corporation (CSC), now a wholly-owned subsidiary of the
Company, who was awarded the contract in February 2004
by the Department of Homeland Security, Bureau of Immigration and Customs Enforcement (ICE) for
the development and operation of a 1,020 bed detention complex in Frio County, Texas. In order to
finance the construction of the detention center, South Texas Local Development Corporation, a
non-profit corporation (STLDC) was created and issued $49.5 million in taxable revenue bonds.
Additionally, CSC provided $5.0 million of subordinated notes to STLDC for initial development.
STLDC is the owner of the complex and entered into a development agreement with CSC to oversee the
development of the complex. In addition, STLDC entered into an operating agreement providing CSC
the sole and exclusive right to operate and manage the complex. The operating agreement and bond
indenture require the revenue from CSCs contract with ICE be used to fund the periodic debt
service requirements as they become due. The net revenues, if any, after various expenses such as
trustee fees, property taxes and insurance premiums are distributed to CSC to cover operating
expenses and management fees. CSC is responsible for the entire operations of the facility
including all operating expenses and is required to pay all operating expenses whether or not there
are sufficient revenues. STLDC has no liabilities resulting from its ownership. The bonds have a
ten year term and are non-recourse to CSC and STLDC. The bonds are fully insured and the sole
source of payment for the bonds is the operating revenues of the center. The Company has determined
that it is the primary beneficiary of STLDC and consolidates the entity as a result.
On February 1, 2007, the Company made a payment of $4.1 million for the current portion of our
periodic debt service requirement in relation to the STLDC operating agreement and bond indenture.
As of September 30, 2007, the remaining balance of the debt service requirement is $45.3 million,
of which $4.3 million is due within the next twelve months. Also as of September 30, 2007, $15.4
million is included in non-current restricted cash as funds held in trust with respect to the STLDC
for debt service and other reserves.
Northwest Detention Center
On June 30, 2003, CSC arranged financing for the construction of the Northwest Detention Center in
Tacoma, Washington, referred to as the Northwest Detention Center, which CSC completed and opened
for operation in April 2004. In connection with this financing, CSC of Tacoma LLC, a wholly owned
subsidiary of CSC, issued a $57 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 to CSC of Tacoma LLC for
the purposes of constructing the Northwest Detention Center. The bonds are non-recourse to CSC and
the loan from WEDFA to CSC of Tacoma, LLC is non-recourse to CSC.
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
September 30, 2007 in relation to the WEDFA bond indenture. As of September 30, 2007, the
remaining balance of the debt service requirement is $47.8 million, of which $5.1 is due within the
next 12 months.
As of September 30, 2007, $6.7 million is included in non-current restricted cash equivalents and
investments as funds held in trust with respect to the Northwest Detention Center for debt service
and other reserves.
Australia
In connection with the financing and management of one Australian facility, the Companys wholly
owned Australian subsidiary financed the facilitys development and subsequent expansion in 2003
with long-term debt obligations, which are non-recourse to the Company. As a condition of the loan,
the Company is required to maintain a restricted cash balance of Australian Dollar (AUD) 5.0
million, which, at September 30, 2007, was $4.4 million and is included in non-current restricted
cash. 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.
12
Variable Interest Entities
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, which
addressed consolidation by a
business of variable interest entities in which it is the primary beneficiary. In December 2003,
the FASB issued FIN No. 46R which replaced FIN No. 46. The
Companys 50% owned South African joint venture in
South African Custodial Services Pty. Limited (SACS), is a variable interest
entity. The Company has determined that it is not the primary
beneficiary of SACS and as a result is not
required to consolidate SACS under FIN 46R. The Company accounts for SACS as an equity affiliate. SACS was
established in 2001, to design, finance and build the Kutama Sinthumule Correctional Center.
Subsequently, SACS was awarded a 25-year contract to design, construct, manage and finance a
facility in Louis Trichardt, South Africa. SACS, based on the terms of the contract with
government, was able to obtain long-term financing to build the prison. The financing is fully
guaranteed by the government, except in the event of default, for which it provides an 80%
guarantee. Separately, SACS entered into a long-term operating contract with South African
Custodial Management (Pty) Limited (SACM), to provide security and other
management services and with SACSs joint venture partner to provide purchasing, programs and
maintenance services upon completion of the construction phase, which concluded in February 2002.
The Companys maximum exposure for loss under this contract is
$15.6 million, which represents its initial
investment and the guarantees.
In February 2004, CSC was awarded a contract by the Department of Homeland Security, Immigration
and Customs Enforcement, or ICE, to develop and operate a 1,020-bed detention complex in Frio
County, Texas. STLDC was created and issued $49.5 million in taxable revenue bonds to finance the
construction of the detention complex. Additionally, CSC provided a $5 million subordinated note to
STLDC for initial development costs. The Company determined that it is the primary beneficiary of STLDC and
consolidates the entity as a result. STLDC is the owner of the complex and entered into a
development agreement with CSC to oversee the development of the complex. In addition, STLDC
entered into an operating agreement providing CSC the sole and exclusive right to operate and
manage the complex. The operating agreement and bond indenture require that the revenue from CSCs
contract with ICE be used to fund the periodic debt service requirements as they become due. The
net revenues, if any, after various expenses such as trustee fees, property taxes and insurance
premiums, are distributed to CSC to cover CSCs operating expenses and management fee. CSC is
responsible for the entire operations of the facility including all operating expenses and is
required to pay all operating expenses whether or not there are sufficient revenues. STLDC has no
liabilities resulting from its ownership. The bonds have a ten year term and are non-recourse to
CSC and STLDC. The bonds are fully insured and the sole source of payment for the bonds is the
operating revenues of the center.
Guarantees
In connection with the creation of South African Custodial Services Ltd., referred to as SACS, the
Company entered into certain guarantees related to the financing, construction and operation of the
prison. The Company guaranteed certain obligations of SACS under its debt agreements up to a
maximum amount of 60.0 million South African Rand, or approximately $8.8 million, to SACS senior
lenders through the issuance of letters of credit. Additionally, SACS is required to fund a
restricted account for the payment of certain costs in the event of contract termination. The
Company has guaranteed the payment of 50% of amounts which may be payable by SACS into the
restricted account and provided a standby letter of credit of 7.0 million South African Rand, or
approximately $1.0 million, as security for its guarantee. The Companys obligations under this
guarantee expire upon the release from SACS of its obligations in respect of the restricted account
under its debt agreements. No amounts have been drawn against these letters of credit, which are
included in the Companys outstanding letters of credit under its Revolver.
The Company has agreed to provide a loan of up to 20.0 million South African Rand, or approximately
$2.9 million, referred to as the Standby Facility, to SACS for the purpose of financing the
obligations under the contract between SACS and the South African government. No amounts have been
funded under the Standby Facility, and the Company does not currently anticipate that such funding
will be required by SACS in the future. The Companys obligations under the Standby Facility expire
upon the earlier of full funding or SACSs release from its obligations under its debt agreements.
The lenders abilities to draw on the Standby Facility are 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 Companys
shares in SACS. The Companys 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 not-for-profit entity. The potential
estimated exposure of these obligations is Canadian Dollar (CAN) 2.5 million, or approximately
$2.5 million, commencing in 2017. The Company has a liability of approximately $0.8 million related
to this exposure as of September 30, 2007 and December 31, 2006. To secure this guarantee, the
Company has purchased Canadian dollar denominated securities with maturities matched to the
estimated tax obligations in 2017 to 2021. The Company has recorded an asset and a liability equal
to the current fair market value of those securities on its balance sheet. The Company does not
currently operate or manage this facility.
13
The Companys wholly-owned Australian subsidiary financed the development of a facility and
subsequent expansion in 2003, with long-term debt obligations, which are non-recourse to the
Company and total $54.6 million and $50.0 million at September 30, 2007 and December 31, 2006,
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 September 30, 2007, was approximately $4.4 million. This
amount is included in non-current restricted cash and the annual maturities of the future debt
obligation is included in non-recourse debt.
At September 30, 2007, the Company also had outstanding seven letters of guarantee totaling
approximately $6.9 million under separate international facilities.
Derivatives
Effective September 18, 2003, the Company entered into interest rate swap agreements in the
aggregate notional amount of $50.0 million. The Company has designated the swaps as hedges against
changes in the fair value of a designated portion of the Notes due to changes in underlying
interest rates. Changes in the fair value of the interest rate swaps are recorded in earnings along
with related designated changes in the value of the Notes. The agreements, which have payment and
expiration dates and call provisions that coincide with the terms of the Notes, effectively convert
$50.0 million of the Notes into variable rate obligations. Under the agreements, the Company
receives a fixed interest rate payment from the financial counterparties to the agreements equal to
8.25% per year calculated on the notional $50.0 million amount, while the Company makes a variable
interest rate payment to the same counterparties equal to the six-month LIBOR plus a fixed margin
of 3.45%, also calculated on the notional $50.0 million amount. As of September 30, 2007 and
December 31, 2006 the fair value of the swap liabilities totaled $1.1 million and $1.7 million,
respectively, and are included in other non-current liabilities and as an adjustment to the
carrying value of the Notes in the accompanying balance sheets. There was no material
ineffectiveness of the Companys interest rate swaps for the period ended September 30, 2007.
The Companys Australian subsidiary is a party to an interest rate swap agreement to fix the
interest rate on the variable rate non-recourse debt to 9.7%. The Company has determined the swap
to be an effective cash flow hedge. Accordingly, the Company records the value of the interest rate
swap in accumulated other comprehensive income, net of applicable income taxes. The total value of
the swap asset as of September 30, 2007 and December 31, 2006 was approximately $5.2 million and
$3.2 million, respectively, and was recorded as a component of other assets within the consolidated
financial statements. There was no material ineffectiveness of the Companys 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 of amounts
associated with this swap which are currently reported in accumulated other comprehensive income.
10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Australia
Property Damage
In June 2004, the Company received notice of a third-party claim for property damage incurred
during 2001 and 2002 at several detention facilities that the Australian subsidiary formerly
operated. The claim relates to property damage caused by detainees at the detention facilities.
The notice was given by the Australian governments insurance provider and did not specify the
amount of damages being sought. In August 2007, legal proceedings in this matter were formally
commenced when the Company was served with notice of a complaint filed against it by the
Commonwealth of Australia seeking damages of up to approximately AUS 18 million or $16 million.
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.
Although the outcome of this matter cannot be predicted with certainty, based on information known
to date and its preliminary review of the claim, the Company believes that, if settled unfavorably,
this matter could have a material adverse effect on its financial condition, results of operations
and cash flows. Furthermore, the Company is unable to determine the losses, if any, that it will
incur under the litigation should the matter be resolved unfavorably to it. The Company is
uninsured for any damages or costs that it may incur as a result of this claim, including the
expenses of defending the claim. The Company has 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 its legal
counsel in connection with this matter.
14
Florida Department of Management Services Matter
On May 19, 2006, the Company, along with Corrections Corporation of America, referred to as CCA,
was sued by an individual plaintiff in the Circuit Court of the Second Judicial Circuit for Leon
County, Florida (Case No. 2005CA001884). The complaint alleged that, during the period from 1995 to
2004, the Company and CCA over-billed the State of Florida by an amount of at least $12.7 million
by submitting false claims to the State for various items under the management contracts at the
Companys South Bay and Moore Haven, Florida correctional facilities. The complaint appeared to be
largely based on the same set of issues raised by a Florida Inspector Generals Evaluation Report
released in late June 2005, referred to below as the IG Report, which alleged that the Company and
CCA over billed the State of Florida by over $12.0 million. On August 10, 2007, the plaintiff
voluntarily dismissed the lawsuit without prejudice. No payment was made by the Company.
As a result of the set of issues raised by the Florida Inspector General, the Florida Department of
Management Services (DMS) conducted a detailed analysis of the allegations raised by the IG
Report which included a comprehensive written response to the IG Report prepared by the Company. In
September 2005, the DMS provided a letter to the Company stating that, although its review had not
yet been fully completed, it did not find any indication of any improper conduct by the Company. On
October 17, 2006, DMS provided a letter to the Company stating that its review had been completed.
The Company and DMS then agreed to settle this matter for $0.3 million. This amount was accrued at
December 31, 2006 and paid in the first quarter of 2007. Subsequently, the Florida Department of
Law Enforcement also completed its investigation of this matter and found no wrongdoing on behalf
of the Company.
Texas Wrongful Death Action
On September 15, 2006, a jury in an inmate wrongful death lawsuit in a Texas state court awarded a
$47.5 million verdict against the Company. Recently, the verdict was entered as a judgment against
the Company in the amount of $51.7 million. The lawsuit is being administered under the insurance
program established by The Wackenhut Corporation, the Companys former parent company, in which the
Company participated until October 2002. Policies secured by the Company under that program provide
$55 million in aggregate annual coverage. As a result, the Company believes it is fully insured for
all damages, costs and expenses associated with the lawsuit and as such has not taken any reserves
in connection with the matter. The lawsuit stems from an inmate death which occurred at the
Companys former Willacy County State Jail in Raymondville, Texas, in April 2001, when two inmates
at the facility attacked another inmate. Separate investigations conducted internally by the
Company, The Texas Rangers and the Texas Office of the Inspector General exonerated the Company and
its employees of any culpability with respect to the incident. The Company believes that the
verdict awarded in 2006 is contrary to law and unsubstantiated by the evidence. The Companys
insurance carrier has posted a supersedeas bond in the amount of approximately $60 million to cover
the judgment. On December 9, 2006, the trial court denied the Companys post trial motions and the
Company filed a notice of appeal on December 18, 2006. The appeal is proceeding.
Other Legal Proceedings
The nature of the Companys 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 our customers and
other third parties, contractual claims and claims for personal injury or other damages resulting
from contact with the Companys facilities, programs, personnel or prisoners, including damages
arising from a prisoners 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.
Contracts
Taft Correctional Institution
On April 26, 2007, the Company announced that the Federal Bureau of Prisons awarded a contract for
the management of the 2,048-bed Taft Correctional Institution, which has been managed by the
Company since 1997, to another private operator. The management contract, which was competitively
re-bid, was transitioned to the alternative operator effective August 20, 2007. The loss of this
contract did not have a material adverse effect on its financial condition or results of
operations.
15
Dickens County Correctional Center
In July 2007, the Company cancelled the Operations and Management contract with Dickens County for
the management of the 489-bed facility located in Spur, Texas. GEO has operated the management
contract since the acquisition of CSC in November 2005. The Company does not expect that the
termination of this contract, effective December 28, 2007, will have a significant impact on its
results of operations or cash flows.
Insurance claims
The Company maintains general liability insurance for property damages incurred, property operating
costs during downtimes, business interruption and incremental costs incurred during inmate
disturbances. In April 2007, the Company incurred significant damages at one of its managed-only
facilities in New Castle, Indiana as a result of a disturbance. The total amount of impairments,
losses recognized and expenses incurred has been recorded in the accompanying statements of income
as operating expenses and is partially offset by $1.1 million which management believes is probable
of being collected from the Companys insurance carrier. The expenses incurred are in excess of
the amount recorded as a receivable from the claim. When the Company and its insurance carrier
agree on the final amount of the insurance proceeds to which it is entitled, any excess, should
there be any excess, will be recorded in these accounts.
Construction Projects
The
Companys total commitment for construction projects as of September 30, 2007 is approximately $230
million, of which approximately $48 million has been paid.
11. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
Operating and Reporting Segments
The Company conducts its business through three reportable business segments: its U.S. corrections
segment; its international services segment; and its GEO Care segment. The U.S. corrections segment
primarily encompasses the 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 is
operated by the Companys wholly-owned subsidiary GEO Care, Inc., comprises privatized mental
health and residential treatment services business, all of which is currently conducted in the
United States. Other primarily consists of activities associated with the Companys construction
business. Set forth below is certain financial and other information regarding each of the
Companys reportable segments. U.S. corrections operating income for the thirty-nine weeks ended
September 30, 2007 includes $1.1 million related to certain contingencies established during the
preliminary purchase price allocation that are no longer necessary due to the resolution of those
matters in the Second Quarter of 2007. The segment information presented below with respect to
prior periods has been reclassified to conform to the Companys current presentation (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-nine Weeks Ended |
|
|
|
September 30, 2007 |
|
|
October 1, 2006 |
|
|
September 30, 2007 |
|
|
October 1, 2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corrections |
|
$ |
169,369 |
|
|
$ |
153,877 |
|
|
$ |
502,765 |
|
|
$ |
451,358 |
|
International services |
|
|
33,510 |
|
|
|
26,797 |
|
|
|
95,672 |
|
|
|
74,814 |
|
GEO Care |
|
|
30,943 |
|
|
|
19,770 |
|
|
|
82,590 |
|
|
|
50,202 |
|
Other |
|
|
33,187 |
|
|
|
18,465 |
|
|
|
81,168 |
|
|
|
37,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
267,009 |
|
|
$ |
218,909 |
|
|
$ |
762,195 |
|
|
$ |
613,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corrections |
|
$ |
8,318 |
|
|
$ |
5,192 |
|
|
$ |
22,951 |
|
|
$ |
15,222 |
|
International services |
|
|
461 |
|
|
|
723 |
|
|
|
995 |
|
|
|
2,136 |
|
GEO Care |
|
|
400 |
|
|
|
165 |
|
|
|
985 |
|
|
|
410 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
9,179 |
|
|
$ |
6,080 |
|
|
$ |
24,931 |
|
|
$ |
17,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corrections |
|
$ |
35,367 |
|
|
$ |
26,105 |
|
|
$ |
103,419 |
|
|
$ |
75,021 |
|
International services |
|
|
2,375 |
|
|
|
2,060 |
|
|
|
8,151 |
|
|
|
5,418 |
|
GEO Care |
|
|
3,292 |
|
|
|
2,685 |
|
|
|
7,608 |
|
|
|
7,117 |
|
Other |
|
|
284 |
|
|
|
208 |
|
|
|
97 |
|
|
|
222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income from segments |
|
|
41,318 |
|
|
|
31,058 |
|
|
|
119,275 |
|
|
|
87,778 |
|
Corporate expenses |
|
|
(16,054 |
) |
|
|
(14,073 |
) |
|
|
(46,849 |
) |
|
|
(42,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
25,264 |
|
|
$ |
16,985 |
|
|
$ |
72,426 |
|
|
$ |
45,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
Segment assets: |
|
|
|
|
|
|
|
|
U.S. corrections |
|
$ |
924,203 |
|
|
$ |
457,545 |
|
International services |
|
|
92,574 |
|
|
|
79,641 |
|
GEO Care |
|
|
22,835 |
|
|
|
15,606 |
|
Other |
|
|
19,330 |
|
|
|
21,057 |
|
|
|
|
|
|
|
|
Total segment assets |
|
$ |
1,058,942 |
|
|
$ |
573,849 |
|
|
|
|
|
|
|
|
Pre-Tax Income Reconciliation of Segments
The following is a reconciliation of the Companys total operating income from its reportable
segments to the Companys income before income taxes, equity in earnings of affiliates,
discontinued operations and minority interest, in each case, during the thirteen weeks and
thirty-nine weeks ended September 30, 2007 and October 1, 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-nine Weeks Ended |
|
|
|
September 30, 2007 |
|
|
October 1, 2006 |
|
|
September 30, 2007 |
|
|
October 1, 2006 |
|
Total operating income from segments |
|
$ |
41,318 |
|
|
$ |
31,058 |
|
|
$ |
119,275 |
|
|
$ |
87,778 |
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses |
|
|
(16,054 |
) |
|
|
(14,073 |
) |
|
|
(46,849 |
) |
|
|
(42,374 |
) |
Net interest expense |
|
|
(6,055 |
) |
|
|
(3,804 |
) |
|
|
(21,513 |
) |
|
|
(14,189 |
) |
Write off of deferred financing fees
from extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
(4,794 |
) |
|
|
(1,295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority
interest, equity in earnings of
affiliates and discontinued operations |
|
$ |
19,209 |
|
|
$ |
13,181 |
|
|
$ |
46,119 |
|
|
$ |
29,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Reconciliation of Segments
The following is a reconciliation of the Companys reportable segment assets to the Companys total
assets as of September 30, 2007 and December 31, 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
Reportable segment assets |
|
$ |
1,039,612 |
|
|
$ |
552,792 |
|
Cash |
|
|
56,276 |
|
|
|
111,520 |
|
Deferred tax asset, net |
|
|
19,010 |
|
|
|
24,433 |
|
Restricted cash |
|
|
39,575 |
|
|
|
33,651 |
|
Other |
|
|
19,330 |
|
|
|
21,057 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,173,803 |
|
|
$ |
743,453 |
|
|
|
|
|
|
|
|
Sources of Revenue
The Company derives most of its revenue from the management of privatized correctional and
detention facilities. The Company also derives revenue from the management of residential treatment
facilities and from the construction and expansion of new and existing correctional, detention and
residential treatment facilities. All of the Companys revenue is generated from external
customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-nine Weeks Ended |
|
|
|
September 30, 2007 |
|
|
October 1, 2006 |
|
|
September 30, 2007 |
|
|
October 1, 2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correctional and detention |
|
$ |
202,879 |
|
|
$ |
180,674 |
|
|
$ |
598,437 |
|
|
$ |
526,172 |
|
Residential treatment |
|
|
30,943 |
|
|
|
19,770 |
|
|
|
82,590 |
|
|
|
50,202 |
|
Construction |
|
|
33,187 |
|
|
|
18,465 |
|
|
|
81,168 |
|
|
|
37,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
267,009 |
|
|
$ |
218,909 |
|
|
$ |
762,195 |
|
|
$ |
613,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Equity in Earnings of Affiliate
Equity in earnings of affiliate includes our joint venture in South Africa, SACS. This entity is
accounted for under the equity method of accounting.
A summary of financial data for SACS is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine Weeks Ended |
|
|
|
September 30, 2007 |
|
|
October 1, 2006 |
|
Statement of Operations Data |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
26,660 |
|
|
$ |
25,866 |
|
Operating income |
|
|
10,808 |
|
|
|
9,956 |
|
Net (loss) income |
|
|
(2,087 |
) |
|
|
2,093 |
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
Current assets |
|
|
16,144 |
|
|
|
15,396 |
|
Non-current assets |
|
|
52,166 |
|
|
|
60,023 |
|
Current liabilities |
|
|
5,649 |
|
|
|
5,282 |
|
Non-current liabilities |
|
|
59,443 |
|
|
|
63,919 |
|
Shareholders equity |
|
|
3,218 |
|
|
|
6,217 |
|
SACS commenced operations in fiscal 2002. Total equity in undistributed income for SACS before
income taxes, for the thirty-nine weeks ended September 30, 2007 and October 1, 2006 was $4.3
million, and $2.2 million, respectively.
12. BENEFIT PLANS
The Company has two non-contributory defined benefit pension plans covering certain of the
Companys 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.
In 2001, the Company established non-qualified deferred compensation agreements with three key
executives. These agreements were modified in 2002, and again in 2003. The current agreements
provide for a lump sum payment when the executives retire, no sooner than age 55.
The Company adopted FAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R), (FAS 158)
at December 31, 2006. FAS 158 requires an employer to recognize the overfunded or underfunded
status of a defined benefit postretirement plan (other than a multi-employer plan) as an asset or
liability on its balance sheet and to recognize changes in that funded status in the year in which
the changes occur through comprehensive income. FAS 158 requires an employer to measure the funded
status of a plan as of its year-end date.
FAS 158 also requires an entity to measure a defined benefit postretirement plans assets and
obligations that determine its funded status as of the end of the employers fiscal year, and
recognize changes in the funded status of a defined benefit postretirement plan in comprehensive
income in the year in which the changes occur. Since the Company currently has a measurement date
of December 31 for all plans, this provision did not have a material impact in the year of
adoption.
In accordance with FAS 158, the Company has disclosed contributions and payment of benefits related
to the plans. There were no assets in the plan at September 30, 2007 or December 31, 2006. There
were no significant transactions between the employer or related parties and the plan during the
period.
The following table summarizes key information related to these pension plans and retirement
agreements which includes information as required by FAS 158. The table illustrates the
reconciliation of the beginning and ending balances of the benefit obligation showing the effects
during the period attributable to each of the following: service cost, interest cost, plan
amendments, termination benefits, actuarial gains and losses. The assumptions used in the Companys
calculation of accrued pension costs are based on market information and the Companys historical
rates for employment compensation and discount rates, respectively.
18
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
(in thousands) |
|
Change in Projected Benefit Obligation |
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of period |
|
$ |
17,098 |
|
|
$ |
15,702 |
|
Service cost |
|
|
413 |
|
|
|
671 |
|
Interest cost |
|
|
393 |
|
|
|
546 |
|
Plan amendments |
|
|
|
|
|
|
|
|
Actuarial gain |
|
|
|
|
|
|
215 |
|
Benefits paid |
|
|
(33 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
Projected benefit obligation, end of period |
|
$ |
17,871 |
|
|
$ |
17,098 |
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
Plan assets at fair value, beginning of period |
|
$ |
|
|
|
$ |
|
|
Company contributions |
|
|
33 |
|
|
|
36 |
|
Benefits paid |
|
|
(33 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
Plan assets at fair value, end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded Status of the Plan |
|
$ |
(17,871 |
) |
|
$ |
(17,098 |
) |
|
|
|
|
|
|
|
Amounts Recognized in Accumulated Other Comprehensive Income |
|
|
|
|
|
|
|
|
Prior service cost |
|
|
133 |
|
|
|
164 |
|
Net loss |
|
|
2,801 |
|
|
|
3,028 |
|
|
|
|
|
|
|
|
Accrued pension cost |
|
$ |
2,934 |
|
|
$ |
3,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Thirty-nine Weeks Ended |
|
|
|
September 30, 2007 |
|
|
October 1, 2006 |
|
|
September 30, 2007 |
|
|
October 1, 2006 |
|
Components of Net Periodic Benefit
Cost (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
138 |
|
|
$ |
133 |
|
|
$ |
413 |
|
|
$ |
398 |
|
Interest cost |
|
|
188 |
|
|
|
171 |
|
|
|
393 |
|
|
|
479 |
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
10 |
|
|
|
36 |
|
|
|
30 |
|
|
|
108 |
|
Net loss |
|
|
76 |
|
|
|
10 |
|
|
|
227 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
412 |
|
|
$ |
350 |
|
|
$ |
1,063 |
|
|
$ |
1,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Assumptions for Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.75 |
% |
|
|
5.50 |
% |
|
|
5.75 |
% |
|
|
5.50 |
% |
Expected return on plan assets |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Rate of compensation increase |
|
|
5.50 |
% |
|
|
5.50 |
% |
|
|
5.50 |
% |
|
|
5.50 |
% |
In fiscal 2006, the Company reported total comprehensive income of approximately $34.5 million
which included the effect of the adoption of FAS 158 of approximately ($1.9) million. The effect of
the adoption of FAS 158 should not have been reported as an adjustment to comprehensive income
which, if excluded, would have resulted in total comprehensive income in 2006 of approximately
$36.4 million. The ending accumulated other comprehensive income balance of approximately $2.4
million and total stockholders equity of approximately $248.6 million reported in the consolidated
statements of stockholders equity at December 31, 2006 are correct as reported. The Company will
adjust the presentation of the 2006 comprehensive income amounts in its 2007 10-K filing.
13. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued FAS No. 157 (FAS 157),
Fair Value Measurements, which establishes a framework for measuring fair value in accordance
with GAAP and expands disclosures about fair value measurements. FAS 157 does not require any new
fair value measurements but rather eliminates inconsistencies in guidance found in various prior
accounting pronouncements. FAS 157 is effective for fiscal years beginning after November 15, 2007.
The Company will adopt FAS 157 effective January 1, 2008 and is currently evaluating the impact
this standard will have on its financial condition, results of operations, cash flows or
disclosures.
In February 2007, the FASB issued FAS No. 159 (FAS 159), Fair Value Option for Financial Assets
and Financial Liabilities, which permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective of FAS 159 is to improve financial reporting
by providing entities with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. The fair value option established by FAS 159 permits all entities to choose
to measure eligible items at fair value at specified election dates. A business entity shall report
unrealized gains and losses on items for which the fair value option has been elected in earnings
at each subsequent
19
reporting date. FAS 159 is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact this standard will have on its financial condition,
results of operations, cash flows or disclosures.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48). The Company adopted the provisions of FIN 48, on January 1, 2007. Previously, the
Company had accounted for tax contingencies in accordance with Statement of Financial Accounting
Standards 5, Accounting for Contingencies. As required by FIN 48, which clarifies Statement 109,
Accounting for Income Taxes, the Company recognizes the financial statement benefit of a tax
position only after determining that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the more-likely-than-not threshold, the
amount recognized in the financial statements is the largest benefit that has a greater than 50
percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At
the adoption date, the Company applied FIN 48 to all tax positions for which the statute of
limitations remained open. As a result of the implementation of FIN 48, the Company recognized an
increase of approximately a $2.5 million in the liability for unrecognized tax benefits, which was
accounted for as a reduction to the January 1, 2007, balance of retained earnings.
The amount of unrecognized tax benefits as of January 1, 2007, was $5.7 million. That amount
includes $3.4 million of unrecognized tax benefits which, if ultimately recognized, will reduce the
Companys annual effective tax rate. As a result of a South African tax law change enacted in
February 2007, a liability for unrecognized tax benefits in the amount of $2.4 million is no longer
required resulting in a material change in unrecognized tax benefits during the first quarter of
2007. The reduction in the liability resulted in an increase to equity in earnings of affiliate for
the first quarter of 2007. During the second and third quarters of 2007 there have been no material
changes to the amount of unrecognized tax benefits.
The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. Tax regulations within each jurisdiction are subject to interpretation of
the related tax laws and regulations and require significant judgment to apply. With few
exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income
tax examinations by tax authorities for the years before 2002.
The Internal Revenue Service commenced an examination of the Companys U.S. income tax returns for
2002 through 2004 in the third quarter of 2005 that is anticipated to be completed during 2008. The
Company does not expect to recognize any further significant changes to the total amount of
unrecognized tax benefits during the remaining quarters of the year.
In adopting FIN 48, the Company changed its previous method of classifying interest and penalties
related to unrecognized tax benefits as income tax expense to classifying interest accrued as
interest expense and penalties as operating expenses. Because the transition rules of FIN 48 do not
permit the retroactive restatement of prior period financial statements, the Companys third
quarter 2006 financial statements continue to reflect interest and penalties on unrecognized tax
benefits as income tax expense. The Company accrued approximately $0.9 million for the payment of
interest and penalties at January 1, 2007. Subsequent changes to accrued interest and penalties
have not been significant.
Subsequently, in May 2007, the FASB published FSP FIN 48-1. FSP FIN 48-1 is an amendment to FIN 48.
It clarifies how an enterprise should determine whether a tax position is effectively settled for
the purpose of recognizing previously unrecognized tax benefits. As of our adoption date of FIN 48,
our accounting is consistent with the guidance in FSP FIN 48-1.
14. SUBSEQUENT EVENTS
Contracts
Coke County
On October 2, 2007, the Company received notice of the termination of its contract with the Texas
Youth Commission for the housing of juvenile inmates at the 200-bed Coke County Juvenile Justice
center located in Bronte, Texas. The Company is in the preliminary
stages of reviewing the
termination of this contract however, does not expect that the
termination, or any liability that may arise with respect to such
termination, will have a material adverse impact on its results of
operations and cash flows.
Aurora
On October 15, 2007 the Company announced the expansion of the 400-bed Aurora ICE Processing Center
(the Center) located in Aurora, Colorado. The Company will begin a 1,100 bed expansion of the
Company-owned Center in the Fourth Quarter of 2007 and expects to complete construction in the
Third Quarter of 2009.
Cost
of Acquisition Opportunities
In
November 2007, the Company wrote off approximately $1.0 million of
costs associated with unsuccessful negotiations related to
acquisition opportunities.
20
THE GEO GROUP, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
This report and our other filings with the Securities and Exchange Commission, which we refer to as
the SEC, contain forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are any statements that are not based on historical information.
Statements other than statements of historical facts included in this report, including, without
limitation, statements regarding our future financial position, business strategy, budgets,
projected costs and plans and objectives of management for future operations, are forward-looking
statements. Forward-looking statements generally can be identified by the use of forward-looking
terminology such as may, will, expect, anticipate, intend, plan, believe, seek,
estimate or continue or the negative of such words or variations of such words and similar
expressions. These statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such forward-looking
statements and we can give no assurance that such forward-looking statements will prove to be
correct. Important factors that could cause actual results to differ materially from those
expressed or implied by the forward-looking statements, or cautionary statements, include, but
are not limited to:
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our ability to timely build and/or open facilities as planned, profitably manage such
facilities and successfully integrate such facilities into our operations without substantial
additional costs; |
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the instability of foreign exchange rates, exposing us to currency risks in Australia, the
United Kingdom, and South Africa, or other countries in which we may choose to conduct our
business; |
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our ability to reactivate the North Lake Correctional Facility in Michigan; |
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an increase in unreimbursed labor rates; |
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our ability to expand, diversify and grow our correctional and residential treatment
services; |
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our ability to win management contracts for which we have submitted proposals and to retain
existing management contracts; |
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our ability to raise new project development capital given the often short-term nature of the
customers commitment to use newly developed facilities; |
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our ability to estimate the governments level of dependency on privatized correctional
services; |
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our ability to grow our mental health and residential treatment services; |
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our ability to accurately project the size and growth of the U.S. and international
privatized corrections industry; |
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our ability to develop long-term earnings visibility; |
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our ability to obtain future financing at competitive rates; |
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our exposure to rising general insurance costs; |
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our exposure to claims for which we are uninsured; |
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our exposure to rising employee and inmate medical costs; |
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our ability to maintain occupancy rates at our facilities; |
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our ability to manage costs and expenses relating to ongoing litigation arising from our
operations; |
21
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our ability to accurately estimate on an annual basis, loss reserves related to general
liability, workers compensation and automobile liability claims; |
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our ability to identify suitable acquisitions, and to successfully complete and integrate
such acquisition on satisfactory terms; |
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the ability of our government customers to secure budgetary appropriations to fund their
payment obligations to us; and |
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other factors contained in our filings with the SEC including, but not limited to, those
detailed in this quarterly report on Form 10-Q, our annual report on Form 10-K and our Form
8-Ks filed with the SEC. |
We undertake no obligation to update publicly any forward-looking statements, whether as a result
of new information, future events or otherwise. All subsequent written and oral forward-looking
statements attributable to us, or persons acting on our behalf, are expressly qualified in their
entirety by the cautionary statements included in this report.
FINANCIAL CONDITION
Introduction
The following discussion and analysis provides information which management believes is relevant to
an assessment and understanding of our consolidated results of operations and financial condition.
This discussion contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these forward-looking statements as
a result of numerous factors including, but not limited to, those described under Risk Factors in
our Form 10-K for the year ended December 31, 2006, filed with the SEC on March 2, 2007. The
discussion should be read in conjunction with our unaudited consolidated financial statements and
notes thereto included in this Form 10-Q.
We are a leading provider of government-outsourced services specializing in the management of
correctional, detention and mental health and residential treatment facilities in the United
States, Australia, South Africa, the United Kingdom and Canada. We operate a broad range of
correctional and detention facilities including maximum, medium and minimum security prisons,
immigration detention centers, minimum security detention centers and mental health and residential
treatment facilities. Our correctional and detention management services involve the provision of
security, administrative, rehabilitation, education, health and food services, primarily at adult
male correctional and detention facilities. Our mental health and residential treatment services
involve the delivery of quality care, innovative programming and active patient treatment,
primarily at privatized state mental health. We also develop new facilities based on contract
awards, using our project development expertise and experience to design, construct and finance
what we believe are state-of-the-art facilities that maximize security and efficiency.
As of September 30, 2007, we operated a total of 60 correctional, detention and mental health and
residential treatment facilities and had approximately 59,000 beds under management or for which we
had been awarded contracts. We maintained an average facility occupancy rate of 96.8% for the
thirteen weeks ended September 30, 2007 excluding our vacant Michigan and Jena facilities.
Reference is made to Part II, Item 7 of our annual report on Form 10-K filed with the SEC on March
2, 2007, for further discussion and analysis of information pertaining to our financial condition
and results of operations for the fiscal year ended December 31, 2006.
Recent Developments
Re-activation of LaSalle Detention Facility
On July 25, 2007, we announced that the LaSalle Economic Development District (the LEDD) had
signed a contract with U.S. Immigration and Customs Enforcement (ICE) for the housing of up to
1,160 immigration detainees at our Company-owned LaSalle Detention Facility (the Facility)
located in Jena, Louisiana. We will house and manage the immigration detainee population at the
Facility pursuant to an agreement with LEDD.
The intake
of 416 detainees began on October 22, 2007. The Facility is expected to ramp-up to
416 detainees by year-end 2007. As announced previously, we are currently expanding the Facility by
744 beds. The 744-bed expansion, which will cost approximately $32.0 million, is expected to be
completed by the end of the second quarter of 2008. Following the completion of construction, we
will begin intake of the additional 744 detainees. The Facility is expected to ramp-up to full
occupancy of 1,160 beds by the end of the third quarter of 2008. The agreement is expected to
generate approximately $23.4 million in annualized operating revenues at full occupancy.
22
Transition of Taft Correctional Institution
On April 26, 2007, we announced that the Federal Bureau of Prisons awarded a contract for the
management of the 2,048-bed Taft Correctional Institution, which has been managed by us since 1997,
to another private operator. The management contract, which was competitively re-bid, was
transitioned to the alternative operator effective August 20, 2007.
Stock Split
On May 1, 2007 our Board of Directors declared a two-for-one stock split of our common stock. The
stock split took effect on June 1, 2007 with respect to stockholders of record on May 15, 2007.
Following the stock split, our shares outstanding increased from 25.4 million to 50.8 million. All
share and per share data included in this quarterly report on Form 10-Q have been adjusted to
reflect the stock split.
Acquisition of CentraCore Properties Trust
On January 24, 2007, we completed the acquisition of CentraCore Properties Trust, which we refer to
as CPT, pursuant to the merger of CPT with and into GEO Acquisition II, Inc., our wholly-owned
subsidiary. We paid an aggregate purchase price of $421.6 million for the acquisition of CPT,
inclusive of the payment of $368.3 million in exchange for the outstanding CPT common stock and
stock options, the repayment of $40.0 million in CPT debt and the payment of $13.3 million in
transaction related fees. We financed the acquisition through the use of $365.0 million in new
borrowings under a new seven-year Term Loan B (defined below) and $65.6 million in cash on hand.
The Company deferred debt issuance costs of $9.1 million related to the new $365 million term loan.
These costs are being amortized over the life of the term loan. As a result of the merger we no
longer have ongoing lease expense related to the properties we previously leased from CPT. However,
we have increased depreciation expense reflecting our ownership of the properties and higher
interest expense as a result of borrowings used to fund the acquisition.
Recent Financings
On January 24, 2007, in connection with our acquisition of CPT, we completed the refinancing of our
senior credit facility through the execution of an amended senior credit facility, which we refer
to as the Senior Credit Facility. The Senior Credit Facility initially consisted of a $365.0
million seven-year term loan, referred to as the Term Loan B, and a $150 million five-year
revolver, referred to as the Revolver. The initial interest rate for the Term Loan B is LIBOR plus
1.50% and any future borrowings under the Revolver would bear interest at LIBOR plus 2.25% or at
the base rate plus 1.25%. On January 24, 2007, we used the $365.0 million in borrowings under the
Term Loan B to finance our acquisition of CPT.
On March 23, 2007, we sold in a follow-on public equity offering 5,462,500 shares of our common
stock at a price of $43.99 per share, (10,925,000 shares of our common stock at a price of $22.00
per share reflecting the two-for-one stock split). All shares were issued from treasury. The
aggregate net proceeds to us from the offering (after deducting underwriters discounts and
expenses of $12.8 million) were $227.5 million. On March 26, 2007, we utilized $200.0 million of
the net proceeds from the offering to repay outstanding debt under the Term Loan B portion of the
Senior Credit Facility. We intend to use the balance of the proceeds from the offering for general
corporate purposes, which may include working capital, capital expenditures and potential
acquisitions of complementary businesses and other assets.
Variable Interest Entities
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, which
addressed consolidation by a business of variable interest entities in which it is the primary
beneficiary. In December 2003, the FASB issued FIN No. 46R which replaced FIN No. 46. Our 50% owned
South African joint venture in South African Custodial Services Pty. Limited, which we refer to as
SACS, is a variable interest entity. We determined that we are not the primary beneficiary of SACS
and as a result are not required to consolidate SACS under FIN 46R. We account for SACS as an
equity affiliate. SACS was established in 2001, to design, finance and build the Kutama Sinthumule
Correctional Center. Subsequently, SACS was awarded a 25-year contract to design, construct, manage
and finance a facility in Louis Trichardt, South Africa. SACS, based on the terms of the contract
with government, was able to obtain long-term financing to build the prison. The financing is fully
guaranteed by the government, except in the event of default, for which it provides an 80%
guarantee. See Managements Discussion and Analysis of Financial Condition and Results of
Operations Guarantees for a discussion of our guarantees related to SACS. Separately, SACS
entered into a long-term operating contract with South African Custodial Management (Pty) Limited,
which we refer to as SACM, to provide security and other management services and with SACSs joint
venture partner to provide purchasing, programs and maintenance services upon completion of the
construction
phase, which concluded in February 2002. Our maximum exposure for loss under this contract is $15.6
million, which represents our initial investment and the guarantees discussed in Managements
Discussion and Analysis of Financial Condition and Results of Operations.
23
In February 2004, Correctional Services Corporation, now our wholly-owned subsidiary which we refer
to as CSC, was awarded a contract by the Department of Homeland Security, Immigration and Customs
Enforcement, or ICE, to develop and operate a 1,020- bed detention complex in Frio County, Texas.
South Texas Local Development Corporation, referred to as STLDC, a non-profit corporation, was
created and issued $49.5 million in taxable revenue bonds to finance the construction of the
detention complex. Additionally, CSC provided a $5 million subordinated note to STLDC for initial
development costs. We determined that we are the primary beneficiary of STLDC and consolidate the
entity as a result. STLDC is the owner of the complex and entered into a development agreement with
CSC to oversee the development of the complex. In addition, STLDC entered into an operating
agreement providing CSC the sole and exclusive right to operate and manage the complex. The
operating agreement and bond indenture require that the revenue from CSCs contract with ICE be
used to fund the periodic debt service requirements as they become due. The net revenues, if any,
after various expenses such as trustee fees, property taxes and insurance premiums, are distributed
to CSC to cover CSCs operating expenses and management fee. CSC is responsible for the entire
operations of the facility including all operating expenses and is required to pay all operating
expenses whether or not there are sufficient revenues. STLDC has no liabilities resulting from its
ownership. The bonds have a ten year term and are non-recourse to CSC and STLDC. The bonds are
fully insured and the sole source of payment for the bonds is the operating revenues of the center.
Shelf Registration Statement
On March 13, 2007, we filed a universal shelf registration statement with the SEC, which became
effective immediately upon filing. The universal shelf registration statement provides for the
offer and sale by us, from time to time, on a delayed basis, of an indeterminate aggregate amount
of our common stock, preferred stock, debt securities, warrants, and/or depositary shares. These
securities, which may be offered in one or more offerings and in any combination, will in each case
be offered pursuant to a separate prospectus supplement issued at the time of the particular
offering that will describe the specific types, amounts, prices and terms of the offered
securities. Unless otherwise described in the applicable prospectus supplement relating to the
offered securities, we anticipate using the net proceeds of each offering for general corporate
purposes, including debt repayment, capital expenditures, acquisitions, business expansion,
investments in subsidiaries or affiliates, and/or working capital.
Critical Accounting Policies
The accompanying unaudited consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States. As such, we are required to make
certain estimates, judgments and assumptions that we believe are reasonable based upon the
information available. These estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. We routinely evaluate our estimates based on historical
experience and on various other assumptions that management believes are reasonable under the
circumstances. Actual results may differ from these estimates under different assumptions or
conditions. A summary of our significant accounting policies is contained in Note 1 to our
financial statements on Form 10-K for the fiscal year ended December 31, 2006.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin, or SAB, No. 101, Revenue
Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition, and related
interpretations. Facility management revenues are recognized as services are provided under
facility management contracts with approved government appropriations based on a net rate per day
per inmate or on a fixed monthly rate.
Project development and design revenues are recognized as earned on a percentage of completion
basis measured by the percentage of costs incurred to date as compared to the estimated total cost
for each contract. This method is used because we consider costs incurred to date to be the best
available measure of progress on these contracts. Provisions for estimated losses on uncompleted
contracts and changes to cost estimates are made in the period in which we determine that such
losses and changes are probable. Typically, we enter into fixed price contracts and do not perform
additional work unless approved change orders are in place. Costs attributable to unapproved change
orders are expensed in the period in which the costs are incurred if we believe that it is not
probable that the costs will be recovered through a change in the contract price. If we believe
that it is probable that the costs will be recovered through a change in the contract price, costs
related to unapproved change orders are expensed in the period in which they are
24
incurred, and contract revenue is recognized to the extent of the costs incurred. Revenue in excess
of the costs attributable to unapproved change orders is not recognized until the change order is
approved. Contract costs include all direct material and labor costs and those indirect costs
related to contract performance. Changes in job performance, job conditions, and estimated
profitability, including those arising from contract penalty provisions, and final contract
settlements, may result in revisions to estimated costs and income, and are recognized in the
period in which the revisions are determined.
We extend credit to the governmental agencies we contract with and other parties in the normal
course of business as a result of billing and receiving payment for services thirty to sixty days
in arrears. Further, we regularly review outstanding receivables, and provide estimated losses
through an allowance for doubtful accounts. In evaluating the level of established loss reserves,
we make judgments regarding our customers ability to make required payments, economic events and
other factors. As the financial condition of these parties change, circumstances develop or
additional information becomes available, adjustments to the allowance for doubtful accounts may be
required. We also perform ongoing credit evaluations of our customers financial condition and
generally do not require collateral. We maintain reserves for potential credit losses, and such
losses traditionally have been within our expectations.
Reserve for Insurance Losses
We currently maintain a general liability policy for all U.S. corrections operations with limits of
$62.0 million per occurrence and in the aggregate. On October 1, 2004, we increased our deductible
on this general liability policy from $1.0 million to $3.0 million for each claim occurring after
October 1, 2004. GEO Care, Inc. is separately insured for general and professional liability.
Coverage is maintained with limits of $10.0 million per occurrence and in the aggregate subject to
a $3.0 million self-insured retention. We also maintain insurance to cover property and casualty
risks, workers compensation, medical malpractice, environmental liability and automobile
liability. Our Australian subsidiary is required to carry tail insurance on a general liability
policy providing an extended reporting period through 2011 related to a discontinued contract. We
also carry various types of insurance with respect to our operations in South Africa, United
Kingdom and Australia. There can be no assurance that our insurance coverage will be adequate to
cover all claims to which we may be exposed.
Since our insurance policies generally have high deductible amounts (including a $3.0 million per
claim deductible for general liability, $1.0 million per claim for auto liability and $2.0 million
per claim deductible for our workers compensation policy), losses are recorded when reported and a
further provision is made to cover losses incurred but not reported. Loss reserves are undiscounted
and are computed based on independent actuarial studies. If actual losses related to insurance
claims significantly differ from our estimates, our financial condition and results of operations
could be materially impacted.
Certain of our facilities located in Florida and determined by insurers to be in high-risk
hurricane areas carry substantial windstorm deductibles of up to $3.8 million. Since hurricanes are
considered unpredictable future events, no reserves have been established to pre-fund for potential
windstorm damage. Limited commercial availability of certain types of insurance relating to
windstorm exposure in coastal areas and earthquake exposure mainly in California may prevent us
from insuring our facilities to full replacement value.
Income Taxes
We account for income taxes in accordance with Financial Accounting Standards, or FAS, No. 109,
Accounting for Income Taxes. Under this method, deferred income taxes are determined based on the
estimated future tax effects of differences between the financial statement and tax bases of assets
and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and
benefits are based on changes to the assets or liabilities from year to year. Valuation allowances
are recorded related to deferred tax assets based on the more likely than not criteria of FAS
109.
In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we
operate, and estimates of future taxable income and available tax planning strategies. If tax
regulations, operating results or the ability to implement tax-planning strategies vary,
adjustments to the carrying value of deferred tax assets and liabilities may be required.
25
Property and Equipment
As of September 30, 2007, we had $740.4 million in long-lived property and equipment held for use.
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed
using the straight-line method over the estimated useful lives of the related assets. Buildings and
improvements are depreciated over 2 to 40 years. Equipment and furniture and fixtures are
depreciated over 3 to 10 years. Accelerated methods of depreciation are generally used for income
tax purposes. Leasehold improvements are amortized on a straight-line basis over the shorter of the
useful life of the improvement or the term of the lease. We perform ongoing evaluations of the
estimated useful lives of our property and equipment for depreciation purposes. The estimated
useful lives are determined and continually evaluated based on the period over which services are
expected to be rendered by the asset. Maintenance and repairs are expensed as incurred.
We review long-lived assets to be held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be fully recoverable in
accordance with FAS No. 144, (FAS 144) Accounting for the Impairment of Disposal of Long-Lived
Assets. Determination of recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss
for long-lived assets that management expects to hold and use is based on the fair value of the
asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair
value less costs to sell. Events that would trigger an impairment assessment include deterioration
of profits for a business segment that has long-lived assets, or when other changes occur which
might impair recovery of long-lived assets. Management has reviewed long-lived assets and
determined that there was an impairment to the intangible asset acquired in the 2005 CSC
acquisition as a result of the termination of the Dickens Correctional Center management contract
in July 2007. As of and for the thirteen week and thirty-nine week periods ended September 30,
2007, we wrote off $0.4 million, net of accumulated amortization of $0.1 million, of assets. This
amount is included in depreciation and amortization in the accompanying consolidated financial
statements and is included in the U.S. Corrections segment. There were no other events requiring
impairment loss recognition for the period ended September 30, 2007.
Stock-based Compensation Expense
We account for stock-based compensation in accordance with the provisions of SFAS 123R using the
modified prospective method. Under the fair value recognition provisions of SFAS 123R, stock-based
compensation cost is estimated at the grant date based on the fair value of the award and is
recognized as expense ratably over the requisite service period of the award. Determining the
appropriate fair value model and calculating the fair value of the stock-based awards, which
includes estimates of stock price volatility, forfeiture rates and expected lives, requires
judgment that could materially impact our operating results.
Commitments and Contingencies
Australia
Property Damage
In June 2004, we received notice of a third-party claim for property damage incurred during 2001
and 2002 at several detention facilities that our Australian subsidiary formerly operated. The
claim relates to property damage caused by detainees at the detention facilities. The notice
was given by the Australian governments insurance provider and did not specify the amount of
damages being sought. In August 2007, legal proceedings in this matter were formally commenced
when the Company was served with notice of a complaint filed against it by the Commonwealth of
Australia (the Plaintiff) seeking damages of up to AUS 18 million or $16 million. We believe
that we have several defenses to the allegations underlying the litigation and the amounts sought
and intend to vigorously defend our rights with respect to this matter. Although the outcome of
this matter cannot be predicted with certainty, based on information known to date and our
preliminary review of the claim, we believe that, if settled unfavorably, this matter could have
a material adverse effect on our financial condition, results of operations and cash flows.
Furthermore, we are unable to determine the losses, if any, that we will incur under the
litigation should the matter be resolved unfavorably to us. We are uninsured for any damages or
costs that we may incur as a result of this claim, including the expenses of defending the claim.
We have established a reserve based on our estimate of the most probable loss based on the facts
and circumstances known to date and the advice of our legal counsel in connection with this
matter.
Florida Department of Management Services Matter
On May 19, 2006, we, along with Corrections Corporation of America, referred to as CCA, were sued
by an individual plaintiff in the Circuit Court of the Second Judicial Circuit for Leon County,
Florida (Case No. 2005CA001884). The complaint alleged that, during the period from 1995 to 2004,
we and CCA over billed the State of Florida by an amount of at least $12.7 million by submitting
false claims to the State for various items under the management contracts at the our South Bay
and Moore Haven,
Florida correctional facilities. The complaint appeared to be largely based on the same set of
issues raised by a Florida Inspector Generals Evaluation Report released in late June 2005,
referred to below as the IG Report, which alleged that the we and CCA over billed the State of
Florida by over $12.0 million. On August 10, 2007, the plaintiff voluntarily dismissed to
lawsuit. No payment was made by us.
26
As a result of the set of issues raised by the Florida Inspector General, the Florida Department
of Management Services (DMS) conducted a detailed analysis of the allegations raised by the IG
Report which included a comprehensive written response to the IG Report prepared by us. In
September 2005, the DMS provided a letter to us stating that, although its review had not yet
been fully completed, it did not find any indication of any improper conduct. On October 17,
2006, DMS provided a letter to us stating that its review had been completed. We and DMS then
agreed to settle this matter for $0.3 million. This amount was accrued at December 31, 2006 and
paid in the first quarter of 2007. Subsequently, the Florida Department of Law Enforcement also
completed its investigation of this matter and found no wrongdoing on our behalf.
Texas Wrongful Death Action
On September 15, 2006, a jury in an inmate wrongful death lawsuit in a Texas state court awarded
a $47.5 million verdict against us. Recently, the verdict was entered as a judgment against us in
the amount of $51.7 million. The lawsuit is being administered under the insurance program
established by The Wackenhut Corporation, our former parent company, in which we participated
until October 2002. Policies secured by us under that program provide $55.0 million in aggregate
annual coverage. As a result, we believe that we are fully insured for all damages, costs and
expenses associated with the lawsuit and as such have not taken any reserves in connection with
the matter. The lawsuit stems from an inmate death which occurred at our former Willacy County
State Jail in Raymondville, Texas, in April 2001, when two inmates at the facility attacked
another inmate. Separate investigations conducted internally by us, The Texas Rangers and the
Texas Office of the Inspector General exonerated us and our employees of any culpability with
respect to the incident. We believe that the verdict is contrary to law and unsubstantiated by
the evidence. Our insurance carrier has posted a supersedeas bond in the amount of approximately
$60.0 million to cover the judgment. On December 9, 2006, the trial court denied our post trial
motions and we filed a notice of appeal on December 18, 2006. The appeal is proceeding.
Contracts
On April 26, 2007, we announced that the Federal Bureau of Prisons awarded a contract for the
management of the 2,048-bed Taft Correctional Institution, which we have managed since 1997, to
another private operator. The management contract, which was competitively re-bid, will be
transitioned to the alternative operator effective August 20, 2007. We do not expect the loss of
this contract to have a material adverse effect on our financial condition or results of
operations.
In
July 2007, we cancelled the Operations and Management contract with Dickens County
for the management of the 489-bed facility located in Spur, Texas. We
have operated the
management contract since the acquisition of CSC in
November 2005. We do not expect
that the termination of this contract, effective December 28, 2007, will have a significant
impact on our results of operations or cash flows.
Insurance claims
We maintain general liability insurance for property damages incurred, property operating costs
during downtimes, business interruption and incremental costs incurred during inmate
disturbances. In April 2007, we incurred significant damages at one of our managed-only
facilities in New Castle, Indiana as a result of a disturbance. The total amount of impairments,
losses recognized and expenses incurred has been recorded in the accompanying statements of
income as operating expenses and is offset by $1.1 million which we believe is probable of being
collected from our insurance carriers. When we and our insurance carrier agree on the final
amount of the insurance proceeds we are entitled to, we will also record any excess, should there
be any excess, in these accounts.
Construction Projects
Our total commitment for construction projects as of September 30, 2007 is approximately $230
million, of which approximately $48 million has been paid.
27
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our unaudited consolidated
financial statements and the
notes to our unaudited consolidated financial statements included in Part I, Item 1, of this
report.
Comparison of Thirteen Weeks Ended September 30, 2007 and Thirteen Weeks Ended October 1, 2006:
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
% of Revenue |
|
|
2006 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
U.S. Corrections |
|
$ |
169,369 |
|
|
|
63.4 |
% |
|
$ |
153,877 |
|
|
|
70.3 |
% |
|
$ |
15,492 |
|
|
|
10.1 |
% |
International Services |
|
|
33,510 |
|
|
|
12.6 |
% |
|
|
26,797 |
|
|
|
12.3 |
% |
|
|
6,713 |
|
|
|
25.1 |
% |
GEO Care |
|
|
30,943 |
|
|
|
11.6 |
% |
|
|
19,770 |
|
|
|
9.0 |
% |
|
|
11,173 |
|
|
|
56.5 |
% |
Other |
|
|
33,187 |
|
|
|
12.4 |
% |
|
|
18,465 |
|
|
|
8.4 |
% |
|
|
14,722 |
|
|
|
79.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
267,009 |
|
|
|
100.0 |
% |
|
$ |
218,909 |
|
|
|
100.0 |
% |
|
$ |
48,100 |
|
|
|
22.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Corrections
The increase in revenues for U.S. corrections facilities in the thirteen weeks ended September 30,
2007 (Third Quarter 2007) compared to the thirteen weeks ended October 1, 2006 (Third Quarter
2006) is primarily attributable to five items: (i) revenues increased $6.0 million in Third
Quarter 2007 due to increases in capacity at the Central Arizona Correctional Facility which was
completed in Forth Quarter 2006; (ii) revenues increased $3.1 million in Third Quarter 2007 as a
result of capacity increases in Lawton Correctional Facility located at Lawton, Oklahoma; (iii)
revenues increased $0.9 million in Third Quarter 2007 due to the commencement of our contract with
the Arizona Department of Corrections (ADOC) at our New Castle, Indiana facility in March 2007;
(iv) revenues increased $2.5 million in the Third Quarter 2007 as a result of the capacity
increases in August 2006 in our South Texas Detention Complex and capacity increases in December
2006 in our Northwest Detention Center located in Tacoma, Washington and (v) other revenue
increases due to contractual adjustments for inflation, and improved terms negotiated into a number
of contracts.
The number of compensated mandays in U.S. corrections facilities increased to 3.7 million in Third
Quarter 2007 from 3.4 million in Third Quarter 2006 due to the addition of new facilities and
capacity increases. We look at the average occupancy in our facilities to determine how we are
managing our available beds. The average occupancy is calculated by taking compensated mandays as a
percentage of capacity. The average occupancy in our U.S. correction and detention facilities was
96.4% of capacity in Third Quarter 2007 compared to 97.7% in Third Quarter 2006, excluding our
vacant Michigan and Jena facilities due in part to a delay in the ramp-up of the New Castle
contract.
International Services
The increase in revenues for international services facilities in the Third Quarter 2007 compared
to the Third Quarter 2006 was primarily attributable to the following items: (i) The United Kingdom
revenues increased approximately $2.1 million due to favorable exchange rates and a capacity
increase and increase in revenues from the acquisition of Recruitment Solutions International in
the Fourth Quarter of 2006; (ii) Australian revenues increased approximately $4.3 million due to
favorable fluctuations in foreign currency exchange rates during the period, contractual
adjustments for inflation, the three-year renewal of the contract for the Fulham Correctional
Centre at favorable terms and an increase of 50 beds at the Junee Correctional Centre; and (iii)
South African revenues increased by approximately $0.3 million due to contractual adjustments for
inflation and favorable exchange rates in the Third Quarter 2007.
The number of compensated mandays in international services facilities increased to 503,975 in
Third Quarter 2007 from 501,335 million in Third Quarter 2006. The average occupancy is calculated
by taking compensated mandays as a percentage of capacity. The average occupancy in our
international services facilities was 98.5% of capacity in both the Third Quarter 2007 and the
Third Quarter 2006.
GEO Care
The increase in revenues for GEO Care in the Third Quarter 2007 compared to the Third Quarter 2006
is primarily attributable to three items: (i) the Florida Civil Commitment Center in Arcadia,
Florida, which commenced operations in July 2006, contributed revenues
28
of $5.8 million, an increase of $1.9 over the same period last year; (ii) the Treasure Coast
Forensic Center in Martin County, Florida, which commenced operations in First Quarter 2007 and
increased revenues by $5.2 million; (iii) the South Florida Evaluation and Treatment Center
Annex in Miami, Florida which commenced operation in January 2007 increased revenues by $3.1
million.
Other
The increase in revenues from other activities is mainly due to an increase in construction
activities in the Third Quarter 2007 compared to the Third Quarter 2006 and is primarily
attributable to four items: (i) the construction of the Clayton Correctional facility located in
Clayton County, New Mexico, which commenced construction in September 2006 and increased revenues
by $15.6 million; (ii) the construction of the South Florida Evaluation and Treatment Center that
we are building in Miami, Florida, which commenced construction in November 2005 and increased
revenues by $8.1 million; (iii) the construction of the Florida Civil Commitment Center located in
Arcadia, Florida which commenced construction in November 2006 and increased revenues by $5.5
million offset by (iv) a reduction in the construction activity related to Graceville Correctional
Facility located in Graceville, Florida, which we commenced construction in February 2006 by $10.8
million.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Segment |
|
|
|
|
|
|
% of Segment |
|
|
|
|
|
|
|
|
|
2007 |
|
|
Revenue |
|
|
2006 |
|
|
Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
U.S. Corrections |
|
$ |
125,684 |
|
|
|
74.2 |
% |
|
$ |
122,581 |
|
|
|
79.7 |
% |
|
$ |
3,103 |
|
|
|
2.5 |
% |
International Services |
|
|
30,674 |
|
|
|
91.5 |
% |
|
|
24,013 |
|
|
|
89.6 |
% |
|
|
6,661 |
|
|
|
27.7 |
% |
GEO Care |
|
|
27,251 |
|
|
|
88.1 |
% |
|
|
16,921 |
|
|
|
85.6 |
% |
|
|
10,330 |
|
|
|
61.0 |
% |
Other |
|
|
32,903 |
|
|
|
99.1 |
% |
|
|
18,256 |
|
|
|
98.9 |
% |
|
|
14,647 |
|
|
|
80.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
216,512 |
|
|
|
81.1 |
% |
|
$ |
181,771 |
|
|
|
83.0 |
% |
|
$ |
34,741 |
|
|
|
19.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses consist of those expenses incurred in the operation and management of our
correctional, detention and mental health and GEO Care facilities. Expenses also include
construction costs which are included in Other.
U.S. Corrections
The increase in U.S. corrections operating expenses reflects the new openings and expansions
discussed above as well as general increases in labor costs and utilities. Operating expense as a
percentage of revenues decreased in Third Quarter 2007 compared to Third Quarter 2006 due to higher
margins at certain facilities as well as the overall increase in revenue during the Third Quarter
2007.
International Services
Operating expenses for international services facilities increased in the Third Quarter 2007
compared to the Third Quarter 2006 largely as a result of the June 2006 commencement of the
Campsfield House contract in the United Kingdom. The Campsfield House contract increased operating
expenses in the United Kingdom by $2.2 million. Australian operating expenses also increased by
$4.3 million mainly due to fluctuations in foreign currency exchange rates during the period as
well as additional staffing and expenses related to contract variations and South African operating
expenses increased $0.2 million for the Third Quarter 2007 compared to the Third Quarter 2006.
GEO Care
Operating expenses for residential treatment increased approximately $9.5 million during Third
Quarter 2007 from Third Quarter 2006 primarily due to the new contracts discussed above. Operating
expense as a percentage of revenues increased in Third Quarter 2007 as compared to Third Quarter
2006 primarily due to start-up costs related to new contracts at the Florida Civil Commitment
Center, Treasure Coast Forensic Center and the South Florida Evaluation and Treatment Center.
Other
Other increased $14.6 million during the Third Quarter 2007 compared to the Third Quarter 2006
primarily due to the four construction contracts discussed above.
29
Other Unallocated Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
% of Revenue |
|
|
2006 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
General and Administrative Expenses |
|
$ |
16,054 |
|
|
|
6.0 |
% |
|
$ |
14,073 |
|
|
|
6.4 |
% |
|
$ |
1,981 |
|
|
|
14.1 |
% |
General and administrative expenses comprise substantially all of our other unallocated expenses.
General and administrative expenses consist primarily of corporate management salaries and
benefits, professional fees and other administrative expenses. General and administrative expenses
increased by approximately $2.0 million in Third Quarter 2007 compared to Third Quarter 2006,
however decreased slightly as a percentage of revenues due to the overall increase in revenue
during Third Quarter 2007. The increase in general and administrative costs is mainly due to
increases in direct labor costs as a result of increased administrative staff.
Non Operating Expenses
Interest Income and Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
% of Revenue |
|
|
2006 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Interest Income |
|
$ |
2,296 |
|
|
|
0.9 |
% |
|
$ |
2,783 |
|
|
|
1.3 |
% |
|
$ |
(487 |
) |
|
|
(17.5 |
)% |
Interest Expense |
|
$ |
8,351 |
|
|
|
3.1 |
% |
|
$ |
6,587 |
|
|
|
3.0 |
% |
|
$ |
1,764 |
|
|
|
26.8 |
% |
The decrease in interest income is primarily due to lower average invested cash balances.
The increase in interest expense is primarily attributable to the increase in our debt as a result
of the CPT acquisition, as well as the increase in LIBOR rates.
Provision (Benefit) for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
% of Revenue |
|
|
2006 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Income Taxes |
|
$ |
7,385 |
|
|
|
2.8 |
% |
|
$ |
4,854 |
|
|
|
2.2 |
% |
|
$ |
2,531 |
|
|
|
52.1 |
% |
The income tax expense is based on an estimated annual effective tax rate of approximately 38% for
the Third Quarter 2007 and 2006.
Comparison of Thirty-nine Weeks Ended September 30, 2007 and Thirty-nine Weeks Ended October 1,
2006:
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
% of Revenue |
|
|
2006 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
U.S. corrections |
|
$ |
502,765 |
|
|
|
66.0 |
% |
|
$ |
451,358 |
|
|
|
73.6 |
% |
|
$ |
51,407 |
|
|
|
11.4 |
% |
International services |
|
|
95,672 |
|
|
|
12.6 |
% |
|
|
74,814 |
|
|
|
12.2 |
% |
|
|
20,858 |
|
|
|
27.9 |
% |
GEO Care |
|
|
82,590 |
|
|
|
10.8 |
% |
|
|
50,202 |
|
|
|
8.2 |
% |
|
|
32,388 |
|
|
|
64.5 |
% |
Other |
|
|
81,168 |
|
|
|
10.6 |
% |
|
|
37,104 |
|
|
|
6.0 |
% |
|
|
44,064 |
|
|
|
118.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
762,195 |
|
|
|
100.0 |
% |
|
$ |
613,478 |
|
|
|
100.0 |
% |
|
$ |
148,717 |
|
|
|
24.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Corrections
The increase in revenues for U.S. corrections facilities in the thirty-nine weeks ended September
30, 2007 (Nine Months 2007) compared to the thirty-nine weeks ended October 1, 2006 (Nine Months
2006) is primarily attributable to five items: (i) revenues increased $15.7 million in 2007 due to
the completion of the Central Arizona Correctional Facility at the end of 2006 in Florence,
Arizona; (ii) revenues increased $8.5 million in 2007 as a result of the capacity increase in
September 2006 in our Lawton Correctional Facility located at Lawton, Oklahoma; (iii) revenues
increased $5.5 million in 2007 as a result of the capacity increases in August 2006 in our South
Texas Detention Facility; and in December 2006 in our Northwest Detention Center, located at
Tacoma, Washington; (iv) revenues increased $1.2 million due to the commencement of our contract
with the Arizona Department of Corrections (ADOC) located in New Castle, Indiana in March 2007
and (v) revenues increased due to contractual adjustments for inflation, and improved terms
negotiated into a number of contracts.
30
The number of compensated mandays in U.S. corrections facilities increased to 11.0 million in Nine
Months 2007 from 9.9 million in Nine Months 2006 due to the addition of new facilities and capacity
increases. We look at the average occupancy in our facilities to determine how we are managing our
available beds. The average occupancy is calculated by taking compensated mandays as a percentage
of capacity. The average occupancy in our U.S. correction and detention facilities was 96.7% of
capacity in Nine Months 2007 compared to 97.2% in Nine Months 2006, excluding our vacant Michigan
and Jena facilities (reactivated June 2007).
International Services
The increase in revenues for international services facilities in the Nine Months 2007 compared to
the Nine Months 2006 was primarily due to following items: (i) South African revenues increased by
approximately $1.1 million due to a contractual adjustment for inflation; (ii) Australian revenues
increased approximately $10.6 million due to the overall favorable fluctuations in foreign currency
exchange rates during the period, contractual adjustments for inflation and improved terms; and
(iii) The United Kingdom revenues increased approximately $9.1 million due to favorable
fluctuations in foreign currency exchange rates, a construction project which began in Fourth
Quarter 2006 and the acquisition by our U.K. subsidiary of Recruitment Solutions International also
occurring in the Fourth Quarter 2006.
The number of compensated mandays in international services facilities remained constant at 1.5
million for Nine Months 2007 and Nine Months 2006. We look at the average occupancy in our
facilities to determine how we are managing our available beds. The average occupancy is calculated
by taking compensated mandays as a percentage of capacity. The average occupancy in our
international services facilities was 99.3% of capacity in Nine Months 2007 compared to 97.9% in
Nine Months 2006.
GEO Care
The increase in revenues for GEO Care in the Nine Months 2007 compared to the Nine Months 2006 is
primarily attributable to five items: (i) the Florida Civil Commitment Center in Arcadia, Florida,
which commenced in July 2006 and increased revenues of $12.5 million; (ii) the Treasure Coast
Forensic Center in Martin County, Florida, which commenced operations in First Quarter 2007 and
increased revenues by $9.5 million and (iii) the South Florida Evaluation and Treatment Center
Annex in Miami, Florida which commenced operation in January 2007 increased revenues by $6.8
million.
Other
The increase in revenues from other activities is mainly due to an increase in construction
activities in the Nine Months 2007 compared to the Nine Months 2006 and is primarily attributable
to four items: (i) the renovation of Treasure Coast Forensic Center located in Martin County,
Florida, which we commenced construction in March, 2007 increased revenue by $2.1 million; (ii) the
construction of the Clayton Correctional facility located in Clayton County, New Mexico, which
commenced construction in September 2006 and increased revenues by $29.1 million; (iii) the
construction of the expansion facility in the Florida Civil Commitment Center in Arcadia, Florida
increased revenues by $9.1 million and (iv) the construction of the South Florida Evaluation and
Treatment Center that we are building in Miami, Florida, which commenced construction in November
2005 and increased revenues by $17.0 million, offset by $9.8 million in decreased revenue for the
Graceville Correctional Facility in Graceville, FL which commenced construction in February 2006.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
% of Segment Revenue |
|
|
2006 |
|
|
% of Segment Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
U.S. Corrections |
|
$ |
376,395 |
|
|
|
74.9 |
% |
|
$ |
361,115 |
|
|
|
80.0 |
% |
|
$ |
15,280 |
|
|
|
4.2 |
% |
International Services |
|
|
86,526 |
|
|
|
90.4 |
% |
|
|
67,260 |
|
|
|
89.9 |
% |
|
|
19,266 |
|
|
|
28.6 |
% |
GEO Care |
|
|
73,997 |
|
|
|
89.6 |
% |
|
|
42,676 |
|
|
|
85.0 |
% |
|
|
31,321 |
|
|
|
73.4 |
% |
Other |
|
|
81,071 |
|
|
|
99.9 |
% |
|
|
36,881 |
|
|
|
99.4. |
% |
|
|
44,190 |
|
|
|
119.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
617,989 |
|
|
|
81.1 |
% |
|
$ |
507,932 |
|
|
|
82.8 |
% |
|
$ |
110,057 |
|
|
|
21.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses consist of those expenses incurred in the operation and management of our
correctional, detention and mental health and GEO Care facilities. Expenses also include
construction costs which are included in Other.
31
U.S. Corrections
The increase in U.S. corrections operating expenses reflects the new openings and expansions
discussed above as well as general
increases in labor costs and utilities. This increase was partially offset by a decrease of $1.1
million in Second Quarter 2007 related to certain contingencies established during purchase
accounting for CSC in 2005 that are no longer necessary. Operating expenses as a percentage of
revenues decreased in Nine Months 2007 compared to Nine Months 2006 due to higher margins at
certain facilities as well as the overall increase in revenue during the Nine Months 2007.
International Services
Operating expenses for international services facilities increased in the Nine Months 2007 compared
to the Nine Months 2006 largely as a result of the June 2006 commencement of the Campsfield House
contract in the United Kingdom. The Campsfield House contract increased operating expenses in the
United Kingdom by $8.7 million. Australian operating expenses also increased by $10.7 million
mainly due to unfavorable fluctuations in foreign currency exchange rates during the period as well
as additional staffing and expenses related to contract variations. South African operating
expenses decreased by $0.5 million for the Nine Months 2007 and the Nine Months 2006. Margins in
Australia were consistent with margins for the same period in 2006 while margins in South Africa
improved due to certain non-reoccurring costs incurred in the comparable period of the prior year
partially offset by inflating costs in the current period.
GEO Care
Operating expenses for residential treatment increased approximately $29.9 million during Nine
Months 2007 from Nine Months 2006 primarily due to the new contracts discussed above. Operating
expenses as a percentage of revenues increased in Nine Months 2007 compared to Nine Months 2006
primarily due to start-up costs related to the new contracts discussed above.
Other
Other expenses increased $44.2 million during the Nine Months 2007 compared to the Nine Months 2006
primarily due to the four construction contracts discussed above.
Other Unallocated Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
% of Revenue |
|
|
2006 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
General and Administrative Expenses |
|
$ |
46,849 |
|
|
|
6.1 |
% |
|
$ |
42,374 |
|
|
|
6.9 |
% |
|
$ |
4,475 |
|
|
|
10.6 |
% |
General and administrative expenses comprise substantially all of our other unallocated expenses.
General and administrative expenses consist primarily of corporate management salaries and
benefits, professional fees and other administrative expenses. General and administrative expenses
increased by $4.5 million in Nine Months 2007 compared to Nine Months 2006, however decreased
slightly as a percentage of revenues due to the overall increase in revenue during 2007. The
increase in general and administrative costs is mainly due to increases in direct labor costs as a
result of increased administrative staff.
Non Operating Expenses
Interest Income and Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
% of Revenue |
|
|
2006 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Interest Income |
|
$ |
6,536 |
|
|
|
0.9 |
% |
|
$ |
7,806 |
|
|
|
1.3 |
% |
|
$ |
(1,270 |
) |
|
|
(16.3 |
%) |
Interest Expense |
|
$ |
28,049 |
|
|
|
3.7 |
% |
|
$ |
21,995 |
|
|
|
3.6 |
% |
|
$ |
6,054 |
|
|
|
27.5 |
% |
The decrease in interest income is primarily due to lower average invested cash balances.
The increase in interest expense is primarily attributable to the increase in our debt as a result
of the CPT acquisition, as well as the increase in LIBOR rates.
Provision (Benefit) for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
% of Revenue |
|
|
2006 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Income Taxes |
|
$ |
17,530 |
|
|
|
2.3 |
% |
|
$ |
11,142 |
|
|
|
1.8 |
% |
|
$ |
6,388 |
|
|
|
57.3 |
% |
32
The income tax expense is based on an estimated annual effective tax rate for Nine Months 2007 and
2006 of approximately 38%.
Liquidity and Capital Resources
Capital Requirements
Our current cash requirements consist of amounts needed for working capital, debt service, supply
purchases, investments in joint ventures, and capital expenditures. Additional capital needs may
also arise in the future with respect to possible acquisitions, other corporate transactions or
other corporate purposes.
Capital expenditures currently comprise the largest component of our capital needs. Our business
requires us to make various capital expenditures from time to time, including expenditures related
to the development of new correctional, detention and/or mental health facilities, and expenditures
relating to the maintenance of existing facilities. In addition, some of our management contracts
require us to make substantial initial expenditures of cash in connection with opening or
renovating a facility. Generally, these initial expenditures are subsequently fully or partially
recoverable as pass-through costs or are billable as a component of the per diem rates or monthly
fixed fees to the contracting agency over the original term of the contract. However, we cannot
assure you that any of these expenditures will, if made, be recovered.
We believe that total capital expenditures for 2007 will range between $100 million and $120
million excluding maintenance capital expenditures, approximately $51 million of which we had
incurred as of September 30, 2007. In addition, based on current estimates, we anticipate that
capital expenditures excluding maintenance capital expenditures will range from $120.0 million to
$130.0 million during the next 12 months. These amounts include expenditures relating to the
following projects: (i) our construction of the 1,100-bed Aurora ICE Processing Center in Aurora,
Colorado for approximately $68.8 million, which is expected to be completed in the third quarter of
2009; (ii) our funding of the expansion of Delaney Hall, a facility which we own as a result of the
CPT acquisition but do not operate, for approximately $12.5 million, which is expected to be
completed in the first quarter 2008; (iii) our construction of the 1500-bed Rio Grande Detention
Center for approximately $85.9 million which is expected to completed in the third quarter of 2008;
(iv) our renovation of the 576-bed Robert A. Deyton Detention Facility in Clayton County, GA for
approximately $8.9 million; and (v) our 744-bed expansion of the 416 bed LaSalle Detention Facility
for approximately $32.1 million which is expected to be completed in the third quarter 2008.
Capital expenditures related to other potential facility expansions and facility maintenance costs
are expected to range between $20 million and $40 million.
Capital Sources
We plan to fund all of our capital needs, including our capital expenditures, from cash on hand,
cash from operations, borrowings under our Senior Credit Facility and any other financings which
our management and board of directors, in their discretion, may consummate.
With respect to our Senior Credit Facility, as of September 30, 2007, we had $163.2 million
outstanding under the Term Loan B, no amounts outstanding under the Revolver, $69.0 million
outstanding in letters of credit under the Revolver and $81.0 million available under the Revolver.
In addition, subject to certain conditions set forth in the Senior Credit Facility, we also have
the ability to borrow an additional aggregate amount of $150 million under the term loan portion of
our Senior Credit Facility. However, any such additional term loans are not required to be made
available under the terms of the Senior Credit Facility and would be subject to adequate lender
demand at the time of the loans. We cannot assure that such demand will in fact exist if we desire
to incur such additional term loans.
Our management believes that cash on hand, cash flows from operations and borrowings available
under our Senior Credit Facility will be adequate to support our currently identified capital needs
described above and to meet our various obligations incurred in the ordinary operation of our
business, both on a near and long-term basis. However, additional expansions of our business may
require additional financing from external sources. There is no assurance that such financing will
be available on satisfactory terms, or at all.
In addition to our sources of capital described above, we may, at the discretion of our senior
management and board of directors, consummate additional debt, equity or other financings on
satisfactory terms if we deem such financings to be in the best interest of the company. The
proceeds of such financings may be used for the corporate purposes identified above or for new
business purposes.
33
In the future, our access to capital could be significantly limited by the amount of our existing
indebtedness. As of September 30, 2007, we had $313.2 million of consolidated debt outstanding, excluding $144.6 million of
non-recourse debt and $69.0 million outstanding in letters of credit under our Revolver. Our
significant debt service obligations could, under certain circumstances, prevent us from accessing
additional capital necessary to sustain or grow our business. Additionally, our future access to
capital and our ability to compete for future capital-intensive projects will be dependent upon,
among other things, our ability to meet certain financial covenants in the indenture governing our
outstanding Notes and in our Senior Credit Facility. A decline in our financial performance could
cause us to breach our debt covenants, limit our access to capital and have a material adverse
affect on our liquidity and capital resources and, as a result, on our financial condition and
results of operations.
Executive Retirement Agreements
We have entered into three executive retirement agreements with our CEO and Chairman, President and
Vice Chairman, and Chief Financial Officer. These agreements provide each executive with a lump sum
payment upon retirement. Under the agreements, each executive may retire at any time after reaching
the age of 55. Each of the executives reached the eligible retirement age of 55 in 2005. None of
the executives has indicated their intent to retire as of this time. However, under the retirement
agreements, retirement may be taken at any time at the individual executives discretion. In the
event that all three executives were to retire in the same year, we believe we will have funds
available to pay the retirement obligations from various sources, including cash on hand, operating
cash flows or borrowings under our Revolver. Based on our current capitalization, we do not believe
that making these payments in any one period, whether in separate installments or in the aggregate,
would materially adversely impact our liquidity.
Description of Long-Term Debt and Derivative Financial Instruments
Senior Debt
The Senior Credit Facility
On January 24, 2007, we completed the refinancing of our Senior Credit Facility. The Company
intends to use future borrowings thereunder for general corporate purposes. As of September 30,
2007, we have $163.2 million outstanding under the Term Loan B, no amounts outstanding under the
Revolver, $69.0 million outstanding in letters of credit under the Revolver, and $81.0 million
available for borrowings under the Revolver.
Indebtedness under the Revolver bears interest in each of the instances below at the stated rate:
|
|
|
|
|
Interest Rate under the Revolver |
Borrowings
|
|
LIBOR plus 2.25% or base rate plus 1.25%. |
Letters of Credit
|
|
1.50% to 2.50%. |
Available Borrowings
|
|
0.38% to 0.05%. |
The Senior Credit Facility contains financial covenants which require us to maintain the following
ratios, as computed at the end of each fiscal quarter for the immediately preceding four
quarter-period:
|
|
|
Period |
|
Leverage Ratio |
Through December 30, 2008
|
|
Total leverage ratio £ 5.50 to 1.00 |
From December 31, 2008 through December 31, 2011
|
|
Reduces from 4.75 to 1.00, to 3.00 to 1.00 |
Through December 30, 2008
|
|
Senior secured leverage ratio £ 4.00 to 1.00 |
From December 31, 2008 through December 31, 2011
|
|
Reduces from 3.25 to 1.00, to 2.00 to 1.00 |
Four quarters ending June 29, 2008, to December 30, 2009
|
|
Fixed charge coverage ratio of 1.00, thereafter 1.10 to 1.00 |
All of the obligations under the Senior Credit Facility are unconditionally guaranteed by each of
our existing material domestic subsidiaries. The Senior Credit Facility and the related guarantees
are secured by substantially all of our present and future tangible and intangible assets and all
present and future tangible and intangible assets of each guarantor, including but not limited to
(i) a first-priority pledge of all of the outstanding capital stock owned by us and each guarantor,
and (ii) perfected first-priority security interests in all of our present and future tangible and
intangible assets and the present and future tangible and intangible assets of each guarantor.
The Senior Credit Facility contains certain customary representations and warranties, and certain
customary covenants that restrict our ability to, among other things (i) create, incur or assume
any indebtedness, (ii) incur liens, (iii) make loans and investments, (iv) engage in mergers,
acquisitions and asset sales, (v) sell its assets, (vi) make certain restricted payments, including
declaring any cash dividends or redeem or repurchase capital stock, except as otherwise permitted,
(vii) issue, sell or otherwise dispose of capital stock,
34
(viii) transact with affiliates, (ix) make changes in accounting treatment, (x) amend or modify the
terms of any subordinated indebtedness, (xi) enter into debt agreements that contain negative
pledges on its assets or covenants more restrictive than those contained in the Senior Credit
Facility, (xii) alter the business it conducts, and (xiii) materially impair our lenders security
interests in the collateral for its loans.
Events of default under the Senior Credit Facility include, but are not limited to, (i) our failure
to pay principal or interest when due, (ii) our material breach of any representation or warranty,
(iii) covenant defaults, (iv) bankruptcy, (v) cross default to certain other indebtedness, (vi)
unsatisfied final judgments over a specified threshold, (vii) material environmental claims which
are asserted against it, and (viii) a change of control.
Senior
8
1/4% Notes
To facilitate the completion of the purchase of the interest of the our former majority shareholder
in 2003, we issued $150.0 million aggregate principal amount, ten-year, 8 1/4% senior unsecured
notes, (the Notes). The Notes are general, unsecured, senior obligations. Interest is payable
semi-annually on January 15 and July 15 at 8 1/4%. The Notes are governed by the terms of an
Indenture, dated July 9, 2003, between us and the Bank of New York, as trustee, referred to as the
Indenture. Additionally, after July 15, 2008, we may redeem, at our option, all or a portion of the
Notes plus accrued and unpaid interest at various redemption prices ranging from 104.125% to
100.000% of the principal amount to be redeemed, depending on when the redemption occurs. The
Indenture contains covenants that limit our ability to incur additional indebtedness, pay dividends
or distributions on our common stock, repurchase our common stock, and prepay subordinated
indebtedness. The Indenture also limits our ability to issue preferred stock, make certain types of
investments, merge or consolidate with another company, guarantee other indebtedness, create liens
and transfer and sell assets.
Non-Recourse Debt
South Texas Detention Complex
We have a debt service requirement related to the development of the South Texas Detention
Complex. This detention center was acquired in November 2005 from Correctional Services
Corporation (CSC) who was awarded the contract in February 2004 by the Department of Homeland
Security, Bureau of Immigration and Customs Enforcement (ICE) for the development and operation
of a 1,020-bed detention complex in Frio County, Texas. In order to finance the construction of the
detention center, South Texas Local Development Corporation (STLDC) was created and issued $49.5
million in taxable revenue bonds. Additionally, CSC provided $5.0 million of subordinated notes to
STLDC for initial development.
STLDC is the owner of the complex and entered into a development agreement with CSC to oversee the
development of the complex. In addition, STLDC entered into an operating agreement providing CSC
the sole and exclusive right to operate and manage the complex. The operating agreement and bond
indenture require the revenue from CSCs contract with ICE be used to fund the periodic debt
service requirements as they become due. The net revenues, if any, after various expenses such as
trustee fees, property taxes and insurance premiums are distributed to CSC to cover operating
expenses and management fees. CSC is responsible for the entire operations of the facility
including all operating expenses and is required to pay all operating expenses whether or not there
are sufficient revenues. STLDC has no liabilities resulting from its ownership. The bonds have a
ten year term and are non-recourse to CSC and STLDC. The bonds are fully insured and the sole
source of payment for the bonds is the operating revenues of the
center. We have determined
that we are the primary beneficiary of STLDC and consolidate the entity as a result.
On February 1, 2007, we made a payment of $4.1 million for the current portion of our periodic debt
service requirement in relation to STLDC operating agreement and bond indenture. As of September
30, 2007, the remaining balance of the debt service requirement is $45.3 million, of which $4.3
million is due within next twelve months. Also as of September 30, 2007, $15.4 million is included
in non-current restricted as funds held in trust with respect to the STLDC for debt service and
other reserves.
Northwest Detention Center
On June 30, 2003, CSC arranged financing for the construction of the Northwest Detention Center in
Tacoma, Washington, referred to as the Northwest Detention Center, which CSC completed and opened
for operation in April 2004. In connection with this financing, CSC of Tacoma LLC, a wholly owned
subsidiary of CSC, issued a $57 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 to CSC of Tacoma LLC for
the purposes of constructing the Northwest Detention Center. The bonds are non-recourse to CSC and
the loan from WEDFA to CSC of Tacoma LLC is non-recourse to CSC.
35
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
September 30, 2007 in relation to the WEDFA bond indenture. As of September 30, 2007, the
remaining balance of the debt service requirement is $47.8 million, of which $5.1 is due within the
next 12 months.
Included in non-current restricted cash equivalents and investments is $6.7 million as of September
30, 2007 as funds held in trust with respect to the Northwest Detention Center for debt service and
other reserves.
Australia
In connection with the financing and management of one Australian facility, our wholly owned
Australian subsidiary financed the facilitys development and subsequent expansion in 2003 with
long-term debt obligations, which are non-recourse to us. As a condition of the loan, we are
required to maintain a restricted cash balance of AUD 5.0 million, which, at September 30, 2007,
was $4.4 million. The term of the non-recourse debt is through 2017 and it bears interest at a
variable rate quoted by certain Australian banks plus 140 basis points. Any obligations or
liabilities of the subsidiary are matched by a similar or corresponding commitment from the
government of the State of Victoria.
Guarantees
In connection with the creation of South African Custodial Services Ltd., referred to as SACS, we
entered into certain guarantees related to the financing, construction and operation of the prison.
We guaranteed certain obligations of SACS under its debt agreements up to a maximum amount of 60.0
million South African Rand, or approximately $8.8 million, to SACS senior lenders through the
issuance of letters of credit. Additionally, SACS is required to fund a restricted account for the
payment of certain costs in the event of contract termination. We have guaranteed the payment of
50% of amounts which may be payable by SACS into the restricted account and provided a standby
letter of credit of 7.0 million South African Rand, or approximately $1.0 million, as security for
our guarantee. Our obligations under this guarantee expire upon the release from SACS of its
obligations in respect of the restricted account under its debt agreements. No amounts have been
drawn against these letters of credit, which are included in our outstanding letters of credit
under our Revolver.
We have agreed to provide a loan, if necessary, of up to 20.0 million South African Rand, or
approximately $2.9 million, referred to as the Standby Facility, to SACS for the purpose of
financing the obligations under the contract between SACS and the South African government. No
amounts have been funded under the Standby Facility, and we do not currently anticipate that such
funding will be required by SACS in the future. Our obligations under the Standby Facility expire
upon the earlier of full funding or release from SACS of its obligations under its debt agreements.
The lenders ability to draw on the Standby Facility is limited to certain circumstances, including
termination of the contract.
We have also guaranteed certain obligations of SACS to the security trustee for SACS lenders. We
have secured our guarantee to the security trustee by ceding our rights to claims against SACS in
respect of any loans or other finance agreements, and by pledging our shares in SACS. Our liability
under the guarantee is limited to the cession and pledge of shares. The guarantee expires upon
expiration of the cession and pledge agreements.
In connection with a design, build, finance and maintenance contract for a facility in Canada, we
guaranteed certain potential tax obligations of a not-for-profit entity. The potential estimated
exposure of these obligations is CAN$2.5 million, or approximately $2.5 million, commencing in
2017. We have recorded a liability of approximately $0.7 million related to this exposure as of
September 30, 2007 and December 31, 2006. To secure this guarantee, we purchased Canadian dollar
denominated securities with maturities matched to the estimated tax obligations in 2017 to 2021. We
have recorded an asset and a liability equal to the current fair market value of those securities
on our balance sheet. We do not currently operate or manage this facility.
Our wholly-owned Australian subsidiary financed the development of a facility and subsequent
expansion in 2003, with long-term debt obligations, which are non-recourse to us and total $54.6
million and $50.0 million at September 30, 2007 and December 31, 2006, 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, we are required to maintain a restricted cash balance of AUD 5.0 million,
which, at September 30, 2007, was approximately $4.4 million. This amount is included in restricted
cash and the annual maturities of the future debt obligation is included in non-recourse debt.
36
At September 30, 2007, we also have outstanding seven letters of guarantee totaling approximately
$6.9 million under separate international facilities.
Derivatives
Effective September 18, 2003, we entered into interest rate swap agreements in the aggregate
notional amount of $50.0 million. We have designated the swaps as hedges against changes in the
fair value of a designated portion of the Notes due to changes in underlying interest rates.
Changes in the fair value of the interest rate swaps are recorded in earnings along with related
designated changes in the value of the Notes. The agreements, which have payment and expiration
dates and call provisions that coincide with the terms of the Notes, effectively convert $50.0
million of the Notes into variable rate obligations. Under the agreements, we receive a fixed
interest rate payment from the financial counterparties to the agreements equal to 8.25% per year
calculated on the notional $50.0 million amount, while we make a variable interest rate payment to
the same counterparties equal to the six-month London Interbank Offered Rate, (LIBOR) plus a
fixed margin of 3.45%, also calculated on the notional $50.0 million amount. As of September 30,
2007 and December 31, 2006 the fair value of liabilities associated with the swaps totaled
approximately $1.1 million and $1.7 million, respectively, and are included in other non-current
liabilities and as an adjustment to the carrying value of the Notes in the accompanying
consolidated balance sheets. There was no material ineffectiveness of our interest rate swaps for
the period ended September 30, 2007.
Our Australian subsidiary is a party to an interest rate swap agreement to fix the interest rate on
the variable rate non-recourse debt to 9.7%. We have determined the swap to be an effective
cash flow hedge. Accordingly, we record the value of the interest rate swap in accumulated other
comprehensive income, net of applicable income taxes. The total value of the swap asset as of
September 30, 2007 and as of December 31, 2006 was approximately $5.2 million and $3.2 million,
respectively, and was recorded as a component of other assets within the consolidated financial
statements. There was no material ineffectiveness of our interest rate swaps for the fiscal years
presented. We do not expect to enter into any transactions during the next twelve months which
would result in the reclassification into earnings or losses of amounts associated with this swap
which are currently reported in accumulated other comprehensive income.
Cash Flows
Cash and cash equivalents as of September 30, 2007 were $56.3 million, a decrease of $55.2 million
from December 31, 2006.
Cash provided by operating activities of continuing operations for the thirty-nine month period
ended September 30, 2007 increased to $41.4 million from $30.0 million for the thirty-nine month
period ended October 1, 2006. Cash provided by operating activities of continuing operations in
thirty-nine week period ending 2007 was positively impacted by non-cash charges to income for
depreciation and amortization offset by an increase in accounts receivable. Cash provided by
operating activities of continuing operations in the comparable period of the prior year was
positively impacted by increases in accounts payable and also by non-cash charges for depreciation
and amortization (although to a lesser extent than in 2007) offset by a negative impact due to an
increase in accounts receivable.
Cash used in investing activities amounted to $481.4 million in the Nine Months 2007 compared to
cash used in investing activities of $12.5 million in the Nine Months 2006. Cash used in investing
activities in the Nine Months 2007 primarily reflects capital expenditures of $68.0 million and the
acquisition of CPT, net of cash acquired of $410.4 million in addition to an increase in restricted
cash. Cash used in investing activities in the Nine Months 2006 primarily reflects capital
expenditures of $25.8 million and an increase in restricted cash of $7.3 million.
Cash provided by financing activities in the Nine Months 2007 amounted to $383.9 million compared
to cash provided by financing activities of $25.4 million in the Nine Months 2006. Cash provided by
financing activities in the Nine Months 2007 reflects proceeds received from an equity offering of
$227.5 million, borrowings of $380.0 million related to the CPT acquisition and payments on
long-term debt of $218.1 million. Cash provided by financing activities in the Nine Months 2006
reflects proceeds received from equity offering of $100.0 million and proceeds received from
employees for the exercise of stock options of $3.8 million offset by payments on long-term debt of
$76.1 million.
37
Outlook
The following discussion of our future performance contains statements that are not historical
statements and, therefore, constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Our forward-looking
statements are subject to risks and uncertainties that could cause actual results to differ
materially from those stated or implied in the forward-looking statement. Please refer to Item 2.
Managements Discussion and Analysis of Financial Condition and Results of
OperationsForward-Looking Information above, Item 1A. Risk Factors in our Annual Report on
Form 10-K, the Forward-Looking Statements Safe Harbor section in our Annual Report on Form
10-K, as well as the other disclosures contained in our Annual Report on Form 10-K, for further
discussion on forward-looking statements and the risks and other factors that could prevent us from
achieving our goals and cause the assumptions underlying the forward-looking statements and the
actual results to differ materially from those expressed in or implied by those forward-looking
statements.
With prison populations growing at 3% to 5% a year, the private corrections industry has played an
increasingly important role in addressing U.S. detention and correctional needs. The number of
State and Federal prisoners housed in private facilities increased 10.1% since mid-year 2005 with
states such as Texas, Indiana, Colorado and Florida accounting for more than half of the increase.
At June 2006, approximately 7.2% of the estimated 1.6 million State and Federal prisoners
incarcerated in the United States were held in private facilities, up from 6.5% in 2000. In
addition to our strong positions in Texas and Florida and in the U.S. market in general, we are the
only publicly traded U.S. correctional company with international operations. With the existing
operations in South Africa and Australia and the management of the 198-bed Campsfield House
Immigration Removal Centre in the United Kingdom beginning in the Second Quarter of 2006, we
believe that our international presence positions us to capitalize on growth opportunities within
the private corrections and detention industry in new and established international markets.
We intend to pursue a diversified growth strategy by winning new customers and contracts, expanding
our government services portfolio and pursuing selective acquisition opportunities. We achieve
organic growth through competitive bidding that begins with the issuance by a government agency of
a request for proposal, or RFP. We primarily rely on the RFP process for organic growth in our U.S.
and international corrections operations as well as in our mental health and residential treatment
services. We believe that our long operating history and reputation have earned us credibility with
both existing and prospective clients when bidding on new facility management contracts or when
renewing existing contracts. Our success in the RFP process has resulted in a pipeline of new
projects with significant revenue potential. In 2007, we announced 7 new contracts including a
contract to reactivate the LaSalle Detention Facility in Jena, Louisiana. The new contracts
represent 5,713 new beds. In addition, the Company has announced the expansion of 4
facilities in 2007 which will provide 1,778 additional beds. This compares to the 10
new projects announced in 2006 representing 4,934 new beds. In addition to pursuing organic growth
through the RFP process, we will from time to time selectively consider the financing and
construction of new facilities or expansions to existing facilities on a speculative basis without
having a signed contract with a known customer. We also plan to leverage our experience to expand
the range of government-outsourced services that we provide. We will continue to pursue selected
acquisition opportunities in our core services and other government services areas that meet our
criteria for growth and profitability.
Revenue
Domestically, we continue to be encouraged by the number of opportunities that have recently
developed in the privatized corrections and detention industry. The need for additional bed space
at the federal, state and local levels has been as strong as it has been at any time during recent
years, and we currently expect that trend to continue for the foreseeable future. Overcrowding at
corrections facilities in various states, most recently California and Arizona and increased demand
for bed space at federal prisons and detention facilities primarily resulting from government
initiatives to improve immigration security are two of the factors that have contributed to the
greater number of opportunities for privatization. We plan to actively bid on any new projects that
fit our target profile for profitability and operational risk. Although we are pleased with the
overall industry outlook, positive trends in the industry may be offset by several factors,
including budgetary constraints, unanticipated contract terminations and contract non-renewals. In
Michigan, the State cancelled our Michigan Youth Correctional Facility management contract in 2005
based upon the Governors veto of funding for the project. Although we do not expect this
termination to represent a trend, any future unexpected terminations of our existing management
contracts could have a material adverse impact on our revenues. Additionally, several of our
management contracts are up for renewal and/or re-bid in 2007. Although we have historically had a
relative high contract renewal rate, there can be no assurance that we will be able to renew our
management contracts scheduled to expire in 2007 on favorable terms, or at all.
Internationally, in the United Kingdom, we recently won our first contract since re-establishing
operations. We believe that additional opportunities will become available in that market and plan
to actively bid on any opportunities that fit our target profile for profitability and operational
risk. In South Africa, we continue to promote government procurements for the private development
and operation of one or more correctional facilities in the near future. We expect to bid on any
suitable opportunities.
38
With respect to our mental health/residential treatment services business conducted through our
wholly-owned subsidiary, GEO Care, Inc., we are currently pursuing a number of business development
opportunities. In addition, we continue to expend resources on
informing state and local governments about the benefits of privatization and we anticipate that
there will be new opportunities in the future as those efforts begin to yield results. We believe
we are well positioned to capitalize on any suitable opportunities that become available in this
area.
We currently have nine projects under various stages of construction with approximately 7,567 beds
that will become available upon completion. Subject to achieving our occupancy targets these
projects are expected to generate approximately $142 million dollars in combined annual operating
revenues when opened between the third quarter of 2007 and the First
Quarter of 2008. We believe
that these projects comprise the largest and most diversified organic growth pipeline in our
industry. In addition, we have approximately 730 additional empty beds available at two of our
facilities to meet our customers potential future needs for bed space.
Operating Expenses
Operating expenses consist of those expenses incurred in the operation and management of our
correctional, detention and mental health facilities. In 2006, operating expenses totaled
approximately 83.4% of our consolidated revenues. Our operating expenses as a percentage of revenue
in 2007 will be impacted by several factors. We could experience continued savings under our
general liability, auto liability and workers compensation insurance program, although the amount
of these potential savings cannot be predicted. These savings, which totaled $4.0 million in fiscal
year 2006 and are now reflected in our current actuarial projections, are a result of improved
claims experience and loss development as compared to our results under our prior insurance
program. In addition, as a result of our CPT acquisition, we will no longer incur lease expense
relating to the eleven facilities that we purchased in that transaction which we formerly leased
from CPT. However; we will have increased depreciation expense reflecting our ownership of the
properties and higher interest expense as a result of borrowings used to fund the acquisition. As a
result, our operating expenses will decrease by the aggregate amount of that lease expense, which
totaled $23.0 million in fiscal year 2006. These potential reductions in operating expenses may be
offset by increased start-up expenses relating to a number of new projects which we are developing,
including our new Graceville prison and Moore Haven expansion project in Florida, our Clayton
facility in New Mexico, our Lawton, Oklahoma prison expansion and our Florence West expansion
project in Arizona. Overall, excluding start-up expenses and the elimination of lease expense as a
result of the CPT acquisition, we anticipate that operating expenses as a percentage of our revenue
will remain relatively flat, consistent with our historical performance.
General and Administrative Expenses
General and administrative expenses consist primarily of corporate management salaries and
benefits, professional fees and other administrative expenses. We have recently incurred increasing
general and administrative costs including increased costs associated with increases in business
development costs, professional fees and travel costs, primarily relating to our mental health and
residential treatment services business. We expect this trend to continue as we pursue additional
business development opportunities in all of our business lines and build the corporate
infrastructure necessary to support our mental health and residential treatment services business.
We also plan to continue expending resources on the evaluation of potential acquisition targets.
Recent Accounting Developments
In February 2007, the Financial Accounting Standards Board (FASB) issued FAS No 159 (FAS 159),
Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to
choose to measure many financial instruments and certain other items at fair value. The objective
of FAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. The fair value option established by
FAS 159 permits all entities to choose to measure eligible items at fair value at specific election
dates. A business entity shall report unrealized gain or loss on items for which the fair value
option has been elected in earnings at each subsequent reporting date FAS 159 is effective for
fiscal years beginning after November 15, 2007. We are currently evaluating the impact this
standard will have on our financial condition, results of operations, cash flows or disclosures.
In September 2006, the FASB issued FAS No. 157 (FAS 157), Fair Value Measurements, which
establishes a framework for measuring fair value in accordance with GAAP and expands disclosures
about fair value measurements. FAS 157 does not require any new fair value measurements but rather
eliminates inconsistencies in guidance found in various prior accounting pronouncements. FAS 157 is
effective for fiscal years beginning after November 15, 2007. We are currently evaluating the
impact this standard will have on our financial condition, results of operations, cash flows or
disclosures.
39
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48). We adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on
January 1, 2007. Previously, we had accounted for tax
contingencies in accordance with Statement of Financial Accounting Standards 5, Accounting for
Contingencies. As required by FIN 48, which clarifies Statement 109, Accounting for Income Taxes,
we recognize the financial statement benefit of a tax position only after determining that the
relevant tax authority would more likely than not sustain the position following an audit. For tax
positions meeting the more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood of being realized
upon ultimate settlement with the relevant tax authority. At the adoption date, we applied FIN 48
to all tax positions for which the statute of limitations remained open. As a result of the
implementation of FIN 48, we recognized an increase of approximately a $2.5 million in the
liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1,
2007, balance of retained earnings.
The amount of unrecognized tax benefits as of January 1, 2007, was $5.7 million. That amount
includes $3.4 million of unrecognized tax benefits which, if ultimately recognized, will reduce our
annual effective tax rate. As a result of a South African tax law change enacted in February 2007,
a liability for unrecognized tax benefits in the amount of $2.4 million is no longer required
resulting in a material change in unrecognized tax benefits during the First Quarter 2007. The
reduction in the liability resulted in an increase to equity in earnings of affiliate for First
Quarter 2007. During Second and Third Quarters of 2007 there have been no material change to the
amount of unrecognized tax benefits.
We are subject to income taxes in the U.S. federal jurisdiction, and various states and foreign
jurisdictions. Tax regulations within each jurisdiction are subject to interpretation of the
related tax laws and regulations and require significant judgment to apply. With few exceptions, we
are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax
authorities for the years before 2002.
The Internal Revenue Service commenced an examination of our U.S. income tax returns for 2002
through 2004 in the third quarter of 2005 that is anticipated to be completed during 2008. We do
not expect to recognize any further significant changes to the total amount of unrecognized tax
benefits during the remaining quarters of the year.
In adopting FIN 48, we changed our previous method of classifying interest and penalties related to
unrecognized tax benefits as income tax expense to classifying interest accrued as interest expense
and penalties as operating expenses. Because the transition rules of FIN 48 do not permit the
retroactive restatement of prior period financial statements, our first quarter 2006 financial
statements continue to reflect interest and penalties on unrecognized tax benefits as income tax
expense. We accrued approximately $0.9 million for the payment of interest and penalties at January
1, 2007. Subsequent changes to accrued interest and penalties have not been significant.
Subsequently, in May 2007, the FASB published FSP FIN 48-1. FSP FIN 48-1 is an amendment to FIN 48.
It clarifies how an enterprise should determine whether a tax position is effectively settled for
the purpose of recognizing previously unrecognized tax benefits. As of our adoption date of FIN 48,
our accounting is consistent with the guidance in FSP FIN 48-1.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to market risks related to changes in interest rates with respect to our Senior
Credit Facility. Payments under the Senior Credit Facility are indexed to a variable interest rate.
Based on borrowings outstanding under the Term Loan B of our Senior Credit Facility of $163.2
million as of September 30, 2007, for every one percent increase in the interest rate applicable to
the Amended Senior Credit Facility, our total annual interest expense would increase by $1.6
million.
Effective September 18, 2003, we entered into interest rate swap agreements in the aggregate
notional amount of $50.0 million. We have designated the swaps as hedges against changes in the
fair value of a designated portion of the Notes due to changes in underlying interest rates.
Changes in the fair value of the interest rate swaps are recorded in earnings along with related
designated changes in the value of the Notes. The agreements, which have payment and expiration
dates and call provisions that coincide with the terms of the Notes, effectively convert $50.0
million of the Notes into variable rate obligations. Under the agreements, we receive a fixed
interest rate payment from the financial counterparties to the agreements equal to 8.25% per year
calculated on the notional $50.0 million amount, while we make a variable interest rate payment to
the same counterparties equal to the six-month LIBOR plus a fixed margin of 3.45%, also calculated
on the notional $50.0 million amount. Additionally, for every one percent increase in the interest
rate applicable to the $50.0 million swap agreements on the Notes described above, our total annual
interest expense will increase by $0.5 million.
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We have entered into certain interest rate swap arrangements for hedging purposes, fixing the
interest rate on our Australian non-recourse debt to 9.7%. The difference between the floating rate
and the swap rate on these instruments is recognized in interest expense within the respective
entity. Because the interest rates with respect to these instruments are fixed, a hypothetical 100
basis point change in the current interest rate would not have a material impact on our financial
condition or results of operations.
Additionally, we invest our cash in a variety of short-term financial instruments to provide a
return. These instruments generally consist of highly liquid investments with original maturities
at the date of purchase of three months or less. While these instruments are subject to interest
rate risk, a hypothetical 100 basis point increase or decrease in market interest rates would not
have a material impact on our financial condition or results of operations.
Foreign Currency Exchange Rate Risk
We are also exposed to market risks related to fluctuations in foreign currency exchange rates
between the U.S. dollar and the Australian dollar, the South African rand and the U.K. Pound
currency exchange rates. Based upon our foreign currency exchange rate exposure at September 30,
2007, every 10 percent change in historical currency rates would have approximately a $4.3 million
effect on our financial position and approximately a $0.8 million impact on our results of
operations over the next fiscal year.
Additionally, we invest our cash in a variety of short-term financial instruments to provide a
return. These instruments generally consist of highly liquid investments with original maturities
at the date of purchase of three months or less. While these instruments are subject to interest
rate risk, a hypothetical 100 basis point increase or decrease in market interest rates would not
have a material impact on our financial condition or results of operations.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
Our management, with the participation of our Chief Executive Officer and our Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
referred to as the Exchange Act), as of the end of the period covered by this report. On the basis
of this review, our management, including our Chief Executive Officer and our Chief Financial
Officer, has concluded that as of the end of the period covered by this report, our disclosure
controls and procedures were effective to give reasonable assurance that the information required
to be disclosed in our reports filed with the SEC under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms of the SEC, and to
ensure that the information required to be disclosed in the reports filed or submitted under the
Exchange Act is accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, in a manner that allows timely decisions regarding
required disclosure.
It should be noted that the effectiveness of our system of disclosure controls and procedures is
subject to certain limitations inherent in any system of disclosure controls and procedures,
including the exercise of judgment in designing, implementing and evaluating the controls and
procedures, the assumptions used in identifying the likelihood of future events, and the inability
to eliminate misconduct completely. Accordingly, there can be no assurance that our disclosure
controls and procedures will detect all errors or fraud. As a result, by its nature, our system of
disclosure controls and procedures can provide only reasonable assurance regarding managements
control objectives.
(b) Internal Control Over Financial Reporting.
Our management is responsible to report any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the period to which this report relates that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. Management believes that there
have not been any changes in our internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period to which this report
relates that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
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THE GEO GROUP, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Australia
Property Damage
In June 2004, we received notice of a third-party claim for property damage incurred during 2001
and 2002 at several detention facilities that our Australian subsidiary formerly operated. The
claim relates to property damage caused by detainees at the detention facilities. The notice was
given by the Australian governments insurance provider and did not specify the amount of damages
being sought. In August 2007, legal proceedings in this matter were formally commenced when the
Company was served with notice of a complaint filed against it by the Commonwealth of Australia
(the Plaintiff) seeking damages of up to approximately AUS 18 million or $16 million as of
September 30, 2007. We believe that we have several defenses to the allegations underlying the
litigation and the amounts sought and intend to vigorously defend our rights with respect to this
matter. Although the outcome of this matter cannot be predicted with certainty, based on
information known to date and our preliminary review of the claim, we believe that, if settled
unfavorably, this matter could have a material adverse effect on our financial condition, results
of operations and cash flows. Furthermore, we are unable to determine the losses, if any, that we
will incur under the litigation should the matter be resolved unfavorably to us. We are uninsured
for any damages or costs that we may incur as a result of this claim, including the expenses of
defending the claim. We have established a reserve based on our estimate of the most probable loss
based on the facts and circumstances known to date and the advice of our legal counsel in
connection with this matter. We have taken no further reserves for any potential losses since it
is not possible at this time to estimate the likelihood of loss or amount of potential exposure
based on the uncertainties with respect to this matter.
Florida Department of Management Services Matter
On
May 19, 2006, we along with Corrections Corporation of America, referred to as CCA,
was sued by an individual plaintiff in the Circuit Court of the Second Judicial Circuit for Leon
County, Florida (Case No. 2005CA001884). The complaint alleged that, during the period from 1995 to
2004, we and CCA over billed the State of Florida by an amount of at least $12.7 million
by submitting false claims to the State for various items under the management contracts at our South Bay and Moore Haven, Florida correctional facilities. The complaint appeared to be
largely based on the same set of issues raised by a Florida Inspector Generals Evaluation Report
released in late June 2005, referred to below as the IG Report,
which alleged that we and
CCA over billed the State of Florida by over $12.0 million. On August 10, 2007, the plaintiff
voluntarily dismissed the lawsuit without prejudice. No payment was
made by us.
As a result of the set of issues raised by the Florida Inspector General, the Florida Department of
Management Services (DMS) conducted a detailed analysis of the allegations raised by the IG
Report which included a comprehensive written response to the IG
Report prepared by us. In
September 2005, the DMS provided a letter to us stating that, although its review had not
yet been fully completed, it did not find any indication of any
improper conduct. On
October 17, 2006, DMS provided a letter to us stating that its review had been completed.
We and DMS then agreed to settle this matter for $0.3 million. This amount was accrued at
December 31, 2006 and paid in the first quarter of 2007. Subsequently, the Florida Department of
Law Enforcement also completed its investigation of this matter and
found no wrongdoing on our behalf.
Texas Wrongful Death Action
On September 15, 2006, a jury in an inmate wrongful death lawsuit in a Texas state court awarded a
$47.5 million verdict against us. Recently, the verdict was entered as a judgment against us in the
amount of $51.7 million. The lawsuit is being administered under the insurance program established
by The Wackenhut Corporation, our former parent company, in which we participated until October
2002. Policies secured by us under that program provide $55 million in aggregate annual coverage.
As a result, we believe we are fully insured for all damages, costs and expenses associated with
the lawsuit and as such we have not taken any reserves in connection with the matter. The lawsuit
stems from an inmate death which occurred at our former Willacy County State Jail in Raymondville,
Texas, in April 2001, when two inmates at the facility attacked another inmate. Separate
investigations conducted internally by us, The Texas Rangers and the Texas Office of the Inspector
General exonerated us and our employees of any culpability with respect to the incident. We believe
that the verdict is contrary to law and unsubstantiated by the evidence. Our insurance carrier has
posted a supersedeas bond in the amount of approximately $60 million to cover the judgment. On
December 9, 2006, the trial court denied our post trial motions and we filed a notice of appeal on
December 18, 2006. The appeal is proceeding.
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Other Legal Proceedings
The nature of our business exposes us to various types of claims or litigation against us,
including, but not limited to, civil rights claims relating to conditions of confinement and/or
mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice
claims, claims relating to employment matters (including, but not limited to, employment
discrimination claims, union grievances and wage and hour claims), property loss claims,
environmental claims, automobile liability claims, indemnification claims by our customers and
other third parties, contractual claims and claims for personal injury or other damages resulting
from contact with our facilities, programs, personnel or prisoners, including damages arising from
a prisoners escape or from a disturbance or riot at a facility. Except as otherwise disclosed
above, we do not expect the outcome of any pending claims or legal proceedings to have a material
adverse effect on our financial condition, results of operations or cash flows.
ITEM 1A. RISK FACTORS
There were no material changes to the risk factors previously disclosed in our Annual Report on
Form 10-K, for the fiscal year ended December 31, 2006, filed on March 2, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
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31.1
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Rule 13a-14(a) Certification in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.* |
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31.2
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Rule 13a-14(a) Certification in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.* |
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32.1
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
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32.2
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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THE GEO GROUP, INC.
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Date: November 9, 2007 |
/s/ John G. ORourke
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John G. ORourke |
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Senior Vice President, Chief Financial Officer
(Principal Financial Officer) |
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