The GEO Group, Inc.
The
information in this preliminary prospectus supplement and the
accompanying prospectus is not complete and may be changed. This
preliminary prospectus supplement and the accompanying
prospectus are not an offer to sell these securities and are not
soliciting an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted.
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Filed Pursuant to Rule 424(b)(5)
Registration
No. 333-111003
Subject to Completion, dated May 25,
2006
PROSPECTUS SUPPLEMENT
(To Prospectus dated January 28, 2004)
3,000,000 Shares
Common Stock
The GEO Group, Inc. is offering 3,000,000 of its shares of
common stock. The GEO Group, Inc. will receive all of the net
proceeds from the sale of its common stock.
Our common stock is quoted on the New York Stock Exchange under
the symbol GGI. On May 24, 2006, the last sale
price of our common stock as reported on the New York Stock
Exchange was $39.11 per share.
Investing in our common stock involves risks. See Risk
Factors beginning on page S-13 of this prospectus
supplement.
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We have granted the underwriters a 30-day option to purchase up
to an additional 450,000 shares from us on the same terms and
conditions as set forth above if the underwriters sell more than
3,000,000 shares of common stock in this offering.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus supplement or the
accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to
deliver the shares to purchasers on or
about ,
2006.
Lehman
Brothers
Banc
of America Securities LLC
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First
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2006
TABLE OF CONTENTS
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This document is in two parts. The first part is this prospectus
supplement, which describes the terms of the offering of our
common stock and also adds to and updates information contained
in the accompanying prospectus and the documents incorporated by
reference into this prospectus supplement or the accompanying
prospectus. The second part is the accompanying prospectus,
which gives more general information, some of which may not
apply to our common stock. To the extent there is a conflict
between the information contained in this prospectus supplement,
on the one hand, and the information contained in the
accompanying prospectus or any document incorporated by
reference as of the date of this prospectus supplement, on the
other hand, the information in this prospectus supplement shall
control. Unless otherwise expressly stated, all information in
this prospectus supplement assumes that the underwriters
option to purchase additional shares is not exercised.
S-i
You should rely only on the information contained or
incorporated by reference in this prospectus supplement and the
accompanying prospectus. Neither we nor any underwriter or agent
has authorized any other person to provide you with different or
additional information. If anyone provides you with different or
additional information, you should not rely on it. Neither we
nor any underwriter or agent is making an offer to sell our
common stock in any jurisdiction where the offer or sale is not
permitted. You should assume that the information contained or
incorporated by reference in this prospectus supplement and the
accompanying prospectus is accurate only as of the date of the
applicable document, regardless of the time of delivery of this
prospectus supplement or of any sale of our common stock. Our
business, financial condition, results of operations and
prospects may have changed since that date.
Statements contained in this prospectus supplement as to the
contents of any contract or other document are not complete, and
in each instance we refer you to the copy of the contract or
document filed or incorporated by reference as an exhibit to the
registration statement of which the accompanying prospectus
constitutes a part or to a document incorporated or deemed to be
incorporated by reference in the registration statement, each of
those statements being qualified in all respects by this
reference.
GEO is incorporated under the laws of the state of Florida. Our
principal executive offices are located at One Park Place,
Suite 700, 621 Northwest 53rd Street Boca Raton,
Florida 33487, and our telephone number at that address is
(561) 893-0101.
S-ii
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS AND MARKET AND STATISTICAL DATA
This prospectus supplement, the accompanying prospectus and the
documents incorporated or deemed to be incorporated by reference
in this prospectus supplement and the accompanying prospectus
contain forward-looking statements that involve risks and
uncertainties, including those discussed under the caption
Risk Factors. We develop forward-looking statements
by combining currently available information with our beliefs
and assumptions. These statements relate to future events,
including our future performance, and some of these statements
can be identified by the use of forward-looking terminology such
as believe, expect,
anticipate, intend,
contemplate, seek, plan,
estimate, will, may,
should and the negative or other variations of those
terms or comparable terminology or by discussion of strategy,
plans or intentions. Forward-looking statements do not guarantee
future performance, which may be materially different from that
expressed in, or implied by, any such statements. You should not
rely upon these statements as facts.
We make these statements under the protection afforded by
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. Because we cannot predict all of the risks and
uncertainties that may affect us, or control the ones we do
predict, these risks and uncertainties can cause our results to
differ materially from the results we express in our
forward-looking statements. We undertake no obligation to, and
expressly disclaim any such obligation to, update or revise any
forward-looking statements to reflect changed assumptions, the
occurrence of anticipated or unanticipated events, changes to
future results over time or otherwise.
The information in this prospectus supplement, the accompanying
prospectus and the documents incorporated or deemed to be
incorporated by reference in this prospectus supplement and the
accompanying prospectus concerning our industry, our market
position and similar matters, is derived principally from
publicly available information, industry publications, data
compiled by market research firms and similar sources. Although
we believe that this information is reliable, we have not
independently verified any of this information and, accordingly,
we cannot assure you that it is accurate.
Data presented herein regarding facilities in operation and
average occupancy levels excludes facilities which we own or
lease but which are currently inactive. See Risk
Factors Risks Related to Our Business and
Industry.
Data presented herein regarding the percentage of federal and
state inmates held in private facilities has been obtained from
publications by the U.S. Department of Justice, whose
calculations regarding such data do not include federal and
state prisoners held in local jails.
S-iii
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights selected information contained
elsewhere in this prospectus supplement or the accompanying
prospectus or the documents incorporated or deemed to be
incorporated by reference in this prospectus supplement and the
accompanying prospectus. This summary is not complete and does
not contain all of the information that you should consider
before deciding whether to invest in our shares of common stock.
You should read this entire prospectus supplement and the
accompanying prospectus and the documents incorporated and
deemed to be incorporated by reference in this prospectus
supplement and the accompanying prospectus, including the
Risk Factors section included in this prospectus
supplement and the financial statements and related notes
incorporated by reference herein, carefully before making an
investment decision. Unless this prospectus supplement expressly
indicates otherwise or the context otherwise requires the terms
we, our, us, GEO
and the Company refer to The GEO Group, Inc., its
consolidated subsidiaries and its unconsolidated affiliates.
Our Company
Overview
We are a leading provider of government-outsourced services
specializing in the management of correctional, detention,
mental health and residential treatment facilities in the United
States, Canada, Australia, South Africa and the United Kingdom.
We operate a broad range of correctional and detention
facilities including maximum, medium and minimum security
prisons, immigration detention centers and minimum security
detention centers. Our correctional and detention management
services involve the provision of security, administrative,
rehabilitation, education, health and food services, primarily
at adult male correctional and detention facilities. Our mental
health and residential treatment services, which are operated
through our wholly-owned subsidiary, GEO Care, Inc., involve the
delivery of quality care, innovative programming and active
patient treatment, primarily at privatized state mental health
facilities. We also develop new facilities based on contract
awards, using our project development expertise and experience
to design, construct and finance what we believe are
state-of-the-art
facilities that maximize security and efficiency.
We currently manage over 44,000 total beds with an average
facility occupancy rate of 97.0% for the quarter ended
April 2, 2006, and have an additional 4,583 beds currently
under development or pending commencement of operations. On
November 4, 2005 we completed the acquisition of
Correctional Services Corporation, or CSC. As a result of the
acquisition, we assumed the management of CSCs sixteen
adult correctional and detention facilities, totaling 8,037
beds. For the twelve months ended January 1, 2006, on a pro
forma basis assuming the CSC acquisition occurred on
January 3, 2005, we generated consolidated revenues of
$692.5 million. For the three months ended April 2,
2006, we generated consolidated revenues of $185.9 million.
The following depicts our revenue mix by business unit for the
year ended January 1, 2006 on a pro forma basis assuming
the CSC acquisition occurred on January 3, 2005:
S-1
The private corrections industry has played an increasingly
important role in addressing U.S. detention and
correctional needs over the past five years. Since year-end
2000, the number of federal inmates held at private correctional
and detention facilities has increased over 50 percent. At
midyear 2005, the private sector housed approximately 14.4% of
federal inmates. Approximately 57% of the estimated
2.2 million individuals incarcerated in the United States
at year-end 2004 were held in state prisons. At midyear 2005,
the private sector housed approximately 5.6% of all state
inmates.
In addition to our strong position in the U.S. market, we
are the only publicly traded U.S. correctional company with
international operations. We believe that our existing
international presence positions us to capitalize on growth
opportunities within the private corrections and detention
industry in new and established international markets.
We intend to pursue a diversified growth strategy by winning new
clients 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. Since March 2005, we have
announced seven new projects representing 4,583 beds. In
addition to pursuing organic growth through the RFP process, we
will from time to time selectively consider the financing and
construction of new facilities or expansions to existing
facilities on a speculative basis without having a signed
contract with a known client. 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.
Our business was founded in 1984 as a division of The Wackenhut
Corporation, or TWC, a multinational provider of global security
services. We were incorporated in 1988 as a wholly-owned
subsidiary of TWC. In July 1994, we became a publicly-traded
company. In 2002, TWC was acquired by Group 4 Falck A/ S,
which became our new parent company. In July 2003, we purchased
all of our common stock owned by Group 4 Falck A/ S and became
an independent company. In November 2003, we changed our
corporate name to The GEO Group, Inc. We currently
trade on the New York Stock Exchange under the ticker symbol
GGI.
Competitive Advantages
We believe we enjoy the following competitive advantages:
Established Long Term Relationships with High-Quality
Government Customers. We have developed long term
relationships with our government customers and have generally
been successful at retaining our facility management contracts.
We have provided correctional and detention management services
to the U.S. Federal Government for 19 years, the State
of California for 18 years, the State of Texas for
18 years, various Australian state government entities for
14 years and the State of Florida for 12 years. These
customers accounted for approximately 61% of our consolidated
revenues for the fiscal year ended January 1, 2006. Our
strong operating track record has enabled us to achieve a high
renewal rate for contracts, thereby providing us with a stable
source of revenue. During the past three years, we renewed
approximately 90% of the contracts that were scheduled for
renewal or expiration during that period. In addition, over the
same three-year period, we won approximately 59% of the total
number of beds for which we submitted RFPs.
Diverse, Full-Service Facility Developer and Operator. We
have developed comprehensive expertise in the design,
construction and financing of high quality correctional,
detention and mental health facilities. In addition, we have
extensive experience in overall facility operations, including
staff recruitment, administration, facility maintenance, food
service, healthcare, security, supervision, treatment and
education of inmates. We believe that the breadth of our service
offerings gives us the flexibility and resources to respond to
S-2
customers needs as they develop. We believe that the
relationships we foster when offering these additional services
also help us win new contracts and renew existing contracts.
Regional U.S. Operating Structure and Presence in Key
International Markets. We operate three regional
U.S. offices and three international offices that provide
administrative oversight and support to our correctional and
detention facilities and allow us to maintain close
relationships with our customers and suppliers. Each of our
three regional U.S. offices is responsible for the
facilities located within a defined geographic area. We believe
that our regional operating structure is unique within the U.S.
private corrections industry and provides us with the
competitive advantage of close proximity and direct access to
our customers and our facilities. We believe that this regional
structure has facilitated the rapid integration of CSCs
facilities into our operations. We also believe that our
regional structure and international offices will help with the
integration of any future acquisitions.
Experienced, Proven Senior Management Team. Our top three
senior executives have over 56 years of combined industry
experience, have worked together at our company for more than
15 years and have established a track record of growth and
profitability. Under their leadership, our annual consolidated
revenues have grown from $40.0 million in 1991 to
$612.9 million in 2005. Our Chief Executive Officer,
George C. Zoley, is one of the pioneers of the industry,
having developed and opened what we believe was one of the first
privatized detention facilities in the United States in 1986. In
addition to senior management, our operational and facility
level management has significant operational experience and
expertise.
Strategies
In order to strengthen our market position, enhance growth and
maximize our profitability and cash flow, we intend to:
Provide High Quality, Essential Services at Lower Costs.
Our objective is to provide federal, state and local
governmental agencies with high quality, essential services at a
lower cost than they themselves could achieve. We have developed
considerable expertise in the management of facility security,
administration, rehabilitation, education, health and food
services. Our quality is recognized through many accreditations
including that of the American Correctional Association, which
has certified facilities representing approximately 72% of our
U.S. corrections revenue as of year-end 2005.
Maintain Disciplined Operating Approach. We manage our
business on a contract by contract basis in order to maximize
our operating margins. We typically refrain from pursuing
contracts that we do not believe will yield attractive profit
margins in relation to the associated operational risks. In
addition, we generally do not engage in facility development
without having a corresponding management contract award in
place, although we may opt to do so in select situations when we
believe attractive business development opportunities may become
available at a given location. We have also elected not to enter
certain international markets with a history of economic and
political instability. We believe that our strategy of
emphasizing lower risk, higher profit opportunities helps us to
consistently deliver strong operational performance, lower our
costs and increase our overall profitability.
Expand Into Complementary Government-Outsourced Services.
We intend to capitalize on our long term relationships with
governmental agencies to become a more diversified provider of
government-outsourced services. These opportunities may include
services which leverage our existing competencies and expertise,
including the design, construction and management of large
facilities, the training and management of a large workforce and
our ability to service the needs and meet the requirements of
government clients. We believe that government outsourcing of
currently internalized functions will increase largely as a
result of the public sectors desire to maintain quality
service levels amid governmental budgetary constraints. We
believe that our successful expansion into the mental health and
residential treatment services sector is an example of our
ability to deliver higher quality services at lower costs in new
areas of privatization.
Pursue International Growth Opportunities. As a global
provider of privatized correctional services, we are able to
capitalize on opportunities to operate existing or new
facilities on behalf of foreign governments. We currently have
international operations in Australia, Canada, South Africa and
the United Kingdom. We
S-3
intend to further penetrate the current markets we operate in
and to expand into new international markets which we deem
attractive. For example, during the fourth quarter of 2004, we
opened an office in the United Kingdom to vigorously pursue new
business opportunities in England, Wales and Scotland. In March
2006, we entered into a contract to manage the operations of the
198-bed Campsfield House in Kidlington, United Kingdom. We
expect to begin operations under this contract in the second
quarter of 2006.
Selectively Pursue Acquisition Opportunities. We consider
acquisitions that are strategic in nature and enhance our
geographic platform on an ongoing basis. On November 4,
2005, we acquired CSC, bringing over 8,000 additional adult
correctional and detention beds under our management. We will
continue to review acquisition opportunities that may become
available in the future, both in the privatized corrections,
detention, mental health and residential treatment services
sectors, and in complementary government-outsourced services
areas.
Industry Trends
We are encouraged by the number of opportunities that have
recently developed in the privatized corrections and detention
industry. We believe growth in the market for our services will
benefit from the following factors:
Continued Growth of the U.S. Prison Inmate
Population. The number of inmates in the prison and jail
system in the United States has grown at an annual average
growth rate of 3.4% percent since 1995. The total number of
U.S. inmates in custody in federal and state prisons and
local jails is currently estimated at approximately
2.2 million. This sustained period of growth has been
driven by a number of factors including higher incarceration
rates and growth in the 14 to
24-year old population
that is typically at the highest risk with regard to potential
incarceration.
Illegal Immigration and Homeland Security Reform. Since
the events of 9/11, ongoing efforts by the United States
Department of Homeland Security to secure the nations
borders and capture and detain illegal aliens have increased
demand for cost efficient detention beds. President Bushs
proposed 2007 budget requests funding for 6,700 new immigration
detention beds for the Bureau of Immigration and Customs
Enforcement, and 9,500 new detainee beds for the United States
Marshals Service.
Greater Federal Government Acceptance of Privatized
Correctional Facilities. The number of federal prisoners
being held in private facilities has increased from 15,524 at
year-end 2000 to 26,544 at midyear 2005, representing a compound
annual growth rate of over 12%. Of the 39,068 new federal prison
beds that were added over that same period, we estimate that 28%
were awarded to the private sector.
Capacity Constraints of Public Correctional Systems.
State and federal correctional systems are experiencing
overcrowding conditions and tight budget constraints. At the end
of 2004, 24 state prison systems and the federal prison
system were operating at or above designed detention capacity.
The federal prison system, which includes the Bureau of Prisons,
the United States Marshals Service, the Department of Homeland
Security and the Bureau of Immigration and Customs Enforcement,
operated at 140% of design capacity at year-end 2004. As a
result, federal and state jurisdictions throughout the United
States are increasingly exploring partnerships with private
service providers as a cost effective alternative to the growth
of their public payrolls.
Aging State and Federal Correctional Facilities.
Approximately 50% of adult prisons currently in operation in the
United States are more than 30 years old and 25% to 30% of
the facilities are more than 60 years old. It is likely
that significant capital expenditures will be required in order
to refurbish or replace outdated facilities. We believe that
budget constraints will encourage prison agencies to explore
outsourcing to private operations as an alternative to capital
intensive projects such as prison construction.
Cost and Quality Advantages of Private Prisons. According
to several government and university studies, private prison
facilities operate at a lower cost than public sector
facilities. More than 50% of private facilities are accredited
by the American Corrections Association, referred to as ACA,
versus a lower percentage of public prisons. The ACAs
standards impose strict requirements with regard to
accountability, response time, level of quality, safety records
and general programs and services.
S-4
Growth of Privatization in International Markets. We
estimate that the capacity of privately managed adult secure
institutional facilities in operation worldwide increased from
approximately 60,000 beds at year end 1995 to approximately
179,000 beds at year-end 2005. The United Kingdom, Australia and
South Africa have growing prison markets. The United Kingdom is
the largest non-U.S. market for private prisons and through its
Private Finance Initiative indicated its intentions to increase
its reliance on private correctional facilities to accommodate
future inmate growth.
Corporate Information
Our principal executive offices are located at One Park Place,
Suite 700, 621 Northwest 53rd Street Boca Raton,
Florida 33487, and our telephone number at that address is
(561) 893-0101.
Our website is located at www.thegeogroupinc.com. The
information on our website is not part of this prospectus
supplement unless such information is specifically incorporated
herein.
Forward-Looking Statements
In addition to historical information, this prospectus
supplement and the accompanying prospectus and the documents
incorporated or deemed to be incorporated by reference herein or
therein contain certain statements that constitute
forward-looking statements within this meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. See Special Note Regarding Forward-Looking
Statements and Market Data beginning on page S-ii of this
prospectus supplement.
S-5
The Offering
Unless otherwise indicated, all of the information in this
prospectus supplement assumes no exercise of the
underwriters option to purchase additional shares of
common stock as described below.
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Common stock offered |
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3,000,000 shares |
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Common stock to be outstanding after the offering(1) |
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12,814,853 shares |
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Underwriters option |
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We have granted the underwriters a
30-day option to
purchase from us up to an aggregate of 450,000 additional shares
of our common stock if they sell more than 3,000,000 shares
in the offering. |
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Use of proceeds(2)(3) |
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We estimate that we will receive net proceeds from this offering
of approximately $110 million. We will retain broad
discretion over the use of the net proceeds from this offering.
We intend to use the net proceeds from this offering to repay
$74.6 million of existing indebtedness outstanding under
the term loan portion of our Senior Credit Facility and the
balance for general corporate purposes. |
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General corporate purposes may include working capital and
capital expenditures, as well as acquisitions of companies or
businesses in the government services sector that meet our
criteria for growth and profitability. We may also use proceeds
from this offering to invest in proprietary assets relating to
our business, including the development of new facilities, the
expansion of current facilities and/or the acquisition of
facilities or facility management contracts. In addition, we may
use up to $5.0 million of the proceeds from this offering
to purchase from certain of our executive officers and employees
stock options that are currently outstanding and exercisable.
Such purchases would be made at prices not exceeding the
in-the-money value of
the options, which is equal to the amount by which the market
price per share of our common stock at the time of the purchases
exceeds the exercise price per share of the options, multiplied
by the number of options being purchased. Pending application of
the net proceeds for these purposes, we intend to invest the net
proceeds in interest-bearing short-term investment grade
securities. |
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New York Stock Exchange symbol |
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GGI |
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Risk factors |
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An investment in our common stock involves a high degree of
risk. You should carefully consider the risk factors set forth
under Risk Factors beginning on page S-13 and
the other information contained in this prospectus supplement
prior to making an investment decision regarding our common
stock. |
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(1) |
The number of shares of common stock to be outstanding after
this offering is based on the number of shares of common stock
outstanding as of May 22, 2006 and does not include: |
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1,265,947 shares of common stock reserved and available for
issuance pursuant to stock options outstanding under our stock
plans as of May 22, 2006 at a weighted average exercise
price of $15.02 per share; |
S-6
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150,000 shares of common stock issued under restricted stock
awards granted pursuant to our stock plans on May 4, 2006,
which are scheduled to vest in equal annual increments over the
four-year period following the date of grant; and |
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150,000 shares of common stock reserved and available for
issuance as of May 22, 2006 under our stock plans. |
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(2) |
We estimate that we will receive approximately $126 million
in net proceeds from this offering if the underwriters exercise
their option to purchase additional shares in full, in each case
assuming a public offering price of $39.11 per share (the last
reported sale price of our common stock on the New York Stock
Exchange on May 24, 2006) and after deducting underwriting
discounts and commissions and estimated offering expenses
payable by us. |
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(3) |
We plan to write-off approximately $1.3 million in deferred
financing fees associated with the origination of the term loan
in connection with the repayment of indebtedness under the
Senior Credit Facility. |
S-7
Summary Selected Consolidated Financial Information and Other
Data
The following table sets forth our summary historical
consolidated financial information and other data. The
historical statement of operations and cash flow data for the
thirteen weeks ended April 2, 2006 and April 3, 2005
and for the fiscal years ended January 1, 2006,
January 2, 2005 and December 28, 2003 are derived
from, and should be read in conjunction with, our audited
consolidated financial statements and related notes appearing
elsewhere in this prospectus supplement. The results of
operations for the interim period are not necessarily indicative
of the operating results for the entire year or any future
period.
The information contained in this table should also be read in
conjunction with Use of Proceeds,
Capitalization, Managements Discussion
and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and
accompanying notes thereto, all included elsewhere in this
prospectus supplement.
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Apr. 2, 2006 | |
|
Apr. 3, 2005 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
|
|
(Dollars in thousands) | |
Revenues(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correction and detention facilities
|
|
$ |
169,876 |
|
|
$ |
136,339 |
|
|
$ |
572,109 |
|
|
$ |
546,952 |
|
|
$ |
519,246 |
|
|
Other
|
|
|
16,005 |
|
|
|
11,916 |
|
|
|
40,791 |
|
|
|
47,042 |
|
|
|
29,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
185,881 |
|
|
|
148,255 |
|
|
|
612,900 |
|
|
|
593,994 |
|
|
|
549,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
153,746 |
|
|
|
125,813 |
|
|
|
540,128 |
|
|
|
495,226 |
|
|
|
467,018 |
|
Depreciation and amortization
|
|
|
5,664 |
|
|
|
3,668 |
|
|
|
15,876 |
|
|
|
13,898 |
|
|
|
13,341 |
|
General and administrative expenses(2)
|
|
|
14,009 |
|
|
|
11,401 |
|
|
|
48,958 |
|
|
|
45,879 |
|
|
|
39,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
173,419 |
|
|
|
140,882 |
|
|
|
604,962 |
|
|
|
555,003 |
|
|
|
519,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
12,462 |
|
|
|
7,373 |
|
|
|
7,938 |
|
|
|
38,991 |
|
|
|
29,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,216 |
|
|
|
2,330 |
|
|
|
9,154 |
|
|
|
9,568 |
|
|
|
6,853 |
|
Interest expense
|
|
|
(7,579 |
) |
|
|
(5,454 |
) |
|
|
(23,016 |
) |
|
|
(22,138 |
) |
|
|
(17,896 |
) |
Write-off of deferred financing fees from extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(1,360 |
) |
|
|
(317 |
) |
|
|
(1,989 |
) |
Gain on sale of U.K. joint venture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses)
|
|
|
(5,363 |
) |
|
|
(3,124 |
) |
|
|
(15,222 |
) |
|
|
(12,887 |
) |
|
|
43,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes, minority interest, earnings in
affiliates and discontinued operations
|
|
|
7,099 |
|
|
|
4,249 |
|
|
|
(7,284 |
) |
|
|
26,104 |
|
|
|
72,562 |
|
Income tax expense (benefit)
|
|
|
2,693 |
|
|
|
1,723 |
|
|
|
(11,826 |
) |
|
|
8,231 |
|
|
|
36,852 |
|
Minority interest
|
|
|
(9 |
) |
|
|
(184 |
) |
|
|
(742 |
) |
|
|
(710 |
) |
|
|
(645 |
) |
Earnings in affiliates (net of income tax expense)
|
|
|
277 |
|
|
|
49 |
|
|
|
2,079 |
|
|
|
0 |
|
|
|
1,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
|
4,674 |
|
|
|
2,391 |
|
|
|
5,879 |
|
|
|
17,163 |
|
|
|
36,375 |
|
Income (loss) from discontinued operations, net of income
tax
|
|
|
(118 |
) |
|
|
505 |
|
|
|
1,127 |
|
|
|
(348 |
) |
|
|
3,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
4,556 |
|
|
$ |
2,896 |
|
|
$ |
7,006 |
|
|
$ |
16,815 |
|
|
$ |
40,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
9,700 |
|
|
|
9,525 |
|
|
|
9,580 |
|
|
|
9,384 |
|
|
|
15,618 |
|
Income from continuing operations
|
|
$ |
0.48 |
|
|
$ |
0.25 |
|
|
$ |
0.61 |
|
|
$ |
1.83 |
|
|
$ |
2.33 |
|
Income (loss) from discontinued operations
|
|
|
(0.01 |
) |
|
|
0.05 |
|
|
|
0.12 |
|
|
|
(0.04 |
) |
|
|
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic share
|
|
$ |
0.47 |
|
|
$ |
0.30 |
|
|
$ |
0.73 |
|
|
$ |
1.79 |
|
|
$ |
2.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
10,034 |
|
|
|
10,002 |
|
|
|
10,010 |
|
|
|
9,738 |
|
|
|
15,829 |
|
Diluted income per share -continued operations
|
|
$ |
0.46 |
|
|
$ |
0.24 |
|
|
$ |
0.59 |
|
|
$ |
1.77 |
|
|
$ |
2.30 |
|
Diluted income (loss) per share
|
|
|
(0.01 |
) |
|
|
0.05 |
|
|
|
0.11 |
|
|
|
(0.04 |
) |
|
|
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share
|
|
$ |
0.45 |
|
|
$ |
0.29 |
|
|
$ |
0.70 |
|
|
$ |
1.73 |
|
|
$ |
2.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended | |
|
Fiscal Years | |
|
|
| |
|
| |
|
|
Apr. 2, 2006 | |
|
Apr. 3, 2005 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
|
|
(Dollars in thousands) | |
Segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correction and detention facilities
|
|
$ |
11,353 |
|
|
$ |
7,276 |
|
|
$ |
7,646 |
|
|
$ |
38,092 |
|
|
$ |
27,952 |
|
|
Other
|
|
|
1,109 |
|
|
|
97 |
|
|
|
292 |
|
|
|
899 |
|
|
|
1,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$ |
12,462 |
|
|
$ |
7,373 |
|
|
$ |
7,938 |
|
|
$ |
38,991 |
|
|
$ |
29,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correction and detention facilities
|
|
$ |
5,564 |
|
|
$ |
3,600 |
|
|
$ |
15,617 |
|
|
$ |
13,672 |
|
|
$ |
13,237 |
|
|
Other
|
|
|
100 |
|
|
|
68 |
|
|
|
259 |
|
|
|
226 |
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$ |
5,664 |
|
|
$ |
3,668 |
|
|
$ |
15,876 |
|
|
$ |
13,898 |
|
|
$ |
13,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(3)(4)
|
|
|
18,294 |
|
|
|
11,395 |
|
|
|
22,902 |
|
|
|
51,514 |
|
|
|
101,889 |
|
Capital expenditures
|
|
|
7,432 |
|
|
|
1,841 |
|
|
|
31,465 |
|
|
|
10,235 |
|
|
|
6,791 |
|
Lease rental expense(5)
|
|
|
6,048 |
|
|
|
5,832 |
|
|
|
23,658 |
|
|
|
23,024 |
|
|
|
22,540 |
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
56,169 |
|
|
|
102,135 |
|
|
|
57,094 |
|
|
|
92,005 |
|
|
|
49,959 |
|
Current assets
|
|
|
236,398 |
|
|
|
215,948 |
|
|
|
229,292 |
|
|
|
222,766 |
|
|
|
191,811 |
|
Total assets
|
|
|
653,979 |
|
|
|
469,673 |
|
|
|
639,511 |
|
|
|
480,326 |
|
|
|
505,341 |
|
Current liabilities
|
|
|
149,418 |
|
|
|
106,571 |
|
|
|
136,519 |
|
|
|
117,478 |
|
|
|
118,854 |
|
Total debt
|
|
|
373,898 |
|
|
|
240,218 |
|
|
|
376,046 |
|
|
|
242,887 |
|
|
|
288,951 |
|
Total liabilities
|
|
|
538,530 |
|
|
|
366,929 |
|
|
|
530,917 |
|
|
|
380,587 |
|
|
|
428,016 |
|
Shareholders equity
|
|
|
115,449 |
|
|
|
102,744 |
|
|
|
108,594 |
|
|
|
99,739 |
|
|
|
77,325 |
|
Operational data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities in operation(6)
|
|
|
55 |
|
|
|
39 |
|
|
|
55 |
|
|
|
39 |
|
|
|
40 |
|
Design capacity of facilities(7)
|
|
|
48,661 |
|
|
|
36,581 |
|
|
|
48,370 |
|
|
|
35,981 |
|
|
|
36,014 |
|
Compensated resident mandays(8)
|
|
|
3,793,590 |
|
|
|
3,125,505 |
|
|
|
12,607,525 |
|
|
|
12,458,102 |
|
|
|
11,389,821 |
|
|
|
(1) |
On November 4, 2005, we completed the acquisition of
Correctional Services Corporation, a
Florida-based provider
of privatized jail, community corrections and alternative
sentencing services for approximately $62.1 million in
cash. Immediately following the purchase of CSC, we sold Youth
Services International, Inc., or YSI, the former juvenile
services division of CSC, for $3.75 million,
$1.75 million in cash and $2.0 million in promissory
note with an annual interest rate of 6%. The financial
information included in the tables for fiscal year 2005 reflects
the operations of CSC from November 4, 2005 through
January 1, 2006. The following unaudited pro forma
financial information combines our results of operations with
the results of operations of CSC as if the acquisition of CSC
had occurred on December 29, 2003, excluding the operations of
YSI for the same period: |
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Revenues
|
|
$ |
692,545 |
|
|
$ |
670,563 |
|
Income from continuing operations
|
|
$ |
5,719 |
|
|
$ |
21,662 |
|
Net income
|
|
$ |
4,402 |
|
|
$ |
9,571 |
|
Net income per share basic
|
|
$ |
0.46 |
|
|
$ |
1.02 |
|
Net income per share diluted
|
|
$ |
0.44 |
|
|
$ |
0.98 |
|
|
|
(2) |
Includes non-cash stock compensation expense of
$0.2 million for the thirteen weeks ended April 2,
2006 related to the implementation of Financial Accounting
Standards (FAS) No. 123(R). See
Note 3 Equity Incentive Plans in
the Unaudited Financial Statements for the thirteen weeks ended
April 12, 2006 and April 3, 2005, and
Note 1 Summary of Business Operations and
Significant Accounting Policies Accounting for Stock
Based Compensation in the Audited Financial Statements for
the fiscal years ended January 1, 2006, January 2,
2005 and December 28, 2003 for further discussion. |
|
(3) |
We define EBITDA as earnings before deducting interest, income
taxes, depreciation and amortization. We believe that EBITDA
provides useful and relevant information to our investors
because it is used by our management to evaluate the operating
performance of our business and compare our operating
performance with that of our competitors. Management also uses
EBITDA for planning purposes, |
S-9
|
|
|
including the preparation of annual operating budgets, and to
determine appropriate levels of operating and capital
investments. We utilize EBITDA as a useful alternative to net
income as an indicator of our operating performance. However,
EBITDA is not a measure of financial performance under GAAP and
should be considered in addition to, but not as a substitute
for, other measures of financial performance reported in
accordance with GAAP, such as net income. While we believe that
some of the items excluded from EBITDA are not indicative of our
core operating results, these items do impact our income
statement, and management therefore utilizes EBITDA as an
operating performance measure in conjunction with GAAP measures
such as net income. Because EBITDA excludes some, but not all,
items that affect net income, such as loss on extinguishment of
debt, and may vary among companies, EBITDA mentioned above may
not be comparable to similarly titled measures of other
companies. The following table reconciles EBITDA to net income
(loss), the most directly comparable GAAP measure. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended | |
|
Fiscal Years | |
|
|
| |
|
| |
|
|
Apr. 2, 2006(2) | |
|
Apr. 3, 2005 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
|
|
(Dollars in thousands) | |
Net income
|
|
$ |
4,556 |
|
|
$ |
2,896 |
|
|
$ |
7,006 |
|
|
$ |
16,815 |
|
|
$ |
40,019 |
|
|
Interest expense, net
|
|
|
5,363 |
|
|
|
3,124 |
|
|
|
13,862 |
|
|
|
12,570 |
|
|
|
11,043 |
|
|
Income tax expense (benefit)(9)
|
|
|
2,711 |
|
|
|
1,707 |
|
|
|
(13,842 |
) |
|
|
8,231 |
|
|
|
37,486 |
|
|
Depreciation and amortization
|
|
|
5,664 |
|
|
|
3,668 |
|
|
|
15,876 |
|
|
|
13,898 |
|
|
|
13,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(3)(4)
|
|
$ |
18,294 |
|
|
$ |
11,395 |
|
|
$ |
22,902 |
|
|
$ |
51,514 |
|
|
$ |
101,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
EBITDA includes the following items that, in managements
opinion, are not indicative of our core operating performance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended | |
|
Fiscal Years | |
|
|
| |
|
| |
|
|
Apr. 2, 2006 | |
|
Apr. 3, 2005 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
|
|
(Dollars in thousands) | |
Discontinued operations(10)
|
|
$ |
118 |
|
|
$ |
505 |
|
|
$ |
(1,127 |
) |
|
$ |
348 |
|
|
$ |
(3,644 |
) |
Australian insurance reserves(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,600 |
|
Gain on sale of UK joint venture(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,094 |
) |
Insurance reduction(13)
|
|
|
|
|
|
|
|
|
|
|
(1,300 |
) |
|
|
(4,150 |
) |
|
|
|
|
Jena, Louisiana write-offs(14)
|
|
|
|
|
|
|
|
|
|
|
4,255 |
|
|
|
3,000 |
|
|
|
5,000 |
|
Job reclassification expenses(15)
|
|
|
|
|
|
|
|
|
|
|
400 |
|
|
|
|
|
|
|
|
|
Michigan correctional facility write-off(16)
|
|
|
|
|
|
|
|
|
|
|
20,859 |
|
|
|
|
|
|
|
|
|
Queens, New York contract transitioning(17)
|
|
|
|
|
|
|
|
|
|
|
786 |
|
|
|
|
|
|
|
|
|
Start-up expenses at certain domestic facilities(18)
|
|
|
340 |
|
|
|
|
|
|
|
977 |
|
|
|
|
|
|
|
|
|
Write-off of acquisition costs(19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,306 |
|
|
|
|
|
Write-off of deferred financing fees(20)
|
|
|
|
|
|
|
|
|
|
|
1,360 |
|
|
|
317 |
|
|
|
1,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
458 |
|
|
$ |
505 |
|
|
$ |
26,210 |
|
|
$ |
821 |
|
|
$ |
(49,149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
Lease rental expense consists of rental expense under our
facility leases that are non-cancellable in the event of the
termination of the corresponding facility management contract. |
|
|
(6) |
Facilities in operation consists of facilities that we currently
operate pursuant to a facility management contract which
currently have an inmate/resident population. |
|
|
(7) |
Design capacity of facilities consists of the total maximum
number of beds for each facility as determined by the
architectural design of the facility, and includes facilities
under management and facilities for which we have received
contract awards but which have not yet opened. |
S-10
|
|
|
|
(8) |
Compensated resident mandays are calculated as follows: for per
diem rate facilities, the number of beds occupied by residents
on a daily basis during the period; and for fixed rate
facilities, the design capacity of the facility multiplied by
the number of days the facility was in operation during the
period. |
|
|
(9) |
Income tax expense (benefit) includes a one-time tax benefit of
$2.1 million taken in 2005 as a result of a change in South
African tax law, which is reflected on our income statement in
equity in earnings of affiliates, net of income tax provision
(benefit). |
|
|
(10) |
Discontinued operations consist, for all periods presented, of
the result of operations of (i) our former contract to
manage Australias immigration centers, which was
terminated in 2003, (ii) our former contract to manage the
Auckland Central Remand Prison in New Zealand, which was
terminated in 2005, and (iii) our former 72-bed private
mental health hospital, Atlantic Shores Hospital, which we sold
in January 2006. |
|
(11) |
This reserve was taken as a provision for operating losses
resulting from liability insurance expenses associated with the
transitioning of our former contract to manage Australias
immigration centers in 2003. |
|
(12) |
This gain was recorded when we sold our 50% interest in our
former joint venture in the United Kingdom in 2003. |
|
(13) |
This reduction in insurance reserves is attributable to improved
claims experience under our general liability and workers
compensation insurance program, which resulted in revised
actuarial loss projections in 2004 and 2005. |
|
(14) |
These write-offs were taken to cover operating losses relating
to lease expense associated with our inactive facility in Jena,
Louisiana in 2003, 2004 and 2005. |
|
(15) |
These costs were incurred in connection with the
reclassification of certain employees from salaried status into
hourly status in 2005. |
|
(16) |
This write-off is an impairment charge taken as a result of the
closure of our Michigan Youth Correctional Facility in October
2005. |
|
(17) |
These costs were incurred in 2005 in connection with the
transitioning of our facility in Queens, New York for use by the
United States Marshals Service. |
|
(18) |
These costs relate to start-up activity at several U.S.
facilities in 2005. |
|
(19) |
This write-off was taken in 2004 when we determined that the
potential acquisitions with respect to which we had incurred the
deferred acquisition costs were no longer probable. |
|
(20) |
These write-offs were attributable to the refinancing of our
Senior Credit Facility in 2003 and 2005, and the early repayment
of $43.0 million of the term loan portion of our credit
facility in 2004. |
S-11
RISK FACTORS
Investing in our common stock involves risks. You should
carefully consider the risks described below, as well as the
other information included in this prospectus supplement, the
accompanying prospectus and the documents incorporated and
deemed to be incorporated by reference in this prospectus
supplement and the accompanying prospectus, before you decide to
invest in our common stock. The risks described below replace
and supersede the risks described in the accompanying prospectus
under the heading Risk Factors in their entirety.
The risks and uncertainties described below are not the only
ones we face.
Risks Related to Our Business and Industry
|
|
|
We are subject to the termination or non-renewal of our
government contracts, which could adversely affect our results
of operations and liquidity, and our ability to secure new
facility management contracts from other government
customers. |
Governmental agencies may terminate a facility contract at any
time without cause or use the possibility of termination to
negotiate a lower fee for per diem rates. They also generally
have the right to renew facility contracts at their option.
Excluding the impact of customer renewal options, as of
May 19, 2006, five of our facility management contracts are
scheduled to expire on or before December 31, 2006. These
contracts represented 12.5% of our consolidated revenues for the
year ended January 1, 2006. Some or all of these contracts
may not be renewed by the corresponding governmental agency. See
Business Facilities. In addition,
governmental agencies may determine not to exercise renewal
options with respect to any of our contracts in the future. In
the event any of our management contracts are terminated or are
not renewed on favorable terms or otherwise, we may not be able
to obtain additional replacement contracts. The non-renewal or
termination of any of our contracts with governmental agencies
could materially adversely affect our financial condition,
results of operations and liquidity, and our ability to secure
new facility management contracts from other government
customers.
|
|
|
We will continue to be responsible for certain real
property payments even if our underlying facility management
contracts terminate, which could adversely affect our
profitability. |
Eleven of our facilities are leased from CentraCore Properties
Trust, an independent, publicly-traded REIT which we refer to as
CPV. These leases have an initial ten-year term with varying
renewal periods at our option, and an average remaining initial
term of 4.0 years. Our 2006 expected obligation for lease
payments under the eleven CPV leases is approximately
$25.8 million and our expected aggregate obligations after
2006 are approximately $114.4 million. The facility
management contracts underlying these leases generally have a
term ranging from one to five years, but are terminable by the
governmental entity at will. In the event that a facility
management contract is terminated or expires and is not renewed
prior to the expiration of the corresponding lease term for the
facility, we will continue to be liable to CPV for the related
lease payments. Because these lease payments would not be offset
by revenues from an active facility management contract, they
could represent a material ongoing loss. If we are unable to
find a replacement management contract or an alternative use for
the facility, the loss could continue until the expiration of
the lease term then in effect, which could adversely affect our
profitability.
During 2000, our management contract at the 276-bed Jena
Juvenile Justice Center in Jena, Louisiana was discontinued by
the mutual agreement of the parties. Despite the discontinuation
of the management contract, we remain responsible for payments
on our underlying lease of the inactive facility with CPV
through January 2010. During the third quarter 2005, we
determined that the alternative uses being pursued were no
longer probable and as a result we revised our estimated
sublease income and recorded an operating charge of
$4.3 million, representing our remaining obligation on the
lease through the contractual term of January 2010. However, we
plan to continue our efforts to reactivate the facility. The
Jena facility is the only lease with CPV for which we had no
corresponding management contract to operate as of
January 1, 2006.
S-12
|
|
|
The restructuring of our relationship with CPV may have
material adverse consequences. |
We recently announced our intention to restructure our
relationship with CPV, from whom we lease eleven of our
correctional and detention facilities, in an effort to reduce
our cost of capital for those facilities. At the same time, we
announced several key decisions that we have made with respect
to our relationship with CPV. For a detailed discussion of those
decisions, see Managements Discussion and Analysis
of Financial Condition and Results of Operations
Outlook Relationship with CPV.
The restructuring of our relationship poses several risks.
First, with respect to seven of our leases with CPV which are
scheduled to expire in April 2008, referred to as the Expiring
Leases, we are in the process of conducting a comprehensive
review of the possibility of developing replacement facilities
in close proximity to the facilities covered by the Expiring
Leases as a potential alternative to exercising our exclusive
option to renew the Expiring Leases. We may not be able to
successfully develop replacement facilities acceptable to our
government customers in sites proximate to those covered by the
Expiring Leases. If we do not develop replacement facilities, we
may be forced to renew some or all of the Expiring Leases,
potentially on terms less favorable to us than currently apply,
which could have a dilutive impact on our earnings. Even if we
are able to successfully develop replacement facilities, we
cannot assure that such development will be completed prior to
the expiration of the Expiring Leases, or at a cost of capital
that is lower than that which CPV currently provides us.
Further, if we opt not to renew some or all of the Expiring
Leases, CPV may lease the facilities we vacate to our
competitors or directly to some of our government customers,
which may cause us to either lose some of our facility
management contracts or to reduce our margins in order to retain
contracts.
With respect to the Right to Purchase Agreement between us and
CPV, CPV has claimed that the agreement gives it the right to
acquire certain of the facilities now under our management as a
result of the CSC acquisition. We do not believe that the Right
to Purchase Agreement gives CPV the right to acquire any of the
facilities involved in the CSC acquisition and intend to
vigorously defend our rights with respect to those facilities.
Nevertheless, in the event that CPV were to successfully
establish a claim to those facilities, or to any other
facilities that we may operate in the future, we may be forced
to sell and lease back such facilities from CPV. Any such
leasebacks could be completed at rates that are higher than
those which we currently pay to use the same facilities. Any
future sale/leaseback transactions with CPV at higher than then
prevailing market rates or our then current costs could have a
material adverse impact on financial condition and our results
of operations. The restructuring of our relationship with CPV
could also have unintended consequences, including causing
litigation between us and CPV, which could be costly and have a
negative impact on our stock price.
|
|
|
Our growth depends on our ability to secure contracts to
develop and manage new correctional and detention facilities,
the demand for which is outside our control. |
Our growth is generally dependent upon our ability to obtain new
contracts to develop and manage new correctional and detention
facilities, because contracts to manage existing public
facilities have not to date typically been offered to private
operators. Public sector demand for new facilities may decrease
and our potential for growth will depend on a number of factors
we cannot control, including overall economic conditions, crime
rates and sentencing patterns in jurisdictions in which we
operate, governmental and public acceptance of the concept of
privatization, and the number of facilities available for
privatization.
The demand for our facilities and services could be adversely
affected by the relaxation of criminal enforcement efforts,
leniency in conviction and sentencing practices, or through the
decriminalization of certain activities that are currently
proscribed by criminal laws. For instance, any changes with
respect to the decriminalization of drugs and controlled
substances or a loosening of immigration laws could affect the
number of persons arrested, convicted, sentenced and
incarcerated, thereby potentially reducing demand for
correctional facilities to house them. Similarly, reductions in
crime rates could lead to reductions in arrests, convictions and
sentences requiring incarceration at correctional facilities.
S-13
|
|
|
We may not be able to secure financing and land for new
facilities, which could adversely affect our results of
operations and future growth. |
In certain cases, the development and construction of facilities
by us is subject to obtaining construction financing. Such
financing may be obtained through a variety of means, including
without limitation, the sale of tax-exempt or taxable bonds or
other obligations or direct governmental appropriations. The
sale of tax-exempt or taxable bonds or other obligations may be
adversely affected by changes in applicable tax laws or adverse
changes in the market for tax-exempt or taxable bonds or other
obligations.
Moreover, certain jurisdictions, including California, where we
have a significant amount of operations, have in the past
required successful bidders to make a significant capital
investment in connection with the financing of a particular
project. If this trend were to continue in the future, we may
not be able to obtain sufficient capital resources when needed
to compete effectively for facility management contacts.
Additionally, our success in obtaining new awards and contracts
may depend, in part, upon our ability to locate land that can be
leased or acquired under favorable terms. Otherwise desirable
locations may be in or near populated areas and, therefore, may
generate legal action or other forms of opposition from
residents in areas surrounding a proposed site. Our inability to
secure financing and desirable locations for new facilities
could adversely affect our results of operations and future
growth.
|
|
|
We depend on a limited number of governmental customers
for a significant portion of our revenues. The loss of, or a
significant decrease in business from, these customers could
seriously harm our financial condition and results of
operations. |
We currently derive, and expect to continue to derive, a
significant portion of our revenues from a limited number of
governmental agencies. Of our 32 governmental customers, six
customers accounted for over 50% of our consolidated revenues
for the fiscal year ended January 1, 2006. In addition, the
three federal governmental agencies with correctional and
detention responsibilities, the Bureau of Prisons, the Bureau of
Immigration and Customs Enforcement, which we refer to as ICE,
and the Marshals Service, accounted for approximately 26.8% of
our total consolidated revenues for the fiscal year ended
January 1, 2006, with the Bureau of Prisons accounting for
approximately 11.5% of our total consolidated revenues for such
period, the Marshals Service accounting for approximately 9.8%
of our total consolidated revenues for such period, and ICE
accounting for approximately 5.5% of our total consolidated
revenues for such period. The loss of, or a significant decrease
in, business from the Bureau of Prisons, ICE or the
U.S. Marshals Service or any other significant customers
could materially adversely affect our financial condition and
results of operations. We expect to continue to depend upon
these federal agencies and a relatively small group of other
governmental customers for a significant percentage of our
revenues.
|
|
|
A decrease in occupancy levels could cause a decrease in
revenues and profitability. |
While a substantial portion of our cost structure is generally
fixed, a significant portion of our revenues is generated under
facility management contracts which provide for per diem
payments based upon daily occupancy. We are dependent upon the
governmental agencies with which we have contracts to provide
inmates for our managed facilities. We cannot control occupancy
levels at our managed facilities. Under a per diem rate
structure, a decrease in our occupancy rates could cause a
decrease in revenues and profitability. When combined with
relatively fixed costs for operating each facility, regardless
of the occupancy level, a decrease in occupancy levels could
have a material adverse effect on our profitability.
|
|
|
Competition for inmates may adversely affect the
profitability of our business. |
We compete with government entities and other private operators
on the basis of cost, quality and range of services offered,
experience in managing facilities, and reputation of management
and personnel. Barriers to entering the market for the
management of correctional and detention facilities may not be
sufficient to limit additional competition in our industry. In
addition, our government customers may assume the management of
a facility currently managed by us upon the termination of the
corresponding management contract or, if such customers have
capacity at the facilities which they operate, they may take
inmates
S-14
currently housed in our facilities and transfer them to
government operated facilities. Since we are paid on a per diem
basis with no minimum guaranteed occupancy under most of our
contracts, the loss of such inmates and resulting decrease in
occupancy would cause a decrease in both our revenues and our
profitability.
|
|
|
We are dependent on government appropriations, which may
not be made on a timely basis or at all. |
Our cash flow is subject to the receipt of sufficient funding of
and timely payment by contracting governmental entities. If the
contracting governmental agency does not receive sufficient
appropriations to cover its contractual obligations, it may
terminate our contract or delay or reduce payment to us. Any
delays in payment, or the termination of a contract, could have
a material adverse effect on our cash flow and financial
condition, which may make it difficult to satisfy our payment
obligations on our indebtedness, including our
81/4
% senior unsecured notes due 2013, which we refer to as
the Notes, and our senior credit facility, which we refer to as
the Senior Credit Facility, in a timely manner. The Governor of
the State of Michigans veto in October 2005 of
appropriations for our Michigan Correctional Facility in October
2005 is an example of this risk. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Commitments and Contingencies. In
addition, as a result of, among other things, recent economic
developments, federal, state and local governments have
encountered, and may continue to encounter, unusual budgetary
constraints. As a result, a number of state and local
governments are under pressure to control additional spending or
reduce current levels of spending. Accordingly, we may be
requested in the future to reduce our existing per diem contract
rates or forego prospective increases to those rates. In
addition, it may become more difficult to renew our existing
contracts on favorable terms or at all.
|
|
|
Public resistance to privatization of correctional and
detention facilities could result in our inability to obtain new
contracts or the loss of existing contracts, which could have a
material adverse effect on our business, financial condition and
results of operations. |
The management and operation of correctional and detention
facilities by private entities has not achieved complete
acceptance by either governments or the public. Some
governmental agencies have limitations on their ability to
delegate their traditional management responsibilities for
correctional and detention facilities to private companies and
additional legislative changes or prohibitions could occur that
further increase these limitations. In addition, the movement
toward privatization of correctional and detention facilities
has encountered resistance from groups, such as labor unions,
that believe that correctional and detention facilities should
only be operated by governmental agencies. Changes in dominant
political parties could also result in significant changes to
previously established views of privatization. Increased public
resistance to the privatization of correctional and detention
facilities in any of the markets in which we operate, as a
result of these or other factors, could have a material adverse
effect on our business, financial condition and results of
operations.
|
|
|
Adverse publicity may negatively impact our ability to
retain existing contracts and obtain new contracts. Our business
is subject to public scrutiny. |
Any negative publicity about an escape, riot or other
disturbance or perceived poor conditions at a privately managed
facility may result in publicity adverse to us and the private
corrections industry in general. Any of these occurrences or
continued trends may make it more difficult for us to renew
existing contracts or to obtain new contracts or could result in
the termination of an existing contract or the closure of one of
our facilities, which could have a material adverse effect on
our business.
|
|
|
We may incur significant
start-up and operating
costs on new contracts before receiving related revenues, which
may impact our cash flows and not be recouped. |
When we are awarded a contract to manage a facility, we may
incur significant
start-up and operating
expenses, including the cost of constructing the facility,
purchasing equipment and staffing the facility, before we
receive any payments under the contract. These expenditures
could result in a significant reduction in our cash reserves and
may make it more difficult for us to meet other cash
obligations, including our payment obligations on the Notes and
the Senior Credit Facility. In addition, a contract may be
terminated prior to its
S-15
scheduled expiration and as a result we may not recover these
expenditures or realize any return on our investment.
|
|
|
Failure to comply with extensive government regulation and
applicable contractual requirements could have a material
adverse effect on our business, financial condition or results
of operations. |
The industry in which we operate is subject to extensive
federal, state and local regulations, including educational,
environmental, health care and safety regulations, which are
administered by many regulatory authorities. Some of the
regulations are unique to the corrections industry, and the
combination of regulations affects all areas of our operations.
Facility management contracts typically include reporting
requirements, supervision and
on-site monitoring by
representatives of the contracting governmental agencies.
Corrections officers and juvenile care workers are customarily
required to meet certain training standards and, in some
instances, facility personnel are required to be licensed and
are subject to background investigations. Certain jurisdictions
also require us to award subcontracts on a competitive basis or
to subcontract with businesses owned by members of minority
groups. We may not always successfully comply with these and
other regulations to which we are subject and failure to comply
can result in material penalties or the non-renewal or
termination of facility management contracts. In addition,
changes in existing regulations could require us to
substantially modify the manner in which we conduct our business
and, therefore, could have a material adverse effect on us.
In addition, private prison managers are increasingly subject to
government legislation and regulation attempting to restrict the
ability of private prison managers to house certain types of
inmates, such as inmates from other jurisdictions or inmates at
medium or higher security levels. Legislation has been enacted
in several states, and has previously been proposed in the
United States House of Representatives, containing such
restrictions. Although we do not believe that existing
legislation will have a material adverse effect on us, future
legislation may have such an effect on us.
Governmental agencies may investigate and audit our contracts
and, if any improprieties are found, we may be required to
refund amounts we have received, to forego anticipated revenues
and we may be subject to penalties and sanctions, including
prohibitions on our bidding in response to Requests for
Proposals, or RFPs, from governmental agencies to manage
correctional facilities. Governmental agencies we contract with
have the authority to audit and investigate our contracts with
them. As part of that process, governmental agencies may review
our performance of the contract, our pricing practices, our cost
structure and our compliance with applicable laws, regulations
and standards. For contracts that actually or effectively
provide for certain reimbursement of expenses, if an agency
determines that we have improperly allocated costs to a specific
contract, we may not be reimbursed for those costs, and we could
be required to refund the amount of any such costs that have
been reimbursed. If a government audit asserts improper or
illegal activities by us, we may be subject to civil and
criminal penalties and administrative sanctions, including
termination of contracts, forfeitures of profits, suspension of
payments, fines and suspension or disqualification from doing
business with certain governmental entities. Any adverse
determination could adversely impact our ability to bid in
response to RFPs in one or more jurisdictions.
|
|
|
We may face community opposition to facility location,
which may adversely affect our ability to obtain new
contracts. |
Our success in obtaining new awards and contracts sometimes
depends, in part, upon our ability to locate land that can be
leased or acquired, on economically favorable terms, by us or
other entities working with us in conjunction with our proposal
to construct and/or manage a facility. Some locations may be in
or near populous areas and, therefore, may generate legal action
or other forms of opposition from residents in areas surrounding
a proposed site. When we select the intended project site, we
attempt to conduct business in communities where local leaders
and residents generally support the establishment of a
privatized correctional or detention facility. Future efforts to
find suitable host communities may not be successful. In many
cases, the site selection is made by the contracting
governmental entity. In such cases, site selection may be made
for reasons related to political and/or economic development
interests and may lead to the selection of sites that have less
favorable environments.
S-16
|
|
|
Our business operations expose us to various liabilities
for which we may not have adequate insurance. |
The nature of our business exposes us to various types of
third-party legal claims, including, but not limited to, civil
rights claims relating to conditions of confinement and/or
mistreatment, sexual misconduct claims brought by prisoners or
detainees, medical malpractice claims, claims relating to
employment matters (including, but not limited to, employment
discrimination claims, union grievances and wage and hour
claims), property loss claims, environmental claims, automobile
liability claims, contractual claims and claims for personal
injury or other damages resulting from contact with our
facilities, programs, personnel or prisoners, including damages
arising from a prisoners escape or from a disturbance or
riot at a facility. In addition, our management contracts
generally require us to indemnify the governmental agency
against any damages to which the governmental agency may be
subject in connection with such claims or litigation. We
maintain insurance coverage for these types of claims, except
for claims relating to employment matters. However, the
insurance we maintain to cover the various liabilities to which
we are exposed may not be adequate. Any losses relating to
matters for which we are either uninsured or for which we do not
have adequate insurance could have a material adverse effect on
our business, financial condition or results of operations. In
addition, any losses relating to employment matters could have a
material adverse effect on our business, financial condition or
results of operations.
Claims for which we are insured arising from our
U.S. operations that have an occurrence date of
October 1, 2002 or earlier are handled by TWC and are fully
insured up to an aggregate limit of between $25.0 million
and $50.0 million, depending on the nature of the claim.
With respect to claims for which we are insured arising after
October 1, 2002, we maintain a general liability policy for
all U.S. operations with $52.0 million per occurrence
and in the aggregate. On October 1, 2004, we increased our
deductible on this general liability policy from
$1.0 million to $3.0 million for each claim which
occurs after October 1, 2004. We also maintain insurance to
cover property and casualty risks, workers compensation,
medical malpractice and automobile liability. Our Australian
subsidiary is required to carry tail insurance through 2011
related to a discontinued contract. We also carry various types
of insurance with respect to our operations in South Africa and
Australia. There can be no assurance that our insurance coverage
will be adequate to cover claims to which we may be exposed.
Since our insurance policies generally have high deductible
amounts (including a $3.0 million per claim deductible
under our general liability policy), losses are recorded as
reported and a provision is made to cover losses incurred but
not reported. Loss reserves are undiscounted and are computed
based on independent actuarial studies. Our management uses
judgments in assessing loss estimates that are based on actual
claim amounts and loss development experience considering
historical and industry experience. If actual losses related to
insurance claims significantly differ from our estimates, our
financial condition and results of operations could be
materially adversely affected.
|
|
|
We may not be able to obtain or maintain the insurance
levels required by our government contracts. |
Our government contracts require us to obtain and maintain
specified insurance levels. The occurrence of any events
specific to our company or to our industry, or a general rise in
insurance rates, could substantially increase our costs of
obtaining or maintaining the levels of insurance required under
our government contracts, or prevent us from obtaining or
maintaining such insurance altogether. If we are unable to
obtain or maintain the required insurance levels, our ability to
win new government contracts, renew government contracts that
have expired and retain existing government contracts could be
significantly impaired, which could have a material adverse
affect on our business, financial condition and results of
operations.
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Our international operations expose us to risks which
could materially adversely affect our financial condition and
results of operations. |
For the fiscal year ended January 1, 2006 and the quarter
ended April 2, 2006, our international operations accounted
for approximately 16.1% and 12.4%, respectively, of our
consolidated revenues. We face risks associated with our
operations outside the U.S. These risks include, among
others, political and economic instability, exchange rate
fluctuations, taxes, duties and the laws or regulations in those
foreign
S-17
jurisdictions in which we operate. In the event that we
experience any difficulties arising from our operations in
foreign markets, our business, financial condition and results
of operations may be materially adversely affected.
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We conduct certain of our operations through joint
ventures, which may lead to disagreements with our joint venture
partners and adversely affect our interest in the joint
ventures. |
We conduct substantially all of our operations in South Africa
through joint ventures with third parties and may enter into
additional joint ventures in the future. Our joint venture
agreements generally provide that the joint venture partners
will equally share voting control on all significant matters to
come before the joint venture. Our joint venture partners may
have interests that are different from ours which may result in
conflicting views as to the conduct of the business of the joint
venture. In the event that we have a disagreement with a joint
venture partner as to the resolution of a particular issue to
come before the joint venture, or as to the management or
conduct of the business of the joint venture in general, we may
not be able to resolve such disagreement in our favor and such
disagreement could have a material adverse effect on our
interest in the joint venture or the business of the joint
venture in general.
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We are dependent upon our senior management and our
ability to attract and retain sufficient qualified
personnel. |
We are dependent upon the continued service of each member of
our senior management team, including George C. Zoley, our
Chairman and Chief Executive Officer, Wayne H. Calabrese, our
Vice Chairman and President, and John G. ORourke, our
Chief Financial Officer. Under the terms of their retirement
agreements, each of these executives is currently eligible to
retire at any time from GEO and receive significant lump sum
retirement payments. The unexpected loss of any of these
individuals could materially adversely affect our business,
financial condition or results of operations. We do not maintain
key-man life insurance to protect against the loss of any of
these individuals.
In addition, the services we provide are labor-intensive. When
we are awarded a facility management contract or open a new
facility, we must hire operating management, correctional
officers and other personnel. The success of our business
requires that we attract, develop and retain these personnel.
Our inability to hire sufficient qualified personnel on a timely
basis or the loss of significant numbers of personnel at
existing facilities could have a material effect on our
business, financial condition or results of operations.
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Our profitability may be materially adversely affected by
inflation. |
Many of our facility management contracts provide for fixed
management fees or fees that increase by only small amounts
during their terms. While a substantial portion of our cost
structure is generally fixed, if, due to inflation or other
causes, our operating expenses, such as costs relating to
personnel, utilities, insurance, medical and food, increase at
rates faster than increases, if any, in our facility management
fees, then our profitability could be materially adversely
affected.
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Various risks associated with the ownership of real estate
may increase costs, expose us to uninsured losses and adversely
affect our financial condition and results of operations. |
Our ownership of correctional and detention facilities subjects
us to risks typically associated with investments in real
estate. Investments in real estate, and in particular,
correctional and detention facilities, are relatively illiquid
and, therefore, our ability to divest ourselves of one or more
of our facilities promptly in response to changed conditions is
limited. Investments in correctional and detention facilities,
in particular, subject us to risks involving potential exposure
to environmental liability and uninsured loss. Our operating
costs may be affected by the obligation to pay for the cost of
complying with existing environmental laws, ordinances and
regulations, as well as the cost of complying with future
legislation. In addition, although we maintain insurance for
many types of losses, there are certain types of losses, such as
losses from earthquakes, riots and acts of terrorism, which may
be either uninsurable or for which it may not be
S-18
economically feasible to obtain insurance coverage, in light of
the substantial costs associated with such insurance. As a
result, we could lose both our capital invested in, and
anticipated profits from, one or more of the facilities we own.
Further, even if we have insurance for a particular loss, we may
experience losses that may exceed the limits of our coverage.
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Risks related to facility construction and development
activities may increase our costs related to such
activities. |
When we are engaged to perform construction and design services
for a facility, we typically act as the primary contractor and
subcontract with other companies who act as the general
contractors. As primary contractor, we are subject to the
various risks associated with construction (including, without
limitation, shortages of labor and materials, work stoppages,
labor disputes and weather interference) which could cause
construction delays. In addition, we are subject to the risk
that the general contractor will be unable to complete
construction at the budgeted costs or be unable to fund any
excess construction costs, even though we typically require
general contractors to post construction bonds and insurance.
Under such contracts, we are ultimately liable for all late
delivery penalties and cost overruns.
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The rising cost and increasing difficulty of obtaining
adequate levels of surety credit on favorable terms could
adversely affect our operating results. |
We are often required to post performance bonds issued by a
surety company as a condition to bidding on or being awarded a
facility development contract. Availability and pricing of these
surety commitments is subject to general market and industry
conditions, among other factors. Recent events in the economy
have caused the surety market to become unsettled, causing many
reinsurers and sureties to reevaluate their commitment levels
and required returns. As a result, surety bond premiums
generally are increasing. If we are unable to effectively pass
along the higher surety costs to our customers, any increase in
surety costs could adversely affect our operating results. In
addition, we may not continue to have access to surety credit or
be able to secure bonds economically, without additional
collateral, or at the levels required for any potential facility
development or contract bids. If we are unable to obtain
adequate levels of surety credit on favorable terms, we would
have to rely upon letters of credit under our Senior Credit
Facility, which would entail higher costs even if such borrowing
capacity was available when desired, and our ability to bid for
or obtain new contracts could be impaired.
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We may not be able to successfully identify, consummate or
integrate acquisitions. |
We have an active acquisition program, the objective of which is
to identify suitable acquisition targets that will enhance our
growth. The pursuit of acquisitions may pose certain risks to
us. We may not be able to identify acquisition candidates that
fit our criteria for growth and profitability. Even if we are
able to identify such candidates, we may not be able to acquire
them on terms satisfactory to us. We will incur expenses and
dedicate attention and resources associated with the review of
acquisition opportunities, whether or not we consummate such
acquisitions. Additionally, even if we are able to acquire
suitable targets on agreeable terms, we may not be able to
successfully integrate their operations with ours. We may also
assume liabilities in connection with acquisitions that we would
otherwise not be exposed to.
Risks Related to Our High Level of Indebtedness
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Our significant level of indebtedness could adversely
affect our financial condition and prevent us from fulfilling
our debt service obligations. |
We have a significant amount of indebtedness. Assuming the
repayment of $74.6 million of existing indebtedness
outstanding under the term loan portion of our Senior Credit
Facility with the proceeds from this offering, our total
consolidated long-term indebtedness immediately following this
offering will be $144.4 million, excluding non recourse
debt of $136.9 million. In addition, as of April 2,
2006, we had $46.5 million outstanding in letters of credit
under the revolving loan portion of our Senior Credit Facility.
As a result, as of that date, we would have had the ability to
borrow an additional approximately
S-19
$53.5 million under the revolving loan portion of our
Senior Credit Facility, subject to our satisfying the relevant
borrowing conditions under the Senior Credit Facility with
respect to the incurrence of additional indebtedness.
Our substantial indebtedness could have important consequences.
For example, it could:
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require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby
reducing the availability of our cash flow to fund working
capital, capital expenditures, and other general corporate
purposes; |
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate; |
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increase our vulnerability to adverse economic and industry
conditions; |
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place us at a competitive disadvantage compared to competitors
that may be less leveraged; and |
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limit our ability to borrow additional funds or refinance
existing indebtedness on favorable terms. |
If we are unable to meet our debt service obligations, we may
need to reduce capital expenditures, restructure or refinance
our indebtedness, obtain additional equity financing or sell
assets. We may be unable to restructure or refinance our
indebtedness, obtain additional equity financing or sell assets
on satisfactory terms or at all. In addition, our ability to
incur additional indebtedness will be restricted by the terms of
our Senior Credit Facility and the indenture governing our
outstanding Notes.
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Despite current indebtedness levels, we may still incur
more indebtedness, which could further exacerbate the risks
described above. Future indebtedness issued pursuant to our
universal shelf registration statement could have rights
superior to those of our existing or future indebtedness. |
The terms of the indenture governing the Notes and our Senior
Credit Facility restrict our ability to incur but do not
prohibit us from incurring significant additional indebtedness
in the future. In addition, we may refinance all or a portion of
our indebtedness, including borrowings under our Senior Credit
Facility, and incur more indebtedness as a result. If new
indebtedness is added to our and our subsidiaries current
debt levels, the related risks that we and they now face could
intensify. As of April 2, 2006, we had the ability to
borrow an additional $53.5 million under the revolving loan
portion of our Senior Credit Facility. Additionally, on
January 28, 2004, our universal shelf registration
statement on
Form S-3 was
declared effective by the SEC. The universal shelf registration
statement provides for the offer and sale by us, from time to
time, on a delayed basis of up to $200.0 million aggregate
amount of certain of our securities. We are conducting this
offering pursuant to our universal shelf registration statement.
As a result, assuming gross proceeds from this offering of
approximately $117 million, based on an assumed public
offering price of $39.11 per share (which was the last reported
sale price of our common stock on the New York Stock Exchange on
May 24, 2006), we will have the ability to issue up to
approximately $83 million in additional securities under
the shelf registration statement, including debt securities. Any
debt securities issued pursuant to the universal shelf
registration statement may have characteristics that provide
them with rights that are superior to those of other series of
our debt securities that have already been created or that will
be created in the future.
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The covenants in the indenture governing the Notes and our
Senior Credit Facility impose significant operating and
financial restrictions which may adversely affect our ability to
operate our business. |
The indenture governing the Notes and our Senior Credit Facility
impose significant operating and financial restrictions on us
and certain of our subsidiaries, which we refer to as restricted
subsidiaries. These restrictions limit our ability to, among
other things, incur additional indebtedness, pay dividends and
or distributions on our capital stock, repurchase, redeem or
retire our capital stock, prepay subordinated indebtedness, make
investments, issue preferred stock of subsidiaries, make certain
types of investments, guarantee other indebtedness, create liens
on our assets, transfer and sell assets, create or permit
restrictions on the ability of our restricted subsidiaries to
make dividends or make other distributions to us, enter into
S-20
sale/leaseback transactions, enter into transactions with
affiliates, and merge or consolidate with another company or
sell all or substantially all of our assets. These restrictions
could limit our ability to finance our future operations or
capital needs, make acquisitions or pursue available business
opportunities.
In addition, our Senior Credit Facility requires us to maintain
specified financial ratios and satisfy certain financial
covenants, including maintaining maximum senior and total
leverage ratios, a minimum fixed charge coverage ratio, a
minimum net worth and a limit on the amount of our annual
capital expenditures. Some of these financial ratios become more
restrictive over the life of the Senior Credit Facility. We may
be required to take action to reduce our indebtedness or to act
in a manner contrary to our business objectives to meet these
ratios and satisfy these covenants. Our failure to comply with
any of the covenants under our Senior Credit Facility and the
indenture governing the Notes could cause an event of default
under such documents and result in an acceleration of all of our
outstanding indebtedness. If all of our outstanding indebtedness
were to be accelerated, we likely would not be able to
simultaneously satisfy all of our obligations under such
indebtedness, which would materially adversely affect our
financial condition and results of operations.
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Servicing our indebtedness will require a significant
amount of cash. Our ability to generate cash depends on many
factors beyond our control. |
Our ability to make payments on our indebtedness and to fund
planned capital expenditures will depend on our ability to
generate cash in the future. This, to a certain extent, is
subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control.
Our business may not be able to generate sufficient cash flow
from operations or future borrowings may not be available to us
under our Senior Credit Facility or otherwise in an amount
sufficient to enable us to pay our indebtedness or new debt
securities, or to fund our other liquidity needs. We may need to
refinance all or a portion of our indebtedness on or before
maturity. However, we may not be able to complete such
refinancing on commercially reasonable terms or at all.
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Because portions of our indebtedness have floating
interest rates, a general increase in interest rates will
adversely affect cash flows. |
Our Senior Credit Facility bears interest at a variable rate. To
the extent our exposure to increases in interest rates is not
eliminated through interest rate protection agreements, such
increases will adversely affect our cash flows. We do not
currently have any interest rate protection agreements in place
to protect against interest rate fluctuations related to the
Senior Credit Facility. Assuming the repayment of
$74.6 million of existing indebtedness outstanding under
the term loan portion of our Senior Credit Facility with the
proceeds from this offering, our estimated total annual interest
expense based on borrowings outstanding immediately following
this offering will be approximately $23.7 million.
In addition, effective September 18, 2003, we entered into
interest rate swap agreements in the aggregate notional amount
of $50.0 million. The agreements, which have payment and
expiration dates that coincide with the payment and expiration
terms of the Notes, effectively convert $50.0 million of
the Notes into variable rate obligations. Under the agreements,
we receive a fixed interest rate payment from the financial
counterparties to the agreements equal to 8.25% per year
calculated on the notional $50.0 million amount, while we
make a variable interest rate payment to the same counterparties
equal to the six-month London Interbank Offered Rate plus a
fixed margin of 3.45%, also calculated on the notional
$50.0 million amount. As a result, for every one percent
increase in the interest rate applicable to the swap agreements,
our total annual interest expense will increase by
$0.5 million.
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We depend on distributions from our subsidiaries to make
payments on our indebtedness. These distributions may not be
made. |
We generate a substantial portion of our revenues from
distributions on the equity interests we hold in our
subsidiaries. Therefore, our ability to meet our payment
obligations on our indebtedness is substantially dependent on
the earnings of our subsidiaries and the payment of funds to us
by our subsidiaries as
S-21
dividends, loans, advances or other payments. Our subsidiaries
are separate and distinct legal entities and are not obligated
to make funds available for payment of our other indebtedness in
the form of loans, distributions or otherwise. Our
subsidiaries ability to make any such loans, distributions
or other payments to us will depend on their earnings, business
results, the terms of their existing and any future
indebtedness, tax considerations and legal or contractual
restrictions to which they may be subject. If our subsidiaries
do not make such payments to us, our ability to repay our
indebtedness will be materially adversely affected. For the
fiscal year ended January 1, 2006 and the quarter ended
April 2, 2006, our subsidiaries accounted for 24.4% and
35.4%, respectively, of our consolidated revenues, and, as of
January 1, 2006 and the quarter ended April 2, 2006,
our subsidiaries accounted for 56.4% and 55.5%, respectively, of
our consolidated total assets.
Risks Related to our Common Stock
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Fluctuations in the stock market as well as general
economic, market and industry conditions may harm the market
price of our common stock. |
The market price of our common stock has been subject to
significant fluctuation. The market price of our common stock
may continue to be subject to significant fluctuations in
response to operating results and other factors, including:
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actual or anticipated quarterly fluctuations in our financial
results, particularly if they differ from investors
expectations; |
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changes in financial estimates and recommendations by securities
analysts; |
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general economic, market and political conditions, including war
or acts of terrorism, not related to our business; |
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actions of our competitors and changes in the market valuations,
strategy and capability of our competitors; |
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our ability to successfully integrate acquisitions and
consolidations; and |
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changes in the prospects of the privatized corrections and
detention industry. |
In addition, the stock market in recent years has experienced
price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of companies.
These fluctuations, may harm the market price of our common
stock, regardless of our operating results.
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Future sales of our common stock in the public market
could adversely affect the trading price of our common stock
that we may issue and our ability to raise funds in new
securities offerings. |
Future sales of substantial amounts of our common stock in the
public market, or the perception that such sales could occur,
could adversely affect prevailing trading prices of our common
stock and could impair our ability to raise capital through
future offerings of equity or equity-related securities. As of
May 22, 2006, we had:
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9,814,853 shares of common stock outstanding; |
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1,265,947 shares of common stock reserved and available for
issuance pursuant to stock options outstanding under our stock
plans as of May 22, 2006 at a weighted average exercise
price of $15.02 per share; |
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150,000 shares of common stock issued under restricted stock
awards granted pursuant to our stock plans on May 4, 2006,
which are scheduled to vest in equal annual increments over the
four-year period following the date of grant; and |
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150,000 additional shares of common stock reserved and available
for issuance as of May 22, 2006, under our stock plans. |
S-22
Assuming the issuance of 3,000,000 shares in this offering, we
will have 12,814,853 shares of common stock outstanding. All
shares sold in this offering will be freely tradable without
restrictions or further registration under the Securities Act of
1933, as amended. In addition, in connection with our
acquisition strategy, we may issue shares of our common stock as
consideration in other acquisition transactions. We cannot
predict the effect, if any, that future sales of shares of
common stock or the availability of shares of common stock for
future sale will have on the trading price of our common stock.
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Various anti-takeover protections applicable to us may
make an acquisition of us more difficult and reduce the market
value of our common stock. |
We are a Florida corporation and the anti-takeover provisions of
Florida law impose various impediments to the ability of a third
party to acquire control of our company, even if a change of
control would be beneficial to our shareholders. In addition,
provisions of our articles of incorporation may make an
acquisition of us more difficult. Our articles of incorporation
authorize the issuance by our board of directors of blank
check preferred stock without shareholder approval. Such
shares of preferred stock could be given voting rights, dividend
rights, liquidation rights or other similar rights superior to
those of our common stock, making a takeover of us more
difficult and expensive. We also have adopted a shareholder
rights plan, commonly known as a poison pill, which
could result in the significant dilution of the proportionate
ownership of any person that engages in an unsolicited attempt
to take over our company and, accordingly, could discourage
potential acquirors. In addition to discouraging takeovers, the
anti-takeover provisions of Florida law and our articles of
incorporation, as well as our shareholder rights plan, may have
the impact of reducing the market value of our common stock.
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Failure to maintain effective internal controls in
accordance with Section 404 of the Sarbanes-Oxley Act of
2002 could have an adverse effect on our business and the
trading price of our common stock. |
If we fail to maintain the adequacy of our internal controls, in
accordance with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 and as such standards are modified,
supplemented or amended from time to time, we may not be able to
ensure that we can conclude on an ongoing basis that we have
effective internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act of
2002. Failure to achieve and maintain effective internal
controls could have an adverse effect on the price of our common
stock.
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We may issue additional debt securities that could limit
our operating flexibility and negatively affect the value of our
common stock. |
In the future, we may issue additional debt securities which may
be governed by an indenture or other instrument containing
covenants that could place restrictions on the operation of our
business and the execution of our business strategy in addition
to the restrictions on our business already contained in the
agreements governing our existing debt. In addition, we may
choose to issue debt that is convertible or exchangeable for
other securities, including our common stock, or that has
rights, preferences and privileges senior to our common stock.
Because any decision to issue debt securities will depend on
market conditions and other factors beyond our control, we
cannot predict or estimate the amount, timing or nature of any
future debt financings and we may be required to accept
unfavorable terms for any such financings. Accordingly, any
future issuance of debt could dilute the interest of holders of
our common stock and reduce the value of our common stock.
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Management will have broad discretion as to the use of the
proceeds from this offering. |
Our management will have broad discretion as to the application
of the net proceeds and could use them for purposes other than
those contemplated at the time of this offering. Currently, we
intend to use the net proceeds from this offering to repay
existing indebtedness outstanding under our Senior Credit
Facility and for general corporate purposes. However, our
management will have the ability to change the application of
the proceeds of this offering at any time without shareholder
approval. Our shareholders may not agree with the manner in
which our management chooses to allocate and spend the net
proceeds. Moreover, our
S-23
management may use the net proceeds for corporate purposes that
may not increase our profitability or market value.
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Because we do not intend to pay dividends, shareholders
will benefit from an investment in our common stock only if it
appreciates in value. |
We currently intend to retain our future earnings, if any, to
finance the further expansion and continued growth of our
business and do not expect to pay any cash dividends in the
foreseeable future. As a result, the success of an investment in
our common stock will depend upon any future appreciation in its
value. There is no guarantee that our common stock will
appreciate in value or even maintain the price at which
shareholders have purchased their shares.
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New investors in our common stock will experience
immediate and substantial dilution. |
The offering price to the public is substantially higher than
the net tangible book value per share of our common stock.
Investors purchasing common stock in this offering will,
therefore, incur immediate dilution of $26.47 in net tangible
book value per share of common stock, at a public offering price
of $39.11 per share.
S-24
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering
of approximately $110 million, or approximately
$126 million if the underwriters exercise their option to
purchase additional shares in full, in each case assuming a
public offering price of $39.11 per share (the last reported
sale price of our common stock on the New York Stock Exchange on
May 24, 2006) and after deducting underwriting discounts
and commissions and estimated offering expenses payable by us.
For each $0.05 change in the price at which our shares are
actually purchased by the underwriters, the net proceeds to us
will increase (or decrease) by $150,000. We will retain broad
discretion over the use of the net proceeds from this offering.
We intend to use the net proceeds from this offering to repay
$74.6 million of existing indebtedness outstanding under
the term loan portion of our Senior Credit Facility and the
balance for general corporate purposes.
General corporate purposes may include working capital and
capital expenditures, as well as acquisitions of companies or
businesses in the government-outsourced services sector that
meet our criteria for growth and profitability. We may also use
proceeds from this offering to invest in proprietary assets
relating to our business, including the development of new
facilities, the expansion of current facilities and/or the
acquisition of facilities or facility management contracts. In
addition, we may use up to $5.0 million of the proceeds
from this offering to purchase from certain of our executive
officers and employees stock options that are currently
outstanding and exercisable. Such purchases would be made at
prices not exceeding the
in-the-money value of
the options, which is equal to the amount by which the market
price per share of our common stock at the time of the purchases
exceeds the exercise price per share of the options, multiplied
by the number of options being purchased. Pending application of
the net proceeds for these purposes, we intend to invest the net
proceeds in interest-bearing short-term investment grade
securities.
S-25
CAPITALIZATION
The following table sets forth our capitalization as of
April 2, 2006:
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on an actual basis, and |
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on a pro forma basis to give effect to (i) the sale of
3,000,000 shares of our common stock in this offering and our
receipt of approximately $110 million of net proceeds,
based on an assumed public offering price of $39.11 per share
(which was the last reported sale price of our common stock on
the New York Stock Exchange on May 24, 2006) and after
deducting underwriting discounts and commissions and estimated
expenses of this offering payable by us (ii) the assumed
application of $74.6 million of the proceeds of this
offering to repay $74.6 million of existing indebtedness
outstanding under the term loan portion of our Senior Credit
Facility, and (iii) the use of $5.0 million of the
proceeds from this offering to purchase from certain of our
executive officers and employees stock options that are
currently outstanding and exercisable. |
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April 2, 2006(1) | |
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As adjusted for | |
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Actual | |
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this offering | |
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(unaudited) | |
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(unaudited) | |
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(in thousands, except per share | |
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data) | |
Cash and cash equivalents
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$ |
56,169 |
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$ |
86,214 |
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Long-term debt
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Senior Term Loan(2)
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74,625 |
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Senior Unsecured
81/4
% Notes
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150,000 |
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150,000 |
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Discount on Senior Unsecured
81/4
% Notes
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(3,649 |
) |
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(3,649 |
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Interest Rate Swap on Senior Unsecured
81/4
% Notes
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(2,234 |
) |
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(2,234 |
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Other
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301 |
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301 |
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219,043 |
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144,418 |
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Capital Lease Obligations
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17,951 |
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17,951 |
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Non Recourse Debt
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136,904 |
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136,904 |
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Total Long-term obligations
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|
$ |
373,898 |
|
|
$ |
299,273 |
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 shares authorized,
none issued or outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 30,000,000 shares authorized,
21,723,653 shares issued and 9,723,653 outstanding, and
21,723,653 shares issued and 12,723,653 outstanding as adjusted
|
|
|
97 |
|
|
|
127 |
|
|
Additional paid-in capital
|
|
|
71,635 |
|
|
|
143,305 |
|
|
Retained earnings
|
|
|
176,221 |
|
|
|
176,221 |
|
|
Accumulated other comprehensive loss
|
|
|
(624 |
) |
|
|
(624 |
) |
|
Treasury stock, 12,000,000 shares and 9,000,000 shares(3)
|
|
|
(131,880 |
) |
|
|
(98,910 |
) |
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
115,449 |
|
|
|
220,119 |
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
489,347 |
|
|
$ |
519,392 |
|
|
|
|
|
|
|
|
|
|
(1) |
You should read this table in conjunction with the financial
statements incorporated by reference in this prospectus
supplement and the related notes thereto, the pro forma
financial data included in this prospectus supplement and the
related notes thereto and the section of this prospectus
supplement entitled Use of Proceeds. |
|
(2) |
We plan to write-off approximately $1.3 million in deferred
financing fees associated with the origination of the term loan
in connection with the repayment of indebtedness under the
Senior Credit Facility. |
|
(3) |
We intend to issue the shares in this offering from treasury
stock. |
S-26
COMMON STOCK PRICE RANGE AND DIVIDEND POLICY
Our common stock is quoted on the New York Stock Exchange under
the ticker symbol GGI. The following table sets
forth, for the periods indicated, the high and low closing sale
prices per share of our common stock as reported on the New York
Stock Exchange.
|
|
|
|
|
|
|
|
|
|
|
High | |
|
Low | |
|
|
| |
|
| |
2006
|
|
|
|
|
|
|
|
|
First Quarter ended April 2, 2006
|
|
$ |
33.34 |
|
|
$ |
22.11 |
|
2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
32.20 |
|
|
|
25.60 |
|
Second Quarter
|
|
|
28.73 |
|
|
|
23.03 |
|
Third Quarter
|
|
|
28.95 |
|
|
|
25.15 |
|
Fourth Quarter
|
|
|
25.60 |
|
|
|
20.72 |
|
2004
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
24.23 |
|
|
|
19.80 |
|
Second Quarter
|
|
|
24.62 |
|
|
|
18.70 |
|
Third Quarter
|
|
|
21.00 |
|
|
|
17.33 |
|
Fourth Quarter
|
|
|
26.58 |
|
|
|
19.56 |
|
On May 24, 2006, the last sale price of our common stock as
reported on the New York Stock Exchange was $39.11 per share.
We currently intend to retain all available cash to finance our
operations and do not intend to declare or pay cash dividends on
our shares of common stock in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of
our board of directors and will depend upon our results of
operations, financial condition, current and anticipated cash
needs, contractual restrictions, restrictions imposed by
applicable law and other factors that our board of directors
deems relevant. In addition, the indenture governing our Notes
and our Senior Credit Facility also place material restrictions
on our ability to pay dividends. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Cash Flow for further description
of these restrictions.
S-27
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Introduction
The following discussion and analysis provides information which
management believes is relevant to an assessment and
understanding of our consolidated results of operations and
financial condition. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these
forward-looking statements as a result of numerous factors
including, but not limited to, those described in Risk
Factors, and Special Note Regarding Forward-Looking
Statements and Market and Statistical Data. The discussion
should be read in conjunction with the consolidated financial
statements and notes thereto.
CSC Acquisition
On November 4, 2005, we completed the acquisition of
Correctional Services Corporation, or CSC, a Florida-based
provider of privatized jail, community corrections and
alternative sentencing services. The acquisition was completed
through the merger of CSC into GEO Acquisition, Inc., a wholly
owned subsidiary of GEO, referred to as the Merger. Under the
terms of the Merger, we acquired 100% of the 10.2 million
outstanding shares of CSC common stock for $6.00 per share,
or approximately $62.1 million in cash. As a result of the
Merger, we became responsible for supervising the operation of
the 16 adult correctional and detention facilities, totaling
8,037 beds, formerly run by CSC. Immediately following the
purchase of CSC, we sold Youth Services International, Inc., the
former juvenile services division of CSC, for
$3.75 million, $1.75 million of which was paid in cash
and the remaining $2.0 million of which will be paid in the
form of a promissory note accruing interest at a rate of
6% per annum. The financial information included in the
discussion below for fiscal year 2005 reflects the operations of
CSC from November 4, 2005 through January 1, 2006.
Discontinued Operations
Through our Australian subsidiary, we previously had a contract
with the Department of Immigration, Multicultural and Indigenous
Affairs, or DIMIA, for the management and operation of
Australias immigration centers. In 2003, the contract was
not renewed, and effective February 29, 2004, we completed
the transition of the contract and exited the management and
operation of the DIMIA centers. The accompanying consolidated
financial statements and notes reflect the operations of DIMIA
as a discontinued operation in all periods presented.
In early 2005, the New Zealand Parliament repealed the law that
permitted private prison operation resulting in the termination
of our contract for the management and operation of the Auckland
Central Remand Prison or Auckland. We have operated this
facility since July 2000. We ceased operating the facility upon
the expiration of the contract on July 13, 2005. The
accompanying consolidated financial statements and notes reflect
the operations of Auckland as a discontinued operation.
On January 1, 2006, the last day of our 2005 fiscal year,
we completed the sale of a 72-bed private mental health hospital
which we owned and operated since 1997 for approximately
$11.5 million. We recognized a gain on the sale of this
transaction of approximately $1.6 million. The accompanying
consolidated financial statements and notes reflect the
operations of the hospital and the related sale as a
discontinued operation.
Share Purchase
On July 9, 2003 we purchased all 12 million shares of
our common stock beneficially owned by Group 4 Falck, our former
57% majority shareholder, for $132.0 million in cash
pursuant to the terms of a share purchase agreement, dated
April 30, 2003, by and among us, Group 4 Falck, our former
parent company, The Wackenhut Corporation, or TWC, and
Tuhnekcaw, Inc., an indirect wholly-owned subsidiary of Group 4
S-28
Falck. In connection with the share purchase, we internalized
several functions previously outsourced to TWC, including
payroll processing, human resources management, tax and
information systems.
Sale of Our Joint Venture Interest in Premier Custodial Group
Limited
On July 2, 2003, we sold our one-half interest in Premier
Custodial Group Limited, our former United Kingdom joint venture
which we refer to as PCG, to Serco for approximately
$80.7 million, on a pretax basis.
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. 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 $24.1 million, which represents our initial investment
and the guarantees discussed in this Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
In February 2004, CSC was awarded a contract by the Department
of Homeland Security, Immigration and Customs Enforcement, or
ICE, to develop and operate a 1,020-bed detention complex in
Frio County, Texas. South Texas Local Development Corporation,
referred to as STLDC, a non profit corporation, was created and
issued $49.5 million in taxable revenue bonds to finance
the construction of the detention complex. Additionally, CSC
provided a $5 million subordinated note to STLDC for
initial development costs. We determined that we are the primary
beneficiary of STLDC and consolidate the entity as a result.
STLDC is the owner of the complex and entered into a development
agreement with CSC to oversee the development of the complex. In
addition, STLDC entered into an operating agreement providing
CSC the sole and exclusive right to operate and manage the
complex. The operating agreement and bond indenture require that
the revenue from 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 January 28, 2004, our universal shelf registration
statement on
Form S-3 was
declared effective by the Securities and Exchange Commission,
which we refer to as the SEC. The universal shelf registration
statement provides for the offer and sale by us, from time to
time, on a delayed basis, of up to $200.0 million aggregate
amount of our common stock, preferred stock, debt securities,
warrants, and/or depositary shares. Assuming gross proceeds from
this offering of approximately $117 million (based on an
assumed public offering price of $39.11 per share (which was the
last reported sale price of our common stock on the New York
Stock Exchange on May 24, 2006), we will have the ability
to issue up to approximately $83 million in
S-29
additional securities under the shelf registration statement.
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.
Rights Agreement
On October 9, 2003, we entered into a rights agreement with
EquiServe Trust Company, N.A., as rights agent. Under the terms
of the rights agreement, each share of our common stock carries
with it one preferred share purchase right. If the rights become
exercisable pursuant to the rights agreement, each right
entitles the registered holder to purchase from us one
one-thousandth of a share of Series A Junior Participating
Preferred Stock at a fixed price, subject to adjustment. Until a
right is exercised, the holder of the right has no right to vote
or receive dividends or any other rights as a shareholder as a
result of holding the right. The rights trade automatically with
shares of our common stock, and may only be exercised in
connection with certain attempts to acquire our company. The
rights are designed to protect the interests of our company and
our shareholders against coercive acquisition tactics and
encourage potential acquirers to negotiate with our board of
directors before attempting an acquisition. The rights may, but
are not intended to, deter acquisition proposals that may be in
the interests of our shareholders.
Critical Accounting Policies
We believe that the accounting policies described below are
critical to understanding our business, results of operations
and financial condition because they involve the more
significant judgments and estimates used in the preparation of
our consolidated financial statements. We have discussed the
development, selection and application of our critical
accounting policies with the audit committee of our board of
directors, and our audit committee has reviewed our disclosure
relating to our critical accounting policies in this
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Our consolidated financial statements are prepared in conformity
with accounting principles generally accepted in the United
States. As such, we are required to make certain estimates,
judgments and assumptions that we believe are reasonable based
upon the information available. These estimates and assumptions
affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. We routinely
evaluate our estimates based on historical experience and on
various other assumptions that our management believes are
reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
If actual results significantly differ from our estimates, our
financial condition and results of operations could be
materially impacted.
Other significant accounting policies, primarily those with
lower levels of uncertainty than those discussed below, are also
critical to understanding our consolidated financial statements.
The notes to our consolidated financial statements contain
additional information related to our accounting policies and
should be read in conjunction with this discussion.
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 estimated total cost
for each contract.
S-30
This method is used because we consider costs incurred to date
to be the best available measure of progress on these contracts.
Provisions for estimated losses on uncompleted contracts and
changes to cost estimates are made in the period in which we
determine that such losses and changes are probable. Typically,
we enter into fixed price contracts and do not perform
additional work unless approved change orders are in place.
Costs attributable to unapproved change orders are expensed in
the period in which the costs are incurred if we believe that it
is not probable that the costs will be recovered through a
change in the contract price. If we believe that it is probable
that the costs will be recovered through a change in the
contract price, costs related to unapproved change orders are
expensed in the period in which they are incurred, and contract
revenue is recognized to the extent of the cost incurred.
Revenue in excess of the costs attributable to unapproved change
orders is not recognized until the change order is approved.
Contract costs include all direct material and labor costs and
those indirect costs related to contract performance. Changes in
job performance, job conditions, and estimated profitability,
including those arising from contract penalty provisions, and
final contract settlements, 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.
|
|
|
Reserves for Insurance Losses |
Claims for which we are insured arising from our
U.S. operations that have an occurrence date of
October 1, 2002 or earlier are handled by TWC and are fully
insured up to an aggregate limit of between $25.0 million
and $50.0 million, depending on the nature of the claim.
With respect to claims for which we are insured arising after
October 1, 2002, we maintain a general liability policy for
all U.S. operations with $52.0 million per occurrence
and in the aggregate. On October 1, 2004, we increased our
deductible on this general liability policy from
$1.0 million to $3.0 million for each claim which
occurs after October 1, 2004. We also maintain insurance to
cover property and casualty risks, workers compensation,
medical malpractice and automobile liability. Our Australian
subsidiary is required to carry tail insurance through 2011
related to a discontinued contract. We also carry various types
of insurance with respect to our operations in South Africa and
Australia. There can be no assurance that our insurance coverage
will be adequate to cover claims to which we may be exposed.
Since our insurance policies generally have high deductible
amounts (including a $3.0 million per claim deductible
under our general liability policy), losses are recorded as
reported and a provision is made to cover losses incurred but
not reported. Loss reserves are undiscounted and are computed
based on independent actuarial studies. Our management uses
judgments in assessing loss estimates based on actuarial
studies, which include actual claim amounts and loss development
considering historical and industry experience. If actual losses
related to insurance claims significantly differ from our
estimates, our financial condition and results of operations
could be materially impacted.
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 No. 109.
S-31
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.
The provision for income taxes for the fiscal year 2005 reflects
a benefit of $1.7 million in the second quarter of 2005
related to the American Jobs Creation Act of 2004, or the AJCA.
A key provision of the AJCA creates a temporary incentive for
U.S. corporations to repatriate undistributed income earned
abroad by providing an 85 percent dividends received
deduction for certain dividends from controlled foreign
corporations. Additionally, 2005 reflects a benefit of
$6.5 million in the fourth quarter related to a step up in
basis for an asset in Australia.
As of April 2, 2006, we had approximately
$287.1 million in long-lived property and equipment.
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets.
Buildings and improvements are depreciated over 2 to
40 years. Equipment and furniture and fixtures are
depreciated over 3 to 7 years. Accelerated methods of
depreciation are generally used for income tax purposes.
Leasehold improvements are amortized on a straight-line basis
over the shorter of the useful life of the improvement or the
term of the lease. We perform ongoing evaluations of the
estimated useful lives of our property and equipment for
depreciation purposes. The estimated useful lives are determined
and continually evaluated based on the period over which
services are expected to be rendered by the asset. Maintenance
and repairs are expensed as incurred.
We review long-lived assets to be held and used for impairment
whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be fully recoverable in
accordance with FAS No. 144 Accounting for the
Impairment of Disposal of Long-Lived Assets. Determination
of recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual
disposition. Measurement of an impairment loss for long-lived
assets that management expects to hold and use is based on the
fair value of the asset. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less
costs to sell. Management has reviewed our long-lived assets and
determined that there are no events requiring impairment loss
recognition for the period ended April 2, 2006, other than
the Michigan Facility charge. See this Managements
Discussion and Analysis of Financial Condition and Results of
Operations Commitments and Contingencies.
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.
We have entered into ten year non cancelable operating leases
with CentraCore Properties Trust, or CPV, for eleven facilities
with initial terms that expire at various times beginning in
April 2008 and extending through 2016. In the event that our
facility management contract for any of these leased facilities
is terminated, we would remain responsible for payments to CPV
on the underlying lease. We will account for idle periods under
any such lease in accordance with FAS No. 146
Accounting for Costs Associated with Exit or Disposal
Activities. Specifically, we will review our estimate for
sublease income and record a charge for the difference between
the net present value of the sublease income and the lease
expense over the remaining term of the lease.
Results of Operations
Comparison of Thirteen Weeks
Ended April 2, 2006 and Thirteen Weeks Ended April 3,
2005
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 this prospectus supplement.
S-32
As further discussed above, the discussion of our results of
operations below excludes the results of our discontinued
operations resulting from the termination of our management
contract with DIMIA, Auckland, and Atlantic Shores Hospital for
all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
% of Revenue | |
|
2005 | |
|
% of Revenue | |
|
$ Change | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correctional and Detention Facilities
|
|
$ |
169,876 |
|
|
|
91.4 |
% |
|
$ |
136,339 |
|
|
|
92.0 |
% |
|
$ |
33,537 |
|
|
|
24.6 |
% |
|
Other
|
|
|
16,005 |
|
|
|
8.6 |
% |
|
|
11,916 |
|
|
|
8.0 |
% |
|
|
4,089 |
|
|
|
34.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
185,881 |
|
|
|
100.0 |
% |
|
$ |
148,255 |
|
|
|
100.0 |
% |
|
$ |
37,626 |
|
|
|
25.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenues in the thirteen weeks ended
April 2, 2006 (First Quarter 2006) compared to
the thirteen weeks ended April 3, 2005 (First Quarter
2005) is primarily attributable to four items:
(i) the acquisition in November 2005 of Correctional
Services Corporation, referred to as CSC, increased revenues by
$27.7 million; (ii) revenues increased approximately
$2.7 million in First Quarter 2006 as a result of the New
Castle Correctional Facility in New Castle, Indiana, which we
began managing in January 2006; (iii) Australian and South
African revenues decreased approximately $0.2 million each.
The weakening of the Australian dollar and South African Rand
resulted in a decrease of $1.1 million, while higher
occupancy rates and contractual adjustments for inflation
accounted for an increase of $0.7 million; and
(iv) domestic revenues also increased due to contractual
adjustments for inflation, and improved terms negotiated into a
number of contracts.
The number of compensated resident days in domestic facilities
increased to 3.3 million in First Quarter 2006 from
2.6 million in First Quarter 2005. Compensated resident
days in Australian and South African facilities during First
Quarter 2006 remained consistent at 0.5 million for the
comparable periods. 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 domestic, Australian and South African facilities combined
was 97.0% of capacity in First Quarter 2006 compared to 99.0% in
First Quarter 2005, excluding our vacant Michigan and Jena
facilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
% of Revenue | |
|
2005 | |
|
% of Revenue | |
|
$ Change | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correctional and Detention Facilities
|
|
$ |
138,925 |
|
|
|
74.7 |
% |
|
$ |
114,062 |
|
|
|
76.9 |
% |
|
$ |
24,863 |
|
|
|
21.8 |
% |
|
Other
|
|
|
14,821 |
|
|
|
8.0 |
% |
|
|
11,751 |
|
|
|
7.9 |
% |
|
|
3,070 |
|
|
|
26.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
153,746 |
|
|
|
82.7 |
% |
|
$ |
125,813 |
|
|
|
84.9 |
% |
|
$ |
27,933 |
|
|
|
22.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses consist of those expenses incurred in the
operation and management of our correctional, detention, mental
health and residential treatment facilities. The increase in
operating expenses primarily reflects the acquisition of CSC in
November 2005. There was also an increase in utilities expense,
which was offset by a decrease in health insurance. Operating
expenses remained at a consistent percentage of revenues in
First Quarter 2006 compared to First Quarter 2005.
Other
Other primarily consists of revenues and related operating
expenses associated with our mental health, residential
treatment and construction businesses. There was an increase of
$7.0 million related to revenue from two new mental health
facilities, the South Florida Evaluation & Treatment Center
in Miami, Florida and the Fort Bayard Medical Center in
Fort Bayard, New Mexico. The increase in 2006 is offset by
approximately $2.9 million less construction revenue as
compared to 2005. The construction revenue is
S-33
related to our expansion of the South Bay Facility and the South
Florida Evaluation & Treatment Center, two facilities that
we manage. The expansion of South Bay was completed at the end
of the second quarter of 2005, while the South Florida
Evaluation & Treatment Center began in the fourth quarter of
2005.
Other Unallocated Operating Expenses
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
% of Revenue | |
|
2005 | |
|
% of Revenue | |
|
$ Change | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
General & Administrative Expenses
|
|
$ |
14,009 |
|
|
|
7.5 |
% |
|
$ |
11,401 |
|
|
|
7.7 |
% |
|
$ |
2,608 |
|
|
|
22.9 |
% |
General and administrative expenses consist primarily of
corporate management salaries and benefits, professional fees
and other administrative expenses. General and administrative
expenses remained at a consistent percentage of revenues in
First Quarter 2006 compared to First Quarter 2005. The increase
in general and administrative costs relates to increases in
direct labor costs due to increased headcount, travel, an
increase in the bonus accrual due to an increase in earnings and
an increase in professional fees.
Non Operating Expenses
Interest Income and Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
% of Revenue | |
|
2005 | |
|
% of Revenue | |
|
$ Change | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Interest Income
|
|
$ |
2,216 |
|
|
|
1.2 |
% |
|
$ |
2,330 |
|
|
|
1.6 |
% |
|
$ |
(114 |
) |
|
|
-5.0 |
% |
Interest Expense
|
|
$ |
7,579 |
|
|
|
4.1 |
% |
|
$ |
5,454 |
|
|
|
3.7 |
% |
|
$ |
2,125 |
|
|
|
39.0 |
% |
The decrease in interest income is primarily due to lower
average invested cash balances. Interest income for 2006 and
2005 reflects income from interest rate swap agreements entered
into September 2003 for our domestic operations, which increased
interest income. The interest rate swap agreements in the
aggregate notional amounts of $50.0 million are hedges
against the change in the fair value of a designated portion of
our Notes, due to changes in the underlying interest rates. The
interest rate swap agreements have payment and expiration dates
and call provisions that coincide with the terms of the Notes.
The increase in interest expense is primarily attributable to
the refinancing of the term loan portion of our senior credit
facility, referred to as the Senior Credit Facility, in
connection with the completion of the CSC acquisition.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
% of Revenue | |
|
2005 | |
|
% of Revenue | |
|
$ Change | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Income Taxes
|
|
$ |
2,693 |
|
|
|
1.4 |
% |
|
$ |
1,723 |
|
|
|
1.2 |
% |
|
$ |
970 |
|
|
|
56.3 |
% |
The effective tax rate for First Quarter 2006 was 38% comparable
to 41% in First Quarter 2005.
|
|
|
Comparison of Fiscal Year Ended January 1, 2006 and Fiscal
Year Ended January 2, 2005 |
The following discussion should be read in conjunction with our
consolidated financial statements and the notes to the
consolidated financial statements accompanying this report. This
discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not
limited to, those described under Risk Factors and
those included in other portions of this report.
As further discussed above, the discussion of our results of
operations below excludes the results of our discontinued
operations resulting from the termination of our management
contract with DIMIA, Auckland, and Atlantic Shores Hospital for
all periods presented.
S-34
For the purposes of the discussion below, 2005 means
the 52 week fiscal year ended January 1, 2006,
2004 means the 53 week fiscal year ended
January 2, 2005, and 2003 means the
52 week fiscal year ended December 28, 2003.
GEO had diluted earnings per share of $0.70, $1.73 and $2.53 in
2005, 2004, and 2003 respectively. For fiscal year 2005, the
$0.70 amount included ($1.54) per diluted share for certain
items, as detailed below, compared to the fiscal year 2004 $1.73
amount, which included ($0.03) per diluted share for certain
items detailed below. The fiscal year 2003 $2.53 amount included
$1.58 per diluted share for certain items detailed below.
Weighted average common shares outstanding for fiscal year 2004
reflects a full year of the effect of our purchase of
12 million shares of our common stock in the third quarter
2003.
The following table sets forth certain items before tax which we
consider relevant to the discussion below of our operating
results for 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in thousands, | |
|
|
except per share data) | |
Certain Items (before income taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
Michigan correctional facility write-off
|
|
$ |
(20,859 |
) |
|
$ |
|
|
|
$ |
|
|
Insurance reduction
|
|
|
1,300 |
|
|
|
4,150 |
|
|
|
|
|
Jena, Louisiana write-off
|
|
|
(4,255 |
) |
|
|
(3,000 |
) |
|
|
(5,000 |
) |
DIMIA insurance reserves
|
|
|
|
|
|
|
|
|
|
|
(3,600 |
) |
Write-off of acquisition costs
|
|
|
|
|
|
|
(1,306 |
) |
|
|
|
|
Gain on sale of UK joint venture
|
|
|
|
|
|
|
|
|
|
|
56,094 |
|
Write-off of deferred financing fees
|
|
|
(1,360 |
) |
|
|
(317 |
) |
|
|
(1,989 |
) |
|
|
|
|
|
|
|
|
|
|
Certain Items
|
|
$ |
(25,174 |
) |
|
$ |
(473 |
) |
|
$ |
45,505 |
|
Amounts per diluted common share after-tax
|
|
$ |
(1.54 |
) |
|
$ |
(0.03 |
) |
|
$ |
1.58 |
|
|
|
|
|
|
|
|
|
|
|
The following table delineates where the total of certain items
above are classified in our Consolidated Statements of Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Certain Items represented in the various lines of the
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
$ |
(23,814 |
) |
|
$ |
1,150 |
|
|
$ |
(8,600 |
) |
General and Administrative Expenses
|
|
|
|
|
|
|
(1,306 |
) |
|
|
|
|
Write-off of deferred financing fees
|
|
|
(1,360 |
) |
|
|
(317 |
) |
|
|
(1,989 |
) |
Gain on Sale of UK joint venture
|
|
|
|
|
|
|
|
|
|
|
56,094 |
|
|
|
|
|
|
|
|
|
|
|
Certain Items
|
|
$ |
(25,174 |
) |
|
$ |
(473 |
) |
|
$ |
45,505 |
|
|
|
|
|
|
|
|
|
|
|
S-35
|
|
|
Revenues and Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
% of Revenue | |
|
2004 | |
|
% of Revenue | |
|
$ Change | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correctional and Detention Facilities
|
|
$ |
572,109 |
|
|
|
93.3 |
% |
|
$ |
546,952 |
|
|
|
92.1 |
% |
|
$ |
25,157 |
|
|
|
4.6 |
% |
Other
|
|
$ |
40,791 |
|
|
|
6.7 |
% |
|
$ |
47,042 |
|
|
|
7.9 |
% |
|
$ |
(6,251 |
) |
|
|
(13.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
612,900 |
|
|
|
100.0 |
% |
|
$ |
593,994 |
|
|
|
100.0 |
% |
|
$ |
18,906 |
|
|
|
3.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenues in 2005 compared to 2004 is primarily
attributable to five items: (i) Australian and South
African revenues increased approximately $7.8 million,
$2.6 million and $0.2 million of which was due to the
strengthening of the Australian dollar and South African Rand,
respectively, and $5.0 million of which was due to higher
occupancy rates and contractual adjustments for inflation;
(ii) the acquisition of CSC increased revenues
$17.3 million; (iii) the McFarland facility was idle
for all of 2004 and was re-opened in January 2005 resulting in
an increase in revenues of approximately $3.1 million;
(iv) domestic revenues also increased due to contractual
adjustments for inflation, slightly higher occupancy rates and
improved terms negotiated into a number of contracts. These
increases offset a decrease in revenues due to the transition of
the Queens contract from ICE to USMS, the closure of the
Michigan Correctional Facility on October 14, 2005, the
expiration of our operating contract for the Kyle Facility on
August 31, 2005, and lower populations in our Val Verde,
and San Diego Facilities; and (v) revenues decreased
in 2005 because it contained 52 weeks compared to 2004,
which contained 53 weeks.
The number of compensated resident days in domestic facilities
increased to 10.7 million in 2005 from 10.5 million in
2004. Compensated resident days in Australian and South African
facilities remained constant at 2.0 million during 2005 and
2004. 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 domestic,
Australian and South African facilities combined was 97.5% of
capacity in 2005 compared to 99.3% in 2004. The decrease in the
average occupancy is due to an increase in the number of beds
made available to us under our contracts and lower populations
in our Val Verde and San Diego facilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
% of Revenue | |
|
2004 | |
|
% of Revenue | |
|
$ Change | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correctional and Detention Facilities
|
|
$ |
499,924 |
|
|
|
81.6 |
% |
|
$ |
449,310 |
|
|
|
75.7 |
% |
|
$ |
50,614 |
|
|
|
11.3 |
% |
Other
|
|
$ |
40,204 |
|
|
|
6.5 |
% |
|
$ |
45,916 |
|
|
|
7.7 |
% |
|
$ |
(5,712 |
) |
|
|
(12.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
540,128 |
|
|
|
88.1 |
% |
|
$ |
495,226 |
|
|
|
83.4 |
% |
|
$ |
44,902 |
|
|
|
9.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses consist of those expenses incurred in the
operation and management of our correctional, detention, mental
health and residential treatment facilities. Operating expenses
for fiscal year 2005 reflect an impairment charge of
$20.9 million for the Michigan Correctional Facility. We
own the 480-bed Michigan Correctional Facility and operated the
facility from 1999 until October 2005 pursuant to a management
contract with the Michigan Department of Corrections, or the
MDOC. Separately, we leased the facility, as lessor, to the
State, as lessee, under a lease with an initial term of
20 years followed by two
5-year options. On
September 30, 2005, the Governor of the State of Michigan
announced her decision to close the facility. As a result of the
closure, our management contract with the MDOC was terminated.
On October 3, 2005, the Michigan Department of
Management & Budget provided a 60 day lease
cancellation notice to us. See this Managements
Discussion and Analysis of Financial Condition and Results of
Operations Commitments and Contingencies for
further discussion relating to our Michigan Correctional
Facility.
S-36
Additionally, 2005 operating expenses reflect an operating
charge on the Jena lease of $4.3 million, representing the
remaining obligation on the lease through the contractual term
of January 2010.
Operating expenses in 2005 were favorably impacted by a
$3.4 million reduction in our reserves for general
liability, auto liability, and workers compensation insurance.
This favorable reduction was largely offset by higher than
anticipated U.S. employee health insurance costs of
approximately $1.7 million, transition expenses of
approximately $0.8 million associated with our Queens New
York Facility, start-up
expenses at certain domestic facilities of approximately
$0.6 million and adjustments of approximately
$0.4 million to insurance reserves in our Australian
operations.
The $3.4 million reduction in insurance reserves was the
result of revised actuarial projections related to loss
estimates for the initial three years of our insurance program
which was established on October 2, 2002. Prior to
October 2, 2002, our insurance coverage was provided
through an insurance program established by TWC, our former
parent company. We experienced significant adverse claims
development in general liability and workers compensation
in the late 1990s. Beginning in approximately 1999, we
made significant operational changes and began to aggressively
manage our risk in a proactive manner. These changes have
resulted in improved claims experience and loss development,
which we are realizing in our actuarial projections. As a result
of improving loss trends, our independent actuary reduced its
expected losses for claims arising since October 2, 2002.
We adjusted our reserves in the third quarter of 2005 to reflect
the actuarys improved expected loss projections. There can
be no assurance that our improved claims experience and loss
developments will continue. Similarly, 2004 operating expenses
reflect a $4.2 million reduction in insurance reserves also
attributable to improved actuarial loss projections.
During 2005, we experienced adverse development in our employee
health program. Since we are self-insured for employee
healthcare, this adverse development resulted in additional
claims expense and increased reserve requirements. During the
third quarter of 2005, we completed a review of our employee
health program and made adjustments to the plan to reduce future
costs. The revised plan was effective November 1, 2005.
There can be no assurance that these modifications will improve
our claims experience.
Operating expenses in 2004 reflect an additional provision for
operating losses of approximately $3.0 million related to
our inactive facility in Jena, Louisiana.
The remaining increase in operating expenses is consistent with
and proportional to the increase in revenues discussed above as
a result of the CSC acquisition, the
start-up of new
facilities and the expansion of existing facilities.
Other primarily consists of revenues and related operating
expenses associated with our mental health, residential
treatment and construction businesses. The decrease in 2005
primarily relates to approximately $7.2 million less
construction revenue as compared to 2004. The construction
revenue is related to our expansion of the South Bay Facility,
one of the facilities that we manage. The expansion was
completed at the end of the second quarter of 2005.
Other Unallocated Operating Expenses
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
% of Revenue | |
|
2004 | |
|
% of Revenue | |
|
$ Change | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
General and Administrative Expenses
|
|
$ |
48,958 |
|
|
|
8.0 |
% |
|
$ |
45,879 |
|
|
|
7.7 |
% |
|
$ |
3,079 |
|
|
|
6.7 |
% |
General and administrative expenses consist primarily of
corporate management salaries and benefits, professional fees
and other administrative expenses. The increase in expense
reflects increased personnel and business development costs
associated with the expansion of our mental health and
residential treatment business. The increase also reflects costs
associated with compliance with Sarbanes-Oxley requirements for
S-37
managements assessment over internal controls, which
resulted in an increase in professional fees in 2005 of
$0.9 million. The remaining increase in general and
administrative costs relates to other increases in professional
fees, travel, expenses associated with our acquisition program
and rent expense for our corporate offices.
Non Operating Expenses
Interest Income and Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
% of Revenue | |
|
2004 | |
|
% of Revenue | |
|
$ Change | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Interest Income
|
|
$ |
9,154 |
|
|
|
1.5 |
% |
|
$ |
9,568 |
|
|
|
1.6 |
% |
|
$ |
(414 |
) |
|
|
(4.3 |
)% |
Interest Expense
|
|
$ |
23,016 |
|
|
|
3.8 |
% |
|
$ |
22,138 |
|
|
|
3.7 |
% |
|
$ |
878 |
|
|
|
4.0 |
% |
The decrease in interest income is primarily due to lower
average invested cash balances. Interest income for 2005 and
2004 reflects income from interest rate swap agreements entered
into September 2003 for our domestic operations, which increased
interest income. The interest rate swap agreements in the
aggregate notional amounts of $50.0 million are hedges
against the change in the fair value of a designated portion of
the Notes due to changes in the underlying interest rates. The
interest rate swap agreements have payment and expiration dates
and call provisions that coincide with the terms of the Notes.
The increase in interest expense is primarily attributable to
the refinancing of the term loan portion of our Senior Credit
Facility.
Costs Associated with Debt Refinancing
Deferred financing fees of $1.4 million were written off in
2005 in connection with the refinancing of the term loan portion
of the Senior Credit Facility. In 2004, $0.3 million was
written off in 2004 in connection with the $43.0 million
payment related to the term loan portion of the Senior Credit
Facility.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
% of Revenue | |
|
2004 | |
|
% of Revenue | |
|
$ Change | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Income Taxes
|
|
$ |
(11,826 |
) |
|
|
(1.9 |
)% |
|
$ |
8,231 |
|
|
|
1.4 |
% |
|
$ |
(20,057 |
) |
|
|
(243.7 |
)% |
Income taxes for 2005 reflect a benefit as a result of the loss
before income taxes which primarily resulted from the
$20.9 million impairment charge for the Michigan Facility
and the $4.3 million charge to record the remaining lease
obligation for the Jena lease with CPV.
The income tax benefit for 2005 reflects a benefit of
$6.5 million in the fourth quarter 2005 related to a
step-up in tax basis for an asset in Australia which resulted in
a decreased deferred tax liability.
The income tax benefit for 2005 also reflects a benefit of
$1.7 million in the second quarter 2005 related to the
American Jobs Creation Act of 2004, or the AJCA. A key provision
of the AJCA creates a temporary incentive for
U.S. corporations to repatriate undistributed income earned
abroad by providing an 85 percent dividends received
deduction for certain dividends from controlled foreign
corporations.
Equity in Earnings of Affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
% of Revenue | |
|
2004 |
|
% of Revenue | |
|
$ Change | |
|
% Change | |
|
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Equity in Earnings of Affiliate
|
|
$ |
2,079 |
|
|
|
0.3 |
% |
|
$ |
|
|
|
|
0.0 |
% |
|
$ |
2,079 |
|
|
|
100.0 |
% |
Equity in earnings of affiliate in 2005 reflects a one time tax
benefit of $2.1 million related to a change in South
African tax law.
S-38
Financial Condition
|
|
|
Liquidity and Capital Resources |
Current cash requirements consist of amounts needed for working
capital, debt service, capital expenditures, supply purchases
and investments in joint ventures. Our primary source of
liquidity to meet these requirements is cash flow from
operations and borrowings under the $100.0 million
revolving portion of our Senior Credit Facility. As of
April 2, 2006, we had $53.5 million available for
borrowing under the revolving portion of the Senior Credit
Facility.
We incurred substantial indebtedness in connection with the
acquisition of CSC on November 4, 2005 and the share
purchase in 2003. Assuming the repayment of $74.6 million
of existing indebtedness outstanding under the term loan portion
of our Senior Credit Facility with the proceeds from this
offering, our total consolidated long-term indebtedness
immediately following this offering will be $144.4 million,
excluding non recourse debt of $136.9 million and capital
lease obligations of $17.9 million. In addition, as of
April 2, 2006, we also had outstanding seven letters of
guarantee totaling approximately $5.4 million under
separate international credit facilities. Our significant debt
service obligations could, under certain circumstances, have
material consequences. See Risk Factors Risks
Related to Our High Level of Indebtedness. However, our
management believes that cash on hand, cash flows from
operations and our Senior Credit Facility will be adequate to
support currently planned business expansion and various
obligations incurred in the operation of our business, both on a
near and long-term basis.
In the future, our access to capital and ability to compete for
future capital-intensive projects will be dependent upon, among
other things, our ability to meet certain financial covenants in
the indenture governing the Notes and in our Senior Credit
Facility. A substantial decline in our financial performance
could limit our access to capital and have a material adverse
affect on our liquidity and capital resources and, as a result,
on our financial condition and results of operations.
Our business requires us to make various capital expenditures
from time to time, including expenditures related to the
development of new correctional, detention and/or mental health
and residential treatment 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. Based on current
estimates of our capital needs, we anticipate that our capital
expenditures will not exceed $10.0 million during the next
12 months. We plan to fund these capital expenditures from
cash from operations or borrowings under the Senior Credit
Facility.
We have entered into individual executive retirement agreements
with our CEO and Chairman, President and Vice Chairman, and
Chief Financial Officer. These agreements provide each executive
with a lump sum payment upon retirement. Under the agreements,
each executive may retire at any time after reaching the age of
55. Each of the executives reached the eligible retirement age
of 55 in 2005. None of the executives 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 revolving credit facility. Based on our
current capitalization, we do not believe that making these
payments in any one period, whether in separate installments or
in the aggregate, would materially adversely impact our
liquidity.
|
|
|
The Senior Credit Facility |
On September 14, 2005, we amended and restated our Senior
Credit Facility, to consist of a $75 million, six-year
term-loan initially bearing interest at LIBOR plus 2.00%, and a
$100 million, five-year revolving credit facility initially
bearing interest at LIBOR plus 2.00%. We used the borrowings
under the Senior Credit Facility to fund general corporate
purposes and to finance the acquisition of CSC, which closed on
S-39
November 4, 2005 for approximately $62 million in cash
plus deal-related costs. As of April 2, 2006, we had
borrowings of $74.6 million outstanding under the term loan
portion of the Senior Credit Facility, no amounts outstanding
under the revolving portion of the Senior Credit Facility, and
$46.5 million outstanding in letters of credit under the
revolving portion of the Senior Credit Facility.
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.
Indebtedness under the revolving portion of the Senior Credit
Facility bears interest at our option at the base rate plus a
spread varying from 0.50% to 1.25% (depending upon a
leverage-based pricing grid set forth in the Senior Credit
Facility), or at LIBOR plus a spread, varying from 1.50% to
2.25% (depending upon a leverage-based pricing grid, as defined
in the Senior Credit Facility). As of April 2, 2006, there
were no borrowings currently outstanding under the revolving
portion of the Senior Credit Facility. However, new borrowings
would bear interest at LIBOR plus 2.00% or at the base rate plus
1.00%. Letters of credit outstanding under the revolving portion
of the Senior Credit Facility bear interest at 1.50% to 2.25%
(depending upon a leverage-based pricing grid, as defined in the
Senior Credit Facility). Available capacity under the revolving
portion of the Senior Credit Facility bears interest at 0.38% to
0.5%. The term loan portion of the Senior Credit Facility bears
interest at our option at either the base rate plus a spread of
0.75% to 1.00%, or at LIBOR plus a spread, varying from 1.75% to
2.00% (depending upon a leverage-based pricing grid, as defined
in the Senior Credit Facility). Borrowings under the term loan
portion of the Senior Credit Facility currently bear interest at
LIBOR plus a spread of 2.00%. If an event of default occurs
under the Senior Credit Facility, (i) all LIBOR rate loans
bear interest at the rate which is 2.00% in excess of the rate
then applicable to LIBOR rate loans until the end of the
applicable interest period and thereafter at a rate which is
2.00% in excess of the rate then applicable to base rate loans,
and (ii) all base rate loans bear interest at a rate which
is 2.00% in excess of the rate then applicable to base rate
loans.
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: a total leverage ratio equal to or less than
3.50 to 1.00 through December 30, 2006, which reduces
thereafter in 0.50 increments to 3.00 to 1.00 for the period
from December 31, 2006 through December 27, 2007 and
thereafter; a senior secured leverage ratio equal to or less
than 2.50 to 1.00; and a fixed charge coverage ratio equal to or
less than 1.05 to 1.00 until December 30, 2006, and
thereafter a ratio of 1.10 to 1.00. In addition, the Senior
Credit Facility prohibits us from making capital expenditures
greater than $19.0 million in the aggregate during any
fiscal year until 2009 and $24.0 million during each of the
years 2010 and 2011, provided that to the extent that our
capital expenditures during any fiscal year are less than the
limit, such amount will be added to the maximum amount of
capital expenditures that we can make in the following year.
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 our 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 our capital
stock, (viii) transact with affiliates, (ix) make
changes to our accounting treatment, (x) amend or modify
the terms of any subordinated indebtedness (including the
Notes), (xi) enter into debt agreements that contain
negative pledges on our assets or covenants more restrictive
than contained in the Senior Credit Facility, (xii) alter
the business we conduct, and (xiii) materially impair our
lenders security interests in the collateral for our
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 representations or warranty, (iii) covenant defaults,
(iv) bankruptcy, (v) cross defaults to certain other
indebtedness,
S-40
(vi) unsatisfied final judgments over a threshold to be
determined, (vii) material environmental claims which are
asserted against us, and (viii) a change of control.
The covenants governing our Senior Credit Facility, including
the covenants described above, impose significant operating and
financial restrictions which may substantially restrict, and
materially adversely affect, our ability to operate our business.
See Risk Factors Risks Related to Our High
Level of Indebtedness The covenants in the indenture
governing the Notes and our Senior Credit Facility impose
significant operating and financial restrictions which may
adversely affect our ability to operate our business.
To facilitate the completion of the purchase of the
12 million shares from Group 4 Falck, we issued
$150.0 million aggregate principal amount, ten-year,
81/4% senior
unsecured notes, which we refer to as the Notes. The Notes are
general, unsecured, senior obligations of ours. Interest is
payable semi-annually on January 15 and July 15 at
81/4
%. The Notes are governed by the terms of an Indenture,
dated July 9, 2003, between us and the Bank of New York, as
trustee, referred to as the Indenture. Under the terms of the
Indenture, at any time on or prior to July 15, 2006, we may
redeem up to 35% of the Notes with the proceeds from equity
offerings at 108.25% of the principal amount to be redeemed plus
the payment of accrued and unpaid interest, and any applicable
liquidated damages. Additionally, after July 15, 2008, we
may redeem, at our option, all or a portion of the Notes plus
accrued and unpaid interest at various redemption prices ranging
from 104.125% to 100.000% of the principal amount to be
redeemed, depending on when the redemption occurs. The Indenture
contains certain covenants that limit our ability to incur
additional indebtedness, pay dividends or distributions on our
common stock, repurchase our common stock, and prepay
subordinated indebtedness. The Indenture also limits our ability
to issue preferred stock, make certain types of investments,
merge or consolidate with another company, guarantee other
indebtedness, create liens and transfer and sell assets.
The covenants governing the Notes impose significant operating
and financial restrictions which may substantially restrict and
adversely affect our ability to operate our business. See
Risk Factors Risks Related to Our High Level
of Indebtedness The covenants in the indenture
governing the Notes and our Senior Credit Facility impose
significant operating and financial restrictions which may
adversely affect our ability to operate our business. We
believe that we were in compliance with all of the covenants of
the Indenture governing the Notes as of April 2, 2006.
|
|
|
South Texas Detention Complex: |
In February 2004, CSC was awarded a contract by 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
center. Additionally, CSC provided a $5 million
subordinated note to STLDC for initial development. 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 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.
S-41
Included in non-current restricted cash equivalents and
investments is $10.9 million as of April 2, 2006 as
funds held in trust with respect to the STLDC for debt service
and other reserves.
|
|
|
Northwest Detention Center |
On June 30, 2003 CSC arranged financing for the
construction of the Northwest Detention Center in Tacoma,
Washington (the 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
(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.
Included in non-current restricted cash equivalents and
investments is $5.9 million as of April 2, 2006 as
funds held in trust with respect to the Northwest Detention
Center for debt service and other reserves.
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. We have consolidated the subsidiarys
direct finance lease receivable from the state government and
related non-recourse debt each totaling approximately
$40.3 million and $44.7 million as of January 1,
2006 and January 2, 2005, respectively. As a condition of
the loan, we are required to maintain a restricted cash balance
of AUD 5.0 million, which, at April 2, 2006, was
approximately $3.6 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.
In connection with the creation of SACS, we entered into certain
guarantees related to the financing, construction and operation
of the prison. We guaranteed certain obligations of SACS under
its debt agreements up to a maximum amount of 60.0 million
South African Rand, which at April 2, 2006 was
approximately $9.8 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 6.5 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 the revolving loan portion of our Senior
Credit Facility.
We have agreed to provide a loan, if necessary, of up to
20.0 million South African Rand, or approximately
$3.2 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
S-42
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 $2.1 million
commencing in 2017. We have a liability of $0.6 million
related to this exposure as of January 1, 2006 and
April 2, 2006, respectively. To secure this guarantee, we
purchased Canadian dollar denominated securities with maturities
matched to the estimated tax obligations in 2017 to 2021. We
have recorded an asset and a liability equal to the current fair
market value of those securities on our balance sheet. We do not
currently operate or manage this facility
At April 2, 2006, we also had outstanding seven letters of
guarantee totaling approximately $5.4 million under
separate international facilities. We do not have any off
balance sheet arrangements.
Effective September 18, 2003, we entered into interest rate
swap agreements in the aggregate notional amount of
$50.0 million. We have designated the swaps as hedges
against changes in the fair value of a designated portion of the
Notes due to changes in underlying interest rates. Changes in
the fair value of the interest rate swaps are recorded in
earnings along with related designated changes in the value of
the Notes. The agreements, which have payment and expiration
dates and call provisions that coincide with the terms of the
Notes, effectively convert $50.0 million of the Notes into
variable rate obligations. Under the agreements, we receive a
fixed interest rate payment from the financial counterparties to
the agreements equal to 8.25% per year calculated on the
notional $50.0 million amount, while we make a variable
interest rate payment to the same counterparties equal to the
six-month LIBOR plus a fixed margin of 3.45%, also calculated on
the notional $50.0 million amount. As of April 2, 2006
and January 1, 2006, the fair value of the swaps totaled
approximately $(2.2) million and $(1.1) million,
respectively, and is included in other non-current assets and
other non-current liabilities in the accompanying balance
sheets. There was no material ineffectiveness of our interest
rate swaps for the period ended April 2, 2006.
Our Australian subsidiary is a party to an interest rate swap
agreement to fix the interest rate on the variable rate
non-recourse debt to 9.7%. We have determined the swap to be an
effective cash flow hedge. Accordingly, we record the value of
the interest rate swap in accumulated other comprehensive
income, net of applicable income taxes. The total value of the
swap liability as of April 2, 2006 and January 1, 2006
was approximately $0.3 million and $0.4 million,
respectively, and is recorded as a component of other
liabilities in the accompanying consolidated financial
statements. There was no material ineffectiveness of the
interest rate swaps for the fiscal years presented. We do not
expect to enter into any transactions during the next twelve
months which will result in the reclassification into earnings
of gains or losses associated with this swap that are currently
reported in accumulated other comprehensive loss.
Cash and cash equivalents as of April 2, 2006 were
$56.2 million, a decrease of $0.9 million from
January 1, 2006.
Cash provided by operating activities of continuing operations
amounted to $11.5 million in the First Quarter 2006 versus
cash provided by operating activities of continuing operations
of $2.7 million in the First Quarter 2005. Cash provided by
operating activities of continuing operations in First Quarter
2006 was positively impacted by an increase in accounts payable
and accrued payroll and a decrease in other current assets. Cash
provided by operating activities of continuing operations in
First Quarter 2006 was negatively impacted by an increase in
accounts receivable. Cash provided by operating activities of
continuing operations in First Quarter 2005 was positively
impacted by an increase in accrued payroll and a decrease in
accounts receivable. Cash provided by operating activities of
continuing operations in First Quarter 2005 was negatively
impacted by an increase in other current assets and a decrease
in accounts payable.
S-43
Cash used in investing activities amounted to $12.1 million
in the First Quarter 2006 compared to cash provided by investing
activities of $8.2 million in the First Quarter 2005. Cash
used in investing activities in the First Quarter 2006 reflects
capital expenditures of $7.4 million and an increase in
restricted cash. Cash provided by investing activities in the
First Quarter 2005 reflect sales of short term investments of
$39.0 million and purchases of short term investments of
$29.0 million. Capital expenditures amounted to
$1.8 million.
Cash provided by financing activities in the First Quarter 2006
amounted to $0.1 million compared to cash used in financing
activities of $1.0 million in the First Quarter 2005. Cash
provided by financing activities in the First Quarter 2006
reflects proceeds received from the exercise of stock options of
$0.7 million and payments on long-term debt of
$0.6 million. Cash used in financing activities in the
First Quarter 2005 reflect payments on long-term debt of
$1.4 million and proceeds received from the exercise of
stock options of $0.4 million.
|
|
|
Contractual Obligations and Off Balance Sheet Arrangements |
The following is a table of certain of our contractual
obligations, as of January 1, 2006, which requires us to
make payments over the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
|
|
| |
|
|
|
|
|
|
Less Than | |
|
|
|
More Than | |
Contractual Obligations |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Long-term debt obligations
|
|
$ |
225,114 |
|
|
$ |
1,051 |
|
|
$ |
1,500 |
|
|
$ |
19,125 |
|
|
$ |
203,438 |
|
Capital lease obligations (includes imputed interest)
|
|
|
32,805 |
|
|
|
2,087 |
|
|
|
4,254 |
|
|
|
3,884 |
|
|
|
22,580 |
|
Operating lease obligations
|
|
|
206,879 |
|
|
|
37,233 |
|
|
|
69,730 |
|
|
|
33,306 |
|
|
|
66,610 |
|
Non-recourse debt
|
|
|
142,479 |
|
|
|
6,707 |
|
|
|
23,171 |
|
|
|
25,868 |
|
|
|
86,733 |
|
Estimated interest payments on debt(a)
|
|
|
176,146 |
|
|
|
24,937 |
|
|
|
48,371 |
|
|
|
46,103 |
|
|
|
56,735 |
|
Estimated payments on interest rate swaps(a)
|
|
|
(76 |
) |
|
|
(10 |
) |
|
|
(20 |
) |
|
|
(20 |
) |
|
|
(26 |
) |
Other long-term liabilities
|
|
|
12,749 |
|
|
|
11,047 |
|
|
|
112 |
|
|
|
248 |
|
|
|
1,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
796,096 |
|
|
$ |
83,052 |
|
|
$ |
147,118 |
|
|
$ |
128,514 |
|
|
$ |
437,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Due to the uncertainties of future LIBOR rates, the variable
interest payments on our credit facility and swap agreements
were calculated using LIBOR rates of 4.61% and 4.73% based on
our bank rates as of February 24, 2006 and January 13,
2006, respectively. |
We do not have any additional off balance sheet arrangements
which would subject us to additional liabilities.
Commitments and Contingencies
During 2000, our management contract at the 276-bed Jena
Juvenile Justice Center in Jena, Louisiana, which is included in
the correction and detention facilities segment, was
discontinued by the mutual agreement of the parties. Despite the
discontinuation of the management contract, we remain
responsible for payments on our underlying lease of the inactive
facility with CentraCore Properties Trust through January 2010.
During the Third Quarter 2005, we determined the alternative
uses being pursued were no longer probable and as a result
revised our estimated sublease income and recorded an operating
charge of $4.3 million, representing the remaining
obligation on the lease through the contractual term of January
2010 for a total reserve of $8.6 million. However, we plan
to continue our efforts to reactivate the facility.
We own the 480-bed Michigan Correctional Facility in Baldwin,
Michigan, referred to as the Michigan Facility. We operated the
Michigan Facility from 1999 until October 2005 pursuant to a
management contract with the Michigan Department of Corrections,
or the MDOC. Separately, we leased the Michigan Facility, as
lessor, to the State, as lessee, under a lease with an initial
term of 20 years followed by two five-year options.
S-44
On September 30, 2005, the Governor of the State of
Michigan announced her decision to close the Michigan Facility.
As a result of the closure of the Michigan Facility, our
management contract with the MDOC to operate the Michigan
Facility was terminated. On October 3, 2005, the Michigan
Department of Management & Budget sent us a 60 day
cancellation notice to terminate the lease for the Michigan
Facility. Based in part on the language of certain provisions in
the lease, we believe that the Governor does not have the
authority to unilaterally terminate the Michigan Facility lease.
As a result, in November 2005, we filed a lawsuit against the
State to enforce our rights under the lease. On
February 24, 2006, the Ingham County Circuit Court, the
trial court with jurisdiction over the case, granted summary
judgment in favor of the State and against us and the other
plaintiffs, The Village of Baldwin and Webber Township. The
trial court ruled that the State lawfully cancelled the lease
when the Governor exercised her line item veto of the
legislative appropriation for the funding of the lease. We are
in the process of appealing the summary judgment entered by the
trial court. We have reviewed the Michigan Facility for
impairment in accordance with FAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, and recorded an
impairment charge in the fourth quarter of 2005 for
$20.9 million.
We have entered into construction contracts with the Florida
Department of Management Services, or DMS, to expand the
Moorehaven Correctional Facility by 235 beds, which we operate
for DMS, and build the 1,500bed Graceville Correctional
Facility, which we will operate for DMS upon final completion of
the construction. Payment under these construction contracts is
contingent on the receipt of proceeds from bonds being issued by
the State of Florida to finance the projects. Subsequent to
January 1, 2006, we may incur approximately
$8.5 million in costs related to these projects prior to
the financing being completed. These costs would be incurred in
order to preserve construction prices and our development
timeline. We expect the financing for these facilities to be
completed by March 31, 2006. In the event the required
financing is not completed, we will expense these costs during
the first quarter of 2006 without an offsetting revenue source.
We believe that inflation, in general, did not have a material
effect on our results of operations during 2005, 2004 and 2003.
While some of our contracts include provisions for inflationary
indexing, inflation could have a substantial adverse effect on
our results of operations in the future to the extent that wages
and salaries, which represent our largest expense, increase at a
faster rate than the per diem or fixed rates received by us for
our management services.
Outlook
The following discussion of our future performance contains
statements that are not historical statements and, therefore,
constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Our
forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those stated or implied in the forward-looking
statement. Please refer to Risk Factors in this
prospectus supplement, the Forward-Looking
Statements Safe Harbor, as well as the other
disclosures contained in this prospectus supplement 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.
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 at local levels has been as strong
as it has been at any time during the last decade, and we
currently expect that trend to continue for the foreseeable
future. Overcrowding at corrections facilities in various states
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
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the industry may be offset by several factors, including
budgetary constraints, unanticipated contract terminations and
contract non-renewals. In Michigan, the State recently cancelled
our Baldwin Correctional Facility management contract 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 2006. 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 2006 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 anticipate that the government will seek to outsource
the development and operation of one or more correctional
facilities in the near future. We expect to bid on any suitable
opportunities.
With respect to our mental health and 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.
Operating expenses consist of those expenses incurred in the
operation and management of our correctional, detention, mental
health and residential treatment facilities. In 2005, operating
expenses totaled approximately 88.1% of our consolidated
revenues. Our operating expenses as a percentage of revenue in
2006 will be impacted by several factors. First, 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 $3.4 million in
fiscal year 2005 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. Second, we may experience a reduction in employee
healthcare costs following adjustments to our employee
healthcare program in November 2005 intended to reduce costs
relating to additional claims expense and increased reserve
requirements. 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, we
anticipate that operating expenses as a percentage of our
revenue will remain relatively flat, consistent with our
historical performance.
With respect to our future lease expense, we intend to
restructure our relationship with CPV, now known as CentraCore
Properties Trust, from whom we lease eleven facilities. In 1998,
the original need for our sponsorship and creation of CPV was to
provide us with a means to source capital for the development of
new correctional and detention facilities. This need was
prompted by the fact that TWC, our former parent company at the
time, would not allow us to issue stock or incur indebtedness in
order to finance our growth.
Presently, as a fully independent public company, we believe
that we have a number of avenues available to us to raise
capital for the development of new facilities, including the
equity markets, bank debt, corporate bonds and government
sponsored bonds similar to those involved in several of our new
facilities under development. All of these financial avenues
currently provide a lower cost of capital than our present lease
rates with CPV, which are approximately 12% at this time.
Accordingly, we believe that we have a duty to our shareholders
to seek the most cost-effective available sources of capital in
order to best manage and grow the company. That duty has led us
to make a number of decisions.
Our first decision is to not renew GEOs
15-year Right to
Purchase Agreement with CPV when it expires in 2013, thus
eliminating our obligation to provide CPV with the right to
acquire future company-
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owned facilities that are covered by that agreement. Second, we
do not anticipate developing any new projects using CPV
financing. We expect that for the foreseeable future we will be
able to achieve a lower cost of capital by accessing development
capital through government-supported bond financing or other
third party financing. Third, with regard to the Jena, Louisiana
facility, unless we find a new client in the very near future
allowing us to reactivate the facility on a profitable basis, we
will not renew that lease, which is scheduled to expire in
January 2010, and we will no longer be required to make the
annual lease payment of approximately $2.1 million dollars
after that date.
Fourth, with respect to the other ten facilities that we lease
from CPV, seven of those leases expire in April 2008, referred
to as the Expiring Leases. We have until late October 2007 to
exercise our option, in our discretion, to renew each of the
Expiring Leases for an additional five-year term. We are under
no obligation to renew any or all of the Expiring Leases, and
may renew some of the Expiring Leases without renewing others.
If we opt to renew any of the Expiring Leases, the Expiring
Leases will be renewed on identical terms, except that the
rental rate will be equal to the fair market rental value of the
facility being renewed, as mutually agreed to by us and CPT or,
in the absence of such an agreement, as determined through
binding arbitration.
We have acquired property in close proximity to several of the
properties leased from CPV and are researching available sites
near the other CPV leased properties. These steps have put us in
a position to conduct a comprehensive review of
government-sponsored financing and third-party ownership
alternatives that may be available to us with respect to the
Expiring Leases. It is possible that we may elect to not
exercise our exclusive option to renew certain of the Expiring
Leases upon their expiration in favor of the construction and
development through government-sponsored bonds or other third
party financing of new replacement facilities in close proximity
to the facilities covered by the Expiring Leases. In such cases,
with our customers approval, we would transition our
contracted inmate population to the new facilities prior to the
expiration of the Expiring Leases in April 2008.
We believe that these decisions with respect to our relationship
with CPV will best serve our shareholders interests and
allow us to better manage and grow our company by accessing the
lowest cost of capital available to us.
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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.
Forward-Looking Statements Safe Harbor
This report and the documents incorporated by reference herein
contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements are any
statements that are not based on historical information.
Statements other than statements of historical facts included in
this report, including, without limitation, statements regarding
our future financial position, business strategy, budgets,
projected costs and plans and objectives of management for
future operations, are forward-looking statements.
Forward-looking statements generally can be identified by the
use of forward-looking terminology such as may,
will, expect, anticipate,
intend, plan, believe,
seek, estimate or continue
or the negative of such words or variations of such words and
similar expressions. These statements are not guarantees of
future performance and involve certain risks, uncertainties and
assumptions, which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is
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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 and South Africa, or other countries
in which we may choose to conduct our business; |
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our ability to reactivate the Michigan Correctional Facility; |
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an increase in unreimbursed labor rates; |
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our ability to expand and diversify our correctional and mental
health 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 reactivate our Jena, Louisiana facility, or to
sublease or coordinate the sale of the facility with the owner
of the property, CentraCore Properties Trust, or CPV; |
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our ability to accurately project the size and growth of the
domestic and international privatized corrections industry; |
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our ability to grow our mental health and residential treatment
services industry; |
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our ability to estimate the governments level of
dependency on privatized correctional services; |
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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 inmate medical costs; |
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our ability to maintain occupancy rates at our facilities; |
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our ability to manage costs and expenses relating to ongoing
litigation arising from our operations; |
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our ability to accurately estimate on an annual basis, loss
reserves related to general liability, 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 Securities and
Exchange Commission, or the SEC, including, but not limited to,
those detailed in this annual report on
Form 10-K, our
Form 10-Qs and our
Form 8-Ks filed
with the SEC. |
We undertake no obligation to update publicly any
forward-looking statements, whether as a result of new
information, future events or otherwise. All subsequent written
and oral forward-looking statements
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attributable to us, or persons acting on our behalf, are
expressly qualified in their entirety by the cautionary
statements included in this report.
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. Monthly
payments under the Senior Credit Facility are indexed to a
variable interest rate. Based on borrowings outstanding under
the term loan portion of our Senior Credit Facility of
$74.8 million as of January 1, 2006, for every one
percent increase in the interest rate applicable to the Senior
Credit Facility, our total annual interest expense would
increase by $0.7 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. For every one percent
increase in the interest rate applicable to the
$50.0 million swap agreements on the Notes described above,
our total annual interest expense would increase by
$0.5 million.
We have entered into certain interest rate swap arrangements for
hedging purposes, fixing the interest rate on our Australian
non-recourse debt to 9.7%. The difference between the floating
rate and the swap rate on these instruments is recognized in
interest expense within the respective entity. Because the
interest rates with respect to these instruments are fixed, a
hypothetical 100 basis point change in the current interest
rate would not have a material impact on our financial condition
or results of operations.
Additionally, we invest our cash in a variety of short-term
financial instruments to provide a return. These instruments
generally consist of highly liquid investments with original
maturities at the date of purchase of three months or less.
While these instruments are subject to interest rate risk, a
hypothetical 100 basis point increase or decrease in market
interest rates would not have a material impact on our financial
condition or results of operations.
Foreign Currency Exchange Rate Risk
We are exposed to market risks related to fluctuations in
foreign currency exchange rates between the U.S. dollar and
the Australian dollar and the South African Rand currency
exchange rates. Based upon our foreign currency exchange rate
exposure as of January 1, 2006 with respect to our
international operations, every 10 percent change in
historical currency rates would have approximately a
$2.2 million effect on our financial position and
approximately a $1.8 million impact on our results of
operations over the next fiscal year.
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BUSINESS
General
We are a leading provider of government-outsourced services
specializing in the management of correctional, detention and
mental health and residential treatment facilities in the United
States, 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, mental health facilities 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.
On November 4, 2005, we completed the acquisition of
Correctional Services Corporation, or CSC, a Florida-based
provider of privatized jail, community corrections and
alternative sentencing services. The acquisition was completed
through the merger of CSC into GEO Acquisition, Inc., a wholly
owned subsidiary of GEO, referred to as the Merger. Under the
terms of the Merger, we acquired 100% of the 10.2 million
outstanding shares of CSC common stock for $6.00 per share,
or approximately $62.1 million in cash. As a result of the
Merger, we became responsible for supervising the operation of
the sixteen adult correctional and detention facilities,
totaling 8,037 beds, formerly run by CSC. Immediately following
the purchase of CSC, we sold Youth Services International, Inc.,
the former juvenile services division of CSC, for
$3.75 million, $1.75 million of which was paid in cash
and the remaining $2.0 million of which will be paid in the
form of a three-year promissory note accruing interest at a rate
of 6% per annum.
On January 1, 2006, the last day of our 2005 fiscal year,
our mental health subsidiary Atlantic Shores Healthcare, Inc.,
or ASH, completed the sale of its 72-bed private mental health
hospital which it had owned and operated since 1997, for
approximately $11.5 million. We recognized a gain on the
sale of this transaction of approximately $1.6 million. The
accompanying consolidated financial statements and notes reflect
the operations of the hospital as a discontinued operation.
Our business was founded in 1984 as a division of The Wackenhut
Corporation, or TWC, a multinational provider of global security
services. We were incorporated in 1988 as a wholly-owned
subsidiary of TWC. In July 1994, we became a publicly-traded
company. In 2002, TWC was acquired by Group 4 Falck A/ S,
which became our new parent company. In July 2003, we purchased
all of our common stock owned by Group 4 Falck A/ S and became
an independent company. In November 2003, we changed our
corporate name to The GEO Group, Inc. We currently
trade on the New York Stock Exchange under the ticker symbol
GGI.
As of April 2, 2006, we operated a total of 56
correctional, detention, mental health and residential treatment
facilities and had over 48,370 beds under management or for
which we had been awarded contracts. We maintained an average
facility occupancy rate of 97.5% and 97.0% for the fiscal year
ended January 1, 2006 and the quarter ended April 2,
2006, respectively. For the fiscal year ended January 1,
2006, we had consolidated revenues of $612.9 million and
consolidated operating income of $7.9 million. For the
quarter ended April 2, 2006 we had consolidated revenues of
$185.9 million and consolidated operating income of
$12.5 million.
Overview of Operations
We offer services that go beyond simply housing offenders in a
safe and secure manner for our correctional and detention
facilities. We offer a wide array of in-facility rehabilitative
and educational programs. Inmates at most of our facilities can
also receive basic education through academic programs designed
to improve inmates literacy levels and enhance the
opportunity to acquire General Education Development
certificates. Most of our managed facilities also offer
vocational training for in-demand
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occupations to inmates who lack marketable job skills. In
addition, most of our managed facilities offer life
skills/transition planning programs that provide inmates job
search training and employment skills, anger management skills,
health education, financial responsibility training, parenting
skills and other skills associated with becoming productive
citizens. We also offer counseling, education and/or treatment
to inmates with alcohol and drug abuse problems at most of the
domestic facilities we manage.
Our mental health and residential treatment facility services
primarily involve the provision of acute mental health and
related administrative services to mentally ill patients that
have been placed under public sector supervision and care. At
these mental health facilities, we employ psychiatrists,
physicians, nurses, counselors, social workers and other trained
personnel to deliver active psychiatric treatment which is
designed to diagnose, treat and rehabilitate patients for
community reintegration.
Quality of Operations
We operate each facility in accordance with our company-wide
policies and procedures and with the standards and guidelines
required under the relevant management contract. For many
facilities, the standards and guidelines include those
established by the American Correctional Association, or ACA.
The ACA is an independent organization of corrections
professionals, which establishes correctional facility standards
and guidelines that are generally acknowledged as a benchmark by
governmental agencies responsible for correctional facilities.
Many of our contracts in the United States require us to seek
and maintain ACA accreditation of the facility. We have sought
and received ACA accreditation and re-accreditation for all such
facilities. We achieved a median re-accreditation score of 98.4%
in fiscal year 2005. Approximately 72% of our 2005
U.S. corrections revenue was derived from ACA accredited
facilities. We have also achieved and maintained certification
by the Joint Commission on Accreditation for Healthcare
Organizations, or JCAHO, for both of our mental health
facilities and two of our correctional facilities. We have been
successful in achieving and maintaining accreditation under the
National Commission on Correctional Health Care, or NCCHC, in a
majority of the facilities that we currently operate. The NCCHC
accreditation is a voluntary process which we have used to
establish comprehensive health care policies and procedures to
meet and adhere to the ACA standards. The NCCHC standards, in
most cases, exceed ACA Health Care Standards.
Marketing and Business Proposals
Our primary potential customers are governmental agencies
responsible for local, state and federal correctional facilities
in the United States and governmental agencies responsible for
correctional facilities in Australia, South Africa and the
United Kingdom. Other primary customers include state agencies
in the U.S. responsible for mental health facilities, and
other foreign governmental agencies.
Governmental agencies responsible for correctional and detention
facilities generally procure goods and services through requests
for proposals. A typical request for proposal requires bidders
to provide detailed information, including, but not limited to,
descriptions of the following: the services to be provided by
the bidder, its experience and qualifications, and the price at
which the bidder is willing to provide the services (which may
include the renovation, improvement or expansion of an existing
facility, or the planning, design and construction of a new
facility).
If the project meets our profile for new projects, we then will
submit a written response to the request for proposal. We
estimate that we typically spend between $100,000 and $200,000
when responding to a request for proposal. We have engaged and
intend in the future to engage independent consultants to assist
us in developing privatization opportunities and in responding
to requests for proposals, monitoring the legislative and
business climate, and maintaining relationships with existing
customers.
Our state and local experience has been that a period of
approximately 60 to 90 days is generally required from the
issuance of a request for proposal to the submission of our
response to the request for proposal; that between one and four
months elapse between the submission of our response and the
agencys award for a contract; and that between one and
four months elapse between the award of a contract and the
commencement of construction of the facility, in the case of a
new facility, or the management of the facility in the case of
an existing facility. If the facility for which an award has
been made must be constructed, our
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experience is that construction usually takes between nine and
24 months, depending on the size and complexity of the
project; therefore, management of a newly constructed facility
typically commences between 10 and 28 months after the
governmental agencys award.
Our federal experience has been that a period of approximately
60 to 90 days is generally required from the issuance of a
request for proposal to the submission of our response to the
request for proposal; that between 12 and 18 months elapse
between the submission of our response and the agencys
award for a contract; and that between four and 18 weeks
elapse between the award of a contract and the commencement of
construction of the facility, in the case of a new facility, or
the management of the facility in the case of an existing
facility. If the facility for which an award has been made must
be constructed, our experience is that construction usually
takes between nine and 24 months, depending on the size and
complexity of the project; therefore, management of a newly
constructed facility typically commences between 10 and
28 months after the governmental agencys award.
Facility Design, Construction and Finance
We offer governmental agencies consultation and management
services relating to the design and construction of new
correctional and detention facilities and the redesign and
renovation of older facilities. As of April 2, 2006, we had
provided services for the design and construction of forty-three
facilities and for the redesign and renovation of thirteen
facilities.
Contracts to design and construct or to redesign and renovate
facilities may be financed in a variety of ways. Governmental
agencies may finance the construction of such facilities through
the following:
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a one time general revenue appropriation by the governmental
agency for the cost of the new facility; |
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general obligation bonds that are secured by either a limited or
unlimited tax levy by the issuing governmental entity; or |
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revenue bonds or certificates of participation secured by an
annual lease payment that is subject to annual or bi-annual
legislative appropriations. |
We may also act as a source of financing or as a facilitator
with respect to the financing of the construction of a facility.
In these cases, the construction of such facilities may be
financed through various methods including, but not limited to,
the following:
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funds from equity offerings of our stock; |
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cash flows from operations; |
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borrowings from banks or other institutions (which may or may
not be subject to government guarantees in the event of contract
termination); or |
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lease arrangements with third parties. |
If the project is financed using direct governmental
appropriations, with proceeds of the sale of bonds or other
obligations issued prior to the award of the project or by us
directly, then financing is in place when the contract relating
to the construction or renovation project is executed. If the
project is financed using project-specific tax-exempt bonds or
other obligations, the construction contract is generally
subject to the sale of such bonds or obligations. Generally,
substantial expenditures for construction will not be made on
such a project until the tax-exempt bonds or other obligations
are sold; and, if such bonds or obligations are not sold,
construction and therefore, management of the facility, may
either be delayed until alternative financing is procured or the
development of the project will be suspended or entirely
cancelled. If the project is self-financed by us, then financing
is generally in place prior to the commencement of construction.
Under our construction and design management contracts, we
generally agree to be responsible for overall project
development and completion. We typically act as the primary
developer on construction contracts for facilities and
subcontract with national general contractors. Where possible,
we subcontract with construction companies that we have worked
with previously. We make use of an in-house staff of architects
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and operational experts from various correctional disciplines
(e.g. security, medical service, food service, inmate programs
and facility maintenance) as part of the team that participates
from conceptual design through final construction of the
project. This staff coordinates all aspects of the development
with subcontractors and provides site-specific services.
When designing a facility, our architects seek to utilize, with
appropriate modifications, prototype designs we have used in
developing prior projects. We believe that the use of these
designs allows us to reduce cost overruns and construction
delays and to reduce the number of correctional officers
required to provide security at a facility, thus controlling
costs both to construct and to manage the facility. Our facility
designs also maintain security because they increase the area
under direct surveillance by correctional officers and make use
of additional electronic surveillance.
Competitive Advantages
We believe we enjoy the following competitive advantages:
Established Long Term Relationships with High-Quality
Government Customers. We have developed long term
relationships with our government customers and have generally
been successful at retaining our facility management contracts.
We have provided correctional and detention management services
to the U.S. Federal Government for 19 years, the State
of California for 18 years, the State of Texas for
18 years, various Australian state government entities for
14 years and the State of Florida for 12 years. These
customers accounted for approximately 61% of our consolidated
revenues for the fiscal year ended January 1, 2006. Our
strong operating track record has enabled us to achieve a high
renewal rate for contracts, thereby providing us with a stable
source of revenue. During the past three years, we renewed
approximately 90% of the contracts that were scheduled for
renewal or expiration during that period. In addition, over the
same three-year period, we won approximately 59% of the total
number of beds for which we submitted RFPs.
Diverse, Full-Service Facility Developer and Operator. We
have developed comprehensive expertise in the design,
construction and financing of high quality correctional,
detention and mental health facilities. In addition, we have
extensive experience in overall facility operations, including
staff recruitment, administration, facility maintenance, food
service, healthcare, security, supervision, treatment and
education of inmates. We believe that the breadth of our service
offerings gives us the flexibility and resources to respond to
customers needs as they develop. We believe that the
relationships we foster when offering these additional services
also help us win new contracts and renew existing contracts.
Regional U.S. Operating Structure and Presence in Key
International Markets. We operate three regional
U.S. offices and three international offices that provide
administrative oversight and support to our correctional and
detention facilities and allow us to maintain close
relationships with our customers and suppliers. Each of our
three regional U.S. offices is responsible for the
facilities located within a defined geographic area. We believe
that our regional operating structure is unique within the U.S.
private corrections industry and provides us with the
competitive advantage of close proximity and direct access to
our customers and our facilities. We believe that this regional
structure has facilitated the rapid integration of CSCs
facilities into our operations. We also believe that our
regional structure and international offices will help with the
integration of any future acquisitions.
Experienced, Proven Senior Management Team. Our top three
senior executives have over 56 years of combined industry
experience, have worked together at our company for more than
15 years and have established a track record of growth and
profitability. Under their leadership, our annual consolidated
revenues have grown from $40.0 million in 1991 to
$612.9 million in 2005. Our Chief Executive Officer,
George C. Zoley, is one of the pioneers of the industry,
having developed and opened what we believe was one of the first
privatized detention facilities in the United States in 1986. In
addition to senior management, our operational and facility
level management has significant operational experience and
expertise.
S-53
Strategies
In order to strengthen our market position, enhance growth and
maximize our profitability and cash flow, we intend to:
Provide High Quality, Essential Services at Lower Costs.
Our objective is to provide federal, state and local
governmental agencies with high quality, essential services at a
lower cost than they themselves could achieve. We have developed
considerable expertise in the management of facility security,
administration, rehabilitation, education, health and food
services. Our quality is recognized through many accreditations
including that of the American Correctional Association, which
has certified facilities representing approximately 72% of our
U.S. corrections revenue as of year-end 2005.
Maintain Disciplined Operating Approach. We manage our
business on a contract by contract basis in order to maximize
our operating margins. We typically refrain from pursuing
contracts that we do not believe will yield attractive profit
margins in relation to the associated operational risks. In
addition, we generally do not engage in facility development
without having a corresponding management contract award in
place, although we may opt to do so in select situations when we
believe attractive business development opportunities may become
available at a given location. We have also elected not to enter
certain international markets with a history of economic and
political instability. We believe that our strategy of
emphasizing lower risk, higher profit opportunities helps us to
consistently deliver strong operational performance, lower our
costs and increase our overall profitability.
Expand Into Complementary Government-Outsourced Services.
We intend to capitalize on our long term relationships with
governmental agencies to become a more diversified provider of
government-outsourced services. These opportunities may include
services which leverage our existing competencies and expertise,
including the design, construction and management of large
facilities, the training and management of a large workforce and
our ability to service the needs and meet the requirements of
government clients. We believe that government outsourcing of
currently internalized functions will increase largely as a
result of the public sectors desire to maintain quality
service levels amid governmental budgetary constraints. We
believe that our successful expansion into the mental health and
residential treatment services sector is an example of our
ability to deliver higher quality services at lower costs in new
areas of privatization.
Pursue International Growth Opportunities. As a global
provider of privatized correctional services, we are able to
capitalize on opportunities to operate existing or new
facilities on behalf of foreign governments. We currently have
international operations in Australia, Canada, South Africa and
the United Kingdom. We intend to further penetrate the current
markets we operate in and to expand into new international
markets which we deem attractive. For example, during the fourth
quarter of 2004, we opened an office in the United Kingdom to
vigorously pursue new business opportunities in England, Wales
and Scotland. In March 2006, we entered into a contract to
manage the operations of the 198-bed Campsfield House in
Kidlington, United Kingdom. We expect to begin operations under
this contract in the second quarter of 2006.
Selectively Pursue Acquisition Opportunities. We consider
acquisitions that are strategic in nature and enhance our
geographic platform on an ongoing basis. On November 4,
2005, we acquired CSC, bringing over 8,000 additional adult
correctional and detention beds under our management. We will
continue to review acquisition opportunities that may become
available in the future, both in the privatized corrections,
detention, mental health and residential treatment services
sectors, and in complementary government-outsourced services
areas.
Industry Trends
We are encouraged by the number of opportunities that have
recently developed in the privatized corrections and detention
industry. We believe growth in the market for our services will
benefit from the following factors:
Continued Growth of the U.S. Prison Inmate
Population. The number of inmates in the prison and jail
system in the United States has grown at an annual average
growth rate of 3.4% percent since 1995. The total number of
U.S. inmates in custody in federal and state prisons and
local jails is currently estimated at
S-54
approximately 2.2 million. This sustained period of growth
has been driven by a number of factors including higher
incarceration rates and growth in the 14 to
24-year old population
that is typically at the highest risk with regard to potential
incarceration.
Illegal Immigration and Homeland Security Reform. Since
the events of 9/11, ongoing efforts by the United States
Department of Homeland Security to secure the nations
borders and capture and detain illegal aliens have increased
demand for cost efficient detention beds. President Bushs
proposed 2007 budget requests funding for 6,700 new immigration
detention beds for the Bureau of Immigration and Customs
Enforcement, and 9,500 new detainee beds for the United States
Marshals Service.
Greater Federal Government Acceptance of Privatized
Correctional Facilities. The number of federal prisoners
being held in private facilities has increased from 15,524 at
year-end 2000 to 26,544 at midyear 2005, representing a compound
annual growth rate of over 12%. Of the 39,068 new federal prison
beds that were added over that same period, we estimate that 28%
were awarded to the private sector.
Capacity Constraints of Public Correctional Systems.
State and federal correctional systems are experiencing
overcrowding conditions and tight budget constraints. At the end
of 2004, 24 state prison systems and the federal prison
system were operating at or above designed detention capacity.
The federal prison system, which includes the Bureau of Prisons,
the United States Marshals Service, the Department of Homeland
Security and the Bureau of Immigration and Customs Enforcement,
operated at 140% of design capacity at year-end 2004. As a
result, federal and state jurisdictions throughout the United
States are increasingly exploring partnerships with private
service providers as a cost effective alternative to the growth
of their public payrolls.
Aging State and Federal Correctional Facilities.
Approximately 50% of adult prisons currently in operation in the
United States are more than 30 years old and 25% to 30% of
the facilities are more than 60 years old. It is likely
that significant capital expenditures will be required in order
to refurbish or replace outdated facilities. We believe that
budget constraints will encourage prison agencies to explore
outsourcing to private operations as an alternative to capital
intensive projects such as prison construction.
Cost and Quality Advantages of Private Prisons. According
to several government and university studies, private prison
facilities operate at a lower cost than public sector
facilities. More than 50% of private facilities are accredited
by the American Corrections Association, referred to as ACA,
versus a lower percentage of public prisons. The ACAs
standards impose strict requirements with regard to
accountability, response time, level of quality, safety records
and general programs and services.
Growth of Privatization in International Markets. We
estimate that the capacity of privately managed adult secure
institutional facilities in operation worldwide increased from
approximately 60,000 beds at year end 1995 to approximately
179,000 beds at year-end 2005. The United Kingdom, Australia and
South Africa have growing prison markets. The United Kingdom is
the largest non-U.S. market for private prisons and through its
Private Finance Initiative has indicated its intention to
increase its reliance on private correctional facilities to
accommodate future inmate growth.
S-55
Facilities
The following table summarizes certain information with respect
to facilities that GEO (or a subsidiary or joint venture of
GEOs) operated under a management contract or had an award
to manage as of May 24, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility Name |
|
Design | |
|
|
|
|
|
|
|
Commencement |
|
|
|
Renewal |
|
Type of |
& Location |
|
Capacity | |
|
Customer |
|
Facility Type |
|
Security Level |
|
of Current Term |
|
Duration |
|
Option |
|
Ownership |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allen
Correctional Center
Kinder, LA |
|
|
1,538 |
|
|
LA DPS&C |
|
State Correctional Facility |
|
Medium/ Maximum |
|
October 2003 |
|
3 years |
|
One, Two-year |
|
Manage only |
|
Arizona State Prison
Florence West
Florence, AZ |
|
|
750 |
|
|
ADOC |
|
State DUI/RTC Correctional Facility |
|
Minimum/ Medium |
|
October 2002 |
|
10 years |
|
Two, Five-year |
|
Lease |
|
Arizona State Prison
Florence Sex Offender
Florence, AZ |
|
|
1,000 |
|
|
ADOC |
|
State Sex Offender Correctional Facility |
|
Minimum/ Medium |
|
N/A |
|
10 years |
|
Two, Five-year |
|
Lease |
|
Arizona State Prison
Phoenix West
Phoenix, AZ |
|
|
450 |
|
|
ADOC |
|
State DUI/RTC Correctional Facility |
|
Minimum/ Medium |
|
July 2002 |
|
10 years |
|
Two, Five-year |
|
Lease |
|
Aurora ICE Processing
Center
Aurora, CO |
|
|
356 |
|
|
ICE |
|
Federal Detention Facility |
|
Minimum/ Medium |
|
March 2003 |
|
1 year |
|
Four, Six Month |
|
Lease-CPV |
|
Bill Clayton Detention
Center
Littlefield, TX |
|
|
310 |
|
|
Littlefield, TX/ WDOC |
|
Local/ State Correctional/ Detention Facility |
|
Minimum/ Medium |
|
January 2004 |
|
10 years |
|
Two Five-year |
|
Manage Only |
|
Bridgeport Correctional
Center
Bridgeport, TX |
|
|
520 |
|
|
TDCJ |
|
State Correctional Facility |
|
Minimum/ Medium |
|
September 2005 |
|
3 year |
|
Two, One-year |
|
Manage only |
|
Bronx
Community Corrections
Center
Bronx, NY |
|
|
130 |
|
|
BOP |
|
Federal Halfway House |
|
Minimum |
|
April 2002 |
|
Two year |
|
Three, One-year |
|
Lease |
|
Brooklyn
Community Corrections
Center
Brooklyn, NY |
|
|
174 |
|
|
BOP |
|
Federal Halfway House |
|
Minimum |
|
February 2005 |
|
Two year |
|
Three One-year |
|
Lease |
|
Broward
Transition Center
Deerfield Beach, FL |
|
|
450 |
|
|
ICE/ Broward County |
|
Federal & Local Detention Facility |
|
Minimum |
|
October 2003/ February 2003 |
|
1 year/
1 year |
|
Four, One-year/ Unlimited, One-Year |
|
Lease-CPV |
|
Central Texas Detention Facility
San Antonio, TX(2) |
|
|
664 |
|
|
Bexar County/ ICE & USMS |
|
Local & Federal Detention Facility |
|
All levels |
|
January 2002 |
|
3 years |
|
One, Two-year |
|
Lease- County |
|
Central Valley MCCF
McFarland, CA |
|
|
550 |
|
|
CDCR |
|
State Correctional Facility |
|
Medium |
|
March 1997 |
|
10 years |
|
N/A |
|
Lease-CPV |
|
Cleveland Correctional
Center
Cleveland, TX |
|
|
520 |
|
|
TDCJ |
|
State Correctional Facility |
|
Minimum/ Medium |
|
January 2004 |
|
3 year |
|
Two, One-year |
|
Manage only |
|
Coke County JJC
Bronte, TX |
|
|
200 |
|
|
TYC |
|
State Juvenile Correctional Facility |
|
Medium/ Maximum |
|
September 2004 |
|
2 year |
|
N/A |
|
Lease |
|
Colorado Pre-Parole &
Revocation Center
Pueblo, CO |
|
|
500 |
|
|
CDOC |
|
State Correctional Facility |
|
Medium |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
Desert View MCCF
Adelanto, CA |
|
|
568 |
|
|
CDCR |
|
State Correctional Facility |
|
Medium |
|
March 1997 |
|
10 years |
|
N/A |
|
Lease-CPV |
|
Dickens County
Correctional Center
Spur, TX |
|
|
489 |
|
|
Dickens County/ ICE/Other Counties |
|
Local & Federal Correctional Facility |
|
All levels |
|
August 2001 |
|
15 years |
|
N/A |
|
Manage only |
|
East Mississippi
Correctional
Facility
Meridian, MS |
|
|
1,000 |
|
|
MDOC |
|
State Correctional Facility |
|
Mental Health |
|
April 1997 |
|
5 years |
|
One, Two-year |
|
Manage only |
S-56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility Name |
|
Design | |
|
|
|
|
|
|
|
Commencement |
|
|
|
Renewal |
|
Type of |
& Location |
|
Capacity | |
|
Customer |
|
Facility Type |
|
Security Level |
|
of Current Term |
|
Duration |
|
Option |
|
Ownership |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fort Worth Community
Corrections Facility
Fort Worth, TX |
|
|
225 |
|
|
TDCJ |
|
State Halfway House |
|
Minimum |
|
September 2003 |
|
2 years |
|
Two, Two year |
|
Leased |
|
Frio County Detention
Center
Pearsall, TX |
|
|
391 |
|
|
Frio County/ Other Counties |
|
Local Detention Facility |
|
All levels |
|
December 1997 |
|
12 years |
|
One, Five year |
|
Part Leased/ Part Owned |
|
George W. Hill
Correctional Facility
Thornton, PA |
|
|
1,851 |
|
|
Delaware County |
|
Local Detention Facility |
|
All levels |
|
June 2003 |
|
3 years |
|
Unlimited, Three-year |
|
Manage only |
|
Golden State MCCF
McFarland, CA |
|
|
550 |
|
|
CDCR |
|
State Correctional Facility |
|
Medium |
|
March 1997 |
|
10 years |
|
N/A |
|
Lease-CPV |
|
Graceville Correctional Facility
Graceville, FL |
|
|
1,500 |
|
|
DMS |
|
State Correctional Facility |
|
Medium/ Close |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
Grenada County Jail
Grenada, MS |
|
|
178 |
|
|
Grenada County/ MDOC |
|
Local Detention Facility |
|
All levels |
|
August 2004 |
|
5 year |
|
One, Two year |
|
Manage Only |
|
Guadalupe County Correctional Facility
Santa Rosa, NM(3) |
|
|
600 |
|
|
Guadalupe County/ NMCD |
|
Local/ State Correctional Facility |
|
Medium |
|
September 1998 |
|
5 year |
|
Five one-year extension beginning 2004 |
|
Own |
|
Jefferson County
Downtown Jail
Beaumont, TX |
|
|
500 |
|
|
Jefferson County/ USMS |
|
Local & Federal Detention Facility |
|
All levels |
|
May 1998 |
|
Month to Month |
|
N/A |
|
Manage Only |
|
Karnes Correctional
Center
Karnes City, TX(2) |
|
|
633 |
|
|
Karnes County/ ICE & USMS |
|
Local & Federal Detention Facility |
|
All levels |
|
January 1998 |
|
30 years |
|
N/A |
|
Lease-CPV |
|
Lawrenceville
Correctional Center
Lawrenceville, VA |
|
|
1,536 |
|
|
VDOC |
|
State Correctional Facility |
|
Medium |
|
March 2003 |
|
5 year |
|
Ten, One-year |
|
Manage only |
|
Lawton
Correctional Facility
Lawton, OK |
|
|
2,518 |
|
|
ODOC |
|
State Correctional Facility |
|
Medium |
|
July 2003 |
|
1 year |
|
Four, One-year |
|
Lease-CPV |
|
Lea County Correctional
Facility
Hobbs, NM(3) |
|
|
1,200 |
|
|
Lea County/NMCD |
|
Local/State Correctional Facility |
|
All levels |
|
September 1998 |
|
5 years |
|
Unlimited, 1-year |
|
Lease-CPV |
|
Lockhart Secure Work
Program Facilities
Lockhart, TX |
|
|
1,000 |
|
|
TDCJ |
|
State Correctional Facility |
|
Minimum |
|
January 2004 |
|
3 years |
|
Two, One year |
|
Manage only |
|
Marshall County
Correctional
Holly Springs, MS |
|
|
1,000 |
|
|
MDOC |
|
State Correctional Facility |
|
Medium |
|
September 2004 |
|
2 years |
|
Three, One-year |
|
Manage only |
|
McFarland CCF
McFarland, CA |
|
|
224 |
|
|
CDCR |
|
State Correctional Facility |
|
Minimum |
|
January 2006 |
|
5 years |
|
Two, 5-year |
|
Lease-CPV |
|
Migrant Operations
Center
Guantanamo Bay NAS, Cuba |
|
|
100 |
|
|
ICE |
|
Federal Migrant Center |
|
Minimum |
|
October 2003 |
|
Four Month |
|
Two One-month |
|
Manage only |
|
Moore Haven
Correctional Facility
Moore Haven, FL |
|
|
985 |
|
|
DMS |
|
State Correctional Facility |
|
Medium |
|
January 2000 |
|
2 years |
|
Unlimited, Two-year |
|
Manage only |
|
New Castle Correctional
Facility
New Castle, IN |
|
|
2,416 |
|
|
IDOC |
|
State Correctional Facility |
|
Medium |
|
January 2006 |
|
4 years |
|
Three Two-year |
|
Manage only |
|
Newton County
Correctional Center
Newton, TX |
|
|
872 |
|
|
Newton County/ TDCJ/ ICE/Idaho |
|
State & Federal Correctional Facility |
|
All levels |
|
February 2002 |
|
5 years |
|
Two Five-year |
|
Manage Only |
|
North Texas ISF
Fort Worth, TX |
|
|
400 |
|
|
TDCJ |
|
State Intermediate Sanction Facility |
|
Minimum |
|
March 2004 |
|
3 years |
|
Four, One-year |
|
Lease |
|
Northwest Detention Center
Tacoma, WA |
|
|
890 |
|
|
ICE |
|
Federal Detention Facility |
|
Minimum/ Medium |
|
April 2004 |
|
1 year |
|
Four One-year |
|
Own |
|
Queens Private
Correctional Facility
Jamaica, NY |
|
|
220 |
|
|
OFDT/ USMS |
|
Federal Detention Facility |
|
Minimum/ Medium |
|
April 2002 |
|
1 year |
|
Four, One-year |
|
Lease-CPV |
S-57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility Name |
|
Design | |
|
|
|
|
|
|
|
Commencement |
|
|
|
Renewal |
|
Type of |
& Location |
|
Capacity | |
|
Customer |
|
Facility Type |
|
Security Level |
|
of Current Term |
|
Duration |
|
Option |
|
Ownership |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reeves County
Detention Complex
Pecos, TX(2) |
|
|
3,064 |
|
|
Reeves County/ ADOC/BOP |
|
Federal & State Correctional Facility |
|
All levels |
|
November 2003 |
|
10 years |
|
N/A |
|
Manage only |
|
Rivers Correctional
Institution
Winton, NC |
|
|
1,200 |
|
|
BOP |
|
Federal Correctional Facility |
|
Low |
|
March 2001 |
|
3 years |
|
Seven, One-year |
|
Own |
|
Sanders Estes Unit
Venus, TX |
|
|
1,000 |
|
|
TDCJ |
|
State Correctional Facility |
|
Minimum/ Medium |
|
January 2004 |
|
3 years |
|
Two, One-year |
|
Manage only |
|
South Bay Correctional Facility
South Bay, FL |
|
|
1,862 |
|
|
DMS |
|
State Correctional Facility |
|
Medium/ Close |
|
June 2003 |
|
1 year |
|
Unlimited, Two-year |
|
Manage only |
|
South Texas Detention Complex
Pearsall, TX |
|
|
1,020 |
|
|
ICE |
|
Federal Detention Facility |
|
Minimum/ Medium |
|
June 2005 |
|
1 year |
|
Four, One-year |
|
Lease |
|
South Texas ISF
Houston, TX |
|
|
450 |
|
|
TDCJ |
|
State Intermediate Sanction Facility |
|
Minimum |
|
March 2004 |
|
3 years |
|
Two One-year |
|
Manage Only |
|
Taft Correctional Institution
Taft, CA |
|
|
2,048 |
|
|
BOP |
|
Federal Correctional Facility |
|
Low/ Minimum |
|
August 1997 |
|
3 years |
|
Seven, One-year |
|
Manage only |
|
Tri-County Justice & Detention Center
Ullin, IL |
|
|
226 |
|
|
Pulaski County/ USMS |
|
Local & Federal Detention Facility |
|
All levels |
|
July 2004 |
|
6 years |
|
Two, Five-year |
|
Manage only |
|
Val Verde Correctional Facility
Del Rio, TX(2) |
|
|
784 |
|
|
Val Verde County |
|
Local & Federal Detention Facility |
|
All levels |
|
January 2001 |
|
20 years |
|
Unlimited, Five-year |
|
Own |
|
Western Region Detention Facility at San Diego
San Diego, CA |
|
|
700 |
|
|
USMS |
|
Federal Detention Facility |
|
Maximum |
|
January 2006 |
|
5 years |
|
One, Five-year |
|
Lease |
|
International Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur Gorrie Correctional Centre
Wacol, Australia |
|
|
710 |
|
|
QLD DCS |
|
Reception & Remand Centre |
|
All levels |
|
December 2002 |
|
5 years |
|
One, Five-year |
|
Manage only |
|
Campsfield House |
|
|
198 |
|
|
U.K.
Home Office |
|
Immigration Removal Centre |
|
Medium |
|
May 2006 |
|
5 years |
|
N/A |
|
Manage only |
|
Fulham Correctional Centre
Victoria, Australia |
|
|
845 |
|
|
VIC MOC |
|
State Prison |
|
Minimum/ Medium |
|
September 2003 |
|
3 years |
|
Four, Three-year |
|
Manage only |
|
Junee Correctional Centre
Junee, Australia |
|
|
750 |
|
|
NSW |
|
State Prison |
|
Minimum/ Medium |
|
April 2001 |
|
5 years |
|
One, Three-year |
|
Manage only |
|
Kutama-Sinthumule Correctional Centre Northern Province,
Republic of South Africa |
|
|
3,024 |
|
|
RSA DCS |
|
National Prison |
|
Maximum |
|
July 1999 |
|
25 years |
|
None |
|
Manage only |
|
Melbourne Custody Centre
Melbourne, Australia |
|
|
67 |
|
|
VIC CC |
|
State Jail |
|
All levels |
|
March 2003 |
|
2 years |
|
One, One-year |
|
Manage only |
|
New Brunswick
Youth Centre
Mirimachi, Canada(4) |
|
|
N/A |
|
|
PNB |
|
Provincial Juvenile Facility |
|
All levels |
|
October 1997 |
|
25 years |
|
One, Ten-year |
|
Manage only |
|
Pacific Shores Healthcare
Victoria, Australia(5) |
|
|
N/A |
|
|
VIC CV |
|
Health Care Services |
|
N/A |
|
December 2003 |
|
3 years |
|
Four, Six-months |
|
Manage only |
S-58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility Name |
|
Design | |
|
|
|
|
|
|
|
Commencement |
|
|
|
Renewal |
|
Type of |
& Location |
|
Capacity | |
|
Customer |
|
Facility Type |
|
Security Level |
|
of Current Term |
|
Duration |
|
Option |
|
Ownership |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mental Health Facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South Florida State Hospital
Pembroke Pines, FL |
|
|
325 |
|
|
DCF |
|
State Psychiatric Hospital |
|
Mental Health |
|
July 2003 |
|
5 years |
|
Two, Five-year |
|
Manage only |
|
Fort Bayard Medical Center
Ft. Bayard, NM |
|
|
230 |
|
|
|
|
State Mental Health Hospital |
|
Mental Health |
|
|
|
|
|
|
|
Manage only |
|
South Florida Evaluation and Treatment Center Miami, FL |
|
|
200 |
|
|
DCF |
|
State Forensic Hospital |
|
Mental Health |
|
July 2005 |
|
5 years |
|
Two, Five-year |
|
Manage only |
|
|
|
Abbreviation |
|
Customer |
|
|
|
LA DPS&C
|
|
Louisiana Department of Public Safety & Corrections |
|
ADOC |
|
Arizona Department of Corrections |
|
ICE |
|
Bureau of Immigration & Customs Enforcement |
|
WDOC |
|
Wyoming Department of Corrections |
|
TDCJ |
|
Texas Department of Criminal Justice |
|
CDCR |
|
California Department of Corrections |
|
CDOC |
|
Colorado Department of Corrections |
|
TYC |
|
Texas Youth Commission |
|
MDOC |
|
Mississippi Department of Corrections (East
Mississippi & Marshall County) |
|
NMCD |
|
New Mexico Corrections Department |
|
VDOC |
|
Virginia Department of Corrections |
|
ODOC |
|
Oklahoma Department of Corrections |
|
DMS |
|
Florida Department of Management Services |
|
BOP |
|
Federal Bureau of Prisons |
|
USMS |
|
United States Marshals Service |
|
IDOC |
|
Indiana Department of Corrections |
|
QLD DCS |
|
Department of Corrective Services of the State of Queensland |
|
OFDT |
|
Office of Federal Detention Trustees |
|
VIC MOC |
|
Minister of Corrections of the State of Victoria |
|
NSW |
|
Commissioner of Corrective Services for New South Wales |
|
RSA DCS |
|
Republic of South Africa Department of Correctional Services |
|
VIC CC |
|
The Chief Commissioner of the Victoria Police |
|
PNB |
|
Province of New Brunswick |
|
VIC CV |
|
The State of Victoria represented by Corrections Victoria |
|
DCF |
|
Florida Department of Children & Families |
|
|
(1) |
GEO also leases a facility from CPV in Jena, LA that was not in
use during fiscal year 2005. The Jena facility remains inactive.
See Note 12 of the Financial Statements. |
|
(2) |
GEO provides services at this facility through various
Inter-Governmental Agreements, or IGAs, for the county, USMS,
ICE, BOP, and other state jurisdictions. |
|
(3) |
GEO has a five-year contract with four one-year options to
operate this facility on behalf of the county. The county, in
turn, has a one-year contract, subject to annual renewal, with
the state to house state prisoners at the facility. |
|
(4) |
The contract for this facility only requires GEO to provide
maintenance services. |
|
(5) |
GEO provides comprehensive healthcare services to 11
government-operated prisons under this contract. |
S-59
The following table sets forth the number of contracts that have
terms subject to renewal or re-bid in each of the next five
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of | |
|
|
|
Total Number of | |
|
|
|
|
Beds up for | |
|
|
|
Beds up for | |
Year |
|
Renewals(1) | |
|
Renewal | |
|
Re-bids(1) | |
|
Re-bid | |
|
|
| |
|
| |
|
| |
|
| |
2006(2)
|
|
|
3 |
|
|
|
1,010 |
|
|
|
6 |
|
|
|
6,406 |
|
2007
|
|
|
0 |
|
|
|
0 |
|
|
|
7 |
|
|
|
4,709 |
|
2008
|
|
|
0 |
|
|
|
0 |
|
|
|
3 |
|
|
|
3,588 |
|
2009
|
|
|
1 |
|
|
|
750 |
|
|
|
9 |
|
|
|
6,137 |
|
2010
|
|
|
1 |
|
|
|
226 |
|
|
|
3 |
|
|
|
1,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
1,986 |
|
|
|
28 |
|
|
|
22,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Many of our contracts with our government customers have an
initial fixed term and are thereafter subject to periodic
renewals at the unilateral option of the customer. This table
assumes that all of our government customers will exercise their
unilateral renewal options under each existing facility
management contract and, accordingly, that each contract will
not be up for renewal or re-bid, as the case may be, until the
full stated term of the contract, including the exercise of all
applicable renewal options, has run. Although our historical
contract renewal rate exceeds 90%, we cannot assure you that our
customers will in fact exercise all of their unilateral renewal
options under existing contracts. See Risk
Factors We are subject to the termination or
non-renewal of our government contracts, which could adversely
affect our results of operations and liquidity, and our ability
to secure new facility management contracts from other
government customers. |
|
(2) |
Re-bid figures for 2006 include our Western Region Detention
Facility in San Diego, California, with respect to which we
secured a new contract in January 2006, and our South Bay
Correctional Facility, with respect to which we received a
notification of intent to award in April 2006. |
We undertake substantial efforts to renew our contracts upon
their expiration but we can provide no assurance that we will in
fact be able to do so. Previously, in connection with our
contract renewals, either we or the contracting government
agency have typically requested changes or adjustments to
contractual terms. As a result, contract renewals may be made on
terms that are more or less favorable to us than in prior
contractual terms.
Our contracts typically allow a contracting governmental agency
to terminate a contract with or without cause by giving us
written notice ranging from 30 to 180 days. If government
agencies were to use these provisions to terminate, or
renegotiate the terms of their agreements with us, our financial
condition and results of operations could be materially
adversely affected.
In addition, in connection with our management of such
facilities, we are required to comply with all applicable local,
state and federal laws and related rules and regulations. Our
contracts typically require us to maintain certain levels of
coverage for general liability, workers compensation,
vehicle liability, and property loss or damage. See
Insurance below. If we do not maintain the required
categories and levels of coverage, the contracting governmental
agency may be permitted to terminate the contract. In addition,
we are required under our contracts to indemnify the contracting
governmental agency for all claims and costs arising out of our
management of facilities and, in some instances, we are required
to maintain performance bonds relating to the construction,
development and operation of facilities.
Competition
We compete primarily on the basis of the quality and range of
services we offer; our experience domestically and
internationally in the design, construction, and management of
privatized correctional and detention facilities; our
reputation; and our pricing. We compete directly with the public
sector, where governmental agencies that are responsible for the
operation of correctional, detention, mental health and
residential treatment facilities are often seeking to retain
projects that might otherwise be privatized. In the
S-60
private sector, we compete with a number of companies,
including, but not limited to: Corrections Corporation of
America; Cornell Companies, Inc.; Management and Training
Corporation; and Group 4 Falck Global Solutions Limited. Some of
our competitors are larger and have more resources than we do.
We also compete in some markets with small local companies that
may have a better knowledge of the local conditions and may be
better able to gain political and public acceptance.
Employees and Employee Training
As of April 2, 2006, we had 8,463 full-time employees.
Of such full-time employees, 171 were employed at our
headquarters and regional offices and 8,292 were employed at
facilities and international offices. We employ management,
administrative and clerical, security, educational services,
health services and general maintenance personnel at our various
locations. Approximately 620 and 962 employees are covered by
collective bargaining agreements in the United States and at
international offices, respectively. We believe that our
relations with our employees are satisfactory.
Under the laws applicable to most of our operations, and
internal company policies, our correctional officers are
required to complete a minimum amount of training. We generally
require at least 160 hours of pre-service training before
an employee is allowed to work in a position that will bring the
employee in contact with inmates in our domestic facilities,
consistent with ACA standards and/or applicable state laws. In
addition to a minimum of 160 hours of pre-service training,
most states require 40 or 80 hours of
on-the-job training.
Florida law requires that correctional officers receive
520 hours of training. We believe that our training
programs meet or exceed all applicable requirements.
Our training program for domestic facilities begins with
approximately 40 hours of instruction regarding our
policies, operational procedures and management philosophy.
Training continues with an additional 120 hours of
instruction covering legal issues, rights of inmates, techniques
of communication and supervision, interpersonal skills and job
training relating to the particular position to be held. Each of
our employees who has contact with inmates receives a minimum of
40 hours of additional training each year, and each manager
receives at least 24 hours of training each year.
At least 240 and 160 hours of training are required for our
employees in Australia and South Africa, respectively, before
such employees are allowed to work in positions that will bring
them into contact with inmates. Our employees in Australia and
South Africa receive a minimum of 40 hours of additional
training each year.
Business Regulations and Legal Considerations
Many governmental agencies are required to enter into a
competitive bidding procedure before awarding contracts for
products or services. The laws of certain jurisdictions may also
require us to award subcontracts on a competitive basis or to
subcontract or partner with businesses owned by women or members
of minority groups.
Certain states, such as Florida, deem correctional officers to
be peace officers and require our personnel to be licensed and
subject to background investigation. State law also typically
requires correctional officers to meet certain training
standards.
The failure to comply with any applicable laws, rules or
regulations or the loss of any required license could have a
material adverse effect on our business, financial condition and
results of operations. Furthermore, our current and future
operations may be subject to additional regulations as a result
of, among other factors, new statutes and regulations and
changes in the manner in which existing statutes and regulations
are or may be interpreted or applied. Any such additional
regulations could have a material adverse effect on our
business, financial condition and results of operations.
Insurance
The nature of our business exposes us to various types of
third-party legal claims, including, but not limited to, civil
rights claims relating to conditions of confinement and/or
mistreatment, sexual misconduct
S-61
claims brought by prisoners or detainees, medical malpractice
claims, claims relating to employment matters (including, but
not limited to, employment discrimination claims, union
grievances and wage and hour claims), property loss claims,
environmental claims, automobile liability claims, contractual
claims and claims for personal injury or other damages resulting
from contact with our facilities, programs, personnel or
prisoners, including damages arising from a prisoners
escape or from a disturbance or riot at a facility. In addition,
our management contracts generally require us to indemnify the
governmental agency against any damages to which the
governmental agency may be subject in connection with such
claims or litigation. We maintain insurance coverage for these
types of claims, except for claims relating to employment
matters, for which we carry no insurance.
Claims for which we are insured arising from our
U.S. operations that have an occurrence date of
October 1, 2002 or earlier are handled by TWC and are fully
insured up to an aggregate limit of between $25.0 million
and $50.0 million, depending on the nature of the claim.
With respect to claims for which we are insured arising after
October 1, 2002, we maintain a general liability policy for
all U.S. operations with $52.0 million per occurrence
and in the aggregate. On October 1, 2004, we increased our
deductible on this general liability policy from
$1.0 million to $3.0 million for each claim which
occurs after October 1, 2004. We also maintain insurance to
cover property and casualty risks, workers compensation,
medical malpractice and automobile liability. Our Australian
subsidiary is required to carry tail insurance through 2011
related to a discontinued contract. We also carry various types
of insurance with respect to our operations in South Africa and
Australia. There can be no assurance that our insurance coverage
will be adequate to cover claims to which we may be exposed.
International Operations
Our international operations for fiscal years 2005 and 2004
consisted of the operations of our wholly owned Australian
subsidiaries, and of our consolidated joint venture in South
Africa (South African Custodial Management Pty. Limited, or
SACM). Through our wholly owned subsidiary, GEO Group Australia
Pty. Limited, we currently manage five facilities in Australia.
We operate one facility in South Africa through SACM. Our
international operations for fiscal year 2003 consisted of the
operations of our wholly owned Australian subsidiary only.
During the fourth quarter of 2004, we opened an office in the
United Kingdom to vigorously pursue new business opportunities
in England, Wales and Scotland. On March 6, 2006, we were
awarded a contract to manage the operations of the 198 bed
Campsfield House in Kidlington, United Kingdom. We expect to
begin operations under this contract in the second quarter of
2006.
Business Concentration
Except for the major customers noted in the following table, no
single customer provided more than 10% of our consolidated
revenues during fiscal years 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Various agencies of the U.S. Federal Government
|
|
|
27 |
% |
|
|
27 |
% |
|
|
27 |
% |
Various agencies of the State of Texas
|
|
|
8 |
% |
|
|
9 |
% |
|
|
12 |
% |
Various agencies of the State of Florida
|
|
|
7 |
% |
|
|
12 |
% |
|
|
12 |
% |
Concentration of credit risk related to accounts receivable is
reflective of the related revenues.
Properties
In April 2003, we relocated our corporate offices to Boca Raton,
Florida, under a 10-year lease. In addition, we lease office
space for our eastern regional office in Palm Beach Gardens,
Florida; our central regional office in New Braunfels, Texas;
and our western regional office in Carlsbad, California. We also
lease office space in Sydney, Australia, through our overseas
affiliates, in Sandton, South Africa, and in Theale, England to
support our Australian, South African, and U.K. operations,
respectively. See Business Facilities
for a list of the correctional, detention, mental health and
residential treatment properties we own or lease in connection
with our operations.
S-62
Legal Proceedings
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 May 2005, we
received additional correspondence indicating that the insurance
provider still intends to pursue the claim against our
Australian subsidiary. Although the claim is in the initial
stages and we are still in the process of fully evaluating its
merits, we believe that we have defenses to the allegations
underlying the claim and intend to vigorously defend our rights
with respect to this matter. However, although the insurance
provider has not quantified its damage claim and the outcome of
this matter cannot be predicted with certainty, based on
information known to date, and our preliminary review of the
claim, we believe that, if settled unfavorably, this matter
could have a material adverse effect on our financial condition,
results of operations and cash flows. We are uninsured for any
damages or costs that we may incur as a result of this claim,
including the expenses of defending the claim. We have accrued a
reserve related to the claim 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.
On May 19, 2006, we, along with Corrections Corporation of
America, referred to as CCA, were sued by an individual
plaintiff in the Circuit Court of the Second Judicial Circuit
for Leon County, Florida (Case No. 2005CA001884). The
complaint alleges that, during the period from 1995 to 2004, we
and CCA overbilled the State of Florida by an amount of at least
$12,700,000 by submitting to the State false claims for various
items relating to (i) repairs, maintenance and improvements
to certain facilities which we operate in Florida, (ii) our
staffing patterns in filling vacant security positions at those
facilities, and (iii) our alleged failure to meet the
conditions of certain waivers granted to us by the State of
Florida from the payment of liquidated damages penalties
relating to our staffing patterns at those facilities. The
portion of the complaint relating to us arises out of our
operations at our South Bay and Moore Haven correctional
facilities. The complaint appears to be based largely on the
same set of issues raised by a Florida Inspector Generals
Evaluation Report released in late June 2005, referred to as the
IG Report, which alleged that we and CCA overbilled the State of
Florida by over $12 million.
Subsequently, the Florida Department of Management Services,
referred to as the DMS, which is responsible for administering
our correctional contracts with the State of Florida, conducted
a detailed analysis of the allegations raised by the IG Report
which included a comprehensive written response to the IG Report
which we had prepared and delivered to the DMS. In September
2005, the DMS provided a letter to us stating that, although its
review had not yet been fully completed, it did not find any
indication of any improper conduct by GEO. Although this
determination is not dispositive of the recently initiated
litigation, we believe it supports our position that we have
valid defenses in this matter. We will continue to investigate
this matter and intend to defend our rights vigorously. However,
given the amounts claimed by the plaintiff and the fact that the
nature of the allegations could cause adverse publicity to us,
we believe that this matter, if settled unfavorably to us, could
have a material adverse effect on or financial condition and
results of operations.
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.
S-63
Securities and Exchange Commission
Additional information about us can be found at
www.thegeogroupinc.com. We make available on our website,
free of charge, access to our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q, Current
Reports on
Form 8-K, our
annual proxy statement on Schedule 14A and amendments to
those materials filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities and Exchange Act
of 1934 as soon as reasonably practicable after we
electronically submit such materials to the Securities and
Exchange Commission, or the SEC. In addition, the SEC makes
available on its website, free of charge, reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC, including GEO. The
SECs website is located at http://www.sec.gov. Information
provided on our website or on the SECs website is not part
of this prospectus supplement.
S-64
MANAGEMENT
The following table sets forth the names, ages and a brief
account of the business experience of each of our directors and
certain of our executive officers.
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
Wayne H. Calabrese
|
|
|
55 |
|
|
Vice Chairman, President and COO |
Norman A. Carlson
|
|
|
72 |
|
|
Director |
Anne N. Foreman
|
|
|
58 |
|
|
Director |
Richard H. Glanton
|
|
|
59 |
|
|
Director |
John M. Palms
|
|
|
70 |
|
|
Director |
John M. Perzel
|
|
|
56 |
|
|
Director |
George C. Zoley
|
|
|
56 |
|
|
Chairman of the Board and CEO |
John G. ORourke
|
|
|
55 |
|
|
Senior Vice President and Chief Financial Officer |
John J. Bulfin
|
|
|
52 |
|
|
Senior Vice President, General Counsel and Secretary |
Jorge A. Dominicis
|
|
|
43 |
|
|
Senior Vice President, Residential Treatment Services |
John M. Hurley
|
|
|
58 |
|
|
Senior Vice President, North American Operations |
Donald H. Keens
|
|
|
62 |
|
|
Senior Vice President, International Services |
David N.T. Watson
|
|
|
40 |
|
|
Vice President, Finance and Treasurer |
Brian R. Evans
|
|
|
38 |
|
|
Vice President, Chief Accounting Officer |
Wayne H. Calabrese. Mr. Calabrese is our Vice Chairman of
the Board, President and Chief Operating Officer. He joined us
as Vice President, Business Development in 1989 and has served
in a range of increasingly senior positions since then. From
1992 to 1994, Mr. Calabrese was Chief Executive Officer of
Australasian Correctional Management, Pty Ltd., a Sydney-based
subsidiary of ours. Mr. Calabrese has served as a director
since 1998. Prior to joining us, Mr. Calabrese was a
partner in the Akron, Ohio law firm of Calabrese, Dobbins and
Kepple. He also served as an Assistant City Law Director in
Akron; an Assistant County Prosecutor and Chief of the County
Bureau of Support for Summit County, Ohio; and Legal Counsel and
Director of Development for the Akron Metropolitan Housing
Authority. Mr. Calabrese also serves as a Director of
numerous subsidiaries and partnerships through which we conduct
our global operations.
Norman A. Carlson. Mr. Carlson has served as a director
since 1994 and served previously as a Director of The Wackenhut
Corporation. Mr. Carlson retired from the Department of
Justice in 1987 after serving as the Director of the Federal
Bureau of Prisons for 17 years. During his
30-year career,
Mr. Carlson worked at the United States Penitentiary,
Leavenworth, Kansas, and at the Federal Correctional
Institution, Ashland, Kentucky. Mr. Carlson was President
of the American Correctional Association from 1978 to 1980, and
is a Fellow in the National Academy of Public Administration.
From 1987 until 1998, Mr. Carlson was Adjunct Professor in
the department of sociology at the University of Minnesota in
Minneapolis.
Anne N. Foreman. Ms. Foreman has served as a director
since 2002. Since 1999, Ms. Foreman has been a Trustee of
the National Gypsum Company Settlement Trust and Director and
Treasurer of the Asbestos Claims Management Corporation.
Ms. Foreman is also a member of the board of directors of
Ultra Electronics Defense, Inc. and Trust Services, Inc.
Ms. Foreman served as Under Secretary of the United States
Air Force from September 1989 until January 1993. Prior to her
appointment as Under Secretary, Ms. Foreman was General
Counsel of the Department of the Air Force and a member of the
Departments Intelligence Oversight Board. She practiced
law in the Washington office of Bracewell and Patterson and with
the British solicitors Boodle Hatfield, Co., in London, England
from 1979 to 1985. Ms. Foreman is a former member of the
U.S. Foreign Service, and served in Beirut, Lebanon; Tunis,
Tunisia; and the U.S. Mission to the U.N. Ms. Foreman
was twice awarded the Air Force Medal for Distinguished Civilian
Service. Ms. Foreman also served on the Board of The
Wackenhut Corporation for nine years.
Richard H. Glanton. Mr. Glanton has served as a director
since 1998. Mr. Glanton joined Exelon Corporation, an
energy company, as Senior Vice President in May 2003 with
leadership responsibilities for corporate development. He has
served as a member of the Exelon board of directors since its
inception in October 2000 and relinquished his board position
when he assumed his role as an officer of the company.
S-65
Mr. Glanton served as a Director on the Board of PECO
Energy Company, a predecessor company of Exelon, from 1990 to
2000. Prior to joining Exelon in 2003, Mr. Glanton was a
Partner in the General Corporate Group of the law firm of Reed,
Smith, Shaw and McClay, LLP in Philadelphia, Pennsylvania and
was with the firm since 1987. Mr. Glanton is active in
public affairs and civic organizations and has a distinguished
record of public service. He served from 1979 to 1983 as Deputy
Counsel to Richard L. Thornburgh, former Governor of
Pennsylvania. Mr. Glanton is a member of the board of
directors of Aqua America Corporation and Chairman of its
governance committee.
John M. Palms. John M. Palms, Ph.D., is currently a
Distinguished University Professor and President Emeritus at the
University of South Carolina. Dr. Palms serves on the board
of directors of Exelon Corporation, an energy company, and is
currently the Chair of Exelons Audit and Finance
Committee. Dr. Palms served as President at the University
of South Carolina from 1991 to 2002 and previously as President
at Georgia State University from 1989 to 1991. In addition to a
distinguished career in academia, Dr. Palms has served in a
number of military and governmental positions and committees. He
currently serves as Chairman of the Board of Trustees of the
Institute for Defense Analyses. He also served in the United
States Air Force with a Regular Commission and on the United
States Presidents Selection Committee for White House
Fellows.
John M. Perzel. The Honorable John M. Perzel was sworn in
as Pennsylvanias Speaker of the House of Representatives
on April 15, 2003. Prior to being elected Speaker,
Mr. Perzel served four consecutive terms as House Majority
Leader, becoming the longest serving House Majority Leader in
Pennsylvania history. First elected to the House of
Representatives in 1978, Speaker Perzel steadily climbed the
ladder of responsibility, authority, and leadership. Before
being elected Majority Leader in 1994, he held the offices of
Republican Whip, Policy Committee Chairman, and head of the
House Republican Campaign Committee. In March 2004, he
established the Speakers Foundation Fund of the
Philadelphia Foundation, a charitable organization created to
support education, culture, and economic development across
Pennsylvania.
George C. Zoley. George C. Zoley serves as our Chairman
of the Board and Chief Executive Officer and Chairman of GEO
Care, Inc., our wholly-owned subsidiary. He served as our Vice
Chairman and Chief Executive Officer from January 1997 to May of
2002. Mr. Zoley has served as our Chief Executive Officer
since the company went public in 1994. Prior to 1994,
Mr. Zoley served as President and Director since our
incorporation in 1988. Mr. Zoley has served as a director
since 1988. Mr. Zoley founded GEO in 1984 and continues to be a
major factor in development of new business opportunities in the
areas of correctional and detention management, health and
mental health and other diversified government services.
Mr. Zoley also serves as a director of several business
subsidiaries through which we conduct our operations worldwide.
Mr. Zoley is a member of the Board of Trustees of Florida
Atlantic University in Boca Raton, Florida. Mr. Zoley also
served as Chair of the FAU Presidential Search Committee and is
a member of the FAU Foundation board of directors.
John G. ORourke. Mr. ORourke has been
responsible for our business management since 1991, assuming the
position of Chief Financial Officer in 1994. Prior to joining
us, Mr. ORourke was a career officer in the United
States Air Force. In addition to operational flying experience
as an instructor pilot in B-52 aircraft, his assignments
included senior executive positions in the Pentagon involved in
managing several multi-billion dollar national security
projects, including the
B-2 Stealth Bomber.
John J. Bulfin. As our General Counsel since 2000,
Mr. Bulfin has oversight responsibility for all our
litigation, investigations and professional responsibility.
Mr. Bulfin is a member of the Florida Bar and the American
Bar Associations. He has been a trial lawyer since 1978 and is a
Florida Bar Board Certified Civil trial lawyer. Prior to joining
us in 2000, Mr. Bulfin was a founding partner of the West
Palm Beach law firm of Wiederhold, Moses, Bulfin &
Rubin.
Jorge A. Dominicis. Mr. Dominicis joined us in May
2004 as Senior Vice President of Residential Treatment Services
and President of GEO Care, Inc., our wholly-owned subsidiary.
Mr. Dominicis is responsible for the overall management,
administrative, and business development activities of the
Residential Treatment Services division of GEO and of GEO Care,
Inc. Prior to joining us, Mr. Dominicis served for
14 years as Vice President of Corporate Affairs at Florida
Crystals Corporation, a sugar company, where he
S-66
was responsible for all governmental and public affairs activity
at the local, state and federal level, as well as for the
coordination of corporate community outreach and charitable
involvement. Prior to that, Mr. Dominicis served in public
and government policy positions.
John M. Hurley. As our Senior Vice President of North
American Operations since 2000, Mr. Hurley is responsible
for the overall administration and management of our domestic
detention and correctional facilities. From 1998 to 2000,
Mr. Hurley served as Warden of our South Bay, Florida
correctional facility. Prior to joining us in 1998,
Mr. Hurley was employed by the Department of Justice,
Federal Bureau of Prisons for 26 years. During his tenure,
he served as Warden at three different Bureau facilities. He
also served as Director of the Bureaus Staff Training
Center in Glynco, Georgia.
Donald H. Keens. As our Senior Vice President of
International Services since 2000, Mr. Keens is responsible
for management and control of our international marketing, sales
and operations. From 1994 when Mr. Keens joined us, to
2000, Mr. Keens held positions with us abroad.
Mr. Keens has 40 years of experience in the management
of a wide range of criminal justice and security operations,
including establishment and
day-to-day management
of security and correctional companies in the United Kingdom,
Australia, New Zealand, the United States, and South Africa. He
is also experienced in the operation of multi-million dollar
prison service contracts.
David N.T. Watson. Mr. Watson has been our Vice
President, Finance since July 1999 and Treasurer since May 2003.
He was also Assistant Secretary from 2000 to 2002 and Chief
Accounting Officer from 1994 to 2003. From 1989 until joining
us, Mr. Watson was with the Miami office of Arthur
Andersen, LLP where his most recent position was Manager, Audit
and Business Advisory Services Group. Mr. Watson is a
member of the American Institute of Certified Public Accountants
and the Florida Institute of Certified Public Accountants.
Brian R. Evans. Mr. Evans has been our Vice
President of Accounting since October 2002 and Chief Accounting
Officer since May 2003. Mr. Evans joined us in October 2000
as Corporate Controller. From 1994 until joining us,
Mr. Evans was with the West Palm Beach office of Arthur
Andersen, LLP where his most recent position was Manager in the
Audit and Business Advisory Services Group. From 1990 to 1994,
Mr. Evans served in the U.S. Navy as an officer in the
Supply Corps. Mr. Evans is a member of the American
Institute of Certified Public Accountants.
S-67
PRINCIPAL SHAREHOLDERS
The following table shows beneficial ownership of our common
stock as of December 31, 2005 by:
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each of our directors; |
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certain of our executive officers; |
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all directors and executive officers as a group; and |
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each shareholder that beneficially owns more than 5% of our
common stock based solely on a review of SEC filings. |
Beneficial ownership is a technical term broadly defined by the
SEC to mean more than ownership in the usual sense. In general,
beneficial ownership includes any shares that the holder can
vote or transfer and stock options and warrants that are
exercisable currently or become exercisable within 60 days.
These shares are considered to be outstanding for the purpose of
calculating the percentage of outstanding GEO common stock owned
by a particular shareholder, but are not considered to be
outstanding for the purpose of calculating the percentage
ownership of any other person. Percentage of ownership is based
on shares outstanding as of
May , 2006. Except as
otherwise noted, the shareholders named in this table have sole
voting and dispositive power for all shares shown as
beneficially owned by them.
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Common Stock | |
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Amount & Nature | |
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|
of Beneficial | |
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Percent of | |
Beneficial Owner(1) |
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Ownership(2) | |
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Class(3) | |
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| |
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DIRECTORS(4)
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Wayne H. Calabrese
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268,955 |
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2.69 |
% |
Norman A. Carlson
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19,200 |
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* |
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Anne N. Foreman
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10,400 |
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* |
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Richard H. Glanton
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10,200 |
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* |
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John M. Palms
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0 |
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* |
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John M. Perzel
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2,700 |
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* |
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George C. Zoley
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393,170 |
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3.88 |
% |
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EXECUTIVE OFFICERS(4)
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Donald H. Keens
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60,195 |
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* |
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John G. ORourke
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136,195 |
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1.38 |
% |
John J. Bulfin
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71,195 |
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* |
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John M. Hurley
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76,195 |
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* |
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ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP(5)
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1,083,305 |
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10.04 |
% |
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OTHER
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Wells Fargo & Company(6)
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1,482,331 |
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15.23 |
% |
FMR Corp.(7)
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1,445,491 |
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14.85 |
% |
Morgan Stanley(8)
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1,142,612 |
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11.74 |
% |
Barclays Global Investors(9)
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719,056 |
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7.39 |
% |
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* |
Beneficially owns less than 1% of our common stock |
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(1) |
Unless stated otherwise, the address of the beneficial owners is
One Park Place, Suite 700, 621 NW 53rd Street, Boca Raton,
Florida 33487. |
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(2) |
Information concerning beneficial ownership was furnished by the
persons named in the table or derived from documents filed with
the Securities and Exchange Commission, which we refer to as the
SEC. Unless stated otherwise, each person named in the table has
sole voting and investment power with respect to the shares
beneficially owned. |
S-68
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(3) |
As of April 9, 2006, we had 9,733,653 shares of common
stock outstanding. |
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(4) |
The number of shares of common stock underlying stock options
held by directors and the Named Executive Officers that are
immediately exercisable, or exercisable within 60 days of
April 9, 2006, are as follows:
Mr. Calabrese 248,955;
Mr. Carlson 18,200;
Ms. Foreman 10,200;
Mr. Glanton 10,200; Mr. Perzel
2,700; Mr. Zoley 393,170;
Mr. Keens 60,195;
Mr. ORourke 136,195;
Mr. Bulfin 71,195; Mr. Hurley
76,195. |
|
(5) |
Includes 1,060,605 shares of common stock underlying stock
options held by the directors, nominees and executive officers
that are immediately exercisable or exercisable within
60 days of April 9, 2006. |
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(6) |
The principal business address of Wells Fargo & Company
is 420 Montgomery Street, San Francisco, California
94104. On January 31, 2006, Wells Capital Management
Incorporated informed us that, as of December 31, 2005,
Wells Capital Management Incorporated beneficially owned
1,440,879 shares with sole voting power over 303,405 such
shares and sole dispositive power over all such shares. Also on
that date, Wells Fargo Funds Management, LLC informed us that,
as of December 31, 2005, Wells Fargo Funds Management, LLC
beneficially owned 1,133,493 shares with sole voting power
over all such shares and sole dispositive power over 40,452 such
shares. Altogether, Wells Fargo & Company beneficially
owned 1,482,331 shares as of December 31, 2005. |
|
(7) |
The principal business address of FMR Corp. is 82 Devonshire
Street, Boston, Massachusetts 02109. On February 14, 2006,
FMR Corp. informed us that, as of December 31, 2005, FMR
Corp. beneficially owned 1,445,491 shares with sole voting
power over 504,010 such shares and sole dispositive power over
all such shares. |
|
(8) |
The principal business address of Morgan Stanley is 1585
Broadway, New York, New York 10036. On February 15, 2006,
Morgan Stanley Investment Management Inc. informed us that, as
of December 31, 2005, Morgan Stanley Investment Management
Inc. beneficially owned 488,850 shares with sole voting and
dispositive power over 462,800 such shares. Also on that date,
Morgan Stanley Investment Advisors Inc. informed us that, as of
December 31, 2005, Morgan Stanley Investment Advisors Inc.
beneficially owned 382,900 shares with sole voting and
dispositive power over all such shares. Altogether, Morgan
Stanley beneficially owned 1,142,612 shares as of
December 31, 2005, with sole voting and dispositive power
over 1,073,761 such shares, and shared voting and dispositive
power over 1,251 such shares. |
|
(9) |
The principal business address of Barclays Global Investors
Japan Trust and Banking Company Limited (Barclays) is Ebisu
Prime Square Tower 8th Floor, 1-1-39 Hiroo Shibuya-Ku,
Tokyo 150-0012 Japan. On January 26, 2006, Barclays Global
Investors, NA informed us that, as of December 31, 2005,
Barclays Global Investors, NA beneficially owned
719,056 shares with sole voting power over 632,828 such
shares and sole dispositive power over all such shares. Also on
that date, Barclays Global Fund Advisors informed us that,
as of December 31, 2005, Barclays Global Fund Advisors
beneficially owned 113,146 shares with sole voting power
over 109,521 such shares and sole dispositive power over all
such shares. Altogether, Barclays beneficially owned
832,202 shares as of December 31, 2005. |
S-69
UNDERWRITING
Lehman Brothers Inc. is acting as the representative of the
underwriters and the sole book-running manager of this offering.
Under the terms of an underwriting agreement, which we will file
as an exhibit to our current report on Form 8-K and
incorporate by reference in this prospectus supplement and the
accompanying prospectus, each of the underwriters named below
has severally agreed to purchase from us the respective number
of shares of common stock shown opposite its name below:
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Underwriters |
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Number of Shares | |
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Lehman Brothers Inc.
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Banc of America Securities LLC
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First Analysis Securities Corporation
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Jefferies & Company, Inc.
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Avondale Partners, LLC
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BNP Paribas Securities Corp.
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Total
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The underwriting agreement provides that the underwriters
obligation to purchase shares of common stock depends on the
satisfaction of the conditions contained in the underwriting
agreement including:
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the obligation to purchase all of the shares of common stock
offered hereby (other than those shares of common stock covered
by their option to purchase additional shares as described
below), if any of the shares are purchased; |
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the representations and warranties made by us to the
underwriters are true; |
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there is no material change in our business or in the financial
markets; and |
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we deliver customary closing documents to the underwriters. |
Commissions and Expenses
The following table summarizes the underwriting discounts and
commissions we will pay to the underwriters. These amounts are
shown assuming both no exercise and full exercise of the
underwriters option to purchase additional shares. The
underwriting fee is the difference between the initial price to
the public and the amount the underwriters pay to us for the
shares.
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No Exercise | |
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Full Exercise | |
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Per share
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Total
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The representative of the underwriters has advised us that the
underwriters propose to offer the shares of common stock
directly to the public at the public offering price on the cover
of this prospectus supplement and to selected dealers, which may
include the underwriters, at such offering price less a selling
concession not in excess of $ per share. After the
commencement of the offering, the representative may change the
offering price and other selling terms.
The expenses of the offering that are payable by us are
estimated to be $ (excluding underwriting discounts
and commissions).
Option to Purchase Additional Shares
We have granted the underwriters an option exercisable for
30 days after the date of this prospectus supplement/the
underwriting agreement, to purchase, from time to time, in whole
or in part, up to an aggregate of 450,000 shares at the public
offering price less underwriting discounts and commissions. This
option may be exercised if the underwriters sell more than
3,000,000 shares in connection with this offering. To the extent
that this option is exercised, each underwriter will be
obligated, subject to certain conditions, to
S-70
purchase its pro rata portion of these additional shares based
on the underwriters percentage underwriting commitment in
the offering as indicated in the table at the beginning of this
Underwriting Section.
Lock-Up Agreements
We, all of our directors and executive officers have agreed
that, other than with respect to the options purchased by the
Company from certain of its executive officers and employees as
described in Use of Proceeds, without the prior
written consent of Lehman Brothers Inc., we will not directly or
indirectly (1) offer for sale, sell, pledge, or otherwise
dispose of (or enter into any transaction or device that is
designed to, or could be expected to, result in the disposition
by any person at any time in the future of) any shares of common
stock (including, without limitation, shares of common stock
that may be deemed to be beneficially owned by the undersigned
in accordance with the rules and regulations of the SEC and
shares of common stock that may be issued upon exercise of any
options or warrants) or securities convertible into or
exercisable or exchangeable for common stock, (2) enter
into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the common stock, (3) make any demand for
or exercise any right or file or cause to be filed a
registration statement, including any amendments thereto, with
respect to the registration of any shares of common stock or
securities convertible, exercisable or exchangeable into common
stock or any of our other securities, or (4) publicly
disclose the intention to do any of the foregoing for a period
of 90 days after the date of this prospectus supplement.
The 90-day restricted period described in the preceding
paragraph will be extended if:
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during the last 17 days of the 90-day restricted period we
issue an earnings release or material news or a material event
relating to us occurs; or |
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prior to the expiration of the 90-day restricted period, we
announce that we will release earnings results during the 16-day
period beginning on the last day of the 90-day period; |
in which case the restrictions described in the preceding
paragraph will continue to apply until the expiration of the
18-day period beginning on the issuance of the earnings release
or the announcement of the material news or material event,
unless such extension is waived in writing by Lehman Brothers
Inc.
Lehman Brothers Inc., in its sole discretion, may release the
common stock and other securities subject to the lock-up
agreements described above in whole or in part at any time with
or without notice. When determining whether or not to release
common stock and other securities from lock-up agreements,
Lehman Brothers Inc. will consider, among other factors, the
holders reasons for requesting the release, the number of
shares of common stock and other securities for which the
release is being requested and market conditions at the time.
Indemnification
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, and
to contribute to payments that the underwriters may be required
to make for these liabilities.
Stabilization, Short Positions and Penalty Bids
The representative may engage in stabilizing transactions, short
sales and purchases to cover positions created by short sales,
and penalty bids or purchases for the purpose of pegging, fixing
or maintaining the price of the common stock, in accordance with
Regulation M under the Securities Exchange Act of 1934:
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Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum. |
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A short position involves a sale by the underwriters of shares
in excess of the number of shares the underwriters are obligated
to purchase in the offering, which creates the syndicate short
position. This short position may be either a covered short
position or a naked short position. In a covered short position,
the number of shares involved in the sales made by the
underwriters in excess of the number |
S-71
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of shares they are obligated to purchase is not greater than the
number of shares that they may purchase by exercising their
option to purchase additional shares. In a naked short position,
the number of shares involved is greater than the number of
shares in their option to purchase additional shares. The
underwriters may close out any short position by either
exercising their option to purchase additional shares and/or
purchasing shares in the open market. In determining the source
of shares to close out the short position, the underwriters will
consider, among other things, the price of shares available for
purchase in the open market as compared to the price at which
they may purchase shares through their option to purchase
additional shares. A naked short position is more likely to be
created if the underwriters are concerned that there could be
downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase
in the offering. |
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Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. |
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Penalty bids permit the representative to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions. |
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of the common stock. As a result,
the price of the common stock may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on The New York Stock Exchange or otherwise and, if
commenced, may be discontinued at any time.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
the common stock. In addition, neither we nor any of the
underwriters make representation that the representative will
engage in these stabilizing transactions or that any
transaction, once commenced, will not be discontinued without
notice.
Electronic Distribution
A prospectus and prospectus supplement in electronic format may
be made available on the Internet sites or through other online
services maintained by one or more of the underwriters and/or
selling group members participating in this offering, or by
their affiliates. In those cases, prospective investors may view
offering terms online and, depending upon the particular
underwriter or selling group member, prospective investors may
be allowed to place orders online. The underwriters may agree
with us to allocate a specific number of shares for sale to
online brokerage account holders. Any such allocation for online
distributions will be made by the representative on the same
basis as other allocations.
Other than the prospectus and prospectus supplement in
electronic format, the information on any underwriters or
selling group members web site and any information
contained in any other web site maintained by an underwriter or
selling group member is not part of the prospectus, prospectus
supplement or the registration statement of which this
prospectus supplement and the accompanying prospectus forms a
part, has not been approved and/or endorsed by us or any
underwriter or selling group member in its capacity as
underwriter or selling group member and should not be relied
upon by investors.
Stamp Taxes
If you purchase shares of common stock offered in this
prospectus supplement and the accompanying prospectus, you may
be required to pay stamp taxes and other charges under the laws
and practices of the country of purchase, in addition to the
offering price listed on the cover page of this prospectus
supplement and the accompanying prospectus.
S-72
Relationships
Certain of the underwriters and their related entities have
engaged and may engage in commercial and investment banking
transactions with us in the ordinary course of their business.
They have received customary compensation and expenses for these
commercial and investment banking transactions.
United Kingdom
This document is only being distributed to and is only directed
at (i) persons who are outside the United Kingdom or
(ii) to investment professionals falling within
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 (the Order) or
(iii) high net worth entities, and other persons to whom it
may lawfully be communicated, falling within
Article 49(2)(a) to (e) of the Order (all such persons
together being referred to as relevant persons). The
shares of common stock are only available to, and any
invitation, offer or agreement to subscribe, purchase or
otherwise acquire such common stock will be engaged in only
with, relevant persons. Any person who is not a relevant person
should not act or rely on this document or any of its contents.
Each of the underwriters has represented and agreed that:
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(a) |
it has only communicated or caused to be communicated and will
only communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning
of Section 21 of the Financial Services and Markets Act
2000 or FSMA) received by it in connection with the issue or
sale of the shares in circumstances in which Section 21(1)
of the FSMA does not apply to us, and |
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(b) |
it has complied with, and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the shares in, from or otherwise involving the
United Kingdom. |
European Economic Area
To the extent that the offer of the common stock is made in any
Member State of the European Economic Area that has implemented
the Prospectus Directive before the date of publication of a
prospectus in relation to the common stock which has been
approved by the competent authority in the Member State in
accordance with the Prospectus Directive (or, where appropriate,
published in accordance with the Prospectus Directive and
notified to the competent authority in the Member State in
accordance with the Prospectus Directive), the offer (including
any offer pursuant to this document) is only addressed to
qualified investors in that Member State within the meaning of
the Prospectus Directive or has been or will be made otherwise
in circumstances that do not require us to publish a prospectus
pursuant to the Prospectus Directive.
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
Relevant Member State), each underwriter has
represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that
Relevant Member State (the Relevant Implementation
Date) it has not made and will not make an offer of shares
to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the shares which has
been approved by the competent authority in that Relevant Member
State or, where appropriate, approved in another Relevant Member
State and notified to the competent authority in that Relevant
Member State, all in accordance with the Prospectus Directive,
except that it may, with effect from and including the Relevant
Implementation Date, make an offer of shares to the public in
that Relevant Member State at any time:
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(a) |
to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities, |
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|
(b) |
to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than
43,000,000 and
(3) an annual net turnover of more than
50,000,000, as shown in its last annual or consolidated
accounts, or |
|
|
|
|
(c) |
in any other circumstances which do not require the publication
by us of a prospectus pursuant to Article 3 of the
Prospectus Directive. |
S-73
For the purposes of this provision, the expression an
offer of shares to the public in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State and
the expression Prospectus Directive means Directive
2003/71/ EC and includes any relevant implementing measure in
each Relevant Member State.
LEGAL MATTERS
Certain legal matters relating to the shares of common stock
being offered hereby will be passed upon for us by Akerman
Senterfitt, Miami, Florida. Simpson Thacher & Bartlett LLP
advised the underwriters in connection with the offering of the
common stock.
EXPERTS
The consolidated financial statements of The GEO Group, Inc.
appearing in our Annual Report on Form 10-K for the year
ended January 1, 2006, including the schedule appearing
therein, and managements assessment of the effectiveness
of our internal control over financial reporting as of
January 1, 2006 included in our Annual Report on
Form 10-K, have been audited by Ernst & Young LLP, an
independent registered certified public accounting firm, as set
forth in its reports thereon, included therein, and incorporated
herein by reference. Such consolidated financial statements and
managements assessment are incorporated herein in reliance
upon such reports given on the authority of such firm as experts
in accounting and auditing.
On March 27, 2006, the audit committee of our board of
directors appointed Grant Thornton LLP as our independent public
accountant for the 2006 fiscal year. In connection therewith,
the audit committee of our board of directors dismissed Ernst
& Young LLP as our independent auditor. During our two most
recent fiscal years, Ernst & Youngs report on our
consolidated financial statements did not contain an adverse
opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting
principles. Ernst & Young LLPs report with respect to
our financial statements for the fiscal year ended
January 2, 2005 contained a reference to Ernst &Young
LLPs report on the effectiveness of our internal control
over financial reporting, referred to as the 2004 E&Y
Report, which contained an adverse opinion on the effectiveness
of our internal control over financial reporting. The 2004
E&Y Report referred to five material weaknesses identified
in managements annual report on internal control over
financial reporting as of January 2, 2005, referred to as
the 2004 Management Report. The 2004 E&Y Report and the 2004
Management Report were included in our annual report on
Form 10-K for the fiscal year ended January 2, 2005,
filed with the SEC on March 23, 2005. As a result of these
material weaknesses, the 2004 Management Report concluded, and
the 2004 E&Y Report stated that, in Ernst & Young
LLPs opinion, we did not maintain effective internal
control over financial reporting as of January 2, 2005,
based on the criteria set forth by COSO, known as the Committee
of Sponsoring Organizations of the Treadway Commission in
Internal Control Integrated Framework The material
weaknesses referenced in the 2004 Management Report and the 2004
E&Y Report, together with certain items identified during
efforts undertaken to remediate those material weaknesses,
caused us to restate certain portions of our previously issued
financial statements for the fiscal years ended
December 30, 2001, December 29, 2002,
December 28, 2003 and January 2, 2005, as previously
disclosed in our amended annual report on Form 10-K/ A for
the fiscal year ended January 2, 2005, filed with the SEC
on August 17, 2005. As disclosed in Item 9A of our
annual report on Form 10-K for the fiscal year ended
January 1, 2006, referred to as the 2005 10-K, filed with
the SEC on March 17, 2006, our management has concluded
that all of the material weaknesses referred to in the 2004
Management Report and the 2004 E&Y Report were remediated as
of January 1, 2006. Managements annual report on
internal control over financial reporting as of January 1,
2006, as well as Ernst & Young LLPs report on the
effectiveness of our internal control over financial reporting
as of January 1, 2006, both of which were included in the
2005 10-K, concluded that we maintained, in all material
respects, effective internal control over financial reporting as
of January 1, 2006, based on the COSO criteria. During our
two fiscal years ended January 1, 2006 and January 2,
2005, and in the interim period from January 1, 2006
S-74
through March 21, 2006, the date of cessation of our audit
relationship with Ernst & Young, there were no disagreements
with Ernst & Young on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the
satisfaction of Ernst & Young, would have caused them to
make reference thereto in their report on our consolidated
financial statements for those years. Additionally, during this
time frame, there were no reportable events, as
defined in Item 304(a)(1)(v) of Regulation S-K
promulgated under the Securities Exchange Act of 1934, as
amended. The audit committee of our board of directors requested
Ernst & Young to furnish it with a letter addressed to the
SEC stating whether or not it agrees with the above statements.
A copy of that letter, dated March 27, 2006, was filed as
Exhibit 16.1 to our Current Report on Form 8-K, which
was filed with the SEC on March 27, 2006.
INCORPORATION BY REFERENCE
We have elected to incorporate by reference information into
this prospectus supplement. By incorporating by reference, we
can disclose important information to you by referring to
another document we have filed separately with the SEC. The
information incorporated by reference is deemed to be part of
this prospectus supplement, except as described in the following
sentence. Any statement in this prospectus supplement or the
accompanying prospectus or in any document that is incorporated
or deemed to be incorporated by reference in this prospectus
supplement or the accompanying prospectus will be deemed to have
been modified or superseded to the extent that a statement
contained in this prospectus supplement or any document that we
subsequently file or have filed with the SEC that is
incorporated or deemed to be incorporated by reference in this
prospectus supplement, modifies or supersedes that statement.
Any statement so modified or superseded will not be deemed to be
a part of this prospectus supplement or the accompanying
prospectus, except as so modified or superseded.
We are incorporating by reference the following documents that
we have filed with the SEC and our future filings with the SEC
(other than information furnished under Item 2.02 or 7.01
in current reports on Form 8-K) under Sections 13(a),
13(c), 14, or 15(d) of the Exchange Act until this offering is
completed:
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our Annual Report on Form 10-K for the year ended
January 1, 2006; |
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|
our Quarterly Report on Form 10-Q for the quarter ended
April 2, 2006; |
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|
our Current Reports on Form 8-K which were filed with the
SEC on January 6, 2006, February 14, 2006 and
March 27, 2006; |
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our Current Reports on
Form 8-K/A which
were filed with the SEC on January 20, 2006 and
March 31, 2006; and |
|
|
|
The description of our common stock contained in our
registration statement on Form 8-A/A, filed on
October 30, 2003, including any amendment or report filed
for the purpose of updating such description. |
We will provide without charge to each person, including any
beneficial owner, to whom this prospectus supplement is
delivered a copy of any of the documents that we have
incorporated by reference into this prospectus supplement, other
than exhibits unless the exhibits are specifically incorporated
by reference in those documents. To receive a copy of any of the
documents incorporated by reference in this prospectus
supplement, other than exhibits unless they are specifically
incorporated by reference in those documents, call or write to
The GEO Group, Inc., 621 NW 53rd Street, Suite 700, Boca
Raton, Florida 33487, Attention: Investor Relations, telephone:
(561) 893-0101. The information relating to us contained in
this prospectus supplement and the accompanying prospectus is
not complete and should be read together with the information
contained in the documents incorporated and deemed to be
incorporated by reference in this prospectus supplement and the
accompanying prospectus.
S-75
FINANCIAL STATEMENT OF THE GEO GROUP, INC. AND
SUBSIDIARIES
|
|
|
|
|
|
AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED
JANUARY 1, 2006, JANUARY 2, 2005 AND DECEMBER 28,
2003 |
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Managements Responsibility for Financial Statements
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S-74 |
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|
Managements Annual Report on Internal Control over
Financial Reporting
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S-75 |
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Report of Independent Registered Certified Public Accountants
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S-76 |
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Consolidated Statements of Income for the fiscal years ended
January 1, 2006, January 2, 2005 and December 28,
2003
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S-78 |
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Consolidated Balance Sheets as of January 1, 2006 and
January 2, 2005
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|
S-79 |
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Consolidated Statements of Cash Flows for the fiscal years ended
January 1, 2006, January 2, 2005 and December 28,
2003
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|
S-80 |
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|
Consolidated Statements of Shareholders Equity and
Comprehensive Income for the fiscal years ended January 1,
2006, January 2, 2005 and December 28, 2003
|
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S-81 |
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|
Notes to Consolidated Financial Statements
|
|
|
S-82 |
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|
UNAUDITED FINANCIAL STATEMENTS FOR THE THIRTEEN WEEKS
ENDED
APRIL 2, 2006 AND APRIL 3, 2005 |
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|
Consolidated Statements of Income for the thirteen weeks ended
April 2, 2006 and April 3, 2005 (unaudited)
|
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|
S-118 |
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|
Consolidated Balance Sheets as of April 2, 2006 and
January 1, 2006 (audited)
|
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|
S-119 |
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|
Consolidated Statements of Cash Flows for the thirteen weeks
ended April 2, 2006 and April 3, 2005 (unaudited)
|
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|
S-120 |
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Notes to Unaudited Consolidated Financial Statements
|
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S-121 |
|
S-76
MANAGEMENTS RESPONSIBILITY FOR FINANCIAL STATEMENTS
To the Shareholders of
The GEO Group, Inc.:
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States. They include amounts based on
judgments and estimates.
Representation in the consolidated financial statements and the
fairness and integrity of such statements are the responsibility
of management. In order to meet managements
responsibility, the Company maintains a system of internal
controls and procedures and a program of internal audits
designed to provide reasonable assurance that our assets are
controlled and safeguarded, that transactions are executed in
accordance with managements authorization and properly
recorded, and that accounting records may be relied upon in the
preparation of financial statements.
The consolidated financial statements have been audited by
Ernst & Young LLP, independent registered certified
public accountants, whose appointment was ratified by our
shareholders. Their report expresses a professional opinion as
to whether managements consolidated financial statements
considered in their entirety present fairly, in conformity with
accounting principles generally accepted in the United States,
the Companys financial position and results of operations.
Their audit was conducted in accordance with the standards of
the Public Company Accounting Oversight Board. As part of this
audit, Ernst & Young LLP considered the Companys
system of internal controls to the degree they deemed necessary
to determine the nature, timing, and extent of their audit tests
which support their opinion on the consolidated financial
statements.
The Audit Committee of the Board of Directors meets periodically
with representatives of management, the independent registered
certified public accountants and our internal auditors to review
matters relating to financial reporting, internal accounting
controls and auditing. Both the internal auditors and the
independent registered certified public accountants have
unrestricted access to the Audit Committee to discuss the
results of their reviews.
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|
|
George C. Zoley |
|
Chairman and Chief Executive Officer |
|
|
Wayne H. Calabrese |
|
Vice Chairman, President |
|
and Chief Operating Officer |
|
|
John G. ORourke |
|
Senior Vice President of Finance |
|
and Chief Financial Officer |
S-77
MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
and 15d-15(f) under the
Securities Exchange Act of 1934. The Companys internal
control over financial reporting is a process designed under the
supervision of the Companys Chief Executive Officer and
Chief Financial Officer that: (i) pertains to the
maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the
Companys assets; (ii) provides reasonable assurance
that transactions are recorded as necessary to permit
preparation of financial statements for external reporting in
accordance with accounting principles generally accepted in the
United States, and that receipts and expenditures are being made
only in accordance with authorization of the Companys
management and directors; and (iii) provides reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedure may deteriorate.
Management has assessed the effectiveness of the Companys
internal control over financial reporting as of January 1,
2006. In making its assessment of internal control over
financial reporting, management used the criteria set forth by
the Committee of Sponsoring Organizations (COSO) of
the Treadway Commission in Internal Control
Integrated Framework.
On November 4, 2005, the Company completed the acquisition
of Correctional Services Corporation (CSC), as
discussed elsewhere in this report. For 2005, CSC represented
2.8% of the Companys consolidated revenue and, as of
January 1, 2006, CSC represented 34.7% of the
Companys total consolidated assets. In making
managements assessment of the effectiveness of its
internal control over financial reporting, management has
excluded CSC from its report on internal control over financial
reporting as management did not have sufficient time to make an
assessment of CSCs internal controls using the COSO
criteria in accordance with Section 404 of the
Sarbanes-Oxley Act.
The Company evaluated, with the participation of its Chief
Executive Officer and Chief Financial Officer, its internal
control over financial reporting as of January 1, 2006,
based on the COSO Internal Control Integrated
Framework. Based on this evaluation, the Companys
management concluded that as of January 1, 2006, its
internal control over financial reporting is effective in
providing reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles.
Managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
January 1, 2006 has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated
in their report which appears on page S-76.
S-78
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC
ACCOUNTANTS
The Board of Directors and Shareholders
of The GEO Group, Inc.
We have audited the accompanying consolidated balance sheets of
The GEO Group, Inc. as of January 1, 2006 and
January 2, 2005, and the related consolidated statements of
income, shareholders equity and comprehensive income, and
cash flows for each of the three years in the period ended
January 1, 2006. Our audits also included the financial
statement schedule listed in the index at item 15(a). These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of The GEO Group, Inc. at January 1,
2006 and January 2, 2005, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended January 1, 2006, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of The GEO Group, Inc.s internal control
over financial reporting as of January 1, 2006, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 14, 2006
expressed an unqualified opinion thereon.
Fort Lauderdale, Florida
March 14, 2006
S-79
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC
ACCOUNTANTS
The Board of Directors and Shareholders
of The GEO Group, Inc.
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
over Financial Reporting, that The GEO Group, Inc. maintained
effective internal control over financial reporting as of
January 1, 2006, based on criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The GEO Group, Inc.s management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is
to express an opinion on managements assessment and an
opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that The GEO Group,
Inc. maintained effective internal control over financial
reporting as of January 1, 2006, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, The GEO Group, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of January 1, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of The GEO Group, Inc. as of
January 1, 2006 and January 2, 2005, and the related
consolidated statements of income, shareholders equity and
comprehensive income, and cash flows for each of the three years
in the period ended January 1, 2006, of The GEO Group, Inc.
and our report dated March 14, 2006 expressed an
unqualified opinion thereon.
Fort Lauderdale, Florida
March 14, 2006
S-80
THE GEO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended January 1, 2006, January 2,
2005, and December 28, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Revenues
|
|
$ |
612,900 |
|
|
$ |
593,994 |
|
|
$ |
549,238 |
|
Operating Expenses
|
|
|
540,128 |
|
|
|
495,226 |
|
|
|
467,018 |
|
Depreciation and Amortization
|
|
|
15,876 |
|
|
|
13,898 |
|
|
|
13,341 |
|
General and Administrative Expenses
|
|
|
48,958 |
|
|
|
45,879 |
|
|
|
39,379 |
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
7,938 |
|
|
|
38,991 |
|
|
|
29,500 |
|
Interest Income
|
|
|
9,154 |
|
|
|
9,568 |
|
|
|
6,853 |
|
Interest Expense
|
|
|
(23,016 |
) |
|
|
(22,138 |
) |
|
|
(17,896 |
) |
Write-off of Deferred Financing Fees from Extinguishment of
Debt
|
|
|
(1,360 |
) |
|
|
(317 |
) |
|
|
(1,989 |
) |
Gain on Sale of UK Joint Venture
|
|
|
|
|
|
|
|
|
|
|
56,094 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) Before Income Taxes, Minority Interest, Equity
in Earnings of Affiliates, and Discontinued Operations
|
|
|
(7,284 |
) |
|
|
26,104 |
|
|
|
72,562 |
|
Provision (benefit) for Income Taxes
|
|
|
(11,826 |
) |
|
|
8,231 |
|
|
|
36,852 |
|
Minority Interest
|
|
|
(742 |
) |
|
|
(710 |
) |
|
|
(645 |
) |
Equity in Earnings of Affiliates, (net of income tax
provision (benefit) of $(2,016), $0, and $634)
|
|
|
2,079 |
|
|
|
|
|
|
|
1,310 |
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
5,879 |
|
|
|
17,163 |
|
|
|
36,375 |
|
Income (loss) from discontinued operations, (net of tax
(benefit) provision of $895, $(181), and $1,544)
|
|
|
1,127 |
|
|
|
(348 |
) |
|
|
3,644 |
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$ |
7,006 |
|
|
$ |
16,815 |
|
|
$ |
40,019 |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,580 |
|
|
|
9,384 |
|
|
|
15,618 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
10,010 |
|
|
|
9,738 |
|
|
|
15,829 |
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.61 |
|
|
$ |
1.83 |
|
|
$ |
2.33 |
|
|
Income (loss) from discontinued operations
|
|
|
0.12 |
|
|
|
(0.04 |
) |
|
|
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share-basic
|
|
$ |
0.73 |
|
|
$ |
1.79 |
|
|
$ |
2.56 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.59 |
|
|
$ |
1.77 |
|
|
$ |
2.30 |
|
|
Income (loss) from discontinued operations
|
|
|
0.11 |
|
|
|
(0.04 |
) |
|
|
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share-diluted
|
|
$ |
0.70 |
|
|
$ |
1.73 |
|
|
$ |
2.53 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
S-81
THE GEO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
January 1, 2006 and January 2, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands, except per | |
|
|
share data) | |
ASSETS |
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
57,094 |
|
|
$ |
92,005 |
|
|
Restricted cash
|
|
|
8,882 |
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
10,000 |
|
|
Accounts receivable, less allowance for doubtful accounts of
$224 and $907
|
|
|
127,612 |
|
|
|
90,386 |
|
|
Deferred income tax asset
|
|
|
19,755 |
|
|
|
12,891 |
|
|
Other current assets
|
|
|
15,826 |
|
|
|
12,083 |
|
|
Current assets of discontinued operations
|
|
|
123 |
|
|
|
5,401 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
229,292 |
|
|
|
222,766 |
|
|
|
|
|
|
|
|
Restricted Cash
|
|
|
17,484 |
|
|
|
3,908 |
|
Property and Equipment, Net
|
|
|
282,236 |
|
|
|
190,865 |
|
Assets Held for Sale
|
|
|
5,000 |
|
|
|
|
|
Direct Finance Lease Receivable
|
|
|
38,492 |
|
|
|
42,953 |
|
Goodwill and Other Intangible Assets, Net
|
|
|
52,127 |
|
|
|
615 |
|
Other Non Current Assets
|
|
|
14,880 |
|
|
|
13,282 |
|
Other Assets of Discontinued Operations
|
|
|
|
|
|
|
5,937 |
|
|
|
|
|
|
|
|
|
|
$ |
639,511 |
|
|
$ |
480,326 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
27,762 |
|
|
$ |
21,039 |
|
|
Accrued payroll and related taxes
|
|
|
26,985 |
|
|
|
24,595 |
|
|
Accrued expenses
|
|
|
70,177 |
|
|
|
53,104 |
|
|
Current portion of deferred revenue
|
|
|
1,894 |
|
|
|
1,844 |
|
|
Current portion of capital lease obligations, long-term debt and
non-recourse debt
|
|
|
8,441 |
|
|
|
13,736 |
|
|
Current liabilities of discontinued operations
|
|
|
1,260 |
|
|
|
3,160 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
136,519 |
|
|
|
117,478 |
|
|
|
|
|
|
|
|
Deferred Revenue
|
|
|
3,267 |
|
|
|
4,320 |
|
Deferred Tax Liability
|
|
|
2,085 |
|
|
|
8,466 |
|
Minority Interest
|
|
|
1,840 |
|
|
|
1,194 |
|
Other Non Current Liabilities
|
|
|
19,601 |
|
|
|
19,978 |
|
Capital Lease Obligations
|
|
|
17,072 |
|
|
|
|
|
Long-Term Debt
|
|
|
219,254 |
|
|
|
186,198 |
|
Non-Recourse Debt
|
|
|
131,279 |
|
|
|
42,953 |
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 shares
authorized, none issued or outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 30,000,000 shares
authorized, 21,691,143 and 21,507,391 issued and 9,691,143 and
9,507,391 outstanding
|
|
|
97 |
|
|
|
95 |
|
|
Additional paid-in capital
|
|
|
70,784 |
|
|
|
67,005 |
|
|
Retained earnings
|
|
|
171,666 |
|
|
|
164,660 |
|
|
Accumulated other comprehensive loss
|
|
|
(2,073 |
) |
|
|
(141 |
) |
|
Treasury stock 12,000,000 shares
|
|
|
(131,880 |
) |
|
|
(131,880 |
) |
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
108,594 |
|
|
|
99,739 |
|
|
|
|
|
|
|
|
|
|
$ |
639,511 |
|
|
$ |
480,326 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
S-82
THE GEO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended January 1, 2006, January 2,
2005, and December 28, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash Flow from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
5,879 |
|
|
$ |
17,163 |
|
|
$ |
36,375 |
|
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charge
|
|
|
20,859 |
|
|
|
|
|
|
|
|
|
|
Idle facility charge
|
|
|
4,255 |
|
|
|
3,000 |
|
|
|
5,000 |
|
|
Depreciation and amortization
|
|
|
15,876 |
|
|
|
13,898 |
|
|
|
13,341 |
|
|
Amortization of debt issuance costs
|
|
|
449 |
|
|
|
303 |
|
|
|
607 |
|
|
Deferred tax liability (benefit)
|
|
|
(10,614 |
) |
|
|
3,433 |
|
|
|
230 |
|
|
Provision for doubtful accounts
|
|
|
|
|
|
|
229 |
|
|
|
170 |
|
|
Major maintenance reserve
|
|
|
290 |
|
|
|
465 |
|
|
|
296 |
|
|
Equity in earnings of affiliates, net of tax
|
|
|
(2,079 |
) |
|
|
|
|
|
|
(1,310 |
) |
|
Minority interests in earnings of consolidated entity
|
|
|
742 |
|
|
|
710 |
|
|
|
645 |
|
|
Other non-cash charges
|
|
|
|
|
|
|
141 |
|
|
|
|
|
|
Tax benefit related to employee stock options
|
|
|
731 |
|
|
|
773 |
|
|
|
330 |
|
|
Gain on sale of UK joint venture
|
|
|
|
|
|
|
|
|
|
|
(56,094 |
) |
|
Write-off of deferred financing fees from extinguishment of debt
|
|
|
1,360 |
|
|
|
317 |
|
|
|
1,989 |
|
Changes in assets and liabilities, net of acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,238 |
) |
|
|
(6,688 |
) |
|
|
(12,517 |
) |
|
Other current assets
|
|
|
(3,235 |
) |
|
|
(1,283 |
) |
|
|
2,455 |
|
|
Other assets
|
|
|
(564 |
) |
|
|
1,442 |
|
|
|
(2,365 |
) |
|
Accounts payable and accrued expenses
|
|
|
4,918 |
|
|
|
(12,558 |
) |
|
|
24,341 |
|
|
Accrued payroll and related taxes
|
|
|
(996 |
) |
|
|
6,699 |
|
|
|
(3,005 |
) |
|
Deferred revenue
|
|
|
(1,003 |
) |
|
|
(1,844 |
) |
|
|
(1,891 |
) |
|
Other liabilities
|
|
|
1,763 |
|
|
|
5,282 |
|
|
|
5,787 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing
operations
|
|
|
31,393 |
|
|
|
31,482 |
|
|
|
14,384 |
|
Net cash provided by operating activities of discontinued
operations
|
|
|
3,420 |
|
|
|
14,024 |
|
|
|
4,300 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
34,813 |
|
|
|
45,506 |
|
|
|
18,684 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flow from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(79,290 |
) |
|
|
|
|
|
|
|
|
Investments in and advances to affiliates
|
|
|
|
|
|
|
|
|
|
|
193 |
|
Proceeds from sale of assets
|
|
|
707 |
|
|
|
315 |
|
|
|
|
|
Proceeds from the sale of UK joint venture
|
|
|
|
|
|
|
|
|
|
|
80,678 |
|
Proceeds from sales of short-term investments
|
|
|
39,000 |
|
|
|
56,835 |
|
|
|
2,000 |
|
Purchases of short-term investments
|
|
|
(29,000 |
) |
|
|
(56,835 |
) |
|
|
(12,000 |
) |
Change in restricted cash
|
|
|
(4,406 |
) |
|
|
52,000 |
|
|
|
(55,794 |
) |
Capital expenditures
|
|
|
(31,465 |
) |
|
|
(10,235 |
) |
|
|
(6,791 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities of
continuing operations
|
|
|
(104,454 |
) |
|
|
42,080 |
|
|
|
8,286 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities of discontinued
operations
|
|
|
11,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(92,954 |
) |
|
|
42,080 |
|
|
|
8,286 |
|
Cash Flow from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt and non-recourse debt
|
|
|
75,000 |
|
|
|
10,000 |
|
|
|
272,130 |
|
Debt issuance costs including original issue discount
|
|
|
|
|
|
|
|
|
|
|
(11,857 |
) |
Payments on long-term debt
|
|
|
(53,398 |
) |
|
|
(58,704 |
) |
|
|
(146,250 |
) |
Proceeds from the exercise of stock options
|
|
|
2,999 |
|
|
|
1,589 |
|
|
|
776 |
|
Purchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(132,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
24,601 |
|
|
|
(47,115 |
) |
|
|
(17,201 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash and Cash
Equivalents
|
|
|
(1,371 |
) |
|
|
1,575 |
|
|
|
5,734 |
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash
Equivalents
|
|
|
(34,911 |
) |
|
|
42,046 |
|
|
|
15,503 |
|
Cash and Cash Equivalents, beginning of period
|
|
|
92,005 |
|
|
|
49,959 |
|
|
|
34,456 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, end of period
|
|
$ |
57,094 |
|
|
$ |
92,005 |
|
|
$ |
49,959 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$ |
(636 |
) |
|
$ |
8,906 |
|
|
$ |
32,517 |
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
21,181 |
|
|
$ |
20,158 |
|
|
$ |
5,920 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired, net of cash acquired
|
|
$ |
223,934 |
|
|
$ |
|
|
|
$ |
|
|
Total liabilities assumed
|
|
|
144,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
79,290 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Sale of assets in exchange for note receivable
|
|
$ |
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
S-83
THE GEO GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME
Fiscal Years Ended January 1, 2006, January 2,
2005, and December 28, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
|
|
|
|
Accumulated | |
|
Treasury Stock | |
|
|
|
|
| |
|
Additional | |
|
|
|
Other | |
|
| |
|
Total | |
|
|
Number | |
|
|
|
Paid-In | |
|
Retained | |
|
Comprehensive | |
|
Number | |
|
|
|
Shareholders | |
|
|
of Shares | |
|
Amount | |
|
Capital | |
|
Earnings | |
|
Income (Loss) | |
|
of Shares | |
|
Amount | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance, December 29, 2002
|
|
|
21,246 |
|
|
$ |
212 |
|
|
$ |
63,500 |
|
|
$ |
107,826 |
|
|
$ |
(21,323 |
) |
|
|
|
|
|
$ |
|
|
|
$ |
150,215 |
|
Proceeds from stock options exercised
|
|
|
87 |
|
|
|
1 |
|
|
|
775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
776 |
|
Purchase of common stock
|
|
|
(12,000 |
) |
|
|
(120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,000 |
) |
|
|
(131,880 |
) |
|
|
(132,000 |
) |
Tax benefit related to employee stock options
|
|
|
|
|
|
|
|
|
|
|
330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
330 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation, net of income tax
expense of $3,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment, net of income tax benefit
of $116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(263 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivative instruments, net of income tax
benefit of $476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for losses on UK interest rate swaps
included in net income related to the sale of the UK joint
venture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 28, 2003
|
|
|
9,333 |
|
|
|
93 |
|
|
|
64,605 |
|
|
|
147,845 |
|
|
$ |
(3,338 |
) |
|
|
(12,000 |
) |
|
|
(131,880 |
) |
|
|
77,325 |
|
Proceeds from stock options exercised
|
|
|
174 |
|
|
|
2 |
|
|
|
1,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,591 |
|
Tax benefit related to employee stock options
|
|
|
|
|
|
|
|
|
|
|
773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
773 |
|
Acceleration of vesting on employee stock options
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation, net of income tax
expense of $384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment, net of income tax expense
of $480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on derivative instruments, net of income tax
expense of $815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 2, 2005
|
|
|
9,507 |
|
|
|
95 |
|
|
|
67,005 |
|
|
|
164,660 |
|
|
$ |
(141 |
) |
|
|
(12,000 |
) |
|
|
(131,880 |
) |
|
|
99,739 |
|
Proceeds from stock options exercised
|
|
|
184 |
|
|
|
2 |
|
|
|
2,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,999 |
|
Tax benefit related to employee stock options
|
|
|
|
|
|
|
|
|
|
|
731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
731 |
|
Acceleration of vesting on employee stock options
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation, net of income tax
benefit of $2,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,375 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment, net of income tax expense
of $8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on derivative instruments, net of income tax
expense of $625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2006
|
|
|
9,691 |
|
|
$ |
97 |
|
|
$ |
70,784 |
|
|
$ |
171,666 |
|
|
$ |
(2,073 |
) |
|
|
(12,000 |
) |
|
$ |
(131,880 |
) |
|
$ |
108,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
S-84
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended January 1, 2006,
January 2, 2005, and December 28, 2003
|
|
1. |
Summary of Business Operations and Significant Accounting
Policies |
The GEO Group, Inc., a Florida corporation, and subsidiaries
(the Company) is a leading developer and manager of
privatized correctional, detention, mental health and
residential treatment services facilities located in the United
States, Australia and South Africa. Until July 9, 2003, the
Company was a majority owned subsidiary of The Wackenhut
Corporation, (TWC). TWC previously owned
12 million shares of the Companys common stock.
On November 4, 2005, the Company completed the acquisition
of Correctional Services Corporation (CSC), a Florida-based
provider of privatized jail, community corrections and
alternative sentencing services. Management of the Company
believes the acquisition is an excellent strategic fit, will
have positive impact on earnings and broaden our existing client
base. The acquisition was completed through the merger (the
Merger) of CSC into GEO Acquisition, Inc., a wholly
owned subsidiary of the Company. Under the terms of the Merger,
the Company acquired for cash, 100% of the 10.2 million
outstanding shares of CSC common stock for $6.00 per share
or approximately $62.1 million. As a result of the Merger,
GEO will become responsible for supervising the operation of the
sixteen adult correctional and detention facilities, totaling
8,037 beds, formerly run by CSC. Immediately following the
purchase of CSC, the Company sold Youth Services International,
Inc., the former juvenile services division of CSC, for
$3.75 million, $1.75 million of which was paid in cash
and the remaining $2.0 million of which was paid in the
form of a promissory note accruing interest at a rate of
6% per annum. Principal and interest are due quarterly. The
annual maturities are $0.6 million in 2006,
$0.7 million in 2007, and $0.7 million in 2008.
The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States. The significant accounting policies of the
Company are described below.
The Companys fiscal year ends on the Sunday closest to the
calendar year end. Fiscal year 2004 included 53 weeks.
Fiscal years 2005 and 2003 each included 52 weeks. The
Company reports the results of its South African equity
affiliate, South African Custodial Services Pty. Limited,
(SACS), and its consolidated South African entity,
South African Custodial Management Pty. Limited
(SACM) on a calendar year end, due to the
availability of information.
The consolidated financial statements include the accounts of
the Company and all controlled subsidiaries. Investments in 50%
owned affiliates, which we do not control, are accounted for
under the equity method of accounting. Intercompany transactions
have been eliminated.
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make certain estimates,
judgments and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. While the Company believes that
such estimates are fair when considered in conjunction with the
consolidated financial statements taken as a whole, the actual
amounts of such estimates, when known, will vary from
S-85
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
these estimates. If actual results significantly differ from the
Companys estimates, the Companys financial condition
and results of operations could be materially impacted.
|
|
|
Fair Value of Financial Instruments |
The carrying value of cash and cash equivalents, restricted
cash, short-term investments, accounts receivable, accounts
payable and accrued expenses approximate their fair value due to
the short maturity of these items. The carrying value of the
Companys long-term debt related to its Senior Credit
Facility (See Note 10) and non-recourse debt approximates
fair value based on the variable interest rates on the debt. For
the Companys
81/4
% Senior Unsecured Notes, the stated value and fair
value based on quoted market rates was $150.0 million and
$147.4 million, respectively, at January 1, 2006. For
the Companys non-recourse debt related to CSC, the stated
value and fair value based on quoted market rates was
$102.2 million and $98.4 million, respectively, at
January 1, 2006.
|
|
|
Cash and Cash Equivalents |
Cash and cash equivalents include all interest-bearing deposits
or investments with original maturities of three months or less.
Short-term investments consist of auction rate securities
classified as available-for-sale, which are stated at estimated
fair value. These investments are on deposit with a major
financial institution. Unrealized gains and losses, net of tax,
are computed on the
first-in first-out
basis and are reported as a separate component of accumulated
other comprehensive income (loss) in shareholders equity
until realized. There were no unrealized gains or losses at
January 1, 2006 and January 2, 2005. The Company had
no short-term investments at January 1, 2006.
The Company extends credit to the governmental agencies it
contracts with and other parties in the normal course of
business as a result of billing and receiving payment for
services thirty to sixty days in arrears. Further, management of
the Company regularly reviews outstanding receivables, and
provides estimated losses through an allowance for doubtful
accounts. In evaluating the level of established reserves the
Company makes judgments regarding its customers ability to
make required payments, economic events and other factors. The
Company does not require collateral for the credit it extends to
its customers. 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.
Food and supplies inventories are carried at the lower of cost
or market, on a
first-in first-out
basis and are included in other current assets in
the accompanying consolidated balance sheets. Uniform
inventories are carried at amortized cost and are amortized over
a period of eighteen months. The current portion of unamortized
uniforms is included in other current assets. The
long-term portion is included in other non current
assets in the accompanying consolidated balance sheets.
The Company had $8.9 million in current restricted cash and
cash equivalents and $17.5 million in long-term restricted
cash equivalents and investments. The balances in those accounts
are attributable primarily to
S-86
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
amounts held in escrow or in trust in connection with the
1,020-bed South Texas Detention Complex in Frio County, Texas
and the 890-bed Northwest Detention Center in Tacoma, Washington.
Additionally, the Companys wholly owned Australian
subsidiary financed a 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 AUD
5.0 million. The term of the non-recourse debt is through
2017.
|
|
|
Costs of Acquisition Opportunities |
Internal costs associated with a business combination are
expensed as incurred. Direct and incremental costs related to
successful negotiations where we are the acquiring company are
capitalized as part of the cost of the acquisition. As of
January 1, 2006 the Company had no capitalized costs.
During 2004, the Company wrote off approximately
$1.3 million of costs. Costs associated with unsuccessful
negotiations are expensed when it is probable that the
acquisition will not occur.
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 7 years. Accelerated methods of
depreciation are generally used for income tax purposes.
Leasehold improvements are amortized on a straight-line basis
over the shorter of the useful life of the improvement or the
term of the lease. The Company performs ongoing evaluations of
the estimated useful lives of the property and equipment for
depreciation purposes. The estimated useful lives are determined
and continually evaluated based on the period over which
services are expected to be rendered by the asset. Maintenance
and repairs are expensed as incurred. Interest is capitalized in
connection with the construction of correctional and detention
facilities. Capitalized interest is recorded as part of the
asset to which it relates and is amortized over the assets
estimated useful life. No interest cost was capitalized in 2005
or 2004.
|
|
|
Assets Held Under Capital Leases |
Assets held under capital leases are recorded at the lower of
the net present value of the minimum lease payments or the fair
value of the leased asset at the inception of the lease.
Amortization expense is recognized using the straight-line
method over the shorter of the estimated useful life of the
asset or the term of the related lease and is included in
depreciation expense.
The Company reviews long-lived assets to be held and used for
impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be fully
recoverable. Determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the
use of the asset and its eventual disposition. Measurement of an
impairment loss for long-lived assets that management expects to
hold and use is based on the fair value of the asset. Long-lived
assets to be disposed of are reported at the lower of carrying
amount or fair value less costs to sell. Management has reviewed
the Companys long-lived assets and determined that there
are no events requiring impairment loss recognition, other than
the Michigan Facility charge. See Note 12. Events that
would trigger an impairment assessment include deterioration of
profits for a business segment that has long-lived assets, or
when other changes occur which might impair recovery of
long-lived assets.
S-87
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
Goodwill and Other Intangible Assets |
The Companys goodwill at January 1, 2006 consisted of
$35.3 million related to the November 4, 2005
acquisition of CSC (See Note 2: Acquisition) and
$0.6 million related to its Australian subsidiary and at
January 2, 2005 consisted of $0.6 million associated
with its Australian subsidiary. Goodwill related to CSC and
Australia is included in the correction and detention facility
segment. With the adoption of Financial Accounting Standard
(FAS) No. 142, the Companys goodwill is
no longer amortized, but is subject to an annual impairment test
related to the goodwill associated with the Australian
subsidiary. There was no impairment of goodwill as a result of
adopting FAS No. 142, Goodwill and Other
Intangible Assets or as a result of the annual impairment
test completed during the fourth quarter of 2005 and 2004
related to goodwill associated with its Australian subsidiary.
The annual impairment test for the goodwill related to the
acquisition of CSC will be on the first day of the fourth
quarter.
Acquired intangible assets are separately recognized if the
benefit of the intangible asset is obtained through contractual
or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented or exchanged, regardless of the
Companys intent to do so. The Companys intangible
assets were recorded in connection with the acquisition of CSC
and have finite lives ranging from 4-20 years and are
amortized using a straight-line method. The Company reviews
finite-lived intangible assets for impairment whenever an event
occurs or circumstances change which indicate that the carrying
amount of such assets may not be fully recoverable. See
Note 8.
The Company has entered into ten year non cancelable operating
leases with CentraCore Properties Trust, or CPV, a Maryland real
estate investment trust for eleven facilities with initial terms
that expire at various times beginning in April 2008 and
extending through 2016. In the event that the Companys
facility management contract for one of these leased facilities
is terminated, the Company would remain responsible for payments
to CPV on the underlying lease. The Company will account for
idle periods under any such lease in accordance with
FAS No. 146 Accounting for Costs Associated with
Exit or Disposal Activities. Specifically, the Company
reviews its estimate for sublease income and records a charge
for the difference between the net present value of the sublease
income and the lease expense over the remaining term of the
lease.
|
|
|
Variable Interest Entities |
In January 2003, the Financial Accounting Standards Board
(FASB) issued Financial Interpretation FIN
No. 46, Consolidation of Variable Interest
Entities, which addressed consolidation by a business of
variable interest entities in which it is the primary
beneficiary. In December 2003, the FASB issued
FIN No. 46R which replaced FIN No. 46. Our
50% owned South African joint venture in South African Custodial
Services Pty. Limited, which the Company refers to as SACS, is a
variable interest entity. The Company determined that it is not
the primary beneficiary of SACS and as a result it is not
required to consolidate SACS under FIN 46R. The Company
accounts for SACS as an equity affiliate. SACS was established
in 2001, to design, finance and build the Kutama Sinthumule
Correctional Center. Subsequently, SACS was awarded a
25 year contract to design, construct, manage and finance a
facility in Louis Trichardt, South Africa. SACS, based on the
terms of the contract with government, was able to obtain long
term financing to build the prison. The financing is fully
guaranteed by the government, except in the event of default,
for which it provides an 80% guarantee. Separately, SACS entered
into a long term operating contract with South African Custodial
Management (Pty) Limited (SACM) to provide security
and other management services and with SACS joint venture
partner to provide purchasing, programs and maintenance services
upon completion of the construction phase, which concluded in
February 2002. The Companys
S-88
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
maximum exposure for loss under this contract is
$24.1 million, which represents the Companys initial
investment and the guarantees discussed in Note 10.
In February 2004, CSC was awarded a contract by the Department
of Homeland Security, Bureau of Immigration and Customs
Enforcement (ICE) to develop and operate a 1,020 bed
detention center in Frio County Texas. South Texas Local
Development Corporation (STLDC) was created and
issued $49.5 million in taxable revenue bonds to finance
the construction of the detention complex. Additionally, CSC
provided a $5 million subordinated note to STLDC for
initial development. The Company determined that it is the
primary beneficiary of STLDC and consolidates the entity as a
result. STLDC is the owner of the complex and entered into a
development agreement with CSC to oversee the development of the
complex. In addition, STLDC entered into an operating agreement
providing CSC the sole and exclusive right to operate and manage
the complex. The operating agreement and bond indenture require
the revenue from 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 complex.
Deferred revenue primarily represents the unamortized net gain
on the development of properties and on the sale and leaseback
of properties by the Company. The Company leases these
properties back from CPV under operating leases. Deferred
revenue is being amortized over the lives of the leases and is
recognized in income as a reduction of rental expenses.
In accordance with Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial
Statements, as amended by SAB No. 104,
Revenue Recognition, and related interpretations,
facility management revenues are recognized as services are
provided under facility management contracts with approved
government appropriations based on a net rate per day per inmate
or on a fixed monthly rate.
Project development and design revenues are recognized as earned
on a percentage of completion basis measured by the percentage
of costs incurred to date as compared to estimated total cost
for each contract. This method is used because we consider costs
incurred to date to be the best available measure of progress on
these contracts. Provisions for estimated losses on uncompleted
contracts and changes to cost estimates are made in the period
in which we determine that such losses and changes are probable.
Typically, the Company enters into fixed price contracts and
does not perform additional work unless approved change orders
are in place. Costs attributable to unapproved change orders are
expensed in the period in which the costs are incurred if the
Company believes that it is not probable that the costs will be
recovered through a change in the contract price. If the Company
believes that it is probable that the costs will be recovered
through a change in contract price, costs related to unapproved
change orders are expensed in the period in which they are
incurred, and contract revenue is recognized to the extent of
the costs incurred. Revenue in excess of the costs attributable
to unapproved change orders is not recognized until the change
order is approved. Contract costs include all direct material
and labor costs and those indirect costs related to contract
performance. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract
penalty provisions, and final contract settlements, may result
in revisions to estimated costs and income, and are recognized
in the period in which the revisions are determined.
S-89
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company extends credit to the governmental agencies it
contracts with and other parties in the normal course of
business as a result of billing and receiving payment for
services thirty to sixty days in arrears. Further, the Company
regularly reviews outstanding receivables, and provides
estimated losses through an allowance for doubtful accounts. In
evaluating the level of established loss reserves, the Company
makes judgments regarding its customers ability to make
required payments, economic events and other factors. As the
financial condition of these parties change, circumstances
develop or additional information becomes available, adjustments
to the allowance for doubtful accounts may be required. The
Company also performs ongoing credit evaluations of
customers financial condition and generally does not
require collateral. The Company maintains reserves for potential
credit losses, and such losses traditionally have been within
its expectations.
The Company accounts for income taxes in accordance with
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 No. 109.
Basic earnings per share is computed by dividing net income by
the weighted-average number of common shares outstanding. In the
computation of diluted earnings per share, the weighted-average
number of common shares outstanding is adjusted for the dilutive
effect of shares issuable upon exercise of stock options
calculated using the treasury stock method.
The Company accounts for the portion of its contracts with
certain governmental agencies that represent capitalized lease
payments on buildings and equipment as investments in direct
finance leases. Accordingly, the minimum lease payments to be
received over the term of the leases less unearned income are
capitalized as the Companys investments in the leases.
Unearned income is recognized as income over the term of the
leases using the interest method.
|
|
|
Reserves for Insurance Losses |
Claims for which the Company is insured arising from its
U.S. operations that have an occurrence date of
October 1, 2002 or earlier are handled by TWC and are fully
insured up to an aggregate limit of between $25.0 million
and $50.0 million, depending on the nature of the claim.
With respect to claims for which the Company is insured arising
after October 1, 2002, the Company maintains a general
liability policy for all U.S. operations with
$52.0 million per occurrence and in the aggregate. On
October 1, 2004 the Company increased its deductible on
this general liability policy from $1.0 million to
$3.0 million for each claim which occurs after
October 1, 2004. The Company also maintains insurance in
amounts the Companys management deems adequate to cover
property and casualty risks, workers compensation, medical
malpractice and automobile liability. The Companys
Australian subsidiary is required to carry tail insurance
through 2011 related to a discontinued contract. In addition,
the Company carries various types of insurance with respect to
its operations in South Africa and Australia.
Since the Companys insurance policies generally have high
deductible amounts (including a $3.0 million per claim
deductible under our general liability policy), losses are
recorded as reported and a provision is made to cover losses
incurred but not reported. Loss reserves are undiscounted and
are computed based on
S-90
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
independent actuarial studies. The Companys management
uses judgments in assessing loss estimates based on actuarial
studies, which include actual claim amounts and loss development
considering historical and industry experience. If actual losses
related to insurance claims significantly differ from our
estimates, the Companys financial condition and results of
operations could be materially impacted.
Debt issuance costs totaling $7.0 million and
$5.9 million at January 1, 2006, and January 2,
2005, respectively, are included in other non current assets in
the consolidated balance sheets and are amortized into interest
expense using the effective interest method, over the term of
the related debt.
The Companys comprehensive income is comprised of net
income, foreign currency translation adjustments, unrealized
gain (loss) on derivative instruments, minimum pension liability
adjustment, and a reclassification adjustment for losses on UK
interest rate swaps related to the sale of the UK joint venture
in the Consolidated Statements of Shareholders Equity and
Comprehensive Income.
|
|
|
Concentration of Credit Risk |
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents, trade accounts receivable, short-term
investments, direct finance lease receivable, long-term debt and
financial instruments used in hedging activities. The
Companys cash management and investment policies restrict
investments to low-risk, highly liquid securities, and the
Company performs periodic evaluations of the credit standing of
the financial institutions with which it deals. As of
January 1, 2006, and January 2, 2005, the Company had
no significant concentrations of credit risk except as disclosed
in Note 17.
|
|
|
Foreign Currency Translation |
The Companys foreign operations use their local currencies
as their functional currencies. Assets and liabilities of the
operations are translated at the exchange rates in effect on the
balance sheet date and shareholders equity is translated
at historical rates. Income statement items are translated at
the average exchange rates for the year. The impact of foreign
currency fluctuation is included in shareholders equity as
a component of accumulated other comprehensive (loss) income and
totaled $(0.9) million at January 1, 2006 and
$2.5 million as of January 2, 2005.
In accordance with FAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and its
related interpretations and amendments, the Company records
derivatives as either assets or liabilities on the balance sheet
and measures those instruments at fair value. For derivatives
that are designed as and qualify as effective cash flow hedges,
the portion of gain or loss on the derivative instrument
effective at offsetting changes in the hedged item is reported
as a component of accumulated other comprehensive income and
reclassified into earnings when the hedged transaction affects
earnings. Total accumulated other comprehensive loss related to
these cash flow hedges was $0.3 million and
$1.7 million as of January 1, 2006 and January 2,
2005, respectively. For derivative instruments that are
designated as and qualify as effective fair value hedges, the
gain or loss on the derivative instrument as well as the
offsetting gain or loss on the hedged item attributable to the
hedged risk is recognized in current earnings as interest income
(expense) during the period of the change in fair values.
S-91
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company formally documents all relationships between hedging
instruments and hedge items, as well as its risk-management
objective and strategy for undertaking various hedge
transactions. This process includes attributing all derivatives
that are designated as cash flow hedges to floating rate
liabilities and attributing all derivatives that are designated
as fair value hedges to fixed rate liabilities. The Company also
assesses whether each derivative is highly effective in
offsetting changes in the cash flows of the hedged item.
Fluctuations in the value of the derivative instruments are
generally offset by changes in the hedged item; however, if it
is determined that a derivative is not highly effective as a
hedge or if a derivative ceases to be a highly effective hedge,
the Company will discontinue hedge accounting prospectively for
the affected derivative.
|
|
|
Accounting for Stock-Based Compensation |
The Company applies Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees in accounting for stock-based employee
compensation arrangements whereby compensation cost related to
stock options is generally not recognized in determining net
income. Had compensation cost for the Companys stock
option plans been determined pursuant to Statement of Financial
Accounting Standards No. 123, Accounting for Stock
Based Compensation, the Companys net income and
earnings per share would have decreased accordingly. Using the
Black-Scholes option pricing model for all options granted, the
Companys pro forma net income, pro forma earnings per
share and pro forma weighted average fair value of options
granted, with related assumptions, are as follows for the years
ended January 1, 2006, January 2, 2005 and
December 28, 2003 (in thousands, except per share data):(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Disclosures |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Net income
|
|
$ |
7,006 |
|
|
$ |
16,815 |
|
|
$ |
40,019 |
|
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects
|
|
|
(397 |
) |
|
|
(765 |
) |
|
|
(935 |
) |
Pro forma net income
|
|
$ |
6,609 |
|
|
$ |
16,050 |
|
|
$ |
39,084 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.73 |
|
|
$ |
1.79 |
|
|
$ |
2.56 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
0.69 |
|
|
$ |
1.71 |
|
|
$ |
2.50 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.70 |
|
|
$ |
1.73 |
|
|
$ |
2.53 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
0.66 |
|
|
$ |
1.65 |
|
|
$ |
2.47 |
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rates
|
|
|
3.96 |
% |
|
|
3.25 |
% |
|
|
1.73%-2.92 |
% |
Expected lives
|
|
|
3-7 years |
|
|
|
3-7 years |
|
|
|
3-7 years |
|
Expected volatility
|
|
|
39 |
% |
|
|
40 |
% |
|
|
49 |
% |
Expected dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2004, the FASB issued FAS 123R,
Share-Based Payment, a revision of FAS 123. In
March 2005, the SEC issued Staff Accounting
Bulletin No. 107 (SAB 107) regarding its
interpretation of FAS 123R. The standard requires companies
to expense the grant-date fair value of stock options and other
equity-based compensation issued to employees. In accordance
with the revised statement and related
|
|
(1) |
See Note 15 for more information regarding the
Companys stock option plans. |
S-92
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
guidance, the Company will begin to recognize the expense
attributable to stock options granted or vested subsequent to
January 1, 2006 using the modified prospective method in
the first quarter of 2006. The Company will continue using the
Black-Scholes valuation model and straight-line amortization of
compensation expense over the requisite service period of the
grant. The Company expects compensation expense during 2006
related to stock based awards consistent with the pro forma
disclosures under FAS 123 above for the year ended
January 1, 2006.
|
|
|
Recent Accounting Pronouncements |
In May 2005, FASB issued FAS No. 154, Accounting
for Changes and Error Corrections. FAS No. 154
requires retrospective application to prior periods
financial statements of changes in accounting principle. It also
requires that the new accounting principle be applied to the
balances of assets and liabilities as of the beginning of the
earliest period for which retrospective application is
practicable and that a corresponding adjustment be made to the
opening balance of retained earnings for that period rather than
being reported in an income statement. The statement was
effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. The
adoption of FAS No. 154 did not have a material effect
on the Companys consolidated financial position or results
of operations.
In March 2005, the Financial Accounting Standards Board issued
Interpretation No. 47 (FIN 47), Accounting
for Conditional Asset Retirement Obligations. FIN 47
clarifies that an entity must record a liability for a
conditional asset retirement obligation if the fair
value of the obligation can be reasonably estimated. The
provision was effective no later than the end of fiscal years
ending after December 15, 2005. The application of
FIN 47 did not have a material effect on the Companys
financial position, results of operations, and cash flows.
Under the purchase method of accounting, the purchase price for
CSC was allocated to CSCs net tangible and intangible
assets based on their estimated fair values as of the date of
the completion of the acquisition. The aggregate consideration
for this transaction was approximately $79.3 million,
comprised of approximately $62.1 million in cash to acquire
100% of the 10.2 million shares of outstanding common
stock, approximately $7.0 million in payments of CSC debt
and direct transactions costs of approximately
$10.2 million. Independent valuation specialists have been
engaged to perform valuations to assist in the determination of
the fair values of a significant portion of CSCs net
assets. Immediately following the purchase of CSC, the Company
sold Youth Services International, Inc., the former juvenile
services division of CSC, for $3.75 million,
$1.75 million of which was paid in cash and the remaining
$2.0 million of which was paid in the form of a promissory
note accruing interest at a rate of 6% per annum. Principal
and interest are due quarterly. The annual maturities are
$0.6 million in 2006, $0.7 million in 2007, and
$0.7 million in 2008. The purchase price allocations
related to property and equipment, other assets, capital lease
obligations and certain tax elections are still tentative as the
Company has not received information from our independent
valuation specialists. This information is expected to be
received in the first quarter of 2006. The purchase price
allocation excludes the assets of Youth Services International,
Inc.
S-93
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The preliminary allocation of the purchase price is summarized
below (in thousands):
|
|
|
|
|
|
|
|
|
|
Purchase Price | |
|
|
|
|
Allocation | |
|
Asset Life |
|
|
| |
|
|
Current Assets
|
|
$ |
44,391 |
|
|
|
Property and Equipment
|
|
|
110,150 |
|
|
Various |
Intangible assets
|
|
|
16,520 |
|
|
4-20 years |
Goodwill
|
|
|
35,317 |
|
|
Indefinite |
Other non-current assets
|
|
|
17,566 |
|
|
|
|
|
|
|
|
|
|
Total Assets acquired
|
|
|
223,934 |
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
23,565 |
|
|
|
Other non-current liabilities
|
|
|
6,052 |
|
|
|
Debt and capital lease obligations
|
|
|
115,027 |
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
144,644 |
|
|
|
|
|
|
|
|
|
Net assets acquired, including direct transaction costs
|
|
$ |
79,290 |
|
|
|
|
|
|
|
|
|
None of the goodwill recorded in relation to this acquisition is
deductible for tax purposes. Identifiable intangible assets
purchased in the acquisition and their weighted average lives
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Description | |
|
Asset Life | |
|
|
| |
|
| |
Facility management contracts
|
|
$ |
15,050 |
|
|
|
7-20 years |
|
Covenants not to compete
|
|
|
1,470 |
|
|
|
4 years |
|
|
|
|
|
|
|
|
Total
|
|
$ |
16,520 |
|
|
|
|
|
|
|
|
|
|
|
|
The fair values used in determining the purchase price
allocation for the intangible assets were based on independent
appraisal.
The $35.3 million of goodwill related to the acquisition
was assigned to the Correctional and Detention Facilities
segment. See Note 17 for segment information.
The results of operations of CSC are included in the
Companys results of operations beginning after
November 4, 2005. CSC is part of the Companys
Correctional and Detention Facilities reportable segment. The
following unaudited pro forma information combines the
consolidated results of operations of the Company and CSC as if
the acquisitions had occurred at the beginning of fiscal year
2004 and excludes the operations of Youth Services
International, Inc. (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Revenues
|
|
$ |
692,545 |
|
|
$ |
670,563 |
|
Income from continuing operations
|
|
|
5,719 |
|
|
|
21,662 |
|
Net income
|
|
|
4,402 |
|
|
|
9,571 |
|
Net income per share basic
|
|
$ |
0.46 |
|
|
$ |
1.02 |
|
Net income per share diluted
|
|
$ |
0.44 |
|
|
$ |
0.98 |
|
|
|
3. |
Discontinued Operations |
The Company formerly had, through its Australian subsidiary, a
contract with the Department of Immigration, Multicultural and
Indigenous Affairs (DIMIA) for the management and
operation of
S-94
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Australias immigration centers. In 2003, the contract was
not renewed, and effective February 29, 2004, the Company
completed the transition of the contract and exited the
management and operation of the DIMIA centers. In accordance
with the provisions related to discontinued operations specified
within FAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the
accompanying consolidated financial statements and notes reflect
the operations of DIMIA as a discontinued operation in all
periods presented.
In New Zealand, the New Zealand Parliament in early 2005
repealed the law that permitted private prison operation
resulting in the termination of the Companys contract for
the management and operation of the Auckland Central Remand
Prison (Auckland). The Company has operated this
facility since July 2000. The Company ceased operating the
facility upon the expiration of the contract on July 13,
2005. The accompanying consolidated financial statements and
notes reflect the operations of Auckland as a discontinued
operation.
On January 1, 2006, the Company completed the sale of
Atlantic Shores Hospital, a 72-bed private mental health
hospital which the Company owned and operated since 1997 for
approximately $11.5 million. The Company recognized a gain
on the sale of this transaction of approximately
$1.6 million or $1.0 million net of tax. Pre-tax
profit related to the 72-bed private mental health hospital was
$0.1 million, $(0.2) million and $0.2 million in
2005, 2004 and 2003 respectively. The accompanying consolidated
financial statements and notes reflect the operations of the
hospital and the related sale as a discontinued operation.
The following are the revenues related to DIMIA, Auckland and
Atlantic Shores Hospital for the periods presented (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Revenues DIMIA
|
|
$ |
20 |
|
|
$ |
6,040 |
|
|
$ |
62,673 |
|
Revenues Auckland
|
|
|
7,256 |
|
|
|
12,940 |
|
|
|
10,492 |
|
Revenues Atlantic Shores
|
|
|
8,602 |
|
|
|
7,614 |
|
|
|
7,711 |
|
|
|
4. |
Property and Equipment |
Property and equipment consist of the following at fiscal year
end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful |
|
|
|
|
|
|
Life |
|
2005 | |
|
2004 | |
|
|
|
|
| |
|
| |
|
|
(Years) |
|
|
|
|
|
|
(In thousands) | |
Land
|
|
|
|
$ |
6,195 |
|
|
$ |
2,699 |
|
Buildings and improvements
|
|
2 to 40 |
|
|
258,008 |
|
|
|
168,855 |
|
Leasehold improvements
|
|
1 to 15 |
|
|
45,356 |
|
|
|
40,126 |
|
Equipment
|
|
3 to 7 |
|
|
32,541 |
|
|
|
23,106 |
|
Furniture and fixtures
|
|
3 to 7 |
|
|
9,309 |
|
|
|
3,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
351,409 |
|
|
$ |
238,218 |
|
Less accumulated depreciation and amortization
|
|
|
|
|
(69,173 |
) |
|
|
(47,353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
282,236 |
|
|
$ |
190,865 |
|
|
|
|
|
|
|
|
|
|
At January 1, 2006, the Company had $17.3 million of
assets recorded under capital leases including
$16.6 million related to buildings and improvements,
$0.6 million related to equipment and $0.1 million
related to leasehold improvements with accumulated amortization
of $0.1 million. There were no assets under capital leases
at January 2, 2005.
S-95
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In conjunction with the acquisition of CSC, the Company acquired
a building and assets associated with a program that had been
discontinued by CSC in October 2003. These assets meet the
criteria to be classified as held for sale per the guidance of
FAS No. 144 and have been recorded at their net
realizable value at November 4, 2005. No depreciation has
been recorded related to these assets in accordance with
FAS No. 144.
|
|
6. |
Investment in Direct Finance Leases |
The Companys investment in direct finance leases relates
to the financing and management of one Australian facility. The
Companys wholly-owned Australian subsidiary financed the
facilitys development with long-term debt obligations,
which are non-recourse to the Company. The Companys
financial statements reflect the consolidated Australians
subsidiarys direct finance lease receivable from the state
government and related non-recourse debt each totaling
approximately $40.3 million and $44.7 as of January 1,
2006 and January 2, 2005, respectively.
The future minimum rentals to be received are as follows:
|
|
|
|
|
|
|
Annual | |
Fiscal Year |
|
Repayment | |
|
|
| |
|
|
(In thousands) | |
2006
|
|
$ |
5,630 |
|
2007
|
|
|
5,660 |
|
2008
|
|
|
5,705 |
|
2009
|
|
|
5,744 |
|
2010
|
|
|
5,792 |
|
Thereafter
|
|
|
39,433 |
|
|
|
|
|
Total minimum obligation
|
|
$ |
67,964 |
|
Less unearned interest income
|
|
|
(27,670 |
) |
Less current portion of direct finance lease
|
|
|
(1,802 |
) |
|
|
|
|
Investment in direct finance lease
|
|
$ |
38,492 |
|
|
|
|
|
|
|
7. |
Derivative Financial Instruments |
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 London Interbank Offered Rate, (LIBOR)
plus a fixed margin of 3.45%, also calculated on the notional
$50.0 million amount. As of January 1, 2006 and
January 2, 2005 the fair value of the swaps totaled
approximately $(1.1) million and $0.7 million and is
included in other non-current assets or liabilities and as an
adjustment to the carrying value of the Notes in the
accompanying balance sheets. There was no material
ineffectiveness of the Companys interest rate swaps for
the fiscal year ended January 1, 2006.
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
S-96
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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
liability as of January 1, 2006 and January 2, 2005
was approximately $0.4 million and $2.5 million,
respectively, and is recorded as a component of other
liabilities in the accompanying consolidated financial
statements. There was no material ineffectiveness of the
Companys interest rate swaps for the fiscal years
presented. The Company does not expect to enter into any
transactions during the next twelve months which would result in
the reclassification into earnings of losses associated with
this swap currently reported in accumulated other comprehensive
loss.
The Companys former 50% owned joint venture operating in
the United Kingdom was a party to several interest rate swaps to
fix the interest rate on its variable rate credit facility. The
Company previously determined the swaps to be effective cash
flow hedges and upon the initial adoption of
FAS No. 133 on January 1, 2001, the Company
recognized a $12.1 million reduction of shareholders
equity. In fiscal 2003, in connection with the sale of the 50%
owned joint venture in the UK, the Company reclassified the
remaining balance of approximately $13.3 million from
accumulated other comprehensive loss into earnings as a
reduction of the gain on sale of the UK joint venture.
|
|
8. |
Goodwill and Other Intangible Assets, Net |
As of January 1, 2006 and January 2, 2005, the Company
had $35.9 million and $0.6 million of goodwill,
respectively.
Intangible assets, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Useful Life | |
|
|
|
|
in Years | |
|
2005 | |
|
|
| |
|
| |
Facility Management Contracts
|
|
|
7-20 |
|
|
$ |
15,050 |
|
Covenants not to compete
|
|
|
4 |
|
|
|
1,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,520 |
|
Less Accumulated Amortization
|
|
|
|
|
|
|
(289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,231 |
|
|
|
|
|
|
|
|
Amortization expense was $0.3 million for the fiscal year
ended 2005. Amortization is recognized on a straight-line basis
over the estimated useful life of the intangible assets.
Estimated amortization expense for fiscal 2006 through fiscal
2010 and thereafter are as follows:
|
|
|
|
|
|
|
Expense | |
Fiscal Year |
|
Amortization | |
|
|
| |
|
|
(In thousands) | |
2006
|
|
$ |
1,754 |
|
2007
|
|
|
1,754 |
|
2008
|
|
|
1,754 |
|
2009
|
|
|
1,693 |
|
2010
|
|
|
1,387 |
|
Thereafter
|
|
|
7,889 |
|
|
|
|
|
|
|
$ |
16,231 |
|
|
|
|
|
S-97
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Accrued expenses consisted of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Accrued interest
|
|
$ |
7,193 |
|
|
$ |
5,476 |
|
Accrued bonus
|
|
|
4,369 |
|
|
|
5,608 |
|
Accrued insurance
|
|
|
25,923 |
|
|
|
15,686 |
|
Accrued taxes
|
|
|
882 |
|
|
|
1,522 |
|
Jena idle facility lease reserve
|
|
|
8,257 |
|
|
|
5,847 |
|
Other
|
|
|
23,553 |
|
|
|
18,965 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
70,177 |
|
|
$ |
53,104 |
|
|
|
|
|
|
|
|
Debt consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Capital Lease Obligations
|
|
$ |
17,755 |
|
|
$ |
|
|
Senior Credit Facility:
|
|
|
|
|
|
|
|
|
Term loan
|
|
$ |
74,813 |
|
|
$ |
51,521 |
|
Senior
81/4% Notes:
|
|
|
|
|
|
|
|
|
Notes Due in 2013
|
|
$ |
150,000 |
|
|
$ |
150,000 |
|
Discount on Notes
|
|
|
(3,735 |
) |
|
|
(4,063 |
) |
Swap on Notes
|
|
|
(1,074 |
) |
|
|
746 |
|
|
|
|
|
|
|
|
|
Total Senior
81/4
% Notes
|
|
$ |
145,191 |
|
|
$ |
146,683 |
|
Non Recourse Debt:
|
|
|
|
|
|
|
|
|
Non recourse debt
|
|
$ |
142,479 |
|
|
$ |
44,683 |
|
Discount on bonds
|
|
|
(4,493 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total non recourse debt
|
|
|
137,986 |
|
|
|
44,683 |
|
Other debt
|
|
|
301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$ |
376,046 |
|
|
$ |
242,887 |
|
|
|
|
|
|
|
|
Current portion of capital lease obligations, long-term debt and
non-recourse debt
|
|
|
(8,441 |
) |
|
|
(13,736 |
) |
Capital lease obligations
|
|
|
(17,072 |
) |
|
|
|
|
Non recourse debt
|
|
|
(131,279 |
) |
|
|
(42,953 |
) |
|
|
|
|
|
|
|
Long term debt
|
|
$ |
219,254 |
|
|
$ |
186,198 |
|
|
|
|
|
|
|
|
|
|
|
The Senior Credit Facility |
On September 14, 2005, the Company amended its senior
credit facility (the Senior Credit Facility), to
consist of a $75 million, six-year term-loan bearing
interest at London Interbank Offered Rate, (LIBOR)
plus 2.00%, and a $100 million, five-year revolving credit
facility bearing interest at LIBOR plus 2.00%. The Company used
the borrowings under the Senior Credit Facility to fund general
corporate purposes and to finance the acquisition of
Correctional Services Corporation (CSC) for
approximately $62 million plus
S-98
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
transaction-related costs. The acquisition of CSC closed in the
fourth quarter of 2005. As of January 1, 2006, the Company
had borrowings of $74.8 million outstanding under the term
loan portion of the Senior Credit Facility, no amounts
outstanding under the revolving portion of the Senior Credit
Facility, and $43.7 million outstanding in letters of
credit under the revolving portion of the Senior Credit
Facility. As of January 1, 2006 the Company had
$56.3 million available for borrowings under the revolving
portion of the Senior Credit Facility.
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.
Indebtedness under the Revolving Credit Facility bears interest
at the Companys option at the base rate plus a spread
varying from 0.50% to 1.25% (depending upon a leverage-based
pricing grid set forth in the Senior Credit Facility), or at
LIBOR plus a spread, varying from 1.50% to 2.25% (depending upon
a leverage-based pricing grid, as defined in the Senior Credit
Facility). As of January 1, 2006, there were no borrowings
outstanding under the Revolving Credit Facility. However, new
borrowings would bear interest at LIBOR plus 2.00% or at the
base rate plus 1.00%. Letters of credit outstanding under the
revolving portion of the Senior Credit Facility bear interest at
1.50% to 2.25% (depending upon a leverage-based pricing grid, as
defined in the Senior Credit Facility). Available capacity under
the revolving portion of the Senior Credit Facility bears
interest at 0.38% to 0.5%. The Term Loan Facility bears
interest at the Companys option at the base rate plus a
spread of 0.75% to 1.00%, or at LIBOR plus a spread, varying
from 1.75% to 2.00% (depending upon a leverage-based pricing
grid, as defined in the Senior Credit Facility). Borrowings
under the Term Loan Facility currently bear interest at
LIBOR plus a spread of 2.00%. If an event of default occurs
under the Senior Credit Facility, (i) all LIBOR rate loans
bear interest at the rate which is 2.00% in excess of the rate
then applicable to LIBOR rate loans until the end of the
applicable interest period and thereafter at a rate which is
2.00% in excess of the rate then applicable to base rate loans,
and (ii) all base rate loans bear interest at a rate which
is 2.00% in excess of the rate then applicable to base rate
loans.
The Senior Credit Facility contains financial covenants which
require the Company to maintain the following ratios, as
computed at the end of each fiscal quarter for the immediately
preceding four quarter-period: a total leverage ratio equal to
or less than 3.50 to 1.00 through December 30, 2006, which
reduces thereafter in 0.50 increments to 3.00 to 1.00 for the
period from December 31, 2006 through December 27,
2007 and thereafter; a senior secured leverage ratio equal to or
less than 2.50 to 1.00; and a fixed charge coverage ratio equal
to or less than 1.05 to 1.00 until December 30, 2006, and
thereafter a ratio of 1.10 to 1.00. In addition, the Senior
Credit Facility prohibits the Company from making capital
expenditures greater than $19.0 million in the aggregate
during any fiscal year until 2009 and $24.0 million during
each of the years 2010 and 2011, provided that to the extent
that the Companys capital expenditures during any fiscal
year are less than the limit, such amount will be added to the
maximum amount of capital expenditures that the Company can make
in the following year.
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 our 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 the
Companys capital stock, (viii) transact with
affiliates, (ix) make changes to the Companys
accounting treatment, (x) amend or modify the terms of any
subordinated indebtedness (including the Notes), (xi) enter
S-99
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
into debt agreements that contain negative pledges on the
Companys assets or covenants more restrictive than
contained in the Senior Credit Facility, (xii) alter the
business the Company conducts, and (xiii) materially impair
the Companys lenders security interests in the
collateral for the Companys loans. The covenants in the
Senior Credit Facility can substantially restrict the
Companys business operations.
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 representations or warranty,
(iii) covenant defaults, (iv) bankruptcy,
(v) cross default to certain other indebtedness,
(vi) unsatisfied final judgments over a threshold to be
determined, (vii) material environmental claims which are
asserted against the Company, and (viii) a change of
control.
To facilitate the completion of the purchase of the
12 million shares from Group 4 Falck, the Company amended
the Senior Credit Facility and issued $150.0 million
aggregate principal amount, ten-year,
81/4% senior
unsecured notes, (the Notes), in a private placement
pursuant to Rule 144A of the Securities Act of 1933, as
amended. The Notes are general, unsecured, senior obligations.
Interest is payable semi-annually on January 15 and July 15 at
81/4
%. The Notes are governed by the terms of an Indenture,
dated July 9, 2003, between the Company and the Bank of New
York, as trustee, referred to as the Indenture. Under the terms
of the Indenture, at any time on or prior to July 15, 2006,
the Company may redeem up to 35% of the Notes with the proceeds
from equity offerings at 108.25% of the principal amount to be
redeemed plus the payment of accrued and unpaid interest, and
any applicable liquidated damages. 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. On June 25, 2004, as required by the terms of the
Indenture governing the Notes, the Company used
$43.0 million of the net proceeds from the sale of PCG to
permanently reduce the Senior Credit Facility, and wrote off
approximately $0.3 million in deferred financing costs
related to this payment.
The Company is in compliance with all of the covenants of the
Indenture governing the notes as of January 1, 2006.
|
|
|
South Texas Detention Complex: |
In February 2004, CSC was awarded a contract by the Department
of Homeland Security, Bureau of Immigration and Customs
Enforcement (ICE) to develop and operate a 1,020-bed
detention complex in Frio County Texas. South Texas Local
Development Corporation (STLDC) was created and
issued $49.5 million in taxable revenue bonds to finance
the construction of the detention center. Additionally, CSC
provided a $5 million subordinated note to STLDC for
initial development. The Company determined that it is the
primary beneficiary of STLDC and 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
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.
The bonds have a ten year term
S-100
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
and are non-recourse to CSC and STLDC. 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 are fully insured and
the sole source of payment for the bonds is the operating
revenues of the center.
Included in non-current restricted cash equivalents and
investments is $12.2 million as of January 1, 2006 as
funds held in trust with respect to the STLDC for debt service
and other reserves.
|
|
|
Northwest Detention Center |
On June 30, 2003 CSC arranged financing for the
construction of the Northwest Detention Center in Tacoma,
Washington (the 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
(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.
Included in non-current restricted cash equivalents and
investments is $1.3 million as of January 1, 2006 as
funds held in trust with respect to the Northwest Detention
Center for debt service and other reserves.
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. We have consolidated the subsidiarys
direct finance lease receivable from the state government and
related non-recourse debt each totaling approximately
$40.3 million and $44.7 million as of January 1,
2006 and January 2, 2005, respectively. As a condition of
the loan, we are required to maintain a restricted cash balance
of AUD 5.0 million, which, at January 1, 2006, was
approximately $3.7 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.
As of January 1, 2006, the Notes are reflected net of the
original issuers discount of approximately
$3.7 million which is being amortized over the ten year
term of the Notes using the effective interest method.
S-101
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Debt repayment schedules under capital lease obligations, long
term debt and non-recourse debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital | |
|
Long Term | |
|
Non | |
|
Total Annual | |
Fiscal Year |
|
Leases | |
|
Debt | |
|
Recourse | |
|
Repayment | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(In thousands) | |
2006
|
|
$ |
2,087 |
|
|
$ |
1,051 |
|
|
$ |
6,707 |
|
|
$ |
9,845 |
|
2007
|
|
|
2,135 |
|
|
|
750 |
|
|
|
11,272 |
|
|
|
14,157 |
|
2008
|
|
|
2,119 |
|
|
|
750 |
|
|
|
11,899 |
|
|
|
14,768 |
|
2009
|
|
|
1,975 |
|
|
|
750 |
|
|
|
12,606 |
|
|
|
15,331 |
|
2010
|
|
|
1,909 |
|
|
|
18,375 |
|
|
|
13,262 |
|
|
|
33,546 |
|
Thereafter
|
|
|
22,580 |
|
|
|
203,438 |
|
|
|
86,733 |
|
|
|
312,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
32,805 |
|
|
$ |
225,114 |
|
|
$ |
142,479 |
|
|
$ |
400,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original issuers discount
|
|
|
|
|
|
|
(3,735 |
) |
|
|
(4,493 |
) |
|
|
(8,228 |
) |
Current portion
|
|
|
(683 |
) |
|
|
(1,051 |
) |
|
|
(6,707 |
) |
|
|
(8,441 |
) |
Interest imputed on Capital Leases
|
|
|
(15,050 |
) |
|
|
|
|
|
|
|
|
|
|
(15,050 |
) |
Swap
|
|
|
|
|
|
|
(1,074 |
) |
|
|
|
|
|
|
(1,074 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non current portion
|
|
$ |
17,072 |
|
|
$ |
219,254 |
|
|
$ |
131,279 |
|
|
$ |
367,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2006 the Company also had outstanding eleven
letters of guarantee totaling approximately $6.5 million
under separate international facilities.
In connection with the creation of SACS, the Company entered
into certain guarantees related to the financing, construction
and operation of the prison. The Company guaranteed certain
obligations of SACS under its debt agreements up to a maximum
amount of 60.0 million South African Rand, or approximately
$9.5 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 6.5 million South African Rand, or approximately
$1.0 million as security for the Companys guarantee.
The Companys obligations under this guarantee expire upon
SACS release from its obligations in respect of the
restricted account under its debt agreements. No amounts have
been drawn against these letters of credit, which are included
in the Companys outstanding letters of credit under its
Revolving Credit Facility.
The Company has agreed to provide a loan of up to
20.0 million South African Rand, or approximately
$3.2 million (the Standby Facility) to SACS for
the purpose of financing SACS obligations under its
contract with the South African government. No amounts have been
funded under the Standby Facility, and the Company does not
anticipate that such funding will ever be required by SACS. The
Companys obligations under the Standby Facility expire
upon the earlier of full funding or SACS release from its
obligations under its debt agreements. The lenders ability
to draw on the Standby Facility is limited to certain
circumstance, 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.
S-102
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In connection with a design, build, finance and maintenance
contract, the Company guaranteed certain potential tax
obligations of a special purpose entity. The potential estimated
exposure of these obligations is CAN$2.5 million, or
approximately $2.1 million commencing in 2017. To secure
this guarantee, the Company purchased Canadian dollar
denominated securities with maturities matched to the estimated
tax obligations in 2017 to 2021. The Company has recorded an
asset and a liability equal to the current fair market value of
those securities on its balance sheet.
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 $40.3 million and $44.7 million at
January 1, 2006 and January 2, 2005, respectively. The
term of the non-recourse debt is through 2017 and it bears
interest at a variable rate quoted by certain Australian banks
plus 140 basis points. Any obligations or liabilities of
the subsidiary are matched by a similar or corresponding
commitment from the government of the State of Victoria. As a
condition of the loan, the Company is required to maintain a
restricted cash balance of AUD 5.0 million, which, at
January 1, 2006, was approximately $3.7 million. This
amount is included in restricted cash and the annual maturities
of the future debt obligation is included in non recourse debt.
The debt amortization schedule requires annual repayments of
$1.8 million in 2006, $2.0 million in 2007,
$2.3 million in 2008, $2.5 million in 2009,
$2.8 million in 2010 and $28.9 million thereafter. CSC
non-recourse requires annual repayments of $4.9 million in
2006, $9.3 million in 2007, $9.7 million in 2008,
$10.1 million in 2009, $10.3 million in 2010 and
$57.9 million thereafter.
|
|
11. |
Transactions with CentraCore Properties Trust
(CPV) |
During fiscal 1998, 1999 and 2000, CPV acquired 11 correctional
and detention facilities operated by the Company. There have
been no purchase and sale transactions between the Company and
CPV since 2000.
Simultaneous with the purchases, the Company entered into
ten-year operating leases of these facilities from CPV. As the
lease agreements are subject to contractual lease increases, the
Company records operating lease expense for these leases on a
straight-line basis over the term of the leases. Additionally,
the lease contains three five-year renewal options based on fair
market rental rates. The deferred unamortized net gain related
to sales of the facilities to CPV at January 1, 2006, which
is included in Deferred Revenue in the accompanying
consolidated balance sheets is $5.2 million with
$1.9 million short-term and $3.3 million long-term.
The gain is being amortized over the ten-year lease terms. The
Company recorded net rental expense related to the CPV leases of
$21.6 million, $21.0 million and $20.0 million in
2005, 2004 and 2003, respectively, excluding the Jena rental
expense (See Note 12).
The future minimum lease commitments under the leases for these
eleven facilities are as follows:
|
|
|
|
|
|
|
Annual | |
Fiscal Year |
|
Rental | |
|
|
| |
|
|
(In thousands) | |
2006
|
|
$ |
25,750 |
|
2007
|
|
|
27,292 |
|
2008
|
|
|
20,022 |
|
2009
|
|
|
10,617 |
|
2010
|
|
|
8,203 |
|
Thereafter
|
|
|
48,267 |
|
|
|
|
|
|
|
$ |
140,151 |
|
|
|
|
|
The Company operates the 1,918-bed Lawton Correctional Facility
in Lawton Oklahoma and leases the facility under a ten year
non-cancelable operating lease from CentraCore Properties Trust
(CPV). The
S-103
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Company completed the construction of a 300-bed expansion to the
original 1,618-bed facility in 1999 and capitalized the
expansion as a leasehold improvement. On May 27, 2005 the
Company entered into an amended lease agreement with CPV which
includes the purchase by CPV of the 300-bed expansion for
$3.5 million and an additional 600-bed expansion for
$23.0 million. The Company recognized a $1.0 million
gain on the sale of the existing 300-bed expansion which is
being deferred and amortized over the new lease term. The
Company accounts for the construction of the new 600-bed
expansion in accordance with EITF 97-10 The Effect of
Lessee Involvement in Asset Construction and capitalized
the construction costs through the completion of construction.
On January 1, 2006, the Company had capitalized
$8.9 million of construction costs. The Company expects the
construction of the new 600-bed expansion to be completed
sometime during the third quarter 2006, after which time a new
ten year non-cancelable operating lease with CPV for the entire
Lawton Correctional Facility will become effective.
In February 2005, the Company appointed a new board member who
previously served on CPVs board of directors. Subsequently
on February 8, 2006, the director resigned from the
Companys board of directors.
|
|
12. |
Commitments and Contingencies |
During 2000, the Companys management contract at the
276-bed Jena Juvenile Justice Center in Jena, Louisiana, which
is included in the correction and detention facilities segment,
was discontinued by the mutual agreement of the parties. Despite
the discontinuation of the management contract, the Company
remains responsible for payments on the Companys
underlying lease of the inactive facility with CPV through
January 2010. During the third quarter of 2005, the Company
determined the alternative uses being pursued were no longer
probable and as a result revised its estimated sublease income
and recorded an operating charge of $4.3 million,
representing the remaining obligation on the lease through the
contractual term of January 2010 for a total reserve of
$8.6 million. This $4.3 million charge is included in
the caption Operating Expenses in the Consolidated
Statement of Income for the fiscal year ended January 1,
2006. However, the Company will continue its effort to
reactivate the facility.
The Company owns the 480-bed Michigan Correctional Facility in
Baldwin, Michigan, referred to as the Michigan Facility. The
Company operated the Michigan Facility from 1999 until October
2005 pursuant to a management contract with the Michigan
Department of Corrections, or the MDOC. Separately, the Company
leased the Michigan Facility, as lessor, to the State, as
lessee, under a lease with an initial term of 20 years
followed by two five-year options. On September 30, 2005,
the Governor of the State of Michigan announced her decision to
close the Michigan Facility. As a result of the closure of the
Michigan Facility, the Companys management contract with
the MDOC to operate the Michigan Facility was terminated. On
October 3, 2005, the Michigan Department of
Management & Budget sent the Company a 60 day
cancellation notice to terminate the lease for the Michigan
Facility. Based in part on the language of certain provisions in
the lease, the Company believes that the Governor does not have
the authority to unilaterally terminate the Michigan Facility
lease. As a result, in November 2005, the Company filed a
lawsuit against the State to enforce the Companys rights
under the lease. On February 24, 2006, the Ingham County
Circuit Court, the trial court with jurisdiction over the case,
granted summary judgment in favor of the State and against the
Company and the other plaintiffs, The Village of Baldwin and
Webber Township. The trial court ruled that the State lawfully
cancelled the lease when the Governor exercised her line item
veto of the legislative appropriation for the funding of the
lease. The Company is in the process of appealing the summary
judgment entered by the trial court. The Company has reviewed
the Michigan Facility for impairment in accordance with
FAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, and recorded an impairment charge in
the fourth quarter of 2005 for $20.9 million based on an
independent appraisal of fair market value.
The Company has entered into construction contracts with the
Florida Department of Management Services (DMS) to
expand the Moorehaven Correctional Facility by 235 beds, which
the Company
S-104
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
operates for DMS, and build the 1,500-bed Graceville
Correctional Facility, which the Company will operate for DMS
upon final completion of the construction. Payment under these
construction contracts is contingent on the receipt of proceeds
from bonds being issued by the state of Florida to finance the
projects. Subsequent to January 1, 2006, the Company
incurred approximately $8.5 million in costs related to
these projects prior to the financing being completed. We expect
the financing to be completed by March 31, 2006. In the
event the required financing is not completed, the Company will
expense these costs during the first quarter of 2006 without an
offsetting revenue source.
The Company leases correctional facilities, office space,
computers and vehicles under non-cancelable operating leases
expiring between 2005 and 2013. The future minimum commitments
under these leases exclusive of lease commitments related to
CPV, are as follows:
|
|
|
|
|
|
|
Annual | |
Fiscal Year |
|
Rental | |
|
|
| |
|
|
(In thousands) | |
2006
|
|
$ |
11,483 |
|
2007
|
|
|
11,353 |
|
2008
|
|
|
11,063 |
|
2009
|
|
|
8,583 |
|
2010
|
|
|
5,903 |
|
Thereafter
|
|
|
18,343 |
|
|
|
|
|
|
|
$ |
66,728 |
|
|
|
|
|
Rent expense was approximately $24.9 million,
$14.4 million, and $12.5 million for fiscal 2005,
2004, and 2003 respectively.
|
|
|
Litigation, Claims and Assessments |
The Company was defending a wage and hour class action lawsuit
(Salas et al v. WCC) filed on December 26, 2001
in California state court by ten current and former employees.
In January 2005, this lawsuit was settled by a satisfaction of
judgment and a release of all claims executed by the plaintiffs
which was filed with the Superior Court of California in Kern
County. As part of the settlement, the Company made a cash
payment of approximately $3.1 million and is required to
provide certain non-cash considerations to current California
employees who were included in the lawsuit. The non-cash
considerations include a designated number of paid days off
according to longevity of employment, modifications to the
Companys human resources department, and changes in
certain operational procedures at the Companys
correctional facilities in California. The settlement
encompasses all current and former employees in California
through the approval date of the settlement and constitutes a
full and final settlement of all actual and potential wage and
hour claims against the Company in California for the period
preceding July 29, 2004.
In June 2004, the Company received notice of a third-party claim
for property damage incurred during 2002 and 2001 at several
detention facilities that the Companys Australian
subsidiary formerly operated pursuant to its discontinued
operation. 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 May 2005, the
Company received additional correspondence indicating that the
insurance provider still intends to pursue the claim against our
Australian subsidiary. Although the claim is in the initial
stages and the Company is still in the process of fully
evaluating its merits, the Company believes that it has defenses
to the allegations underlying the claim and intends to
S-105
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
vigorously defend the Companys rights with respect to this
matter. While the insurance provider has not quantified its
damage claim and the outcome of this matter discussed above
cannot be predicted with certainty, based on information known
to date, and managements preliminary review of the claim,
the Company believes that, if settled unfavorably, this matter
could have a material adverse effect on the Companys
financial condition, results of operations and cash flows. The
Company is uninsured for any damages or costs that it may incur
as a result of this claim, including the expenses of defending
the claim. The Company has accrued a reserve related to this
claim 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.
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.
|
|
|
Collective Bargaining Agreements |
The Company had approximately twenty percent of its workforce
covered by collective bargaining agreements at January 1,
2006. Collective bargaining agreements with nine percent of
employees are set to expire in less than one year.
On July 9, 2003, the Company purchased all 12 million
shares of the Companys common stock beneficially owned by
Group 4 Falck, the Companys former 57% majority
shareholder, for $132.0 million in cash.
In April 1994, the Companys Board of Directors authorized
10,000,000 shares of blank check preferred
stock. The Board of Directors is authorized to determine the
rights and privileges of any future issuance of preferred stock
such as voting and dividend rights, liquidation privileges,
redemption rights and conversion privileges.
S-106
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The table below shows the amounts used in computing earnings per
share (EPS) in accordance with FAS No. 128
and the effects on income and the weighted average number of
shares of potential dilutive common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, | |
|
|
except per share data) | |
Net income
|
|
$ |
7,006 |
|
|
$ |
16,815 |
|
|
$ |
40,019 |
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
9,580 |
|
|
|
9,384 |
|
|
|
15,618 |
|
|
|
|
|
|
|
|
|
|
|
|
Per share amount
|
|
$ |
0.73 |
|
|
$ |
1.79 |
|
|
$ |
2.56 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
9,580 |
|
|
|
9,384 |
|
|
|
15,618 |
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee and director stock options
|
|
|
430 |
|
|
|
354 |
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares assuming dilution
|
|
|
10,010 |
|
|
|
9,738 |
|
|
|
15,829 |
|
|
|
|
|
|
|
|
|
|
|
|
Per share amount
|
|
$ |
0.70 |
|
|
$ |
1.73 |
|
|
$ |
2.53 |
|
|
|
|
|
|
|
|
|
|
|
For fiscal 2005, options to purchase 16,000 shares of
the Companys common stock with exercise prices ranging
from $26.88 to $32.20 per share and expiration dates
between 2006 and 2014 were outstanding at January 1, 2006,
but were not included in the computation of diluted EPS because
their effect would be anti-dilutive.
For fiscal 2004, options to purchase 362,447 shares of
the Companys common stock with exercise prices ranging
from $21.50 to $26.88 per share and expiration dates
between 2006 and 2014 were outstanding at January 2, 2005,
but were not included in the computation of diluted EPS because
their effect would be anti-dilutive.
For fiscal 2003, options to purchase 735,600 shares of
the Companys common stock with exercise prices ranging
from $15.40 to $29.56 per share and expiration dates
between 2006 and 2012 were outstanding at December 28,
2003, but were not included in the computation of diluted EPS
because their effect would be anti-dilutive.
The Company has four stock option plans: The Wackenhut
Corrections Corporation 1994 Stock Option Plan (First Plan), the
Wackenhut Corrections Corporation 1994 Stock Option Plan (Second
Plan), the 1995 Non-Employee Director Stock Option Plan (Third
Plan) and the Wackenhut Corrections Corporation 1999 Stock
Option Plan (Fourth Plan). The Wackenhut Corrections Corporation
1994 Stock Option Plan (First Plan) has expired and has no
outstanding stock options.
Under the Second Plan and Fourth Plan, the Company may grant
options to key employees for up to 1,500,000 and
1,150,000 shares of common stock, respectively. Under the
terms of these plans, the exercise price per share and vesting
period is determined at the sole discretion of the Board of
Directors. All options that have been granted under these plans
are exercisable at the fair market value of the common stock at
the date of the grant. Generally, the options vest and become
exercisable ratably over a four-year period, beginning
immediately on the date of the grant. However, the Board of
Directors has exercised its discretion
S-107
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
and has granted options that vest 100% immediately. All options
under the Second Plan and Fourth Plan expire no later than ten
years after the date of the grant.
Under the Third Plan, the Company may grant up to
110,000 shares of common stock to non-employee directors of
the Company. Under the terms of this plan, options are granted
at the fair market value of the common stock at the date of the
grant, become exercisable immediately, and expire ten years
after the date of the grant.
A summary of the status of the Companys stock option plans
is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
Wtd. Avg. | |
|
|
|
Wtd. Avg. | |
|
|
|
Wtd. Avg. | |
|
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
|
Exercise | |
Fiscal Year |
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Outstanding at beginning of year
|
|
|
1,591,509 |
|
|
$ |
15.49 |
|
|
|
1,614,374 |
|
|
$ |
14.21 |
|
|
|
1,410,306 |
|
|
$ |
14.26 |
|
Granted
|
|
|
13,500 |
|
|
|
32.20 |
|
|
|
160,374 |
|
|
|
22.00 |
|
|
|
305,000 |
|
|
|
12.67 |
|
Exercised
|
|
|
183,752 |
|
|
|
16.32 |
|
|
|
174,839 |
|
|
|
9.10 |
|
|
|
86,932 |
|
|
|
8.93 |
|
Forfeited/ Cancelled
|
|
|
14,600 |
|
|
|
16.70 |
|
|
|
8,400 |
|
|
|
22.93 |
|
|
|
14,000 |
|
|
|
17.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at end of year
|
|
|
1,406,657 |
|
|
|
15.53 |
|
|
|
1,591,509 |
|
|
|
15.49 |
|
|
|
1,614,374 |
|
|
|
14.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
1,260,492 |
|
|
$ |
15.32 |
|
|
|
1,381,692 |
|
|
$ |
15.26 |
|
|
|
1,443,032 |
|
|
$ |
14.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about the stock
options outstanding at January 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Wtd. Avg. | |
|
Wtd. Avg. | |
|
|
|
Wtd. Avg. | |
|
|
Number | |
|
Remaining | |
|
Exercise | |
|
Number | |
|
Exercise | |
Exercise Prices |
|
Outstanding | |
|
Contractual Life | |
|
Price | |
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$7.88 - $7.88
|
|
|
2,000 |
|
|
|
4.3 |
|
|
$ |
7.88 |
|
|
|
2,000 |
|
|
$ |
7.88 |
|
$8.44 - $8.44
|
|
|
184,500 |
|
|
|
4.1 |
|
|
|
8.44 |
|
|
|
184,500 |
|
|
|
8.44 |
|
$9.30 - $9.30
|
|
|
172,500 |
|
|
|
5.1 |
|
|
|
9.30 |
|
|
|
172,500 |
|
|
|
9.30 |
|
$9.51 - $12.51
|
|
|
80,091 |
|
|
|
7.1 |
|
|
|
9.61 |
|
|
|
56,807 |
|
|
|
9.65 |
|
$14.00 - $14.00
|
|
|
184,182 |
|
|
|
7.3 |
|
|
|
14.00 |
|
|
|
134,732 |
|
|
|
14.00 |
|
$14.69 - $14.69
|
|
|
15,000 |
|
|
|
3.7 |
|
|
|
14.69 |
|
|
|
15,000 |
|
|
|
14.69 |
|
$15.40 - $15.40
|
|
|
264,000 |
|
|
|
6.1 |
|
|
|
15.40 |
|
|
|
264,000 |
|
|
|
15.40 |
|
$15.90 - $18.63
|
|
|
176,137 |
|
|
|
4.3 |
|
|
|
18.43 |
|
|
|
160,753 |
|
|
|
18.44 |
|
$20.25 - $22.93
|
|
|
159,000 |
|
|
|
3.7 |
|
|
|
22.30 |
|
|
|
120,600 |
|
|
|
22.10 |
|
$23.00 - $32.20
|
|
|
169,247 |
|
|
|
4.4 |
|
|
|
25.09 |
|
|
|
149,600 |
|
|
|
25.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,406,657 |
|
|
|
5.2 |
|
|
$ |
15.53 |
|
|
|
1,260,492 |
|
|
$ |
15.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had 13,000 options available to be granted at
January 1, 2006 under the aforementioned stock plans.
|
|
16. |
Retirement and Deferred Compensation Plans |
The Company has two noncontributory 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.
S-108
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In 2001, the Company established non-qualified deferred
compensation agreements with three key executives. These
agreements were modified in 2002, and again in 2003. The current
agreements provide for a lump sum payment when the executives
retire, no sooner than age 55.
The following table summarizes key information related to these
pension plans and retirement agreements which includes
information as required by FAS 132, Employers
Disclosures about Pensions and Other Postretirement
Benefits. 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.
In accordance with FAS 132, the Company has also disclosed
contributions and payment of benefits related to the plans.
There were no assets in the plan at January 1, 2006 or
January 2, 2005. All changes as a result of the adjustments
to the accumulated benefit obligation are included below and
shown net of tax in the Consolidated Statement of
Shareholders Equity and Comprehensive Income. There were
no significant transactions between the employer or related
parties and the plan during the period.
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Change in Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation, Beginning of Year
|
|
$ |
14,423 |
|
|
$ |
13,408 |
|
Service Cost
|
|
|
437 |
|
|
|
313 |
|
Interest Cost
|
|
|
542 |
|
|
|
836 |
|
Plan Amendments
|
|
|
|
|
|
|
|
|
Actuarial Gain (Loss)
|
|
|
332 |
|
|
|
(102 |
) |
Benefits Paid
|
|
|
(32 |
) |
|
|
(32 |
) |
|
|
|
|
|
|
|
Projected Benefit Obligation, End of Year
|
|
$ |
15,702 |
|
|
$ |
14,423 |
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
Plan Assets at Fair Value, Beginning of Year
|
|
$ |
|
|
|
$ |
|
|
Company Contributions
|
|
|
32 |
|
|
|
32 |
|
Benefits Paid
|
|
|
(32 |
) |
|
|
(32 |
) |
|
|
|
|
|
|
|
Plan Assets at Fair Value, End of Year
|
|
$ |
|
|
|
$ |
|
|
Reconciliation of Prepaid (Accrued) and Total Amount
Recognized
|
|
|
|
|
|
|
|
|
Funded Status of the Plan
|
|
$ |
(15,702 |
) |
|
$ |
(14,423 |
) |
Unrecognized Prior Service Cost
|
|
|
204 |
|
|
|
1,141 |
|
Unrecognized Net Loss
|
|
|
2,930 |
|
|
|
2,719 |
|
|
|
|
|
|
|
|
Accrued Pension Cost
|
|
$ |
(12,568 |
) |
|
$ |
(10,563 |
) |
Accrued Benefit Liability
|
|
|
(12,568 |
) |
|
|
(11,748 |
) |
Intangible Asset
|
|
|
|
|
|
|
1,141 |
|
Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
Total Recognized
|
|
$ |
(12,568 |
) |
|
$ |
(10,563 |
) |
|
|
|
|
|
|
|
S-109
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 | |
|
Fiscal 2004 | |
|
|
| |
|
| |
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
Service Cost
|
|
$ |
437 |
|
|
$ |
314 |
|
Interest Cost
|
|
|
542 |
|
|
|
836 |
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
Unrecognized Prior Service Cost
|
|
|
936 |
|
|
|
1,078 |
|
|
Unrecognized Net Loss
|
|
|
121 |
|
|
|
404 |
|
|
|
|
|
|
|
|
Net Periodic Pension Cost
|
|
$ |
2,036 |
|
|
$ |
2,632 |
|
|
|
|
|
|
|
|
Weighted Average Assumptions for Expense
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
|
5.50 |
% |
|
|
5.75 |
% |
Expected Return on Plan Assets
|
|
|
N/A |
|
|
|
N/A |
|
Rate of Compensation Increase
|
|
|
5.50 |
% |
|
|
5.50 |
% |
The accumulated benefit obligation for all defined benefit plans
was $12.6 million and $11.7 million at January 1,
2006 and January 2, 2005, respectively. The accrued benefit
liability for the three plans at January 1, 2006 are as
follows, $1.7 million for the executive retirement plan,
$0.8 million for the officer retirement plan and
$10.1 million for the three key executives plans.
The Company has established a deferred compensation agreement
for non-employee directors, which allow eligible directors to
defer their compensation in either the form of cash or stock.
Participants may elect lump sum or monthly payments to be made
at least one year after the deferral is made or at the time the
participant ceases to be a director. The Company recognized
total compensation expense under this plan of
$(0.1) million, $0.1 and $0.1 million for 2005, 2004,
and 2003, respectively. Payouts under the plan were $0.0 and
$0.1 million in 2005 and 2004 respectively. The liability
for the deferred compensation was $0.5 million and
$0.5 million at year-end 2005 and 2004, respectively, and
is included in Accrued expenses in the accompanying
consolidated balance sheets.
The Company also has a non-qualified deferred compensation plan
for employees who are ineligible to participate in its qualified
401(k) plan. Eligible employees may defer a fixed percentage of
their salary, which earns interest at a rate equal to the prime
rate less 0.75%. The Company matches employee contributions up
to $400 each year based on the employees years of service.
Payments will be made at retirement age of 65 or at termination
of employment. The Company recognized expense of
$0.1 million, $0.1 million and $0.1 million in
2005, 2004, and 2003, respectively. The liability for this plan
at year-end 2005 and 2004 was $2.3 million and
$2.1 million, respectively, and is included in accrued
expense in the accompanying consolidated balance sheets.
The Company expects to make the following benefit payments based
on eligible retirement dates:
|
|
|
|
|
|
|
Pension | |
Fiscal Year |
|
Benefits | |
|
|
| |
|
|
(In thousands) | |
2006
|
|
$ |
11,047 |
|
2007
|
|
|
53 |
|
2008
|
|
|
59 |
|
2009
|
|
|
118 |
|
2010
|
|
|
130 |
|
2011-2015
|
|
|
1,342 |
|
|
|
|
|
|
|
$ |
12,749 |
|
|
|
|
|
S-110
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
17. |
Business Segment and Geographic Information |
|
|
|
Operating and Reporting Segment |
The Company operates in one industry segment encompassing the
development and management of privatized government institutions
located in the United States, Australia, South Africa and the
United Kingdom. The segment information presented in the prior
periods has been reclassified to conform to the current
presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correction and detention facilities
|
|
$ |
572,109 |
|
|
$ |
546,952 |
|
|
$ |
519,246 |
|
|
Other
|
|
|
40,791 |
|
|
|
47,042 |
|
|
|
29,992 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
612,900 |
|
|
$ |
593,994 |
|
|
$ |
549,238 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correction and detention facilities
|
|
$ |
15,617 |
|
|
$ |
13,672 |
|
|
$ |
13,237 |
|
|
Other
|
|
|
259 |
|
|
|
226 |
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$ |
15,876 |
|
|
$ |
13,898 |
|
|
$ |
13,341 |
|
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correction and detention facilities
|
|
$ |
7,646 |
|
|
$ |
38,092 |
|
|
$ |
27,952 |
|
|
Other
|
|
|
292 |
|
|
|
899 |
|
|
|
1,548 |
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$ |
7,938 |
|
|
$ |
38,991 |
|
|
$ |
29,500 |
|
|
|
|
|
|
|
|
|
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correction and detention facilities
|
|
$ |
525,625 |
|
|
$ |
343,505 |
|
|
|
|
|
|
Other
|
|
|
10,671 |
|
|
|
18,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
$ |
536,296 |
|
|
$ |
361,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 segment operating expenses include net non cash
charges of $23.8 million consisting of a $20.9 million
impairment charge for the Michigan Correctional Facility and a
$4.3 million charge for the remaining obligation for the
inactive Jena Facility offset by a $1.3 million reduction
in insurance reserves.
Fiscal 2004 segment operating expenses includes a net non cash
credit of $1.2 million, consisting of a $4.2 million
reduction in our general liability, auto liability and
workers compensation insurance reserves offset by an
additional provision for operating losses of approximately
$3.0 million related to our inactive facility in Jena,
Louisiana. Fiscal 2003 operating expenses include net non cash
charges of $8.6 million in 2003, consisting of a provision
for operating losses of approximately $5.0 million related
to the Jena facility, and approximately $3.6 million
primarily attributable to liability insurance expenses, related
to the transitioning of the DIMIA contract in Australia.
S-111
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
Pre-Tax Income Reconciliation |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Total operating income from segment
|
|
$ |
7,646 |
|
|
$ |
38,092 |
|
|
$ |
27,952 |
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Expense
|
|
|
(13,862 |
) |
|
|
(12,570 |
) |
|
|
(11,043 |
) |
Gain on sale of UK Joint Venture
|
|
|
|
|
|
|
|
|
|
|
56,094 |
|
Costs related to early extinguishment of debt
|
|
|
(1,360 |
) |
|
|
(317 |
) |
|
|
(1,989 |
) |
Other
|
|
|
292 |
|
|
|
899 |
|
|
|
1,548 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, equity in earnings of
affiliates, Discontinued operations and Minority interest
|
|
$ |
(7,284 |
) |
|
$ |
26,104 |
|
|
$ |
72,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Total segment assets
|
|
$ |
525,625 |
|
|
$ |
343,505 |
|
Cash
|
|
|
57,094 |
|
|
|
92,005 |
|
Short term investments
|
|
|
|
|
|
|
10,000 |
|
Deferred income tax-current
|
|
|
19,755 |
|
|
|
12,891 |
|
Restricted cash
|
|
|
26,366 |
|
|
|
3,908 |
|
Other
|
|
|
10,671 |
|
|
|
18,017 |
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
639,511 |
|
|
$ |
480,326 |
|
|
|
|
|
|
|
|
The Companys international operation are conducted through
the Companys wholly owned Australian subsidiaries, and one
of the Companys joint ventures in South Africa, SACM.
Through the Companys wholly owned subsidiary, GEO Group
Australia Pty. Limited, the Company currently manages five
correctional facilities, including one police custody center.
Through the Companys joint venture SACM, the Company
currently manages one facility.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
$ |
514,071 |
|
|
$ |
502,989 |
|
|
$ |
475,043 |
|
|
Australia operations
|
|
|
83,335 |
|
|
|
75,947 |
|
|
|
61,571 |
|
|
South African operations
|
|
|
15,494 |
|
|
|
15,058 |
|
|
|
12,624 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
612,900 |
|
|
$ |
593,994 |
|
|
$ |
549,238 |
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
$ |
275,415 |
|
|
$ |
183,655 |
|
|
|
|
|
|
Australia operations
|
|
|
6,243 |
|
|
|
6,916 |
|
|
|
|
|
|
South African operations
|
|
|
578 |
|
|
|
294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$ |
282,236 |
|
|
$ |
190,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-112
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Companys derives most of its revenue from the
management of privatized correction and detention facilities.
The Companys also derives revenue from the management of
mental health hospitals and from the construction and expansion
of new and existing correctional, detention and mental health
facilities. All of the Companys revenue is generated from
external customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correction and detention facilities
|
|
$ |
572,109 |
|
|
$ |
546,952 |
|
|
$ |
519,246 |
|
|
Mental health
|
|
|
32,616 |
|
|
|
31,704 |
|
|
|
29,911 |
|
|
Construction
|
|
|
8,175 |
|
|
|
15,338 |
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
612,900 |
|
|
$ |
593,994 |
|
|
$ |
549,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Earnings of Affiliates |
Equity in earnings of affiliates for 2005 and 2004 include one
of our joint ventures in South Africa, SACS. Equity in earnings
of affiliates for 2003 represent the operations of the
Companys 50% owned joint ventures in the United Kingdom
(Premier Custodial Group Limited) and SACS. These entities and
their subsidiaries are accounted for under the equity method.
The Company sold its interest in Premier Custodial Group Limited
on July 2, 2003 for approximately $80.7 million and
recognized a gain of approximately $56.0 million. Total
equity in the undistributed earnings for Premier Custodial Group
Limited, before income taxes, for fiscal 2003, and 2002 was
$3.0 million, and $10.2 million, respectively.
The following table summarizes certain financial information
pertaining to this joint venture for the period from
December 30, 2002 through the date of sale of the UK joint
venture on July 2, 2003 and for the fiscal year ended
December 29, 2002 (in thousands):
|
|
|
|
|
|
|
2003 | |
|
|
| |
Statement of Operations Data
|
|
|
|
|
Revenues
|
|
$ |
104,080 |
|
Operating loss
|
|
$ |
(2,981 |
) |
Net income
|
|
$ |
3,486 |
|
S-113
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of financial data for SACS is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
33,179 |
|
|
$ |
31,175 |
|
|
$ |
24,801 |
|
|
Operating income
|
|
|
11,969 |
|
|
|
11,118 |
|
|
|
7,528 |
|
|
Net (loss) income
|
|
|
2,866 |
|
|
|
|
|
|
|
(817 |
) |
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
13,212 |
|
|
|
14,250 |
|
|
|
8,154 |
|
|
Noncurrent assets
|
|
|
68,149 |
|
|
|
74,648 |
|
|
|
61,342 |
|
|
Current liabilities
|
|
|
4,187 |
|
|
|
5,094 |
|
|
|
2,896 |
|
|
Non current liabilities
|
|
|
73,645 |
|
|
|
83,474 |
|
|
|
69,749 |
|
|
Shareholders equity (deficit)
|
|
|
3,529 |
|
|
|
330 |
|
|
|
(3,150 |
) |
SACS commenced operation in fiscal 2002. Total equity in
undistributed loss for SACS before income taxes, for fiscal
2005, 2004 and 2003 was $0.9 million, $(0.1) million,
and $(0.4) million, respectively.
Except for the major customers noted in the following table, no
single customer provided more than 10% of the Companys
consolidated revenues during fiscal 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Various agencies of the U.S. Federal Government
|
|
|
27% |
|
|
|
27% |
|
|
|
27% |
|
Various agencies of the State of Texas
|
|
|
8% |
|
|
|
9% |
|
|
|
12% |
|
Various agencies of the State of Florida
|
|
|
7% |
|
|
|
12% |
|
|
|
12% |
|
Concentration of credit risk related to accounts receivable is
reflective of the related revenues.
18. Income Taxes
The United States and foreign components of income
(loss) before income taxes, minority interest and equity
income from affiliates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Income (loss) before income taxes, minority interest,
equity earnings in affiliates, and discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
(20,395 |
) |
|
$ |
9,627 |
|
|
$ |
61,064 |
|
|
Foreign
|
|
|
13,111 |
|
|
|
16,477 |
|
|
|
11,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,284 |
) |
|
|
26,104 |
|
|
|
72,562 |
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operation of discontinued business
|
|
|
2,022 |
|
|
|
(529 |
) |
|
|
5,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(5,262 |
) |
|
$ |
25,575 |
|
|
$ |
77,750 |
|
|
|
|
|
|
|
|
|
|
|
S-114
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Taxes on income (loss) consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Federal income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
(4,146 |
) |
|
$ |
(72 |
) |
|
$ |
29,182 |
|
|
Deferred
|
|
|
(4,151 |
) |
|
|
2,050 |
|
|
|
1,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,297 |
) |
|
|
1,978 |
|
|
|
30,972 |
|
|
|
|
|
|
|
|
|
|
|
State income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(714 |
) |
|
|
643 |
|
|
|
2,332 |
|
|
Deferred
|
|
|
(756 |
) |
|
|
469 |
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,470 |
) |
|
|
1,112 |
|
|
|
2,558 |
|
|
|
|
|
|
|
|
|
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(3,304 |
) |
|
|
4,226 |
|
|
|
5,108 |
|
|
Deferred
|
|
|
1,245 |
|
|
|
915 |
|
|
|
(1,786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,059 |
) |
|
|
5,141 |
|
|
|
3,322 |
|
|
|
|
|
|
|
|
|
|
|
Total U.S. and foreign
|
|
|
(11,826 |
) |
|
|
8,231 |
|
|
|
36,852 |
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations of discontinued business
|
|
|
895 |
|
|
|
(181 |
) |
|
|
1,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(10,931 |
) |
|
$ |
8,050 |
|
|
$ |
38,396 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory U.S. federal tax rate (35.0%)
and the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions using statutory federal income tax rate
|
|
$ |
(2,549 |
) |
|
$ |
9,136 |
|
|
$ |
25,396 |
|
|
State income taxes, net of federal tax benefit
|
|
|
(907 |
) |
|
|
723 |
|
|
|
1,650 |
|
|
Australia consolidation benefit
|
|
|
(6,460 |
) |
|
|
|
|
|
|
|
|
|
Basis difference PCG stock
|
|
|
|
|
|
|
(3,351 |
) |
|
|
8,639 |
|
|
Section 965 benefit
|
|
|
(1,704 |
) |
|
|
(197 |
) |
|
|
|
|
|
Non-performance based compensation
|
|
|
|
|
|
|
1,417 |
|
|
|
|
|
|
Other, net
|
|
|
(206 |
) |
|
|
503 |
|
|
|
1,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total continuing operations
|
|
|
(11,826 |
) |
|
|
8,231 |
|
|
|
36,852 |
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes from operations of discontinued business
|
|
|
895 |
|
|
|
(181 |
) |
|
|
1,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$ |
(10,931 |
) |
|
$ |
8,050 |
|
|
$ |
38,396 |
|
|
|
|
|
|
|
|
|
|
|
S-115
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The components of the net current deferred income tax asset at
fiscal year end are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Revenue not yet taxed
|
|
$ |
(260 |
) |
|
$ |
|
|
Deferred revenue
|
|
|
574 |
|
|
|
|
|
Uniforms
|
|
|
(158 |
) |
|
|
(207 |
) |
Deferred loan costs
|
|
|
945 |
|
|
|
|
|
Other, net
|
|
|
6 |
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
211 |
|
|
|
426 |
|
Accrued vacation
|
|
|
4,753 |
|
|
|
2,644 |
|
Accrued liabilities
|
|
|
13,684 |
|
|
|
10,028 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
19,755 |
|
|
$ |
12,891 |
|
|
|
|
|
|
|
|
The components of the net non-current deferred income tax
liability at fiscal year end are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Capital losses
|
|
$ |
5,945 |
|
|
$ |
|
|
Depreciation
|
|
|
(2,241 |
) |
|
|
(9,808 |
) |
Deferred loan costs
|
|
|
2,568 |
|
|
|
|
|
Deferred revenue
|
|
|
1,841 |
|
|
|
2,886 |
|
Bond Discount
|
|
|
(1,746 |
) |
|
|
|
|
Net operating losses
|
|
|
3,499 |
|
|
|
1,587 |
|
Tax credits
|
|
|
815 |
|
|
|
|
|
Intangible assets
|
|
|
(6,013 |
) |
|
|
|
|
Accrued liabilities
|
|
|
762 |
|
|
|
|
|
Deferred compensation
|
|
|
6,031 |
|
|
|
5,231 |
|
Residual U.S. tax liability on unrepatriated foreign earnings
|
|
|
(4,754 |
) |
|
|
(4,611 |
) |
Foreign deferred tax assets
|
|
|
|
|
|
|
(2,277 |
) |
Other, net
|
|
|
261 |
|
|
|
113 |
|
Valuation allowance
|
|
|
(9,053 |
) |
|
|
(1,587 |
) |
|
|
|
|
|
|
|
|
Total liability
|
|
$ |
(2,085 |
) |
|
$ |
(8,466 |
) |
|
|
|
|
|
|
|
In accordance with SFAS No. 109, Accounting for Income
Taxes, deferred income taxes should be reduced by a valuation
allowance if it is not more likely than not that some portion or
all of the deferred tax assets will be realized. On a periodic
basis, management evaluates and determines the amount of the
valuation allowance required and adjusts such valuation
allowance accordingly. At fiscal year end 2005, the Company has
recorded a valuation allowance of approximately
$9.1 million. The valuation allowance includes
$6.9 million reported as part of purchase accounting
relating to deferred tax assets for capital losses, federal and
state net operating losses and charitable contribution
carryforwards from the CSC acquisition. A full valuation
allowance was provided against capital losses and a partial
valuation allowance was provided against net operating losses
and charitable contribution carryovers from the acquisition. The
remaining valuation allowance of $2.2 million relates to
deferred tax assets for foreign net operating losses and state
tax credits unrelated to the CSC acquisition.
S-116
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At fiscal year end 2005, the Company had $15.1 million of
capital loss and $4.2 million of net operating loss
carryforwards from the CSC acquisition. The capital loss
carryforwards begin to expire in 2007 and the net operating loss
carryforwards begin to expire in 2020. The utilization of these
capital and net operating loss carryforwards are subject to
annual usage limitations pursuant to Internal Revenue Code
Section 382.
Also at fiscal year end the Company had $6.1 million of
foreign operating losses which carry forward indefinitely and
state tax credits which begin to expire in 2006. The Company has
recorded a full valuation allowance against these deferred tax
assets.
As a result of tax legislation in Australia, the Company
realized an income tax benefit of $6.5 million in the
fourth quarter 2005. The benefit is due to an elective tax
step-up that in effect reestablishes tax basis that had
previously been depreciated on an accelerated methodology. The
permanent tax step-up was exempt from taxation and results in a
decrease in the same amount in the deferred tax liability
associated with the depreciable asset. Equity in earnings of
affiliate in 2005 reflects a one time tax benefit of
$2.1 million related to a change in South African tax law
applicable to companies in a qualified Public Private
Partnership (PPP) with the South African Government.
Beginning in 2005 Government revenues earned under the PPP are
exempt from South African taxation. Additionally, prior year
temporary differences that gave rise to deferred tax liabilities
of the affiliate are exempt from tax in the future.
Consequently, the affiliate eliminated these deferred tax
liabilities which contributed to the one time tax benefit.
On October 22, 2004, the President of the United States
signed into law the American Jobs Creation Act of 2004
(AJCA). A key provision of the AJCA creates a
temporary incentive for U.S. corporations to repatriate
undistributed income earned abroad by providing an
85 percent dividends received deduction for certain
dividends from controlled foreign corporations. In December
2004, the Company repatriated approximately $17.3 million
in incentive dividends and recognized an income tax benefit of
$1.7 million and $0.2 million in 2005 and 2004,
respectively.
During 2004, the Company adjusted its tax provision to reflect
an adjustment to its treatment of certain executive
compensation. During the fiscal years ended 2003 and 2002, along
with the period ending June 27, 2004, the Company
calculated its tax provision as if its executive bonus plan met
the Internal Revenue Service code section 162(m) requirements
for deductibility. During 2004, the Company discovered that the
plan did not meet certain specific requirements of section
162(m). The Company recognized $1.4 million of additional
tax provision under section 162(m) for 2004, including
$0.6 million to correct its tax provision for the fiscal
years ended 2003 and 2002.
The 2004 income tax expense includes a benefit from the
realization of approximately $3.4 million of foreign tax
credits related to the gain on sale of PCG in July 2003. This
benefit was realized in 2004 as a result of the Company
completing its analysis of its earnings and profits in PCG and
determining the amount of available foreign tax credits which
could be applied against the gain from the sale.
The exercise of non-qualified stock options which have been
granted under the Companys stock option plans give rise to
compensation which is includable in the taxable income of the
applicable employees and deducted by the Company for federal and
state income tax purposes. Such compensation results from
increases in the fair market value of the Companys common
stock subsequent to the date of grant. In accordance with APB
No. 25, such compensation is not recognized as an expense
for financial accounting purposes and related tax benefits are
credited directly to additional paid-in-capital.
In the ordinary course of global business, there are
transactions for which the ultimate tax outcome is uncertain,
thus judgment is required in determining the worldwide provision
for income taxes. The company provides for income taxes on
transactions based on its estimate of the probable liability.
The Company adjusts its provision as appropriate for changes
that impact its underlying judgments. Changes that impact
provision estimates include such items as jurisdictional
interpretations on tax filing positions based on the result of
tax audits and general tax authority rulings.
S-117
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
19. |
Related Party Transactions with The Wackenhut Corporation |
Related party transactions occurred in the past in the normal
course of business between the Company and TWC. Such
transactions included the purchase of goods and services and
corporate costs for management support, office space, insurance
and interest expense. No related party transactions occurred
during fiscal years 2005 and 2004.
The Company incurred the following expenses related to
transactions with TWC in 2003 (in thousands):
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
General and administrative expenses
|
|
$ |
1,750 |
|
Rent
|
|
|
501 |
|
|
|
|
|
|
|
$ |
2,251 |
|
|
|
|
|
General and administrative expenses represented charges for
management and support services. TWC previously provided various
general and administrative services to the Company under a
services agreement, including payroll services, human resources
support, tax services and information technology support
services through December 31, 2002. Beginning
January 1, 2003, the only service provided was for
information technology support through year-end 2003. The
Company began handling information technology support services
internally effective January 1, 2004, and no longer relies
on TWC for any services. All of the services formerly provided
by TWC to the Company were pursuant to negotiated annual rates
with TWC based upon the level of service to be provided under
the services agreement. The Company believes that such rates
were on terms no less favorable than the Company could obtain
from unaffiliated third parties.
The Company also leased office space from TWC for its corporate
headquarters under a non-cancelable operating lease that expired
February 11, 2011. This lease was terminated effective
July 19, 2003 as a result of the share purchase agreement.
|
|
20. |
Selected Quarterly Financial Data (Unaudited) |
The Companys selected quarterly financial data is as
follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
First Quarter | |
|
Second Quarter | |
|
|
| |
|
| |
2005
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
148,255 |
|
|
$ |
152,623 |
|
Operating income
|
|
$ |
7,373 |
|
|
$ |
7,588 |
|
Income from continuing operations
|
|
$ |
2,391 |
|
|
$ |
4,301 |
|
Income from discontinued operations, net of tax
|
|
$ |
505 |
|
|
$ |
173 |
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.25 |
|
|
$ |
0.45 |
|
Income from discontinued operations
|
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
Net income per share
|
|
$ |
0.30 |
|
|
$ |
0.47 |
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.24 |
|
|
$ |
0.43 |
|
Income from discontinued operations
|
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
Net income per share
|
|
$ |
0.29 |
|
|
$ |
0.45 |
|
S-118
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth | |
|
|
Third Quarter | |
|
Quarter(b) | |
|
|
| |
|
| |
Revenues
|
|
$ |
147,148 |
|
|
$ |
164,874 |
|
Operating income (loss)
|
|
$ |
5,444 |
|
|
$ |
(12,467 |
) |
Income (loss) from continuing operations
|
|
$ |
510 |
(a) |
|
$ |
(1,323 |
)(c) |
Income (loss) from discontinued operations, net of tax
|
|
$ |
(67 |
) |
|
$ |
516 |
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
0.06 |
|
|
$ |
(0.13 |
) |
Income (loss) from discontinued operations
|
|
$ |
(0.01 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$ |
0.05 |
|
|
$ |
(0.08 |
) |
Diluted earnings per share
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
0.05 |
|
|
$ |
(0.13 |
) |
Income (loss) from discontinued operations
|
|
$ |
(0.01 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$ |
0.04 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
First Quarter | |
|
Second Quarter | |
|
|
| |
|
| |
2004
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
140,837 |
|
|
$ |
145,062 |
|
Operating income
|
|
$ |
7,373 |
|
|
$ |
9,992 |
|
Income from continuing operations
|
|
$ |
1,899 |
|
|
$ |
3,657 |
|
Income (loss) from discontinued operations, net of tax
|
|
$ |
395 |
|
|
$ |
(25 |
) |
Basic earnings per share
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.21 |
|
|
$ |
0.39 |
|
Income from discontinued operations
|
|
$ |
0.04 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
Net income per share
|
|
$ |
0.25 |
|
|
$ |
0.39 |
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.20 |
|
|
$ |
0.37 |
|
Income from discontinued operations
|
|
$ |
0.04 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
Net income per share
|
|
$ |
0.24 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth | |
|
|
Third Quarter | |
|
Quarter(e) | |
|
|
| |
|
| |
Revenues
|
|
$ |
146,501 |
|
|
$ |
161,594 |
|
Operating income
|
|
$ |
13,785 |
|
|
$ |
7,841 |
|
Income from continuing operations
|
|
$ |
5,681 |
(d) |
|
$ |
5,926 |
(f) |
Loss from discontinued operations, net of tax
|
|
$ |
(46 |
) |
|
$ |
(697 |
) |
Basic earnings per share
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.61 |
|
|
$ |
0.62 |
|
Loss from discontinued operations
|
|
$ |
(0.01 |
) |
|
$ |
(0.07 |
) |
Net income per share
|
|
$ |
0.60 |
|
|
$ |
0.55 |
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.59 |
|
|
$ |
0.60 |
|
Loss from discontinued operations
|
|
$ |
(0.01 |
) |
|
$ |
(0.07 |
) |
Net income per share
|
|
$ |
0.58 |
|
|
$ |
0.53 |
|
S-119
THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
(a) |
|
Includes a $4.3 million write-off for our Jena, Louisiana
facility and a charge of approximately $1.4 million related
to the write-off of deferred financing fees from the
extinguishment of debt. |
|
(b) |
|
Includes operations of CSC from November 4, 2005 through
January 1, 2006. |
|
(c) |
|
Includes a $20.9 million impairment charge for Michigan
facility, a $6.5 million tax benefit in Australia and
$2.0 million tax benefit in South Africa related to changes
in law. |
|
(d) |
|
Includes a $4.2 million pre-tax reduction in our general
liability, auto liability and workers compensation
insurance reserves. |
|
(e) |
|
Includes 14 weeks of operations. |
|
(f) |
|
Includes a $3.0 million write-off for our Jena, Louisiana
facility. |
S-120
THE GEO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS ENDED
APRIL 2, 2006 AND APRIL 3, 2005
(In thousands, except per share data)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended | |
|
|
| |
|
|
April 2, 2006 | |
|
April 3, 2005 | |
|
|
| |
|
| |
Revenues
|
|
$ |
185,881 |
|
|
$ |
148,255 |
|
Operating expenses
|
|
|
153,746 |
|
|
|
125,813 |
|
Depreciation and amortization
|
|
|
5,664 |
|
|
|
3,668 |
|
General and administrative expenses
|
|
|
14,009 |
|
|
|
11,401 |
|
|
|
|
|
|
|
|
Operating income
|
|
|
12,462 |
|
|
|
7,373 |
|
Interest income
|
|
|
2,216 |
|
|
|
2,330 |
|
Interest expense
|
|
|
7,579 |
|
|
|
5,454 |
|
|
|
|
|
|
|
|
Income before income taxes, minority interest, equity in
earnings of affiliate and discontinued operations
|
|
|
7,099 |
|
|
|
4,249 |
|
Provision for income taxes
|
|
|
2,693 |
|
|
|
1,723 |
|
Minority interest
|
|
|
(9 |
) |
|
|
(184 |
) |
Equity in earnings of affiliate, net of income tax expense
(benefit) of $18 and $(16)
|
|
|
277 |
|
|
|
49 |
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
4,674 |
|
|
|
2,391 |
|
Income (loss) from discontinued operations, net of income tax
expense (benefit) of $(65) and $187
|
|
|
(118 |
) |
|
|
505 |
|
|
|
|
|
|
|
|
Net income
|
|
$ |
4,556 |
|
|
$ |
2,896 |
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,700 |
|
|
|
9,525 |
|
|
Diluted
|
|
|
10,034 |
|
|
|
10,002 |
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.48 |
|
|
$ |
0.25 |
|
|
|
Income (loss) from discontinued operations
|
|
|
(0.01 |
) |
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share-basic
|
|
$ |
0.47 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.46 |
|
|
$ |
0.24 |
|
|
|
Income (loss) from discontinued operations
|
|
|
(0.01 |
) |
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share-diluted
|
|
$ |
0.45 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
S-121
THE GEO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
APRIL 2, 2006 AND JANUARY 1, 2006
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2, 2006 | |
|
January 1, 2006 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
ASSETS |
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
56,169 |
|
|
$ |
57,094 |
|
|
Restricted cash
|
|
|
10,633 |
|
|
|
8,882 |
|
|
Accounts receivable, less allowance for doubtful accounts of
$224 and $224
|
|
|
137,468 |
|
|
|
127,612 |
|
|
Deferred income tax asset
|
|
|
19,756 |
|
|
|
19,755 |
|
|
Other current assets
|
|
|
12,366 |
|
|
|
15,826 |
|
|
Current assets of discontinued operations
|
|
|
6 |
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
236,398 |
|
|
|
229,292 |
|
|
|
|
|
|
|
|
Restricted Cash
|
|
|
20,317 |
|
|
|
17,484 |
|
Property and Equipment, Net
|
|
|
287,145 |
|
|
|
282,236 |
|
Assets Held for Sale
|
|
|
1,265 |
|
|
|
5,000 |
|
Direct Finance Lease Receivable
|
|
|
37,394 |
|
|
|
38,492 |
|
Goodwill and Other Intangible Assets, Net
|
|
|
56,780 |
|
|
|
52,127 |
|
Other Non Current Assets
|
|
|
14,680 |
|
|
|
14,880 |
|
|
|
|
|
|
|
|
|
|
$ |
653,979 |
|
|
$ |
639,511 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
39,761 |
|
|
$ |
27,762 |
|
|
Accrued payroll and related taxes
|
|
|
30,204 |
|
|
|
26,985 |
|
|
Accrued expenses
|
|
|
64,028 |
|
|
|
70,177 |
|
|
Current portion of deferred revenue
|
|
|
1,810 |
|
|
|
1,894 |
|
|
Current portion of capital lease obligations, long-term debt and
non-recourse debt
|
|
|
12,399 |
|
|
|
8,441 |
|
|
Current liabilities of discontinued operations
|
|
|
1,216 |
|
|
|
1,260 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
149,418 |
|
|
|
136,519 |
|
|
|
|
|
|
|
|
Deferred Revenue
|
|
|
2,899 |
|
|
|
3,267 |
|
Deferred Tax Liability
|
|
|
2,121 |
|
|
|
2,085 |
|
Minority Interest
|
|
|
1,325 |
|
|
|
1,840 |
|
Other Non Current Liabilities
|
|
|
21,268 |
|
|
|
19,601 |
|
Capital Lease Obligations
|
|
|
17,262 |
|
|
|
17,072 |
|
Long-Term Debt
|
|
|
217,992 |
|
|
|
219,254 |
|
Non-Recourse Debt
|
|
|
126,245 |
|
|
|
131,279 |
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 shares
authorized, none issued or outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 30,000,000 shares
authorized, 21,723,653 and 21,691,143 issued and 9,723,653 and
9,691,143 outstanding
|
|
|
97 |
|
|
|
97 |
|
|
Additional paid-in capital
|
|
|
71,635 |
|
|
|
70,784 |
|
|
Retained earnings
|
|
|
176,221 |
|
|
|
171,666 |
|
|
Accumulated other comprehensive loss
|
|
|
(624 |
) |
|
|
(2,073 |
) |
|
Treasury stock 12,000,000 shares
|
|
|
(131,880 |
) |
|
|
(131,880 |
) |
|
|
Total shareholders equity
|
|
|
115,449 |
|
|
|
108,594 |
|
|
|
$ |
653,979 |
|
|
$ |
639,511 |
|
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
S-122
THE GEO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED
APRIL 2, 2006 AND APRIL 3, 2005
(In thousands)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended | |
|
|
| |
|
|
April 2, 2006 | |
|
April 3, 2005 | |
|
|
| |
|
| |
Cash Flow from Operating Activities:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
4,674 |
|
|
$ |
2,391 |
|
|
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
5,664 |
|
|
|
3,668 |
|
|
|
Amortization of debt issuance costs
|
|
|
281 |
|
|
|
79 |
|
|
|
Stock-based compensation expense
|
|
|
177 |
|
|
|
|
|
|
|
Deferred tax liability (benefit)
|
|
|
(56 |
) |
|
|
534 |
|
|
|
Major maintenance reserve
|
|
|
57 |
|
|
|
41 |
|
|
|
Equity in earnings of affiliates, net of tax
|
|
|
(277 |
) |
|
|
(49 |
) |
|
|
Minority interests in earnings of consolidated entity
|
|
|
(515 |
) |
|
|
184 |
|
|
|
Tax benefit related to employee stock options
|
|
|
|
|
|
|
180 |
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(10,180 |
) |
|
|
11,935 |
|
|
|
Other current assets
|
|
|
2,951 |
|
|
|
(8,024 |
) |
|
|
Other assets
|
|
|
(642 |
) |
|
|
1,928 |
|
|
|
Accounts payable and accrued expenses
|
|
|
5,764 |
|
|
|
(11,788 |
) |
|
|
Accrued payroll and related taxes
|
|
|
3,375 |
|
|
|
1,694 |
|
|
|
Deferred revenue
|
|
|
(452 |
) |
|
|
(461 |
) |
|
|
Other liabilities
|
|
|
636 |
|
|
|
351 |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing
operations
|
|
|
11,457 |
|
|
|
2,663 |
|
|
Net cash provided by operating activities of discontinued
operations
|
|
|
73 |
|
|
|
854 |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
11,530 |
|
|
|
3,517 |
|
|
|
|
|
|
|
|
Cash Flow from Investing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of short-term investments
|
|
|
|
|
|
|
39,000 |
|
|
Purchases of short-term investments
|
|
|
|
|
|
|
(29,000 |
) |
|
Change in restricted cash
|
|
|
(4,666 |
) |
|
|
|
|
|
Proceeds from sale of assets
|
|
|
19 |
|
|
|
33 |
|
|
Capital expenditures
|
|
|
(7,432 |
) |
|
|
(1,841 |
) |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(12,079 |
) |
|
|
8,192 |
|
|
|
|
|
|
|
|
Cash Flow from Financing Activities:
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(586 |
) |
|
|
(1,417 |
) |
|
Proceeds from the exercise of stock options
|
|
|
674 |
|
|
|
402 |
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
88 |
|
|
|
(1,015 |
) |
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash and Cash
Equivalents
|
|
|
(464 |
) |
|
|
(564 |
) |
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash
Equivalents
|
|
|
(925 |
) |
|
|
10,130 |
|
Cash and Cash Equivalents, beginning of period
|
|
|
57,094 |
|
|
|
92,005 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, end of period
|
|
$ |
56,169 |
|
|
$ |
102,135 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
S-123
THE GEO GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 January 1, 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 thirteen weeks ended
April 2, 2006 are not necessarily indicative of the results
for the entire fiscal year ending December 31, 2006.
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 17,
2006 for the fiscal year ended January 1, 2006, with the
exception of the Companys implementation of Financial
Accounting Standards (FAS) No. 123(R) as
discussed in Note 3 below. Certain amounts in the prior
period have been reclassified to conform to the current
presentation.
On November 4, 2005, the Company completed the acquisition
of Correctional Services Corporation (CSC), a
Florida-based provider of privatized jail, community corrections
and alternative sentencing services. The allocation of purchase
price at January 1, 2006 was preliminary. During the
quarter ended April 2, 2006, the Company received
information from its independent valuation specialists and
finalized the purchase price allocation related to property and
equipment, other assets and capital lease obligations. This
information resulted in an increase in goodwill of
$4.8 million. The purchase price allocations related to
certain tax elections as well as certain exit activities are
still tentative at this time and information that will enable
the Company to finalize these items is expected to be received
by the third quarter of 2006.
Additionally, in connection with the CSC acquisition and related
sale of Youth Services International (YSI), the
Company has determined that an adjustment will be made to the
purchase price based on an unresolved matter relating to the
closing balance sheet of YSI. The adjustment is expected to
result in additional cash consideration to the Company and will
reduce goodwill when finally determined, expected no later than
the third quarter of 2006.
|
|
3. |
EQUITY INCENTIVE PLANS |
On January 2, 2006, the Company adopted the provisions of
FAS No. 123(R), Share-Based Payment using
the modified prospective method. FAS No. 123(R)
requires companies to recognize the cost of employee services
received in exchange for awards of equity instruments based upon
the grant date fair value of those awards. Under the modified
prospective method of adopting FAS No. 123(R), the
Company will recognize compensation cost for all share-based
payments granted after January 1, 2006, plus any awards
granted to employees prior to January 2, 2006 that remain
unvested at that time. Under this method of adoption, no
restatement of prior periods is made. The Company uses a
Black-Scholes option valuation model to estimate the fair value
of each option awarded. The impact of forfeitures that may occur
prior to vesting is also estimated and considered in the amount
recognized. The adoption of FAS No. 123(R) did not
have a significant impact on income from continuing operations,
income before income taxes, net income, cash flow from
operations, or earnings per share during the period. Financial
statement disclosures relating to the Companys various
stock option plans under FAS 123(R) can be found in the
Companys annual report, which was filed with the
Securities and Exchange Commission on March 17, 2006, for
the year ended January 1, 2006.
S-124
THE GEO GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Prior to January 2, 2006, the Company recognized the cost
of employee services received in exchange for equity instruments
in accordance with Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued
to Employees. APB No. 25 required the use of the
intrinsic value method, which measures compensation cost as the
excess, if any, of the quoted market price of the stock over the
amount the employee must pay for the stock. Compensation expense
for all of the Companys equity-based awards was measured
under APB No. 25 on the date the shares were granted. Under
APB No. 25, no compensation expense has been recognized for
stock options.
During the thirteen weeks ended April 3, 2005, had the cost
of employee services received in exchange for equity instruments
been recognized based on the grant date fair value of those
instruments in accordance with the provisions of
FAS No. 123, Accounting for Stock-based
Compensation, the Companys net income and earnings
per share would have been impacted as shown in the following
table (in thousands, except per share data):
|
|
|
|
|
|
|
|
Thirteen Weeks Ended | |
|
|
April 3, 2005 | |
|
|
| |
Net income
|
|
$ |
2,896 |
|
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects
|
|
$ |
(186 |
) |
|
|
|
|
Pro forma net income
|
|
$ |
2,710 |
|
Basic earnings per share
|
|
|
|
|
|
As reported
|
|
$ |
0.30 |
|
|
Pro forma
|
|
$ |
0.28 |
|
Diluted earnings per share
|
|
|
|
|
|
As reported
|
|
$ |
0.29 |
|
|
Pro forma
|
|
$ |
0.27 |
|
For the purposes of the pro forma calculations above, the fair
value of each option is estimated on the date of the grant using
the Black-Scholes option-pricing model, assuming no expected
dividends and the following assumptions:
|
|
|
|
|
|
|
Thirteen Weeks Ended | |
|
|
April 3, 2005 | |
|
|
| |
Risk free interest rates
|
|
|
3.96% |
|
Expected lives
|
|
|
3.3 years |
|
Expected volatility
|
|
|
39% |
|
Expected dividend
|
|
|
|
|
The Company has four stock option plans: The Wackenhut
Corrections Corporation 1994 Stock Option Plan (First Plan), the
Wackenhut Corrections Corporation 1994 Stock Option Plan (Second
Plan), the 1995 Non-Employee Director Stock Option Plan (Third
Plan) and the Wackenhut Corrections Corporation 1999 Stock
Option Plan (Fourth Plan). The Wackenhut Corrections Corporation
1994 Stock Option Plan (First Plan) has expired and has no
outstanding stock options.
Under the Second Plan and Fourth Plan, the Company may grant
options to key employees for up to 1,500,000 and
1,150,000 shares of common stock, respectively. Under the
terms of these plans, the exercise price per share and vesting
period is determined at the sole discretion of the Board of
Directors. All options that have been granted under these plans
are exercisable at the fair market value of the common stock at
the date of the grant. Generally, the options vest and become
exercisable ratably over a four-year period, beginning
immediately on the date of the grant. However, the Board of
Directors has exercised its discretion
S-125
THE GEO GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and has granted options that vest 100% immediately. All options
under the Second Plan and Fourth Plan expire no later than ten
years after the date of the grant.
Under the Third Plan, the Company may grant up to
110,000 shares of common stock to non-employee directors of
the Company. Under the terms of this plan, options are granted
at the fair market value of the common stock at the date of the
grant, become exercisable immediately, and expire ten years
after the date of the grant.
A summary of the status of the Companys stock option plans
is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2, 2006 | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Wtd. Avg. | |
|
Wtd. Avg. | |
|
Aggregate | |
|
|
|
|
Exercise | |
|
Remaining | |
|
Intrinsic | |
Fiscal Year |
|
Shares | |
|
Price | |
|
Contractual Term | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
|
|
|
(In thousands) | |
Outstanding at beginning of period
|
|
|
1,407 |
|
|
$ |
15.53 |
|
|
|
|
|
|
$ |
|
|
Granted
|
|
|
15 |
|
|
|
22.53 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
33 |
|
|
|
20.75 |
|
|
|
|
|
|
|
|
|
Forfeited/ Cancelled
|
|
|
33 |
|
|
|
22.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at end of period
|
|
|
1,356 |
|
|
|
15.31 |
|
|
|
5.2 |
|
|
|
24,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of period
|
|
|
1,233 |
|
|
$ |
15.09 |
|
|
|
4.9 |
|
|
$ |
22,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted
during the thirteen weeks ended April 2, 2006 was
$0.1 million.
The total intrinsic value of options exercised during the
thirteen weeks ended April 2, 2006 was $0.2 million.
The following table summarizes information about the stock
options outstanding at April 2, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Wtd. Avg. | |
|
Wtd. Avg. | |
|
|
|
Wtd. Avg. | |
|
|
Number | |
|
Remaining | |
|
Exercise | |
|
Number | |
|
Exercise | |
Exercise Prices |
|
Outstanding | |
|
Contractual Life | |
|
Price | |
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$7.88 $7.88
|
|
|
2,000 |
|
|
|
4.1 |
|
|
$ |
7.88 |
|
|
|
2,000 |
|
|
$ |
7.88 |
|
$8.44 $8.44
|
|
|
184,500 |
|
|
|
3.9 |
|
|
|
8.44 |
|
|
|
184,500 |
|
|
|
8.44 |
|
$9.30 $9.30
|
|
|
172,500 |
|
|
|
4.9 |
|
|
|
9.30 |
|
|
|
172,500 |
|
|
|
9.30 |
|
$9.51 $12.51
|
|
|
80,091 |
|
|
|
6.8 |
|
|
|
9.61 |
|
|
|
68,451 |
|
|
|
9.63 |
|
$14.00 $14.00
|
|
|
182,182 |
|
|
|
7.1 |
|
|
|
14.00 |
|
|
|
132,732 |
|
|
|
14.00 |
|
$14.69 $14.69
|
|
|
15,000 |
|
|
|
3.4 |
|
|
|
14.69 |
|
|
|
15,000 |
|
|
|
14.69 |
|
$15.40 $15.40
|
|
|
264,000 |
|
|
|
5.9 |
|
|
|
15.40 |
|
|
|
264,000 |
|
|
|
15.40 |
|
$15.90 $18.63
|
|
|
166,127 |
|
|
|
4.1 |
|
|
|
18.46 |
|
|
|
150,743 |
|
|
|
18.48 |
|
$20.25 $23.00
|
|
|
135,800 |
|
|
|
5.0 |
|
|
|
22.29 |
|
|
|
108,654 |
|
|
|
22.14 |
|
$23.09 $32.20
|
|
|
153,747 |
|
|
|
4.2 |
|
|
|
25.26 |
|
|
|
134,100 |
|
|
|
25.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,355,947 |
|
|
|
5.2 |
|
|
$ |
15.31 |
|
|
|
1,232,680 |
|
|
$ |
15.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had 1,200 options available to be granted at
April 2, 2006 under the aforementioned stock plans.
S-126
THE GEO GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of April 2, 2006, the Company had $1.9 million of
unrecognized compensation costs related to non-vested stock
option awards that is expected to be recognized over a weighted
average period of 7.6 years. Proceeds received from option
exercises during the thirteen weeks ended April 2, 2006
were $0.7 million.
|
|
4. |
DISCONTINUED OPERATIONS |
The Company formerly had, through its Australian subsidiary, a
contract with the Department of Immigration, Multicultural and
Indigenous Affairs (DIMIA) for the management and
operation of Australias immigration centers. In 2003, the
contract was not renewed, and effective February 29, 2004,
the Company completed the transition of the contract and exited
the management and operation of the DIMIA centers.
In New Zealand, the Company ceased operating the Auckland
Central Remand Prison (Auckland) upon the expiration
of the contract on July 13, 2005.
On January 1, 2006, the Company completed the sale of
Atlantic Shores Hospital, a 72-bed private mental health
hospital which the Company owned and operated since 1997 for
approximately $11.5 million. The Company recognized a gain
on the sale of this transaction of approximately
$1.6 million or $1.0 million net of tax. The
accompanying unaudited consolidated financial statements and
notes reflect the operations of the DIMIA, Auckland and Atlantic
Shores Hospital as discontinued operations. There were no cash
flows from investing or financing activities for discontinued
operations for the thirteen weeks ended April 2, 2006.
The following are the revenues related to DIMIA, Auckland and
Atlantic Shores Hospital for the periods presented (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended | |
|
|
| |
|
|
April 2, 2006 |
|
April 3, 2005 | |
|
|
|
|
| |
Revenues DIMIA
|
|
$ |
|
|
|
$ |
|
|
Revenues Auckland
|
|
|
|
|
|
$ |
3,797 |
|
Revenues Atlantic Shores Hospital
|
|
|
|
|
|
$ |
1,978 |
|
The components of the Companys comprehensive income, net
of tax are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended | |
|
|
| |
|
|
April 2, 2006 | |
|
April 3, 2005 | |
|
|
| |
|
| |
Net income
|
|
$ |
4,556 |
|
|
$ |
2,896 |
|
Change in foreign currency translation, net of income tax
(expense) benefit of $(833), and $874, respectively
|
|
|
1,359 |
|
|
|
(1,338 |
) |
Minimum pension liability adjustment, net of income tax expense
of $0, and $16, respectively
|
|
|
|
|
|
|
25 |
|
Unrealized gain on derivative instruments, net of income tax
expense of $39, and $362, respectively
|
|
|
90 |
|
|
|
828 |
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
6,005 |
|
|
$ |
2,411 |
|
|
|
|
|
|
|
|
S-127
THE GEO GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Basic and diluted earnings per share (EPS) were
calculated for the thirteen weeks ended April 2, 2006 and
April 3, 2005 as follows (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended | |
|
|
| |
|
|
April 2, 2006 | |
|
April 3, 2005 | |
|
|
| |
|
| |
Net income
|
|
$ |
4,556 |
|
|
$ |
2,896 |
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
9,700 |
|
|
|
9,525 |
|
|
|
|
|
|
|
|
|
Per share amount
|
|
$ |
0.47 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
9,700 |
|
|
|
9,525 |
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Employee and director stock options
|
|
|
334 |
|
|
|
477 |
|
|
|
|
|
|
|
|
|
Weighted average shares assuming dilution
|
|
|
10,034 |
|
|
|
10,002 |
|
|
|
|
|
|
|
|
|
Per share amount
|
|
$ |
0.45 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
Of 1,355,947 options outstanding at April 2, 2006, options
to purchase 110,500 shares of the Companys
common stock, with exercise prices ranging from $25.06 to
$32.20 per share and expiration dates between 2006 and
2015, were not included in the computation of diluted EPS
because their effect would be anti-dilutive. Of 1,574,796
options outstanding at April 3, 2005, options to
purchase 13,500 shares of the Companys common
stock, with an exercise price of $32.20 and an expiration date
of 2015, were not included in the computation of diluted EPS
because their effect would be anti-dilutive.
|
|
7. |
GOODWILL AND OTHER INTANGIBLE ASSETS, NET |
Changes in the Companys goodwill balances for the thirteen
weeks ended April 2, 2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill resulting | |
|
Foreign | |
|
|
|
|
Balance as of | |
|
from Business | |
|
Currency | |
|
Balance as of | |
|
|
January 1, 2006 | |
|
Combinations | |
|
Translation | |
|
April 2, 2006 | |
|
|
| |
|
| |
|
| |
|
| |
Correction and detention facilities
|
|
$ |
35,896 |
|
|
$ |
5,107 |
|
|
$ |
(12 |
) |
|
$ |
40,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segments
|
|
$ |
35,896 |
|
|
$ |
5,107 |
|
|
$ |
(12 |
) |
|
$ |
40,991 |
|
The goodwill increase of $4.8 million during the thirteen
weeks ended April 2, 2006 is a result of the finalization
of purchase price allocation related to property and equipment,
other assets and capital lease obligations of the CSC
acquisition.
Intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Description | |
|
Asset Life | |
|
|
| |
|
| |
Facility management contracts
|
|
$ |
15,050 |
|
|
|
7-20 years |
|
Covenants not to compete
|
|
|
1,470 |
|
|
|
4 years |
|
|
|
|
|
|
|
|
|
|
$ |
16,520 |
|
|
|
|
|
Less accumulated amortization
|
|
|
(731 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,789 |
|
|
|
|
|
|
|
|
|
|
|
|
S-128
THE GEO GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization expense was $0.4 million for the thirteen
weeks ended April 2, 2006. Amortization is recognized on a
straight-line basis over the estimated useful life of the
intangible assets.
|
|
8. |
LONG TERM DEBT AND DERIVATIVE FINANCIAL INSTRUMENTS |
|
|
|
The Senior Credit Facility |
On September 14, 2005, the Company amended and restated its
senior credit facility (the Senior Credit Facility),
to consist of a $75 million, six-year term-loan bearing
interest at London Interbank Offered Rate, (LIBOR)
plus 2.00%, and a $100 million, five-year revolving credit
facility bearing interest at LIBOR plus 2.00%. The Company used
the borrowings under the Senior Credit Facility to fund general
corporate purposes and to finance the acquisition of CSC for
approximately $62 million plus transaction-related costs.
The acquisition of CSC closed in the fourth quarter of 2005. As
of April 2, 2006, the Company had borrowings of
$74.6 million outstanding under the term loan portion of
the Senior Credit Facility, no amounts outstanding under the
revolving portion of the Senior Credit Facility, and
$46.5 million outstanding in letters of credit under the
revolving portion of the Senior Credit Facility. As of
April 2, 2006 the Company had $53.5 million available
for borrowings under the revolving portion of the Senior Credit
Facility.
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,
81/4% senior
unsecured notes, (the Notes). The Notes are general,
unsecured, senior obligations. Interest is payable semi-annually
on January 15 and July 15 at
81/4
%. The Notes are governed by the terms of an Indenture,
dated July 9, 2003, between the Company and the Bank of New
York, as trustee, referred to as the Indenture. The Company was
in compliance with all of the covenants of the Indenture
governing the notes as of April 2, 2006.
|
|
|
South Texas Detention Complex: |
In February 2004, CSC was awarded a contract by the Department
of Homeland Security, Bureau of Immigration and Customs
Enforcement (ICE) to develop and operate a 1,020 bed
detention complex in Frio County Texas. South Texas Local
Development Corporation (STLDC) was created and
issued $49.5 million in taxable revenue bonds to finance
the construction of the detention center. Additionally, CSC
provided a $5.0 million subordinated note to STLDC for
initial development costs. The Company has determined that it is
the primary beneficiary of STLDC and therefore, in accordance
with FIN 46, has consolidated STLDC for accounting
purposes. 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 CSCs operating expenses and management fee.
The bonds have a ten year term and are non-recourse to CSC and
STLDC. 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 are fully insured and the sole source of payment for
the bonds is the operating revenues of the center.
Included in non-current restricted cash equivalents and
investments is $10.9 million as of April 2, 2006 as
funds held in trust with respect to the STLDC for debt service
and other reserves.
S-129
THE GEO GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Northwest Detention Center |
On June 30, 2003 CSC arranged financing for the
construction of the Northwest Detention Center in Tacoma,
Washington (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
(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.
Included in non-current restricted cash equivalents and
investments is $5.9 million as of April 2, 2006 as
funds held in trust with respect to the Northwest Detention
Center for debt service and other reserves.
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. We have consolidated the subsidiarys
direct finance lease receivable from the state government and
related non-recourse debt each totaling approximately
$39.0 million and $40.3 million as of April 2,
2006 and January 1, 2006, respectively. As a condition of
the loan, we are required to maintain a restricted cash balance
of AUD 5.0 million, which, at April 2, 2006, was
approximately $3.6 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.
In connection with the creation of South African Custodial
Services Ltd. (SACS), the Company entered into
certain guarantees related to the financing, construction and
operation of its prison in South Africa. 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 $9.8 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 6.5 million South African Rand, or
approximately $1.1 million as security for the
Companys guarantee. The Companys obligations under
this guarantee expire upon SACS release from its
obligations in respect of the restricted account under its debt
agreements. No amounts have been drawn against these letters of
credit, which are included in the Companys outstanding
letters of credit under the revolving loan portion of the Senior
Credit Facility.
The Company has agreed to provide a loan of up to
20.0 million South African Rand, or approximately
$3.3 million (the Standby Facility) to SACS for
the purpose of financing SACS obligations under its
contract with the South African government. No amounts have been
funded under the Standby Facility, and the Company does not
anticipate that such funding will ever be required by SACS. The
Companys obligations under the Standby Facility expire
upon the earlier of full funding or SACS release from its
obligations under its debt agreements. The lenders ability
to draw on the Standby Facility is limited to certain
circumstances, including termination of the contract.
S-130
THE GEO GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, the Company guaranteed certain potential tax
obligations of a special purpose entity. The potential estimated
exposure of these obligations is CAN$2.5 million, or
approximately $2.1 million commencing in 2017. The Company
has a liability of $0.6 million related to this exposure as
of April 2, 2006 and January 1, 2006. To secure this
guarantee, the Company purchased Canadian dollar denominated
securities with maturities matched to the estimated tax
obligations in 2017 to 2021. The Company has recorded an asset
and a liability equal to the current fair market value of those
securities on its balance sheet.
At April 2, 2006, the Company also had outstanding seven
letters of guarantee totaling approximately $5.4 million
under separate international facilities. The Company does not
have any off balance sheet arrangements.
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 London Interbank Offered Rate, (LIBOR)
plus a fixed margin of 3.45%, also calculated on the notional
$50.0 million amount. As of April 2, 2006 and
January 1, 2006 the fair value of the swaps totaled
approximately $(2.2) million and $(1.1) million and is
included in other non-current assets or liabilities and as an
adjustment to the carrying value of the Notes in the
accompanying balance sheets. There was no material
ineffectiveness of the Companys interest rate swaps for
the period ended April 2, 2006.
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 liability
as of April 2, 2006 and January 1, 2006 was
approximately $0.3 million and $0.4 million,
respectively, and is recorded as a component of other
liabilities in the accompanying consolidated financial
statements. There was no material ineffectiveness of the
Companys interest rate swaps for the fiscal years
presented. The Company does not expect to enter into any
transactions during the next twelve months which would result in
the reclassification into earnings of losses associated with
this swap currently reported in accumulated other comprehensive
loss.
|
|
9. |
COMMITMENTS AND CONTINGENCIES |
The Company owns the 480-bed Michigan Correctional Facility in
Baldwin, Michigan, referred to as the Michigan Facility. The
Company operated the Michigan Facility from 1999 until October
2005 pursuant to a management contract with the Michigan
Department of Corrections, or the MDOC. Separately, the Company
leased the Michigan Facility, as lessor, to the State, as
lessee, under a lease with an initial term of 20 years
followed by two five-year options. In September 2005, the
Governor of the State of Michigan closed the
S-131
THE GEO GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Michigan Facility and terminated the Companys management
contract with the MDOC. In October 2005, the State of Michigan
also sought to terminate its lease for the Michigan Facility.
The Company believes that the State did not have the right to
unilaterally terminate the Michigan Facility lease. As a result,
in November 2005, the Company filed a lawsuit against the State
to enforce the Companys rights under the lease. On
February 24, 2006, the Ingham County Circuit Court, the
trial court with jurisdiction over the case, granted summary
judgment in favor of the State and against the Company and
granted the Company leave to amend the complaint. The Company
has filed an amended complaint and is proceeding with the
lawsuit. The Company has reviewed the Michigan Facility for
impairment in accordance with FAS 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, and
recorded an impairment charge in the fourth quarter of 2005 for
$20.9 million based on an independent appraisal of fair
market value.
In June 2004, the Company received notice of a third-party claim
for property damage incurred during 2002 and 2001 at several
detention facilities that the Companys Australian
subsidiary formerly operated pursuant to its discontinued
operation. 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 May 2005, the
Company received additional correspondence indicating that the
insurance provider still intends to pursue the claim against our
Australian subsidiary. Although the claim is in the initial
stages and the Company is still in the process of fully
evaluating its merits, the Company believes that it has defenses
to the allegations underlying the claim and intends to
vigorously defend the Companys rights with respect to this
matter. While the insurance provider has not quantified its
damage claim and the outcome of this matter discussed above
cannot be predicted with certainty, based on information known
to date, and managements preliminary review of the claim,
the Company believes that, if settled unfavorably, this matter
could have a material adverse effect on the Companys
financial condition, results of operations and cash flows. The
Company is uninsured for any damages or costs that it may incur
as a result of this claim, including the expenses of defending
the claim. The Company has accrued a reserve related to this
claim 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.
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.
|
|
10. |
BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION |
|
|
|
Operating and Reporting Segment |
The Company operates in one industry segment encompassing the
development and management of privatized government institutions
located in the United States, Australia, South Africa and the
United
S-132
THE GEO GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Kingdom. The segment information presented in the prior periods
has been reclassified to conform to the current presentation.
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended | |
|
|
| |
|
|
April 2, 2006 | |
|
April 3, 2005 | |
|
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
Correction and detention facilities
|
|
$ |
169,876 |
|
|
$ |
136,339 |
|
|
Other
|
|
|
16,005 |
|
|
|
11,916 |
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
185,881 |
|
|
$ |
148,255 |
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
Correction and detention facilities
|
|
$ |
5,564 |
|
|
$ |
3,600 |
|
|
Other
|
|
|
100 |
|
|
|
68 |
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$ |
5,664 |
|
|
$ |
3,668 |
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
Correction and detention facilities
|
|
$ |
11,353 |
|
|
$ |
7,276 |
|
|
Other
|
|
|
1,109 |
|
|
|
97 |
|
|
|
|
|
|
|
|
Total operating income
|
|
$ |
12,462 |
|
|
$ |
7,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended | |
|
|
| |
Pre-Tax Income Reconciliation |
|
April 2, 2006 | |
|
April 3, 2005 | |
|
|
| |
|
| |
Total operating income from segment
|
|
$ |
11,353 |
|
|
$ |
7,276 |
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
|
(5,363 |
) |
|
|
(3,124 |
) |
|
Other
|
|
|
1,109 |
|
|
|
97 |
|
|
|
|
|
|
|
|
Income before income taxes, equity in earnings of affiliates,
Discontinued operations and minority interest
|
|
$ |
7,099 |
|
|
$ |
4,249 |
|
|
|
|
|
|
|
|
Sources of Revenue
The Company derives most of its revenue from the management of
privatized correction and detention facilities. The Company also
derives revenue from the management of mental health hospitals
and from the construction and expansion of new and existing
correctional, detention and mental health facilities. All of the
Companys revenue is generated from external customers.
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended | |
|
|
| |
|
|
April 2, 2006 | |
|
April 3, 2005 | |
|
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
Correction and detention facilities
|
|
$ |
169,876 |
|
|
$ |
136,339 |
|
|
Mental health
|
|
|
14,902 |
|
|
|
7,906 |
|
|
Construction
|
|
|
1,103 |
|
|
|
4,010 |
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
185,881 |
|
|
$ |
148,255 |
|
|
|
|
|
|
|
|
S-133
THE GEO GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
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. A summary of financial data for SACS is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended | |
|
|
| |
|
|
April 2, 2006 | |
|
April 3, 2005 | |
|
|
| |
|
| |
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
8,862 |
|
|
$ |
8,383 |
|
|
Operating income
|
|
|
3,343 |
|
|
|
2,909 |
|
|
Net income (loss)
|
|
|
561 |
|
|
|
60 |
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
10,728 |
|
|
|
12,684 |
|
|
Noncurrent assets
|
|
|
69,850 |
|
|
|
64,750 |
|
|
Current liabilities
|
|
|
4,477 |
|
|
|
3,610 |
|
|
Non current liabilities
|
|
|
71,895 |
|
|
|
73,616 |
|
|
Shareholders equity (deficit)
|
|
|
4,206 |
|
|
|
208 |
|
SACS commenced operations in fiscal 2002. Total equity in
undistributed loss for SACS before income taxes, for the
thirteen weeks ended April 2, 2006 and April 3, 2005
was $0.6 million, and $0.0 million, respectively.
During the first quarter of fiscal 2004, the Company adopted the
interim disclosure provisions of FAS No. 132 (revised
2003), Employers Disclosure about Pensions and Other
Postretirement Benefits, an Amendment of FAS Statements
No. 87, 88 and 106 and a Revision of FAS Statement
No. 132. This statement revises employers
disclosures about pension plans and other postretirement benefit
plans.
The following table summarizes the components of net periodic
benefit cost for the Company (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended | |
|
|
| |
|
|
April 2, 2006 | |
|
April 3, 2005 | |
|
|
| |
|
| |
Service cost
|
|
$ |
132 |
|
|
$ |
109 |
|
Interest cost
|
|
|
244 |
|
|
|
136 |
|
Amortization of unrecognized net actuarial loss
|
|
|
36 |
|
|
|
30 |
|
Amortization of prior service cost
|
|
|
10 |
|
|
|
234 |
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
422 |
|
|
$ |
509 |
|
|
|
|
|
|
|
|
S-134
PROSPECTUS
$200,000,000
THE GEO GROUP, INC.
Common stock
Preferred stock
Debt securities
Warrants
Depositary shares
We may offer and sell the securities from time to time in one or
more offerings. This prospectus provides you with a general
description of the securities we may offer.
Each time we sell securities, we will provide a supplement to
this prospectus that contains specific information about the
offering and the terms of the securities. The supplement may
also add, update or change information contained in this
prospectus. You should carefully read this prospectus and the
accompanying prospectus supplement before you invest in any of
our securities.
We may offer and sell the following securities:
|
|
|
|
|
common stock; |
|
|
|
preferred stock; |
|
|
|
debt securities; |
|
|
|
warrants to purchase common stock, preferred stock or debt
securities; and/or |
|
|
|
depositary shares. |
Our common stock is traded on the New York Stock Exchange under
the symbol WHC.
See Risk Factors on page 8 for a discussion
of factors you should consider before investing in these
securities.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
We will sell these securities directly to our shareholders or to
purchasers or through agents on our behalf or through
underwriters or dealers as designated from time to time. If any
agents or underwriters are involved in the sale of any of these
securities, the applicable prospectus supplement will provide
the names of the agents or underwriters and any applicable fees,
commissions or discounts.
The date of this prospectus is January 28, 2004.
TABLE OF CONTENTS
|
|
|
|
|
|
|
Page | |
|
|
| |
ABOUT THIS PROSPECTUS
|
|
|
3 |
|
|
OUR COMPANY
|
|
|
3 |
|
|
RECENT DEVELOPMENTS
|
|
|
3 |
|
|
THE SECURITIES WE MAY OFFER
|
|
|
4 |
|
|
RATIO OF EARNINGS TO FIXED CHARGES
|
|
|
6 |
|
|
USE OF PROCEEDS
|
|
|
6 |
|
|
RISK FACTORS
|
|
|
8 |
|
|
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
|
|
19 |
|
|
DESCRIPTION OF CAPITAL STOCK
|
|
|
21 |
|
|
DESCRIPTION OF DEBT SECURITIES
|
|
|
22 |
|
|
DESCRIPTION OF WARRANTS
|
|
|
28 |
|
|
DESCRIPTION OF DEPOSITARY SHARES
|
|
|
31 |
|
|
LEGAL OWNERSHIP OF SECURITIES
|
|
|
33 |
|
|
PLAN OF DISTRIBUTION
|
|
|
36 |
|
|
LEGAL MATTERS
|
|
|
38 |
|
|
EXPERTS
|
|
|
38 |
|
|
WHERE YOU CAN FIND MORE INFORMATION
|
|
|
38 |
|
You should rely only on the information contained or
incorporated by reference in this prospectus and in any
supplement to this prospectus. We have not authorized any other
person to provide you with different information. If anyone
provides you with different or inconsistent information, you
should not rely on it. You should assume that the information
appearing in this prospectus and the accompanying prospectus
supplement is accurate as of the date on their respective
covers. Our business, financial condition, results of operations
and prospects may have changed since that date.
When used in this prospectus, the terms GEO,
we, our and us refer to The
GEO Group, Inc. and its consolidated subsidiaries, unless
otherwise specified.
2
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we
filed with the Securities and Exchange Commission, or SEC, using
a shelf registration process. Under this shelf
registration process, we may offer from time to time any
combination of securities described in this prospectus in one or
more offerings in a total aggregate amount of up to
$200.0 million. This prospectus only provides you with a
general description of the securities that we may offer. Each
time we sell securities, we will provide a supplement to this
prospectus that contains specific information about the terms of
the securities being offered. The supplement may also add,
update or change information contained in this prospectus.
Before purchasing any securities, you should carefully read both
this prospectus and the accompanying prospectus supplement,
together with the additional information described under the
heading, Where You Can Find More Information.
OUR COMPANY
We are a leading provider of government-outsourced services
specializing in the management of correctional, detention and
mental health facilities. As of September 29, 2003, we
operated a total of 49 correctional, detention and mental health
facilities and had over 36,000 beds either under management or
for which we had been awarded contracts.
We are incorporated in Florida. Our principal executive offices
are located at 621 NW 53rd Street, Suite 700, Boca Raton,
Florida 33487. Our telephone number is
(561) 893-0101.
Our website is www.thegeogroupinc.com. Information on, or
accessible through, our website is not a part of this prospectus.
RECENT DEVELOPMENTS
Share Repurchase
On April 30, 2003, we entered into a share purchase
agreement with Group 4 Falck A/S, our former majority
shareholder which we refer to as Group 4 Falck, to repurchase
all 12,000,000 shares of our common stock held by Group 4
Falck for $132.0 million in cash. Group 4 Falck obtained these
shares when it acquired our former parent company, The Wackenhut
Corporation, in 2002. We completed the share repurchase on
July 9, 2003.
Recent Financings
In connection with the share repurchase, we completed two
financing transactions on July 9, 2003. First, we amended
our former senior credit facility. The amended
$150.0 million senior credit facility, which we refer to as
the amended senior credit facility, consists of a $50.0 million,
five-year revolving credit facility, with a $40.0 million
sublimit for letters of credit, and a $100.0 million, six-year
term loan. Second, we offered and sold $150.0 million
aggregate principal amount of
81/4
% senior notes due 2013, which we refer to as the Notes.
Sale of Our Joint Venture Interest in Premier Custodial Group
Limited
On July 2, 2003, we sold our one-half interest in Premier
Custodial Group Limited, our United Kingdom joint venture, which
we refer to as PCG, to Serco Investments Limited, our joint
venture partner, which we refer to as Serco, for approximately
$80.0 million, on a pretax basis. For the twenty-six weeks
ended June 29, 2003, PCG accounted for 3,573 of our beds
under management and seven of our facilities under management
and, for the twenty-six weeks ended June 29, 2003 and the
fiscal year ended December 29, 2002, respectively, PCG
accounted for $1.7 million and $6.5 million of our equity in
earnings of affiliates. In addition, for the fiscal year ended
December 29, 2002, we received $1.6 million of dividends
from equity affiliates through our interest in PCG. Under the
terms of the indenture governing the Notes, we have an
obligation to use the proceeds from the sale of our interest in
PCG to reinvest in certain permitted businesses or assets, to
repay indebtedness outstanding under the amended senior credit
facility or to make an offer to repurchase the Notes.
3
Name Change
On November 25, 2003, our corporate name was changed from
Wackenhut Corrections Corporation to The GEO
Group, Inc. The name change was required under the terms
of the share purchase agreement between us and Group 4 Falck
referred to above. Under the terms of the share purchase
agreement, GEO is required to cease using the name, trademark
and service mark Wackenhut by July 9, 2004. In
addition to achieving compliance with the terms of the share
purchase agreement, we believe that the change in our name to
The GEO Group, Inc. will help reinforce the fact
that we are no longer affiliated with the Wackenhut entities. As
a result of the name change, effective January 21, 2004,
the symbol under which our common stock is traded on the New
York Stock Exchange will be changed to GGI.
THE SECURITIES WE MAY OFFER
We may offer shares of our common stock and preferred stock,
various series of debt securities, warrants to purchase any of
such securities and/or depositary shares with a total value of
up to $200.0 million from time to time under this
prospectus at prices and on terms to be determined by market
conditions at the time of offering. Any preferred stock that we
may offer may be offered either as shares of preferred stock or
be represented by depositary shares. This prospectus provides
you with a general description of the securities we may offer.
Each time we offer a type or series of securities, we will
provide a prospectus supplement that will describe the specific
amounts, prices and other important terms of the securities,
including, to the extent applicable:
|
|
|
|
|
designation or classification; |
|
|
|
aggregate principal amount or aggregate offering price; |
|
|
|
maturity; |
|
|
|
original issue discount, if any; |
|
|
|
rates and times of payment of interest or dividends, if any; |
|
|
|
redemption, conversion, exchange or sinking fund terms, if any; |
|
|
|
conversion or exchange prices or rates, if any, and, if
applicable, any provisions for changes to or adjustments in the
conversion or exchange prices or rates and in the securities or
other property receivable upon conversion or exchange; |
|
|
|
ranking; |
|
|
|
restrictive covenants, if any; |
|
|
|
voting or other rights, if any; and |
|
|
|
important federal income tax considerations. |
The prospectus supplement also may add, update or change
information contained in this prospectus or in documents we have
incorporated by reference into this prospectus.
THIS PROSPECTUS MAY NOT BE USED TO OFFER OR SELL ANY SECURITIES
UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
We may sell the securities directly to or through agents,
underwriters or dealers. We, and our agents or underwriters,
reserve the right to accept or reject all or part of any
proposed purchase of securities. If we do offer securities
through agents or underwriters, we will include in the
applicable prospectus supplement:
|
|
|
|
|
the names of those agents or underwriters; |
|
|
|
applicable fees, discounts and commissions to be paid to them; |
4
|
|
|
|
|
details regarding over-allotment options, if any; and |
|
|
|
the net proceeds to us. |
Common Stock
We may issue shares of our common stock from time to time.
Holders of our common stock are entitled to one vote per share
for the election of directors and on all other matters that
require shareholder approval. Subject to any preferential rights
of any outstanding preferred stock, in the event of our
liquidation, dissolution or winding up, holders of our common
stock are entitled to share ratably in the assets remaining
after payment of liabilities and the liquidation preferences of
any outstanding preferred stock. Our common stock does not carry
any preemptive rights enabling a holder to subscribe for, or
receive shares of, any class of our common stock or any other
securities convertible into shares of any class of our common
stock, or any redemption rights.
Preferred Stock
We may issue shares of our preferred stock from time to time, in
one or more series. Under our articles of incorporation, our
board of directors has the authority, without further action by
the shareholders, to designate up to 10,000,000 shares of
preferred stock in one or more series and to fix the rights,
preferences, privileges, qualifications and restrictions granted
to or imposed upon the preferred stock, including dividend
rights, conversion rights, voting rights, redemption rights,
liquidation preferences and sinking fund terms, any or all of
which may be greater than the rights of the common stock. As of
the date of this prospectus, there are no shares of preferred
stock outstanding.
We will fix the rights, preferences, privileges, qualifications
and restrictions of the preferred stock of each series that we
sell under this prospectus and applicable prospectus supplements
in the certificate of designation relating to that series. We
will incorporate by reference into the registration statement of
which this prospectus is a part the form of any certificate of
designation that describes the terms of the series of preferred
stock we are offering before the issuance of the related series
of preferred stock. We urge you to read the prospectus
supplements related to the series of preferred stock being
offered, as well as the complete certificate of designation that
contains the terms of the applicable series of preferred stock.
Debt Securities
We may issue debt securities from time to time, in one or more
series, as either senior or subordinated debt or as senior or
subordinated convertible debt. The senior debt securities will
rank equally with any other unsubordinated debt that we may have
and may be secured or unsecured. The subordinated debt
securities will be subordinate and junior in right of payment,
to the extent and in the manner described in the instrument
governing the debt, to all or some portion of our indebtedness.
Any convertible debt securities that we issue will be
convertible into or exchangeable for our common stock or other
securities of ours. Conversion may be mandatory or at your
option and would be at prescribed conversion rates.
The debt securities will be issued under one or more documents
called indentures, which are contracts between us and a trustee
for the holders of the debt securities. In this prospectus, we
have summarized certain general features of the debt securities.
We have also filed as an exhibit to this prospectus the form of
indenture containing some of the general terms applicable to the
debt securities. However, many of the specific terms applicable
to the debt securities will be set forth in supplemental
indentures and described in the prospectus supplements related
to the debt securities being offered. These terms and conditions
may differ materially from those described in this prospectus.
As a result, we urge you to read the form of indenture, as well
as the complete supplemental indentures and prospectus
supplements that contain the terms of the series of debt
securities being offered. The supplemental indentures and forms
of debt securities related to the debt securities being offered
will be incorporated by reference into the registration
statement of which this prospectus is a part from reports we
file with the SEC.
5
Warrants
We may issue warrants for the purchase of common stock,
preferred stock or debt securities in one or more series, from
time to time. We may issue warrants independently or together
with common stock, preferred stock and/or debt securities, and
the warrants may be attached to or separate from those
securities.
The warrants will be evidenced by warrant certificates issued
under one or more warrant agreements, which are contracts
between us and an agent for the holders of the warrants. In this
prospectus, we have summarized certain general features of the
warrants. We urge you, however, to read the prospectus
supplements related to the series of warrants being offered, as
well as the complete warrant agreements and warrant certificates
that contain the terms of the warrants. Forms of warrant
agreements and warrant certificates containing the terms of the
warrants being offered will be incorporated by reference into
the registration statement of which this prospectus is a part
from reports we file with the SEC.
Depositary Shares
We may elect to offer fractional shares of preferred stock
rather than full shares of preferred stock and, in that event,
we will issue receipts for depositary shares. Each of these
depositary shares will represent a fraction, which will be set
forth in the applicable prospectus supplement, of a share of the
applicable series of preferred stock.
Any depositary shares that we sell under this prospectus will be
evidenced by depositary receipts issued under a deposit
agreement between us and a depositary with whom we deposit the
shares of the applicable series of preferred stock that underlie
the depositary shares that are sold. In this prospectus, we have
summarized certain general features of the depositary shares. We
urge you, however, to read the prospectus supplements related to
any depositary shares being sold, as well as the complete
deposit agreement and depositary receipt. A form of deposit
agreement containing the terms of any depositary shares that we
sell under this prospectus will be incorporated by reference
into the registration statement of which this prospectus is a
part from reports we file with the SEC.
RATIO OF EARNINGS TO FIXED CHARGES
Our ratio of earnings to fixed charges for each of the periods
indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended, | |
|
Thirty-nine weeks ended | |
|
|
| |
|
| |
|
|
January 3, | |
|
January 2, | |
|
December 31, | |
|
December 30, | |
|
December 29, | |
|
September 29, | |
|
September 28, | |
|
|
1999 | |
|
2000 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2002 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Ratio of earnings to fixed charges
|
|
|
4.67x |
|
|
|
2.77x |
|
|
|
1.85x |
|
|
|
2.11x |
|
|
|
2.36x |
|
|
|
2.39x |
|
|
|
4.43x |
|
The ratio of earnings to fixed charges was calculated by
dividing income before income taxes and equity in earnings of
affiliates plus fixed charges by fixed charges. Fixed charges
consist of interest expense (including the interest element of
rental expense) and amortization of deferred financing fees.
For the periods indicated above, we had no outstanding shares of
preferred stock with required dividend payments. Therefore, the
ratios of earnings to combined fixed charges and preferred stock
dividends are identical to the ratios presented in the table
above.
USE OF PROCEEDS
We intend to use the net proceeds from the sale of the
securities under this prospectus for general corporate purposes.
General corporate purposes may include any of the following:
|
|
|
|
|
repaying debt; |
|
|
|
funding capital expenditures; |
|
|
|
paying for possible acquisitions or the expansion of our
businesses; |
6
|
|
|
|
|
investing in or lending money to subsidiaries of GEO; or |
|
|
|
providing working capital. |
When a particular series of securities is offered, the
prospectus supplement relating thereto will set forth our
intended use for the net proceeds we receive from the sale of
the securities. Pending the application of the net proceeds, we
may invest the proceeds in short-term, interest-bearing
instruments or other investment-grade securities.
From time to time, we engage in preliminary discussions and
negotiations with various businesses in order to explore the
possibility of an acquisition or investment. However, as of the
date of this prospectus, we have not entered into any agreements
or arrangements which would make an acquisition or investment
probable under Rule 3-05(a) of Regulation S-X.
7
RISK FACTORS
You should carefully consider the risk factors set forth
below before investing in our securities.
Risks Related to Our High Level of Indebtedness
|
|
|
Our significant level of indebtedness could adversely affect
our financial condition and prevent us from fulfilling our debt
service obligations. |
We have a significant amount of indebtedness. Our total
consolidated long-term indebtedness as of November 23, 2003
was $259.5 million, excluding non recourse debt of $42.9
million. In addition, as of November 23, 2003, we had $29.4
million outstanding in letters of credit under the revolving
loan portion of our former senior credit facility. As a result,
as of that date, we would have had the ability to borrow an
additional approximately $10.6 million under the revolving loan
portion of our amended senior credit facility, subject to our
satisfying the relevant borrowing conditions under those
facilities with respect to the incurrence of additional
indebtedness.
Our substantial indebtedness could have important consequences.
For example, it could:
|
|
|
|
|
require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby
reducing the availability of our cash flow to fund working
capital, capital expenditures, and other general corporate
purposes; |
|
|
|
limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate; |
|
|
|
increase our vulnerability to adverse economic and industry
conditions; |
|
|
|
place us at a competitive disadvantage compared to competitors
that may be less leveraged; and |
|
|
|
limit our ability to borrow additional funds or refinance
existing indebtedness on favorable terms. |
If we are unable to meet our debt service obligations, we may
need to reduce capital expenditures, restructure or refinance
our indebtedness, obtain additional equity financing or sell
assets. We may be unable to restructure or refinance our
indebtedness, obtain additional equity financing or sell assets
on satisfactory terms or at all. In addition, our ability to
incur additional indebtedness will be restricted by the terms of
our amended senior credit facility and the indenture governing
our outstanding Notes.
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Despite current indebtedness levels, we may still incur more
indebtedness, which could further exacerbate the risks described
above. Future indebtedness issued pursuant to this prospectus
could have rights superior to those of our existing or future
indebtedness. |
The terms of the indenture governing the Notes and our amended
senior credit facility restrict our ability to incur but do not
prohibit us from incurring significant additional indebtedness
in the future. In addition, we may refinance all or a portion of
our indebtedness, including borrowings under our amended senior
credit facility, and incur more indebtedness as a result. If new
indebtedness is added to our and our subsidiaries current
debt levels, the related risks that we and they now face could
intensify. As of November 23, 2003, we would have had the
ability to borrow an additional approximately $10.6 million
under the revolving loan portion of our amended senior credit
facility. In addition, any indebtedness incurred pursuant to
this prospectus will be created through the issuance of debt
securities. Such debt securities may be issued in more than one
series and some of those series may have characteristics that
provide them with rights that are superior to those of series
that have already been created or that will be created in the
future.
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The covenants in the indenture governing the Notes and our
amended senior credit facility impose significant operating and
financial restrictions which may adversely affect our ability to
operate our business. |
The indenture governing the Notes and our amended senior credit
facility impose significant operating and financial restrictions
on us and certain of our subsidiaries, which we refer to as
restricted subsidiaries. These restrictions limit our ability
to, among other things:
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incur additional indebtedness; |
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pay dividends and or distributions on our capital stock or
repurchase our capital stock, purchase, redeem or retire our
capital stock, prepay subordinated indebtedness and make
investments; |
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issue preferred stock of subsidiaries; |
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make certain types of investments; |
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guarantee other indebtedness; |
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create liens on our assets; |
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transfer and sell assets; |
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create or permit restrictions on the ability of our restricted
subsidiaries to make dividends or make other distributions to us; |
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enter into sale/leaseback transactions; |
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enter into transactions with affiliates; and |
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merge or consolidate with another company or sell all or
substantially all of our assets. |
These restrictions could limit our ability to finance our future
operations or capital needs, make acquisitions or pursue
available business opportunities. In addition, our amended
senior credit facility requires us to maintain specified
financial ratios and satisfy certain financial covenants,
including maintaining maximum senior and total leverage ratios,
a minimum fixed charge coverage ratio, a minimum net worth and a
limit on the amount of our annual capital expenditures. Some of
these financial ratios become more restrictive over the life of
the amended senior credit facility. We may be required to take
action to reduce our indebtedness or to act in a manner contrary
to our business objectives to meet these ratios and satisfy
these covenants. Our failure to comply with any of the covenants
under our amended senior credit facility and the indenture
governing the Notes could cause an event of default under such
documents and result in an acceleration of all of our
outstanding indebtedness. If all of our outstanding indebtedness
were to be accelerated, we likely would not be able to
simultaneously satisfy all of our obligations under such
indebtedness, which would materially adversely affect our
financial condition and results of operations.
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Servicing our indebtedness will require a significant amount
of cash. Our ability to generate cash depends on many factors
beyond our control. |
Our ability to make payments on our indebtedness and to fund
planned capital expenditures will depend on our ability to
generate cash in the future. This, to a certain extent, is
subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control.
Our business may not be able to generate sufficient cash flow
from operations or future borrowings may not be available to us
under our amended senior credit facility or otherwise in an
amount sufficient to enable us to pay our indebtedness or new
debt securities, or to fund our other liquidity needs. We may
need to refinance all or a portion of our indebtedness on or
before maturity. However, we may not be able to complete such
refinancing on commercially reasonable terms or at all.
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Because portions of our indebtedness have floating interest
rates, a general increase in interest rates will adversely
affect cash flows. |
Our amended senior credit facility bears interest at a variable
rate. To the extent our exposure to increases in interest rates
is not eliminated through interest rate protection agreements,
such increases will adversely affect our cash flows. We do not
currently have any interest rate protection agreements in place
to protect against interest rate fluctuations related to the
amended senior credit facility. Our estimated total annual
interest expense based on borrowings outstanding as of
September 29, 2003 is approximately $22.1 million, $5.0
million of which is interest expense attributable to borrowings
of $120.0 million currently outstanding under the amended senior
credit facility. As a result, for every one percent increase in
the interest rate applicable to the amended senior credit
facility, our total annual interest expense will increase by
$1.2 million.
In addition, effective September 18, 2003, we entered into
interest rate swap agreements in the aggregate notional amount
of $50.0 million. The agreements, which have payment and
expiration dates that coincide with the payment and expiration
terms of the Notes, effectively convert $50.0 million of the
Notes into variable rate obligations. Under the agreements, we
receive a fixed interest rate payment from the financial
counterparties to the agreements equal to 8.25% per year
calculated on the notional $50.0 million amount, while we make a
variable interest rate payment to the same counterparties equal
to the six-month London Interbank Offered Rate plus a fixed
margin of 3.45%, also calculated on the notional $50.0 million
amount. As a result, for every one percent increase in the
interest rate applicable to the swap agreements, our total
annual interest expense will increase by $0.5 million.
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We depend on distributions from our subsidiaries to make
payments on our indebtedness. These distributions may not be
made. |
We generate a substantial portion of our revenues from
distributions on the equity interests we hold in our
subsidiaries. Therefore, our ability to meet our payment
obligations on our indebtedness is substantially dependent on
the earnings of our subsidiaries and the payment of funds to us
by our subsidiaries as dividends, loans, advances or other
payments. Our subsidiaries are separate and distinct legal
entities and are not obligated to make funds available for
payment of our other indebtedness in the form of loans,
distributions or otherwise. Our subsidiaries ability to
make any such loans, distributions or other payments to us will
depend on their earnings, business results, the terms of their
existing and any future indebtedness, tax considerations and
legal restrictions. If our subsidiaries do not make such
payments to us, our ability to repay our indebtedness will be
materially adversely affected. For the fiscal year ended
December 29, 2002 and the thirty-nine weeks ended
September 28, 2003, our subsidiaries accounted for 26.9%
and 27.6% of our consolidated revenues, respectively, and, as of
December 29, 2002 and September 28, 2003, our
subsidiaries accounted for 21.4% and 21.1% of our consolidated
total assets, respectively.
Risks Related to Our Business and Industry
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Our results of operations are dependent on revenues generated
by our prisons and detention facilities, which are subject to
the following risks associated with the corrections and
detention industry. |
We are subject to the termination or non-renewal of our
government contracts, which could adversely affect our results
of operations and liquidity, including our ability to secure new
facility management contracts from other government customers.
Governmental agencies typically may terminate a facility
contract at any time without cause or use the possibility of
termination to negotiate a lower fee for per diem rates. They
also generally have the right to renew facility contracts at
their option. Notwithstanding any contractual renewal option, as
of December 1, 2003, 14 of our facility management
contracts were scheduled to expire on or before January 5,
2005. These contracts represented 28.8% and 30.4%, respectively,
of our consolidated revenues for the thirty-nine weeks ended
June 29, 2003 and for the fiscal year ended
December 29, 2002. We have been notified that four of these
contracts, which represented 13.5% and 14.9%, respectively, of
our consolidated revenues for the thirty-nine weeks ended
September 28, 2003 and for the fiscal year ended
December 29, 2002, will not be renewed and will therefore
terminate on their scheduled
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expiration dates, all of which occur prior to March 1,
2004. We do not expect the loss of these four contracts to
affect our ability to satisfy our financial obligations. Also,
some of our other contracts scheduled to expire before
January 5, 2005 or thereafter may not be renewed. In
addition, government agencies with whom we contract may
determine not to exercise renewal options with respect to any of
our contracts in the future. In the event any of our management
contracts are terminated or are not renewed on favorable terms
or otherwise, we may not be able to obtain additional
replacement contracts. The non-renewal or termination of any of
our contracts with governmental agencies could materially
adversely affect our financial condition, results of operations
and liquidity, including our ability to secure new facility
management contracts from other government customers.
In Australia, the Department of Immigration, Multicultural and
Indigenous Affairs, which we refer to as DIMIA, recently entered
into a contract with a division of Group 4 Falck for the
management and operation of Australias immigration
centers, services which we have provided since 1997 through our
Australian subsidiary. We are currently in the process of
transitioning the management and operation of the DIMIA centers
to the division of Group 4 Falck and expect that the transition
will be fully completed by February 29, 2004, when our
contract with DIMIA is scheduled to expire. Once the division of
Group 4 Falck begins to fully operate the DIMIA centers, we will
no longer recognize any further revenue from the DIMIA contract.
For the thirty-nine weeks ended September 28, 2003, the
contract with DIMIA represented approximately 9.8% of our
consolidated revenues. We do not have any lease obligations
related to our contract with DIMIA. During the thirteen weeks
ended September 29, 2003, we incurred increased costs of
approximately $3.0 million related to the transitioning of the
DIMIA contract to the division of Group 4 Falck, primarily
related to liability insurance expenses. We may incur additional
costs related to the transition in the future.
We will continue to be responsible for certain real property
payments even if our underlying facility management contracts
terminate, which could adversely affect our profitability.
Eleven of our facilities are leased from Correctional
Properties Trust, an independent, publicly-traded REIT which we
refer to as CPV. These leases have an initial ten-year term with
varying renewal periods at our option, and a total average
remaining initial term of 5.7 years. The facility
management contracts underlying these leases generally have a
term ranging from one to five years, however, they are
terminable by the governmental entity at will. In the event that
a facility management contract is terminated or expires and is
not renewed prior to the expiration of the corresponding lease
term for the facility, we will continue to be liable to CPV for
the related lease payments. Our average annual obligations and
aggregate total remaining obligations for lease payments under
the eleven CPV leases are approximately $23.5 million and $124.3
million, respectively. Because these lease payments would not be
offset by revenue from an active facility management contract,
they could represent a material ongoing loss. If we are unable
to find a replacement management contract or an alternative use
for the facility, the loss could continue until the expiration
of the lease term then in effect, which could adversely affect
our profitability.
For example, during 2000, our management contract at the 276-bed
Jena Juvenile Justice Center in Jena, Louisiana was discontinued
by the mutual agreement of the parties. Despite the
discontinuation of the management contract, we remain
responsible for payments on our underlying lease of the inactive
facility. We incurred an operating charge of $1.1 million during
the year ended December 29, 2002 related to our lease of
the inactive facility that represented the expected costs to be
incurred under the lease until a sublease or alternative use
could be initiated. We are continuing our efforts to find a
sublease or alternative correctional use for the facility.
However, parties that we previously believed might sublease the
facility prior to early 2004 have recently either indicated that
they do not have an immediate need for the facility or did not
enter into a binding commitment for a sublease of the facility.
As a result, our management has determined that it is unlikely
that we will sublease the facility or find an alternative
correctional use for the facility prior to the expiration of the
current provision for anticipated loss in early 2004 and we
incurred an additional provision for operating loss of
approximately $5.0 million during the thirteen weeks ended
September 29, 2003. This additional operating charge both
covers our anticipated losses under the lease for the facility
until a sublease is in place and provides an estimated discount
to sublease the facility to prospective sublessees. If we are
unable to sublease or find an alternative correctional use for
the facility prior to January 2006, an additional operating
charge will be required. As of September 28, 2003, the
remaining obligation on the Jena lease
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through the contractual term of 2009, exclusive of the reserve
for losses through early 2006, is approximately $7.0 million.
Also, our contract with the California Department of Corrections
for the management of the 224-bed McFarland Community
Corrections Center expired on December 31, 2003. During the
thirty-nine weeks ended September 28, 2003, the contract
for the McFarland facility represented less than 1% of our
consolidated revenues. Even though we are no longer operating
the McFarland facility, we will continue to be responsible for
payments on our underlying lease of the facility with CPV
through 2008, when the lease is scheduled to expire. We are
actively pursuing various alternatives for the facility,
including finding an alternative correctional use for the
facility or subleasing the facility to agencies of the federal
and/or state governments. If we are unable to find an
appropriate correctional use for the facility or sublease the
facility, we may be required to record an operating charge
related to a portion of the future lease costs with CPV in
accordance with SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The remaining
lease obligation is approximately $5.0 million through
April 28, 2008.
In addition, we own four properties on which we operate
correctional and detention facilities. Our purchase of these
properties was financed through borrowings under our former
senior credit facility which have now been incorporated into our
amended senior credit facility. In the event that an underlying
facility management contract for one or more of these properties
terminates, we would still be responsible for servicing the
indebtedness incurred to purchase those properties.
Our growth depends on our ability to secure contracts to
develop and manage new correctional and detention facilities,
the demand for which is outside our control. Our growth is
generally dependent upon our ability to obtain new contracts to
develop and manage new correctional and detention facilities,
because contracts to manage existing public facilities have not
to date typically been offered to private operators. Public
sector demand for new facilities may decrease and our potential
for growth will depend on a number of factors we cannot control,
including overall economic conditions, crime rates and
sentencing patterns in jurisdictions in which we operate,
governmental and public acceptance of the concept of
privatization and the number of facilities available for
privatization. For example, in the first six months of 2002, the
number of prisoners in privately operated facilities decreased
by 6.1%. A continuation of this trend could have a material
adverse effect on our financial condition or results of
operations.
The demand for our facilities and services could be adversely
affected by the relaxation of criminal enforcement efforts,
leniency in conviction and sentencing practices, or through the
decriminalization of certain activities that are currently
proscribed by criminal laws. For instance, any changes with
respect to the criminalization of drugs and controlled
substances or a loosening of immigration laws could affect the
number of persons arrested, convicted, sentenced and
incarcerated, thereby potentially reducing demand for
correctional facilities to house them. Similarly, reductions in
crime rates could lead to reductions in arrests, convictions and
sentences requiring incarceration at correctional facilities.
We may not be able to secure financing and desirable
locations for new facilities, which could adversely affect our
results of operations and future growth. In certain cases,
the development and construction of facilities by us is subject
to obtaining construction financing. Such financing may be
obtained through a variety of means, including without
limitation, the sale of tax-exempt or taxable bonds or other
obligations or direct governmental appropriations. The sale of
tax-exempt or taxable bonds or other obligations may be
adversely affected by changes in applicable tax laws or adverse
changes in the market for tax-exempt or taxable bonds or other
obligations.
Moreover, certain jurisdictions, including California where we
have a significant amount of operations, often require
successful bidders to make a significant capital investment in
connection with the financing of a particular project, which
requires us to have sufficient capital resources to compete
effectively for facility management contacts. We may not be able
to obtain these capital resources when needed. Additionally, our
success in obtaining new awards and contracts may depend, in
part, upon our ability to locate land that can be leased or
acquired under favorable terms. Otherwise desirable locations
may be in or near populated areas and, therefore, may generate
legal action or other forms of opposition from residents in
areas surrounding a
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proposed site. Our inability to secure financing and desirable
locations for new facilities could adversely affect our results
of operations and future growth.
We depend on a limited number of governmental customers for a
significant portion of our revenues. The loss of, or a
significant decrease in business from, these customers could
seriously harm our financial condition and results of
operations. We currently derive, and expect to continue to
derive, a significant portion of our revenues from a limited
number of governmental agencies. The loss of, or a significant
decrease in, business from the Bureau of Prisons, the U.S.
Immigration and Naturalization Service now known as the Bureau
of Immigration and Customs Enforcement, which we refer to as the
INS, or the U.S. Marshals Service or various state agencies
could seriously harm our financial condition and results of
operations. The three federal governmental agencies with
correctional and detention responsibilities, the Bureau of
Prisons, the INS and the Marshals Service, accounted for
approximately 18.7% of our total consolidated revenues for the
thirty-nine weeks ended September 28, 2003, with the Bureau
of Prisons accounting for approximately 10.4% of our total
consolidated revenues for such period, the Marshals Service
accounting for approximately 4.7% of our total consolidated
revenues for such period and the INS accounting for
approximately 3.6% of our total consolidated revenues for such
period. We expect to continue to depend upon these federal
agencies and a relatively small group of other governmental
customers for a significant percentage of our revenues.
A decrease in occupancy levels could cause a decrease in
revenue and profitability. While a substantial portion of
our cost structure is generally fixed, a significant portion of
our revenues are generated under facility management contracts
which provide for per diem payments based upon daily occupancy.
We are dependent upon the government agencies with which we have
contracts to provide inmates for our managed facilities. As a
result, we cannot control occupancy levels at our managed
facilities. Under a per diem rate structure, a decrease in our
occupancy rates could cause a decrease in revenue and
profitability. When combined with relatively fixed costs for
operating each facility regardless of the occupancy level, a
decrease in occupancy levels could have a material adverse
effect on our profitability.
Competition for inmates may adversely affect the
profitability of our business. We compete with government
entities and other private operators on the basis of cost,
quality and range of services offered, experience in managing
facilities, and reputation of management and personnel. Barriers
to entering the market for the management of correctional and
detention facilities may not be sufficient to limit additional
competition in our industry. In addition, our government
customers may assume the management of a facility currently
managed by us upon the termination of the corresponding
management contract or, if such customers have capacity at the
facilities which they operate, they may take inmates currently
housed in our facilities and transfer them to
government-operated facilities. Since we are paid on a per diem
basis with no minimum guaranteed occupancy under most of our
contracts, the loss of such inmates and resulting decrease in
occupancy would cause a decrease in both our revenues and our
profitability.
We are dependent on government appropriations, which may not
be made on a timely basis or at all. Our cash flow is
subject to the receipt of sufficient funding of and timely
payment by contracting governmental entities. If the contracting
governmental agency does not receive sufficient appropriations
to cover its contractual obligations, it may terminate our
contract or delay or reduce payment to us. Any delays in
payment, or the termination of a contract, could have a material
adverse effect on our cash flow and financial condition. In
addition, as a result of, among other things, recent economic
developments, federal, state and local governments have
encountered, and may continue to encounter, severe budgetary
constraints. As a result, a number of state and local
governments are under pressure to control additional spending or
reduce current levels of spending. Accordingly, we may be
requested in the future to reduce our existing per diem contract
rates or forego prospective increases to those rates. In
addition, it may become more difficult to renew our existing
contracts on favorable terms or at all.
Public resistance to privatization of correctional and
detention facilities could result in our inability to obtain new
contracts or the loss of existing contracts, which could have a
material adverse effect on our business, financial condition and
results of operations. The management and operation of
correctional and detention facilities by private entities has
not achieved complete acceptance by either
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governments or the public. Some governmental agencies have
limitations on their ability to delegate their traditional
management responsibilities for correctional and detention
facilities to private companies and additional legislative
changes or prohibitions could occur that further increase these
limitations. In addition, the movement toward privatization of
correctional and detention facilities has encountered resistance
from groups, such as labor unions, that believe that
correctional and detention facilities should only be operated by
governmental agencies. Changes in dominant political parties
could also result in significant changes to previously
established views of privatization. Increased public resistance
to the privatization of correctional and detention facilities in
any of the markets in which we operate, as a result of these or
other factors, could have a material adverse effect on our
business, financial condition and results of operations.
Adverse publicity may negatively impact our ability to retain
existing contracts and obtain new contracts. Our business is
subject to public scrutiny. Any negative publicity about an
escape, riot or other disturbance or perceived poor conditions
at a privately managed facility may result in publicity adverse
to us and the private corrections industry in general. Any of
these occurrences or continued trends may make it more difficult
for us to renew existing contracts or to obtain new contracts or
could result in the termination of an existing contract or the
closure of one of our facilities, which could have a material
adverse effect on our business.
We may incur significant start-up and operating costs on new
contracts before receiving related revenues, which may impact
our cash flows and not be recouped. When we are awarded a
contract to manage a facility, we may incur significant start-up
and operating expenses, including the cost of constructing the
facility, purchasing equipment and staffing the facility, before
we receive any payments under the contract. These expenditures
could result in a significant reduction in our cash reserves and
may make it more difficult for us to meet other cash
obligations, including our payment obligations on the Notes. In
addition, a contract may be terminated prior to its scheduled
expiration and as a result we may not recover these expenditures
or realize any return on our investment.
Failure to comply with extensive government regulation and
unique contractual requirements could have a material adverse
effect on our business, financial condition or results of
operations. The industry in which we operate is subject to
extensive federal, state and local regulations, including
educational, environmental, health care and safety regulations,
which are administered by many regulatory authorities. Some of
the regulations are unique to the corrections industry, and the
combination of regulations affects all areas of our operations.
Facility management contracts typically include reporting
requirements, supervision and on-site monitoring by
representatives of the contracting governmental agencies.
Corrections officers and juvenile care workers are customarily
required to meet certain training standards and, in some
instances, facility personnel are required to be licensed and
are subject to background investigations. Certain jurisdictions
also require us to award subcontracts on a competitive basis or
to subcontract with businesses owned by members of minority
groups. We may not always successfully comply with these and
other regulations to which we are subject, and failure to comply
can result in material penalties or the non-renewal or
termination of facility management contracts. In addition,
changes in existing regulations could require us to
substantially modify the manner in which we conduct our business
and, therefore, could have a material adverse effect on us.
In addition, private prison managers are increasingly subject to
government legislation and regulation attempting to restrict the
ability of private prison managers to house certain types of
inmates, such as inmates from other jurisdictions or inmates at
medium or higher security levels. Legislation has been enacted
in several states, and has previously been proposed in the
United States House of Representatives, containing such
restrictions. Although we do not believe that existing
legislation will have a material adverse effect on us, future
legislation of this nature may have such an effect on us.
Government agencies may investigate and audit our contracts and,
if any improprieties are found, we may be required to refund
revenues we have received, to forego anticipated revenues and we
may be subject to penalties and sanctions, including
prohibitions on our bidding in response to Requests for
Proposals, or RFPs, from governmental agencies to manage
correctional facilities. Governmental agencies we contract with
have the authority to audit and investigate our contracts with
them. As part of that process, government
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agencies may review our performance under the contract, our
pricing practices, our cost structure and our compliance with
applicable laws, regulations and standards. For contracts that
actually or effectively provide for certain reimbursement of
expenses, if an agency determines that we have improperly
allocated costs to a specific contract, we may not be reimbursed
for those costs, and we could be required to refund the amount
of any such costs that have been reimbursed. If a government
audit asserts improper or illegal activities by us, we may be
subject to civil and criminal penalties and administrative
sanctions, including termination of contracts, forfeitures of
profits, suspension of payments, fines and suspension or
disqualification from doing business with certain governmental
entities. Any adverse determination could adversely impact our
ability to bid in response to RFPs in one or more jurisdictions.
We may face community opposition to facility location, which
may adversely affect our ability to obtain new contracts.
Our success in obtaining new awards and contracts sometimes
depends, in part, upon our ability to locate land that can be
leased or acquired, on economically favorable terms, by us or
other entities working with us in conjunction with our proposal
to construct and/or manage a facility. Some locations may be in
or near populous areas and, therefore, may generate legal action
or other forms of opposition from residents in areas surrounding
a proposed site. When we select the intended project site, we
attempt to conduct business in communities where local leaders
and residents generally support the establishment of a
privatized correctional or detention facility. Future efforts to
find suitable host communities may not be successful. In many
cases, the site selection is made by the contracting
governmental entity. In such cases, site selection may be made
for reasons related to political and/or economic development
interests and may lead to the selection of sites that have less
favorable environments.
Our business operations expose us to various liabilities for
which we may not have adequate insurance. The nature of our
business exposes us to various types of third-party legal
claims, including, but not limited to, civil rights claims
relating to conditions of confinement and/or mistreatment,
sexual misconduct claims brought by prisoners or detainees,
medical malpractice claims, claims relating to employment
matters (including, but not limited to, employment
discrimination claims, union grievances and wage and hour
claims), property loss claims, environmental claims, automobile
liability claims, contractual claims and claims for personal
injury or other damages resulting from contact with our
facilities, programs, personnel or prisoners, including damages
arising from a prisoners escape or from a disturbance or
riot at a facility. In addition, our management contracts
generally require us to indemnify the governmental agency
against any damages to which the governmental agency may be
subject in connection with such claims or litigation. We
maintain insurance coverage for these types of claims, except
for claims relating to employment matters, for which we carry no
insurance. However, the insurance we maintain to cover the
various liabilities to which we are exposed may not be adequate.
Any losses relating to matters for which we are either uninsured
or for which we do not have adequate insurance could have a
material adverse effect on our business, financial condition or
results of operations.
Claims for which we are insured that have an occurrence date of
October 1, 2002 or earlier are handled by The Wackenhut
Corporation, our former parent company which we refer to as TWC,
and are fully insured up to an aggregate limit of between $25.0
million and $50.0 million, depending on the nature of the claim.
With respect to claims for which we are insured that have an
occurrence date of October 2, 2002 or later, our coverage
varies depending on the nature of the claim. For claims relating
to general liability and automobile liability, we have a
deductible of $1.0 million per claim, primary coverage of $5.0
million per claim (up to a limit of $20.0 million for all claims
in the aggregate), and excess/umbrella coverage of up to $50.0
million per claim and for all claims in the aggregate. For
claims relating to medical malpractice at our correctional
facilities, we have a deductible of $1.0 million per claim and
primary coverage of $5.0 million per claim (up to a limit of
$20.0 million for all claims in the aggregate). For claims
relating to medical malpractice at our mental health facilities,
we have a deductible of $2.0 million per claim and primary
coverage of up to $5.0 million per claim and for all claims in
the aggregate. For claims relating to workers
compensation, we maintain statutory coverage as determined by
state and/or local law and, as a result, our coverage varies
among the various jurisdictions in which we operate.
In addition, since the events of September 11, 2001, and
due to concerns over corporate governance and recent corporate
accounting scandals, liability and other types of insurance have
become more difficult and
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costly to obtain. Unanticipated additional insurance costs could
adversely impact our results of operations and cash flows, and
the failure to obtain or maintain any necessary insurance
coverage could have a material adverse effect on our business,
financial condition or results of operations.
We are defending a wage and hour lawsuit filed in California
state court by ten current and former employees. The employees
are seeking certification of a class which would encompass all
of our current and former California employees in certain
positions. Discovery is underway and the court has yet to hear
the plaintiffs certification motion. We are unable to
estimate the potential loss exposure due to the current
procedural posture of the lawsuit. While the plaintiffs in this
case have not quantified their claim of damages and the outcome
of the matters discussed above cannot be predicted with
certainty, based on information known to date, our management
believes that the ultimate resolution of these matters, if
settled unfavorably to us, could have a material adverse effect
on our financial position, operating results and cash flows. We
are uninsured for any damages or costs we may incur as a result
of this lawsuit, including the expenses of defending the
lawsuit. We are vigorously defending our rights in this action.
We may not be able to obtain or maintain the insurance levels
required by our government contracts. Our government
contracts require us to obtain and maintain specified insurance
levels. The occurrence of any events specific to our company or
to our industry, or a general rise in insurance rates, could
substantially increase our costs of obtaining or maintaining the
levels of insurance required under our government contracts. If
we are unable to obtain or maintain the required insurance
levels, our ability to win new government contracts, renew
government contracts that have expired and retain existing
government contracts could be significantly impaired, which
could have a material adverse affect on our business, financial
condition and results of operations.
Our international operations expose us to risks which could
materially adversely affect our financial condition and results
of operations. We face risks associated with our operations
outside the U.S. These risks include, among others, political
and economic instability, exchange rate fluctuations, taxes,
duties and the laws or regulations in those foreign
jurisdictions in which we operate. In the event that we
experience any difficulties arising from our operations in
foreign markets, our business, financial condition and results
of operations may be materially adversely affected. For the
thirty-nine weeks ended September 28, 2003 and the fiscal
year ended December 29, 2002, respectively, our
international operations accounted for approximately 21.4% and
20.6% of our consolidated revenues.
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We conduct certain of our operations through joint ventures,
which may lead to disagreements with our joint venture partners
and adversely affect our interest in the joint ventures. |
We conduct substantially all of our operations in South Africa
through joint ventures with third parties and may enter into
additional joint ventures in the future. Joint venture
agreements generally provide that the joint venture partners
will equally share voting control on all significant matters to
come before the joint venture. Our joint venture partners may
have interests that are different from ours which may result in
conflicting views as to the conduct of the business of the joint
venture. In the event that we have a disagreement with a joint
venture partner as to the resolution of a particular issue to
come before the joint venture, or as to the management or
conduct of the business of the joint venture in general, we may
not be able to resolve such disagreement in our favor and such
disagreement could have a material adverse effect on our
interest in the joint venture or the business of the joint
venture in general.
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We are dependent upon our senior management and our ability
to attract and retain sufficient qualified personnel. |
We are dependent upon the continued service of each member of
our senior management team, including George C. Zoley, our
Chairman and Chief Executive Officer, Wayne H. Calabrese, our
Vice Chairman and President, and John G. ORourke, our
Chief Financial Officer. The unexpected loss of any of these
individuals could materially adversely affect our business,
financial condition or results of operations. We do not maintain
key-man life insurance to protect against the loss of any of
these individuals.
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In addition, the services we provide are labor-intensive. When
we are awarded a facility management contract or open a new
facility, we must hire operating management, correctional
officers and other personnel. The success of our business
requires that we attract, develop and retain these personnel.
Our inability to hire sufficient qualified personnel on a timely
basis or the loss of significant numbers of personnel at
existing facilities could have a material effect on our
business, financial condition or results of operations.
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Our profitability may be materially adversely affected by
inflation. |
Many of our facility management contracts provide for fixed
management fees or fees that increase by only small amounts
during their terms. While a substantial portion of our cost
structure is generally fixed, if, due to inflation or other
causes, our operating expenses, such as costs relating to
personnel, utilities, insurance, medical and food, increase at
rates faster than increases, if any, in our facility management
fees, then our profitability could be materially adversely
affected.
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Various risks associated with the ownership of real estate
may increase costs, expose us to uninsured losses and adversely
affect our financial condition and results of operations. |
Our ownership of correctional and detention facilities subjects
us to risks typically associated with investments in real
estate. Investments in real estate, and in particular,
correctional and detention facilities, are relatively illiquid
and, therefore, our ability to divest ourselves of one or more
of our facilities promptly in response to changed conditions is
limited. Investments in correctional and detention facilities,
in particular, also subject us to risks involving potential
exposure to environmental liability and uninsured loss. Our
operating costs may be affected by the obligation to pay for the
cost of complying with existing environmental laws, ordinances
and regulations, as well as the cost of complying with future
legislation. In addition, although we maintain insurance for
many types of losses, there are certain types of losses, such as
losses from earthquakes, riots and acts of terrorism, which may
be either uninsurable or for which it may not be economically
feasible to obtain insurance coverage, in light of the
substantial costs associated with such insurance. As a result,
in the event of such types of losses, we could lose both our
capital invested in, and anticipated profits from, one or more
of the facilities we own. Further, it is possible to experience
losses that may exceed the limits of insurance coverage.
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Risks related to facility construction and development
activities may increase our costs related to such activities. |
When we are engaged to perform construction and design services
for a facility, we typically act as the primary contractor and
subcontract with other companies who act as the general
contractors. As primary contractor, we are subject to the
various risks associated with construction (including, without
limitation, shortages of labor and materials, work stoppages,
labor disputes and weather interference) which could cause
construction delays. In addition, we are subject to the risk
that the general contractor will be unable to complete
construction at the budgeted costs or be unable to fund any
excess construction costs, even though we require general
contractors to post construction bonds and insurance. Under such
contracts, we are ultimately liable for all late delivery
penalties and cost overruns.
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The rising cost and increasing difficulty of obtaining
adequate levels of surety credit on favorable terms could
adversely affect our operating results. |
We are often required to post bid or performance bonds issued by
a surety company as a condition to bidding on or being awarded a
facility management contract. Availability and pricing of these
surety commitments is subject to general market and industry
conditions, among other factors. Recent events in the economy
have caused the surety market to become unsettled, causing many
reinsurers and sureties to reevaluate their commitment levels
and required returns. As a result, surety bond premiums
generally are increasing. If we are unable to effectively pass
along the higher surety costs to our customers, any increase in
surety costs could adversely affect our operating results. In
addition, we may not continue to have access to surety credit or
be able to secure bonds economically, without additional
collateral, or at the levels required
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for any potential facility development or contract bids. If we
are unable to obtain adequate levels of surety credit on
favorable terms, we would have to rely upon letters of credit
under our amended senior credit facility, which would entail
higher costs even if such borrowing capacity was available when
desired, and our ability to bid for or obtain new contracts
could be impaired.
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We may not be able to successfully transition key services
previously provided by our former parent company, which may
adversely affect our financial results. |
We have historically been reliant upon TWC for various services
including payroll, tax, data processing, internal auditing,
treasury, cash management, insurance, information technology and
human resource services. During 2002, we transitioned all of
these services in-house with the exception of information
technology support services, which TWC provided during 2003 for
an annual fee of $1.75 million. In January 2004, we began
handling our information technology support services internally.
If we are unable to capably handle any of these services
previously handled by TWC, or if we handle them less efficiently
or on a more costly basis than what TWC charged us to handle
them, our financial results could be adversely affected.
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Our former independent public accountant, Arthur Andersen
LLP, has been found guilty of federal obstruction of justice
charges and you are unlikely to be able to exercise effective
remedies against such firm in any legal action. |
Although we have dismissed Arthur Andersen as our independent
public accountants and engaged Ernst & Young, LLP, our
consolidated financial statements as of December 31, 2000
and December 30, 2001, and for the fiscal years then ended
were audited by Arthur Andersen LLP. On March 14, 2002,
Arthur Andersen was indicted on federal obstruction of justice
charges arising from the federal governments investigation
of Enron Corporation. On June 15, 2002, a jury returned
with a guilty verdict against Arthur Andersen following a trial.
In light of the jury verdict and the underlying events, on
August 31, 2002, Arthur Andersen ceased practicing before
the SEC. However, certain of the information included herein is
derived in part from our consolidated financial statements as of
and for the fiscal years ended December 31, 2000 and
December 30, 2001, which were audited by Arthur Andersen.
Arthur Andersen has not performed any procedures in connection
with this prospectus. In addition, Arthur Andersen has not
consented to the inclusion of their report in this prospectus,
and we have dispensed with the requirement to file their consent
in reliance on Rule 437a under the Securities Act. Because
Arthur Andersen has not consented to the inclusion of their
report in this prospectus, you may not be able to recover
against Arthur Andersen under Section 11 of the Securities
Act for any untrue statement of a material fact contained in the
financial statements audited by Arthur Andersen or any omissions
to state a material fact required to be stated in those
financial statements.
Moreover, as a public company, we are required to file with the
SEC periodic financial statements audited or reviewed by an
independent public accountant. The SEC has said that it will
continue accepting financial statements audited by Arthur
Andersen on an interim basis so long as a reasonable effort is
made to have Arthur Andersen reissue its reports and to obtain a
manually signed accountants report from Arthur Andersen.
Arthur Andersen has informed us that it is no longer able to
reissue its audit reports because both the partner and the audit
manager who were assigned to our account have left the firm. In
addition, Arthur Andersen is unable to perform procedures to
assure the continued accuracy of its report on our audited
financial statements included in this prospectus. Arthur
Andersen will also be unable to perform such procedures or to
provide other information or documents that would customarily be
received by us in connection with financings or other
transactions, including consents and comfort
letters. As a result, we may encounter delays, additional
expense and other difficulties in future financings. Any
resulting delay in accessing or inability to access the public
capital markets could have a material adverse effect on our
business, financial condition or results of operations.
In addition, Statement of Financial Accounting Standards
No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144)
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and the accounting and
reporting provisions of Accounting
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Principles Board Opinion No. 30, Reporting the
Results of Operations Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business. SFAS 144 broadens the scope
of defining discontinued operations. Under the provisions of
SFAS 144, the identification and classification of a facility as
held for sale or the termination of any of our material facility
management contracts, by expiration or otherwise, would result
in the classification of the operating results of such facility
as a discontinued operation, so long as the financial results
can be clearly identified, and so long as we do not have any
significant continuing involvement in the operations of the
component after the disposal or termination transaction. In the
event that we have a discontinued operation in the future that
requires us to present discontinued operations for fiscal years
audited by Arthur Andersen, we would be required to have such
fiscal years audited by another accounting firm as Arthur
Andersen is unable to reissue their audit opinion for those
fiscal years. As a result, we may encounter delays, additional
expense and other difficulties in filing registration statements
for future financings. Any resulting delay in accessing or
inability to access public markets could have a material adverse
effect on our business, financial condition or results of
operations. In addition, any such required reaudit may result in
changes to our financial statements for such fiscal years.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts
included in this prospectus, 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, New Zealand and South Africa, or
other countries in which we may choose to conduct our business; |
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an increase in labor rates beyond that which was budgeted; |
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our ability to expand our correctional and mental health
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 find customers for our Jena, Louisiana Facility
and our McFarland, California Facility and/or to sub-lease or
coordinate the sale of the facilities with their owner,
Correctional Properties Trust, which we refer to as CPV; |
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our ability to accurately project the size and growth of the
domestic and international privatized corrections industry; |
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our ability to estimate the governments level of
utilization of privatization; |
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our ability to obtain future financing at competitive rates; |
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our exposure to general liability and workers compensation
insurance costs; |
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our ability to maintain occupancy rates at our facilities; |
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our ability to manage health related insurance costs and medical
malpractice liability claims; |
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the ability of our government customers to secure budgetary
appropriations to fund their payment obligations to us; |
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our ability to effectively internalize functions and services
previously provided by The Wackenhut Corporation, our former
parent company; and |
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those factors disclosed under Risk Factors and
elsewhere in this prospectus, including, without limitation, in
conjunction with the forward-looking statements included in this
prospectus. |
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
prospectus.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock is summarized
from GEOs articles of incorporation, as amended, which
have been publicly filed with the SEC. See Where You Can
Find More Information.
Our authorized capital stock consists of:
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30,000,000 shares of common stock, par value $0.01 per share; and |
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10,000,000 shares of preferred stock, par value $0.01 per share,
of which 100,000 shares are designated as Series A Junior
Participating Preferred Stock. |
The only equity securities currently outstanding are shares of
common stock. As of January 16, 2004, there were 9,332,552
shares of common stock issued and outstanding.
Common Stock
Each holder of our common stock is entitled to one vote per
share on all matters to be voted upon by our shareholders. Upon
any liquidation, dissolution or winding up of our business, the
holders of our common stock are entitled to share equally in all
assets available for distribution after payment of all
liabilities, subject to the liquidation preference of shares of
preferred stock, if any, then outstanding. Our common stock has
no preemptive or conversion rights. All outstanding shares of
common stock are fully paid and non-assessable. Our common stock
is traded on the on the New York Stock Exchange under the symbol
WHC. As a result of our recent name change,
effective January 21, 2004, the symbol under which our
common stock is traded on the New York Stock Exchange will be
changed to GGI.
Preferred Stock
Pursuant to our articles of incorporation, our board of
directors may, by resolution and without further action or vote
by our shareholders, provide for the issuance of up to
10,000,000 shares of preferred stock from time to time in one or
more series having such voting powers, and such designations,
preferences, and relative, participating, optional, or other
special rights and qualifications, limitations, or restrictions
thereof, as the board of directors may determine.
The issuance of preferred stock may have the effect of delaying
or preventing a change in our control without further action by
our shareholders. The issuance of shares of preferred stock with
voting and conversion rights may adversely affect the voting
power of the holders of our common stock.
Rights Agreement and Series A Junior Participating
Preferred Stock
Each share of our common stock carries with it one preferred
share purchase right. If the rights become exercisable, each
right entitles the registered holder to purchase from us one
one-thousandth of a share of Series A Junior Participating
Preferred Stock at a fixed price, subject to adjustment. Until a
right is exercised, the holder of the right has no right to vote
or receive dividends or any other rights as a shareholder as a
result of holding the right. The rights trade automatically with
shares of our common stock, and may only be exercised in
connection with certain attempts to take over our company. The
rights are designed to protect the interests of our company and
our shareholders against coercive takeover tactics and encourage
potential acquirors to negotiate with our board of directors
before attempting a takeover. The rights may, but are not
intended to, deter takeover proposals that may be in the
interests of our shareholders. The description and terms of the
rights are set forth in a rights agreement, dated as of
October 9, 2003, as the same may be amended from time to
time, between us and EquiServe Trust Company, N.A., as rights
agent.
Dividends
Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled
ratably to receive dividends, if any, declared by our board of
directors out of funds legally available for the payment of
dividends. We have not paid cash dividends to date and do not
expect to pay any cash dividends in the foreseeable future.
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Anti-Takeover Protections
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Certain Provisions of Florida Law |
We are subject to several anti-takeover provisions under Florida
law that apply to a public corporation organized under Florida
law, unless the corporation has elected to opt out of those
provisions in its articles of incorporation or bylaws. We have
not elected to opt out of those provisions. Our common stock is
subject to the affiliated transactions and
control-share acquisitions provisions of the Florida
Business Corporation Act. These provisions require, subject to
certain exceptions, that an affiliated transaction
be approved by the holders of two-thirds of the voting shares
other than those beneficially owned by an interested
shareholder and that voting rights be conferred on
control shares acquired in specified control share
acquisitions only to the extent conferred by resolution approved
by the shareholders, excluding holders of shares defined as
interested shares. Subject to several exceptions,
these provisions have the effect of deterring certain
transactions between us and our shareholders and certain
acquisitions of specified percentages of our common stock, that
in each case have not been approved by disinterested
shareholders.
Our board of directors is authorized, without further
shareholder action, to divide any or all shares of the
authorized preferred stock into series and fix and determine the
designations, preferences and relative rights and
qualifications, limitations or restrictions thereon of any
series so established, including voting powers, dividend rights,
liquidation preferences, redemption rights and conversion
privileges. The issuance of preferred stock with voting rights
or conversion rights may adversely affect the voting power of
the common stock, including the loss of voting control to
others. The issuance of preferred stock may also have the effect
of delaying, deferring or preventing a change in our control
without shareholder approval.
The rights issued under the rights agreement described above
have certain anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to
acquire control of our company without conditioning the offer on
the redemption of the rights. The rights should not interfere
with any merger or other business combination approved by our
board of directors prior to the time that the rights may not be
redeemed. The rights are designed to provide additional
protection against abusive takeover tactics such as offers for
all shares at less than full value or at an inappropriate time
(in terms of maximizing long-term shareholder value), partial
tender offers and selective open-market purchases. The rights
are intended to assure that our board of directors has the
ability to protect shareholders and GEO if efforts are made to
gain control of GEO in a manner that is not in the best
interests of GEO and its shareholders.
Transfer Agent
The transfer agent and registrar for our common stock is Mellon
Investor Services.
DESCRIPTION OF DEBT SECURITIES
The following description, together with the additional
information we include in any applicable prospectus supplements,
summarizes the material terms and provisions of the debt
securities that we may offer under this prospectus. While the
terms we have summarized below will generally apply to any
future debt securities we may offer under this prospectus, we
will describe the particular terms of any debt securities that
we may offer in more detail in the applicable prospectus
supplements. The terms of any debt securities we offer under a
prospectus supplement may differ from the terms we describe
below.
We may offer under this prospectus up to $200.0 million in
aggregate principal amount of debt securities, or if debt
securities are issued at a discount, or in a foreign currency or
composite currency, such principal amount as may be sold for an
initial public offering price of up to $200.0 million. We
may offer debt securities in the form of either senior debt
securities or subordinated debt securities. The senior debt
securities and the subordinated debt securities are together
referred to in this prospectus as the debt
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securities. Unless otherwise specified in a supplement to
this prospectus, any senior debt securities will be our direct,
unsecured obligations and will rank equally with all of our
other unsecured and unsubordinated indebtedness. Any
subordinated debt securities generally will be entitled to
payment only after payment of our senior debt. See
Subordination below.
The debt securities will be issued under one or more indentures
between us and a trustee. A form of indenture containing some of
the general terms applicable to the debt securities has been
filed as an exhibit to this prospectus. The summary below is a
general description of the debt securities based on the
provisions included in the form of indenture. However, many of
the specific terms applicable to the debt securities will be set
forth in supplemental indentures and described in the prospectus
supplements related to the debt securities being offered. These
terms and conditions may differ materially from the description
set forth below. We urge you to read the form of indenture, as
well as the supplemental indentures and the prospectus
supplements that contain the terms of the series of debt
securities being offered, before investing in our debt
securities.
General
The terms of each series of debt securities will be established
by or pursuant to a resolution of our board of directors, or a
committee thereof, and set forth or determined in the manner
provided in an officers certificate or by a supplemental
indenture. The particular terms of each series of debt
securities will be described in a prospectus supplement relating
to such series, including any pricing supplement.
We can issue an unlimited amount of debt securities under an
indenture that may be in one or more series with the same or
various maturities, at par, at a premium or at a discount. We
will set forth in a prospectus supplement, including any pricing
supplement, relating to any series of debt securities being
offered, the following terms of the debt securities:
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the title; |
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the aggregate principal amount being offered, and, if a series,
the total amount authorized and the total amount outstanding; |
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any limit on the amount that may be issued; |
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whether or not we will issue the series of debt securities in
global form and, if so, the terms and who the depositary will be; |
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the maturity date; |
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the principal amount due at maturity, and whether the debt
securities will be issued with any original issue discount; |
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whether and under what circumstances, if any, we will pay
additional amounts on any debt securities held by a person who
is not a United States person for tax purposes, and whether we
can redeem the debt securities if we have to pay such additional
amounts; |
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the annual interest rate, which may be fixed or variable, or the
method for determining the rate, the date interest will begin to
accrue, the dates interest will be payable and the regular
record dates for interest payment dates or the method for
determining such dates; |
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whether or not the debt securities will be secured or unsecured,
and the terms of any secured debt; |
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the terms of the subordination of any series of subordinated
debt; |
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the place where payments will be payable; |
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restrictions on transfer, sale or other assignment, if any; |
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our right, if any, to defer payment of interest and the maximum
length of any such deferral period; |
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the date, if any, after which, the conditions upon which, and
the price at which we may, at our option, redeem the series of
debt securities pursuant to any optional or provisional
redemption provisions, and any other applicable terms of those
redemption provisions; |
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provisions for sinking fund purchases or other analogous funds,
if any; |
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the date, if any, on which, and the price at which we are
obligated, pursuant to any mandatory sinking fund or analogous
fund provisions or otherwise, to redeem, or at the holders
option to purchase, the series of debt securities; |
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whether the indenture will restrict our ability and/or the
ability of our subsidiaries to: |
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incur additional indebtedness; |
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issue additional securities; |
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create liens; |
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pay dividends and make distributions in respect of our capital
stock and the capital stock of our subsidiaries; |
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redeem capital stock; |
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place restrictions on our subsidiaries ability to pay
dividends, make distributions or transfer assets; |
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make investments or other restricted payments; |
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sell or otherwise dispose of assets; |
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enter into sale-leaseback transactions; |
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engage in transactions with shareholders and affiliates; |
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issue or sell stock of our subsidiaries; or |
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effect a consolidation or merger; |
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whether the indenture will require us to maintain any interest
coverage, fixed charge, cash flow-based, asset-based or other
financial ratios; |
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a discussion of any material or special United States federal
income tax considerations applicable to the debt securities; |
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information describing any book-entry features; |
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the procedures for any auction and remarketing, if any; |
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the denominations in which we will issue the series of debt
securities, if other than denominations of $1,000 and any
integral multiple thereof; |
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if other than dollars, the currency in which the series of debt
securities will be denominated; and |
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any other specific terms, preferences, rights or limitations of,
or restrictions on, the debt securities, including any events of
default that are in addition to those described in this
prospectus or any covenants provided with respect to the debt
securities that are in addition to those described above, and
any terms which may be required by us or be advisable under
applicable laws or regulations or advisable in connection with
the marketing of the debt securities. |
We may issue debt securities that provide for an amount less
than their stated principal amount to be due and payable upon
declaration of acceleration of their maturity pursuant to the
terms of the indenture. We will provide you with information on
the federal income tax considerations and other special
considerations applicable to any of these debt securities in the
applicable prospectus supplement.
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Conversion or Exchange Rights
We will set forth in the prospectus supplement the terms, if
any, on which a series of debt securities may be convertible
into or exchangeable for common stock or other securities of
ours or a third party, including the conversion or exchange
rate, as applicable, or how it will be calculated, and the
applicable conversion or exchange period. We will include
provisions as to whether conversion or exchange is mandatory, at
the option of the holder or at our option. We may include
provisions pursuant to which the number of our securities or the
securities of a third party that the holders of the series of
debt securities receive upon conversion or exchange would, under
the circumstances described in those provisions, be subject to
adjustment, or pursuant to which those holders would, under
those circumstances, receive other property upon conversion or
exchange, for example in the event of our merger or
consolidation with another entity.
Covenants
We will set forth in the applicable prospectus supplement any
restrictive covenants applicable to any issue of debt securities.
Consolidation, Merger or Sale
We will set forth in the applicable prospectus supplement a
description of any covenant which restricts our ability to merge
or consolidate, or sell, convey, transfer or otherwise dispose
of all or substantially all of our assets.
Events of Default
The following are events of default under the indenture with
respect to any series of debt securities that we may issue:
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if we fail to pay interest when due and payable and our failure
continues for 90 days and the time for payment has not been
extended or deferred; |
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if we fail to pay the principal, or premium, if any, when due
and payable and the time for payment has not been extended or
delayed; |
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if we fail to observe or perform any other covenant contained in
the debt securities or the indenture, other than a covenant
specifically relating to another series of debt securities, and
our failure continues for 90 days after we receive notice
from the trustee or holders of at least 25% in aggregate
principal amount of the outstanding debt securities of the
applicable series; |
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if specified events of bankruptcy, insolvency or reorganization
occur; and |
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any other event of default provided with respect to debt
securities of that series that is described in the applicable
prospectus supplement accompanying this prospectus. |
No event of default with respect to a particular series of debt
securities (except as to certain events of bankruptcy,
insolvency or reorganization) will necessarily constitute an
event of default with respect to any other series of debt
securities. The occurrence of an event of default may constitute
an event of default under our bank credit agreements in
existence from time to time. In addition, the occurrence of
certain events of default or an acceleration under any indenture
may constitute an event of default under certain of our other
indebtedness outstanding from time to time.
If an event of default with respect to debt securities of any
series at the time outstanding occurs and is continuing, then
the trustee or the holders of not less than a majority in
aggregate principal amount of the outstanding debt securities of
that series may, by a notice in writing to us (and to the
trustee if given by the holders), declare to be due and payable
immediately the principal of, and accrued and unpaid interest,
if any, on all debt securities of that series. In the case of an
event of default resulting from certain events of bankruptcy,
insolvency or reorganization, the principal of, and accrued and
unpaid interest, if any, on all outstanding debt securities will
become and be immediately due and payable without any
declaration or other
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act on the part of the trustee or any holder of outstanding debt
securities. At any time after a declaration of acceleration with
respect to debt securities of any series has been made, but
before a judgment or decree for payment of the money due has
been obtained by the trustee, the holders of a majority in
principal amount of the outstanding debt securities of that
series may rescind and annul the acceleration if all events of
default with respect to debt securities of that series have been
cured or waived as provided in the indenture. We refer you to
the prospectus supplement relating to any series of debt
securities that are discount securities for the particular
provisions relating to acceleration of a portion of the
principal amount of such discount securities upon the occurrence
of an event of default.
The holders of a majority in aggregate principal amount of the
outstanding debt securities of any series may on behalf of the
holders of all the debt securities of such series waive any past
default under the indenture with respect to that series and its
consequences, except a continuing default in the payment of the
principal of, or any premium or interest on, any debt security
of that series or in respect of a covenant or provision, which
cannot be modified or amended without the consent of the holder
of each outstanding debt security of the series affected;
provided, however, that the holders of a majority in principal
amount of the outstanding debt securities of any series may
rescind an acceleration and its consequences, including any
related payment default that resulted from the acceleration.
The indenture provides that the trustee will be under no
obligation to exercise any of its rights or powers under the
indenture at the request of any holder of outstanding debt
securities, unless the trustee receives indemnity satisfactory
to it against any loss, liability or expense. Subject to certain
rights of the trustee, the holders of a majority in principal
amount of the outstanding debt securities of any series will
have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the
trustee or exercising any trust or power conferred on the
trustee with respect to the debt securities of that series.
No holder of any debt security of any series will have any right
to institute any proceeding, judicial or otherwise, with respect
to the indenture or for the appointment of a receiver or
trustee, or for any remedy under the indenture, unless:
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that holder has previously given to the trustee written notice
of a continuing event of default with respect to debt securities
of that series; and |
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the holders of at least a majority in aggregate principal amount
of the outstanding debt securities of that series have made
written request, and offered reasonable indemnity, to the
trustee to institute the proceeding as trustee, and the trustee
has not received from the holders of a majority in aggregate
principal amount of the outstanding debt securities of that
series a direction inconsistent with that request and has failed
to institute the proceeding within 60 days. |
Notwithstanding the foregoing, the holder of any debt security
will have an absolute and unconditional right to receive payment
of the principal of, and any premium and interest on, that debt
security on or after the due dates expressed in that debt
security and to institute suit for the enforcement of payment.
If any securities are outstanding under the indenture, the
indenture requires us, within 120 days after the end of our
fiscal year, to furnish to the trustee a statement as to
compliance with the indenture. The indenture provides that the
trustee may withhold notice to the holders of debt securities of
any series of any default or event of default (except in payment
on any debt securities of that series) with respect to debt
securities of that series if it in good faith determines that
withholding notice is in the interest of the holders of those
debt securities.
Modification and Waiver
Generally, we may modify and amend the indenture with the
consent of the holders of at least a majority in aggregate
principal amount of the outstanding debt securities of each
series affected by the modifications
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or amendments. However, we will not be able to make any
modification or amendment without the consent of the holder of
each affected debt security then outstanding if that amendment
will:
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reduce the amount of debt securities whose holders must consent
to an amendment supplement or waiver; |
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reduce the principal of or premium on or change the fixed
maturity of any debt security or alter the provisions, or waive
any payment, with respect to the redemption of the debt security; |
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reduce the rate of or extend the time for payment of interest
(including default interest) on any debt security; |
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reduce the rate of, or change the time for payment of interest
on, any debt security; |
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waive a default, or an event of default, in the payment of the
principal of, or interest or premium, if any, on any debt
security (except a rescission of acceleration of the debt
securities of any series by the holders of at least a majority
in aggregate principal amount of the then outstanding debt
securities of that series and a waiver of the payment default
that resulted from such acceleration); |
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make the principal of, or interest or premium, if any, on any
debt security payable in currency other than that stated in the
debt security; |
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make any change to certain provisions of the indenture relating
to waivers of past defaults or the rights of holders of debt
securities to receive payment of the principal of, and interest
and premium, if any, on, those debt securities; |
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release any guarantor from any of its obligations under its
guarantee or the indenture, except in accordance with the terms
of the indenture; |
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impair the right to institute suit for the enforcement of any
payment on or with respect to the debt securities of any series
or the guarantees of any series; |
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waive a redemption payment with respect to any debt security; or |
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make any change in the preceding amendment and waiver provisions. |
Except for certain specified provisions, the holders of at least
a majority in aggregate principal amount of the outstanding debt
securities of any series may on behalf of the holders of all
debt securities of that series waive our compliance with
provisions of the indenture.
Defeasance of Debt Securities and Certain Covenants in
Certain Circumstances
Legal Defeasance. The indenture provides that, unless
otherwise provided by the terms of the applicable series of debt
securities, we may be discharged from any and all obligations in
respect of the debt securities of any series (except for certain
obligations to register the transfer or exchange of debt
securities of such series, to replace stolen, lost or mutilated
debt securities of such series, and to maintain paying agencies
and certain provisions relating to the treatment of funds held
by paying agents). We will be so discharged upon the deposit
with the trustee, in trust, of money and/or U.S. government
securities or, in the case of debt securities denominated in a
single currency other than U.S. dollars, foreign government
securities, that, through the payment of interest and principal
in accordance with their terms, will provide money in an amount
sufficient in the opinion of a nationally recognized firm of
independent public accountants to pay and discharge each
installment of principal of, premium and interest on and any
mandatory sinking fund payments in respect of the debt
securities of that series on the stated maturity of those
payments in accordance with the terms of the indenture and those
debt securities.
This discharge may occur only if, among other things, we have
delivered to the trustee an opinion of counsel stating that we
have received from, or there has been published by, the United
States Internal Revenue Service a ruling or, since the date of
execution of the indenture, there has been a change in the
applicable United States federal income tax law, in either case
to the effect that, and based thereon such opinion shall confirm
that, the holders of the debt securities of that series will not
recognize income, gain or
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loss for United States federal income tax purposes as a result
of the deposit, defeasance and discharge and will be subject to
United States federal income tax on the same amounts and in the
same manner and at the same times as would have been the case if
the deposit, defeasance and discharge had not occurred.
Defeasance of Certain Covenants. The indenture will
provide that, unless otherwise provided by the terms of the
applicable series of debt securities, upon compliance with
certain conditions:
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we may omit to comply with certain covenants set forth in the
indenture, as well as any additional covenants which may be set
forth in the applicable supplemental indenture and prospectus
supplement; and |
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any omission to comply with those covenants will not constitute
a default or an event of default with respect to the debt
securities of that series, or covenant defeasance. |
The conditions include:
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depositing with the trustee money and/or U.S. government
securities that, through the payment of interest and principal
in accordance with their terms, will provide money in an amount
sufficient in the opinion of a nationally recognized firm of
independent public accountants to pay and discharge each
installment of principal of, premium and interest on and any
mandatory sinking fund payments in respect of the debt
securities of that series on the stated maturity of those
payments in accordance with the terms of the indenture and those
debt securities; and |
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delivering to the trustee an opinion of counsel to the effect
that the holders of the debt securities of that series will not
recognize income, gain or loss for United States federal income
tax purposes as a result of the deposit and related covenant
defeasance and will be subject to United States federal income
tax on the same amounts and in the same manner and at the same
times as would have been the case if the deposit and related
covenant defeasance had not occurred. |
Subordination
The debt securities may be subordinate and junior in priority of
payment to certain of our other indebtedness to the extent
described in a prospectus supplement and the applicable
supplemental indenture. In addition, any supplemental indenture
governing debt securities that we issue may not limit the amount
of additional indebtedness that we may incur, including
indebtedness that may rank senior to the debt securities. As a
result, we may be able to incur substantial additional amounts
of indebtedness in the future and such indebtedness may be
senior in right of payment to the debt securities.
Governing Law
The indenture and the debt securities will be governed by, and
construed in accordance with, the internal laws of the State of
New York.
DESCRIPTION OF WARRANTS
This section describes the general terms of the warrants that we
may offer and sell by this prospectus. This prospectus and any
accompanying prospectus supplement will contain the material
terms and conditions for each warrant. The accompanying
prospectus supplement may add, update or change the terms and
conditions of the warrants as described in this prospectus.
General
We may issue warrants to purchase common stock, preferred stock
or debt securities. Warrants may be issued independently or
together with any securities and may be attached to or separate
from those securities. The warrants will be issued under warrant
agreements to be entered into between us and a bank or trust
company, as warrant agent, all of which will be described in the
prospectus supplement relating to the warrants we are offering.
The warrant agent will act solely as our agent in connection
with the warrants and
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will not have any obligation or relationship of agency or trust
for or with any holders or beneficial owners of warrants. A copy
of the warrant agreement will be filed with the SEC in
connection with the offering of the warrants.
Equity Warrants
We may issue warrants for the purchase of our equity securities,
such as our common stock or our preferred stock. As explained
below, each equity warrant will entitle its holder to purchase
equity securities at an exercise price set forth in, or to be
determinable as set forth in, the related prospectus supplement.
Equity warrants may be issued separately or together with equity
securities.
The equity warrants are to be issued under equity warrant
agreements to be entered into between us and one or more banks
or trust companies, as equity warrant agent, as will be set
forth in the prospectus supplement relating to the equity
warrants being offered by the prospectus supplement and this
prospectus. A copy of the equity warrant agreement, including a
form of the equity warrant certificate representing the equity
warranty, will be filed with the SEC in connection with the
offering of the equity warrants.
The particular terms of each issue of equity warrants, the
equity warrant agreement relating to the equity warrants and the
equity warrant certificates representing equity warrants will be
described in the applicable prospectus supplement, including, as
applicable:
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the title of the equity warrants; |
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the initial offering price; |
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the aggregate number of equity warrants and the aggregate number
of shares of the equity security purchasable upon exercise of
the equity warrants; |
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the currency or currency units in which the offering price, if
any, and the exercise price are payable; |
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if applicable, the designation and terms of the equity
securities with which the equity warrants are issued, and the
number of equity warrants issued with each equity security; |
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the date, if any, on and after which the equity warrants and the
related equity security will be separately transferable; |
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if applicable, the minimum or maximum number of the equity
warrants that may be exercised at any one time; |
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the date on which the right to exercise the equity warrants will
commence and the date on which the right will expire; |
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if applicable, a discussion of United States federal income tax,
accounting or other considerations applicable to the equity
warrants; |
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anti-dilution provisions of the equity warrants, if any; |
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redemption or call provisions, if any, applicable to the equity
warrants; and |
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any additional terms of the equity warrants, including terms,
procedures and limitations relating to the exchange and exercise
of the equity warrants. |
Holders of equity warrants will not be entitled, solely by
virtue of being holders, to vote, to consent, to receive
dividends, to receive notice as shareholders with respect to any
meeting of shareholders for the election of directors or any
other matter, or to exercise any rights whatsoever as a holder
of the equity securities purchasable upon exercise of the equity
warrants.
Debt Warrants
We may issue warrants for the purchase of our debt securities.
As explained below, each debt warrant will entitle its holder to
purchase debt securities at an exercise price set forth in, or
to be determinable as set
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forth in, the related prospectus supplement. Debt warrants may
be issued separately or together with debt securities.
The debt warrants are to be issued under debt warrant agreements
to be entered into between us, and one or more banks or trust
companies, as debt warrant agent, as will be set forth in the
prospectus supplement relating to the debt warrants being
offered by the prospectus supplement and this prospectus. A copy
of the debt warrant agreement, including a form of the debt
warrant certificate representing the debt warrants, will be
filed with the SEC in connection with the offering of the debt
warrants.
The particular terms of each issue of debt warrants, the debt
warrant agreement relating to the debt warrants and the debt
warrant certificates representing debt warrants will be
described in the applicable prospectus supplement, including, as
applicable:
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the title of the debt warrants; |
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the initial offering price; |
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the title, aggregate principal amount and terms of the debt
securities purchasable upon exercise of the debt warrants; |
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the currency or currency units in which the offering price, if
any, and the exercise price are payable; |
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the title and terms of any related debt securities with which
the debt warrants are issued and the number of the debt warrants
issued with each debt security; |
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the date, if any, on and after which the debt warrants and the
related debt securities will be separately transferable; |
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the principal amount of debt securities purchasable upon
exercise of each debt warrant and the price at which that
principal amount of debt securities may be purchased upon
exercise of each debt warrant; |
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if applicable, the minimum or maximum number of warrants that
may be exercised at any one time; |
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the date on which the right to exercise the debt warrants will
commence and the date on which the right will expire; |
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if applicable, a discussion of United States federal income tax,
accounting or other considerations applicable to the debt
warrants; |
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whether the debt warrants represented by the debt warrant
certificates will be issued in registered or bearer form, and,
if registered, where they may be transferred and registered; |
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anti-dilution provisions of the debt warrants, if any; |
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redemption or call provisions, if any, applicable to the debt
warrants; and |
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any additional terms of the debt warrants, including terms,
procedures and limitations relating to the exchange and exercise
of the debt warrants. |
Debt warrant certificates will be exchangeable for new debt
warrant certificates of different denominations and, if in
registered form, may be presented for registration of transfer,
and debt warrants may be exercised at the corporate trust office
of the debt warrant agent or any other office indicated in the
related prospectus supplement. Before the exercise of debt
warrants, holders of debt warrants will not be entitled to
payments of principal of, premium, if any, or interest, if any,
on the debt securities purchasable upon exercise of the debt
warrants, or to enforce any of the covenants in the indenture.
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DESCRIPTION OF DEPOSITARY SHARES
This section describes the general terms of the depositary
shares we may offer and sell by this prospectus. This prospectus
and any accompanying prospectus supplement will contain the
material terms and conditions for the depositary shares. The
accompanying prospectus supplement may add, update, or change
the terms and conditions of the depositary shares as described
in this prospectus.
General
We may, at our option, elect to offer depositary shares, each
representing a fraction (to be set forth in the prospectus
supplement relating to a particular series of preferred stock)
of a share of a particular class or series of preferred stock as
described below. In the event we elect to do so, depositary
receipts evidencing depositary shares will be issued to the
public.
The shares of any class or series of preferred stock represented
by depositary shares will be deposited under a deposit agreement
among us, a depositary selected by us, and the holders of the
depositary receipts. The depositary will be a bank or trust
company having its principal office in the United States and
having a combined capital and surplus of at least
$50.0 million. Subject to the terms of the deposit
agreement, each owner of a depositary share will be entitled, in
proportion to the applicable fraction of a share of preferred
stock represented by such depositary share, to all of the rights
and preferences of the shares of preferred stock represented by
the depositary share, including dividend, voting, redemption and
liquidation rights.
The depositary shares will be evidenced by depositary receipts
issued pursuant to the deposit agreement. Depositary receipts
will be distributed to those persons purchasing the fractional
shares of the related class or series of preferred shares in
accordance with the terms of the offering described in the
related prospectus supplement.
Pending the preparation of definitive depositary receipts, the
depositary may, upon our written order, issue temporary
depositary receipts substantially identical to, and entitling
the holders thereof to all the rights pertaining to, the
definitive depositary receipts but not in definitive form.
Definitive depositary receipts will be prepared without
unreasonable delay, and temporary depositary receipts will be
exchangeable for definitive depositary receipts without charge
to the holder.
Dividends and Other Distributions
The depositary will distribute all cash dividends or other cash
distributions received for the preferred stock to the entitled
record holders of depositary shares in proportion to the number
of depositary shares that the holder owns on the relevant record
date; provided, however, that if we or the depositary is
required by law to withhold an amount on account of taxes, then
the amount distributed to the holders of depositary shares shall
be reduced accordingly. The depositary will distribute only an
amount that can be distributed without attributing to any holder
of depositary shares a fraction of one cent. The depositary will
add the undistributed balance to and treat it as part of the
next sum received by the depositary for distribution to holders
of the depositary shares.
If there is a non-cash distribution, the depositary will
distribute property received by it to the entitled record
holders of depositary shares, in proportion, insofar as
possible, to the number of depositary shares owned by the
holders, unless the depositary determines, after consultation
with us, that it is not feasible to make such distribution. If
this occurs, the depositary may, with our approval, sell such
property and distribute the net proceeds from such sale to the
holders. The deposit agreement also will contain provisions
relating to how any subscription or similar rights that we may
offer to holders of the preferred stock will be available to the
holders of the depositary shares.
Withdrawal of Shares
Upon surrender of the depositary receipts at the corporate trust
office of the depositary, unless the related depositary shares
have previously been called for redemption, converted or
exchanged into our other securities, the holder of the
depositary shares evidenced thereby is entitled to delivery of
the number of whole
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shares of the related class or series of preferred stock and any
money or other property represented by such depositary shares.
Holders of depositary receipts will be entitled to receive whole
shares of the related class or series of preferred stock on the
basis set forth in the prospectus supplement for such class or
series of preferred stock, but holders of such whole shares of
preferred stock will not thereafter be entitled to exchange them
for depositary shares. If the depositary receipts delivered by
the holder evidence a number of depositary shares in excess of
the number of depositary shares representing the number of whole
shares of preferred stock to be withdrawn, the depositary will
deliver to such holder at the same time a new depositary receipt
evidencing such excess number of depositary shares. In no event
will fractional shares of preferred stock be delivered upon
surrender of depositary receipts to the depositary.
Conversion, Exchange and Redemption
If any class or series of preferred stock underlying the
depositary shares may be converted or exchanged, each record
holder of depositary receipts representing the shares of
preferred stock being converted or exchanged will have the right
or obligation to convert or exchange the depositary shares
represented by the depositary receipts.
Whenever we redeem or convert shares of preferred stock held by
the depositary, the depositary will redeem or convert, at the
same time, the number of depositary shares representing the
preferred stock to be redeemed or converted. The depositary will
redeem the depositary shares from the proceeds it receives from
the corresponding redemption of the applicable series of
preferred stock. The depositary will mail notice of redemption
or conversion to the record holders of the depositary shares
that are to be redeemed between 30 and 60 days before the
date fixed for redemption or conversion. The redemption price
per depositary share will be equal to the applicable fraction of
the redemption price per share on the applicable class or series
of preferred stock. If less than all the depositary shares are
to be redeemed, the depositary will select which shares are to
be redeemed by lot on a pro rata basis or by any other equitable
method as the depositary may decide.
After the redemption or conversion date, the depositary shares
called for redemption or conversion will no longer be
outstanding. When the depositary shares are no longer
outstanding, all rights of the holders will end, except the
right to receive money, securities or other property payable
upon redemption or conversion of the depositary shares.
Voting the Preferred Stock
When the depositary receives notice of a meeting at which the
holders of the particular class or series of preferred stock are
entitled to vote, the depositary will mail the particulars of
the meeting to the record holders of the depositary shares. Each
record holder of depositary shares on the record date may
instruct the depositary on how to vote the shares of preferred
stock underlying the holders depositary shares. The
depositary will try, if practical, to vote the number of shares
of preferred stock underlying the depositary shares according to
the instructions. We will agree to take all reasonable action
requested by the depositary to enable it to vote as instructed.
Amendment and Termination of the Deposit Agreement
We and the depositary may agree at any time to amend the deposit
agreement and the depositary receipt evidencing the depositary
shares. Any amendment that (a) imposes or increases certain
fees, taxes or other charges payable by the holders of the
depositary shares as described in the deposit agreement or
(b) otherwise materially adversely affects any substantial
existing rights of holders of depositary shares, will not take
effect until such amendment is approved by the holders of at
least a majority of the depositary shares then outstanding. Any
holder of depositary shares that continues to hold its shares
after such amendment has become effective will be deemed to have
agreed to the amendment.
We may direct the depositary to terminate the deposit agreement
by mailing a notice of termination to holders of depositary
shares at least 30 days before termination. The depositary
may terminate the deposit
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agreement if 90 days have elapsed after the depositary
delivered written notice of its election to resign and a
successor depositary is not appointed. In addition, the deposit
agreement will automatically terminate if:
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the depositary has redeemed all related outstanding depositary
shares; |
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all outstanding shares of preferred stock have been converted
into or exchanged for common stock; or |
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we have liquidated, terminated or wound up our business and the
depositary has distributed the preferred stock of the relevant
series to the holders of the related depositary shares. |
Reports and Obligations
The depositary will forward to the holders of depositary shares
all reports and communications from us that are delivered to the
depositary and that we are required by law, the rules of an
applicable securities exchange or our amended and restated
articles of incorporation to furnish to the holders of the
preferred stock. Neither we nor the depositary will be liable if
the depositary is prevented or delayed by law or any
circumstances beyond its control in performing its obligations
under the deposit agreement. The deposit agreement limits our
obligations to performance in good faith of the duties stated in
the deposit agreement. The depositary assumes no obligation and
will not be subject to liability under the deposit agreement
except to perform such obligations as are set forth in the
deposit agreement without negligence or bad faith. Neither we
nor the depositary will be obligated to prosecute or defend any
legal proceeding connected with any depositary shares or class
or series of preferred stock unless the holders of depositary
shares requesting us to do so furnish us with a satisfactory
indemnity. In performing our obligations, we and the depositary
may rely and act upon the advice of our counsel or accountants,
on any information provided to us by a person presenting shares
for deposit, any holder of a receipt, or any other document
believed by us or the depositary to be genuine and to have been
signed or presented by the proper party or parties.
Payment of Fees and Expenses
We will pay all fees, charges and expenses of the depositary,
including the initial deposit of the preferred stock and any
redemption of the preferred stock. Holders of depositary shares
will pay taxes and governmental charges and any other charges as
are stated in the deposit agreement for their accounts.
Resignation and Removal of Depositary
At any time, the depositary may resign by delivering notice to
us, and we may remove the depositary at any time. Resignations
or removals will take effect upon the appointment of a successor
depositary and its acceptance of the appointment. The successor
depositary must be appointed within 90 days after the
delivery of the notice of resignation or removal and must be a
bank or trust company having its principal office in the United
States and having a combined capital and surplus of at least
$50,000,000.
LEGAL OWNERSHIP OF SECURITIES
We can issue securities in registered form or in the form of one
or more global securities. We describe global securities in
greater detail below. We refer to those persons who have
securities registered in their own names on the books that we or
any applicable trustee or depositary or warrant agent maintain
for this purpose as the holders of those securities.
These persons are the legal holders of the securities. We refer
to those persons who, indirectly through others, own beneficial
interests in securities that are not registered in their own
names, as indirect holders of those securities. As
we discuss below, indirect holders are not legal holders, and
investors in securities issued in book-entry form or in street
name will be indirect holders.
Book-Entry Holders
We may issue securities in book-entry form only, as we will
specify in the applicable prospectus supplement. This means
securities may be represented by one or more global securities
registered in the name of a financial institution that holds
them as depositary on behalf of other financial institutions
that participate
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in the depositarys book-entry system. These participating
institutions, which are referred to as participants, in turn,
hold beneficial interests in the securities on behalf of
themselves or their customers.
Only the person in whose name a security is registered is
recognized as the holder of that security. Global securities
will be registered in the name of the depositary. Consequently,
for global securities, we will recognize only the depositary as
the holder of the securities, and we will make all payments on
the securities to the depositary. The depositary passes along
the payments it receives to its participants, which in turn pass
the payments along to their customers who are the beneficial
owners. The depositary and its participants do so under
agreements they have made with one another or with their
customers; they are not obligated to do so under the terms of
the securities.
As a result, investors in a global security will not own
securities directly. Instead, they will own beneficial interests
in a global security, through a bank, broker or other financial
institution that participates in the depositarys
book-entry system or holds an interest through a participant. As
long as the securities are issued in global form, investors will
be indirect holders, and not holders, of the securities.
Street Name Holders
We may terminate global securities or issue securities that are
not issued in global form. In these cases, investors may choose
to hold their securities in their own names or in street
name. Securities held by an investor in street name would
be registered in the name of a bank, broker or other financial
institution that the investor chooses, and the investor would
hold only a beneficial interest in those securities through an
account he or she maintains at that institution.
For securities held in street name, we or any applicable trustee
or depositary will recognize only the intermediary banks,
brokers and other financial institutions in whose names the
securities are registered as the holders of those securities,
and we or any such trustee or depositary will make all payments
on those securities to them. These institutions pass along the
payments they receive to their customers who are the beneficial
owners, but only because they agree to do so in their customer
agreements or because they are legally required to do so.
Investors who hold securities in street name will be indirect
holders, not holders, of those securities.
Legal Holders
Our obligations, as well as the obligations of any applicable
trustee or third party employed by us or a trustee, run only to
the legal holders of the securities. We do not have obligations
to investors who hold beneficial interests in global securities,
in street name or by any other indirect means. This will be the
case whether an investor chooses to be an indirect holder of a
security or has no choice because we are issuing the securities
only in global form.
For example, once we make a payment or give a notice to the
holder, we have no further responsibility for the payment or
notice, even if that holder is required, under agreements with
its participants or customers or by law, to pass it along to the
indirect holders, but does not do so. Similarly, we may want to
obtain the approval of the holders to amend an indenture, to
relieve us of the consequences of default or of our obligation
to comply with a particular provision of an indenture, or for
other purposes. In such an event, we would seek approval only
from the holders, and not the indirect holders, of the
securities. Whether and how the holders contact the indirect
holders is up to the holders.
Special Considerations For Indirect Holders
If you hold securities through a bank, broker or other financial
institution, either in book-entry form because the securities
are represented by one or more global securities or in street
name, you should check with your own institution to find out:
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how it handles securities payments and notices; |
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whether it imposes fees or charges; |
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how it would handle a request for the holders consent, if
ever required; |
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whether and how you can instruct it to send you securities
registered in your own name so you can be a holder, if that is
permitted in the future; |
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how it would exercise rights under the securities if there were
a default or other event triggering the need for holders to act
to protect their interests; and |
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if the securities are global securities, how the
depositarys rules and procedures will affect these matters. |
Global Securities
A global security is a security that represents one or any other
number of individual securities held by a depositary. Generally,
all securities represented by the same global securities will
have the same terms.
Each security issued in book-entry form will be represented by a
global security that we issue to, deposit with and register in
the name of a financial institution or its nominee that we
select. The financial institution that we select for this
purpose is called the depositary. Unless we specify otherwise in
the applicable prospectus supplement, DTC will be the depositary
for all global securities issued under this prospectus.
A global security may not be transferred to or registered in the
name of anyone other than the depositary, its nominee or a
successor depositary, unless special termination situations
arise. We describe those situations below under
Special Situations when a Global Security will
be Terminated. As a result of these arrangements, the
depositary, or its nominee, will be the sole registered owner
and holder of all securities represented by a global security,
and investors will be permitted to own only beneficial interests
in a global security. Beneficial interests must be held by means
of an account with a broker, bank or other financial institution
that in turn has an account with the depositary or with another
institution that does. Thus, an investor whose security is
represented by a global security will not be a holder of the
security, but only an indirect holder of a beneficial interest
in the global security.
If the prospectus supplement for a particular security indicates
that the security will be issued as a global security, then the
security will be represented by a global security at all times
unless and until the global security is terminated. If
termination occurs, we may issue the securities through another
book-entry clearing system or decide that the securities may no
longer be held through any book-entry clearing system.
Special Considerations for Global Securities
As an indirect holder, an investors rights relating to a
global security will be governed by the account rules of the
investors financial institution and of the depositary, as
well as general laws relating to securities transfers. We do not
recognize an indirect holder as a holder of securities and
instead deal only with the depositary that holds the global
security.
If securities are issued only as global securities, an investor
should be aware of the following:
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An investor cannot cause the securities to be registered in his
or her name, and cannot obtain non-global certificates for his
or her interest in the securities, except in the special
situations we describe below; |
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An investor will be an indirect holder and must look to his or
her own bank or broker for payments on the securities and
protection of his or her legal rights relating to the
securities, as we describe above; |
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An investor may not be able to sell interests in the securities
to some insurance companies and to other institutions that are
required by law to own their securities in non-book-entry form; |
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An investor may not be able to pledge his or her interest in the
global security in circumstances where certificates representing
the securities must be delivered to the lender or other
beneficiary of the pledge in order for the pledge to be
effective; |
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The depositarys policies, which may change from time to
time, will govern payments, transfers, exchanges and other
matters relating to an investors interest in the global
security. We and any applicable trustee have no responsibility
for any aspect of the depositarys actions or for its
records of ownership interests in the global security. We and
the trustee also do not supervise the depositary in any way; |
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The depositary may, and we understand that DTC will, require
that those who purchase and sell interests in the global
security within its book-entry system use immediately available
funds, and your broker or bank may require you to do so as well;
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Financial institutions that participate in the depositarys
book-entry system, and through which an investor holds its
interest in the global security, may also have their own
policies affecting payments, notices and other matters relating
to the securities. There may be more than one financial
intermediary in the chain of ownership for an investor. We do
not monitor and are not responsible for the actions of any of
those intermediaries. |
Special Situations When a Global Security will be
Terminated
In a few special situations described below, a global security
will terminate and interests in it will be exchanged for
physical certificates representing those interests. After that
exchange, the choice of whether to hold securities directly or
in street name will be up to the investor. Investors must
consult their own banks or brokers to find out how to have their
interests in securities transferred to their own names, so that
they will be direct holders.
We have described the rights of holders and street name
investors above. A global security will terminate when the
following special situations occur:
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if the depositary notifies us that it is unwilling, unable or no
longer qualified to continue as depositary for that global
security and we do not appoint another institution to act as
depositary within 90 days; |
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if we notify any applicable trustee that we wish to terminate
that global security; or |
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if an event of default has occurred with regard to securities
represented by that global security and the default has not been
cured or waived. |
The prospectus supplement may also list additional situations
for terminating a global security that would apply only to the
particular series of securities covered by the prospectus
supplement. When a global security terminates, the depositary,
and not we or any applicable trustee, is responsible for
deciding the names of the institutions that will be the initial
direct holders.
PLAN OF DISTRIBUTION
We may sell the securities described in this prospectus from
time to time in one or more transactions:
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to purchasers directly; |
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to underwriters for public offering and sale by them; |
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through agents; |
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through dealers; or |
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through a combination of any of the foregoing methods of sale. |
We may distribute the securities from time to time in one or
more transactions at:
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a fixed price or prices, which may be changed; |
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market prices prevailing at the time of sale; |
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prices related to such prevailing market prices; or |
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negotiated prices. |
Direct Sales
We may sell the securities directly to institutional investors
or others. A prospectus supplement will describe the terms of
any sale of securities we are offering hereunder.
To Underwriters
The applicable prospectus supplement will name any underwriter
involved in a sale of securities. Underwriters may offer and
sell securities at a fixed price or prices, which may be
changed, or from time to time at market prices or at negotiated
prices. Underwriters may be deemed to have received compensation
from us from sales of securities in the form of underwriting
discounts or commissions and may also receive commissions from
purchasers of securities for whom they may act as agent.
Underwriters may sell securities to or through dealers, and such
dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or
commissions (which may be changed from time to time) from the
purchasers for whom they may act as agent.
Unless otherwise provided in a prospectus supplement, the
obligations of any underwriters to purchase securities or any
series of securities will be subject to certain conditions
precedent, and the underwriters will be obligated to purchase
all such securities if any are purchased.
Through Agents and Dealers
We will name any agent involved in a sale of securities, as well
as any commissions payable by us to such agent, in a prospectus
supplement. Unless we indicate differently in the prospectus
supplement, any such agent will be acting on a reasonable
efforts basis for the period of its appointment.
If we utilize a dealer in the sale of the securities being
offered pursuant to this prospectus, we will sell the securities
to the dealer, as principal. The dealer may then resell the
securities to the public at varying prices to be determined by
the dealer at the time of resale.
Delayed Delivery Contracts
If we so specify in the applicable prospectus supplement, we
will authorize underwriters, dealers and agents to solicit
offers by certain institutions to purchase securities pursuant
to contracts providing for payment and delivery on future dates.
Such contracts will be subject to only those conditions set
forth in the applicable prospectus supplement.
The underwriters, dealers and agents will not be responsible for
the validity or performance of the contracts. We will set forth
in the prospectus supplement relating to the contracts the price
to be paid for the securities, the commissions payable for
solicitation of the contracts and the date in the future for
delivery of the securities.
General Information
Underwriters, dealers and agents participating in a sale of the
securities may be deemed to be underwriters as defined in the
Securities Act, and any discounts and commissions received by
them and any profit realized by them on resale of the securities
may be deemed to be underwriting discounts and commissions,
under the Securities Act. We may have agreements with
underwriters, dealers and agents to indemnify them against
certain civil liabilities, including liabilities under the
Securities Act, and to reimburse them for certain expenses.
Underwriters or agents and their associates may be customers of,
engage in transactions with or perform services for us or our
affiliates in the ordinary course of business.
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Unless we indicate differently in a prospectus supplement, we
will not list the securities on any securities exchange, other
than shares of our common stock. The securities, except for our
common stock, will be a new issue of securities with no
established trading market. Any underwriters that purchase
securities for public offering and sale may make a market in
such securities, but such underwriters will not be obligated to
do so and may discontinue any market making at any time without
notice. We make no assurance as to the liquidity of or the
trading markets for any securities offered pursuant to this
prospectus.
LEGAL MATTERS
Akerman Senterfitt, Miami, Florida, will pass on our behalf upon
certain legal matters relating to the issuance and sale of the
securities.
EXPERTS
The consolidated financial statements of The Geo Group Inc.,
formerly known as Wackenhut Corrections Corporation, as of
December 29, 2002 and for the fiscal year then ended
appearing in this prospectus and registration statement have
been audited by Ernst & Young LLP, independent certified
public accountants, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Wackenhut Corrections
Corporation as of December 30, 2001 and December 31,
2000 and for each of the fiscal years then ended, which are
included in this prospectus and registration statement, have
been included in reliance on the reports of Arthur Andersen LLP,
independent public accountants, given on the authority of that
firm as experts in giving said reports. See Risk Factors
Our former independent public accountant, Arthur Andersen
LLP, has been found guilty of federal obstruction of justice
charges and you are unlikely to be able to exercise effective
remedies against such firm in any legal action.
The consolidated financial statements of Premier Custodial Group
Limited as of and for the fiscal years ended December 31,
2002, 2001 and 2000, appearing in this prospectus and
registration statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Available Information
We file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy such
material at the SECs Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference
room. You may also obtain copies of this information by mail
from the SECs Public Reference Section of the SEC, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at
prescribed rates. You can also find our SEC filings at the
SECs website at www.sec.gov. In addition, reports,
proxy statements and other information concerning us can be
inspected at the NYSE, 20 Broad Street, New York, New York
10005, where our common stock is listed.
Incorporation by Reference
We are incorporating by reference into this prospectus some
information filed by us with the SEC. We are disclosing
important information to you by referring you to those
documents. The information
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incorporated by reference is part of this prospectus. We
incorporate by reference the following documents listed below
that we have filed with the SEC:
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our annual report on
Form 10-K for the
year ended December 29, 2002, filed on March 20, 2003; |
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our annual report on
Form 10-K/A for
the year ended December 29, 2002, filed on June 30,
2003; |
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our annual report on
Form 10-K /A-2 for
the year ended December 29, 2002, filed on
November 10, 2003; |
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our quarterly report on
Form 10-Q for the
quarter ended March 30, 2003, filed on May 14, 2003; |
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our quarterly report on
Form 10-Q for the
quarter ended June 29, 2003, filed on August 13, 2003; |
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our quarterly report on
Form 10-Q/A for
the quarter ended June 29, 2003, filed on November 10,
2003; |
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our quarterly report on
Form 10-Q for the
quarter ended September 28, 2003, filed on
November 12, 2003; |
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our current report on
Form 8-K, filed on
May 8, 2003; |
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our current report on
Form 8-K, filed on
July 29, 2003; |
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our current report on
Form 8-K, filed on
August 13, 2003; |
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our current report on
Form 8-K, filed on
October 27, 2003; |
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our current report on
Form 8-K, filed on
October 30, 2003; |
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our current report on
Form 8-K, filed on
November 7, 2003; |
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our current report on
Form 8-K/A, filed
on November 18, 2003; |
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our registration statement on Form 8-A, filed on
June 27, 1994; |
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our registration statement on Form 8-A/A, filed on
October 30, 2003; and |
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our registration statement on Form 8-A, filed on
October 30, 2003. |
All documents filed by us with the SEC under
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act
from the date of this prospectus to the end of the offering of
all of the securities being registered under this document
(other than current reports deemed furnished and not filed)
shall also be deemed to be incorporated by reference and will
automatically update information in this prospectus.
Any statements made in this prospectus or in a document
incorporated or deemed to be incorporated by reference in this
prospectus will be deemed to be modified or superseded for
purposes of this prospectus to the extent that a statement
contained in this prospectus or in any other subsequently filed
document that is also incorporated or deemed to be incorporated
by reference in this prospectus modifies or supersedes the
statement. Any statement so modified or superseded will not be
deemed, except as so modified or superseded, to constitute a
part of this prospectus.
We will furnish without charge to you, on written or oral
request, a copy of any and all of the documents incorporated by
reference, including exhibits to these documents. You should
direct any requests for documents to the following address or
telephone number:
Manager, Corporate Communications
The GEO Group, Inc.
621 NW 53rd Street, Suite 700
Boca Raton, Florida 33487
(561) 893-0101
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3,000,000 Shares
Common Stock
PROSPECTUS SUPPLEMENT
May , 2006
Sole Book-Running Manager
Lehman
Brothers
Banc of America
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