Document/ExhibitDescriptionPagesSize 1: 10-K The Geo Group, Inc. HTML 1.00M
2: EX-10.28 Asset Purchase Agreement HTML 216K
3: EX-21.1 Subsidiaries HTML 6K
4: EX-23.1 Consent of Ernst & Young LLP HTML 8K
5: EX-31.1 Section 302 Certification of CEO HTML 13K
6: EX-31.2 Section 302 Certification of CFO HTML 13K
7: EX-32.1 Section 906 Certification of CEO HTML 9K
8: EX-32.2 Section 906 Certification of CFO HTML 9K
Securities registered pursuant to Section 12(b) of the
Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.01 Par Value
New York Stock Exchange
Indicate by a check mark whether the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by a check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d)
of the
Act. Yes o No þ
Indicate by a check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such
filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by a check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and larger
accelerated filer” in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the 7,040,265 shares of
common stock held by non-affiliates of the registrant as of
July 1, 2005 (based on the last reported sales price of
such stock on the New York Stock Exchange on such date of
$26.20 per share) was approximately $184,454,943.
Certain portions of the registrant’s definitive proxy
statement pursuant to Regulation 14A of the Securities
Exchange Act of 1934 for its 2006 annual meeting of shareholders
are incorporated by reference into Part III of this report.
As used in this report, the terms “we,”“us,”“our,”“GEO” and the
“Company” refer to The GEO Group, Inc., its
consolidated subsidiaries and its unconsolidated affiliates,
unless otherwise expressly stated or the context otherwise
requires.
General
We are a leading provider of government-outsourced services
specializing in the management of correctional, detention and
mental health facilities in the United States, Australia, South
Africa, the United Kingdom and Canada. We operate a broad range
of correctional and detention facilities including maximum,
medium and minimum security prisons, immigration detention
centers, minimum security detention centers and mental health
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 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, and was incorporated in the State of
Florida in 1988. On May 8, 2002, TWC consummated a merger
with a wholly-owned subsidiary of Group 4 Falck A/ S, referred
to as Group 4 Falck. As a result of the merger, Group 4 Falck
became the indirect beneficial owner of TWC’s
12 million share majority interest in GEO. On July 9,2003, we purchased all 12 million shares of our common
stock from Group 4 Falck. On November 25, 2003, our
corporate name was changed from “Wackenhut Corrections
Corporation” to “The GEO Group, Inc”.
As of January 1, 2006, we operated a total of 56
correctional, detention and mental health 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% for the fiscal year ended January 1, 2006.
For the fiscal year ended January 1, 2006, we had
consolidated revenues of $612.9 million and consolidated
operating income of $7.9 million.
Additional information regarding significant events affecting us
during the fiscal year ended January 1, 2006 is set forth
in Item 7 below under Management’s Discussion and
Analysis of Financial Condition and Results 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 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 facilities residential 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
services may include the renovation, improvement or expansion of
an existing facility, or the planning, design and construction
of a new facility).
If the project meets our profile for new projects, we then will
submit a written response to the request for proposal. We
estimate that we typically spend between $100,000 and $200,000
when responding to a request for proposal. We have engaged and
intend in the future to engage independent consultants to assist
us in developing privatization opportunities and in responding
to requests for proposals, monitoring the legislative and
business climate, and maintaining relationships with existing
customers.
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 proposals; that between one and four
months elapse between the submission of our response and the
agency’s award for a contract; and that between one and
four months elapse between the award of a contract and the
commencement of construction of the facility, in the case of a
new facility, or the management of the facility, in the case of
an existing facility. If the facility for which an award has
been made must be constructed, our experience is that
construction usually takes between nine and 24 months,
depending on the size and complexity of the project; therefore,
management of a newly constructed facility typically commences
between 10 and 28 months after the governmental
agency’s award.
Our federal experience has been that a period of approximately
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 agency’s
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 agency’s 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 January 1, 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:
•
a one time general revenue appropriation by the governmental
agency for the cost of the new facility;
•
general obligation bonds that are secured by either a limited or
unlimited tax levy by the issuing governmental entity; or
•
revenue bonds or certificates of participation secured by an
annual lease payment that is subject to annual or bi-annual
legislative appropriations.
We may also act as a source of financing or as a facilitator
with respect to the financing of the construction of a facility.
In these cases, the construction of such facilities may be
financed through various methods including, but not limited to,
the following:
•
funds from equity offerings of our stock;
•
cash flows from operations;
•
borrowings from banks or other institutions (which may or may
not be subject to government guarantees in the event of contract
termination); or
•
lease arrangements with third parties.
If the project is financed using direct governmental
appropriations, with proceeds of the sale of bonds or other
obligations issued prior to the award of the project or by us
directly, then financing is in place when the contract relating
to the construction or renovation project is executed. If the
project is financed using project-specific tax-exempt bonds or
other obligations, the construction contract is generally subject
to the sale of such bonds or obligations. Generally, substantial
expenditures for construction will not be made on such a project
until the tax-exempt bonds or other obligations are sold; and,
if such bonds or obligations are not sold, construction and
therefore, management of the facility, may either be delayed
until alternative financing is procured or the development of
the project will be suspended or entirely cancelled. If the
project is self-financed by us, then financing is generally in
place prior to the commencement of construction.
Under our construction and design management contracts, we
generally agree to be responsible for overall project
development and completion. We typically act as the primary
developer on construction contracts for facilities and
subcontract with national general contractors. Where possible,
we subcontract with construction companies that we have worked
with previously. We make use of an in-house staff of architects
and operational experts from various correctional disciplines
(e.g. security, medical service, food service, inmate programs
and facility maintenance) as part of the team that participates
from conceptual design through final construction of the
project. This staff coordinates all aspects of the development
with subcontractors and provides site-specific services.
When designing a facility, our architects 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 Strengths
Regional Operating Structure
We operate three regional U.S. offices and three
international offices that provide administrative oversight and
support to our correctional and detention facilities and allow
us to maintain close relationships with our customers and
suppliers. Each of our three regional U.S. offices is
responsible for the facilities located within a defined
geographic area. The regional offices perform regular internal
audits of the facilities in order to ensure continued compliance
with the underlying contracts, applicable accreditation
standards, governmental regulations and our internal policies
and procedures.
Long Term Relationships with High-Quality Government
Customers
We have developed long term relationships with our government
customers and have been successful at retaining our facility
management contracts. We have provided correctional and
detention management services to the United States Federal
Government for 18 years, the State of California for
16 years, the State of Texas for 16 years, various
Australian state government entities for 13 years and the
State of Florida for 10 years. These customers accounted
for approximately 60.4% 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. Our government customers typically satisfy their
payment obligations to us through budgetary appropriations.
Full-Service Facility Developer
We believe that our ability to provide comprehensive facility
development and design services enables us to retain existing
customers seeking to update their facilities and to attract new
customers by demonstrating the benefits of privatization. We
have developed an expertise in the design, construction and
financing of high quality correctional, detention and mental
health facilities.
Experienced, Proven Senior Management Team
Our top three senior executives have over 48 years of
combined industry experience, have worked together at our
company for more than 13 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 U.S. in 1986. In
addition to senior management, our operational and facility
level management has significant operational experience and
expertise.
Business Strategies
Provide High Quality, Essential Services at Lower
Costs
Our objective is to provide federal, state and local
governmental agencies with high quality, essential services at a
lower cost than they themselves could achieve.
Maintain Disciplined Operating Approach
We manage our business on a contract by contract basis in order
to maximize our operating margins. We typically refrain from
pursuing contracts that we do not believe will yield attractive
profit margins in relation to the associated operational risks.
Generally, we do not engage in speculative development and do
not build facilities without having a corresponding management
contract award in place. In addition, we have 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 continue to grow our correctional,
detention and mental health facilities management services and
to become a preferred provider of complementary
government-outsourced services. We believe that government
outsourcing of currently internalized functions will increase
largely as a result of the public sector’s desire to
maintain quality service levels amid governmental budgetary
constraints. Based on our expansion into the mental health
residential treatment services sector, we believe that we are
well positioned to continue to deliver higher quality services
at lower costs in new areas of privatization.
Pursue International Growth Opportunities
As a global international provider of privatized correctional
services, we are able to capitalize on opportunities to operate
existing or new facilities on behalf of foreign governments. We
currently have operations in Australia, South Africa and Canada.
We intend to further penetrate the current markets we operate in
and to expand into new international markets which we deem
attractive. 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.
The following table summarizes certain information with respect
to facilities that GEO (or a subsidiary or joint venture of
GEO’s) operated under a management contract or had an award
to manage as of January 1, 2006:
South Florida Evaluation and Treatment Center Miami, FL
200
DCF
State Forensic Hospital
Mental Health
July 2005
5 years
Two, Five-year
Manage only
Customer Legend:
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.
(6)
GEO’s subsidiary, Atlantic Shores Healthcare, Inc., sold
this facility on January 1, 2006, for $11.5 million in
cash.
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:
Year
Renewal
Re-bid
2006
3
4
2007
1
6
2008
3
3
2009
2
8
2010
3
2
Thereafter
7
10
19
33
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 and mental health
facilities are often seeking to retain projects that might
otherwise be privatized. In the 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
At January 1, 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 451 and 962 employees are covered by
collective bargaining agreements in the United States and at
international offices, respectively. Collective bargaining
agreements covering 70% of employees at our international
offices were renegotiated in 2005 for new two to three year
terms. Two additional international collective bargaining
agreements are outstanding and are currently being
finalized. We plan to seek renewal of these agreements on
satisfactory terms. 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 claims brought by prisoners or
detainees, medical malpractice claims, claims relating to
employment matters (including, but not limited to, employment
discrimination claims, union grievances and wage and hour
claims), property loss claims, environmental claims, automobile
liability claims, contractual claims and claims for personal
injury or other damages resulting from contact with our
facilities, programs, personnel or prisoners, including damages
arising from a prisoner’s escape or from a disturbance or
riot at a facility. In addition, our management contracts
generally require us to indemnify the governmental agency
against any damages to which the governmental agency may be
subject in connection with such claims or litigation. We
maintain insurance coverage for these 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. See
Item 7 for more information on SACM. Financial information
about our operations in different geographic regions appears in
“Item 8. Financial Statements — Note 17
Business Segment and Geographic Information.”
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.
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
SEC’s website is located at http://www.sec.gov. Information
provided on our website or on the SEC’s website is not part
of this Annual Report on
Form 10-K.
Item 1A. Risk
Factors
The following are certain of the risks to which our business
operations are subject. Any of these risks could materially
adversely affect our business, financial condition, or results
of operations. These risks could also cause our actual results
to differ materially from those indicated in the forward-looking
statements contained herein and elsewhere. The risks described
below are not the only risks facing us. Additional risks not
currently known to us or those we currently deem to be
immaterial may also materially and adversely affect our business
operations.
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 January 1, 2006
was $225.1 million, excluding non recourse debt of
$142.5 million. In addition, as of January 1, 2006, we
had $43.7 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 $56.3 million under the
revolving loan portion of our Senior Credit Facility, subject to
our satisfying the relevant borrowing conditions under the
Senior Credit Facility with respect to the incurrence of
additional indebtedness.
Our substantial indebtedness could have important consequences.
For example, it could:
•
require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby
reducing the availability of our cash flow to fund working
capital, capital expenditures, and other general corporate
purposes;
•
limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
•
increase our vulnerability to adverse economic and industry
conditions;
•
place us at a competitive disadvantage compared to competitors
that may be less leveraged; and
•
limit our ability to borrow additional funds or refinance
existing indebtedness on favorable terms.
If we are unable to meet our debt service obligations, we may
need to reduce capital expenditures, restructure or refinance
our indebtedness, obtain additional equity financing or sell
assets. We may be unable to restructure or refinance our
indebtedness, obtain additional equity financing or sell assets
on satisfactory terms or at all. In addition, our ability to
incur additional indebtedness will be restricted by the terms of
our Senior Credit Facility and the indenture governing our
outstanding Notes.
Despite current indebtedness levels, we may still incur
more indebtedness, which could further exacerbate the risks
described above. Future indebtedness issued pursuant to our
universal shelf registration statement could have rights
superior to those of our existing or future indebtedness.
The terms of the indenture governing the Notes and our Senior
Credit Facility restrict our ability to incur but do not
prohibit us from incurring significant additional indebtedness
in the future. 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 January 1, 2006, we would have had the
ability to borrow an additional $56.3 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, including our debt
securities. Any indebtedness incurred pursuant to the universal
shelf registration statement will be created through the
issuance of these 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 other series of our debt securities that have
already been created or that will be created in the future.
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
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.
Servicing our indebtedness will require a significant
amount of cash. Our ability to generate cash depends on many
factors beyond our control.
Our ability to make payments on our indebtedness and to fund
planned capital expenditures will depend on our ability to
generate cash in the future. This, to a certain extent, is
subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control.
Our business may not be able to generate sufficient cash flow
from operations or future borrowings may not be available to us
under our Senior Credit Facility or otherwise in an amount
sufficient to enable us to pay our indebtedness or new debt
securities, or to fund our other liquidity needs. We may need to
refinance all or a portion of our indebtedness on or before
maturity. However, we may not be able to complete such
refinancing on commercially reasonable terms or at all.
Because portions of our 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. Our estimated total annual interest
expense based on borrowings outstanding as of January 1,2006 is approximately $25.1 million, $4.8 million of
which is interest expense attributable to estimated borrowings
of $74.8 million currently outstanding under the Senior
Credit Facility inclusive of expected mandatory payments under
the Senior Credit Facility. Based on estimated borrowings under
the Senior Credit Facility, inclusive of expected mandatory
payments, a one percent increase in the interest rate applicable
to the Senior Credit Facility, will increase interest expense by
$0.7 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.
We depend on distributions from our subsidiaries to make
payments on our indebtedness. These distributions may not be
made.
We generate a substantial portion of our revenues from
distributions on the equity interests we hold in our
subsidiaries. Therefore, our ability to meet our payment
obligations on our indebtedness is substantially dependent on
the earnings of our subsidiaries and the payment of funds to us
by our subsidiaries as dividends, loans, advances or other
payments. Our subsidiaries are separate and distinct legal
entities and are not obligated to make funds available for
payment of our other indebtedness in the form of loans,
distributions or otherwise. Our subsidiaries’ ability to
make any such loans, distributions or other payments to us will
depend on their earnings, business results, the terms of their
existing and any future indebtedness, tax considerations and
legal or contractual restrictions to which they may be subject.
If our subsidiaries do not make such payments to us, our ability
to repay our indebtedness will be materially adversely affected.
For the fiscal year ended January 1, 2006, our subsidiaries
accounted for 24.1% of our consolidated revenues, and, as of
January 1, 2006 our subsidiaries accounted for 21.4% of our
consolidated total assets.
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, including 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.
Notwithstanding any contractual renewal option, as of
January 1, 2006, seven of our facility management contracts
are scheduled to expire on or before December 31, 2006.
These contracts represented 15.9% of our consolidated revenues
for the year ended January 1, 2006. Some of these contracts
may not be renewed by the corresponding governmental agency. See
“Business — Facilities and Facility Management
Contracts.” 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, including 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 a total average remaining
initial term of 4.0 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 2006 expected obligation for lease payments
under the eleven CPV leases is approximately $25.8 million
with $114.4 million remaining thereafter. 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 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. The Jena
facility is the only lease with CPV for which we had no
corresponding management contract to operate as of
January 1, 2006.
In addition, we own four properties on which we operate
correctional and detention facilities. Our purchase of these
properties during 2002 was financed through borrowings under our
former senior credit facility which have now been incorporated
into our current Senior Credit Facility. If the underlying
facility management contract for one or more of these properties
terminates, we will continue to be responsible for servicing the
indebtedness incurred to purchase those properties. For example,
we will be required to continue servicing the indebtedness
related to one of these properties, the Michigan Correctional
Facility, even though our management contract to operate the
facility was terminated in 2005.
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.
We may not be able to secure financing 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. The loss of, or a significant decrease
in, business could seriously harm our financial condition and
results of operations. The loss of, or a significant decrease
in, business from the Bureau
of Prisons, the Bureau of Immigration and Customs Enforcement,
which we refer to as ICE, 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, 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. 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 are 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 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 the Notes and the
Senior Credit Facility, in a timely manner. The Governor of the
State of Michigan’s veto in October 2005 of appropriations
for our Michigan Correctional Facility in October 2005 is an
example of this risk. See Item 7. Management’s
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 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.
Our business operations expose us to various liabilities
for which we may not have adequate insurance.
The nature of our business exposes us to various types of
third-party legal claims, including, but not limited to, civil
rights claims relating to conditions of confinement and/or
mistreatment, sexual misconduct claims brought by prisoners or
detainees, medical malpractice claims, claims relating to
employment matters (including, but not limited to, employment
discrimination claims, union grievances and wage and hour
claims), property loss claims, environmental claims, automobile
liability claims, contractual claims and claims for personal
injury or other damages resulting from contact with our
facilities, programs, personnel or prisoners, including damages
arising from a prisoner’s escape or from a disturbance or
riot at a facility. In addition, our management contracts
generally require us to indemnify the governmental agency
against any damages to which the governmental agency may be
subject in connection with such claims or litigation. We
maintain insurance coverage for these 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 impacted.
We may not be able to obtain or maintain the insurance
levels required by our government contracts.
Our government contracts require us to obtain and maintain
specified insurance levels. The occurrence of any events
specific to our company or to our industry, or a general rise in
insurance rates, could substantially increase our costs of
obtaining or maintaining the levels of insurance required under
our government contracts, or prevent us from obtaining or
maintaining such insurance altogether. If we are unable to
obtain or maintain the required insurance levels, our ability to
win new government contracts, renew government contracts that
have expired and retain existing government contracts could be
significantly impaired, which could have a material adverse
affect on our business, financial condition and results of
operations.
Our international operations expose us to risks which
could materially adversely affect our financial condition and
results of operations.
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 fiscal year ended
January 1, 2006, our international operations accounted for
approximately 16.1% of our consolidated revenues.
We conduct certain of our operations through joint
ventures, which may lead to disagreements with our joint venture
partners and adversely affect our interest in the joint
ventures.
We conduct substantially all of our operations in South Africa
through joint ventures with third parties and may enter into
additional joint ventures in the future. Our joint venture
agreements generally provide that the joint venture partners
will equally share voting control on all significant matters to
come before the joint venture. Our joint venture partners may
have interests that are different from ours which may result in
conflicting views as to the conduct of the business of the joint
venture. In the event that we have a disagreement with a joint
venture partner as to the resolution of a particular issue to
come before the joint venture, or as to the management or
conduct of the business of the joint venture in general, we may
not be able to resolve such disagreement in our favor and such
disagreement could have a material adverse effect on our
interest in the joint venture or the business of the joint
venture in general.
We are dependent upon our senior management and our
ability to attract and retain sufficient qualified
personnel.
We are dependent upon the continued service of each member of
our senior management team, including George C. Zoley, our
Chairman and Chief Executive Officer, Wayne H. Calabrese, our
Vice Chairman and President, and John G. O’Rourke, our
Chief Financial Officer. Under the terms of their retirement
agreements, each of these executives are 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.
Our profitability may be materially adversely affected by
inflation.
Many of our facility management contracts provide for fixed
management fees or fees that increase by only small amounts
during their terms. While a substantial portion of our cost
structure is generally fixed, if, due to inflation or other
causes, our operating expenses, such as costs relating to
personnel, utilities, insurance, medical and food, increase at
rates faster than increases, if any, in our facility management
fees, then our profitability could be materially adversely
affected.
Various risks associated with the ownership of real estate
may increase costs, expose us to uninsured losses and adversely
affect our financial condition and results of operations.
Our ownership of correctional and detention facilities subjects
us to risks typically associated with investments in real
estate. Investments in real estate, and in particular,
correctional and detention facilities, are relatively illiquid
and, therefore, our ability to divest ourselves of one or more
of our facilities promptly in response to changed conditions is
limited. Investments in correctional and detention facilities,
in particular, subject us to risks involving potential exposure
to environmental liability and uninsured loss. Our operating
costs may be affected by the obligation to pay for the cost of
complying with existing environmental laws, ordinances and
regulations, as well as the cost of complying with future
legislation. In addition, although we maintain insurance for
many types of losses, there are certain types of losses, such as
losses from earthquakes, riots and acts of terrorism, which may
be either uninsurable or for which it may not be economically
feasible to obtain insurance coverage, in light of the
substantial costs associated with such insurance. As a result,
we could lose both our capital invested in, and anticipated
profits from, one or more of the facilities we own. Further,
even if we have insurance for a particular loss, we may
experience losses that may exceed the limits of our coverage.
Risks related to facility construction and development
activities may increase our costs related to such
activities.
When we are engaged to perform construction and design services
for a facility, we typically act as the primary contractor and
subcontract with other companies who act as the general
contractors. As primary contractor, we are subject to the
various risks associated with construction (including, without
limitation, shortages of labor and materials, work stoppages,
labor disputes and weather interference) which could cause
construction delays. In addition, we are subject to the risk
that the general contractor will be unable to complete
construction at the budgeted costs or be unable to fund any
excess construction costs, even though we typically require
general contractors to post construction bonds and insurance.
Under such contracts, we are ultimately liable for all late
delivery penalties and cost overruns.
The rising cost and increasing difficulty of obtaining
adequate levels of surety credit on favorable terms could
adversely affect our operating results.
We are often required to post performance bonds issued by a
surety company as a condition to bidding on or being awarded a
facility development contract. Availability and pricing of these
surety commitments is subject to general market and industry
conditions, among other factors. Recent events in the economy
have caused the surety market to become unsettled, causing many
reinsurers and sureties to reevaluate their commitment levels
and required returns. As a result, surety bond premiums
generally are increasing. If we are unable to effectively pass
along the higher surety costs to our customers, any increase in
surety costs could adversely affect our operating results. In
addition, we may not continue to have access to surety credit or
be able to secure bonds economically, without additional
collateral, or at the levels required for any potential facility
development or contract bids. If we are unable to obtain
adequate levels of surety credit on favorable terms, we would
have to rely upon letters of credit under our Senior Credit
Facility, which would entail higher costs even if such borrowing
capacity was available when desired, and our ability to bid for
or obtain new contracts could be impaired.
We may not be able to successfully identify, consummate or
integrate acquisitions.
We have an active acquisition program, the objective of which is
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.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
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 UK operations, respectively.
See “Facilities” listing under Item 1 for a list
of the correctional, detention and mental health properties we
own or lease in connection with our operations.
Item 3.
Legal Proceedings
In June 2004, we received notice of a third-party claim for
property damage incurred during 2001 and 2002 at several
detention facilities that our Australian subsidiary formerly
operated. The claim relates to property damage caused by
detainees at the detention facilities. The notice was given by
the Australian government’s insurance provider and did not
specify the amount of damages being sought. In 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.
The nature of our business exposes us to various types of claims
or litigation against us, including, but not limited to, civil
rights claims relating to conditions of confinement and/or
mistreatment, sexual misconduct claims brought by prisoners or
detainees, medical malpractice claims, claims relating to
employment matters (including, but not limited to, employment
discrimination claims, union grievances and wage and hour
claims), property loss claims, environmental claims, automobile
liability claims, indemnification claims by our customers and
other third parties, contractual claims and claims for personal
injury or other damages resulting from contact with our
facilities, programs, personnel or prisoners, including damages
arising from a prisoner’s escape or from a disturbance or
riot at a facility. Except as otherwise disclosed above, we do
not expect the outcome of any pending claims or legal
proceedings to have a material adverse effect on our financial
condition, results of operations or cash flows.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our shareholders during
the thirteen weeks ended January 1, 2006.
PART II
Item 5.
Market for Registrant’s Common Equity and Related
Stockholder Matters
Our common stock trades on the New York Stock Exchange under the
symbol “GGI.” The following table shows the high and
low prices for our common stock, as reported by the New York
Stock Exchange, for each of the four quarters of fiscal years
2005 and 2004. The prices shown have been rounded to the nearest
$1/100. The approximate number of shareholders of record as of
March 14, 2006, was 135.
2005
2004
Quarter
High
Low
High
Low
First
$
32.20
$
25.60
$
24.23
$
19.80
Second
28.73
23.03
24.62
18.70
Third
28.95
25.15
21.00
17.33
Fourth
25.60
20.72
26.58
19.56
We did not pay any cash dividends on our common stock for fiscal
years 2005 and 2004. We intend to retain our earnings to finance
the growth and development of our business and do not anticipate
paying cash dividends on our capital stock in the foreseeable
future. Future dividends, if any, will depend, on our future
earnings, our capital requirements, our financial condition and
on such other factors as our board of directors may consider
relevant. In addition, the indenture governing our
$150.0 million
81/4% senior
notes due in 2013, and our $150.0 million senior credit
facility also place material restrictions on our ability to pay
dividends. See “Item 7. Management’s Discussion
and Analysis, Cash Flow and Liquidity” and
“Item 8. Financial Statements —
Note 10- Debt” for further description of these
restrictions.
We did not buy back any of our common stock during 2005. 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.
Equity Compensation Plan Information
The following table sets forth information about our common
stock that may be issued upon the exercise of options, warrants
and rights under all of our equity compensation plans as of
January 1, 2006, including our 1994 Stock Option Plan, our
1994 Second Stock Option Plan, our 1999 Stock Option Plan, and
our Non-Employee Director Stock Option Plan. Our shareholders
have approved all of these plans.
(a)
(b)
(c)
Number of Securities
Remaining Available for
Number of Securities
Future Issuance Under
to be Issued Upon
Weighted-Average
Equity Compensation
Exercise of
Exercise Price of
Plans (Excluding
Outstanding Options,
Outstanding Options,
Securities Reflected in
Plan Category
Warrants and Rights
Warrants and Rights
Column (a))
Equity compensation plans approved by security holders
1,406,657
$
15.53
13,000
Equity compensation plans not approved by security holders
To facilitate the completion of the share purchase from Group 4
Falck, on July 9, 2003, we issued $150.0 million
aggregate principal amount ten-year
81/4% senior
notes, referred to as the Notes, in a private offering to
qualified institutional buyers under Rule 144A of the
Securities Act.
Subsequent to the private offering of the Notes, we filed an S-4
registration statement to register under the Securities Act of
1933 exchange notes, having substantially identical terms as the
Notes, which we refer to as the Exchange Notes. The registration
statement was declared effective by the SEC on November 10,2003. We then completed an exchange offer pursuant to the
registration statement, in which holders of the Notes exchanged
the Notes for the Exchange Notes which are generally freely
tradable, subject to certain exceptions. We did not sell any
securities that were unregistered under the Securities Act of
1933 in 2004 or 2005.
Item 6.
Selected Financial Data
The selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the
notes to the consolidated financial statements (in thousands,
except per share data).
Fiscal Year Ended:(1)
2005
2004
2003
2002
2001
Results of Continuing Operations:
Revenues
$
612,900
100.0%
$
593,994
100.0%
$
549,238
100.0%
$
501,982
100.0%
$
490,115
100.0%
Operating income from continuing operations
7,938
1.3%
38,991
6.6%
29,500
5.4%
23,195
4.6%
19,729
4.0%
Income from continuing operations
$
5,879
1.0%
$
17,163
2.9%
$
36,375
6.6%
$
17,617
3.5%
$
16,861
3.4%
Income from continuing operations per common share:
Basic:
$
0.61
$
1.83
$
2.33
$
0.83
$
0.80
Diluted:
$
0.59
$
1.77
$
2.30
$
0.82
$
0.79
Weighted Average Shares Outstanding:
Basic
9,580
9,384
15,618
21,148
21,028
Diluted
10,010
9,738
15,829
21,364
21,261
Financial Condition:
Current assets
$
229,292
$
222,766
$
191,811
$
142,839
$
141,003
Current liabilities
136,519
117,478
118,704
79,360
74,441
Total assets
639,511
480,326
505,341
405,378
242,565
Long-term debt, including current portion (excluding
non-recourse debt)
Our fiscal year ends on the Sunday closest to the calendar year
end. The fiscal year ended January 2, 2005 contained
53 weeks. Discontinued Operations have not been included
with Selected Financial Data. Information related to
Discontinued Operations is listed in “Item 8.
Financial Statements — Note 3 Discontinued
Operations.”
(2)
Compensated resident days are calculated as follows:
(a) for per diem rate facilities — the number of
beds occupied by residents on a daily basis during the fiscal
year; and (b) for fixed rate facilities — the
design capacity of the facility multiplied by the number of days
the facility was in operation during the fiscal year. Amounts
exclude compensated resident days for United Kingdom for all of
the above periods.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Introduction
The following discussion and analysis provides information which
management believes is relevant to an assessment and
understanding of our consolidated results of operations and
financial condition. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these
forward-looking statements as a result of numerous factors
including, but not limited to, those described below under
“Item 1A. Risk Factors,” and Forward-Looking
Statements. 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.
Recent Financings
On September 14, 2005, we amended our senior secured credit
facility, referred to as the Senior Credit Facility, to consist
of a $75 million, six-year term-loan bearing interest at
London Interbank Offered Rate, or LIBOR plus 2.00%, and a
$100 million, five-year revolving credit facility 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 for approximately
$62 million in cash plus transaction-related costs.
Discontinued Operations
Through our Australian subsidiary, we previously had a contract
with the Department of Immigration, Multicultural and Indigenous
Affairs, or DIMIA, for the management and operation of
Australia’s immigration centers. In 2003, the contract was
not renewed, and effective February 29, 2004, we completed
the transition of the contract and exited the management and
operation of the DIMIA centers. 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.
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
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. “See Item 7. Financial
Condition — Guarantees” for a discussion of our
guarantees related to SACS. Separately, SACS entered into a long
term operating contract with South African Custodial Management
(Pty) Limited, which we refer to as SACM, to provide security
and other management services and with SACS’s joint venture
partner to provide purchasing, programs and maintenance services
upon completion of the construction phase, which concluded in
February 2002. Our maximum exposure for loss under this contract
is $24.1 million, which represents our initial investment
and the guarantees discussed in Item 7. Management’s
Discussion and Analysis of Financial Condition.
In February 2004, CSC was awarded a contract by the Department
of Homeland Security, Immigration and Customs Enforcement, or
ICE, to develop and operate a 1,020 bed detention complex in
Frio County, Texas. South Texas Local Development Corporation,
referred to as STLDC, a non profit corporation, was created and
issued $49.5 million in taxable revenue bonds to finance
the construction of the detention complex. Additionally, CSC
provided a $5 million subordinated note to STLDC for
initial development costs. We determined that we are the primary
beneficiary of STLDC and consolidate the entity as a result.
STLDC is the owner of the complex and entered into a development
agreement with CSC to oversee the development of the complex. In
addition, STLDC entered into an operating agreement providing
CSC the sole and exclusive right to operate and manage the
complex. The operating agreement and bond indenture require that
the revenue from CSC’s contract with ICE be used to fund
the periodic debt service requirements as they become due. The
net revenues, if any, after various expenses such as trustee
fees, property taxes and insurance premiums, are distributed to
CSC to cover CSC’s operating expenses and management fee.
CSC is responsible for the entire operations of the facility
including all operating expenses and is required to pay all
operating expenses whether or not there are sufficient revenues.
STLDC has no liabilities resulting from its ownership. The bonds
have a ten year term and are non-recourse to CSC and STLDC. The
bonds are fully insured and the sole source of payment for the
bonds is the operating revenues of the center.
Shelf Registration Statement
On January 28, 2004, our universal shelf registration
statement 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. 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.
On October 9, 2003, we entered into a rights agreement with
EquiServe Trust Company, N.A., as rights agent. Under the terms
of the rights agreement, each share of our common stock carries
with it one preferred share purchase right. If the rights become
exercisable pursuant to the rights agreement, each right
entitles the registered holder to purchase from us one
one-thousandth of a share of Series A Junior Participating
Preferred Stock at a fixed price, subject to adjustment. Until a
right is exercised, the holder of the right has no right to vote
or receive dividends or any other rights as a shareholder as a
result of holding the right. The rights trade automatically with
shares of our common stock, and may only be exercised in
connection with certain attempts to acquire our company. The
rights are designed to protect the interests of our company and
our shareholders against coercive acquisition tactics and
encourage potential acquirers to negotiate with our board of
directors before attempting an acquisition. The rights may, but
are not intended to, deter acquisition proposals that may be in
the interests of our shareholders.
Critical Accounting Policies
We believe that the accounting policies described below are
critical to understanding our business, results of operations
and financial condition because they involve the more
significant judgments and estimates used in the preparation of
our consolidated financial statements. We have discussed the
development, selection and application of our critical
accounting policies with the audit committee of our board of
directors, and our audit committee has reviewed our disclosure
relating to our critical accounting policies in this
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Our consolidated financial statements are prepared in conformity
with accounting principles generally accepted in the United
States. As such, we are required to make certain estimates,
judgments and assumptions that we believe are reasonable based
upon the information available. These estimates and assumptions
affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. We routinely
evaluate our estimates based on historical experience and on
various other assumptions that our management believes are
reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
If actual results significantly differ from our estimates, our
financial condition and results of operations could be
materially impacted.
Other significant accounting policies, primarily those with
lower levels of uncertainty than those discussed below, are also
critical to understanding our consolidated financial statements.
The notes to our consolidated financial statements contain
additional information related to our accounting policies and
should be read in conjunction with this discussion.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting
Bulletin, or SAB, No. 101, “Revenue Recognition in
Financial Statements”, as amended by SAB No. 104,
“Revenue Recognition”, and related interpretations.
Facility management revenues are recognized as services are
provided under facility management contracts with approved
government appropriations based on a net rate per day per inmate
or on a fixed monthly rate.
Project development and design revenues are recognized as earned
on a percentage of completion basis measured by the percentage
of costs incurred to date as compared to estimated total cost
for each contract. This method is used because we consider costs
incurred to date to be the best available measure of progress on
these contracts. Provisions for estimated losses on uncompleted
contracts and changes to cost estimates are made in the period
in which we determine that such losses and changes are probable.
Typically, we enter into fixed price contracts and do not
perform additional work unless approved change orders are in
place. Costs attributable to unapproved change orders are
expensed in the period in which the costs are incurred if we
believe that it is not probable that the costs will be recovered
through a change in the contract price. If we believe that it is
probable that the costs will be recovered through a change in
the contract price, costs related to unapproved change orders
are expensed in the period in which they are incurred, and
contract revenue is recognized to the extent of the cost
incurred. Revenue in excess of the costs attributable to
unapproved change orders is not recognized until the change
order is approved. Contract costs include all direct material
and labor costs and those indirect costs related to contract
performance. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract
penalty provisions, and final contract settlements, 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.
Income Taxes
We account for income taxes in accordance with Financial
Accounting Standards, or FAS, No. 109, “Accounting for
Income Taxes.” Under this method, deferred income taxes are
determined based on the estimated future tax effects of
differences between the financial statement and tax bases of
assets and liabilities given the provisions of enacted tax laws.
Deferred income tax provisions and benefits are based on changes
to
the assets or liabilities from year to year. Valuation
allowances are recorded related to deferred tax assets based on
the “more likely than not” criteria of
FAS No. 109.
In providing for deferred taxes, we consider tax regulations of
the jurisdictions in which we operate, and estimates of future
taxable income and available tax planning strategies. If tax
regulations, operating results or the ability to implement
tax-planning strategies vary, adjustments to the carrying value
of deferred tax assets and liabilities may be required.
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.
Property and Equipment
As of January 1, 2006, we had approximately
$282.2 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 January 1, 2006, other
than the Michigan Facility charge. See Item 7.
Management’s 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.
Idle Leased Facilities
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
The following discussion should be read in conjunction with our
consolidated financial statements and the notes to the
consolidated financial statements accompanying this report. This
discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ
materially from those anticipated in
these forward-looking statements as a result of certain factors,
including, but not limited to, those described under
“Item 1A. Risk Factors” and those included in
other portions of this report.
As further discussed above, 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.
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.
Overview
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
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 and
mental health 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 Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations “Commitments and Contingencies” for further
discussion relating to our Michigan Correctional Facility.
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 1990’s. Beginning in approximately 1999, we
made significant operational changes and began to aggressively
manage our risk in a proactive manner. These changes have
resulted in improved claims experience and loss development,
which we are realizing in our actuarial projections. As a result
of improving loss trends, our independent actuary reduced its
expected losses for claims arising since October 2, 2002.
We adjusted our reserves in the third quarter of 2005 to reflect
the actuary’s improved expected loss projections. There can
be no assurance that our improved claims experience and loss
developments will continue. Similarly, 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
Other primarily consists of revenues and related operating
expenses associated with our mental health and construction
businesses. The decrease in 2005 primarily relates to
approximately $7.2 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 business. The
increase also reflects costs associated with compliance with
Sarbanes-Oxley requirements for management’s assessment
over internal controls, which resulted in an increase in
professional fees in 2005 of $0.9 million. The remaining
increase in general and administrative costs relates to other
increases in professional fees, travel, expenses associated with
our acquisition program and rent expense for our corporate
offices.
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.
The increase in revenues in 2004 compared to 2003 is primarily
attributable to five items: (i) Australian and South
African revenues increased approximately $17.7 million,
$9.7 million and $2.2 million of which was due to the
strengthening of the Australian dollar and South African Rand,
respectively, and $5.8 million of which was due to higher
occupancy rates and contractual adjustments for inflation;
(ii) revenues derived from construction increased by
$13.1 million in 2004 as compared to 2003 when construction
revenue was insignificant. The construction revenue was related
to our expansion of South Bay, one of the facilities that we
manage, which was completed during the second quarter of 2005;
(iii) the opening of new facilities, including Reeves and
Sanders Estes, resulted in a $13.1 million increase in
revenue. The increase in revenues also reflects
$4.9 million of additional revenue in 2004 because the
Lawrenceville Correctional Center, which opened in March 2003,
was operational for the entire period; (iv) revenues
increased in 2004 because it contained 53 weeks compared to
2003, which contained 52 weeks; and (v) 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 were
offset by $24.6 million of lost revenue due to the non
renewal in January 2004 of the management contracts for the
Willacy State Jail and John R. Lindsey State Jail, and the
closure of the McFarland CCF State Correctional Facility on
December 31, 2003. The McFarland facility was reactivated
on January 1, 2005.
The number of compensated resident days in domestic facilities
increased to 10.5 million in 2004 from 9.7 million in
2003. Compensated resident days in Australian and South African
facilities during 2004 increased to 2.0 million from
1.7 million for the comparable periods in 2003 primarily
due to higher population levels. 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 99.3% of capacity in 2004 compared to
97.9% in 2003. The decrease in the average occupancy is
primarily due to an increase in the number of beds made
available to us under our contracts.
2004
% of Revenue
2003
% of Revenue
$ Change
% Change
(Dollars in thousands)
Operating Expenses
Correctional and Detention Facilities
$
449,310
75.7
%
$
438,678
79.9
%
$
10,632
2.4
%
Other
$
45,916
7.7
%
$
28,340
5.1
%
$
17,576
62.0
%
Total
$
495,226
83.4
%
$
467,018
85.0
%
$
28,208
6.0
%
Operating expenses consist of those expenses incurred in the
operation and management of our correctional, detention and
mental health facilities. Fiscal 2004 operating expenses include
a $4.2 million reduction in our general liability, auto
liability and worker’s compensation insurance reserves that
was made in the third quarter 2004.
Operating expenses in 2004 also reflect an additional provision
for operating losses of approximately $3.0 million related
to our inactive facility in Jena, Louisiana.
Operating expenses in 2003 reflect a provision for operating
losses of approximately $5.0 million related to the Jena
facility, and approximately $3.0 million primarily
attributable to liability insurance expenses, related to the
transitioning of the DIMIA contract.
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
Other primarily consists of revenues and related operating
expenses associated with our mental health business and
construction business. The increase in 2004 primarily relates to
approximately $13.1 of construction revenue as compared to 2003,
when construction revenue was insignificant. The construction
revenue is related to our expansion of the South Bay Facility,
one of the facilities that we manage. The expansion was
completed during the second quarter of 2005.
Other Unallocated Operating Expenses
General and Administrative Expenses
2004
% of Revenue
2003
% of Revenue
$ Change
% Change
(Dollars in thousands)
General and Administrative Expenses
$
45,879
7.7%
$
39,379
7.2%
$
6,500
16.5%
General and administrative expenses consist primarily of
corporate management salaries and benefits, professional fees
and other administrative expenses. The increase also reflects
costs associated with compliance with Sarbanes-Oxley
requirements for management’s assessment over internal
controls resulted in an increase in professional fees in 2004 of
$1.0 million. Salary expense increased $5.0 million in
2004 as a result of increased incentive targets under our senior
officer incentive plan and the internalization of functions and
services previously outsourced to TWC. In addition, we were
pursuing acquisition opportunities in 2004, and had capitalized
direct and incremental costs related to potential acquisitions.
During the fourth quarter of 2004, we determined that the
related acquisitions were no longer probable, and wrote off the
capitalized deferred acquisition costs of $1.3 million.
Finally, the remaining increase in general and administrative
costs relates to other increases in professional fees, travel
and rent expense for our corporate offices. These increases were
partially offset by reduced salary expense in 2004 as compared
to 2003. In May 2004, we completed payments under employment
agreements with certain key executives triggered by the change
in control from the sale of TWC in May 2002, resulting in a
$2.4 million reduction in salary expense in 2004.
Non Operating Expenses
Interest Income and Interest Expense
2004
% of Revenue
2003
% of Revenue
$ Change
% Change
(Dollars in thousands)
Interest Income
$
9,568
1.6
%
$
6,853
1.2%
$
2,715
39.6%
Interest Expense
$
22,138
3.7
%
$
17,896
3.3%
$
4,242
23.7%
The increase in interest income is primarily due to higher
average invested cash balances. The increase also 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 Notes, which began accruing interest on July 9, 2003.
This resulted in a full year of interest expense in 2004 as
compared to approximately six months in
2003. On June 25, 2004, we made a payment of approximately
$43.0 million on the term loan portion of our Senior Credit
Facility, eliminating interest expense on the term loan for the
remainder of 2004. Further, interest expense reflects higher
average interest rates during 2004.
Costs Associated with Debt Refinancing
Deferred financing fees of $0.3 million were written off in
2004 in connection with the $43.0 million payment related
to the term loan portion of the Senior Credit Facility on
June 25, 2004. In 2003, the extinguishment of debt resulted
in write-offs of deferred financing fees of $2.0 million.
Sale of Joint Venture
Fiscal year 2003’s results of operations includes the sale
of the UK joint venture for $80.7 million which resulted in
a gain of $56.1 million.
Provision for Income Taxes
2004
% of Revenue
2003
% of Revenue
$ Change
% Change
(Dollars in thousands)
Income Taxes
$
8,231
1.4%
$
36,852
6.7%
$
(28,621
)
(77.7
)%
Provision for income taxes increased primarily due to the tax
effect on the gain on sale of PCG in July 2003.
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
January 1, 2006, we had $56.3 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. As of January 1, 2006, we had
$225.1 million of consolidated debt outstanding, excluding
$142.5 million of non-recourse debt. As of January 1,2006, we also had outstanding eleven letters of guarantee
totaling approximately $6.5 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
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 have indicated their
intent to retire as of this time. However, under the retirement
agreements, retirement may be taken at any time at the
individual executive’s discretion. In the event that all
three executives were to retire in the same year, we believe we
will have funds available to pay the retirement obligations from
various sources, including cash on hand, operating cash flows or
borrowings under our revolving credit facility. Based on our
current capitalization, we do not believe that making these
payments in any one period, whether in separate installments or
in the aggregate, would materially adversely impact our
liquidity.
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
November 4, 2005 for approximately $62 million in cash
plus deal-related costs. As of January 1, 2006, we 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.
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 January 1, 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, (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.”
Senior
81/4% Notes
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 January 1, 2006.
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 CSC’s
contract with ICE be used to fund the periodic debt service
requirements as they become due. The net revenues, if any, after
various expenses such as trustee fees, property taxes and
insurance premiums are distributed to CSC to cover CSC’s
operating expenses and management fee. CSC is responsible for
the entire operations of the facility including all operating
expenses and is required to pay all operating expenses whether
or not there are sufficient revenues. STLDC has no liabilities
resulting from its ownership. The bonds have a ten year term and
are non-recourse to CSC and STLDC. The bonds are fully insured
and the sole source of payment for the bonds is the operating
revenues of the center.
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.
Australia
In connection with the financing and management of one
Australian facility, our wholly owned Australian subsidiary
financed the facility’s development and subsequent
expansion in 2003 with long-term debt obligations, which are
non-recourse to us. We have consolidated the subsidiary’s
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.
Guarantees
In connection with the creation of SACS, we entered into certain
guarantees related to the financing, construction and operation
of the prison. We guaranteed certain obligations of SACS under
its debt agreements up to a maximum amount of 60.0 million
South African Rand, or approximately $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. 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 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 and
$0.5 million related to this exposure as of January 1,2006 and January 2, 2005, 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 January 1, 2006, we also had outstanding eleven letters
of guarantee totaling approximately $6.5 million under
separate international facilities. We do not have any off
balance sheet arrangements.
Interest Rate Swaps
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 January 1,2006 and January 2, 2005, the fair value of the swaps
totaled approximately $(1.1) million and $0.7 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 years ended January 1, 2006 or
January 2, 2005.
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 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
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 provided by operating activities of continuing operations
in 2005, 2004 and 2003 was $31.8 million,
$31.5 million, and $14.4 million, respectively. Cash
provided by operating activities of continuing operations in
2005 was positively impacted by impairment charges of
$20.9 million for our Michigan Correctional Facility and
$4.3 million related to our Jena facility. Cash provided by
operating activities of continuing operations in 2003 was
positively impacted by an increase in accounts payable and
accrued expenses and other liabilities. The increase in accounts
payable and other accrued expenses is attributable to the
increase in value of our Australian subsidiary’s accounts
payable and accrued expenses due to an increase in foreign
exchange rates and an increase in reserves for self insurance.
The increase in other liabilities reflects an increase in the
liability for the fair market value of our Australian
subsidiary’s interest rate swap and an increase in certain
pension obligations.
Cash provided by operating activities of continuing operations
in 2005 was negatively impacted by an increase in accounts
receivable. The increase in accounts receivable is attributable
to the increase in value of our Australian subsidiary’s
accounts receivable due to an increase in foreign exchange
rates, the addition of the Lawrenceville Correctional Facility
and slightly higher monthly billings reflecting a general
increase in facility occupancy levels.
Cash used in investing activities of continuing operations in
2005 was $104.9 million. Cash provided by investing
activities in 2004 and 2003, was $42.1 million and
$8.3 million, respectively. Cash used in investing
activities in 2005 reflect the acquisition of CSC. In 2004,
there was a decrease in the restricted cash balance of
$52.0 million due to the payment of $43.0 million of
the term loan portion of the Senior Credit Facility with the net
proceeds of the sale of PCG. This payment satisfied the
restriction on cash imposed by the terms of the Senior Credit
Facility and the remainder was reclassified to cash. Cash
provided by investing activities in 2003 reflects the gross
proceeds from the sale of PCG offset by restricted cash and
capital expenditures in the normal course of business.
Cash provided by financing activities in 2005 was
$24.6 million. Cash used in financing activities in 2004
and 2003 was $47.1 million and $17.2 million,
respectively. Cash provided by financing activities in 2005
reflect the payoff of $53.4 million and the refinancing of
$75.0 million of the term loan portion of the Senior Credit
Facility. Cash used in financing activities in 2004 reflect
payments of $10.0 million on borrowings under the Revolving
Credit Facility, $4.0 million in scheduled payments on the
Term Loan Facility, and a one-time $43.0 million
payment on the Term Loan Facility from the net proceeds
from the sale of our interest in PCG. The $10.0 million
proceeds from debt reflect borrowings under the Revolving Credit
Facility in 2004.
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, (“CPV”)
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. 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 1,500 bed 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.
Inflation
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 “Item 1A. Risk
Factors” in this Annual Report on
Form 10-K, the
“Forward-Looking Statements — Safe Harbor,”
as well as the other disclosures contained in this Annual Report
on Form 10-K, for
further discussion on forward-looking statements and the risks
and other factors that could prevent us from achieving our goals
and cause the assumptions underlying the forward-looking
statements and the actual results to differ materially from
those expressed in or implied by those forward-looking
statements.
Revenue
Domestically, we continue to be encouraged by the number of
opportunities that have recently developed in the privatized
corrections and detention industry. The need for additional bed
space at the federal, state 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 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
Governor’s veto of funding for the project. Although we do
not expect this termination to represent a trend, any future
unexpected terminations of our existing management contracts
could have a material adverse impact on our revenues.
Additionally, several of our management contracts are up for
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 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
Operating expenses consist of those expenses incurred in the
operation and management of our correctional, detention and
mental health 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 percent 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 GEO’s
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-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.
General and Administrative Expenses
General and administrative expenses consist primarily of
corporate management salaries and benefits, professional fees
and other administrative expenses. We have recently incurred
increasing general and administrative costs including increased
costs associated with increases in business development costs,
professional fees and travel costs, primarily relating to our
mental health residential treatment services business. We expect
this trend to continue as we pursue additional business
development opportunities in all of our business lines and build
the corporate infrastructure necessary to support our mental
health residential treatment services business. We also plan to
continue expending resources on the evaluation of potential
acquisition targets.
Forward-Looking Statements — Safe Harbor
This report and the documents incorporated by reference herein
contain “forward-looking” statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. “Forward-looking” statements are any
statements that are not based on historical information.
Statements other than statements of historical facts included in
this report, including, without limitation, statements regarding
our future financial position, business strategy, budgets,
projected costs and plans and objectives of management for
future operations, are “forward-looking” statements.
Forward-looking statements generally can be identified by the
use of forward-looking terminology such as “may,”“will,”“expect,”“anticipate,”“intend,”“plan,”“believe,”“seek,”“estimate” or “continue”
or the negative of such words or variations of such words and
similar expressions. These statements are not guarantees of
future performance and involve certain risks, uncertainties and
assumptions, which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements and
we can give no assurance that such forward-looking statements
will prove to be correct. Important factors that could cause
actual results to differ materially from those expressed or
implied by the forward-looking statements, or “cautionary
statements,” include, but are not limited to:
•
our ability to timely build and/or open facilities as planned,
profitably manage such facilities and successfully integrate
such facilities into our operations without substantial
additional costs;
•
the instability of foreign exchange rates, exposing us to
currency risks in Australia and South Africa, or other countries
in which we may choose to conduct our business;
•
our ability to reactivate the Michigan Correctional Facility;
•
an increase in unreimbursed labor rates;
•
our ability to expand and diversify our correctional and mental
health residential treatment services;
our ability to win management contracts for which we have
submitted proposals and to retain existing management contracts;
•
our ability to raise new project development capital given the
often short-term nature of the customers’ commitment to use
newly developed facilities;
•
our ability to 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;
•
our ability to accurately project the size and growth of the
domestic and international privatized corrections industry;
•
our ability to grow our mental health residential treatment
services industry;
•
our ability to estimate the government’s level of
dependency on privatized correctional services;
•
our ability to develop long-term earnings visibility;
•
our ability to obtain future financing at competitive rates;
•
our exposure to rising general insurance costs;
•
our exposure to claims for which we are uninsured;
•
our exposure to rising inmate medical costs;
•
our ability to maintain occupancy rates at our facilities;
•
our ability to manage costs and expenses relating to ongoing
litigation arising from our operations;
•
our ability to accurately estimate on an annual basis, loss
reserves related to general liability, workers compensation and
automobile liability claims;
•
our ability to identify suitable acquisitions, and to
successfully complete and integrate such acquisition on
satisfactory terms;
•
the ability of our government customers to secure budgetary
appropriations to fund their payment obligations to us; and
•
other factors contained in our filings with the Securities and
Exchange Commission, or the SEC, including, but not limited to,
those detailed in this annual report on
Form 10-K, our
Form 10-Qs and our
Form 8-Ks filed
with the SEC.
We undertake no obligation to update publicly any
forward-looking statements, whether as a result of new
information, future events or otherwise. All subsequent written
and oral forward-looking statements attributable to us, or
persons acting on our behalf, are expressly qualified in their
entirety by the cautionary statements included in this report.
Item 7A.
Quantitative and Qualitative Disclosures About Market
Risk
Interest Rate Risk
We are exposed to market risks related to changes in interest
rates with respect to our Senior Credit Facility. 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.
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
To the Shareholders of
The GEO Group, Inc.:
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States. They include amounts based on
judgments and estimates.
Representation in the consolidated financial statements and the
fairness and integrity of such statements are the responsibility
of management. In order to meet management’s
responsibility, the Company maintains a system of internal
controls and procedures and a program of internal audits
designed to provide reasonable assurance that our assets are
controlled and safeguarded, that transactions are executed in
accordance with management’s authorization and properly
recorded, and that accounting records may be relied upon in the
preparation of financial statements.
The consolidated financial statements have been audited by
Ernst & Young LLP, independent registered certified
public accountants, whose appointment was ratified by our
shareholders. Their report expresses a professional opinion as
to whether management’s consolidated financial statements
considered in their entirety present fairly, in conformity with
accounting principles generally accepted in the United States,
the Company’s financial position and results of operations.
Their audit was conducted in accordance with the standards of
the Public Company Accounting Oversight Board. As part of this
audit, Ernst & Young LLP considered the Company’s
system of internal controls to the degree they deemed necessary
to determine the nature, timing, and extent of their audit tests
which support their opinion on the consolidated financial
statements.
The Audit Committee of the Board of Directors meets periodically
with representatives of management, the independent registered
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.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
and 15d-15(f) under the
Securities Exchange Act of 1934. The Company’s internal
control over financial reporting is a process designed under the
supervision of the Company’s Chief Executive Officer and
Chief Financial Officer that: (i) pertains to the
maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the
Company’s assets; (ii) provides reasonable assurance
that transactions are recorded as necessary to permit
preparation of financial statements for external reporting in
accordance with accounting principles generally accepted in the
United States, and that receipts and expenditures are being made
only in accordance with authorization of the Company’s
management and directors; and (iii) provides reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedure may deteriorate.
Management has assessed the effectiveness of the Company’s
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 Company’s consolidated revenue and, as of
January 1, 2006, CSC represented 34.7% of the
Company’s total consolidated assets. In making
management’s 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 CSC’s 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 Company’s
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.
Management’s assessment of the effectiveness of the
Company’s 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 51.
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
Company’s 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.
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC
ACCOUNTANTS
The Board of Directors and Shareholders
of The GEO Group, Inc.
We have audited management’s assessment, included in the
accompanying Management’s Annual Report on Internal Control
over Financial Reporting, that The GEO Group, Inc. 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 management’s assessment and an
opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s 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 company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that The GEO Group,
Inc. 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.
Summary of Business Operations and Significant Accounting
Policies
The GEO Group, Inc., a Florida corporation, and subsidiaries
(the “Company”) is a leading developer and manager of
privatized correctional, detention and mental health residential
treatment services facilities located in the United States,
Australia 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 Company’s 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.
Fiscal Year
The Company’s 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.
Basis of Presentation
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.
Use of Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make certain estimates,
judgments and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
known, will vary from these estimates. If actual results
significantly differ from the Company’s estimates, the
Company’s financial condition and results of operations
could be materially impacted.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, restricted
cash, 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
Company’s 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 Company’s
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 Company’s
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
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.
Accounts Receivable
The Company extends credit to the governmental agencies it
contracts with and other parties in the normal course of
business as a result of billing and receiving payment for
services thirty to sixty days in arrears. Further, 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.
Inventories
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.
Restricted Cash
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
primarily to 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 Company’s wholly owned Australian
subsidiary financed a facility’s development and subsequent
expansion in 2003 with long-term debt obligations, which are
non-recourse to the Company. As a condition of the loan, the
Company is required to maintain a restricted cash balance of AUD
5.0 million. 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, 2006the 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
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 asset’s
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.
Long-Lived Assets
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 Company’s 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Goodwill and Other Intangible Assets
The Company’s 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 Company’s 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
Company’s intent to do so. The Company’s 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.
Idle Facilities
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 Company’s
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
February 2002. The Company’s maximum exposure for loss
under this contract is $24.1 million, which represents the
Company’s initial investment and the guarantees discussed
in Note 10.
In February 2004, CSC was awarded a contract by the Department
of Homeland Security, Bureau of Immigration and Customs
Enforcement (“ICE”) to develop and operate a 1,020 bed
detention center in Frio County Texas. South Texas Local
Development Corporation (“STLDC”) was created and
issued $49.5 million in taxable revenue bonds to finance
the construction of the detention complex. Additionally, CSC
provided a $5 million subordinated note to STLDC for
initial development. The Company determined that it is the
primary beneficiary of STLDC and consolidates the entity as a
result. STLDC is the owner of the complex and entered into a
development agreement with CSC to oversee the development of the
complex. In addition, STLDC entered into an operating agreement
providing CSC the sole and exclusive right to operate and manage
the complex. The operating agreement and bond indenture require
the revenue from CSC’s contract with ICE be used to fund
the periodic debt service requirements as they become due. The
net revenues, if any, after various expenses such as trustee
fees, property taxes and insurance premiums are distributed to
CSC to cover CSC’s operating expenses and management fee.
CSC is responsible for the entire operations of the facility
including all operating expenses and is required to pay all
operating expenses whether or not there are sufficient revenues.
STLDC has no liabilities resulting from its ownership. The bonds
have a ten year term and are non-recourse to CSC and STLDC. The
bonds are fully insured and the sole source of payment for the
bonds is the operating revenues of the complex.
Deferred Revenue
Deferred revenue primarily represents the unamortized net gain
on the development of properties and on the sale and leaseback
of properties by the Company. The Company leases these
properties back from 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.
Revenue Recognition
In accordance with Staff Accounting Bulletin (“SAB”)
No. 101, “Revenue Recognition in Financial
Statements”, as amended by SAB No. 104,
“Revenue Recognition”, and related interpretations,
facility management revenues are recognized as services are
provided under facility management contracts with approved
government appropriations based on a net rate per day per inmate
or on a fixed monthly rate.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
result in revisions to estimated costs and income, and are
recognized in the period in which the revisions are determined.
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.
Income Taxes
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.
Earnings Per Share
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.
Direct Finance Leases
The Company accounts for the portion of its contracts with
certain governmental agencies that represent capitalized lease
payments on buildings and equipment as investments in direct
finance leases. Accordingly, the minimum lease payments to be
received over the term of the leases less unearned income are
capitalized as the Company’s investments in the leases.
Unearned income is recognized as income over the term of the
leases using the 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, 2004the 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 Company’s management deems adequate to cover
property and casualty risks, workers’ compensation, medical
malpractice and automobile liability. The Company’s
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Since the Company’s 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. The
Company’s 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 Company’s
financial condition and results of operations could be
materially impacted.
Debt Issuance Costs
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.
Comprehensive Income
The Company’s 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
Company’s 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 Company’s foreign operations use their local currencies
as their functional currencies. Assets and liabilities of the
operations are translated at the exchange rates in effect on the
balance sheet date and 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.
Financial Instruments
In accordance with FAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and its
related interpretations and amendments, the Company records
derivatives as either assets or liabilities on the balance sheet
and measures those instruments at fair value. For derivatives
that are designed as and qualify as effective cash flow hedges,
the portion of gain or loss on the derivative instrument
effective at offsetting changes in the hedged item is reported
as a component of accumulated other comprehensive income 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
well as the offsetting gain or loss on the hedged item
attributable to the hedged risk is recognized in current
earnings as interest income (expense) during the period of the
change in fair values.
The Company formally documents all relationships between hedging
instruments and hedge items, as well as its risk-management
objective and strategy for undertaking various hedge
transactions. This process includes attributing all derivatives
that are designated as cash flow hedges to floating rate
liabilities and attributing all derivatives that are designated
as fair value hedges to fixed rate liabilities. The Company also
assesses whether each derivative is highly effective in
offsetting changes in the cash flows of the hedged item.
Fluctuations in the value of the derivative instruments are
generally offset by changes in the hedged item; however, if it
is determined that a derivative is not highly effective as a
hedge or if a derivative ceases to be a highly effective hedge,
the Company will discontinue hedge accounting prospectively for
the affected derivative.
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 Company’s stock
option plans been determined pursuant to Statement of Financial
Accounting Standards No. 123, “Accounting for Stock
Based Compensation,”the Company’s net income and
earnings per share would have decreased accordingly. Using the
Black-Scholes option pricing model for all options granted, the
Company’s 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
(1)
See Note 15 for more information regarding the
Company’s stock option plans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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 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 Company’s 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 Company’s
financial position, results of operations, and cash flows.
2.
Acquisition
Under the purchase method of accounting, the purchase price for
CSC was allocated to CSC’s 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 CSC’s 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.
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):
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
Company’s results of operations beginning after
November 4, 2005. CSC is part of the Company’s
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):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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 Australia’s 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 Company’s 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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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.
5.
Assets Held for Sale
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 Company’s investment in direct finance leases relates
to the financing and management of one Australian facility. The
Company’s wholly-owned Australian subsidiary financed the
facility’s development with long-term debt obligations,
which are non-recourse to the Company. The Company’s
financial statements reflect the consolidated Australian’s
subsidiary’s 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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
Company’s interest rate swaps for the fiscal year ended
January 1, 2006.
The Company’s Australian subsidiary is a party to an
interest rate swap agreement to fix the interest rate on the
variable rate non-recourse debt to 9.7%. The Company has
determined the swap 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 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
Company’s interest rate swaps for the fiscal years
presented. The Company does not expect to enter into any
transactions during the next twelve months which would result in
the reclassification into earnings of losses associated with
this swap currently reported in accumulated other comprehensive
loss.
The Company’s 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.
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
9.
Accrued Expenses
Accrued expenses consisted of the following (dollars in
thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
10.
Debt
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
secured 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
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, 2006the 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 Company’s
existing material domestic subsidiaries. The Senior Credit
Facility and the related guarantees are secured by substantially
all of the Company’s present and future tangible and
intangible assets and all present and future tangible and
intangible assets of each guarantor, including but not limited
to (i) a first-priority pledge of all of the outstanding
capital stock owned by the Company and each guarantor, and
(ii) perfected first-priority security interests in all of
the Company’s present and future tangible and intangible
assets and the present and future tangible and intangible assets
of each guarantor.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Indebtedness under the Revolving Credit Facility bears interest
at the Company’s 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 Company’s 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 Company’s 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 Company’s ability to, among other things
(i) create, incur or assume any indebtedness,
(ii) incur liens, (iii) make loans and investments,
(iv) engage in mergers, acquisitions and asset sales,
(v) sell 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
Company’s capital stock, (viii) transact with
affiliates, (ix) make changes to the Company’s
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 the
Company’s assets or covenants more restrictive than
contained in the Senior Credit Facility, (xii) alter the
business the Company conducts, and (xiii) materially impair
the Company’s lenders’ security interests in the
collateral for the Company’s loans. The covenants in the
Senior Credit Facility can substantially restrict the
Company’s business operations.
Events of default under the Senior Credit Facility include, but
are not limited to, (i) the Company’s failure to pay
principal or interest when due, (ii) the Company’s
material breach of any representations or warranty,
(iii) covenant defaults, (iv) 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Senior
81/4% Notes
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
Company’s option, all or a portion of the Notes plus
accrued and unpaid interest at various redemption prices ranging
from 104.125% to 100.000% of the principal amount to be
redeemed, depending on when the redemption occurs. The Indenture
contains covenants that limit the Company’s ability to
incur additional indebtedness, pay dividends or distributions on
its common stock, repurchase its common stock, and prepay
subordinated indebtedness. The Indenture also limits the
Company’s ability to issue preferred stock, make certain
types of investments, merge or consolidate with another company,
guarantee other indebtedness, create liens and transfer and sell
assets. 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.
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 CSC’s contract with ICE be used to fund
the periodic debt service requirements as they become due. The
net revenues, if any, after various expenses such as trustee
fees, property taxes and insurance premiums are distributed to
CSC to cover CSC’s operating expenses and management fee.
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 $12.2 million as of January 1, 2006 as
funds held in trust with respect to the STLDC for debt service
and other reserves.
NOTES TO 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 $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.
Australia
In connection with the financing and management of one
Australian facility, our wholly owned Australian subsidiary
financed the facility’s development and subsequent
expansion in 2003 with long-term debt obligations, which are
non-recourse to us. We have consolidated the subsidiary’s
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 issuer’s discount of approximately
$3.7 million which is being amortized over the ten year
term of the Notes using the effective interest method.
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 issuer’s 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, 2006the Company also had outstanding eleven
letters of guarantee totaling approximately $6.5 million
under separate international facilities.
Guarantees
In connection with the creation of SACS, the Company entered
into certain guarantees related to the financing, construction
and operation of the prison. The Company guaranteed certain
obligations of SACS under its debt agreements up to a maximum
amount of 60.0 million South African Rand, or approximately
$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 Company’s guarantee.
The Company’s obligations under this guarantee expire upon
SACS’ release from its obligations in respect of the
restricted account under its debt agreements. No amounts have
been drawn against these letters of credit, which are included
in the Company’s outstanding letters of credit under its
Revolving Credit Facility.
The Company has agreed to provide a loan of up to
20.0 million South African Rand, or approximately
$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
Company’s obligations under the Standby Facility expire
upon the earlier of full funding or SACS’ release from its
obligations under its debt agreements. The lenders’ ability
to draw on the Standby Facility is limited to certain
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 Company’s shares in SACS.
The Company’s liability under the guarantee is limited to
the cession and pledge of shares. The guarantee expires upon
expiration of the cession and pledge agreements.
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 Company’s wholly-owned Australian subsidiary financed
the development of a facility and subsequent expansion in 2003,
with long-term debt obligations, which are non-recourse 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:
Fiscal Year
Annual 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
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 CPV’s board of directors. Subsequently
on February 8, 2006, the director resigned from the
Company’s board of directors.
12.
Commitments and Contingencies
During 2000, the Company’s 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 Company’s
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 Company’s 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 Company’s rights
under the lease. On February 24, 2006, the Ingham County
Circuit Court, the trial court with jurisdiction over the case,
granted summary judgment in favor of the State and against the
Company and 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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 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.
Operating Leases
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:
Fiscal Year
Annual 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
Company’s human resources department, and changes in
certain operational procedures at the Company’s
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 Company’s 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 government’s 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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 Company’s rights with respect to this
matter. While the 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 management’s preliminary review of the claim,
the Company believes that, if settled unfavorably, this matter
could have a material adverse effect on the Company’s
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 Company’s business exposes it to various
types of claims or litigation against the Company, including,
but not limited to, civil rights claims relating to conditions
of confinement and/or mistreatment, sexual misconduct claims
brought by prisoners or detainees, medical malpractice claims,
claims relating to employment matters (including, but not
limited to, employment discrimination claims, union grievances
and wage and hour claims), property loss claims, environmental
claims, automobile liability claims, indemnification claims by
our customers and other third parties, contractual claims and
claims for personal injury or other damages resulting from
contact with the Company’s facilities, programs, personnel
or prisoners, including damages arising from a prisoner’s
escape or from a disturbance or riot at a facility. Except as
otherwise disclosed above, the Company does not expect the
outcome of any pending claims or legal proceedings to have a
material adverse effect on its financial condition, results of
operations or cash flows.
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.
13.
Share Purchase
On July 9, 2003, the Company purchased all 12 million
shares of the Company’s common stock beneficially owned by
Group 4 Falck, the Company’s former 57% majority
shareholder, for $132.0 million in cash.
In April 1994, the Company’s 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
14.
Earnings Per Share
The table below shows the amounts used in computing earnings per
share (“EPS”) in accordance with FAS No. 128
and the effects on income and the weighted average number of
shares of potential dilutive common stock.
Fiscal Year
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 Company’s 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 Company’s 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 Company’s 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.
15.
Stock Options
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
exercised its discretion and has granted options that vest 100%
immediately. All options under the Second Plan and Fourth Plan
expire no later than ten years after the date of the grant.
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 Company’s 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 Company’s executives.
Retirement benefits are based on years of service,
employees’ average compensation for the last five years
prior to retirement and social security benefits. Currently, the
plans are not funded. The Company purchased and is the
beneficiary of life insurance policies for certain participants
enrolled in the plans.
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 Company’s calculation of accrued
pension costs are based on market information and the
Company’s historical rates for employment compensation and
discount rates, respectively.
In accordance with FAS 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
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 employee’s years of service.
Payments will be made at retirement age of 65 or at termination
of employment. The Company recognized expense of
$0.1 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:
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
worker’s 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.
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
Asset Reconciliation
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
Geographic Information
The Company’s international operation are conducted through
the Company’s wholly owned Australian subsidiaries, and one
of the Company’s joint ventures in South Africa, SACM.
Through the Company’s wholly owned subsidiary, GEO Group
Australia Pty. Limited, the Company currently manages five
correctional facilities, including one police custody center.
Through the Company’s joint venture SACM, the Company
currently manages one facility.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Sources of Revenue
The Company’s derives most of its revenue from the
management of privatized correction and detention facilities.
The Company’s 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 Company’s 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
Company’s 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):
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.
Business Concentration
Except for the major customers noted in the following table, no
single customer provided more than 10% of the Company’s
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
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.
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 Company’s 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 Company’s 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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.
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 Company’s selected quarterly financial data is as
follows (in thousands, except per share data):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Fourth
Third Quarter
Quarter(e)
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
(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.
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 worker’s compensation
insurance reserves.
(e)
Includes 14 weeks of operations.
(f)
Includes a $3.0 million write-off for our Jena, Louisiana
facility.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive
Officer and our Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such
term is defined in
Rules 13a-15(e)
and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, referred to as the
Exchange Act), as of the end of the period covered by this
report. On the basis of this review, our management, including
our Chief Executive Officer and our Chief Financial Officer, has
concluded that as of the end of the period covered by this
report, our disclosure controls and procedures were effective to
give reasonable assurance that the information required to be
disclosed in our reports filed with the Securities and Exchange
Commission, or the SEC, under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms of the SEC, and to ensure that
the information required to be disclosed in the reports filed or
submitted under the Exchange Act is accumulated and communicated
to our management, including our Chief Executive Officer and our
Chief Financial Officer, in a manner that allows timely
decisions regarding required disclosure.
It should be noted that the effectiveness of our system of
disclosure controls and procedures is subject to certain
limitations inherent in any system of disclosure controls and
procedures, including the exercise of judgment in designing,
implementing and evaluating the controls and procedures, the
assumptions used in identifying the likelihood of future events,
and the inability to eliminate misconduct completely.
Accordingly, there can be no assurance that our disclosure
controls and procedures will detect all errors or fraud. As a
result, by its nature, our system of disclosure controls and
procedures can provide only reasonable assurance regarding
management’s control objectives.
Internal Control Over Financial Reporting
(a) Management’s Annual Report on Internal Control
Over Financial Reporting
See “Item 8. — Financial Statements and
Supplemental Data — Management’s Report on
Internal Control over Financial Reporting” for
management’s report on the effectiveness of our internal
control over financial reporting as of January 1, 2006.
(b) Attestation Report of the Registered Public Accounting
Firm
See “Item 8. — Financial Statements and
Supplemental Data — Report of Independent Registered
Certified Public Accountants” for the report of our
independent registered public accounting firm on the
effectiveness of our internal control over financial reporting
as of January 1, 2006.
(c) Changes in Internal Control over Financial Reporting
Our management is responsible for reporting any changes in our
internal control over financial reporting (as such terms is
defined in
Rules 13a-15(f)
and 15d-15(f) under the
Exchange Act) during the period to which this report relates
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting. During fiscal year 2005, we made changes to our
internal controls designed to address the material weaknesses in
our internal control over financial reporting identified in our
Form 10-K/ A for
the year end January 2, 2005, filed on August 17,2005. Due to these changes, all of the material weaknesses have
been remediated. Other than these changes, management believes
that there have not been any changes in our internal control
over financial reporting (as such term is defined in
Rules 13a-15(f)
and 15d-15(f) under the
Exchange Act) during the period to which this report relates
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
The information required by Items 10, 11, 12 (except
for the information required by Item 201(d) of
Regulation S-K
which is included in Part II, Item 5 of this report),
13 and 14 of
Form 10-K will be
contained in, and is incorporated by reference from, the proxy
statement for our 2006 annual meeting of shareholders, which
will be filed with the SEC pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by
this report.
PART IV
Item 15.
Exhibits, and Financial Statement Schedules
(a) (1) Financial Statements.
The following consolidated financial statements of GEO are filed
under Item 8 of Part II of this report:
Reports of Independent Registered Certified Public
Accountants — Page 50
Notes to Consolidated Financial Statements —
Pages 57 through 89
(2) Financial Statement Schedules.
Schedule II — Valuation and Qualifying
Accounts — Page 94
All other schedules specified in the accounting regulations of
the Securities and Exchange Commission have been omitted because
they are either inapplicable or not required.
(3) Exhibits Required by Item 601 of
Regulation S-K.
The following exhibits are filed as part of this Annual
Report:
Registration Rights Agreement, dated July 9, 2003, by and
among the Company Corporation and BNP Paribas Securities Corp.,
Lehman Brothers Inc., First Analysis Securities Corporation,
SouthTrust Securities, Inc. and Comerica Securities, Inc.
(incorporated herein by reference to Exhibit 4.2 to the
Company’s report on Form 8-K, filed on July 29,2003)
Senior Officer Employment Agreement, dated March 23, 2005,
by and between the Company and John J. Bulfin (incorporated
herein by reference to Exhibit 10.22 to the Company’s
report on Form 10-K, filed on March 23, 2005)*†
10
.23
—
Senior Officer Employment Agreement, dated March 23, 2005,
by and between the Company and Jorge A. Dominicis (incorporated
herein by reference to Exhibit 10.23 to the Company’s
report on Form 10-K, filed on March 23, 2005)*†
10
.24
—
Senior Officer Employment Agreement, dated March 23, 2005,
by and between the Company and John M. Hurley (incorporated
herein by reference to Exhibit 10.24 to the Company’s
report on Form 10-K, filed on March 23, 2005)*†
10
.25
—
Senior Officer Employment Agreement, dated March 23, 2005,
by and between the Company and Donald H. Keens (incorporated
herein by reference to Exhibit 10.25 to the Company’s
report on Form 10-K, filed on March 23, 2005)*†
10
.26
—
Office Lease, dated September 12, 2002, by and between the
Company and Canpro Investments Ltd. (incorporated herein by
reference to Exhibit 10.22 to the Company’s report on
Form 10-K, filed on March 20, 2003)
10
.27
—
Second Amended and Restated Credit Agreement, dated as of
September 14, 2005, by and among The GEO Group, Inc., as
Borrower, BNP Paribas, as Administrative Agent and Lead
Arranger, Bank of America, N.A., as Syndication Agent, and the
lenders who are, or may from time to time become, a party
thereto (incorporated herein by reference to Exhibit 10.1
to the Company’s report on Form 10-K, filed on
September 21, 2005)
10
.28
—
Asset Purchase Agreement, December 9, 2005, by and between
GEO Care, Inc., a Florida corporation and Atlantic Shores
Hospital, LLC*
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Company and in the capacities and on the dates
indicated.