FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

OR

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

Commission file number 1-14260

The GEO Group, Inc.

(Exact name of registrant as specified in its charter)

Florida		65-0043078
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
One Park Place, 621 NW 53rd Street, Suite 700, Boca Raton, Florida		33487
(Address of principal executive offices)		(Zip code)

(561) 893-0101

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days.

Yes R No £

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes R No £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £ No R

At November 8, 2005, 9,643,201 shares of the registrant’s Common Stock were issued and outstanding.

 

 

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION			3
ITEM 1. FINANCIAL STATEMENTS			3
CONSOLIDATED STATEMENTS OF INCOME FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED OCTOBER 2, 2005 AND SEPTEMBER 26, 2004 (UNAUDITED)			4
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 2, 2005 (UNAUDITED) AND JANUARY 2, 2005			5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 2, 2005 AND SEPTEMBER 26, 2004 (UNAUDITED)			6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)			7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			18
FINANCIAL CONDITION			20
RESULTS OF OPERATIONS			23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			32
ITEM 4. CONTROLS AND PROCEDURES			33
PART II — OTHER INFORMATION			34
ITEM 1. LEGAL PROCEEDINGS			34
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			34
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			34
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			34
ITEM 5. OTHER INFORMATION			34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K			34
SIGNATURES			36
Section 302 CEO Certification
Section 302 CFO Certification
Section 906 CEO Certification
Section 906 Cfo Certification

THE GEO GROUP, INC.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		October 2, 2005				September 26, 2004				October 2, 2005				September 26, 2004
Revenues		$	149,457			$	148,197			$	454,501			$	437,831
Operating expenses			128,533				120,330				387,032				363,923
Depreciation and amortization			3,672				3,666				11,125				10,465
General and administrative expenses			11,719				10,629				35,793				32,602
Operating income			5,533				13,572				20,551				30,841
Interest income			2,196				2,194				6,888				7,097
Interest expense			(5,300	)			(5,167	)			(16,094	)			(16,662	)
Write off of deferred financing fees from extinguishment of debt			(1,233	)			—				(1,360	)			(317	)
Income before income taxes, minority interest, equity in income (loss) of affiliate and discontinued operations			1,196				10,599				9,985				20,959
Provision for income taxes			608				4,847				1,942				9,124
Minority interest			(181	)			(215	)			(540	)			(547	)
Equity in income (loss) of affiliate, net of income tax provision (benefit) of $20, $(22), $41 and $(207)			135				16				(201	)			(239	)
Income from continuing operations			542				5,553				7,302				11,049
Income (loss) from discontinued operations, net of tax provision (benefit) of $(42), $35, $219 and $219			(99	)			82				511				510
Net income		$	443			$	5,635			$	7,813			$	11,559
Weighted-average common shares outstanding:
Basic			9,584				9,382				9,553				9,352
Diluted			10,006				9,670				9,997				9,721
Income per common share:
Basic:
Income from continuing operations		$	0.06			$	0.59			$	0.77			$	1.18
Income (loss) from discontinued operations			(0.01	)			0.01				0.05				0.06
Net income per share-basic		$	0.05			$	0.60			$	0.82			$	1.24
Diluted:
Income from continuing operations		$	0.05			$	0.57			$	0.73			$	1.14
Income (loss) from discontinued operations			(0.01	)			0.01				0.05				0.05
Net income per share-diluted		$	0.04			$	0.58			$	0.78			$	1.19

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

THE GEO GROUP, INC.

CONSOLIDATED BALANCE SHEETS

		October 2, 2005				January 2, 2005
		(Unaudited)				(Restated)
ASSETS
Current assets
Cash and cash equivalents		$	97,430			$	91,982
Restricted cash			30,621				—
Short-term investments			—				10,000
Accounts receivable, less allowance for doubtful accounts of $1,131 and $1,170			96,549				93,082
Deferred income tax asset			12,105				12,891
Other current assets			16,370				12,174
Current assets of discontinued operations			143				2,637
Total current assets			253,218				222,766
Restricted cash			3,807				3,908
Property and equipment, net			193,502				196,565
Direct finance lease receivable			40,495				42,953
Other non current assets			13,003				13,955
Non current assets of discontinued operations			—				179
		$	504,025			$	480,326
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	22,294			$	21,077
Accrued payroll and related taxes			24,536				24,670
Accrued expenses			47,753				53,298
Current portion of deferred revenue			1,941				1,844
Current portion of long-term debt and non-recourse debt			2,576				13,736
Current liabilities of discontinued operations			1,355				2,853
Total current liabilities			100,455				117,478
Deferred revenue			3,752				4,320
Deferred tax liability			9,576				8,466
Minority interest			1,627				1,194
Other non current liabilities			19,233				19,978
Long-term debt			219,771				186,198
Non-recourse debt			40,495				42,953
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized			—				—
Common stock, $.01 par value, 30,000,000 shares authorized, 21,636,530 and 21,507,391 shares issued and 9,636,530 and 9,507,391 issued and outstanding			96				95
Additional paid-in capital			69,766				67,005
Retained earnings			172,473				164,660
Accumulated other comprehensive loss			(1,339	)			(141	)
Treasury stock, 12,000,000 shares			(131,880	)			(131,880	)
Total shareholders’ equity			109,116				99,739
		$	504,025			$	480,326

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

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Thirty-nine Weeks Ended
		October 2, 2005				September 26, 2004
Cash flows from operating activities:
Income from continuing operations		$	7,302			$	11,049
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization			11,125				10,465
Amortization of original issue discount and debt issue costs			243				229
Write off of deferred financing fees			1,360				317
Deferred tax provision			1,045				1,573
Provision for doubtful accounts			1,489				731
Major maintenance reserve			190				169
Equity in earnings of affiliate, net of tax			201				239
Minority interest in earnings of consolidated entity			540				547
Tax benefit related to employee stock options			543				596
Changes in assets and liabilities:
Accounts receivable			(4,943	)			(2,389	)
Other current assets			(4,976	)			106
Other assets			(2,848	)			1,620
Accounts payable and accrued expenses			(779	)			(9,091	)
Accrued payroll and related taxes			96				4,638
Deferred revenue			(471	)			(1,383	)
Other liabilities			1,260				1,037
Net cash provided by operating activities of continuing operations			11,377				20,453
Net cash provided by operating activities of discontinued operations			1,175				8,561
Net cash provided by operating activities			12,552				29,014
Cash flows used in investing activities:
Proceeds from sales of short-term investments			39,000				41,000
Purchases of short-term investments			(29,000	)			(50,950	)
Proceeds from sale of assets			12				250
Capital expenditures			(10,173	)			(5,890	)
(Increase) decrease in restricted cash			(30,621	)			52,000
Net cash (used in) provided by investing activities			(30,782	)			36,410
Cash flows from financing activities:
Proceeds from long-term debt			75,000				10,000
Payments on debt			(52,740	)			(57,256	)
Increase in common stock			—				2
Proceeds from exercise of stock options			2,179				924
Net cash provided by (used in) financing activities			24,439				(46,330	)
Effect of exchange rate changes on cash			(761	)			(667	)
Net increase in cash and cash equivalents			5,448				18,427
Cash and cash equivalents, beginning of period			91,982				51,283
Cash and cash equivalents, end of period		$	97,430			$	69,710

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

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The unaudited consolidated financial statements of The GEO Group, Inc., a Florida corporation (the “Company”), included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States and the instructions to Form 10-Q and consequently do not include all disclosures required by Form 10-K. Additional information may be obtained by referring to the Company’s Form 10-K/A for the year ended January 2, 2005. In the opinion of management, all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the financial information for the interim periods reported in this Form 10-Q have been made. Results of operations for the thirty-nine weeks ended October 2, 2005 are not necessarily indicative of the results for the entire fiscal year ending January 1, 2006.

The accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Consolidated Financial Statements included in the Company’s Form 10-K/A filed with the Securities and Exchange Commission on August 17, 2005 for the fiscal year ended January 2, 2005. Certain amounts in the prior period have been reclassified to conform to the current presentation.

2. RESTATEMENTS

On August 17, 2005, the Company restated its audited consolidated financial statements for the year ended January 2, 2005 (the “Second Restatement”) related to the calculation of the gain on sale of its one-half interest in Premier Custodial Group Limited, the Company’s former United Kingdom joint venture (“PCG”) and certain deferred tax liabilities. In 2003, the Company failed to properly calculate the gain on the sale of its 50% interest in PCG. This miscalculation was due to the fact that, in computing the gain of $61.0 million, the Company reduced the sale price of $80.7 million by, among other things, $9.6 million in deferred tax liabilities. The Company has recently determined that $4.9 million of the total deferred tax liabilities used to compute the gain on the sale of the Company’s interest in PCG related to previously undistributed earnings of the Company’s Australian subsidiary. As a result, the Company determined that the deferred tax liabilities related to previously undistributed earnings of PCG at the time were $4.7 million and that the actual gain on the sale of the Company’s interest in PCG was $56.1 million. Additionally, in connection with the Company’s review, the Company determined that the deferred tax liability for undistributed earnings of its Australian subsidiary was understated by $1.1 million. The impact of the Second Restatement is reflected as an adjustment to the deferred tax liability, retained earnings and cumulative translation adjustment in the January 2, 2005 Consolidated Balance Sheet and had no impact in the Consolidated Statements of Income for the thirteen and thirty-nine weeks ended October 2, 2005 and September 26, 2004. The following table shows the effect of the Second Restatement on the Company’s unaudited consolidated balance sheet as of January 2, 2005 (in thousands):

		Year Ended January 2, 2005
		As Originally
		Reported				Restated				Change
Deferred Tax Liabilities		$	1,489			$	8,466			$	6,977
Retained Earnings		$	170,879			$	164,660			$	(6,219	)
Cumulative Translation Adjustment		$	749			$	(141	)		$	(890	)

The Company previously restated its unaudited consolidated financial statements for the thirteen and thirty-nine weeks ended September 26, 2004 (the “First Restatement”) to reflect the application of the appropriate accounting principles to the recognition of compensated absences according to generally accepted accounting principles. Additionally, the Company restated its unaudited consolidated financial statements for the thirteen and thirty-nine weeks ended September 26, 2004 to reflect the operations of South African Custodial Management, the Company’s joint venture in South Africa (“SACM”), as a consolidated subsidiary. SACM was previously included in the Company’s consolidated balance sheets as investments in and advances to affiliates, and in the Company’s consolidated statements of income as equity in earnings of affiliates. The Company has also restated its unaudited consolidated financial statements for the thirteen and thirty-nine weeks ended September 26, 2004 to reflect the appropriate amortization of certain leasehold improvement assets. All financial information reported for the thirteen and thirty-nine weeks ended September 26, 2004 in these unaudited consolidated financial statements reflects the First Restatement. In addition, throughout these notes to unaudited consolidated financial statements, all referenced amounts for prior periods and prior period comparisons reflect the balances and amounts on a restated basis. The following tables show the effect of the First Restatement on the Company’s unaudited consolidated statement of income for the thirteen and thirty-nine weeks ended September 26, 2004 (in thousands, except per share data):

		Thirteen Weeks Ended September 26, 2004
		As Originally
Unaudited Consolidated Statement of Income		Reported				Restated				Change
Revenues		$	144,441			$	148,197			$	3,756
Operating expenses			117,731				120,330				2,599
Depreciation and amortization			3,537				3,666				129
General and administrative expenses			10,629				10,629				—
Operating income			12,544				13,572				1,028
Interest income			2,107				2,194				87
Interest expense			(5,167	)			(5,167	)			—
Income before income taxes, minority interest, equity in income of affiliate, and discontinued operations			9,484				10,599				1,115
Provision for income taxes			4,408				4,847				439
Minority interest			—				(215	)			(215	)
Equity in income of affiliate			583				16				(567	)
Income from continuing operations			5,659				5,553				(106	)
Income from discontinued operations, net of tax provision of $35			82				82				—
Net income		$	5,741			$	5,635			$	(106	)
Income per common share:
Basic:
Income from continuing operations		$	0.60			$	0.59			$	(0.01	)
Income from discontinued operations			0.01				0.01				0.00
Net income per share-basic		$	0.61			$	0.60			$	(0.01	)
Diluted:
Income from continuing operations		$	0.58			$	0.57			$	(0.01	)
Income from discontinued operations			0.01				0.01				0.00
Net income per share-diluted		$	0.59			$	0.58			$	(0.01	)

		Thirty-nine Weeks Ended September 26, 2004
		As Originally
Unaudited Consolidated Statement of Income		Reported				Restated				Change
Revenues		$	426,987			$	437,831			$	10,844
Operating expenses			355,987				363,923				7,936
Depreciation and amortization			10,198				10,465				267
General and administrative expenses			32,602				32,602				—
Operating income			28,200				30,841				2,641
Interest income			6,883				7,097				214
Interest expense			(16,662	)			(16,662	)			—
Write off of deferred financing fees			(317	)			(317	)			—
Income before income taxes, minority interest, equity in income (loss) of affiliate, and discontinued operations			18,104				20,959				2,855
Provision for income taxes			7,984				9,124				1,140
Minority interest			—				(547	)			(547	)
Equity in income (loss) of affiliate			1,248				(239	)			(1,487	)
Income from continuing operations			11,368				11,049				(319	)
Income from discontinued operations, net of tax provision of $219			510				510				—
Net income		$	11,878			$	11,559			$	(319	)
Income per common share:
Basic:
Income from continuing operations		$	1.21			$	1.18			$	(0.03	)
Income from discontinued operations			0.06				0.06				0.00
Net income per share-basic		$	1.27			$	1.24			$	(0.03	)
Diluted:
Income from continuing operations		$	1.18			$	1.14			$	(0.04	)
Income from discontinued operations			0.05				0.05				0.00
Net income per share-diluted		$	1.23			$	1.19			$	(0.04	)

During the second quarter of 2005, the Company corrected $0.4 million in errors related to income taxes and depreciation expense that related to prior periods. The Company’s management does not believe the adjustment is material to its trend of earnings for the periods affected, or that it will be material to its 2005 net income.

3. EQUITY INCENTIVE PLANS

As permitted by Financial Accounting Standard (“FAS”) No. 123, “Accounting for Stock-Based Compensation” as amended by FAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, the Company currently accounts for share-based payments to employees under the intrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and, as such, generally recognizes no compensation cost for employee stock options.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued FAS No. 123(R) (revised 2004), “Share-Based Payment”, which is a revision of FAS No. 123 that requires companies to recognize compensation cost for share-based payments made to employees equal to the fair value of the share-based payments on the date of grant. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the compliance dates for FAS 123(R). In accordance with the new rule, the accounting provisions of FAS 123(R) will be effective for the Company in fiscal year 2006. The impact of adoption of FAS 123(R) on the Company cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted FAS 123(R) in prior periods, the Company would have recognized additional expense related to share-based payments, and the Company expects to recognize additional expense in the future related to such payments, when it does adopt FAS 123(R). FAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement is expected to reduce the Company’s net operating cash flows and increase net financing cash flows in periods after adoption. The Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options). The amount of operating cash flows recognized for such excess tax deductions were $0.5 million, and $0.6 million for the thirty-nine weeks ended October 2, 2005 and September 26, 2004, respectively.

If compensation cost for these plans had been determined based on the fair value at the date of grant in accordance with FAS No. 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts as follows (in thousands, except per share data):

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		October 2, 2005				September 26, 2004				October 2, 2005				September 26, 2004
Net income:
As reported		$	443			$	5,635			$	7,813			$	11,559
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(67	)			(153	)			(333	)			(522	)
Pro forma net income		$	376			$	5,482			$	7,480			$	11,037
Basic earnings per share:
As reported		$	0.05			$	0.60			$	0.82			$	1.24
Pro forma		$	0.04			$	0.58			$	0.78			$	1.18
Diluted earnings per share:
As reported		$	0.04			$	0.58			$	0.78			$	1.19
Pro forma		$	0.04			$	0.57			$	0.75			$	1.14

For the purposes of the pro forma calculations above, the fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model, assuming no expected dividends and the following assumptions:

		Stock options granted during the
		Thirteen and Thirty-nine Weeks Ended
		October 2, 2005				September 26, 2004
Expected volatility factor			39	%			48	%
Approximate risk free interest rate			4.0	%			3.2	%
Expected lives		3.3 years				4.7 years

4. DISCONTINUED OPERATIONS

The Company formerly had, through its Australian subsidiary, a contract with the Department of Immigration, Multicultural and Indigenous Affairs (“DIMIA”) for the management and operation of 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 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. During the thirty-nine weeks ended October 2, 2005, the contract with Auckland represented approximately 1.6% of the Company’s consolidated revenue. The Company does not expect the non renewal of the contract to have a significant impact on its financial condition, cash flows or results of operations.

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 unaudited consolidated financial statements and notes thereto reflect the operations of DIMIA and Auckland, both of which are included within the correction and detention facilities segment, as discontinued operations in all periods presented. The following are the revenues related to DIMIA and Auckland for the periods presented (in thousands):

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		October 2, 2005				September 26, 2004				October 2, 2005				September 26, 2004
Revenues – DIMIA		$	—			$	28			$	22			$	5,855
Revenues – Auckland		$	132			$	3,838			$	7,258			$	10,569

5. COMPREHENSIVE INCOME

     The components of the Company’s comprehensive income, net of tax are as follows (in thousands):

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		October 2, 2005				September 26, 2004				October 2, 2005				September 26, 2004
Net income		$	443			$	5,635			$	7,813			$	11,559
Change in foreign currency translation, net of income tax benefit (expense) of $219, $(184), $1,405 and $1,208, respectively			(343	)			218				(2,393	)			(1,573	)
Minimum pension liability adjustment, net of income tax benefit (expense) of $2, $(265), $(12) and $(44), respectively			(5	)			313				18				59
Unrealized gain (loss) on derivative instruments, net of income tax (expense) benefit of $(280), $203, $(515) and $(1,414), respectively			640				(239	)			1,177				1,777
Comprehensive income		$	735			$	5,927			$	6,615			$	11,822

6. EARNINGS PER SHARE

Basic and diluted earnings per share (“EPS”) were calculated for the thirteen and thirty-nine weeks ended October 2, 2005 and September 26, 2004 as follows (in thousands, except per share data):

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		October 2, 2005				September 26, 2004				October 2, 2005				September 26, 2004
Net income		$	443			$	5,635			$	7,813			$	11,559
Basic earnings per share:
Weighted average shares outstanding			9,584				9,382				9,553				9,352
Per share amount		$	0.05			$	0.60			$	0.82			$	1.24
Diluted earnings per share:
Weighted average shares outstanding			9,584				9,382				9,553				9,352
Effect of dilutive securities:
Employee and director stock options			422				288				444				369
Weighted average shares assuming dilution			10,006				9,670				9,997				9,721
Per share amount		$	0.04			$	0.58			$	0.78			$	1.19

Thirteen Weeks

Of 1,472,270 options outstanding during the thirteen weeks ended October 2, 2005, options to purchase 13,500 shares of the Company’s common stock, with an exercise price of $32.20 per share and an expiration date of 2015, were not included in the computation of diluted EPS because their effect would be anti-dilutive. Of 1,647,822 options outstanding during the thirteen weeks ended September 26, 2004, options to purchase 379,847 shares of the Company’s common stock, with exercise prices ranging from $20.25 to $26.88 per share expiration dates between 2006 and 2014, were not included in the computation of diluted EPS because their effect would be anti-dilutive.

Thirty-nine Weeks

Of 1,472,270 options outstanding during the thirty-nine weeks ended October 2, 2005, options to purchase 13,500 shares of the Company’s common stock, with an exercise price of $32.20 per share and an expiration date of 2015, were not included in the computation of diluted EPS because their effect would be anti-dilutive. Of 1,647,822 options outstanding during the thirty-nine weeks ended September 26, 2004, options to purchase 374,847 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 not included in the computation of diluted EPS because their effect would be anti-dilutive.

7. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at October 2, 2005 and January 2, 2005 (in thousands):

		Useful
		Life				October 2, 2005				January 2, 2005
		(Years)
Land			—			$	7,398			$	4,399
Buildings and improvements			4 to 40				165,508				173,013
Leasehold improvements			1 to 15				42,851				40,866
Equipment			3 to 7				28,712				23,443
Furniture and fixtures			3 to 7				4,220				3,989
						$	248,689			$	245,710
Less accumulated depreciation and amortization							( 55,187	)			(49,145	)
						$	193,502			$	196,565

8. LONG-TERM DEBT AND DERIVATIVE FINANCIAL INSTRUMENTS

The Company’s debt consisted of the following (in thousands):

		October 2, 2005				January 2, 2005
Senior Credit Facility:
Term Loan		$	75,000			$	51,521
Senior 8 1/4% Notes:
Notes Due in 2013			150,000				150,000
Discount on Notes			(3,820	)			(4,063	)
Swap on Notes			(659	)			746
Total Senior 8 1/4% Notes			145,521				146,683
Non Recourse Debt			42,321				44,683
Total Debt			262,842				242,887
Current Portion of Debt			(2,576	)			(13,736	)
Non-Current Portion of Non Recourse Debt			(40,495	)			(42,953	)
Long Term Debt		$	219,771			$	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 plans to use the borrowings under the Senior Credit

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Facility to fund general corporate purposes and to finance the proposed acquisition of Correctional Services Corporation (“CSC”) for approximately $62 million plus transaction-related costs. Of the $75 million term-loan, $30.6 million has been placed in an escrow account for use in connection with the completion of the CSC acquisition. The acquisition of CSC closed in the fourth quarter of 2005. See Note 14, Subsequent Events, for further discussion. As of October 2, 2005, the Company had borrowings of $75.0 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 $33.4 million outstanding in letters of credit under the revolving portion of the Senior Credit Facility.

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 October 2, 2005, 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%. 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.

At October 2, 2005 the Company also had outstanding eleven letters of guarantee totaling approximately $6.7 million under separate international facilities. Amounts outstanding under the letters of guarantee reduce the amounts available for borrowing by the Company under the Revolving Credit Facility.

Senior 8 1/4% Notes

To facilitate the Company’s purchase in July 2003 of the 12 million share majority interest held in the Company by Group 4 Falck, the Company’s former parent company, the Company issued $150.0 million aggregate principal amount, ten-year, 8 1/4% senior unsecured notes, (“the Notes”). The Notes are general, unsecured, senior obligations of the Company. Interest is payable semi-annually on January 15 and July 15 at 8 1/4%. The Notes are governed by the terms of an indenture, dated July 9, 2003, between the Company and the Bank of New York, as trustee, referred to as the Indenture. 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 certain covenants that impose significant operating and financial restrictions on the Company, including 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.

Non-Recourse debt

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 $42.3 million and $44.7 million at October 2, 2005 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 October 2, 2005, was approximately $3.8 million. This amount is included in restricted cash and the annual maturities of the future debt obligation is included in the Company’s non recourse debt.

Guarantees

In connection with the creation of South Africa Custodial Services Pty. Limited (“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 the senior lenders of SACS through the issuance of letters of credit. Additionally, SACS is required to fund a restricted account for the payment

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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 the release from SACS of its obligations in respect of the restricted account under its debt agreements. No amounts have been drawn against these letters of credit, which are included in the Company’s outstanding letters of credit under the revolving loan portion of its Senior Credit Facility.

The Company has also 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 currently anticipate that such funding will be required by SACS in the future. The Company’s obligations under the Standby Facility expire upon the earlier of full funding or SACS’ release from its obligations under its debt agreements. The lenders’ ability to draw on the Standby Facility is limited to certain circumstances, including termination of the contract.

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

In connection with a design, build, and maintenance contract for a facility in Canada, the Company guaranteed certain potential tax obligations of a not-for-profit entity through 2021. The potential estimated exposure of these obligations is CAN$2.5 million, or approximately $2.1 million commencing in 2017. The Company has a liability of $0.6 million and $0.5 million related to this exposure as of October 2, 2005 and January 2, 2005. 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 does not currently operate or manage this facility.

Derivatives

Effective September 18, 2003, the Company entered into interest rate swap agreements in the aggregate notional amount of $50.0 million. The Company has designated the swaps as hedges against changes in the fair value of a designated portion of the Notes due to changes in underlying interest rates. Changes in the fair value of the interest rate swaps are recorded in earnings along with related designated changes in the value of the Notes. The agreements, which have payment and expiration dates and call provisions that coincide with the terms of the Notes, effectively convert $50.0 million of the Notes into variable rate obligations. Under the agreements, the Company receives a fixed interest rate payment from the financial counterparties to the agreements equal to 8.25% per year calculated on the notional $50.0 million amount, while the Company makes a variable interest rate payment to the same counterparties equal to the six-month LIBOR plus a fixed margin of 3.45%, also calculated on the notional $50.0 million amount. As of October 2, 2005 and January 2, 2005 the fair value of the swaps totaled approximately $(0.7) million and $0.7 million, respectively, and is included in other non-current liabilities and other non-current assets, respectively, 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 nine months ended October 2, 2005.

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 October 2, 2005 and January 2, 2005 was approximately $0.8 million and $2.5 million, respectively, and is recorded as a component of other liabilities in the accompanying unaudited consolidated financial statements. There was no material ineffectiveness of the Company’s interest rate swaps for the periods presented in this Form 10-Q. The Company does 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.

9. COMMITMENTS AND CONTINGENCIES

During 2000, the Company’s 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, the Company remains responsible for payments on the Company’s underlying lease of the inactive facility with Correctional Properties Trust, (“CPV”) through January 2010. During Third Quarter 2005, the Company determined the alternative uses being pursued were no longer probable and as a result

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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. However, the Company will continue its effort to reactivate the facility.

The Company owns the 480-bed Michigan Youth Correctional Facility in Baldwin, Michigan (the “Michigan Facility”). The Company operated this facility since 1999 pursuant to a management contract with the Michigan Department of Corrections (“DOC”). Separately, the Company, as lessor, leases the facility to the State, as lessee, under a lease with an initial term of 20 years followed by two 5-year options. During the thirty-nine weeks ended October 2, 2005, the management contract and the lease with the State represented approximately 3.0% of the Company’s consolidated revenues. 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 DOC to operate the Michigan Facility has been terminated. The Michigan Facility’s operations were funded through October 14, 2005, when all inmates were transferred from the Michigan Facility to other prisons in the State of Michigan. On October 3, 2005, the Michigan Department of Management & Budget provided a 60 day lease cancellation notice to the Company. The Company believes that the Governor does not have the authority to unilaterally terminate the Michigan Facility lease and is preparing to defend its position. The Company has filed a lawsuit against the State to enforce its rights under the lease. The Village of Baldwin and Webber Township have joined GEO in the lawsuit. The Company has reviewed the Michigan Facility for impairment in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and determined the facility is not impaired. In the event litigation is not settled favorably to the Company or as circumstances change, the Company will reevaluate the Michigan Facility for impairment.

The Company manages the 700 bed Western Region Detention Facility in San Diego, California under a contract with the US Marshals Service. The facility has been experiencing significant downward pressure on its population count. The contract for the facility was set to expire on July 18, 2005. The Company recently received an interim extension through January 5, 2006, during which time the Company will negotiate with the Office of Federal Detention Trustee (“OFDT”) under a sole source contract pursuant to a determination by the OFDT that the Company is the only party capable of providing a 700 bed secure facility within the boundaries of San Diego County. There can be no assurance the Company will successfully negotiate a renewal of this management contract or that, even if a renewal is negotiated, that population at the facility will recover to previous levels. The Company leases the Western Region Detention Facility from San Diego County under an operating lease set to expire in 10 years (2015). The current annual lease expense related to the facility is $2.0 million, with annual CPI adjustments.

The Company operates the 1918-bed Lawton Correctional Facility in Lawton Oklahoma and leases the facility under a ten year non-cancelable operating lease from Correctional Properties Trust (CPV). The 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 $25.0 million. The Company recognized a $1.0 million gain on the sale of the existing 300-bed expansion which will be 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 capitalize the construction costs through the completion of construction. On October 2, 2005, the Company had capitalized $1.2 million of construction costs. The Company expects the construction of the new 600-bed expansion to be completed sometime during the fourth quarter 2006, after which time a new ten year non-cancelable operating lease with CPV for the entire Lawton Correctional Facility will become effective.

Legal

In June 2004, the Company received notice of a third-party claim for property damage incurred during 2001 and 2002 at several detention facilities that the Company’s 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, the Company received additional correspondence indicating that the insurance provider still intends to pursue the claim against the Company’s 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 its rights with respect to this matter. While 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 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

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Other primarily consists of revenues and operating expenses associated with the Company’s mental health and construction businesses.

Segment operating expenses were impacted by reductions in the Company’s reserves for general liability, auto liability, and workers compensation insurance of $3.4 million and $4.2 million in the third quarters of 2005 and 2004, respectively. Additionally, 2005 segment operating expenses reflect an additional operating charge on the Jena lease of $4.3 million, representing the remaining obligation on the lease through the contractual term of January 2010.

The reductions in insurance reserves were the result of revised actuarial projections related to loss estimates for the initial three years of the Company’s insurance program which was established on October 2, 2002. Prior to October 2, 2002, the insurance coverage was provided through an insurance program established by TWC, the Company’s former parent company. The Company experienced significant adverse claims development in general liability and workers’ compensation in the late 1990’s. Beginning in approximately 1999, the Company made significant operational changes and began to aggressively manage risk in a proactive manner. These changes have resulted in improved claims experience and loss development. As a result of improving loss trends, the Company’s independent actuary reduced its expected losses for claims arising since October 2, 2002 during the annual actuarial review process occurring during the third quarter of both 2005 and 2004. The Company has adjusted its reserve at October 2, 2005 to reflect the actuary’s expected loss.

Pre-Tax Income Reconciliation		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		October 2, 2005				September 26, 2004				October 2, 2005				September 26, 2004
Total operating income from segment		$	5,668			$	13,429			$	21,249			$	30,600
Unallocated amounts:
Net interest expense			(3,104	)			(2,973	)			(9,206	)			(9,565	)
Write off of deferred financing fees from extinguishment of debt			(1,233	)			—				(1,360	)			(317	)
Other			(135	)			143				(698	)			241
Income before income taxes, equity in earnings of affiliates, Discontinued operations and minority interest		$	1,196			$	10,599			$	9,985			$	20,959

Sources of Revenue

The Company derives most of its revenue from the management of privatized correction and detention facilities. The Company also derives revenue from the management of mental health hospitals and from the construction and expansion of new and existing correctional, detention and mental health facilities. All of the Company’s revenue is generated from external customers.

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		October 2, 2005				September 26, 2004				October 2, 2005				September 26, 2004
Revenues:
Correction and detention facilities		$	138,676			$	133,326			$	416,733			$	400,231
Mental health			10,638				9,596				30,627				28,692
Construction			143				5,275				7,141				8,908
Total revenues		$	149,457			$	148,197			$	454,501			$	437,831

Geographic Information

The Company’s international operations 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 four correctional facilities, and one police custody center. Through the Company’s joint venture SACM, the Company currently manages one facility.

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		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		October 2, 2005				September 26, 2004				October 2, 2005				September 26, 2004
Revenues:
U.S. operations		$	124,987			$	126,699			$	380,123			$	372,816
Australian operations			20,614				17,742				62,718				54,171
South African operations			3,856				3,756				11,660				10,844
Total revenues		$	149,457			$	148,197			$	454,501			$	437,831

		October 2, 2005				January 2, 2005
Long-Lived Assets:
U.S. operations		$	186,567			$	189,355
Australian operations			6,531				6,916
South African operations			404				294
Total long-lived assets		$	193,502			$	196,565

Equity in Earnings of Affiliate

Equity in earnings of affiliate includes the Company’s joint venture in South Africa, SACS. This entity is accounted for under the equity method. A summary of financial data for SACS is as follows (in thousands):

		Thirty-nine Weeks Ended
		October 2, 2005				September 26, 2004
Statement of Operations Data
Revenues		$	24,764			$	21,849
Operating income			8,822				6,843
Net income (loss)			255				(572	)
Balance Sheet Data
Current assets			9,131				10,936
Noncurrent assets			63,581				62,856
Current liabilities			3,842				3,550
Non current liabilities			70,600				70,405
Shareholders’ equity (deficit)			(1,730	)			(163	)

SACS commenced operations in fiscal year 2002. Total equity in undistributed income (loss) for SACS before income taxes, for the thirteen weeks ended October 2, 2005 and September 26, 2004, was $0.5 million, and $(1.0) million, respectively.

11. BENEFIT PLANS

During the first quarter of fiscal 2004, the Company adopted the interim disclosure provisions of FAS No. 132 (revised 2003), “Employers’ Disclosure about Pensions and Other Postretirement Benefits, an Amendment of FAS Statements No. 87, 88 and 106 and a Revision of FAS Statement No. 132.” This statement revises employers’ disclosures about pension plans and other postretirement benefit plans.

The following table summarizes the components of net periodic benefit cost for the Company (in thousands):

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		October 2, 2005				September 26, 2004				October 2, 2005				September 26, 2004
Service cost		$	109			$	80			$	327			$	232
Interest cost			135				210				406				621
Amortization of unrecognized net actuarial loss			31				101				92				303
Amortization of prior service cost			234				270				702				810
Net periodic benefit cost		$	509			$	661			$	1,527			$	1,966

12. INCOME TAXES

The provision for income taxes for the Nine Months 2005 reflects a benefit of $1.7 million in the second quarter 2005 related to 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. The Company’s effective tax rate exclusive of this one time benefit was approximately 37%.

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