DEFM14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant  x                             Filed by a party other than the Registrant  ¨

Check the appropriate box:

 

¨   Preliminary Proxy Statement
¨   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
x   Definitive Proxy Statement
¨   Definitive Additional Materials
¨   Soliciting Material under § 240.14a-12

The GEO Group, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

¨   No fee required.
¨   Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1)  

Title of each class of securities to which transaction applies:

 

  (2)  

Aggregate number of securities to which transaction applies:

     

  (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

     

  (4)  

Proposed maximum aggregate value of transaction:

     

  (5)  

Total fee paid:

     

x   Fee paid previously with preliminary materials.
¨   Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)  

Amount Previously Paid:

 

     

  (2)  

Form, Schedule or Registration Statement No.:

 

     

  (3)  

Filing Party:

 

    .

  (4)  

Date Filed:

 

     

 

 

 


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LOGO

April 3, 2014

Dear Shareholder:

I am pleased to invite you to attend a special meeting of shareholders of The GEO Group, Inc., or GEO, a Florida corporation, which will be held on Friday, May 2, 2014 at 10:00 a.m., local time, at The Boca Raton Resort & Club, 501 East Camino Real, Boca Raton, Florida 33432.

As previously disclosed, the GEO board of directors unanimously approved GEO to take all necessary steps for GEO to position itself to operate in compliance with the real estate investment trust, or REIT, rules of the Internal Revenue Code of 1986, as amended, or the REIT rules, beginning January 1, 2013. Among these necessary steps was the adoption of a plan to reorganize the business operations of GEO to allow GEO to be taxed as a REIT. We refer to this reorganization plan as the REIT conversion. On December 31, 2012, GEO completed all the necessary steps in the REIT conversion, including the previously announced divestiture of its health care assets and payment of its accumulated earnings and profits as a special dividend, enabling GEO to operate in compliance with the REIT rules, beginning January 1, 2013.

Although the required steps to operate in compliance with the REIT rules beginning January 1, 2013 have been implemented, GEO intends to take one additional step, a merger of GEO into a newly formed entity, to facilitate GEO’s compliance with the REIT rules by ensuring the effective adoption of charter provisions that implement standard REIT share ownership and transfer restrictions. The GEO board of directors plans to merge GEO into The GEO Group REIT, Inc., or GEO REIT, a Florida corporation and wholly owned subsidiary of GEO, which was formed for the purpose of the merger in connection with the REIT conversion. Effective at the time of the merger, GEO REIT will be renamed “The GEO Group, Inc.” and will hold, directly or indirectly through its subsidiaries, the assets currently held by GEO and will conduct the existing businesses of GEO and its subsidiaries. In the merger, you will receive a number of shares of GEO REIT common stock equal to, and in exchange for, the number of shares of GEO common stock you own. We anticipate that the shares of GEO REIT common stock will trade on the New York Stock Exchange and retain GEO’s symbol “GEO.”

The affirmative vote of the holders of a majority of the outstanding shares of common stock entitled to vote is required for the approval of the agreement and plan of merger, which we refer to as the merger agreement. After careful consideration, the board of directors has adopted the merger agreement and recommends that all shareholders vote “FOR” the approval of the merger agreement.

This proxy statement/prospectus is a prospectus of GEO REIT as well as a proxy statement for GEO and provides you with detailed information about the REIT conversion, the merger and the special meeting. We encourage you to read carefully this entire proxy statement/prospectus, including all annexes, and we especially encourage you to read the section titled “Risk Factors” beginning on page 17.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the shares of common stock to be issued by GEO REIT under this proxy statement/prospectus or passed upon the adequacy or accuracy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense.

This proxy statement/prospectus is dated April 3, 2014 and is being first mailed to shareholders on or about April 7, 2014.

 

Sincerely,
LOGO
George C. Zoley

Chairman of the Board of Directors,
Chief Executive Officer and Founder


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THE GEO GROUP, INC.

621 NW 53rd Street, Suite 700

Boca Raton, Florida 33487

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF

THE GEO GROUP, INC.

TO BE HELD ON MAY 2, 2014

NOTICE IS HEREBY GIVEN that a special meeting of shareholders of The GEO Group, Inc., a Florida corporation, will be held on Friday, May 2, 2014 at 10:00 a.m., local time, at The Boca Raton Resort & Club, 501 East Camino Real, Boca Raton, Florida 33432, for the following purposes:

 

  1. to consider and vote upon a proposal to approve the Agreement and Plan of Merger dated as of March 21, 2014, between The GEO Group, Inc., or GEO, and The GEO Group REIT, Inc., a newly formed wholly owned subsidiary of GEO, which is being implemented in connection with GEO’s conversion to a real estate investment trust, or REIT, effective January 1, 2013; and

 

  2. to consider and vote upon a proposal to permit GEO’s board of directors to adjourn the special meeting, if necessary, for further solicitation of proxies if there are not sufficient votes at the originally scheduled time of the special meeting to approve the foregoing proposal.

The GEO board of directors has adopted the Agreement and Plan of Merger and recommends that you vote “FOR” the proposals, which are described in more detail in the accompanying proxy statement/prospectus.

GEO reserves the right to cancel or defer the merger even if shareholders of GEO vote to approve the agreement and plan of merger, which we refer to as the merger agreement, and the other conditions to the completion of the merger are satisfied or waived, if the GEO board of directors determines that the merger is no longer in the best interests of GEO and its shareholders.

Only shareholders of GEO’s common stock as of the close of business on March 10, 2014, the record date, are entitled to notice of the special meeting, and to vote at the special meeting and at any adjournment or postponement of the special meeting. During the ten-day period before the special meeting, GEO will keep a list of shareholders entitled to vote at the special meeting or any adjournment thereof available for inspection upon reasonable notice by any shareholder at GEO’s offices in Boca Raton, Florida, during usual business hours. The list of shareholders will also be made available at the time and place of the special meeting and will be subject to inspection by any shareholder at any time during the special meeting.

Your vote is important. Whether or not you plan to attend the special meeting in person, please complete, sign and date the enclosed proxy card as soon as possible and return it in the enclosed envelope, or submit your proxy by telephone or over the Internet in accordance with the instructions in the enclosed proxy card. Shareholders who return proxy cards by mail or submit proxies by telephone or over the Internet prior to the special meeting may nevertheless attend the special meeting, revoke their proxies and vote their shares at the special meeting.

We encourage you to read the accompanying proxy statement/prospectus carefully.

 

By order of the board of directors,

LOGO

George C. Zoley

Chairman of the Board of Directors and
Chief Executive Officer

Boca Raton, Florida

April 3, 2014


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WHERE YOU CAN FIND MORE INFORMATION

GEO files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. GEO’s SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. Please note that the SEC’s website is included in this proxy statement/prospectus and any applicable prospectus supplement as an inactive textual reference only. The information contained on the SEC’s website is not incorporated by reference into this proxy statement/prospectus and should not be considered to be part of this proxy statement/prospectus, except as described in the following paragraph. You may also read and copy any document we file with the SEC at its public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room.

We have elected to “incorporate by reference” information into this proxy statement/prospectus. By incorporating by reference, we can disclose important information to you by referring to another document we have filed separately with the SEC. The information incorporated by reference is an important part of this proxy statement/prospectus. Certain information that we subsequently file with the SEC will automatically update and supersede information in this proxy statement/ prospectus and in our other filings with the SEC. We incorporate by reference the documents listed below, which we have already filed with the SEC, and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, or Exchange Act, between the date of this proxy statement/prospectus and the date of the special meeting, except that we are not incorporating any information included in a Current Report on Form 8-K that has been or will be furnished (and not filed) under Item 2.02 or Item 7.01 of Form 8-K, unless such information is expressly incorporated herein by reference to a furnished Current Report on Form 8-K or other furnished document:

 

    our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 3, 2014;

 

    our Current Reports on Form 8-K filed with the SEC on February 25, 2014 and March 6, 2014; and

 

    the description of our common stock set forth in our Registration Statement on Form 8-A filed with the SEC on October 30, 2003, as amended on Form 8-A/A, filed with the SEC on October 30, 2003.

You may request a copy of these filings at no cost, by writing or calling us at the following address:

The GEO Group, Inc.

621 NW 53rd Street, Suite 700,

Boca Raton, Florida 33487

Attention: Investor Relations

Telephone: (866) 301-4436 or 561-893-0101

In order for you to receive timely delivery of the documents in advance of the GEO special meeting, you must request the information no later than April 25, 2014.

The GEO Group REIT, Inc., or GEO REIT, has filed a registration statement on Form S-4 to register with the SEC the GEO REIT common stock that GEO shareholders will receive in connection with the closing of the merger if the merger agreement is approved and the merger is completed. This proxy statement/prospectus is part of the registration statement of GEO REIT on Form S-4 and is a prospectus of GEO REIT and a proxy statement of GEO for its special meeting.

 

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Upon completion of the merger, GEO REIT will be required to file annual, quarterly and special reports, proxy statements and other information with the SEC.

You should only rely on the information in, or incorporated by reference into, this proxy statement/prospectus. No one has been authorized to provide you with different information. You should not assume that the information contained in this proxy statement/prospectus is accurate as of any date other than the date on the front page. We are not making an offer to exchange or sell (or soliciting any offer to buy) any securities, or soliciting any proxy, in any state where it is unlawful to do so.

 

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TABLE OF CONTENTS

 

     Page  

QUESTIONS AND ANSWERS ABOUT THE REIT CONVERSION AND THE MERGER

     1   

CORPORATE STRUCTURE

     7   

SUMMARY

     8   

RISK FACTORS

     17   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     38   

VOTING AND PROXIES

     40   

BACKGROUND OF THE REIT CONVERSION AND THE MERGER

     43   

OUR REASONS FOR THE REIT CONVERSION AND THE MERGER

     45   

TERMS OF THE MERGER

     46   

DISTRIBUTION POLICY

     49   

OUR BUSINESS

     50   

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

     73   

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     75   

THE GEO GROUP REIT, INC. BALANCE SHEET AS OF DECEMBER 31, 2013

     76   

THE GEO GROUP REIT, INC. NOTE TO THE BALANCE SHEET

     77   

SELECTED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA

     78   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     81   

DESCRIPTION OF GEO REIT CAPITAL STOCK

     113   

COMPARISON OF RIGHTS OF SHAREHOLDERS OF GEO AND GEO REIT

     119   

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

     122   

UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

     125   

LEGAL MATTERS

     144   

EXPERTS

     144   

PROPOSALS OF SHAREHOLDERS

     144   

SPECIAL SHAREHOLDER MEETING GUIDELINES

     144   

ANNEX A AGREEMENT AND PLAN OF MERGER

     A-1   

ANNEX B-1 FORM OF AMENDED AND RESTATED ARTICLES OF INCORPORATION OF THE GEO GROUP REIT, INC.

     B-1   

ANNEX B-2 FORM OF AMENDED AND RESTATED BYLAWS OF THE GEO GROUP REIT, INC.

     B-2   

 

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QUESTIONS AND ANSWERS ABOUT THE REIT CONVERSION AND THE MERGER

What follows are questions that you, as a shareholder of GEO, may have regarding the REIT conversion, the merger and the special meeting of shareholders and the answers to those questions. You are urged to carefully read this proxy statement/prospectus and the other documents referred to in this proxy statement/prospectus in their entirety because the information in this section may not provide all of the information that might be important to you with respect to the REIT conversion and the merger or the special meeting. Additional important information is contained in the annexes to, and the documents incorporated by reference into, this proxy statement/prospectus.

The GEO board of directors previously approved the REIT conversion and GEO has taken all of the required steps necessary for the REIT conversion so that GEO could begin operating in compliance with the REIT rules beginning on January 1, 2013. When used in this proxy statement/prospectus, unless otherwise specifically stated or the context otherwise requires, the terms “Company,” “GEO,” “we,” “our” and “us” refer to The GEO Group, Inc. and its subsidiaries with respect to the period prior to the merger, and The GEO Group REIT, Inc. and its subsidiaries, including the taxable GEO REIT subsidiaries, with respect to the period after the merger.

 

Q. What will happen in the merger?

 

A. GEO will merge with and into GEO REIT, a Florida corporation that is wholly owned by GEO, and GEO REIT will be the surviving entity in the merger and will succeed to and continue the business and assume the obligations of GEO. We refer to this transaction in this proxy statement/prospectus as the “merger.” Although the REIT rules do not require the completion of the merger, GEO intends to complete the merger to facilitate our compliance with the REIT rules by ensuring the effective adoption of charter provisions that implement standard REIT share ownership and transfer restrictions, subject to approval by GEO shareholders.

As a consequence of the merger:

 

    the outstanding shares of common stock of GEO, which we refer to as GEO common stock, will convert into the right to receive the same number of shares of common stock of GEO REIT, which we refer to as GEO REIT common stock;

 

    the board of directors and executive management of GEO immediately prior to the merger will be the board of directors and executive management, respectively, of GEO REIT immediately following the merger;

 

    effective at the time of the merger, GEO REIT will be renamed “The GEO Group, Inc.” and will become the publicly traded New York Stock Exchange listed company that will continue to operate, directly or indirectly, all of GEO’s existing businesses;

 

    the rights of the shareholders of GEO REIT will be governed by the amended and restated articles of incorporation of GEO REIT, which we refer to as the GEO REIT Articles, and the amended and restated bylaws of GEO REIT, which we refer to as the GEO REIT Bylaws. The GEO REIT Articles are substantially similar to GEO’s amended and restated articles of incorporation, except that the GEO REIT Articles provide for restrictions on ownership of GEO REIT capital stock to facilitate compliance with the REIT rules. These ownership restrictions could delay, defer or prevent a transaction or a change of control of GEO REIT that might involve a premium price for common stock of GEO REIT or otherwise be in the best interests of its shareholders. The GEO REIT Bylaws are substantially similar to GEO’s bylaws;

 

    there will be no change in the assets we hold or in the businesses we conduct; and

 

    there will be no fundamental change to our discretionary capital allocation strategy or current operational strategy.

 

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We have attached to this proxy statement/prospectus a copy of the merger agreement as Annex A, a copy of the form of the GEO REIT Articles as Annex B-1 and a copy of the form of the GEO REIT Bylaws as Annex B-2.

 

Q. When and where is the special meeting?

 

A. The special meeting will be held on Friday, May 2, 2014 at 10:00 a.m., local time, at The Boca Raton Resort & Club, 501 East Camino Real, Boca Raton, Florida 33432.

 

Q. What will I be voting on at the special meeting?

 

A. As a shareholder, you are entitled to, and requested to, vote on the proposal to approve the merger agreement pursuant to which GEO will be merged with and into GEO REIT, a wholly owned subsidiary of GEO, with GEO REIT as the surviving entity. In addition, you are requested to vote on the proposal to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposal regarding the approval of the merger agreement. You are not being asked to vote on the REIT conversion, which became effective for the taxable year beginning January 1, 2013 and was not conditioned upon shareholder approval of the merger.

 

Q. Who can vote on the merger?

 

A. If you are a shareholder of record at the close of business on March 10, 2014 you may vote the shares of common stock that you held on the record date at the special meeting. On or about April 7, 2014 we will begin mailing this proxy statement/prospectus to all persons entitled to vote at the special meeting.

 

Q. Why is my vote important?

 

A. If you do not submit a proxy or vote in person at the meeting, it will be more difficult for us to obtain the necessary quorum to hold the special meeting. In addition, your failure to submit a proxy or to vote in person will have the same effect as a vote against the approval of the merger agreement. If you hold your shares through a broker, bank, or other nominee, your broker, bank, or other nominee will not be able to cast a vote on the approval of the merger agreement without instructions from you.

 

Q. What constitutes a quorum for the special meeting?

 

A. The presence, in person or by proxy, of a majority of the total number of shares of GEO common stock outstanding on the record date will constitute a quorum for purposes of the special meeting.

 

Q. What vote is required on the merger?

 

A. The affirmative vote of the holders of a majority of the outstanding shares of GEO common stock entitled to vote is required for the approval of the merger agreement. As of the close of business on the record date, there were 72,295,631 shares of GEO common stock outstanding and entitled to vote at the special meeting. Each share of outstanding GEO common stock on the record date is entitled to one vote on each proposal submitted to you for consideration at the special meeting.

 

Q. How do I vote without attending the special meeting?

 

A. If you are a holder of common stock on the record date, you may vote by completing, signing and promptly returning the proxy card in the self-addressed stamped envelope provided. You may also authorize a proxy to vote your shares by telephone or over the Internet as described in your proxy card. Authorizing a proxy by telephone or over the Internet or by mailing a proxy card will not limit your right to attend the special meeting and vote your shares in person. Those shareholders of record who choose to vote by telephone or over the Internet must do so no later than 11:59 p.m., Eastern Time, on May 1, 2014.

 

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Q. Can I attend the special meeting and vote my shares in person?

 

A. Yes. All shareholders are invited to attend the special meeting. Shareholders of record at the close of business on the record date are invited to attend and vote at the special meeting. If your shares are held by a broker, bank or other nominee, then you are not the shareholder of record. Therefore, to vote at the special meeting, you must bring the appropriate documentation from your broker, bank or other nominee confirming your beneficial ownership of the shares.

 

Q. If my shares are held in “street name” by my broker, bank or other nominee, will my broker, bank or other nominee vote my shares for me?

 

A. No. If your shares are held in “street name” by your broker, bank or other nominee, you should follow the directions provided by your broker, bank or other nominee. Your broker, bank or other nominee will vote your shares only if you provide instructions on how you would like your shares to be voted.

 

Q. Can I change my vote after I have mailed my signed proxy card?

 

A. Yes. You can change your vote at any time before your proxy is voted at the special meeting. To revoke your proxy, you must either (1) notify the secretary of GEO in writing, (2) mail a new proxy card dated after the date of the proxy you wish to revoke, (3) submit a later dated proxy by telephone or over the Internet by following the instructions on your proxy card or (4) attend the special meeting and vote your shares in person. Merely attending the special meeting will not constitute revocation of your proxy. If your shares are held through a broker, bank, or other nominee, you should contact your broker, bank or other nominee to change your vote.

 

Q. Who will be on the board of directors and management after the merger?

 

A. The board of directors and executive management of GEO immediately prior to the merger will be the board of directors and executive management, respectively, of GEO REIT immediately following the merger.

 

Q. Do any of GEO’s directors and executive officers have any interests in the merger that are different from mine?

 

A. No. GEO’s directors and executive officers own shares of GEO common stock, restricted stock and options to purchase shares of GEO common stock and, to that extent, their interest in the merger is the same as that of the other holders of shares of GEO common stock, restricted stock and options to purchase shares of GEO common stock.

 

Q. Will I have to pay federal income taxes as a result of the merger?

 

A. No. You will not recognize gain or loss for federal income tax purposes as a result of the exchange of shares of GEO common stock for shares of GEO REIT common stock in the merger. However, if you are a non-United States person who owns or has owned more than 5% of the outstanding GEO common stock, it may be necessary for you to comply with reporting and other requirements of the Treasury regulations in order to achieve nonrecognition of gain on the exchange of your GEO common stock for GEO REIT common stock in the merger. See the section titled “United States Federal Income Tax Consequences” beginning on page 125 for a more detailed discussion of the federal income tax consequences of the merger.

 

Q. Am I entitled to appraisal rights?

 

A. No. Under the Florida Business Corporation Act, which we refer to as Florida Corporate Law, you are not entitled to any appraisal rights in connection with the merger.

 

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Q. How does the board of directors recommend I vote on the merger proposal?

 

A. The board of directors of GEO believes that the merger is advisable and in the best interests of the company and its shareholders. The board of directors unanimously recommends that you vote “FOR” the approval of the merger agreement.

 

Q. What actions has GEO taken in connection with the REIT conversion?

 

A. The board of directors of GEO has previously approved a plan to reorganize GEO’s business operations so that GEO could elect to be treated as a real estate investment trust, or REIT, for federal income tax purposes beginning January 1, 2013. We refer to this plan, including the related reorganization transactions, as the REIT conversion. The board of directors of GEO determined that the REIT conversion would be in the best interests of GEO and its shareholders. The REIT conversion includes the following elements:

 

    reorganization of our business operations and divestiture of healthcare facility operations which were completed by December 31, 2012 to facilitate the election to be taxed as a REIT for federal income tax purposes beginning January 1, 2013;

 

    special distribution of our accumulated earnings and profits—we declared and paid a special dividend during the fourth quarter of 2012 for the purposes of distributing to our shareholders our pre-REIT accumulated earnings and profits; and

 

    commencement of payment of regular quarterly distributions, the amounts of which are determined and subject to adjustment by the board of directors (GEO paid quarterly cash dividends as a REIT of $0.50 per share of common stock on March 1, 2013 to shareholders of record as of the close of business on February 15, 2013, $0.50 per share of common stock on June 3, 2013 to shareholders of record as of the close of business on May 20, 2013, $0.50 per share of common stock on August 29, 2013 to shareholders of record as of the close of business on August 19, 2013, $0.55 per share of common stock on November 26, 2013 to shareholders of record as of the close of business on November 14, 2013 and $0.57 per share of common stock on March 14, 2014 to shareholders of record as of the close of business on March 3, 2014).

The REIT conversion took place on January 1, 2013. You are not being asked to vote on the REIT conversion. Instead, you are being asked to vote on the merger agreement.

 

Q. What is a REIT?

 

A. A REIT is a company that qualifies for special treatment for federal income tax purposes because, among other things, it derives most of its income from real estate, including in the case of GEO the ownership and leasing of correctional and detention facilities, and makes a special election under the Internal Revenue Code of 1986, as amended, or the Code.

A corporation that qualifies as a REIT generally is not subject to federal income taxes on its corporate income and gains that it distributes to its shareholders.

We continue to be required to pay federal income tax on earnings from our non-REIT assets and operations, which consist primarily of our managed-only contracts, electronic monitoring services, and non-residential and community based facilities. In addition, our international operations will continue to be subject to taxation in the foreign jurisdictions where those operations are conducted. We may also be subject to a variety of taxes, including payroll taxes and state, local and foreign income, property, gross receipts and other taxes on our assets and operations.

 

Q. What happened in our REIT conversion?

 

A.

To comply with certain REIT qualification requirements, we hold and operate certain of our assets that cannot be held directly by a REIT through taxable REIT subsidiaries, or TRSs. A TRS is a subsidiary of

 

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  a REIT that pays corporate tax at regular rates on its taxable income. Please see the section titled “United States Federal Income Tax Consequences—Effect of Subsidiary Entities” beginning on page 129 for a more detailed description of the requirements and limitations regarding our expected use of TRSs.

The businesses that we initially contributed to, or retained in, several subsidiaries that elected to be treated as TRSs effective as of January 1, 2013 principally consist of our managed-only contracts, electronic monitoring services, non-residential and community based facilities and international operations. Net income from our TRSs either will be retained by our TRSs and used to fund their operations, or will be distributed to us, where it will either be reinvested by us into our business or available for distribution to our shareholders.

The GEO board of directors previously approved the REIT conversion and GEO began operating as a REIT beginning on January 1, 2013.

 

Q. What are our reasons for the REIT conversion and the merger?

 

A. We completed the REIT conversion primarily for the following reasons:

 

    To increase shareholder value: As a REIT, we believe we increase the stock market value of our common stock and benefit from a lower cost of capital compared to a regular C corporation as a result of increased cash flows and distributions;

 

    To return capital to shareholders: We believe our shareholders will benefit from increased regular cash distributions, resulting in a yield-oriented stock; and

 

    To expand our base of potential shareholders: By becoming a company that makes regular distributions to its shareholders, our shareholder base may expand to include investors attracted by yield, resulting in greater liquidity of our common stock.

We are proposing the merger primarily for the following reason:

 

    To facilitate our compliance with the REIT qualification rules: The merger will facilitate our compliance with the REIT rules because GEO REIT will adopt and maintain charter documents that implement standard REIT share ownership and transfer restrictions.

To review the background of, and the reasons for, the REIT conversion and the merger in greater detail, and the related risks associated with the reorganization, see the sections titled “Background of the REIT Conversion and Merger” beginning on page 43, “Our Reasons for the REIT Conversion and the Merger” beginning on page 45 and “Risk Factors” beginning on page 17.

 

Q. What will I receive in connection with the merger? When will I receive it?

 

A. You will receive:

Shares of GEO REIT common stock

At the time of the completion of the merger, you will have the right to receive one share of GEO REIT common stock in exchange for each of your then outstanding shares of GEO common stock.

 

Q. When was the REIT conversion effective?

 

A. We completed the necessary actions to elect REIT status effective January 1, 2013. You are not being asked to vote on the REIT conversion and the REIT conversion was not conditioned upon shareholder approval of the merger agreement.

 

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Q. When is the merger expected to be completed?

 

A. We expect to complete the merger in the first half of 2014. We reserve the right to cancel or defer the merger even if shareholders of GEO vote to approve the merger agreement and other conditions to the completion of the merger are satisfied or waived, if the board of directors determines that the merger is no longer in the best interests of GEO and its shareholders.

 

Q. What are some of the risks associated with the REIT conversion?

 

A. There are a number of risks relating to the REIT conversion, including the following:

 

    If GEO REIT fails to remain qualified as a REIT, it will be subject to taxation at regular corporate rates without a deduction for dividends paid and will have reduced funds available for distribution to its shareholders;

 

    There is no assurance that our cash flows from operations will be sufficient for us to fund required distributions; and

 

    We must continue to comply with the REIT requirements, which may hinder our ability to make certain attractive investments, including investments in our TRS businesses.

To review the risks associated with the REIT conversion, see the sections titled “Risk Factors” beginning on page 17 and “Our Reasons for the REIT Conversion and the Merger” beginning on page 45.

 

Q. What do I need to do now?

 

A. You should carefully read and consider the information contained in this proxy statement/prospectus, including its annexes. It contains important information about what the board of directors of GEO considered in evaluating, approving and implementing the REIT conversion and adopting the merger agreement.

You should then complete and sign your proxy card and return it in the enclosed envelope as soon as possible so that your shares will be represented at the special meeting, or vote your proxy by telephone or over the Internet in accordance with the instructions on your proxy card. If your shares are held through a broker, bank or other nominee, you should receive a separate voting instruction form with this proxy statement/prospectus.

 

Q. Should I send in my stock certificates now?

 

A. No. After the merger is completed, GEO shareholders will receive written instructions from the exchange agent on how to exchange their shares of GEO common stock for shares of GEO REIT common stock. Please do not send in your GEO stock certificates with your proxy.

 

Q. Where will my GEO REIT common stock be publicly traded?

 

A. GEO REIT will apply to list the new shares of GEO REIT common stock on the New York Stock Exchange, or NYSE, upon completion of the merger. We expect that GEO REIT common stock will trade under our current symbol “GEO.”

 

Q. Whom should I call with questions?

 

A. You may call Pablo E. Paez, our Vice President of Corporate Relations, at (866) 301-4436. If we retain a proxy solicitor, you may also contact the proxy solicitor with any questions about the merger, or to obtain additional copies of this proxy statement/prospectus or additional proxy cards.

 

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CORPORATE STRUCTURE

The following diagrams summarize the corporate structure of GEO before and after the merger and the related reorganization transactions.

 

LOGO

 

(1) A “TRS” is a taxable REIT subsidiary that pays corporate income tax at regular rates on its taxable income.
(2) A “QRS” is a qualified REIT subsidiary.
(3) Recently formed for the purpose of effecting the merger.
(4) Former shareholders of The GEO Group, Inc.
(5) To be renamed “The GEO Group, Inc.”

 

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SUMMARY

This summary highlights selected information from this proxy statement/prospectus and may not contain all of the information that is important to you. You should carefully read this entire proxy statement/prospectus and the other documents to which this proxy statement/prospectus refers to fully understand the REIT conversion and the merger. In particular, you should read the annexes attached to this proxy statement/prospectus, including the merger agreement, which is attached as Annex A. You also should read the form of GEO REIT Articles, attached as Annex B-1, and the form of GEO REIT Bylaws, attached as Annex B-2, because these documents will govern your rights as a shareholder of GEO REIT following the merger. See the section titled “Where You Can Find More Information” in the front part of this proxy statement/prospectus. For a discussion of the risk factors that you should carefully consider, see the section titled “Risk Factors” beginning on page 17. Most items in this summary include a page reference directing you to a more complete description of that item.

The GEO board of directors previously approved the REIT conversion and GEO has taken all of the required steps necessary so that GEO could begin operating in compliance with the REIT rules beginning on January 1, 2013. When used in this proxy statement/prospectus, unless otherwise specifically stated or the context otherwise requires, the terms “Company,” “GEO,” “we,” “our” and “us” refer to The GEO Group, Inc. and its subsidiaries with respect to the period prior to the merger, and GEO REIT and its subsidiaries including the TRSs with respect to the period after the merger.

The Companies

The GEO Group, Inc.

One Park Place, Suite 700

621 Northwest 53rd Street

Boca Raton, Florida 33487

(561) 893-0101

We are a real estate investment trust, or REIT, specializing in the ownership, leasing and management of correctional, detention, and re-entry facilities and the provision of community-based services and youth services in the United States, Australia, South Africa, the United Kingdom and Canada. We own, lease and operate a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers, and community based re-entry facilities. For the year ended December 31, 2013, we generated revenues of $1.5 billion.

As of December 31, 2013, our worldwide operations included the ownership and/or management of approximately 77,000 beds at 98 correctional, detention and re-entry facilities, including idle facilities and projects under development, and also included the provision of monitoring services, tracking more than 70,000 offenders in a community-based environment on behalf of approximately 900 federal, state and local correctional agencies located in all 50 states.

We provide a diversified scope of services on behalf of our government clients:

 

    our correctional and detention management services involve the provision of security, administrative, rehabilitation, education and food services, primarily at adult male correctional and detention facilities;

 

    our community-based services involve supervision of adult parolees and probationers and the provision of temporary housing, programming, employment assistance and other services with the intention of the successful reintegration of residents into the community;

 

    our youth services include residential, detention and shelter care and community-based services along with rehabilitative and educational programs;

 

 

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    we provide comprehensive electronic monitoring and supervision services;

 

    we develop new facilities, using our project development experience to design, construct and finance what we believe are state-of-the-art facilities that maximize security and efficiency; and

 

    we provide secure transportation services for offender and detainee populations as contracted.

We conduct our business through four reportable business segments: our U.S. Corrections & Detention segment; our International Services segment; our GEO Community Services segment; and our Facility Construction & Design segment. We have identified these four segments to reflect our current view that we operate four distinct business lines, each of which constitutes a material part of our overall business. Our U.S. Corrections & Detention segment primarily encompasses our U.S.-based privatized corrections and detention business. Our International Services segment primarily consists of our privatized corrections and detention operations in South Africa, Australia, Canada and the United Kingdom. Our GEO Community Services segment comprises our community-based services business, our youth services business and our electronic monitoring and supervision services, all of which are currently conducted in the U.S. Our Facility Construction & Design segment primarily contracts with various state, local and federal agencies for the design and construction of facilities for which we generally have been, or expect to be, awarded management contracts.

GEO’s business was founded in 1984 as a division of The Wackenhut Corporation, or TWC, a multinational provider of global security services. GEO was incorporated in 1988 as a wholly owned subsidiary of TWC. In July 1994, GEO became a publicly traded company. In 2002, TWC was acquired by Group 4 Falck A/S, which became GEO’s new parent company. In July 2003, GEO purchased all of its common stock owned by Group 4 Falck A/S and became an independent company. In November 2003, GEO changed its corporate name to “The GEO Group, Inc.” GEO currently trades on the New York Stock Exchange under the ticker symbol “GEO.”

GEO is incorporated in Florida. GEO’s principal executive offices are located at One Park Place, Suite 700, 621 NW 53rd Street, Boca Raton, Florida 33487. GEO’s telephone number is (561) 893-0101. GEO’s website is www.geogroup.com. Information on, or accessible through, GEO’s website is not a part of this proxy statement/prospectus.

The GEO REIT Group, Inc., which we refer to as GEO REIT, is a wholly owned subsidiary of GEO and was organized in Florida on July 11, 2013 to succeed to and continue the business of GEO upon completion of the merger of GEO with and into GEO REIT. Effective at the time of the merger, GEO REIT will be renamed “The GEO Group, Inc.” Prior to the merger, GEO REIT will conduct no business other than that incidental to the merger. Immediately following the merger, GEO REIT will directly or indirectly conduct all of the business currently conducted by GEO. Upon completion of the merger, GEO REIT will directly or indirectly hold all of GEO’s assets.

General

The board of directors of GEO previously approved a plan to reorganize GEO’s business operations to enable the qualification of GEO as a REIT for federal income tax purpose beginning January 1, 2013. The reorganization transactions were designed to enable GEO to hold its assets and business operations in a manner that would enable us to elect to be treated as a REIT for federal income tax purposes. We refer to the reorganization transactions in this proxy statement/prospectus as the REIT conversion. Although the required steps for the REIT conversion have been implemented, GEO also intends to merge GEO into a newly formed entity, to facilitate GEO’s compliance with REIT rules by implementing standard REIT ownership limitations that generally restrict shareholders from owning more than 9.8% of our outstanding shares. GEO’s board of directors has approved the merger of GEO into GEO REIT to succeed to and continue the business operations of GEO and its assets. As a REIT, GEO REIT is generally not subject to federal corporate income taxes on that

 

 

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portion of its capital gain or ordinary income from its REIT operations that is distributed to its shareholders. However, as explained more fully below, the non-REIT operations of GEO, which consist primarily of our managed-only contracts, international operations, electronic monitoring services, and non-residential and community based facilities, continue to be subject to federal corporate income taxes. We will also continue to be subject to a myriad of other taxes on income and assets.

We are distributing this proxy statement/prospectus to you as a holder of GEO common stock in connection with the solicitation of proxies by the board of directors to vote on a proposal to approve the merger agreement. A copy of the merger agreement is attached to this proxy statement/prospectus as Annex A.

The GEO board of directors reserves the right to cancel or defer the merger even if GEO shareholders vote to approve the merger agreement and the other conditions to the completion of the merger are satisfied or waived if it determines that the merger is no longer in the best interests of GEO and its shareholders.

Board of Directors and Management of GEO REIT

The board of directors and executive management of GEO immediately prior to the merger will be the board of directors and executive management, respectively, of GEO REIT immediately following the merger.

Interests of Directors and Executive Officers in the Merger

Our directors and executive officers own shares of our common stock, restricted stock and stock options to purchase shares of our common stock and, to that extent, their interest in the merger is the same as that of the other holders of shares of our common stock, restricted stock and stock options to purchase shares of our common stock.

Regulatory Approvals (See page 48)

We are not aware of any federal, state or local regulatory requirements that must be complied with or approvals that must be obtained prior to completion of the merger pursuant to the merger agreement and the transactions contemplated thereby, other than compliance with applicable federal and state securities laws, the filing of articles of merger as required under Florida Corporate Law, and various state governmental authorizations.

Comparison of Rights of Shareholders of GEO and GEO REIT (See page 119)

Your rights as a holder of GEO common stock are currently governed by Florida Corporate Law, GEO’s Amended and Restated Articles of Incorporation, as amended, which we refer to as the GEO Articles, and the Amended and Restated Bylaws of GEO, which we refer to as the GEO Bylaws. If the merger agreement is approved by GEO’s shareholders and the merger is completed, you will become a shareholder of GEO REIT and your rights as a shareholder of GEO REIT will be governed by Florida Corporate Law, the GEO REIT Articles and the GEO REIT Bylaws. There are certain differences that exist between your rights as a holder of GEO common stock and your rights as a holder of GEO REIT common stock.

The major difference is that, to assist with GEO REIT’s ability to satisfy requirements under the Code that are applicable to REITs in general, the GEO REIT Articles will generally prohibit any shareholder from owning more than 9.8% of the outstanding shares of GEO REIT common stock or any other class or series of GEO REIT stock. These limitations are subject to waiver or modification by the board of directors of GEO REIT. For more detail regarding the differences between your rights as a holder of GEO common stock and your rights as a holder of GEO REIT common stock, see the sections titled “Description of GEO REIT Capital Stock” and “Comparison of Rights of Shareholders of GEO and GEO REIT.”

 

 

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The forms of the GEO REIT Articles and GEO REIT Bylaws are attached as Annex B-1 and Annex B-2, respectively.

United States Federal Income Tax Consequences of the Merger (See page 125)

Our tax counsel, Skadden, Arps, Slate, Meagher & Flom LLP, or Skadden, is of the opinion that the merger will be treated for federal income tax purposes as a tax-free reorganization under section 368(a) of the Code. Accordingly, we expect for federal income tax purposes:

 

    no gain or loss will be recognized by GEO or GEO REIT as a result of the merger;

 

    you will not recognize any gain or loss upon the conversion of your shares of GEO common stock into GEO REIT common stock;

 

    the tax basis of the shares of GEO REIT common stock that you receive pursuant to the merger in the aggregate will be the same as your adjusted tax basis in the shares of GEO common stock being converted in the merger; and

 

    the holding period of shares of GEO REIT common stock that you receive pursuant to the merger will include your holding period with respect to the shares of GEO common stock being converted in the merger, assuming that your GEO common stock was held as a capital asset at the effective time of the merger.

The federal income tax treatment of holders of GEO common stock and GEO REIT common stock depends in some instances on determinations of fact and interpretations of complex provisions of federal income tax law for which no clear precedent or authority may be available. In addition, the tax consequences of holding GEO common stock or GEO REIT common stock to any particular shareholder will depend on the shareholder’s particular tax circumstances. For example, in the case of a non-U.S. shareholder that owns or has owned in excess of 5% of GEO common stock, it may be necessary for that person to comply with reporting requirements for him or her to achieve the nonrecognition of gain, carryover tax basis and tacked holding period described above. We urge you to consult your tax advisor regarding the specific tax consequences, including the federal, state, local and foreign tax consequences, to you in light of your particular investment or tax circumstances of acquiring, holding, exchanging or otherwise disposing of GEO common stock or GEO REIT common stock.

Qualification of GEO REIT as a REIT (See page 128)

We have taken all of the required steps necessary to qualify as a REIT for federal income tax purposes effective for our taxable year commencing January 1, 2013. As a REIT, we are permitted to deduct distributions paid to our shareholders, allowing the income represented by such distributions not to be subject to taxation at the entity level and to be taxed, if at all, only at the shareholder level. Nevertheless, the earnings of our TRSs are subject, as applicable, to federal corporate income taxes and to foreign income taxes where those operations are conducted.

Our ability to continue to qualify as a REIT will depend upon our continuing compliance with various REIT requirements, including requirements related to the nature of our assets, the sources of our income and the distributions to our shareholders. If we fail to qualify as a REIT, we will be subject to federal income tax at regular corporate rates. As a REIT, we are also subject to some federal, state, local and foreign taxes on our income and property.

Recommendation of the Board of Directors (See page 41)

The GEO board of directors believes that the merger is advisable for GEO and its shareholders and unanimously recommends that you vote “FOR” the approval of the merger agreement, which is being

 

 

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implemented in connection with GEO’s conversion to a REIT, effective January 1, 2013, and “FOR” permitting GEO’s board of directors to adjourn the special meeting, if necessary, for further solicitation of proxies if there are not sufficient votes at the originally scheduled time of the special meeting to approve the merger agreement.

Date, Time, Place and Purpose of Special Meeting (See page 40)

The special meeting will be held on Friday, May 2, 2014 at 10:00 a.m., local time, at The Boca Raton Resort & Club, 501 East Camino Real, Boca Raton, Florida 33432 to consider and vote upon the proposals described in the notice of special meeting.

Shareholders Entitled to Vote (See page 40)

The board of directors has fixed the close of business on March 10, 2014 as the record date for the determination of shareholders entitled to receive notice of, and to vote at, the special meeting. As of March 10, 2014, there were 72,295,631 shares of GEO common stock outstanding and entitled to vote and 682 holders of record.

Vote Required (See pages 40 and 41)

The affirmative vote of the holders of a majority of the outstanding shares of GEO common stock entitled to vote is required for the approval of the merger agreement. Accordingly, abstentions and “broker non-votes,” if any, will have the effect of a vote against the proposal to approve the merger agreement. You are not being asked to vote on the REIT conversion.

The GEO board of directors reserves the right to cancel or defer the merger even if GEO’s shareholders vote to approve the merger agreement and the other conditions to the completion of the merger are satisfied or waived, if the board of directors determines that the merger is no longer in the best interests of GEO and its shareholders.

The affirmative vote of the holders of a majority of the shares of GEO common stock voting on the proposal to adjourn the special meeting, if necessary, to solicit further proxies is required to permit GEO’s board of directors to adjourn the special meeting, if necessary, to solicit further proxies.

No Appraisal Rights (See page 48)

Under Florida Corporate Law, you will not be entitled to appraisal rights as a result of the merger.

Shares Owned by GEO’s Directors and Executive Officers

As of March 10, 2014, the directors and executive officers of GEO and their affiliates owned and were entitled to vote 1,625,466 shares of GEO common stock, or 2.2% of the shares outstanding on that date entitled to vote with respect to each of the proposals. We currently expect that each director and executive officer of GEO will vote the shares of GEO common stock beneficially owned by such director or executive officer “FOR” approval of the merger agreement and “FOR” permitting GEO’s board of directors to adjourn the special meeting, if necessary, for further solicitation of proxies if there are not sufficient votes at the originally scheduled time of the special meeting to approve the merger agreement.

 

 

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Historical Market Price of GEO Common Stock

GEO’s common stock is listed on the NYSE under the symbol “GEO.”

The following table presents the reported high and low sale prices of GEO common stock on the NYSE, in each case for the periods presented and as reported on the consolidated tape of the NYSE. On December 6, 2012, the last full trading day prior to the public announcement of the proposed REIT conversion, the closing sale price of the GEO common stock on the NYSE was $29.44 per share. On April 2, 2014, the latest practicable date before the printing of this proxy statement/prospectus, the closing sale price of GEO common stock on the NYSE was $33.26 per share. You should obtain a current stock price quotation for GEO common stock.

 

     GEO Common Stock Market
Price Per Share ($)
 
         High              Low      

Year Ended December 31, 2012

     

First Quarter

     19.36         16.56   

Second Quarter

     22.91         18.77   

Third Quarter

     28.19         22.00   

Fourth Quarter

     32.36         26.60   

Year Ended December 31, 2013

     

First Quarter

     37.72         28.51   

Second Quarter

     39.35         32.84   

Third Quarter

     35.96         30.11   

Fourth Quarter

     36.63         31.54   

Year Ending December 31, 2014

     

First Quarter

     34.14         30.85   

Second Quarter (through April 2, 2014)

     33.26         32.15   

It is expected that, upon completion of the merger, GEO REIT common stock will be listed and traded on the NYSE in the same manner as shares of GEO common stock currently trade on that exchange. The historical trading prices of GEO common stock are not necessarily indicative of the future trading prices of GEO REIT’s common stock because, among other things, the historical stock price of GEO reflects the previous market valuation of GEO’s previous business and assets, including the GEO Care business that was disposed of as of December 31, 2012 and the cash that was distributed in connection with the special distribution of our pre-REIT accumulated earnings and profits paid on December 31, 2012.

In February 2012, the GEO board of directors adopted a dividend policy. In May 2012, the GEO board of directors determined to accelerate the implementation of the dividend policy to the third quarter of 2012. On August 7, 2012, the GEO board of directors declared a dividend of $0.20 per share to shareholders of record on August 21, 2012, which was paid on September 7, 2012 for a total of $12.3 million. On November 5, 2012, GEO announced that on October 31, 2012, the GEO board of directors declared a quarterly cash dividend of $0.20 per share which was paid on November 30, 2012 to shareholders of record as of the close of business on November 16, 2012.

In connection with GEO’s special distribution of its pre-REIT accumulated earnings and profits, GEO paid, on December 31, 2012, a total of approximately $76 million in cash and issued approximately 9.7 million shares of GEO common stock to its shareholders.

Shareholders received payment of the special distribution in cash, shares of GEO common stock or a combination as a result of shareholder elections. GEO paid approximately $5.68 per share of common stock pursuant to the special distribution to shareholders of record as of the close of business on December 12, 2012.

 

 

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GEO paid quarterly cash dividends as a REIT of $0.50 per share of common stock on March 1, 2013 to shareholders of record as of the close of business on February 15, 2013, $0.50 per share of common stock on June 3, 2013 to shareholders of record as of the close of business on May 20, 2013, $0.50 per share of common stock on August 29, 2013 to shareholders of record as of the close of business on August 19, 2013, $0.55 per share of common stock on November 26, 2013 to shareholders of record as of the close of business on November 14, 2013 and $0.57 per share of common stock on March 14, 2014 to shareholders of record as of the close of business on March 3, 2014.

Prior to August 7, 2012, GEO had not declared or paid cash dividends on its common stock.

 

 

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SUMMARY HISTORICAL FINANCIAL AND OTHER DATA

The following table sets forth the summary historical financial and other data of us and our consolidated subsidiaries at the dates and for the periods indicated. The summary consolidated balance sheet data as of December 31, 2013 and December 31, 2012 and the summary consolidated statements of comprehensive income data and other financial data for each of the years in the three-year period ended December 31, 2013 have been derived from our audited consolidated financial statements incorporated by reference into this proxy statement/prospectus. The summary balance sheet data as of January 1, 2012 has been derived from our audited consolidated financial statements, which are not included in or incorporated by reference into this proxy statement/prospectus. The summary consolidated statements of comprehensive income and other financial data for each of the years in the three-year period ended December 31, 2013 reflect the reclassification of certain amounts as discontinued operations. In connection with our conversion to a REIT, we determined to change our fiscal year end from the close of business on the Sunday closest to December 31 of each year to December 31 of each year. This change was effective for the 2012 fiscal year and as a result the 2012 fiscal year ended on December 31, 2012 instead of December 30, 2012. In the opinion of management, the presentation of such results includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the data for such periods.

The information presented below should be read in conjunction with the historical consolidated financial statements of GEO, including the related notes, and GEO’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in or incorporated by reference into this proxy statement/prospectus. All amounts are presented in thousands except operational and per share data.

 

    Fiscal Year Ended  
    January 1,
2012
    December 31,
2012
    December 31,
2013
 

Consolidated Statements of Comprehensive Income:

     

Revenues

  $ 1,407,172      $ 1,479,062      $ 1,522,074   

Operating costs and expenses

     

Operating expenses

    1,036,010        1,089,232        1,124,865   

Depreciation and amortization

    81,548        91,685        94,664   

General and administrative expenses

    110,015        113,792        117,061   
 

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

  $ 1,227,573      $ 1,294,709      $ 1,336,590   
 

 

 

   

 

 

   

 

 

 

Operating income

    179,599        184,353        185,484   

Interest income

    7,032        6,716        3,324   

Interest expense(1)

    (75,378     (82,189     (83,004

Loss on extinguishment of debt

    —          (8,462     (20,657
 

 

 

   

 

 

   

 

 

 

Income before income taxes, equity in earnings of affiliates, and discontinued operations

  $ 111,253      $ 100,418      $ 85,147   

Provision (benefit) for income taxes

    43,172        (40,562     (26,050

Equity in earnings of affiliates, net of income tax

    1,563        3,578        6,265   
 

 

 

   

 

 

   

 

 

 

Income from continuing operations

    69,644        144,558        117,462   

Income (loss) from discontinued operations, net of income tax

    7,819        (10,660     (2,265
 

 

 

   

 

 

   

 

 

 

Net income

  $ 77,463      $ 133,898      $ 115,197   

Less: (Income) loss attributable to noncontrolling interests

    1,162        852        (62
 

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

  $ 78,625      $ 134,750      $ 115,135   
 

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

     

Net income

  $ 77,463      $ 133,898      $ 115,197   

Total other comprehensive income (loss), net of tax

    (8,253     624        (7,199
 

 

 

   

 

 

   

 

 

 

Total comprehensive income

    69,210        134,522        107,998   

Comprehensive (income) loss attributable to noncontrolling interests

    1,274        968        38   
 

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

  $ 70,484      $ 135,490      $ 108,036   
 

 

 

   

 

 

   

 

 

 

 

 

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    Fiscal Year Ended  
    January 1,
2012
    December 31,
2012
    December 31,
2013
 

Weighted Average Common Shares Outstanding:

     

Basic

    63,425        60,934        71,116   

Diluted

    63,740        61,265        71,605   

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

     

Basic:

     

Income from continuing operations

  $ 1.12      $ 2.39      $ 1.65   
 

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

    0.12        (0.17     (0.03

Net income per share—basic

  $ 1.24      $ 2.21      $ 1.62   
 

 

 

   

 

 

   

 

 

 

Diluted:

     

Income from continuing operations

  $ 1.11      $ 2.37      $ 1.64   

Income (loss) from discontinued operations

    0.12        (0.17     (0.03
 

 

 

   

 

 

   

 

 

 

Net income per share—basic

  $ 1.23      $ 2.20      $ 1.61   
 

 

 

   

 

 

   

 

 

 

Cash and Stock Dividends Per Common Share:

     

Quarterly Cash Dividends

  $ —        $ 0.40      $ 2.05   

Special Dividend—Cash and Stock

  $ —        $ 5.68        —     

Business Segment Data:

     

Revenues:

     

U.S. Corrections & Detention

  $ 925,695      $ 974,780      $ 1,011,818   

GEO Community Services(2)

    280,080        291,891        302,094   

International Services

    201,397        212,391        208,162   

Facility Construction & Design

    —          —          —     
 

 

 

   

 

 

   

 

 

 

Total revenues

  $ 1,407,172      $ 1,479,062      $ 1,522,074   
 

 

 

   

 

 

   

 

 

 

Operating income

     

U.S. Corrections & Detention

  $ 215,281      $ 222,976      $ 217,918   

GEO Community Services(2)

    61,270        65,401        71,279   

International Services

    13,063        9,768        13,348   

Facility Construction & Design

    —          —          —     

Unallocated general and administrative expenses

    (110,015     (113,792     (117,061
 

 

 

   

 

 

   

 

 

 

Total operating income

  $ 179,599      $ 184,353      $ 185,484   
 

 

 

   

 

 

   

 

 

 

Balance Sheet Data (at period end):

     

Cash and cash equivalents

  $ 43,378      $ 31,755      $ 52,125   

Restricted cash and investments

    99,459        48,410        29,867   

Accounts receivable, net

    265,250        246,635        250,530   

Property and equipment, net

    1,688,356        1,687,159        1,727,798   

Total assets

    3,049,923        2,839,194        2,889,364   

Total debt

    1,594,317        1,488,173        1,584,776   

Total shareholders’ equity

    1,038,521        1,047,304        1,023,976   

Other Operational Data (at period end):

     

Facilities in operation(3)

    90        87        86   

Operations capacity of contracts(3)

    65,787        65,949        66,130   

Compensated mandays(4)

    19,884,802        20,530,885        20,867,016   

 

(1) Interest expense excludes the following capitalized interest amounts for the periods presented:

 

Fiscal Year Ended  
January 1, 2012     December 31, 2012     December 31, 2013  
$ 3,060      $ 1,244        —     
(2) Our GEO Care reporting segment previously consisted of four aggregated operating segments including Residential Treatment Services, Community Based Services, Youth Services and B.I. Incorporated. The GEO Care reporting segment was renamed GEO Community Services concurrently with the divestiture of the Company’s Residential Treatment Services operating segment. All current and prior year financial position and results of operations amounts presented for this reporting segment are referred to as GEO Community Services. The operating results of the Residential Treatment Services operating segment and the loss on disposal have been classified in discontinued operations.
(3) Excludes idle facilities and assets held for sale.
(4) Compensated mandays 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 capacity of the facility multiplied by the number of days the facility was in operation during the fiscal year.

 

 

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RISK FACTORS

You should carefully consider the risk factors set forth below, as well as the other information contained and incorporated by reference in this proxy statement/prospectus, before deciding whether to vote for approval of the merger agreement. 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 we face. Additional risks not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business operations.

Risks Related to REIT Status and the Merger

If we fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our shareholders.

We began operating as a REIT on January 1, 2013. We received an opinion of our special REIT tax counsel, Skadden, Arps, Slate, Meagher & Flom LLP (“Special Tax Counsel”), with respect to our qualification as a REIT. Investors should be aware, however, that opinions of counsel are not binding on the Internal Revenue Service (the “IRS”) or any court. The opinion of Special Tax Counsel represents only the view of Special Tax Counsel based on its review and analysis of existing law and on certain representations as to factual matters and covenants made by us, including representations relating to the values of our assets and the sources of our income. The opinion is expressed as of the date issued. Special Tax Counsel will have no obligation to advise us or the holders of our common stock of any subsequent change in the matters stated, represented or assumed or of any subsequent change in applicable law. Furthermore, both the validity of the opinion of Special Tax Counsel and our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis, the results of which will not be monitored by Special Tax Counsel. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals.

We have received a favorable private letter ruling from the IRS with respect to certain issues relevant to our qualification as a REIT. Although we may generally rely upon the ruling, no assurance can be given that the IRS will not challenge our qualification as a REIT on the basis of other issues or facts outside the scope of the ruling.

If we fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and dividends paid to our shareholders would not be deductible by us in computing our taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our shareholders, which in turn could have an adverse impact on the value of our common stock. Unless we were entitled to relief under certain Internal Revenue Code of 1986, as amended (the “Code”), provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify as a REIT. If we fail to qualify for taxation as a REIT, we may need to borrow additional funds or liquidate some investments to pay any additional tax liability. Accordingly, funds available for investment and making payments on our indebtedness would be reduced.

Qualifying as a REIT involves highly technical and complex provisions of the Code.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis.

 

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Complying with the REIT requirements may cause us to liquidate or forgo otherwise attractive opportunities.

To qualify as a REIT, we must ensure that, at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and “real estate assets” (as defined in the Code), including certain mortgage loans and securities. The remainder of our investments (other than government securities, qualified real estate assets and securities issued by a TRS) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets (other than government securities, qualified real estate assets and securities issued by a TRS) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate or forgo otherwise attractive investments. These actions could have the effect of reducing our income, amounts available for distribution to our shareholders and amounts available for making payments on our indebtedness.

In addition to the asset tests set forth above, to qualify as a REIT we must continually satisfy tests concerning, among other things, the sources of our income, the amounts we distribute to our shareholders and the ownership of our stock. We may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive investments and make payments on our indebtedness.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum U.S. federal income tax rate applicable to income from “qualified dividends” payable to U.S. shareholders that are individuals, trusts and estates is currently 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates applicable to qualified dividends. Although these rules do not adversely affect the taxation of REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.

REIT distribution requirements could adversely affect our ability to execute our business plan.

We generally must distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, in order for us to qualify as a REIT (assuming that certain other requirements are also satisfied) so that U.S. federal corporate income tax does not apply to earnings that we distribute. To the extent that we satisfy this distribution requirement and qualify for taxation as a REIT but distribute less than 100% of our REIT taxable income, including any net capital gains, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our shareholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We intend to make distributions to our shareholders to comply with the REIT requirements of the Code.

From time to time, we may generate taxable income greater than our cash flow as a result of differences in timing between the recognition of taxable income and the actual receipt of cash or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments. If we do not have other funds available in these situations, we could be required to borrow funds on unfavorable terms, sell assets at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives

 

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could increase our costs or reduce our equity or adversely impact our ability to raise short and long-term debt. Furthermore, the REIT distribution requirements may increase the financing we need to fund capital expenditures, further growth and expansion initiatives. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our common stock.

Our cash distributions are not guaranteed and may fluctuate.

A REIT generally is required to distribute at least 90% of its REIT taxable income to its shareholders. Our board of directors, in its sole discretion, will determine on a quarterly basis the amount of cash to be distributed to our shareholders based on a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions that may impose limitations on cash payments and plans for future acquisitions and divestitures. Consequently, our distribution levels may fluctuate.

Certain of our business activities may be subject to corporate level income tax and foreign taxes, which would reduce our cash flows, and would have potential deferred and contingent tax liabilities.

We may be subject to certain federal, state, local and foreign taxes on our income and assets, including alternative minimum taxes, taxes on any undistributed income and state, local or foreign income, franchise, property and transfer taxes. In addition, we could, in certain circumstances, be required to pay an excise or penalty tax, which could be significant in amount, in order to utilize one or more relief provisions under the Code to maintain qualification for taxation as a REIT. In addition, we may incur a 100% excise tax on transactions with a TRS if they are not conducted on an arm’s length basis. Any of these taxes would decrease our earnings and our available cash.

Our TRS assets and operations will continue to be subject, as applicable, to federal and state corporate income taxes and to foreign taxes in the jurisdictions in which those assets and operations are located. Any of these taxes would decrease our earnings and our available cash.

We will also be subject to a federal corporate level tax at the highest regular corporate rate (currently 35%) on the gain recognized from a sale of assets occurring during our first ten years as a REIT, up to the amount of the built-in gain that existed on January 1, 2013, which is based on the fair market value of those assets in excess of our tax basis in those assets as of January 1, 2013. Gain from a sale of an asset occurring after the specified period ends will not be subject to this corporate level tax. We currently do not expect to sell any asset if the sale would result in the imposition of a material tax liability. We cannot, however, assure you that we will not change our plans in this regard.

REIT ownership limitations may restrict or prevent you from engaging in certain transfers of our common stock.

In order for us to satisfy the requirements for REIT qualification, no more than 50% in value of all classes or series of our outstanding shares of stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year beginning with our 2014 taxable year. GEO intends to merge GEO into a newly formed entity to facilitate GEO’s compliance with REIT rules regarding ownership of its stock by implementing ownership limitations that generally restrict shareholders from owning more than 9.8% of our outstanding shares. Under applicable constructive ownership rules, any shares of stock owned by certain affiliated owners generally would be added together for purposes of the common stock ownership limits, and any shares of a given class or series of preferred stock owned by certain affiliated owners generally would be added together for purposes of the ownership limit on such class or series.

If our shareholders do not approve the merger agreement, we may not be able to satisfy the REIT stock ownership limitations on a continuing basis, which could cause us to fail to qualify as a REIT.

 

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Our significant use of TRSs may cause us to fail to qualify as a REIT.

The net income of our TRSs is not required to be distributed to us, and such undistributed TRS income is generally not subject to our REIT distribution requirements. However, if the accumulation of cash or reinvestment of significant earnings in our TRSs causes the fair market value of our securities in those entities, taken together with other non-qualifying assets, to exceed 25% of the fair market value of our assets, in each case as determined for REIT asset testing purposes, we would, absent timely responsive action, fail to qualify as a REIT.

There are uncertainties relating to the special earnings and profits (“E&P”) distribution.

To qualify for taxation as a REIT, we were required to distribute to our shareholders all of our pre-REIT accumulated earnings and profits, if any, as measured for federal income tax purposes, prior to the end of our first taxable year as a REIT, which was the taxable period ended December 31, 2013. We declared and paid a special dividend during the fourth quarter of 2012 for the purposes of distributing to our shareholders our pre-REIT accumulated earnings and profits. The calculation of the amount of our pre-REIT accumulated E&P is a complex factual and legal determination. We currently believe that our special E&P distribution paid during the fourth quarter of 2012, together with distributions paid in 2013, satisfied the requirements relating to the distribution of our pre-REIT accumulated E&P. No assurance can be given, however, that the IRS will agree with our calculation. If the IRS finds additional amounts of pre-REIT E&P, there are procedures generally available to cure any failure to distribute all of our pre-REIT E&P.

Legislative or other actions affecting REITs could have a negative effect on us.

The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury (the “Treasury”). Changes to the tax laws or interpretations thereof, with or without retroactive application, could materially and adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, U.S. Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the U.S. federal income tax consequences to our investors and us of such qualification.

The ability of the GEO REIT board of directors to revoke our REIT qualification, without shareholder approval, may cause adverse consequences to our shareholders.

The GEO REIT Articles provide that the board of directors may revoke or otherwise terminate our REIT election, without the approval of our shareholders, if it determines that it is no longer in our best interests to continue to qualify as a REIT. If we cease to be a REIT, we will not be allowed a deduction for dividends paid to shareholders in computing our taxable income, and we will be subject to federal income tax at regular corporate rates and state and local taxes, which may have adverse consequences on our total return to our shareholders.

We have limited experience operating as a REIT, which may adversely affect our financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy debt service obligations.

We have been operating as a REIT only since January 1, 2013. Accordingly, the experience of our senior management operating a REIT is limited. Our pre-REIT operating experience may not be sufficient to enable us to operate successfully as a REIT. Our limited experience operating as a REIT could, by adversely affecting our ability to remain qualified as a REIT or otherwise, adversely affect our financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy debt service obligations.

The market price of our common stock may vary substantially.

The trading prices of equity securities issued by REITs have historically been affected by changes in market interest rates. One of the factors that may influence the market price of our common stock is the annual yield

 

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from distributions on our common stock as compared to yields on other financial instruments. An increase in market interest rates, or a decrease in our distributions to shareholders, may lead prospective purchasers of our shares to demand a higher annual yield, which could reduce the market price of our common stock.

Other factors that could affect the market price of our common stock include the following:

 

    actual or anticipated variations in our quarterly results of operations;

 

    changes in market valuations of companies in the correctional and detention industries;

 

    changes in expectations of future financial performance or changes in estimates of securities analysts;

 

    fluctuations in stock market prices and volumes;

 

    issuances of common stock or other securities in the future;

 

    the addition or departure of key personnel;

 

    announcements by us or our competitors of acquisitions, investments or strategic alliances; and

 

    changes in the prospects of the privatized corrections and detention industry.

Risks Related to Our High Level of Indebtedness

Our significant level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt service obligations.

We have a significant amount of indebtedness. Our total consolidated indebtedness as of December 31, 2013 was approximately $1.5 billion (excluding non-recourse debt of $84.1 million and capital lease obligations of $11.9 million). As of December 31, 2013, we had $61.0 million outstanding in letters of credit and $340.0 million in borrowings outstanding under the revolver portion of our senior credit facility (the “Senior Credit Facility”). Also as of December 31, 2013, we had the ability to borrow an additional $299.0 million under the revolver portion of the Senior Credit Facility, after applying the limitations and restrictions in our debt covenants and 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:

 

    make it more difficult for us to satisfy our obligations with respect to our 6.625% senior notes due 2021 (the “6.625% Senior Notes”), our 5 18% senior notes due 2023 (the “5 18% Senior Notes” or the “5.125% Senior Notes”) and our 5 78% senior notes due 2022 (the “5 78% Senior Notes” and collectively with the 6.625% Senior Notes and the 5 18% Senior Notes, the “Senior Notes”) and our other debt and liabilities;

 

    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 including to make distributions on our common stock as currently contemplated or necessary to maintain our qualification as a REIT;

 

    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;

 

    restrict us from pursuing strategic acquisitions or exploiting certain business opportunities; and

 

    limit our ability to borrow additional funds or refinance existing indebtedness on favorable terms.

 

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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 the Senior Credit Facility, the indenture governing the 6.625% Senior Notes, the indenture governing the 5.125% Senior Notes and the indenture governing the 5 78% Senior Notes.

We are incurring significant indebtedness in connection with substantial ongoing capital expenditures. Capital expenditures for existing and future projects may materially strain our liquidity.

As of December 31, 2013, we were developing a number of projects that we estimate will cost approximately $68.9 million, of which $19.8 million was spent through December 31, 2013. We estimate our remaining capital requirements for those projects to be approximately $49.1 million, which we anticipate will be spent in fiscal years 2014 and 2015. Capital expenditures related to facility maintenance costs are expected to be $23.0 million for fiscal year 2014. We intend to finance these and future projects using our own funds, including cash on hand, cash flow from operations and borrowings under the revolver portion of the Senior Credit Facility. In addition to these current estimated capital requirements for 2014 and 2015, we are currently in the process of bidding on, or evaluating potential bids for, the design, construction and management of a number of new projects. In the event that we win bids for these projects and decide to self-finance their construction, our capital requirements in 2014 and/or 2015 could materially increase. As of December 31, 2013, we had the ability to borrow an additional $299.0 million under the revolver portion of the Senior Credit Facility, after applying the limitations and restrictions in our debt covenants and subject to our satisfying the relevant borrowing conditions under the Senior Credit Facility. In addition, we have the ability to increase the Senior Credit Facility by an additional $350 million subject to lender demand and prevailing market conditions and satisfying the relevant borrowing conditions thereunder. While we believe we currently have adequate borrowing capacity under the Senior Credit Facility to fund our operations and all of our committed capital expenditure projects, we may need additional borrowings or financing from other sources in order to complete potential capital expenditures related to new projects in the future. We cannot assure you that such borrowings or financing will be made available to us on satisfactory terms, or at all. In addition, the large capital commitments that these projects will require over the next 12 to 18 months may materially strain our liquidity and our borrowing capacity for other purposes. Capital constraints caused by these projects may also cause us to have to entirely refinance our existing indebtedness or incur more indebtedness. Such financing may have terms less favorable than those we currently have in place, or may not be available to us at all. In addition, the concurrent development of these and other large capital projects exposes us to material risks. For example, we may not complete some or all of the projects on time or on budget, which could cause us to absorb any losses associated with any delays.

Despite current indebtedness levels, we may still incur more indebtedness, which could further exacerbate the risks described above.

The terms of the indentures governing the 6.625% Senior Notes, the 5.125% Senior Notes and the 5 78% Senior Notes and of the Senior Credit Facility restrict our ability to incur but do not prohibit us from incurring significant additional indebtedness in the future. As of December 31, 2013, we had the ability to borrow an additional $299.0 million under the revolver portion of the Senior Credit Facility after applying the limitations and restrictions in our debt covenants and subject to our satisfying the relevant borrowing conditions under the Senior Credit Facility. We also would have the ability to increase the Senior Credit Facility by an additional $350 million subject to lender demand, prevailing market conditions and satisfying relevant borrowing conditions. Also, we may refinance all or a portion of our indebtedness, including borrowings under the Senior Credit Facility, the 6.625% Senior Notes, the 5.125% Senior Notes and the 5 78% Senior Notes. The terms of such refinancing may be less restrictive and permit us to incur more indebtedness than we can now. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face related to our significant level of indebtedness could intensify.

 

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The covenants in the indentures governing the 6.625% Senior Notes, the 5.125% Senior Notes, and the 5 78% Senior Notes and the Senior Credit Facility impose significant operating and financial restrictions which may adversely affect our ability to operate our business.

The indentures governing the 6.625% Senior Notes, the 5.125% Senior Notes, and the 5 78% Senior Notes and the 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 or distributions on our capital stock, repurchase, redeem or retire our capital stock, prepay subordinated indebtedness and make investments;

 

    issue preferred stock of subsidiaries;

 

    guarantee other indebtedness;

 

    create liens on our assets;

 

    transfer and sell assets;

 

    make capital expenditures above certain limits;

 

    create or permit restrictions on the ability of our restricted subsidiaries to pay 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, the Senior Credit Facility requires us to maintain specified financial ratios and satisfy certain financial covenants, including maintaining a maximum senior secured leverage ratio and total leverage ratio, and a minimum interest coverage ratio. Some of these financial ratios will 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. We could also incur additional indebtedness having even more restrictive covenants. Our failure to comply with any of the covenants under the Senior Credit Facility, the indentures governing the 6.625% Senior Notes, the 5.125% Senior Notes, and the 5 78% Senior Notes, or any other indebtedness could prevent us from being able to draw on the revolver portion of the Senior Credit Facility, 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 and we may not be able to generate the cash required to service our indebtedness.

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 the Senior Credit Facility or otherwise in an amount sufficient to enable us to pay our

 

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indebtedness or debt securities, including the 6.625% Senior Notes, the 5.125% Senior Notes, and the 5 78% Senior Notes, or to fund our other liquidity needs. As a result, 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 senior indebtedness have floating interest rates, a general increase in interest rates will adversely affect cash flows.

Borrowings under the Senior Credit Facility bear interest at a variable rate. As a result, to the extent our exposure to increases in interest rates is not eliminated through interest rate protection agreements, such increases will result in higher debt service costs which will adversely affect our cash flows. We currently do not have interest rate protection agreements in place to protect against interest rate fluctuations on borrowings under the Senior Credit Facility. As of December 31, 2013, we had $638.5 million of indebtedness outstanding under our Senior Credit Facility, and a one percent increase in the interest rate applicable to the Senior Credit Facility would increase our annual interest expense by $6.4 million.

We depend on distributions from our subsidiaries to make payments on our indebtedness. These distributions may not be made.

A substantial portion of our business is conducted by our subsidiaries. Therefore, our ability to meet our payment obligations on our indebtedness is substantially dependent on the earnings of certain 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, unless they expressly guarantee any indebtedness of ours, they are not obligated to make funds available for payment of our 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, their 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 may be materially adversely affected. For the year ended December 31, 2013, our subsidiaries accounted for 72.2% of our consolidated revenues and as of December 31, 2013, our subsidiaries accounted for 92.5% of our total assets.

We may not be able to satisfy our repurchase obligations in the event of a change of control because the terms of our indebtedness or lack of funds may prevent us from doing so.

Upon a change of control as specified in the indentures governing the terms of our Senior Notes, each holder of the 6.625% Senior Notes, the 5.125% Senior Notes and the 5 78% Senior Notes will have the right to require us to repurchase their notes at 101% of their principal amount, plus accrued and unpaid interest and liquidated damages, if any, to the date of repurchase. The terms of the Senior Credit Facility limit our ability to repurchase the Senior Notes in the event of a change of control. Any future agreement governing any of our indebtedness may contain similar restrictions and provisions. Accordingly, it is possible that restrictions in the Senior Credit Facility or other indebtedness that may be incurred in the future will not allow the required repurchase of the 6.625% Senior Notes, the 5.125% Senior Notes and the 5 78% Senior Notes upon a change of control. Even if such repurchase is permitted by the terms of our then existing indebtedness, we may not have sufficient funds available to satisfy our repurchase obligations. Our failure to purchase any of the Senior Notes would be a default under the indenture governing such notes, which in turn would trigger a default under the Senior Credit Facility and the indentures governing the other Senior Notes.

 

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Risks Related to Our Business and Industry

From time to time, we may not have a management contract with a client to operate existing beds at a facility or new beds at a facility that we are expanding and we cannot assure you that such a contract will be obtained. Failure to obtain a management contract for these beds will subject us to carrying costs with no corresponding management revenue.

From time to time, we may not have a management contract with a client to operate existing beds or new beds at facilities that we are currently in the process of renovating and expanding. While we will always strive to work diligently with a number of different customers for the use of these beds, we cannot assure you that a contract for the beds will be secured on a timely basis, or at all. While a facility or new beds at a facility are vacant, we incur carrying costs. We are currently marketing approximately 6,000 vacant beds at six of our idle facilities to potential customers. The annual carrying cost of idle facilities in 2014 is estimated to be $21.9 million, including depreciation expense of $5.9 million, if the facilities remain vacant for the remainder of 2014. As of December 31, 2013, these facilities had a net book value of $193.6 million. Failure to secure a management contract for a facility or expansion project could have a material adverse impact on our financial condition, results of operations and/or cash flows. We review our facilities for impairment whenever events or changes in circumstances indicate the net book value of the facility may not be recoverable. Impairment charges taken on our facilities could require material non-cash charges to our results of operations. In addition, in order to secure a management contract for these beds, we may need to incur significant capital expenditures to renovate or further expand the facility to meet potential clients’ needs.

Negative conditions in the capital markets could prevent us from obtaining financing, which could materially harm our business.

Our ability to obtain additional financing is highly dependent on the conditions of the capital markets, among other things. The capital and credit markets have experienced significant volatility and disruption since 2008. During this time period, the economic impacts observed have included a downturn in the equity and debt markets, the tightening of the credit markets, the general economic slowdown and other macroeconomic conditions, volatility in currency exchange rates and concerns over sovereign debt levels abroad and in the U.S. and concern over the failure to adequately address the federal deficit and the debt ceiling. If those macroeconomic conditions continue or worsen in the future, we could be prevented from raising additional capital or obtaining additional financing on satisfactory terms, or at all. If we need, but cannot obtain, adequate capital as a result of negative conditions in the capital markets or otherwise, our business, results of operations and financial condition could be materially adversely affected. Additionally, such inability to obtain capital could prevent us from pursuing attractive business development opportunities, including new facility constructions or expansions of existing facilities, and business or asset acquisitions.

We are subject to the loss of our facility management contracts, due to terminations, non-renewals or competitive re-bids, which could adversely affect our results of operations and liquidity, including our ability to secure new facility management contracts from other government customers.

We are exposed to the risk that we may lose our facility management contracts primarily due to one of three reasons: (i) the termination by a government customer with or without cause at any time; (ii) the failure by a customer to exercise its unilateral option to renew a contract with us upon the expiration of the then current term; or (iii) our failure to win the right to continue to operate under a contract that has been competitively re-bid in a procurement process upon its termination or expiration. Our facility management contracts typically allow a contracting governmental agency to terminate a contract with or without cause at any time 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.

Aside from our customers’ unilateral right to terminate our facility management contracts with them at any time for any reason, there are two points during the typical lifecycle of a contract which may result in the loss by

 

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us of a facility management contract with our customers. We refer to these points as contract “renewals” and contract “re-bids.” Many of our facility management contracts with our government customers have an initial fixed term and subsequent renewal rights for one or more additional periods at the unilateral option of the customer. Because most of our contracts for youth services do not guarantee placement or revenue, we have not considered these contracts to ever be in the renewal or re-bid stage since they are more perpetual in nature. We count each government customer’s right to renew a particular facility management contract for an additional period as a separate “renewal.” For example, a five-year initial fixed term contract with customer options to renew for five separate additional one-year periods would, if fully exercised, be counted as five separate renewals, with one renewal coming in each of the five years following the initial term. As of December 31, 2013, 46 of our facility management contracts representing approximately 26,700 beds are scheduled to expire on or before December 31, 2014, unless renewed by the customer at its sole option in certain cases, or unless renewed by mutual agreement in other cases. These contracts represented 39.4% of our consolidated revenues for the fiscal year ended December 31, 2013. We undertake substantial efforts to renew our facility management contracts. Our average historical facility management contract renewal rate approximates 90%. However, given their unilateral nature, we cannot assure you that our customers will in fact exercise their renewal options under existing contracts. In addition, in connection with 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 those in existence prior to the renewals.

We define competitive re-bids as contracts currently under our management which we believe, based on our experience with the customer and the facility involved, will be re-bid to us and other potential service providers in a competitive procurement process upon the expiration or termination of our contract, assuming all renewal options are exercised. Our determination of which contracts we believe will be competitively re-bid may in some cases be subjective and judgmental, based largely on our knowledge of the dynamics involving a particular contract, the customer and the facility involved. Competitive re-bids may result from the expiration of the term of a contract, including the initial fixed term plus any renewal periods, or the early termination of a contract by a customer. Competitive re-bids are often required by applicable federal or state procurement laws periodically in order to further competitive pricing and other terms for the government customer. Potential bidders in competitive re-bid situations include us, other private operators and other government entities.

As of December 31, 2013, nine of our facility management contracts representing $160.5 million (or 10.5%) of our consolidated revenues for the year ended December 31, 2013 are subject to competitive re-bid in 2014. While we are pleased with our historical win rate on competitive re-bids and are committed to continuing to bid competitively on appropriate future competitive re-bid opportunities, we cannot assure you that we will prevail in future re-bid situations. Also, we cannot assure you that any competitive re-bids we win will be on terms more favorable to us than those in existence with respect to the expiring contract.

For additional information on facility management contracts that we currently believe will be competitively re-bid during each of the next five years and thereafter, please see “Our Business—Government Contracts—Terminations, Renewals and Competitive Re-bids” below. The loss by us of facility management contracts due to terminations, non-renewals or competitive re-bids 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 may not be able to successfully identify, consummate or integrate acquisitions.

We have an active acquisition program, the objective of which is to identify suitable acquisition targets that will enhance our growth. The pursuit of acquisitions may pose certain risks to us. We may not be able to identify acquisition candidates that fit our criteria for growth and profitability. Even if we are able to identify such candidates, we may not be able to acquire them on terms satisfactory to us. We will incur expenses and dedicate attention and resources associated with the review of acquisition opportunities, whether or not we consummate such acquisitions.

 

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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. Achieving the anticipated benefits of any acquisition will depend in significant part upon whether we integrate such acquired businesses in an efficient and effective manner. We may not be able to achieve the anticipated operating and cost synergies or long-term strategic benefits of our acquisitions within the anticipated timing or at all. For example, elimination of duplicative costs may not be fully achieved or may take longer than anticipated. For at least the first year after a substantial acquisition, and possibly longer, the benefits from the acquisition will be offset by the costs incurred in integrating the businesses and operations. We may also assume liabilities in connection with acquisitions that we would otherwise not be exposed to. An inability to realize the full extent of, or any of, the anticipated synergies or other benefits of an acquisition as well as any delays that may be encountered in the integration process, which may delay the timing of such synergies or other benefits, could have an adverse effect on our business and results of operations.

As a result of our acquisitions, we have recorded and will continue to record a significant amount of goodwill and other intangible assets. In the future, our goodwill or other intangible assets may become impaired, which could result in material non-cash charges to our results of operations.

We have a substantial amount of goodwill and other intangible assets resulting from business acquisitions. As of December 31, 2013 we had $653.6 million of goodwill and other intangible assets. At least annually, or whenever events or changes in circumstances indicate a potential impairment in the carrying value as defined by generally accepted accounting principles, or GAAP, we will evaluate such goodwill and other intangible assets for impairment by first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting unit is less than the carrying amount. Estimated fair values could change if there are changes in our capital structure, cost of debt, interest rates, capital expenditure levels, operating cash flows, or market capitalization. Impairments of goodwill or other intangible assets could require material non-cash charges to our results of operations.

Our growth depends on our ability to secure contracts to develop and manage new correctional, detention and community based facilities and to secure contracts to provide electronic monitoring services, community-based re-entry services and monitoring and supervision services, the demand for which is outside our control.

Our growth is primarily dependent upon our ability to obtain new contracts to develop and manage new correctional, detention and community based facilities, because contracts to manage existing public facilities have not to date typically been offered to private operators. Additionally, our growth is generally dependent upon our ability to obtain new contracts to offer electronic monitoring services, provide community-based re-entry services and provide monitoring and supervision services. Public sector demand for new privatized facilities in our areas of operation may decrease and our potential for growth will depend on a number of factors we cannot control, including overall economic conditions, governmental and public acceptance of the concept of privatization, government budgetary constraints, and the number of facilities available for privatization.

In particular, the demand for our correctional and detention facilities and services, electronic monitoring services, community-based re-entry services and monitoring and supervision services could be adversely affected by changes in existing criminal or immigration laws, crime rates in jurisdictions in which we operate, the relaxation of criminal or immigration enforcement efforts, leniency in conviction, sentencing or deportation practices, and the decriminalization of certain activities that are currently proscribed by criminal laws or the loosening of immigration laws. For example, any changes with respect to the decriminalization of drugs and controlled substances 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. Immigration reform laws which are currently a focus for legislators and politicians at the federal, state and local level also could materially adversely impact us. Various factors outside our control could adversely impact the growth of our GEO Community Service business, including government customer resistance to the privatization of residential treatment facilities, and changes to Medicare and Medicaid reimbursement programs.

 

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We may not be able to meet state requirements for capital investment or locate land for the development of new facilities, which could adversely affect our results of operations and future growth.

Certain jurisdictions, including California, 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 contracts. Additionally, our success in obtaining new awards and contracts may depend, in part, upon our ability to locate land that can be leased or acquired under favorable terms. Otherwise desirable locations may be in or near populated areas and, therefore, may generate legal action or other forms of opposition from residents in areas surrounding a proposed site. Our inability to secure financing and desirable locations for new facilities could adversely affect our results of operations and future growth.

We depend on a limited number of governmental customers for a significant portion of our revenues. The loss of, or a significant decrease in business from, these customers could seriously harm our financial condition and results of operations.

We currently derive, and expect to continue to derive, a significant portion of our revenues from a limited number of governmental agencies. Of our governmental clients, four customers through multiple individual contracts accounted for 48.6% of our consolidated revenues for the year ended December 31, 2013. In addition, three federal governmental agencies with correctional and detention responsibilities, the Bureau of Prisons, U.S. Immigration and Custom Enforcement (“ICE”), and the U.S. Marshals Service, accounted for 44.6% of our total consolidated revenues for the year ended December 31, 2013 through multiple individual contracts, with the Bureau of Prisons accounting for 16.8% of our total consolidated revenues for such period, ICE accounting for 16.7% of our total consolidated revenues for such period, and the U.S. Marshals Service accounting for 11.1% of our total consolidated revenues for such period; however, no individual contract with these clients accounted for more than 5.0% of our total consolidated revenues. Government agencies from the State of Florida accounted for 4.0% of our total consolidated revenues for the year ended December 31, 2013 through multiple individual contracts. Our revenues depend on our governmental customers receiving sufficient funding and providing us with timely payment under the terms of our contracts. If the applicable governmental customers do not receive sufficient appropriations to cover their contractual obligations, they may delay or reduce payment to us or terminate their contracts with us. With respect to our federal government customers, any future impasse or struggle impacting the federal government’s ability to reach agreement on the federal budget and debt ceiling or any future federal government shut downs could result in material payment delays, payment reductions or contract terminations. Additionally, our governmental customers may request in the future that we reduce our per diem contract rates or forgo increases to those rates as a way for those governmental customers to control their spending and address their budgetary shortfalls. The loss of, or a significant decrease in, business from the Bureau of Prisons, ICE, the U.S. Marshals Service, the State of Florida or any other significant customers could seriously harm our financial condition and results of operations. We expect to continue to depend upon these federal and state 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, most of our revenues are generated under facility management contracts which provide for per diem payments based upon daily occupancy. Several of these contracts provide minimum revenue guarantees for us, regardless of occupancy levels, up to a specified maximum occupancy percentage. However, many of our contracts have no minimum revenue guarantees and simply provide for a fixed per diem payment for each inmate/detainee/patient actually housed. As a result, with respect to our contracts that have no minimum revenue guarantees and those that guarantee revenues only up to a certain specified occupancy percentage, we are highly dependent upon the governmental agencies with which we have contracts to provide inmates, detainees and patients for our managed facilities. Under a per diem rate structure, a decrease in our occupancy rates could cause a decrease in revenues and profitability. In October 2011, the State of California implemented its Criminal Justice Realignment Plan. As a result of the implementation of the Criminal Justice Realignment Plan, the State of California discontinued contracts with

 

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Community Correctional Facilities which housed low level state offenders across the state. The implementation of the Criminal Justice Realignment Plan by California resulted in the cancellation of our agreements for the housing of low level state offenders at three of our California Community Corrections facilities as well as an agreement for the housing of out-of-state California inmates at our North Lake Correctional Facility in Michigan. Also, in Michigan there have been recommendations for the early release of inmates to relieve overcrowding conditions. When combined with relatively fixed costs for operating each facility, regardless of the occupancy level, a material decrease in occupancy levels at one or more of our facilities could have a material adverse effect on our revenues and profitability and, consequently, on our financial condition and results of operations.

State budgetary constraints may have a material adverse impact on us.

State budgets continue their slow to moderate recovery. While most states anticipate revenues to increase in fiscal year 2014 compared with fiscal year 2013, several states still face budget shortfalls. According to the National Conference of State Legislatures, despite these positive trends, federal deficit reduction actions, increasing program pressures, international debt crises and the impact from recent storms will continue to challenge lawmakers as they begin their new legislative sessions. As of December 31, 2013, we had eleven state correctional clients: Florida, Georgia, Alaska, Louisiana, Virginia, Indiana, Texas, Oklahoma, New Mexico, Arizona, and California. If state budgetary constraints persist or intensify, our eleven state customers’ ability to pay us may be impaired and/or we may be forced to renegotiate our management contracts with those customers on less favorable terms and our financial condition, results of operations or cash flows could be materially adversely impacted. In addition, budgetary constraints in states that are not our current customers could prevent those states from outsourcing correctional, detention or community-based service opportunities that we otherwise could have pursued.

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, bed availability, 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, some of 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 some of our contracts, the loss of such inmates and resulting decrease in occupancy could 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 and may be adversely impacted by budgetary constraints at the federal, state and local levels.

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 5 78% Senior Notes, the 5.125% Senior Notes, the 6.625% Senior Notes and the Senior Credit Facility, in a timely manner. 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 which could limit or eliminate appropriations for the facilities that we operate. Additionally, as a result of these factors, we may be requested in the future to reduce our existing per diem contract rates or forgo prospective increases to those rates. Budgetary limitations may also make it more difficult for us to renew our existing contracts on favorable terms or at all. Further, a number of states in which we operate are

 

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experiencing budget constraints for fiscal year 2014. We cannot assure that these constraints will not result in reductions in per diems, delays in payment for services rendered or unilateral termination of contracts.

Public resistance to privatization of correctional, detention, mental health and residential 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, detention and community based facilities by private entities has not achieved complete acceptance by either government agencies or the public. Some governmental agencies have limitations on their ability to delegate their traditional management responsibilities for such facilities to private companies and additional legislative changes or prohibitions could occur that further increase these limitations. In addition, the movement toward privatization of such facilities has encountered resistance from groups, such as labor unions, that believe that correctional, detention and community based facilities should only be operated by governmental agencies. In addition, negative publicity about poor conditions, an escape, riot or other disturbance at a privately managed facility may result in adverse publicity 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 or maintain existing contracts or to obtain new contracts. Changes in governing political parties could also result in significant changes to previously established views of privatization. Increased public resistance to the privatization of correctional, detention and community based 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.

Operating juvenile correctional facilities poses certain unique or increased risks and difficulties compared to operating other facilities.

As a result of the acquisition of Cornell Companies, Inc. (“Cornell”) in 2010, we re-entered the market of operating juvenile correctional facilities. We intentionally had exited the market of operating juvenile correctional facilities a number of years prior to the Cornell acquisition. Operating juvenile correctional facilities may pose increased operational risks and difficulties that may result in increased litigation, higher personnel costs, higher levels of turnover of personnel and reduced profitability. Examples of the increased operational risks and difficulties involved in operating juvenile correctional facilities include higher staff ratios, elevated reporting and audit requirements, and multiple funding sources as opposed to a single source payer. Additionally, juvenile services contracts related to educational services may provide for annual collection several months after a school year is completed. This may pose a risk that we will not be able to collect the full amount owed thereby, reducing our profitability, or it may adversely impact our annual budgeting process due to the lag time between us providing the educational services required under a contract and collecting the amount owed to us for such services. We cannot assure that we will be successful in operating juvenile correctional facilities or that we will be able to minimize the risks and difficulties involved while yielding an attractive profit margin.

Adverse publicity may negatively impact our ability to retain existing contracts and obtain new contracts.

Any negative publicity about an escape, riot or other disturbance or perceived poor conditions at a privately managed facility, any failures experienced by our electronic monitoring services or the loss of or unauthorized access to any of the data we maintain in the course of providing our services 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 or more of our facilities, which could have a material adverse effect on our business. Such negative events may also result in a significant increase in our liability insurance costs.

 

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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 5 78% Senior Notes, the 5.125% Senior Notes, the 6.625% Senior 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 regulation, including educational, environmental, health care and safety laws, rules and 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. 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 or to forgo 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 we are found to have engaged in improper or illegal activities, including under the United States False Claims Act, 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. An adverse determination in an action alleging improper or illegal activities by us could also adversely impact our ability to bid in response to RFPs in one or more jurisdictions.

 

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In addition to compliance with applicable laws and regulations, our facility management contracts typically have numerous requirements addressing all aspects of our operations which we may not be able to satisfy. For example, our contracts require us to maintain certain levels of insurance coverage for general liability, workers’ compensation, vehicle liability, and property loss or damage. 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. Facility management contracts also typically include reporting requirements, supervision and on-site monitoring by representatives of the contracting governmental agencies. Failure to properly adhere to the various terms of our customer contracts could expose us to liability for damages relating to any breaches as well as the loss of such contracts, which could materially adversely impact us.

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, product liability claims, intellectual property infringement 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, electronic monitoring products, 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 general types of claims, except for claims relating to employment matters, for which we carry no insurance. However, we generally have high deductible payment requirements on our primary insurance policies, including our general liability insurance, and there are also varying limits on the maximum amount of our overall coverage. As a result, 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, including any losses relating to employment matters, could have a material adverse effect on our business, financial condition or results of operations.

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

 

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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 effect 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.

For the year ended December 31, 2013, our international operations accounted for 14% of our consolidated revenues from continuing operations. We face risks associated with our operations outside the United States. 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.

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 our operations in South Africa through our consolidated joint venture, South African Custodial Management Pty. Limited, which we refer to as SACM, and through our 50% owned joint venture South African Custodial Services Pty. Limited, referred to as SACS. We conduct our prisoner escort and related custody services in the United Kingdom through our 50% unconsolidated joint venture in GEO Amey PECS Limited, which we refer to as GEOAmey. We may enter into additional joint ventures in the future. Although we have the majority vote in our consolidated joint venture, SACM, through our ownership of 62.5% of the voting shares, we share equal voting control on all significant matters to come before SACS. We also share equal voting control on all significant matters to come before GEOAmey. These joint venture partners, as well as any future 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, Ph.D., our Chairman and Chief Executive Officer, Brian R. Evans, our Chief Financial Officer, John M. Hurley, our Senior Vice President, Operations and President, U.S. Corrections & Detention, Jorge A. Dominicis, Senior Vice President, GEO Community Services, and also our other five executive officers at the Vice President level and above. The unexpected loss of Mr. Zoley, Mr. Evans or any other key member of our senior management team could materially adversely affect our business, financial condition or results of operations.

In addition, the services we provide are labor-intensive. When we are awarded a facility management contract or open a new facility, depending on the service we have been contracted to provide, we may need to hire operating management, correctional officers, security staff, physicians, nurses and other qualified 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 adverse 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

 

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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 hurricanes, 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 within the level of 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 the 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.

Adverse developments in our relationship with our employees could adversely affect our business, financial condition or results of operations.

At December 31, 2013, approximately 26% of our workforce was covered by collective bargaining agreements and, as of such date, collective bargaining agreements with approximately 14% of our employees

 

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were set to expire in less than one year. While only approximately 26% of our workforce schedule is covered by collective bargaining agreements, increases in organizational activity or any future work stoppages could have a material adverse effect on our business, financial condition, or results of operations.

Technological change could cause our electronic monitoring products and technology to become obsolete or require the redesign of our electronic monitoring products, which could have a material adverse effect on our business.

Technological changes within the electronic monitoring business in which we conduct business may require us to expend substantial resources in an effort to develop and/or utilize new electronic monitoring products and technology. We may not be able to anticipate or respond to technological changes in a timely manner, and our response may not result in successful electronic monitoring product development and timely product introductions. If we are unable to anticipate or timely respond to technological changes, our business could be adversely affected and could compromise our competitive position, particularly if our competitors announce or introduce new electronic monitoring products and services in advance of us. Additionally, new electronic monitoring products and technology face the uncertainty of customer acceptance and reaction from competitors.

Any negative changes in the level of acceptance of or resistance to the use of electronic monitoring products and services by governmental customers could have a material adverse effect on our business, financial condition and results of operations.

Governmental customers use electronic monitoring products and services to monitor low risk offenders as a way to help reduce overcrowding in correctional facilities, as a monitoring and sanctioning tool, and to promote public safety by imposing restrictions on movement and serving as a deterrent to alcohol usage. If the level of acceptance of or resistance to the use of electronic monitoring products and services by governmental customers were to change over time in a negative manner so that governmental customers decide to decrease their usage levels and contracting for electronic monitoring products and services, this could have a material adverse effect on our business, financial condition and results of operations.

We depend on a limited number of third parties to manufacture and supply quality infrastructure components for our electronic monitoring products. If our suppliers cannot provide the components or services we require and with such quality as we expect, our ability to market and sell our electronic monitoring products and services could be harmed.

If our suppliers fail to supply components in a timely manner that meets our quantity, quality and cost requirements, or technical specifications, we may not be able to access alternative sources of these components within a reasonable period of time or at commercially reasonable rates. A reduction or interruption in the supply of components, or a significant increase in the price of components, could have a material adverse effect on our marketing and sales initiatives, which could adversely affect our financial condition and results of operations.

The interruption, delay or failure of the provision of our services or information systems could adversely affect our business.

Certain segments of our business depend significantly on effective information systems. As with all companies that utilize information technology, we are vulnerable to negative impacts if information is inadvertently interrupted, delayed, compromised or lost. We routinely process, store and transmit large amounts of data for our clients. We continually work to update and maintain effective information systems. Despite the security measures we have in place and any additional measures we may implement in the future, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, human errors, acts of vandalism, or other events. For example, several well-known companies have recently disclosed high-profile security breaches, involving sophisticated and highly targeted attacks on their company’s infrastructure or their customers’ data, which were

 

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not recognized or detected until after such companies had been affected notwithstanding the preventative measures they had in place. Any security breach or event resulting in the interruption, delay or failure of our services or information systems, or the misappropriation, loss, or other unauthorized disclosure of client data or confidential information, whether by us directly or our third-party service providers, could damage our reputation, expose us to the risks of litigation and liability, disrupt our business, result in lost business or otherwise adversely affect our results of operations.

An inability to acquire, protect or maintain our intellectual property and patents in the electronic monitoring space could harm our ability to compete or grow.

We have numerous United States and foreign patents issued as well as a number of United States patents pending in the electronic monitoring space. There can be no assurance that the protection afforded by these patents will provide us with a competitive advantage, prevent our competitors from duplicating our products, or that we will be able to assert our intellectual property rights in infringement actions.

In addition, any of our patents may be challenged, invalidated, circumvented or rendered unenforceable. There can be no assurance that we will be successful should one or more of our patents be challenged for any reason. If our patent claims are rendered invalid or unenforceable, or narrowed in scope, the patent coverage afforded to our products could be impaired, which could significantly impede our ability to market our products, negatively affect our competitive position and harm our business and operating results.

There can be no assurance that any pending or future patent applications held by us will result in an issued patent, or that if patents are issued to us, that such patents will provide meaningful protection against competitors or against competitive technologies. The issuance of a patent is not conclusive as to its validity or its enforceability. The United States federal courts or equivalent national courts or patent offices elsewhere may invalidate our patents or find them unenforceable. Competitors may also be able to design around our patents. Our patents and patent applications cover particular aspects of our products. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. If these developments were to occur, it could have an adverse effect on our sales. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former employees and current employees, despite the existence of nondisclosure and confidentiality agreements and other contractual restrictions. Furthermore, the laws of foreign countries may not protect our intellectual property rights effectively or to the same extent as the laws of the United States. If our intellectual property rights are not adequately protected, we may not be able to commercialize our technologies, products or services and our competitors could commercialize our technologies, which could result in a decrease in our sales and market share that would harm our business and operating results.

Additionally, the expiration of any of our patents may reduce the barriers to entry into our electronic monitoring line of business and may result in loss of market share and a decrease in our competitive abilities, thus having a potential adverse effect on our financial condition, results of operations and cash flows.

Our electronic monitoring products could infringe on the intellectual property rights of others, which may lead to litigation that could itself be costly, could result in the payment of substantial damages or royalties, and/or prevent us from using technology that is essential to our products.

There can be no assurance that our current products or products under development will not infringe any patent or other intellectual property rights of third parties. If infringement claims are brought against us, whether successfully or not, these assertions could distract management from other tasks important to the success of our business, necessitate us expending potentially significant funds and resources to defend or settle such claims and harm our reputation. We cannot be certain that we will have the financial resources to defend ourselves against any patent or other intellectual property litigation.

 

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In addition, intellectual property litigation or claims could force us to do one or more of the following:

 

    cease selling or using any products that incorporate the asserted intellectual property, which would adversely affect our revenue;

 

    pay substantial damages for past use of the asserted intellectual property;

 

    obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; or

 

    redesign or rename, in the case of trademark claims, our products to avoid infringing the intellectual property rights of third parties, which may not be possible and could be costly and time-consuming if it is possible to do.

In the event of an adverse determination in an intellectual property suit or proceeding, or our failure to license essential technology, our sales could be harmed and/or our costs could increase, which would harm our financial condition.

We license intellectual property rights in the electronic monitoring space, including patents, from third party owners. If such owners do not properly maintain or enforce the intellectual property underlying such licenses, our competitive position and business prospects could be harmed. Our licensors may also seek to terminate our license.

We are a party to a number of licenses that give us rights to third-party intellectual property that is necessary or useful to our business. Our success will depend in part on the extent to which our licensors obtain, maintain and enforce our licensed intellectual property. Our licensors may not successfully prosecute any applications for or maintain intellectual property to which we have licenses, may determine not to pursue litigation against other companies that are infringing such intellectual property, or may pursue such litigation less aggressively than we would. Without protection for the intellectual property we license, other companies might be able to offer similar products for sale, which could adversely affect our competitive business position and harm our business prospects.

If we lose any of our right to use third-party intellectual property, it could adversely affect our ability to commercialize our technologies, products or services, as well as harm our competitive business position and our business prospects.

We may be subject to costly product liability claims from the use of our electronic monitoring products, which could damage our reputation, impair the marketability of our products and services and force us to pay costs and damages that may not be covered by adequate insurance.

Manufacturing, marketing, selling, testing and the operation of our electronic monitoring products and services entail a risk of product liability. We could be subject to product liability claims to the extent our electronic monitoring products fail to perform as intended. Even unsuccessful claims against us could result in the expenditure of funds in litigation, the diversion of management time and resources, damage to our reputation and impairment of the marketability of our electronic monitoring products and services. While we maintain liability insurance, it is possible that a successful claim could be made against us, that the amount of our insurance coverage would not be adequate to cover the costs of defending against or paying such a claim, or that damages payable by us would harm our business.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus and the documents incorporated by reference herein contain statements about future events and expectations, or forward-looking statements, all of which are inherently uncertain. We have based those forward-looking statements on our current expectations and projections about future results. When we use words such as “anticipates,” “intends,” “plans,” “believes,” “estimates,” “expects,” or similar expressions, we identify forward-looking statements. Examples of forward-looking statements include statements we make regarding our ability to qualify or to remain qualified as a REIT, future prospects of growth in the correctional and detention facilities industry, our future financial position, business strategy, budgets, projected costs, plans and objectives of our management for future operations, our future operating results, our future distributions to our shareholders, our future capital expenditure levels, our future financing transactions and our plans to fund our future liquidity needs. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to:

 

    our ability to remain qualified for taxation as a REIT;

 

    the risk that the REIT distribution requirements could adversely affect our ability to execute our business plan or may cause us to liquidate or forgo otherwise attractive opportunities;

 

    our inexperience operating as a REIT, which may adversely affect our financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service obligations;

 

    the level of our cash distributions to shareholders is not guaranteed and may fluctuate;

 

    the ability of the GEO REIT board of directors to revoke our REIT status, without shareholder approval, may cause adverse consequences to our shareholders;

 

    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;

 

    our ability to fulfill our debt service obligations and their impact on our liquidity;

 

    the instability of foreign exchange rates, exposing us to currency risks in Australia, Canada, the United Kingdom and South Africa, or other countries in which we may choose to conduct our business;

 

    our ability to activate the inactive beds at our idle facilities;

 

    our ability to maintain occupancy rates at our facilities;

 

    an increase in unreimbursed labor rates;

 

    our ability to expand, diversify and grow our correctional, detention, re-entry, community-based services, youth services, monitoring services, evidence-based supervision and treatment programs and secure transportation services businesses;

 

    our ability to win management contracts for which we have submitted proposals, retain existing management contracts and meet any performance standards required by such management contracts;

 

    our ability to control operating costs associated with contract start-ups;

 

    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 estimate the government’s level of dependency on privatized correctional services;

 

    our ability to accurately project the size and growth of the United States and international privatized corrections industry and our ability to capitalize on opportunities for public-private partnerships;

 

    our ability to successfully respond to delays encountered by states privatizing correctional services and cost savings initiatives implemented by a number of states;

 

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    our ability to develop long-term earnings visibility;

 

    our ability to identify suitable acquisitions, to successfully complete and integrate such acquisitions on satisfactory terms, and to estimate and achieve synergies as a result of such acquisitions;

 

    our exposure to the impairment of goodwill and other intangible assets as a result of our acquisitions;

 

    our ability to successfully conduct our operations in the United Kingdom and South Africa through joint ventures;

 

    our ability to obtain future financing on satisfactory terms or at all, including our ability to secure the funding we need to complete ongoing capital projects;

 

    our exposure to political and economic instability and other risks impacting our international operations;

 

    our exposure to risks impacting our information systems, including those that may cause an interruption, delay or failure in the provision of our services;

 

    our exposure to rising general insurance costs;

 

    our exposure to state and federal income tax law changes internationally and domestically, including changes to the REIT rules, and our exposure as a result of federal and international examinations of our tax returns or tax positions;

 

    our exposure to claims for which we are uninsured;

 

    our exposure to rising employee and inmate medical costs;

 

    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;

 

    the ability of our government customers to secure budgetary appropriations to fund their payment obligations to us and to continue to operate under our existing agreements and/or renew our existing agreements;

 

    our ability to pay dividends consistent with our requirements as a REIT, and expectations as to timing and amounts;

 

    our ability to comply with government regulations and applicable contractual requirements;

 

    our ability to acquire, protect or maintain our intellectual property;

 

    the risk that future sales of shares of our common stock could adversely affect the market price of our common stock and may be dilutive; and

 

    other factors contained in this proxy statement/prospectus and in our filings with the Securities and Exchange Commission, referred to in this proxy statement/prospectus as the Commission or the SEC, including, but not limited to, those detailed in our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K filed with the Commission.

You should keep in mind that any forward-looking statement we make in this proxy statement/prospectus or elsewhere speaks only as of the date on which we make it. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. In any event, these and other important factors, including those set forth under the caption “Risk Factors,” may cause actual results to differ materially from those indicated by our forward-looking statements. We have no duty to, and do not intend to, update or revise the forward-looking statements we make in this proxy statement/prospectus, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that the future events or circumstances described in any forward-looking statement we make in this proxy statement/prospectus or elsewhere might not occur.

 

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VOTING AND PROXIES

This proxy statement/prospectus is furnished in connection with the solicitation of proxies by the board of directors of GEO for use at the special meeting of shareholders to be held on May 2, 2014, or any adjournments or postponements thereof.

Date, Time and Place of the Special Meeting

The special meeting will be held on Friday, May 2, 2014 at 10:00 a.m., local time, at The Boca Raton Resort & Club, 501 East Camino Real, Boca Raton, Florida 33432.

Purpose of the Special Meeting

The purpose of the special meeting is:

 

    To consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated as of March 21, 2014, by and between GEO and GEO REIT, which is being implemented in connection with GEO’s conversion to a REIT effective January 1, 2013; and

 

    To consider and vote upon a proposal to permit GEO’s board of directors to adjourn the special meeting, if necessary, for further solicitation of proxies if there are not sufficient votes at the originally scheduled time of the special meeting to approve the foregoing proposal.

Shareholder Record Date for the Special Meeting

GEO’s board of directors has fixed the close of business on March 10, 2014 as the record date for determining which GEO shareholders are entitled to notice of the special meeting, and to vote at the special meeting and at any adjournment or postponement of the special meeting. On the record date, there were 72,295,631 shares of common stock outstanding, held by approximately 682 holders of record.

During the ten-day period before the special meeting, GEO will keep a list of shareholders entitled to vote at the special meeting available for inspection during normal business hours at GEO’s offices in Boca Raton, Florida, for any purpose germane to the special meeting. The list of shareholders will also be provided and kept at the location of the special meeting for the duration of the special meeting, and may be inspected by any shareholder who is present.

Quorum

A quorum is necessary to hold the special meeting. A majority of the total number of shares of GEO common stock outstanding on the record date must be represented either in person or by proxy to constitute a quorum at the special meeting. For the purposes of determining the presence of a quorum, abstentions will be included in determining the number of shares of common stock present and entitled to vote at the special meeting; however, because brokers, banks and other nominees are not entitled to vote on the proposal to approve the merger agreement absent specific instructions from the beneficial owner and as a result are not entitled to vote on an uninstructed basis on the proposal to adjourn the special meeting (as more fully described below), shares held by brokers, banks, or other nominees for which instructions have not been provided will not be included in the number of shares present and entitled to vote at the special meeting for the purposes of establishing a quorum. At the special meeting, each share of common stock is entitled to one vote on all matters properly submitted to the GEO shareholders.

Vote Required for Each Proposal

Proposal Number One: The affirmative vote of the holders of a majority of the outstanding shares of GEO common stock entitled to vote is required for the approval of the merger agreement.

 

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Proposal Number Two: If a quorum exists, the approval of the adjournment of the special meeting, if necessary for further solicitation of proxies if there are not sufficient votes at the originally scheduled time of the special meeting to approve the merger agreement requires that the number of votes in favor of the proposal exceed the number of votes cast against the proposal. If a quorum does not exist, approval of such an adjournment will require the affirmative vote of holders of a majority of the shares of GEO common stock present in person or represented by proxy at the special meeting and entitled to vote on the proposal.

The GEO board of directors unanimously recommends that the GEO shareholders vote “FOR” each of the proposals.

Proxies

If you are a holder of common stock on the record date, you may vote by completing, signing and promptly returning the proxy card in the self-addressed stamped envelope provided. You may also authorize a proxy to vote your shares by telephone or over the Internet as described in your proxy card. Authorizing a proxy to vote your shares by telephone or over the Internet will not limit your right to attend the special meeting and vote your shares in person. Those shareholders of record who choose to vote by telephone or over the Internet must do so no later than 11:59 p.m., Eastern Time, on May 1, 2014. All shares of common stock represented by properly executed proxy cards received before or at the GEO special meeting and all proxies properly submitted by telephone or over the Internet will, unless the proxies are revoked, be voted in accordance with the instructions indicated on those proxy cards, telephone or Internet submissions. If no instructions are indicated on a properly executed proxy card, the shares will be voted “FOR” each of the proposals. You are urged to indicate how to vote your shares, whether you vote by proxy card, by telephone or over the Internet.

If a properly executed proxy card is returned or properly submitted by telephone or over the Internet and the shareholder has abstained from voting on one or more of the proposals, the common stock represented by the proxy will be considered present at the special meeting for purposes of determining a quorum, but will not be considered to have been voted on the abstained proposals. For the proposal to approve the merger agreement, an abstention has the same effect as a vote against the proposal. For the proposal to adjourn the meeting to solicit additional proxies, if a quorum exists, an abstention has no effect on such proposal, and if a quorum does not exist, an abstention has the same effect as a vote against such proposal.

If your shares are held in an account at a broker, bank or other nominee, you must instruct them on how to vote your shares. Under applicable rules and regulations of the NYSE, brokers, banks or other nominees have the discretion to vote on routine matters, but do not have the discretion to vote on non-routine matters. The proposal to approve the merger agreement is a non-routine matter. Accordingly, your broker, bank or other nominee will vote your shares only if you provide instructions on how to vote by following the information provided to you by your broker, bank or other nominee. If you do not provide voting instructions, your shares will be considered “broker non-votes” because the broker, bank or other nominee will not have discretionary authority to vote your shares. Therefore, your failure to provide voting instructions to the broker, bank, or other nominee will have the same effect as a vote against approval of the merger agreement. For the vote on the proposal to adjourn the special meeting, if necessary, for further solicitation of proxies if there are not sufficient votes at the originally scheduled time of the special meeting to approve the merger agreement, failure to provide voting instructions to the broker, bank or other nominee will have no effect.

Revoking Your Proxy

You can change your vote at any time before your proxy is voted at the special meeting. To revoke your proxy, you must either (1) notify the secretary of GEO in writing, (2) mail a new proxy card dated after the date of the proxy you wish to revoke, (3) submit a later dated proxy, by telephone or over the Internet by following the instructions on your proxy card or (4) attend the special meeting and vote your shares in person. Merely attending the special meeting will not constitute revocation of your proxy. If your shares are held through a broker, bank or other nominee, you should contact your broker, bank or other nominee to change your vote.

 

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Adjournment or Postponement

Although it is not currently expected, the special meeting may be adjourned to solicit additional proxies if there are not sufficient votes to approve the merger agreement. In that event, GEO may ask its shareholders to vote upon the proposal to consider the adjournment of the special meeting to solicit additional proxies, but not the proposal to approve the merger agreement. If GEO shareholders approve this proposal, we could adjourn the meeting and use the time to solicit additional proxies.

Additionally, at any time prior to convening the special meeting, we may seek to postpone the meeting if a quorum is not present at the meeting or as otherwise permitted by the GEO Articles, the GEO Bylaws or as otherwise permitted by applicable law.

Solicitation of Proxies

GEO will bear all expenses incurred in connection with the printing and mailing of this proxy statement/prospectus. GEO will also request banks, brokers and other nominees holding shares of common stock beneficially owned by others to send this proxy statement/prospectus to, and obtain proxies from, the beneficial owners and will, upon request, reimburse the holders for their reasonable expenses in so doing. Solicitation of proxies by mail may be supplemented by telephone and other electronic means and personal solicitation by the officers or employees of GEO. No additional compensation will be paid to officers or employees for those solicitation efforts.

GEO may retain the services of a professional proxy solicitor and, if so, will pay the fees for the proxy solicitor’s services.

Other Matters

GEO is not aware of any business to be acted on at the special meeting, except as described in this proxy statement/prospectus. If any other matters are properly presented at the special meeting, or any adjournment or postponement of the special meeting, the persons appointed as proxies or their substitutes will have discretion to vote or act on the matter according to their best judgment and applicable law unless the proxy indicates otherwise.

 

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BACKGROUND OF THE REIT CONVERSION AND THE MERGER

As part of ongoing strategic reviews of our business, the board of directors of GEO and senior management have been focused on the careful evaluation of our allocation of capital to enhance shareholder value through alternative financing, capital and other strategies. As part of this process, our board and senior management have evaluated investments in new projects which meet or exceed our targeted returns on capital, and we have been focused on balancing these capital investments with a long-term goal to return value to our shareholders. Between 2011 and 2012, we executed two stock buyback programs authorized by our board, which we believe resulted in enhanced value for our shareholders, and in February 2012, we announced the adoption of a dividend policy and the expectation that we would begin paying a quarterly cash dividend for the first time in our company’s history beginning in the fourth quarter of 2012. In May 2012, we announced that we were accelerating the implementation of our dividend policy and we would begin paying a quarterly cash dividend in the third quarter of 2012.

As part of these ongoing efforts to evaluate capital allocation strategies that maximize value for our shareholders, we began an internal evaluation of the feasibility of GEO converting to a REIT. Following this initial internal review, our board met with senior management in May 2012 to discuss the evaluation of a potential REIT conversion. During this meeting, our board decided to engage legal, financial, and accounting experts to conduct a review of the rules related to REIT status and to evaluate the potential impact of a REIT conversion on our shareholders, our company, and our long-term growth objectives.

Shortly after the May 2012 board meeting, we retained the law firms of Skadden, Arps, Slate, Meagher & Flom LLP, which we refer to as “Skadden” or “Special Tax Counsel,” and Akerman LLP as legal advisors, Bank of America Merrill Lynch and Barclays Capital as financial advisors, and Deloitte, LLP as accounting advisors to conduct this comprehensive review. Our analysis focused on a potential conversion to a REIT with a TRS structure in which our real estate would be owned directly by the REIT and by qualified REIT subsidiaries, or QRSs, and our facility operations and non-real estate businesses would be conducted by wholly owned taxable REIT subsidiaries, or TRSs.

In early June of 2012, our board met with senior management to review the progress of our REIT conversion analysis. During this meeting, senior management identified the restructuring steps we would need to take to achieve REIT status by January 1, 2013. The restructuring steps identified by senior management included the divestiture by December 31, 2012 of the Residential Treatment Services division of our wholly owned subsidiary, GEO Care (the “GEO Care Divestiture”), required because applicable REIT rules substantially restrict the ability of REITs to directly or indirectly operate or manage health care facilities. The Residential Treatment Services division held six managed-only health care facility contracts and provided correctional mental health services for the Palm Beach County, Florida jail system and correctional health care services in publicly operated prisons in the State of Victoria, Australia.

Additionally, the REIT conversion required a reorganization of our operations into a TRS structure. Through the TRS structure, our facility operations and our non-real estate related businesses, such as our managed-only contracts, international operations, electronic monitoring services, and non-residential facility operations, would be conducted by TRSs, while our real estate, including company-owned and company-leased facilities, would be held directly by the REIT or by QRSs. In connection with the REIT conversion, we also needed to complete a distribution of our historical earnings and profits to our shareholders in the form of a special dividend.

During June 2012, after providing a pre-submission memorandum, our Special Tax Counsel met with the IRS to outline our proposed REIT conversion. In mid-July 2012, our Special Tax Counsel filed, on our behalf, a request for a private letter ruling from the IRS on various REIT qualification issues.

In August 2012, our board met with senior management and our legal, financial, and accounting advisors to review the progress of our request for a private letter ruling as well as our review of the REIT conversion. During

 

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this meeting, the board received detailed presentations on the different requirements GEO would have to meet to achieve REIT status by January 1, 2013 as well as the potential benefits and drawbacks of a REIT conversion. The board was also presented with a potential valuation analysis of the company post-REIT conversion. Between August and October 2012, our board continued to receive updates from senior management and our legal, financial, and accounting advisors on the REIT conversion process.

On October 31, 2012, our board met with senior management and our legal, financial, and accounting advisors to receive a detailed update on the REIT conversion process. During this meeting, our board reviewed the steps that would need to be completed by December 31, 2012 in order to achieve REIT status as of January 1, 2013. Among these steps, we would need to complete the GEO Care Divestiture; obtain consents from customers to assign our managed-only contracts to TRSs; provide notice to customers of the subcontracting to TRSs for management services at our owned and leased facilities; assign a portion of our existing senior notes and other debt to TRSs; and finalize our internal organizational restructuring. Additionally, it was determined that completing the distribution of our historical earnings and profits prior to year-end 2012, although not required, would maximize value for our shareholders.

On November 30, 2012, our board set a record date of December 12, 2012 for the payment of a special dividend of $340 million to $360 million in connection with the REIT conversion by December 31, 2012, subject to final approval by the board on or before December 7, 2012. Our board was required to set the record date at that time in order to preserve our ability to pay the Special Dividend prior to year-end 2012 in accordance with applicable NYSE and SEC rules.

On December 5, 2012, our board met with senior management and our legal and financial advisors to review the status of our request for a private letter ruling as well as the progress on the needed restructuring steps to achieve REIT status on January 1, 2013. Following detailed presentations by senior management and our legal, financial, and accounting advisors and after a thorough analysis and careful consideration, our board unanimously authorized for senior management to take all necessary steps, including the payment of the special dividend and the GEO Care Divestiture by December 31, 2012 in order for GEO to operate in compliance with the REIT rules beginning January 1, 2013. On December 6, 2012, GEO’s board declared the special dividend of $5.68 per share of common stock, representing approximately $350 million of accumulated earnings and profits to be paid on December 31, 2012 to shareholders of record as of December 12, 2012.

During the period May 2012 to December 2012, senior management met regularly with our legal, financial and accounting advisors to review the considerations involved in our REIT conversion, including valuation perspectives, balance sheet considerations, our ability to grow both organically and through acquisitions, our continued access to capital markets, requirements to qualify as a REIT (including the REIT asset tests, income tests and distribution requirements and the distribution of pre-REIT accumulated earnings and profits) and structuring considerations.

On December 31, 2012, we completed the payment of the special dividend as well as all the restructuring steps described above and we began operating in compliance with the REIT rules effective January 1, 2013. We also received an opinion from Skadden on December 31, 2012 to the effect that we have been organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT commencing with our taxable year ending December 31, 2013. On January 17, 2013, we received a favorable private letter ruling from the IRS regarding various REIT qualification issues. Based on the receipt of the private letter ruling and the Skadden opinion, our board unanimously authorized senior management to elect REIT status effective January 1, 2013.

Although we have been operating as a REIT effective January 1, 2013, we believe that the merger of GEO into GEO REIT is in our best interests and those of our shareholders, as it facilitates compliance with the REIT qualification rules by ensuring GEO REIT can adopt and maintain charter documents that implement standard REIT share ownership and transfer restrictions. In October 2013, our board adopted the merger agreement and, after determining that it is in our best interests and those of our shareholders, recommended that GEO shareholders vote for the approval of the merger agreement.

 

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OUR REASONS FOR THE REIT CONVERSION AND THE MERGER

The GEO board of directors has unanimously determined that the merger and the related transactions are fair to, and in the best interests of, GEO and its shareholders. In reaching this determination, the board of directors consulted with management, as well as Bank of America Merrill Lynch, Barclays Capital and its legal advisors. The factors considered by the board of directors in reaching its determination included, but were not limited to, the following:

 

    To increase shareholder value: As a REIT, we believe we increase the stock market value of our common stock and benefit from a lower cost of capital compared to a regular C corporation as a result of increased cash flows and distributions;

 

    To return capital to shareholders: We believe our shareholders will benefit from increased regular cash distributions, resulting in a yield-oriented stock;

 

    To expand our base of potential shareholders: By becoming a company that makes regular distributions to its shareholders, our shareholder base may expand to include investors attracted by yield, resulting in greater liquidity of our common stock;

 

    To comply with REIT qualification rules: The merger will facilitate our compliance with REIT tax rules because GEO REIT will adopt and maintain charter provisions that implement standard REIT share ownership and transfer restrictions;

 

    To raise capital at higher stock prices: As a REIT, we believe we will be able to raise capital at higher stock prices than as a C corporation; and

 

    To be receptive to our shareholders’ viewpoint: We believe our shareholders were receptive to the REIT conversion effective as of January 1, 2013.

To review the background of the REIT conversion and the merger in greater detail and the related risks associated with the reorganization, please see the sections titled, “Background of the REIT Conversion and Merger” beginning on page 43 and “Risks Factors” beginning on page 17.

The GEO board of directors also considered, among others, the following potentially negative factors:

 

    an increased dependence on the capital markets to fund our liquidity requirements under the REIT rules;

 

    the limitations imposed on our activities under the REIT structure;

 

    the need to comply with the complicated REIT qualification provisions;

 

    the requirement to pay dividends in order to comply with the REIT rules; and

 

    concerns regarding investor perception and the potential significant changes to our shareholder base.

The GEO board of directors weighed the advantages against the disadvantages and potential risks of the REIT conversion including, but not limited to, that as a REIT we will be unable to retain earnings as we will be required each year to distribute to our shareholders at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding any net capital gain) and that we will need to comply with highly technical REIT qualification provisions, which may hinder our ability to make certain attractive investments and acquisitions, including investments in the businesses to be conducted by our TRSs. In addition, the GEO board of directors considered the potential risks discussed in “Risk Factors—Risks Related to the REIT Conversion and the Merger.”

The foregoing discussion does not include all of the information and factors considered by the board of directors. The board of directors did not quantify or otherwise assign relative weights to the particular factors considered, but conducted an overall analysis of the information presented to and considered by it in reaching its determination.

 

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TERMS OF THE MERGER

The following is a summary of the material terms of the merger agreement. For a complete description of all of the terms of the merger, you should refer to the copy of the merger agreement that is attached to this proxy statement/prospectus as Annex A and incorporated herein by reference. You should read carefully the merger agreement in its entirety as it is the legal document that governs the merger.

Structure and Completion of the Merger

GEO REIT is currently a wholly owned subsidiary of GEO. The merger agreement provides that GEO will merge with and into GEO REIT, at which time the separate corporate existence of GEO will cease and GEO REIT will be the surviving entity of the merger. Upon the effectiveness of the merger, the outstanding shares of common stock of GEO will be converted into the right to receive the same number of shares of GEO REIT common stock, and GEO REIT will change its name to “The GEO Group, Inc.” and will succeed to and continue to operate the existing business of GEO.

The board of directors of GEO and the board of directors of GEO REIT have adopted the merger agreement, subject to shareholder approval. The merger will become effective at the time the articles of merger are submitted for filing and accepted by the Secretary of State of the State of Florida in accordance with the Florida Business Corporation Act or at such later time as specified in the articles of merger. We anticipate that the merger will be completed during the first half of 2014, following our shareholders’ approval of the merger agreement at the special meeting and the satisfaction or waiver of the other conditions to the merger as described in “—Conditions to Completion of the Merger.” However, the board of directors of GEO reserves the right to cancel or defer the merger even if its shareholders vote to approve the merger agreement and the other conditions to the completion of the merger are satisfied or waived, if it determines that the merger is no longer in the best interests of GEO and its shareholders.

Exchange of Stock Certificates

Surrender of Certificates. Computershare will act as exchange agent for the merger. As soon as reasonably practicable after the completion of the merger, Computershare will mail to each registered holder of a certificate of GEO common stock a letter of transmittal containing instructions for surrendering such holder’s certificate. Holders who properly submit a letter of transmittal and surrender their certificates to the exchange agent will receive a certificate representing shares of GEO REIT common stock equal to that number of shares reflected in the surrendered certificate. The surrendered certificates will thereafter be cancelled. Upon the effectiveness of the merger, each certificate representing shares of GEO common stock will be deemed for all purposes to evidence a right to receive the same number of shares of GEO REIT common stock until such certificate is exchanged for a certificate representing an equal number of shares of GEO REIT common stock. If you currently hold shares of GEO common stock in uncertificated form, you will receive a notice of the completion of the merger and your shares of GEO REIT common stock received in connection with the merger will continue to exist in uncertificated form.

Lost Certificates. If any GEO certificate is lost, stolen or destroyed, the owner of the certificate must provide an appropriate affidavit of that fact to the exchange agent and, if required by GEO REIT, post a reasonable bond as indemnity against any claim that may be made against GEO REIT with respect to such lost certificate.

Stock Transfer Books. At the completion of the merger, GEO will close its stock transfer books, and no subsequent transfers of common stock will be recorded on such books.

Other Effects of the Merger

We expect the following to occur in connection with the merger:

 

    Charter Documents of GEO REIT. The Articles of Incorporation and Bylaws of GEO REIT will be amended in connection with the merger. Copies of the form of the GEO REIT Articles and GEO REIT Bylaws, reflecting those amendments, are set forth in Annex B-1 and Annex B-2, respectively, of this proxy statement/prospectus. See also the section entitled “Description of GEO REIT Capital Stock.”

 

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    Directors and Officers. The directors and officers of GEO serving as directors and officers of GEO immediately prior to the effective time of the merger will be the directors and officers of GEO REIT immediately after the merger.

 

    Stock Incentive Plans and Employee Stock Purchase Plan. GEO REIT will assume The GEO Group, Inc. Stock Option Plan, The GEO Group, Inc. 1994 Stock Option Plan, The GEO Group, Inc. 1999 Stock Option Plan, The GEO Group, Inc. 2006 Stock Incentive Plan, The GEO Group, Inc. 2011 Employee Stock Purchase Plan, and any equity compensation plans which GEO assumed in connection with various merger and acquisition transactions, including but not limited to the Cornell Companies, Inc. Amended and Restated 2006 Incentive Plan, which we refer to collectively as the Plans, and each, a Plan, and all rights of participants to acquire shares of common stock under any Plan will be converted into rights to acquire shares of GEO REIT common stock in accordance with the terms of the Plans.

 

    Distributions. GEO’s obligations with respect to any distributions to the shareholders of GEO that have been declared by GEO but not paid prior to the completion of the merger will be assumed by GEO REIT.

 

    Listing of GEO REIT common stock. We expect that the GEO REIT common stock will trade on the NYSE under our current symbol “GEO” following the completion of the merger.

Conditions to Completion of the Merger

The board of directors of GEO has the right to cancel or defer the merger even if shareholders of GEO vote to approve the merger agreement and the other conditions to the completion of the merger are satisfied or waived, if it determines that the merger is no longer in the best interests of GEO and its shareholders. The respective obligations of GEO and GEO REIT to complete the merger require the satisfaction or, where permitted, waiver, of the following conditions:

 

    approval of the merger agreement by the requisite vote of the shareholders of GEO and GEO REIT;

 

    receipt by GEO from its tax counsel of an opinion to the effect that the merger qualifies as a reorganization within the meaning of section 368(a) of the Code and that each of GEO and GEO REIT is a party to a reorganization within the meaning of section 368(b) of the Code;

 

    GEO REIT will have amended and restated its articles of incorporation to read in substantially the form attached hereto as Annex B-1;

 

    GEO REIT will have amended its Bylaws to read substantially in the form attached hereto as Annex B-2;

 

    approval for listing on the NYSE of GEO REIT common stock, subject to official notice of issuance;

 

    the effectiveness of the Registration Statement, of which this proxy statement/prospectus is a part, without the issuance of a stop order or initiation of any proceeding seeking a stop order by the SEC;

 

    the determination by the board of directors of GEO, in its sole discretion, that no legislation or proposed legislation with a reasonable possibility of being enacted would have the effect of substantially (a) impairing the ability of GEO REIT to qualify as a REIT, (b) increasing the federal tax liabilities of GEO or of GEO REIT resulting from the REIT conversion or (c) reducing the expected benefits to GEO REIT resulting from the REIT conversion; and

 

    receipt of all governmental approvals and third-party consents to the merger, except where the failure to obtain such approvals or consents as would not reasonably be expected to materially and adversely affect the business, financial condition or results of operations of GEO REIT.

 

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Termination of the Merger Agreement

The merger agreement provides that it may be terminated and the merger abandoned at any time prior to its completion, before or after approval of the merger agreement by the shareholders of GEO, by either:

 

    the mutual written consent of the board of directors of GEO and the board of directors of GEO REIT; or

 

    the board of directors of GEO in its sole discretion.

We have no current intention of abandoning the merger subsequent to the special meeting if shareholder approval is obtained and the other conditions to the merger are satisfied or waived. However, the board of directors of GEO reserves the right to cancel or defer the merger even if shareholders of GEO vote to approve the merger agreement and the other conditions to the completion of the merger are satisfied or waived, if it determines that the merger is no longer in the best interests of GEO and its shareholders.

Regulatory Approvals

We are not aware of any federal, state, local or foreign regulatory requirements that must be complied with or approvals that must be obtained prior to completion of the merger pursuant to the merger agreement, other than compliance with applicable federal and state securities laws, the filing of articles of merger as required under the Florida Business Corporation Act and various state governmental authorizations.

Absence of Appraisal Rights

Pursuant to Section 607.1302 of the Florida Business Corporation Act, the shareholders of GEO will not be entitled to appraisal rights as a result of the merger.

Restrictions on Sales of GEO REIT Common Stock Issued Pursuant to the Merger

The shares of GEO REIT common stock to be issued in connection with the merger will, subject to the restrictions on the transfer and ownership of GEO REIT common stock set forth in the GEO REIT Articles, be freely transferable under the Securities Act of 1933, as amended, or the Securities Act, except for shares issued to any shareholder who may be deemed to be an “affiliate” of GEO REIT for purposes of Rule 144 under the Securities Act. Persons who may be deemed to be affiliates include individuals or entities that control, are controlled by, or are under the common control with, GEO and may include the executive officers, directors and significant shareholders of GEO.

Accounting Treatment of the Merger

For accounting purposes, the merger of GEO with and into GEO REIT will be treated as a transfer of assets and exchange of shares between entities under common control. The accounting basis used to initially record the assets and liabilities in GEO REIT is the carryover basis of GEO. Shareholders’ equity of GEO REIT will be that carried over from GEO.

 

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DISTRIBUTION POLICY

We intend to declare regular quarterly distributions to holders of GEO REIT common stock. GEO commenced declaring regular REIT quarterly distributions in the first quarter of 2013. The amount of distributions will be determined, and are subject to adjustment by, the board of directors. To qualify as a REIT, we must annually distribute to our shareholders an amount at least equal to 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gain). Generally, we expect to distribute all or substantially all of our REIT taxable income so as to not be subject to the income or excise tax on undistributed REIT taxable income. See the section titled “United States Federal Income Tax Consequences.”

We expect that distributions will be declared quarterly. The amount, timing and frequency of distributions, however, will be at the sole discretion of the board of directors and will be declared based upon various factors, many of which are beyond our control, including:

 

    our financial condition and operating cash flows;

 

    our retention of cash to pursue acquisitions;

 

    our operating and other expenses;

 

    debt service requirements;

 

    capital expenditure requirements;

 

    the amount required to maintain REIT status and reduce any income and excise taxes that we otherwise would be required to pay;

 

    limitations on distributions in our existing and future debt instruments;

 

    limitations on our ability to fund distributions using cash generated through our TRSs; and

 

    other factors that the board of directors may deem relevant.

We anticipate that distributions will generally be paid from cash from operations after debt service requirements and non-discretionary capital expenditures. To the extent that our cash available for distribution is insufficient to allow us to satisfy the REIT distribution requirements, we currently intend to borrow funds to make distributions consistent with this policy. Our ability to fund distributions through borrowings is subject to continued compliance with debt covenants, as well as the availability of borrowing capacity under our lending arrangements. If our operations do not generate sufficient cash flows and we are unable to borrow, we may be required to reduce our anticipated quarterly distributions. Our distribution policy enables us to review the alternative funding sources available to us for distributions from time to time. For information regarding risk factors that could materially adversely affect our actual results of operations, please see the section titled “Risk Factors.”

 

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OUR BUSINESS

Set forth below is a description of the business of GEO. GEO REIT, a wholly owned subsidiary of GEO, was incorporated in Florida on July 11, 2013 to succeed to and continue the business of GEO, which is described below, upon completion of the merger of GEO with and into GEO REIT. Effective at the time of the merger, GEO REIT will be renamed “The GEO Group, Inc.” and will continue to operate GEO’s current business.

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 fully-integrated real estate investment trust, or REIT, specializing in the ownership, leasing and management of correctional, detention, and re-entry facilities and the provision of community-based services and youth services in the United States, Australia, South Africa, the United Kingdom and Canada. We own, lease and operate a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers, as well as community based re-entry facilities. We develop new facilities based on contract awards, using our project development expertise and experience to design, construct and finance what we believe are state-of-the-art facilities that maximize security and efficiency. We provide innovative compliance technologies, industry-leading monitoring services, and evidence based supervision and treatment programs for community-based parolees, probationers and pretrial defendants. We also provide secure transportation services for offender and detainee populations as contracted domestically and in the United Kingdom through our joint venture, GEO Amey PECS Ltd., which we refer to as GEOAmey. As of December 31, 2013, our worldwide operations included the management and/or ownership of approximately 77,000 beds at 98 correctional, detention and community based facilities, including idle facilities and projects under development, and also included the provision of monitoring of more than 70,000 offenders in a community-based environment on behalf of approximately 900 federal, state and local correctional agencies located in all 50 states.

We provide a diversified scope of services on behalf of our government clients:

 

    our correctional and detention management services involve the provision of security, administrative, rehabilitation, education, and food services, primarily at adult male correctional and detention facilities;

 

    our community-based services involve supervision of adult parolees and probationers and the provision of temporary housing, programming, employment assistance and other services with the intention of the successful reintegration of residents into the community;

 

    our youth services include residential, detention and shelter care and community-based services along with rehabilitative and educational programs;

 

    we provide comprehensive electronic monitoring and supervision services;

 

    we develop new facilities, using our project development experience to design, construct and finance what we believe are state-of-the-art facilities that maximize security and efficiency;

 

    we provide secure transportation services for offender and detainee populations as contracted; and

 

    our services are provided at facilities which we either own or lease or are owned by our customers.

We began operating as a REIT for federal income tax purposes effective January 1, 2013. As a result of the REIT conversion, we reorganized our operations and moved non-real estate components into taxable REIT subsidiaries (“TRS”). We are a Florida corporation originally organized in 1984.

 

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Business Segments

We conduct our business through four reportable business segments: our U.S. Corrections & Detention segment; our GEO Community Services segment; our International Services segment; and our Facility Construction & Design segment. We have identified these four reportable segments to reflect our current view that we operate four distinct business lines, each of which constitutes a material part of our overall business. Our U.S. Corrections & Detention segment primarily encompasses our United States-based privatized corrections and detention business. Our GEO Community Services segment, which conducts its services in the U.S., consists of our community based services business, our youth services business and our electronic monitoring and supervision service. Our International Services segment primarily consists of our privatized corrections and detention operations in South Africa, Australia, the United Kingdom and Canada. Our Facility Construction & Design segment primarily contracts with various states, local and federal agencies for the design and construction of facilities for which we generally have been, or expect to be, awarded management contracts. Financial information about these segments for fiscal years 2013, 2012 and 2011 is contained in the “Notes to Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Recent Developments

Amended and Restated Credit Agreement

On April 3, 2013, we entered into the Amended and Restated Credit Agreement with GEO Corrections Holdings, Inc. (with GEO as the sole term loan borrower, and GEO and GEO Corrections Holdings, Inc. as joint and several revolver borrowers), BNP Paribas, as Administrative Agent, and the lenders who are, or may from time to time become, a party thereto (the “Credit Agreement”). The Credit Agreement evidences the Senior Credit Facility consisting of a $300 million Term Loan (the “Term Loan”) initially bearing interest at LIBOR plus 2.50% (with a LIBOR floor of 0.75%), and a $700 million revolving credit facility (the “Revolver”) initially bearing interest at LIBOR plus 2.50% (with no LIBOR floor), in each case subject to adjustment based on a total leverage ratio pricing grid. We also have the ability to increase the Senior Credit Facility by an additional $350 million, subject to lender demand, prevailing market conditions and satisfying the borrowing and other conditions thereunder. The Revolver component is scheduled to mature on April 3, 2018 and the Term Loan component is scheduled to mature on April 3, 2020. The Term Loan and Revolver may be prepaid in whole or in part by us at any time without premium or penalty, subject to certain conditions. The Senior Credit Facility is a refinancing of the Fourth Amended and Restated Credit Agreement (the “Prior Senior Credit Facility”) which consisted of a Term Loan A, Term Loan A-2, Term Loan A-3, Term Loan B (“Prior Term Loans”) and a revolver (“Prior Revolver”).

As of December 31, 2013, we had $298.5 million in aggregate borrowings outstanding, net of discount, under the Term Loan and $340.0 million in borrowings under the Revolver, and approximately $61.0 million in letters of credit which left $299.0 million in additional borrowing capacity under the Revolver.

5.125% Senior Notes

On March 19, 2013, we issued $300.0 million aggregate principal amount of the 5.125% Senior Notes in a private offering under the indenture, dated as of March 19, 2013, among us, certain of our domestic subsidiaries, as guarantors, and Wells Fargo Bank, National Association, as trustee. The 5.125% Senior Notes were offered and sold to “qualified institutional buyers” in accordance with Rule 144A under the Securities Act and outside the United States to non-U.S. persons in accordance with Regulation S under the Securities Act. The 5.125% Senior Notes were issued at a coupon rate and yield to maturity of 5.125%. Interest on the 5.125% Senior Notes is payable semi-annually in cash in arrears on April 1 and October 1 each year. The 5.125% Senior Notes mature on April 1, 2023. The 5.125% Senior Notes are guaranteed on a senior unsecured basis by all of our restricted subsidiaries that guarantee obligations under the Senior Credit Facility, our 6.625% senior notes due 2021 (the “6.625% Senior Notes”), and our 5 7/8% Senior Notes (see discussion of 5 7/8% Senior Notes issuance below).

 

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The 5.125% Senior Notes and the guarantees are our general unsecured senior obligations and rank equally in right of payment with all of our and the guarantors’ existing and future unsecured senior debt, including our 6.625% Senior Notes and the 5 7/8% Senior Notes. The 5.125% Senior Notes and the guarantees are effectively subordinated to any of our and the guarantors’ existing and future secured debt to the extent of the value of the assets securing such debt, including all anticipated borrowings under the Senior Credit Facility. The 5.125% Senior Notes are structurally subordinated to all existing and future liabilities (including trade payables) of our subsidiaries that do not guarantee the 5.125% Senior Notes. A portion of the proceeds received from the 5.125% Senior Notes were used on the date of the financing to repay the outstanding Prior Term Loans under the Prior Senior Credit Facility (see discussion above).

Under the terms of a registration rights agreement dated as of March 19, 2013, among us, the guarantors and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as the representative of the initial purchasers of the 5.125% Senior Notes, we agreed to register under the Securities Act notes having terms identical in all material respects to the 5.125% Senior Notes (the “5.125% Exchange Notes”) and to make an offer to exchange the 5.125% Exchange Notes for the 5.125% Senior Notes. We filed the registration statement on May 30, 2013 which was declared effective on September 12, 2013. We launched the exchange offer on September 13, 2013 and the exchange offer expired on October 11, 2013.

5 7/8% Senior Notes

On October 3, 2013, we issued $250.0 million aggregate principal amount of the 5 7/8% Senior Notes in a private offering under the indenture, dated as of October 3, 2013, among us, certain of our domestic subsidiaries, as guarantors, and Wells Fargo Bank, National Association, as trustee. The 5 7/8% Senior Notes were offered and sold to “qualified institutional buyers” in accordance with Rule 144A under the Securities Act, and outside the United States to non-U.S. persons in accordance with Regulations S under the Securities Act. The 5 7/8% Senior Notes were issued at a coupon rate and yield to maturity of 5 7/8%. Interest on the 5 7/8% Senior Notes is payable semi-annually in cash in arrears on January 15 and July 15 each year. The 5 7/8% Senior Notes mature on January 15, 2022. The 5 7/8% Senior Notes are guaranteed on a senior unsecured basis by all of our restricted subsidiaries that guarantee obligations under the Senior Credit Facility, our 6.625% Senior Notes, and our 5.125% Senior Notes (see discussion of 5.125% Senior Notes issuance above). The 5 7/8% Senior Notes and the guarantees are our general unsecured senior obligations and rank equally in right of payment with all of our and the guarantors’ existing and future unsecured senior debt, including our 6.625% Senior Notes and the 5.125% Senior Notes. The 5 7/8% Senior Notes and the guarantees are effectively subordinated to any of our and the guarantors’ existing and future secured debt to the extent of the value of the assets securing such debt, including all anticipated borrowings under the Senior Credit Facility. The 5 7/8% Senior Notes are structurally subordinated to all existing and future liabilities (including trade payables) of our subsidiaries that do not guarantee the 5 7/8% Senior Notes. We used the net proceeds from the offering, together with cash on hand, to fund the repurchase, redemption or other discharge of our 7 3/4% senior notes (see discussion below) and to pay related transaction fees and expenses.

Under the terms of a registration rights agreement, dated as of October 3, 2013, among us, the guarantors and Wells Fargo Securities, LLC, as the representative of the initial purchasers of the notes, we agreed to register under the Securities Act notes having terms identical in all material respects to the 5 7/8% Senior Notes (the “5 7/8% Exchange Notes”) and to make an offer to exchange the 5 7/8% Exchange Notes for the 5 7/8% Senior Notes. We filed the registration statement on October 2, 2013 which was declared effective on January 6, 2014. We launched the exchange offer on January 6, 2014 and the exchange offer expired on February 4, 2014.

7 3/4% Senior Notes Tender Offer

On September 19, 2013, we announced the commencement of a cash tender offer and consent solicitation for any and all of our outstanding $250.0 million aggregate principal amount of 7 3/4% senior notes due 2017 (the “7 3/4% Senior Notes”). Holders who validly tendered their 7 3/4% Senior Notes prior to 5:00 p.m. Eastern

 

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Standard time on October 2, 2013 (“Consent Payment Deadline”), received a cash payment of $1,043.45 for each $1,000 principal amount of notes, which included a consent payment of $30.00 per $1,000 principal amount of notes. Holders of the 7 3/4% Senior Notes accepted for purchase received accrued and unpaid interest up to, but not including, the applicable payment date. Valid early tenders received by us represented $209.1 million aggregate principal amount of the 7 3/4% Senior Notes which was 83.6% of the outstanding principal balance. We settled these notes on October 3, 2013. There were no holders who tendered their notes after the Consent Payment Deadline, but before the expiration date of 11:59 p.m., Eastern Standard time on October 17, 2013 (the “Expiration Date”) who would have otherwise been entitled to receive $1,013.45 per $1,000 principal amount of notes. On November 4, 2013, we completed the redemption of the remaining 7 3/4% Senior Notes in connection with the terms of the notice of redemption delivered to the noteholders pursuant to the terms of the indenture governing the 7 3/4% Senior Notes. We financed the purchase of the 7 3/4% Senior Notes under the tender offer and the redemption of the remaining 7 3/4% Senior Notes with the net cash proceeds from our 5 7/8% Senior Notes offering discussed above and cash on hand.

Debt Deafeasance

We consolidated South Texas Local Development Corporation (“STLDC”), a variable interest entity (“VIE”) until September 30, 2013. STLDC was created to finance construction for the development of a 1,904-bed facility in Frio County, Texas. STLDC, the owner of the complex, issued $49.5 million in taxable revenue bonds and had an operating agreement with us, which provided us with the sole and exclusive right to operate and manage the detention center. The operating agreement and bond indenture required the revenue from the contract to be used to fund the periodic debt service requirements as they became due. The net revenues, if any, after various expenses such as trustee fees, property taxes and insurance premiums were distributed to us to cover operating expenses and management fees. We were responsible for the entire operations of the facility including the payment of all operating expenses whether or not there were sufficient revenues. The bonds had a 10-year term and were non-recourse to us. At the end of the 10-year term of the bonds, or if the bonds were redeemed, canceled or defeased, title and ownership of the facility transfers from STLDC to us.

On September 30, 2013, we completed a defeasance of the bonds and the title to the facility was transferred to us. In connection with the defeasance, we incurred a $1.5 million loss on extinguishment of debt which represented the excess of the reacquisition price of the defeasance over the net carrying value of the bonds and other defeasance related fees and expenses. Upon the closing of the transaction, the operating agreement was terminated and STLDC is no longer a VIE and is no longer consolidated with us. The carrying value of the facility as of December 31, 2013 and December 31, 2012 was $25.2 million and $25.8 million, respectively, and is included in Property and Equipment in the accompanying consolidated balance sheets.

Prospectus Supplement

On May 8, 2013, the Company filed with the Securities and Exchange Commission a prospectus supplement related to the offer and sale from time to time of the Company’s common stock at an aggregate offering price of up to $100 million through sales agents. Sales of shares of the Company’s common stock under the prospectus supplement and the equity distribution agreements entered into with the sales agents, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act. There were no sales of shares of the Company’s common stock under the prospectus supplement during the year ended December 31, 2013.

Contract awards and facility activations

The following contract awards and facility activations occurred during fiscal year 2013:

On September 9, 2013, we announced that we have entered into a five year contract inclusive of renewal options, with ICE for the housing of immigration detainees in a new 400-bed transfer center to be located at England Airpark in Alexandria, Louisiana (the “Center”). We

 

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will finance, develop and manage the company-owned Center, which is expected to be completed during the fourth quarter of 2014. Our contract with ICE is expected to generate approximately $8.5 million in annualized revenues.

On September 23, 2013, we announced that we have signed five year contracts with the California Department of Corrections and Rehabilitation for the housing of 1,400 California inmates at the Company-owned 700-bed Central Valley Modified Community Correctional Facility and the Company-owned 700-bed Desert View Modified Community Correctional Facility located in McFarland, California and Adelanto, California, respectively. We began the intake of inmates at both facilities in the fourth quarter of 2013. The facilities are expected to generate approximately $30.7 million in combined annualized revenues at full occupancy. These facilities were previously included in our idle facility inventory.

On October 21, 2013, we announced that we have signed a new contract, effective from November 1, 2013 through June 30, 2018, with the California Department of Corrections and Rehabilitation for the housing of 700 California inmates at the Company-owned Golden State Modified Community Correctional Facility located in McFarland, California. The new agreement, which will replace our existing contract at the facility that was previously effective through June 30, 2016, will expand the facility’s contract capacity by 100-beds and is expected to generate an additional $2.2 million in annual revenues. At full occupancy of 700 beds, the facility is expected to generate approximately $15.3 million in annualized revenues.

On February 3, 2014, we announced that we had assumed management of the 985-bed Moore Haven Correctional Facility, the 985-bed Bay Correctional Facility and the 1,884- bed Graceville Correctional Facility under contracts with the Florida Department of Management Services effective February 1, 2014. The managed-only agreements have contract terms of 3 years with successive 2-year renewal option periods. The facilities are expected to generate approximately $31.6 million in combined annualized revenues at full occupancy.

Also on February 3, 2014, we announced that we have increased the contracted capacity at the Company-owned Rio Grande Detention Center in Laredo, Texas from 1,500 beds to 1,900 beds under a contract with the U.S. Marshals Service. The U.S. Marshals Service is expected to occupy up to 1,228 beds with the remaining 672 beds reserved for ICE. The 1,900-bed center is expected to generate approximately $38 million in total annualized revenue.

Contract terminations

The contract for the housing of Alaskan inmates at the Hudson Correctional Facility located in Hudson, Colorado was terminated during the third quarter of 2013. The termination of this contract did not have a material impact on our financial position, results of operations and/or cash flows.

On November 1, 2013, we terminated the contract for the management of the county-owned 688-bed Maverick County Detention Center located in Maverick, Texas. The termination of this managed-only contract did not have a material impact on our financial position, results of operations and/or cash flows.

We are currently marketing approximately 6,000 vacant beds at six of our idle facilities to potential customers. The annual carrying cost of idle facilities in 2014 is estimated to be $21.9 million, including depreciation expenses of $5.9 million. As of December 31, 2013, these facilities had a net book value of $193.6 million. We currently do not have any firm commitment or agreement in place to activate these facilities. Historically, some facilities have been idle for multiple years before they received a new contract award. Currently, our North Lake Correctional Facility located in Baldwin, Michigan and our Great Plains Correctional Facility located in Hinton, Oklahoma have been idle the longest of our idle facility inventory. Both facilities have been idle since October of 2010. These idle facilities are included in the U.S. Corrections & Detention segment. The per diem rates that we charge our clients often vary by contract across our portfolio. However, if all of these idle facilities were to be activated using our U.S. Corrections & Detention average per diem rate in 2013,

 

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(calculated as the U.S. Corrections & Detention revenue divided by the number of U.S. Corrections & Detention mandays) and based on the average occupancy rate in our U.S. Corrections & Detention facilities for 2013, we would expect to receive incremental revenue of approximately $125 million and an increase in earnings per share of approximately $0.35 to $0.40 per share based on our average U.S. Corrections and Detention operating margin.

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 99.7% as of December 31, 2013. Approximately 91.4% of our 2013 U.S. Corrections & Detention revenue was derived from ACA accredited facilities for the year ended December 31, 2013. In January 2012, we also received accreditation at our Blackwater River Correctional Facility and at Hudson Correctional Facility. We have also achieved and maintained accreditation by The Joint Commission (TJC), at three of our correctional facilities and at nine of our youth services locations. 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 and we have achieved this accreditation at six of our U.S. Corrections & Detention facilities and at two youth services locations. Additionally, BI has achieved a certification for ISO 9001:2008 for the design, production, installation and servicing of products and services produced by the Electronic Monitoring business units, including electronic home arrest and domestic violence intervention monitoring services and products, installation services, and automated caseload management services.

Business Development Overview

We intend to pursue a diversified growth strategy by winning new clients and contracts, expanding our government services portfolio and pursuing selective acquisition opportunities. Our primary potential customers include: governmental agencies responsible for local, state and federal correctional facilities in the United States; governmental agencies responsible for correctional facilities in Australia, South Africa, the United Kingdom and Canada; federal, state and local government agencies in the United States responsible for community-based services for adult and juvenile offenders; federal, state and local government agencies responsible for monitoring community-based parolees, probationers and pretrial defendants; and other foreign governmental agencies. We achieve organic growth through competitive bidding that begins with the issuance by a government agency of a request for proposal, or RFP. We primarily rely on the RFP process for organic growth in our U.S. and international corrections operations as well as in our community based re-entry services and electronic monitoring services business.

For our facility management contracts, our state and local experience has been that a period of approximately sixty to ninety days is generally required from the issuance of a request for proposal to the submission of our response to the request for proposal; that between one and four months elapse between the submission of our response and the agency’s award for a contract; and that between one and four months elapse between the award of a contract and the commencement of facility construction or management of the facility, as applicable.

For our facility management contracts, our federal experience has been that a period of approximately sixty to ninety days is generally required from the issuance of a request for proposal to the submission of our response

 

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to the request for proposal; that between twelve and eighteen months elapse between the submission of our response and the agency’s award for a contract; and that between four and eighteen weeks elapse between the award of a contract and the commencement of facility construction or management of the facility, as applicable.

If the state, local or federal facility for which an award has been made must be constructed, our experience is that construction usually takes between nine and twenty-four months to complete, depending on the size and complexity of the project. Therefore, management of a newly constructed facility typically commences between ten and twenty-eight months after the governmental agency’s award.

For the services provided by BI, state, local and federal experience has been that a period of approximately thirty to ninety days is generally required from the issuance of an RFP or Invitation to Bid, or ITB, to the submission of our response; that between one and three months elapse between the submission of our response and the agency’s award for a contract; and that between one and three months elapse between the award of a contract and the commencement of a program or the implementation of a program operations, as applicable.

The term of our local, state and federal contracts range from one to five years and some contracts include provisions for optional renewal years beyond the initial contract term. Contracts can, and are periodically, extended beyond the contract term and optional renewal years through alternative procurement processes including sole source justification processes, cooperative procurement vehicles and agency decisions to add extension time periods.

We believe that our long operating history and reputation have earned us credibility with both existing and prospective customers when bidding on new facility management contracts or when renewing existing contracts. Our success in the RFP process has resulted in a pipeline of new projects with significant revenue potential.

During 2013, we activated five new or expansion projects representing an aggregate of 5,354 additional beds compared to the activation of four new or expansion projects representing an aggregate of 2,082 beds during 2012.

In addition to pursuing organic growth through the RFP process, we will from time to time selectively consider the financing and construction of new facilities or expansions to existing facilities on a speculative basis without having a signed contract with a known customer. We also plan to leverage our experience and scale of service offerings to expand the range of government-outsourced services that we provide. We will continue to pursue selected acquisition opportunities in our core services and other government services areas that meet our criteria for growth and profitability. 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.

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. Domestically, as of December 31, 2013, we have provided services for the design and construction of approximately 50 facilities and for the redesign, renovation and expansion of approximately 43 facilities. Internationally, as of December 31, 2013, we have provided services for the design and construction of 10 facilities and for the redesign, renovation and expansion of 1 facility.

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 any of the following methods:

 

    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

 

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    revenue bonds or certificates of participation secured by an annual lease payment that is subject to annual or bi-annual legislative appropriations.

We may also act as a source of financing or as a facilitator with respect to the financing of the construction of a facility. In these cases, the construction of such facilities may be financed through various methods including the following:

 

    funds from equity offerings of our stock;

 

    cash on hand and/or cash flows from our operations;

 

    borrowings by us from banks or other institutions (which may or may not be subject to government guarantees in the event of contract termination);

 

    funds from debt offerings of our notes; 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, 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 canceled. 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 bonded National and/or Regional Design Build 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 use, with appropriate modifications, prototype designs we have used in developing prior projects. We believe that the use of these designs allows us to reduce the potential of 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.

The following table sets forth the current expansion and development project at its stage of completion:

 

Facilities Under Construction

   Additional
Beds
     Capacity
Following
Expansion/
Construction
     Estimated
Completion
Date
     Customer      Financing  

Alexandria Transfer Center, Louisiana

     400         400         Q4 2014         ICE         GEO   

Competitive Strengths

Leading Corrections Provider Uniquely Positioned to Offer a Continuum of Care

We are the second largest provider of privatized correctional and detention facilities worldwide, and the largest provider of community-based re-entry services, youth service and electronic monitoring services in the

 

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United States corrections industry. We believe these leading market positions and our diverse and complementary service offerings enable us to meet the growing demand from our clients for comprehensive services throughout the entire corrections lifecycle. Our continuum of care enables us to provide consistency and continuity in case management, which we believe results in a higher quality of care for offenders, reduces recidivism, lowers overall costs for our clients, improves public safety and facilitates successful reintegration of offenders back into society.

Attractive REIT Profile

Key characteristics of our business make us a highly attractive REIT. We believe that, fundamentally we are in a real estate-intensive industry. Since our inception, we have financed and developed dozens of facilities. We have a diversified set of investment-grade customers in the form of government agencies, which are required to pay us on time by law. We have historically experienced customer retention in excess of 90%. Our strong and predictable occupancy rates generate a stable and sustainable stream of revenue. This stream of revenue combined with our low maintenance capital expenditure requirement translates into steady, predictable cash flow. The REIT structure also allows us to pursue growth opportunities due to the capital intensive nature of correctional detention business.

Large Scale Operator with National Presence

We operate the sixth largest correctional system in the United States by number of beds, including the federal government and all 50 states. We currently have operations in 33 states and offer electronic monitoring services in every state. In addition, we have extensive experience in overall facility operations, including staff recruitment, administration, facility maintenance, food service, security, and in the supervision and education of inmates. We believe our size and breadth of service offerings enable us to generate economies of scale which maximize our efficiencies and allow us to pass along cost savings to our clients. Our national presence also positions us to bid on and develop new facilities across the United States.

Long-Term Relationships with Diversified Set of High-Quality Government Customers

We have developed long-term relationships with our federal, state and other governmental customers, which we believe enhance our ability to win new contracts and retain existing business. We have provided correctional and detention management services to the U.S. Federal Government for 27 years, the State of California for 26 years, the State of Texas for approximately 26 years, various Australian state government entities for 22 years and the State of Florida for approximately 20 years. These customers accounted for approximately 62.7% of our consolidated revenues for the fiscal year ended December 31, 2013. For the fiscal year ended December 31, 2012, no one customer accounted for more than 17.3% of total revenues and no state government customer accounted for more than 4.1% of total revenues.

Recurring Revenue with Strong Cash Flow

Our revenue base is derived from our long-term customer relationships, with contract renewal rates and facility occupancy rates both in excess of 90% over the past five years. We have been able to expand our revenue base by continuing to reinvest our strong operating cash flow into expansionary projects and through strategic acquisitions that provide scale and further enhance our service offerings. Our consolidated revenues have grown from $877.0 million in 2007 to $1.5 billion in 2013. We expect our operating cash flow to be well in excess of our anticipated annual maintenance capital expenditure needs, which would provide us significant flexibility for growth in capital expenditures, future dividend payments in connection with operating as a REIT, acquisitions and/or the repayment of indebtedness.

Sizeable International Business

Our international infrastructure, which leverages our operational excellence in the United States, allows us to aggressively target foreign opportunities that our United States-based competitors without overseas operations

 

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may have difficulty pursuing. We currently have international operations in Australia, Canada, South Africa and the United Kingdom. Our International Services business generated $208 million of revenues representing approximately 14% of our consolidated revenues for the year ended December 31, 2013. We believe we are well positioned to continue to benefit from foreign governments’ initiatives to outsource correctional services.

Experienced, Proven Senior Management Team

Our Chief Executive Officer and Founder, George C. Zoley, has led our company for 29 years and has established a track record of growth and profitability. Under his leadership, our annual consolidated revenues from continuing operations have grown from $40.0 million in 1991 to $1.5 billion in 2013 . Mr. Zoley is one of the pioneers of the industry, having developed and opened what we believe was one of the first privatized detention facilities in the United States in 1986. Our Chief Financial Officer, Brian R. Evans, has been with our company for over thirteen years and has led our conversion to a REIT as well as the integration of our recent acquisitions and financing activities. Our top seven senior executives have an average tenure with our company of over 11 years.

Business Strategies

Provide High Quality, Comprehensive Services and Cost Savings Throughout the Corrections Lifecycle

Our objective is to provide federal, state and local governmental agencies with a comprehensive offering of high quality, essential services at a lower cost than they themselves could achieve. We believe government agencies facing budgetary constraints will increasingly seek to outsource a greater proportion of their correctional needs to reliable providers that can enhance quality of service at a reduced cost. We believe our expanded and diversified service offerings strategically position us to bundle our high quality services and provide a comprehensive continuum of care for our clients, which we believe will lead to lower cost outcomes for our clients and larger scale business opportunities for us.

Maintain Disciplined Operating Approach

We refrain from pursuing contracts that we do not believe will yield attractive profit margins in relation to the associated operational risks. In addition, although we engage in facility development from time to time without having a corresponding management contract award in place, we endeavor to do so only where we have determined that there is medium-to long-term client demand for a facility in that geographic area. We have also elected not to enter certain international markets with a history of economic and political instability. We believe that our strategy of emphasizing lower risk and higher profit opportunities helps us to consistently deliver strong operational performance, lower our costs and increase our overall profitability.

Pursue International Growth Opportunities

As a global operator of privatized correctional facilities, we are able to capitalize on opportunities to operate existing or new facilities on behalf of foreign governments. We have seen increased business development opportunities including opportunities to cross-sell our expanded service offerings in recent years in the international markets in which we operate and are currently bidding on several new projects. We will continue to actively bid on new international projects in our current markets and in new markets that fit our target profile for profitability and operational risk.

Selectively Pursue Acquisition Opportunities

We intend to continue to supplement our organic growth by selectively identifying, acquiring and integrating businesses that fit our strategic objectives and enhance our geographic platform and service offerings. Since 2005, and including the acquisition of BI, we have successfully completed six acquisitions for total consideration, including debt assumed, in excess of $1.7 billion. Our management team utilizes a disciplined approach to analyze and evaluate acquisition opportunities, which we believe has contributed to our success in completing and integrating our acquisitions.

 

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Facilities and Day Reporting Centers

The following table summarizes certain information with respect to: (i) U.S. and international detention and corrections facilities; (ii) community-based services facilities; and (iii) residential and non-residential youth services facilities. The information in the table includes the facilities that we (or a subsidiary or joint venture of GEO) owned, operated under a management contract, had an agreement to provide services, had an award to manage or was in the process of constructing or expanding as of December 31, 2013:

 

Facility Name &

Location

  Capacity(1)     Primary
Customer
  Facility Type   Security
Level
  Commencement
of Current
Contract(2)
  Base
Period
  Renewal
Options
  Managed/
Leased/
Owned

Corrections & Detention—Western Region:

         
Adelanto Detention Facility, Adelanto, CA     1,300      ICE-IGA   Federal

Detention

  Minimum/

Medium

  May 2011   5 years   None   Owned

Alhambra City Jail,

Los Angeles, CA

    67      Los Angeles
County
  City Jail   All

Levels

  July 2008   3 years   Two,

One-year,
Plus 1 Year
Extension

  Managed
Arizona State-Prison
Florence West Florence, AZ
    750      AZ DOC   State DUI/

RTC

Correctional

  Minimum   October

2002

  10 years   Two,

Five-year

  Managed
Arizona State-Prison
Phoenix West Phoenix, AZ
    500      AZ DOC   State DWI

Correctional

  Minimum   July

2002

  10 years   Two,

Five-year

  Managed
Aurora/ICE Processing Center, Aurora, CO     1,532      ICE/USMS   Federal

Detention

  All Levels   September
2011/October
2012
  2 years/
2 years
  Two-Year/
Four,

Two-year

  Owned
Baldwin Park City Jail,
Baldwin Park, CA
    32      Los Angeles
County
  City Jail   All

Levels

  July

2003

  3 years   Three,

Three-year

  Managed
Central Arizona
Correctional Facility
Florence, AZ
    1,280      AZ DOC   State Sex

Offender

Correctional

  Minimum/

Medium

  December

2006

  10 years   Two, Five-
year
  Managed
Central Valley MCCF
McFarland, CA
    700      CDCR   State

Correctional

Facility

  Medium   October

2013

  Four
Years and
Eight
Months
  None   Owned

Desert View MCCF

Adelanto, CA

    700      CDCR   State

Correctional

Facility

  Medium   October

2013

  Four
Years and
Eight
Months
  None   Owned

Downey City Jail

Los Angeles, CA

    30      Los Angeles
County
  City Jail   All

Levels

  June

2003

  3 years   Three,

Three-year

  Managed

Fontana City Jail

Los Angeles, CA

    39      Los Angeles
County
  City Jail   All

Levels

  February

2007

  5 months   Five,

One-year
Plus 2 Year
Extension

  Managed

Garden Grove City Jail

Los Angeles, CA

    16      Los Angeles
County
  City Jail   All

Levels

  January

2010

  30 months   Unlimited   Managed
Golden State MCCF
McFarland, CA
    700      CDCR   State

Correctional

  Medium   November

2013

  Four
Years and
Eight
Months
  None   Owned

 

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Facility Name &

Location

  Capacity(1)     Primary
Customer
  Facility Type   Security
Level
  Commencement
of Current
Contract(2)
  Base
Period
  Renewal
Options
  Managed/
Leased/
Owned

Guadalupe County
Correctional Facility

Santa Rosa, NM(3)

    600      NMCD-IGA   Local/State

Correctional

  Medium   January

1999

  Perpetual   Automatic
One-year
  Owned
Hudson Correctional
Facility Hudson, CO
    1,250      Idle   —  
  —     —     —     —     Leased
Lea County Correctional
Facility Hobbs, NM(3)
    1,200      NMCD-IGA   Local/State

Correctional

  Medium   September

1998

  Perpetual   Automatic

One-year

  Owned
Leo Chesney Community
Correctional Facility Live Oak, CA
    318      Idle   —     —     —     —     —     Leased
McFarland Community
Correctional Facility
McFarland, CA
    260      Idle   —     —     —     —     —     Owned
Mesa Verde Community
Correctional Facility
Bakersfield, CA
    400      Idle   —     —     —     —     —     Owned

Montebello City Jail

Los Angeles, CA

    25      Los Angeles
County
  City Jail   All

Levels

  January 1996
  2 years   Unlimited,

One-year

  Managed
Northeast New Mexico
Detention Facility Clayton,
NM(3)
    625      NMDOC/
Clayton
County
  Local/State

Correctional

  Medium   August

2008

  5 years   Five,

One-year

  Managed
Northwest Detention Center
Tacoma, WA
    1,575      ICE   Federal

Detention

  All

Levels

  October

2009

  1 year   Four,

One-year

  Owned

Ontario City Jail

Los Angeles, CA

    40      Los Angeles
County
  City Jail   Any

Level

  September

2006

  3 years   Unlimited,

One-year

  Managed
Western Region Detention
Facility San Diego, CA
    770      USMS   Federal

Detention

  Maximum   January

2006

  5 years   One,

Five-year

  Leased

Corrections & Detention—Central Region:

         
Big Spring Correctional
Center Big Spring, TX
    3,509      BOP   Federal

Correctional

  Medium   April

2007

  4 years   Three,

Two-year

  Owned

Central Texas Detention

Facility San Antonio, TX(3)

    688      USMS/

ICE/Bexar
County

  Local &

Federal

Detention

  Minimum/

Medium

  April

2009

  10 years   None   Managed
Cleveland Correctional
Center Cleveland, TX
    520      TDCJ   State

Correctional

  Minimum   January

2009

  2.6 years   Two,

Two-year

  Managed
Great Plains Correctional
Facility Hinton, OK
    2,048      Idle   —     —     —     —     —     Owned
Joe Corley Detention
Facility Conroe, TX(4)
    1,517      USMS/

ICE

  Local

Correctional

  Medium   July
2008/July

2008

  Perpetual   Perpetual   Owned
Karnes Correctional Center
Karnes City, TX(4)
    679      USMS-IGA   Local &

Federal

Detention

  All

Levels

  February
1998
  Perpetual   None   Owned

 

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Facility Name &

Location

  Capacity(1)     Primary
Customer
  Facility Type   Security
Level
  Commencement
of Current
Contract(2)
  Base
Period
  Renewal
Options
  Managed/
Leased/
Owned
Karnes Civil Detention
Center Karnes City, TX(4)
    600      ICE-IGA   Federal

Detention

  All

Levels

  December

2010

  5 years   None   Owned
Lawton Correctional
Facility Lawton, OK
    2,526      OK

DOC

  State

Correctional

  Medium   October 2013   1 year   Four,
Automatic
One-year
  Owned
Lockhart Work
Program Facilities
Lockhart, TX
    1,000      TDCJ   State

Correctional

  Minimum/

Medium

  January

2009

  2.6 years   Two,

Two-year

  Managed
Reeves County Detention
Complex R1/R2 Pecos, TX(3)
    2,407      Reeves
County/
BOP
  Federal
Correctional
  Low   February
2007
  10 years   Unlimited,
Ten-year
  Managed

Reeves County Detention
Complex R3

Pecos, TX(3)

    1,356      Reeves
County/
BOP
  Federal

Correctional

  Low   January

2007

  10 years   Unlimited,

Ten-year

  Managed
Rio Grande Detention
Center Laredo, TX
    1,900      USMS
  Federal

Detention

  Medium   October

2008

  5 years   Three,

Five-year

  Owned
South Texas Detention
Complex Pearsall, TX
    1,904      ICE   Federal

Detention

  All

Levels

  December

2011

  11 months   Four,

One-year

  Owned
Val Verde Correctional
Facility Del Rio, TX(3)
    1,407      USMS-IGA   Local &

Federal

Detention

  All

Levels

  January

2001

  Perpetual   None   Owned

Corrections & Detention—Eastern Region

           
Allen Correctional Center
Kinder, LA
    1,538      LA DOC   State

Correctional

  Medium/

Maximum

  July

2010

  10 years   None   Managed

Blackwater River
Correctional Facility

Milton, FL

    2,000      FL DMS   State

Correctional

  Medium/

close

  October

2013

  3 years   Two,

two-year

  Managed
Broward Transition Center
Deerfield Beach, FL
    700      ICE   Federal

Detention

  Minimum   April

2009

  11 months   Four,

One-year,

Unlimited

6-month

  Owned
D. Ray James Correctional
Facility Folkston, GA
    2,507      BOP   Federal

Detention

  All

Levels

  October

2010

  4 years   Three,

Two-year

  Owned
D. Ray James Detention Facility Folkston, GA     340      USMS/IGA   Federal

Detention

  All

Levels

  January

2007

  Perpetual   None   Owned

Plainfield Indiana

STOP Program
Plainfield, IN

    1,066      INDOC   State

Correctional

  Minimum   March

2011

  4 years   Unspecified
  Managed
LaSalle Detention Facility
Jena, LA(3)
    1,160      ICE-IGA   Federal

Detention

  Minimum/

Medium

  July

2007

  5 years   Forty/

One-year

  Owned
Lawrenceville Correctional
Center Lawrenceville, VA
    1,536      VA

DOC

  State

Correctional

  Medium   March

2003

  5 years   Ten,

One-year

  Managed
Moshannon Valley
Correctional Center
Philipsburg, PA
    1,820      BOP   Federal

Correctional

  Medium   April

2006

  36 months   Seven,

One-year

  Owned

 

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Facility Name &

Location

  Capacity(1)     Primary
Customer
  Facility Type   Security
Level
  Commencement
of Current
Contract(2)
  Base
Period
  Renewal
Options
  Managed/
Leased/
Owned
New Castle Correctional
Facility New Castle, IN
    3,094      INDOC   State

Correctional

  All

Levels

  January

2006

  4 years   Three

Two-year,
then
through
2020 with
two
additional
5 year
extensions

  Managed
North Lake Correctional
Facility Baldwin, MI
    1,740      Idle   —     —     —     —     —     Owned

Queens Private

Detention Facility
Jamaica, NY

    222      USMS   Federal

Detention

  Minimum/

Medium

  January

2008

  2 years   Four,

Two-year

  Owned
Riverbend Correctional
Facility Milledgeville, GA
    1,500      GA DOC
  State

Correctional

  Medium   July

2010

  Partial

1 year

  Forty,

One-year

  Owned
Rivers Correctional
Institution Winton, NC
    1,450      BOP   Federal

Correctional

  Low   April

2011

  4 years   Three,

Two-year

  Owned
Robert A. Deyton Detention
Facility Lovejoy, GA
    768      USMS
  Federal

Detention

  Medium   February

2008

  5 years   Three,
Five year
  Leased
South Bay Correctional
Facility South Bay, FL
    1,898      FL DMS   State

Correctional

  Medium/

Close

  July

2009

  3 years   Unlimited,

Two-year

  Managed

Corrections & Detention—Australia:

           
Arthur Gorrie Correctional
Centre Queensland,
Australia
    890      QLD

DCS

  State

Remand

Prison

  High/

Maximum

  January

2008

  5 years   One,

Five-year

  Managed
Fulham Correctional
Centre & Nalu Challenge
Community Victoria,
Australia
    785      VIC DOJ   State Prison   Minimum/

Medium

  October

1995

  22 years   None   Managed

Junee Correctional Centre

New South Wales, Australia

    790      NSW   State Prison   Minimum/

Medium

  April 2009   5 years   Two,

Five-year

  Managed
Parklea Correctional Centre
Sydney, Australia
    823      NSW   State

Remand

Prison

  All Levels   October

2009

  5 years   One,

Two-year

  Managed

Corrections & Detention—United Kingdom

           

Dungavel House
Immigration Removal
Centre, South Lanarkshire,

UK

    249      UKBA   Detention

Centre

  Minimum   September

2011

  5 years   None   Managed
Harmondsworth
Immigration Removal
Centre London, UK
    620      UKBA   Detention

Centre

  Minimum   June

2011

  3 years   None   Managed

Corrections & Detention—South Africa:

           

Kutama-Sinthumule
Correctional Centre
Limpopo Province,

Republic of South Africa

    3,024      RSA DCS   National

Prison

  Maximum   February

2002

  25 years   None   Managed

 

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Table of Contents

Facility Name &

Location

  Capacity(1)     Primary
Customer
  Facility Type   Security
Level
  Commencement
of Current
Contract(2)
  Base
Period
  Renewal
Options
  Managed/
Leased/
Owned

Corrections & Detention—Canada:

           
New Brunswick Youth
Centre Mirimachi,
Canada(4)
    N/A      PNB   Provincial

Juvenile

Facility

  All Levels   October

1997

  25 years   One,

Ten-year

  Managed

Corrections & Detention—Leased:

           

Delaney Hall

Newark, NJ

    1,200      Community

Education

Centers

  Community

Corrections

  Community   None
  —     —     Owned

GEO Community Services—Community Based Services:

         
Beaumont Transitional
Treatment Center
Beaumont, TX
    180      TDCJ   Community

Corrections

  Community   September

2003

  2 years   Five,

Two-year

and One,

six-month

  Owned
Bronx Community Re-entry
Center Bronx, NY
    110      BOP   Community

Corrections

  Community   April

2013

  2 months
and
21 days
  Four,

Two-year

  Leased

Cordova Center

Anchorage, AK

    262      ABOP/AK
  Community

Corrections

  Community   January

2013

  2 years/
4 months
  Four,

One-year,

One
five-month

  Owned

El Monte Center

El Monte, CA

    70      BOP   Community

Corrections

  Community   July

2013

  1 year   Four,

One-year

  Leased
Grossman Center
Leavenworth, KS
    150      BOP   Community

Corrections

  Community   November

2012

  2 years   Three,

One-year

  Leased

Las Vegas Community
Correctional Center

Las Vegas, NV

    124      BOP
  Community

Corrections

  Community   October

2010

  2 years   Three,

One-year

  Owned

Leidel Comprehensive
Sanction Center

Houston, TX

    190      BOP
  Community

Corrections

  Community   January

2011

  2 years   Three,

One-year

  Owned

Marvin Gardens Center

Los Angeles, CA

    60      BOP   Community

Corrections

  Community   March

2012

  2 years   Three,

One-year

  Leased
McCabe Center Austin, TX     113      Multiple
Counties
  Community

Corrections

  Community   September

2012

  1 year   Three,

One-year

  Owned
Mid Valley House
Edinburg, TX
    100      BOP   Community

Corrections

  Community   December

2008

  2 years   Three,

One-year
and One
six-month

  Leased

Midtown Center

Anchorage, AK

    32      AK

DOC

  Community

Corrections

  Community   March

2013

  4 months   Four,

One-year,

One

five-month

  Owned
Northstar Center Fairbanks,
AK
    143      AK

DOC

  Community

Corrections

  Community   February

2011

  5 months   Four,

One-year,

One

five-month

  Leased

 

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Table of Contents

Facility Name &

Location

  Capacity(1)     Primary
Customer
  Facility Type   Security
Level
  Commencement
of Current
Contract(2)
  Base
Period
  Renewal
Options
  Managed/
Leased/
Owned
Oakland Center Oakland,
CA
    69      BOP   Community

Corrections

  Community   November

2008

  3 years   Seven,

One-year

  Owned

Parkview Center

Anchorage, AK

    112      AK DOC   Community

Corrections

  Community   March

2013

  4 months   Four,

One-year,

One

five-month

  Owned
Reality House Brownsville, TX     500      TDCJ   Community

Corrections

  Community   September

2003

  2 years   Five,

Two-year

  Own
Salt Lake City Center Salt
Lake City, UT
    115      BOP
  Community

Corrections

  Community   June

2011

  2 years   Three,

One-year

  Leased
Seaside Center Nome, AK     50      AK DOC   Community

Corrections

  Community   December

2007

  7 months   Four,

One-year
and One,
five-month

  Leased
Taylor Street Center
San Francisco, CA
    210      BOP/

CDCR

  Community

Corrections

  Community   April

2006/

January

2012

  2 years,

8 months/
3 years

  Seven,

One-year

  Owned
Tundra Center Bethel, AK     85      AK DOC   Community

Corrections

  Community   February

2012

  5 months   Four,

One-year
and One,
five-month

  Owned

GEO Community Services—Youth Services:

           
Residential Facilities                

Abraxas Academy

Morgantown, PA

    214      Various   Youth

Residential

  Secure   June

2005

  N/A   N/A   Owned
Abraxas I Marienville, PA     250      Various   Youth

Residential

  Staff

Secure

  May

2005

  N/A   N/A   Owned
Abraxas Ohio Shelby, OH     100      Various   Youth

Residential

  Staff

Secure

  June

2005

  N/A   N/A   Owned

Abraxas Youth Center

South Mountain, PA

    72      PA Dept of
Public
Welfare
  Youth

Residential

  Secure/

Staff

Secure

  June

2005

  N/A   N/A   Leased
Contact Interventions
Wauconda, IL
    32      Idle   —     —     —     —     —     Owned

DuPage Interventions

Hinsdale, IL

    36      IL DASA,

Medicaid,

Private

  Youth

Residential

  Staff

Secure

  June

2005

  N/A   N/A   Owned
Erie Residential Programs
Erie, PA
    53      Idle   —     —     —     —     —     Owned
Hector Garza Center
San Antonio, TX
    133      TYC   Youth

Residential

  Staff

Secure

  June

2005

  N/A   N/A   Owned
Leadership Development
Program South Mountain,
PA
    128      Various   Youth

Residential

  Staff

Secure

  1994   N/A   N/A   Leased

 

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Table of Contents

Facility Name &

Location

  Capacity(1)     Primary
Customer
  Facility Type   Security
Level
  Commencement
of Current
Contract(2)
  Base
Period
  Renewal
Options
  Managed/
Leased/
Owned
Southern Peaks Regional
Treatment Center Canon
City, CO
    136      Various   Youth

Residential

  Staff

Secure

  June

2005

  N/A   N/A   Owned
Southwood Interventions
Chicago, IL
    128      IL DASA,

City of

Chicago,

Medicaid

  Youth

Residential

  Staff

Secure

  June

2005

  N/A   N/A   Owned
Woodridge Interventions
Woodridge, IL
    90      IL DASA,

Medicaid

  Youth

Residential

  Staff

Secure

  June

2005

  N/A   N/A   Owned

GEO Community Services—Youth Services:

           
Non-residential Facilities:                
Abraxas Counseling Center
Columbus, OH
    120      Various   Youth

Non-residential

  Open   2008   N/A   N/A   Leased
Cincinnati Counseling Center, Cincinnati, OH     55      City of
Cincinnati
  Youth

Non-residential

  Open   2012   N/A   N/A   Leased
Harrisburg Community
-Based Programs
Harrisburg, PA
    145      Dauphin or

Cumberland

Counties

  Youth

Non-residential

  Open   1995   N/A   N/A   Leased
Lehigh Valley Community
-Based Programs Lehigh
Valley, PA
    30      Lehigh and

Northampton

Counties

  Youth

Non-residential

  Open   1987   N/A   N/A   Leased
Philadelphia Community
-Based Programs
Philadelphia, PA
    71      Philadelphia
DHS, C&Y
Division
  Youth

Non-residential

  Open
  1987   N/A   N/A   Leased
WorkBridge Pittsburgh, PA     725      Allegheny

County

  Youth

Non-residential

  Open   1987   N/A   N/A   Leased

The following table summarizes certain information with respect to our re-entry Day Reporting Centers, which we refer to as DRCs. The information in the table includes the DRCs that we (or a subsidiary or joint venture of GEO) operated under a management contract or had an agreement to provide services as of December 31 2013:

 

DRC Location

   Number of
reporting
centers
     Type of
Customers
   Commencement
of current
contract(s)
   Base
period
   Renewal
options
   Managed/
Leased

Colorado(5)

     15       State, County    Various,

2004 – 2012

   Various,

1 year to

18 months

   One to Four, One

year

   Leased

 

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Table of Contents

DRC Location

   Number of
reporting
centers
     Type of
Customers
   Commencement
of current
contract(s)
   Base
period
   Renewal
options
   Managed/
Leased

California

     17       State, County    Various,

2007 – 2012

   Various,

1 to 5 years

   Varies    Leased

North Carolina

     6       State    2012    2 years    One, Two year    Leased

New Jersey

     4       State, County    2008    3 years    Two, One

year

   Leased

Pennsylvania

     4       County    Various,

2006 – 2010

   Various,

1 to 3 years

   Indefinite, One

year

   Leased

Illinois

     1       State, County    2003    5 years    One, Five

year

   Leased or Managed

Kansas

     2       County    2011    4 years    Four, One

year

   Leased

Louisiana

     1       State    2010    1 year    Two, One

year

   Leased

Kentucky

     1       County    2010    2 years    Three, One

year

   Leased

Georgia

     1       County    2012    1 year    One, One year    Leased

New York

     1       County    2010    6 months    Four, One

year

   Leased

Customer Legend:

 

Abbreviation

  

Customer

AZ DOC    Arizona Department of Corrections
AK DOC    Alaska Department of Corrections
BOP    Federal Bureau of Prisons
CDCR    California Department of Corrections & Rehabilitation
CO DOC    Colorado Department of Corrections
FL DMS    Florida Department of Management Services
GDOC    Georgia Department of Corrections
ICE    U.S. Immigration & Customs Enforcement
IDOC    Indiana Department of Correction
IGA    Intergovernmental Agreement
IL DASA    Illinois Department of Alcoholism and Substance Abuse
LA DOC    Louisiana Department of Corrections
LEDD    LaSalle Economic Development District
NMCD    New Mexico Corrections Department
NSW    Commissioner of Corrective Services for New South Wales
OK DOC    Oklahoma Department of Corrections

 

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Table of Contents

Abbreviation

  

Customer

OFDT    Office of Federal Detention Trustee
PNB    Province of New Brunswick
QLD DCS    Department of Corrective Services of the State of Queensland
RSA DCS    Republic of South Africa Department of Correctional Services
TDCJ    Texas Department of Criminal Justice
TDFPS    Texas Department of Family and Protective Services
TYC    Texas Youth Commission
UKBA    United Kingdom Border Agency
USMS    United States Marshals Service
USPO    United States Probation Office
VA DOC    Virginia Department of Corrections
VIC DOJ    Department of Justice of the State of Victoria
YCCYS    York County Human Services Division, Children and Youth Services

 

(1) Capacity as used in the table refers to operational capacity consisting of total beds for all facilities except for the seven Non-residential service centers under Youth Services for which we have provided service capacity which represents the number of juveniles that can be serviced daily.
(2) For Youth Services Non-Residential Service Centers, the contract commencement date represents either the program start date or the date that the facility operations were acquired by Cornell. The service agreements under these arrangements, with the exception of Schaffner Youth Center, provide for services on an as-contracted basis and there are no guaranteed minimum populations or management contracts with specified renewal dates. These arrangements are more perpetual in nature.
(3) GEO provides services at these facilities through various Inter-Governmental Agreements, or IGAs, through the various counties and other jurisdictions.
(4) The contract for this facility only requires GEO to provide maintenance services.
(5) The Colorado Day Reporting Centers provide many of the same services as the full service Day Reporting Centers, but rather than providing these services through comprehensive treatment plans dictated by the governing authority, these services are provided on a fee for service basis. Such services may be connected to government agency contracts and would be reimbursed by those agencies. Other services are offered directly to offenders allowing them to meet court-ordered requirements and paid by the offender as the service is provided.

Government Contracts—Terminations, Renewals and Competitive Re-bids

Generally, we may lose our facility management contracts due to one of three reasons: the termination by a government customer with or without cause at any time; the failure by a customer to renew a contract with us upon the expiration of the then current term; or our failure to win the right to continue to operate under a contract that has been competitively re-bid in a procurement process upon its termination or expiration. Our facility management contracts typically allow a contracting governmental agency to terminate a contract with or without cause at any time 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. See “Risk Factors—“We are subject to the loss of our facility management contracts, due to terminations, non-renewals or competitive re-bids, which could adversely affect our results of operations and liquidity, including our ability to secure new facility management contracts from other government customers.”

 

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Aside from our customers’ unilateral right to terminate our facility management contracts with them at any time for any reason, there are two points during the typical lifecycle of a contract which may result in the loss by us of a facility management contract with our customers. We refer to these points as contract “renewals” and contract “re-bids.” Many of our facility management contracts with our government customers have an initial fixed term and subsequent renewal rights for one or more additional periods at the unilateral option of the customer. Because most of our contracts for youth services do not guarantee placement or revenue, we have not considered these contracts to ever be in the renewal or re-bid stage since they are more perpetual in nature. As such, the contracts for youth services are not considered as renewals or re-bids nor are they included in the table below. We count each government customer’s right to renew a particular facility management contract for an additional period as a separate “renewal.” For example, a five-year initial fixed term contract with customer options to renew for five separate additional one-year periods would, if fully exercised, be counted as five separate renewals, with one renewal coming in each of the five years following the initial term. As of December 31, 2013, 46 of our facility management contracts representing approximately 26,700 beds are scheduled to expire on or before December 31, 2014, unless renewed by the customer at its sole option in certain cases, or unless renewed by mutual agreement in other cases. These contracts represented 39.4% of our consolidated revenues for the fiscal year ended December 31, 2013. We undertake substantial efforts to renew our facility management contracts. Our average historical facility management contract renewal rate approximates 90%. However, given their unilateral nature, we cannot assure you that our customers will in fact exercise their renewal options under existing contracts. In addition, in connection with 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 those in existence prior to the renewals.

We define competitive re-bids as contracts currently under our management which we believe, based on our experience with the customer and the facility involved, will be re-bid to us and other potential service providers in a competitive procurement process upon the expiration or termination of our contract, assuming all renewal options are exercised. Our determination of which contracts we believe will be competitively re-bid may in some cases be subjective and judgmental, based largely on our knowledge of the dynamics involving a particular contract, the customer and the facility involved. Competitive re-bids may result from the expiration of the term of a contract, including the initial fixed term plus any renewal periods, or the early termination of a contract by a customer. Competitive re-bids are often required by applicable federal or state procurement laws periodically in order to further competitive pricing and other terms for the government customer. Potential bidders in competitive re-bid situations include us, other private operators and other government entities. While we are pleased with our historical win rate on competitive re-bids and are committed to continuing to bid competitively on appropriate future competitive re-bid opportunities, we cannot in fact assure you that we will prevail in future re-bid situations. Also, we cannot assure you that any competitive re-bids we win will be on terms more favorable to us than those in existence with respect to the expiring contract.

As of December 31, 2013, nine of our facility management contracts representing 10.5% and $160.5 million of our fiscal year 2013 consolidated revenues are subject to competitive re-bid in 2014. The following table sets forth the number of facility management contracts that we currently believe will be subject to competitive re-bid in each of the next five years and thereafter, and the total number of beds relating to those potential competitive re-bid situations during each period:

 

Year

   Re-bid      Total Number of Beds up for Re-bid  

2014

     9         6,426   

2015

     21         5,569   

2016

     14         7,864   

2017

     13         11,120   

2018

     7         6,677   

Thereafter

     21         20,277   
  

 

 

    

 

 

 

Total

     85         57,933   
  

 

 

    

 

 

 

 

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In addition to the facility management contracts subject to competitive re-bid in the table above, certain of our other management contracts are also subject to competitive re-bid including our contract to provide services to ICE under the Intensive Supervision Appearance Program (“ISAP”) which is subject to competitive re-bid in 2014. We generated revenues under this contract during the fiscal year ended December 31, 2013 of $41.9 million (or 2.8%) of our consolidated revenues.

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 responsible for the operation of correctional, detention, youth services, community based services and re-entry facilities are often seeking to retain projects that might otherwise be privatized. In the private sector, our U.S. Corrections & Detention and International Services business segments compete with a number of companies, including, but not limited to: Corrections Corporation of America; Management and Training Corporation; Louisiana Corrections Services, Inc.; Emerald Companies; Community Education Centers; LaSalle Southwest Corrections; Group 4 Securicor; Sodexo Justice Services (formerly Kaylx); and Serco. Our GEO Community Service business segment competes with a number of different small-to-medium sized companies, reflecting the highly fragmented nature of the youth services and community based services industry. BI’s electronic monitoring business segment competes with a number of companies, including, but not limited to: G4 Justice Services, LLC; Elmo-Tech, a 3M Company; and Pro-Tech, a 3M Company. 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 December 31, 2013, we had 16,292 full-time employees. Of our full-time employees, 462 were employed at our headquarters and regional offices and 15,830 were employed at facilities and international offices. We employ personnel in positions of management, administrative and clerical, security, educational services, human services, health services and general maintenance at our various locations. Approximately 2,580 and 1,694 employees are covered by collective bargaining agreements in the United States and at international offices, respectively. We believe that our relations with our employees are satisfactory.

Under the laws applicable to most of our operations, and internal company policies, our correctional officers are required to complete a minimum amount of training. We generally require at least 40 hours of pre-service training before an employee is allowed to assume their duties plus an additional 120 hours of training during their first year of employment in our domestic facilities, consistent with ACA standards and/or applicable state laws. In addition to the usual 160 hours of training in the first year, 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 typically 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 160 hours of training are required for our employees in Australia and South Africa 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 refresher training each year. In the United

 

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Kingdom, our corrections employees also receive a minimum of 240 hours prior to coming in contact with inmates and receive additional training of approximately 25 hours annually.

With respect to BI and the ISAP services contract, new employees are required to complete training requirements as outlined in the contract within 14 days of hire and prior to being assigned autonomous ISAP related duties. These employees receive 25 hours of refresher training annually thereafter. Program managers for our ISAP contract must receive 24 hours of additional initial training. BI’s monitoring services maintains its own comprehensive certification and training program for all monitoring service specialists. We require all new personnel hired for a position in monitoring operations to complete a seven-week training program. Successful completion of our training program training and a final certification is required of all of our personnel performing monitoring operations. We require that certification is achieved prior to being permitted to work independently in the call center.

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, product liability claims, intellectual property infringement 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, electronic monitoring products, 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 general types of claims, except for claims relating to employment matters, for which we carry no insurance. There can be no assurance that our insurance coverage will be adequate to cover all claims to which we may be exposed. It is our general practice to bring merged or acquired companies into our corporate master policies in order to take advantage of certain economies of scale.

We currently maintain a general liability policy and excess liability policies with total limits of $67.0 million per occurrence and in the aggregate covering the operations of U.S. Corrections & Detention, GEO Community Services’ community based services, GEO Community Services’ youth services and BI. We have a claims-made liability insurance program with a specific loss limit of $35.0 million per occurrence and in the aggregate related to medical professional liability claims arising out of correctional healthcare services. We are is

 

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uninsured for any claims in excess of these limits. We also maintain insurance to cover property and other casualty risks including, workers’ compensation, environmental liability and automobile liability.

For most casualty insurance policies, we carry substantial deductibles or self-insured retentions of $3.0 million per occurrence for general liability and medical professional liability, $2.0 million per occurrence for workers’ compensation and $1.0 million per occurrence for automobile liability. In addition, certain of our facilities located in Florida and other high-risk hurricane areas carry substantial windstorm deductibles. Since hurricanes are considered unpredictable future events, no reserves have been established to pre-fund for potential windstorm damage. Limited commercial availability of certain types of insurance relating to windstorm exposure in coastal areas and earthquake exposure mainly in California and the Pacific Northwest may prevent us from insuring some of our facilities to full replacement value.

With respect to our operations in South Africa, the United Kingdom and Australia, we utilize a combination of locally-procured insurance and global policies to meet contractual insurance requirements and to protect us. In addition to these policies, our Australian subsidiary carries tail insurance on a general liability policy related to a discontinued contract.

Of the reserves discussed above, our most significant insurance reserves relate to workers’ compensation, general liability and auto claims. These reserves are undiscounted and were $47.6 million and $45.1 million as of December 31, 2013 and 2012, respectively, and are included in accrued expenses in the accompanying balance sheets. We use statistical and actuarial methods to estimate amounts for claims that have been reported but not paid and claims incurred but not reported. In applying these methods and assessing their results, we consider such factors as historical frequency and severity of claims at each of our facilities, claim development, payment patterns and changes in the nature of our business, among other factors. Such factors are analyzed for each of our business segments. Our estimates may be impacted by such factors as increases in the market price for medical services and unpredictability of the size of jury awards. We also may experience variability between our estimates and the actual settlement due to limitations inherent in the estimation process, including our ability to estimate costs of processing and settling claims in a timely manner as well as our ability to accurately estimate our exposure at the onset of a claim. Because we have high deductible insurance policies, the amount of our insurance expense is dependent on our ability to control our claims experience. If actual losses related to insurance claims significantly differ from our estimates, our financial condition, results of operations and cash flows could be materially adversely impacted.

International Operations

Our international operations for fiscal years 2013, 2012, and 2011 consisted of the operations of our wholly- owned Australian subsidiaries, our wholly owned subsidiary in the United Kingdom, and South African Custodial Management Pty. Limited, our consolidated joint venture in South Africa, which we refer to as SACM. In Australia, our wholly-owned subsidiary, GEO Australia, currently manages four facilities. We operate one facility in South Africa through SACM. During fourth quarter 2004, we opened an office in the United Kingdom to pursue new business opportunities throughout Europe. Since June 29, 2009, GEO UK has managed the 620-bed Harmondsworth Immigration Removal Centre in London, England. In September 2011, we activated the 217-bed Dungavel House Immigration Removal Centre located near Glasgow, Scotland. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more discussion related to the results of our international operations.

Business Concentration

Except for the major customers noted in the following table, no other single customer made up greater than 10% of our consolidated revenues, excluding discontinued operations, for these years.

 

Customer

   2013     2012     2011  

Various agencies of the U.S. Federal Government:

     45     47     40

Credit risk related to accounts receivable is reflective of the related revenues.

 

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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

The following is a discussion of our anticipated policies with respect to distributions, investments, financing, lending and certain other activities of GEO REIT. Upon completion of the REIT conversion, these policies will be determined and periodically thereafter amended by the board of directors of GEO REIT without notice to, or a vote of, the shareholders of GEO REIT, except that changes in certain policies with respect to conflicts of interest must be consistent with legal and contractual requirements.

Distribution Policy

We commenced declaring regular quarterly distributions as a REIT beginning the first quarter of 2013. For a discussion of our distribution policy, see the section titled “Distribution Policy.”

Investment Policy

Effective as of January 1, 2013, we own and lease correctional, detention and re-entry facilities directly and indirectly through one or more QRSs, and we hold our facility operations, managed-only contracts, electronic monitoring services, non-residential and community based facilities and international operations through one or more TRSs. Our investment objective is to seek to expand our revenue base and strong cash flow by maintaining and strengthening our long-term customer relationships, contract renewal rates and facility occupancy rates. To achieve this, we expect to continue to deploy our capital through our annual capital expenditure program and acquisitions to enhance our scale and service offerings, subject to available funds and market conditions.

 

    Annual capital expenditure program. We will continue to reinvest in our existing assets and expand our portfolio of correctional, detention and re-entry facilities through our annual capital expenditure program. This includes capital expenditures associated with maintenance, expansion of capacity of our existing correctional, detention and re-entry facilities and new construction of correctional, detention and re-entry facilities.

 

    Acquisitions. We will seek to pursue acquisitions of correctional, detention and re-entry facilities or complementary services. This includes acquisitions in our existing or new markets where we can meet our return on investment criteria. When evaluating international investments, our return on investment criteria reflects the additional risks inherent to the particular geographic area.

There are currently no limitations on (a) the percentage of our assets that may be invested in any one property, venture or type of security, (b) the number of properties in which we may invest, or (c) the concentration of investments in a single geographic region. The board of directors may establish limitations, and other policies, as it deems appropriate from time to time.

Financing Policy

Our financing policies will largely depend on the nature and timeline of our investment opportunities and the prevailing economic and market conditions. If the board of directors determines that additional funding is desirable, we may raise funds through the following means:

 

    debt financings, including but not limited to, accessing the U.S. debt capital markets and drawing from the Amended and Restated Senior Credit Facility;

 

    equity offerings of securities, including through our at-the-market equity offering program through which we may from time to time sell shares of our common stock for an aggregate purchase price of up to $100 million; and

 

    any combination of the above methods.

We intend to retain the maximum possible cash flow to fund our investments, subject to provisions in the Code requiring distribution of REIT taxable income to maintain our REIT status, and to minimize our income

 

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and excise tax liabilities. Further, as of December 31, 2013, we had approximately $52.1 million of cash and cash equivalents. As of December 31, 2013, we had approximately, $299.0 million of availability under the Revolver. We intend to utilize our cash on hand and availability under the Senior Credit Facility to fund future discretionary investments.

We do not have a formal policy limiting the amount of indebtedness that we may incur, although we are subject to certain restrictions in our indentures and the Senior Credit Facility with regard to permitted indebtedness.

The board of directors may also authorize the obtaining of additional capital through the issuance of equity securities. Pursuant to the GEO REIT Articles, we will have authority to issue up to 125,000,000 shares of GEO REIT common stock and 30,000,000 shares of undesignated preferred stock.

In the future, we may seek to extend, expand, reduce or renew the Senior Credit Facility, obtain a new credit facility or credit facilities, lines of credit, or issue new unsecured or secured debt that may contain limitations on indebtedness.

We will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of indebtedness, including overall prudence, the purchase price of assets to be acquired with debt financing, the estimated market value of our assets upon refinancing, our ability to generate cash flow to cover our expected debt service and restrictions under our existing debt arrangements. For additional information, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Lending Policy

We expect we will continue to make loans to our operating subsidiaries to the extent to which they require additional financing to fund growth through their discretionary capital programs and acquisitions.

Reports to Shareholders

We make available to our shareholders our annual reports, including our audited financial statements. We are subject to the information reporting provisions of the Exchange Act, which require us to file annual and periodic reports, proxy statements and other information, including audited financial statements, with the SEC.

Other Activities

At all times, we intend to operate and to invest so as to comply with the REIT rules in the Code unless, due to changing circumstances or changes to the Code or the Treasury regulations thereunder, the board of directors determines that it is no longer in the best interests of GEO REIT and its shareholders to qualify as a REIT.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholder

The GEO Group REIT, Inc.

We have audited the accompanying balance sheet of The GEO Group REIT, Inc. (a Florida corporation) (the “Company”) as of December 31, 2013. This financial statement is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement 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 the financial statement is free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of The GEO Group REIT, Inc. as of December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Miami, FL

March 21, 2014

 

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THE GEO GROUP REIT, INC.

BALANCE SHEET

AS OF DECEMBER 31, 2013

 

Assets:

  

Cash

   $ 1,000   
  

 

 

 

Total assets

   $ 1,000   
  

 

 

 

Liabilities and stockholder’s equity:

  

Liabilities

   $ —     

Stockholder’s equity:

  

Preferred stock, $.01 par value, 30,000,000 shares authorized, none issued or outstanding

     —     

Common stock, $.01 par value per share, 125,000,000 authorized, 100,000 shares issued and outstanding

     1,000   
  

 

 

 

Total stockholder’s equity

     1,000   
  

 

 

 

Total liabilities and stockholder’s equity

   $ 1,000   
  

 

 

 

 

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THE GEO GROUP REIT, INC.

NOTE TO THE BALANCE SHEET

1. Organization

The GEO Group REIT, Inc. (“The GEO Group REIT”, the “Company”) was incorporated on July 11, 2013, under the laws of the State of Florida and was authorized to issue 125,000,000 shares of common stock, par value $.01 per share and 30,000,000 shares of preferred stock, $.01 par value per share. The GEO Group REIT, a wholly owned subsidiary of The GEO Group, Inc., was created to effect the merger described below. The GEO Group, Inc. paid $1,000 to capitalize the Company. This was the only transaction for the period ended December 31, 2013.

Prior to the merger, The GEO Group REIT will conduct no business other than incident to the merger. In the merger, The GEO Group, Inc. will merge with and into The GEO Group REIT. Upon effectiveness of the merger, shares of The GEO Group, Inc. will be cancelled and the outstanding shares of common and preferred stock will be converted into the right to receive the same number of shares of The GEO Group REIT common and preferred stock. The GEO Group REIT will, by virtue of the merger, directly or indirectly own all of the assets and business formerly owned by The GEO Group, Inc.

Also effective at the time of the merger, The GEO Group REIT will change its name to “The GEO Group, Inc.” and its certificate of incorporation will be amended and restated. The restated certificate is substantially the same as The GEO Group, Inc., except for a change in its authorized capital stock and the addition of restrictions on ownership and transfer of common and preferred stock to facilitate compliance with the rules applicable to REITs. The members of the board of directors and executive management of The GEO Group, Inc. immediately prior to the merger will hold the same positions with The GEO Group REIT immediately after the merger.

 

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SELECTED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA

The following table sets forth the selected historical financial and other data of us and our consolidated subsidiaries at the dates and for the periods indicated. The selected consolidated balance sheet data as of December 31, 2013 and December 31, 2012 and the selected consolidated statements of comprehensive income data and other financial data for each of the years in the three-year period ended December 31, 2013 have been derived from our audited consolidated financial statements incorporated by reference into this proxy statement/prospectus. The selected balance sheet data as of January 1, 2012, January 2, 2011 and January 3, 2010 and the selected consolidated statements of comprehensive income data and other financial data for each of January 2, 2011 and January 3, 2010 have been derived from our audited consolidated financial statements, which are not included in or incorporated by reference into this proxy statement/prospectus. The selected consolidated statements of comprehensive income and other financial data for each of the years in the five-year period ended December 31, 2013 reflect the reclassification of certain amounts as discontinued operations. In connection with our conversion to a REIT, we determined to change our fiscal year end from the close of business on the Sunday closest to December 31 of each year to December 31 of each year. This change was effective for the 2012 fiscal year and as a result the 2012 fiscal year ended on December 31, 2012 instead of December 30, 2012. In the opinion of management, the presentation of such results includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the data for such periods.

The information presented below should be read in conjunction with the historical consolidated financial statements of GEO, including the related notes, and GEO’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in or incorporated by reference into this proxy statement/prospectus. All amounts are presented in thousands except operational data.

 

    Fiscal Year Ended  
    January 3,
2010
    January 2,
2011
    January 1,
2012
    December 31,
2012
    December 31,
2013
 

Consolidated Statements of Comprehensive Income:

         

Revenues

  $ 976,504     $ 1,084,592     $ 1,407,172     $ 1,479,062     $ 1,522,074   

Operating costs and expenses

         

Operating expenses

    753,515       811,767       1,036,010       1,089,232       1,124,865   

Depreciation and amortization

    37,022       44,365       81,548       91,685       94,664   

General and administrative expenses

    62,619       101,558       110,015       113,792       117,061   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

  $ 852,899     $ 957,690     $ 1,227,573     $ 1,294,709     $ 1,336,590   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    123,348       126,902       179,599       184,353       185,484   

Interest income

    5,031       6,242       7,032       6,716       3,324   

Interest expense(1)

    (28,518 )     (40,694 )     (75,378 )     (82,189 )     (83,004

Loss on extinguishment of debt

    (6,839 )     (7,933 )     —         (8,462 )     (20,657
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes, equity in earnings of affiliates, and discontinued operations

  $ 93,022     $ 84,517     $ 111,253     $ 100,418     $ 85,147   

Provision (benefit) for income taxes

    37,649       34,364       43,172       (40,562 )     (26,050

Equity in earnings of affiliates, net of income tax

    3,517       4,218       1,563       3,578       6,265   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    58,890       54,371       69,644       144,558       117,462   

Income (loss) from discontinued operations, net of income tax

    7,064       8,419       7,819       (10,660 )     (2,265
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    65,954       62,790       77,463       133,898     $ 115,197   

Less: (Income) loss attributable to noncontrolling interests

    (169 )     678       1,162       852       (62
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

  $ 65,785     $ 63,468     $ 78,625     $ 134,750     $ 115,135   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Fiscal Year Ended    

 

 
    January 3,
2010
    January 2,
2011
    January 1,
2012
    December 31,
2012
    December 31,
2013
 

Other comprehensive income (loss), net of tax:

         

Net income

  $ 66,123     $ 62,790     $ 77,463     $ 133,898     $ 115,197   

Total other comprehensive income (loss), net of tax

    12,174       4,645       (8,253 )     624       (7,199
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

    78,297       67,435       69,210       134,522       107,998   

Comprehensive (income) loss attributable to noncontrolling interests

    428       608       1,274       968       38   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

  $ 78,725     $ 68,043     $ 70,484     $ 135,490     $ 108,036   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Common Shares Outstanding:

         

Basic

    50,879       55,379       63,425       60,934       71,116   

Diluted

    51,922       55,989       63,740       61,265       71,605   

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

         

Basic:

         

Income from continuing operations

  $ 1.15     $ 0.99     $ 1.12     $ 2.39     $ 1.65   

Income (loss) from discontinued operations

    0.14       0.15       0.12       (0.17 )     (0.03
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share—basic

  $ 1.30     $ 1.15     $ 1.24     $ 2.21     $ 1.62   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

         

Income from continuing operations

  $ 1.13     $ 0.98     $ 1.11     $ 2.37     $ 1.64   

Income (loss) from discontinued operations

    0.14       0.15       0.12       (0.17 )     (0.03
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share—basic

  $ 1.27     $ 1.13     $ 1.23     $ 2.20     $ 1.61   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and Stock Dividends Per Common Share:

         

Quarterly Cash Dividends

    —         —         —         0.40     $ 2.05   

Special Dividend—Cash and Stock

    —         —         —         5.68       —     

Business Segment Data:

         

Revenues:

         

U.S. Corrections & Detention

  $ 740,451     $ 805,857     $ 925,695     $ 974,780     $ 1,011,818   

GEO Community Services(2)

    11,569       76,913       280,080       291,891       302,094   

International Services

    126,449       178,567       201,397       212,391       208,162   

Facility Construction & Design

    98,035       23,255       —         —         —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 976,504     $ 1,084,592     $ 1,407,172     $ 1,479,062     $ 1,522,074   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

         

U.S. Corrections & Detention

  $ 173,068     $ 198,837     $ 215,406     $ 222,976     $ 217,918   

GEO Community Services(2)

    5,522       15,877       61,270       65,401       71,279   

International Services

    6,996       11,364       12,938       9,768       13,348   

Facility Construction & Design

    381       2,382       —         —         —     

Unallocated G&A expenses

    (62,619 )     (101,558 )     (110,015 )     (113,792 )     (117,061
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

  $ 123,348     $ 126,902     $ 179,599     $ 184,353     $ 185,484   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Data (at period end):

         

Cash and cash equivalents

  $ 28,592     $ 38,088     $ 43,378     $ 31,755     $ 52,125   

Restricted cash and investments

    33,651       89,977       99,459       48,410       29,867   

Accounts receivable, net

    175,796       247,630       265,250       246,635       250,530   

Property and equipment, net

    979,867       1,493,389       1,688,356       1,687,159       1,727,798   

Total assets

    1,447,818       2,412,373       3,049,923       2,839,194       2,889,364   

Total debt

    584,694       1,044,942       1,594,317       1,488,173       1,584,776   

Total shareholders’ equity

    665,098       1,039,490       1,038,521       1,047,304       1,023,976   

 

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    Fiscal Year Ended  
    January 3,
2010
    January 2,
2011
    January 1,
2012
    December 31,
2012
    December 31,
2013
 

Other Operational Data (at period end):

         

Facilities in operation(3)

    50       98       90       87       86   

Operations capacity of contracts(3)

    49,388       70,552       65,787       65,949       66,130   

Compensated mandays(4)

    15,888,828       17,203,880       19,884,802       20,530,885       20,867,016   

 

(1) Interest expense excludes the following capitalized interest amounts for the periods presented:

 

Fiscal Year Ended

January 3,
2010

  

January 2,
2011

  

January 1,
2012

  

December 31,
2012

  

December 31,

2013

$4,942    $4,144    $3,060    $1,244    —  

 

(2) Our GEO Care reporting segment previously consisted of four aggregated operating segments including Residential Treatment Services, Community Based Services, Youth Services and B.I. Incorporated. The GEO Care reporting segment was renamed concurrent with the divestiture of the Company’s Residential Treatment Services operating segment to GEO Community Services. All current and prior year financial position and results of operations amounts presented for this reporting segment are referred to as GEO Community Services. The operating results of the Residential Treatment Services operating segment and the loss on disposal have been classified in discontinued operations.
(3) Excludes idle facilities and assets held for sale.
(4) Compensated mandays 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 capacity of the facility multiplied by the number of days the facility was in operation during the fiscal year.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Set forth below is a discussion and analysis of the financial condition and results of operations of GEO. After the merger, GEO REIT will succeed to and continue the business of GEO. Due to the impact of taxes and anticipated distributions following the REIT conversion, our historical results of operations of GEO may not be fully comparable to the results of operations following the REIT conversion.

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 above under “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” The discussion should be read in conjunction with the consolidated financial statements and notes thereto incorporated by reference in this joint proxy statement/prospectus. For purposes of this discussion and analysis, we refer to 2013 as the year ended December 31, 2013, 2012 as the year ended December 31, 2012 and 2011 as the year ended January 1, 2012.

We are a real estate investment trust specializing in the ownership, leasing and management of correctional, detention and re-entry facilities and the provision of community-based services and youth services in the United States, Australia, South Africa, the United Kingdom and Canada. We own, lease and operate a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers, and community based re-entry facilities. We offer counseling, education and/or treatment to inmates with alcohol and drug abuse problems at most of the domestic facilities we manage. We are also a provider of innovative compliance technologies, industry-leading monitoring services, and evidence-based supervision and treatment programs for community-based parolees, probationers and pretrial defendants. Additionally, we have an exclusive contract with the U.S. Immigration and Customs Enforcement, which we refer to as ICE, to provide supervision and reporting services designed to improve the participation of non-detained aliens in the immigration court system. We develop new facilities based on contract awards, using our project development expertise and experience to design, construct and finance what we believe are state-of-the-art facilities that maximize security and efficiency. We also provide secure transportation services for offender and detainee populations as contracted domestically and in the United Kingdom through our joint venture, GEO Amey PECS Ltd., which we refer to as GEOAmey.

As of December 31, 2013, our worldwide operations included the management and/or ownership of approximately 77,000 beds at 98 correctional, detention and re-entry facilities, including idle facilities and projects under development, and also included the provision of monitoring services, tracking more than 70,000 offenders in a community-based environment on behalf of approximately 900 federal, state and local correctional agencies located in all 50 states.

For each of the years ended December 31, 2013 and December 31, 2012, we had consolidated revenues of $1.5 billion and we maintained an average company wide facility occupancy rate of 94.8% including 66,130 active beds and excluding 6,016 idle beds for the year ended December 31, 2013, and 95.7% including 66,730 active beds and excluding 6,056 idle beds for the year ended December 31, 2012.

We began operating as a REIT for federal income tax purposes effective January 1, 2013. As a result of the REIT conversion, we reorganized our operations and moved non-real estate components into TRSs. Through the TRS structure, the portion of our businesses, which are non-real estate related, such as our managed-only contracts, international operations, electronic monitoring services, and other non-residential and community based facilities, are part of wholly owned taxable subsidiaries of the REIT. Most of our business segments, which

 

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are real estate related and involve company-owned and company-leased facilities, are part of the REIT. The TRS structure allows us to maintain the strategic alignment of almost all of our diversified business segments under one entity. The TRS assets and operations will continue to be subject to federal and state corporate income taxes and to foreign taxes as applicable in the jurisdictions in which those assets and operations are located.

As a REIT, we are required to distribute annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gain) and we began paying regular distributions in 2013. We paid quarterly cash dividends as a REIT of $0.50 per share of common stock on March 1, 2013 to shareholders of record as of the close of business on February 15, 2013, $0.50 per share of common stock on June 3, 2013 to shareholders of record as of the close of business on May 20, 2013, $0.50 per share of common stock on August 29, 2013 to shareholders of record as of the close of business on August 19, 2013 and $0.55 per share of common stock on November 26, 2013 to shareholders of record as of the close of business on November 14, 2013.

Divestiture of Residential Treatment Services

Applicable REIT rules substantially restrict the ability of REITs to operate health care facilities. As a result, in order to achieve and preserve our REIT status, on December 31, 2012, we completed the divestiture of all of our residential treatment health care facility assets and related management contracts (“Residential Treatment Services” or “RTS”). The operating results of RTS have been retroactively reclassified to discontinued operations for all periods presented in our Form 10-K for the year ended December 31, 2013.

Fiscal Year

In connection with our conversion to a REIT, on December 31, 2012, we changed our fiscal year to a calendar year and changed our fiscal quarters to coincide with each calendar quarter.

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, 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 revenue 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 to our Form 10-K for the year ended December 31, 2013 contain additional information related to our accounting policies and should be read in conjunction with this discussion.

 

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Revenue Recognition

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, as applicable. A limited number of our contracts have provisions upon which a small portion of the revenue for the contract is based on the performance of certain targets. Revenue based on the performance of certain targets is less than 1% of our consolidated annual revenues. These performance targets are based on specific criteria to be met over specific periods of time. Such criteria includes our ability to achieve certain contractual benchmarks relative to the quality of service we provide, non-occurrence of certain disruptive events, effectiveness of our quality control programs and our responsiveness to customer requirements and concerns. For the limited number of contracts where revenue is based on the performance of certain targets, revenue is either (i) recorded pro rata when revenue is fixed and determinable or (ii) recorded when the specified time period lapses. In many instances, we are a party to more than one contract with a single entity. In these instances, each contract is accounted for separately. We have not recorded any revenue that is at risk due to future performance contingencies.

Construction revenues are recognized from our contracts with certain customers to perform construction and design services (“project development services”) for various facilities. In these instances, we act as the primary developer and subcontract with bonded National and/or Regional Design Build Contractors. These construction revenues are recognized as earned on a percentage of completion basis measured by the percentage of costs

incurred to date as compared to the estimated total cost for each contract. 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 costs incurred. Revenue in excess of the costs attributable to unapproved change orders is not recognized until the change order is approved. 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. For the year ended December 31, 2013 and the fiscal years ended December 31, 2012 and January 1, 2012, there have been no changes in job performance, job conditions and estimated profitability that would require a revision to the estimated costs and income related to project development services. As the primary contractor, we are exposed to the various risks associated with construction, including the risk of cost overruns. Accordingly, we record our construction revenue on a gross basis and include the related cost of construction activities in Operating Expenses.

When evaluating multiple element arrangements for certain contracts where we provide project development services to our clients in addition to standard management services, we follow revenue recognition guidance for multiple element arrangements. This revenue recognition guidance related to multiple deliverables in an arrangement provides guidance on determining if separate contracts should be evaluated as a single arrangement and if an arrangement involves a single unit of accounting or separate units of accounting and if the arrangement is determined to have separate units, how to allocate amounts received in the arrangement for revenue recognition purposes. In instances where we provide these project development services and subsequent management services, generally, the arrangement results in no delivered elements at the onset of the agreement. The elements are delivered over the contract period as the project development and management services are performed. Project development services are not provided separately to a customer without a management contract. One of our wholly-owned subsidiaries, BI, periodically sells its monitoring equipment and other services together in multiple-element arrangements. In such cases, we allocate revenue on the basis of the relative selling price of the delivered and undelivered elements. The selling price for each of the elements is estimated based on the price we charge when the elements are sold on a stand alone basis.

 

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Reserves for Insurance Losses

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, product liability claims, intellectual property infringement 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, electronic monitoring products, 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 general types of claims, except for claims relating to employment matters, for which we carry no insurance. There can be no assurance that our insurance coverage will be adequate to cover all claims to which we may be exposed. It is our general practice to bring merged or acquired companies into our corporate master policies in order to take advantage of certain economies of scale.

We currently maintain a general liability policy and excess liability policies with total limits of $67.0 million per occurrence and in the aggregate covering the operations of U.S. Corrections & Detention, GEO Community Services’ community based services, GEO Community Services’ youth services and BI. We have a claims-made liability insurance program with a specific loss limit of $35.0 million per occurrence and in the aggregate related to medical professional liability claims arising out of correctional healthcare services. We are uninsured for any claims in excess of these limits. We also maintain insurance to cover property and other casualty risks including, workers’ compensation, environmental liability and automobile liability.

For most casualty insurance policies, we carry substantial deductibles or self-insured retentions of $3.0 million per occurrence for general liability and medical professional liability, $2.0 million per occurrence for workers’ compensation and $1.0 million per occurrence for automobile liability. In addition, certain of our facilities located in Florida and other high-risk hurricane areas carry substantial windstorm deductibles. Since hurricanes are considered unpredictable future events, no reserves have been established to pre-fund for potential windstorm damage. Limited commercial availability of certain types of insurance relating to windstorm exposure in coastal areas and earthquake exposure mainly in California and the Pacific Northwest may prevent the Company from insuring some of its facilities to full replacement value.

With respect to operations in South Africa, the United Kingdom and Australia, we utilize a combination of locally-procured insurance and global policies to meet contractual insurance requirements and protect us. In addition to these policies, our Australian subsidiary carries tail insurance on a general liability policy related to a discontinued contract.

Of the reserves discussed above, our most significant insurance reserves relate to workers’ compensation, general liability and auto claims. These reserves are undiscounted and were $47.6 million and $45.1 million as of December 31, 2013 and 2012, respectively, and are included in accrued expenses in the accompanying balance sheets. We use statistical and actuarial methods to estimate amounts for claims that have been reported but not paid and claims incurred but not reported. In applying these methods and assessing their results, we consider such factors as historical frequency and severity of claims at each of our facilities, claim development, payment patterns and changes in the nature of our business, among other factors. Such factors are analyzed for each of our business segments. Our estimates may be impacted by such factors as increases in the market price for medical services and unpredictability of the size of jury awards. We also may experience variability between our estimates and the actual settlement due to limitations inherent in the estimation process, including our ability to estimate costs of processing and settling claims in a timely manner as well as our ability to accurately estimate our exposure at the onset of a claim. Because we have high deductible insurance policies, the amount of our insurance expense is dependent on our ability to control our claims experience. If actual losses related to

 

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insurance claims significantly differ from our estimates, our financial condition, results of operations and cash flows could be materially adversely impacted.

Income Taxes

The consolidated financial statements reflect provisions for federal, state, local and foreign income taxes. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities as a result of a change in tax rates is recognized as income in the period that includes the enactment date. At December 31, 2012, we have reversed certain deferred tax assets and liabilities related to our REIT activities (Refer to Note 17- Income Taxes in Part II, Item 8 of our Form 10-K for the fiscal year ended December 31, 2013). Effective January 1, 2013, as a REIT that plans to distribute 100% of its taxable income to shareholders, we do not expect to pay federal income taxes at the REIT level (including our qualified REIT subsidiaries), but instead a dividends paid deduction will generally offset our taxable income. Since we do not expect to pay taxes on our REIT taxable income we do not expect to be able to recognize such net deferred tax assets and liabilities.

Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Significant judgments are required to determine the consolidated provision for income taxes. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. Realization of the our deferred tax assets is dependent upon many factors such as tax regulations applicable to the jurisdictions in which we operate, estimates of future taxable income and the character of such taxable income.

Additionally, we must use significant judgment in addressing uncertainties in the application of complex tax laws and regulations. If actual circumstances differ from the our assumptions, adjustments to the carrying value of deferred tax assets or liabilities may be required, which may result in an adverse impact on the results of our operations and our effective tax rate. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria. We have not made any significant changes to the way we accounts for its deferred tax assets and liabilities in any year presented in the consolidated financial statements, with the exception of the reversal of certain deferred tax assets and liabilities related to our REIT conversion. Based on our estimate of future earnings and our favorable earnings history, we currently expect full realization of the deferred tax assets net of any recorded valuation allowances. Furthermore, tax positions taken by us may not be fully sustained upon examination by the taxing authorities. In determining the adequacy of our provision (benefit) for income taxes, potential settlement outcomes resulting from income tax examinations are regularly assessed. As such, the final outcome of tax examinations, including the total amount payable or the timing of any such payments upon resolution of these issues, cannot be estimated with certainty. To the extent that the provision for income taxes increases/decreases by 1% of income before income taxes, equity in earnings of affiliate, discontinued operations and consolidated income from continuing operations would have decreased/increased by $1.0 million, $1.1 million and $0.9 million, respectively, for the fiscal years ended December 31, 2012, January 1, 2012 and January 2, 2011.

In September 2013, the U.S. Internal Revenue Service (IRS) issued new regulations for capitalizing and deducting costs incurred to acquire, produce, or improve tangible property. These new regulations are effective for taxable years beginning on or after January 1, 2014; however, they are considered enacted as of the date of issuance, September 15, 2013. As a result of the new regulations, we are required to review our existing income tax accounting methods related to tangible property, and determine which, if any, income tax accounting method changes are required; whether we will early adopt any of the new provisions through income tax accounting method changes for the 2012 or 2013 tax years; whether we will file any income tax accounting method changes with our 2014 federal income tax return; and the potential financial statement impact. Because additional

 

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implementation guidance from the IRS is anticipated, we are in the process of reviewing our existing income tax accounting methods related to tangible property; however, we believe that certain of our historical income tax accounting policies may differ from what is prescribed in the new regulations. While some of our assets are held by our TRSs, the vast majority are held by the REIT. Based on our initial assessment, the new regulations will not have a material effect on our consolidated financial statements.

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 50 years. Equipment and furniture and fixtures are depreciated over 3 to 10 years. Accelerated methods of depreciation are generally used for income tax purposes. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. We perform ongoing evaluations of the estimated useful lives of 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. If the assessment indicates that assets will be used for a longer or shorter period than previously anticipated, the useful lives of the assets are revised, resulting in a change in estimate. We have not made any changes in estimates during the year ended December 31, 2013 or the years ended December 31, 2012 and January 1, 2012. Maintenance and repairs are expensed as incurred. Interest is capitalized in connection with the construction of correctional and detention facilities. Cost for self-constructed correctional and detention facilities includes direct materials and labor, capitalized interest and certain other indirect costs associated with construction of the facility, such as property taxes, other indirect labor and related benefits and payroll taxes. The Company begins the capitalization of costs during the pre-construction phase, which is the period during which costs are incurred to evaluate the site, and continues until the facility is substantially complete and ready for occupancy. Labor costs capitalized for the years ended December 31, 2013, December 31, 2012 and January 1, 2012 were not significant. Capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life.

Assets Held for Sale

As of December 31, 2013, we had no facilities classified as held for sale in the consolidated balance sheet. We classify a long-lived asset (disposal group) as held for sale in the period in which all of the following criteria are met (i) management, having the authority to approve the action, commits to a plan to sell the asset (disposal group), (ii) the asset (disposal group) is available for immediate sale in its present condition subject only to the terms that are usual and customary for sales of such assets (disposal groups), (iii) an active program to locate a buyer and other actions required to complete the plan to sell the asset (disposal group) have been initiated, (iv) the sale of the asset (disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale, within one year, except as permitted, (v) the asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. We record assets held for sale at the lower of cost or estimated fair value and estimate fair value by using third party appraisers or other valuation techniques. We do not record depreciation for assets held for sale. Any gain or loss on the sale of operating assets is included in the operating income of the reportable segment to which it relates.

Asset Impairments

We had property and equipment of $1.7 billion as of December 31, 2013 and December 31, 2012 including approximately 6,000 vacant beds at six idle facilities with a carrying value of $193.6 million which were being marketed to potential customers as of December 31, 2013, excluding equipment and other assets that can be easily transferred for use at other facilities.

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. Events that would

 

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trigger an impairment assessment include deterioration of profits for a business segment that has long-lived assets, or when other changes occur that might impair recovery of long-lived assets such as the termination of a management contract or a significant decrease in inmate population. If impairment indicators are present, we perform a recoverability test to determine whether or not an impairment loss should be measured.

We test idle facilities for impairment upon notification that the facilities will no longer be utilized by the customer. If a long-lived asset is part of a group that includes other assets, the unit of accounting for the long-lived asset is its group. Generally, we group assets by facility for the purpose of considering whether any impairment exists. The estimates of recoverability are based on projected undiscounted cash flows associated with actual marketing efforts where available or, in other instances, projected undiscounted cash flows that are comparable to historical cash flows from management contracts at similar facilities and sensitivity analyses that consider reductions to such cash flows. Our sensitivity analyses include adjustments to projected cash flows compared to the historical cash flows due to current business conditions which impact per diem rates as well as labor and other operating costs, changes related to facility mission due to changes in prospective clients, and changes in projected capacity and occupancy rates. We also factor in prolonged periods of vacancies as well as the time and costs required to ramp up facility population once a contract is obtained. We perform the impairment analyses on an annual basis for each of the idle facilities and update each quarter for market developments for the potential utilization of each of the facilities in order to identify events that may cause us to reconsider the most recent assumptions. Such events could include negotiations with a prospective customer for the utilization of an idle facility at terms significantly less favorable than used in our most recent impairment analysis, or changes in legislation surrounding a particular facility that could impact our ability to house certain types of inmates at such facility. Further, a substantial increase in the number of available beds at other facilities that we own, or in the marketplace, could lead to deterioration in market conditions and projected cash flows. Although they are not frequently received, an unsolicited offer to purchase any of our idle facilities, at amounts that are less than their carrying value could also cause us to reconsider the assumptions used in the most recent impairment analysis. We have identified marketing prospects to utilize each of the remaining currently idled facilities and do not see any catalysts that would result in a current impairment. However, we can provide no assurance that we will be able to secure management contracts to utilize our idle facilities, or that we will not incur impairment charges in the future. In all cases, the projected undiscounted cash flows in our analysis as of December 31, 2013 substantially exceeded the carrying amounts of each facility.

Our evaluations also take into consideration historical experience in securing new management contracts to utilize facilities that had been previously idled for periods comparable to or in excess of the periods our currently idle facilities have been idle. Such previously idle facilities are currently being operated under contracts that generate cash flows resulting in the recoverability of the net book value of the previously idled facilities by substantial amounts. Due to a variety of factors, the lead time to negotiate contracts with federal and state agencies to utilize idle bed capacity is generally lengthy which has historically resulted in periods of idleness similar to the ones we are currently experiencing. As a result of our analyses, we determined each of these assets to have recoverable values substantially in excess of the corresponding carrying values.

By their nature, these estimates contain uncertainties with respect to the extent and timing of the respective cash flows due to potential delays or material changes to forecasted terms and conditions in contracts with prospective customers that could impact the estimate of projected cash flows. Notwithstanding the effects the current economy has had on our customers’ demand for prison beds in the short term which has led to our decision to idle certain facilities, we believe the long-term trends favor an increase in the utilization of our idle correctional facilities. This belief is also based on our experience in operating in recessionary environments and based on our experience in working with governmental agencies faced with significant budgetary challenges which is a primary contributing factor to the lack of appropriated funding to build new bed capacity by federal and state agencies.

 

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Discontinued Operations

We report the results of operations of a component of an entity that either has been disposed of or is classified as held for sale or where the management contracts with that component have terminated either by expiration or otherwise in discontinued operations. We present such events as discontinued operations so long as the financial results can be clearly identified, the future operations and cash flows are completely eliminated from ongoing operations, and so long as we do not have any significant continuing involvement in the operations of the component after the disposal or termination transaction.

When a component of an entity has been disposed of or classified as held for sale or a management contract is terminated, we look at our overall relationship with the customer. If the operations or cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the transaction and the entity will not have significant continuing involvement in the operations of the component after the transaction, the results of operations of the component of an entity are reported in discontinued operations. If we will continue to maintain a relationship generating significant cash flows and having continuing involvement with the customer, the disposal, the asset held for sale classification or the loss of the management contract(s) is not treated as discontinued operations. If the disposal, the asset held for sale classification or the loss of the management contract(s) results in a loss in the overall customer relationship as no future significant cash flows will be generated and we will have no continuing involvement with the customer, the results are classified in discontinued operations.

Recent Accounting Pronouncements

The following accounting standards have an implementation date subsequent to the year ended December 31, 2013 and as such, have not yet been adopted by us during the year ended December 31, 2013:

In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force) (“ASU 2013-05”). The objective of ASU 2013-05 is to resolve diversity in practice regarding the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. ASU 2013-05 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The ASU is not expected to have a material effect on the Company’s results of operations or financial position.

In July 2013, the FASB issued ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the FASB Emerging Issues Task Force) (“ASU 2013-10”). The objective of ASU 2013-10 is to provide for the inclusion of the Fed Funds Effective Swap Rate as a U.S. benchmark interest rate for hedge accounting purposes, in addition to U.S Government Treasury obligations and the London Interbank Offered Rate. ASU 2013-10 is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The ASU is not expected to have a material effect on the Company’s results of operations or financial position.

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Tax Force) (“ASU 2013-11”). The objective of ASU 2013-11 is to resolve diversity in practice regarding the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or tax credit carryforward exists. ASU 2013-11 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The ASU is not expected to have a material effect on the Company’s results of operations or financial position.

 

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Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC did not, or are not expected to, have a material effect on the Company’s results of operations or financial position.

Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the notes to the consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2013. The discussion of our results of operations below excludes the results of discontinued operations reported in 2013, 2012 and 2011 related to the Company’s discontinued operations for all periods presented. Refer to Note 2-Discontinued Operations of the notes to our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2013.

2013 versus 2012

Revenues

 

     2013      % of Revenue     2012      % of Revenue     $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 1,011,818         66.5   $ 974,780         65.9   $ 37,038        3.8

GEO Community Services

     302,094         19.8     291,891         19.7     10,203        3.5

International Services

     208,162         13.7     212,391         14.4     (4,229     (2.0 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total

   $ 1,522,074         100.0   $ 1,479,062         100.0   $ 43,012        2.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

U.S. Corrections & Detention

Revenues increased in 2013 as compared to 2012 primarily due to aggregate increases of $24.3 million due to the activation and intake of inmates at Adelanto East in August 2012, Central Valley and Desert View in fourth quarter 2013 and the commencement of services under our contract, signed in October 2012, with the United States Marshals Service for the housing of up to 320 federal detainees at our Aurora Detention Facility. We also experienced aggregate increases in revenues of $28.9 million at certain of our facilities primarily due to net increases in population, transportation services and/or rates, including the expansion of New Castle in the first quarter of 2012. These increases were partially offset by an aggregate decrease of $16.1 million due to contract terminations.

The number of compensated mandays in U.S. Corrections & Detention facilities was 17.1 million in 2013 as compared to 16.6 million in 2012. We experienced an aggregate net increase of approximately 400,000 mandays as a result of our new contracts discussed above and also as a result of population increases at certain facilities. These increases were partially offset by decreases resulting from contract terminations. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. Detention & Corrections facilities was 95.4% and 96.3% of capacity in 2013 and 2012, respectively, excluding idle facilities.

GEO Community Services

The increase in revenues for GEO Community Based Services in 2013 compared to 2012 is primarily attributable to increases of $8.7 million due to new electronic monitoring equipment and an increase in ISAP counts at BI. In addition, we experienced a net increase of $5.5 million due to population increases at certain youth facilities and new programs and growth at our community based and re-entry centers. These increases were partially offset by decreases in revenues of $4.1 million related to contract terminations and census declines at certain facilities.

 

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International Services

The decrease in revenues in 2013 compared to 2012 is primarily due to the result of foreign exchange rate fluctuations of $(14.6) million caused by the weakening of the U.S. dollar against certain foreign currencies. This decrease was partially offset by an aggregate net increase of $10.4 million primarily attributable to our Australian subsidiary related to population increases, contractual increases linked to the inflationary index, and the provision of additional services under certain contracts.

Operating Expenses

 

     2013      % of Segment
Revenues
    2012      % of Segment
Revenues
    $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 731,788         72.3   $ 689,226         70.7   $ 42,562        6.2

GEO Community Services

     200,826         66.5     199,752         68.4     1,074        0.5

International Services

     192,251         92.4     200,254         94.3     (8,003     (4.0 )% 
  

 

 

      

 

 

      

 

 

   

Total

   $ 1,124,865         73.9   $ 1,089,232         73.6   $ 35,633        3.3
  

 

 

      

 

 

      

 

 

   

Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and GEO Community Services facilities and expenses incurred in our Facility Construction and Design segment, except that there were no significant expenses incurred in such segment for 2013 or 2012.

U.S. Corrections & Detention

The increase in operating expenses for U.S. Corrections & Detention reflects the following: (i) the activation and intake of inmates at Adelanto East in August 2012, Central Valley and Desert View during fourth quarter 2013 and the commencement of services under our contract, signed in October 2012, with the United States Marshals Service at our Aurora Detention Facility which contributed an aggregate increase to operating expenses of $15.2 million; (ii) increases of $22.4 million at certain of our facilities primarily related to net population increases, higher levels of required staffing, additional medical costs and other variable costs; (iii) in 2012 we received approximately $10 million in net operating tax refunds, not related to income taxes, for certain previously disputed claims in various jurisdictions that did not recur in 2013; and (iv) in connection with our annual actuarial analysis we recorded an additional $6.1 million to our insurance reserves in 2013. Additionally, in 2012, we recorded a $0.8 million decrease to our reserve based on the same actuarial analysis. These increases were partially offset by aggregate decreases in operating expenses of $8.7 million due to contract terminations. We also donated one of our facilities during fourth quarter 2012 which resulted in a decrease over 2013 of $2.8 million. The additional charge to our insurance reserve in 2013 as compared to the net operating tax refunds received in 2012 resulted in an increase in our operating expenses as a percentage of revenues.

GEO Community Services

Operating expenses for GEO Community Services increased by $1.1 million during 2013 from 2012 primarily due to net increases of $4.5 million due to the following: (i) variable costs associated with increases in electronic monitoring contracts and ISAP services at BI; (ii) population increases at certain youth facilities and the related variable costs; and (iii) new programs and program growth at our community based and re-entry centers. In addition, in connection with our annual actuarial analysis, we recorded an additional $2.1 million to our insurance reserves during 2013. In 2012, we recorded an additional $1.3 million to our insurance reserves based on this same analysis. These increases were partially offset by decreases that resulted from contract terminations and census declines of $4.2 million. The decrease in operating expenses as a percentage of revenue is primarily due to a shift in our product mix to BI products that have higher profit margins.

 

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International Services

Operating expenses for our International Services segment during 2013 decreased $8.0 million over 2012 which was primarily attributable to the impact of foreign currency exchange rate fluctuations of $(13.4) million caused by the weakening of the U.S. dollar against certain foreign currencies. In addition, there was a net decrease of $4.2 million primarily related to cost cutting measures implemented to reduce overhead costs in the United Kingdom. These decreases were partially offset by a net increase of $9.6 million primarily attributable to our Australian subsidiary due to population increases, contractual increases in labor and additional services provided under new contracts at those facilities.

Depreciation and Amortization

 

     2013      % of Segment
Revenue
    2012      % of Segment
Revenue
    $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 62,112         6.1   $ 62,578         6.4   $ (466     (0.7 )% 

GEO Community Services

     29,989         9.9     26,738         9.2     3,251        12.2

International Services

     2,563         1.2     2,369         1.1     194        8.2
  

 

 

      

 

 

      

 

 

   

Total

   $ 94,664         6.2   $ 91,685         6.2   $ 2,979        3.2
  

 

 

      

 

 

      

 

 

   

U.S. Corrections & Detention

U.S. Corrections & Detention depreciation and amortization expense decreased slightly in 2013 compared to 2012 primarily due to certain intangible assets which became fully amortized towards the end of 2012.

GEO Community Services

GEO Community Services depreciation and amortization increased by $3.3 million in 2013 compared to 2012. The increase is primarily due to an increase in monitoring and other equipment at BI in 2013 related to certain contract wins.

International Services

Depreciation and amortization expense increased slightly in 2013 compared to 2012 primarily due to increases in capital expenditures at our Australian subsidiary. This increase was partially offset by exchange rate fluctuations caused by the weakening of the U.S. dollar against certain foreign currencies.

Other Unallocated Operating Expenses

 

    2013     % of Revenue     2012     % of Revenue     $ Change     % Change  
    (Dollars in thousands)  

General and Administrative Expenses

  $ 117,061        7.7   $ 113,792        7.0   $ 3,269        2.9

General and administrative expenses comprise substantially all of our other unallocated operating expenses including primarily corporate management salaries and benefits, professional fees and other administrative expenses. The increase in general and administrative expenses in 2013 compared to 2012 was primarily due to professional fees incurred in connection with our various debt refinancing activities and related registration statements in 2013. Refer to Note 14 — Debt of the notes to our audited consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2013.

 

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Non Operating Income and Expense

Interest Income and Interest Expense

 

     2013      % of Revenue     2012      % of Revenue     $ Change     % Change  
     (Dollars in thousands)  

Interest Income

   $ 3,324         0.2   $ 6,716         0.5   $ (3,392     (50.5 )% 

Interest Expense

   $ 83,004         5.5   $ 82,189         5.6   $ 815        1.0

The majority of our interest income generated in 2013 and 2012 is from the cash balances at our foreign subsidiaries. Interest income decreased in 2013 primarily due to lower cash balances at our foreign subsidiaries along with declining interest rates in 2013.

Interest expense increased slightly in 2013 compared to 2012 due to the following: (i) interest expense increased by $12.5 million in connection with the completion of our $300 million 5.125% Senior Notes offering in March 2013; (ii) an increase of $1.2 million caused by the capitalization of interest in 2012; and (iii) interest expense increased by $3.7 million in connection with the completion of our $250 million 5 7/8% Senior Notes offering during the fourth quarter 2013. These increases were partially offset by decreases due to the following (i) interest expense on the Municipal Corrections Finance L.P. (“MCF”) 8.47% Taxable Revenue Bonds, Series 2001, due August 1, 2016 issued by MCF (the “MCF Bonds”) was $3.3 million (the MCF bonds were redeemed in August 2012); (ii) interest expense decreased in 2013 by $6.6 million as a result of our refinancing the Prior Senior Credit Facility in the second quarter 2013; (iii) a decrease of $4.1 million in connection with our tender offer and redemption of the 7 3/4% Senior Notes during the fourth quarter 2013; (iv) a decrease of $0.5 million related to the defeasance of the STLDC bonds in the third quarter 2013; and (v) other less significant decreases of $2.1 million. Refer to Note 14 — Debt of the notes to our audited consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2013.

Loss on Early Extinguishment of Debt

 

    2013     % of Revenue     2012     % of Revenue     $ Change     % Change  
    (Dollars in thousands)  

Loss on Early Extinguishment of Debt

  $ 20,657        1.4   $ 8,462        0.6   $ 12,195        144.1

The loss on extinguishment of debt in 2013 is the result of the following: (i) in the second quarter 2013, we refinanced our Prior Senior Credit Facility and entered into a new Credit Agreement, as a result of which, we wrote off $4.4 million of unamortized deferred financing costs and unamortized debt discount pertaining to the Prior Senior Credit Facility and expensed $1.1 million in fees related to the new Credit Agreement; (ii) our defeasance of the non-recourse bonds related to STLDC on September 30, 2013, as a result of which, we incurred a $1.5 million loss on extinguishment of debt which represented the excess of the reacquisition price over the carrying value of the bonds and other defeasance related fees and expenses; and (iii) in the fourth quarter 2013, we completed a tender offer and redemption of our 7 3/4% Senior Notes which resulted in a loss of $17.7 million related to the tender premium and deferred costs associated with the 7 3/4% Senior Notes. This loss was partially offset by proceeds of $4.0 million received for the settlement of the interest rate swaps related to the 7 3/4% Senior Notes. The loss on extinguishment of debt in 2012 was the result of our early redemption of the MCF Bonds. Refer to Note 14 — Debt of the notes to our audited consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2013.

Income Tax Benefit

 

     2013     Effective Rate     2012     Effective Rate  
     (Dollars in thousands)  

Income Tax Benefit

   $ (26,050     (30.6 )%    $ (40,562     (40.4 )% 

 

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The income tax benefit was $26.1 million in 2013 compared to $40.6 million in 2012 and the effective tax rate increased from (40.4)% to (30.6%). The benefit in both years is primarily attributable to our REIT conversion which became effective January 1, 2013. As a REIT, we are required to distribute at least 90% of our taxable income to shareholders and in turn are allowed a deduction for the distribution at the REIT level. The Company’s wholly-owned taxable REIT subsidiaries continue to be fully subject to federal, state and foreign income taxes, as applicable. In 2013, GEO had a net tax benefit relating to its REIT conversion, IRS settlement and miscellaneous nonrecurring items of $21.9 million. Together these items had a favorable impact to the effective tax rate. In 2012, GEO had a net tax benefit relating to the REIT conversion of $79.0 million which was primarily related to the reversal of certain deferred tax assets and liabilities upon conversion.

Equity in Earnings of Affiliates

 

     2013      % of Revenue     2012      % of Revenue     $ Change      % Change  
     (Dollars in thousands)  

Equity in Earnings of Affiliates

   $ 6,265         0.4   $ 3,578         0.2   $ 2,687         75.1

Equity in earnings of affiliates, presented net of income taxes, represents the earnings of SACS and GEOAmey, respectively. Overall, we experienced an increase in equity in earnings of affiliates during 2013 compared to 2012, which is primarily due to increased performance from the operations of GEOAmey in 2013 compared to 2012.

2012 versus 2011

Revenues

 

     2012      % of
Revenue
    2011      % of
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 974,780         65.9   $ 925,098         65.7   $ 49,682         5.4

GEO Community Services

     291,891         19.7     280,080         19.9     11,811         4.2

International Services

     212,391         14.4     201,994         14.4     10,397         5.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total

   $ 1,479,062         100.0   $ 1,407,172         100.0   $ 71,890         5.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

U.S. Corrections & Detention

Revenues increased in 2012 as compared to 2011 primarily due to aggregate increases of $55.6 million due to the activation and intake of inmates at Adelanto East, Riverbend Correctional Facility (“Riverbend”) and Karnes Civil Detention Center (“Karnes”). We also experienced aggregate increases in revenues of $37.5 million at certain of our facilities primarily due to net increases in population, transportation services and/or rates, including the expansion of New Castle in the first quarter of 2012. These increases were partially offset by an aggregate decrease of $44.0 million due to contract terminations and other decreases primarily related to lower populations at some facilities.

The number of compensated mandays in U.S. Corrections & Detention facilities was 16.6 million in 2012 as compared to 16.1 million in 2011. We experienced an aggregate net increase of approximately 500,000 mandays as a result of our new contracts discussed above and also as a result of population increases at certain facilities. These increases were partially offset by decreases resulting from contract terminations. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. Detention & Corrections facilities was 96.3% and 95.6% of capacity in 2012 and 2011, respectively, excluding idle facilities.

 

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GEO Community Services

The increase in revenues for GEO Community Services in 2012 as compared to 2011 is primarily attributable to a full year of revenues generated by BI in 2012 compared to approximately ten and a half months of revenues in 2011 which contributed to an increase of $16.9 million. We also experienced a net increase in revenues of $5.1 million at certain of our facilities primarily due to increases in population and/or rates. These increases were partially offset by a decrease in revenues of $10.2 million related to our terminated contracts.

International Services

Revenues for our International Services segment during 2012 increased by $10.4 million over 2011 primarily due to the following factors: (i) aggregate increases at our Australian subsidiary of $7.8 million related to population increases, contractual increases linked to the inflationary index and the provision of additional services under certain contracts; (ii) aggregate increases at our South African subsidiary of $1.4 million primarily due to increases in the inflationary index; and (iii) an increase of $7.3 million due to the provision of additional services at Harmondsworth Immigration Removal Centre (“Harmondsworth”) and the assumption of operations at Dungavel Immigration Removal Centre (“Dungavel”) on September 25, 2011. These increases were partially offset by decreases of $2.7 million as a result of foreign exchange rate fluctuations and a decrease of $4.0 million in revenues due to the termination of the management contracts for the operation of Campsfield House Immigration Removal Centre (“Campsfield House”).

Operating Expenses

 

     2012      % of Segment
Revenues
    2011      % of Segment
Revenues
    $ Change      % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 689,226         70.7   $ 654,609         70.8   $ 34,617         5.3

GEO Community Services

     199,752         68.4     194,539         69.5     5,213         2.7

International Services

     200,254         94.3     186,862         92.5     13,392         7.2
  

 

 

      

 

 

      

 

 

    

Total

   $ 1,089,232         73.6   $ 1,036,010         73.6   $ 53,222         5.1
  

 

 

      

 

 

      

 

 

    

Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and GEO Community Services facilities and expenses incurred on our Facility Construction and Design segment, except that there were no significant expenses incurred in such segment for 2012 and 2011.

U.S. Corrections & Detention

The increase in operating expenses for U.S. Corrections & Detention reflects the following: (i) the activation and intake of inmates at Adelanto East, Riverbend and Karnes which contributed an aggregate increase to operating expenses of $42.6 million, and (ii) increases of $28.7 million at certain of our facilities primarily related to net population increases, higher levels of required staffing and additional medical costs. We also donated one of our facilities during the fourth quarter 2012 which resulted in an increase of $2.8 million. These increases were partially offset by aggregate decreases in operating expenses of $30.0 million due to contract terminations. In addition, operating expenses decreased by $9.7 million in 2012 due to net operating tax refunds received, not related to income taxes, for certain previously disputed tax claims in various jurisdictions.

GEO Community Services

Operating expenses for GEO Community Services increased $5.2 million during 2012 from 2011 primarily due to BI, which was operating for a full year during 2012 compared to a partial year during 2011 as BI was acquired in February 2011. These increases were partially offset by a decrease in operating expenses for terminated contracts. During 2012, we experienced a decrease in operating expenses as a percentage of revenue due to improved margins resulting from our acquisition of BI.

 

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International Services

Operating expenses for our International Services segment during 2012 increased $13.4 million over the prior year primarily due to: (i) an increase in operating expenses at our Australian and South African subsidiaries of $7.2 million related to increases in population and additional services provided at certain of those facilities; and (ii) a net increase of $8.4 million in operating expenses in the United Kingdom primarily due to the opening of Dungavel on September 25, 2011, partially offset by the termination of our contract for the management of Campsfield House effective in May 2011, and an increase in international bid costs incurred during 2012. These net increases were partially offset by a decrease of $2.7 million as a result of foreign exchange rate fluctuations.

Depreciation and Amortization

 

     2012      % of Segment
Revenue
    2011      % of Segment
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 62,578         6.4   $ 55,207         6.0   $ 7,371         13.4

GEO Community Services

     26,738         9.2     24,271         8.7     2,467         10.2

International Services

     2,369         1.1     2,070         1.0     299         14.4
  

 

 

      

 

 

      

 

 

    

Total

   $ 91,685         6.2   $ 81,548         5.8   $ 10,137         12.4
  

 

 

      

 

 

      

 

 

    

U.S. Corrections & Detention

U.S. Corrections & Detention depreciation and amortization expense increased by $7.4 million in 2012 compared to 2011 primarily as a result of the completion of construction projects in 2011 and 2012.

GEO Community Services

The increase in depreciation and amortization expense for GEO Community Services in 2012 compared to 2011 is primarily due to an increase in monitoring and other equipment at BI in 2012 related to certain contract wins and amortization of BI intangible assets. As BI was acquired in February 2011, 2011 does not include a full year of depreciation and amortization expense for BI.

International Services

Depreciation and amortization expense increased slightly in 2012 over 2011 primarily due to increases in capital expenditures at our Australian subsidiary and also from fluctuations in foreign exchange rates. These increases were partially offset by a decrease in depreciation expense due to the termination of our Campsfield House management contract effective May 2011.

Other Unallocated Operating Expenses

 

     2012      % of
Revenue
    2011      % of
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

General and Administrative Expenses

   $ 113,792         7.7   $ 110,015         7.8   $ 3,777         3.4

General and administrative expenses comprise substantially all of our other unallocated operating expenses including primarily corporate management salaries and benefits, professional fees and other administrative expenses. The increase in general and administrative expenses in 2012 compared to 2011 was due to REIT conversion related expenses and transaction costs related to the acquisition of MCF, offset by start-up costs incurred in 2011 in connection with the acquisition costs of BI and start-up costs incurred in 2011 for our joint venture in the United Kingdom.

 

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Non Operating Income and Expense

Interest Income and Interest Expense

 

     2012      % of
Revenue
    2011      % of
Revenue
    $ Change     % Change  
     (Dollars in thousands)  

Interest Income

   $ 6,716         0.5   $ 7,032         0.5   $ (316     (4.5 )%

Interest Expense

   $ 82,189         5.6   $ 75,378         5.4   $ 6,811        9.0

The majority of our interest income generated in 2012 and 2011 is from the cash balances at our foreign subsidiaries.

The increase in interest expense of $6.8 million is attributable to more indebtedness outstanding in 2012 compared to 2011. We incurred $2.2 million in additional interest expense during 2012 due to the issuance of our 6.625% Senior Notes in February 2011. We also incurred aggregate increases in interest expense of $5.3 million due to greater outstanding borrowings under our prior Senior Credit Facility and due to the issuance of non-recourse debt by our wholly owned subsidiary in December 2011. We also had a reduction in capitalized interest in 2012 of $1.8 million due to the completion of the Karnes and Adelanto projects in the first half of 2012. These increases were partially offset by decreases in interest expense aggregating $2.3 million primarily due to lower outstanding borrowings on certain of our other non-recourse debt.

Loss on Early Extinguishment of Debt

 

     2012      % of
Revenue
    2011      % of
Revenue
     $ Change      % Change  
     (Dollars in thousands)  

Loss on Early Extinguishment of Debt

   $ 8,462         0.6   $ —          —        $ 8,462         100.0

The loss on early extinguishment of debt in 2012 was the result of our early redemption of the MCF bonds and consisted of a make-whole premium of $14.9 million which includes $0.1 million of bond redemption costs, offset by the effect of the unamortized bond premium of $6.4 million.

Provision (Benefit) for Income Taxes

 

     2012     Effective Rate     2011      Effective Rate  
     (Dollars in thousands)  

Income Tax Provision (Benefit)

   $ (40,562     (40.4 )%   $ 43,172         38.8

The effective tax rate for 2012 was (40.4)% and includes certain items related to the REIT conversion that had an overall favorable impact on the effective tax rate. Without these items our effective tax rate would have been 38.3% The effective tax rate for the same period in the prior year was 38.8% which included certain favorable one-time items. Excluding these one-time items, the effective tax rate for the same period in the prior year would have been 38.2%.

Equity in Earnings of Affiliates

 

     2012      % of
Revenue
    2011      % of
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

Equity in Earnings of Affiliates

   $ 3,578         0.2   $ 1,563         0.1   $ 2,015         128.9

 

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Equity in earnings of affiliates, presented net of income taxes, represents the earnings (loss) of SACS and GEOAmey, respectively. Overall, we experienced an increase in equity in earnings of affiliates due to an increase in net earnings from SACS of $1.4 million, and a decreased net loss of $0.7 million from the operations of GEOAmey, which began operating in August 2011.

Financial Condition

Capital Requirements

Our current cash requirements consist of amounts needed for working capital, distributions of our REIT taxable income in order to maintain our REIT qualification under the Code, debt service, supply purchases, investments in joint ventures, and capital expenditures related to either the development of new correctional, detention and re-entry facilities, or the maintenance of existing facilities. In addition, some of our management contracts require us to make substantial initial expenditures of cash in connection with opening or renovating a facility. Generally, these initial expenditures are subsequently fully or partially recoverable as pass-through costs or are billable as a component of the per diem rates or monthly fixed fees to the contracting agency over the original term of the contract. Additional capital needs may also arise in the future with respect to possible acquisitions, other corporate transactions or other corporate purposes.

In connection with GEOAmey, our joint venture in the United Kingdom, we and our joint venture partner have each provided a line of credit of £12 million, or $19.8 million, based on exchange rates as of December 31, 2013, for GEOAmey’s operations.

We are currently developing a number of projects using Company financing. We estimate that these existing capital projects will cost approximately $68.9 million, of which $19.8 million was spent through the year ended December 31, 2013. We have future committed capital projects for which we estimate our remaining capital requirements to be approximately $49.1 million, which will be spent through fiscal years 2014 and 2015. Capital expenditures related to facility maintenance costs are expected to be approximately $23.0 million for fiscal year 2014. In addition to these current estimated capital requirements for 2014 and 2015, we are currently in the process of bidding on, or evaluating potential bids for the design, construction and management of a number of new projects. In the event that we win bids for these projects and decide to self-finance their construction, our capital requirements could materially increase.

Liquidity and Capital Resources

Credit Agreement

On April 3, 2013, we entered into the Amended and Restated Credit Agreement with GEO Corrections Holdings, Inc. (with GEO as the sole term loan borrower, and GEO and GEO Corrections Holdings, Inc. as joint and several revolver borrowers), BNP Paribas, as Administrative Agent, and the lenders who are, or may from time to time become, a party thereto. The Credit Agreement evidences a Senior Credit Facility consisting of a $300 million Term Loan initially bearing interest at LIBOR plus 2.50% (with a LIBOR floor of 0.75%), and a $700 million revolving credit facility initially bearing interest at LIBOR plus 2.50% (with no LIBOR floor), in each case subject to adjustment based on a total leverage ratio pricing grid. We also have the ability to increase the Senior Credit Facility by an additional $350 million, subject to lender demand, prevailing market conditions and satisfying the borrowing and other conditions thereunder. The Revolver component is scheduled to mature on April 3, 2018 and the Term Loan component is scheduled to mature on April 3, 2020. The Term Loan and Revolver may be prepaid in whole or in part by us at any time without premium or penalty, subject to certain conditions. The Senior Credit Facility is a refinancing of the Fourth Amended and Restated Credit Agreement which consisted of a Term Loan A, Term Loan A-2, Term Loan A-3, Term Loan B and a revolver.

As of December 31, 2013, we had $298.5 million in aggregate borrowings outstanding, net of discount, under the Term Loan and $340.0 million in borrowings under the Revolver, and approximately $61.0 million in letters of credit which left $299.0 million in additional borrowing capacity under the Revolver.

 

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In addition to the debt outstanding under the Senior Credit Facility, the 6.625% Senior Notes, the 5.125% Senior Notes, and the 5 78% Senior Notes (each of which is discussed below), we also have significant debt obligations which, although these obligations are non-recourse to us, require cash expenditures for debt service. Our significant debt obligations could have material consequences. See “Risk Factors — Risks Related to Our High Level of Indebtedness” in Item 1A of this Annual Report on Form 10-K. We are exposed to various commitments and contingencies which may have a material adverse effect on our liquidity. We also have guaranteed certain obligations for our South African joint venture and other of our international subsidiaries. These non-recourse obligations, commitments and contingencies and guarantees are further discussed in Notes 1, 14 and 18 of the notes to our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2013.

We are also considering opportunities for future business and/or asset acquisitions. If we are successful in our pursuit of these new projects, our cash on hand, cash flows from operations and borrowings under the existing Senior Credit F