FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

For the transition period from _______ to _________

Commission file number 1-14260

The GEO Group, Inc.

(561) 893-0101

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

Yes x No o

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

Yes x No o

At August 2, 2004, 9,359,236 shares of the registrant’s Common Stock were issued and outstanding.

TABLE OF CONTENTS

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THE GEO GROUP, INC.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

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THE GEO GROUP, INC.

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

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THE GEO GROUP, INC.

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

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THE GEO GROUP, INC.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The unaudited consolidated financial statements of The GEO Group, Inc., a Florida corporation (the “Company”), have been prepared in accordance with the instructions to Form 10-Q and consequently do not include all disclosures required by Form 10-K. Additional information may be obtained by referring to The Company’s Form 10-K for the year ended December 28, 2003. In the opinion of management, all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the financial information for the interim periods reported have been made. Results of operations for the twenty-six weeks ended June 27, 2004 are not necessarily indicative of the results for the entire fiscal year ending January 2, 2005.

The accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Consolidated Financial Statements included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 10, 2004 for the fiscal year ended December 28, 2003. Certain amounts in the prior period have been reclassified to conform to the current presentation.

2. EQUITY INCENTIVE PLANS

The Company accounts for stock option plans under the intrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25, under which no compensation has been recognized. The Company provides pro forma disclosures of the compensation expense determined under the fair value provisions of Statement of Financial Accounting Standards (“FAS”) No. 123, “Accounting for Stock-Based Compensation” as amended by FAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”.

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

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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

3. DISCONTINUED OPERATIONS

The Company, through its Australian subsidiary, had a contract with the Department of Immigration, Multicultural and Indigenous Affairs (“DIMIA”) for the management and operation of Australia’s immigration centers. The contract was not renewed, and effective February 29, 2004, the Company completed the transition of the contract and exited the management and operation of the DIMIA centers. In accordance with the provisions related to discontinued operations specified within FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the accompanying consolidated financial statements and notes reflect the operations of DIMIA as a discontinued operation in all periods presented.

4. COMPREHENSIVE INCOME

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

5. EARNINGS PER SHARE

Basic and diluted earnings per share (“EPS”) were calculated for the thirteen and twenty-six weeks ended June 27, 2004 and June 29, 2003 as follows (in thousands except per share data):

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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Thirteen Weeks

Options to purchase 330,600 shares of the Company’s common stock, with exercise prices ranging from $21.50 to $26.88 per share and expiration dates between 2006 and 2014, were outstanding at the thirteen weeks ended June 27, 2004, but were not included in the computation of diluted EPS because their effect would be anti-dilutive. At the thirteen weeks ended June 29, 2003, outstanding options to purchase 996,600 shares of the Company’s common stock, with exercise prices ranging from $13.75 to $26.88 and expiration dates between 2005 and 2013 were outstanding and also excluded from the computation of diluted EPS because their effect would be anti-dilutive.

Twenty-six Weeks

Options to purchase 252,000 shares of the Company’s common stock, with exercise prices ranging from $22.63 to $26.88 per share and expiration dates between 2006 and 2014, were outstanding at the twenty-six weeks ended June 27, 2004, but were not included in the computation of diluted EPS because their effect would be anti-dilutive. At the twenty-six weeks ended June 29, 2003, outstanding options to purchase 1,071,600 shares of the Company’s common stock, with exercise prices ranging from $11.88 to $26.88 and expiration dates between 2005 and 2013 were outstanding and also excluded from the computation of diluted EPS because their effect would be anti-dilutive.

6. LONG-TERM DEBT AND DERIVATIVE FINANCIAL INSTRUMENTS

The Senior Credit Facility consists of a $50.0 million, five-year revolving loan, referred to as the Revolving Credit Facility, and a $100.0 million, six-year term loan, referred to as the Term Loan Facility. The Revolving Credit Facility contains a $40.0 million sub limit for the issuance of standby letters of credit. On February 20, 2004, the Company amended the Senior Credit Facility to, among other things, reduce the interest rates applicable to borrowings under the Senior Credit Facility, obtain flexibility to make certain information technology related capital expenditures and provide additional time to reinvest the net proceeds from the sale of the Company’s interest in Premier Custodial Group Limited. On June 25, 2004, the Company used $43.0 million of the net proceeds from the sale of Premier Custodial Group to permanently reduce the Term Loan Facility. The Company also wrote off approximately $0.3 million in deferred financing costs related to this payment. At June 27, 2004, there were borrowings of $53.3 million outstanding under the Term Loan Facility, no amounts outstanding under the Revolving Credit Facility, and $28.9 million outstanding in letters of credit under the Revolving Credit Facility.

Indebtedness under the Revolving Credit Facility portion of the Senior Credit Facility bears interest at the Company’s option at the base rate plus a spread varying from 0.75% to 1.50% (depending upon a leverage-based pricing grid set forth in the Senior Credit Facility), or at the London inter-bank offered rate (“LIBOR”) plus a spread, varying from 2.00% to 2.75% (depending upon a leverage-based pricing grid, as defined in the Senior Credit Facility). The Term Loan Facility bears interest at the Company’s option at the base rate plus a spread of 1.25%, or at LIBOR plus a spread of 2.5%. Borrowings under the Term Loan Facility currently bear interest at LIBOR plus 2.5%. If an event of default occurs under the Senior Credit Facility (i) all LIBOR rate loans bear interest at the rate which is 2.0% in excess of the rate then applicable to LIBOR rate loans until the end of the applicable interest period and thereafter at a rate which is 2.0% in excess of the rate then applicable to base rate loans, and (ii) all base rate loans bear interest at a rate which is 2.0% in excess of the rate then applicable to base rate loans.

On January 28, 2004, the Company’s universal shelf registration statement on Form S-3 was declared effective by the Securities and Exchange Commission, which we refer to as the SEC. The universal shelf registration statement provides for the offer and sale by the Company, from time to time, on a delayed basis, of up to $200.0 million aggregate amount of our common stock, preferred stock, debt securities, warrants, and/or depositary shares. These securities, which may be offered in one or more offerings and in any combination, will in each case be offered pursuant to a separate prospectus supplement issued at the time of the particular offering that will describe the specific types, amounts, prices and terms of the offered securities. Unless otherwise described in the applicable prospectus supplement relating to the offered securities, we anticipate using the net proceeds of each offering for general corporate purposes, including debt repayment, capital expenditures, acquisitions, business expansion, investments in subsidiaries or affiliates, and/or working capital.

Effective September 18, 2003, the Company entered into interest rate swap agreements in the aggregate notional amount of $50 million. The Company has designated the swaps as hedges against changes in the fair value of a designated portion of the ten-year $150.0 million, 8 1/4% senior notes, referred to as the Notes, due to changes in underlying interest rates. Changes in the fair value of

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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

the interest rate swaps will be recorded in earnings along with related designated changes in the value of the Notes. The agreements, which have payment and expiration dates and call provisions that coincide with the terms of the Notes, effectively convert $50 million of the Notes into variable rate obligations. Under the agreements, the Company receives a fixed interest rate payment from the financial counterparties to the agreements equal to 8.25% per year calculated on the notional $50 million amount, while the Company makes a variable interest rate payment to the same counterparties equal to the six-month LIBOR plus a fixed margin of 3.45%, also calculated on the notional $50 million amount. The fair value of the swaps was ($0.7) million and $0.7 million as of June 27, 2004 and December 28, 2003, respectively and they are included as an adjustment to the carrying value of the Notes and in other non current liabilities and other non current assets, respectively in the accompanying balance sheets.

Our wholly-owned Australian subsidiary financed the development of a facility with long-term debt obligations, which are non-recourse to us. The term of the non-recourse debt is through 2017 and it bears interest at a variable rate quoted by certain Australian banks plus 140 basis points. Any obligations or liabilities of the subsidiary are matched by a similar or corresponding commitment from the government of the State of Victoria. In connection with the non-recourse debt, the subsidiary is a party to an interest rate swap agreement to fix the interest rate on the variable rate non-recourse debt to 9.7%. We have determined that the swap is an effective cash flow hedge and we record changes in the value of the swap as a component of other comprehensive income, net of applicable income taxes. The total value of the swap liability as of June 27, 2004 and December 28, 2003 was $2.4 million and $5.2 million, respectively, and is recorded as a component of other liabilities in the accompanying consolidated financial statements.

7. COMMITMENTS AND CONTINGENCIES

The Company’s contract with the California Department of Corrections for the management of the 224-bed McFarland Community Corrections Center expired in the first quarter of 2004, on December 31, 2003. Even though the Company no longer operates the McFarland facility, the Company will continue to be responsible for payments on the underlying lease of the facility with Correctional Properties Trust (“CPV”) through 2008, when the lease is scheduled to expire. The Company is actively pursuing various alternatives for the facility, including finding an alternative correctional use for the facility or subleasing the facility to agencies of the federal and/or state governments or another private operator. If the Company is unable to find an appropriate correctional use for the facility or sublease the facility, the Company will be required to record an operating charge related to a portion of the future lease costs with CPV in accordance with FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The remaining lease obligation is approximately $2.9 million through April 28, 2008.

During 2000, the Company’s management contract at the 276-bed Jena Juvenile Justice Center in Jena, Louisiana was discontinued by the mutual agreement of the parties. Despite the discontinuation of the management contract, the Company remains responsible for payments on the Company’s underlying lease of the inactive facility with CPV through 2009. During 2003, the Company incurred an operating charge of $5.0 million to cover its anticipated losses under the lease for the facility through January 2006, when the Company estimates that an alternative correctional use for the facility may be identified or a sublease for the facility may be in place, and to provide an estimated discount to sublease the facility to prospective sublessees. The Company has incurred additional operating charges in prior periods related to lease payments for the facility. The Company is continuing its efforts to find an alternative correctional use or sublease for the facility. If the Company is unable to sublease or find an alternative correctional use for the facility prior to January 2006, an additional operating charge will be required. In accordance with FAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”, all terminations initiated before December 31, 2002, shall be accounted for under Emerging Issues Task Force (“EITF”) No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” The remaining obligation on the Jena lease through the contractual term of 2009, exclusive of the reserve for losses through early 2006, is approximately $7.0 million.

LEGAL

The Company is defending a wage and hour lawsuit filed in California state court by ten current and former employees (Salas at el v. WCC). The Superior Court of California in Kern County has preliminarily approved a settlement of this lawsuit. The settlement is subject to final approval by the court upon the expiration of a 30-day claim filing period for the plaintiffs in the lawsuit. As part of the settlement, the Company would make a cash payment to certain of the Company’s former California employees and provide certain non-cash considerations to our current California employees who were a part of the lawsuit. The non-cash considerations include a designated number of paid days off according to longevity of employment, modifications to our Human Resources Department, and changes in certain operational procedures at our correctional facilities in California. The settlement would encompass all of the Company’s current and former employees in California through the approval date of the settlement and would constitute a full and final settlement of all actual and potential wage and hour claims against the Company in California for the period preceding July 29, 2004.

The Company is fully reserved for this preliminary settlement. If the settlement is approved, the Company believes that the lawsuit will not have a material adverse effect on the Company’s financial condition and results of operations. However, we cannot assure you that the settlement will receive final court approval. If the settlement is not approved, the Company may have to further litigate this lawsuit and, if the lawsuit is later settled or decided on terms less favorable to the Company than the terms of the preliminary settlement, we cannot estimate the amount of losses or costs that we may incur as a result of the lawsuit and such losses or costs may exceed amounts for which the Company has reserved. In such event, management believes that the lawsuit could have a material adverse effect on the Company’s financial condition and results of operations. The Company is uninsured for any damages or costs we may incur as a result of this lawsuit, including the expenses of defending the lawsuit.

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THE GEO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

In June 2004, the Company received notice of a third-party claim for property damage incurred during 2001 and 2002 at several detention facilities that our Australian subsidiary formerly operated pursuant to our discontinued contract with DIMIA. The claim did not specify the amount of damages the third-party may be seeking. Although the claim is in the initial stages and the Company is still in the process of fully evaluating its merits, we believe that we have defenses to the allegations underlying the claim and intend to vigorously defend the Company’s rights. However, based on management’s preliminary review of the claim, we believe that, if settled unfavorably to the Company, this matter could have a material adverse effect on the Company’s financial condition and results of operations. We are uninsured for any damages or costs we may incur as a result of this claim, including the expenses of defending the claim.

The nature of the Company’s business exposes it to various types of claims or litigation against the Company, including, but not limited to, civil rights claims relating to conditions of confinement and/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, contractual claims and claims for personal injury or other damages resulting from contact with the Company’s facilities, programs, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. In addition, our management contracts generally require us to indemnify the governmental agency against any damages to which the governmental agency may be subject in connection with such claims or litigation. We maintain insurance coverage for these types of claims, except for claims relating to employment matters, for which we carry no insurance. Except as otherwise disclosed above, we do not expect the outcome of any pending claims or legal proceedings to have a material adverse effect on our financial condition, results of operations or cash flows.

8. DOMESTIC AND INTERNATIONAL OPERATIONS

     A summary of domestic and international operations is presented below (dollars in thousands):