FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended April 3, 2005
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from _______ to _________
Commission file number 1-14260
The GEO Group, Inc.
| Florida (State or other jurisdiction of incorporation or organization) |
65-0043078 (I.R.S. Employer Identification No.) |
|
| One Park Place, 621 NW 53rd Street, Suite 700, Boca Raton, Florida (Address of principal executive offices) |
33487 (Zip code) |
(561) 893-0101
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months
(or for such shorter period that the registrant was required to file such report), and (2) has been
subject to such filing requirements for the past 90 days.
Yes xNo 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 May 9, 2005 9,550,346 shares of the registrant’s Common Stock were issued and outstanding.
TABLE OF CONTENTS
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| Senior Management Performance Award Plan | ||||||||
| Section 302 CEO Certification | ||||||||
| Section 302 CFO Certification | ||||||||
| Section 906 CEO Certification | ||||||||
| Section 906 CFO Certification | ||||||||
2
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE GEO GROUP, INC.
| Thirteen Weeks Ended | ||||||||
| April 3, 2005 | March 28, 2004 | |||||||
| Restated | ||||||||
Revenues |
$ | 154,030 | $ | 146,058 | ||||
Operating expenses |
130,953 | 123,845 | ||||||
Depreciation and amortization |
3,803 | 3,457 | ||||||
General and administrative expenses |
11,401 | 11,191 | ||||||
Operating income |
7,873 | 7,565 | ||||||
Interest income |
2,336 | 2,388 | ||||||
Interest expense |
5,454 | 5,840 | ||||||
Income before taxes, minority interest, equity in |
||||||||
earnings of affiliates and discontinued operations |
4,755 | 4,113 | ||||||
Provision for income taxes |
1,854 | 1,746 | ||||||
Minority interest |
(184 | ) | (174 | ) | ||||
Equity in earnings (loss) of affiliate, net of income tax |
||||||||
(benefit) of $(16) and $(107) |
49 | (148 | ) | |||||
Income from continuing operations |
2,766 | 2,045 | ||||||
Income from discontinued operations, |
||||||||
net of tax of $56 and $107 |
130 | 249 | ||||||
Net income |
$ | 2,896 | $ | 2,294 | ||||
Weighted-average common shares |
||||||||
outstanding: |
||||||||
Basic |
9,525 | 9,333 | ||||||
Diluted |
10,002 | 9,712 | ||||||
Income per common share: |
||||||||
Basic: |
||||||||
Income from continuing operations |
$ | 0.29 | $ | 0.22 | ||||
Income from discontinued operations |
0.01 | 0.03 | ||||||
Net income per share-basic |
$ | 0.30 | $ | 0.25 | ||||
Diluted: |
||||||||
Income from continuing operations |
$ | 0.28 | $ | 0.21 | ||||
Income from discontinued operations |
0.01 | 0.03 | ||||||
Net income per share-diluted |
$ | 0.29 | $ | 0.24 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
THE GEO GROUP, INC.
| April 3, 2005 | January 2, 2005 | |||||||
| Unaudited | ||||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 103,148 | $ | 92,801 | ||||
Short-term investments |
— | 10,000 | ||||||
Accounts receivable, less allowance for doubtful accounts of $1,266 and $1,170 |
82,334 | 94,028 | ||||||
Deferred income tax asset |
12,245 | 12,771 | ||||||
Other current assets |
18,101 | 12,386 | ||||||
Current assets of discontinued operations |
— | 660 | ||||||
Total current assets |
215,828 | 222,646 | ||||||
Restricted Cash |
3,857 | 3,908 | ||||||
Property and Equipment, Net |
194,743 | 196,744 | ||||||
Direct Finance Lease Receivable |
41,972 | 42,953 | ||||||
Other Non Current Assets |
13,093 | 13,895 | ||||||
| $ | 469,493 | $ | 480,146 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts payable |
$ | 18,802 | $ | 21,874 | ||||
Accrued payroll and related taxes |
26,923 | 25,026 | ||||||
Accrued expenses |
43,552 | 53,077 | ||||||
Current portion of deferred revenue |
1,844 | 1,844 | ||||||
Current portion of long-term debt and non-recourse debt |
13,683 | 13,736 | ||||||
Current liabilities of discontinued operations |
1,454 | 1,609 | ||||||
Total current liabilities |
106,258 | 117,166 | ||||||
Deferred Revenue |
3,859 | 4,320 | ||||||
Deferred Tax Liability |
2,345 | 1,489 | ||||||
Minority Interest |
1,294 | 1,194 | ||||||
Other Non Current Liabilities |
19,441 | 20,724 | ||||||
Long-Term Debt |
184,563 | 185,452 | ||||||
Non-Recourse Debt |
41,972 | 42,953 | ||||||
Commitments and Contingencies |
||||||||
Shareholders’ Equity |
||||||||
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued or outstanding |
— | — | ||||||
Common stock, $0.01 par value, 30,000,000 shares authorized, 9,537,004 and 9,507,391 |
||||||||
shares issued and outstanding, respectively |
95 | 95 | ||||||
Additional paid-in capital |
67,600 | 67,005 | ||||||
Retained earnings |
173,775 | 170,879 | ||||||
Accumulated other comprehensive income |
171 | 749 | ||||||
Treasury stock 12,000,000 shares |
(131,880 | ) | (131,880 | ) | ||||
Total shareholders’ equity |
109,761 | 106,848 | ||||||
| $ | 469,493 | $ | 480,146 | |||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
THE GEO GROUP, INC.
| Thirteen Weeks Ended | ||||||||
| April 3, 2005 | March 28, 2004 | |||||||
| Restated | ||||||||
Cash Flow from Operating Activities: |
||||||||
Income from continuing operations |
$ | 2,766 | $ | 2,045 | ||||
Adjustments to reconcile income from continuing operations to net |
||||||||
cash provided by operating activities |
||||||||
Depreciation and amortization expense |
3,803 | 3,457 | ||||||
Amortization of debt issuance costs |
79 | 376 | ||||||
Deferred tax liability (benefit) |
534 | (479 | ) | |||||
Provision for doubtful accounts |
329 | — | ||||||
Major maintenance reserve |
41 | 93 | ||||||
Equity in earnings of affiliates, net of tax |
(49 | ) | 148 | |||||
Minority interests in earnings of consolidated entity |
184 | 174 | ||||||
Tax benefit related to employee stock options |
180 | — | ||||||
Changes in assets and liabilities |
||||||||
Accounts receivable |
11,621 | 2,633 | ||||||
Other current assets |
(7,975 | ) | 598 | |||||
Other assets |
1,356 | (633 | ) | |||||
Accounts payable and accrued expenses |
(12,189 | ) | (6,324 | ) | ||||
Accrued payroll and related taxes |
2,029 | 1,385 | ||||||
Deferred revenue |
(461 | ) | (895 | ) | ||||
Other liabilities |
981 | 1,215 | ||||||
Net cash provided by operating activities of continuing operations |
3,229 | 3,793 | ||||||
Net cash provided by operating activities of discontinued operations |
31 | 2,938 | ||||||
Net cash provided by operating activities |
3,260 | 6,731 | ||||||
Cash Flow from Investing Activities: |
||||||||
Proceeds from sales of short-term investments |
39,000 | — | ||||||
Purchases of short-term investments |
(29,000 | ) | (5,000 | ) | ||||
Proceeds from sale of assets |
33 | — | ||||||
Capital expenditures |
(1,841 | ) | (2,476 | ) | ||||
Net cash provided by (used in) investing activities |
8,192 | (7,476 | ) | |||||
Cash Flow from Financing Activities: |
||||||||
Proceeds from long-term debt and non-recourse debt |
— | 10,000 | ||||||
Payments on long-term debt |
(1,417 | ) | (6,618 | ) | ||||
Proceeds from the exercise of stock options |
402 | — | ||||||
Net cash (used in) provided by financing activities |
(1,015 | ) | 3,382 | |||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
(564 | ) | (25 | ) | ||||
Net Increase in Cash and Cash Equivalents |
9,873 | 2,612 | ||||||
Cash and Cash Equivalents, beginning of period* |
93,275 | 56,325 | ||||||
Cash and Cash Equivalents, end of period** |
$ | 103,148 | $ | 58,937 | ||||
| * | Includes cash and cash equivalents of discontinued operations of $474 and $4,138 for the thirteen weeks ended April 3, 2005 and March 28, 2004, respectively. | |
| ** | Includes cash and cash equivalents of discontinued operations of $0 and $586 for the thirteen weeks ended April 3, 2005 and March 28, 2004, respectively. |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
THE GEO GROUP, INC.
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements of The GEO Group, Inc., a Florida corporation (the “Company”), included in this Form 10-Q have been prepared in accordance with 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 January 2, 2005. In the opinion of management, all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the financial information for the interim periods reported in this Form 10-Q have been made. Results of operations for the thirteen weeks ended April 3, 2005 are not necessarily indicative of the results for the entire fiscal year ending January 1, 2006.
The accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Consolidated Financial Statements included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 23, 2005 for the fiscal year ended January 2, 2005. Certain amounts in the prior period have been reclassified to conform to the current presentation.
Throughout these notes to unaudited consolidated financial statements, all referenced amounts for prior periods and prior period comparisons reflect the balances and amounts on a restated basis.
2. RESTATEMENTS
The Company has restated its unaudited consolidated financial statements for the quarter ended March 28, 2004 to reflect the application of the appropriate accounting principles to the recognition of compensated absences according to generally accepted accounting principles. Additionally, the Company has restated its unaudited consolidated financial statements for the quarter ended March 28, 2004 to reflect the operations of South African Custodial Management, the Company’s joint venture in South Africa (“SACM”), as a consolidated subsidiary. SACM was previously included in our consolidated balance sheets as investments in and advances to affiliates, and in the Company’s consolidated statements of income as equity in earnings of affiliates. The Company has also restated its unaudited consolidated financial statements for the quarter ended March 28, 2004 to reflect the appropriate amortization of certain leasehold improvement assets. All financial information reported for the quarter ended March 28, 2004 in these unaudited consolidated financial statements reflects the restatements. The following tables show the effect of the restatement adjustments on the Company’s unaudited consolidated statement of income and balance sheet as of and for the thirteen weeks ended March 28, 2004 (in thousands, except per share data):
| Thirteen Weeks Ended March 28, 2004 | ||||||||||||
| As Originally | ||||||||||||
| Unaudited Consolidated Statement of Income | Reported | Restated | Change | |||||||||
Revenues |
$ | 142,551 | $ | 146,058 | $ | 3,507 | ||||||
Operating Expenses |
121,237 | 123,845 | 2,608 | |||||||||
Depreciation and Amortization |
3,365 | 3,457 | 92 | |||||||||
General and Administrative Expenses |
11,191 | 11,191 | — | |||||||||
Operating Income |
6,758 | 7,565 | 807 | |||||||||
Interest Income |
2,328 | 2,388 | 60 | |||||||||
Interest Expense |
5,840 | 5,840 | — | |||||||||
Income before income taxes, minority interest, equity
in earnings of affiliates, and discontinued operations |
3,246 | 4,113 | 867 | |||||||||
Provision for income taxes |
1,406 | 1,746 | 340 | |||||||||
Minority Interest |
— | (174 | ) | (174 | ) | |||||||
Equity in Earnings of Affiliates |
310 | (148 | ) | (458 | ) | |||||||
Income from continuing operations |
2,150 | 2,045 | (105 | ) | ||||||||
Income from discontinued operations, net of tax of $107 |
249 | 249 | — | |||||||||
Net income |
$ | 2,399 | $ | 2,294 | $ | (105 | ) | |||||
Earnings per Common Share: |
||||||||||||
Basic: |
||||||||||||
Income from continuing operations |
$ | 0.23 | $ | 0.22 | $ | (0.01 | ) | |||||
Income from discontinued operations |
$ | 0.03 | 0.03 | — | ||||||||
Net income per share-basic |
$ | 0.26 | $ | 0.25 | $ | (0.01 | ) | |||||
Diluted: |
||||||||||||
Income from continuing operations |
$ | 0.22 | $ | 0.21 | $ | (0.01 | ) | |||||
Income from discontinued operations |
$ | 0.03 | 0.03 | — | ||||||||
Net income per share-diluted |
$ | 0.25 | $ | 0.24 | $ | (0.01 | ) | |||||
6
THE GEO GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Unaudited Consolidated Balance Sheet
| Thirteen Weeks Ended March 28, 2004 | ||||||||||||
| As Originally | ||||||||||||
| Reported | Restated | Change | ||||||||||
ASSETS |
||||||||||||
Current Assets |
||||||||||||
Cash and cash equivalents |
$ | 69,095 | $ | 58,351 | $ | (10,744 | ) | |||||
Short-term investments |
— | 15,000 | 15,000 | |||||||||
Accounts receivable |
84,882 | 86,157 | 1,275 | |||||||||
Deferred income tax asset |
12,458 | 13,764 | 1,306 | |||||||||
Other |
9,721 | 10,001 | 280 | |||||||||
Current assets of discontinued operations |
5,442 | 5,442 | — | |||||||||
Total current assets |
181,598 | 188,715 | 7,117 | |||||||||
Restricted Cash |
55,733 | 55,733 | — | |||||||||
Property and Equipment, Net |
200,192 | 199,354 | (838 | ) | ||||||||
Deferred Income Tax Asset |
5,220 | 5,653 | 433 | |||||||||
Direct Finance Lease Receivable |
42,308 | 42,308 | — | |||||||||
Other Non Current Assets |
18,968 | 16,657 | (2,311 | ) | ||||||||
Other Assets of Discontinued Operations |
34 | 34 | — | |||||||||
| $ | 504,053 | $ | 508,454 | $ | 4,401 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||||
Current Liabilities |
||||||||||||
Accounts payable |
$ | 20,249 | $ | 20,365 | $ | 116 | ||||||
Accrued payroll and related taxes |
15,659 | 19,196 | 3,537 | |||||||||
Accrued expenses |
57,194 | 58,755 | 1,561 | |||||||||
Current portion of deferred revenue |
1,836 | 1,836 | — | |||||||||
Current portion of long-term debt and non-recourse debt |
7,753 | 7,753 | — | |||||||||
Current liabilities of discontinued operations |
1,910 | 1,910 | — | |||||||||
Total current liabilities |
104,601 | 109,815 | 5,214 | |||||||||
Deferred Revenue |
5,712 | 5,712 | — | |||||||||
Minority Interest |
— | 1,010 | 1,010 | |||||||||
Other Non-Current Liabilities |
20,066 | 20,066 | — | |||||||||
Long-Term Debt |
243,791 | 243,791 | — | |||||||||
Non-Recourse Debt |
42,308 | 42,308 | — | |||||||||
Shareholders’ Equity |
||||||||||||
Preferred stock |
— | — | — | |||||||||
Common stock |
93 | 93 | — | |||||||||
Additional paid-in capital |
64,605 | 64,605 | — | |||||||||
Retained earnings |
159,004 | 156,357 | (2,647 | ) | ||||||||
Accumulated other comprehensive loss |
(4,247 | ) | (3,423 | ) | 824 | |||||||
Treasury stock |
(131,880 | ) | (131,880 | ) | — | |||||||
Total shareholders’ equity |
87,575 | 85,752 | (1,823 | ) | ||||||||
| $ | 504,053 | $ | 508,454 | $ | 4,401 | |||||||
3. EQUITY INCENTIVE PLANS
As permitted by Financial Accounting Standard (“FAS”) No. 123, “Accounting for Stock-Based Compensation” as amended by FAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, the Company currently accounts for share-based payments to employees using Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” intrinsic method and, as such, generally recognizes no compensation cost for employee stock options.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued FAS No. 123(R) (revised 2004), “Share-Based Payment”, which is a revision of FAS No. 123. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the compliance dates for FAS 123(R). In accordance with the new rule, the accounting provisions of FAS 123(R);
7
THE GEO GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
will be effective for the Company in fiscal 2006. The impact of adoption of FAS 123(R) on the Company cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted FAS 123(R) in prior periods, the Company would have recognized additional expense related to share-based payments, and the Company expects to recognize additional expense in the future related to such payments, when it does adopt FAS 123(R). FAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement is expected to reduce the Company’s net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $0.2 million, and $0.0 million at April 3, 2005 and March 28, 2004, respectively.
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 (in thousands, except per share data):
| Thirteen Weeks Ended | ||||||||
| April 3, 2005 | March 28, 2004 | |||||||
Net income |
$ | 2,896 | $ | 2,294 | ||||
Less: Total stock-based employee compensation expense determined under fair |
||||||||
value based method for all awards, net of related tax effects |
$ | (186 | ) | $ | (165 | ) | ||
Pro forma net income |
$ | 2,710 | $ | 2,129 | ||||
Basic earnings per share |
||||||||
As reported |
$ | 0.30 | $ | 0.25 | ||||
Pro forma |
$ | 0.28 | $ | 0.23 | ||||
Diluted earnings per share |
||||||||
As reported |
$ | 0.29 | $ | 0.24 | ||||
Pro forma |
$ | 0.27 | $ | 0.22 | ||||
For the purposes of the pro forma calculations above, the fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model, assuming no expected dividends and the following assumptions:
| Thirteen Weeks Ended | ||||||||
| April 3, 2005 | March 28, 2004 | |||||||
Risk free interest rates |
3.96% | 3.07% | ||||||
Expected lives |
3.3 years | 5.0 years | ||||||
Expected volatility |
39% | 49% | ||||||
Expected dividend |
— | — | ||||||
4. DISCONTINUED OPERATIONS
The Company formerly had, through its Australian subsidiary, a contract with the Department of Immigration, Multicultural and Indigenous Affairs (“DIMIA”) for the management and operation of Australia’s immigration centers. In 2003, the contract was not renewed, and effective February 29, 2004, the Company completed the transition of the contract and exited the management and operation of the DIMIA centers. In accordance with the provisions related to discontinued operations specified within FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the accompanying unaudited consolidated financial statements and notes thereto reflect the operations of DIMIA as a discontinued operation in all periods presented. The following are the revenues related to DIMIA for the periods presented (in thousands):
| Thirteen Weeks Ended | ||||||||
| April 3, 2005 | March 28, 2004 | |||||||
Revenues |
$ | — | $ | 5,778 | ||||
8
THE GEO GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. COMPREHENSIVE INCOME
The components of the Company’s comprehensive income, net of tax are as follows (in thousands):
| Thirteen Weeks Ended | ||||||||
| April 3, 2005 | < | |||||||