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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:

 

x		Preliminary Proxy Statement
¨		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
¨		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.
x		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: Common Stock, par value $0.01 per share, of The GEO Group, Inc.
		(2)		Aggregate number of securities to which transaction applies: 90,000,000
		(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): $33.73
		(4)		Proposed maximum aggregate value of transaction: $3,035,700,000
		(5)		Total fee paid: $390,998
¨		Fee paid previously with preliminary materials.
x		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:   $390,998
		(2)		Form, Schedule or Registration Statement No.:   Form S-4 Registration No 333-192209
		(3)		Filing Party:   The GEO Group REIT, Inc.
		(4)		Date Filed:   November 8, 2013

 

 

 

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The information in this proxy statement/prospectus is not complete and may be changed. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. GEO REIT may not sell or exchange these securities until the registration statement is effective. This proxy statement/prospectus is not an offer to sell or exchange these securities and it is not soliciting an offer to buy these securities in any state where the offer, sale or exchange is not permitted.

 

Preliminary—Subject to Completion, dated November 8, 2013

 

 

 

[—]

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 [—] at [—] a.m., local time, at [—].

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 recently 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 20.

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 [—] and is being first mailed to shareholders on or about [—].

 

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THE GEO GROUP, INC.

621 NW 53^rd Street, Suite 700

Boca Raton, Florida 33487

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF

THE GEO GROUP, INC.

TO BE HELD ON [—]

NOTICE IS HEREBY GIVEN that a special meeting of shareholders of The GEO Group, Inc., a Florida corporation, will be held on [—] at [—] a.m., local time, at [—], for the following purposes:

 

1.

to consider and vote upon a proposal to approve the Agreement and Plan of Merger dated [—], 2013 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 approved 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 [—], 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.

 

Boca Raton, Florida

[—]

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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 with the SEC, 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, 2012 filed with the SEC on March 1, 2013;

 

•

our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013 filed with the SEC on May 10, 2013 and August 8, 2013;

 

•

our Current Reports on Form 8-K filed with the SEC on January 7, 2013, February 21, 2013, March 18, 2013, March 25, 2013, April 9, 2013, April 30, 2013, May 8, 2013, May 8, 2013, June 4, 2013, August 13, 2013, September 25, 2013 and October 9, 2013; 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 53^rd 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 [—] [5 business days before investment decision].

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
STRUCTURE OF THE MERGER			8
SUMMARY			9
RISK FACTORS			20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS			41
VOTING AND PROXIES			43
BACKGROUND OF THE REIT CONVERSION AND THE MERGER			46
OUR REASONS FOR THE REIT CONVERSION AND THE MERGER			48
TERMS OF THE MERGER			49
DISTRIBUTION POLICY			52
OUR BUSINESS			53
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES			75
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			77
THE GEO GROUP REIT, INC. BALANCE SHEET AS OF NOVEMBER 5, 2013			78
THE GEO GROUP REIT, INC. NOTE TO THE BALANCE SHEET			79
SELECTED HISTORICAL FINANCIAL INFORMATION			80
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			85
DESCRIPTION OF GEO REIT CAPITAL STOCK			113
COMPARISON OF RIGHTS OF SHAREHOLDERS OF GEO AND GEO REIT			119
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES			125

 

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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 newly formed 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 the 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 existing 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 by-laws, as amended, of GEO REIT, which we refer to as the GEO REIT By-Laws. 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 By-Laws are substantially similar to GEO’s by-laws;

 

•

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 and a copy of the form of the GEO REIT Articles as Annex B.

 

Q.	When and where is the special meeting?

 

A.	The special meeting will be held on [—] at [—] a.m., local time, at [—].

 

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 [—] you may vote the shares of common stock that you hold on the record date at the special meeting. On or about [—] 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 at least 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 [—] 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.

 

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 [—].

 

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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.

 

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 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:

 

•

a reorganization of our business operations and a divestiture of healthcare facility operations which was 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, and $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).

The REIT conversion took place on January 1, 2013. You are not being asked to vote on the REIT conversion and it is not conditioned upon shareholder approval of the merger described below. Instead, you are being asked to vote on the merger agreement described below.

 

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 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 GEO 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—Taxation of The GEO Group REIT, Inc.—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 rules 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 46, “Our Reasons for the REIT Conversion and the Merger” beginning on page 48 and “Risk Factors” beginning on page 20.

 

Q.	What will I receive in connection with the merger and the REIT conversion? 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.

Regular Quarterly Distributions

As a REIT, GEO REIT will be required to distribute annually at least 90% of its REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gain). Our REIT taxable income generally does not include income earned by our TRSs except to the extent the TRSs pay dividends to the REIT.

 

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We commenced declaring regular quarterly distributions as a REIT beginning with the first quarter of 2013. We paid our first quarterly cash dividend 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. We also paid a quarterly cash dividend of $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 and a quarterly cash dividend of $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. The amount of the quarterly distributions will be determined, and is subject to adjustment, by the board of directors. We currently anticipate our typical distributions will be based on a payment equal to 100% of our REIT taxable income, subject to adjustment by the board of directors. Furthermore, distributions will be subject to adjustment by the board of directors. The actual timing and amount of the distributions will be as determined and declared by the board of directors and will depend on, among other factors, our financial condition, earnings, debt covenants and other possible uses of such funds. See the section titled “Distribution Policy” beginning on page 52.

If you dispose of your shares before the record date for any quarterly distribution, you will not receive such quarterly distribution.

 

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.

 

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 “Our Reasons for the REIT Conversion and the Merger” beginning on page 48 and “Risk Factors” beginning on page 20.

 

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 approving 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

 

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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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STRUCTURE OF THE MERGER

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

 

 

(1)	A “TRS” is a taxable REIT subsidiary that pays corporate 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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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 Conversion and the Merger

If we do not qualify as a REIT, or 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 operate and intend to continue to operate in a manner that will allow us to qualify as a REIT commencing with our taxable year ending December 31, 2013. We have 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 were to 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 provisions of the Code, 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% (commencing in 2013). Dividends payable by REITs, however, generally are not eligible for the reduced rates. 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, determined without regard to the dividends paid deduction and excluding 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

 

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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 could increase our costs, 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, future 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.

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 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 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. 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 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.

 

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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.

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.

We have no 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 only been operating as a REIT 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 operate successfully as a REIT. Failure to maintain REIT status could adversely affect our financial condition, results of operations, or cash flow, the per share trading price of our common stock and our ability to satisfy our debt service obligations.

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

To qualify for taxation as a REIT, we are 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 we expect will be the taxable period ending December 31, 2013. Failure to make the special E&P distribution before December 31, 2013 could result in our disqualification for taxation as a REIT. 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 amount to be distributed in a special E&P distribution is a complex factual and legal determination. We currently believe and intend that our special E&P distribution paid during the fourth quarter of 2012, together with distributions in 2013, will satisfy the requirements relating to the distribution of our pre-REIT accumulated earnings and profits. 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, 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 the REIT election, without the approval of our shareholders, if it determines that it is no longer in our best interest 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.

 

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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 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;

 

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

 

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fluctuations in stock market prices and volumes;

 

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issuances of common stock or other securities in the future;

 

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the addition or departure of key personnel; and

 

•

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

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 June 30, 2013, on an as adjusted basis after giving effect to the subsequent consummation of the tender offer for any and all of the 7 ³⁄₄% senior notes due 2017 (the “7 ³⁄₄% Senior Notes”), the redemption of the remaining 7 ³⁄₄% Senior Notes that were not tendered in the tender offer and the issuance of $250.0 million of 5 ⁷⁄₈% senior notes due 2022 (the “5 ⁷⁄₈% Senior Notes”), was $1,457.8 million (excluding non-recourse debt of $111.5 million and $58.2 million of existing letters of credit, but including capital lease obligations of $12.4 million), primarily consisting of $595.0 million of secured indebtedness under our amended and restated senior credit facility (the “Amended and Restated Senior Credit Facility”), $300.0 million of 6.625% senior notes due 2021 (the “6.625% Senior Notes”), $300.0 million of 5 ¹⁄₈% senior notes due 2023 (the “5 ¹⁄₈ Senior Notes” or the “5.125% Senior Notes”) and $250.0 million of the 5 ⁷⁄₈% Senior Notes (collectively, the 6.625% Senior Notes, the 5 ¹⁄₈% Senior Notes and the 5 ⁷⁄₈% Senior Notes are referred to as the “Senior Notes”). Also as of June 30, 2013, we have the ability to borrow $346.8 million under the revolver portion of the Amended and Restated Senior Credit Facility, after applying the limitations and restrictions in our debt covenants and subject to our satisfying the relevant borrowing conditions under the Amended and Restated Senior Credit Facility with respect to the incurrence of additional indebtedness.

Our substantial indebtedness could have important consequences. For example, it could:

 

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make it more difficult for us to satisfy our obligations with respect to our Senior Notes and our other debt and liabilities;

 

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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;

 

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place us at a competitive disadvantage compared to competitors that may be less leveraged;

 

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

 

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

If we are unable to meet our debt service obligations, we may need to reduce capital expenditures, restructure or refinance our indebtedness, obtain additional equity financing or sell assets. We may be unable to restructure or refinance our indebtedness, obtain additional equity financing or sell assets on satisfactory terms or at all. In addition, our ability to incur additional indebtedness will be restricted by the terms of the Amended and Restated Senior Credit Facility, the indenture governing the 6.625% Senior Notes, the indenture governing the 5 ¹⁄₈% Senior Notes and the indenture governing the 5 ⁷⁄₈% 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 June 30, 2013, we were developing a number of projects that we estimate will cost approximately $161.0 million, of which $25.0 million was spent through June 30, 2013. We estimate our remaining capital requirements to be approximately $136.0 million, which we anticipate will be spent in fiscal years 2013 and 2014. Capital expenditures related to facility maintenance costs are expected to range between $30.0 million and $35.0 million for fiscal year 2013. 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 Amended and Restated Senior Credit Facility. In addition to these current estimated capital requirements for 2013 and 2014, 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 2013 and 2014 could materially increase. As of June 30, 2013, we had the ability to borrow an additional $346.8 million under the revolver portion of the Amended and Restated Senior Credit Facility, after applying the limitations and restrictions in our debt covenants and subject to our satisfying the relevant borrowing conditions under the Amended and Restated Senior Credit Facility with respect to the incurrence of additional indebtedness. In addition, we have the ability to borrow $350 million under the accordion feature of the Amended and Restated Senior Credit Facility subject to lender demand and prevailing market conditions and satisfying the relevant borrowing conditions thereunder. While we believe we have adequate borrowing capacity under the Amended and Restated 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 Amended and Restated Senior Credit Facility, the indenture governing the 6.625% Senior Notes, the indenture governing the 5 ¹⁄₈% Senior Notes and the indenture governing the 5 ⁷⁄₈% Senior Notes restrict our ability to incur but do not prohibit us from incurring significant additional indebtedness in the future. As of June 30, 2013, we had the ability to borrow an additional $346.8 million under the revolver portion of our Amended and Restated Senior Credit Facility after applying the limitations and restrictions in our debt covenants and subject to our satisfying the relevant borrowing conditions under the Amended and Restated Senior Credit

 

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Facility. We also have the ability to borrow an additional $350 million under the accordion feature of the Amended and Restated Senior Credit Facility 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 Amended and Restated Senior Credit Facility, the 6.625% Senior Notes, the 5 ¹⁄₈% Senior Notes or the 5 ⁷⁄₈% 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.

The covenants in the Amended and Restated Senior Credit Facility and the covenants in the indentures governing the 6.625% Senior Notes, the 5 ¹⁄₈% Senior Notes and the 5 ⁷⁄₈% Senior Notes impose significant operating and financial restrictions which may adversely affect our ability to operate our business.

The covenants in the Amended and Restated Senior Credit Facility and the covenants in the indentures governing the 6.625% Senior Notes, 5 ¹⁄₈% Senior Notes and the 5 ⁷⁄₈% Senior Notes 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:

 

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incur additional indebtedness;

 

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pay dividends and or distributions on our capital stock, repurchase, redeem or retire our capital stock, prepay subordinated indebtedness and make investments;

 

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issue preferred stock of subsidiaries;

 

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guarantee other indebtedness;

 

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create liens on our assets;

 

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transfer and sell assets;

 

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make capital expenditures above certain limits;

 

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create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us;

 

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enter into sale/leaseback transactions;

 

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enter into transactions with affiliates; and

 

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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 Amended and Restated 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 Amended and Restated 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 Amended and Restated Senior Credit Facility, the indenture governing the 6.625% Senior Notes, the indenture governing the 5 ¹⁄₈% Senior Notes and the indenture governing the 5 ⁷⁄₈% Senior Notes or any other indebtedness could prevent us from being able to draw on the revolver portion of the Amended and Restated 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.

 

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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 Amended and Restated Senior Credit Facility or otherwise in an amount sufficient to enable us to pay our indebtedness or debt securities, including the 6.625% Senior Notes, the 5 ¹⁄₈% Senior Notes and the 5 ⁷⁄₈% 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. If for any reason we are unable to meet our debt service obligations, we would be in default under the terms of the agreements governing our outstanding debt. If such a default were to occur, the lenders under the Amended and Restated Senior Credit Facility, and holders of the 6.625% Senior Notes, the 5 ¹⁄₈% Senior Notes and the 5 ⁷⁄₈% Senior Notes could elect to declare all amounts outstanding immediately due and payable, and the lenders would not be obligated to continue to advance funds under the Amended and Restated Senior Credit Facility. If the amounts outstanding under the Amended and Restated Senior Credit Facility or other agreements governing our outstanding debt, were accelerated, our assets may not be sufficient to repay in full the money owed to our lenders, holders of the 6.625% Senior Notes, the 5 ¹⁄₈% Senior Notes and the 5 ⁷⁄₈% Senior Notes and any other debt holders.

Because portions of our senior indebtedness have floating interest rates, a general increase in interest rates will adversely affect cash flows.

Borrowings under our Amended and Restated 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 anticipate entering into any interest rate protection agreements to protect against interest rate fluctuations on borrowings under the Amended and Restated Senior Credit Facility. As of June 30, 2013 we had $595.0 million of indebtedness outstanding under our Amended and Restated Senior Credit Facility, and a one percent increase in the interest rate applicable to the Amended and Restated Senior Credit Facility would increase our annual interest expense by $6.0 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, 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 six months ended June 30, 2013 and the year ended December 31 2012, our subsidiaries accounted for 74.2% and 64.4% of our consolidated revenues, respectively, and 95.8% and 75.0% of our total assets, respectively.

 

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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 seven of our idle facilities to potential customers. The annual carrying cost of idle facilities in 2013 is estimated to be $14.4 million, including depreciation expense of $7.3 million, if the facilities remain vacant for the remainder of 2013. As of June 30, 2013, these facilities had a net book value of $237.3 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 been experiencing significant volatility and disruption since 2008. The downturn in the equity and debt markets, the tightening of the credit markets, the general economic slowdown and other macroeconomic conditions, such as the current global economic environment could prevent us 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 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

 

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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, 2012, 48 of our facility management contracts representing approximately 22,000 beds are scheduled to expire on or before December 31, 2013, unless renewed by the customer at its sole option in certain cases, or unless renewed by mutual agreement in other cases. These contracts represented 27% of our consolidated revenues for the fiscal year ended December 31, 2012. 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, 2012, thirteen of our facility management contracts representing $80.1 million (or 5.4%) of our consolidated revenues for the year ended December 31, 2012 are subject to competitive re-bid in 2013. 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.

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 “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.

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

 

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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 June 30, 2013 we had $661.0 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 this goodwill 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 50% of our consolidated revenues for the year ended December 31, 2012. In addition, three federal governmental agencies with correctional and detention responsibilities, the Bureau of Prisons, ICE, and the U.S. Marshals Service, accounted for 45.8% of our total consolidated revenues for the year ended December 31, 2012 through multiple individual contracts, with the Bureau of Prisons accounting for 17.0% of our total consolidated revenues for such period, ICE accounting for 17.3% of our total consolidated revenues for such period, and the U.S. Marshals Service accounting for 11.4% 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 4.1% of our total consolidated revenues for the year ended December 31, 2012 through multiple individual contracts. On March 1, 2013, as a result of the federal government being unable to reach an agreement on budget reduction measures required by the Budget Control Act of 2011, an automatic sequestration process was triggered which imposes automatic, across-the-board cuts to mandatory and discretionary federal spending in the amount of $1.2 trillion over the next ten years. We have had preliminary discussions with some of our clients regarding sequestration related issues, and we do not currently believe that any impact to our contracts as a result of sequestration cuts would have a material impact on our financial results. However, the automatic sequestration process could result in a decline in, or redirection of, current and future budgets that could adversely affect our financial results. The loss of, or a significant decrease in, business from the Bureau of Prisons, ICE, 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. Recently, 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 Community Correctional

 

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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 2013 compared with fiscal year 2012, 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. At December 31, 2012, 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, 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 ⁷⁄₈% Senior Notes, the 5 ¹⁄₈% Senior Notes, the 6.625% Senior Notes and the Amended and Restated 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 forego prospective increases to those rates. Budgetary limitations may also

 

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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 experiencing budget constraints for fiscal year 2013. 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. 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 Cornell Acquisition 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, mandated client to staff ratios as high as 1:6, elevated reporting and audit requirements, a reduced number of options to use with offenders (e.g., mechanical restraints and seclusion are not permitted options to use with offenders in juvenile correctional facilities), 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 provided 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 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 ⁷⁄₈% Senior Notes, the 5 ¹⁄₈% Senior Notes, the 6.625% Senior Notes and the Amended and Restated 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, to forego anticipated revenues and we may be subject to penalties and sanctions, including prohibitions on our bidding in response to Requests for Proposals, or RFPs, from governmental agencies to manage correctional facilities. Governmental agencies we contract with have the authority to audit and investigate our contracts with them. As part of that process, governmental agencies may review our performance of the contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations and standards. For contracts that actually or effectively provide for certain reimbursement of expenses, if an agency determines that we have improperly allocated costs to a specific contract, we may not be reimbursed for those costs, and we could be required to refund the amount of any such costs that have been reimbursed. If 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.

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 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

 

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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 could have a material adverse effect on our business, financial condition or results of operations. In addition, any losses relating to employment matters could have a material adverse effect on our business, financial condition or results of operations.

We may not be able to obtain or maintain the insurance levels required by our government contracts.

Our government contracts require us to obtain and maintain specified insurance levels. The occurrence of any events specific to our company or to our industry, or a general rise in insurance rates, could substantially increase our costs of obtaining or maintaining the levels of insurance required under our government contracts, or prevent us from obtaining or maintaining such insurance altogether. If we are unable to obtain or maintain the required insurance levels, our ability to win new government contracts, renew government contracts that have expired and retain existing government contracts could be significantly impaired, which could have a material adverse effect on our business, financial condition and results of operations.

 

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Our international operations expose us to risks which could materially adversely affect our financial condition and results of operations.

For the six months ended June 30, 2013 and the year ended December 31, 2012, our international operations accounted for 14.1% and 14.3%, respectively, 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 effect on our business, financial condition or results of operations.

Our profitability may be materially adversely affected by inflation.

Many of our facility management contracts provide for fixed management fees or fees that increase by only small amounts during their terms. While a substantial portion of our cost structure is generally fixed, if, due to inflation or other causes, our operating expenses, such as costs relating to personnel, utilities, insurance, medical and food, increase at rates faster than increases, if any, in our facility management fees, then our profitability could be materially adversely affected.

 

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Various risks associated with the ownership of real estate may increase costs, expose us to uninsured losses and adversely affect our financial condition and results of operations.

Our ownership of correctional and detention facilities subjects us to risks typically associated with investments in real estate. Investments in real estate, and in particular, correctional and detention facilities, are relatively illiquid and, therefore, our ability to divest ourselves of one or more of our facilities promptly in response to changed conditions is limited. Investments in correctional and detention facilities, in particular, subject us to risks involving potential exposure to environmental liability and uninsured loss. Our operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation. In addition, although we maintain insurance for many types of losses, there are certain types of losses, such as losses from earthquakes, riots and acts of terrorism, which may be either uninsurable or for which it may not be economically feasible to obtain insurance coverage, in light of the substantial costs associated with such insurance. As a result, we could lose both our capital invested in, and anticipated profits from, one or more of the facilities we own. Further, even if we have insurance for a particular loss, we may experience losses that may exceed the limits of our coverage.

Risks related to facility construction and development activities may increase our costs related to such activities.

When we are engaged to perform construction and design services for a facility, we typically act as the primary contractor and subcontract with other companies who act as the general contractors. As primary contractor, we are subject to the various risks associated with construction (including, without limitation, shortages of labor and materials, work stoppages, labor disputes and weather interference) which could cause construction delays. In addition, we are subject to the risk that the general contractor will be unable to complete construction 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 Amended and Restated 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, 2012, approximately 21% of our workforce was covered by collective bargaining agreements and, as of such date, collective bargaining agreements with approximately 2% of our employees were set to expire in less than one year. While only approximately 21% 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.

 

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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 for 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, 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.

Providing electronic monitoring services is a relatively new line of business for us and as a result we are subject to all of the risks and uncertainties of developing a new line of business.

Prior to our acquisition of BI, we had never provided electronic monitoring services and had no prior experience in the electronic monitoring services industry. As a result of our acquisition of BI, we entered into a new line of business. Our success providing electronic monitoring services will be subject to all of the uncertainties regarding the development of a new business. There can be no assurance regarding the continued acceptance of electronic monitoring services by our customers. Additionally, we may experience difficulties keeping ahead of or reacting to technological changes in the electronic monitoring services industry as well as reacting to other challenges of the electronic monitoring services industry due to our lack of experience in this industry.

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

 

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inadvertently interrupted, delayed, compromised or lost. We routinely process, store and transmit large amounts of data for our clients. The interruption, delay or failure of our services, information systems or client data could cost us both monetarily and in terms of client good will, lost business, disruption of business, adverse impacts to our results of operations and exposure to the risks of litigation. Such interruptions, delays or failures could damage our brand and reputation. Prior to our acquisition of BI, BI experienced such an issue in October 2010 with one of its offender monitoring servers that caused the server’s automatic notification system to be temporarily disabled resulting in delayed notifications to customers when a database exceeded its data storage capacity. The issue was resolved within approximately 12 hours. We continually work to update and maintain effective information systems, however, there can be no assurance that we will not experience an interruption, delay or failure of our services, information systems or client data that would adversely impact our business.

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

 

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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.

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

 

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

 

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

 

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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 be increased, 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 ability of our licensors to 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 in 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 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:

 

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our ability to remain qualified for taxation as a REIT;

 

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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;

 

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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;

 

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

 

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

 

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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;

 

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

 

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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;

 

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

 

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our ability to maintain occupancy rates at our facilities;

 

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an increase in unreimbursed labor rates;

 

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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;

 

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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;

 

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

 

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our ability to raise new project development capital given the often short-term nature of the customers’ commitment to use newly developed facilities;

 

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

 

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our ability to accurately project the size and growth of the U.S. and international privatized corrections industry;

 

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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;

 

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

 

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

 

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

 

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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;

 

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

 

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

 

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our exposure to rising general insurance costs;

 

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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;

 

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our exposure to claims for which we are uninsured;

 

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our exposure to rising employee and inmate medical costs;

 

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our ability to manage costs and expenses relating to ongoing litigation arising from our operations;

 

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our ability to accurately estimate on an annual basis, loss reserves related to general liability, workers compensation and automobile liability claims;

 

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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;

 

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

 

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

 

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

 

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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

 

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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 [—], or any adjournments or postponements thereof.

Date, Time and Place of the Special Meeting

The special meeting will be held on [—] at [—] a.m., local time, at [—].

Purpose of the Special Meeting

The purpose of the special meeting is:

 

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To consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated as of [—], 2013, 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

 

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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 [—] as the record date for determining which GEO shareholders are entitled to notice of, and to vote those shares by proxy or at the special meeting and at any adjournment or postponement of the special meeting. On the record date, there were [—] shares of common stock outstanding, held by approximately [—] 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 or 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 the proposal to adjourn the 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 at least 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, to solicit additional proxies to adopt and approve the merger agreement requires the affirmative vote of the holders of at least a majority of the shares of GEO common stock present in person or represented by proxy at the special meeting and voting on the proposal. If a quorum does not exist, an adjournment will require the affirmative vote of holders of at least 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 [—] p.m., Eastern Time, on [—]. 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, abstentions have the same effect as a vote against the merger. For the proposal to adjourn the meeting to solicit additional proxies, abstentions have 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. If an executed proxy card is returned by a broker, bank or other nominee holding shares that indicates that the broker, bank or other nominee does not have discretionary authority to vote on the proposals, the shares will be considered present at the meeting for purposes of determining the presence of a quorum, but will not be considered to have been voted on the proposals. 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.

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 By-Laws 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 for the fees of 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 approved 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 adoption 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;

 

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

 

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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;

 

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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;

 

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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

 

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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, and the reasons for, 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 46, “Our Reasons for the REIT Conversion and the Merger” beginning on page 48 and “Risks Factors” beginning on page 20.

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

 

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

 

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the limitations imposed on our activities under the REIT structure;

 

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the need to comply with the complicated REIT qualification provisions;

 

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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 approved 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 the section entitled “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 each 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:

 

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Charter Documents of GEO REIT. The Articles of Incorporation and By-Laws of GEO REIT will be amended in connection with the merger. Copies of the form of the GEO REIT Articles and GEO REIT By-Laws, 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.

 

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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.

 

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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.

 

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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:

 

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

 

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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;

 

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

 

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

 

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

 

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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;

 

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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

 

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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

 

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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 or the REIT conversion even if shareholders of GEO vote to approve the merger agreement, which is an important element of the REIT conversion, 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, 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 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. Shareholder’s 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:

 

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our financial condition and operating cash flows;

 

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our retention of cash to pursue acquisitions;

 

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our operating and other expenses;

 

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debt service requirements;

 

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capital expenditure requirements;

 

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

 

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limitations on distributions in our existing and future debt instruments;

 

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

 

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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 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. 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 June 30, 2013, our worldwide operations included the management and/or ownership of approximately 72,000 beds at 95 correctional, detention and residential facilities, including idle facilities and projects under development, and also included the provision of monitoring 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:

 

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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;

 

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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;

 

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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;

 

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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

 

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

 

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Business Segments

Our GEO Care reporting segment previously consisted of four aggregated operating segments including Residential Treatment Services, Community Based Services, Youth Services and BI. The GEO Care reporting segment was renamed GEO Community Services concurrent 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 segment are referred to as GEO Community Services.

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 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 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 service, all of which are currently conducted in the United States. 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 2012, 2011 and 2010 is contained in the “Notes to Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended December 31, 2012. Financial information about these segments for the three months and six months ended June 30, 2013 are contained in the “Notes to Consolidated Financial Statements” included in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2013

Recent Developments

REIT Conversion

We began operating as a REIT for federal income tax purposes effective January 1, 2013. As a result of a REIT conversion, we reorganized our operations and moved non-real estate components into taxable REIT subsidiaries, or TRSs. 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, are conducted by TRSs, while our real estate, including company-owned and company-leased facilities, is held directly by the REIT and by qualified REIT subsidiaries. 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. 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 and $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.

The amount, timing and frequency of future distributions will be at the sole discretion of our Board and will be declared based upon various factors, many of which are beyond our control, including our financial condition and operating cash flows, the amount required to maintain REIT status and reduce any income 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 TRS’ and other factors that our Board of Directors may deem relevant.

 

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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 healthcare facility assets and related management contracts (“Residential Treatment Services” or “RTS”). The operating results of RTS have been retroactively reclassified to discontinued operations for the three months and six months ended July 1, 2012.

Amended and Restated Senior Credit Facility

On April 3, 2013, we and GEO Corrections Holdings, Inc. entered into the Amended and Restated Credit Agreement (with us as the sole Term Loan borrower, and us and GEO Corrections Holdings, Inc. as joint and several Revolver borrowers) with BNP Paribas, as Administrative Agent, and the lenders that are, or may from time to time, become a party thereto, providing for a senior credit facility. The senior credit facility, referred to as the Senior Credit Facility, consists of a $300 million term loan (the “Term Loan”) initially bearing interest at LIBOR plus 2.50% (with a LIBOR floor of .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. Pursuant to the amended and restated credit agreement, all amounts outstanding under the Senior Credit Facility prior to April 3, 2013, including the Term Loan A, Term Loan A-2, Term Loan A-3, Term Loan B, and the Revolver were refinanced. Refer to our consolidated financial statements and accompanying notes incorporated by reference into this proxy statement/prospectus for further discussion.

The weighted average interest rate on outstanding borrowings under the Senior Credit Facility was 3.0% as of June 30, 2013.

As of June 30, 2013, we had $300.0 million principal amount outstanding under the Term Loan and the Revolver had $295.0 million outstanding in borrowings, $58.2 million outstanding in letters of credit and $346.8 million available for additional borrowings.

All of the obligations under the Senior Credit Facility are unconditionally guaranteed by each of our domestic subsidiaries that are restricted subsidiaries under the Senior Credit Facility. The Senior Credit Facility and the related guarantees are secured on a first-priority basis by substantially all of our present and future tangible and intangible assets (subject to certain exceptions) and all present and future tangible and intangible assets (subject to certain exceptions) of each guarantor.

The Senior Credit Facility contains certain customary representations and warranties, and certain affirmative covenants and certain negative covenants that (subject to certain exceptions and allowances) restrict our ability to, among other things (i) create, incur or assume indebtedness, (ii) create, incur, assume or permit liens, (iii) make loans and investments, (iv) engage in mergers, acquisitions, liquidations and asset sales, (v) make certain restricted payments, (vi) issue, sell or otherwise dispose of certain types of non-common equity, (vii) engage in transactions with affiliates, (viii) allow the total leverage ratio to exceed 5.75 to 1.00, allow the senior secured leverage ratio to exceed 3.50 to 1.00 or allow the interest coverage ratio to be less than 3.00 to 1.00, (ix) cancel, forgive, make any voluntary or optional payment or prepayment on, or redeem or acquire for value any senior notes, except as permitted (x) alter the business we conduct and (xi) materially impair our lenders’ security interests in the collateral for our loans.

The Senior Credit Facility generally requires the Interest Coverage Ratio (as defined under the Senior Credit Facility) to be calculated as the ratio of (a) Adjusted EBITDA (as defined under the Senior Credit Facility) for any period of four consecutive fiscal quarters to (b) Interest Expense (as defined under the Senior Credit Facility), minus Interest Expense attributable to Indebtedness of Unrestricted Subsidiaries and Other Consolidated Persons that is Non-Recourse to us and the Restricted Subsidiaries for such four quarter period (capitalized terms are defined in the Senior Credit Facility).

 

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Events of default under the Senior Credit Facility include, but are not limited to, (i) failure to pay principal or letter of credit reimbursement obligations when due or to pay any interest or other amounts within three business days of the payment deadline, (ii) our material breach of any representation or warranty, (iii) covenant defaults, (iv) liquidation, reorganization or other relief relating to bankruptcy or insolvency, (v) default under certain other material indebtedness, (vi) unsatisfied final money judgments over a specified threshold, (vii) material environmental liability claims which have been asserted against us, and (viii) a change in control.

Contract Awards, Activations and Terminations

We are currently marketing approximately 6,000 vacant beds at seven of our idle facilities to potential customers. The annual carrying cost of idle facilities in 2013 is estimated to be $14.4 million, including depreciation expenses of $7.3 million. As of June 30, 2013, these facilities had a net book value of $237.3 million. As of June 30, 2013, we did 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. 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, (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 annualized revenue of approximately $125 million and an annualized 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 99.6% as of December 31, 2012. Approximately 83.1% of our 2012 U.S. Corrections & Detention revenue was derived from ACA accredited facilities for the year ended December 31, 2012. 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;

 

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governmental agencies responsible for correctional facilities in Australia, South Africa and the United Kingdom; 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 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 2012, we activated four new or expansion projects representing an aggregate of 2,082 additional beds compared to the activation of five new or expansion projects representing an aggregate of 3,533 beds during 2011. Internationally, we activated three new contracts during 2011, respectively, for the provision of Prison Escort and Custody Services (PECS) under our joint venture with GEOAmey.

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

 

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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, 2012, we had 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, 2012, we had 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

 

•

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); 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.

 

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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.

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, the largest provider of community-based re-entry services; youth services and electronic monitoring services in the U.S. corrections industry. We believe these leading market positions and our diverse and complimentary 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. For the fiscal year ended December 31, 2012, we generated 67% of our net operating income from facilities we owned or leased. As of December 31, 2012, we owned or leased 64% of the facilities at which we provided services. 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 high return on invested capital growth opportunities which may be capital intensive in nature.

Large Scale Operator with National Presence

We operate the sixth largest correctional system in the U.S. by number of beds, including the federal government and all 50 states. We currently have operations in approximately 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, treatment 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 allows us to pass along cost savings to our clients. Our national presence also positions us to bid on and develop new facilities across the U.S.

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 United States federal government for 26 years, the State of California for 25 years, the State of Texas for approximately 25 years, various Australian state government entities for 21 years and the State of Florida for approximately 19 years. For the six months ended June 30, 2013, no one customer accounted for more than 17.6% of total revenues and no state government customer accounted for more than 3.9% of total revenues. 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.

 

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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 approximating 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 $1,085 million in 2010 to $1,479 million for the year ended December 31, 2012. 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, acquisitions and/or the repayment of indebtedness.

Sizeable International Business

Our international infrastructure, which leverages our operational excellence in the U.S., allows us to target foreign opportunities that our U.S. based competitors without overseas operations may have difficulty pursuing. We currently have international operations in Australia, Canada, South Africa and the United Kingdom. Our International services business generated approximately $107 million and $212 million of revenues, representing approximately 14.1% and 14.3% of our consolidated revenues for the six months ended June 30, 2013 and the fiscal year ended December 31, 2012, respectively. 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 the Founder, George C. Zoley, Ph.D., has led our Company for 28 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 for the fiscal year ended December 31, 2012. Mr. Zoley is one of the pioneers of the industry, having developed and opened what we believe to be one of the first privatized detention facilities in the U.S. in 1986. Our Chief Financial Officer, Brian R. Evans, has been with our company for over twelve years and has led our conversion to a REIT as well as the integration of our recent acquisitions and financing activities. Our top six senior executives have an average tenure with our company of over 14 years.

Business Strategies

Provide High Quality Comprehensive Operations and Cost Savings Throughout 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 uniquely 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 geographical 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, higher profit opportunities helps us to consistently deliver strong operational performance, lower our costs and increase our overall profitability.

 

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Pursue International Growth Opportunities

As a global provider of privatized correctional services, 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, we have 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.

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 GEO (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 June 30, 2013:

 

Facility Name & Location

Capacity(1)

Primary Customer

Facility Type

Security Level

Commencement of Current Contract(2)

Base Period

Renewal Options

Manage Only Lease/ Own

Corrections & Detention—Western Region:

Adelanto ICE Processing Center East, Adelanto, CA

1,300

ICE

Federal Detention

Minimum/ Medium

May 2011

5 years

None

Own

Alhambra City Jail, Los Angeles, CA

67

Los Angeles County

City Jail

All Levels

July 2008

3 years

Two, One-year

Manage Only

Arizona State-Prison Florence West Florence, AZ

750

AZ DOC

State DUI/ RTC Correctional

Minimum

October 2002

10 years

Two, Five-year

Manage Only

Arizona State-Prison Phoenix West Phoenix, AZ

450

AZ DOC

State DWI Correctional

Minimum

July 2002

10 years

Two, Five-year

Manage Only

Aurora Detention Aurora, CO

1,532

ICE/USMS

Federal Detention

All Levels

October 2012

2 years

Four, Two-year

Own

Baldwin Park City Jail, Baldwin Park, CA

32

Los Angeles County

City Jail

All Levels

July 2003

3 years

Three, Three-year

Manage Only

Central Arizona Correctional Facility Florence, AZ

1,280

AZ DOC

State Sex Offender Correctional

Minimum/ Medium

December 2006

10 years

Two, Five- year

Manage Only

Central Valley MCCF McFarland, CA

640

Idle

—

—

—

—

—

Own

Desert View MCCF Adelanto, CA

650

Idle

—

—

—

—

—

Own

Downey City Jail Los Angeles, CA

30

Los Angeles County

City Jail

All Levels

June 2003

3 years

Three, Three-year

Manage Only

 

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Facility Name & Location

Capacity(1)

Primary Customer

Facility Type

Security Level

Commencement of Current Contract(2)

Base Period

Renewal Options

Manage Only Lease/ Own

Fontana City Jail Los Angeles, CA

39

Los Angeles County

City Jail

All Levels

February 2007

5 months

Five, One-year

Manage Only

Garden Grove City Jail Los Angeles, CA

16

Los Angeles County

City Jail

All Levels

January 2010

30 months

Unlimited

Manage Only

Golden State MCCF McFarland, CA

625

CDCR

State Correctional

Medium

March 1997

10 years

One, Five-year

Own

Guadalupe County Correctional Facility Santa Rosa, NM(3)

600

NMCD

Local/State Correctional

Medium

January 1999

3 years

Two year ext, Five, one-year

Own

Hudson Correctional Facility Hudson, CO

1,250

AK DOC

State Correctional

Medium

September 2009

3 years

Seven, One-year

Lease

Lea County Correctional Facility Hobbs, NM(3)

1,200

NMCD

Local/State Correctional

Medium

September 1998

5 years

Eight, one-year

Own

Leo Chesney Community Correctional Facility Live Oak, CA

318

Idle

—

—

—

—

—

Lease

McFarland Community Correctional Facility McFarland, CA

260

Idle

—

—

—

—

—

Own

Mesa Verde Community Correctional Facility Bakersfield, CA

400

Idle

—

—

—

—

—

Own

Montebello City Jail Los Angeles, CA

25

Los Angeles County

City Jail

All Levels

January 2006

2 years

Unlimited, One-year

Manage Only

Northeast New Mexico Detention Facility Clayton, NM(3)

625

NMCD

Local/State Correctional

Medium

August 2008

5 years

Five, one-year

Manage Only

Northwest Detention Center Tacoma, WA

1,575

ICE

Federal Detention

All Levels

October 2009

1 year

Four, one-year

Own

Ontario City Jail Los Angeles, CA

40

Los Angeles County

City Jail

Any Level

September 2006

3 years

Unlimited, One-year

Manage Only

Western Region Detention Facility San Diego, CA

770

Los Angeles County

Federal Detention

Maximum

January 2006

5 years

One, Five-year

Lease

Corrections & Detention—Central Region:

Big Spring Correctional Center Big Spring, TX

3,509

BOP

Federal Correctional

Medium

April 2007

4 years

Three, Two-year and One, six-month

Own

Central Texas Detention Facility San Antonio, TX(3)

688

USMS/ ICE

Local & Federal Detention

Minimum/ Medium

April 2009

10 years

None

Manage Only

Cleveland Correctional Center Cleveland, TX

520

TDCJ

State Correctional

Minimum

January 2009

2.6 years

Two, Two-year

Manage Only

Great Plains Correctional Facility Hinton, OK

2,048

Idle

—

—

—

—

—

Own

 

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Facility Name & Location

Capacity(1)

Primary Customer

Facility Type

Security Level

Commencement of Current Contract(2)

Base Period

Renewal Options

Manage Only Lease/ Own

Joe Corley Detention Facility Conroe, TX(4)

1,287

USMS/ ICE

Local Correctional

Medium

August 2008/August 2008

2 years

Unlimited, two-year

Manage Only

Karnes Correctional Center Karnes City, TX(4)

679

ICE/ USMS

Local & Federal Detention

All Levels

December 2010/May 1998

5 years/ 30 years

Unspecified

Own

Karnes Civil Detention Center Karnes City, TX(4)

600

ICE

Federal Detention

All Levels

December 2010

5 years

None

Own

Lawton Correctional Facility Lawton, OK

2,526

OK DOC

State Correctional

Medium

July 2008

1 year

Five, One-year Unlimited, Four-year

Own

Lockhart Secure Work Program Facilities Lockhart, TX

1,000

TDCJ

State Correctional

Minimum/ Medium

January 2009

2.6 years

Two, two-year

Manage Only

Maverick County Detention Facility Maverick, TX(3)

688

USMS/ BOP

Local Detention

Medium

April 2007

Month to Month

Perpetual until terminated

Manage Only

Reeves County Detention Complex R1/R2 Pecos, TX(3)

2,407

Reeves County/ BOP

Federal Correctional

Low

February 2007

10 years

One, Ten-year

Manage Only

Reeves County Detention Complex R3 Pecos, TX(3)

1,356

Reeves County/ BOP

Federal Correctional

Low

January 2007

10 years

One, Ten-year

Manage Only

Rio Grande Detention Center Laredo, TX

1,500

USMS/ OFDT

Federal Detention

Medium

October 2008

5 years

Three, Five-year

Own

South Texas Detention Complex Pearsall, TX

1,904

ICE

Federal Detention

All Levels

December 2011

11 months

Four, One-year

Own

Val Verde Correctional Facility Del Rio, TX(3)

1,407

USMS

Local & Federal Detention

All Levels

January 2001

Perpetual

N/A

Own

Corrections & Detention—Eastern Region

Allen Correctional Center Kinder, LA

1,538

LA DOC

State Correctional

Medium/ Maximum

July 2010

10 years

None

Manage only

Blackwater River Correctional Facility Milton, FL

2,000

FL DMS

State Correctional

Medium/ close

April 2010

3 years

Two, two-year

Manage Only

Broward Transition Center Deerfield Beach, FL

700

ICE

Federal Detention

Minimum

April 2009

11 months

Four, One-year, Unlimited 6-month

Own

D. Ray James Correctional Facility Folkston, GA

2,507

BOP

Federal Detention

All Levels

October 2010

4 years

Three, two-year

Own

D. Ray James Correctional Facility Folkston, GA

340

USMS

Federal Detention

All Levels

October 2010

Perpetual

Three, two-year

Own

Indiana STOP Program Plainfield, IN

1,066

IDOC

State Correctional

Minimum

March 2011

4 years

One, four-year

Manage Only

 

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Facility Name & Location

Capacity(1)

Primary Customer

Facility Type

Security Level

Commencement of Current Contract(2)

Base Period

Renewal Options

Manage Only Lease/ Own

LaSalle Detention Facility Jena, LA(3)

1,160

ICE

Federal Detention

Minimum/ Medium

July 2007

Perpetual

N/A

Own

Lawrenceville Correctional Center Lawrenceville, VA

1,536

VA DOC

State Correctional

Medium

March 2003

5 years

Ten, One-year

Manage Only

Moshannon Valley Correctional Center Philipsburg, PA

1,820

BOP

Federal Correctional

Medium

April 2006

36 months

Seven, One-year

Own

New Castle Correctional Facility New Castle, IN

3,094

IDOC

State Correctional

All Levels

January 2006

4 years

Two, Five-year

Manage Only

North Lake Correctional Facility Baldwin, MI

1,740

Idle

—

—

—

—

—

Own

Queens Detention Facility Jamaica, NY

222

USMS

Federal Detention

Minimum/ Medium

January 2008

2 year

Four, two-year

Own

Riverbend Correctional Facility Milledgeville, GA

1,500

GDOC

State Correctional

Medium

July 2010

Partial 1 year

Forty, One-year and one partial year

Own

Rivers Correctional Institution Winton, NC

1,450

BOP

Federal Correctional

Low

April 2013

4 years

Three, Two-year

Own

Robert A. Deyton Detention Facility Lovejoy, GA

768

USMS/ OFDT

Federal Detention

Medium

February 2008

5 years

Three, Five year

Lease

South Bay Correctional Facility South Bay, FL

1,898

DMS

State Correctional

Medium/ Close

July 2009

3 years

Unlimited, Two-year

Manage Only

Corrections & Detention—Australia:

Arthur Gorrie Correctional Centre Queensland, Australia

890

QLD DCS

State Remand Prison

High/ Maximum

January 2008

5 years

One, Five-year

Manage Only

Fulham Correctional Centre & Nalu Challenge Community Victoria, Australia

785

VIC DOJ

State Prison

Minimum/ Medium

October 1995

22 years

None

Manage Only

Junee Correctional Centre New South Wales, Australia

790

NSW

State Prison

Minimum/ Medium

April 2009

5 years

Two, Five-year

Manage Only

Parklea Correctional Centre Sydney, Australia

823

NSW

State Remand Prison

All Levels

October 2009

5 years

One, Two-year

Manage Only

Corrections & Detention—United Kingdom

Dungavel House Immigration Removal Centre, South Lanarkshire, UK

217

UKBA

Detention Centre

Minimum

September 2011

5 years

None

Manage Only

Harmondsworth Immigration Removal Centre London, UK

620

UKBA

Detention Centre

Minimum

June 2009

3 years

None

Manage Only

 

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Facility Name & Location

Capacity(1)

Primary Customer

Facility Type

Security Level

Commencement of Current Contract(2)

Base Period

Renewal Options

Manage Only Lease/ Own

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

Manage Only

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

Manage Only

Corrections & Detention—Leased:

Delaney Hall Newark, NJ

1,200

Community Education Centers

Community Corrections

Community

May 2003

—

—

Own

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

Own

Bronx Community Re-entry Center Bronx, NY

110

BOP

Community Corrections

Community

October 2007

2 years

Three, One-year

Lease

Cordova Center Anchorage, AK

207

AK DOC/BOP

Community Corrections

Community

September 2007

7 months

Four, one-year, One five-month

Own

El Monte Center El Monte, CA

61

BOP

Community Corrections

Community

March 2008

7 months

Four, one-year

Lease

Grossman Center Leavenworth, KS

150

BOP

Community Corrections

Community

October 2007

2 years

Three, one-year

Lease

Las Vegas Community Correctional Center Las Vegas, NV

124

BOP/ USPO

Community Corrections

Community

October 2010

2 years

Three, one-year

Own

Leidel Comprehensive Sanction Center Houston, TX

190

BOP/ USPO

Community Corrections

Community

January 2011

2 years

Three, one-year

Own

Marvin Gardens Center Los Angeles, CA

60

BOP

Community Corrections

Community

May 2006

2 years

Three, one-year

Lease

McCabe Center Austin, TX

113

BOP/Travis County/ USPO

Community Corrections

Community

April 2007

2 years

Three, one-year

Own

Mid Valley House Edinburg, TX

100

BOP/USPO

Community Corrections

Community

December 2008

2 years

Three, one-year

Lease

Midtown Center Anchorage, AK

32

AK DOC

Community Corrections

Community

September 2007

7 months

Four, one-year, One five-month

Own

 

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Facility Name & Location

Capacity(1)

Primary Customer

Facility Type

Security Level

Commencement of Current Contract(2)

Base Period

Renewal Options

Manage Only Lease/ Own

Northstar Center Fairbanks, AK

143

AK DOC/BOP

Community Corrections

Community

February 2011

5 months

Four, one-year, One five-month

Lease

Oakland Center Oakland, CA

69

BOP

Community Corrections

Community

November 2008

3 years

Seven, one-year

Own

Parkview Center Anchorage, AK

112

AK DOC

Community Corrections

Community

September 2007

7 months

Four, one-year, One five-month

Own

Southeast Texas Transitional Center Houston, TX

500

TDCJ

Community Corrections

Community

September 2003

2 years

Five, two-year

Own

Salt Lake City Center Salt Lake City, UT

115

BOP/ USPO

Community Corrections

Community

June 2011/October 2009

2 years/ 2 years

Three, one-year/ Two, two-year

Lease

Seaside Center Nome, AK

50

AK DOC

Community Corrections

Community

December 2007

1 year

Five, one-year

Lease

Taylor Street Center San Francisco, CA

210

BOP/ CDCR

Community Corrections

Community

February 2006

3 years

Seven, one-year

Own

Tundra Center Bethel, AK

85

AK DOC

Community Corrections

Community

December 2006

1 year

Five, one-year

Own

GEO Community Services—Youth Services:

Residential Facilities

Abraxas Academy Morgantown, PA

214

Various

Youth Residential

Secure

2006

N/A

N/A

Own

Abraxas Center For Adolescent Females Pittsburgh, PA(6)

108

AHFS

—

—

—

—

—

Own

Abraxas I Marienville, PA

266

Various

Youth Residential

Staff Secure

1973

N/A

N/A

Own

Abraxas Ohio Shelby, OH

100

Various

Youth Residential

Staff Secure

1993

N/A

N/A

Own

Abraxas III, Pittsburgh, PA[6]

24

AHFS

—

—

—

—

—

Own

Abraxas Youth Center South Mountain, PA

72

PA Dept of Public Welfare

Youth Residential

Secure/ Staff Secure

1999

N/A

N/A

Lease

Contact Interventions Wauconda, IL(6)

32

AHFS

—

—

—

—

—

Own

DuPage Interventions Hinsdale, IL

36

IL DASA, Medicaid, Private

Youth Residential

Staff Secure

1999

N/A

N/A

Own

 

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Facility Name & Location

Capacity(1)

Primary Customer

Facility Type

Security Level

Commencement of Current Contract(2)

Base Period

Renewal Options

Manage Only Lease/ Own

Erie Residential Programs Erie, PA

41

Various

Youth Residential

Staff Secure

1974

N/A

N/A

Own

Hector Garza Center San Antonio, TX

133

TYC

Youth Residential

Staff Secure

2003

N/A

N/A

Own

Leadership Development Program South Mountain, PA

128

Various

Youth Residential

Staff Secure

1994

N/A

N/A

Lease

Schaffner Youth Center Steelton, PA

24

Dauphin County

Youth Residential

Secure/ Staff Secure

2009

2 years

N/A

Manage Only

Southern Peaks Regional Treatment Center Canon City, CO

136

Various

Youth Residential

Staff Secure

2004

N/A

N/A

Own

Southwood Interventions Chicago, IL

128

IL DASA, City of Chicago, Medicaid

Youth Residential

Staff Secure

1999

N/A

N/A

Own

Woodridge Interventions Woodridge, IL

90

IL DASA, Medicaid

Youth Residential

Staff Secure

1999

N/A

N/A

Own

GEO Community Services—Youth Services:

Non-residential Facilities:

Abraxas Counseling Center Columbus, OH

100

Various

Youth Non-residential

Open

2008

N/A

N/A

Lease

Delaware Community -Based Programs Milford, DE

66

State of Delaware

Youth Non-residential

Open

1994

N/A

N/A

Lease

Harrisburg Community -Based Programs Harrisburg, PA

100

Dauphin or Cumberland Counties

Youth Non-residential

Open

1995

N/A

N/A

Lease

Lehigh Valley Community -Based Programs Lehigh Valley, PA

30

Lehigh and Northampton Counties

Youth Non-residential

Open

1987

N/A

N/A

Lease

Philadelphia Community -Based Programs Philadelphia, PA(6)

71

AHFS

—

—

—

—

—

Own

WorkBridge Pittsburgh, PA

600

Allegheny County

Youth Non-residential

Open

1987

N/A

N/A

Lease

York County Juvenile Drug Court Programs Harrisburg, PA

36

YCCYS

Youth Non-residential

Open

1995

N/A

N/A

Lease

 

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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 GEO (or a subsidiary or joint venture of GEO) operated under a management contract or had an agreement to provide services as of December 31 2012:

 

DRC Location

Number of reporting centers

Type of Customers

Commencement of current contract(s)

Base period

Renewal options

Manage only/ lease

Colorado(5)

16

State, County

Various, 2004 – 2012

Various, 1 year to 18 months

One to Four, One year

Lease

California

16

State, County

Various, 2007 – 2012

Various, 1 to 5 years

Varies

Lease

North Carolina

6

State

2012

2 years

One, Two year

Lease

New Jersey

4

State, County

2008

3 years

Two, One year

Lease

Pennsylvania

3

County

Various, 2006 – 2010

Various, 1 to 3 years

Indefinite, One year

Lease

Illinois

1

State, County

2003

5 years

One, Five year

Lease or Manage only

Kansas

1

County

2011

4 years

Four, One year

Lease

Louisiana

1

State

2010

1 year

Two, One year

Lease

Kentucky

1

County

2010

2 years

Three, One year

Lease

Georgia

1

County

2012

1 year

One, One year

Lease

New York

1

County

2010

6 months

Four, One year

Lease

 

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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
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

 

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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.

(6)	This facility is classified as held for sale as of December 31, 2012.

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”.

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, 2012, 48 of our facility management contracts representing approximately 22,000 beds are scheduled to expire on or before December 31, 2013, unless renewed by the customer at its sole option in certain cases, or unless renewed by mutual agreement in other cases. These contracts represented 27% of our consolidated revenues for the fiscal year ended December 31, 2012. We undertake substantial efforts to renew our facility management contracts. Our average historical facility management contract renewal 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.

 

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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 encourage 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 competitive 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, 2012, 13 of our facility management contracts representing 5.4% and $80.1 million of our fiscal year 2012 consolidated revenues are subject to competitive re-bid in 2013. 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
2013			14				2,144
2014			8				5,481
2015			20				4,545
2016			13				6,672
2017			8				8,452
Thereafter			23				22,715
Total			86				50,009

In addition to the facility management contracts subject to competitive re-bid in the table above, certain other of our management contracts are also subject to competitive re-bid including our contract to provide services to ICE under the Intensive Supervision Appearance Program which is subject to competitive re-bid in 2014. We generated revenues under this contract during the fiscal year ended December 31, 2012 of $40.0 million, or 2.7%, 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

 

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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, 2012, we had 18,733 full-time employees. Of our full-time employees, 406 were employed at our headquarters and regional offices and 18,327 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 2,064 and 1,818 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 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.

 

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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 a broad program of 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 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 its 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 protect the Company. 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 $45.1 million and $45.3 million as of December 31, 2012 and January 1, 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,

 

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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, its financial condition, results of operations and cash flows could be materially adversely impacted.

International Operations

Our international operations for fiscal years 2012, 2011 and 2010 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		2012				2011				2010
Various agencies of the U.S Federal Government:			47	%			40	%			35	%

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 June 30, 2013, we had approximately $38.5 million of cash and cash equivalents. As of June 30, 2013, we had approximately, $346.8 million of availability under the Amended and Restated Senior Credit Facility. We intend to utilize our cash on hand and availability under the Amended and Restated 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 Amended and Restated 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 Amended and Restated 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 November 5, 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 provide 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 November 5, 2013, in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Miami, FL

November 7, 2013

 

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THE GEO GROUP REIT, INC.

BALANCE SHEET

AS OF NOVEMBER 5, 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) 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.

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. Charter, 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

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, 2012 and January 1, 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, 2012 have been derived from our audited consolidated financial statements incorporated by reference into this proxy statement/prospectus. The selected consolidated balance sheet data as of June 30, 2013 and July 1, 2012, and the selected consolidated statements of comprehensive income data and other financial data for each of the six months ended on each date, have been derived from our unaudited consolidated financial statements incorporated by reference into this proxy statement/prospectus. The selected consolidated balance sheet data as of January 2, 2011, January 3, 2010 and December 28, 2010 and the selected consolidated statements of comprehensive income data and other financial data for each of the years in the two-year period ended January 3, 2010 have been derived from our audited consolidated financial statements which are not included or incorporated by reference into this proxy statement/prospectus. In connection with our conversion to a REIT, we changed 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 beginning with the 2012 fiscal year. As a result the 2012 fiscal year ended on December 31, 2012 instead of December 30, 2012.

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 certain operational data.

 

		Fiscal Year Ended																				Six Months Ended
		December 28, 2008				January 3, 2010				January 2, 2011				January 1, 2012				December 31, 2012				July 1, 2012				June 30, 2013
Consolidated Statements of Comprehensive Income:
Revenues		$	885,840			$	976,504			$	1,084,592			$	1,407,172			$	1,479,062			$	731,215			$	758,684
Operating costs and expenses
Operating expenses			681,457				753,258				811,767				1,036,010				1,089,232				539,861				560,043
Depreciation and amortization			35,025				37,022				44,365				81,548				91,685				45,201				46,592
General and administrative expenses			64,384				62,619				101,558				110,015				113,792				52,715				59,403
Total operating costs and expenses			780,866				852,899				957,690				1,227,573				1,294,709				637,777				666,038
Operating income			104,974				123,605				126,902				179,599				184,353				93,438				92,646
Interest income			7,045				4,943				6,242				7,032				6,716				3,568				2,349
Interest expense(1)			(30,202	)			(28,518	)			(40,694	)			(75,378	)			(82,189	)			(41,424	)			(40,444	)
Loss on extinguishment of debt			—				(6,839	)			(7,933	)			—				(8,462	)			—				(5,527
Income before income taxes, equity in earnings of affiliates, and discontinued operations			81,817				93,191				84,517				111,253				100,418				55,582				49,024
Provision (benefit) for income taxes			30,668				37,649				34,364				43,172				(40,562	)			22,150				(6,387	)
Equity in earnings of affiliates, net of income tax			4,623				3,517				4,218				1,563				3,578				1,178				2,246
Income from continuing operations			55,772				59,059				54,371				69,644				144,558				34,610				57,657
Income (loss) from discontinued operations, net of income tax			3,506				7,064				8,419				7,819				(10,660	)			2,925				—
Net income			59,278				66,123				62,790				77,463				133,898				37,535				57,657
Less: (Income) loss attributable to noncontrolling interests			(376	)			(169	)			678				1,162				852				(9	)			(30	)
Net income attributable to The GEO Group, Inc.		$	58,902			$	65,954			$	63,468			$	78,625			$	134,750			$	37,526			$	57,627

 

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		Fiscal Year Ended																				Six Months Ended
		December 28, 2008				January 3, 2010				January 2, 2011				January 1, 2012				December 31, 2012				July 1, 2012				June 30, 2013
Other comprehensive income (loss), net of tax:
Net income		$	59,278			$	66,123			$	62,790			$	77,463			$	133,898			$	37,535			$	57,657
Total other comprehensive income (loss), net of tax			(14,361	)			12,174				4,645				(8,253	)			624				(482	)			(6,440	)
Total comprehensive income			44,917				78,297				67,435				69,210				134,522				37,053				51,217
Comprehensive (income) loss attributable to noncontrolling interests			(210	)			428				608				1,274				968				(4	)			42
Comprehensive income attributable to The GEO Group, Inc.		$	44,707			$	78,725			$	68,043			$	70,484			$	135,490			$	37,049			$	51,259
Weighted Average Common Shares Outstanding:
Basic			50,539				50,879				55,379				63,425				60,934				60,803				70,967
Diluted			51,830				51,922				55,989				63,740				61,265				60,984				71,510
Income per Common Share Attributable to The GEO Group, Inc.
Basic:
Income from continuing operations		$	1.09			$	1.15			$	0.99			$	1.12			$	2.39			$	0.57			$	0.81
Income (loss) from discontinued operations			0.07				0.14				0.15				0.12				(0.17	)			0.05				—
Net income per share—basic		$	1.17			$	1.30			$	1.15			$	1.24			$	2.21			$	0.62			$	0.81
Diluted:
Income from continuing operations		$	1.06			$	1.13			$	0.98			$	1.11			$	2.37			$	0.57			$	0.81
Income (loss) from discontinued operations			0.08				0.14				0.15				0.12				(0.17	)			0.05				—
Net income per share—basic		$	1.14			$	1.27			$	1.13			$	1.23			$	2.20			$	0.62			$	0.81
Cash and Stock Dividends Per Common Share:
Quarterly Cash Dividends			—				—				—				—				0.40				—				1.00
Special Dividend—Cash and Stock			—				—				—				—				5.68				—				—
Business Segment Data:
Revenues:
U.S. Corrections & Detention		$	674,621			$	740,451			$	805,857			$	925,695			$	975,445			$	480,710			$	502,815
GEO Community Services(2)			8,647				11,569				76,913				280,080				291,891				145,025				149,013
International Services			116,675				126,449				178,567				201,397				211,726				105,480				106,856
Facility Construction & Design			85,897				98,035				23,255				—				—				—				—
Total revenues		$	885,840			$	976,504			$	1,084,592			$	1,407,172			$	1,479,062			$	731,215			$	$758,684
Operating income
U.S. Corrections & Detention		$	153,993			$	173,325			$	198,837			$	215,406			$	222,703			$	106,861			$	110,723
GEO Community Services(2)			5,606				5,522				15,877				61,270				65,401				33,342				36,259
International Services			9,433				6,996				11,364				12,938				10,041				5,950				5,067
Facility Construction & Design			326				381				2,382				—				—				—				—
Unallocated G&A expenses			(64,384	)			(62,619	)			(101,558	)			(110,015	)			(113,792	)			(52,715	)			(59,403	)
Total operating income		$	104,974			$	123,605			$	126,902			$	179,599			$	184,353			$	93,438			$	92,646
Balance Sheet Data (at period end):
Cash and cash equivalents		$	30,862			$	28,592			$	38,088			$	43,378			$	31,755			$	68,316			$	38,511
Restricted cash and investments			32,400				33,651				89,977				99,459				48,410				98,933				53,394
Accounts receivable, net			178,994				175,796				247,630				265,250				246,635				267,448				239,001
Property and equipment, net			875,659				979,867				1,493,389				1,688,356				1,687,159				1,700,723				1,739,986
Total assets			1,288,622				1,447,818				2,412,373				3,049,923				2,839,194				3,049,228				2,888,202
Total debt			512,133				584,694				1,044,942				1,594,317				1,488,173				1,569,209				1,571,594
Total shareholders’ equity			579,597				665,098				1,039,490				1,038,521				1,047,304				1,072,646				1,035,884

 

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		Fiscal Year Ended																				Six Months Ended
		December 28, 2008				January 3, 2010				January 2, 2011				January 1, 2012				December 31, 2012				July 1, 2012				June 30, 2013
Other Financial Data:
Depreciation and amortization expense			35,025				37,022				44,365				81,548				91,685				45,201				46,592
Non-GAAP Financial Data:
EBITDA(3)			143,187				158,673				169,764				265,116				272,814				140,441				136,851
Adjusted EBITDA(3)			155,342				174,730				208,083				301,415				318,896				152,708				153,131
Funds From Operations(4)			82,025				86,814				86,914				114,313				196,592				59,720				82,878
Normalized Funds From Operations(4)			82,025				93,653				120,228				120,621				143,162				59,720				83,555
Adjusted Funds From Operations (AFFO)(4)			87,412				101,673				124,929				132,723				163,338				71,806				101,960
Financial Ratios:
Ratio of earnings to fixed charges			2.8x				2.8x				2.3x				2.2x				1.9x				2.1x				1.9x
Other Operational Data (end of period):
Facilities in operation(5)			53				50				98				90				87				87				87
Operations capacity of contracts(5)			48,402				49,388				70,552				65,787				65,949				65,495				66,338
Compensated mandays(6)			14,688,262				15,888,828				17,203,880				19,884,802				20,476,153				10,090,674				10,371,336

 

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

 

Fiscal Year Ended										Six Months Ended
December 28, 2008		January 3, 2010		January 2, 2011		January 1, 2012		December 31, 2012		July 1, 2012		June 30, 2013
$4,343		$4,942		$4,144		$3,060		$1,244		$1,244		$2

 

(2)

The 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)

We define EBITDA as income from continuing operations before net interest expense, income tax provision (benefit), depreciation and amortization, and tax provision on equity in earnings of affiliates. We define Adjusted EBITDA as EBITDA further adjusted for net income/loss attributable to non-controlling interests, non-cash stock-based compensation expenses, and certain other adjustments as defined from time to time, including for the periods presented start-up transition expenses, pre-tax; international bid related costs, pre-tax; REIT conversion related expenses, pre-tax; M&A related expenses, pre-tax; early extinguishment of debt, pre-tax; gain on land sale; and IRS settlement. Given the nature of our business as a real estate owner and operator, we believe that EBITDA and Adjusted EBITDA are helpful to investors as measures of our operational performance because they provide an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We believe that by removing the impact of our asset base (primarily depreciation and amortization) and excluding certain non-cash charges, amounts spent on interest and taxes, and certain other charges that are highly variable from year to year, EBITDA and Adjusted EBITDA provide our investors with performance measures that reflect the impact to operations from trends in occupancy rates, per diem rates and operating costs, providing a perspective not immediately apparent from income from continuing operations. The adjustments we make to derive the non-GAAP measures of EBITDA and Adjusted EBITDA exclude items which may cause short-term fluctuations in income from continuing operations and which we do not consider to be the fundamental attributes or primary drivers of our business plan and they do not affect our overall long-term operating performance. EBITDA and Adjusted EBITDA provide disclosure on the same basis as that used by our management and provide consistency in our financial reporting, facilitate internal and external comparisons of our historical operating performance and our business units and provide continuity to investors for comparability purposes.

 

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The following table provides a reconciliation of EBITDA and Adjusted EBITDA to income from continuing operations, the most directly comparable GAAP measure:

 

		Fiscal Year Ended																				Six Months Ended
		December 28, 2008				January 3, 2010				January 2, 2011				January 1, 2012				December 31, 2012				July 1, 2012				June 30, 2013
Income from continuing operations		$	55,772			$	59,059			$	54,371			$	69,644			$	144,558			$	34,610			$	57,657
Interest expense, net			23,157				23,575				34,452				68,346				75,473				37,856				38,095
Income tax provision (benefit)			30,668				37,649				34,364				43,172				(40,562	)			22,150				(6,387	)
Depreciation and amortization expense			35,025				37,022				44,365				81,548				91,685				45,201				46,592
Tax provision on equity in earnings of affiliates			(805	)			1,368				2,212				2,406				1,660				624				894
EBITDA		$	143,817			$	158,673			$	169,764			$	265,116			$	272,814			$	140,441			$	136,851
Net (income) loss attributable to noncontrolling interests			(376	)			(169	)			678				1,162				852				(9	)			(30	)
Stock based compensation expenses, pre-tax			4,469				5,321				4,639				6,113				6,543				3,433				3,345
Start-up transition expenses, pre-tax(a)			7,432				4,066				3,812				21,625				9,027				6,424				—
International bid related costs, pre-tax(b)			—				—				—				1,091				4,057				1,615				—
REIT conversion related expenses and other expenses, pre-tax(c)			—				—				—				—				15,670				—				7,438
M&A related expenses, pre-tax			—				—				25,381				6,308				1,471				804				—
Early extinguishment of debt, pre-tax			—				6,839				7,933				—				8,462				—				5,527
Gain on land sale			—				—				(801	)			—				—				—				—
IRS Settlement(d)			—				—				(3,323	)			—				—				—				—
Adjusted EBITDA		$	155,342			$	174,730			$	208,083			$	301,415			$	318,896			$	152,708			$	153,131

 

(a)

Represents start-up/transition expenses of certain domestic facilities and our transportation contract in the U.K.

(b)

Represents international bid and proposal costs incurred in connection with potential opportunities in the U.K. and Australia.

(c)

Represents expenses related to our REIT conversion.

(d)

Represents a gain related to the settlement of a claim with the Internal Revenue Service.

 

(4)

We define Funds From Operations, or FFO, in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, which defines FFO as net income (loss) attributable to common shareholders (computed in accordance with GAAP), excluding real estate related depreciation and amortization, excluding gains and losses from the cumulative effects of accounting changes, extraordinary items and sales of properties, and including adjustments for unconsolidated partnerships and joint ventures. We define Normalized Funds From Operations, or Normalized FFO, as FFO adjusted for certain items which by their nature are not comparable from period to period or that tend to obscure our actual operating performance, including for the periods presented M&A related expenses, REIT conversion related expenses and early extinguishment of debt, pre-tax. We define Adjusted Funds From Operations, or AFFO, as Normalized Funds From Operations adjusted by adding non-cash items such as non-real estate related depreciation and amortization, stock based compensation and the amortization of debt costs and other non-cash interest and by subtracting recurring real estate expenditures that are capitalized and then amortized, but which are required to maintain REIT properties and their revenue stream. Because of the unique design, structure and use of our correctional facilities, we believe that assessing performance of our correctional facilities without the impact of depreciation or amortization is useful and meaningful to investors. Although NAREIT has published its definition of FFO, companies often modify this definition as they seek to provide financial measures that meaningfully reflect their distinctive operations. We have modified FFO to derive Normalized FFO and AFFO that meaningfully reflect our operations. Our assessment of our operations is focused on long-term sustainability. The adjustments we make to derive the non-GAAP measures of Normalized FFO and AFFO exclude items which may cause short-term fluctuations in income from continuing operations but have no impact on our cash flows, or we do not consider them to be fundamental attributes or the primary drivers of our business plan and they do not affect our overall long-term operating performance. We may make adjustments to FFO from time to time for certain other income and expenses that do not reflect a necessary component of our operational performance on the basis discussed above, even though such items may require cash settlement. Because FFO, Normalized FFO and AFFO exclude depreciation and amortization unique to real estate as well as non-operational items and certain other charges that are highly variable from year to year, they provide our investors with performance measures that reflect the impact to operations from trends in occupancy rates, per diem rates, operating costs and interest costs, providing a perspective not immediately apparent from income from continuing operations. We believe the presentation of FFO, Normalized FFO and AFFO provide useful information to investors as they provide an indication of our ability to fund capital expenditures and expand our business. FFO, Normalized FFO and AFFO provide disclosure on the same basis as that used by our management and provide consistency in our financial reporting, facilitate internal and external comparisons of our historical operating performance and our business units and provide continuity to investors for comparability purposes. Additionally, FFO, Normalized FFO and AFFO are widely recognized measures in our industry as a real estate investment trust. Normalized FFO and AFFO have been adjusted in prior periods to be reported consistently with our disclosure for the six months ended June 30, 2013.

 

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The following table provides a reconciliation of Funds From Operations, Normalized Funds From Operations and Adjusted Funds From Operations to income from continuing operations, the most directly comparable GAAP measure:

 

		Fiscal Year Ended																				Six Months Ended
		December 28, 2008				January 3, 2010				January 2, 2011				January 1, 2012				December 31, 2012				July 1, 2012				June 30, 2013
Income from continuing operations(7)		$	55,772			$	59,059			$	54,371			$	69,644			$	144,558			$	34,610			$	57,657
Net (income) loss attributable to non-controlling interests			(376	)			(169	)			678				1,162				852				(9	)			(30	)
Real estate related depreciation and amortization			26,629				27,924				31,865				43,507				51,182				25,119				25,251
Funds From Operations		$	82,025			$	86,814			$	86,914			$	114,313			$	196,592			$	59,720			$	82,878
M&A related expenses			—				—				25,381				6,308				1,471				—				—
REIT conversion related expenses(a)			—				—				—				—				15,670				—				4,697
Impact of REIT Election(b)			—				—				—				—				(79,033	)			—				(8,416	)
Early extinguishment of debt, pre-tax			—				6,839				7,933				—				8,462				—				4,396
Normalized Funds From Operations		$	82,025			$	93,653			$	120,228			$	120,621			$	143,162			$	59,720			$	83,555
Non-real estate related depreciation and amortization			8,397				9,098				12,500				38,040				40,503				20,082				21,341
Maintenance capital expenditures			(10,519	)			(9,811	)			(15,647	)			(33,796	)			(30,739	)			(12,798	)			(9,296	)
Stock based compensation expense			4,469				5,321				4,639				6,113				6,543				3,433				3,345
Amortization of debt costs and other non-cash interest			3,040				3,412				3,209				1,745				3,869				1,369				3,015
Adjusted Funds From Operations		$	87,412			$	101,673			$	124,929			$	132,723