GEO 10-Q Quarter ended Oct. 2, 2011

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended October 2, 2011

OR

For the transition period from              to

Commission file number 1-14260

The GEO Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)

(561) 893-0101

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes þ No ¨

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No þ

As of November 4, 2011, the registrant had 62,612,179 shares of common stock outstanding.

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THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED

OCTOBER 2, 2011 AND OCTOBER 3, 2010

(In thousands, except per share data)

(UNAUDITED)

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

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THE GEO GROUP, INC.

OCTOBER 2, 2011 AND JANUARY 2, 2011

(In thousands, except share data)

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

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THE GEO GROUP, INC.

FOR THE THIRTY-NINE WEEKS ENDED

OCTOBER 2, 2011 AND OCTOBER 3, 2010

(In thousands)

(UNAUDITED)

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

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THE GEO GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The unaudited consolidated financial statements of The GEO Group, Inc., a Florida corporation, and subsidiaries (the “Company”, or “GEO”), included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States and the instructions to Form 10-Q and consequently do not include all disclosures required by Form 10-K. Additional information may be obtained by referring to the Company’s Annual Report on Form 10-K for the year ended January 2, 2011. In the opinion of management, all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the financial information for the interim periods reported in this Quarterly Report on Form 10-Q have been made. Results of operations for the thirty-nine weeks ended October 2, 2011 are not necessarily indicative of the results for the entire fiscal year ending January 1, 2012.

The GEO Group, Inc. is a leading provider of government-outsourced services specializing in the management of correctional, detention, mental health, residential treatment 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. The Company operates a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers, mental health, residential treatment and community based re-entry facilities. The Company offers counseling, education and/or treatment to inmates with alcohol and drug abuse problems at most of the domestic facilities it manages. In February 2011, the Company acquired BII Holding Corporation (“BII Holding”), the indirect owner of 100% of the equity interests of B.I. Incorporated (“BI”). The Company, through its acquisition of BI, is 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, BII Holding has an exclusive contract with the U.S. Immigration and Customs Enforcement (“ICE”) to provide supervision and reporting services designed to improve the participation of non-detained aliens in the immigration court system. The Company develops new facilities based on contract awards, using its project development expertise and experience to design, construct and finance what it believes are state-of-the-art facilities that maximize security and efficiency. The Company also provides secure transportation services for offender and detainee populations as contracted.

On August 12, 2010, the Company acquired Cornell Companies, Inc., (“Cornell”) and on February 10, 2011, the Company acquired BII Holding. As of October 2, 2011, the Company’s worldwide operations included the management and/or ownership of approximately 79,600 beds at 116 correctional, detention and residential treatment facilities, including projects under development, and also included the provision of monitoring of more than 67,000 offenders in a community-based environment on behalf of approximately 900 federal, state and local correctional agencies located in all 50 states.

Except as discussed in Note 15, the accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2011 for the fiscal year ended January 2, 2011. As discussed in Note 15, during the thirty-nine weeks ended October 2, 2011, the Company implemented Accounting Standards Update (ASU) No. 2009-13 which provides amendments to revenue recognition criteria for separating consideration in multiple element arrangements. The amendments, among other things, establish the selling price of a deliverable, replace the term fair value with selling price and eliminate the residual method such that consideration can be allocated to the deliverables using the relative selling price method based on GEO’s specific assumptions. At this time, the Company has not identified any differences in accounting policies that would have a material impact on the consolidated financial statements as of October 2, 2011.

As discussed in Note 2, relative to our acquisition of Cornell, the Company recognized adjustments primarily to certain tax assets and liabilities, which was one of the areas of purchase accounting not finalized as of January 2, 2011. According to United States Generally Accepted Accounting Principles (“US GAAP”) business combination accounting, an acquirer is required to recognize adjustments to provisional amounts retrospectively and as if the accounting for the business combination had been completed at the acquisition date. As such, the Company has revised comparative information in its consolidated balance sheet for the year ended January 2, 2011 to reflect these adjustments as if the purchase price allocation had been complete at the acquisition date.

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Discontinued operations

The termination of any of the Company’s management contracts, by expiration or otherwise, may result in the classification of the operating results of such management contract, net of taxes, as a discontinued operation. When material, the Company reflects such events as discontinued operations so long as the financial results can be clearly identified, the operations and cash flows are completely eliminated from ongoing operations, and so long as the Company does not have any significant continuing involvement in the operations of the component after the disposal or termination transaction. The component unit for which cash flows are considered to be completely eliminated exists at the customer level. Historically, the Company has classified operations as discontinued in the period they are announced as normally all continuing cash flows cease within three to six months of that date.

2. BUSINESS COMBINATIONS

Acquisition of BII Holding

On February 10, 2011, the Company completed its acquisition of B.I. Incorporated (“BI”), a Colorado corporation, pursuant to an Agreement and Plan of Merger, dated as of December 21, 2010 (the “Merger Agreement”), among GEO, BII Holding, a Delaware corporation, which owns BI, GEO Acquisition IV, Inc., a Delaware corporation and wholly-owned subsidiary of GEO (“Merger Sub”), BII Investors IF LP, in its capacity as the stockholders’ representative, and AEA Investors 2006 Fund L.P (the “BI Acquisition”). Under the terms of the Merger Agreement, Merger Sub merged with and into BII Holding, with BII Holding emerging as the surviving corporation of the merger. As a result of the BI Acquisition, the Company paid merger consideration of $409.6 million in cash, net of cash acquired of $9.7 million, excluding transaction related expenses and any potential adjustments, for 100% of BI’s outstanding common stock. Under the Merger Agreement, $12.5 million of the merger consideration was placed in an escrow account for a one-year period to satisfy any applicable indemnification claims pursuant to the terms of the Merger Agreement by GEO, the Merger Sub or its affiliates. At the time of the BI Acquisition, approximately $78.4 million, including accrued interest, was outstanding under BI’s senior term loan and $107.5 million, including accrued interest, was outstanding under its senior subordinated note purchase agreement, excluding the unamortized debt discount. All indebtedness of BI under its senior term loan and senior subordinated note purchase agreement were repaid by BI with a portion of the $409.6 million of merger consideration. In connection with the BI Acquisition and included in general and administrative expenses, the Company incurred $4.3 million in non-recurring transaction costs for the thirty-nine weeks ended October 2, 2011.

The Company is identified as the acquiring company for US GAAP accounting purposes and believes its acquisition of BI provides it with the ability to offer turn-key solutions to its customers in managing the full lifecycle of an offender from arraignment to reintegration into the community, which the Company refers to as the corrections lifecycle. Under the acquisition method of accounting, the purchase price for BI was allocated to BI’s net tangible and intangible assets based on their estimated fair values as of February 10, 2011, the date of closing and the date that the Company obtained control over BI. In order to determine the fair values of certain tangible and intangible assets acquired, the Company has engaged a third party independent valuation specialist. For all other assets acquired and liabilities assumed, the recorded fair value was determined by the Company’s management and represents an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

The allocation of the purchase price had not been finalized as of October 2, 2011. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to: (i) final agreement of the adjustment to the purchase price based upon the level of net working capital, and the fair value of certain components thereof, transferred at closing; and (ii) deferred tax assets and liabilities. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired at the acquisition date during the measurement period. Measurement period adjustments that the Company determines to be material will be applied retrospectively to the period of acquisition. The Company does not believe that any of the goodwill recorded as a result of the BI Acquisition will be deductible for federal income tax purposes. At this time, the Company has not identified any differences in accounting policies that would have a material impact on the consolidated financial statements as of October 2, 2011. The preliminary purchase price consideration of $409.6 million, net of cash acquired of $9.7 million, excluding transaction related expenses and any potential adjustments, was allocated to the assets acquired and liabilities assumed, based on management’s estimates at the time of this Quarterly Report.

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The Company has retrospectively adjusted provisional amounts with respect to the BI Acquisition that were recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. These adjustments relate to the Company’s valuation of accounts receivable, property and equipment, intangible assets and other non-current assets and resulted in a net decrease to goodwill of $7.0 million. The increase in amortization expense for the adjustment to intangible assets was not significant for any quarterly or fiscal year to date period within the thirty-nine weeks ended October 2, 2011. The preliminary purchase price allocation as of April 3, 2011 and as of October 2, 2011 is as follows (in thousands):

For the thirteen weeks ended October 2, 2011, the Company has included revenue and earnings, excluding intercompany transactions, of $31.1 million and $4.6 million, respectively, in its consolidated statement of income. For the thirty-nine weeks ended October 2, 2011, the Company has included revenue and earnings, excluding intercompany transactions, of approximately $79.8 million and $9.4 million, respectively, in its consolidated statement of income which represents revenue and earnings since February 10, 2011, the date BI was acquired.

Acquisition of Cornell Companies, Inc.

On August 12, 2010, the Company completed its acquisition of Cornell pursuant to a definitive merger agreement entered into on April 18, 2010, and amended on July 22, 2010, among the Company, GEO Acquisition III, Inc., and Cornell. Under the terms of the merger agreement, the Company acquired 100% of the outstanding common stock of Cornell for aggregate consideration of $618.3 million. The measurement period for certain tax assets and liabilities, which was the only area of the purchase price not yet finalized, ended on August 12, 2011.

During the measurement period, the Company retrospectively adjusted provisional amounts with respect to the Cornell acquisition that were recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Those changes are reflected in the table below. The Company made a measurement period adjustment for income taxes in the thirteen weeks ended October 2, 2011 which reduced goodwill by $7.4 million. The purchase price allocation as of January 2, 2011 and as of October 2, 2011 and adjustments made to the estimated acquisition date fair values during the thirty-nine weeks ended October 2, 2011 are as follows (in thousands):

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The Company recognized a reduction of operating expenses of $1.4 million and $3.9 million, respectively, in the thirteen and thirty-nine weeks ended October 2, 2011 for items related to Cornell that occurred after the measurement period or purchase price allocation period had ended. These adjustments to operating expenses were the result of a recovery of accounts receivable and an insurance settlement for property damage at one of Cornell’s facilities.

Pro forma financial information

The pro forma financial statement information set forth in the table below is provided for informational purposes only and presents comparative revenue and earnings for the Company as if the acquisitions of BI and Cornell and the financing of these transactions had occurred on January 4, 2010, which is the beginning of the first period presented. The pro forma information provided below is compiled from the financial statements of the combined companies and includes pro forma adjustments for: (i) estimated changes in depreciation expense, interest expense and amortization expense, (ii) adjustments to eliminate intercompany transactions, (iii) adjustments to remove $0.1 million and $6.8 million, respectively, for the thirteen and thirty-nine weeks ended October 2, 2011 in non-recurring charges directly related to these acquisitions that are included in the combined Companies’ financial results, and (iv) the income tax impact of the adjustments. For the purposes of the table and disclosure below, earnings is the same as net income attributable to The GEO Group, Inc. shareholders (in thousands):

3. SHAREHOLDERS’ EQUITY

The following table presents the changes in shareholders’ equity that are attributable to the Company’s shareholders and to noncontrolling interests (in thousands):

Noncontrolling interests

Noncontrolling interests in consolidated entities represent equity that other investors have contributed to Municipal Correctional Finance, L.P. (“MCF”) and the noncontrolling interest in South African Custodial Management Pty. Limited (“SACM”). Noncontrolling interests are adjusted for income and losses allocable to the other shareholders in these entities.

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Upon acquisition of Cornell in August 2010, the Company assumed MCF as a variable interest entity and allocated a portion of the purchase price to the noncontrolling interest based on the estimated fair value of MCF as of August 12, 2010. The noncontrolling interest in MCF represents 100% of the equity in MCF which was contributed by its partners at inception in 2001. The Company includes the results of operations and financial position of MCF in its consolidated financial statements. MCF owns eleven facilities which it leases to the Company. In the thirty-nine weeks ended October 2, 2011, there was a cash distribution to the partners of MCF of $4.0 million.

The Company includes the results of operations and financial position of SACM, its majority-owned subsidiary, in its consolidated financial statements. SACM was established in 2001 to operate correctional centers in South Africa. SACM currently provides security and other management services for the Kutama Sinthumule Correctional Centre in the Republic of South Africa under a 25-year management contract which commenced in February 2002. The Company’s and the second joint venture partner’s shares in the profits of SACM are 88.75% and 11.25%, respectively. There were no changes in the Company’s ownership percentage of the consolidated subsidiary during the thirty-nine weeks ended October 2, 2011. The noncontrolling interest as of October 2, 2011 and January 2, 2011 is included in Total Shareholders’ Equity in the accompanying Consolidated Balance Sheets. There were no contributions from owners or distributions to owners in the thirty-nine weeks ended October 2, 2011.

4. EQUITY INCENTIVE PLANS

The Company had awards outstanding under four equity compensation plans at October 2, 2011: The Wackenhut Corrections Corporation 1994 Stock Option Plan (the “1994 Plan”); the 1995 Non-Employee Director Stock Option Plan (the “1995 Plan”); the Wackenhut Corrections Corporation 1999 Stock Option Plan (the “1999 Plan”); and The GEO Group, Inc. 2006 Stock Incentive Plan (the “2006 Plan” and, together with the 1994 Plan, the 1995 Plan and the 1999 Plan, the “Company Plans”).

On August 12, 2010, the Company’s Board of Directors adopted and its shareholders approved an amendment to the 2006 Plan to increase the number of shares of common stock subject to awards under the 2006 Plan by 2,000,000 shares from 2,400,000 to 4,400,000 shares of common stock. On February 16, 2011, the Company’s Board of Directors approved Amendment No. 1 to the 2006 Plan to provide that of the 2,000,000 additional shares of Common Stock that were authorized to be issued pursuant to awards granted under the 2006 Plan, up to 1,083,000 of such shares may be issued in connection with awards, other than stock options and stock appreciation rights, that are settled in common stock. The 2006 Plan, as amended, specifies that up to 2,166,000 of such total shares pursuant to awards granted under the plan may constitute awards other than stock options and stock appreciation rights, including shares of restricted stock. As of October 2, 2011, under the 2006 Plan, the Company had 1,707,484 shares of common stock available for issuance pursuant to future awards that may be granted under the plan of which up to 943,804 shares were available for the issuance of awards other than stock options. See “Restricted Stock” below for further discussion.

Stock Options

The Company uses a Black-Scholes option valuation model to estimate the fair value of each option awarded. During the thirty-nine weeks ended October 2, 2011, the Company’s Board of Directors approved the issuance of 529,350 stock option awards to employees of the Company and 25,000 stock option awards to the Company’s directors. These awards vested 20% on the date of grant and will vest in 20% increments annually through 2015. A summary of the activity of stock option awards issued and outstanding under Company Plans is presented below.

The fair value of each option awarded on March 1, 2011 and April 15, 2011 was $9.72 and $10.06, respectively. For the thirty-nine weeks ended October 2, 2011 and October 3, 2010, the amount of stock-based compensation expense related to stock options was $2.2 million and $1.0 million, respectively. As of October 2, 2011, the Company had $4.6 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 3.0 years.

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Restricted Stock

Shares of restricted stock become unrestricted shares of common stock upon vesting on a one-for-one basis. The cost of these awards is determined using the fair value of the Company’s common stock on the date of the grant and compensation expense is recognized over the vesting period. A summary of the activity of restricted stock outstanding is as follows: