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The GEO Group, Inc. (NYSE:GEO)

Q4 2007 Earnings Call

February 13, 2008 11:00 am ET

Executives

Pablo E. Paez – Director, Corporate Relations

George C. Zoley, Chairman, Chief Executive Officer and Founder

John G. O’Rourke - Senior Vice President and Chief Financial Officer

Brian Evans - Vice President of Finance, Treasurer and Chief Accounting Officer

Wayne H. Calabrese - Vice Chairman, President and Chief Operating Officer

Analysts

Analyst on behalf of Jeff Kessler - Lehman Brothers

Todd Van Fleet - First Analysis

Kevin Campbell - Avondale Partners

T.C. Robillard - Banc of America Securities

Ben Mackovjak - Rivanna Capital

William Gilchrist – Westfield Capital

Operator

Welcome to the fourth quarter 2007 GEO Group earnings conference call. (Operator instructions) I would now like to turn the presentation over to your host for today’s conference, Pablo Paez, Director of Corporate Relations.

Pablo E. Paez

Thank you for joining us for today’s discussion of The GEO Group’s fourth quarter and year-end 2007 earnings results.

With us today is George Zoley, Chairman and Chief Executive Officer; Wayne Calabrese, Vice Chairman, President and Chief Operating Officer; Jerry O’Rourke, Chief Financial Officer; and Brian Evans, Vice President of Finance, Treasurer and Chief Accounting Officer.

This morning, we will discuss our fourth quarter and year-end performance, current business development activities and conclude the call with a question-and-answer session.

This conference is also being webcast live on our website at www.thegeogroupinc.com. A replay of the audio webcast will be available on the website for one year. A telephone replay of the audio webcast will also be available through March 13 at 1-888-286-8010. The passcode for the telephone replay is 24342195.

During this call we will discuss non-GAAP basis information. Reconciliation from non-GAAP basis information to GAAP basis results may be found on the conference call section of our investor relations webpage.

Before I turn the call over to George, please let me remind you that much of the information we will discuss today, including the answers we give in response to your questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters.

These forward-looking statements are intended to fall within the Safe Harbor provisions of the Securities laws. Our actual results may differ materially from those in the forward-looking statements as a result of various factors contained in our Securities and Exchange Commission filings, including the Forms 10-K, 10-Q and 8-K reports.

With that, please allow me to turn this call over to George Zoley.

George C. Zoley

Good morning to everyone and thank you for joining me today as I provide an overview of our financial results for the fourth quarter and year-end 2007, update our 2008 projects under development and discuss our guidance for 2008. When I conclude my prepared remarks I’ll open out the call to a question and answer session.

A year ago we announced that our company had experienced the best year in our history in 2006. I’m very pleased to announce that 2007 now exceeded 2006 and is now the best year of our company has ever experienced. This past year was an extraordinary in many respects for The GEO Group.

We completed the acquisition of CentraCore Properties Trust at a cost of $430 million, thereby increasing our facility assets by approximately that amount. We completed a $230 million equity offering allowing us to reduce our debt by $200 million. We split our stock 2-for-1 thus increasing our publicly traded flow to more $51 million. During 2007, we activated 10 new or expanded projects representing 5,400 beds and approximately $100 million in additional annualized revenues.

Our total revenues for the year broke through the $1 billion mark for the first time representing an important milestone for our company. We believe our performance strongly validates the continuing success of our company’s uniquely diversified growth platform.

Our three business units delivered strong financial results driven primarily by the new projects brought online in 2007 as I mentioned earlier and strong performance at a number of our correctional and residential treatment facilities at both the state and Federal levels.

Our fourth quarter pro forma earnings increased 32% to $14.1 million or $0.27 per share based on 51.8 million shares compared to $10.7 million or $0.26 per share, based on 40.3 million shares for the same period in 2006.

For the full year, pro forma earnings increased 59% to $51.5 million or $1.05 per share based on 49.2 million shares, from $32.4 million, or $0.91 per share, based on 35.7 million shares in 2006.

Our pro forma earnings for the fourth quarter exclude approximately $1.3 million, or $0.02 per share, in after-tax start-up expenses; approximately $400,000, or $0.01 per share, in after-tax costs associated with the phase-out of our Coke County and Dickens County contracts in Texas; and approximately $800,000 or $0.02 per share related to the write-off of deferred acquisition expenses.

Our full year pro forma results exclude these items as well as the write-off of deferred financing fees associated with the pay down of $200 million in term loan borrowings during the first quarter; $0.01 per share associated with the one-time after-tax construction cost overruns related to the South Bay and Moore Haven prison expansions; and $0.01 per share in after-tax cost associated with the phase-out of our Dickens County, Texas contract in the third and fourth quarter of the year.

On a GAAP basis, our fourth quarter 2007 income from continuing operations was $11.5 million, or $0.22 per share, based on 51.8 million shares compared to $10.5 million or $0.26 per share based on 40.3 million shares during the same period in 2006.

For the full year our GAAP income from continuing operations was $41.3 million or $0.84 per share based on 49.2 million shares compared to $30.3 million or $0.85 per share based on 35.7 million shares in 2006. All of our financial results reflect the effect of our June 1, 2-for-1 stock split and our prior 3-for-2 stock split in October 2006.

Our revenue during the fourth quarter increased to $262.6 million from $247.4 million for the same period in 2006. Quarterly revenues reflect $27.6 million in pass-through construction revenues as compared to $37 million in pass-through construction revenues for the same period in 2006.

Year-end revenues increased to $1.02 billion from $860.9 million in 2006. Full year revenues reflect $108.8 million in pass-through revenue construction revenue as compared to $74 million for full year 2006.

Our top line growth has been driven by the factors I mentioned in the beginning of the call, new contract activations during 2007, which totaled 10 new or expanded projects, approximately 5,400 beds and $100 million in additional annualized operating revenues and strong performance from a number of our state and Federal facilities.

Our company wide average per diem rate for the fourth quarter was $60.75 compared to $50.69 for the same period in 2006. Our company wide paid level of occupancy was approximately 97% excluding idle facilities in Baldwin, Michigan and Coke County, Texas.

Our adjusted EBITDA increased 47% to $37.1 million for the fourth quarter of 2007 from $25.2 million for the same period in 2006. Year-end adjusted EBITDA increased 57% to $143.2 million from $91.2 million in 2006.

Our adjusted free cash flow for the fourth quarter of 2007 increased 68% to $19.5 million from $11.6 million for the same period a year ago. For the full year our adjusted free cash flow increased 60% to $82.6 million from $51.5 million in 2006.

We can now self-fund approximately 1500 beds per year at company owned facilities by using only our free cash flow. The significant growth in our revenues, our net income and our adjusted EBITDA and our free cash flow in 2007 as compared to 2006, demonstrates the success of our investment in diversified growth strategy over the last several years.

Looking ahead, we believe 2008 will be an even better year. During 2008, we expect to commence operations at seven new projects representing approximately 5,900 beds with more than $100 million of additional normalized operating revenues.

We are optimistic that one year from today, we’ll be able to announce that 2008 surpassed 2007 as the best year in our company’s history. We’ve previously provided guidance for 2008, which I will address after I discuss a number of upcoming events and provide an update on our recent contract rebids and our projects currently under development.

I’d like to begin with the New Castle Correctional Facility in Indiana, which is owned by the State of Indiana. The New Castle Facility currently houses approximately 2,200 inmates of, which 630 are Arizona prisoners under an agreement between the State of Indiana and the State of Arizona.

The Indiana Department of Corrections has determined it has an increased need to use additional beds at the New Castle Facility for Indiana inmates beginning in April 2008. We expect to transfer approximately 100 Arizona inmates out of the New Castle Facility every two weeks beginning in the first week of April, while simultaneously filling these vacant beds with additional Indiana inmates reaching an initial total of over 2,000 Indiana inmates.

Concurrently we’ve been authorized by the Arizona Department of Corrections to increase the capacity at our Central Arizona facility in Florence from its current 1000 beds to 1200 beds. We expect to begin taking the 200 additional Arizona prisoners in the first quarter. These incremental beds were added without any construction and will offset any financial impacts from the transfer of Arizona inmates out of the New Castle Facility in Indiana, along with the additional Indiana prisoners at the New Castle Facility.

Moving to our recent contract rebids. On November 27, our contract with Delaware County, Pennsylvania to operate the 1,883 beds George W. Hill Correctional Facility was renewed for two more years. Under the new two-year contract extension, the facility is expected to generate approximately $39 million in annual operating revenues.

On December 20, we were selected by Bexar County to negotiate a five-year contract to continue to operate the 688-bed Central Texas Detention Facility in downtown San Antonio. We’re currently working with the county to finalize terms for a new five-year agreement.

Additionally, the OFDT recently awarded GEO a new 10-year contract inclusive of four two-year option periods for the continued management of our 222-bed Queens Detention Facility in New York, which houses detainees for the U.S. Marshals Service. Under the new 10-year contract the facility is expected to generate approximately $13 million in the annualized revenues.

Now, I’d like to discuss our facility openings and startup activities for 2008. As we announced in our recent press release in Clayton County, Georgia, we have signed a contract for the housing of U.S. Marshals detainees at the 576-bed Robert A. Deyton Facility, which we leased from the county.

We expect to receive a notice to proceed within the next few days, which will begin the intake of detainees at that facility. And we expect the facility to ramp up to full occupancy by the end of the first quarter. Our contract provides for a fixed monthly base payment with an 80% occupancy guarantee enabling us to recover all of our fixed cost and desired economics at this guaranteed level of occupancy.

We receive a nominal per diem above the guaranteed occupancy level. At the 576-bed occupancy level the facility is expected to generate approximately $16 million in annualized revenues. We are in the process of expanding the facility by an additional 192 beds with completion and initial intake expected in October 2008. When completed, we expect expanded facility to generate approximately $20 million in annualized revenues at the 768-bed occupancy level.

In Louisiana, we have completed the activation and ramp up of the 416-bed Phase I of our LaSalle Detention Facility for ICE as previously disclosed we are further expanding the facility by 744 beds. We initially expected to complete the 744-bed expansion early in the second quarter of 2008, however we are currently experiencing weather related construction delay and as a result we now expect to complete and open the 744-bed Phase II expansion by May 1.

Upon completion and full occupancy the $30 million expansion will generate over $12 million in additional annualized revenues. The expansion costs are being funded from company free cash flow.

In Clayton, New Mexico we are constructing a new 625-bed facility using tax-exempt non-recourse revenue bond financing issued by the town of Clayton. The facility will house New Mexico prisoners under an IGA between the New Mexico Corrections Department and the town who in turn has a management in the operations contract with GEO.

The target opening date for the facility has been delayed by approximately one month from July to August. This managed only facility is expected to generate $11 million in annual operating revenues exclusive of debt service.

We are working on three separate projects in Texas. In Montgomery County, we are awaiting the county’s completion of 1100-bed non-recourse bond finance detention facility, which we expect will be used by other state or federal agencies. We expect to open this managed only facility in September and estimate it will generate $14 million in annual operating revenues.

In Laredo we are building 1500-bed Rio Grande Detention Center for the U.S. Marshals Service under a contract with the Office of the Federal Detention Trustee. This facility will cost approximately $86 million when completed and is being company financed. We expect the contract to generate approximately $36 million in annual revenues when the facility is available to open by October of this year.

Our contract with OFDT provides for a fixed monthly payment with an occupancy guarantee of 50% enabling us again to recover all of our fixed cost and desired economics at the guaranteed occupancy level. We receive a nominal per diem for population levels in excess of the 50% guarantee.

In Maverick County, we are constructing a 654-bed detention facility, which is being financed through the issuance of non-recourse project revenue bonds. We anticipate the project will be completed and ready for occupancy by the county or Federal Detention Agencies in September. At full occupancy this managed only facility will generate approximately $10 million in annualized operating revenues exclusive of debt service.

Finally in Mississippi, the state is building a non-recourse bond financed 500-bed expansion to our East Mississippi Correctional Facility, which we expect to open in October, generating $5 million in additional annualized revenues.

I would now like to address our guidance for 2008. While we are experiencing a weather related construction delay related to the expansion of our LaSalle Detention Facility, we are maintaining our financial guidance for 2008. This construction delay is offset by improved company-wide performance in other areas.

We are maintaining our 2008 operating revenue guidance in a range of $1.01 billion to $1.03 billion excluding pass-through construction revenues. We are maintaining our earnings per share guidance for the full year 2008 in a pro forma range of $1.27 to $1.35.

As we disclosed in our last conference call, our fourth quarter 2007 was impacted by a seasonal decline in Federal inmate populations at two of our Texas facilities, which in turn led to the delay in intake of Federal detainees at our Val Verde facility expansion and our LaSalle Detention Facility in Louisiana.

The seasonal decline in the fourth quarter, which was localized to the two Texas facilities through the end of January to correct itself for the most part, LaSalle Facility is currently enjoying a high level of occupancy, but we still have a couple of 100-beds available at the Val Verde expansion, which hold U.S. Marshals detainees.

We are maintaining our first quarter 2008 revenue guidance in the range of $240 to $245 million excluding pass-through construction revenues and our earnings guidance in the pro forma range of $0.25 to $0.27 per share.

Our first quarter pro forma earnings guidance excludes $0.02 in after-tax startup expenses and $0.01 in after-tax bid and proposal expenses, related to international business opportunities we are pursuing in United Kingdom and South Africa. Additionally, as we have discussed previously our first quarter results are impacted by employment taxes, which are front-loaded.

We are maintaining second quarter 2008 revenues in the range of $245 to $250 million excluding pass-through construction revenues, and earnings in the pro forma range of $0.30 to $0.32 per share, excluding $0.02 in after-tax startup expenses and $0.01 in after-tax international bid and proposal expenses.

We are maintaining third quarter 2008 revenues in the range of $255 million to $260 million, excluding pass-through construction revenues and earnings in the pro forma range of $0.33 to $0.35 per share, excluding $0.08 in after-tax startup expenses.

We are maintaining fourth quarter 2008 revenues in the range of $270 million to $275 million excluding pass-through construction revenues and earnings in the pro forma range of $0.39 to $0.41 per share excluding $0.01 in after-tax startup expenses.

Our 2008 guidance includes a number of assumptions which such as the continued operation of our existing contracts at projected occupancy levels, the activation of our new projects on schedule, and the activation of one new contract by GEO Care in the second half of the year.

Our guidance does not include the potential reactivation of our Baldwin, Michigan Facility where we have 500 idle beds. We are marketing these beds to a number of agencies around the country. We also have sufficient acreage adjacent to this facility and others to expand by the current bed capacity.

Our guidance also does not take an account our possible reactivation of the Coke County, Texas Facility, which is currently the subject of a public auction by its owner’s accounting.

Further our guidance does not assume any additional contract wins by any of the three business units US Corrections, International Services, and GEO Care, which could represent additional upside to our projections.

I would now like to discuss our projects under development scheduled to open in 2009. In Florida, we are expanding our recently completed 1500-bed Graceville Correctional Facility by an additional 384 beds. We expect the expansion to become operational in March of 2009. Upon completion the expansion will generate approximately $5 million in additional annualized revenues with occupancy, guarantee of 90%.

In Colorado, we are about to begin an 1100-bed expansion of our company-owned detention center in Aurora. We expect the expansion to be completed and ready for occupancy during the fourth quarter of 2009. The expansion will cost approximately $72 million, which will be funded through company financing. We expect the 1100-bed expansion to generate approximately $30 million in additive annual operating revenues.

Altogether, we have nine new project activations, seven that was scheduled to open in 2008, and two that are scheduled for 2009. These new activations will add approximately 7,400 beds, and generate over $140 million in combined annualized operating revenues when fully normalized. We believe that this represents the largest and most diversified organic growth pipeline in our industry.

Now, I would like to discuss our capital expenditure requirements as well as our new business development activities. We’ve recently completed or are currently developing a number of projects using company financing. We estimate that these existing capital projects will cost approximately $246 million through the second half of 2009, of which $106 million was completed by year-end 2007.

We estimate our CapEx requirements for 2008 to be approximately $94 million. This breaks down to approximately $44 million for the first quarter, $21 million for the second quarter, $14 million for the third quarter and $14 million for the fourth quarter. We currently have approximately $44 million in cash on hand to fund these projects, and we are generating approximately $7 million per month or $85 million annually in free cash flow.

In addition, we have approximately $80 million available after letters of credit under our $150 million revolving credit facility, which bears interest at LIBOR plus 1.5%. We have enough financial flexibility to carry out our current capital projects program and pursue additional development projects of new facilities as well as expansions of existing sites.

Moving to our pending proposals and new business development opportunities, we are competing for a number of opportunities at the state and Federal levels in the United States. At the Federal level we are awaiting a contract award for the solicitation issued by the Office of the Federal Detention Trustee for the development and management of a 1000-bed detention facility for the U.S. Marshals to be located near Las Vegas, Nevada. We expect award to be announced in the second quarter of 2008.

Further, Congress has approved a budget for 2008 fiscal year and has provided a funding that supports a 4500-bed increase in the Immigration Detention beds to 32,000 beds from the prior year’s 27,500. We currently have approximately 5,200 beds housing Federal Bureau of Prisons Offenders, 4,700 beds housing U.S. Marshals detainees and 4,700 beds housing Immigration Detainees for ICE for a total of more than 14,000 Federal beds, which represents 34% of our total correctional detention beds in the United States.

We currently have just under 29,000 beds housing our state and county populations, which represents two-thirds of our total US beds. With regard to state opportunities we have responded to a solicitation issued by the Arizona Department of Administration for 2,000 new in-state minimum-security beds. We expect awards to be published in the second quarter of 2008.

In Virginia, we submitted an unsolicited proposal for a 1,500 to 2000-bed medium-custody correctional facility to be located in Charlotte County, Virginia under a state statute that allows companies to submit unsolicited proposals for an apparent state requirement.

The Virginia Department of Corrections has decided to move forward with GEO to Phase II of this procurement with the state expecting to authorize the issuance of project revenue bonds to finance the new facility. We expect a final contract with GEO to be signed in the second or third quarter of this year.

In addition to these proposals, we are currently working on a number of negotiated projects, which may involve the expansion of existing GEO facilities to meet the needs of our existing state and Federal customers. We also expect a number of solicitation opportunities from state and Federal agencies over the next 12 to 18 months, specifically in Florida we believe the state will be considering the addition of approximately 6,000 new beds during the upcoming legislative session.

Now turning to our international business unit, in England the Ministry of Justice has issued RFPs for two new 600-bed prison projects. We have responded with our pre-qualification responses and we expect to be on the short list of preferred vendors for these two projects. The Ministry of Justice has previously announced plans to increase prison capacity by 9,500 additional new beds by 2012.

On December 5, the Secretary of State for the Justice in the United Kingdom announced a program for building a further 10,500 prison beds. This program includes building up to three large prisons housing around 2,500 offenders each as well as closing in old and inefficient prisons. It is expected that many of these new prison beds will be provided by the private sector. We will continue to monitor the UK market and believe we are well positioned with our GEO UK subsidiary to take advantage of these future opportunities.

In South Africa, we have responded to the request for pre-qualification for the design, construction and financing operation of five new 3000-bed prisons late last month. We are waiting to be short-listed for these projects, totaling 15,000 new beds. Based on successful development and operation of our South African 3000-bed prison, we believe that we are very well positioned to capitalize on new growth opportunities in South Africa.

With regard to mental health and residential treatment facilities, our GEO Care team has been marketing to several states around the country and we expect to compete for new projects in the near-term.

In Pennsylvania, we have responded to an RFP issued by the Commonwealth for the management and operation of two forensic centers totaling more than 200 beds valued in excess of $40 million in annualized operating revenues. We are expecting contract awards for this solicitation to be announced during the first quarter of 2008.

In summary, we are very pleased with the financial performance of our three business units during 2007 and we remain optimistic about our outlook for 2008. We have what we believe is the largest organic pipeline in our industry, with nearly 400 beds under development in 2008 and 2009, representing over $140 million in normalized annual revenues.

We are currently competing for more than 20,000 beds in the US and overseas this year we hope to win our share. Additionally, we are actively considering those facilities that can be expanded for our existing clients.

This concludes my presentation. I would now like to open the call to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Analyst on behalf of Jeff Kessler - Lehman Brothers.

Analyst on behalf of Jeff Kessler - Lehman Brothers

On the US Corrections side, could you give us your take on the revised projections by the articles and stuff that came out from Texas? How are you viewing that and what impact do you expect or no impact do you expect to have on your facilities and relationship with the state?

George C. Zoley

Well, we’re actually encouraged that the state has announced the need for additional treatment beds. We have a long history in the State of Texas going back to the early 90s of providing treatment services for the state, and we have several existing locations where we feel we can provide such treatment beds, and we are aware of other Greenfield sites that could also provide those additional beds.

Analyst on behalf of Jeff Kessler - Lehman Brothers

In GEO Care, besides the Pennsylvania RFP, could you talk about maybe, if you’ve seen any other indications of interest from other states? And also in the guidance, you talked about you expect one new contract or you’ve baked in one new contract in the second half of 2008, could you give us a little more color on that contract, and maybe the size that you are baking into the numbers?

George C. Zoley

With respect to your first question, GEO Care business development continues at a number of different states, and I’m not really at liberty to disclose which of those states we’re speaking to, because we consider that proprietary information.

With respect to Pennsylvania, we’ve recently submitted a best and finals for the two facilities we’re competing for and as I said in my conference call script, they both total approximately $40 million. And we’re hopeful of winning one of them, but we’ll await the results, which we believe will occur by the end of the first quarter.

Analyst on behalf of Jeff Kessler - Lehman Brothers

The one contract that you have baked in for the second half of 2008 in your guidance is one of the two Pennsylvania Centers that you bid for.

George C. Zoley

Yes.

Analyst on behalf of Jeff Kessler - Lehman Brothers

On the international side, I know you gave the color on the beds and stuff, but from a revenue impact or from a financial impact would you expect at some point for that to hit in towards the end of 2008 or are we still talking 2009 and beyond?

George C. Zoley

International would be later in the year, ‘09 and beyond.

Operator

Your next question comes from the line of Todd Van Fleet - First Analysis.

Todd Van Fleet - First Analysis

I wanted to ask you about Arizona and it sounds like Indiana requiring more beds, I would guess that at some point moving through 2008 they might actually want more of those beds where the Arizona inmates are currently residing. Can you expand the Florence Facility further without construction? Where you are going to accommodate the 200 inmates is it possible to go further or is 200 the max and then you have to start actually allocating some capital to build out that facility?

So that’s one-half of the question. And then related to that, would Arizona, are they one of the states to which you are marketing the Baldwin Facility?

George C. Zoley

We have other land in close proximity to that facility. So we are in a position to construct additional beds, the current facility we don’t believe we can expand any further without new construction. We believe these 200 additional incremental beds that we discussed in the conference call is really the one that as far as how many additional new beds you can provide without new construction.

Todd Van Fleet - First Analysis

How about their desire perhaps interest in maybe using Michigan, George?

George C. Zoley

Well, I think that remains to be seen. They have a procurement in place right now for 2000 beds, but obviously it will take some time for those 2000 beds to come online I would say a year and half to two, and in the interim they may feel the need for additional capacity and we have talked to them in the past about Michigan.

Todd Van Fleet - First Analysis

Regarding the expansion at Aurora in Colorado, are there a series of legislative hurdles or zoning hurdles that need to be overcome prior to that expansion being completed, so you can actually receive inmates into that facility? Or could you talk a little bit about what’s some of the complicating factors might be before you can actually receive the inmates?

George C. Zoley

Well it is an urban location and there are more hoops to go through from a planning standpoint, but there aren’t any zoning issues per say. But there are lots of planning issues such as proper buffering from adjacent neighborhoods and lines of site.

So it is a much more sophisticated community that it takes more care and time in reviewing construction plans. And it takes longer to construct in Colorado. But there aren’t any zoning issues, so I think we will be on track to deliver the facility as we’ve identified it at the latter part of 2009.

Todd Van Fleet - First Analysis

Are there multiple customers potentially for that facility George, ultimately maybe only one customer in the facility, but you are marketing into more than one customer?

George C. Zoley

It could be another Federal user, that’s a possibility.

Todd Van Fleet - First Analysis

Not state?

George C. Zoley

No.

Operator

Your next question comes from the line of Kevin Campbell - Avondale Partners.

Kevin Campbell - Avondale Partners

I was hoping you guys could talk a little bit about the interest income, and the G&A, they were both a little bit higher than we had expected. So and I understand that the G&A, I think was related to the deferred acquisition costs, but could you give us an idea of maybe what we might expect going forward from both of these line items?

John G. O’Rourke

Kevin, you’re exactly correct. We had the one-time, $1.4 million influence associated with those write down of the acquisition fees that had previously been deferred. So, we’re anticipating that we will probably be running in the $16.5 million per quarter run rate on the G&A respectively.

Kevin Campbell - Avondale Partners

The acquisition fees were those related to CPT or was it with some other acquisitions maybe you’re looking at that didn’t come to fruition and then, therefore you wrote it off?

George C. Zoley

They were not CPT, and the rest of your question is confirmed.

Kevin Campbell - Avondale Partners

On the interest income, again that number was a little bit high, it was about what it was in the third quarter, I believe so, but just again higher than we had thought, should we continue to expect it to be around that $2 million level?

John G. O’Rourke

I think it’s really between $1.5 and $2 million is where you should expect it to run on.

Kevin Campbell - Avondale Partners

Could you talk a little bit about the current budgetary environment at the state level, and whether or not these tight budgets are something that favor you in the near-term or short-term or perhaps more so over the long-term?

John G. O’Rourke

I think the state budgetary difficulties actually favor us, particularly for those states that require additional beds. The needed capital funds for those additional beds, which based on new construction costs of $60,000 to $70,000 a bed, are very hard to come by at the state level, and they often compete with the need to build more schools.

It makes, an easier sell for us to present and pursue a privatization alternative for the states to add to their capacity by using private companies through either their own company financing or through project revenue bond financing that they help facilitate. So, I think the current market as a whole really promotes the development and opportunities for more privatized beds.

Kevin Campbell - Avondale Partners

On LaSalle, you said the construction was delayed, was it just delayed a month, was that it from April to May?

George C. Zoley

Its just one month, they got lot of rain this year.

Kevin Campbell - Avondale Partners

On New Castle, were you going to be transferring all of the Arizona inmates back or was it just going to be the 200?

George C. Zoley

They will all go back I discussed. And we will be receiving Indiana prisoners in advance of Arizona prisons leaving.

Operator

Your next question comes from the line of T.C. Robillard - Banc of America Securities.

T.C. Robillard - Banc of America Securities

On South Africa, George, can you give us a sense of timing as to when they have indicated the RFPs will be awarded? And then from that standpoint assuming you win one or more than one of those. Can you give us a timeline to construction and opening a facility?

George C. Zoley

They haven’t said when they will award, at this time we don’t expect that will occur for some time. Our own estimates based on what they have done in the past is that award could come by the end of the year, so fourth quarter. And then, these are very large projects it will take two years thereafter to construct the facilities before they are permitted to open.

T.C. Robillard - Banc of America Securities

Jerry, can I get cash from ops and CapEx for the quarter?

Brian Evans

CapEx for the quarter was $47 million including maintenance CapEx of about $3 million and cash flow from operations was about $39 million.

T.C. Robillard - Banc of America Securities

Brian, do you have the op margins for the main segments, US Corrections, International and GEO Care?

Brian Evans

I don’t have those in front of me right now, those will be in the 10-K which we should be filing shortly.

Operator

Your next question comes from the line of Ben Mackovjak - Rivanna Capital.

Ben Mackovjak - Rivanna Capital

Can you breakout what percent of compensated mandates are from the US as opposed to international?

John G. O’Rourke

In the 10-K and in the Q we disclosed the amount of compensated mandates by International and US operations.

Ben Mackovjak - Rivanna Capital

Is that something you can share now?

John G. O’Rourke

I don’t have the 10-K in front of me, but we’ll have it filed shortly.

Ben Mackovjak - Rivanna Capital

Historically how do you see international rates compared to US rates by the per diem?

John G. O’Rourke

They are a little bit higher. You got to remember that rate is affected also by the exchange rate so, that those international per diem rates, average per diem rates are higher this quarter than they would have been a year ago due to higher exchange rates.

Ben Mackovjak - Rivanna Capital

Do you have any plans to hedge that?

John G. O’Rourke

No.

Ben Mackovjak - Rivanna Capital

For ‘08 do you have a maintenance CapEx estimate?

John G. O’Rourke

$12 million, $10 to $12 million is what’s our run rate has been on an annualized basis for maintenance CapEx.

Operator

Your next question is a follow-up from the line of Todd Van Fleet - First Analysis.

Todd Van Fleet - First Analysis

Could you give us the organic growth or rather the contribution revenue from the foreign exchange in the quarter and then Brian if you could tell us whether there was some deferred interest in the quarter as well. The impact of foreign exchange on revenue during the quarter did it add?

Brian Evans

Quarter-over-quarter it was probably about $2 million. There was about $1.5, $2 million.

Todd Van Fleet - First Analysis

Deferred interest in the quarter that might have reduced the interest expense overall.

Brian Evans

There was some capitalized interest; I want to say that was about $600,000 to $800,000. That will be disclosed in the 10-K specifically also.

Todd Van Fleet - First Analysis

George as you chat with your business development folks and as we consider what’s happening more broadly in the US, I think we’ve heard that, and consistent with what you expected that the immigration flow is returning here in the earlier part of this year, you’ve got the project streamline impacting incarceration levels along the Southwestern border.

Has there been any discussion between you and your clients or customers at the state levels regarding what the impact could be potentially for increased cooperation between state and Federal law enforcement regarding illegal immigration flow? Have they had meaningful conversations? Do they understand the impact that it’s going to have on their state and local prison systems? Is that an issue; is it not an issue, if you can help us understand how you are thinking about that?

George C. Zoley

From my personal view it seems like the greatest impact is on the local court systems, the county courts to which are often in these particular locations where our project streamline is taking place, our small counties, rural counties with small jails and therefore have a bottleneck effect in the program.

If they only have a limited capacity of how many people they can detain and therefore a finite limit as to how many people eventually will be sent to us. So there are practical limitations to this new policy. But the capacity of the county is to how many people they can readily detain.

Todd Van Fleet - First Analysis

So if they don’t have capacity in their facilities at the local level, they wouldn’t pass those individuals on to another facility at perhaps the state level?

George C. Zoley

They may spread it around, but it’s more difficult.

Wayne H. Calabrese

Todd further to the question about the federal detention activity, first the Federal magistrates will process what they think can be processed in terms of the available space, but we do talk with them about making available the space we have that maybe 80 or even a 100 miles away and arrange transportation. So we are having ongoing discussions about that and some of that’s already assisted us in bringing that Val Verde population up to its current status.

Your question also I thought was about the impact on states, and I think California, Arizona, New Mexico, Texas, those states are going to continue to be impacted by those illegal undocumented aliens who come into the country and commit crimes that aren’t Federal in nature, but are state felonies. And we have already seen in some cases states saying that their populations are what, 15 to 25% represented by those folks. And I don’t see any change in that over the immediate or even mid-term.

Todd Van Fleet - First Analysis

So really the two issues then, Wayne, project streamline being one issue, but then perhaps increased cooperation between local state and Federal authorities being a catalyst for higher incarceration or capacity utilization levels. You would see the greater impact from the project streamline activity as opposed to the latter?

Wayne H. Calabrese

I think the project streamline activity is going to continue to impact the numbers that we see in our Federal detention space. And, we’re seeing that seasonally coming back now as George discussed. And, I think streamline and efforts like that to tighten and close that border are continuing to have the impact that was expected by those agencies and our numbers are going up as a result seasonally now.

In terms of states though, I haven’t seen a lot of additional cooperation to bring down the numbers of prisoners in the states that undocumented criminal aliens at the state levels. I think those numbers are continuing to increase as they have over the last several years, and are going to continue to impact these states’ requirements for more beds.

Operator

Your next question comes from the line of William Gilchrist – Westfield Capital.

William Gilchrist – Westfield Capital

On Coke County, George the county has actually auctioned off its facility, and I’m just trying to get some sense of expansion opportunities to whoever gets that and if there is any restrictions on what type of inmates go there, or anything like that?

George C. Zoley

The county, I think just came out with their solicitation in the last few days. It’s due in the next 10 days, I think. And it’s a monetary type of auction. The proposal with the highest price will likely win. They did indicate an interest in the proposer committing themselves to marketing the facility aggressively for several years.

I don’t think they’ve placed any limitations per say on what prisoners can come in there. But if they are out of state prisoners that issue will be regulated by Texas State Law, which has a fairly comprehensive set of statutes that involve the involvement in the Texas Commission on Jail Standards in the review of the facility and the prisoners and it requires, I believe approval by the local sheriff of the prisoners and contract.

So, Texas does have probably the oldest and most comprehensive standing laws governing the transfer or the in-take of out of state prisoners.

William Gilchrist – Westfield Capital

So they are basically looking to Coke County, the county’s looking to lease this out to someone, not an outright sale?

George C. Zoley

No it’s an outright sale. I believe they’ll cooperate to facilitate whatever contracts or intergovernmental agreements would be available to reactivate this facility.

William Gilchrist – Westfield Capital

Moving on to the UK, can I just clarify something? So the December 5, I was confused, 9500 additional beds is what they were initially talking about for 2012. They upped that to 10,500 beds, is that right or was it an additional 10,500-beds on top of those?

Wayne H. Calabrese

It’s additional, in addition to the 9,500 there is another 10,500 in total.

William Gilchrist – Westfield Capital

So the visibility on those additional beds is way too far out.

Wayne H. Calabrese

I don’t know if it’s way too far out, but it’s certainly further out than ‘09 and ‘10.

Operator

Your next question is a follow-up from the line of Todd Van Fleet - First Analysis.

Todd Van Fleet - First Analysis

Can’t pretend California doesn’t exist anymore just because they have been quiet for a while, but do you expect any resolution or movement in that state in 2008 or what’s the next chip to fall here?

George C. Zoley

Well, as we’ve said in the past, none of our guidance is dependent upon further business with or new business with California although we would certainly welcome it. We’re waiting and watching ourselves as to what the legislature does with the governor’s very dramatic and apparently extreme proposals. From what we’ve heard, nothing much has happened. So, we don’t know whether this will just result in some stalemate or, but none of our guidance is impacted by it.

Todd Van Fleet - First Analysis

Let me turn to the business development pipeline then George for a second. You had mentioned Arizona, Virginia and Florida, I think, as you talked about at the state level, what’s cooking in the new business pipeline. Is that because there have been actual RFPs or pretty detailed discussions going on with those states regarding what the RFP or the procurement might look like. I’m wondering, why you didn’t mention anything with the State of Idaho or maybe few others?

George C. Zoley

We don’t mention everybody we are talking too. We usually only mention opportunities that are in the public domain. That is a solicitation that has come out either by a state or federal agency that’s in the public domain.

Operator

There are no additional questions at this time.

George Zoley

We thank everyone for having joined us today. We look forward to addressing you in the next quarterly conference call. Thank you.

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Source: The GEO Group, Inc. Q4 2007 Earnings Call Transcript
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