Equity Incentive Plans

The Company had awards outstanding under four equity compensation plans at December 31, 2012: 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 December 31, 2012, under the 2006 Plan, the Company had 1,946,417 shares of common stock available for issuance pursuant to future awards that may be granted under the plan of which up to 656,804 shares were available for the issuance of awards other than stock options. See Restricted Stock below for further discussion.

On February 4, 2013, the Compensation Committee resolved to increase the number of shares of common stock subject to awards under the 2006 Plan from 4,400,000 to 5,087,385 shares of common stock.

Under the terms of the Company Plans, the vesting period and, in the case of stock options, the exercise price per share, are determined by the terms of each plan. All stock options that have been granted under the Company Plans are exercisable at the fair market value of the common stock at the date of the grant. Generally, the stock options vest and become exercisable ratably over a four-year period, beginning immediately on the date of the grant. However, the Board of Directors has exercised its discretion to grant stock options that vest 100% immediately for the Chief Executive Officer. In addition, stock options granted to non-employee directors under the 1995 Plan became exercisable immediately. All stock options awarded under the Company Plans expire no later than ten years after the date of the grant. When options are exercised, the Company issues shares related to exercised options out of common stock.

Award Modifications

In connection with the divestiture of RTS (Refer to Note 2 - Discontinued Operations), all employees of RTS terminated their employment with GEO effective December 31, 2012. Nineteen of these employees had 24,100 unvested options and 8,375 unvested shares of restricted stock from previously granted GEO share-based awards. The Compensation Committee of the Board of Directors resolved on December 11, 2012 to accelerate the vesting of these awards and the Company recorded a compensation charge of approximately $0.3 million.

In connection with mandatory anti-dilution provisions of GEO's equity incentive plans, as it pertains to the Special Dividend, an adjustment was made to all options outstanding on December 31, 2012 to (i) increase the number of shares subject to an option by multiplying the number of shares by 1.156 (the “Adjustment Factor”) and (ii) reduce the exercise price per share of common stock subject to the options by dividing the initial exercise price by the Adjustment Factor. The Adjustment Factor was determined by the percentage increase in the Company's common stock in connection with the stock portion of the Special Dividend. The adjustment affected all GEO employees who had outstanding option grants on December 31, 2012 (313 employees) and resulted in approximately 0.2 million of incremental options awarded. As the adjustment was designed to equalize the fair value of the option award for the stock portion of the Special Dividend and the Company Plans included an anti-dilution provision, there was no incremental compensation cost resulting from the incremental options awarded.

The Company recognized compensation expense related to the Company Plans for the fiscal years ended December 31, 2012, January 1, 2012 and January 2, 2011 as follows (in thousands):



	2012		2011		2010
Stock option plan expense	$	2,539	$	2,681	$	1,378
Restricted stock expense	$	4,449	$	3,432	$	3,261

Additional tax benefits realized from tax deductions associated with the exercise of stock options and the vesting of restricted stock activity for 2012, 2011 and 2010 totaled $0.6 million, $0.5 million and $3.9 million, respectively.

Stock Options

A summary of the activity of the Company’s stock options plans is presented below:



	Shares		Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Term	Aggregate Intrinsic Value
	(In thousands)					(In thousands)
Options outstanding at January 1, 2012 [1]	1,601		$	19.44	6.73	$	2,778
Granted [2]	96		22.30
Exercised [1]	(593	)	15.65
Forfeited/Canceled [1]	(73	)	22.93
Incremental shares granted due to anti-dilution provision existing in the compensation plans	167		—
Options outstanding at December 31, 2012 [2]	1,198		$	18.92	6.85	$	11,090
Options vested and expected to vest at December 31, 2012 [2]	1,153		$	18.90	6.79	$	10,785
Options exercisable at December 31, 2012 [2]	722		$	17.51	5.95	$	7,694

[1] Weighted Average Exercise Price reflects initial exercise price and has not been adjusted in the table above for the Adjustment Factor in connection with the Special Dividend.

[2] Weighted Average Exercise Price reflects the Adjustment Factor in connection with the Special Dividend.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of fiscal year 2012 and the exercise price, times the number of shares that are “in the money”) that would have been received by the option holders had all option holders exercised their options on December 31, 2012. This amount changes based on the fair value of the Company’s stock.

The following table summarizes information relative to stock option activity during the Company’s fiscal years ended December 31, 2012, January 1, 2012 and January 2, 2011 (in thousands):



	2012		2011		2010
Intrinsic value of options exercised	$	7,051	$	4,718	$	21,095
Fair value of shares vested	$	2,062	$	2,358	$	2,054

The following table summarizes information about the exercise prices and related information of stock options outstanding under the Company Plans at December 31, 2012:



	Options Outstanding				Options Exercisable
Exercise Prices	Number Outstanding	Wtd. Avg. Remaining Contractual Life	Wtd. Avg. Exercise Price		Number Exercisable	Wtd. Avg. Remaining Contractual Life	Wtd. Avg. Exercise Price
	(In thousands)
3.17 – 5.26	29	1.0	$	4.55	30	1.0	$	4.55
6.66 – 13.72	46	2.42	9.15		45	2.33	9.03
14.44 – 22.26	1,021	6.97	19.44		629	6.37	18.59
22.30 – 24.61	102	9.35	22.32		18	8.10	22.36
Total	1,198	6.8	$	18.92	722	5.95	$	17.51

The weighted average grant date fair value of options granted during the fiscal years ended December 31, 2012 and January 1, 2012 and January 2, 2011 was $6.81, $9.75 and $6.73 per share, respectively.

The following table summarizes the status of non-vested stock options as of January 1, 2012 and changes during the fiscal year ending December 31, 2012:



	Number of Shares		Wtd. Avg. Grant Date Fair Value
	(In thousands)
Options non-vested at January 1, 2012	605		$	8.99
Granted	96		6.81
Vested	(184	)	8.32
Forfeited	(41	)	8.96
Options non-vested at December 31, 2012	476		$	8.89

As of December 31, 2012, the Company had $2.7 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 2.0.

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 closing price of the Company’s common stock on the date of the grant and compensation expense is recognized over the vesting period. Generally, the restricted stock awards vest in equal increments over either a three or four year period. The Company has issued share-based awards with non-performance and performance-based vesting criteria. For share-based awards that are performance-based, achievement of the milestones must be “probable” before share-based compensation expense is recorded. At each reporting date, the Company reviews the likelihood that these awards will vest and if the vesting is deemed probable, compensation expense is recorded at that time. If ultimately performance goals are not met, for any awards where vesting was previously deemed probable, previously recognized compensation cost will be reversed.

A summary of the activity of restricted stock is as follows:



	Shares		Wtd. Avg. Grant date Fair value
	(In thousands)
Restricted stock outstanding at January 1, 2012	442		$	23.32
Granted	315		18.40
Vested	(145	)	23.28
Forfeited/Canceled	(28	)	22.79
Restricted stock outstanding at December 31, 2012	584		$	20.98

During the fiscal year ended December 31, 2012, the Company granted 315,000 shares of restricted stock to its executives and to certain senior employees. Of these awards, 205,000 are performance based awards which will be forfeited if the Company does not achieve certain annual metrics during fiscal years 2012, 2013 and 2014. These performance based awards, which were previously granted on March 12, 2012 to certain executive officers and senior employees, were canceled and new performance based awards were granted on July 20, 2012 in connection with a resolution by the Compensation Committee of the Board of Directors to revise the performance metrics used from targeted revenues to multiple metrics, which include earnings-per-share performance and return on capital employed results. These new restricted awards granted on July 20, 2012 were to the same executive officers and senior employees covering the same number of shares of restricted stock as were granted in March 2012.

The vesting of these new restricted stock grants will be subject to the achievement by GEO of two annual performance metrics as follows: (i) up to 75% of the shares of restricted stock in each award can vest annually or cumulatively if GEO meets certain earnings per share performance targets during years 2012, 2013 and 2014; and (ii) up to 25% of the shares of restricted stock in each award can vest annually if GEO meets certain return on capital performance targets in 2012, 2013 and 2014. Based on the terms of the agreement, there was no incremental compensation cost related to the modified awards. The Company achieved the annual performance metrics in 2012.

For performance based awards granted prior to July 20, 2012, these grants vested over a three year period from the date of the award if the previous metric, targeted revenue, was achieved. The aggregate fair value of the awards issued during the fiscal year ended December 31, 2012 and the fiscal year ended January 1, 2012, based on the closing price of the Company's common stock on the respective grant dates, was $5.8 million and $9.3 million, respectively.

See discussion of a modification to accelerate the vesting of restricted stock awards for certain employees in connection with the divestiture of RTS discussed above under Award Modifications.

As of December 31, 2012, the Company had $8.3 million of unrecognized compensation expense that is expected to be recognized over a weighted average period of 2.2 years.

Employee Stock Purchase Plan

On July 9, 2011, the Company adopted The GEO Group Inc. 2011 Employee Stock Purchase Plan (the “Plan”), subject to obtaining shareholder approval. The Plan was approved by the Company’s Compensation Committee and its Board of Directors on May 4, 2011. The purpose of the Plan, which is qualified under Section 423 of the Internal Revenue Service Code of 1986, as amended, is to encourage stock ownership through payroll deductions by the employees of GEO and designated subsidiaries of GEO in order to increase their identification with the Company’s goals and secure a proprietary interest in the Company’s success. These deductions are used to purchase shares of the Company’s Common Stock at a 5% discount from the then current market price.

The Plan, which was approved by the Company's shareholders on May 4, 2012, specifies that the pre-shareholder approval period began on July 9, 2011 with shares being purchased on June 29, 2012. During the pre-shareholder approval periods, which ended on June 29, 2012, the Plan was considered to be compensatory due to an option feature contained in the Plan during that period. Stock-based compensation recorded during the pre-shareholder approval period was not significant. During the post-shareholder approval periods, the Plan no longer contains an option feature and therefore is considered to be non-compensatory. As such, no compensation expense has been recorded during the post-shareholder approval periods. Share purchases for the post-shareholder approval offering periods begin on the last day of each month. During the year ended December 31, 2012, 22,760 shares were issued out of the Company's treasury stock in connection with the Plan. The Company offered up to 500,000 shares of its common stock, which were registered with the Securities and Exchange Commission on May 4, 2012, for sale to eligible employees.