03-0000890566-97-000650_1996_10K – dillonreadandco.com

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0000890566-97-000650.txt : 19970401
0000890566-97-000650.hdr.sgml : 19970401
ACCESSION NUMBER: 0000890566-97-000650
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 9
CONFORMED PERIOD OF REPORT: 19961231
FILED AS OF DATE: 19970331
SROS: AMEX

FILER:

COMPANY DATA:
COMPANY CONFORMED NAME: CORNELL CORRECTIONS INC
CENTRAL INDEX KEY: 0001016152
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-FACILITIES SUPPORT MANAGEMENT SERVICES [8744]
IRS NUMBER: 760433642
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231

FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-14472
FILM NUMBER: 97569622

BUSINESS ADDRESS:
STREET 1: 4801 WOODWAY
STREET 2: STE 400W
CITY: HOUSTON
STATE: TX
ZIP: 77056
BUSINESS PHONE: 7136230790

MAIL ADDRESS:
STREET 1: 4801 WOODWAY
STREET 2: STE 400W
CITY: HOUSTON
STATE: TX
ZIP: 77056

10-K
1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-14472

CORNELL CORRECTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 76-0433642
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

4801 WOODWAY, SUITE #100E, HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 623-0790

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 par value per Share
(Title of Class)

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 ( X ) No ( )

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will be not contained, to the
best of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( ).

At February 28, 1997, Registrant had outstanding 6,765,398 shares of its
common stock. The aggregate market value of the Registrant’s voting stock held
by non-affiliates at this date was approximately $45,796,000 based on the
closing price of $10.625 per share as reported on the American Stock Exchange.
For purposes of the foregoing calculation, all directors and officers of the
Registrant have been deemed to be affiliates, but the Registrant disclaims that
any of such directors or officers is an affiliate.

Documents Incorporated by Reference

Portions of the Proxy Statement for 1996 Annual Meeting of Stockholders.Part III

PART I

ITEM 1. BUSINESS

Cornell Corrections, Inc. (the “Company”) is one of the leading providers of
privatized correctional, detention and pre-release services in the United
States. The Company is the successor to entities that began developing
institutional correctional and detention facilities in Massachusetts and Rhode
Island in 1991, and pre-release facilities in California in 1977. The Company
has rapidly expanded its operations through acquisitions and internal growth and
is currently developing or operating facilities in the following 7 states:
California, Texas, Rhode Island, Utah, North Carolina, Georgia and New Mexico.
As of December 31, 1996, the Company had 24 contracts to operate 21 private
correctional, detention and pre-release facilities with an aggregate design
capacity of 3,577 beds. Of these facilities, 18 were in operation (3,142 beds)
and 3 were under development (435 beds). The 3 facilities under development
commenced operations during the first quarter of 1997.

As of March 25, 1997, the Company had expanded its operations to include 31
contracts to operate 26 facilities with an aggregate design capacity of 5,303
beds. The increase from December 31, 1996 included completing the acquisition of
Interventions, Co. (300 pre-release beds and 150 juvenile beds), two newly
awarded contracts in Santa Fe, New Mexico (504 secure institutional beds and 156
juvenile beds), and the beginning of a 516 bed expansion of the Company’s Big
Spring, Texas operations, with the balance from internal expansion. Construction
on the Santa Fe, New Mexico and Big Spring, Texas expansion projects are
expected to be completed during 1998.

The Company provides to governmental agencies the integrated development,
design, construction and operation of facilities within three areas of
operational focus: (i) secure institutional correctional and detention services,
(ii) pre-release correctional services and (iii) juvenile correctional and
detention services. Institutional correctional and detention services primarily
consist of the operation of secure adult incarceration facilities. Pre-release
correctional services primarily consist of providing pre-release and halfway
house programs for adult inmates serving the last three to six months of their
sentences and preparing for re-entry into society at large. At the facilities it
operates, the Company generally provides maximum and medium security
incarceration and minimum security residential services, institutional food
services, certain transportation services, general education programs (such as
high school equivalency and English as a second language programs), health care
(including medical, dental and psychiatric services), work and recreational
programs and chemical dependency and substance abuse programs. Additional
services provided in the Company’s pre-release facilities typically include life
skills and employment training and job placement assistance. Juvenile services
provided by the Company will include medical, educational and counseling
programs tailored to meet the special needs of juveniles.

ACQUISITIONS HISTORY

In March 1994, the Company acquired Eclectic Communications, Inc.
(“Eclectic”), the operator of 11 privatized institutional and pre-release
facilities in California with an aggregate design capacity of 979 beds.
Consideration for this acquisition was $10.3 million, consisting of $6.0 million
in cash, $3.3 million of subordinated indebtedness, approximately $700,000 of
other long-term obligations, and $300,000 of direct acquisition costs.

In May 1996, the Company acquired the Reid Center, a 310 bed pre-release
facility located in Houston, Texas, for approximately $2.0 million. Included in
the acquisition were the Reid Center facility property and buildings, the
equipment, inventory and supplies used in the operation of the Reid Center
facility and the assignment of the Reid Center’s contract with the Texas
Department of Criminal Justice (“TDCJ”). Following the consummation of this
acquisition, approximately 100 employees of the Reid Center became

– 2 –

employees of the Company. The Company believes that the Reid Center is the
largest single facility pre-release center in Texas and that its acquisition
enhances the Company’s position as one of the leaders in providing pre-release
services.

In July 1996, the Company completed the acquisition of substantially all the
assets of MidTex Detentions, Inc. (“MidTex”), an operator of secure
institutional facilities in Big Spring, Texas (“Big Spring Facility”), for an
aggregate purchase price of approximately $23.7 million. The City of Big Spring
has an Intergovernmental Agreement (“IGA”) with the Federal Bureau of Prisons
(“FBOP”) to house up to 1,333 inmates at the Big Spring Facility, and, as part
of the acquisition, MidTex assigned to the Company its rights under an operating
agreement with the City of Big Spring (“Big Spring Operating Agreement”) to
manage the Big Spring Facility. The Big Spring Operating Agreement has a base
term of 20 years from the closing of the acquisition and three five-year renewal
options at the discretion of the Company. The IGA has an indefinite term,
although it may be terminated or modified by the FBOP upon 90 days’ written
notice. Following consummation of the this acquisition, approximately 250
employees of the City of Big Spring and MidTex became employees of the Company.

In January 1997, the Company acquired substantially all of the assets and
liabilities of Interventions, Co. (“Interventions”) for $6.0 million which
included the assumption of $2.3 million of pre-acquisition debt and $230,000 of
transaction costs. Included as part of the acquisition is the operation of a 300
bed residential pre-release facility in Dallas, Texas and a 150 bed capacity
residential Transitional Living Center for juveniles in San Antonio, Texas. In
addition to the residential program operated at the Dallas facility,
Interventions provides various non-residential aftercare treatment programs for
probationers in Dallas, Texas. Following consummation of this acquisition,
approximately 150 employees of Interventions became employees of the Company.

INDUSTRY AND MARKET

There is a growing trend in the United States toward privatization of
governmental correctional and detention services and functions. Generally, this
trend results from continuing pressures faced by governments to control costs
and improve service efficiency as a result of the rapidly growing inmate
population in the United States. Further, as a result of the number of crimes
committed each year and the corresponding number of arrests, incarceration costs
generally grow faster than other parts of government budgets. In an attempt to
address these pressures, governmental agencies are increasingly privatizing new
facilities.

According to reports issued by the Bureau of Justice Statistics (“BJS”), the
number of adult inmates in United States federal and state prison facilities
increased from 503,601 at December 31, 1985 to 1,104,074 at June 30, 1995, an
increase of more than 119%. According to the Private Adult Correctional Facility
Census, prepared by the Private Corrections Project Center for Studies in
Criminology & Law, University of Florida, (“Private Correctional Facility
Census”), the design capacity of privately managed adult correctional and
detention facilities in the United States increased from 26 facilities with a
design capacity of 10,973 beds at December 31, 1989 to 92 facilities with a
design capacity of 57,609 beds at December 31, 1995. By year-end 1995, according
to the Private Correctional Facility Census, numerous counties, various agencies
of the federal government and 20 states had awarded management contracts to
private companies. According to the Private Correctional Facility Census,
privatized facilities include (i) correctional facilities operated for the FBOP
and detention facilities operated for the Immigration and Naturalization Service
(“INS”) and U.S. Marshals Service, (ii) state prisons, pre-release correctional
facilities, intermediate sanction facilities, work program facilities and state
jail facilities operated for state agencies and (iii) city jail and transfer
facilities operated for local agencies. Even after such growth, according to the
Private Correctional Facility Census, less than five percent of adult inmates in
United States correctional and detention facilities

– 3 –

were housed in privately-managed facilities. There are also many privatized
juvenile offender facilities. The Company believes that the market for juvenile
services is also growing rapidly because of an increasing population of
teenagers and an escalation of crime rates and incidents of mental health
problems among that population. In addition, the Company believes that there is
a growing trend toward privatization of juvenile services by governmental
agencies.

AREAS OF OPERATIONAL FOCUS

INSTITUTIONAL. At December 31, 1996, the Company operated 6 facilities, with
an aggregate design capacity of 2,193 beds, that provide secure institutional
correctional and detention services for incarcerated adults. These facilities
consist of: the Big Spring Facility, medium and minimum security facilities
operated primarily for the FBOP; the Donald W. Wyatt Federal Detention Facility
(“Wyatt Facility”), a medium and maximum security unit operated primarily for
the U.S. Marshals Service in Central Falls, Rhode Island; and two minimum
security facilities in California operated for the California Department of
Corrections (“CDC”).

The Company operates the Big Spring Facility pursuant to the Big Spring
Operating Agreement between the Company and the City of Big Spring. The City of
Big Spring in turn is a party to the IGA with the FBOP for an indefinite term
with respect to the facilities. The INS and the U.S. Marshals Service also use
the facilities. Inmates include detainees held by the INS, adjudicated inmates
held by the INS who will be deported after serving their sentences and
adjudicated inmates held for the FBOP. These facilities are equipped with an
interactive satellite link to INS courtroom facilities and judges that should
allow processing of a high volume of INS detainees, while reducing the time,
effort and expense incurred in transporting inmates to offsite courtrooms.

The Wyatt Facility in Central Falls opened in 1993 and primarily houses
federal inmates awaiting adjudication under federal criminal charges. In
addition, the Wyatt Facility houses certain other inmates under a contract with
the Suffolk County, Massachusetts, Sheriff’s Department. The Company’s
California facilities house primarily inmates sentenced by the State of
California, most of whom are non-violent offenders with sentences of up to two
years.

Under its contracts, the Company provides a variety of programs and services
at its institutional adult incarceration facilities, including secure
incarceration services, institutional food services, certain transportation
services, general education programs (such as high school equivalency and
English as a second language programs), work and recreational programs and
chemical dependency and substance abuse programs.

PRE-RELEASE. At December 31, 1996 the Company operated or had contracts to
operate 13 facilities, with an aggregate design capacity of 1,024 beds, that
provide pre-release correctional services. Of these facilities, 6 are operated
primarily for the FBOP, 5 are operated primarily for the CDC, 1 is operated for
the TDCJ and 1 began operations for the North Carolina Department of Corrections
(“NCDC”) during the first quarter of 1997. Most residents of these facilities
are or will be serving the last three to six months of their sentences and
preparing for re-entry into society at large.

At its pre-release facilities, the Company typically provides minimum
security residential services, institutional food services, general education
programs, life skills and employment training, job placement assistance and
chemical dependency and substance abuse counseling. About 20% of the inmates at
the FBOP pre-release facilities in California, Utah and Texas are on home
confinement; monitoring is primarily done by required check-ins and by
unscheduled visits to places of residence and employment.

– 4 –

JUVENILE SERVICES. At December 31, 1996, the Company had contracts to operate
2 facilities, with an aggregate design capacity of 360 beds, that provide
juvenile services. During the first quarter of 1997, the Company completed the
construction, and began the operation of a 160 bed short-term juvenile detention
facility for the State of Utah in Salt Lake City. The facility primarily houses
pre-adjudicated juvenile detainees and juveniles awaiting placement in long-term
correctional facilities. The Salt Lake City Juvenile Detention Facility includes
an interactive satellite link to juvenile courtroom facilities and judges that
should allow processing of a high volume of juvenile detainees, while reducing
the time, effort and expense incurred in transporting detainees to offsite
courtrooms. During the first quarter of 1997, the Company began the operation of
a 200 bed capacity juvenile correctional facility for the State of Georgia
located in Pelham, Georgia (“Pelham Facility”). The current contract is for 120
beds. Services at the Pelham Facility include intake and evaluation, mental
health care, counseling, and an education program.

The Company intends to pursue additional contract awards to provide juvenile
detention and correctional services, including contracts for specialized
rehabilitation programs and services for juveniles such as military style boot
camps, wilderness programs and secure education and training centers.

– 5 –

FACILITIES

The following table summarizes certain additional information with respect to
contracts and facilities under operation by the Company as of December 31, 1996
(note: This table does not reflect new facilities from contracts awarded or
acquired after December 31, 1996):

– ———-
(1) Design capacity is based on the physical space available presently, or with
minimal additional expenditure, for inmate or residential beds in compliance
with relevant regulations and contract requirements. In certain cases, the
management contract for a facility provides for a different number of beds.

(2) Date from which the Company, or its predecessor, has had a contract with the
contracting governmental agency on an uninterrupted basis.

(3) Substantially all contracts are terminable by the contracting government
agency for any reason upon the required notice to the Company.

(FOOTNOTES CONTINUED ON FOLLOWING PAGE)

– 6 –

(4) Except as otherwise noted, the renewal option, if any, is at the
discretion of the contracting government agency.

(5) Facility is accredited by the American Correctional Association.

(6) The City of Big Spring, Texas entered into the IGA with the FBOP for an
indefinite term (until modified or terminated) with respect to the Big
Spring Facility, which began operations during 1989 and expanded through
1995. The Big Spring Operating Agreement has a term of 20 years with
three five-year renewal options at the Company’s discretion, pursuant to
which the Company will manage the Big Spring Facility for the City of
Big Spring.

(7) The U.S. Marshals Service entered into an intergovernmental agreement
with the Central Falls Detention Facility Corporation (“DFC”) in August
1991 for an indefinite term (until modified or terminated) with respect
to the Wyatt Facility. The DFC, in turn, entered into a Professional
Management Agreement with the Company for the Company to operate this
facility effective November 1993 for a term of five years, with one
five-year renewal option. In addition, pursuant to a contract between
the DFC and the Suffolk County, Massachusetts Sheriff’s Department,
entered into in March 1996, Massachusetts state inmates are housed under
the Company’s management at this facility.

(8) The current contract term was less than one year, with an original
termination date of September 1993; the FBOP has exercised three of its
four one-year renewal options.

(9) In addition to its contract with the FBOP with respect to these
facilities, the Company has contracts with the Administrative Office of
the United States Courts, Pretrial Services (“Pretrial Services”) to
provide beds at these facilities.

(10) The current contract term was two years, with an original termination
date of August 1995; the FBOP has exercised the first of its three
one-year renewal options.

(11) In addition to its contract with the CDC with respect to this facility,
in March 1996 the Company entered into a contract with the FBOP, with a
term of two years and three one-year renewal options, to provide beds at
this facility.

(12) In addition to its contract with the FBOP with
respect to this facility, the Company has contracts with Pretrial
Services and with the City of San Francisco to provide beds at this
facility.

(13) State of Georgia, Department of Children and Youth
Services.

(14) Utah Department of Human Services, Division of Youth
Corrections.

FACILITY MANAGEMENT CONTRACTS

Generally, the Company is compensated on the basis of the number of inmates
held or supervised under each of its facilities’ management contracts. The
Company’s existing facility management contracts generally provide that the
Company will be compensated at an occupant per diem rate. Such compensation is
invoiced in accordance with applicable law and is paid on a monthly basis. Under
a per diem rate structure, a decrease in occupancy rates would cause a decrease
in revenues and profitability. The Company is, therefore, dependent upon
governmental agencies to supply the Company’s facilities with a sufficient
number of inmates to meet the facilities’ design capacities, and in most cases
such governmental agencies are under no obligation to do so. Moreover, because
many of the Company’s facilities have inmates serving relatively short sentences
or only the last three to six months of their sentences, the high turnover rate
of inmates requires a constant influx of new inmates from the relevant
governmental agencies to provide sufficient occupancies to achieve
profitability. Occupancy rates during the start-up phase when facilities are
first opened typically result in capacity underutilization for 30 to 90 days.
After a management contract has been awarded, the Company incurs facility
start-up costs consisting principally of initial employee training, travel and
other direct expenses incurred in connection with the contract. These costs vary
by contract and can range between $30,000 and $1.0 million.

All the Company’s contracts are subject to legislative appropriations. A
failure by a governmental agency to receive appropriations could result in
termination of the contract by such agency or a reduction of the management fee
payable to the Company.

The Company’s contracts generally require the Company to operate each
facility in accordance with all applicable laws and regulations. The Company is
required by its contracts to maintain certain levels of insurance coverage for
general liability, workers’ compensation, vehicle liability and property loss or
damage. The Company is also required to indemnify the contracting agency for
claims and costs arising out of the Company’s operations, and in certain cases,
to maintain performance bonds.

– 7 –

The Company’s facility management contracts typically have terms ranging from
one to five years, and many have one or more renewal options for terms ranging
from one to five years. Only the contracting governmental agency may exercise a
renewal option. To date, all renewal options under the Company’s management
contracts have been exercised. However, in connection with the exercise of the
renewal option, the contracting governmental agency or the Company typically has
requested changes or adjustments to the contract terms. Additionally, the
Company’s facility management contracts typically allow a contracting
governmental agency to terminate a contract without cause by giving the Company
written notice ranging from 30 to 180 days.

MARKETING

The Company’s principal customers are the federal, state, and county
governmental agencies responsible for correctional, detention and pre-release
services. These governmental agencies often procure these services from the
private sector by issuing a Request for Proposal (“RFP”) to which a number of
companies may respond. Most of the Company’s activities in the area of securing
new business are expected to be in the form of responding to RFPs. As part of
the Company’s process of responding to RFPs, management of the Company meets
with appropriate personnel from the requesting agency to best determine the
agency’s distinct needs. If the Company believes that the project complies with
its business strategy, the Company will submit a written response to the RFP.
When responding to RFPs, the Company incurs costs, typically ranging from
$10,000 to $75,000 per proposal, to determine the prospective client’s distinct
needs and prepare a detailed response to the RFP. The preparation of a response
to an RFP typically takes from five to 10 weeks. In addition, the Company may
incur substantial costs to (i) acquire options to lease or purchase land for a
proposed facility and (ii) engage outside consulting and legal expertise related
to a particular RFP.

A typical RFP requires bidders to provide detailed information, including,
but not limited to, descriptions of the following: the services to be provided
by the bidder, the bidder’s experience and qualifications, and the price at
which the bidder is willing to provide the services requested by the agency
(which services may include the renovation, improvement or expansion of an
existing facility or the planning, design and construction of a new facility).
Based on proposals received in response to an RFP, the governmental agency will
award a contract; however, the governmental agency does not necessarily award a
contract to the lowest bidder. In addition to costs, governmental agencies also
consider experience and qualifications of bidders in awarding contracts.

The marketing process for obtaining facility management contracts consists of
several critical events. These include issuance of an RFP by a governmental
agency, submission of a response to the RFP by the Company, the award of the
contract by a governmental agency and the commencement of construction or
operation of the facility. The Company’s experience has been that a substantial
period of time may elapse from the initial inquiry to receipt of a new contract,
although, as the concept of privatization has gained wider acceptance, the
length of time from inquiry to the award of contract has shortened. The length
of time required to award a contract is also affected, in some cases, by the
need to introduce enabling legislation. The bidding and award process for an RFP
typically takes from three to nine months. Generally, if the facility for which
an award has been made must be constructed, the Company’s experience has been
that management of a newly constructed facility typically commences between 12
and 24 months after the governmental agency’s award.

The Company also at times receives inquiries from or on behalf of
governmental agencies that are considering privatization of certain facilities
or that have already decided to contract with private providers. When such an
inquiry is received, the Company determines whether there is a need for the
Company’s services and whether the legal and political climate in which the
governmental agency operates is conducive to serious consideration of
privatization. The Company then conducts an initial cost analysis to further
determine project feasibility.

– 8 –

When a contract requires construction of a new facility, the Company’s
success depends, in part, upon its ability to acquire real property for its
facilities on desirable terms and at satisfactory locations. Management of the
Company expects that many such locations will be in or near populous areas and
therefore anticipates legal action and other forms of opposition from residents
in areas surrounding each proposed site. The Company may incur significant
expenses in responding to such opposition and there can be no assurance of
success. In addition, the Company may choose not to bid in response to an RFP or
may determine to withdraw a bid if legal action or other forms of opposition are
anticipated.

OPERATIONS

Pursuant to the terms of its management contracts, the Company is responsible
for the overall operation of its facilities, including staff recruitment,
general administration of the facilities, security and supervision of the
offenders and facility maintenance. The Company also provides a variety of
rehabilitative and educational programs at many of its facilities. Inmates at
most facilities managed by the Company may receive basic education through
academic programs designed to improve inmate literacy levels (including English
as a second language programs) and the opportunity to acquire General Education
Development certificates. At many facilities, the Company also offers vocational
training to inmates who lack marketable job skills. In addition, the Company
offers life skills, transition planning programs that provide inmates job search
training and employment skills, health education, financial responsibility
training and other skills associated with becoming productive citizens. At
several of its facilities, the Company also offers counseling, education and/or
treatment to inmates with chemical dependency or substance abuse problems.

The Company operates each facility in accordance with Company-wide policies
and procedures generally based on the standards and guidelines established by
the American Correctional Association (“ACA”) Commission on Accreditation. The
ACA is an independent organization comprised of professionals in the corrections
industry which establishes guidelines and standards by which a correctional
institution may gain accreditation. The ACA standards, which are the industry’s
most widely accepted correctional standards, describe specific objectives to be
accomplished and cover such areas as administration, personnel and staff
training, security, medical and health care, food service, inmate supervision
and physical plant requirements. At December 31, 1996, 12 of the Company’s
facilities are accredited by the ACA and the Company intends to seek ACA
accreditation for certain of its other facilities.

Internal quality control, conducted by senior facility staff and executive
officers of the Company, takes the form of periodic operational, programmatic
and fiscal audits; facility inspections; regular review of logs, reports and
files; and strict maintenance of personnel standards, including an active
training program. The requirements for training at the Company meet and often
exceed ACA standards. Each of the Company’s facilities develops its own training
plan that is reviewed, evaluated and updated annually. Dedicated space and
equipment for training is provided and outside resources such as community
colleges are utilized in the training process. All correctional officers undergo
an initial 40-hour orientation upon their hiring and receive academy-level
training amounting to 120 hours and on-the-job training of up to 80 hours. Each
correctional officer also receives up to 40 hours of training and education
annually.

FACILITY DESIGN, CONSTRUCTION AND FINANCE

In addition to operating correctional facilities, the Company also provides
services to governmental agencies with respect to the development, design and
construction of new correctional and detention facilities and the redesign and
renovation of older facilities. The Company has developed and/or managed: (i)
the development, design and construction of the 302 bed Wyatt Facility in
Central Falls, Rhode Island; (ii) the development, design and construction of a
1,140 bed multi-purpose, multi-jurisdictional detention center in Plymouth,
Massachusetts; (iii) the development of the 288 bed facility in Baker
California; (iv) the

– 9 –

development of the 270 bed facility in Live Oak, California; (v) the
development, design and construction of the 58 bed FBOP facility in Salt Lake
City, Utah; (vi) the development, design and construction of the 94 bed Leidel
Center in Houston, Texas; (vii) the development, design and remodeling of a 75
bed pre-release center in Durham, North Carolina, (viii) the development,
design, and construction of the 160 bed Salt Lake City Juvenile Detention
Facility in Salt Lake City, Utah; and (ix) the development, design and
remodeling of the 200 bed capacity Pelham, Georgia Juvenile Facility. Currently,
the Company operates all of the facilities it has developed, designed and
constructed with the exception of the detention center in Plymouth,
Massachusetts, which is operated by the Sheriff’s Department of the County of
Plymouth, Massachusetts.

The Company utilizes an experienced team of outside professional
architectural consultants as part of the group that participates from conceptual
design through final construction of a project. When designing a facility, the
Company’s outside architects utilize, with appropriate modifications, prototype
designs the Company has previously used in developing projects. Management of
the Company believes that the use of such proven designs allows the Company to
reduce cost overruns and avoid construction delays. Additionally, the Company
designs its facilities with the intention to improve security and minimize the
number of guards or correctional officers needed to properly staff the facility
by enabling enhanced visual and electronic surveillance of the facility.

The Company may propose various construction financing structures to the
contracting governmental agencies. The governmental agency may finance, or the
Company may arrange for the financing of, the construction of such facilities
through various methods including, but not limited to, the following: (i) a
one-time general revenue appropriation by the governmental agency for the cost
of the new facility, (ii) general obligation bonds that are secured by either a
limited or unlimited tax levy by the issuing governmental entity or (iii) lease
revenue bonds or certificates of participation secured by an annual lease
payment that is subject to annual or bi-annual legislative appropriations. 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. Substantial expenditures for construction will not be made
on such a project until the tax-exempt bonds or other obligations are sold. If
such bonds or obligations are not sold, construction and management of the
facility will be delayed until alternate financing is procured or development of
the project will be entirely suspended. When the Company is awarded a facility
management contract, appropriations for the first annual or bi-annual period of
the contract’s term have generally already been approved, and the contract is
subject to governmental appropriations for subsequent annual or bi-annual
periods. Of the 21 facilities the Company operates or has contracted to operate
as of December 31, 1996, 2 were funded using one of the above-described
financing methods, 2 are owned by the Company and 17 are leased. Of the 17
leased facilities, 3 at the Big Spring Facility are operated under long-term
leases ranging from 34 to 38 years including renewal options at the discretion
of the Company. As part of the purchase price for the MidTex acquisition, the
Company prepaid a majority of the facility costs related to the Big Spring
Facility through at least the year 2030.

The Company has in the past worked with governmental agencies and placement
agents to obtain and structure financing for construction of facilities. In some
cases, an unrelated special purpose corporation is established to incur
borrowings to finance construction and, in other cases, the Company directly
incurs borrowings for construction financing. A growing trend in the
privatization industry is the requirement by governmental agencies that private
operators make capital investments in new facilities and enter into direct
financing arrangements in connection with the development of such facilities.

– 10 –

COMPETITION

The Company competes with a number of companies, including, but not limited
to, Corrections Corporation of America (“CCA”), Wackenhut Corrections
Corporation (“WHC”) and U.S. Corrections Corporation (“USCC”). At December 31,
1995, CCA and WHC accounted for more than 70% of the privatized secure adult
beds under contract in the United States, according to the Private Correctional
Facility Census. Therefore, certain competitors of the Company are larger and
may have greater resources than the Company. The Company also competes in some
markets with small local companies that may have better knowledge of local
conditions and may be better able to gain political and public acceptance. In
addition, the Company may compete in some markets with governmental agencies
that operate correctional and detention facilities.

EMPLOYEES

At December 31, 1996, the Company had 715 full-time employees and 39
part-time employees. Of such full-time employees, approximately 30 were employed
at the Company’s corporate and administrative offices in Houston, Texas and
Ventura, California. The remainder of the employees work at the Company’s
facilities. The Company employs management, administrative and clerical,
security, educational and counseling services, health services and general
maintenance personnel. The Company believes its relations with its employees are
good. From time to time, collective bargaining efforts have begun at certain of
the Company’s facilities, although to date none of the efforts has been
successful. The Company expects such collective bargaining efforts to continue.

REGULATIONS

The industry in which the Company operates is subject to federal, state and
local regulations administered by a variety of regulatory authorities.
Generally, prospective providers of correctional, detention and pre-release
services must comply with a variety of applicable state and local regulations,
including education, healthcare and safety regulations. The Company’s contracts
frequently include extensive reporting requirements and require supervision with
on-site monitoring by representatives of contracting governmental agencies.

In addition to regulations requiring certain contracting governmental
agencies to enter into a competitive bidding procedure before awarding
contracts, the laws of certain jurisdictions may also require the Company to
award subcontracts on a competitive basis or to subcontract with businesses
owned by women or members of minority groups.

INSURANCE

The Company maintains a $10 million general liability insurance policy for
all its operations. The Company also maintains insurance in amounts it deems
adequate to cover property and casualty risks, workers’ compensation and
directors’ and officers’ liability.

The Company’s contracts and the statutes of certain states in which the
Company operates typically require the maintenance of insurance by the Company.
The Company’s contracts provide that, in the event that the Company does not
maintain such insurance, the contracting agency may terminate its agreement with
the Company. The Company believes that it is in compliance in all material
respects with respect to these requirements.

– 11 –

ITEM 2. PROPERTIES

The Company leases corporate headquarters office space in Houston, Texas and
an administrative office in Ventura, California. The Company also leases space
for 20 of the facilities it is currently operating or developing. In connection
with the acquisition of MidTex, and as part of the purchase price, the Company
prepaid a majority of the facility costs related to the Big Spring Facility
through at least the year 2030.

At December 31, 1996, the Company owned two facilities, the Leidel Center and
the Reid Center, both located in Houston, Texas. The Company is not required to
lease space at the Wyatt Facility, which is owned by the DFC, or the Salt Lake
City Juvenile Detention Facility, which is owned by the County of Salt Lake and
leased to the State of Utah.

ITEM 3. LEGAL PROCEEDINGS

The Company currently and from time to time is subject to claims and suits
arising in the ordinary course of business, including claims for damages for
personal injuries or for wrongful restriction of, or interference with, inmate
privileges, and employment matters. In the opinion of management of the Company,
the outcome of the proceedings to which the Company is currently a party will
not have a material adverse effect upon the Company’s operations or financial
condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to the Company’s security holders during the fourth
quarter of 1996.

ITEM 5. MARKET FOR CORNELL CORRECTIONS, INC. COMMON STOCK AND RELATED
STOCKHOLDER MATTERS

The common stock of the Company is currently listed on the American Stock
Exchange (“AMEX”) under the symbol CRN. As of February 28, 1997, there were
approximately 37 record holders of common stock. The high and low sales prices
for the common stock on the AMEX since the common stock began trading on October
3, 1996 are shown below:
1996
Period HIGH LOW

1st Quarter………………… N/A N/A
2nd Quarter………………… N/A N/A
3rd Quarter………………… N/A N/A
4th Quarter………………… 12 3/4 8 7/8

The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain excess cash flow, if any, for use in the
operation and expansion of its business and does not anticipate paying cash
dividends on the common stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will be
dependent upon, among other factors, the Company’s results of operations,
financial condition, capital requirements, restrictions, if any, imposed by
financing commitments and legal requirements. The Company’s current credit
facility prohibits payment of dividends.

– 12 –

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data should be read in conjunction with the
Company’s Consolidated Financial Statements and Notes thereto and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this report.

– ———-

(1) Includes the operations of Eclectic purchased by the Company on March
31, 1994.

(2) Includes the operations of the Big Spring Facility and the Reid Center
acquired in July 1996 and May 1996, respectively.

(3) Prior to March 31, 1994, the Company was organized as a partnership. For
purposes of computing average shares outstanding for the period prior to
March 31, 1994, the partnership units were converted to common shares
using a one-to-one unit-to-share conversion ratio.

(4) Supplemental per share data is presented to show what the earnings would
have been if the repayment of debt with proceeds from the initial public
offering had taken place at the beginning of the respective periods.

(5) For any applicable facilities, includes reduced occupancy during the
start-up phase. For the year ended December 31, 1993, occupancy did not
commence until December 1993.

– 13 –

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

The Company provides to governmental agencies the integrated development,
design, construction and operation of correctional and detention facilities. The
following table sets forth the number of facilities under contract or award at
the end of the periods shown.

– ———-

(1) Consists of facilities in operation, facilities under development and
facilities for which awards have been obtained.

(2) For any applicable facilities, includes reduced occupancy during the
start-up phase.

During 1996, the Company added the management of 2,230 beds through opening
or contracting to open five new facilities (587 beds) and the acquisitions of
MidTex and the Reid Center (1,643 beds). As of December 31, 1996, the Company
had 24 contracts to operate 21 private correctional, detention and pre-release
facilities with an aggregate design capacity of 3,577 beds. Of these facilities,
18 were in operation (3,142 beds) and 3 were under development (435 beds). The 3
facilities under development commenced operations during the first quarter of
1997.

The Company derives substantially all its revenues from operating
correctional, detention and pre-release facilities for federal and state
governmental agencies in the United States. Revenues for operation of
correctional, detention and pre-release facilities are generally recognized on a
per diem rate based upon the number of occupant days for the period.

The Company’s operating expenses consist primarily of facility personnel
costs, lease expense, insurance, utilities, food, medical services, supplies and
clothing. Depreciation and amortization includes amortization of prepaid
facility use costs pertaining to the Big Spring Facility, amortization of
intangible assets including goodwill, and depreciation of buildings and other
property and equipment. General and administrative expenses consists primarily
of salaries and related overhead of the Company’s corporate and administrative
personnel who provide senior management, accounting, finance, personnel and
other services, and costs of developing new contracts.

RESULTS OF OPERATIONS

The Company’s historical operating results reflect that the Company has
expanded its business significantly since 1994. Material fluctuations in the
Company’s results of operations are principally the result of the timing and
effect of acquisitions, the level of development activity conducted by the
Company, and occupancy rates at Company-operated facilities. The Company’s
acquisitions to date have been accounted for using the purchase method of
accounting, whereby the operating results of the acquired businesses have been
reported in the Company’s operating results since the date of acquisition.

– 14 –

The Company’s operations grew significantly with the March 1994 acquisition
of Eclectic. The operations of Eclectic were included in the Company’s results
of operations for nine months in 1994 and a full twelve months in the years
thereafter. The Company’s acquisition of the Reid Center in May 1996 and MidTex
in July 1996 significantly increased 1996 revenues over 1995 and will have a
greater impact in 1997 once such operations are included in the Company’s
reported results of operations for a full year.

In connection with the Company’s July 1996 credit facility (“1996 Credit
Facility”), the Company incurred expenses, issued certain options and warrants,
and sold shares of common stock, for which the Company recognized total deferred
financing costs of $1.3 million, of which $726,000 was noncash, to be amortized
over the life of the 1996 Credit Facility. Since the use of proceeds from the
initial public offering were used to retire the outstanding indebtedness under
the 1996 Credit Facility, the total deferred financing costs were charged to
interest expense during the third quarter of 1996 in connection with the early
retirement of the borrowings under the 1996 Credit Facility. In addition, the
Company recognized noncash compensation expense of $870,000 during the third
quarter of 1996 in connection with the issuance of certain options granted in
July 1996 to purchase shares of common stock.

The following table sets forth for the periods indicated the percentages of
total revenue represented by certain items in the Company’s historical
consolidated statements of operations.

YEAR ENDED DECEMBER 31,
1994 1995 1996
—————————

Total revenues………………………………. 100.0% 100.0% 100.0%
Operating expenses…………………………… 78.5 79.0 80.5
Depreciation and amortization…………………. 4.8 4.0 4.3
General and administrative expenses……………. 18.9 17.0 14.1
—— —— ——
Income (loss) from operations…………………. (2.2) 0.0 1.1
Interest expense (income)…………………….. 1.0 4.8 8.2
—— —— ——
Income (loss) before income taxes……………… (3.2) (4.8) (7.1)
Provision for income taxes……………………. 0.6 0.0 0.2
—— —— ——
Net income (loss)……………………………. (3.8) (4.8) (7.3)
====== ====== ======

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

TOTAL REVENUES. Total revenues increased by 56.2% to $32.3 million for the
year ended December 31, 1996 from $20.7 million for the year ended December 31,
1995. The increase in occupancy fees of $11.3 million, or 54.8%, was due
principally to the acquisition of MidTex as of July 1, 1996, the opening of two
new pre-release facilities during the first quarter of 1996, and the acquisition
of the Reid Center as of May 1, 1996. The increase in other income for the year
ended December 31, 1996 to $450,000 from $98,000 for the year ended December 31,
1995 was due principally to the recognition of revenue related to a previously
reserved note receivable of $206,000 pertaining to 1994 operations of the Wyatt
Facility, the realization of which improved from prior periods due to payments
received on the note and due to the additional operating experience with the
facility. Additional other income related to commissary operations and
commissions earned at the Big Spring Facility.

OPERATING EXPENSES. Operating expenses increased by 59.2% to $26.0 million
for the year ended December 31, 1996 from $16.4 million for the year ended
December 31, 1995. This increase was principally attributable to the acquisition
of MidTex as of July 1, 1996, the opening of two new pre-release facilities
during the first quarter of 1996, and the acquisition of the Reid Center as of
May 1, 1996. As a percentage of revenues, operating expenses increased to 80.5%
from 79.0% due primarily to the relative increase in secure institutional
operations.

– 15 –

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 69.5%
to $1.4 million for the year ended December 31, 1996 from $820,000 for the year
ended December 31, 1995. The increase was principally due to the amortization of
prepaid facility use costs of the Big Spring Facility, the opening of two new
pre-release facilities in January 1996, and to the acquisition of the Reid
Center in May 1996.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 29.1% to $4.6 million for the year ended December 31, 1996 from
$3.5 million for the year ended December 31, 1995. Included in general and
administrative expenses for the year ended December 31, 1996 was a
non-recurring, non-cash charge of $870,000 in connection with the July 1996
grant of certain options to purchase shares of the Company’s common stock. As a
percentage of revenues, excluding the non-recurring charge, general and
administrative expenses decreased to 11.4% from 17.0% due principally to
spreading fixed costs over a larger revenue base.

INTEREST. Interest expense, net of interest income, increased to $2.6 million
for the year ended December 31, 1996 from $979,000 for the year ended December
31, 1995. The increase in net interest expense was principally due to the $1.3
million non-recurring charge ($726,000 of which was non-cash) to expense
deferred financing costs associated with the early retirement of significant
portions of the 1996 Credit Facility, borrowings under the Company’s 1995 and
1996 Credit Facilities related to the acquisition of MidTex in July 1996, the
Company’s financing of the purchase of certain outstanding stock in November
1995, the construction and development of the two new pre-release facilities
which opened during the first quarter of 1996, and the acquisition of the Reid
Center in May 1996.

INCOME TAXES. The Company did not recognize any provision for federal income
taxes due to a taxable loss in both years. The Company recognized a provision
for state income taxes of $75,000 for the year ended December 31, 1996. As of
December 31, 1996, the Company had recognized a deferred tax asset of $608,000.
Management of the Company believes that this deferred tax asset is realizable.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

TOTAL REVENUES. Total revenues increased 31.9% to $20.7 million for the year
ended December 31, 1995 from $15.7 million for the year ended December 31, 1994.
The revenue increase was due principally to the recognition of occupancy fees
for a full 12 months in 1995 related to the Eclectic acquisition versus the
recognition of nine months in 1994. Additionally, an increase in occupancy fees
of approximately $1.1 million was attributable to the Wyatt Facility principally
as a result of a higher occupancy and per diem rate in 1995 compared to 1994.

OPERATING EXPENSES. Operating expenses increased 32.8% to $16.4 million for
the year ended December 31, 1995 from $12.3 million for the year ended December
31, 1994. The increase in operating expenses was due principally to the
recognition of operating expenses of Eclectic for a full 12 months in 1995. As a
percentage of revenues, operating expenses increased to 79.0% from 78.5%
principally for the same reason.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
8.2% to $820,000 for the year ended December 31, 1995 from $758,000 for the year
ended December 31, 1994. The increase was due principally to recognizing 12
months of contract value and goodwill amortization in 1995 as compared to nine
months of amortization in 1994 resulting from the acquisition of Eclectic,
offset in part by an accounting adjustment in the first quarter of 1995 to
adjust depreciation expense in prior periods.

– 16 –

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 19.3% to $3.5 million for the year ended December 31, 1995 from $3.0
million for the year ended December 31, 1994. The increase in general and
administrative expenses was principally due to the addition of the operations of
Eclectic and an increase in RFP and development costs. Development costs
increased by $457,000 for the year ended December 31, 1995 compared to the year
ended December 31, 1994. As a percentage of revenues, general and administrative
expenses decreased to 17.0% from 18.9% due principally to spreading fixed costs
over a larger revenue base.

INTEREST. Interest expense, net of interest income, increased to $979,000 for
the year ended December 31, 1995 from $156,000 for the year ended December 31,
1994. The increase resulted from the expensing of debt issuance costs and
commitment fees of $472,000 associated with the 1995 Credit Facility, the
incurrence of $4.0 million of debt and other long-term obligations in connection
with the acquisition of Eclectic and increased borrowings under the 1995 Credit
Facility to purchase treasury stock.

INCOME TAXES. There was no provision for income taxes for the year ended
December 31, 1995 due to a taxable loss. The Company recognized a provision for
income taxes of $101,000 for the year ended December 31, 1994, even though the
Company incurred a loss for financial reporting purposes in 1994, principally
because certain goodwill amortization contributing to the loss for financial
reporting purposes was not deductible for income tax purposes.

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993

REVENUES. Revenues increased 390.6% to $15.7 million for the year ended
December 31, 1994 from $3.2 million for the year ended December 31, 1993. The
revenue increase was principally due to the recognition of occupancy fees for
nine months of operations in 1994 for the facilities added as part of the
Eclectic acquisition in March 1994. Additionally, because the Wyatt Facility did
not begin operations until December 1993, Wyatt Facility occupancy fees for 1994
increased by approximately $3.5 million as compared to 1993. For the year ended
December 31, 1993, there were $3.0 million of procurement and preopening
revenues included in development fees and other income related to the
procurement and preopening activities of the Wyatt Facility.

OPERATING EXPENSES. Operating expenses increased 335.6% to $12.3 million for
the year ended December 31, 1994 from $2.8 million for the year ended December
31, 1993. The increase in operating expenses was principally due to the addition
of the operations of Eclectic and to a full year of operating costs of the Wyatt
Facility. As a percentage of revenues, operating expenses decreased to 78.5%
from 88.4% due principally to spreading fixed costs over a larger revenue base.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$758,000 for 1994 from $16,000 in 1993. The increase was due to recognizing nine
months of amortization and depreciation in 1994 resulting from the Eclectic
acquisition.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 125.0% to $3.0 million for the year ended December 31, 1994 from $1.3
million for the year ended December 31, 1993. The increase was principally due
to the addition of the operations of Eclectic. As a percentage of revenues,
general and administrative expenses decreased to 18.9% from 41.1% due
principally to spreading fixed costs over a larger revenue base.

– 17 –

INTEREST. Interest expense was $294,000 for the year ended December 31, 1994
compared to no interest expense for the year ended December 31, 1993 due to the
incurrence of indebtedness related to the Eclectic acquisition. Interest income
increased to $138,000 for the year ended December 31, 1994 from $45,000 for the
year ended December 31, 1993 due to the assumption of certain interest-bearing
receivables from the California Department of Corrections in connection with the
Eclectic acquisition.

INCOME TAXES. As described above, the Company recognized a provision for
income taxes of $101,000 for the year ended December 31, 1994. There was no
provision for income taxes for the year ended December 31, 1993 because the
Company was organized as a partnership prior to March 31, 1994.

LIQUIDITY AND CAPITAL RESOURCES

INITIAL PUBLIC OFFERING. On October 8, 1996, the Company completed an initial
public offering (“IPO”) of its common stock. Net proceeds to the Company from
the sale of the 3,523,103 shares of newly issued common stock were approximately
$37.4 million. On October 8, 1996, the Company repaid a total of $33.9 million
of indebtedness, $27.9 million of which was borrowed under the 1996 Credit
Facility and $6.0 million of which was borrowed under a short term convertible
note (“Convertible Bridge Note”).

GENERAL. The Company’s primary capital requirements are for working capital,
start-up costs related to new operating contracts, furniture, fixtures and
equipment, supply purchases, new facility renovations and acquisitions. Working
capital requirements generally increase immediately prior to the Company
commencing management of a new facility as the Company incurs start-up costs and
purchases necessary equipment and supplies before facility management revenue
(through occupancy fees) is realized. Some of the Company’s management contracts
have required the Company to make substantial initial expenditures of cash in
connection with the opening or renovating of a facility. Substantially all these
start-up expenditures are fully or partially recoverable as pass-through costs
or are reimbursable from the contracting governmental agency over the term of
the contract.

CHANGES IN FINANCIAL POSITION. As of December 31, 1996, total assets had
increased $32.6 million to $46.8 million since December 31, 1995. The increase
related principally to the acquisitions of MidTex and the Reid Center for which
total consideration was $25.7 million, and excess cash proceeds from the IPO.
Total stockholders’ equity increased $38.0 million to $41.1 million as of
December 31, 1996 largely as a result of the IPO and certain other equity
transactions. The Company utilized the net proceeds from the IPO in early
October 1996 to retire all of the outstanding borrowings under the 1996 Credit
Facility and the Convertible Bridge Note. Therefore, immediately following the
consummation of the IPO, the Company had no material debt. The Company used
borrowings under the 1996 Credit Facility to refinance outstanding borrowings
under the 1995 Credit Facility, to finance a portion of the MidTex acquisition
and for working capital. As of December 31, 1996, the Company had no outstanding
borrowings under the 1996 Credit Facility.

WORKING CAPITAL. The Company’s working capital increased to $7.7 million at
December 31, 1996 from $1.5 million at December 31, 1995. This increase was
principally due to excess cash proceeds from the IPO after repayment of
indebtedness, and an increase in receivables resulting from the acquisition of
MidTex in July 1996 and the Reid Center in May 1996.

EXISTING CREDIT FACILITIES. Under the 1996 Credit Facility, as amended, the
Company has a $15.0 million credit facility comprised of a $5.0 million
revolving credit facility for working capital purposes and a $10.0 million
multiple-advance term loan facility available for new and expanded facilities
costs.

– 18 –

In January 1997, the Company acquired the assets of Interventions. The
Company financed the $6.0 million purchase price, which included the retirement
of $2.3 million of pre-acquisition bank debt, with $2.0 million of borrowings
from the multiple-advance term loan facility under the 1996 Credit Facility, and
the remainder with cash. See Note 7 to the consolidated financial statements.

CAPITAL EXPENDITURES. Capital expenditures for the year ended December 31,
1996 were $1.3 million and related to construction in progress for a new
pre-release facility which opened during the first quarter of 1997, completion
of construction and purchase of furniture and equipment for the two pre-release
facilities which opened during the first quarter of 1996, and for normal
replacement of furniture and equipment at various facilities.

CASH USED IN OPERATING ACTIVITIES. The Company had net cash used in operating
activities of $540,000 for the year ended December 31, 1996. For the three
months ended December 31, 1996, the Company had net cash provided by operating
activities of $858,000. Significant uses of operating cash during 1996 include
start-up costs for facilities under development, and increased prepaid insurance
and other items related to the additional acquired facilities.

Management of the Company believes that the cash flows anticipated to be
generated from operations, together with the credit available under the 1996
Credit Facility, will provide sufficient liquidity to meet the Company’s working
capital requirements for the near term. It is not anticipated that the 1996
Credit Facility will provide sufficient financing to finance construction costs
related to future institutional contract awards or significant future
acquisitions. The Company anticipates obtaining separate sources of financing to
finance such activities.

INFLATION

Management of the Company believes that inflation has not had a material
effect on the Company’s results of operations during the past three years.
However, most of the Company’s facility management contracts provide for
payments to the Company of either fixed per diem fees or per diem fees that
increase by only small amounts during the terms of the contracts. Inflation
could substantially increase the Company’s personnel costs (the largest
component of facility management expense) or other operating expenses at rates
faster than any increases in occupancy fees.

– 19 –

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Cornell Corrections, Inc.:

We have audited the accompanying consolidated balance sheets of Cornell
Corrections, Inc. (formerly Cornell Cox, Inc., a Delaware corporation and
successor to the Cornell Cox Group, L.P., a Delaware limited partnership), and
subsidiaries as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders’ equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cornell Corrections, Inc. and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 7, 1997

– 20 –

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

CORNELL CORRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

DECEMBER 31,
1995 1996
——- ——-
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ……………………… $ 390 $ 4,874
Accounts receivable, net ………………………. 3,436 4,976
Current portion of notes receivable …………….. 216 211
Deferred tax asset ……………………………. 27 120
Prepaids and other ……………………………. 187 1,128
Restricted assets …………………………….. 284 1,124
——- ——-
Total current assets ……………………….. 4,540 12,433
PROPERTY AND EQUIPMENT, net ………………………. 1,909 26,074
OTHER ASSETS:
Notes receivable, noncurrent …………………… 519 620
Goodwill, net ………………………………… 6,204 5,864
Contract value, net …………………………… 206 —
Deferred tax asset, noncurrent …………………. 409 488
Deferred costs and other ………………………. 397 1,345
——- ——-
Total assets ………………………………. $14,184 $46,824
======= =======
LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued liabilities ………… $ 2,991 $ 4,403
Current portion of long-term debt ………………. 24 283
——- ——-
Total current liabilities …………………… 3,015 4,686
LONG-TERM DEBT, net of current portion …………….. 7,625 462
OTHER LONG-TERM LIABILITIES ………………………. 491 625

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 and $.001 par value, respectively,
1,000,000 and 10,000,000 shares authorized, respectively,
none outstanding…………………………….. — —
Common stock, $.01 and $.001 par value, respectively,
9,000,000 and 30,000,000 shares authorized, respectively,
3,189,385 and 7,320,398 shares issued and outstanding,
respectively………………………………… 32 7
Additional paid-in capital……………………… 6,955 47,562
Stock option loans…………………………….. — (455)
Retained deficit………………………………. (1,331) (3,710)
Treasury stock (555,000 shares of common stock, at cost) (2,603) (2,353)
——- ——-
Total stockholders’ equity……………………… 3,053 41,051
——- ——-
Total liabilities and stockholders’ equity……….. $14,184 $46,824
======= =======

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

– 21 –

CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED DECEMBER 31,
1994 1995 1996
——– ——– ——–
REVENUES:
Occupancy fees ……………………….. $ 15,389 $ 20,594 $ 31,877
Other income …………………………. 300 98 450
——– ——– ——–
15,689 20,692 32,327
OPERATING EXPENSES ……………………… 12,315 16,351 26,038
DEPRECIATION AND AMORTIZATION ……………. 758 820 1,390
GENERAL AND ADMINISTRATIVE EXPENSES ………. 2,959 3,531 4,560
——– ——– ——–

INCOME (LOSS) FROM OPERATIONS ……………. (343) (10) 339
INTEREST EXPENSE ……………………….. 294 1,115 2,810
INTEREST INCOME ………………………… (138) (136) (167)
——– ——– ——–

LOSS BEFORE PROVISION FOR INCOME TAXES ……. (499) (989) (2,304)
PROVISION FOR INCOME TAXES ………………. 101 — 75
——– ——– ——–

NET LOSS ………………………………. $ (600) $ (989) $ (2,379)
======== ======== ========

LOSS PER SHARE …………………………. $ (.16) $ (.25) $ (.53)
======== ======== ========

NUMBER OF SHARES USED IN PER SHARE CALCULATION 3,811 3,983 4,466
======== ======== ========

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

– 22 –

CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

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

– 23 –

CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

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

– 24 –

CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cornell Corrections, Inc. (collectively with its subsidiaries, the
“Company”), a Delaware corporation, provides to governmental agencies the
integrated development, design, construction and management of facilities within
three areas of operational focus: (i) secure institutional correctional and
detention services, (ii) pre-release correctional services and (iii) juvenile
correctional and detention services.

CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.

RESTRICTED ASSETS

For certain facilities, the Company maintains bank accounts for restricted
cash belonging to inmates and commissary operations, for an equipment
replacement fund for the replacement of equipment used in state programs, and
for a restoration fund for any necessary restorations of the related facilities.
These bank accounts and commissary inventories are collectively referred to as
“restricted assets” in the accompanying financial statements.

DEFERRED COSTS

Facility start-up costs, which consist of costs of initial employee training,
travel and other direct expenses incurred in connection with the opening of new
facilities, are capitalized and amortized on a straight-line basis over the
lesser of the initial term of the contract plus renewals or five years. Direct
incremental development costs paid to unrelated third parties incurred in
securing new facilities, including certain costs of responding to requests for
proposal (“RFPs”), are capitalized as deferred costs and amortized as part of
start-up costs. Internal payroll and other costs incurred in securing new
facilities are expensed to general and administrative expenses. Deferred
development costs are charged to general and administrative expenses when the
success of obtaining a new facility project is considered doubtful.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Ordinary maintenance and repair
costs are expensed while renewal and betterment costs are capitalized. Prepaid
facility use cost, which resulted from the July 1996 acquisition of MidTex, is
being amortized over 35 years using the straight-line method. Buildings and
improvements are depreciated over their estimated useful lives of 20 to 40 years
using the straight-line method. Furniture and equipment are depreciated over
their estimated useful lives of 3 to 10 years using the straight-line method.
Amortization of leasehold improvements is computed on the straight-line method
based upon the shorter of the life of the asset or the term of the respective
lease.

– 25 –

CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

Property and equipment at December 31, 1995 and 1996, are as follows (in
thousands):

1995 1996
——– ——–
Land …………………………………………. $ — $ 561
Prepaid facility use …………………………… — 21,637
Buildings and improvements ……………………… — 2,651
Leasehold improvements …………………………. 598 1,100
Furniture and equipment ………………………… 407 938
Construction in progress ……………………….. 1,334 439
——– ——–
2,339 27,326
Accumulated depreciation and amortization (430) (1,252)
——– ——–
$ 1,909 $ 26,074
======== ========

Construction in progress at December 31, 1996 represents construction and
development costs attributable to a new pre-release facility which opened during
the first quarter of 1997.

CONTRACT VALUE

Contract value represents the estimated fair value of the contracts acquired
with the acquisition of Eclectic Communications, Inc. (“Eclectic”) which were
amortized over the remaining term of the contracts. Accumulated amortization was
$542,000 as of December 31, 1995 and contract value was fully amortized as of
December 31, 1996.

GOODWILL

Goodwill represents the total consideration the Company paid to acquire
Eclectic in excess of the fair market value of the net tangible and identifiable
intangible assets acquired. Goodwill is being amortized on a straight-line basis
over 20 years, which represents management’s estimation of the related benefit
to be derived from the acquired business. Under Accounting Principles Board
(“APB”) Opinion No. 17, the Company periodically evaluates whether events and
circumstances after the acquisition date indicate that the remaining balance of
goodwill may not be recoverable. If factors indicate that goodwill should be
evaluated for possible impairment, the Company would compare estimated
undiscounted future cash flow from the related operations to the carrying amount
of goodwill. If the carrying amount of goodwill were greater than undiscounted
future cash flow, an impairment loss would be recognized. Any impairment loss
would be computed as the excess of the carrying amount of goodwill over the
estimated fair value of the goodwill (calculated based on discounting estimated
future cash flows). Accumulated amortization of goodwill was $599,000 and
$939,000 as of December 31, 1995 and 1996, respectively.

REALIZATION OF LONG-LIVED ASSETS

In March 1995, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 121, “Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of.”
SFAS No. 121 requires that long-lived assets be probable of future recovery in
their respective carrying amounts as of each balance sheet date. The Company
adopted SFAS No. 121 effective January 1, 1996. Management believes its
long-lived assets are realizable and that no impairment allowance is necessary
pursuant to the provision of SFAS No. 121.

– 26 –

CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

REVENUE RECOGNITION

Substantially all occupancy fees are derived from contracts with federal and
state government agencies, which pay per diem rates based upon the number of
occupant days for the period. Such revenues are recognized as services are
provided.

Revenues related to other income include development fees and miscellaneous
other income. The development fees relate to the development, design and
supervision of facility construction activities.
Revenues are recognized as services are provided.

INCOME TAXES

The Company utilizes the liability method of accounting for income taxes as
required by SFAS No. 109, “Accounting for Income Taxes.” Under the liability
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying values of existing assets and liabilities and their respective tax
bases based on enacted tax rates.

USE OF ESTIMATES

The Company’s financial statements are prepared in accordance with generally
accepted accounting principles (“GAAP”). Financial statements prepared in
accordance with GAAP require the use of management estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Additionally, management estimates affect the reported amounts of revenues and
expenses during the reporting period.
Actual results could differ from those estimates.

BUSINESS CONCENTRATION

Contracts with federal and state governmental agencies account for nearly all
of the Company’s revenues.

FINANCIAL INSTRUMENTS

The Company considers the fair value of all financial instruments not to be
materially different from their carrying values at the end of each fiscal year
based on management’s estimate of the Company’s ability to borrow funds under
terms and conditions similar to those of the Company’s existing debt.

ACCOUNTING FOR STOCK-BASED COMPENSATION

In 1995, the FASB issued SFAS No. 123, “Accounting for Stock-Based
Compensation,” which is effective for the Company’s 1996 fiscal year. SFAS No.
123 allows the Company to adopt either of two methods for accounting for stock
options. The Company intends to continue to account for its stock-based
compensation plans under Accounting Principles Board, Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB Opinion No. 25”). In accordance
with SFAS No. 123, certain pro forma disclosures are provided in Note 6.

PER SHARE DATA

Per share data is based on the weighted average number of common shares and
common share equivalents outstanding for the period. Common shares equivalents
have been included in the calculation of the shares used in computing net loss
per common share using the treasury stock method.

– 27 –

CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

INITIAL PUBLIC OFFERING

On October 3, 1996, the Company completed an initial public offering (“IPO”)
of its common stock. Net proceeds to the Company from the sale of the 3,523,103
shares of newly issued common stock were approximately $37.4 million. Proceeds
of the IPO were used to repay indebtedness and for general working capital
purposes.

NON-RECURRING CHARGES

In connection with the Company’s July 1996 credit facility (“1996 Credit
Facility”), the Company incurred expenses, issued certain options and warrants,
and sold shares of common stock, for which the Company recognized total deferred
financing costs of $1.3 million, of which $726,000 was noncash, to be amortized
over the life of the 1996 Credit Facility. Since the use of proceeds from the
IPO were used to retire significant portions of the 1996 Credit Facility, the
total deferred financing costs were charged to interest expense as of September
30, 1996. In addition, the Company recognized noncash compensation expense of
$870,000 during the third quarter of 1996 in connection with options to purchase
shares of common stock granted in July 1996 to certain officers of the Company
based upon the estimated valuation of the shares of common stock compared to the
exercise price on the date of grant.

2. ACQUISITIONS

In July 1996, the Company completed the acquisition of substantially all the
assets of MidTex Detentions, Inc. (“MidTex”), a private correctional center
operator for the Federal Bureau of Prisons (“FBOP”), operating secure
institutional facilities in Big Spring, Texas with a capacity of 1,305 beds at
the date of acquisition (“Big Spring Facility”). In May 1996, the Company
acquired a 310-bed facility located in Houston, Texas (“Reid Center”),
previously operated by Texas Alcoholism Foundation, Inc., and The Texas House
Foundation, Inc. (collectively, “Texas House”). Total consideration for these
acquisitions was approximately $25.7 million. The acquisitions were financed
primarily through borrowings under the 1996 Credit Facility and a short term
convertible note (“Convertible Bridge Note”). In connection with the MidTex
acquisition, the Company entered into various agreements for the use of the
facilities and the annual payment of $216,000 (in lieu of property taxes) per
year for approximately the next 35 years.

The acquisition costs and the estimated fair market value of the assets
acquired and liabilities assumed associated with the above-mentioned
acquisitions are as follows (in thousands):

MIDTEX REID CENTER

Cash paid……………………………. $23,200 $1,986
Transaction costs…………………….. 470 90
——- ——
Total purchase price……………….. $23,670 $2,076
======= ======
Net assets acquired —
Cash………………………………. $ 486 $ —
Receivables, net……………………. 2,726 —
Other current assets………………… 755 —
Property and equipment, net:
Prepaid facility use……………….. 21,710 —
Other…………………………….. 10 2,090
Other assets……………………….. 5 —
Accounts payable and accrued liabilities. (2,022) (14)
—— ——
$23,670 $2,076
=======
– 28 –

CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

The carrying value of the prepaid facility use relates to the Company’s right
to use the three detention facilities retained by the City of Big Spring for 19,
20, and 23 years, respectively, plus three five-year extensions. Extensions of
the lease agreement are at the option of the Company. The costs will be
amortized over the respective periods, including the option periods. The Company
currently intends to exercise these extensions.

Both the Reid Center and MidTex acquisitions have been accounted for as
purchases; therefore, the accompanying statements of operations reflect the
results of operations since their respective acquisition dates.

The unaudited consolidated results of operations on a pro forma basis as
though the Reid Center and MidTex had been acquired as of the beginning of the
Company’s fiscal years 1995 and 1996 are as follows (amounts in thousands,
except per share data):

YEAR ENDED DECEMBER 31,
1995 1996

Total revenues……………………… $38,716 $42,061
Net loss…………………………… (8) (2,030)
Loss per share……………………… (.00) (.45)

The unaudited consolidated results of operations on a pro forma basis (i)
assuming the Reid Center and MidTex had been acquired as of the beginning of the
Company’s fiscal year 1996, (ii) assuming the IPO had occurred at the beginning
of the Company’s fiscal year 1996, and (iii) excluding the $2.1 million of
non-recurring charges described above, are as follows (amounts in thousands,
except per share data):

YEAR ENDED
DECEMBER 31, 1996

Total revenues…………………………. $42,061
Net income…………………………….. 1,772
Earnings per share……………………… .25

Effective March 31, 1994, the Company purchased all outstanding stock of
Eclectic, a California-based operator of residential care and secure
correctional facilities. Consideration for the Eclectic acquisition was $10.3
million, consisting of $6 million in cash, $3.3 million in seller subordinated
debt, approximately $700,000 of other long-term obligations, and $300,000 of
transaction costs. The Eclectic acquisition was accounted for as a purchase, and
the accompanying statement of operations reflects the operating results of
Eclectic since the acquisition date.

– 29 –

CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

The consideration paid and total net book value of the assets acquired and
liabilities assumed associated with the Eclectic acquisition were as follows (in
thousands):

Cash paid (including transaction costs) ………… $ 6,334
Debt issued and other obligations incurred ……… 4,000
——–
Total purchase price ……………………….. $ 10,334
========
Net assets acquired —
Current assets …………………………….. $ 2,532
Property and equipment ……………………… 586
Contract value …………………………….. 748
Goodwill ………………………………….. 6,799
Other assets ………………………………. 1,717
Current liabilities ………………………… (1,577)
Other liabilities ………………………….. (471)
——–
$ 10,334
========

3. INCOME TAXES

The following is an analysis of the Company’s deferred tax assets (in
thousands):

DECEMBER 31,
———————
1995 1996
——- ——-
Deferred tax assets relating to —
Net operating loss carryforwards ……. $ 380 $ 609
Accelerated depreciation and amortization
of property and equipment for financial
reporting purposes ……………….. 114 290
Accrued expenses recorded for financial
reporting purposes and deferred for tax
purposes ………………………… 217 282
Deferred compensation ……………… — 331
——- ——-
711 1,512
Deferred tax liabilities …………….. — —
Net deferred tax asset before valuation
allowance ………………………… 711 1,512
Valuation allowance …………………. (275) (904)
——- ——-
Net deferred tax asset …………….. $ 436 $ 608
======= =======

The components of the Company’s income tax provision were as follows (in
thousands):

YEAR ENDED DECEMBER 31,
1994 1995 1996
————————-
Current provision…………….. $ — $ — $ 247
Deferred provision (benefit)…… 101 — (172)
—— —— ——
Tax provision………………. $ 101 $ — $ 75
====== ====== ======

– 30 –

YEAR ENDED DECEMBER 31,
————————
1994 1995 1996
—– —– —–

Computed taxes at statutory rate of 34 percent …… $(170) $(336) $(783)
Amortization of non-deductible intangibles ………. 166 162 186
1994 first quarter loss reported in
partnership tax return ……………………… 88 — —
State income taxes, net of federal benefit ………. 35 — (39)
Changes in valuation allowance …………………. — 190 629
Other ……………………………………….. (18) (16) 82
—– —– —–
$ 101 $– $ 75
===== ===== =====

As of December 31, 1996, the Company has a net operating loss (“NOL”)
carryforward for income tax purposes of approximately $1,600,000 available to
offset future taxable income. This carryforward will expire beginning 2008.

4. LONG-TERM DEBT

The Company’s long-term debt consisted of the following (in thousands):

DECEMBER 31,
1995 1996
—— —-
1995 Credit Facility (all repaid in 1996):
Revolving credit ……………………………… $ 740 $–
Term loan ……………………………………. 4,000 —
Multiple-advance term loan …………………….. 500 —
Stock repurchase loan …………………………. 2,350 —
—— —-
Total …………………………………….. 7,590 —
Other notes payable, interest at 2.9% to 9.9% ………. 59 745
—— —-
7,649 745
Less — current maturities ……………………….. 24 283
—— —-
$7,625 $462
====== ====

In conjunction with the acquisition of MidTex, the 1995 Credit Facility
was replaced with the1996 Credit Facility. The 1996 Credit Facility provided up
to $35,000,000 in loans pursuant to four separate facilities consisting of a
$2,500,000 revolving credit facility, a $23,200,000 term loan facility that was
used to finance a portion of the Mid-Tex acquisition costs, a $6,950,000
multiple-advance term loan facility for new and expanded facilities costs and a
$2,350,000 facility that was used to refinance the stock repurchase loan. In
addition, in July 1996, the Company borrowed $6.0 million under the Convertible
Bridge Note.

On October 8, 1996, the Company repaid a total of $33.9 million of
borrowings under the 1996 Credit Facility and the Convertible Bridge Note using
proceeds from the IPO. As a result of the repayments of the term loan facility
and the stock repurchase loan facility, such facilities were canceled.

– 31 –

CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

In December 1996, the 1996 Credit Facility was amended to increase the
revolving credit facility to $5.0 million and the multiple-advance term loan
facility to $10.0 million. Loans under the 1996 Credit Facility bear interest at
a designated prime rate plus the following margins: revolving credit, 1%;
multiple-advance term loan, 1.75%. Commitment fees equal to 0.5% per annum are
payable on the unused portions of the revolving credit and multiple-advance term
loan facilities. The revolving credit facility and the multiple-advance term
loan facility will mature and all amounts, if any, outstanding thereunder will
be due on December 31, 1997. The 1996 Credit Facility is secured by all of the
Company’s assets, including the stock of all the Company’s subsidiaries, does
not permit the payment of cash dividends and requires the Company to comply with
certain earnings, net worth and debt service covenants. At December 31, 1996,
there were no borrowings outstanding under the 1996 Credit Facility.

Other notes payable pertain to financed insurance premiums and various
vehicle notes. Scheduled maturities of long-term debt are as follows (in
thousands):

DECEMBER 31,
1996

1997………………………………. $ 283
1998………………………………. 316
1999………………………………. 119
2000………………………………. 27
——
Total……………………………. $ 745
======

In connection with the 1996 Credit Facility, the Company issued warrants to
the lender enabling the lender to purchase 264,000 shares of Class B Common
Stock at a per share exercise price of $2.82. The warrants are fully vested and
expire in 2003. As a condition to funding, the 1996 Credit Facility required
certain existing stockholders to purchase at least $200,000 of Class B Common
Stock. On July 9, 1996, the existing stockholders purchased an aggregate of
90,331 shares of Class B Common Stock for $254,733 (or $2.82 per share). As a
condition to the Convertible Bridge Note, the lender and certain existing
stockholders entered into a put agreement dated as of July 3, 1996 (“Put
Agreement”). The Company issued options to an existing stockholder to purchase
60,221 shares of Class B Common Stock at $2.82 per share in consideration for
entering into the Put Agreement (see Note 6 – “Treasury Stock” regarding the
expiration of this Put Agreement in 1996). Total financing costs of $1,261,000
(which includes (i) transaction costs of $535,000, (ii) the $568,000 difference
between the exercise price of the warrants granted to the lender and an existing
stockholder and the estimated valuation of the shares of common stock underlying
such options and (iii) the $158,000 difference between the purchase price and
the estimated valuation of the 90,331 shares of common stock purchased by an
existing stockholder) were capitalized as deferred financing costs.

– 32 –

CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases office space and certain facilities under long-term
operating leases. Rent expense for all operating leases for the years ended
December 31, 1994, 1995 and 1996, was approximately $1,667,000, $2,244,000, and
$2,358,000, respectively. As of December 31, 1996, the Company had the following
rental commitments under noncancelable operating leases (in thousands):

For the year ending December 31 —
1997…………………………….. $2,209
1998…………………………….. 1,378
1999…………………………….. 874
2000…………………………….. 447
2001…………………………….. 175
Thereafter……………………….. 1,257
——
$6,340

401(K) PLAN

The Company has a defined contribution 401(k) plan. The Company’s matching
contribution represents 50 percent of a participant’s contribution, up to the
first six percent of the participant’s salary. The Company can also make
additional discretionary contributions. For the years ended December 31, 1994,
1995 and 1996, the Company recorded $100,000, $139,000, and $210,000,
respectively, of contribution expense.

OTHER

The Company is subject to certain claims and disputes arising in the normal
course of the Company’s business. In the opinion of the Company’s management,
uninsured losses, if any, resulting from the ultimate resolution of these
matters will not have a material adverse impact on the Company’s financial
position or results of operations.

6. STOCKHOLDERS’ EQUITY

CAPITALIZATION

Upon the completion of the IPO, the Company’s authorized stock was as
follows:

CLASS AUTHORIZED PAR VALUE

Common stock……………… 30,000,000 $ .001
Preferred stock…………… 10,000,000 .001

Preferred stock may be issued from time to time by the Board of Directors of
the Company, which is responsible for determining the voting, dividend,
redemption, conversion and liquidation features of any preferred stock.

The Company effected a reclassification of its equity in 1996 in connection
with the IPO which resulted in the reclassification of each share of Class A
Common Stock and Class B Common Stock of the Company into one share of Common
stock, par value $.001 per share, of the Company.

– 33 –

CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

OPTIONS AND WARRANTS

In May 1996, the Company adopted the 1996 Stock Option Plan (“1996 Plan”).
Pursuant to the 1996 Plan, the Company may grant non-qualified and incentive
stock options. The Compensation Committee of the Board of Directors is
responsible for determining the exercise price and vesting terms for the
options. Additionally, prior to the IPO, the Company made various grants of
options and warrants to purchase the Company’s common stock.

The Company may grant options for up to 880,000 shares under the 1996 Plan.
The Company has granted options on 673,358 shares through December 31, 1996. The
1996 Plan option exercise price can be no less than the stock’s market price on
the date of grant. The 1996 Plan options vest up to four years, and expire after
seven to ten years.

On July 8, 1996, the chairman of the board and the chief financial officer of
the Company exercised options to purchase 137,110 and 82,750 shares of Class A
Common Stock and Class B Common Stock at an aggregate price of $274,220 and
$180,638, respectively. In connection with the exercise, each officer entered
into a promissory note with the Company for the respective aggregate exercise
amounts. The promissory notes bear interest at the applicable short-term federal
rate as prescribed by Internal Revenue Service regulations, mature in four
years, are full recourse and are collateralized by shares of common stock
exercised.

A summary of the status of the Company’s stock option plan and other options
and warrants at December 31, 1995 and 1996 and changes during the years then
ended is presented in the table and narrative below:

Of the 1,078,109 options outstanding at December 31, 1996, 948,109 options
have exercise prices between $2.00 and $5.64, with a weighted average exercise
price of $3.26 and a weighted average remaining contractual life of 7.3 years.
The remaining 130,000 options have exercise prices of $12.00 and a weighted
average remaining contractual life of 9.8 years.

– 34 –

CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

Had compensation cost for the stock option grants under the 1996 Plan and
other stock options and warrants been determined under SFAS No. 123, the
Company’s net loss and loss per share would have been the following pro forma
amounts (in thousands, except per share amounts):

YEAR ENDED DECEMBER 31,
1995 1996

Net Loss: As reported $ (989) $(2,379)
Pro Forma (1,391) (3,503)

Loss per share: As reported (.25) (.53)
Pro Forma (.35) (.80)

Because SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.

Under SFAS No. 123, the fair value of each option grant was estimated on the
date of grant using the minimum value calculation prior to the IPO, and the
Black-Scholes option pricing model subsequent to the IPO. The following weighted
average assumptions were used for grants in 1995 and 1996, respectively:
risk-free interest rates of 6.1% and 6.8%; dividend rates of $0 and $0; expected
lives of 7.0 and 7.5 years; expected volatility of 32.5% since the Company’s
stock began trading in October 1996.

The Black-Scholes option valuation model and other existing models were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferrable. In addition, option valuation
models require the input of and are highly sensitive to subjective assumptions
including the expected stock price volatility. The Company’s employee stock
options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially affect
the fair value estimate.

TREASURY STOCK

Effective November 1, 1995, the Company repurchased 555,000 shares of Class
A Common Stock from a former officer of the Company (“Stock Repurchase”). The
Stock Repurchase and related expenses were financed with borrowings under the
1995 Credit Facility. In connection with the Stock Repurchase, the Company
issued options to purchase 555,000 shares of Class B Common Stock, each with an
exercise price of $2.00 per share, to certain existing stockholders and to the
lender under the 1995 Credit Facility. Also, in connection with the Stock
Repurchase, the Company granted the lender under the 1995 Credit Facility the
Put Agreement to require the Company to repurchase options to purchase 31,250
shares of Class B Common Stock for an aggregate price of $250,000 (i.e., $8.00
per share) upon the first to occur of (a) the closing of an initial public
offering of shares of common equity of the Company, (b) the repayment by the
Company of the Stock Repurchase Loan or (c) December 31, 1996. The Put
Agreement, which was accrued in 1995, expired and was reversed in 1996.

– 35 –

CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

7. SUBSEQUENT EVENTS

On January 31, 1997, the Company acquired the assets of Interventions, Co.
(“Interventions”). The Company paid an aggregate purchase price of $6,003,000
comprised of $3,523,000 in cash, $2,250,000 for the repayment of Interventions’
outstanding notes payable, and $230,000 of transaction costs. The Company
financed the purchase with $2,000,000 of borrowings from the multiple-advance
term loan facility under its 1996 Credit Facility and the remainder with cash.
The acquisition is being treated as a purchase for accounting purposes.

The operations acquired from Interventions include (i) a 300 bed residential
pre-release correctional center in Dallas County, Texas, (ii) various
non-residential aftercare treatment programs for an additional 170 probationers
in Dallas, Texas, and (iii) a 44 bed juvenile residential transitional living
center program in San Antonio, Texas. In addition, the Company acquired from
Interventions the 72,000 square foot, 150 bed capacity facility in San Antonio
in which the juvenile transitional living center is operated.

– 36 –

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

Items 10, 11, 12 and 13 of Part III have been omitted from this report
because the Company will file with the Securities and Exchange Commission, not
later than 120 days after the close of its fiscal year, a definitive proxy
statement. The information required by Items 10, 11, 12 and 13 of this report,
which will appear in the definitive proxy statement, is incorporated by
reference into Part III of this report.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS

1. Financial statements and reports of Arthur Andersen LLP
Reports of Independent Auditors
Consolidated Balance Sheets – December 31, 1995 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995, and 1996
Consolidated Statements of Stockholders’ Equity for the years
ended December 31, 1994, 1995 and 1996 Consolidated Statements of
Cash Flows for the years ended December 31, 1994, 1995,
and 1996
Notes to Consolidated Financial Statements

2. Financial statement schedules

All schedules are omitted because they are not applicable or
because the required information is included in the financial
statements or notes thereto.

3. Exhibits

(1) Registration Statement on Form S-1 of the Company (Registration No.
333-08243).

(2) Current Report on Form 8-K of the Company dated January 31, 1997 (File
No. 1-14472).

(b) REPORTS ON FORM 8-K

None.

– 39 –

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this annual report to be signed
on its behalf by the undersigned, thereunto duly authorized.

CORNELL CORRECTIONS, INC.

Dated: March 28, 1997 By: /S/ DAVID M. CORNELL
David M. Cornell
Chairman of the Board,
President and Chief
Executive Officer

SIGNATURE TITLE DATE

/S/ DAVID M. CORNELL Chairman of the Board, President March 28, 1997
David M. Cornell and Chief Executive Officer
(Principal Executive Officer)

/S/ STEVEN W. LOGAN Chief Financial Officer, Treasurer March 28, 1997
Steven W. Logan and Secretary
(Principal Financial Officer and
Principal Accounting Officer)

/S/ RICHARD T. HENSHAW III* Director March 28, 1997
Richard T. Henshaw III

/S/ PETER A. LEIDEL* Director March 28, 1997
Peter A. Leidel

/S/ CAMPBELL A. GRIFFIN, JR.* Director March 28, 1997
Campbell A. Griffin, Jr.

/S/ TUCKER TAYLOR* Director March 28, 1997
Tucker Taylor

* By: DAVID M. CORNELL
David M. Cornell
Attorney-in-Fact

– 40 –

EX-3.1
2

EXHIBIT 3.1

RESTATED CERTIFICATE OF INCORPORATION
OF
CORNELL CORRECTIONS, INC.

UNDER SECTIONS 242 AND 245 OF THE
DELAWARE GENERAL CORPORATION LAW

CORNELL CORRECTIONS, INC. (the “Corporation”), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, hereby adopts this Restated Certificate of Incorporation,
which accurately restates and integrates the provisions of the existing
Certificate of Incorporation of the Corporation and all amendments thereto that
are in effect on the date hereof (the “Certificate of Incorporation”) and
further amends the provisions of the Certificate of Incorporation, and hereby
further certifies that:

1. The current name of the Corporation is Cornell Corrections, Inc.
The name under which the Corporation was originally incorporated was Cornell
Cox, Inc. The original Certificate of Incorporation of the Corporation (as
amended, the “Certificate of Incorporation”) was filed with the Secretary of
State of the State of Delaware on March 31, 1994.

2. The restatement of and amendments to the Certificate of
Incorporation contained herein have been duly adopted by a resolution of the
Board of Directors of the Corporation (the “Board of Directors”) proposing and
declaring advisable this Restated Certificate of Incorporation, and a majority
of the outstanding shares of the Corporation’s capital stock has duly approved
and adopted this Restated Certificate of Incorporation, all in accordance with
the provisions of Sections 228, 242 and 245 of the General Corporation Law of
the State of Delaware.

3. This Restated Certificate of Incorporation restates and further
amends the Certificate of Incorporation of the Corporation. The amendments to
the Certificate of Incorporation effected by this Restated Certificate of
Incorporation include, but are not limited to, amendments (i) to reclassify each
share of Class A Common Stock, par value $.001 per share, of the Corporation and
each share of Class B Common Stock, par value $.001 per share, of the
Corporation into one share of Common Stock, par value $.001 per share, of the
Corporation, (ii) to authorize the issuance of up to 10,000,000 shares of
Preferred Stock, par value $.001 per share, of the Corporation from time to time
in one or more series as may be determined by the Board of Directors, (iii) to
add provisions relating to dividends, liquidation and voting with respect to
Common Stock of the Corporation, (iv) to add provisions regarding the denial of
preemptive rights and cumulative voting, (v) to provide for not less than 3 and
no more than 13 Directors of the Corporation, (vi) to provide the procedure for
filling vacancies on the Board of Directors, (vii) to restrict the taking of
action by the stockholders of the Corporation by less than unanimous written
consent without a stockholders’ meeting, and (viii) to provide for the amendment
of the Bylaws of the Corporation by the Board of Directors and by the
stockholders of the Corporation and to establish the required vote for any such
amendment.

1

4. The capital of the Corporation shall not be reduced under or by
reason of the foregoing amendments to the Certificate of Incorporation.

5. The Certificate of Incorporation shall be superseded by this
Restated Certificate of Incorporation, which Restated Certificate of
Incorporation shall become effective at 8:00 a.m., New York time, on the closing
date of an initial public offering of shares of Common Stock of the Corporation
pursuant to a registration statement that shall have become effective under the
Securities Act of 1933, as amended, so long as such date occurs within 90 days
after the date of filing hereof, and this Restated Certificate of Incorporation
shall thereafter be the Certificate of Incorporation of the Corporation.

6. The text of the Certificate of Incorporation is hereby restated
and amended to read in its entirety as follows (hereinafter, this Restated
Certificate of Incorporation, as it may be further amended or restated from time
to time, is referred to the “Restated Certificate of Incorporation”).

RESTATED CERTIFICATE OF INCORPORATION

FIRST:The name of the Corporation is Cornell Corrections, Inc.

SECOND: The address of the registered office of the Corporation in
the State of Delaware is 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.

THIRD: The purpose of the Corporation is to engage in any lawful
business, act or activity for which corporations may be organized under the
provisions of the General Corporation Law of the State of Delaware or any
successor statute (the “DGCL”).

FOURTH: The aggregate number of shares of capital stock that the
Corporation shall have authority to issue is 40,000,000, divided into classes as
follows:

(1) 30,000,000 shares of common stock, par value $.001 per share
(“Common Stock”), and

(2) 10,000,000 shares of preferred stock, par value $.001 per share
(“Preferred Stock”).

2

Shares of any class or series of capital stock of the Corporation
may be issued for such consideration and for such corporate purposes as the
Board of Directors may from time to time determine.

Upon the effectiveness of the Restated Certificate of Incorporation
under the DGCL, each outstanding share of Class A Common Stock, par value $.001
per share, of the Corporation and each outstanding share of Class B Common
Stock, par value $.001 per share, of the Corporation shall be automatically
reclassified as one share of Common Stock.

The following is a statement of the powers, preferences and rights,
and the qualifications, limitations or restrictions, of the Preferred Stock and
Common Stock.

SECTION I. PREFERRED STOCK

Shares of Preferred Stock shall be issuable from time to time in one
or more series as may be determined by the Board of Directors. Each series shall
be distinctly designated. The Board of Directors is hereby expressly granted the
authority to fix, by resolution or resolutions (a) adopted prior to such
issuance, (b) providing for the issuance of any shares of each particular series
of Preferred Stock and (c) incorporated in a certificate of designation filed
with the Secretary of State of the State of Delaware, the designation, powers
(including voting powers and voting rights, full or limited, or no voting
powers) and preferences, and the relative, participating, optional or other
rights, if any, and the qualifications, limitations or restrictions thereof, if
any, of such series, including, without limiting the generality of the
foregoing, the following:

(1) the designation of, and the number of shares of Preferred Stock
which shall constitute, the series, which number may be increased (except
as otherwise fixed by the Board of Directors) or decreased (but not below
the number of shares thereof then outstanding) from time to time by action
of the Board of Directors;

(2) the rate and times at which (or the method of determination
thereof), and the terms and conditions upon which, dividends, if any, on
shares of the series shall be paid, the nature of any preferences or the
relative rights of priority of such dividends to the dividends payable,
and the qualifications, limitations or restrictions, if any, with respect
to such dividends payable, on any other shares of any class or classes of
capital stock of the Corporation or on any shares of other series of
Preferred Stock, and a statement whether or in what circumstances such
dividends shall be cumulative;

3

(3) whether shares of the series shall be convertible into or
exchangeable for shares of any class or series of capital stock or other
securities or property of the Corporation or of any other corporation or
entity, and, if so, the terms and conditions of such conversion or
exchange, including any provisions for the adjustment of the conversion or
exchange rate in such events as the Board of Directors shall determine;

(4) whether shares of the series shall be redeemable, and, if so,
the terms and conditions of such redemption (including whether redemption
shall be optional or mandatory), including the date or dates or event or
events upon or after the occurrence of which they shall be redeemable, and
the amount and type of consideration payable in case of redemption, which
amount per share may vary under different conditions and at different
redemption dates;

(5) the rights, if any, of holders of shares of the series upon the
voluntary or involuntary liquidation, merger, consolidation, distribution
or sale of assets, dissolution or winding-up of the Corporation, and the
relative rights of priority, if any, of payment of shares of the series;

(6) whether shares of the series shall have a sinking fund or
purchase account for the redemption or purchase of shares of the series,
and, if so, the terms, conditions and amount of such sinking fund or
purchase account;

(7) whether shares of the series shall have voting rights in
addition to the voting rights as shall be provided by law and, if so, the
terms of such voting rights, which may, without limiting the generality of
the foregoing, include (a) the right to more or less than one vote per
share on any or all matters voted upon by the stockholders of the
Corporation and (b) the right to vote, as a series by itself or together
with other series of Preferred Stock or together with all series of
Preferred Stock as a class and/or with the Common Stock as a class, upon
such matters, under such circumstances and upon such conditions as the
Board of Directors shall determine, including, without limitation, the
right, voting as a series by itself or together with other series of
Preferred Stock or together with all series of Preferred Stock as a class
and/or with the Common Stock as a class, to elect one or more Directors of
the Corporation under such circumstances and upon such conditions as the
Board of Directors shall determine; and

(8) any other powers, preferences and relative, participating,
optional or other rights, and qualifications, limitations or restrictions,
of shares of that series.

The relative powers, preferences and rights of each series of Preferred Stock in
relation to the powers, preferences and rights of each other series of Preferred
Stock shall, in each case, be as fixed from time to time by the Board of
Directors in the resolution or resolutions adopted pursuant to the

4

authority granted herein, and the consent, by class or series vote or otherwise,
of holders of Preferred Stock of such of the series of Preferred Stock as are
from time to time outstanding shall not be required for the issuance by the
Board of Directors of any other series of Preferred Stock, whether or not the
powers, preferences and rights of such other series shall be fixed by the Board
of Directors as senior to, or on a parity with, the powers, preferences and
rights of such outstanding series, or any of them; PROVIDED, HOWEVER, that the
Board of Directors may provide in such resolution or resolutions adopted with
respect to any series of Preferred Stock that the consent of holders of at least
a majority (or such greater proportion as shall be therein fixed) of the
outstanding shares of such series voting thereon shall be required for the
issuance of shares of any or all other series of Preferred Stock.

SECTION II. COMMON STOCK

(1) DIVIDENDS. Subject to any requirements with respect to
preferential or participating dividends as shall be provided by the express
terms of any outstanding series of Preferred Stock, holders of the Common Stock
shall be entitled to receive such dividends thereon, if any, as may be declared
from time to time by the Board of Directors.

(2) LIQUIDATION. In the event of liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, holders of the
Common Stock shall be entitled to receive such assets and properties of the
Corporation, tangible and intangible, as are available for distribution to
stockholders of the Corporation, after there shall have been paid or set apart
for payment the full amounts necessary to satisfy any preferential or
participating rights to which holders of each outstanding series of Preferred
Stock are entitled by the express terms of such series.

(3) VOTING. Each share of Common Stock shall entitle the holder
thereof to one vote on each matter submitted to a vote of holders of shares of
Common Stock. Holders of shares of Common Stock shall be entitled to vote on
each matter submitted to a vote of stockholders of the Corporation, except (a)
as shall otherwise be provided with respect to the election of one or more
Directors of the Corporation by holders of shares of one or more outstanding
series of Preferred Stock under circumstances as shall be provided by the
Restated Certificate of Incorporation or by any provisions established pursuant
thereto and (b) to the extent holders of shares of one or more outstanding
series of Preferred Stock are entitled to vote separately as a class by law or
under circumstances as shall be provided by the Restated Certificate of
Incorporation or by any provisions established pursuant thereto.

SECTION III. CAPITAL STOCK

(1) REGARDING PREEMPTIVE RIGHTS. No stockholder of the Corporation
shall by reason of his holding shares of any class or series of capital stock of
the Corporation have any

5

preemptive or preferential right to purchase, acquire, subscribe for or
otherwise receive any additional, unissued or treasury shares (whether now or
hereafter acquired) of any class or series of capital stock of the Corporation
now or hereafter to be authorized, or any notes, debentures, bonds or other
securities convertible into or carrying any right, option or warrant to
purchase, acquire, subscribe for or otherwise receive shares of any class or
series of capital stock of the Corporation now or hereafter to be authorized,
whether or not the issuance of any such shares, or such notes, debentures, bonds
or other securities, would adversely affect the dividends or voting or other
rights of such stockholder, and the Board of Directors may issue or authorize
the issuance of shares of any class or series of capital stock of the
Corporation, or any notes, debentures, bonds or other securities convertible
into or carrying rights, options or warrants to purchase, acquire, subscribe for
or otherwise receive shares of any class or series of capital stock of the
Corporation, without offering any such shares of any such class, either in whole
or in part, to the existing stockholders of any such class.

(2) CUMULATIVE VOTING. Cumulative voting of shares of any class or
series of capital stock of the Corporation having voting rights is prohibited.

FIFTH:(1) DIRECTORS. The powers of the Corporation shall be
exercised by or under the authority of, and the business and affairs of the
Corporation shall be managed by or under the direction of, the Board of
Directors. The Board of Directors is hereby authorized and empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, subject to the provisions of the DGCL, the Restated Certificate
of Incorporation and any Bylaw of the Corporation adopted by the stockholders of
the Corporation; PROVIDED, HOWEVER, that no Bylaw of the Corporation hereafter
adopted by the stockholders of the Corporation, nor any amendment thereto, shall
invalidate any prior act of the Board of Directors that would have been valid if
such Bylaw or amendment thereto had not been adopted.

(2) NUMBER AND ELECTION OF DIRECTORS. Subject to such rights of
holders of shares of one or more outstanding series of Preferred Stock to elect
one or more Directors of the Corporation under circumstances as shall be
provided by or established pursuant to the Restated Certificate of
Incorporation, the number of Directors of the Corporation that shall constitute
the Board of Directors shall not be less than three (3) nor more than thirteen
(13) and shall be specified from time to time in the Bylaws of the Corporation.
Election of Directors of the Corporation need not be by written ballot unless
the Bylaws of the Corporation shall so provide.

(3) VACANCIES. Unless otherwise provided by the Restated Certificate
of Incorporation or by any provisions established pursuant thereto with respect
to the rights of holders of shares of one or more outstanding series of
Preferred Stock, newly created directorships resulting from any increase in the
authorized number of Directors of the Corporation and any vacancies on the Board
of Directors resulting from death, resignation or removal of a Director of the
Corporation shall be filled by (a) the affirmative vote of at least a majority
of the remaining Directors of the

6

Corporation then in office, even if such remaining Directors constitute less
than a quorum of the Board of Directors, or (b) the affirmative vote of holders
of at least a majority of the then outstanding Voting Stock (as defined below),
voting together as a single class. The term “Voting Stock” shall mean all
outstanding shares of all classes and series of capital stock of the Corporation
entitled to vote generally in the election of Directors of the Corporation,
considered as one class; and, if the Corporation shall have shares of Voting
Stock entitled to more or less than one vote for any such share, each reference
in the Restated Certificate of Incorporation to a proportion or percentage in
voting power of Voting Stock shall be calculated by reference to the portion or
percentage of votes entitled to be cast by holders of such shares generally in
the election of Directors of the Corporation.

SIXTH:From and after the first date as of which the Corporation has
a class or series of capital stock registered under the Securities Exchange Act
of 1934, as amended, no action required to be taken or that may be taken at any
annual or special meeting of the stockholders of the Corporation may be taken
without a meeting, and the power of the stockholders of the Corporation to
consent in writing to the taking of any action by written consent without a
meeting is specifically denied, except for action by unanimous written consent,
which is expressly allowed. Unless otherwise provided by the DGCL, by the
Restated Certificate of Incorporation or by any provisions established pursuant
thereto with respect to the rights of holders of one or more outstanding series
of Preferred Stock, special meetings of the stockholders of the Corporation may
be called at any time by the Chairman of the Board of Directors or by any two or
more Directors of the Corporation.

SEVENTH: No Director of the Corporation shall be personally liable
to the Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a Director of the Corporation involving any act or omission of
any such Director; PROVIDED, HOWEVER, that this Article SEVENTH shall not
eliminate or limit the liability of such Director (1) for any breach of such
Director’s duty of loyalty to the Corporation or its stockholders, (2) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) under Section 174 of the DGCL, as the same exists
or as such provision may hereafter be amended, supplemented or replaced, or (4)
for any transactions from which such Director derived an improper personal
benefit. If the DGCL is amended after the filing of the Restated Certificate of
Incorporation to authorize corporate action further eliminating or limiting the
personal liability of a Director of the Corporation, then the liability of a
Director of the Corporation, in addition to the limitation on personal liability
provided herein, shall be limited to the fullest extent permitted by such law,
as so amended. Any repeal or modification of this Article SEVENTH by the
stockholders of the Corporation shall be prospective only and shall not
adversely affect any limitation on the personal liability of a Director of the
Corporation existing at the time of such repeal or modification.

EIGHTH: In furtherance of, and not in limitation of, the powers
conferred by statute, the Board of Directors is expressly empowered to adopt,
amend or repeal the Bylaws of the Corporation, or adopt new Bylaws, without any
action on the part of the stockholders of the

7

Corporation. Any adoption, amendment or repeal of the Bylaws of the Corporation
by the Board of Directors shall require, in addition to any other affirmative
vote that may be required by law, the Restated Certificate of Incorporation or
the Bylaws of the Corporation, the affirmative vote of at least a majority of
the Whole Board. The term “Whole Board” shall mean the total number of Directors
of the Corporation as so fixed, whether or not there exist any vacancies in
previously authorized directorships. The stockholders of the Corporation shall
also have the power to adopt, amend or repeal the Bylaws of the Corporation, or
adopt new Bylaws, at any annual or special meeting by the affirmative vote of
holders of at least a majority of the then outstanding Voting Stock, voting
together as a single class, in addition to any other affirmative vote that may
be required by law, the Restated Certificate of Incorporation or the Bylaws of
the Corporation.

8

IN WITNESS WHEREOF, the Corporation has caused the Restated
Certificate of Incorporation to be signed and attested by its duly authorized
officer, this 30th day of September, 1996.

CORNELL CORRECTIONS, INC.

By: DAVID M. CORNELL
David M. Cornell
Chief Executive Officer

EX-3.2
3

EXHIBIT 3.2

AMENDED AND RESTATED BYLAWS

CORNELL CORRECTIONS, INC.

OCTOBER 1, 1996

AMENDED AND RESTATED BYLAWS OF

CORNELL CORRECTIONS, INC.

Table of Contents

Page

ARTICLE I OFFICES………………………………………………….1
1.1 Registered Office………………………………………….1
1.2 Other Offices……………………………………………..1

ARTICLE II MEETINGS OF STOCKHOLDERS…………………………………..1
2.1 Place of Meetings………………………………………….1
2.2 Annual Meetings……………………………………………1
2.3 Special Meetings…………………………………………..1
2.4 Registered Holders of Shares; Closing of Share Transfer Records;
and Record Date…………………………………………..2
2.5 Quorum……………………………………………………2
2.6 Voting by Stockholders……………………………………..3
2.7 Proxies…………………………………………………..3
2.8 No Shareholder Action Without Meeting………………………..4

ARTICLE III DIRECTORS………………………………………………..4
3.1 Number and Election of Directors…………………………….4
3.2. Vacancies………………………………………………..4
3.3. Duties and Powers…………………………………………4
3.4. Meetings…………………………………………………5
3.5. Quorum…………………………………………………..5
3.6. Actions Without a Meeting………………………………….5
3.7. Telephonic Meetings……………………………………….5
3.8. Committees……………………………………………….5
3.9. Reimbursement of Expenses………………………………….6
3.10. Protection for Reliance…………………………………..6

ARTICLE IV OFFICERS…………………………………………………6
4.1. General………………………………………………….6
4.2. Election…………………………………………………6
4.3. Duties…………………………………………………..7
4.4. Chairman…………………………………………………7
4.5. President………………………………………………..7
4.6. Vice Presidents…………………………………………..7
4.7. Secretary and Assistant Secretaries…………………………7

-i-

4.8. Treasurer and Assistant Treasurers………………………….8
4.9. Removal………………………………………………….8
4.10. Voting Securities Owned by the Corporation………………….8

ARTICLE V STOCK……………………………………………………8
5.1. Form of Certificates………………………………………8
5.2. Signatures……………………………………………….9
5.3. Lost Certificates…………………………………………9
5.4. Transfers………………………………………………..9
5.5. Beneficial Ownership………………………………………9
5.6. Dividends………………………………………………..9

ARTICLE VI INDEMNIFICATION………………………………………….10
6.1 General………………………………………………….10
6.2 Expenses…………………………………………………10
6.3 Advances…………………………………………………10
6.4 Request for Indemnification………………………………..11
6.5 Nonexclusivity of Rights…………………………………..11
6.6 Insurance and Subrogation………………………………….11
6.7 Severability……………………………………………..11
6.8 Certain Persons Not Entitled to Indemnification………………11
6.9 Definitions………………………………………………12

ARTICLE VII NOTICES………………………………………………..12
7.1. Notices…………………………………………………12
7.2. Waiver of Notice…………………………………………13

ARTICLE VIII MISCELLANEOUS………………………………………….13
8.1. Fiscal Year……………………………………………..13
8.2. Amendments………………………………………………13

-ii-

AMENDED AND RESTATED BYLAWS OF

CORNELL CORRECTIONS, INC.

ARTICLE I

OFFICES

1.1 REGISTERED OFFICE. The registered office of Cornell Corrections,
Inc., a Delaware corporation (the “Corporation”), is The Corporation Trust
Company, 1209 Orange Street, in the City of Wilmington, County of New Castle,
State of Delaware, 19801.

1.2 OTHER OFFICES. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors of the Corporation (the “Board of Directors”) may from time to time
determine.

ARTICLE II

MEETINGS OF STOCKHOLDERS

2.1 PLACE OF MEETINGS. Annual or special meetings of the
stockholders for the election of directors or for any other purpose shall be
held at such time and place, either within or without the State of Delaware, as
may be designated from time to time by the Board of Directors and stated in the
notice of the meeting or in a duly executed waiver of notice thereof. If not so
designated or stated, such meeting shall be held at the registered office of the
Corporation.

2.2 ANNUAL MEETINGS. The annual meeting of stockholders shall be
held on such date and at such time as may be designated from time to time by the
Board of Directors and stated in the notice of such meeting. At the annual
meeting, the stockholders shall elect by a plurality vote a Board of Directors
and transact such other business as may properly be brought before the meeting.
Written notice of the annual meeting of stockholders of the Corporation stating
the place, date and hour of the meeting shall be sent to each stockholder
entitled to vote at such meeting not less than 10 nor more than 60 days before
the date of the meeting. Failure to hold the annual meeting shall not work a
forfeiture or dissolution of the Corporation or affect otherwise valid corporate
acts.

2.3 SPECIAL MEETINGS. Unless otherwise prescribed by the Delaware
General Corporation Law (“DGCL”) or by the Certificate of Incorporation of the
Corporation (as amended or restated from time to time, the “Certificate of
Incorporation”), special meetings of stockholders of the Corporation for any
purpose or purposes may be called at any time by the Chairman of the Board of
Directors or by any two or more directors of the Corporation. Written notice of
the special meeting stating the place, date and hour of the meeting and the
purpose or purposes for which the

-1-

meeting is called shall be given not less 10 nor more than 60 days before the
date of the meeting to each stockholder entitled to vote at such meeting.

2.4 REGISTERED HOLDERS OF SHARES; CLOSING OF SHARE TRANSFER RECORDS;
AND RECORD DATE.

(a) REGISTERED HOLDERS AS OWNERS. Unless otherwise provided
under Delaware law, the Corporation may regard the person in whose name
any shares issued by the Corporation are registered in the stock transfer
records of the Corporation at any particular time (including, without
limitation, as of a record date fixed pursuant to paragraph (b) of this
Section 2.4) as the owner of those shares at that time for purposes of
voting those shares, receiving distributions thereon or notices in respect
thereof, transferring those shares, exercising rights of dissent with
respect to those shares, entering into agreements with respect to those
shares, or giving proxies with respect to those shares; and neither the
Corporation nor any of its officers, directors, employees or agents shall
be liable for regarding that person as the owner of those shares at that
time for those purposes, regardless of whether that person possesses a
certificate for those shares.

(b) RECORD DATE. For the purpose of determining stockholders
of the Corporation entitled to notice of or to vote at any meeting of
stockholders of the Corporation or any adjournment thereof, or entitled to
receive a distribution by the Corporation (other than a distribution
involving a purchase or redemption by the Corporation of any of its own
shares) or a share dividend, or in order to make a determination of
stockholders of the Corporation for any other proper purpose, the Board of
Directors may fix in advance a date as the record date for any such
determination of stockholders of the Corporation, such date in any case to
be not more than 60 days and, in the case of a meeting of stockholders,
not less than 10 days, prior to the date on which the particular action
requiring such determination of stockholders of the Corporation is to be
taken. The Board of Directors shall not close the books of the Corporation
against transfers of shares during the whole or any part of such period.

If the Board of Directors does not fix a record date for any meeting of the
stockholders of the Corporation, the record date for determining stockholders of
the Corporation entitled to notice of or to vote at such meeting shall be at the
close of business on the day next preceding the day on which notice is given,
or, if in accordance with Section 7.2 of these Bylaws notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held.

2.5 QUORUM. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders of the Corporation for the transaction of business. If, however,
such quorum shall not be present or represented at any meeting of the
stockholders of the Corporation, the stockholders of the Corporation entitled to
vote at such meeting, present in person or represented by proxy, shall have the
power to adjourn the meeting from time to time, without notice other than
announcement

-2-

at the meeting, until a quorum shall be present or represented. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder entitled to vote at the
meeting.

2.6 VOTING BY STOCKHOLDERS.

(a) VOTING ON MATTERS OTHER THAN THE ELECTION OF DIRECTORS.
With respect to any matters as to which no other voting requirement is
specified by the DGCL, the Certificate of Incorporation or these Amended
and Restated Bylaws (these “Bylaws”), the affirmative vote required for
stockholder action shall be that of a majority of the shares present in
person or represented by proxy at the meeting (as counted for purposes of
determining the existence of a quorum at the meeting). In the case of a
matter submitted for a vote of the stockholders of the Corporation as to
which a stockholder approval requirement is applicable under the
stockholder approval policy of any stock exchange or quotation system on
which the capital stock of the Corporation is traded or quoted, the
requirements under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), or any provision of the Internal Revenue Code, in each
case for which no higher voting requirement is specified by the DGCL, the
Restated Certificate of Incorporation or these Bylaws, the vote required
for approval shall be the requisite vote specified in such stockholder
approval policy, the Exchange Act or Internal Revenue Code provision, as
the case may be (or the highest such requirement if more than one is
applicable). For the approval of the appointment of independent public
accountants (if submitted for a vote of the stockholders of the
Corporation), the vote required for approval shall be a majority of the
votes cast on the matter.

(b) VOTING IN THE ELECTION OF DIRECTORS. Unless otherwise
provided in the Certificate of Incorporation or these Bylaws in accordance
with the DGCL, directors shall be elected by a plurality of the votes cast
by the holders of outstanding shares of capital stock of the Corporation
entitled to vote in the election of directors at a meeting of stockholders
at which a quorum is present.

(c) OTHER. The Board of Directors, in its discretion, or the
officer of the Corporation presiding at a meeting of stockholders of the
Corporation, in his discretion, may require that any votes cast at such
meeting shall be cast by written ballot.

2.7 PROXIES. Each stockholder of the Corporation entitled to vote at
a meeting of stockholders of the Corporation may authorize another person or
persons to act for him by proxy. Proxies for use at any meeting of stockholders
of the Corporation shall be filed with the Secretary, or such other officer as
the Board of Directors may from time to time determine by resolution, before or
at the time of the meeting. All proxies shall be received and taken charge of
and all ballots shall be received and canvassed by the secretary of the meeting
who shall decide all questions relating to

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the qualification of voters, the validity of the proxies and the acceptance or
rejection of votes, unless an inspector or inspectors shall have been appointed
by the chairman of the meeting, in which event such inspector or inspectors
shall decide all such questions.

2.8 NO SHAREHOLDER ACTION WITHOUT MEETING. From and after the first
date as of which the Corporation has a class or series of capital stock
registered under the Exchange Act, no action required to be taken or that may be
taken at any annual or special meeting of the stockholders of the Corporation
may be taken without a meeting, and the power of the stockholders of the
Corporation of the Corporation to consent in writing to the taking of any action
by written consent without a meeting is specifically denied, except for action
by unanimous written consent, which is expressly allowed.

ARTICLE III

DIRECTORS

3.1 NUMBER AND ELECTION OF DIRECTORS. The number of directors of the
Corporation shall be five, and thereafter such number of directors may be
increased or decreased from time to time (but not to a number greater than or
less than permitted by the Certificate of Incorporation) by an amendment to
these Bylaws. Any director of the Corporation may resign at any time upon
written notice to the Corporation. To be effective, such notice of resignation
need not be formally accepted by the Board of Directors. A director of the
Corporation need not be a stockholder of the Corporation or a resident of the
State of Delaware.

3.2. VACANCIES. Newly created directorships resulting from any
increase in the authorized number of directors of the Corporation and any
vacancies on the Board of Directors resulting from the death, resignation or
removal of a director of the Corporation shall be filled by (i) the affirmative
vote of at least a majority of the remaining directors then in office, even if
such remaining directors of the Corporation constitute less than a quorum or
(ii) the affirmative vote of holders of at least a majority of the then
outstanding Voting Stock (as defined below), voting together as a single class.
The term “Voting Stock” shall mean all outstanding shares of all classes and
series of capital stock of the Corporation entitled to vote generally in the
election of directors of the Corporation, considered as one class; and, if the
Corporation shall have shares of Voting Stock entitled to more or less than one
vote for any such share, each reference in these Bylaws to a proportion or
percentage in voting power of Voting Stock shall be calculated by reference to
the portion or percentage of votes entitled to be cast by holders of such shares
generally in the election of directors of the Corporation.

3.3. DUTIES AND POWERS. The business, affairs and property of the
Corporation shall be managed by or under the directorship of the Board of
Directors, which may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by law, the Certificate of Incorporation or
these Bylaws authorized or required to be exercised or done by the stockholders
of the Corporation.

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3.4. MEETINGS. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman, if there be one, or by the President or by any two or more
directors of the Corporation. Notice thereof stating the place, date and hour of
the meeting shall be given to each director either by mail not less than 48
hours before the date of the meeting, by telephone, telegram or facsimile on 24
hours’ notice or on such shorter notice as the person or persons calling such
meeting may deem necessary or appropriate in the circumstances. Unless otherwise
required by law, neither the business to be transacted at, nor the purpose of,
any regular or special meeting of the Board of Directors need be specified in
the notice or waiver of notice of such meeting.

3.5. QUORUM. Except as may be otherwise specifically provided by
law, the Certificate of Incorporation or these Bylaws, at all meetings of the
Board of Directors, a majority of the entire Board of Directors shall constitute
a quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors. If a quorum shall not be present at any meeting of the
Board of Directors, the directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.

3.6. ACTIONS WITHOUT A MEETING. Unless otherwise provided by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.

3.7. TELEPHONIC MEETINGS. Unless otherwise provided by the
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors or such committee by means of a conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
pursuant to this Section 3.7 shall constitute presence in person at such
meeting.

3.8. COMMITTEES. The Board of Directors may, by resolution passed by
a majority of the entire Board of Directors, designate one or more committees,
each committee to consist of one or more of the directors of the Corporation.
The Board of Directors may designate one or more directors of the Corporation as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or disqualification
of a member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting

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in place of any absent or disqualified member. Any committee, to the extent
allowed by law and provided in the resolution establishing such committee, shall
have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the Corporation. Each committee
shall keep regular minutes and report to the Board of Directors when required.

3.9. REIMBURSEMENT OF EXPENSES. The directors of the Corporation
shall be paid their expenses, if any, of attendance at each meeting of the Board
of Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary or other consideration as director. No
such reimbursement shall preclude any director from serving the Corporation in
any other capacity and receiving compensation therefor. Members of special or
standing committees shall be allowed like reimbursement for attending committee
meetings.

3.10. PROTECTION FOR RELIANCE. Any member of the Board of Directors,
or any member of any committee designated by the Board of Directors, shall, in
the performance of his duties, be fully protected in relying in good faith upon
the records of the Corporation and upon such information, opinions, reports or
statements presented to the Corporation by any of the Corporation’s officers or
employees, or committees of the Board of Directors, or by any other person as to
matters the member reasonably believes are within such other person’s
professional or expert competence and who has been selected with reasonable care
by or on behalf of the Corporation.

ARTICLE IV

OFFICERS

4.1. GENERAL. The officers of the Corporation shall be chosen by the
Board of Directors and shall be a President and a Secretary. The Board of
Directors, in its discretion, may also choose a Chairman of the Board of
Directors, a Chief Financial Officer, a Treasurer and one or more Vice
Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any
number of offices may be held by the same person, unless otherwise prohibited by
law, the Certificate of Incorporation or these Bylaws. The officers of the
Corporation need not be stockholders of the Corporation nor, except in the case
of the Chairman of the Board of Directors, need such officers be directors of
the Corporation.

4.2. ELECTION. The Board of Directors shall elect or appoint the
officers of the Corporation who shall hold their offices for such terms and
shall exercise such powers and perform such duties as shall be determined from
time to time by the Board of Directors; and all officers of the Corporation
shall hold office until their successors are elected and qualified, or until the
earlier of their resignation or removal. Any officer elected by the Board of
Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the Corporation
may be filled by the Board of Directors.

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4.3. DUTIES. The officers of the Corporation shall have such powers
and duties as generally pertain to their offices, except as modified herein or
by the Board of Directors, as well as such powers and duties as from time to
time may be conferred by the Board of Directors.

4.4. CHAIRMAN. The Chairman of the Board of Directors shall be the
Chief Executive Officer of the Corporation and, subject to the control of the
Board of Directors, shall have general supervision and control of the business,
affairs and properties of the Corporation and its general officers. The Chairman
shall possess the same power as the President to sign all contracts,
certificates and other instruments of the Corporation which may be authorized by
the Board of Directors. The Chairman shall also perform such other duties and
may exercise such other powers as from time to time may be assigned to him by
the Board of Directors.

4.5. PRESIDENT. The President shall, subject to the control of the
Board of Directors, have general supervision of the business of the Corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect. If there is no Chairman of the Board, the President shall
be the Chief Executive Officer of the Corporation; otherwise, he shall be the
Chief Operating Officer of the Corporation and shall execute all bonds,
mortgages, contracts and other instruments of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except that
the other officers of the Corporation may sign and execute documents when so
authorized by these Bylaws, the Board of Directors, the Chairman of the Board or
the President. The President shall preside at all meetings of the stockholders
of the Corporation and the Board of Directors, unless the Board of Directors has
appointed a Chairman of the Board, who would preside at all such meetings. The
President shall also perform such other duties and may exercise such other
powers as from time to time may be assigned to him by these Bylaws or by the
Board of Directors.

4.6. VICE PRESIDENTS. At the request of the President or in his
absence or in the event of his inability or refusal to act, any Vice President
may perform the duties of the President and, when so acting, such officer shall
have all the powers of and be subject to all the restrictions upon the
President. Each Vice President shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe. If there
is no Vice President, the Board of Directors shall designate the officer of the
Corporation who, in the absence of the President or in the event of the
inability or refusal of the President to act, shall perform the duties of the
President and, when so acting, such officer shall have all the powers of and be
subject to all the restrictions upon the President.

4.7. SECRETARY AND ASSISTANT SECRETARIES. The Secretary or an
Assistant Secretary shall attend all meetings of the Board of Directors and all
meetings of stockholders of the Corporation and record all the proceedings at
such meetings in a book or books to be kept for that purpose, and the Secretary
or an Assistant Secretary shall also perform similar duties for the standing
committees when required. The Secretary or an Assistant Secretary shall give, or
cause to be given, notice of all meetings of the stockholders of the Corporation
and special meetings of the Board of Directors, and shall perform such other
duties as may be prescribed by the Board of Directors, the Chairman of the
Board, the President or any Vice President. If a Secretary or Assistant
Secretary

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shall be unable or shall refuse to cause to be given notice of any meeting of
the stockholders of the Corporation or any special meeting of the Board of
Directors, then either the Board of Directors, the Chairman of the Board, the
President or any Vice President may choose another officer to cause such notice
to be given. The Secretary or an Assistant Secretary shall see that all
corporate books, reports, statements, certificates and other documents and
records required by law to be kept or filed are properly kept or filed, as the
case may be.

4.8. TREASURER AND ASSISTANT TREASURERS. The Treasurer or an
Assistant Treasurer shall have custody of the corporate funds and securities and
shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board of Directors, the Chairman of the Board, the
President or any Vice President. The Treasurer or an Assistant Treasurer shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the Chairman of the Board, the President and the Board of Directors, at its
regular meetings, or when the Board of Directors so requires, an account of all
his transactions as Treasurer or Assistant Treasurer and of the financial
condition of the Corporation.

4.9. REMOVAL. Any officer may be removed, with or without cause, by
the Board of Directors. Any such removal shall be without prejudice to any
rights such officer may have pursuant to any employment contract he may have
with the Corporation. Any vacancy in an office may be filled by the Board of
Directors.

4.10. VOTING SECURITIES OWNED BY THE CORPORATION. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name and
on behalf of the Corporation by the Chairman of the Board, the President or any
Vice President, and any such officer may, in the name of and on behalf of the
Corporation, take all such action as any such officer may deem advisable to vote
in person or by proxy at any meeting of security holders of any corporation in
which the Corporation may own securities and at any such meeting shall possess
and may exercise any and all rights and powers incident to the ownership of such
securities and which, as the owner thereof, the Corporation might have exercised
and possessed if present. The Board of Directors may, by resolution, from time
to time, confer like powers upon any other person or persons.

ARTICLE V

STOCK

5.1. FORM OF CERTIFICATES. The shares of stock of the Corporation
shall be represented by certificates of stock, signed in the name of the
Corporation (i) by the Chairman of the Board, the President or a Vice President
and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary, of the Corporation, certifying the number of shares of
stock in the Corporation owned by the holder named in the certificate.

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5.2. SIGNATURES. Where a certificate is countersigned by (i) a
transfer agent other than the Corporation or its employee or (ii) a registrar
other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.

5.3. LOST CERTIFICATES. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the delivery to
the Secretary of the Corporation of an affidavit of the fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate, or his legal
representative, to advertise the same in such manner as the Board of Directors
shall require and/or to give the Corporation a bond in such sum as it may direct
as indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.

5.4. TRANSFERS. Stock of the Corporation shall be transferable in
the manner prescribed by law and in these Bylaws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the certificate
or by his attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be cancelled before a new certificate shall be
issued.

5.5. BENEFICIAL OWNERSHIP. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
law.

5.6. DIVIDENDS. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting thereof,
and may be paid in cash, in property or in shares of capital stock of the
Corporation. Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the Board
of Directors from time to time, in its absolute discretion, deems proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for any proper
purpose, and the Board of Directors may modify or abolish any such reserve.

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ARTICLE VI

INDEMNIFICATION

6.1 GENERAL. The Corporation shall indemnify and hold harmless an
Indemnitee (as this and all other capitalized words used in this Article VI not
previously defined in these Bylaws are defined in Section 6.6 hereof) from and
against any and all judgments, penalties, fines (including excise taxes),
amounts paid in settlement and, subject to Section 6.2, Expenses (including all
interest, assessments and other charges paid or payable in connection with or in
respect of such judgments, fines, penalties, amounts paid in settlement or
Expenses) arising out of any event or occurrence related to the fact that
Indemnitee is or was a director or officer of the Corporation. The Corporation
may, but shall not be required to, indemnify and hold harmless an Indemnitee
from and against any and all judgments, penalties, fines (including excise
taxes), amounts paid in settlement and, subject to Section 6.2, Expenses
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such judgments, fines, penalties, amounts paid
in settlement or Expenses) arising out of any event or occurrence related to the
fact that Indemnitee is or was an employee or agent of the Corporation or is or
was serving in another Corporate Status.

6.2 EXPENSES. If Indemnitee is, by reason of his serving as a
director, officer, employee or agent of the Corporation, a party to and is
successful, on the merits or otherwise, in any Proceeding, the Corporation shall
indemnify him against all Expenses actually and reasonably incurred by him or on
his behalf in connection therewith. If Indemnitee is not wholly successful in
such Proceeding but is successful, on the merits or otherwise, as to any Matter
in such Proceeding, the Corporation shall indemnify Indemnitee against all
Expenses actually and reasonably incurred by him or on his behalf relating to
such Matter. The termination of any Matter in such a Proceeding by dismissal,
with or without prejudice, shall be deemed to be a successful result as to such
Matter. If Indemnitee is, by reason of any Corporate Status other than his
serving as a director, officer, employee or agent of the Corporation, a party to
and is successful, on the merits or otherwise, in any Proceeding, the
Corporation may, but shall not be required to, indemnify him against all
Expenses actually and reasonably incurred by him or on his behalf in connection
therewith. To the extent that the Indemnitee is, by reason of his Corporate
Status, a witness in any Proceeding, the Corporation may, but shall not be
required to, indemnify him against all Expenses actually and reasonably incurred
by him or on his behalf in connection therewith.

6.3 ADVANCES. In the event of any threatened or pending Proceeding
in which Indemnitee is a party or is involved and that may give rise to a right
of indemnification under this Article VI, following written request to the
Corporation by Indemnitee, the Corporation may, but shall not be required to,
pay to Indemnitee amounts to cover Expenses reasonably incurred by Indemnitee in
such Proceeding in advance of its final disposition upon the receipt by the
Corporation of (i) a written undertaking executed by or on behalf of Indemnitee
providing that Indemnitee will repay the advance if it shall ultimately be
determined that Indemnitee is not entitled to be indemnified by the Corporation
as provided in these Bylaws and (ii) satisfactory evidence as to the amount of
such Expenses.

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6.4 REQUEST FOR INDEMNIFICATION. To request indemnification,
Indemnitee shall submit to the Secretary of the Corporation a written claim or
request. Such written claim or request shall contain sufficient information to
reasonably inform the Corporation about the nature and extent of the
indemnification or advance sought by Indemnitee. The Secretary of the
Corporation shall promptly advise the Board of Directors of such request.

6.5 NONEXCLUSIVITY OF RIGHTS. This Article VI shall not be deemed
exclusive of any other rights to which Indemnitee may at any time be entitled to
under applicable law, the Restated Certificate of Incorporation, these Bylaws,
any agreement, a vote of stockholders or a resolution of directors of the
Corporation, or otherwise. No amendment, alteration or repeal of this Article VI
or any provision hereof shall be effective as to any Indemnitee for acts, events
and circumstances that occurred, in whole or in part, before such amendment,
alteration or repeal. The provisions of this Article VI shall continue as to an
Indemnitee whose Corporate Status has ceased for any reason and shall inure to
the benefit of his heirs, executors and administrators. Neither the provisions
of this Article VI nor those of any agreement to which the Corporation is a
party shall be deemed to preclude the indemnification of any person who is not
specified in this Article VI as having the potential to receive indemnification
or is not a party to any such agreement, but whom the Corporation has the power
or obligation to indemnify under the provisions of the DGCL.

6.6 INSURANCE AND SUBROGATION. To the extent the Corporation
maintains an insurance policy or policies providing liability insurance for
directors or officers of the Corporation, an Indemnitee who is a director or
officer of the Corporation shall be covered by such policy or policies in
accordance with its or their terms to the maximum extent of coverage available
for any such director or officer under such policy or policies. In the event of
any payment hereunder, the Corporation shall be subrogated to the extent of such
payment to all the rights of recovery of Indemnitee, who shall execute all
papers required and take all action necessary to secure such rights, including
execution of such documents as are necessary to enable the Corporation to bring
suit to enforce such rights. The Corporation shall not be liable under this
Article VI to make any payment of amounts otherwise indemnifiable hereunder if,
and to the extent that, Indemnitee has otherwise actually received such payment
under any insurance policy, contract, agreement or otherwise.

6.7 SEVERABILITY. If any provision or provisions of this Article VI
shall be held to be invalid, illegal or unenforceable for any reason whatsoever,
the validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby; and, to the fullest extent possible,
the provisions of this Article VI shall be construed so as to give effect to the
intent manifested by the provision held invalid, illegal or unenforceable.

6.8 CERTAIN PERSONS NOT ENTITLED TO INDEMNIFICATION. Notwithstanding
any other provision of this Article VI, no person shall be entitled to
indemnification or advancement of Expenses under this Article VI with respect to
any Proceeding, or any Matter therein, brought or made by such person against
the Corporation.

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6.9 DEFINITIONS. For purposes of this Article VI:

(a) “CORPORATE STATUS” describes the status of a person who is
or was a director, officer, employee or agent of the Corporation or of any
other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which such person is or was serving at the
written request of the Corporation. For purposes of this Agreement,
“serving at the written request of the Corporation” includes any service
by Indemnitee which imposes duties on, or involves services by, Indemnitee
with respect to any employee benefit plan or its participants or
beneficiaries.

(b) “EXPENSES” shall include all reasonable attorneys’ fees,
retainers, court costs, transcript costs, fees of experts, witness fees,
travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees, and all other disbursements or
expenses of the types customarily incurred in connection with prosecuting,
defending, preparing to prosecute or defend, investigating, or being or
preparing to be a witness in a Proceeding.

(c) “INDEMNITEE” includes any person who is, or is threatened
to be made, a witness in or a party to any Proceeding as described in
Section 6.1 or 6.2 hereof by reason of his Corporate Status.

(d) “MATTER” is a claim, a material issue or a substantial
request for relief.

(e) “PROCEEDING” includes any action, suit, alternate dispute
resolution mechanism, hearing or any other proceeding, whether civil,
criminal, administrative, arbitrative, investigative or mediative, any
appeal in any such action, suit, alternate dispute resolution mechanism,
hearing or other proceeding and any inquiry or investigation that could
lead to any such action, suit, alternate dispute resolution mechanism,
hearing or other proceeding, except one initiated by an Indemnitee to
enforce his rights under this Article VI.

ARTICLE VII

NOTICES

7.1. NOTICES. Whenever written notice is required by law, the
Certificate of Incorporation or these Bylaws to be given to any director, member
of a committee or stockholder, such notice may be given by mail, addressed to
such director, member of a committee or stockholder at his address as it appears
on the records of the Corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Written notice may also be given personally or by telegram,
telex, facsimile or cable.

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7.2. WAIVER OF NOTICE. Whenever any notice is required by law, the
Certificate of Incorporation or these Bylaws to be given to any director, member
of a committee or stockholder of the Corporation, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether before or after
the time stated therein, shall be deemed equivalent thereto.

ARTICLE VIII

MISCELLANEOUS

8.1. FISCAL YEAR. The fiscal year of the Corporation shall end on
December 31 of each year.

8.2. AMENDMENTS. These Bylaws may be altered, amended or repealed,
in whole or in part, or new Bylaws may be adopted, by the stockholders of the
Corporation or by the Board of Directors as provided in the Certificate of
Incorporation.

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EX-10.4
4

EXHIBIT 10.4

STOCKHOLDERS AGREEMENT

BY AND AMONG

CERTAIN STOCKHOLDERS OF

CORNELL CORRECTIONS, INC.

OCTOBER 8, 1996

STOCKHOLDERS AGREEMENT

STOCKHOLDERS AGREEMENT, dated as of October 8, 1996, by and among(a)
David M. Cornell (including his guardian, the executor of his estate or other
personal representative, “Cornell”), (b) Charterhouse Equity Partners II, L.P.
and Chef Nominees Limited (collectively, “Charterhouse Group”), and (c) Concord
Partners; Concord Partners II, L.P.; Concord Partners Japan Limited; Dillon,
Read & Co., as Agent; Lexington Partners III, L.P. and Lexington Partners IV,
L.P. (collectively, “Dillon Read Group”). Cornell, Charterhouse Group, and
Dillon Read Group are also collectively referred to herein as the “Holders.”

W I T N E S S E T H:

In consideration of the mutual covenants and agreements contained
herein and for other good and valuable consideration the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree, effective as of the
Effective Date (as defined in Section 3 below), as follows:

Section 1. DEFINITIONS. The following shall have (unless otherwise
provided elsewhere in this Agreement) the following respective meanings (such
meanings being equally applicable to both the singular and plural form of the
terms defined).

“AGREEMENT” means this Stockholders Agreement, including all
amendments and modifications hereof, supplements hereto, and any exhibits or
schedules to any of the foregoing, and shall refer to this Stockholders
Agreement as the same may be in effect at the time such reference becomes
operative.

“COMMON STOCK” means the Common Stock, par value $.001 per share, of
the Company.

Section 2. CERTIFICATE OF INCORPORATION; BY-LAWS; DIRECTORS.

(a) The Company has previously furnished to the Holders copies of
the Restated Certificate of Incorporation dated September 30, 1996 of the
Company and the Amended and Restated Bylaws dated October 1, 1996 of the Company
(collectively, the “Charter Documents”). From and after the date hereof, each
Holder shall vote all shares of Common Stock beneficially held by him or it and
which he or it has the power to vote (including any shares of Common Stock
hereafter acquired or owned by such Holder), at any regular or special meeting
of stockholders of the Company and shall otherwise take all actions necessary to
ensure that the Charter Documents do not, at any time, conflict with the
provisions of this Agreement.

1

(b) From and after the date hereof, each Holder shall vote all
shares of Common Stock beneficially held by him or it and which he or it has the
power to vote (including any shares of Common Stock hereafter acquired or owned
by such Holder), at any regular or special meeting of stockholders of the
Company called for the purpose of filling positions on the Board of Directors of
the Company and shall use its best efforts to otherwise take all actions
necessary to ensure that the following members are elected to the Board of
Directors of the Company: (i) one individual (who may be Cornell) designated by
Cornell (the “Cornell Nominee”), (ii) one individual designated by Charterhouse
Group (the “Charterhouse Nominee”), and (iii) one individual designated by
Dillon Read Group (the “Dillon Read Nominee”).

(c) If, prior to his or her election to the Board of Directors of
the Company pursuant to Section 2(b) hereof, any Cornell Nominee, Charterhouse
Nominee or Dillon Read Nominee shall be unable or unwilling to serve as a
director of the Company, the entity designating such nominee shall be entitled
to nominate a replacement who shall then be the Cornell Nominee, Charterhouse
Nominee or Dillon Read Nominee, as the case may be, for the purposes of this
Section 2. If, following election to the Board of Directors of the Company
pursuant to Section 2(b) hereof, any Cornell Nominee, Charterhouse Nominee, or
Dillon Read Nominee shall resign or be removed or be unable to serve for any
reason prior to the expiration of his or her term as a director of the Company,
then the person or entity designating such nominee may, at any time thereafter,
notify the other Holders in writing of a replacement, and the remaining Cornell
Nominee, Charterhouse Nominee and Dillon Read Nominee, as applicable, and
Cornell, Charterhouse Group and Dillon Read Group, shall use its best efforts to
take all actions necessary to ensure the election to the Board of Directors of
the Company of such replacement nominee to fill the unexpired term of the prior
nominee.

(d) Each Holder hereby agrees to use such Holder’s best efforts to
call, or cause the appropriate officers and directors of the Company to call, a
special or annual meeting of stockholders of the Company and to vote all of the
shares of Common Stock owned or controlled by such Holder for the removal (with
or without cause) of any nominee designated and elected pursuant to Section 2(b)
hereof if the person or entity designating such nominee shall have given written
notice to each of the other Holders of its desire to have such nominee removed.

(e) Each Holder hereby agrees that, except as provided in Section
2(d) hereof, he or it shall not vote to remove any director who is a Cornell
Nominee, Charterhouse Nominee or Dillon Read Nominee without Cause (as such term
is hereinafter defined). For the purposes of this Section 2(e) only, “Cause”
shall mean (i) the commission by a director of an act of fraud or embezzlement
against the Company or any of its subsidiaries or (ii) a conviction for a felony
(or a plea of NOLO CONTENDERE thereto) or guilty plea of such director with
respect to a felony.

(f) In order to effectuate the provisions of this Section 2, the
Holders hereby agree that when any action or vote is required to be taken by
such Holders pursuant to this Agreement, such Holders shall use their respective
best efforts to call, or cause the appropriate

2

officers and directors of the Company to call, a special or annual meeting of
stockholders of the Company, as the case may be, to effectuate such stockholder
action.

Section 3. EFFECTIVE TIME. This Agreement shall become effective
only upon the closing date (the “Effective Date”) of an initial public offering
of shares of Common Stock by the Company pursuant to a registration statement
that shall have become effective under the Securities Act of 1933, as amended.
If the Effective Date has not occurred prior to December 31, 1996, this
Agreement shall become null and void and be of no force or effect.

Section 4. TERMINATION.

(a) This Agreement will terminate upon the first to occur of (i)
four years from the Effective Date or (ii) the Holders collectively owning less
than 25% of the outstanding shares of Common Stock of the Company.

(b) This Agreement will terminate as to any Holder upon such Holder
owning less than 5% of the outstanding shares of Common Stock of the Company.

Section 5. SPECIFIC PERFORMANCE. Each of the Holders acknowledges
and agrees that in the event of any breach of this Agreement, the non-breaching
party or parties would be irreparably harmed and could not be made whole by
monetary damages. It is accordingly agreed that the Holders shall waive the
defense in any action for specific performance that a remedy at law would be
adequate and that the Holders, in addition to any other remedy to which they may
be entitled at law or in equity, shall be entitled to compel specific
performance of this Agreement.

Section 6. MISCELLANEOUS.

(a) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not control or affect the meaning or construction of
any provisions hereof.

(b) ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement and understanding of the parties hereto in respect of the subject
matter contained herein, and there are no restrictions, promises,
representations, warranties, covenants, or undertakings with respect to the
subject matter hereof, other than those expressly set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings
between the parties hereto with respect to the subject matter hereof except to
the extent expressly set forth herein.

(c) NOTICES. Any notice, demand, request, consent, approval,
declaration, delivery or other communication hereunder to be made pursuant to
the provisions of this Agreement shall be sufficiently given or made if in
writing and (i) delivered in person with receipt acknowledged, (ii) sent by
registered or certified mail, return receipt requested, postage prepaid, (iii)
sent by overnight courier with guaranteed next day delivery or (iv) sent by
telex or telecopier to the party to whom directed at the following address:

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(i) If to Cornell, to him at:

David M. Cornell
Cornell Corrections, Inc.
4801 Woodway
Suite 400W
Houston, Texas 77056
Fax: (713) 623-2853

(ii) If to any Charterhouse Group entity, to it at:

Charterhouse Equity Partners II, L.P.
c/o Charter Group International, Inc.
535 Madison Avenue
New York, NY 10022-4299
Attention: Richard T. Henshaw
Fax: (212) 750-9704

(iii) If to any Dillon Read Group entity, to it at:

Dillon, Read & Co. Inc.
535 Madison Avenue
New York, New York 10022
Attention: Peter Leidel
Fax: (212) 308-5107

or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration, delivery or other communication hereunder shall
be deemed to have been duly given or served on the date on which personally
delivered, with receipt acknowledged, three (3) business days after the same
shall have been deposited in the United States mail, one business day after sent
by overnight courier or on the day telexed or telecopied.

(d) APPLICABLE LAW. The laws of the State of Delaware shall govern
the interpretation, validity and performance of the terms of this Agreement,
regardless of the law that might be applied under applicable principles of
conflicts of laws.

(e) SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement in any jurisdiction shall not affect the validity,
legality or enforceability of the remainder of this Agreement in such
jurisdiction or the validity, legality or enforceability of this Agreement,

4

including any provision, in any other jurisdiction, it being intended that all
rights and obligations of the parties hereunder shall be enforceable to the
fullest extent permitted by law.

(f) SUCCESSOR, ASSIGNS, TRANSFEREES. The provisions of this
Agreement shall be binding upon and accrue to the benefit of the parties hereto
and their respective heirs, successors and permitted assigns.

(g) AMENDMENTS; WAIVERS. This Agreement may not be amended, modified
or supplemented and no waivers of or consent to departures from the provisions
hereof may be given unless consented to in writing by the Charterhouse Group,
Dillon Read Group and Cornell.

(h) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same Agreement.

5

IN WITNESS WHEREOF, the parties hereto have executed this
Stockholders Agreement as of the date first above written.

DAVID M. CORNELL

/S/ DAVID M. CORNELL

CHARTERHOUSE EQUITY
PARTNERS II, L.P.

By: Chusa Equity Investors II, L.P.,
general partner

By: Charterhouse Equity II, Inc.,
general partner

By: /S/ RICHARD T. HENSHAW III
Title:

CHEF NOMINEES LIMITED

By: Charterhouse Group International Inc.,
Attorney-in-fact

By: /S/ RICHARD T. HENSHAW III
Title:

CONCORD PARTNERS

By: /S/ PETER A. LEIDEL
Title:

CONCORD PARTNERS II, L.P.

By: /S/ PETER A. LEIDEL
Title:

6

CONCORD PARTNERS JAPAN LIMITED

By: /S/ PETER A. LEIDEL
Title:

DILLON, READ & CO., INC., as Agent

By: /S/ DAVID W. NIEMIEC
Title:

LEXINGTON PARTNERS III, L.P.

By: /S/ DAVID W. NIEMIEC
Title:

LEXINGTON PARTNERS IV, L.P.

By: /S/ DAVID W. NIEMIEC
Title:

EX-11.1
5

EXHIBIT 11.1

Cornell Corrections, Inc.
Statement Re: Computation of Per Share Earnings
(in thousands except per share amounts)

EX-21.1
6

EXHIBIT 21.1

SUBSIDIARIES OF CORNELL CORRECTIONS, INC.
(AS OF DECEMBER 31, 1996)

EX-23.1
7

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of our
report dated February 7, 1997, included herein in this Form 10-K into the
Company’s previously filed Registration Statements on Form S-8 No. 333-19127 and
333-19145 filed on December 31, 1996.

ARTHUR ANDERSEN LLP

Houston, Texas
March 28, 1997

EX-24.1
8

EXHIBIT 24.1

POWER OF ATTORNEY

WHEREAS, CORNELL CORRECTIONS, INC., a Delaware corporation (“Company”),
intends to file with the Securities and Exchange Commission (“Commission”) under
the Securities Exchange Act of 1934, as amended (“Act”), an Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to the said Annual Report;

NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID M.
CORNELL and STEVEN W. LOGAN and each of them severally, his true and lawful
attorney or attorneys with power to act with or without the others, and with
full power of substitution and resubstitution, to execute in his name, place and
stead in his capacity as a director or officer, or both, as the case may be, of
the Company, said Annual Report, any and all amendments to said Annual Report
and all instruments as said attorneys or any of them shall deem necessary or
incidental in connection therewith and to file the same with the Commission.
Each of the said attorneys shall have full power and authority to do and perform
in the name and on behalf of the undersigned in any and all capacities every act
whatsoever necessary or desirable as the undersigned might or could do in
person, the undersigned hereby ratifying and approving the acts of said
attorneys and each of them.