01-0000890566-96-001533_10-04-1996_Prospectus

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SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The summary consolidated financial data set forth below should be read in
conjunction with the Company’s Consolidated Financial Statements and the Notes
thereto, “Pro Forma Financial Data” and “Selected Consolidated Historical and
Pro Forma Financial Data” included elsewhere in this Prospectus. The Pro Forma
Statement of Operations Data for the year ended December 31, 1995 and for the
six months ended June 30, 1996 and the Pro Forma Balance Sheet Data as of June
30, 1996 reflect the results of operations and consolidated financial position
of the Company and its subsidiaries as if (i) the acquisitions of MidTex and the
Reid Center, (ii) the issuance by the Company of shares, and options and
warrants to purchase shares, of Class A Common Stock (“Class A Common Stock”)
and Class B Common Stock (“Class B Common Stock”) of the Company after June
30, 1996, (iii) the Reclassification, (iv) the exercise of outstanding stock
options or warrants relating to the shares of Common Stock to be sold by the
Selling Stockholders in the Offering, and (v) the Offering and the application
of the estimated net proceeds therefrom by the Company, had occurred, in the
case of the Statement of Operations Data, on January 1, 1995, and, in the case
of the Balance Sheet Data, on June 30, 1996.

Income (loss) from
operations…………… 1,427
Interest expense……….. —
Income (loss) before income
taxes……………….. 1,492
Net income (loss)………. 867
Earnings (loss) per
share……………….. $ .12
Number of shares used in
per share
computation(2)……….. 7,204
Supplemental earnings
(loss) per share(3)……
OPERATING DATA:
Beds under contract (end of
period)……………… 3,101
Contracted beds in
operation (end of
period)……………… 2,866
Average occupancy based on
contracted beds in
operation(4)…………. 94.1%

JUNE 30, 1996
———————–
HISTORICAL PRO FORMA
———- ———
(UNAUDITED)
BALANCE SHEET DATA:
Working capital……………….. $ 2,098 $ 8,128
Total assets………………….. 19,773 47,103
Long-term debt, including current
portion…………………….. 13,868 68
Stockholders’ equity…………… 2,367 41,340
– ————
(1) Includes operations purchased by the Company on March 31, 1994.

(2) 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.

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

(4) For any applicable facilities, includes reduced occupancy during the
start-up phase. See “Business — Facility Management Contracts.” For the
year ended December 31, 1993, occupancy did not commence until December
1993.

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RISK FACTORS

ANY INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING
FACTORS, WHICH CAN AFFECT THE COMPANY’S CURRENT POSITION AND FUTURE PROSPECTS,
IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, IN CONNECTION
WITH ANY INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY.

HISTORY OF LOSSES

The Company incurred net losses of $915,000, $600,000 and $989,000 for the
years ended December 31, 1993, 1994 and 1995, respectively, and a net loss of
$710,000 for the six-month period ended June 30, 1996. No assurance can be given
that the Company will not continue to incur losses in future periods. The
Company expects to charge $1.3 million of total deferred financing costs, of
which $726,000 will be noncash, to interest expense prior to December 31, 1996
in connection with the early retirement of certain indebtedness using the net
proceeds to be received by the Company in the Offering. The Company also expects
to record noncash compensation expense of $870,000 during the third quarter of
1996 in connection with the grant of stock options to certain officers of the
Company. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Results of Operations.”

ABSENCE OF COMBINED OPERATING HISTORY

As a result of the Acquisitions, the number of beds under the Company’s
management has almost doubled since December 31, 1995. Prior to the
Acquisitions, the Reid Center was operated as a nonprofit organization, and
substantially all the MidTex employees were employed by the City of Big Spring,
Texas. Consequently, no assurance can be given that the Company will be able to
successfully integrate the operations and personnel of the Reid Center and
MidTex with those of the Company on a profitable basis, and the pro forma
financial information of the Reid Center and MidTex may not be indicative of the
future financial condition or performance of those entities when combined with
the Company. See “Pro Forma Financial Data” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — General.” The
inability of the Company to successfully integrate the businesses and operations
of the Reid Center and MidTex could have a material adverse effect on the
Company’s financial condition and results of operations.

REVENUE AND PROFIT GROWTH DEPENDENT ON EXPANSION

The internal growth of the Company will depend on its ability to obtain
additional management contracts for privatized correctional and detention
facilities. The Company’s ability to obtain new contracts will depend on the
extent to which federal, state and local governmental agencies turn to the
private sector in general and the Company in particular for the management of
new or existing facilities or the rehabilitation or expansion of existing
facilities. Additionally, since contracts to operate existing public facilities
have historically not been offered to private operators, the Company’s growth
rate will generally be heavily dependent on the construction and operation of
new correctional and detention facilities. Because correctional and detention
services are essential public services, governmental agencies (and, in many
states, state legislatures as well) will have to be persuaded that privatization
will result in high-quality services at less cost than that which the agencies
themselves could provide. The Company’s ability to obtain new contracts also
will depend on the extent to which the Company is able to secure awards in
competition with other private-sector providers. Factors that will affect the
Company’s ability to compete effectively in bidding against other providers will
include (i) the price and other terms of the Company’s bids, (ii) the financial
ability of the Company to make capital investments or post bonds or other credit
support which may be required and (iii) particularly in the case of secure adult
facilities, the extent to which the Company is perceived as a credible, reliable
alternative to other providers, including the two companies now holding the
major share of contracts for currently privatized facilities. Prior to 1995, the
Company had limited success in obtaining new management contracts, and the
Company’s success for the most part was confined to contracts for management of
pre-release centers. No assurance can be given that the Company will be able to
obtain additional contracts to develop or operate new facilities on favorable
terms.

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ACQUISITION RISKS

The Company’s business strategy includes growth through acquisitions. This
strategy presents risks that, singly or in any combination, could materially
adversely affect the Company’s business and financial performance. These risks
include the possibility of the adverse effect of acquisitions on existing
operations of the Company, the diversion of management attention and resources
to acquisitions, the dependence on retaining key personnel, the contingent and
latent risks associated with the past operations of, and other unanticipated
problems arising in, acquired businesses and the possible adverse earnings
effects resulting from the amortization of goodwill and other intangible assets.
The success of the Company’s acquisition strategy will depend on the extent to
which it is able to acquire, successfully absorb and profitably operate
additional businesses, and no assurance can be given that the Company’s strategy
will succeed. In addition, no assurance can be given that the Company can
acquire additional businesses at prices and on terms the Company deems
reasonable. In this regard, the Company likely will be competing with other
potential acquirers, some of which are larger and have greater resources than
the Company, and the cost of acquiring businesses could increase materially.

NEED FOR ADDITIONAL FINANCING

The Company’s ability to compete effectively in bidding for new contracts
will depend on certain factors, including, in certain circumstances, the ability
of the Company to make capital investments and finance construction costs
relating to institutional contract awards. In addition, the Company’s
acquisition strategy will require the Company to obtain financing for such
acquisitions on terms the Company deems acceptable. The Company currently
intends to use debt to finance such activities although, in certain
circumstances, the Company may use shares of its Common Stock in making future
acquisitions. No assurance can be given that the Company will be able to obtain
debt financing on terms it considers acceptable or in the amounts it would need
to finance construction of new facilities or acquisitions. The extent to which
the Company will be able or willing to use Common Stock as a financing source
for acquisitions will depend on its market value from time to time and the
willingness of potential sellers to accept it as full or partial payment. The
use of a significant amount of debt financing would increase interest expense
and could adversely affect operating results. In the event the Company issues
additional Common Stock in connection with future acquisitions, purchasers of
Common Stock in the Offering may experience further dilution in the net tangible
book value per share of the Common Stock.

The Company is currently seeking to obtain a new credit facility (the “New
Credit Facility”) upon completion of the Offering. The New Credit Facility,
together with cash provided from operations, is anticipated to provide
sufficient liquidity to meet the Company’s working capital requirements over the
next 24 months. No assurance can be given, however, that the Company will be
able to enter into the New Credit Facility on terms the Company deems
acceptable.

FACILITY OCCUPANCY LEVELS AND CONTRACT DURATION

A substantial portion of the Company’s revenues are generated under
facility management contracts that specify a rate per day per inmate (“per diem
rate”), while a substantial portion of the Company’s cost structure is fixed.
Under a per diem rate structure, a decrease in occupancy rates would cause a
decrease in revenues and profitability. For each of its facilities, the Company
is, therefore, dependent on a single contracting governmental agency (or, in the
case of four of its facilities, two contracting governmental agencies) to supply
the facility with a sufficient number of inmates to meet and exceed the
facility’s break-even design capacities, and in most cases the applicable
governmental agency or agencies are under no obligation to do so. In most cases,
soliciting additional inmates from other governmental agencies to meet capacity
shortfalls in Company facilities is not a viable alternative. 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. A failure of a governmental agency to supply sufficient
occupancies for any reason may cause the Company to forego revenues and income.
Moreover, occupancy rates during the “start-up” phase when facilities are
first opened

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typically result in capacity underutilization for a one-to three-month period
after the facilities first receive inmates. As a result, as the Company opens or
begins operating new facilities under new contracts, there may be a delay in
reaching sufficient occupancies to meet the break-even level of the facilities’
design capacities, and the Company may incur operating losses at such new
facilities until these occupancy levels are reached.

The Company’s facility management contracts typically have terms ranging
from one to five years, and renewal is at the option of the contracting
governmental agency. No assurance can be given that any agency will exercise a
renewal option in the future. Additionally, contracting governmental agencies
typically may terminate a facility contract without cause by giving the Company
adequate written notice. Any such termination could have a material adverse
effect on the Company’s business, financial condition and results of operations.
See “Business — Facility Management Contracts.”

FIXED REVENUE STRUCTURE

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. If, as a result of inflation or
other causes, the Company experiences increases in personnel costs (the largest
component of facility management expense) or other operating expenses at rates
faster than increases, if any, in per diem fees, then the Company’s results of
operations would be adversely affected.

POSSIBLE LOSS OF LEASE RIGHTS

The site of the Airpark Unit (397 beds) and the Flightline Unit (560 beds)
of the Big Spring Facilities (1,305 beds) (the “Airpark / Flightline Site”) is
part of a larger tract of land (the “Larger Tract”), which was formerly part
of a United States Air Force base conveyed to the City of Big Spring (the
“City”) by the United States government in 1978. The document conveying the
Larger Tract to the City (the “Conveyance”) contains certain restrictive
covenants relating to the use of the Larger Tract that apply to the City and its
lessees and any successors and assigns to the ownership of the Larger Tract.
These restrictive covenants include provisions generally requiring use of the
Larger Tract for public airport purposes unless otherwise consented in writing
by the Federal Aviation Administration (the “FAA”), requiring certain
maintenance of facilities on the Larger Tract and requiring the availability of
the Larger Tract for use by federal aircraft. The Conveyance also permits the
United States government to use the Larger Tract in the case of a national
emergency and permits the FAA to be furnished portions of the Larger Tract and
any structures located thereon for use in construction, operation or maintenance
of facilities for air traffic control activities. The Conveyance further
provides that, at the option of the grantor, title to the Larger Tract would
revert to the grantor upon any breach of the provisions of the Conveyance,
following notice of breach by the FAA and a 60-day grace period to cure any such
breach.

The FAA reviewed the operating agreement and the related agreements between
the City and the Company which permit the Company to assume the operation of the
Big Spring Facilities and advised the City in writing that it has no objections
to the execution thereof by the parties thereto. While the Company believes that
(i) the City is in substantial compliance with the terms of the Conveyance, and
(ii) even if not in substantial compliance, the FAA is aware of (and has not
objected to) all past and present uses of the Larger Tract by the City and its
lessees, the FAA could assert that such uses of the Larger Tract violate the
Conveyance. In addition, the City has used and leased, and may in the future use
or lease, other portions of the Larger Tract for other purposes with respect to
which the Company is not involved and may not be aware. The continued compliance
by the City of Big Spring (or its successors or assigns or other lessees) with
the terms of the Conveyance is not within the control of the Company, and any
breach by the City (or its successors or assigns or other lessees) could result
in reversion of title of all or a portion of the Larger Tract to the United
States government. The agreements between the Company and the City do not give
the Company recourse against the City in the case of such a reversion. In
addition, the Company does not have any assurances from the FAA that it would
give effect to the Company’s lease rights in the event of such a reversion.
Accordingly, in the case of a reversion of the Airpark / Flightline Site, or in
any case in which the United States government or the FAA has superior rights to
use the Airpark / Flightline Site, the continued

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ability of the Company to lease and use the Airpark / Flightline Site could be
subject to the discretion of the United States government or the FAA. The
inability of the Company to continue to operate the Airpark/Flightline Site
would have a material adverse effect on the Company’s financial condition and
results of operations.

BUSINESS CONCENTRATION

Contracts with the FBOP, the California Department of Corrections (“CDC”)
and the United States Marshals Service (the “U.S. Marshals Service”) account
for substantially all the Company’s revenues. The loss of, or a significant
decrease in, business from one or more of these governmental agencies would have
a material adverse effect on the Company’s financial condition and results of
operations.

CONTRACTS SUBJECT TO GOVERNMENT FUNDING

The Company’s facility management contracts are subject to either annual or
bi-annual governmental appropriations. A failure by a governmental agency to
receive such appropriations could result in termination of the contract by such
agency or a reduction of the management fee payable to the Company. In addition,
even if funds are appropriated, delays in payments may occur which could
negatively affect the Company’s cash flow. See “Business — Facility Management
Contracts.” Furthermore, in certain cases the development and construction of
facilities to be managed by the Company are subject to obtaining permanent
facility financing. Such financing currently may be obtained through a variety
of means, including the sale of tax-exempt bonds or other obligations or direct
government appropriation. The sale of tax-exempt bonds or other obligations may
be adversely affected by changes in applicable tax laws or adverse changes in
the market for such securities.

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.
There can be no assurance that the Company will have available capital if and
when required to make such an investment to secure a contract for developing a
facility. See “Business — Facility Design, Construction and Finance.”

GOVERNMENT REGULATION: OVERSIGHT, AUDITS AND INVESTIGATIONS

The Company’s business is highly regulated by a variety of governmental
authorities which continuously oversee the Company’s business and operations.
For example, the contracting governmental agency typically assigns full-time,
on-site personnel to institutional facilities to monitor the Company’s
compliance with contract terms and applicable regulations. Failure by the
Company to comply with contract terms or regulations could expose it to
substantial penalties, including the loss of a management contract. In addition,
changes in existing regulations could require the Company to modify
substantially the manner in which it conducts business and, therefore, could
have a material adverse effect on the Company.

Additionally, the Company’s contracts give the contracting agency the right
to conduct audits of the facilities and operations managed by the Company for
the agency, and such audits occur routinely. An audit involves a governmental
agency’s review of the Company’s compliance with the prescribed policies and
procedures established with respect to the facility. The Company also may be
subject to investigations as a result of an audit, an inmate’s complaint or
other causes.

ACCEPTANCE OF PRIVATIZED CORRECTIONAL AND DETENTION FACILITIES

Management of correctional and detention facilities by private entities has
not achieved acceptance by many governmental agencies. Some sectors of the
federal government and some state governments are legally unable to delegate
their traditional management responsibilities for correctional and detention
facilities to private companies. The operation of correctional and detention
facilities by private entities is a relatively new concept, is not widely
understood and has encountered resistance from certain groups, such

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as labor unions, local sheriff’s departments and groups that believe
correctional and detention facility operations should be conducted only by
governmental agencies. Such resistance may cause a change in public and
government acceptance of privatized correctional facilities. In addition,
changes in political parties in any of the markets in which the Company operates
could result in significant changes in elected officials’ previously established
views of privatization in such markets.

OPPOSITION TO FACILITY LOCATION AND ADVERSE PUBLICITY

The Company’s success in obtaining new awards and contracts may depend in
part upon its ability to locate land that can be leased or acquired on
economically favorable terms by the Company or other entities working with the
Company in conjunction with the Company’s proposal to construct and/or manage a
facility. Some locations may be in or near populous areas and, therefore, may
generate legal action or other forms of opposition from residents in areas
surrounding a proposed site. The Company’s business is subject to public
scrutiny. Typically, the Company must obtain and comply with zoning approvals
and/or land use permits from local governmental entities with respect to a
facility. These approvals and permits provide for the type of facility and, in
certain cases, the types of inmates that can be housed in the facility. In
certain circumstances, public hearings are required before obtaining such
approvals and permits.

In addition to possible negative publicity about privatization in general,
an escape, riot or other similar disturbance at a Company-operated facility or
another privately operated facility, or placement of one or more notorious
offenders or criminal or violent actions by inmates or residents at a
Company-operated facility may result in publicity adverse to the Company and its
industry, which could materially adversely affect the Company’s business. In
February 1996, four inmates escaped from the Company’s Donald W. Wyatt Federal
Detention Facility in Central Falls, Rhode Island (the “Wyatt Facility”). The
inmates were apprehended within 48 hours. Although the Company did not
experience any material adverse effect on its business or results of operations
as a result of the escape from the Wyatt Facility, should escapes occur in the
future, no assurance can be given that such escapes would not have a material
adverse effect on the Company’s business or its results of operations.

POTENTIAL LEGAL LIABILITY

The Company’s management of correctional, detention and pre-release
facilities exposes it to potential third-party claims or litigation by inmates
or other persons for personal injury or other damages resulting from contact
with Company-operated facilities, programs, personnel or inmates, including
damages arising from an inmate’s escape or from a disturbance or riot at a
Company-operated facility. In addition, certain of the Company’s correctional,
detention and pre-release centers (including certain of the Company’s medium and
minimum security facilities) contain a high-risk population, many of whom have
been convicted of or charged with violent offenses. As a result, certain inmates
or residents at Company-operated facilities could pose risks to the public at
large for which it may be alleged that the Company should be held liable.
Moreover, the Company’s management contracts generally require the Company to
indemnify the governmental agency against any damages to which the governmental
agency may be subject in connection with such claims or certain liability risks
faced by the Company, including personal or bodily injury, death or property
damage to a third party if the Company is found to be negligent. Insurance is a
pre-requisite for obtaining and maintaining the Company’s management contracts.
While insurance is currently readily available to the Company, there can be no
assurance that insurance will continue to be available on commercially
reasonable terms or will be adequate to cover all potential claims. See
“Business — Insurance.” In addition, the Company is involved in certain
litigation matters resulting from the ordinary course of business at its
facilities. In the opinion of management of the Company, the outcome of the
proceedings to which the Company is currently a party, in the aggregate, will
not have a material adverse effect upon the Company’s operations or financial
condition. See “Business — Litigation.”

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

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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 the local
conditions and may be better able to gain political and public acceptance.
Although certain states require substantial capital investments in new projects,
other states may allow potential competitors to enter the Company’s business
without substantial capital investment or previous experience in the management
of correctional and detention facilities. In addition, the Company may compete
in some markets with governmental agencies that operate correctional and
detention facilities. The Company believes its industry is subject to
consolidation on both a national and a regional scale. Other companies having
growth objectives similar to the Company’s objectives may enter the industry.
These entrants may have greater financial resources than the Company to finance
acquisition and internal growth opportunities. Consequently, the Company may
encounter significant competition in its efforts to achieve its growth strategy.
See “Business — Competition.”

ECONOMIC RISKS ASSOCIATED WITH DEVELOPMENT ACTIVITIES

When the Company is engaged to act as project manager for the design and
construction of a facility, the Company typically acts as the primary contractor
and subcontracts with other parties that act as the general contractors. As
primary contractor, the Company is subject to the various risks of construction
(including shortages of labor and materials, work stoppages, labor disputes and
weather interference) which could cause construction delays, and the Company is
subject to the risk that the general contractor will be unable to complete
construction at the budgeted costs or to fund any excess construction costs.
Under such contracts the Company is ultimately liable for all late delivery
penalties and cost overruns.

DEPENDENCE ON EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES

The Company depends greatly on the efforts of its executive officers and
key personnel to obtain new contracts, to make acquisitions and to manage the
Company’s operations. The loss or unavailability of any of the Company’s
executive officers (David M. Cornell, Chairman of the Board, President and Chief
Executive Officer of the Company, Marvin H. Wiebe, Jr., Vice President of the
Company, and Steven W. Logan, Chief Financial Officer, Treasurer and Secretary
of the Company) could have an adverse effect on the Company. The Company’s
ability to perform under current and new contracts will depend, in part, on its
ability to attract and retain additional qualified senior executives and
operating personnel. There is significant competition for qualified facility
administrators, managers, counselors and other key personnel, and no assurance
can be given that the Company will be successful in recruiting or training a
sufficient number of officers or employees of the requisite caliber to enable
the Company to operate its business and implement its growth strategy as
planned. See “Management.”

POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK

Sales of a substantial number of shares of Common Stock in the public
market following the Offering, or the perception that such sales could occur,
could have an adverse effect on the market price of the Common Stock. Upon
completion of the Offering, 6,765,398 shares of Common Stock will be
outstanding, and 978,109 shares will be issuable upon exercise of outstanding
warrants and stock options. The 4,000,000 shares of Common Stock sold in the
Offering will be freely tradeable without restriction or further registration
under the Securities Act of 1933, as amended (the “Securities Act”), except
for any shares purchased by an “affiliate” of the Company (as that term is
defined under the Securities Act), which will be subject to the resale
limitations of Securities Act Rule 144. Substantially all the remaining
3,743,507 outstanding shares of Common Stock (including shares issuable upon
exercise of outstanding options and warrants) held by the Company’s current
stockholders will be “restricted securities” (within the meaning of Rule 144)
and, therefore, will not be eligible for sale to the public unless they are sold
in transactions registered under the Securities Act or pursuant to an exemption
from Securities Act registration, including pursuant to Rule 144. The Company
has agreed to provide holders of 3,437,726 of these shares (including shares
issuable upon exercise of outstanding options and warrants) with certain rights
to have their shares registered under the Securities Act for public resale. See
“Certain Relationships and Related Party Transactions — Registration Rights
Agreement.” The Company intends to file a registration statement on Form S-8
under the Securities Act to register 880,000 shares of Common Stock reserved or
to be available for issuance pursuant to the Stock Option Plan.

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The Company and persons who will beneficially own in the aggregate
3,556,393 shares of Common Stock (including shares issuable upon exercise of
outstanding options and warrants) upon completion of the Offering, including the
Company’s directors and executive officers, have agreed not to offer or sell any
shares of Common Stock prior to the expiration of at least 180 days following
the date of this Prospectus without the prior written consent of Dillon, Read &
Co. Inc. (“Dillon Read”), subject to certain exceptions. See “Underwriting.”

NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Offering, no public market for the Common Stock has existed,
and the initial public offering price, which will be determined by negotiation
between the Company and representatives of the Underwriters, may not be
indicative of the price at which the Common Stock will trade after the Offering.
See “Underwriting” for the factors that will be considered in determining the
initial public offering price. Application has been made for quotation of the
Common Stock on the American Stock Exchange, Inc., but no assurance can be given
that an active trading market for the Common Stock will develop or, if
developed, continue after the Offering. The market price of the Common Stock
after the Offering may be subject to significant fluctuations from time to time
in response to numerous factors, including variations in the reported periodic
financial results of the Company, changing conditions in the economy in general
or in the Company’s industry in particular and unfavorable publicity affecting
the Company or its industry. In addition, stock markets generally, and the stock
prices of competitors in the Company’s industry, experience significant price
and volume volatility from time to time which may affect the market price of the
Common Stock for reasons unrelated to the Company’s performance.

IMMEDIATE SUBSTANTIAL DILUTION

Purchasers of Common Stock in the Offering will experience an immediate and
substantial dilution of $6.54 in the pro forma net tangible book value per share
of their investment. In the event the Company issues additional Common Stock in
the future, including Common Stock that may be issued in connection with future
acquisitions, purchasers of Common Stock in the Offering may experience further
dilution in the net tangible book value per share of the Common Stock. See
“Dilution.”

POTENTIAL ADVERSE EFFECTS OF AUTHORIZED PREFERRED STOCK

The Company’s Restated Certificate of Incorporation (the “Certificate of
Incorporation”) will authorize the Board of Directors to issue, without
stockholder approval, one or more series of preferred stock having such
preferences, powers and relative, participating, optional and other rights
(including preferences over the Common Stock respecting dividends and
distributions and voting rights) as the Board of Directors may determine. See
“Description of Capital Stock — Preferred Stock.”

POTENTIAL ADVERSE EFFECTS OF CONTROL OF COMPANY BY EXISTING STOCKHOLDERS

Simultaneously with the completion of the Offering, certain current
stockholders of the Company (the “Applicable Stockholders”), who will
beneficially own in the aggregate approximately 41.6% of the outstanding Common
Stock assuming exercise of their outstanding stock options (and 33.2% of the
outstanding Common Stock if the Underwriters exercise their over-allotment
option in full), will enter into a stockholders agreement. The agreement will
provide that the Applicable Stockholders agree to vote all shares of Common
Stock owned by them to elect three directors out of a five-member Board of
Directors of the Company. The stockholders agreement will provide that the
number of directors may only be increased by vote of a majority of the Board of
Directors. Consequently, the Applicable Stockholders, through their Common Stock
holdings and representation on the Board of Directors of the Company, which will
initially include a majority of directors designated by the Applicable
Shareholders, will be able to exercise significant influence over the policies
and direction of the Company. The stockholders agreement will terminate upon the
first to occur of (i) four years from the date of the completion of the Offering
or (ii) the Applicable Stockholders collectively owning less than 25% of the
outstanding Common Stock. The stockholders agreement will also terminate as to
any Applicable Stockholder upon such stockholder owning less than 5% of the
outstanding Common Stock. See “Certain Relationships and Related Party
Transactions — Stockholders Agreement” and “Principal and Selling
Stockholders.”

13

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,523,103 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$38.6 million after deducting underwriting discounts and commissions and
estimated offering expenses. The Company will not receive any of the net
proceeds from the sale of Common Stock by the Selling Stockholders.

Substantially all the net proceeds received by the Company in the Offering
will be used to repay all the Company’s borrowings outstanding under a credit
agreement dated July 3, 1996 (the “1996 Credit Facility”) with Internationale
Nederlanden (U.S.) Capital Corporation (“ING”) and a short-term convertible
note dated July 3, 1996 and issued by the Company to ING (the “Convertible
Bridge Note”). As of September 1, 1996, the outstanding borrowings under the
1996 Credit Facility and the balance on the Convertible Bridge Note in the
aggregate were $34.9 million. Any remaining proceeds will be used for working
capital and general corporate purposes.

The Convertible Bridge Note has an outstanding principal amount of $6.0
million, bears interest at 9.5% per annum and matures December 30, 1996. If not
then paid and the conversion date is not extended, the Convertible Bridge Note
and any accrued interest thereon will convert into Common Stock at a conversion
rate of $5.64 per share. The Company used the proceeds of the Convertible Bridge
Note to finance a portion of the MidTex acquisition.

As of September 1, 1996, the outstanding indebtedness under the 1996 Credit
Facility totaled $28.9 million, of which $3.7 million will be due within one
year of the date of this Prospectus and the balance will be due in subsequent
installments with a final maturity date of December 31, 2002. As of September 1,
1996, the weighted average stated interest rate on the debt outstanding under
the 1996 Credit Facility was approximately 10.0%. The Company used borrowings
under the 1996 Credit Facility to refinance outstanding borrowings under a
credit agreement dated March 14, 1995, as amended (the “1995 Credit
Facility”), to finance a portion of the MidTex acquisition and for working
capital. The Company used borrowings under the 1995 Credit Facility for
consolidation of various prior debt facilities, expansion funding for new
projects, the repurchase of shares of Common Stock from a former officer of the
Company, the acquisition of the Reid Center and working capital purposes. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources.”

The Company does not currently intend to use any of the net proceeds from
the Offering for additional acquisitions. The Company has in the past engaged in
preliminary discussions with several other companies managing private
correctional and detention facilities concerning the acquisition of all or a
portion of their operations, but no agreements have been reached, and the
Company is not currently involved in any negotiations for acquisitions.

DIVIDEND POLICY

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 expects to enter into
a new revolving credit facility that will contain restrictions on payment of
dividends. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Liquidity and Capital Resources.”

14

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company (i) as of June 30, 1996, (ii) on a pro forma consolidated basis to give
effect to the Acquisitions and the issuance by the Company of shares, and
options and warrants to purchase shares, of Class A Common Stock and Class B
Common Stock after June 30, 1996 and (iii) on such pro forma basis as adjusted
for the Reclassification, the exercise of outstanding stock options or warrants
relating to the shares of Common Stock to be sold by the Selling Stockholders in
the Offering and the sale of the 3,523,103 shares of Common Stock offered by the
Company hereby at an offering price of $12.00 per share (after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company) and the application of the net proceeds therefrom. See “Use of
Proceeds.” As of or prior to the completion of the Offering, the Company will
effect the Reclassification, whereby each share of Class A Common Stock and
Class B Common Stock will be reclassified into one share of Common Stock. This
table should be read in conjunction with the Company’s Consolidated Financial
Statements and the Notes thereto and “Pro Forma Financial Data” included
elsewhere in this Prospectus.

JUNE 30, 1996
————————————
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
———- ——— ———–
(DOLLARS IN THOUSANDS)
Long-term debt, including current
portion:
1995 Credit Facility…………… $ 13,800 $ — $ —
1996 Credit Facility…………… — 28,027 —
Other………………………… 68 68 68
———- ——— ———–
Total long-term debt,
including current
portion……………….. 13,868 28,095 68
———- ——— ———–
Convertible Bridge Note…………….. — 6,000 —
Stockholders’ equity:
Preferred Stock, par value $.001
per share, 10,000,000 shares
authorized pro forma as adjusted,
none issued and outstanding……. — — —
Common stock:
Class A Common Stock, par
value $.001 per share,
9,000,000 shares authorized
historical and pro forma,
3,194,042 shares issued and
outstanding historical and
3,226,792 shares issued and
outstanding pro forma(1)… 3 3 —
Class B Common Stock, par
value $.001 per share,
3,000,000 shares authorized
historical and pro forma,
none issued and outstanding
historical and 277,441
shares issued and
outstanding pro forma(2)… — — —
Common Stock, par value $.001
per share, 30,000,000
shares authorized pro forma
as adjusted, 7,320,398
shares issued and
outstanding(3)…………. — — 7
Additional paid-in capital……… 7,008 7,989 47,238
Retained deficit………………. (2,041) (2,041) (3,302)
Treasury stock (555,000 shares of
Class A Common Stock, at cost)… (2,603) (2,603) (2,603)
———- ——— ———–
Total stockholders’ equity…. 2,367 3,348 41,340
———- ——— ———–
Total capitalization….. $ 16,235 $37,443 $41,408
========== ========= ===========
– ————
(1) Par value decreased from $.01 to $.001 per share on July 3, 1996. Excludes
147,062 shares (historical) and 134,312 shares (pro forma) of Class A Common
Stock reserved for issuance upon exercise of outstanding stock options and
warrants.

(2) The number of authorized shares of Class B Common Stock increased from
1,000,000 to 3,000,000 and par value decreased from $.01 to $.001 per share
on July 3, 1996. Excludes 717,500 shares (historical) and 1,106,859 shares
(pro forma) of Class B Common Stock reserved for issuance upon exercise of
outstanding stock options and warrants.

(3) Excludes 353,498 shares of Common Stock reserved for issuance after
completion of the Offering upon exercise of outstanding stock options
granted under the Stock Option Plan and 624,611 shares of Common Stock
reserved for issuance upon exercise of outstanding stock options and
warrants not included under the Stock Option Plan. See “Management — Stock
Option Plan” and Note 4 of Notes to the Company’s Consolidated Financial
Statements.

15

DILUTION

The deficit in the pro forma net tangible book value of the Common Stock as
of June 30, 1996 (pro forma for the Acquisitions) was $(2,737,000), or
approximately $(.93) per share. Pro forma net tangible book value (deficit) per
share represents the amount of the Company’s total tangible assets less total
liabilities, divided by the pro forma number of shares of Common Stock
outstanding. Pro forma net tangible book value (deficit) dilution per share
represents the difference between the amount per share paid by purchasers of
shares of Common Stock in the Offering and the pro forma net tangible book value
(deficit) per share of Common Stock immediately after completion of the
Offering. After giving effect to the sale by the Company of the 3,523,103 shares
of Common Stock offered hereby at the initial public offering price of $12.00
per share and after deducting the underwriting discounts and commissions and
estimated offering expenses payable by the Company, the pro forma net tangible
book value of the Company as of June 30, 1996 would have been $35,255,000, or
approximately $5.46 per share. This represents an immediate increase in pro
forma net tangible book value of $6.39 per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $6.54 per share to
new investors in the Offering.

The following table illustrates this per share dilution:

Public offering price per share……… $ 12.00
Pro forma net tangible book value
(deficit) per share before
the Offering…………………….. $ (.93)
Increase per share attributable to new
investors……………………….. 6.39
———
Pro forma net tangible book value per
share after the Offering………….. 5.46
———
Dilution per share to new investors….. $ 6.54
=========

The following table sets forth, on an unaudited pro forma basis at June 30,
1996, the difference between the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share paid
by the existing holders of Common Stock and by the new investors, before
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company at the initial public offering price of $12.00
per share.

16

PRO FORMA FINANCIAL DATA

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma condensed consolidated balance sheet as
of June 30, 1996 and the unaudited pro forma condensed consolidated statements
of operations for the year ended December 31, 1995 and for the three months
ended June 30, 1996, reflect the consolidated financial position and results of
operations, respectively, of the Company and subsidiaries as if (i) the
Acquisitions, (ii) the issuance by the Company of shares, and options and
warrants to purchase shares, of Class A Common Stock and Class B Common Stock
after June 30, 1996, (iii) the Reclassification, (iv) the exercise of
outstanding stock options and warrants relating to the shares of Common Stock to
be sold by the Selling Stockholders in the Offering and (v) the Offering and the
application of the estimated net proceeds therefrom, had occurred, in the case
of the balance sheet, on June 30, 1996, and, in the case of the statements of
operations, on January 1, 1995. These statements do not purport to be indicative
of the consolidated results of operations of the Company that might have been
obtained had these events actually then occurred or of the Company’s future
results.

The pro forma condensed consolidated financial statements are based on
certain assumptions and estimates which are subject to change.

17

CORNELL CORRECTIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(DOLLARS IN THOUSANDS)

Receivables, net…………………. 6,932
Other current assets……………… 1,347
——–
Total current assets……….. 13,541
Property and equipment, net:
Prepaid facility use……………… 21,710
Other…………………………… 4,251
Goodwill………………………… 6,034
Other assets………………………. 1,567
——–
Total assets…………………… $ 47,103
========
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable and accrued
liabilities……………………. $ 5,389
Current portion of capital lease
obligations……………………. —
Current portion of long-term debt….. 24
——–
Total current liabilities…… 5,413
Long-term capital lease obligations….. —
Other long-term liabilities…………. 306
Long-term debt, excluding current
portion…………………………. 44
Convertible bridge note…………….. —
Stockholders’ equity……………….. 41,340

——–
Total liabilities and
stockholders’ equity……… $ 47,103
========

See accompanying notes to unaudited pro forma condensed consolidated balance
sheet.

18

CORNELL CORRECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

(1) Records the adjustment to eliminate cash not acquired in the MidTex
acquisition.

(2) Records the increase to equity from the proceeds of the issuance of 90,331
shares to existing stockholders in connection with the financing for the
MidTex Acquisition.

(3) Reflects an allocation of $21.7 million of the purchase price to property
and equipment for the Company’s prepaid 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, which may be exercised
unilaterally by the Company. The Company currently intends to exercise
these extensions.

(4) Records a reduction in net property and equipment of $22.1 million due to
the elimination of capital leases related to the three detention facilities
(see Note 7 below).

(5) Reflects an adjustment to eliminate $2.2 million of deferred MidTex
acquisition costs.

(6) Reflects the increase in long-term debt of $20.2 million, net of $1.3
million of deferred financing costs ($726,000 of which are noncash), which
relates to financing the MidTex acquisition.

(7) Records the elimination of capital leases of $1.3 million (current) and
$15.1 million (long-term) resulting from the MidTex acquisition.

(8) Records the elimination of net assets of MidTex prior to the acquisition.

(9) Records the sale of 3,523,103 shares of Common Stock, par value $.001 per
share, at $12.00 per share, net of estimated aggregate offering expenses of
$3.7 million, the use of $35.3 million of the net proceeds thereof to repay
outstanding indebtedness, and the use of the remaining proceeds of $3.3
million as an increase to cash. Deferred financing costs of $1.3 million
are charged to retained earnings as a result of retiring the outstanding
indebtedness. Deferred offering costs of $400,000 as of June 30, 1996 are
reclassified to equity.

(10) Records the assumed proceeds upon the exercise, concurrently with the
Offering, of stock options and warrants by certain Selling Stockholders in
order to purchase shares of Common Stock that will be sold by such Selling
Stockholders in the Offering.

Reference is made to Note 7 of Notes to the Company’s Consolidated
Financial Statements for a summary of the consideration paid and estimated fair
market value of the assets acquired and liabilities assumed related to the
MidTex and Reid Center acquisitions.

19

CORNELL CORRECTIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Depreciation and amortization……….. 1,376

General and administrative expenses….. 3,831
—————-
Income (loss) from operations……….. 3,182
Interest expense…………………… —

Interest income……………………. (145)
—————-
Income (loss) before
provision for income taxes… 3,327
Provision for income taxes………….. 1,346
—————-
Net income (loss)………………….. $ 1,981
================
Earnings (loss) per share…………… $ .26
================
Number of shares used in per share
computation (thousands)…………… 7,506
================

See accompanying notes to unaudited pro forma condensed consolidated statements
of operations.

20

CORNELL CORRECTIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Depreciation and amortization……….. 853

General and administrative expenses….. 1,779
——–
Income (loss) from operations……….. 1,427
Interest expense…………………… —

Interest income……………………. (65)
——–
Income (loss) before provision for
income taxes…………………….. 1,492
Provision for income taxes………….. 625
——–
Net income (loss)………………….. $ 867
========
Earnings (loss) per share…………… $ .12
========
Number of shares used in per share
computation (thousands)…………… 7,204
========

See accompanying notes to unaudited pro forma condensed consolidated statements
of operations.

21

CORNELL CORRECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(1) Records adjustments to operating expenses to reflect annual payments in
lieu of property taxes to the City of Big Spring, Texas resulting from the
acquisition of substantially all the assets of MidTex. Such payments were
not incurred by MidTex and were negotiated between the Company and the City
of Big Spring.

(2) Records reclassification of MidTex’s general and administrative expenses to
operating expenses to conform to the Company’s policy.

(3) Records an adjustment to reduce operating expenses for the compensation of
a MidTex executive less the cost of a new management advisory services
consulting agreement for such executive, which was entered into as part of
the closing of the acquisition of substantially all the assets of MidTex.
The duties of the executive have been and will continue to be primarily
developing contracts and maintaining relationships with governmental
officials. Management of the Company does not anticipate the permanent
replacement of the executive nor does management of the Company believe an
adjustment to revenues is necessary as a result of the absence of this
executive.

(4) Records adjustments to depreciation and amortization as follows for MidTex:

YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
—————– —————-
(DOLLARS IN THOUSANDS)
Elimination of historical depreciation
and amortization expense………….. $(682) $ (407)
Amortization of prepaid facility use
costs…………………………… 471 310
—— ——
$(211) $ (97)
====== ======

(5) Records adjustments to depreciation for revised basis in depreciable assets
as follows for Reid Center:

YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
—————– —————-
(DOLLARS IN THOUSANDS)
Elimination of historical depreciation
expense…………………………. $ (71) $(22)
Depreciation expense for revised basis
in depreciable assets…………….. 65 23
—– —–
$ (6) $ 1
===== =====

(6) Records additional depreciation expense based upon the Company’s revised
estimate of the useful lives of the Reid Center facilities from 30 to 20
years (facilities are currently 30 or more years old and in management’s
opinion have a remaining life of approximately 20 years) as follows:

YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
—————– —————-
(DOLLARS IN THOUSANDS)
Elimination of historical depreciation
expense of the buildings………….. $ (55) $(27)
Depreciation expense based on revised
useful lives of the buildings……… 75 37
—– —–
$ 20 $ 10
===== =====

(7) Records additional interest expense on the bank borrowings incurred to
consummate the MidTex acquisition based on an average effective interest
rate of 12.0% on average total borrowings of $18.2 million and $23.7
million for the year ended December 31, 1995, and for the six months ended
June 30, 1996, respectively. The assumed weighted average borrowings by
MidTex for the year ended December 31, 1995 were reduced by the cost of a
new MidTex facility which was placed in service during 1995.

(8) Records additional interest expense on the bank borrowings incurred to
consummate the Reid Center acquisition based on an average interest rate of
10% on average total borrowings of $2.1 million for the year ended December
31, 1995 and for the six months ended June 30, 1996.

(9) Records adjustments to record income tax effects of the foregoing
adjustments.

(10) Records adjustments to increase general and administrative expenses of
$300,000 for the year ended December 31, 1995, and $150,000 for the six
months ended June 30, 1996, to reflect estimated cost increases associated
with the Company becoming publicly held.

(11) Reflects a reduction in interest expense of $3.2 million for the year ended
December 31, 1995, and $1.8 million for the six months ended June 30, 1996,
as a result of the repayment in full of borrowings outstanding under the
1996 Credit Facility and under the Convertible Bridge Note from the net
proceeds of the Offering.

Reference is made to Note 7 of Notes to the Company’s Consolidated
Financial Statements for a discussion of certain financing and compensation
charges that will be recorded subsequent to June 30, 1996 related to the
Company’s issuance of certain equity securities.

In March 1996, MidTex amended its contract with the FBOP to decrease per
diem rates from $36.92 to $34.92. In connection with this decrease, management
anticipates a corresponding reduction in revenues. The Company’s negotiated
purchase price for the acquisition of substantially all the assets of MidTex
took into consideration the per diem rate reduction. Management is considering
certain cost reduction strategies in connection with the MidTex acquisition
which are expected to substantially mitigate the reduction in revenues. The
impact on income from operations is not expected to be significant.

22

SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA

The selected consolidated financial data for the Company set forth below
with respect to the Statement of Operations Data and Balance Sheet Data as of
and for the five years ended December 31, 1995 is derived from the consolidated
financial statements of the Company, which statements have been audited by
Arthur Andersen LLP, independent public accountants, and of which the statements
relating to 1993, 1994 and 1995 are included elsewhere in this Prospectus. The
selected financial data with respect to the Statement of Operations Data and
Balance Sheet Data as of and for the six month periods ended June 30, 1995 and
1996 is derived from the unaudited consolidated financial statements of the
Company which, in the opinion of management of the Company, reflect all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of such data. The data for the six months ended June 30, 1996
is not necessarily indicative of the results that may be expected for the entire
year. The pro forma financial data of the Company as of and for the year ended
December 31, 1995 and the six months ended June 30, 1996 is derived from the pro
forma financial statements of the Company that appear elsewhere in this
Prospectus. The pro forma Statement of Operations Data gives effect to (i) the
Acquisitions, (ii) the issuance by the Company of shares, and options and
warrants to purchases shares, of Class A Common Stock and Class B Common Stock
after June 30, 1996, (iii) the Reclassification, (iv) the exercise of
outstanding stock options and warrants relating to the shares of Common Stock to
be sold by the Selling Stockholders in the Offering, and (v) the Offering and
the application of the estimated net proceeds therefrom to the Company, as if
such events had occurred on January 1, 1995. The pro forma Balance Sheet Data as
of June 30, 1996 gives effect to such events as if they had occurred on June 30,
1996. The pro forma financial information does not purport to represent what the
Company’s results of operations or financial position actually would have been
had these events, in fact, occurred on the date or at the beginning of the
period indicated, nor are they intended to project the Company’s results of
operations or financial position for any future date or period. 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 Prospectus.

OPERATING DATA:
Beds under contract (end of
period)…………………….. 3,101
Contracted beds in operation (end
of period)………………….. 2,866
Average occupancy based on
contracted beds in
operation(5)………………… 94.1%
BALANCE SHEET DATA:
Working capital (deficit)………. $ 8,128
Total assets………………….. 47,103
Long-term debt………………… 68
Stockholders’ equity (deficit)….. 41,340
– ————
(1) Includes operations purchased by the Company on March 31, 1994.

(2) Although the Company incurred a loss for financial reporting purposes for
the year ended December 31, 1994, a provision was recognized for taxable
income resulting principally from adding back nondeductible amortization of
goodwill to the loss for financial reporting purposes. 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.

(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 (loss)
would have been if the repayment of debt with proceeds from the Offering had
taken place at the beginning of the respective periods.

(5) For any applicable facilities, includes reduced occupancy during the
start-up phase. See “Business — Facility Management Contracts.” For the
year ended December 31, 1993, occupancy did not commence until December
1993.

23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL

The Company was formed in March 1994 as the successor to a partnership
co-founded by David M. Cornell, the Company’s Chairman, Chief Executive Officer
and President. In March 1994, the Company acquired Eclectic, which began
developing pre-release facilities in California in 1977. The acquisition of
Eclectic added 11 privatized institutional and pre-release facilities with an
aggregate design capacity of 979 beds. The following table sets forth the number
of facilities under contract or award at the end of the periods shown.

(2) For any applicable facilities, includes reduced occupancy during the
start-up phase. See “Business — Facility Management Contracts.” For the
year ended December 31, 1993, occupancy did not commence until December
1993.

During 1996, the Company has added the management of 2,002 beds through
opening or contracting to open four new facilities (387 beds) and the
Acquisitions (1,615 beds). As of September 30, 1996, the Company has 24
contracts to operate 20 private correctional, detention and pre-release
facilities with an aggregate design capacity of 3,349 beds. Of these facilities,
18 are currently in operation (3,114 beds) and two are under development (235
beds). One of the two facilities under development is scheduled to commence
operations during the fourth quarter of 1996, and the other is scheduled to
commence operations during the first quarter of 1997. In addition, as of
September 1, 1996, the Company has submitted written bids to operate four new
projects with an aggregate design capacity of 760 beds in response to
governmental agencies’ pending Requests For Proposals (“RFPs”).

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 recognized on a per diem
rate based upon the number of occupant days for the period. In addition,
contracts for seven facilities provide for direct reimbursement by the
contracting governmental agency of facility rent and certain types of insurance.

On a combined pro forma basis, after giving effect to the Acquisitions, for
the year ended December 31, 1995 and for the six months ended June 30, 1996,
respectively, 71.0% and 72.0% of the Company’s revenues were derived from the
operation of institutional correctional and detention facilities, and 29.0% and
28.0% of the Company’s revenues were derived from the operation of pre-release
correctional facilities.

In 1992 and 1993, the Company recognized substantial development fees
related to the development, design and supervision of facility construction
activities. Since that time, competitive bidding practices in the industry have
required the Company to submit bids that include no fee or only a minimal fee
for development activities. Future development fee revenues are not anticipated
to be significant. As such, the Company currently derives revenues from
development, design and construction activities primarily through occupancy fees
that are paid over the term of the contract once a facility begins operations.
See “– Liquidity and Capital Resources — General.”

Factors which the Company considers in determining the per diem rate to
charge include (i) the programs specified by the contract and the related
staffing levels, (ii) wage levels customary in the respective geographic areas,
(iii) whether the proposed facility is to be leased or purchased and (iv) if the

24

contract is currently being operated by a competitor, the historical average
occupancy levels maintained or, if a new contract, the anticipated average
occupancy levels which the Company believes could reasonably be maintained.

The Company’s operating margins generally vary from facility to facility
(regardless of whether the facility is institutional, pre-release or juvenile)
depending on the terms negotiated with each contracting governmental agency. The
Company does not have a target margin that it uses when it submits bids to
operate facilities. The margins that are included and implicit in bids and that
may subsequently result from contract awards vary depending on factors such as
the level of competition for the contract award, the proposed length of the
contract, the historical (for existing facilities) or anticipated (for new
facilities) occupancy levels for a facility, the level of capital commitment
required with respect to a facility and the anticipated changes in operating
costs, if any, over the term of the contract.

The Company incurs all facility operating expenses, except for certain debt
service and lease payments with respect to two facilities for which the Company
has only a management contract. The Company owns two facilities, the Peter A.
Leidel Community Corrections Center (the “Leidel Center”) and the Reid Center,
both located in Houston, Texas.

In connection with the acquisition of substantially all the assets of
MidTex, and as part of the purchase price therefor, the Company prepaid a
majority of the facility use cost of the Big Spring Facilities through at least
the year 2030. See “Risk Factors — Possible Loss of Lease Rights.” MidTex
generated income from operations of $2.0 million, $1.8 million and $3.5 million
for the fiscal years ended September 30, 1993, 1994 and 1995, respectively, and
$3.1 million for the nine months ended June 30, 1996. See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — MidTex and BSCC — Combined Results of Operations-MidTex and
BSCC.” The addition of the operations of MidTex to the Company should improve
the Company’s results of operations in future periods.

A majority of the Company’s facility operating expenses consist of fixed
costs. These fixed costs include lease and rental expense, insurance, utilities
and depreciation. As a result, when the Company commences operation of new or
expanded facilities, fixed operating expenses increase. The amount of the
Company’s variable operating expenses depends on occupancy levels at the
facilities operated by the Company. These variable operating expenses include
food, medical services, supplies and clothing. The Company’s largest single
operating expense, facility payroll expense and related employment taxes and
costs, have both a fixed and a variable component. The Company can adjust the
staffing and payroll to a certain extent based on occupancy at a facility, but a
minimum fixed number of employees is required to operate and maintain any
facility regardless of occupancy levels. Since a majority of the Company’s
operating expenses are fixed, to the extent that the Company can increase
revenues at a facility through higher occupancy or expansion of the number of
beds under contract, the Company should be able to improve operating results.

General and administrative expenses consist primarily of salaries of the
Company’s corporate and administrative personnel who provide senior management,
accounting, finance, personnel and other services and costs of developing new
contracts.

Newly opened facilities are staffed according to contract requirements when
the Company begins receiving residents or inmates. Residents or inmates are
typically assigned to a newly opened facility on a structured basis over a
one-to three-month period. The Company may incur operating losses at new
facilities until break-even occupancy levels are reached. However, the Company
does not have a calculable break-even occupancy level for the Company as a
whole. Quarterly results can be substantially affected by the timing of the
commencement of operations as well as development and construction of new
facilities and by expenses incurred by the Company (including the cost of
options to purchase or lease proposed facility sites and the cost of engaging
outside consultants and legal experts related to submitting responses to RFPs).

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 is realized.

25

As a result of the Company’s existing indebtedness, including indebtedness
incurred in the acquisition of substantially all assets of MidTex, the Company
is incurring monthly interest expense of approximately $300,000. The Company
will utilize the net proceeds from the Offering to retire the outstanding
borrowings under the 1996 Credit Facility and the Convertible Bridge Note. See
“Use of Proceeds.” Therefore, immediately following the consummation of the
Offering, the Company will have no significant debt. The substantial reduction
in outstanding indebtedness will substantially reduce interest expense and
improve the Company’s results of operations. In addition to a substantial
reduction in interest expense after the completion of the Offering, the addition
of the operations of MidTex, which generated income from operations of $3.5
million for the fiscal year ended September 30, 1995 and $3.1 million for the
nine months ended June 30, 1996 (see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — MidTex and BSCC — Combined
Results of Operations-MidTex and BSCC”), and the operations of the Reid Center
should allow the Company to spread its general and administrative expenses over
a larger operating base of revenues, thereby improving the Company’s operating
results. See “Pro Forma Financial Data.”

RESULTS OF OPERATIONS

The Company’s historical operating results reflect that the Company has
expanded its business since 1993 from correctional, detention and pre-release
facility development and consulting into operation of correctional, detention
and pre-release facilities. Material fluctuations in the Company’s results of
operations are principally the result of the timing and effect of acquisitions
and 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.

The Company earned its first occupancy fee revenue in December 1993 upon
the opening of the Wyatt Facility. The Company’s operations grew significantly
with the March 1994 acquisition of Eclectic. See ” — General.” The operations
of Eclectic were included in the Company’s results of operations for nine months
in 1994 and a full twelve months in 1995. The Company’s acquisition of the Reid
Center in May 1996 and MidTex in July 1996 will significantly increase 1996
revenues over 1995 and have a greater impact in 1997 once such operations are
included in the Company’s reported results of operations for a full year.

The Company’s income from operations as a percentage of revenues will
fluctuate depending on the relative mix of operating contracts among the
Company’s three areas of operational focus. See “Business — General.” Since
pre-release facilities involve contracts with a fewer number of beds than secure
institutions, fluctuations in the occupancy levels in such facilities have a
more significant impact on their operating margins.

Subsequent to June 30, 1996, in connection with the 1996 Credit Facility,
the Company incurred expenses, issued certain options and warrants, and sold
shares of Class B 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
Offering is intended to retire the outstanding indebtedness under the 1996
Credit Facility, the total deferred financing costs are expected to be charged
to interest expense prior to December 31, 1996 in connection with the early
retirement of the borrowings under the 1996 Credit Facility. In addition, the
Company will recognize 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.

26

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

TOTAL REVENUES. Total revenues increased by 12.2% to $11.3 million for the
six months ended June 30, 1996 from $10.1 million for the six months ended June
30, 1995. The increase in occupancy fees of $863,000, or 8.5%, was due
principally to the opening of two new pre-release facilities during the first
quarter of 1996 and the acquisition of the Reid Center effective as of May 1,
1996. Revenues were lower than expected as a result of lower than anticipated
occupancy levels at the Wyatt Facility during the first quarter of 1996 and
certain pre-release facilities. The increase in other income for the six months
ended June 30, 1996 to $370,000 from $3,000 for the six months ended June 30,
1995 was due primarily to the recognition of the revenue related to a previously
reserved note receivable of $206,000 pertaining to 1994 operations of the Wyatt
Facility, the realization of which has improved from prior periods due to
payments received on the note and due to the additional operating experience
with the facility.

OPERATING EXPENSES. Operating expenses increased by 17.8% to $9.5 million
for the six months ended June 30, 1996 from $8.0 million for the six months
ended June 30, 1995. This increase is principally attributable to 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 83.5% from 79.5%. The increase in operating
expenses as a percentage of revenues is principally due to incurring fixed
operating costs while experiencing lower occupancy during start-up at one of the
new pre-release facilities and the unanticipated reduced occupancy at the Wyatt
Facility during the first quarter of 1996.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
39.0% to $510,000 for the six months ended June 30, 1996 from $367,000 for the
six months ended June 30, 1995. The increase was primarily due to an accounting
adjustment in the first quarter of 1995 to adjust depreciation expense in prior
periods, to the opening of a new pre-release facility in January 1996 and to the
acquisition of the Reid Center in May 1996.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 5.0% to $1.6 million for the six months ended June 30, 1996 from
$1.5 million for the six months ended June 30, 1995. As a percentage of
revenues, general and administrative expenses decreased to 14.3% from 15.3% due
principally to spreading fixed costs over a larger revenue base. Salary expense
increased by $95,000 or 18.4% for the six months ended June 30, 1996 compared to
the six months ended June 30, 1995. Development costs increased by $98,000 or
31.4% for the six months ended June 30, 1996 compared to the six months ended
June 30, 1995.

INTEREST. Interest expense, net of interest income, increased to $447,000
for the six months ended June 30, 1996 from $199,000 for the six months ended
June 30, 1995. The increase in net interest expense was principally due to
borrowings under the Company’s 1995 Credit Facility related to the Company’s
purchase of 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.

27

INCOME TAXES. The Company did not recognize any provision for income taxes
due to a taxable loss in both periods. As of June 30, 1996, the Company had
recognized a deferred tax asset of $436,000. 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.

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. 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. Salary expense
increased by $9,000 or 0.1% for the year ended December 31, 1995 compared to the
year ended December 31, 1994. Development costs increased by $457,000 or 113.9%
for the year ended December 31, 1995 compared to the year ended December 31,
1994.

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

28

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.

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 CDC 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

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.

The Company typically incurs costs ranging from $10,000 to $75,000 to
prepare a response to an RFP. RFP costs are typically recovered from the
contracting governmental agency over the term of the contract if the Company is
awarded the contract. Otherwise, the RFP costs are unreimbursed expenses. See
“Business — Marketing.” Facility start-up costs vary by contract and can
range between $30,000 and $1.0 million. See “Business — Facility Management
Contracts.”

In the past, certain expenses from development, design and construction of
new or renovated facilities were reimbursed through development fees. More
recently, the Company has derived revenues from development, design and
construction activities primarily through occupancy fees that are paid over the
term of the contract once a facility begins operations. As such, the Company is
often required to incur initial expenditures for development, design or
construction of facilities, which are not necessarily immediately reimbursed.

WORKING CAPITAL. The Company’s working capital increased to $2.1 million
at June 30, 1996 from $1.5 million at December 31, 1995. This increase was
principally due to an increase in receivables resulting from the acquisition of
the Reid Center in May 1996 and to financings under the 1995 Credit Facility for
the purchase and construction of a new pre-release facility that opened during
the first quarter of 1996. A portion of the construction costs were accrued as a
current liability at December 31, 1995. The Company’s working capital decreased
to $1.5 million at December 31, 1995 from $2.0 million at December 31, 1994. The
decrease was principally due to an increase in accounts payable and accrued
liabilities to record incurred construction and development costs for the two
new pre-release facilities that opened during the first quarter of 1996.

EXISTING CREDIT FACILITIES. The Company’s primary financing has been
provided under its 1995 Credit Facility, which the Company entered into on March
14, 1995. In connection with the acquisition of substantially all the assets of
MidTex, the Company entered into the 1996 Credit Facility and issued the

29

Convertible Bridge Note. The Convertible Bridge Note has an outstanding
principal amount of $6.0 million, bears interest at 9.5% per annum and matures
December 30, 1996. If not then paid and the conversion date is not extended, the
Convertible Bridge Note and any accrued interest thereon will convert into
Common Stock at a conversion rate of $5.64 per share. The Company used the
proceeds of the Convertible Bridge Note to finance a portion of the MidTex
acquisition. As of September 1, 1996, the outstanding indebtedness under the
1996 Credit Facility totaled $28.9 million, of which $3.7 million will be due
within one year of the date of this Prospectus and the balance will be due in
subsequent installments with a final maturity date of December 31, 2002. The
Company used borrowings under the 1995 Credit Facility for (i) consolidation of
various prior debt facilities, (ii) expansion funding for new projects, (iii)
the repurchase of shares of Common Stock from a former officer of the Company,
(iv) the acquisition of the Reid Center and (v) working capital purposes. 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.

USE OF PROCEEDS. The Company will utilize the net proceeds from the
Offering to retire the outstanding borrowings under the 1996 Credit Facility and
the Convertible Bridge Note. See “Use of Proceeds.” Therefore, immediately
following the consummation of the Offering, the Company will have no significant
debt.

CAPITAL EXPENDITURES. Management of the Company anticipates that the
capital requirements during the third and fourth quarters of 1996 for a
pre-release facility scheduled to commence operations during the third quarter
of 1996 will be approximately $500,000 and will be used for building renovations
and purchases of furniture and equipment. Capital expenditures for the six
months ended June 30, 1996 were $467,000 and related to completion of
construction and purchase of furniture and equipment for the two newly opened
pre-release facilities, and for normal replacement of furniture and equipment at
various facilities. Capital expenditures for the year ended December 31, 1995
were $1.2 million and related to the purchase and construction costs for the two
new pre-release facilities which opened during the first quarter of 1996 and
miscellaneous facility renovations and equipment. Capital expenditures for the
year ended December 31, 1994 were $167,000. The 1994 capital expenditures were
for furniture and equipment replacements at various facilities.

CASH USED IN OPERATING ACTIVITIES. The Company had net cash used in
operating activities of $1.2 million for the year ended December 31, 1995
primarily due to an increase in occupancy fees receivable and from debt issuance
costs related to the 1995 Credit Facility. The net cash used in operating
activities of $952,000 for the six months ended June 30, 1996 was primarily due
to a loss from operations and to the increase in receivables resulting from the
acquisition of the Reid Center in May 1996. Management of the Company believes
the retirement of all its outstanding debt from the net proceeds of the Offering
and the cash flows anticipated to be generated from operations, including recent
acquisitions, will result in future cash flows from operations sufficient to
meet the Company’s current operating needs. The Company is currently seeking to
obtain the New Credit Facility upon completion of the Offering. The New Credit
Facility, together with cash provided from operations, is anticipated to provide
sufficient liquidity to meet the Company’s working capital requirements over the
next 24 months. It is not anticipated that the New 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.
See “Risk Factors — Need for Additional Financing.”

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 increases, if any, in per diem fees, thereby resulting in a
substantial adverse effect on the Company’s results of operations.

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MIDTEX AND BSCC

MidTex was formed in November 1987 to provide executive management to
construct prison facilities and operate prison activities for the City of Big
Spring, Texas. The Big Spring Correctional Center (“BSCC”) is an enterprise
fund set up by the City to operate these prison facilities. Since 1987, the
three Big Spring Facilities (the Airpark Unit, the Flightline Unit and the
Interstate Unit) have been established to house approximately 1,305 inmates for
the FBOP.

COMBINED RESULTS OF OPERATIONS – MIDTEX AND BSCC

The following table sets forth certain historical selected financial data
and data as a percentage of revenues for the periods indicated (dollars in
thousands) for MidTex and BSCC combined:

NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1995

TOTAL REVENUES. Total revenues increased by 31.0% to $12.8 million for the
nine months ended
June 30, 1996 from $9.8 million for the nine months ended June 30, 1995. The
increase was due principally to the addition of the 560-bed Flightline Unit
which began operation in February 1995 and achieved its expected occupancy
levels in April 1995. Effective March 1996, MidTex amended its contract with the
FBOP, which decreased per diem rates from $36.92 to $34.92, a reduction of 5.4%.

OPERATING EXPENSES. Operating expenses increased by 32.1% to $8.0 million
for the nine months ended June 30, 1996 from $6.1 million for the nine months
ended June 30, 1995. The increase was due principally to the addition of the
Flightline Unit and due to general wage increases for personnel.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
27.2% to $608,000 for the nine months ended June 30, 1996 from $478,000 for the
nine months ended June 30, 1995. The increase was due principally to the
addition of the Flightline Unit.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 23.8% to $1.1 million for the nine months ended June 30, 1996 from
$862,000 for the nine months ended June 30, 1995. The increase was due
principally to the payment of executive bonuses.

YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO YEAR ENDED SEPTEMBER 30, 1994

TOTAL REVENUES. Total revenues increased by 40.7% to $14.7 million for the
fiscal year ended September 30, 1995 from $10.4 million for the fiscal year
ended September 30, 1994. The increase was due principally to the addition of
the Flightline Unit which began operation in February 1995 and achieved its
expected occupancy levels in April 1995.

OPERATING EXPENSES. Operating expenses increased by 27.8% to $9.0 million
for the fiscal year ended September 30, 1995 from $7.0 million for the fiscal
year ended September 30, 1994. The increase was due principally to the addition
of the Flightline Unit.

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DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
46.4% to $682,000 for the fiscal year ended September 30, 1995 from $466,000 for
the fiscal year ended September 30, 1994. The increase was due principally to
the addition of the Flightline Unit.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 40.2% to $1.5 million for the fiscal year ended September 30, 1995
from $1.1 million for the fiscal year ended September 30, 1994. The increase was
due principally to the payment of executive bonuses and the addition of
management personnel.

LIQUIDITY AND CAPITAL RESOURCES – MIDTEX AND BSCC

From October 1, 1993 through the nine months ended June 30, 1996, MidTex
generated $6.6 million of cash from operating activities. During the same
period, MidTex used $1.4 million in investment activities primarily for
purchases and replacements of furniture and equipment, and used $4.3 million in
financing activities which were principally payments on capital lease
obligations pertaining to the facilities.

MidTex had working capital of $1.2 million as of June 30, 1996. MidTex has
historically funded its operations with cash flows from operations.

REID CENTER

The Reid Center is a 310-bed residential rehabilitation and drug treatment
pre-release center which has been in operation since the mid-1960’s as a
nonprofit organization. The Reid Center has a contract with the Texas Department
of Criminal Justice to provide residential services, reintegration programs and
counseling for state parolees.

RESULTS OF OPERATIONS – REID CENTER

The following table sets forth certain historical selected financial data
and data as a percentage of revenues for the periods indicated (dollars in
thousands) for the Reid Center:

LIQUIDITY AND CAPITAL RESOURCES – REID CENTER

From January 1, 1995 through March 31, 1996, the Reid Center used $137,000
of cash in operating activities and made $47,000 in capital expenditures. The
Reid Center had working capital of $696,000 as of March 31, 1996. The Reid
Center has historically funded its operations with cash flows from operations.

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BUSINESS
GENERAL

Based on the information in the Private Correctional Facility Census
regarding combined capacities of adult, pre-release and juvenile facilities
under contract with private correctional and detention providers in the United
States at December 31, 1995, and after giving effect to the Acquisitions
occurring after December 31, 1995 (see ” — Acquisition History” below), the
Company is one of the leading providers of privatized correctional, detention
and pre-release services in the United States based on contracted design
capacity. The Company was incorporated in Delaware on March 31, 1994, and is the
successor to (i) The Cornell Cox Group, L.P., a Delaware limited partnership
formed in 1991 (the “Partnership”) that began developing institutional
correctional and detention facilities in Massachusetts and Rhode Island in 1991,
and (ii) Eclectic, which began developing 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
California, Texas, Rhode Island, Utah and North Carolina. As of September 1,
1996, the Company has 24 contracts to operate 20 private correctional, detention
and pre-release facilities with an aggregate design capacity of 3,349 beds. Of
these facilities, 18 are currently in operation (3,114 beds) and two are under
development (235 beds).

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. The Company is
currently developing and constructing a 160-bed juvenile short-term correctional
and detention facility scheduled to commence operations in the first quarter of
1997. 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, the operator of 11 privatized
institutional and pre-release facilities in California with an aggregate design
capacity of 979 beds. Consideration for the acquisition of Eclectic was $10.0
million, consisting of $6.0 million in cash, $3.3 million of subordinated
indebtedness and $0.7 million of other long-term obligations.

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 the
acquisition, approximately 100 employees of the Reid Center became 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, the operator of the Big Spring Facilities, for an
aggregate purchase price of approximately $23.2 million. The City of Big Spring
has an Intergovernmental Agreement (the “IGA”) with the FBOP to house up to
1,305 inmates at the Big Spring Facilities, and, as part of the acquisition,
MidTex assigned to the Company its

33

rights under an operating agreement with the City of Big Spring (the “Big
Spring Operating Agreement”) to manage the Big Spring Facilities. 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. See “Risk Factors — Possible Loss of Lease Rights.” 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 MidTex acquisition,
approximately 250 employees of the City of Big Spring and MidTex became
employees of the Company. The MidTex acquisition more than doubled the number of
institutional facility beds managed by the Company, and the Company believes
that the acquisition provides a basis for continued expansion of the Company’s
institutional area of operational focus.

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 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 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 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. The Company currently operates six facilities (2,165 beds)
that provide secure institutional correctional and detention services for
incarcerated adults. These facilities consist of: the three Big Spring
Facilities, medium and minimum security facilities operated primarily for the
FBOP; the 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 CDC.

The Company operates the Big Spring Facilities 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.

34

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. The Company’s business historically centered around the
operation of pre-release facilities. The Company currently operates or has
contracts to operate 13 facilities (with an aggregate design capacity of 1,024
beds) that provide pre-release correctional services. Of these facilities, six
are operated primarily for the FBOP, five are operated primarily for the CDC,
one is operated for the TDCJ and one will be operated for the North Carolina
Department of Corrections (the “NCDC”). 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.

JUVENILE SERVICES. Eclectic historically operated juvenile facilities for
the INS, the FBOP and certain counties in the State of California. The Company
is currently developing and constructing a 160-bed juvenile short-term
correctional and detention facility for the State of Utah in Salt Lake City. The
facility is scheduled to commence operations during the first quarter of 1997.
The facility will primarily house pre-adjudicated juvenile detainees and
juveniles awaiting placement in long-term correctional facilities. The Salt Lake
City juvenile facility will include 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. 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.

OPERATING STRATEGIES

The Company’s objective is to enhance its position as one of the leading
providers of private correctional, detention and pre-release services. The
Company is commited to the following operating strategies:

PURSUE DIVERSE MARKETS. The Company intends to continue to diversify its
business within three areas of operational focus. Historically, the Company
primarily provided pre-release services and believes that it has a long-standing
reputation as an effective manager of such facilities. However, after giving
effect to the Company’s acquisition of substantially all the assets of MidTex in
July 1996, a majority of the Company’s facility capacity and revenues will be
concentrated in the institutional correctional and detention service area. In
addition, the Company is currently developing a juvenile correctional and
detention facility and intends to pursue additional contracts to provide
juvenile correctional and detention services. The Company believes that, by
being a diversified provider of services, the Company will be able to compete
for more types of contract awards and adapt to changes in demands within its
industry for varying categories of services.

DELIVER COST EFFECTIVE AND QUALITY MANAGEMENT PROGRAMS. The Company
intends to position itself as a low cost, high quality provider of services in
all its markets. The Company will focus on improving

35

operating performance and efficiency through standardization of practices,
programs and reporting procedures, efficient staffing and attention to
productivity standards. The Company also emphasizes quality of services by
providing trained personnel and effective programs designed to meet the needs of
contracting governmental agencies.

PROVIDE INNOVATIVE SERVICES. The Company intends to implement specialized
and innovative services to address unique needs of governmental agencies and
certain segments of the inmate population. For example, certain facilities of
the Company are equipped with interactive satellite links to courtrooms and
judges that should reduce the time, effort and expense related to transporting
inmates to offsite courtrooms. The Company also intends to actively pursue
contracts to provide services for specialized segments of the inmate population
categorized by age (such as services for aging inmates or juvenile offenders),
medical status, gender or security needs.

GROWTH STRATEGIES

The Company expects the growth in privatization of correctional, detention
and pre-release facilities by governmental agencies to continue in the
foreseeable future. By expanding the number of beds under contract, the Company
should be able to increase economies of scale and purchasing power and qualify
to be considered for additional contract awards. The Company will seek to
increase revenues by pursuing the following growth strategies:

BID FOR NEW CONTRACT AWARDS. The Company will selectively pursue
opportunities to obtain contract awards for new privatized facilities. As of
September 1, 1996, the Company has submitted written bids to operate four new
projects with an aggregate design capacity of over 760 beds. Awards for these
projects should be made by the applicable governmental agencies by the end of
1996. The Company is also currently considering two additional projects with an
aggregate design capacity of 1,000 beds for which it may submit written bids
before the end of 1996.

INCREASE BED CAPACITY OF EXISTING FACILITIES. The Company has the
potential for substantial capacity expansion at certain existing facilities with
modest capital investment. As a result, the Company intends to pursue expansion
of such facilities by obtaining awards of additional or supplemental contracts
to provide services at these facilities.

PURSUE STRATEGIC ACQUISITIONS. The Company believes that the private
correctional and detention industry is consolidating. The Company believes that
the larger, better capitalized providers will acquire smaller providers that are
typically too undercapitalized to pursue the industry’s growth opportunities.
The Company intends to pursue selective acquisitions of other operators or
developers of private correctional and detention facilities in institutional,
pre-release and juvenile areas of operational focus to enhance its position in
its current markets, to acquire operations in new markets and to acquire
operations that will broaden the types of services which the Company can
provide. The Company believes there are opportunities to eliminate costs through
consolidation and coordination of the Company’s current and subsequently
acquired operations. As a public company, the Company will increase its access
to capital markets, allowing the Company to use various combinations of its
Common Stock, cash and debt financing to make additional acquisitions. The
Company has in the past engaged in preliminary discussions with several other
companies managing private correctional and detention facilities concerning the
acquisition of all or a portion of their operations, but no agreements have been
reached, and the Company is not currently involved in any negotiations for
acquisitions. The timing, size and success of the Company’s acquisition program
efforts and the associated potential capital commitments are not predictable.

36

FACILITIES

As of September 1, 1996, the Company operates 18 facilities and has been
awarded contracts to operate two additional facilities currently under
development. In addition to providing management services, the Company has been
involved in the development, design and construction of many of these
facilities. The facilities currently under development are the Durham, North
Carolina facility, which is scheduled to commence operations during the fourth
quarter of 1996, and the Salt Lake City juvenile facility, which is scheduled to
commence operations during the first quarter of 1997. The following table
summarizes certain additional information with respect to contracts and
facilities under operation by the Company as of September 1, 1996:

37

– ————
(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. See “Risk
Factors — Facility Occupancy Levels and Contract Duration.”

(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 three
Big Spring Facilities. The Airpark Unit began operation in February 1991,
the Flightline Unit began operation in February 1995, and the Interstate
Unit began operation in May 1989. 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 three Big Spring
Facilities 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 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.

(12) 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.

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

FACILITY MANAGEMENT CONTRACTS

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. See “Risk Factors — Facility Occupancy
Levels and Contract Duration.”

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. To date, the Company has not lost a contract because
appropriations have not been made to a governmental agency, although no
assurance can be given that the

38

governmental agencies will continue to receive appropriations in all cases. See
“Risk Factors — Contracts Subject to Government Funding.”

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.

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. To date, no contracts
have been terminated before expiration. See “Risk Factors — Facility Occupancy
Levels and Contract Duration.”

MARKETING

The Company’s principal customers are the federal and state governmental
agencies responsible for correctional, detention and pre-release services. These
governmental agencies generally procure these services from the private sector
by issuing an 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.

39

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.

As of September 1, the Company has submitted written bids for operating
four new projects with an aggregate design capacity of 760 beds. Awards for
these projects should be made by the applicable governmental agencies by the end
of 1996. The Company is also currently considering two additional projects with
an aggregate design capacity of 1,000 beds for which it may submit written bids
before the end of 1996.

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. Currently, 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.

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FACILITY DESIGN, CONSTRUCTION AND FINANCE

In addition to operating correctional facilities, the Company also provides
consultation and management 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
consulted on 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 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; and (vii)
the development, design, and construction of the 160-bed Salt Lake City Juvenile
Detention Facility in Salt Lake City, Utah. 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 20 facilities the Company operates or has contracted to operate,
two are funded using one of the above-described financing methods, two are owned
by the Company and 16 are leased. Of the 16 leased facilities, three (the Big
Spring facilities) 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 Facilities through at least the year
2030. See “Risk Factors — Possible Loss of Lease Rights.”

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.
There can be no assurance that the Company will have available capital if and
when required to make such an investment to secure a contract for developing a
facility.

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COMPETITION

The Company competes with a number of companies, including, but not limited
to, CCA, WHC and 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. See “Risk Factors — Competition.”

EMPLOYEES

At June 30, 1996, the Company had 373 full-time employees and 87 part-time
employees. After giving effect to the acquisition of substantially all the
assets of MidTex, at September 1, 1996, the Company had approximately 630
full-time employees and 110 part-time employees. Of such full-time employees,
approximately 25 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. There can be no assurance that the aggregate
amount and types of the Company’s insurance are adequate to cover all risks it
may incur or that insurance will continue to be available in the future on
commercially reasonable terms.

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.

LITIGATION

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. In the opinion of management of the Company, the outcome of the

42

proceedings to which the Company is currently a party will not have a material
adverse effect upon the Company’s operations or financial condition.

PROPERTIES

The Company leases corporate headquarters office space in Houston, Texas
and an administrative office in Ventura, California. The Company also leases
space for 16 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
Facilities through at least the year 2030. For information concerning lease
rights relating to a portion of the Big Spring Facilities, see “Risk
Factors — Possible Loss of Lease Rights.”

The Company owns 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
facility, which is owned by the County of Salt Lake and leased to the State of
Utah. For a list of the locations of each facility, see ” — Facilities.”

43

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES

The following table sets forth the names, ages (as of September 1, 1996)
and positions of the Company’s directors, the person nominated to become a
director of the Company upon completion of the Offering, the Company’s executive
officers and certain other key employees of the Company:

NAME AGE POSITION
– —————————– — ————————————–
David M. Cornell…………. 61 Chairman of the Board, President and
Chief Executive Officer (1)
William J. Schoeffield, Jr. . 46 Chief Operating Officer (1)(2)
Marvin H. Wiebe, Jr………. 49 Vice President (1)
Steven W. Logan………….. 34 Chief Financial Officer, Treasurer
and Secretary (1)
Charles J. Haugh…………. 57 Executive Director of Facilities
Joseph Ponte…………….. 49 Executive Facility Director
Laura Shol………………. 41 Director of Community Corrections
Antonio Medellin…………. 52 Executive Facility Administrator
Irwin F. Roberts…………. 58 Executive Facility Administrator
Jose L. Valencia…………. 50 Executive Facility Administrator
Richard T. Henshaw III……. 57 Director
Peter A. Leidel………….. 40 Director
Campbell A. Griffin, Jr…… 67 Director (3)
Tucker Taylor……………. 56 Director (3)
– ————
(1) Executive officer of the Company.

(2) Appointment as Chief Operating Officer will become effective October 16,
1996.

(3) Appointment will become effective upon completion of the Offering.

DAVID M. CORNELL co-founded a predecessor of the Company in 1991 and has
been the Chairman and Chief Executive Officer of the Company since its founding.
Previously, Mr. Cornell was Operations Manager — Special Projects for the
Bechtel Group and Chief Financial Officer of its wholly owned subsidiary, Becon
Construction Company, from 1983 to 1990. Prior to joining the Bechtel Group, Mr.
Cornell served as President and Director of Tenneco Financial Services Inc., an
investment advisory firm, from 1981 to 1982. He also served as Executive Vice
President of Philadelphia Life Insurance Company and President of its
subsidiary, Philadelphia Life Asset Management Company from 1972 to 1981.

WILLIAM J. SCHOEFFIELD, JR. will become Chief Operating Officer of the
Company effective October 16, 1996. Mr. Schoeffield has been Vice
President — Eastern Regional Ground Operations of Federal Express Corp. since
1990. Prior thereto, Mr. Schoeffield was Vice President — Western Regional
Ground Operations of Federal Express from 1988 to 1990 and has held numerous
positions with Federal Express since 1976.

MARVIN H. WIEBE, JR., has been Vice President of the Company since the
Company acquired Eclectic in 1994 and was previously Vice
President — Administration and Finance, Vice President — Secure Detention and
Chief Financial Officer of Eclectic, where he was employed for 11 years. Prior
to joining Eclectic, Mr. Wiebe served as Executive Director and Business
Administrator of Turning Point of Central California, Inc., a nonprofit provider
of correctional and substance abuse programs from 1975 to 1984. Mr. Wiebe has
served as President of the International Community Corrections Association
(“ICCA”) and as an auditor for the ACA Commission on Accreditation for
Corrections and is a member of the ICCA, the California Probation Parole &
Correctional Association and the ACA.

44

STEVEN W. LOGAN has been Chief Financial Officer, Treasurer and Secretary
of the Company since 1993. From 1984 to 1993, Mr. Logan served in various
positions with Arthur Andersen LLP, Houston, most recently as an Experienced
Manager in the Enterprise Group, a group specializing in emerging, high-growth
companies which Mr. Logan helped form in Houston in 1987. Mr. Logan is a
certified public accountant.

CHARLES J. HAUGH has been Executive Director of Facilities of the Company
since the Company acquired MidTex in July 1996. From 1988 to July 1996, Mr.
Haugh was Vice President of MidTex and Executive Director of Facilities of Big
Spring Correctional Center. Prior to joining MidTex, Mr. Haugh was involved in
consulting for correctional organizations as President of CJH Cortech, Inc. for
a year. From 1963 to 1988, Mr. Haugh served in numerous capacities for the FBOP,
including Special Assistant to Director Administrator of Correctional Services
Branch, Associate Warden, Chief Correctional Supervisor and Correctional
Officer. Mr. Haugh has been an auditor for the ACA and is on the Board of
Directors of various local organizations.

JOSEPH PONTE has served as the Executive Facility Director of the Wyatt
Facility since its opening in 1993. Mr. Ponte served as the Assistant Director
for Institutions and Operations for the Rhode Island Department of Corrections
from 1991 to 1993 and in various positions at facilities managed by the
Massachusetts Department of Corrections from 1969 to 1991, including
Superintendent, Director of Staff Development and Director of Operations.

LAURA SHOL has been Director of Community Corrections of the Company since
June 1996 and was Senior Regional Administrator of Eclectic from 1986 to June
1996. From 1982 to 1986, Ms. Shol was a Facility Director for Eclectic. Prior to
joining Eclectic, Ms. Shol was a Program Director with the Salvation Army, Inc.

ANTONIO MEDELLIN has been Executive Facility Administrator of the Company
since the Company acquired MidTex in July 1996. From April 1996 until July 1996,
he was a Facility Director and Administrator of MidTex. From 1971 to April 1996,
Mr. Medellin served in numerous capacities for the FBOP, including Associate
Warden, Executive Assistant, Captain, Lieutenant, Counselor and Correctional
Officer.

IRWIN F. ROBERTS has been Executive Facility Administrator of the Company
since the Company acquired MidTex in July 1996. Mr. Roberts was a Facility
Director and Administrator of MidTex from 1992 to July 1996 and was Chief of
Security at Big Spring Correctional Center from 1991 to 1992. From 1988 to 1991,
Mr. Roberts served as a Correctional Program Specialist and a Security Officer
with the United States Navy, and, from 1967 to 1988, he served in numerous
positions for the FBOP, including Captain, Lieutenant and Counselor.

JOSE L. VALENCIA has been Executive Facility Administrator of the Company
since the Company acquired MidTex in July 1996. From April 1996 to July 1996,
Mr. Valencia was a Facility Director and Administrator of MidTex. From 1976 to
April 1996, he served in numerous capacities for the FBOP, including Affirmative
Action Administrator, Associate Warden, Assistant Correctional Services
Administrator, Unit Manager, Correctional Supervisor and Correctional Officer.

RICHARD T. HENSHAW III has been a director of the Company since March 1994.
Mr. Henshaw has been a Senior Vice President of Charterhouse Group
International, Inc. (“Charterhouse”), a private investment firm specializing
in leveraged buy-out acquisitions, since 1991. Prior thereto, Mr. Henshaw was a
Senior Vice President of The Bank of New York. Mr. Henshaw is also a director of
American Disposal Services, Inc., a solid waste services company.

PETER A. LEIDEL has been a director of the Company and its predecessor
since May 1991. Mr. Leidel is a partner of Dillon Read Venture Partners III,
L.P. and Concord Partners II, L.P. (“Concord II”), both private venture
capital funds managed by Dillon Read. Mr. Leidel is a Senior Vice President of
Dillon Read where he has been employed since 1983. Mr. Leidel is a director of
Willbros Group, Inc. and seven private companies.

CAMPBELL A. GRIFFIN, JR. will become a director of the Company effective
upon the completion of the Offering. Mr. Griffin joined the law firm of Vinson &
Elkins L.L.P. in 1957 and was a partner from 1968 to

45

1992. He was a member of the Management Committee of Vinson & Elkins L.L.P. from
1981 to 1990 and the Managing Partner of the Dallas office from 1986 to 1989.
From 1991 to 1993, Mr. Griffin served as an Adjunct Professor of Administrative
Science at William Marsh Rice University and, from 1993 to 1995, he was a
Councilman for the City of Hunters Creek Village. Mr. Griffin has been a
director of various local organizations and is an arbitrator for the American
Arbitration Association, the New York Stock Exchange and the National
Association of Securities Dealers and a member of the American, Texas and
Houston Bar Associations.

TUCKER TAYLOR will become a director of the Company effective upon
completion of the Offering. Mr. Taylor has been Vice President of a division of
Columbia/HCA Healthcare System since 1994. From 1992 to 1994, he was Executive
Vice President for Marketing, Sales and Strategic Planning at Medical Care
America. Prior thereto, Mr. Taylor worked as a Marketing and Planning Consultant
from 1982 to 1990 and at Federal Express Corporation from 1974 to 1982. Mr.
Taylor currently serves on the Board of Directors of SuperShuttle.

Upon completion of the Offering, there will be two committees of the Board
of Directors: an Audit Committee and a Compensation Committee. The initial
members of the Audit Committee will be Mr. Griffin and Mr. Taylor. The Audit
Committee will recommend the appointment of indpendent public accountants to
conduct audits of the Company’s financial statements, review with the
independent accountants the plan and results of the auditing engagement, approve
other professional services provided by the independent accountants and evaluate
the independence of the accountants. The Audit Committee will also review the
scope and results of procedures for internal auditing of the Company and the
adequacy of the Company’s system of internal accounting controls. The initial
members of the Compensation Committee will be Mr. Leidel and Mr. Henshaw. The
Compensation Committee will approve, or in some cases recommend to the Board,
remuneration arrangements and compensation plans involving the Company’s
directors, executive officers and certain other employees and consultants whose
compensation exceeds specified levels. The Compensation Committeee will also act
on the granting of stock options, including under the Stock Option Plan. The
members of the Audit and Compensation Committees will not be employees of the
Company.

DIRECTOR COMPENSATION

Directors who are employees of the Company will not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company (a “Nonemployee Director”) and who is elected or appointed on or
after completion of the Offering will receive a fee of $1,000 for attendance at
each Board of Directors meeting and $500 for each committee meeting (unless held
on the same day as a Board of Directors meeting). Individuals who first become
Nonemployee Directors on or after completion of the Offering will receive a
grant of nonqualified options to purchase 15,000 shares of Common Stock under
the Stock Option Plan. Such options will vest 25% on the date of grant and the
remainder ratably over three years with a term of 10 years and a per share
exercise price equal to the fair market value of a share of Common Stock at the
date of grant (the initial public offering price in the Offering in the case of
Messrs. Griffin and Taylor). All directors are reimbursed for out-of-pocket
expenses incurred in attending meetings of the Board of Directors or committees
thereof and for other expenses incurred in their capacity as directors.

46

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE. The following table sets forth certain summary
information concerning the compensation paid or accrued by the Company during
the year ended December 31, 1995 to the Company’s chief executive officer and
the other executive officer of the Company whose combined salary and bonus from
the Company during such period exceeded $100,000 (collectively, the “named
executive officers”).

SUMMARY COMPENSATION TABLE

(2) The bonus amounts shown were paid in 1996 for the year ended December 31,
1995.

(3) The amounts shown represent contributions by the Company under its 401(k)
Profit Sharing Plan and Company payments of life insurance premiums.

(4) In November 1995, the Company granted options to purchase Class B Common
Stock (nonvoting, nondividend stock that will convert on a one-for-one basis
into Common Stock as of or prior to the completion of the Offering as part
of the Reclassification) to all of its stockholders, including Mr. Cornell,
based on each stockholder’s equity interest in the Company, as adjusted by
agreement among certain stockholders. Each stockholder receiving options,
including Mr. Cornell, agreed to exercise such options on December 31, 1996
unless, on or prior to that date, the Company has repaid in full a certain
loan obtained by the Company under the 1996 Credit Facility. See “Certain
Relationships and Related Party Transactions — Certain Equity
Transactions.”

(5) Excludes $59,750 representing Mr. Wiebe’s portion of an annual fixed
installment payment relating to the Eclectic acquisition.

(6) Mr. Wiebe elected, pursuant to his employment agreement with the Company, to
use a portion of the bonus he earned during the year ended December 31, 1995
to purchase Class A Common Stock at 90% of the fair market value of the
Class A Common Stock, as determined by the Board of Directors. The amount
includes the dollar value of the difference between the price paid by Mr.
Wiebe for the Class A Common Stock and the fair market value of the Class A
Common Stock, as determined by the Board of Directors.

Effective June 1, 1996, the Board of Directors of the Company approved
annual salaries of $200,000 and $130,000 for Mr. Cornell and Mr. Logan,
respectively, with respective bonuses of up to $50,000 and up to $20,000,
payable at the recommendation of the Compensation Committee and subject to the
discretion of a majority of the Nonemployee Directors.

Mr. Schoeffield will become Chief Operating Officer of the Company
effective October 16, 1996. The Board of Directors of the Company has approved
an annual salary of $160,000 for Mr. Schoeffield with a guaranteed bonus of
$40,000 for the first twelve months of employment. Mr. Schoeffield will also
receive options to purchase 100,000 shares of Common Stock under the Stock
Option Plan. The options will vest 20% upon commencement of employment and 20%
every twelve months thereafter. The exercise price of the options will be the
initial public offering price in the Offering.

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OPTION GRANTS. The following table contains certain information concerning
options granted to the named executive officers during the year ended December
31, 1995.

STOCK OPTION GRANTS IN LAST FISCAL YEAR

(2) Prior to the Offering, there was no public market for Common Stock and,
therefore, the exercise price of the options was based upon the estimated
fair market value of the underlying Class B Common Stock as of the date of
grant as determined by the Board of Directors.

(3) Calculated based upon the indicated rates of appreciation, compounded
annually, from the date of grant to the end of the option term. Actual
gains, if any, on stock option exercises and Common Stock holdings are
dependent on the actual performance of the Common Stock. There can be no
assurance that the amounts reflected in this table will be achieved.

1995 YEAR-END OPTION HOLDINGS. The following table summarizes the number
and value of the unexercised options to purchase Common Stock held by the named
executive officers at December 31, 1995. Neither of the named executive officers
exercised any stock options during 1995. The Company does not have any
outstanding stock appreciation rights or shares of restricted stock.

1995 YEAR-END OPTION VALUES

(2) The exercise price of the options was based on the estimated fair market
value of the underlying Class B Common Stock as of November 1, 1995 as
determined by the Board of Directors of the Company. The Company believes
that the value of the Company remained constant between November 1, 1995 and
December 31, 1995 and that the value per share of Class B Common Stock at
December 31, 1995 equaled the per share exercise price of Mr. Cornell’s
options.

EMPLOYMENT AGREEMENT

The Company entered into a three-year employment agreement with Mr. Wiebe
on March 31, 1994 in connection with the Company’s acquisition of Eclectic.
Pursuant to the employment agreement, Mr. Wiebe serves as Vice President of the
Company (or in such executive office as the Company determines) for a base
salary of $90,500. In addition, under the employment agreement, Mr. Wiebe
receives a profit sharing bonus, an annual fixed installment payment of $50,000
through 1998 relating to the Eclectic acquisition and monthly interest of 0.5%
of the remaining unpaid annual fixed installment payments. Mr. Wiebe may use up
to 50% of his profit sharing bonus to purchase shares of Common Stock at a price
equal to 90% of the fair market value of such stock and may use up to 50% of his
remaining unpaid annual fixed installment

48

payment to purchase shares of Common Stock in an initial public offering at a
price equal to 90% of the initial issue price per share of Common Stock in the
offering. Additionally, the employment contract provides that Mr. Wiebe may
participate in certain employee benefit plans of the Company, including
medical/dental plans, insurance plans, vacation, company automobile and expense
reimbursement. In the event Mr. Wiebe’s employment is terminated prior to March
31, 1997, under certain circumstances he may be entitled under his employment
contract to receive up to the full amount he had a right to receive under the
employment agreement had his employment not been terminated.

STOCK OPTION PLAN

The Stock Option Plan was approved by the Board of Directors and
stockholders of the Company effective as of May 15, 1996. The objectives of the
Plan are to (i) attract, retain and motivate certain key employees, Nonemployee
Directors and consultants who are important to the success and growth of the
business of the Company and (ii) to create a long-term mutuality of interest
between such persons and the stockholders of the Company by granting options to
purchase Common Stock.

The Company has reserved 880,000 shares of Common Stock for issuance in
connection with the Stock Option Plan, which will be administered by the
Compensation Committee of the Board of Directors. Pursuant to the Stock Option
Plan, the Company may grant (i) Non-Qualified Stock Options (as defined therein)
or Incentive Stock Options (as defined therein) to key employees and (ii)
Non-Qualified Stock Options to eligible Nonemployee Directors and consultants.
See “Management — Director Compensation.” The exercise price and vesting
terms for the options shall be determined by the Compensation Committee and
shall be set forth in an option agreement. The exercise price will be at least
100% of fair market value of the Common Stock on the date of grant in the case
of Incentive Stock Options and Non-Qualified Stock Options that are intended to
be performance-based under Section 162(m) of the Internal Revenue Code, and the
exercise price of any other Non-Qualified Stock Options shall be at least equal
to the par value of the Common Stock. Non-Qualified Stock Options will be
exercisable for not more than ten years, and Incentive Stock Options may be
exercisable for up to ten years except as otherwise provided in the Stock Option
Plan. The Compensation Committee may provide that an optionee may pay for shares
upon exercise of an option: (i) in cash; (ii) in already-owned shares of Common
Stock; (iii) by agreeing to surrender then exercisable options equivalent in
value; (iv) by payment through a cash or margin arrangement with a broker; (v)
in shares otherwise issuable upon exercise of the option; or (vi) by such other
medium or by any combination of (i), (ii), (iii), (iv) or (v) as authorized by
the Compensation Committee. In the event of certain extraordinary transactions,
including a merger, consolidation, a sale or transfer of all or substantially
all assets or an acquisition of all or substantially all the Common Stock,
vesting on such options will generally be accelerated.

As of September 1, 1996, options to purchase 543,358 shares of Common Stock
had been granted under the Stock Option Plan, of which 219,860 had been
exercised, 323,498 were outstanding and 278,498 were exercisable. The Stock
Option Plan will terminate on May 15, 2006.

OFFICER AND DIRECTOR LIABILITY

Pursuant to the Company’s Certificate of Incorporation and under Delaware
law, directors of the Company are not liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty, except for liability in
connection with a breach of the duty of loyalty, for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, for dividend payments or stock repurchases illegal under Delaware law or
any transaction in which a director derived an improper personal benefit. Under
the Certificate of Incorporation, the Company will indemnify the officers and
directors of the Company to the full extent permitted under the Delaware General
Corporation Law (the “DGCL”).

In accordance with Delaware law, the Company intends to enter into
indemnification agreements with its officers and directors, pursuant to which it
will agree to pay certain expenses, including attorney’s fees, judgments, fines
and amounts paid in settlement incurred by such officers and directors in
connection with certain actions, suits or proceedings. These agreements will
require officers and directors to repay the amount of any expenses if it shall
be determined that they were not entitled to indemnification.

The Company maintains liability insurance for the benefit of directors and
officers.

49

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

MANAGING UNDERWRITERS

Dillon Read is a managing underwriter in the Offering. Immediately prior to
the Offering, certain private investment partnerships managed by Dillon Read,
and persons related to Dillon Read, owned an aggregate of 44.2% of the shares of
Common Stock (assuming the exercise of their options, but not the options or
warrants of other persons, into shares of Common Stock). Immediately after the
completion of the Offering, such persons will own an aggregate of 19.7% of the
outstanding shares of Common Stock (assuming the exercise of their options, but
not the options or warrants of other persons, into shares of Common Stock). See
” — Certain Equity Transactions,” ” — Registration Rights Agreement,”
“Principal and Selling Stockholders” and “Underwriting.” Additionally, Mr.
Leidel, a director of the Company and its predecessors since May 1991, is a
Senior Vice President of Dillon Read and a partner of Dillon Read Venture
Partners III, L.P. and Concord II, both private venture capital funds managed by
Dillon Read. See “Management — Directors, Executive Officers and Other Key
Employees.”

ING Baring (U.S.) Securities, Inc. (“ING Baring”) is a managing
underwriter in the Offering. Immediately prior to the Offering, ING, an
affiliate of ING Baring, owned 14.1% of the outstanding shares of Common Stock
(assuming the exercise of its options and warrants, but not the options or
warrants of other persons, into shares of Common Stock). In connection with the
Offering, ING is exercising warrants to purchase 250,000 shares of Common Stock
for an aggregate exercise price of $360,870 and is selling the 250,000 shares of
Common Stock as a Selling Stockholder in the Offering. See “Principal and
Selling Stockholders.” Immediately after the completion of the Offering, ING
will own 3.4% of the outstanding shares of Common Stock (assuming the exercise
of its options and warrants, but not the options or warrants of other persons,
into shares of Common Stock). In addition, ING is a party to the 1996 Credit
Facility and the lender under the Convertible Bridge Note and was a party to the
1995 Credit Facility. See “Use of Proceeds,” “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Liquidity and
Capital Resources — Existing Credit Facilities,” “– 1995 Credit Facility”
and “Underwriting.”

CERTAIN EQUITY TRANSACTIONS

As of or prior to the completion of the Offering, all shares of Class A
Common Stock and Class B Common Stock will be reclassified as Common Stock
pursuant to the Reclassification. Prior to the Reclassification, Class B Common
Stock did not provide holders thereof the right to vote or to receive dividends.

ROLL-UP TRANSACTION. On March 31, 1994, in connection with the
reorganization of the Company from a partnership to a corporation, the Company
issued an aggregate of 2,100,376 shares of the Company’s common stock (which was
reclassified as Class A Common Stock on March 8, 1995 pursuant to an amendment
to the Company’s charter) to the following individuals and entities: (i) an
aggregate of 900,376 shares to Concord Partners (“Concord”), Concord II,
Concord Partners Japan Limited (“Concord Japan”), Lexington Partners III, L.P.
(“Lexington III”), Lexington Partners IV, L.P. (“Lexington IV”), and Dillon
Read, as agent (collectively with Concord, Concord II, Concord Japan, Lexington
III and Lexington IV, the “Concord Investors”), in exchange for an aggregate
of 500,375 Series A Preferred Units in the Partnership and all of the stock
owned by the Concord Investors in CCG Holding Company, Inc. (which, in turn,
owned 400,000 Series A Preferred Units in the Partnership); (ii) 600,000 shares
to Norman R. Cox, Jr., a former officer of the Company, in exchange for all of
the stock owned by Mr. Cox in NRC, Inc. (which, in turn, owned 600,000 Common
Units in the Partnership); and (iii) 600,000 shares to David M. Cornell in
exchange for all of the stock owned by Mr. Cornell in Mayo, Inc. (which, in
turn, owned 600,000 Common Units in the Partnership).

CAPITAL INVESTMENTS. On March 31, 1994, the Company issued an aggregate of
1,088,009 shares of the Company’s common stock (which was reclassified as Class
A Common Stock on March 8, 1995 pursuant to an amendment to the Company’s
charter) for an aggregate purchase price of approximately $6.5 million to the
following entities: (i) an aggregate of 768,790 shares to Charterhouse Equity
Partners II,

50

L.P. (“CEP II”) and a related party; (ii) an aggregate of 239,474 shares to
certain of the Concord Investors; and (iii) 79,745 shares to another
institutional investor.

1995 CREDIT FACILITY. On March 14, 1995, the Company and its subsidiaries
entered into the 1995 Credit Facility with ING to obtain credit in an aggregate
principal amount not exceeding $15 million primarily to refinance certain
indebtedness of the Company and its subsidiaries and to pay certain accounts
payable and for working capital purposes and certain capital expenditures. In
connection with the 1995 Credit Facility, the Company issued warrants to ING to
purchase 162,500 shares of Class B Common Stock at an exercise price of $1.00
per share. The warrants expire March 14, 2002.

STOCK REPURCHASE. On November 1, 1995, in connection with the financing of
the repurchase of 555,000 shares of Class A Common Stock from Mr. Cox (the
“Stock Repurchase”), the Company issued options to purchase an aggregate of
555,000 shares of Class B Common Stock at an exercise price of $2.00 per share
(the “Repurchase Options”) pursuant to stock option agreements (the “Stock
Option Agreements”) to the Concord Investors (129,682 shares), CEP II (87,466
shares), David M. Cornell (137,110 shares), Jane B. Cornell (32,669 shares),
Steven W. Logan (50,000 shares), certain other investors and ING (59,000), which
provided the financing for the Stock Repurchase pursuant to an amendment to the
1995 Credit Facility. Simultaneously, the Company, and each of the holders of
Repurchase Options entered into an investors agreement dated November 1, 1995
(the “Investors Agreement”) pursuant to which each of the holders of
Repurchase Options (excluding ING) agreed to exercise all of its Repurchase
Options on December 31, 1996 unless, on or prior to that date, the Company has
repaid in full the loan the Company had obtained to finance the Stock
Repurchase. The Company assigned its rights under the Stock Option Agreements,
including its right to receive payment, to ING. Additionally, pursuant to the
Investors Agreement, if any holder of Repurchase Options (excluding ING) fails
to exercise its Repurchase Options as required by the Investors Agreement, such
holder’s Repurchase Options would automatically be assigned to Concord II and
CEP II ratably in accordance with their respective ownership interests in the
Company, and Concord II and CEP II would be required to exercise such Repurchase
Options.

OPTION EXERCISE AND INDEBTEDNESS OF MANAGEMENT. On July 8, 1996, Mr.
Cornell and Mr. Logan exercised options to purchase 137,110 and 82,750 shares
consisting of both Class A Common Stock and Class B Common Stock for aggregate
exercise prices of $274,220 and $180,638, respectively. In connection with such
exercise, Mr. Cornell and Mr. Logan each issued a promissory note in favor of
the Company for the respective exercise amounts. The promissory notes have terms
of four years and bear interest at the applicable short-term federal rate as
prescribed by Internal Revenue Service regulations. The maturity of the
promissory notes will be accelerated upon certain events, including termination
of employment. The notes are full recourse and collateralized by the shares
received upon the exercise of the options.

MIDTEX ACQUISITION FINANCING. In connection with the financing of the
acquisition of substantially all the assets of MidTex, the Company entered into
the 1996 Credit Facility with ING and issued the Convertible Bridge Note to ING.
As part of the consideration to ING for the 1996 Credit Facility and the
proceeds under the Convertible Bridge Note, the Company issued warrants to ING
to purchase 264,000 shares of Class B Common Stock at an exercise price of $2.82
per share. The warrants expire July 3, 2003. As a condition to funding, the 1996
Credit Facility required the Concord Investors to purchase at least $200,000 of
Class B Common Stock. On July 9, 1996, certain of the Concord Investors
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, ING, the
Company, Concord II and CEP II entered into a put agreement dated as of July 3,
1996 (the “Put Agreement”). Pursuant to the Put Agreement, Concord II and CEP
II each agreed, upon conversion of the Convertible Bridge Note into shares of
Common Stock (the “Conversion Stock”), to purchase its pro rata share of the
Conversion Stock from ING at $5.64 per share, and the financial institution
agreed to sell such shares to Concord II and CEP II. Additionally, the Company,
Concord II and CEP II entered into an extension agreement dated as of July 3,
1996 (the “Extension Agreement”) pursuant to which, if the Company and ING
agree to extend the date of the conversion of the Convertible Bridge Note beyond
December 30, 1996, Concord II and CEP II agree to a deferral of up to three
months of their rights and obligations under the Put Agreement. In consideration
for their agreement

51

under the Extension Agreement, if an extension occurs, the Company has agreed to
grant to each of Concord II and CEP II options to purchase the number of shares
of Class B Common Stock equal to the product of 15,055 and 10,037, respectively,
and the number of calendar months, up to three, of the extension at an exercise
price of $2.82 per share. The Company issued options to CEP II to purchase
60,221 shares of Class B Common Stock at $2.82 per share in consideration for
entering into the Put Agreement.

INCENTIVE STOCK OPTIONS. Effective July 9, 1996, the Company granted to
each of Mr. Cornell and Mr. Logan Incentive Stock Options for the purchase of
126,124 shares of Class B Common Stock with a term of 10 years and a per share
exercise price of $4.86 per share.

REGISTRATION RIGHTS AGREEMENT

The Company and certain stockholders, optionholders and warrantholders of
the Company, including the Concord Investors, CEP II, Mr. Cornell, Ms. Cornell
and Mr. Logan, are parties to a registration rights agreement dated as of March
31, 1994, as amended (the “Registration Rights Agreement”). The Registration
Rights Agreement provides demand registration rights upon a request (subject to
a maximum of two registrations in total under clauses (i) and (ii) below and a
maximum of one registration under clause (i) below) of (i) certain stockholders
holding at least 50% of the shares of Common Stock (or other securities of the
Company) subject to the agreement (the “Registrable Securities”), if the
request occurs prior to March 31, 1997, (ii) holders of Registrable Securities
holding at least 15% of the outstanding Registrable Securities, if the request
occurs after March 31, 1997 or (iii) holders of at least 50% of the shares of
Common Stock issued upon exercise of warrants granted in March 1995 and July
1996 to ING in connection with the 1995 Credit Facility and the 1996 Credit
Facility (the “Warrant Shares”), if such request occurs upon the expiration of
the six-month period immediately following the consummation of an initial public
offering of shares of Common Stock by the Company in which fewer than 75% of the
Warrant Shares are sold. Under the Registration Rights Agreement, upon such
request the Company is required to use its best efforts to file a registration
statement under the Securities Act to register Registrable Securities held by
the requesting holders and any other stockholders who are parties to the
Registration Rights Agreement and who desire to sell Registrable Securities
pursuant to such registration statement. In addition, subject to certain
conditions and limitations, the Registration Rights Agreement provides that
holders of Registrable Securities may participate in any registration by the
Company of equity securities pursuant to a registration statement under the
Securities Act on any form other than Form S-4 or Form S-8. The Registration
Rights Agreement provides that the number of shares of Registrable Securities
that must be registered on behalf of such participating holders of Registrable
Securities is subject to limitation if the managing underwriter determines that
market conditions require such a limitation. The stockholders who are party to
the Registration Rights Agreement have waived their rights with respect to the
Offering to the extent they are not selling shares of Common Stock pursuant to
the Offering.

The registration rights conferred by the Registration Rights Agreement are
transferable to transferees of the Registrable Securities covered thereby. The
Registration Rights Agreement contains no termination provision, although
securities cease to be Registrable Securities upon the earlier of (i) being
disposed pursuant to an effective registration statement, (ii) being transferred
so that subsequent disposition of such securities does not require registration
or qualification of such securities under the Securities Act or any state
securities law and (iii) ceasing to be outstanding. After completion of the
Offering, 3,437,726 shares of Common Stock (including shares issuable upon
exercise of outstanding options and warrants) were subject to the Registration
Rights Agreement.

Under the Registration Rights Agreement, the Company is required to pay all
expenses incurred in complying with the agreement, except for underwriter fees,
discounts or commissions and fees or expenses of counsel to the selling security
holders (other than one counsel for the selling security holders as a group).
Under the Registration Rights Agreement, the Company will indemnify the selling
stockholders thereunder, and such stockholders will indemnify the Company,
against certain liabilities in respect of any registration statement or offering
covered by the agreement.

52

STOCKHOLDERS AGREEMENT

Simultaneously with the completion of the Offering, the Applicable
Stockholders (which include the Concord Investors, CEP II and Mr. Cornell) will
enter into an Amended and Restated Stockholders Agreement (the “Stockholders
Agreement”). Upon completion of the Offering, the Applicable Stockholders will
beneficially own in the aggregate approximately 41.6% of the outstanding Common
Stock assuming exercise of their outstanding stock options (and 33.2% of the
outstanding Common Stock if the Underwriters exercise their over-allotment
option in full). The Stockholders Agreement will provide that the Applicable
Stockholders agree to vote all shares of Common Stock owned by them to elect
three directors of the Company (one nominee of each of the Concord Investors,
CEP II and David M. Cornell) to a Board of Directors initially consisting of
five members. The Stockholders Agreement will provide that the number of
directors may only be increased by vote of a majority of the Board of Directors.
Consequently, the Applicable Stockholders, through their Common Stock holdings
and representation on the Board of Directors of the Company, which will
initially include a majority of directors designated by the Applicable
Stockholders, will be able to exercise significant influence over the policies
and direction of the Company. The Stockholders Agreement will terminate upon the
first to occur of (i) four years from the date of completion of the Offering or
(ii) the Applicable Stockholders collectively owning less than 25% of the
outstanding Common Stock. The Stockholders Agreement will also terminate as to
any Applicable Stockholder upon such stockholder owning less than 5% of the
oustanding Common Stock.

53

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information as of the date hereof
and as adjusted to reflect the sale of securities offered hereby (assuming the
Underwriters’ over-allotment option is not exercised), based on information
obtained from the persons named below, with respect to the “beneficial
ownership” (as defined for purposes of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)), of shares of Common Stock and outstanding
warrants and options to purchase shares of Common Stock by (i) each stockholder
known to the Company to beneficially own more than 5% of the outstanding shares
of Common Stock (“Significant Stockholders”), (ii) each director and executive
officer of the Company and each person nominated to become a director of the
Company upon completion of the Offering, (iii) all executive officers and
directors of the Company as a group and (iv) other Selling Stockholders.
Outstanding warrants and options to purchase shares of Common Stock represent
shares that may be acquired within 60 days after the date hereof pursuant to the
exercise of options or warrants; such shares are also included in the total
number of shares beneficially owned in the following table. Unless otherwise
stated, all the addresses are in care of the Company, 4801 Woodway, Suite 400W,
Houston, Texas 77056.