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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

** **

### **FORM 10-K**

### ** **

**(Mark One)**

** **
| **x**                                                                                                                                                                                                | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                           | ** **                                                                                               |
| **For fiscal year ended December 31, 2009**                                                                                                                                                     |
| ** **                                                                                                                                                                                           |
| **OR**                                                                                                                                                                                               |
| ** **                                                                                                                                                                                           | ** **                                                                                               |
| **o**                                                                                                                                                                                                | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                                                                                                                           | ** **                                                                                               |
| **For the transition period from                 to             ** |

** **

**Commission File Number 1-14472**

** **

**CORNELL COMPANIES, INC.**

(Exact Name of Registrant as Specified In ItsCharter)

 

| **Delaware**                                               | ** ** | **76-0433642**       |
|------------------------------------------------------------|------------|----------------------|
| (State  or Other Jurisdiction                              |       | (I.R.S.  Employer    |
| of  Incorporation or Organization)                         |       | Identification  No.) |
|                                                       |       |                 |
| **1700 West  Loop South, Suite 1500, Houston, Texas** | ** ** | **77027**            |
| (Address  of Principal Executive Offices)                  |       | (Zip  Code)          |

 

Registrant’stelephone number, including area code:    **(713) 623-0790**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

| **Title of Each Class**  | ** ** | **Name of Each Exchange on Which Registered** |
|-----------------------------------------|------------|-----------------------------------------------------------------------------|
| Common Stock, $.001 par value per share |       | New York Stock Exchange                                                     |
| Preferred Stock Purchase Rights         |       | New York Stock Exchange                                                     |

 

Securities registered pursuant to Section 12(g) ofthe Act:  **None**

 

Indicate by check mark if the registrant is a well-knownseasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  o  No x

 

Indicate by check mark if the registrantis not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.   Yes  o  No x

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   Yes  x  Noo

 

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

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§229.405) is not containedherein, and will not be contained, to the best of Registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K. x.

 

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

 

| Large accelerated Filer o |   | Accelerated filer x         |
|---------------------------|--------|-----------------------------|
| Non-accelerated filer o   |   | Smaller Reporting Company o |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o  No  x

 

The aggregate market value of voting stock held bynon-affiliates of the registrant was $191,785,600 on June 30, 2009. Theregistrant has 14,971,194 shares of common stock outstanding on February 19,2010.

 

**DocumentsIncorporated by Reference**

 

The information required by Part III of this Report, to the extentnot set forth herein, is incorporated by reference from the registrant’sdefinitive proxy statement relating to its Annual Meeting of Stockholders to beheld in 2010, which definitive proxy statement will be filed with theSecurities and Exchange Commission within 120 days after the end of the fiscalyear to which this Report relates.

 

 

 

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**CornellCompanies, Inc.**

** **

**Table ofContents**

 

**2009Form 10-K**

** **
| ** **        | ** **                                                                                                          | **Page**   |
|-------------------|---------------------------------------------------------------------------------------------------------------------|------------|
| **PART I**   | ** **                                                                                                          | ** ** |
| Item 1.           | Business                                                                                                            | 3          |
| Item 1A.          | Risk Factors                                                                                                        | 13         |
| Item  1B.         | Unresolved  Staff Comments                                                                                          | 21         |
| Item 2.           | Properties                                                                                                          | 21         |
| Item 3.           | Legal  Proceedings                                                                                                  | 21         |
| Item  4.          | Submission  of Matters to a Vote of Security Holders                                                                | 22         |
|              |                                                                                                                |       |
| **Part II**  |                                                                                                                |       |
| Item 5.           | Market For  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 22         |
| Item 6.           | Selected  Financial Data                                                                                            | 25         |
| Item  7.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 27         |
| Item  7A.         | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 47         |
| Item  8           | Financial  Statements and Supplementary Data                                                                        | 48         |
| Item  9           | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure                               | 85         |
| Item  9A.         | Controls  and Procedures                                                                                            | 85         |
| Item 9B.          | Other  Information                                                                                                  | 86         |
|              |                                                                                                                |       |
| **Part III** |                                                                                                                |       |
| Item 10.          | Directors, Executive Officers and Corporate Governance                                                              | 86         |
| Item  11.         | Executive  Compensation                                                                                             | 86         |
| Item  12.         | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 86         |
| Item  13.         | Certain  Relationships and Related Transactions, and Director Independence                                          | 86         |
| Item  14.         | Principal  Accountant Fees and Services                                                                             | 86         |
|              |                                                                                                                |       |
| **Part IV**  |                                                                                                                |       |
| Item  15.         | Exhibits  and Financial Statement Schedules                                                                         | 86         |

 

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**Forward-Looking Information**

 

The statementsincluded in this annual report regarding future financial performance andresults of operations and other statements that are not historical facts are forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934.  Forward-looking statements in this annualreport include, but are not limited to, statements about the followingsubjects:

 

·                  revenues,

·                  revenue mix,

·                  expenses, including personnel and medicalcosts,

·                  results of operations,

·                  operating margins,

·                  supply and demand,

·                  market outlook in our various markets,

·                  our other expectations with regard tomarket outlook,

·                  utilization,

·                  parolee, detainee, inmate and youthoffender trends,

·                  pricing and per diem rates,

·                  contract commencements,

·                  new contract opportunities,

·                  operations at, future contracts for, andresults from our Regional Correctional Center,

·                  the timing (including ramp of facilitypopulation) and other aspects of our planned customer transition at our D. RayJames Prison,

·                  adequacy of insurance,

·                  debt levels,

·                  debt reduction,

·                  common stock repurchases,

·                  the effect of income tax positions andrelated assets and liabilities,

·                  our effective tax rate,

·                  tax assessments,

·                  results and effects of legal proceedingsand governmental audits and assessments,

·                  liquidity, including future liquidity andour ability to obtain financing,

·                  financial markets,

·                  cash flow from operations,

·                  adequacy of cash flow for ourobligations,

·                  capital requirements,

·                  capital expenditures,

·                  effects of accounting changes andadoption of accounting policies,

·                  changes in laws and regulations,

·                  adoption of accounting policies,

·                  benefit payments, and

·                  changes in laws and regulations.

 

Forward-lookingstatements in this annual report are identifiable by use of the following wordsand other similar expressions among others:

 

·               “anticipates”

·               “believes”

·               “budgets”

·               “could”

·               “estimates”

·               “expects”

·               “forecasts”

·               “intends”

 

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·               “may”

·               “might”

·               “plans”

·               “predicts”

·               “projects”

·               “scheduled”

·               “should”

 

Such statements are subject to numerous risks,uncertainties and assumptions, including, but not limited to:

 

·                  those described under “Item 1A. RiskFactors,”

·                  the adequacy of sources of liquidity,

·                  the effect and results of litigation,audits and contingencies, and

·                  other factors discussed in this annualreport and in the Company’s other filings with the SEC, which are availablefree of charge on the SEC’s website at *www.sec.gov*.

 

Should one or more ofthese risks or uncertainties materialize, or should underlying assumptionsprove incorrect, actual results may vary materially from those indicated.

 

All subsequent writtenand oral forward-looking statements attributable to the Company or to personsacting on our behalf are expressly qualified in their entirety by reference tothese risks and uncertainties. You should not place undue reliance onforward-looking statements. Each forward-looking statement speaks only as ofthe date of the particular statement, and we undertake no obligation topublicly update or revise any forward-looking statements.

 

**PART I**

** **

#### **ITEM 1.**** ****BUSINESS**

####  

**Company Overview**

** **

***Cornell Companies, Inc.(together with its subsidiaries and predecessors, unless the context requiresotherwise, “Cornell,” the “Company,” “we,” “us” or “our”) was incorporated inDelaware in 1994. We are a leading provider of correctional, detention,educational, rehabilitation and treatment services outsourced by federal,state, county and local government agencies for adults and juveniles. We partnerwith these agencies to deliver quality, cost-efficient programs that we believeenable our customers to achieve their missions while saving taxpayers’ money.Our customers include the Federal Bureau of Prisons (“BOP”), U.S. MarshalsService (“USMS”), various state Departments of Corrections, and city, countyand state departments of human services and similar agencies.***

*** ***

***We offer adiverse portfolio of services in structured and secure environments throughoutthree operating divisions:  (1) AdultSecure Services; (2) Abraxas Youth and Family Services; and (3) AdultCommunity-Based Services. Cornell, through predecessor entities, began juvenileoperations in 1973, adult community-based programs in 1974, and adult secureoperations in 1984. Our three divisions are our reportable operating segments.Financial information and a discussion concerning these segments for fiscalyears 2009, 2008 and 2007 is included in “Note 16 — Segment Disclosure” of the “Notesto Consolidated Financial Statements” included in this Form 10-K.***

*** ***

As of December 31,2009, we operated 64 facilities among our three operating divisions,representing a total operating service capacity of 20,555. We also had fourfacilities that were vacant, representing additional service capacity of 837.Service capacity is comprised of the number of beds currently available forservice in residential facilities and the average program capacity ofnon-residential community-based programs. Our facilities are located in 15 states and the District of Columbia.

 

Additionalinformation about Cornell can be found on our website, *www.cornellcompanies.com*. We makeavailable on our website, free of charge, access to our Annual Report on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and allamendments to these reports as soon as reasonably practicable after suchmaterials are electronically filed with or furnished to the Securities andExchange Commission (“SEC”). Information provided on our website is not part ofthis Form 10-K.

 

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# **Company Operations**

# ** **

We provide a continuum of care to adults and juvenilesin institutional, residential, and community-based settings. Regardless ofoperating division, each of our facilities emphasizes the importance ofengaging in the community as a productive, responsible citizen. In many of ouradult secure institutions, we offer vocational training curricula, as well asliteracy and General Equivalency Diploma (“GED”) programs. In our adultcommunity-based programs, we offer job placement services, instruction onpersonal finance management and other skill-based training. In most of ourjuvenile facilities, we provide family counseling services and behavioralcounseling. In facilities throughout the organization, we provide drug andalcohol counseling for our clients.

 

***We operate ourfacilities and programs under the framework of our Seven Key Principles of Care***â. Theseprinciples state that our operations must maintain the safety and security ofour clients, our employees, and the local community. In addition, theprinciples require that we hold the individuals in our care accountable fortheir actions and expect them to assume responsibility. Furthermore, we expectour employees to act as role models, to communicate effectively andprofessionally, and to treat our clients with dignity and respect. Finally, ourprinciples call for us to manage physically clean and appropriately maintainedfacilities that are safe and conducive to an environment of care.

*** ***

# **Quality ofOperations**

# ** **

Weoperate our facilities in accordance with both company and facility-specificpolicies and procedures. Where required by contract or otherwise deemedappropriate for our service environments, these policies and procedures aredesigned to meet requirements set forth by independent industry oversightorganizations, including the American Correctional Association (“ACA”), JointCommission on Accreditation of Healthcare Organizations (“JCAHO”), and NationalCommission on Correctional Health Care (“NCCHC”). Standards may also beimplemented to meet the requirements of state departments of public welfare,departments of protective and regulatory services and departments of humanservices and education. We believe that accreditation and the correspondingstandards of operation enhance our ability to provide quality programs andcontribute to the public’s increased acceptance of our services.

 

Internalquality control, conducted by senior facility staff and senior management,takes the form of periodic operational, programmatic and fiscal audits;facility inspections; regular review of logs, reports and files; and strictmaintenance of personnel standards, including an active training program. Eachof our facilities is further subject to periodic audits and reviews performedby our contracting agencies.

 

# **Industry andBusiness Segment Summary**

# ** **

***Incarceration, detention, education and treatment servicesfor adults and juveniles have historically been provided by various governmententities. In the United States, the incarcerated and sentenced populations ofadults and juveniles has continued to increase while federal, state and localgovernments face continuing pressures to control costs and improve servicequality. We believe these trends have caused growing consideration andacceptance towards outsourcing certain government services and functions.Moreover, the increasing demand facing governments (from areas such aseducation, healthcare, maintenance/development of public infrastructure, etc.)has also created competition for resources funding such services.***

*** ***

Servicesoffered among our three divisions include incarceration and detention,transition from incarceration, drug and alcohol counseling and treatment,behavioral rehabilitation and treatment, vocational training and academiceducation for grades 3—12. Private-sector companies, like us, contract withgovernment agencies to deliver these services, at what we believe are the sameor higher quality and for a lower cost than what the agency can otherwiseprovide. Although outsourcing these services has historically faced oppositionin the U.S., public and government acceptance has increased as standards of serviceimprove and cost savings are documented. As government agencies face fiscalbudget constraints, outsourcing to private providers can offer economicallypositive alternatives. In addition, as a cost relief measure, governmentagencies have sought alternatives to incarceration, including reentry,education, substance abuse and behavioral health programs — all of which areservices we provide.

 

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*** ***

***Outsourcing has a longer history in the juvenile justice andadult community-based corrections sectors. Increasingly, states, counties andlocal governments have used both for-profit and not-for-profit organizations tomeet the needs of troubled youth and adults reintegrating into society after atime in residential treatment or prison. Governments have sought alternativesto the rising costs of incarceration for offenders who are non-violent and needtreatment, education and rehabilitation. Adult community-based reentry programsas well as education, substance abuse and behavioral health programs that cansuccessfully divert an offender from prison address this need.***

*** ***

###### ***AdultSecure Services***

###### *** ***

Increasingly, federal and state systems are relyingupon private providers to address their incarceration needs.  We also believe that the heightened attentionthat has been placed on border patrol and immigration enforcement will continueto drive demand for services such as those offered by private providers.

 

Webelieve that our adult secure services division is well positioned to respondto these marketplace conditions. We provide low-to-maximum-securityincarceration and detention services. In doing so, we ensure public safetythrough the operation of a physically secure environment, which entails, amongother security and safety measures, a routine patrol of the premises by trainedcorrectional officers, alarmed fencing and razor wire and centralizedmonitoring of activity via closed circuit camera systems. While incarcerated,offenders are offered a variety of educational, counseling and vocationalprograms aimed at providing a successful return to the community and asubsequent reduction in recidivism.

 

As of December 31,2009 we operated 9 adult secure facilities with an aggregate service capacityof 14,169. We also had two facilities that were vacant with a combined servicecapacity of 622 beds. Within the division, we offer the following:

 

·                  Low-to-maximum-security incarceration anddetention,

·                  Confinement of juveniles adjudicated asadults,

·                  Facility design, construction andoperation,

·                  Use of modern security technology,including electronic controls and surveillance equipment,

·                  Education courses, including preparationand testing for the GED, English as a Second Language classes, and Adult BasicEducation (“ABE”),

·                  Holistic healthcare services, includingmedical, dental, vision, psychiatric, and individual and group counselingservices,

·                  Substance abuse counseling,

·                  Life skills training, including angermanagement, hygiene, personal finance, employment and housing issues, andparenting skills,

·                  Religious opportunities and culturallysensitive programs,

·                  Food and laundry service, and

·                  Recreational activities, including exerciseprograms.

 

## *Abraxas Youth and Family Services*

##  

Thejuvenile justice industry sector includes residential, detention, shelter careand community-based services, along with educational, rehabilitation andtreatment programs. This sector is highly fragmented with several thousandproviders operating across the country. Most of the private providers are smalland operate in specific geographic areas.

 

Juvenilejustice issues present a growing area of concern for many states due to thenumber of youth within the judicial system, as well as the related annualexpenditures for placement and treatment. Beyond addressing capacity issueswithin the juvenile justice system, states are also facing challenges posed bythe unique needs of specialized juvenile populations, such as those withmental/behavioral health issues. Partnerships with private providers such asCornell can provide quality alternatives for care.

 

Webelieve that our Abraxas Youth and Family Services division is uniquelyequipped to address the issues currently facing the juvenile justice system.While the market is fragmented with providers located across the country, weoffer a national presence with locations in both urban areas as well assuburban and rural settings.  We providea broad array of services to youth, typically between the ages of 10 and 18, inresidential and community-based settings. The programs and services provided atour facilities are designed to rehabilitate juveniles, hold them accountablefor their actions and behaviors, 

 

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and help themsuccessfully reintegrate back into the community. An underlying principle ofour juvenile programming is the Balanced and Restorative Justice (“BARJ”)model, which provides a restorative component to the victim, be it anindividual, family, or community. The use of the BARJ model, in connection withour Seven Key Principles of Careâ, emphasizes accountability, competencydevelopment and community protection.

 

As of December 31,2009, we operated 16 residential facilities and 9 non-residentialcommunity-based programs within our Abraxas division, representing operatingservice capacity of 2,828. We also had two vacant facilities with a combinedservice capacity of 215. Within the division, we offer the following:

 

·                  Diverse treatment settings, includingphysically-secure, staff-secure, and community-based,

·                  Specialized treatment for uniquepopulations, including females, drug addicts, sex offenders, fire starters andfamilies,

·                  Accredited alternative and special educationservices,

·                  Wilderness training programs andnationally accredited ropes course challenges,

·                  Individualized treatment planning andcase management,

·                  Individual, group and family counselingand therapy, cognitive behavior therapy and stress and anger managementinstruction,

·                  Substance abuse counseling and treatment,relapse prevention and education,

·                  Life skills training, including hygiene,personal finance, employment and housing issues, and parenting skills,

·                  Holistic healthcare services, includingmedical, dental, behavioral health and psychiatric services, and

·                  Recreational activities, includingexercise programs.

 

###### ***Adult Community-Based Services***

###### *** ***

AdultCommunity-Based Services involve the supervision of adult parolees andprobationers. Parolees are persons who have served time in a correctionalfacility and have been released due to either mandatory conditional release ora parole board decision. Probationers have been charged with a crime butsentenced to probation in lieu of incarceration. Services provided to paroleesand probationers include temporary housing, employment assistance, angermanagement instruction, personal finance management training, academicopportunities, vocational training and substance abuse or addiction counseling.

 

Community-basedtreatment services include both residential and outpatient substance abuseprograms. Services include short-term and long-term residential care,counseling, HIV/AIDS testing, counseling and prevention education, substanceabuse and addiction testing, detoxification and methadone maintenance.

 

Webelieve that our adult community-based programs provide positive environmentsof care for both corrections and treatment clients. The market is fragmentedwith providers located across the country. Whereas most providers in theindustry are small and have limited geographic reach, Cornell offers a nationalpresence with locations in large urban areas, as well as suburban and ruralsettings. The adult community-based programs provide an alternative to incarcerationand a focus on transitioning offenders from a correctional facility back intosociety. Through a system of education, employment training, treatment,monitoring and accountability, clients are given the necessary tools to makepositive life choices that can reduce the incidence of recidivism.

 

As of December 31,2009, we operated 27 residential community-based facilities and 3non-residential community-based programs with a combined total service capacityof 3,558.  Within the division, we offerthe following:

 

·                  Minimum-security and staff-secureresidential services,

·                  Home confinement and electronicmonitoring,

·                  Substance-abuse counseling and treatment,including detoxification, testing, 12-step programs and relapse preventionservices,

·                  Employment training and assistance,

·                  Education, including preparation andtesting for the GED, ABE, computer courses, college-level courses and access tolibraries,

·                  Vocational training,

 

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·                  Individual, group and family counselingand therapy, cognitive behavior therapy and stress and anger managementinstruction,

·                  Life skills training, including hygiene,personal finance, housing issues, and parenting skills, and

·                  Municipal jailmanagement.

 

**Facilities**

 

At December 31,2009, we operated 64 facilities and had four vacant facilities. In addition toproviding management services, we develop, design and/or construct many of ourfacilities.

 

Eitherthrough outright ownership or long-term leases, we control operating facilitiesrepresenting a large majority of our revenues. We believe that such controlincreases the likelihood of contract renewal, allows us to expand existingfacilities and thereby realize economies of scale, and enhances our ability towin new contracts and control repair costs. In addition, we believe thatlong-term control of our operating facilities allows us to better managecost-escalation pressures and develop/incorporate a long horizon strategic viewfor our facility assets.

 

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Thefollowing table summarizes certain additional information with respect to ourfacilities as of December 31, 2009. As indicated, the majority of the facilities at which we provideservices are either owned or leased under long-term leases, which are generallyunder terms ranging from one to 45 years.

 
| **Facility Name and Location**                                | ** **   | **Total  Service  Capacity (1)** | ** **   | **Initial  Contract  Date (2)** | ** **   | **Company  Owned,  Leased or  Managed  (3)** | ** **   |
|------------------------------------------------------------------------------|--------------|---------------------------------------|--------------|--------------------------------------|--------------|---------------------------------------------------|--------------|
|                                                                         |         |                                  |         |                                 |         |                                              |         |
| ***Adult  Secure Services Facilities:  Residential Facilities***             | * *     | * *                              | * *     | * *                             | * *     | * *                                          | * *     |
|                                                                         |         |                                  |         |                                 |         |                                              |         |
| Baker Community  Correctional Facility  Baker, California                    |         | 262                                   |         |                                 | (4)          | Owned                                             |         |
| Big Spring  Correctional Center  Big Spring, Texas                           |         | 3,509                                 |         | 1989                                 |         | Leased                                            | (5)          |
| D. Ray James  Prison  Folkston, Georgia                                      |         | 2,870                                 |         | 1998                                 |         | Leased                                            | (5)          |
| Great Plains  Correctional Facility  Hinton, Oklahoma                        |         | 2,048                                 |         | 2007                                 |         | Leased                                            | (5)          |
| High Plains  Correctional Facility  Brush, Colorado                          |         | 272                                   |         | 2007                                 |         | Owned                                             |         |
| Hudson  Correctional Facility  Hudson, Colorado                              |         | 1,250                                 |         | 2009                                 |         | Leased                                            |         |
| Leo Chesney  Community Correctional Facility  Live Oak, California           |         | 305                                   |         | 1988                                 |         | Leased                                            |         |
| Mesa Verde  Community Correctional Facility  Bakersfield, California         |         | 360                                   |         |                                 | (4)          | Leased                                            |         |
| Moshannon Valley Correctional Center  Philipsburg, Pennsylvania              |         | 1,495                                 |         | 2006                                 |         | Owned                                             |         |
| Regional Correctional Center  Albuquerque, New Mexico                        |         | 970                                   |         | 2004                                 | (6)          | Leased                                            |         |
| Walnut Grove Youth Correctional Facility  Walnut Grove, Mississippi          |         | 1,450                                 |         | 2004                                 |         | Managed                                           |         |
|                                                                         |         |                                  |         |                                 |         |                                              |         |
| ***Abraxas Youth and Family  Services Facilities:  Residential Facilities*** | *** *** | *** ***                          | *** *** | *** ***                         | *** *** | *** ***                                      | *** *** |
|                                                                         |         |                                  |         |                                 |         |                                              |         |
| Contact  Wauconda, Illinois                                                  |         | 52                                    |         |                                 | (7)          | Owned                                             |         |
| Cornell Abraxas Academy  New Morgan, Pennsylvania                            |         | 214                                   |         | 2006                                 |         | Owned                                             |         |
| Cornell Abraxas I  Marienville, Pennsylvania                                 |         | 274                                   |         | 1973                                 |         | Leased                                            | (5)          |
| Cornell Abraxas II  Erie, Pennsylvania                                       |         | 23                                    |         | 1974                                 |         | Owned                                             |         |
| Cornell Abraxas III  Pittsburgh, Pennsylvania                                |         | 24                                    |         | 1975                                 |         | Owned                                             |         |
| Cornell Abraxas Center for Adolescent Females  Pittsburgh, Pennsylvania      |         | 108                                   |         | 1989                                 |         | Owned                                             |         |
| Cornell Abraxas of Ohio  Shelby, Ohio                                        |         | 108                                   |         | 1993                                 |         | Leased                                            | (5)          |
| Cornell Abraxas Youth Center  South Mountain, Pennsylvania                   |         | 72                                    |         | 1999                                 |         | Leased                                            |         |

 

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| ***Abraxas Youth and Family  Services Facilities:   Residential Facilities (Continued)*** | * * | * * | * * | * * | * * | * * | * * |
|-------------------------------------------------------------------------------------------|----------|----------|----------|----------|----------|----------|----------|
|                                                                                      |     |     |     |     |     |     |     |
| DuPage Adolescent Center   Hinsdale, Illinois                                        |     | 38       |     |     | (7)      | Owned    |     |
| Erie Residential Behavioral Health Program   Erie, Pennsylvania                           |     | 17       |     | 1999     |     | Owned    |     |
| Hector Garza Residential Treatment Center   San Antonio, Texas                            |     | 122      |     | 2007     |     | Leased   | (5)      |
| Leadership Development Program   South Mountain, Pennsylvania                             |     | 128      |     | 1994     |     | Leased   |     |
| Psychosocial Rehabilitation  Unit   Erie, Pennsylvania                                    |     | 13       |     | 1994     |     | Owned    |     |
| Schaffner Youth Center   Steelton, Pennsylvania                                           |     | 63       |     | 2001     |     | Managed  |     |
| Southern Peaks Regional Treatment Center   Canon City, Colorado                           |     | 160      |     | 2004     |     | Owned    |     |
| Texas Adolescent Treatment Center   San Antonio, Texas                                    |     | 145      |     |     | (8)      | Owned    |     |
| Washington Facility   Washington, D.C.                                                    |     | 70       |     |     | (9)      | Owned    |     |
| Woodridge   Woodridge, Illinois                                                           |     | 200      |     |     | (7)      | Owned    |     |
|                                                                                      |     |     |     |     |     |     |     |
| ***Abraxas  Youth and Family Services Facilities:   Non-Residential Facilities***         | * * | * * | * * | * * | * * | * * | * * |
|                                                                                      |     |     |     |     |     |     |     |
| Abraxas Counseling Center   Columbus, Ohio                                                |     | 78       |     | 2008     |     | Leased   |     |
| Delaware Community-Based Programs   Milford, Delaware                                     |     | 66       |     | 1994     |     | Leased   |     |
| Harrisburg Day Treatment   Harrisburg, Pennsylvania                                       |     | 45       |     | 1996     |     | Leased   |     |
| Lehigh Valley Community-Based Programs   Lehigh Valley, Pennsylvania                      |     | 60       |     | 1992     |     | Leased   |     |
| Non-Residential Detention/Non-Residential Treatment   Harrisburg, Pennsylvania            |     | 91       |     | 1999     |     | Leased   |     |
| Philadelphia Alternative Education   Philadelphia, Pennsylvania                           |     | 165      |     | 2004     |     | Managed  |     |
| Philadelphia Community-Based Programs   Philadelphia, Pennsylvania                        |     | 71       |     | 1992     |     | Owned    |     |
| WorkBridge   Pittsburgh, Pennsylvania                                                     |     | 600      |     | 1994     |     | Leased   |     |
| York County Community Programs   Harrisburg, Pennsylvania                                 |     | 36       |     | 1999     |     | Leased   |     |

 

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| ***Adult Community-Based Services  Facilities:   Residential Facilities*****         | * *   | * *   | * *   | * *   | * *   | * *   | * *   |
|--------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beaumont Transitional Treatment Center   Beaumont, Texas                             |       | 180        |       | 2002       |       | Owned      |       |
| Cordova Center   Anchorage, Alaska                                                   |       | 192        |       | 1985       |       | Leased     | (5)        |
| El Monte Center   El Monte, California                                               |       | 55         |       | 1993       |       | Leased     |       |
| Grossman Center   Leavenworth, Kansas                                                |       | 150        |       | 2002       |       | Leased     |       |
| Las Vegas Community Correctional Center   Las Vegas, Nevada                          |       | 100        |       | 2004       |       | Owned      |       |
| Leidel  Comprehensive Sanction Center   Houston, Texas                               |       | 190        |       | 1996       |       | Leased     | (5)        |
| Los Angeles County Jails (10)   Los Angeles Metropolitan Area,  California |       | 264        |       |       | (10)       | Managed    |       |
| Marvin Gardens Center   Los Angeles, California                                      |       | 52         |       | 1981       |       | Leased     |       |
| McCabe Center   Austin, Texas                                                        |       | 90         |       | 1999       |       | Owned      |       |
| Mid Valley House   Edinburg, Texas                                                   |       | 96         |       | 1998       |       | Leased     |       |
| Midtown Center   Anchorage, Alaska                                                   |       | 32         |       | 1998       |       | Owned      |       |
| Northstar Center   Fairbanks, Alaska                                                 |       | 135        |       | 1990       |       | Leased     |       |
| Oakland Center   Oakland, California                                                 |       | 61         |       | 1981       |       | Owned      |       |
| Parkview Center   Anchorage, Alaska                                                  |       | 112        |       | 1993       |       | Leased     | (5)        |
| Reality House   Brownsville, Texas                                                   |       | 66         |       | 1998       |       | Owned      |       |
| Reid Community Residential Facility   Houston, Texas                                 |       | 500        |       | 1996       |       | Leased     | (5)        |
| Salt Lake City Center   Salt Lake City, Utah                                         |       | 78         |       | 1995       |       | Leased     |       |
| Seaside Center   Nome, Alaska                                                        |       | 48         |       | 1999       |       | Leased     |       |
| Taylor Street Center   San Francisco, California                                     |       | 177        |       | 1984       |       | Owned      |       |
| Tundra Center   Bethel, Alaska                                                       |       | 85         |       | 1986       |       | Leased     | (5)        |

 

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| ***Adult Community-Based Services  Facilities:   Non-Residential Facilities***** | * *   | * *   | * *   | * *   | * *   | * *   | * *   |
|----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| East St. Louis East   St. Louis, Illinois                                        |       | 200        |       |       | (7)        | Leased     |       |
| LifeWorks   Joliet, Illinois                                                     |       | 231        |       |       | (7)        | Leased     |       |
| Southwood   Chicago, Illinois                                                    |       | 464        |       |       | (7)        | Owned      |       |

 

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| (1)  |   | Residential  service capacity is comprised of the number of beds currently available for service  in our residential facilities. Non-residential service capacity is based on  either contractual terms or our estimate of the number of clients to be  served. We update these estimates at least annually based on the program’s  budget and other factors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Date  from which we, or our predecessor, have had a contract for services on an  uninterrupted basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (3)  |   | We  do not incur any facility use costs, such as debt service, rent or  depreciation for facilities that we operate under a management contract only;  however, we are responsible for all other facility operating costs at these  managed facilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (4)  |   | During the  fourth quarter of 2009, the California Department of Corrections and  Rehabilitation (“CDCR”) terminated its contracts to house male inmates at  both our Baker Community Correctional Facility and Mesa Verde Community  Correctional Facility and subsequently removed all of their inmates from  these facilities by December 2009. We are currently considering several  options for use of these facilities, including marketing these facilities to  other customers (including CDOC to house a different population (possibly  female inmates)). Refer to Item 7 — “Management’s Discussion and Analysis of  Financial Condition and Results of Operations — Liquidity and Capital  Resources — Contractual Uncertainties Related to Certain Facilities —  California Facilities” of this Form 10-K for further discussion  concerning these facilities. |
| (5)  |   | Facility was  sold in August 2001 to Municipal Corrections Finance, L.P. (“MCF”) as  part of the 2001 Sale and Leaseback Transaction as discussed in “Note 14 —  Derivative Financial Instruments and Guarantees” of the “Notes to  Consolidated Financial Statements” in Item 8 of this Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (6)  |   | We lease the Regional Correctional Center from Bernalillo County, New  Mexico. The lease commenced in January 2003 and we renovated the  facility in 2003 and 2004. The facility commenced operations in  July 2004 and the lease presently runs to June 2010, and we have  four one-year renewal options. Refer to Item 7 — “Management’s Discussion and  Analysis of Financial Condition and Results of Operations — Liquidity and  Capital Resources — Contractual Uncertainties Related to Certain Facilities —  Regional Correctional Center” of this report for further discussion  concerning this facility.                                                                                                                                                                                                                                                              |
| (7)  |   | These facilities  are operated pursuant to the Cornell Interventions programs/facilities  contract with numerous agencies throughout Illinois. Initial contract dates  vary by agency and range from 1974 to 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (8)  |   | During the fourth quarter of 2009, we closed the Texas Adolescent  Treatment Center (“TATC”) and transferred much of its residential population  to our Hector Garza Residential Treatment Center. In December 2009,  while we were considering several options for its future use, we received an  offer to purchase TATC. We have executed the contract and currently expect  the transaction to close during the second quarter of 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (9)  |   | We closed the formerly leased Washington D.C. Facility in 2005 (we  acquired the facility in September 2007) and are currently considering  several options for use, including both the operation of a new program as  well as utilization of the facility for an administrative location for  personnel from our Adult Secure Services division.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (10) |   | Los  Angeles County Jails represents eight individual locations in Los Angeles  County, California and the surrounding area. Initial contract dates vary by  agency and range from 1994 to 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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**Marketingand Business Development**

 

Our principal customers are federal, state and localgovernment agencies responsible for adult and juvenile corrections, treatmentand educational services. We manage our business development efforts to addressopportunities available in all of our divisions and potential markets. Whilesuch opportunities necessarily include forming relationships with newcustomers, we also believe that further potential lies in the management of ourexisting relationships through improved bed management (including bothutilization and customer mix) and through enhancements of our contract terms.From time to time, we will also evaluate opportunities for accretiveacquisitions.

 

In most instances, we pursue developmentopportunities by responding to Requests for Proposal (“RFPs”) or Requests for Interest(“RFIs”), which are issued by government agencies’ in connection withsolicitations for bids. The decision to respond to such solicitations is basedupon several factors, including management’s assessment of customer needs, ourability to service the needs in an operationally successful and acceptablyprofitable manner, and the fit of the potential program within our existingportfolio and strategic objectives. The solicitations generally require thebidder to demonstrate relevant operational experience. Furthermore, theresponse must also include descriptions of the services to be provided by thebidder and the price at which the bidder is willing to provide them. Servicescan include not only direct care, but also the design, construction orrenovation of the related facility.

 

If we believe a project described in an RFP isconsistent with our strategic business plan, we will submit a proposal to therequesting agency. When responding to RFPs, we typically incur costs rangingfrom $10,000 to $100,000 per proposal. In addition, we could incur substantialcosts to acquire options to lease or purchase land for a proposed facility orto lease or purchase an existing building to house a program. The preparationof a response usually requires four to 12 weeks. The award process usuallytakes an additional three to nine months. If new construction is required bythe contract, the selected company’s operation of the facility generally beginsbetween nine and 18 months following award announcement, although in some casesas early as four months. In instances where construction is required, oursuccess depends, in part, upon our ability to acquire property that is not onlysatisfactory for programmatic needs but also that lies in a community wheresocial opposition does not significantly impede our ability to operate. We mayincur significant expenses in responding to such opposition, and our responsemay not be successful. In addition, we may choose not to respond to an RFP ormay withdraw a submitted proposal if significant legal action or other forms ofopposition are anticipated or encountered.

 

In addition to responding to RFPs, we also rely uponcourt-referrals, insurance- or managed care-referrals, and self-referrals forbusiness growth, particularly in our juvenile and adult community-basedtreatment programs. In such instances, court and community liaisons play a significantrole in developing our growing network of clients.

 

#### **Contracts**

####  

Our facility operating contracts generally providethat we will be compensated via an occupant per diem rate, fees for treatmentservices, guaranteed take-or-pay terms, a fixed fee, or cost-plusreimbursement. Factors we consider in determining billing rates include (1) thespecified programs provided for by the contract and the related staffinglevels, (2) wage levels customary in the respective geographic area, (3) whetherthe proposed facility is to be leased or purchased, and (4) theanticipated average occupancy levels that we believe could reasonably bemaintained (and the ramp up schedule required to reach stable populations).Compensation is invoiced in accordance with the applicable contract and istypically paid on a monthly basis. Some of our juvenile education contractsprovide for annual payments.

 

We pursue new contracts that leverage our existinginfrastructure and capabilities. A significant portion of our opportunities arecontracts producing revenue that varies with the number of individuals housedor served, the types of services provided and/or the frequency of the service.The balance of our contracts are take-or-pay contracts, which provide a fixedminimum revenue stream regardless of occupancy.

 

##### **Competition**

##### ** **

Because our services encompass several diversemarkets, we view our competition within these separate markets. We believe ourprincipal non-governmental competitors in the Adult Secure Services market areCorrections Corporation of America, Inc., The Geo Group, Inc., andManagement and Training Corporation. Within our two other segments — AbraxasYouth and Family Services and Adult Community-Based Services — we typicallyencounter a significantly more fragmented competitor base, which includes notonly for-profit operators like ourselves but also not-for-profit organizations.Within the Abraxas Youth and Family Services division, some of our primarynon-governmental competitors include ViaQuest, Youth and Family CenteredServices, Securicor New Century and Ramsay Youth Services. Our largernon-governmental competitors in the Adult Community-Based Services marketinclude Dismas House, Bannum, Gateway, Salvation Army and Volunteers ofAmerica.

 

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**Employees**

 

At December 31, 2009, we had 4,106 full-timeemployees and 301 part-time employees. We employ management, administrative andclerical, security, educational and counseling services, health services andgeneral maintenance personnel. Approximately 521 employees at five of ourfacilities are represented by labor unions.

 

**Regulations**

 

The industry in which we operate is subject tofederal, state and local regulations administered by a variety of regulatoryauthorities. Generally, prospective providers of correctional, detention,educational, treatment and community-based services must comply with a varietyof applicable federal, state and local regulations, including correctional,education, healthcare, environmental and safety regulations. Our contractsfrequently include extensive reporting requirements, including mandatorysupervision with on-site monitoring by representatives of our contractinggovernment agencies, as well as audits by these and other governmentaldepartments.

 

In addition to regulations requiring certaincontracting government agencies to enter into a competitive bidding procedurebefore awarding contracts, the laws of certain jurisdictions may also requireus to award subcontracts on a competitive basis or to subcontract withbusinesses owned by women or members of minority groups.

 

**Business Concentration**

 

For the years ended December 31, 2009, 2008 and2007, 34.7%, 34.2% and 32.6%, respectively, of our consolidated revenues werederived from multiple contracts with the BOP. No other single customer makes upgreater than 10% of our consolidated revenues for these years. Refer toFootnote 16 — Segment Disclosures in our consolidated financial statements forfurther information concerning revenues from the BOP by operating division.

 

**Insurance**

 

We maintain general liability insurance for all ofour operations at an amount equal to $10 million per occurrence and in theaggregate. We also maintain insurance in amounts management deems adequate tocover property and casualty risks, workers’ compensation, and directors’ andofficers’ liability.

 

Our contracts and the statutes of certain states inwhich we operate typically require us to maintain insurance. Our contractsprovide that, in the event we do not maintain such insurance, the contractingagency may terminate its agreement with us. We believe that we are incompliance in all material respects with these requirements.

 

**EnvironmentalMatters**

 

Weare subject to various federal, state, and local environmental laws andregulations, and these laws can impose strict liability for the discharge ofhazardous or toxic substances. As an owner and operator of facilities, we aresubject to these laws and could be responsible for the discharge ofcontaminants at our facilities. We are not currently incurring material costsassociated with environmental compliance or remediation, although in the eventwe had an environmental issue at any of our current or previously-ownedfacilities, the costof complying with these environmental laws could materially adversely affectour financial condition and results of operations.

 

**ITEM 1A.****              ****RISKFACTORS**

 

***Our significant level of indebtedness couldadversely affect our financial condition.***

 

Wehave a significant amount of indebtedness.  Our total consolidatedindebtedness as of December 31, 2009 was approximately $303.3million.  Our ability to make scheduled payments or to refinance our debtobligations depends on our financial and operating performance, which issubject to prevailing economic and competitive conditions and to certain otherfinancial, business and other factors beyond our control. We cannot assure youthat we will maintain a level of cash flows from operating activitiessufficient to permit us to pay the principal, premium, if any, and interest andadditional interest, if any, on our indebtedness.  We may need to reduceor delay capital expenditures, sell assets, seek additional capital orrestructure or refinance all or a portion of our indebtedness on or beforematurity.  However, we may not be able to complete these alternativemeasures on commercially reasonable terms or at all.  Additionally, asignificant portion of our assets is owned, and a significant percentage of ourrevenue is generated, by our subsidiaries. Our cash flows and our ability torepay our indebtedness depends upon the performance of these subsidiaries andtheir ability to make distributions.  See 

 

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“Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources.”

 

Certainof our borrowings, including any borrowings under our Amended Credit Facility,will be at variable rates of interest and expose us to interest rate risk. Ifinterest rates increase, our debt service obligations on the variable rateindebtedness would increase even though the amount borrowed remained the same,and our net income would decrease.

 

***The volatility and disruption of thecapital and credit markets and adverse changes in the economy may negativelyimpact our ability to access financing, revenues and earnings.***

 

The capital and creditmarkets have been experiencing extreme volatility and disruption for more thantwelve months.  Since the third quarter of 2008 and continuing through2009, the volatility and disruption reached unprecedented levels.  Atcertain points during this period, the markets exerted downward pressure onavailability of liquidity and credit capacity for many issuers, including us.  While we intend to financeour operations with existing cash, cash flow from operations and borrowingunder our Amended Credit Facility, we may require additional financing tosupport our continued growth.  However, due to the existing uncertainty inthe capital and credit markets, access to capital, including capital throughthe accordion feature of our Amended Credit Facility, on terms acceptable to usmay be limited or unavailable.

 

During the 2008/2009 period several large financial institutions haveeither failed or been dependent on the assistance of the federal government tocontinue to operate as a going concern. We can provide no assurance that all ofthe banks that have made commitments to us under our revolving credit facilitywill continue to operate as a going concern in the future or that such bankswould be willing to participate in an expansion to the Amended Credit Facilityin the event the Company desires to exercise the accordion feature of theAmended Credit Facility.

 

If any of the banks in the lending group were to fail or decline toparticipate in the expansion of our Amended Credit Facility under the accordionfeature, it is possible that the capacity under the revolving credit facilitywould not be expanded by the full amount that might be requested by us underthe accordion feature and might even be reduced to below the existing committedavailability. In the event that we could not obtain an increased commitment byvirtue of the accordion feature of the Amended Credit Facility, we could berequired to obtain capital from alternate sources in order to continue ourgrowth through future development and expansion initiatives.  Our options for addressing such capitalconstraints would include, but not be limited to (1) obtaining commitmentsfrom the remaining banks in the lending group or from new banks to fundincreased amounts under the terms of the Amended Credit Facility, or itsaccordion feature, (2) accessing the public capital markets, or (3) delayingcertain of the Company’s planned expansion projects. Such alternatives in thecurrent market would likely be on terms less favorable than under existingterms, which could have a material effect on the Company’s consolidatedfinancial position, results of operations or cash flows.

 

 ***The restrictive covenants in our Senior Notes andAmended Credit Facility may affect our ability to operate our businesssuccessfully.***

 

Theindenture governing our Senior Notes and our Amended Credit Facility containvarious covenants that limit our ability to engage in specified types oftransactions. These covenants limit our ability to, among other things:

 

·                  incuradditional debt;

·                  provideguarantees in respect of obligations of other persons;

·                  pay dividendsor repurchase capital stock or subordinated debt;

·                  make certaintypes of investments;

·                  incur liens;

·                  engage insale-leaseback transactions;

·                  make restrictedpayments;

·                  sell assets andsubsidiary capital stock;

·                  consolidate ormerge with or into, or sell substantially all of our assets to, another; and

·                  enter into newlines of business.

 

Inaddition, our Amended Credit Facility contains restrictive covenants andrequires us to maintain specified financial ratios. Our ability to meet thosefinancial ratios can be affected by events beyond our control, and we cannotassure you that we will meet those ratios. A breach of any of these covenantscould result in a default under our Amended Credit Facility and/or the SeniorNotes. Upon the occurrence of an event of default under our Amended CreditFacility, the lenders could elect to declare all amounts outstanding under ourAmended Credit Facility to be immediately due and payable and terminate 

 

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allcommitments to extend further credit. If we were unable to repay those amounts,the lenders under our Amended Credit Facility could proceed against thecollateral granted to them to secure that indebtedness. We have pledged asignificant portion of our assets as collateral under our Amended Credit Facility.If the lenders under that facility accelerate the repayment of borrowings, wecannot assure you that we will have sufficient assets remaining after we repayour Amended Credit Facility to repay other indebtedness, including the SeniorNotes.

 

***If we default onour obligations to pay our indebtedness we may not be able to make payments onthe Senior Notes.***

 

Anydefault under the agreements governing our indebtedness, including a defaultunder our Amended Credit Facility that is not waived by the required lenders,and the remedies sought by the holders of such indebtedness could make usunable to pay principal, premium, if any, and interest and additional interest,if any, on the Senior Notes and substantially decrease the market value of theSenior Notes. If we are unable to generate sufficient cash flow and areotherwise unable to obtain funds necessary to meet required payments ofprincipal, premium, if any, and interest and additional interest, if any, onour indebtedness, or if we otherwise fail to comply with the various covenants,including financial and operating covenants, in the instruments governing ourindebtedness (including covenants in the indenture and our Amended CreditFacility), we could be in default under the terms of the agreements governingsuch indebtedness, including our Amended Credit Facility and the indenture. Inthe event of such default, the holders of such indebtedness could elect todeclare all the funds borrowed thereunder to be due and payable, together withaccrued and unpaid interest, the lenders under our Amended Credit Facilitycould elect to terminate their commitments thereunder, cease making furtherloans and institute foreclosure proceedings against our assets, and we could beforced into bankruptcy or liquidation. If our operating performance declines wemay, in the future, need to obtain waivers from the required lenders under ourAmended Credit Facility to avoid being in default. If we breach our covenantsunder our Amended Credit Facility and seek a waiver, we may not be able toobtain a waiver from the required lenders. If this occurs, we would be indefault under our Amended Credit Facility, the lenders could exercise theirrights, as described above, and we could be forced into bankruptcy orliquidation.

 

***Despite current indebtedness levels, we maystill be able to incur substantially more debt. This could further exacerbatethe risks described above.***

 

Theterms of the indenture governing our Senior Notes and our Amended CreditFacility restrict our ability to incur but do not prohibit us from incurringsignificant additional indebtedness in the future.  We have recentlycompleted several expansion projects and anticipate commencing other projectsat some future date, and we will likely need to finance these future outlays ofcapital since our cash on hand and cash flows from operations may not besufficient to fully fund all of these potential expenditures.  Dependingon market conditions and other factors, we will consider additional debtfinancing to fund these outlays of capital as well as to refinance a portion ofour existing indebtedness.   If new indebtedness is added to our andour subsidiaries’ current debt levels, the related risks that we and they nowface could intensify.

 

***We are dependent on government appropriations, which may notbe made on a timely basis or at all and may be adversely impacted by budgetaryconstraints at the federal, state and local levels.***

 

Ourcash flow is subject to the receipt of sufficient funding of and timely paymentby contracting governmental entities. If the appropriate governmental agencydoes not receive sufficient appropriations to cover its contractualobligations, a contract may be terminated or the amounts payable to us may bedeferred or reduced.  Also, we are dependent upon funding for anticipatedfuture contracts.

 

Federal, state, county and local governments have encountered, and areexpected to continue to encounter, significant budgetary constraints that mayresult in a reduction of spending on the outsourced services that we provide.Such budgetary limitations may cause the contractual commitments to be reducedor even eliminated, which would make it unprofitable to continue operating acertain facility and require us to find alternate customers or close suchfacility. Any delaysin payment, or the termination of a contract, could have a material adverseeffect on our cash flow and financial condition, which may make it difficult tosatisfy our payment obligations on our indebtedness, including the AmendedCredit Facility, in a timely manner.

 

In addition, as a resultof, among other things, recent economic developments, federal, state and localgovernments have encountered, and may continue to encounter, unusual budgetaryconstraints. As a result, a number of state and local governments are underpressure to control additional spending or reduce current levels of spendingwhich could limit or eliminate appropriations for the facilities that weoperate. Additionally, as a result of these factors, we may be requested in thefuture to reduce our existing per diem contract rates or forego prospectiveincreases to those rates. Budgetary limitations may also make it more difficultfor us to renew our existing contracts on favorable terms or at all. Further, anumber of states in which we operate are experiencing significant budgetdeficits for fiscal year 2010 and may continue to experience budget 

 

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deficits in subsequentyears. We cannot assure that these deficits will not result in reductions inper diems, delays in payment for services rendered or unilateral termination ofcontracts. We received IOU’s from the State of California which were subsequentlypaid in full during the third quarter of 2009. We do not currently hold any IOU’sfrom the State of California. In addition, delays in the passage of budgets(such as experienced in the State of Pennsylvania in 2009) may lead to temporarydelays in the repayment of our receivables from operations in such states. Thiswould lead to a temporary increase in our receivables, as evidenced by theincrease in our accounts receivable-trade at September 30, 2009. As theState of Pennsylvania did not pass a fiscal 2010 budget until mid-October 2009,the majority of the cities and counties in Pennsylvania chose to defer theirpayments (during the state budget impasse present through the third quarter of2009) until the state budget had been adopted. Upon adoption of their fiscal2010 budget, the various cities and counties in Pennsylvania resumed theirnormal payment practices. While we will closely monitor such situations, we donot currently expect this to have a significant negative impact on the repaymentof our receivables related to our facilities in such locations.

 

Moreover,certain states, such as Arizona (whom we serve at our Great Plains CorrectionalFacility) which currently utilize private entities (on both an in-state as wellas an out-of-state basis) have indicated budgetary pressures may influence thefuture extent of their use of such private entities, particularly out-of-state.We believe outsourcing to private providers can offer economically positivealternatives to our customers. However, a reduction in the use of our servicescould have a material adverse effect on our business.

 

Asa result of this increased budgetary pressure, in certain cases we have granteda few of our customers relief from formulaic increase provisions in theiragreements and some of our customers have not included in their appropriationlegislation amounts that would increase the per diem rates payable to us orhave otherwise attempted to reduce the contract value. Contractual rateincreases are generally intended to offset increases in expenses and inflation.To the extent rates are not increased or are reduced, our profitability will beadversely affected.  Examples of this budget pressure include the need ofthe federal government to operate under a continuing resolution as a result ofits failure to pass a new 2008/2009 year budget and reported budget pressuresin most states including Alaska, Arizona, California, Colorado, Georgia,Illinois, Pennsylvania and Texas.

 

***We depend on a limited number of governmentalcustomers for a significant portion of our revenues.***

 

Wecurrently derive, and expect to continue to derive, a significant portion ofour revenues from the BOP and various state agencies. The loss of, or asignificant decrease in, business from the BOP or those state agencies couldseriously harm our financial condition and results of operations. Our BOPcontracts accounted for approximately 34.7% of our total revenues for the yearended December 31, 2009 ($143.1 million), 34.2% of our total revenues forthe year ended December 31, 2008 ($132.3 million) and 32.6% of our totalrevenues for the year ended December 31, 2007 ($117.5 million). We expectto continue to depend upon the BOP and a relatively small group of othergovernmental customers for a significant percentage of our revenues.

 

***We are subject to the short-term nature ofgovernment contracts.***

 

Manygovernmental agencies are legally limited in their ability to enter into fixedlong-term contracts that would bind elected officials responsible for futurebudgets. Therefore, many contracts with government agencies, including the BOP,typically either have a very short term or, even when for a longer term, aresubject to termination on short notice without cause. The majority of ourcontracts have primary terms of one to three years. Our contracts withgovernmental agencies may contain one or more renewal options that may beexercised only by the contracting governmental agency. Some of these contractsmay not be renewed by the governmental agency and no assurance can be giventhat the governmental agency will exercise a renewal option in the future. Inaddition, the governmental agency may elect to solicit bids pursuant to a RFPor RFQ rather than exercise a renewal option. We may not be successful in a bidresponding to a RFP or RFQ.

 

Thenon-renewal or termination of any of our significant contracts withgovernmental agencies, our inability to secure new facility managementcontracts from others or our failure to successfully bid in response to a RFPor RFQ could materially adversely affect our financial condition, results ofoperation and liquidity. To the extent we have made significant capitalexpenditures and have short-term contracts with our customers that are notrenewed or extended, we may not recover our entire capital investment.

 

 ***Our ability to win new contracts to develop and managecorrectional, detention and treatment facilities depends on many factorsoutside our control.***

 

Ourgrowth is generally dependent upon our ability to win new contracts to developand manage new or expanded correctional, detention and treatment facilities.This depends on a number of factors we cannot control, including crime rates 

 

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andsentencing patterns in various jurisdictions. Accordingly, the demand for ourfacilities could be adversely affected by the relaxation of enforcementefforts, leniency in conviction and sentencing practices or through the legaldecriminalization of certain activities that are currently proscribed bycriminal laws. For instance, changes in laws relating to drugs and controlledsubstances or illegal immigration could reduce the number of persons arrested,convicted and sentenced, thereby potentially reducing demand for correctionalfacilities to house them and community-based services to transition offendersback into the community. Similarly, reductions in crime rates could lead toreductions in arrests, convictions and sentences requiring correctionalfacilities.

 

Whenseeking bids, most governmental entities evaluate the financial strength of thebidders. To the extent they believe we do not have sufficient financialresources, we will be unable to effectively compete for bids. Additionally, oursuccess in obtaining new awards and contracts may depend, in part, upon ourability to locate land that can be leased or acquired on favorable terms.Furthermore, desirable locations may be in or near populated areas and,therefore, may generate legal action or other forms of opposition fromresidents in areas surrounding a proposed site.

 

***Our profitability may suffer if the numberof offenders occupying our correctional, detention and treatment facilitiesdecreases or there is a shift in occupancy among our divisions.***

 

Ourcorrectional, detention and treatment facilities are dependent upongovernmental agencies supplying offenders and we do not control occupancylevels at our facilities. We believe the rate of growth experienced in theadult secure sector during the late 1980s and early 1990s is stabilizing.

 

Historically,a substantial portion of our revenues has been generated under contracts thatspecify a net rate per day per resident, or a per diem rate, sometimes with nominimum guaranteed occupancy levels, even though most correctional facilitycost structures are relatively fixed. Under such a per diem rate structure, adecrease in occupancy levels at a particular facility could have a materialadverse effect on the financial condition and results of operations at suchfacility. A decrease in the occupancy of certain juvenile justice, educationand treatment facilities would have a more significant impact on our operatingresults than a decrease in occupancy in the Adult Secure division due to higherper diem revenue at certain juvenile facilities.

 

Certainsocial commentators and various political or governmental representativessuggest that community-based corrections of adults may be emphasized in thefuture as alternatives to traditional incarceration. We have historicallyexperienced higher operating margins in the Adult Secure and the AdultCommunity-Based sectors than in the juvenile services sector. A shift inoccupancy among our segments of business operations could result in a decreasein our profitability.

 

***A failure to comply with existingregulations could result in material penalties or non-renewal or termination ofour contracts.***

 

Our industry is subject to avariety of federal, state, county and local regulations, including education,environmental, health care and safety regulations, which are administered byvarious regulatory authorities. We may not always successfully comply withthese regulations, and failure to comply could result in material penalties ornon-renewal or termination of facility management contracts. The contractstypically include extensive reporting requirements and supervision and on-sitemonitoring by representatives of contracting governmental agencies. Correctionsofficers are customarily required to meet certain training standards, and insome instances facility personnel are required to be licensed and subject tobackground investigation. Certain jurisdictions also require that subcontractsbe awarded on a competitive basis or that we subcontract with businesses ownedby members of minority groups. The failure to comply with any applicable laws, rules orregulations and the loss of any required license could adversely affect thefinancial condition and results of operations at our affected facilities.

 

***Governmental agencies may investigate andaudit our contracts and, if any improprieties are found, we may be required torefund revenues we have received, and/or to forego anticipated revenues and maybe subject to penalties and sanctions, including prohibitions on our bidding inresponse to RFPs.***

 

Governmentalagencies we contract with have the authority to audit and investigate ourcontracts with them. As part of that process, some governmental agencies reviewour performance on the contract, our pricing practices, our cost structure andour compliance with applicable laws, regulations and standards. If the agencydetermines that we have improperly allocated costs to a specific contract, wemay not be reimbursed for those costs and we could be required to refund theamount of any such costs that have been reimbursed. If a government audituncovers improper or illegal activities by us or we otherwise determine thatthese activities have occurred, we may be subject to civil and criminalpenalties and administrative

 

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sanctions,including termination of contracts, forfeitures of profits, suspension ofpayments, fines and suspension or disqualification from doing business with thegovernment. Any adverse determination could adversely impact our ability to bidin response to RFPs in one or more jurisdictions and significantly reduce theprobability of our success in the bid process for future contracts.

 

***If we fail to satisfy our contractualobligations, our ability to compete for future contracts and our financialcondition may be adversely affected.***

 

Ourfailure to comply with contract requirements or to meet our client’sperformance expectations when performing a contract could materially andadversely affect our financial performance and our reputation, which, in turn,would impact our ability to compete for new contracts. Our failure to meetcontractual obligations could also result in substantial actual andconsequential damages. In addition, our contracts often require us to indemnifyclients for our failure to meet performance standards. Some of our contractscontain liquidated damages provisions and financial penalties related toperformance failures. Although we have liability insurance, the policy limitsmay not be adequate to provide protection against all potential liabilities.

 

***Competitors in our industry may adverselyaffect the profitability of our business.***

 

Wemust compete with government entities and other private operators on the basisof cost, quality and range of services offered, experience in managingfacilities, reputation of personnel and ability to design, finance andconstruct new facilities on a cost effective competitive basis. While there aresome barriers for companies seeking to enter into the management and operationof correctional, detention and treatment facilities, these barriers have notbeen sufficient to materially limit additional competition. Certain areas ofour operation may not pose a significant barrier to entry into the market byprivate operators. For example, private operators may not find it as difficultto bid for juvenile treatment, educational and detention services andpre-release correctional and treatment services as they do adult correctionaland detention services.

 

Further,our government customers may assume the management of a facility currentlymanaged by us upon the termination of the corresponding management contract or,if such customers have capacity at their facilities, may take inmates currentlyhoused in our facilities and transfer them to government run facilities. Theresulting decrease in occupancy levels would reduce our revenue due to the perdiem rate structure and could result in a significant decrease in the profitabilityof our business.

 

***A disturbance or violent occurrence in oneof our facilities could result in closure of a facility or harm to ourbusiness.***

 

Anescape, riot, disturbance or violent occurrence at one of our facilities couldadversely affect the financial condition, results of operations and liquidityof our operations. Among other things, the negative publicity generated as aresult of an event could adversely affect our ability to retain an existingcontract or obtain future ones. In addition, if such an event were to occur,there is a possibility that the facility where the event occurred may be shutdown by the relevant governmental agency. A closure of certain of ourfacilities could adversely affect the financial condition, results of operationsand liquidity of our operations. Such negative events (including an occurrenceat a competitor’s facility) may also result in a significant increase in ourliability insurance costs.

 

***Negative media coverage, includinginaccurate or misleading information, could adversely affect our reputation andour ability to bid for government contracts.***

 

Themedia frequently focuses its attention on private operators’ contracts withgovernmental agencies. If the media coverage of private operators is negative,it could influence government officials to slow the pace of outsourcinggovernment services, which could reduce the number of RFPs. The media may alsofocus its attention on the activities of political consultants engaged by us,even when their activities are unrelated to our business, and we may be taintedby adverse media coverage about their activities. Moreover, inaccurate,misleading or negative media coverage about us could harm our reputation and,accordingly, our ability to bid for and win government contracts.

 

***We often incur significant costs beforereceiving related revenues, which could result in cash shortfalls and a risk ofnot recovering our investment.***

 

Whenwe are awarded a contract to manage a new facility, we may incur significantexpenses before we receive contract payments. These expenses include purchasingreal estate, constructing new facilities, leasing office space, purchasingoffice equipment and hiring and training personnel. As a result, when thegovernment does not fund a facility’s pre-opening and start-up costs, we may berequired to invest significant sums of money before receiving related contractpayments. In 

 

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addition,payments due to us from governmental agencies may be delayed due to billingcycles or as a result of failures by our governmental customers to attainnecessary budget approvals and finalize contracts in a timely manner. Severaljuvenile services contracts related to educational services provide for annualcollection several months after a school year is completed. In addition, acontract may be terminated prior to its scheduled expiration and as a result wemay not recover these expenses or realize any return on our investment.

 

Wemay choose to undertake development projects without written commitments tomake use of such facilities. We may not be able to obtain contracts for thesefacilities in a timely fashion, if at all. To the extent we do not obtaincontracts, we could be unable to recover our investment and our financialcondition and results of operations would be adversely affected.

 

***We may be unable to attract andretain sufficient qualified personnel necessary to sustain our business.***

 

Ourdelivery of services is labor-intensive. When we are awarded a contract, wemust hire operating management, security, case management and other personnel.The success of our business requires that we attract, develop, motivate andretain these personnel. Our ability to recruit and retain qualified individualsvaries by facility and is related to the socio-economic factors in theparticular community in which the facility operates. The Department of Laborwages we offer our employees are often higher than wages they could obtainelsewhere in the community. However, if the local economy where a facility islocated is robust and unemployment is low, we may have difficulty hiring andretaining qualified personnel. In addition, there are inherent risks associatedwith the nature of the services we provide, which could cause certain qualifiedindividuals to seek other employment opportunities. We have typicallyexperienced high turnover of personnel in our juvenile and adult secure facilitieswithin the first year of their employment. Our inability to hire sufficientpersonnel on a timely basis or the loss of significant numbers of personnelcould adversely affect our business.

 

***If we do not successfully integrate thebusinesses that we acquire, our results of operations could be adverselyaffected.***

 

Wemay be unable to manage businesses that we may acquire profitably or integratethem successfully without incurring substantial expenses, delays or otherproblems that could negatively impact our results of operations. Acquisitionsgenerally require the integration of facilities, some of which may be locatedin states in which we do not currently have operations.

 

Moreover,business combinations involve additional risks, including:

 

·      diversion ofmanagement’s attention;

·      loss of keypersonnel;

·      assumption ofunanticipated legal or financial liabilities;

·      our becomingsignificantly leveraged as a result of the incurrence of debt to finance anacquisition;

·      unanticipatedoperating, accounting or management difficulties in connection with theacquired entities;

·      amortizationor possible impairment charges of acquired intangible assets, includinggoodwill; and

·      dilution toour earnings per share.

 

Also,client dissatisfaction or performance problems with an acquired business couldmaterially and adversely affect our reputation as a whole. Further, theacquired businesses may not achieve the revenues and earnings we anticipated.

 

***Because environmental laws impose strict,as well as joint and several, liability for clean up costs, unforeseenenvironmental risks could prove to be costly.***

 

Ourfacilities, and any facilities that we may acquire in the future, may besubject to unforeseen environmental risks. The federal ComprehensiveEnvironmental Response, Compensation, and Liability Act (CERCLA) imposesstrict, as well as joint and several, liability for certain environmentalcleanup costs on several classes of potentially responsible parties, including currentowners and operators of the property. Other federal and state laws in certaincircumstances may impose liability for environmental remediation, which costsmay be substantial. Further, the operation of our facilities, and thedevelopment of new facilities, requires that we obtain, and comply with,permits and other authorizations under environmental laws. Obtaining suchpermits and authorizations may affect our existing facilities or could delaythe opening of new facilities, which could have a material adverse effect onour business and results of operations.

 

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***We have in the past incurred, and maycontinue to incur, significant expenses for facilities that we no longeroperate.***

 

Ifwe close a facility, we may remain committed to perform our obligations underthe applicable lease, which would include, among other things, payment of thebase rent for the balance of the lease term. We may also be required to incurother expenses with respect to such facilities. The potential losses associatedwith our inability to cancel leases may result in our keeping openunderperforming facilities. As a result, ongoing lease operations at closed orunder-performing facilities could impair our results of operations. At December 31,2009, we had one leased facility, Mesa Verde Community Correctional Facility,for which we did not have an operating contract.

 

***We may continue to operate underunprofitable contracts at facilities that we own to offset expenses associatedwith ownership of the facility.***

 

Ifour operations are unprofitable at a leased facility or if the leased facilityis performing significantly below targeted levels, we would typically terminatethe contract and the lease. However, we may continue to operate our contract atan owned facility to offset the expenses associated with ownership. Continuedperformance of such a contract could have a material adverse effect on ourbusiness and results of operations.

 

***Because our revenues can fluctuate fromperiod to period, we may face short-term funding shortfalls from time to time.***

 

Revenuescan fluctuate from year to year due to changes in government funding policies,changes in the number of clients referred to our facilities by governmentalagencies, the opening of new facilities or the expansion of existing facilitiesand the termination of contracts for a facility or the closure of a facility.Our revenues fluctuate from quarter to quarter, based on the number ofcontracted days in each quarter and the number of clients served in ourfacilities. Because our revenues can vary, we may face short-term fundingshortfalls from time to time. In addition, full-year results are not likely tobe a direct multiple of any particular quarter or combination of quarters.

 

***Resistance to privatization of correctionaland detention facilities could result in our inability to obtain new contractsor the loss of existing contracts.***

 

Managementof correctional and detention facilities, particularly of adult securefacilities, by private entities has not achieved complete acceptance by eitherthe government or the public. The movement toward privatization of correctionaland detention facilities has also encountered resistance from certain groups,such as labor unions, local sheriff’s departments, religious organizations andgroups believing that correctional and detention facility operations shouldonly be conducted by government agencies. Changes in the dominant politicalparty in any market in which correctional facilities are located could have anadverse impact on privatization. Furthermore, some government agencies are notlegally permitted to delegate their traditional management responsibilities forcorrectional and detention facilities to private companies.

 

Inaddition, as a private prison manager, we are subject to government legislationand regulation restricting the ability of private prison managers to housecertain types of inmates, such as inmates from other jurisdictions or inmatesat medium or higher security levels. Legislation has been enacted in severalstates, and has previously been proposed in the United States House ofRepresentatives, containing such restrictions. Any such legislation may have amaterial adverse affect on us.

 

Anyof these resistances may make it more difficult for us to renew or maintainexisting contracts, to obtain new contracts or sites on which to operate newfacilities or to develop or purchase facilities and lease them to government orprivate entities, any or all of which could have a material adverse effect onour business.

 

***We are subject to significant insurancecosts.***

 

Worker’scompensation, employee health and general liability insurance representsignificant costs to us. We may continue to incur increasing insurance costs,typically due to adverse claims experience or rising healthcare costs ingeneral. Due to concerns over corporate governance and recent corporateaccounting scandals, liability and other types of insurance have become moredifficult and costly to obtain. In addition, stockholder lawsuits willgenerally serve to increase our directors’ and officers’ liability insurance.Unanticipated additional insurance costs could adversely impact our results ofoperations and cash flows, and the failure to obtain or maintain any necessaryinsurance coverage or the inability of an insurance carrier to perform underits obligations through issued coverage could have a material adverse effect onus.

 

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***We are subject to risks associated withownership of real estate and related operation of our facilities.***

 

Ourownership of correctional and detention facilities subjects us to riskstypically associated with investments in real estate. Moreover, correctionaland detention facilities are relatively illiquid and therefore, our ability todivest ourselves of one or more of our facilities promptly in response tochanged conditions is limited. Investments in correctional and detentionfacilities subject us to risks involving potential exposure to uninsured loss.Our operating costs may be affected by the obligation to pay for the cost ofcomplying with existing laws, ordinances and regulations, as well as the costof complying with future legislation.  Our facilities are also subject tohazards such as fire, hurricanes, earthquakes and other natural disasters. Inaddition, although we maintain insurance for many types of losses, there arecertain types of losses, such as losses from earthquakes, riots and acts ofterrorism, which may be either uninsurable or for which it may not beeconomically feasible to obtain insurance coverage. As a result, we could loseboth our capital invested in, and anticipated profits from, one or more of thefacilities we own. Further, we could experience losses that may exceed thelimits of our insurance coverage.

 

***We may be adversely affected by inflation.***

 

Severalof our facility management contracts provide for fixed management fees or feesthat increase by only small amounts during their term. If, due to inflation orother causes, our operating expenses, such as wages and salaries of ouremployees, and insurance, medical and food costs, increase at rates faster thanincreases, if any, in our management fees, then our profitability would beadversely affected.

 

**ITEM 1B.****      ****UNRESOLVEDSTAFF COMMENTS**

 

None

 

**ITEM 2.****         ****PROPERTIES**

 

We lease office space forour corporate headquarters in Houston, Texas and a regional administrativeoffice in Pittsburgh, Pennsylvania. We also lease various facilities we arecurrently operating or developing. For a listing of owned, leased and managedfacilities, see “Business - Facilities” in Item 1 of this report.

 

**ITEM 3.****         ****LEGALPROCEEDINGS**

 

We are party to various legal proceedings, includingthat noted below. While management presently believes that the ultimate outcomeof these proceedings will not have a material adverse effect on our financialposition, overall trends in results of operations or cash flows, litigation issubject to inherent uncertainties, and unfavorable rulings could occur. Anunfavorable ruling could include monetary damages or equitable relief, andcould have a material adverse impact on the net income of the period in whichthe ruling occurs.

 

***Valencia County Detention Center***

 

InApril 2007, a lawsuit was filed against the Company in the FederalDistrict Court in Albuquerque, New Mexico, by Joe Torres and Eufrasio Armijo,who each alleged that he was strip searched at the Valencia County DetentionCenter (“VCDC”) in New Mexico in violation of his federal rights under theFourth, Fourteenth and Eighth amendments to the U.S. Constitution.  The claimantsalso alleged violation of their rights under state law and sought to bring thecase as a class action on behalf of themselves and all detainees at VCDC duringthe applicable statutes of limitation.  The plaintiffs sought damages anddeclaratory and injunctive relief.  Valencia County is also a nameddefendant in the case and operated the VCDC for a significantly greater portionof the period covered by the lawsuit.

 

InDecember 2008, the parties agreed to a proposed stipulation of settlementand, in July 2009, the Court granted final approval of thesettlement.  The settlement amount underthe terms of the agreement is $3.3 million. Cornell’sportion of the stipulated settlement, based on the number of inmates housed atVCDC during the time Cornell operated the facility in comparison to the numberof inmates housed at the facility during the time Valencia County operated thefacility, is $1.2 million and was funded principally through our generalliability and professional liability coverage. The claims administrationprocess is underway and we expect it to be completed in the first half of 2010.

 

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Inthe year ended December 31, 2007, we previously provided insurancereserves for this matter (as part of our regular review of reported andunreported claims) totaling approximately $0.5 million.  During the fourth quarter of 2008, we recordedan additional settlement charge of approximately $0.7 million and the relatedreimbursement from our general liability and professional liabilityinsurance.  The charge and reimbursementwere recognized in general and administrative expenses for the year ended December 31,2008.  The reimbursement was funded bythe insurance carrier in the first quarter of 2009 into a settlement account, where it willremain until payments are made to the settlement class members.

 

***Other***

 

Wecurrently and from time to time are subject to claims and suits arising in theordinary course of business, including claims for damages for personal injuriesor for wrongful restriction of or interference with offender privileges andemployment matters. If an adverse decision in these matters exceeds our insurancecoverage, or if our coverage is deemed not to apply to these matters, or if theunderlying insurance carrier was unable to fulfill its obligation under theinsurance coverage provided, it could have a material adverse effect on ourfinancial condition, results of operations or cash flows.

 

Whilethe outcome of such other matters cannot be predicted with certainty, based onthe information known to date, we believe that the ultimate resolution of thesematters will not have a material adverse effect on our financial condition, butcould be material to operating results or cash flows for a particular reportingperiod.

 

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

 

None.

 

**PART II**

 

**ITEM 5.**                             **MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIES**

 

Our common stock is listed on the New York StockExchange (“NYSE”) under the symbol “CRN.” As of February 19, 2010, there were approximately 550 shareholdersof record of our common stock. The quarterly high and low closing sales pricesfor our common stock for fiscal years 2009 and 2008 are shown below.

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| 2008:          |       |     |       |    |       |
| First Quarter  |       | $        | 23.01      |    | $          | 16.15 |   |
| Second Quarter |       | 24.50    |       | 20.16   |       |
| Third Quarter  |       | 28.32    |       | 22.00   |       |
| Fourth Quarter |       | 26.00    |       | 16.50   |       |
| 2009:          |       |     |       |    |       |
| First Quarter  |       | $        | 18.45      |    | $          | 13.73 |   |
| Second Quarter |       | 20.40    |       | 15.86   |       |
| Third Quarter  |       | 22.64    |       | 15.74   |       |
| Fourth Quarter |       | 23.92    |       | 20.16   |       |

 

We have never declared or paid cash dividends on ourcapital stock. We currently intend to retain excess cash flow, if any, for usein the operation and expansion of our business (which could also include thereduction of outstanding borrowings or the repurchase of common stock) and donot anticipate paying cash dividends on our common stock in the foreseeable future.The payment of dividends is within the discretion of the Board of Directors andis dependent upon, among other factors, our results of operations, financialcondition, capital requirements, restrictions, if any, imposed by financingcommitments and legal requirements. Our 10.75% Senior Notes, as well as ourAmended Credit Facility contain certain restrictions on our ability to paydividends. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations - Liquidity and Capital Resources — Long-Term CreditFacilities” in Item 7 of this report.

 

We did not purchase any of our common stock in thefourth quarter of 2009.

 

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The following table summarizes as of December 31,2009 certain information regarding equity compensation to our employees,officers, directors, and other persons under our plans:

 
| **Plan  Category**                                          | ** ** | **(A)  Number of  Securities to be  Issued upon  Exercise of  Outstanding Options,  Warrants and Rights** | ** ** | **(B)  Weighted-average  Exercise Price of  Outstanding  Options,  Warrants and  Rights** | ** ** | **(C)  Number of  Securities Remaining  Available for  Future Issuance  Under Equity  Compensation  Plans (Excluding  Securities Reflected  in Column A)** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by security  holders     |       | 427,900                                                                                                                                 |       | $                                                                                              | 16.08      |                                                                                                                                                                                                    | 1,263,478  | (1) |
| Equity compensation plans not approved by security  holders |       | 68,347                                                                                                                                  |       | $                                                                                              | 10.83      |                                                                                                                                                                                                    | —     |   |
| Total                                                       |       | 496,247                                                                                                                                 |       | $                                                                                              | 15.36      |                                                                                                                                                                                                    | 1,263,478  |   |

 

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(1)          Includes 115,273 shares issuable pursuantto our Employee Stock Purchase Plan and 57,555 shares issuable pursuant to our2000 Directors Stock Plan.  Also includes1,090,650 shares issuable pursuant to our 2006 Incentive Plan.

 

**Equity Compensation Plans NotApproved by Security Holders**

 

***DeferredCompensation Plan***

 

We maintain a Deferred Compensation Plan for thepurpose of providing deferred compensation for eligible employees andnon-employee directors. The Deferred Compensation Plan is a nonqualified plan.

 

A participant in the Deferred Compensation Plan maydefer into an account a percentage of compensation each year up to 75.0% of theemployee participant’s compensation and up to 100% of the non-employee directorparticipant’s compensation received from Cornell. In addition, we may makecontributions to the Deferred Compensation Plan on behalf of each participant.Compensation deferred by a participant, or contributions made by us on behalfof a participant, will be invested in mutual funds or the common stock ofCornell. Participants are fully vested in their accounts and may elect toreceive the amounts credited to their accounts either in a lump sum or in fiveor ten-year annual installment payments. In the event of a change of control(as defined in the Plan), the amounts in each participant’s account will bepaid to the participant in a lump sum.

 

In conjunction with the approval of the amended andrestated 2006 Incentive Plan and amendments to the 2000 Director Stock Plan bythe Company’s shareholders in June 2009, the Company agreed not tothereafter issue shares under the Deferred Compensation Plan.

 

***Warrants***

 

In conjunction with the issuance of subordinatednotes in July 2000 (which notes are no longer outstanding), we issuedwarrants to purchase 290,370 shares of our common stock at an exercise price of$6.70. The warrants could only be exercised by payment of the exercise price incash to us, by cancellation of an amount of warrants equal to the fair marketvalue of the exercise price, or by the cancellation of indebtedness owed to thewarrant holder. During 2001, 168,292 shares of common stock were issued inconjunction with the exercise and cancellation of 217,778 warrants.  During 2007, the remaining 72,592 shares ofcommon stock were issued in conjunction with the exercise and cancellation ofthe remaining 72,592 warrants.

 

***2000 Broad-BasedEmployee Plan***

 

Under our 2000 Plan, we may grant non-qualifiedstock options to our employees, directors and eligible consultants for up tothe greater of 400,000 shares or 4.0% of the aggregate number of shares ofcommon stock issued and outstanding immediately after the grant of any optionunder the 2000 Plan. However, in conjunction with the approval of the amendedand restated 2006 Incentive Plan and the amendments to the 2000 Directors StockPlan by the Company’s shareholders in 

 

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June 2009,the Company agreed not to thereafter grant any additional awards under the 2000Broad-Based Employee Plan. The 2000 Plan options vest over a period of up tofive years and expire ten years from the grant date. The vestingschedule and term are set by the Compensation Committee of the Board ofDirectors. The exercise price of options issued pursuant to the 2000 Plan couldbe no less than the market price of our common stock on the date of grant.

 

Upon notice of an extraordinary transaction (asdefined in the 2000 Plan), options granted under the 2000 Plan become fullyvested. Upon consummation of the extraordinary transaction, such options, tothe extent not previously exercised, automatically terminate.

 

##### **Performance Graph**

##### ** **

The following performancegraph compares our cumulative total stockholder return at December 31,2009 to the Russell 2000 Stock Index and the Company’s peer group, assuming theinvestment of $100 on January 1, 2005, at closing prices on December 31,2004 and reinvestment of dividends. The peer group companies are CorrectionsCorporation of America and The Geo Group, Inc.

 

Comparisonof 5 Year Cumulative Total Return

AssumesInitial Investment of $100

December2009

 

 
| **Company Name**            | ** ** | **Dec-04** | ** ** | **Dec-05** | ** ** | **Dec-06** | ** ** | **Dec-07** | ** ** | **Dec-08** | ** ** | **Dec-09** | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Cornell Companies, Inc.** |       | 100.00     |       | 91.04      |       | 120.76     |       | 153.63     |       | 122.48     |       | 145.98     |       |
| **Peer Group**                   |       | 100.00     |       | 107.44     |       | 173.70     |       | 233.48     |       | 135.31     |       | 191.02     |       |
| **Russell 2000 Index**           |       | 100.00     |       | 104.56     |       | 123.75     |       | 121.83     |       | 80.66      |       | 102.59     |       |

 

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**ITEM 6.****         ****SELECTEDFINANCIAL DATA**

 

The following data has beenderived from our audited financial statements, including those included in thisForm 10-K for the year ended December 31, 2009 and should be read inconjunction with the consolidated financial statements and notes thereto andItem 7 - “Management’s Discussion and Analysis of Financial Condition andResults of Operations” included elsewhere in this report.

 
| ** **                                                                                                                       | ** ** | **Year Ended December 31,**                         | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2009**                                                           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006 (1)** | ** ** | **2005 (2)** | ** ** |
| ** **                                                                                                                       | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statements  of Operations Data:**                                                                                              | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                                                                         |       | $                                                                  | 412,377    |   | $ | 386,724 |   | $ | 360,604 |   | $ | 360,855 |   | $ | 310,775 |   |
| Income from  operations                                                                                                          |       | 69,701                                                             |       | 62,197 |   | 45,009 |   | 44,798 |   | 27,866 |   |
| Income from  continuing operations before provision for income taxes, non-controlling  interest and discontinued operations |       | 44,528                                                             |       | 38,239 |   | 20,745 |   | 21,728 |   | 6,143 |   |
| Net income                                                                                                                       |       | 26,573                                                             |       | 22,636 |   | 11,910 |   | 12,580 |   | 3,928 |   |
| Non-controlling  interest                                                                                                        |       | 1,947                                                              |       | 445 |   | — |   | — |   | — |   |
| Discontinued  operations, net of tax                                                                                             |       | —                                                             |       | — |   | — |   | (707 | ) | (3,622 | ) |
| Income available  to Cornell Companies, Inc.                                                                                |       | 24,626                                                             |       | 22,191 |   | 11,910 |   | 11,873 |   | 306 |   |
|                                                                                                                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Earnings per  share:                                                                                                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income from  continuing operations                                                                                               |       | $                                                                  | 1.65       |   | $ | 1.51 |   | $ | .82 |   | $ | .83 |   | $ | .29 |   |
| Discontinued  operations, net of tax                                                                                             |       | —                                                             |       | — |   | — |   | (.05 | ) | (.27 | ) |
| Net income                                                                                                                       |       | $                                                                  | 1.65       |   | $ | 1.51 |   | $ | .82 |   | $ | .78 |   | $ | .02 |   |
|                                                                                                                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Diluted                                                                                                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income  from continuing operations                                                                                               |       | $                                                                  | 1.64       |   | $ | 1.49 |   | $ | .82 |   | $ | .83 |   | $ | .29 |   |
| Discontinued  operations, net of tax                                                                                             |       | —                                                             |       | — |   | — |   | (.05 | ) | (.27 | ) |
| Net  income                                                                                                                      |       | $                                                                  | 1.64       |   | $ | 1.49 |   | $ | .82 |   | $ | .78 |   | $ | .02 |   |
|                                                                                                                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Number  of shares used to compute EPS:                                                                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                                                                                            |       | 14,881                                                             |       | 14,701 |   | 14,452 |   | 14,003 |   | 13,692 |   |
| Diluted                                                                                                                          |       | 14,986                                                             |       | 14,847 |   | 14,611 |   | 14,072 |   | 13,787 |   |

 

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| ** **                                                                             | ** ** | **Year Ended December 31,**                    | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2009**                                                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                             | ** ** | **(in thousands, except occupancy data)** | ** ** |
| **Operating Data:**                                                                    | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| **Residential:**                                                                       | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service capacity  (3) (8)                                                         |       | 19,284                                                        |       | 17,592 |   | 15,634 |   | 14,659 |   | 14,682 |   |
| Contracted  beds in operation (end of period) (4) (8)                             |       | 17,663                                                        |       | 16,821 |   | 14,211 |   | 13,492 |   | 11,929 |   |
| Average  contract occupancy on contracted beds in operation (5) (6) (8) |       | 91.1                                                          | %          | 92.0 | % | 99.6 | % | 97.5 | % | 96.0 | % |
| Average  contract occupancy excluding start-up operations (5) (6) (8)   |       | 91.4                                                          | %          | 92.0 | % | 99.6 | % | 97.5 | % | 100.4 | % |
| **Non-Residential:**                                                                   | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  capacity (7) (8)                                                         |       | 2,108                                                         |       | 2,353 |   | 2,953 |   | 3,921 |   | 4,792 |   |
|                                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                                                                | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working  capital                                                                       |       | $                                                             | 64,575     |   | $ | 45,205 |   | $ | 47,757 |   | $ | 75,078 |   | $ | 57,286 |   |
| Total  assets                                                                          |       | 650,565                                                       |       | 636,921 |   | 562,287 |   | 523,533 |   | 510,628 |   |
| Long-term  debt, net of current portion                                                |       | 289,841                                                       |       | 308,070 |   | 275,298 |   | 255,471 |   | 266,659 |   |
| Equity                                                                                 |       | 258,738                                                       |       | 228,167 |   | 200,449 |   | 181,564 |   | 165,461 |   |
|                                                                                        |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Notesto Selected Consolidated Financial Data**

 

(1)                    Income from operations forthe year ended December 31, 2006 includes a charge of approximately $0.4million to record impairments to the carrying value of two of our adultcommunity-based facilities.

(2)                    The statement of operationsand balance sheet data presented for the year ended December 31, 2005includes the assets, liabilities and operations of Correction Systems, Inc.(“CSI”) acquired in April 2005.

(3)                    Residential service capacity is comprisedof the number of beds currently available for service in our residentialfacilities.

(4)                    At certain residential facilities, thecontracted capacity is lower than the facility’s service capacity. We couldincrease a facility’s contracted capacity by obtaining additional contracts orby renegotiating existing contracts to increase the number of beds covered.However, we may not be able to obtain contracts that provide occupancy levelsat a facility’s service capacity or be able to maintain current contractedcapacities in future periods.

(5)                    Occupancy percentages reflect less thannormalized occupancy during the start-up phase of any applicable facility,resulting in a lower average occupancy in periods when we have substantialstart-up activities.

**(6)**                    Averagecontract occupancy percentages are calculated based on actual occupancy for theperiod as a percentage of the contracted capacity for residential facilities inoperation. These percentages do not reflect the operations of non-residentialcommunity-based programs. At certain residential facilities, our contractedcapacity is lower than the facility’s service capacity. Additionally, certainfacilities have and are currently operating above the contracted capacity. As aresult, average contract occupancy percentages can exceed 100% if the averageactual occupancy exceeded contracted capacity.

**(7)**                    Service capacity for non-residential programs is based on eithercontractual terms or an estimate of the number of clients to be served. Weupdate these estimates at least annually based on the program’s budget andother factors.

(8)                    Data presented excludesdiscontinued operating facilities.

 

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**ITEM 7.**                             **MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION****AND RESULTS OF OPERATIONS**

 

**General**

 

Cornell is a leading provider of correctional,detention, educational, rehabilitation and treatment services outsourced byfederal, state and local government agencies. We provide a diversifiedportfolio of services for adults and juveniles through our three operatingdivisions: (1) Adult Secure Services; (2) Abraxas Youth and FamilyServices; and (3) Adult Community-Based Services. At December 31,2009, we operated 64 facilities with a total service capacity of 20,555 and had fourfacilities with a service capacity of 837 beds that were vacant. Our facilitiesare located in 15 states and the District of Columbia.

 

Thefollowing table (which excludes data related to discontinued operatingfacilities) sets forth for the periods indicated total residential servicecapacity and contracted beds in operation at the end of the periods shown,average contract occupancy percentages and total non-residential servicecapacity.

 
| ** **                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Residential**                                                                |       |                             |       |   |   |   |   |
| Service capacity (1)                                                           |       | 19,284                           |       | 17,592 |   | 15,634 |   |
| Contracted beds in operation (end of period) (2)                               |       | 17,663                           |       | 16,821 |   | 14,211 |   |
| Average contract occupancy based on contracted  beds in operation (3) (4) |       | 91.1                             | %          | 92.0 | % | 99.6 | % |
| Average contract occupancy excluding start-up  operations (3) (4)         |       | 91.4                             | %          | 92.0 | % | 99.6 | % |
| **Non-Residential**                                                            |       |                             |       |   |   |   |   |
| Service capacity (5)                                                           |       | 2,108                            |       | 2,353 |   | 2,953 |   |

 

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(1)                    Residential service capacity is comprised of thenumber of beds currently available for service in our residential facilities.

(2)                   At certain residential facilities, thecontracted capacity is lower than the facility’s service capacity. We couldincrease a facility’s contracted capacity by obtaining additional contracts orby renegotiating existing contracts to increase the number of beds covered.However, we may not be able to obtain contracts that provide occupancy levelsat a facility’s service capacity or be able to maintain current contractedcapacities in future periods.

(3)                   Occupancy percentages reflect less thannormalized occupancy during the start-up phase of any applicable facility,resulting in a lower average occupancy in periods when we have substantialstart-up activities.

(4)                   Average contract occupancy percentagesare calculated based on actual occupancy for the period as a percentage of thecontracted capacity for residential facilities in operation. These percentagesdo not reflect the operations of non-residential community-based programs. Atcertain residential facilities, our contracted capacity is lower than thefacility’s service capacity. Additionally, certain facilities have and arecurrently operating above the contracted capacity. As a result, averagecontract occupancy percentages can exceed 100% if the average actual occupancyexceeded contracted capacity.

(5)                   Service capacity for non-residentialprograms is based on either contractual terms or an estimate of the number ofclients to be served. We update these estimates at least annually based on theprogram’s budget and other factors.

 

Our operating results for 2009 were impacted by afew significant events.  We completed the700 bed expansion at D. Ray James Prison at the beginning of April 2009and completed construction during the fourth quarter of 2009 of a new 1,250 bedfacility in Hudson, Colorado.  We beganreceiving inmates under a contract with the Alaska Department of Corrections (“AKDOC”)at the Hudson Correctional Facility in late November 2009. Our 2008results of operations were positively affected by a $1.5 million contract-basedrevenue adjustment recorded in March 2008 related to the RegionalCorrectional Center and a $1.55 million legal settlement (against which weincurred approximately $0.2 million in expenses in 2008) we received relatingto a lawsuit we had brought against certain parties with regard to theoperation of the Cornell Abraxas Academy facility. During 2008, we alsocompleted and activated expansions at several facilities including the D. RayJames Prison (300 beds in February 2008), the Great Plains CorrectionalFacility (1,100 beds in September 2008) and the Walnut Grove YouthCorrectional Facility (500 beds in September 2008).

 

Although we believe we will continue to see steadydemand across our various business segments and our customer base (federal,state and local) in 2010, we are monitoring the declining economic trends(which began in 2008) and the related impact on government budget plans and theeffect tightened spending plans could have on our business (with respect topossible areas including utilization, per diem rates, etc). We expect key areasof focus for our performance in 2010 to include the transition of the customerat our D. Ray James Prison from the Georgia Department of Corrections to theFederal Bureau of 

 

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Prisons(by the fourth quarter of 2010). This will include the ramp-down of the currentpopulation, preparation of the facility for the new customer and subsequentramp-up of the BOP population. We also intend to focus on the options for ourGreat Plains Correctional Facility, including the continued utilization by theArizona Department of Corrections of the facility or the potential utilizationby other customers. We also plan to remain focused on our operating margins, onincreasing utilization (particularly in the Abraxas division and in our AdultSecure facilities) and improving customer mix as we believe those initiativesare key elements of our financial performance.

 

# **Management Overview**

# ** **

***Demand*****.** Our business is driven generally by demand for incarceration ortreatment services, and specifically by demand for private incarceration ortreatment services, within our three primary business segments: Adult SecureServices; Abraxas Youth and Family Services; and Adult Community-Based Services.The demand for adult and juvenile corrections and treatment services hasgenerally increased at a steady rate over the past ten years, largely as aresult of increasing sentence terms and/or mandatory sentences for criminals aswell as a greater range of criminal acts, increasing demand for incarcerationof illegal aliens and a public recognition of the need to provide services tojuveniles that will increase the possibility that they will lead productivelives. Moreover, demand for our services is also affected by the amount ofavailable capacity in the government systems to enable governments to providethe services themselves, as well as desire and ability of these systems to addadditional capacity. In addition, the balance between community-based correctionstreatment of adults as an alternative to traditional incarceration continues tobe analyzed by many political and societal parties.  Among other things, we monitor federal, stateand industry communications and statistics relative to trends in prisonpopulations, juvenile justice statistics and initiatives, and developments inalternatives to traditional incarceration or detention of adults foropportunities to expand our scope or delivery of services.

 

Thefederal government contracts with private providers for the incarceration ofadults, whether they are serving prison sentences, detained as illegal aliens,detained in anticipation of pending judicial administration or transitioningfrom prison to society.  Chief among thefederal agencies which use private providers are the BOP, U.S. Immigration andCustoms Enforcement (“ICE”) and USMS. We provide adult secure and adultcommunity-based services to the federal government. Most of the federalinvolvement in juvenile administration in the federal system is handled viaMedicare and Medicaid assistance to state governments. Although there arecircumstances in which we may contract with a federal agency on a sole sourcebasis, the primary means by which we secure a contract with a federal agency isthrough the RFP bidding process.  Fromtime to time, we contract to provide management services to a localgovernmental unit who then bids on a federal contract.

 

Statesand smaller governmental units remain divided on the issue of private prisonsand private provision of juvenile and community-based programs, although amajority of states permit private provision for our services.  We anticipate that increasing budget pressureon states and smaller governmental units may cause more states and smallergovernmental units to consider utilizing private providers such as us toprovide these services on a more economical basis. We believe capital budgetconstraints of prison agencies may encourage them to continue to exploreoutsourcing to private operators as an alternative to deploying their owncapital for prison construction or major refurbishment. Although it varies fromgovernmental unit to governmental unit, the primary political forces whotypically oppose privatization of prisons are organized labor and religiousgroups.

 

Privatejuvenile and community-based programs are utilized by states and localgovernmental units and are organized on a profit and not-for-profit basis.  We monitor opportunities in these segmentsvia our corporate and business division development officers.  Many opportunities are not published in anymanner and, accordingly, we believe that taking the initiative at the state andlocal levels is key in developing sole source opportunities.

 

***Performance*****.** We track a number of factors as we monitor financial performance.  Chief among them are:

 

·        capacity (the number of bedswithin each business segment’s facilities),

·        occupancy (utilization),

·        per diem reimbursementrates,

·        revenues,

·        operating margins, and

·        operating expenses.

 

*Capacity. *Capacity, commonly expressed in terms ofnumber of beds, is primarily impacted by the number and size of the facilitieswe own or lease and the facilities we operate on behalf of a third party owneror lessee.  We view capacity as one ofthe measures of our development efforts, through which we may increase capacityby adding new projects or by

 

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expanding existing projects (as we have done in2007 through 2009 at several of our facilities including Great PlainsCorrectional Facility, D. Ray James Prison and the Hudson CorrectionalFacility).  As part of the evaluation ofour development efforts, we assess (a) whether a given development projectwas brought into service in accordance with our expectation as to time andexpense; and (b) the number of projects in development or underconsideration at the relevant point in time. In addition to the focus on new projects, capacity will reflect oursuccess in renewing and maintaining existing contracts and facilities.  It will also reflect any closure of programsor facilities due to underutilization or failure to earn an adequate risk-adjustedrate of return.  We must also becognizant of the possibility that state or local budgetary limitations maycause the contractual commitment to a given facility to be reduced or eveneliminated, which would require us to either secure an alternate customer orclose the operation.

 

*Occupancy. *Occupancy is typically expressed in termsof percentage of contract capacity utilized. We look at occupancy to assess the efficacy of both our efforts tomarket our facilities and our efforts to retain existing customers orcontracts.  Because revenue variesdirectly with occupancy, occupancy is a driver of our revenues. Our industryexperiences significant economies of scale, whereby as occupancy rises,operating costs per resident decline. Some of our contracts are “take-or-pay,”meaning that the agency making use of the facility is obligated to pay for bedseven though they are not used. Historically, occupancy percentages in many of our facilities have beenhigh and we are mindful of the need to maintain such occupancy levels.  As new development projects are brought intoservice, occupancy percentages may decline until the projects reach fullutilization (as, for example, with the activations of the 1,100 bed expansionat Great Plains Correctional Facility during the fourth quarter of 2008, the700 bed expansion at D. Ray James Prison during the second quarter of 2009 andthe 1,250 bed Hudson Correctional Facility during the fourth quarter of 2009).Where we have commitments for utilization before the commencement ofoperations, occupancy percentages reflect the speed at which a facilityachieves full service/implementation. However, we may decide to undertakedevelopment projects without written commitments to make full use of afacility. In these instances, we have performed our own assessment, based ondiscussions with local government or other potential customer representativesand analysis of other factors, of the demand for services at the facility.  There is no assurance that we would recoverour initial investment in these projects. We will monitor occupancy as a measure of the accuracy of our estimationof the demand for the services of a development facility, and will incorporatethis information in future assessments of potential projects. In addition, theramp phase for our youth facilities is typically longer than that experiencedin our adult facilities, which will impact our occupancy in the Abraxas Youthand Family Services division in a given period.

 

*Per Diem ReimbursementRates. *Per diem reimbursement rates are another key elementof our gross revenue and operating margin since per diem contracts represent amajority of our revenues (61.0% for the year ended December 31,2009).  Per diem rates are a function ofnegotiation between management and a governmental unit at the inception of acontract or through the bidding process. Actual per diem rates vary dramatically across our business segments,and within each business segment depending upon the particular service orprogram provided. The initial per diem rates often change during the term of acontract in accordance with a schedule. The amount of the change can be a fixed amount set forth within thecontract, an amount determined by formulas set forth within the contract or anamount determined by negotiations between management and the governmental unit(often these negotiations are along the same lines as the original per diemnegotiation — a review of expenses and approval of an amount to recompense forexpenses and assure the potential of an operating profit).  In recent years, as budgetary pressures ongovernmental units have increased, some of our customers have negotiated relieffrom formulaic increase provisions within their agreements or have declined toinclude in their appropriation legislation amounts that would increase the perdiem rates payable under the contract. Based on the economic turmoil whichbegan in the second half of 2008 and continued throughout 2009, we areexpecting such pressures to continue in 2010 for many of our customers. Insimilar prior situations we have attempted to mitigate the impact of thesedevelopments by negotiating services provided, obtaining commitments forincreased volume and other measures. Customers may choose to reduce per diemrates through the reduction of contract services we may provide. We may alsochoose to consider terminating an existing relationship at a given facility andreplacing it with a new customer (as was done with the Great PlainsCorrectional Facility in 2007 and as we intend to do with the D. Ray James Prisonin 2010).

 

*Revenues. *We derivesubstantially all of our revenues from providing adult corrections andtreatment and juvenile justice, educational and treatment services outsourcedby federal, state and local government agencies in the United States. Revenuesfor our services are generally recognized on a per diem rate based upon thenumber of occupant days or hours served for the period, on a guaranteedtake-or-pay basis or on a cost-plus reimbursement basis. For the year ended December 31,2009, our revenue base consisted of 61.0% for services provided under per diemcontracts, 33.7% for services provided under take-or-pay and managementcontracts, 3.3% for services provided under cost-plus reimbursement contracts,1.8% for services provided under fee-for-service contracts and 0.2% from othermiscellaneous sources.  For the yearended December 31, 2008, our revenue base consisted of 54.0% for servicesprovided under per diem contracts, 40.0% for services provided undertake-or-pay and management contracts, 3.8% for services provided undercost-plus reimbursement contracts, 2.0% for services provided underfee-for-service contracts and 0.2% from other miscellaneous sources.  The increase in 

 

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revenuesin 2009 provided under per diem contracts (and the corresponding decrease inrevenues provided under take-or-pay and management contracts) primarilyreflects the transition of our contract at the Great Plains CorrectionalFacility with the Arizona Department of Corrections from a take-or-pay contractto a per diem contract upon the activation (and subsequent ramp in the fourthquarter of 2008) of its 1,100 bed expansion. We also initiated our per diemcontract with the Alaska Department of Corrections at our Hudson CorrectionalFacility in November 2009. In addition, we also terminated severalmanagement contracts in 2008 (including the Salt Lake Valley Detention Center andthe Lincoln County Detention Center in September 2008 and February 2008,respectively).

 

Revenues can fluctuate fromyear to year due to changes in government funding policies, changes in thenumber or types of clients referred to our facilities by governmental agencies,changes in the types of services delivered to our customers, the opening of newfacilities or the expansion of existing facilities and the termination ofcontracts for a facility or the closure of a facility.

 

Factorsconsidered in determining billing rates to charge include: (1) theprograms specified by the contract and the related staffing levels and supportcosts; (2) wage levels customary in the respective geographic areas; (3) whetherthe proposed facility is to be leased or purchased; and (4) theanticipated average occupancy levels that could reasonably be expected to bemaintained and the duration of time required to reach such occupancy levels.

 

*Revenues-Adult Secure Services. *Revenues forour Adult Secure Services division are primarily generated from per diem,take-or-pay and management contracts. For the years ended December 31, 2009, 2008 and 2007, we realizedaverage per diem rates on our adult secure facilities of approximately $54.53,$54.07 and $54.69, respectively. The 2008 average per diem rate benefited froma contract-based revenue adjustment for the contract year ended March 2008in the amount of approximately $1.5 million at the RCC. We periodically haveexperienced pressure from contracting governmental agencies to limit or evenreduce per diem rates. Many of these governmental entities are under severebudget pressures and we anticipate that governmental agencies may periodicallyapproach us about per diem rate concessions (or decline to provide funding forcontractual rate increases).  Decreasesin, or the lack of anticipated increases in, per diem rates could adverselyimpact our operating margin.

 

*Revenues-Abraxas Youth and Family Services. *Revenues for our Abraxas Youth and FamilyServices division are primarily generated from per diem, fee-for-service andcost-plus reimbursement contracts.  Forthe years ended December 31, 2009, 2008 and 2007, we realized average perdiem rates on our residential Abraxas Youth and Family Services facilities ofapproximately $197.98, $192.15 and $174.93, respectively. The increase in theaverage per diem rate for 2008 (as continued in 2009) reflects the continuedramp-up of the Cornell Abraxas Academy (reactivated in the fourth quarter of2006), the reactivation of the Hector Garza Residential Treatment Center in August 2007,as well as changes in the mix of services provided and customers served at ourother facilities.  For the years ended December 31,2009, 2008 and 2007, we realized average fee-for-service rates for our non-residentialcommunity-based Abraxas Youth and Family Services facilities and programs,including rates that are limited by Medicaid and other private insuranceproviders, of approximately $44.65, $48.28 and $44.35, respectively. Thechanges in the average fee-for-service rates are due to changes in the mix ofservices provided at our non-residential facilities. The majority of ourAbraxas Youth and Family Services contracts renew annually.

 

*Revenues-Adult Community-Based Services. *Revenues for our Adult Community-Based Servicesdivision are primarily generated from per diem and fee-for-service contracts.For the years ended December 31, 2009, 2008 and 2007, we realized averageper diem rates on our residential adult community-based facilities ofapproximately $66.94, $68.47 and $62.91, respectively. For the years ended December 31,2009, 2008 and 2007, we realized average fee-for-service rates on ournon-residential Adult Community-Based Services facilities and programs ofapproximately $11.50, $11.00 and $13.70, respectively.  Our average fee-for-service rates fluctuatefrom year to year principally due to changes in the mix of services provided byour various Adult Community-Based Services programs and facilities.

 

*Operating Margins. *We have historically experienced higheroperating margins in our Adult Secure Services and Adult Community-BasedServices divisions as compared to our Abraxas Youth and Family Servicesdivision. Our operating margin, in a given period, will be impacted by bothutilization at active facilities as well as by those facilities which mayeither be dormant or have been reactivated during the period. As previouslydiscussed, we have reactivated several facilities, including the CornellAbraxas Academy and the Hector Garza Residential Treatment Center in 2006 and2007, respectively. We have also expanded several of our Adult Securefacilities (D. Ray James Prison, Great Plains Correctional Facility and WalnutGrove Youth Correctional Facility, for example), which provides the opportunityto leverage existing infrastructure. Additionally, our operating margins withina division can vary from facility to facility based on whether a facility isowned or leased, the level of competition for the contract award, the proposedlength of the contract, the mix of services provided, the occupancy levels fora facility, the level of capital commitment required with respect to afacility, the anticipated changes in operating costs over the term of thecontract and our ability to increase a facility’s contract revenue. Undertake-or-pay 

 

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contracts, such as the contract at the MoshannonValley Correctional Center, operating margins are typically higher during theearly stages of the contract as the facility’s population ramps up (as revenuesare received at contract percentages regardless of actual occupancy). As thevariable costs (primarily resident-related and certain facility costs) increasewith the growth in population, operating margins will generally decline to astabilized level. Following its activation in April 2006, we experiencedsuch operating margin impact pertaining to the Moshannon Valley CorrectionalCenter in the third and fourth quarters of 2006. Such an impact would also beanticipated at our D. Ray James Prison upon the activation of its transition tothe BOP in the fourth quarter of 2010 (see — “Significant 2009-2010 Events”). Adecline in occupancy at our Abraxas Youth and Family Services facilities andprograms can have a more significant impact on operating margins than our AdultSecure Services division due to the longer periods typically required to rampresident population at a youth facility.

 

Wehave experienced and expect to continue to experience interim period operatingmargin fluctuations due to factors such as the number of calendar days in theperiod, higher payroll taxes (generally in the first half of the year) andsalary and wage increases and insurance cost increases that are incurred priorto certain contract rate increases. Periodically, many of the governmentalagencies with whom we contract may experience budgetary pressures and mayapproach us to limit or reduce per diem rates (including contractual priceincreases as well). We anticipate such customer behavior may occur in 2010.Decreases in, or the lack of anticipated increases in, per diem rates couldadversely impact our operating margin. Additionally, a decrease in per diemrates without a corresponding decrease in operating expenses could alsoadversely impact our operating margin. Furthermore, our margins may benegatively impacted during a customer transition at a facility due to therequired population ramp patterns and timing as we change customers.

 

*Operating Expenses. *Wetrack several different areas of our operating expenses.  Foremost among these expenses are employeecompensation and benefits and expenses, risk related areas such as generalliability, medical and worker’s compensation, client/inmate costs such as food,clothing, medical and programming costs, financing costs and administrativeoverhead expenses. Increases or decreases in one or more of these expenses,such as our experience with rising insurance costs, can have a material effecton our financial performance.  Operatingexpenses are also impacted by decisions to close or terminate a particularprogram or facility.  Such decisions arebased on our assessments of operating results, operating efficiency andrisk-adjusted returns and are an ongoing part of our portfolio management.  In addition, decisions to restructureemployee positions will typically increase period costs initially (at the timeof such actions), but generally reduce post-restructuring expense levels.

 

Weare responsible for all facility operating costs, except for certain debtservice and interest or lease payments for facilities where we have amanagement contract only. At these facilities, the facility owner isresponsible for all debt service and interest or lease payments related to thefacility. We are responsible for all other operating expenses at thesefacilities. We operated 11 facilities under management contracts at December 31,2009, 14 facilities at December 31, 2008 and 15 facilities at December 31,2007. Included in the 11 facilities under management contracts at December 31,2009 were the Walnut Grove Youth Correctional Facility and the eight LosAngeles County Jails, which represented 1,714 beds of service capacity, andapproximately 96.5% of the total residential service capacity of our managementcontracts.

 

Amajority of our facility operating costs consists of fixed costs. These fixedcosts include lease and rental expense, insurance, utilities anddepreciation.  As a result, when wecommence operation of new or expanded facilities, fixed operating costs mayincrease. The amount of our variable operating costs, including food, medicalservices, supplies and clothing, depend on occupancy levels at the facilities.Our largest single operating cost, facility payroll expense and relatedemployment taxes and expenses, has both a fixed and a variable component. Wecan adjust a facility’s staffing levels and the related payroll expense to acertain extent based on occupancy at a facility; however a minimum fixed numberof employees is required to operate and maintain any facility regardless ofoccupancy levels. Personnel costs are subject to increases in tightening labormarkets based on local economic environments and other conditions.

 

Weincur pre-opening and start-up expenses including payroll, benefits, trainingand other operating costs prior to opening a new or expanded facility(including customer transitions) and during the period of operation whileoccupancy is ramping up. These costs vary by contract (and the pace/scale ofthe activation and related population ramp). We incurred such costs at ourHudson Correctional Facility in conjunction with its activation during thefourth quarter of 2009 and would also expect to incur similar costs inconjunction with the planned customer transition at our D. Ray James Prison inthe second half of 2010. Since pre-opening and start-up costs are generallyfactored into the revenue per diem rate that is charged to the contracting agency,we typically expect to recover these upfront costs over the life of thecontract. Because occupancy rates during a facility’s start-up phase typicallyresult in capacity under-utilization for at least 90 to 180 days, we may incuradditional post-opening start-up costs. We do not anticipate post-openingstart-up costs at any adult secure facilities operated under any futurecontracts with the BOP which are take-or-pay contracts, meaning that the BOPwill generally pay at least 80.0% of the contractual monthly revenue once thefacility opens, regardless of actual occupancy.

 

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Newlyopened facilities are staffed according to applicable regulatory or contractualrequirements when we begin receiving offenders or clients. Offenders or clientsare typically assigned to a newly opened facility on a phased-in basis over aone- to six-month period. Our start-up period for new juvenile operations is 12months from the date we begin recognizing revenue unless break-even occupancylevels are achieved before then. The actual time required to ramp a juvenilefacility (with approximate capacity of 100 to 200 beds) may be a period of oneto three years. Our start-up period for new adult operations is nine monthsfrom the date we begin recognizing revenue unless break-even occupancy levelsare achieved before then.  Theapproximate time to ramp an adult facility of approximately 1,000 beds may be aperiod of three to six months, depending upon the customer requirements.  Although we typically recover these upfrontcosts over the life of the contract, quarterly results can be substantiallyaffected by the timing of the commencement of operations as well as thedevelopment and construction of new facilities.

 

Workingcapital requirements generally increase immediately prior to commencingmanagement of a new or expanded facility as we incur start-up costs andpurchase necessary equipment and supplies before facility management revenue isrealized.

 

Generaland administrative expenses consist primarily of costs for corporate andadministrative personnel who provide senior management, legal, finance,accounting, human resources, investor relations, payroll and informationsystems, costs of business development and outside professional and consultingfees.

 

#### **Significant2009-2010 Events**

####  

***D. Ray James Prison***

 

InAugust 2007, we announced that we were initiating a second expansion ofthe D. Ray James Prison.  This expansionproject increased the facility’s service capacity by an additional 700 beds fora total service capacity of approximately 2,800 beds.  This expansion project, with a cost ofapproximately $36.6 million, began in the first quarter of 2008 and wascompleted in the second quarter of 2009. In January 2010, we received a contract award from the BOP to houseup to 2,507 low-security adult males at the facility. The contract has ananticipated effective date of October 1, 2010 and has an initial four-yearterm with three two-year option periods. We anticipate we will spend between$5.0 million to $10.0 million prior to the effective date of the BOP contractin order to prepare the facility for the BOP inmates. In conjunction with the preparationsfor the BOP population during 2010, we will be transitioning from the GeorgiaDepartment of Corrections’ inmates currently housed at this facility.

 

***Hudson, Colorado***

 

InAugust 2008, we entered into an agreement pursuant to which we will leasea new 1,250 bed adult secure facility in Hudson, Colorado.  The facility is owned by a third party andwas built on land we sold to the third party. We retained approximately 270 acres out of the original 320 acres weacquired in 2007.  Construction of thefacility began in the third quarter of 2008 and was completed in early November 2009.  We have a contract with the AKDOC to house upto 1,000 state prisoners at the facility. The contract became effective September 16, 2009 and has an initialterm through June 30, 2012, with annual renewal options for the period July 1,2012 through October 31, 2019. Under the contract, the AKDOC will house up to 1,000 adult male inmatesat the facility, with an agreed-upon 800 bed guarantee.  The intake of approximately 800 inmates beganin late November 2009 and was completed by December 2009.

 

***California Facilities***

 

InOctober 2009, we were notified by the California Department of Correctionsand Rehabilitation (“CDCR”) that they were terminating their contracts at ourtwo small California male community correctional facilities (Baker CommunityCorrectional Facility and Mesa Verde Community Correctional Facility) whichrepresent a combined 622 beds of service capacity. We are considering potentialalternate customers for these facilities, but we can make no assurances as towho the customer will be or what the possible timing might be.

 

***Texas Adolescent Treatment Center***

 

Duringthe fourth quarter of 2009, we transitioned the population from this facilityto our Hector Garza Residential Treatment Center (both of which are located inSan Antonio, Texas). In December 2009, we entered into a contract to sellthe facility at a price slightly above our carrying cost. We currentlyanticipate the transaction will close during the second quarter of 2010.

 

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**Liquidity and Capital Resources**

 

***General*****.** Our primary capital requirements are for (1) purchases,construction or renovation of new facilities, (2) expansions of existingfacilities, (3) working capital, (4) pre-opening and start-up costsrelated to new operating contracts, (5) acquisitions of businesses orfacilities, (6) information systems hardware and software and (7) furniture,fixtures and equipment.  Working capitalrequirements generally increase immediately prior to commencing management of anew facility (or activation of facility expansion) as we incur start-up costsand purchase necessary equipment and supplies before facility managementrevenue is realized.

 

***Cash Flows From Operations.***Cash provided by operations wasapproximately $51.9 million for the year ended December 31, 2009 comparedto $59.0 million for the year ended December 31, 2008.  The decreasefrom the prior period was principally due to (1) a decrease in accountspayable and accrued liabilities in the year ended December 31, 2009 due tothe timing and amount of vendor payments, as partially offset by (2) anincrease of approximately $3.9 million in net income in the year ended December 31,2009, and (3) a decrease in accounts receivable-trade due to the timing ofreceipt of customer payments (refer to “Management’s Discussion and Analysis ofOperations - Liquidity and Capital Resources - Future Liquidity” for moreinformation concerning this activity).

 

***Cash Flows From Investing Activities*****. **Cash used in investing activities was approximately$22.0 million for the year ended December 31, 2009 due to (1) capitalexpenditures of $22.3 million primarily related to the 700 bed expansion at theD. Ray James Prison completed in the second quarter of 2009 and furniture andequipment at the Hudson Correctional Facility and (2) net payments to thebond fund payment account of approximately $2.4 million.  Additionally, we had proceeds from insurancerecoveries (related to the Reid Community Residential Facility) ofapproximately $2.7 million. Cash used in investing activities was approximately$81.7 million for the year ended December 31, 2008 due to (1) capitalexpenditures of $79.9 million related primarily to the facility expansionprojects at the Great Plains Correctional Facility and the D. Ray James Prison,(2) net payments to the bond fund payment account of approximately $2.9million, (3) proceeds from the sale of property and equipment of $0.8million and (4) sales of investment securities of $0.3 million.

 

***Cash Flows From Financing Activities*****. **Cash used in financing activities was approximately$16.8 million for the year ended December 31, 2009 due primarily to (1) paymentsof MCF bonds of $12.4 million and (2) net payments on our Amended CreditFacility of $5.0 million.  Additionally,we had net proceeds from the exercise of stock options and employee purchaseplan contributions of approximately $0.6 million. Cash provided by financingactivities was approximately $34.3 million for the year ended December 31,2008 due to (1) net borrowings on our Amended Credit Facility of $45.0million (primarily related to facility expansions) and (2) proceeds fromthe exercise of stock options of $0.6 million, partially offset by payments onMCF bonds of $11.4 million.

 

***Long-Term Credit Facilities.***  Our Amended Credit Facilityprovides for borrowings up to $100.0 million (including letters of credit) andmatures in December 2011. At our election, outstanding borrowings bearinterest at either the LIBOR rate plus a margin ranging from 1.50% to 2.25%, ora rate which ranges from 0.00% to 0.75% above the applicable prime rate. Theapplicable margins are subject to adjustments based on our total leverageratio. The available commitment under our Amended Credit Facility wasapproximately $17.9 million at December 31, 2009.  We had outstandingborrowings under our Amended Credit Facility of $70.0 million and we hadoutstanding letters of credit of approximately $12.1 million at December 31,2009.  Subject to certain requirements, we have the right to increase thecommitments under our Amended Credit Facility up to $150.0 million, althoughthe indenture for our Senior Notes limits our ability, subject to certainconditions, to expand the Amended Credit Facility beyond $100.0 million.  We can provide no assurance that all of thebanks that have made commitments to us under our Amended Credit Facility wouldbe willing to participate in an expansion to the Amended Credit Facility shouldwe desire to do so.  The Amended Credit Facility is collateralized bysubstantially all of our assets, including the assets and stock of all of oursubsidiaries. The Amended Credit Facility is not collateralized by the assetsof Municipal Corrections Finance, LP, a special purpose entity (“MCF”).

 

OurAmended Credit Facility contains financial and other restrictive covenants thatlimit our ability to engage in certain activities.  Our ability to borrow under the AmendedCredit Facility is subject to compliance with certain financial covenants,including bank leverage, total leverage and fixed charge coverage ratios.  At December 31, 2009, we were incompliance with all such covenants.  OurAmended Credit Facility includes other restrictions that, among other things,limit our ability to: incur indebtedness; grant liens; engage in mergers,consolidations and liquidations; make investments, restricted payments andasset dispositions; enter into transactions with affiliates; and engage insale/leaseback transactions.

 

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MCF is obligated for the outstandingbalance of its 8.47% Taxable Revenue Bonds, Series 2001.  The bonds bear interest at a rate of 8.47%per annum and are payable in semi-annual installments of interest and annualinstallments of principal.  All unpaidprincipal and accrued interest on the bonds is due on the earlier of August 1,2016 (maturity) or as noted under the bond documents.

 

The bonds are limited, nonrecourseobligations of MCF and collateralized by the property and equipment, bondreserves, assignment of subleases and substantially all assets related to thefacilities included in the 2001 Sale and Leaseback Transaction (in which wesold eleven facilities (as identified in Item 1 - Facilities of this report) toMCF).  The bonds are not guaranteed byCornell.

 

In June 2004, we issued $112.0million in principal of 10.75% Senior Notes (the “Senior Notes”) due July 1,2012.  The Senior Notes are unsecuredsenior indebtedness and are guaranteed by all of our existing and futuresubsidiaries (collectively, “the Guarantors”). The Senior Notes are not guaranteed by MCF (the “Non-Guarantor”).  Interest on the Senior Notes is payablesemi-annually on January 1 and July 1 of each year, commencing January 1,2005.  On or after July 1, 2008, wewere able to redeem all or a portion of the Senior Notes at the redemptionprices (expressed as a percentage of the principal amount) listed below, plusaccrued and unpaid interest, if any, on the Senior Notes redeemed, to theapplicable date of redemption, if redeemed during the 12-month periodcommencing on July 1 of each of the remaining years indicated below:

 
| **Year**             | ** ** | **Percentages** | ** ** |
|----------------------|------------|-----------------|------------|
|                 |       |            |       |
| 2009                 |       | 102.688         | %          |
| 2010 and  thereafter |       | 100.000         | %          |

 

As the Senior Notes areredeemable at our option (subject to the requirements noted) we anticipate wewill monitor the capital markets and continue to assess our capital needs andour capital structure, including a potential refinancing of the Senior Notes.

 

Upon the occurrence ofspecified change of control events, unless we have exercised our option toredeem all the Senior Notes as described above, each holder will have the rightto require us to repurchase all or a portion of such holder’s Senior Notes at apurchase price in cash equal to 101% of the aggregate principal amount of thenotes repurchased plus accrued and unpaid interest, if any, on the Senior Notesrepurchased, to the applicable date of purchase.  The Senior Notes were issued under anindenture which limits our ability and the ability of our Guarantors to, amongother things, incur additional indebtedness, pay dividends or make otherdistributions, make other restricted payments and investments, create liens,incur restrictions on the ability of the Guarantors to pay dividends or otherpayments to us, enter into transactions with affiliates, and engage in mergers,consolidations and certain sales of assets.

 

***Future Liquidity***

 

Ourshelf registration statement on Form S-3 for potential offerings from timeto time of up to $75.0 million in gross proceeds of debt securities, commonstock, preferred stock, warrants or certain other securities was declaredeffective by the Securities and Exchange Commission in September 2008.

 

Weexpect to use existing cash balances, internally generated cash flows andborrowings from our Amended Credit Facility to fulfill anticipated obligationssuch as capital expenditures, working-capital needs and scheduled debtmaturities over at least the next twelve months. As of December 31, 2009we have approximately $17.9 million of available capacity under our Amended CreditFacility. We will continue to analyze our capital structure, including apotential refinancing of our Senior Notes and financing for our expected futurecapital expenditures, including any potential acquisitions. We will considerpotential acquisitions from time to time. Our principal focus for acquisitionsis anticipated to be in our Adult Secure Services and Adult Community-BasedServices divisions, although we would also pursue attractively pricedacquisitions in our Abraxas Youth and Family Services division. We may decideto use internally generated funds, bank financing, equity issuances, debtissuances or a combination of any of the foregoing to finance our futurecapital needs. We may also seek, from time to time, to retire or purchase someof our common stock and/or outstanding debt through open market purchases,privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions,our liquidity requirements, contractual restrictions and other factors.  In July 2009, our Board of Directorsauthorized a stock repurchase program which provides for up to $10.0 million inpurchases through December 2010.  InSeptember 2009, we adopted a 10b5-1 Plan to facilitate purchases of ourcommon stock pursuant to such stock repurchase plan.  The Company may also repurchase our commonstock in open market purchases.  At December 31,2009 we believe we have sufficient liquidity necessary to complete thoseprojects (including the facility modifications to be performed in associationwith the contract transition preparation at D. Ray James Prison) for which wehave outstanding commitments.

 

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Ourinternally generated cash flow is directly related to our business. Should theprivate corrections and juvenile businesses deteriorate, or should weexperience poor results in our operations, cash flow from operations may bereduced. We have, however, continued to generate positive cash flow fromoperating activities over recent years and expect that cash flow will continueto be positive over the next year. Our access to debt and equity markets may bereduced or closed to us due to a variety of events, including, among others,industry conditions, general economic conditions, market conditions, creditrating agency downgrades of our debt and/or market perceptions of us and ourindustry. The volatility seen in the financial markets beginning in the thirdquarter of 2008 has continued throughout 2009 and is expected to be present (atsome level) for the near term. Such volatility could result in decreasedavailability of capital at economical terms (or at various times) and couldalso put additional financial and budgetary pressure on our customers. Suchconditions could potentially result in our inability to pursue additionalfuture growth opportunities (such as facility expansions or new facilityconstruction) and, if coupled with unexpected client, operational or otherissues affecting our cash flow, in a need to seek additional financing at termswe would otherwise not accept.

 

Inaddition, our accounts receivable are with federal, state, county and localgovernment agencies, which we believe generally reduces our credit risk. However, it is possible that situations such as continuing budget resolutions,delayed passage of budgets or budget pressures may increase the length ofrepayment of certain of these receivables. For example, during 2009 the Stateof California notified vendors providing services to the state that it wouldtemporarily issue IOU’s. We received IOU’s from the State of California whichwere subsequently paid in full during the third quarter of 2009. We do notcurrently hold any IOU’s from the State of California. In addition, delays inthe passage of budgets (such as experienced in the State of Pennsylvania in2009) may lead to temporary delays in the repayment of our receivables fromoperations in such states. This would lead to a temporary increase in ourreceivables, as evidenced by the increase in our accounts receivable-trade inthe third quarter of 2009. As the State of Pennsylvania did not pass a fiscal2010 budget until mid-October 2009, the majority of the cities andcounties in Pennsylvania chose to defer their payments (during the state budgetimpasse present through the third quarter of 2009) until the state budget hadbeen adopted. Subsequent to the passage of the state’s fiscal 2010 budget, ourvarious Pennsylvania customers returned to their historic payment patterns.While we will closely monitor such situations, we do not currently expect thisto have a significant negative impact on the repayment of our receivablesrelated to our facilities in such locations.

 

***Contractual Uncertainties Related toCertain Facilities***

 

***Regional Correctional Center.***  The Office of Federal Detention Trustee (“OFDT”)holds the contract for the use of the RCC on behalf of ICE, USMS and the BOPwith Bernalillo County, New Mexico (the “County”) through an intergovernmentalservices agreement, and we have an operating and management agreement with theCounty.  In July 2007, we werenotified by ICE that it was removing all ICE detainees from the RCC and theremoval was completed in early August 2007.  The facility is stillbeing utilized by the USMS and since May 2008 by the BOP, but not at itsfull capacity.  In February 2008,ICE informed us that it would not resume use of the facility.  In February 2008, OFDT attempted tounilaterally amend its agreement with the County to reduce the number ofminimum annual guaranteed mandays under the agreement from 182,500 to66,300.  Neither we nor the County believe OFDT has the right tounilaterally amend the contract in this manner, and OFDT has been informed ofour position. Although either party to the intergovernmental services agreementhas the right to terminate upon 180 days notice, neither party has exercisedsuch right as of December 31, 2009. During the third quarter of 2009, we filed a claim against the UnitedStates, acting through the United States Department of Justice, OFDT and ICE(collectively, “Defendants”) for breach of contract and breach of the duty ofgood faith and fair dealing, arising out of the Defendants’ improper modificationof the intergovernmental services agreement (the “Contract”) and subsequentfailure to pay for the shortfalls in the 2007-2008 and 2008-2009 minimum annualguaranteed mandays specified in the Contract.

 

Thereis a pending lawsuit against the County concerning the County jail system, knowas the “McClendon” case.  In 1994,plaintiffs sued the County in federal district court in the District of NewMexico over conditions at the county jail, which was then located at what isnow the RCC and run by the Company.  TheCounty subsequently built their new Metropolitan Detention Center to house theCounty inmates and also negotiated two stipulated agreements in 2004 designedto end the McClendon lawsuit.  Thesestipulated settlements covered the Metropolitan Detention Facility and wereapproved by the Court in 2005 (the “2005 settlement agreements”).

 

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InMarch 2009, the Federal Judge presiding over the case issued an Orderbased on motions filed by Plaintiffs class counsel asking the Judge to reformthe 2005 settlement agreements to allow for access to the RCC.  In those motions, the Plaintiffs alsorequested alternative relief in the form of withdrawal of the Court’s approvalof the 2005 settlement agreements.  Basedon our interpretation of the Order, the Judge denied Plaintiffs’ request foraccess to the RCC, granted the alternative relief requested, withdrew her approvalof the 2005 settlement agreements and granted the option to Plaintiffs torescind their 2005 settlement agreements. The Plaintiffs chose to rescind the 2005 settlement agreements.  In the Order, the Judge concluded that theRCC, at least to the extent it is used to house detainees by Bernalillo Countypursuant to the intergovernmental services agreement, is part of the countyjail system.  The County has informed usthat it does not believe McClendon should apply to the RCC and the County hasfiled an appeal of the Order to the U.S. Court of Appeals for the TenthCircuit.  We are not party to thislawsuit and the ramifications of the Court’s Order to our operation of the RCCare unclear.

 

The2005 settlement agreements imposed various conditions on the MetropolitanDetention Center that resulted in material increases to its operatingcosts.  The effect of the rescission ofthe 2005 settlement agreements is unclear since those settlement agreementsreplaced prior settlement agreements approved in 1996.  We do not believe we are contractuallyobligated to bear any incremental costs of complying with any settlementagreements in the McClendon case although the County has expressed to us thatit may want us to absorb a portion of any costs that would be incurred.  We currently plan to continue to operate thefacility and also continue with our marketing plans for the RCC.

 

Revenuesfor this facility were approximately $14.2 million for the year ended December 31,2009 and approximately $9.9 million (including a $1.5 million contract-basedrevenue adjustment for the contract year ended March 2008 due to theOFDT’s shortfall of mandays usage as compared to the annual guarantee) for theyear ended December 31, 2008. The net carrying value of the leasehold improvementsfor this facility was approximately $0.6 million and $1.1 million at December 31,2009 and 2008, respectively. Our lease for this facility requires monthly rentpayments of approximately $0.13 million for the remaining term of the lease(which was extended through June 2010). To date, although we have severalfederal agencies using the RCC, the facility still has available capacity.  Our inability to expand the existingpopulation with current or new customers or any disruption of our operations dueto activity in the McClendon case could have an adverse effect on our financialcondition, results of operations and cash flows.  We believe there has been no impairment tothe carrying value of the leasehold improvements at this facility.

 

***California Facilities.***In October 2009,we were notified by the CDCR that they were terminating our contracts at ourtwo small California male community correctional facilities (Baker CommunityCorrectional Facility (“Baker”) and Mesa Verde Community Correctional Facility(“Mesa”)) which represent a combined 622 beds of service capacity.

 

Revenuesfor Baker were approximately $3.9 million and $5.1 million for the years ended December 31,2009 and 2008, respectively. The net carrying value of this owned facility wasapproximately $2.8 million and $2.7 million at December 31, 2009 and 2008,respectively. We are considering potential alternate customers for thisfacility, but we can make no assurances as to who the customer will be or whatthe possible timing might be. We believe that there has been no impairment tothe carrying value of this facility.

 

Revenuesfor Mesa were $5.7 million and $7.0 million for the years ended December 31,2009 and 2008, respectively. The net carrying value of the leaseholdimprovements for this facility was approximately $0.6 million at December 31,2009 and 2008. Our lease for this facility requires monthly rent paymentsranging from approximately $0.14 million to $0.16 million over the remainingterm of the lease through June 2015. We are considering potentialalternate customers for this facility, but we can make no assurances as to whothe customer will be (or what the possible timing might be). We believe thatthere has been no impairment to the carrying value of the leasehold improvementsat this facility.

 

**Critical Accounting Policies and Estimates**

 

The preparation of our financial statements inconformity with authoritative guidance requires management to make certainestimates and assumptions. These estimates and assumptions affect the reportedamounts of assets and liabilities, the disclosures of contingent assets andliabilities at the balance sheet date and the amounts of revenues and expensesrecognized during the reporting period. We analyze our estimates based on ourhistorical experience and various other assumptions that we believe to bereasonable under the circumstances. However, actual results could differ fromsuch estimates. The following is a discussion of our critical accountingestimates. Management considers an accounting estimate to be critical if:

 

·      it requires assumptions to be made that wereuncertain at the time the estimate was made; and

·                  changes in the estimate ordifferent estimates that could have been selected could have a material impacton our consolidated financial position or results of operations.

 

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For a summary of all of our significant accountingpolicies see “Note 2-Significant Accounting Policies” of the “Notes toConsolidated Financial Statements” in Item 8 of this Form 10-K.

 

***Revenue Recognition***

 

Substantially all of ourrevenues are derived from contracts with federal, state and local governmentalagencies which pay either per diem rates based upon the number of occupant daysor hours served for the period, on a take-or-pay basis, management fee basis,cost-plus reimbursement or fee-for-service basis.  Revenues are recognized as services areprovided under our established contractual agreements to the extent collectionis considered probable.

 

***Accounts Receivable and Related Allowancefor Doubtful Accounts***

 

Weextend credit to the governmental agencies contracted with and other parties inthe normal course of business.  Weregularly review our outstanding receivables and historical collectionexperience and provide for estimated losses through an allowance for doubtfulaccounts. In evaluating the adequacy of our allowance for doubtful accounts, wemake judgments regarding our customers’ ability to make required payments,economic events and other factors.  Asthe financial condition of these parties change, circumstances develop oradditional information becomes available, adjustments to the allowance fordoubtful accounts may occur. If, after reasonable collection efforts have beenmade, a receivable is determined to be uncollectible, it is written off.

 

***Insurance Reserves***

 

Wemaintain insurance coverage for various aspects of our business andoperations.  We retain a portion oflosses that occur through the use of deductibles and retention under self-insuranceprograms.  We regularly review ourestimates of reported and unreported claims and provide for these lossesthrough insurance reserves. These reserves are influenced by rising costs ofhealth care and other costs, increases in claims, time lags in claimsinformation and levels of insurance coverage carried. As claims develop andadditional information becomes available to us, adjustments to the related lossreserves may occur.  Our reserves formedical and worker’s compensation claims are subject to change based on ourestimate of the number and the magnitude of claims to be incurred.

 

***Use of Estimates***

 

Our financial statements are prepared in accordancewith accounting principles generally accepted in the United States of America,which require that we make certain estimates and judgments that affect ourreported amounts of assets, liabilities, revenues and expenses and thedisclosures of contingent assets and liabilities. We evaluate our estimates onan on-going basis, based on historical experience and on various otherassumptions that we believe to be reasonable based on the informationavailable. Actual results could differ from these estimates under differentassumptions or conditions. The significant estimates that we make in theaccompanying consolidated financial statements include the allowance fordoubtful accounts, accruals for insurance and legal claims, valuation allowancefor deferred tax accounts, the realizability of long-lived tangible andintangible assets and the fair value of financial instruments.

 

***Accounting for Long-Lived Assets***

 

Wereview our long-lived assets (including our facilities at afacility-by-facility level) for impairment at least annually or when changes incircumstances or a triggering event indicates that the carrying amount of theasset may not be recoverable. Authoritative guidance requires that long-livedassets to be held and used recognize an impairment loss only if the carryingamount of the long-lived asset is not recoverable from its estimated futureundiscounted cash flows and to measure an impairment loss as the differencebetween the carrying value and the fair value of the asset. Assets to bedisposed of by sale are recorded at the lower of their carrying amount or fairvalue less estimated selling costs. We estimate projections of undiscountedcash flows, and also fair value, based upon the best information available,which may include expected future discounted cash flows to be produced by theasset and/or available market prices. Factors that significantly influenceestimated future cash flows include the periods and levels of occupancy for thefacility, expected per diem or reimbursement rates, assumptions regarding thelevels of staffing, services and future operating and capital expendituresnecessary to generate forecasted revenues, related costs for these activitiesand future rate of increases or decreases associated with these factors.Information typically utilized will also include relevant terms of existingcontracts (for similar services and customers), market knowledge of customerdemand (both present and anticipated) and related pricing, market competitors,and our historical experience (as to areas including customer requirements,contract terms, operating requirements/costs, occupancy trends, etc.). We mayalso consider the results of any appraisals if a fair value is necessary.Estimates for factors such as per diem or reimbursement rates may be highlysubjective, particularly in circumstances where there is no current 

 

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operatingcontract in place and changes in the assumptions and estimates could result inthe recognition of impairment charges.

 

Themost subjective estimates made in our impairment analysis for 2009 related toBaker and the Hector Garza Residential Treatment Center (“Hector Garza”),particularly with respect to estimated timing of occupancy (at Baker) andresident mix (at Hector Garza). The approximate carrying values at December 31,2009 for Baker and Hector Garza were $2.8 million and $3.9 million,respectively. The estimated undiscounted future cash flow values exceeded thecarrying values noted for these facilities, and Hector Garza had operatingcontracts in place. If the underlying assumptions for the deemed subjectiveestimates in the 2009 analyses were adjusted to reflect reasonable likelychanges the undiscounted cash flows would still exceed the carrying value ofthe assets assessed for impairment.

 

Themost subjective estimates made in our impairment analysis for 2008 related toCornell Abraxas 1 and Hector Garza, particularly with respect to estimatedoccupancy. The approximate carrying values at December 31, 2008 for CornellAbraxas 1 and Hector Garza were $10.4 million and $4.0 million, respectively.The estimated undiscounted future cash flow values exceeded the carrying valuesnoted for the facilities, and all facilities had operating contracts in place.During 2009, there were no significant events that caused us to believe that animpairment of these facilities had occurred. 

 

Wemay be required to record an impairment charge in the future if we are unableto successfully negotiate a replacement contract on any of our facilities forwhich we currently have an operating contract. Given the nature of theevaluation of future cash flows and the application to specific assets andspecific times, it is not possible to reasonably quantify the impact of changesin these assumptions.

 

***Goodwill and Intangible Assets***

 

Weaccount for goodwill in accordance with current authoritative guidance whichstates that there is no amortization of goodwill or intangible assets withindefinite lives.  Impairment of theseassets is assessed annually or if there has been a triggering event which wouldresult in a potential impairment, to determine if the estimated fair value ofthe reporting unit exceeds the net carrying value of the reporting unit,including the applicable goodwill.  Theestimates of fair value are based upon our estimates of the present value offuture cash flows.  We make assumptionswhich include the estimated cash flows of the reporting units (and theunderlying components including levels of occupancy, expected per diems, capitalexpenditures necessary to generate forecasted revenues, related costs for theseactivities and future rate of increases or decreases associated with thesefactors) and inflation factors. If the underlying assumptions in the 2009analysis were adjusted to reflect reasonable likely changes, the estimates offair value would still exceed the carrying value of the goodwill.

 

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**Resultsof Operations**

 

Material fluctuations inour results of operations are principally the result of the level of newcontract development activity, the timing and effect of facility expansions,occupancy or contract rates, contract renewals or terminations and facilityclosures and non-recurring charges.

 

The following table setsforth for the periods indicated the percentages of revenue represented bycertain items in our Consolidated Statements of Income and ComprehensiveIncome.

 
| ** **                                                  | ** ** | **Year  Ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                  | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                  | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                    |       | 100.0                             | %          | 100.0 | % | 100.0 | % |
|                                                        |       |                              |       |   |   |   |   |
| Operating expenses, excluding depreciation and amortization |       | 71.7                              |       | 72.6 |   | 76.0 |   |
| Pre-opening and start-up expenses                           |       | 1.0                               |       | — |   | — |   |
| Depreciation and amortization                               |       | 4.6                               |       | 4.6 |   | 4.4 |   |
| General and administrative expenses                         |       | 5.8                               |       | 6.7 |   | 7.1 |   |
| Income from operations                                      |       | 16.9                              |       | 16.1 |   | 12.5 |   |
| Interest expense, net                                       |       | 6.1                               |       | 6.2 |   | 6.7 |   |
| Income before provision for income taxes               |       | 10.8                              |       | 9.9 |   | 5.8 |   |
| Provision for income taxes                                  |       | 4.3                               |       | 4.0 |   | 2.5 |   |
| Net income                                                  |       | 6.5                               |       | 5.9 |   | 3.3 |   |
| Non-controlling interest                                    |       | 0.5                               |       | 0.2 |   | — |   |
| Income available to Cornell Companies, Inc.            |       | 6.0                               | %          | 5.7 | % | 3.3 | % |

 

***Year Ended December 31,2009 Compared to Year Ended December 31, 2008***

*** ***

***Revenues*****.**  Revenues increasedapproximately $25.7 million, or 6.6%, to $412.4 million for the year ended December 31,2009 from $386.7 million for the year ended December 31, 2008.

 

*Adult Secure Services.** ***Adult SecureServices revenues increased approximately $24.3 million, or 11.6%, to $233.6million for the year ended December 31, 2009 from $209.3 million for theyear ended December 31, 2008 due primarily to (1) an increase inrevenues of $14.7 million at the Great Plains Correctional Facility due toincreased occupancy as a result of a facility expansion completed in September 2008,(2) an increase in revenues of $4.3 million at the RCC due to improvedoccupancy, (3) an increase in revenues of $2.2 million at the Walnut GroveYouth Correctional Facility (“Walnut Grove”) due to a facility expansioncompleted in the third quarter of 2008 and (4) revenues of $1.2 million atour Hudson Correctional Facility which began receiving inmates in November 2009.The remaining net increase in revenues of approximately $1.9 million was due tovarious fluctuations in revenues at our other Adult Secure Services facilities.

 

Averagecontract occupancy was 87.8% for the year ended December 31, 2009 comparedto 91.8% for the year ended December 31, 2008. The decrease in the averagecontract occupancy was primarily due to (1) the additional capacitybrought into operations in September 2008 at Walnut Grove, which we beganramping during the fourth quarter of 2008, (2) under-utilization atcertain California facilities, (3) the activation of our Hudson facilityin November 2009 and (4) the non-utilization (during 2009) of the 700 bedexpansion at the D.Ray James Prison which was completed in April 2009.Excluding the actual occupancy and contract capacityfor the start-up operations of the Hudson Correctional Facility in the fourthquarter of 2009, average contract occupancy was 88.0% for the year ended December 31,2009.

 

The average per diem ratewas $54.53 for the year ended December 31, 2009 compared to $54.07 for theyear ended December 31, 2008. Revenues attributable to the start-upoperations for the year ended December 31, 2009 were approximately $1.2million.  There were no revenuesattributable to start-up operations in the year ended December 31, 2008.

 

*Abraxas Youth and Family Services*. Abraxas Youth and Family Services revenues decreased approximately $2.0million, or 1.9%, to $105.3 million for the year ended December 31, 2009from $107.3 million for the year ended December 31, 2008 due primarily to (1) adecrease in revenues of $2.7 million due to the termination of our managementcontract for the Salt Lake Valley Detention Center as of September 2008, (2) adecrease in revenues of $1.2 million due to the termination of our managementcontract for the Reading Alternative Education School Program as of June 2008and (3) a

 

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decrease in revenues of$1.0 million due to the termination of our management contract for the StateReintegration Program as of June 30, 2009. The decrease in revenues due to the above was offset, in part, by (1) anincrease in revenues of $1.9 million at Hector Garza due to increased occupancyand (2) an increase in revenues of $2.4 million at our Abraxas 1 facility(“A-1”) due to improved occupancy.  Theremaining net decrease in revenues of approximately $1.4 million was due tovarious fluctuations in revenues at our other Abraxas Youth and Family Servicesfacilities and programs.

 

Average contractoccupancy was 85.9% for the year ended December 31, 2009 compared to 80.6%for the year ended December 31, 2008. The increase in the 2009 averagecontract occupancy was primarily a result of higher utilization at variousfacilities including Hector Garza and the Abraxas Academy.  The average per diem rate for our residentialAbraxas Youth and Family Services facilities was approximately $197.98 for theyear ended December 31, 2009 compared to approximately $192.15 for theyear ended December 31, 2008. The increase in the 2009 average per diemrate reflects the continued ramp-up of the Abraxas Academy, increasedutilization at A-1 and our San Antonio facilities, as well as changes in themix of services provided at our other facilities.  The average fee-for-service rate for ournon-residential community-based Abraxas Youth and Family Services facilitiesand programs was approximately $44.65 for the year ended December 31, 2009compared to approximately $48.28 for the year ended December 31,2008.  Our average fee-for-service ratecan fluctuate from year to year depending on the mix of services provided atour various non-residential Abraxas Youth and Family Services facilities andprograms.

 

*Adult Community-Based Services.*****AdultCommunity-Based Services revenues increased approximately $3.3 million, or4.7%, to $73.5 million for the year ended December 31, 2009 from $70.2million for the year ended December 31, 2008, due to various fluctuationsin revenues among our 30 Adult Community-Based Services facilities andprograms, none of which represented significant changes year over year.

 

Average contractoccupancy was 111.0% for the year ended December 31, 2009 compared to99.0% for the year ended December 31, 2008.  The average per diem rate for our residentialAdult Community-Based Services facilities was $66.94 for the year ended December 31,2009 compared to $68.47 for the year ended December 31, 2008. The averagefee-for-service rate for our non-residential Adult Community-Based Servicesfacilities and programs was approximately $11.50 for the year ended December 31,2009 compared to approximately $11.00 for the year ended December 31,2008.  Our average fee-for-service ratescan fluctuate from year to year due to changes in the mix of services providedby our various non-residential Adult Community-Based Services facilities andprograms.

 

***Operating Expenses, Excluding Depreciationand Amortization.*** Operating expenses, excluding depreciation and amortization, increasedapproximately $15.0 million, or 5.3%, to $295.6 million for the year ended December 31,2009 from $280.6 million for the year ended December 31, 2008.

 

*Adult Secure Services.*  Adult SecureServices operating expenses increased approximately $16.9 million, or 12.5%, to$152.5 million for the year ended December 31, 2009 from$135.6 million for the year ended December 31,2008 due primarily to (1) an increase in operating expenses of $6.2million at the Great Plains Correctional Facility due to increased occupancyfollowing the facility expansion completed in September 2008, (2) anincrease in operating expenses of $1.4 million at the D. Ray James Prison dueto increased occupancy following the facility expansions completed in February 2008and April 2009, (3) an increase in operating expenses of $3.4 millionat the Big Spring Correctional Center due to improved occupancy, (4) anincrease in operating expenses of $1.3 million at the Walnut Grove YouthCorrectional Facility due to increased occupancy following a facility expansioncompleted in September 2008 and (5) an increase in operating expensesof $3.0 million at RCC due to improved occupancy.  The remaining net increase in operatingexpenses of approximately $1.6 million was due to various fluctuations inoperating expenses at our other Adult Secure Services facilities including anincrease in divisional operating expenses of approximately $0.8 million in the2009 period.

 

As a percentage ofsegment revenues, Adult Secure Services operating expenses were 65.3% for theyear ended December 31, 2009 compared to 64.8% for the year ended December 31,2008.  The 2008 operating margin wasfavorably impacted by the $1.5 million contract-based revenue adjustment at RCCfor the contract year ended March 2008 (which we recognized in March 2008).Excluding approximately $1.2 million of revenues attributable to start-upoperations of the Hudson Correctional Facility, Adult Secure Services operatingexpenses, as a percentage of segment revenues, were 65.6% for the year ended December 31,2009.

 

*Abraxas Youth and Family Services.* Abraxas Youth and Family Services operating expenses decreased $0.6million, or 0.6%, to approximately $95.0 million for the year ended December 31,2009 from $95.6 million for the year ended December 31, 2008 due primarilyto (1) a decrease in operating expenses of $2.9 million due to thetermination of our management contract for the Salt Lake Valley DetentionCenter as of September 2008 and (2) a decrease in operating expensesof $0.9 million due to the termination of our management contract for the ReadingAlternative Education School 

 

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Program as of June 2008.  The decrease in operating expenses due to theabove was offset, in part, by (1) an increase in operating expenses of$2.9 million at the Abraxas Academy due an increase in occupancy in 2009 and thereceipt in 2008 of a legal settlement of $1.5 million (net) which reduced 2008operating expenses and (2) an increase in operating expenses of $2.6million at Hector Garza due to improved occupancy.  The remaining net decrease in operatingexpenses of $2.3 million was due to various other fluctuations in operatingexpenses at our Abraxas Youth and Family Services facilities and programs, noneof which represented significant changes year over year.

 

As a percentage of segment revenues, AbraxasYouth and Family Services operating expenses were 90.3% for the year ended December 31,2009 compared to 89.1% for the year ended December 31, 2008.

 

*Adult Community-Based Services.* Adult Community-Based Services operating expenses decreased $1.3million, or 2.6%, to $48.1 million for the year ended December 31, 2009from $49.4 million for the year ended December 31, 2008 due primarily to (1) adecrease in operating expenses of $0.6 million due to the termination of ourmanagement contract for the Lincoln County Detention Center in May 2008, (2) adecrease in operating expenses of $0.4 million due to the termination of ourmanagement contracts for several county jails in California and (3) a decreasein operating expenses of $0.5 million due to the expiration of our managementcontract for the Dallas County Judicial Treatment Center in November 2009.Additionally, we recorded a gain of $0.6 million related to insurancerecoveries in excess of property carrying values at the Reid CommunityResidential Facility damaged in Hurricane Ike in September 2008.  This gain is reflected in operating expensesfor the year ended December 31, 2009. The remaining net decrease inoperating expenses of $0.4 million was due to various fluctuations in operatingexpenses at our other Adult Community-Based facilities.

 

Asa percentage of segment revenues, Adult Community-Based Services operatingexpenses were 65.4% for the year ended December 31, 2009 compared to 70.5%for the year ended December 31, 2008. The 2009 operating margin was favorably impacted by increased operationsdriven by both increased utilization as well as a change in the mix of servicesprovided during the year. Additionally, the 2009 operating margin was favorablyimpacted by the $0.6 million gain related to insurance recoveries discussedabove.

 

***Pre-Opening and Start-up Expenses.***** **Pre-opening and start-up costs wereapproximately $4.1 million for the year ended December 31, 2009 and wereattributable to the start-up operations of the Hudson Correctional Facilityduring the fourth quarter of 2009 activation. Pre-opening and start-up expenses include payroll, benefits, trainingand other operating costs during periods prior to opening a new or expandedfacility and during the period of operation while occupancy is ramping up.There were no pre-opening and start-up costs for the year ended December 31,2008 as we primarily brought additional capacity on-line at existing operatingfacilities (and thus they were not considered start-up operations).

 

***Depreciation and Amortization*****.**  Depreciation and amortizationincreased approximately $0.9 million, or 5.0%, to $18.8 million for the yearended December 31, 2009 from $17.9 million for the year ended December 31,2008.  Depreciationof property and equipment increased approximately $2.0 million due primarily todepreciation expense related to the facility expansions at the Great Plains CorrectionalFacility and the D. Ray James Prison. Amortization of intangibles was approximately $1.1 million and $2.2million the years ended December 31, 2009 and 2008, respectively.

 

***General and Administrative Expenses.***  General and administrative expenses decreasedapproximately $1.9 million, or 7.3%, to $24.1 million for the year ended December 31,2009 from approximately $26.0 million for the year ended December 31,2008, due primarily to lower legal and other professional expenses in the 2009period.

 

***Interest.***  Interest expense, net of interest income, increasedapproximately $1.2 million to $25.2 million for the year ended December 31,2009 from $24.0 million for the year ended December 31, 2008. The netincrease in interest expense was primarily due to lower capitalized interest inthe year ended December 31, 2009 as compared to the same period of2008.  Capitalized interest wasapproximately $0.7 million in the year ended December 31, 2009 and relatedto the 700 bed facility expansion project at the D. Ray James Prison completedin April 2009.  For the year ended December 31,2008, we capitalized interest of $2.9 million related to the facility expansionprojects at the Great Plains Correctional Facility and the D. Ray JamesPrison.  Interest income decreased byapproximately $2.3 million in the 2009 period due to lower investment balancesand decreased interest rates. Additionally, interest income for the year ended December 31,2008 included a net gain of approximately $1.2 million related to the change infair value of certain derivative instruments pertaining to MCF, a specialpurpose entity (see Note 14 to the consolidated financialstatements).  This increase in net interest expense waspartially offset by lower interest expense of approximately $0.8 million on ourAmended Credit Facility due to lower average interest rates in the 2009period.  Additionally, MCF made annualbond principal payments of $11.4 million in July 2008 and $12.4 million inJuly 2009 which reduced bond interest expense for the year ended December 31,2009 by approximately $1.0 million as compared to the same period of 2008.Interest expense for 2008 also reflected a charge of $1.3 million related to aninterest rate guarantee that was determined to be unrecoverable (see Note 14 tothe consolidated financial statements).

 

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***Income Taxes.***  For the year ended December 31,2009, we recognized a provision for income taxes at an estimated effective rateof 40.3%. For the year ended December 31, 2008, we recognized a provisionfor income taxes at an estimated effective rate of 40.8%.

*** ***

***Year Ended December 31, 2008 Compared to YearEnded December 31, 2007***

*** ***

***Revenues*****.**  Revenues increasedapproximately $26.1 million, or 7.2%, to $386.7 million for the year ended December 31,2008 from $360.6 million for the year ended December 31, 2007.

 

*Adult Secure Services.** ***Adult SecureServices revenues increased approximately $26.1 million, or 14.2%, to $209.3million for the year ended December 31, 2008 from $183.2 million for theyear ended December 31, 2007, due primarily to (1) an increase inrevenues of $17.6 million at the Great Plains Correctional Facility which beganoperating under a contract with the Arizona DOC in September 2007 (thisfacility was vacant from April through August 2007) as well asincreased occupancy as a result of a facility expansion completed in September 2008,(2) an increase in revenues of $10.1 million at the Big SpringCorrectional Center due to increased occupancy resulting from a facilityexpansion completed in November 2007 related to the take-or-pay contractawarded to us by the BOP in 2007, (3) an increase in revenues of $4.8million at the D. Ray James Prison due to a facility expansion completed in February 2008,(4) an increase in revenues of $2.0 million at the High PlainsCorrectional Facility which we acquired in May 2007 and (5) anincrease in revenues of $1.2 million at the Walnut Grove Youth CorrectionalFacility due to a facility expansion completed in September 2008.  The increase in revenues due to the above wasoffset, in part, by (1) a decrease in revenues of $8.0 million at theDonald W. Wyatt Detention Center due to the transition of our managementcontract to the facility’s owner in July 2007 and (2) a decrease inrevenues of approximately $2.9 million at the Regional Correctional Center dueto the withdrawal of all ICE inmates as of August 2007 (revenues for 2008include a $1.5 million contract-based revenue adjustment for the contract yearended March 25, 2008).  Theremaining net increase in revenues of approximately $1.3 million was due tofluctuations in revenues at our other adult secure facilities.

 

Averagecontract occupancy was 91.8% for the year ended December 31, 2008 comparedto 100.4% for the year ended December 31, 2007. The decrease in theaverage contract occupancy is primarily due to the additional capacity ofapproximately 1,600 beds brought into operations in September 2008 (at theGreat Plains Correctional Facility and Walnut Grove Youth CorrectionalFacility), which we began ramping during the fourth quarter of 2008. The average per diem rate was $54.07 forthe year ended December 31, 2008 compared to $54.69 for the year ended December 31,2007.

 

*Abraxas Youth and Family Services*. Abraxas Youth and Family Services revenues decreased approximately $2.0million, or 1.9%, to $107.3 million for the year ended December 31, 2008from $109.3 million for the year ended December 31, 2007, due primarily to(1)  a decrease in revenues of $5.1 million at the Cornell Abraxas Ifacility (“A-1”) due to decreased occupancy, (2) a decrease in revenues of$1.6 million at the Texas Adolescent Treatment Center (“TATC”) due to decreasedoccupancy, (3) a decrease in revenues of $1.8 million due to thetermination of our management contract for the Harrisburg Alternative EducationSchool Program for the 2007-2008 school year (due to lack of funding by thecontracting agency), (4) a decrease in revenues of $1.3 million due to thetermination of our management contract for the Salt Lake Valley DetentionCenter as of September 2008 and (5) a decrease in revenues of $1.2million due to the termination of our management contract for the ReadingAlternative Education School Program in June 2008.  The decrease in revenues due to the above wasoffset, in part, by (1) an increase in revenues of $4.5 million at theCornell Abraxas Academy due to improved occupancy, (2) an increase inrevenues of $2.5 million at the Southern Peaks Regional Treatment Center due toimproved occupancy and mix of clients at the facility, (3) an increase inrevenues of $1.6 million at the Cornell Abraxas of Ohio facility due to a newresidential program activated in 2008 and (4) an increase in revenues of$0.9 million at the Hector Garza Residential Treatment Center which wereactivated in August 2007.  Theremaining net decrease in revenues of approximately $0.5 million was due tovarious fluctuations in revenues at our other Abraxas Youth and Family Servicesfacilities and programs.

 

Average contractoccupancy was 80.6% for the year ended December 31, 2008 compared to 92.0%for the year ended December 31, 2007. The decrease in the 2008 averagecontract occupancy reflects the under-utilization at certain facilities,including A-1 and TATC.

 

The average per diem ratefor our Abraxas Youth and Family Services facilities was approximately $192.15for the year ended December 31, 2008 compared to approximately $174.93 forthe year ended December 31, 2007. The increase in the 2008 average perdiem rate reflects the continued ramp-up of the Cornell Abraxas Academy(reactivated in the fourth quarter of 2006), the reactivation of the HectorGarza Residential Treatment Center in 2007 as well as changes in the mix ofservices provided at other facilities, including a new residential program atour Cornell Abraxas of Ohio facility. The average fee-for-service rate for our non-residential community-basedAbraxas Youth and Family Services facilities and programs was 

 

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approximately $48.28 forthe year ended December 31, 2008 compared to approximately $44.35 for theyear ended December 31, 2007.  Ouraverage fee-for-service rate can fluctuate from year to year depending on themix of services provided at our various non-residential Abraxas Youth andFamily Services facilities and programs.

 

*Adult Community-Based Services.*****AdultCommunity-Based Services revenues increased approximately $2.1 million, or3.1%, to $70.2 million for the year ended December 31, 2008 from $68.1million for the year ended December 31, 2007, due to (1) an increasein revenues of $1.1 million at the Cordova Center due to improved occupancy, (2) anincrease in revenues of $0.5 million at the Midtown Center which wasreactivated in September 2007, (3) an increase in revenues of $0.6million at Southwood due to increased occupancy, (4) revenues of $0.3million at a new jail (Bell Gardens Jail) we began operating in March 2008and (5) an increase in revenues of $0.5 million at the Oakland Center dueto improved occupancy.  The increase inrevenues was offset, in part, by (1) a decrease in revenues of $1.3million due to the termination of our management contract for the LincolnCounty Detention Center in May 2008 (we gave notice of early terminationof our management contract for the facility in February 2008 due tocontinual staffing and other issues in the rural area. This contract generatedrevenues of approximately $0.6 million and $1.9 million in the years ended December 31,2008 and 2007, respectively), (2) a decrease in revenues of $0.9 millionat the Grossman Center due to reduced occupancy and (3) a decrease inrevenues of $0.5 million at the Reid Correctional Facility as a result ofdecreased occupancy due to the damages caused by Hurricane Ike.  The remaining net increase in revenues of$1.8 million was due to various fluctuations in revenues at our various otheradult community-based facilities and programs.

 

Average contractoccupancy was 99.0% for the year ended December 31, 2008 compared to101.1% for the year ended December 31, 2007.

 

The average per diem ratefor our residential Adult Community-Based Services facilities was $68.47 forthe year ended December 31, 2008 compared to $62.91 for the year ended December 31,2007. The average fee-for-service rate for our non-residential AdultCommunity-Based Services facilities and programs was approximately $11.00 forthe year ended December 31, 2008 compared to approximately $13.70 for theyear ended December 31, 2007.  Ouraverage fee-for-service rates can fluctuate from year to year due to changes inthe mix of services provided by our various non-residential AdultCommunity-Based Services facilities and programs.

 

***Operating Expenses, Excluding Depreciationand Amortization.*** Operating expenses, excluding depreciation and amortization, increasedapproximately $6.5 million, or 2.4%, to $280.6 million for the year ended December 31,2008 from $274.1 million for the year ended December 31, 2007.

 

*Adult Secure Services.*  Adult SecureServices operating expenses increased approximately $5.1 million, or 3.9%, to $135.6million for the year ended December 31, 2008 from$130.5 million for the year ended December 31,2007, due primarily to (1) an increase in operating expenses of $8.8million at the Great Plains Correctional Facility due to increased occupancyfollowing the facility expansion completed in September 2008, (2) anincrease in operating expenses of $3.5 million at the D. Ray James Prison dueto increased occupancy following the facility expansion completed in February 2008,(3) an increase in operating expenses of $1.8 million at the High PlainsCorrectional Facility acquired in May 2007, (4) an increase inoperating expenses of $1.5 million at the Big Spring Correctional Center due toincreased occupancy following a facility expansion completed in November 2007and (5) an increase in operating expenses of $1.3 million at the WalnutGrove Youth Correctional Facility due to increased occupancy following afacility expansion completed in September 2008.  The increase in operating expenses due to theabove was offset, in part, by (1) a decrease in operating expenses of $7.5million due to the transition of our management contract at the Donald W. WyattDetention Center to the facility’s owner in July 2007 and (2) adecrease in operating expenses of $3.1 million at the Regional CorrectionCenter due to decreased occupancy following the removal of all ICE inmates in August 2007.  The remaining net decrease in operatingexpenses of approximately $1.2 million was due to various fluctuations inoperating expenses at our other adult secure facilities and divisionaloperating expenses.

 

As a percentage ofsegment revenues, adult secure services operating expenses were 64.8% for theyear ended December 31, 2008 compared to 71.2% for the year ended December 31,2007.  The 2008 operating margin wasfavorably impacted by the $1.5 million contract-based revenue adjustment forthe contract year ended March 2008 at the Regional CorrectionalCenter.  Additionally, the 2007 operatingmargin was negatively impacted by the termination of our contract at the GreatPlains Correctional Facility in April 2007 as we transitioned to itsreactivation in September 2007 under our new contract with the ArizonaDepartment of Corrections.

 

*Abraxas Youth and Family Services.* Abraxas Youth and Family Services operating expenses increased $2.1million, or 2.2%, to approximately $95.6 million for the year ended December 31,2008 from $93.5 million for the year ended December 31, 2007, dueprimarily to (1) an increase in operating expenses of $1.7 million at theCornell Abraxas Academy 

 

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due to increasedoccupancy, (2) an increase in operating expenses of $1.2 million at theHector Garza Residential Treatment Center due to increased occupancy, (3) anincrease in operating expenses of $0.8 million at our Cornell Abraxas of Ohiofacility due to the addition of a new residential program in 2008, and (4) anincrease in operating expenses of $0.4 million at the Southern Peaks RegionalTreatment Center due to increased occupancy.  The increase in operating expenses was offset, in part, by (1) adecrease in operating expenses of $1.8 million due to the termination of ourmanagement contract for the Harrisburg Alternative Education School Program forthe 2007-2008 school year (due to lack of funding by the contracting agency), (2) adecrease in operating expenses of $0.9 million due to the termination of ourmanagement contract for the Salt Lake Valley Detention Center as of September 2008,(3) a decrease in operating expenses of $0.9 million due to thetermination of our management contract for the Reading Alternative EducationSchool Program in June 2008 and (4) a decrease in operating expensesof $0.6 million at the Texas Adolescent Treatment Center due to reducedoccupancy.   The remaining net increasein operating expenses of $2.2 million was due to various fluctuations in operatingexpenses at our various Abraxas Youth and Family Services facilities andprograms.

 

As a percentage of segment revenues, Abraxasoperating expenses were 89.1% for the year ended December 31, 2008compared to 85.5% for the year ended December 31, 2007. The 2008 operatingmargin was negatively impacted by the lower utilization at those facilitiespreviously noted.

 

*Adult Community-Based Services.* Adult Community-Based Services operating expenses decreased $0.7million, or 1.4%, to $49.4 million for the year ended December 31, 2008from $50.1 million for the year ended December 31, 2007 due primarily to (1) adecrease in operating expenses of $1.2 million due to the termination of ourmanagement contract at the Lincoln County Detention Center as of September 2008,(2) a decrease in operating expenses of $0.5 million at the GrossmanCenter due to reduced occupancy and (3) a decrease in operating expensesof $0.1 million at the Reid Community Residential Facility due to reducedoccupancy resulting from damages sustained during Hurricane Ike. The decreasein operating expenses was offset, in part, by (1) an increase in operatingexpenses of $0.4 million at the Midtown Center which we reactivated in September 2007and (2) operating expenses of $0.3 million at a new jail we beganoperating in March 2008.  Theremaining net increase in operating expenses of $0.4 million was due to variousfluctuations in operating expenses at our numerous adult community-basedfacilities and programs.

 

Asa percentage of segment revenues, the segment’s operating expenses were 70.5%for the year ended December 31, 2008 compared to 73.5% for the year ended December 31,2007.  The 2008 operating margin wasfavorably impacted by increased operations driven by a change in the mix ofservices provided during the year.

 

***Pre-Opening and Start-up Expenses.***** **There were no pre-opening and start-up costs for theyears ended December 31, 2008 and 2007.

 

***Depreciation and Amortization*****.**  Depreciation and amortizationincreased approximately $1.9 million, or 11.9%, to $17.9 million for the yearended December 31, 2008 from $16.0 million for the year ended December 31,2007.  Depreciationincreased approximately $2.2 million due primarily to (1) an increase of$1.2 million due to depreciation expense resulting from the facility expansionactivations and related furniture, fixtures and equipment purchases at the BigSpring Correctional Center (in November 2007), the Great PlainsCorrectional Facility (in September 2008) and the D. Ray James Prison (in February 2008)and (2) additional depreciation expense of $0.1 million as a result of thepurchase of the High Plains Correctional Facility in May 2007 and theWashington, D.C. Facility in October 2007. Amortization of intangibles was approximately $2.2 million and $2.4million the years ended December 31, 2008 and 2007, respectively.

 

***General and Administrative Expenses.***  General and administrative expenses increasedapproximately $0.5 million, or 2.0%, to $26.0 million for the year ended December 31,2008 from approximately $25.5 million for the year ended December 31,2007.  General and administrativeexpenses for 2007 include our reimbursement to Veritas Capital Fund III, LP ofapproximately $2.5 million of costs related to a proposed merger agreement, aswell as our legal and professional fees and development costs of approximately$1.2 million related to the merger agreement (the proposed merger agreement wasrejected by our shareholders in January 2007). Additionally, general andadministrative costs for 2007 include a net $1.5 million legal claimssettlement received in August 2007 pertaining to previous legalrepresentation of the Company in a transaction involving our Southern PeaksRegional Treatment Center.

 

***Interest.***  Interest expense, net of interest income, decreasedapproximately $0.3 million to $24.0 million for the year ended December 31,2008 from $24.3 million for the year ended December 31, 2007. Interestincome for the year ended December 31, 2008 includes a net gain ofapproximately $1.2 million related to the change in fair value of certainderivative instruments pertaining to MCF, a special purpose entity (see Note 14 tothe consolidated financial statements).  Additionally,for the year ended December 31, 2008, we capitalized interest of $2.9million related to the facility expansion projects at the Great PlainsCorrectional Facility and the D. Ray James Prison. These were partially offsetby increased interest expense of 

 

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approximately $2.4million primarily driven by higher average borrowings outstanding in 2008 underour Amended Credit Facility, partially offset by a declining interest rateenvironment in 2008.  For the year ended December 31,2007, we capitalized interest of approximately $1.2 million related to thefacility expansion projects at the Big Spring Correctional Center, the D. RayJames Prison and the Great Plains Correctional Facility.

 

***Income Taxes.***** **For the year ended December 31,2008, we recognized a provision for income taxes on our income from continuingoperations at an estimated effective rate of 40.8%. For the year ended December 31,2007, we recognized a provision for income taxes at an estimated effective rateof 42.6%. The reduction in the estimated income tax rate in 2008 is principallydue to an increase in operating income across certain of our business segments,the decreased impact of certain nondeductible expenses and the utilization ofvarious tax credits.

 

###### ***Treasury Stock Repurchases***

###### *** ***

We did not purchase any of our commonstock in the years ended December 31, 2009 and 2008.

 

Underthe terms of our Senior Notes and our Amended Credit Facility, we can purchaseshares of our stock subject to certain cumulative restrictions. In July 2009, our Board of Directorsauthorized a stock repurchase program which provides for up to $10.0 million inpurchases through December 2010.  InSeptember 2009, we adopted a 10b5-1 Plan to facilitate purchases of ourcommon stock pursuant to such stock repurchase plan.  The Company may also repurchase our commonstock in open market purchases.

 

###### ***Contractual Obligations and Commercial Commitments***

###### *** ***

Wehave assumed various financial obligations and commitments in the ordinary courseof conducting our business.  We havecontractual obligations requiring future cash payments, such as management,consulting and non-competition agreements.

 

Wemaintain operating leases in the ordinary course of our businessactivities.  These leases include thosefor operating facilities, office space and office and operating equipment, andthe agreements expire between 2010 and 2075. As of December 31, 2009, ourtotal commitment under these operating leases was approximately $126.9 million.

 

Thefollowing table details the known future cash payments (on an undiscountedbasis) related to various contractual obligations as of December 31, 2009(in thousands):

 
| ** **                                  | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                 | ** ** | **2010** | ** ** | **2011 - 2012** | ** ** | **2013 - 2014** | ** ** | **Thereafter** | ** ** |
|                                        |       |                                      |       |   |   |   |   |   |   |   |   |
| **Contractual Obligations:**                | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-term debt — principal             | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| · Cornell Companies, Inc.         |       | $                                         | 112,000    |   | $ | — |   | $ | 112,000 |   | $ | — |   | $ | — |   |
| · Special Purpose Entities             |       | 121,700                                   |       | 13,400 |   | 30,400 |   | 35,800 |   | 42,100 |   |
| Long-term debt — interest              |       |                                      |       |   |   |   |   |   |   |   |   |
| · Cornell Companies, Inc.         |       | 30,100                                    |       | 12,040 |   | 18,060 |   | — |   | — |   |
| · Special Purpose Entities             |       | 44,578                                    |       | 10,308 |   | 17,110 |   | 11,740 |   | 5,420 |   |
| Revolving line of credit-principal          |       |                                      |       |   |   |   |   |   |   |   |   |
| · Cornell Companies, Inc.         |       | 70,000                                    |       | — |   | 70,000 |   | — |   | — |   |
| Revolving line of credit-interest           |       |                                      |       |   |   |   |   |   |   |   |   |
| · Cornell Companies, Inc.         |       | 2,883                                     |       | 1,442 |   | 1,441 |   | — |   | — |   |
| Capital lease obligations                   |       |                                      |       |   |   |   |   |   |   |   |   |
| · Cornell Companies, Inc.         |       | 14                                        |       | 13 |   | 1 |   | — |   | — |   |
| Construction commitments                    |       | 1,241                                     |       | 1,241 |   | — |   | — |   | — |   |
| Operating leases                            |       | 126,855                                   |       | 15,820 |   | 26,743 |   | 25,453 |   | 58,839 |   |
| Consultative and non-competition agreements |       | 10                                        |       | 10 |   | — |   | — |   | — |   |
| Total contractual cash obligations          |       | $                                         | 509,381    |   | $ | 54,274 |   | $ | 275,755 |   | $ | 72,993 |   | $ | 106,359 |   |

 

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Approximately $2.6 million of unrecognized taxbenefits have been recorded in accordance with ASC 740 as liabilities but arenot included in the contractual obligations table because we are uncertain asto if or when such amounts may be settled. Related to the unrecognized tax benefits not included in the tableabove, we have also recorded a liability for potential penalties ofapproximately $0.1 million and for interest of approximately $0.1 million.

 

We enter into letters ofcredit in the ordinary course of operating and financing activities.  As of December 31, 2009, we hadoutstanding letters of credit of approximately $12.1 million primarily forcertain workers’ compensation insurance and other operating obligations.  The following table details our letter ofcredit commitments as of December 31, 2009 (in thousands):

 
| ** **                | ** ** | **Total**              | ** ** | **Amount of Commitment Expiration Per Period** | ** ** |
|---------------------------|------------|------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                | ** ** | **Amounts  Committed** | ** ** | **Less than  1 Year**                                         | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **More Than  5 Years** | ** ** |
| Commercial Commitments:   |       |                   |       |                                                                    |       |   |   |   |   |   |   |
| Standby letters of credit |       | $                      | 12,116     |                                                                    | $          | 12,116 |   | $ | — |   | $ | — |   | $ | — |   |
|                           |            |                        |            |                                                                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 7A.****                   ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

In the normal course of business, we are exposed tomarket risk, primarily from changes in interest rates. We continually monitorexposure to market risk and develop appropriate strategies to manage this risk.We are not exposed to any other significant market risks, including commodityprice risk, foreign currency exchange risk or interest rate risks from the useof derivative financial instruments.

 

**Credit Risk**

 

Dueto the short duration of our investments, changes in market interest rateswould not have a significant impact on their fair value.  In addition, ouraccounts receivables are with federal, state, county and local governmentagencies, which we believe reduces our credit risk. However, it is possiblethat such situations as continuing budget resolutions, delayed passage ofbudgets or budget pressures may increase the length of repayment of certainreceivables.  During the third quarter of2009 the State of California notified vendors providing services to the statethat it would temporarily issue IOU’s. We received IOU’s from the State of California which were subsequentlyrepaid prior to September 30, 2009, and we do not presently hold any IOU’sfrom the State of California as of December 31, 2009.  In addition, delays in the passage of budgets(such as experienced in the State of Pennsylvania in 2009) may lead totemporary delays in the repayment of our receivables from operations in suchstates. As the State of Pennsylvania did not pass a fiscal 2010 budget untilmid-October 2009, the majority of the cities and counties in Pennsylvaniachose to defer their payments (during the state budget impasse through thethird quarter 2009) until the state budget had been adopted. Subsequent to thepassage of the state’s fiscal 2010 budget, our various Pennsylvania customersreturned to their historic payment patterns. While we closely monitor such situations,we do not currently expect this to have a permanent impact on the repayment ofour receivables related to our facilities.

 

**Interest Rate Exposure**

 

Our exposure to changes in interest ratesprimarily results from our Amended Credit Facility, as these borrowings havefloating interest rates.  The debt on ourconsolidated financial statements at December 31, 2009 with fixed interestrates consist of the 8.47% Bonds issued by MCF in August 2001 inconnection with the 2001 Sale and Leaseback Transaction and $112.0 million ofSenior Notes.  The detrimental effect ofa hypothetical 100 basis point increase in interest rates on our currentborrowings under our Amended Credit Facility would be to reduce income beforeprovision for income taxes by approximately $0.7 million for the year ended December 31,2009.  At December 31, 2009, thefair value of our consolidated fixed rate debt was approximately $309.1 millionbased upon quoted market prices or discounted future cash flows using the sameor similar securities.

 

**Inflation**

 

Otherthan personnel, offender medical costs at certain facilities, and employeemedical and worker’s compensation insurance costs, we believe that inflationhas not had a material effect on our results of operations during the past twoyears.  We have experienced significant increases in offender medicalcosts and employee medical and worker’s compensation insurance costs, and wehave also experienced higher personnel costs during the past two years. Most ofour facility management contracts provide for payments of either fixed per diemfees or per diem fees that increase by only small amounts during the term ofthe contracts. Inflation could substantially increase our personnel costs (thelargest component of our operating expenses), medical and insurance costs orother operating expenses at rates faster than any increases in contractrevenues. Food costs (part of our resident/inmate care costs) have also beensubject to rising prices in 2008 and 2009. We believe we have limited our exposurethrough long-term contracts with fixed term pricing.

 

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**ITEM 8.**          FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA

 
| ** ** | ** **                                                                                                                                                | **Page** |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| 1.         | Financial statements                                                                                                                                      |     |
|       | Report  of Independent Registered Public Accounting Firm                                                                                                  | 49       |
|       | Consolidated  Balance Sheets - December 31, 2009 and 2008                                                                                            | 50       |
|       | Consolidated  Statements of Income and Comprehensive Income for the years ended  December 31, 2009, 2008 and 2007                                    | 51       |
|       | Consolidated  Statements of Changes in Equity and Comprehensive Income for the years ended  December 31, 2009, 2008 and 2007                         | 52       |
|       | Consolidated  Statements of Cash Flows for the years ended December 31, 2009, 2008 and  2007                                                         | 53       |
|       | Notes to consolidated financial statements                                                                                                                | 54       |
|       | Management’s Annual Report on Internal Control over  Financial Reporting                                                                             | 85       |
| 2.         | Financial statement schedules                                                                                                                             |     |
|       | All schedules are omitted  because they are not applicable or because the required information is  included in the financial statements or notes thereto. |     |

 

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### **Report of IndependentRegistered Public Accounting Firm**

### ** **

Tothe Board of Directors and Stockholders of

CornellCompanies, Inc.

 

Inour opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of income and comprehensive income, of changes inequity and comprehensive income, and of cash flows present fairly, in allmaterial respects, the financial position of Cornell Companies, Inc. andits subsidiaries****at December 31, 2009 and2008, and the results of their operations and their****cashflows for each of the three years in the period ended December 31, 2009 inconformity with accounting principles generally accepted in the United Statesof America.  Also in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2009, based on criteria establishedin *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  The Company’s management isresponsible for these financial statements, for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in Management’s Report onInternal Control over Financial Reporting appearing under Item 9A.  Our responsibility is to express opinions onthese financial statements and on the Company’s internal control over financialreporting based on our integrated audits. We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement and whether effective internalcontrol over financial reporting was maintained in all material respects.  Our audits of the financial statementsincluded examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Ouraudit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk.  Our audits also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audits provide a reasonable basis for our opinions.

 

Asdiscussed in Note 5 to the consolidated financial statements, the Companychanged its method of accounting for non-controlling interests beginning onJanuary 1, 2009. Also, as discussed in Note 10 to the consolidatedfinancial statements, the Company changed the manner in which it accounts foruncertainty in income taxes effective January 1, 2007.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

PricewaterhouseCoopersLLP

Houston,Texas

February 26,2010

 

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**CORNELL COMPANIES, INC.**

**CONSOLIDATED BALANCESHEETS**

**(in thousands, except share data)**

 
| ** **                                                                                                                                                            | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **ASSETS**                                                                                                                                                            |       |                  |       |   |   |
| **CURRENT ASSETS:**                                                                                                                                                   |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                             |       | $                     | 27,724     |   | $ | 14,613 |   |
| Accounts receivable - trade (net of allowance for  doubtful accounts of $4,345 and $4,272, respectively)                                                              |       | 59,496                |       | 64,622 |   |
| Other receivables                                                                                                                                                     |       | 1,587                 |       | 4,766 |   |
| Bond fund payment account and other restricted  assets                                                                                                                |       | 29,978                |       | 27,190 |   |
| Deferred tax assets                                                                                                                                                   |       | 9,843                 |       | 9,151 |   |
| Prepaid expenses and other                                                                                                                                            |       | 11,647                |       | 6,368 |   |
| **Total current assets**                                                                                                                                              |       | 140,275               |       | 126,710 |   |
| **PROPERTY AND EQUIPMENT, net**                                                                                                                                       |       | 455,523               |       | 450,354 |   |
| **OTHER ASSETS:**                                                                                                                                                     | ** ** | ** **            | ** ** | ** ** | ** ** |
| Debt service reserve fund and other restricted  assets                                                                                                                |       | 27,017                |       | 27,930 |   |
| Goodwill                                                                                                                                                              |       | 13,308                |       | 13,308 |   |
| Intangible assets, net                                                                                                                                                |       | 1,185                 |       | 2,320 |   |
| Deferred costs and other                                                                                                                                              |       | 13,257                |       | 16,299 |   |
| **Total assets**                                                                                                                                                      |       | $                     | 650,565    |   | $ | 636,921 |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| **LIABILITIES AND EQUITY**                                                                                                                                            |       |                  |       |   |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| **CURRENT LIABILITIES:**                                                                                                                                              |       |                  |       |   |   |
| Accounts payable and accrued liabilities                                                                                                                              |       | $                     | 62,287     |   | $ | 69,093 |   |
| Current portion of long-term debt                                                                                                                                     |       | 13,413                |       | 12,412 |   |
| **Total current liabilities**                                                                                                                                         |       | 75,700                |       | 81,505 |   |
| **LONG-TERM DEBT, net of current  portion**                                                                                                                           |       | 289,841               |       | 308,070 |   |
| **DEFERRED TAX LIABILITIES**                                                                                                                                          |       | 24,455                |       | 17,491 |   |
| **OTHER LONG-TERM LIABILITIES**                                                                                                                                       |       | 1,831                 |       | 1,688 |   |
| **Total liabilities**                                                                                                                                                 |       | 391,827               |       | 408,754 |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| **COMMITMENTS AND CONTINGENCIES**                                                                                                                                     |       |                  |       |   |   |
|                                                                                                                                                                  |       |                  |       |   |   |
| **EQUITY:**                                                                                                                                                           | ** ** | ** **            | ** ** | ** ** | ** ** |
| **CORNELL COMPANIES, INC.  STOCKHOLDERS’ EQUITY:**                                                                                                               |       |                  |       |   |   |
| Preferred stock, $.001 par value, 10,000,000  shares authorized, none issued                                                                                          |       | —                |       | — |   |
| Common stock, $.001 par value, 30,000,000 shares  authorized, 16,434,940 and 16,238,685 shares issued and 14,947,054 and  14,732,522 shares outstanding, respectively |       | 16                    |       | 16 |   |
| Additional paid-in capital                                                                                                                                            |       | 168,852               |       | 164,746 |   |
| Retained earnings                                                                                                                                                     |       | 97,944                |       | 73,318 |   |
| Treasury stock (1,487,886 and 1,506,163 shares of  common stock, at cost, respectively)                                                                               |       | (11,888               | )          | (12,034 | ) |
| Accumulated other comprehensive income                                                                                                                                |       | 1,422                 |       | 1,676 |   |
| **Total Cornell  Companies, Inc. stockholders’ equity**                                                                                                     |       | 256,346               |       | 227,722 |   |
| Non-controlling interest                                                                                                                                              |       | 2,392                 |       | 445 |   |
| **Total equity**                                                                                                                                                      |       | 258,738               |       | 228,167 |   |
| **Total liabilities and equity**                                                                                                                                      |       | $                     | 650,565    |   | $ | 636,921 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**CORNELL COMPANIES, INC.**

**CONSOLIDATED STATEMENTS OFINCOME AND COMPREHENSIVE INCOME**

**(in thousands, except per sharedata)**

 
| ** **                                                                                                                                                | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                                | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                                                                                      |       |                                       |       |   |   |   |   |
| REVENUES                                                                                                                                                  |       | $                                          | 412,377    |   | $ | 386,724 |   | $ | 360,604 |   |
| OPERATING EXPENSES, EXCLUDING DEPRECIATION AND  AMORTIZATION                                                                                              |       | 295,645                                    |       | 280,630 |   | 274,110 |   |
| PRE-OPENING AND START-UP EXPENSES                                                                                                                         |       | 4,086                                      |       | — |   | — |   |
| DEPRECIATION AND AMORTIZATION                                                                                                                             |       | 18,833                                     |       | 17,943 |   | 15,986 |   |
| GENERAL AND ADMINISTRATIVE EXPENSES                                                                                                                       |       | 24,112                                     |       | 25,954 |   | 25,499 |   |
|                                                                                                                                                      |       |                                       |       |   |   |   |   |
| INCOME FROM OPERATIONS                                                                                                                                    |       | 69,701                                     |       | 62,197 |   | 45,009 |   |
| INTEREST EXPENSE                                                                                                                                          |       | 25,830                                     |       | 26,946 |   | 26,215 |   |
| INTEREST INCOME                                                                                                                                           |       | (657                                       | )          | (2,988 | ) | (1,951 | ) |
|                                                                                                                                                      |       |                                       |       |   |   |   |   |
| INCOME FROM BEFORE PROVISION FOR INCOME TAXES                                                                                                             |       | 44,528                                     |       | 38,239 |   | 20,745 |   |
|                                                                                                                                                      |       |                                       |       |   |   |   |   |
| PROVISION FOR INCOME TAXES                                                                                                                                |       | 17,955                                     |       | 15,603 |   | 8,835 |   |
|                                                                                                                                                      |       |                                       |       |   |   |   |   |
| NET INCOME                                                                                                                                                |       | 26,573                                     |       | 22,636 |   | 11,910 |   |
|                                                                                                                                                      |       |                                       |       |   |   |   |   |
| NON-CONTROLLING INTEREST                                                                                                                                  |       | 1,947                                      |       | 445 |   | — |   |
|                                                                                                                                                      |       |                                       |       |   |   |   |   |
| INCOME AVAILABLE TO CORNELL COMPANIES, INC.                                                                                                               |       | $                                          | 24,626     |   | $ | 22,191 |   | $ | 11,910 |   |
|                                                                                                                                                      |       |                                       |       |   |   |   |   |
| EARNINGS PER SHARE ATTRIBUTABLE TO CORNELL  COMPANIES, INC. STOCKHOLDERS:                                                                                 |       |                                       |       |   |   |   |   |
| BASIC:                                                                                                                                                    |       | $                                          | 1.65       |   | $ | 1.51 |   | $ | .82 |   |
| DILUTED:                                                                                                                                                  |       | $                                          | 1.64       |   | $ | 1.49 |   | $ | .82 |   |
|                                                                                                                                                      |       |                                       |       |   |   |   |   |
| NUMBER OF SHARES USED IN PER SHARE COMPUTATION:                                                                                                           |       |                                       |       |   |   |   |   |
| BASIC                                                                                                                                                     |       | 14,881                                     |       | 14,701 |   | 14,452 |   |
| DILUTED                                                                                                                                                   |       | 14,986                                     |       | 14,847 |   | 14,611 |   |
|                                                                                                                                                      |       |                                       |       |   |   |   |   |
| COMPREHENSIVE INCOME:                                                                                                                                     |       |                                       |       |   |   |   |   |
| Net income                                                                                                                                                |       | $                                          | 26,573     |   | $ | 22,636 |   | $ | 11,910 |   |
| Other comprehensive income, net of tax: Unrealized  gain on derivative instruments, net of tax provision of $324 and $425 in 2008  and 2007, respectively |       | —                                     |       | 583 |   | 612 |   |
| Total other comprehensive income, net of tax                                                                                                              |       | 26,573                                     |       | 23,219 |   | 12,522 |   |
| Comprehensive income attributable to  non-controlling interest                                                                                            |       | 1,947                                      |       | 445 |   | — |   |
| Comprehensive income attributable to Cornell  Companies, Inc.                                                                                        |       | $                                          | 24,626     |   | $ | 22,774 |   | $ | 12,522 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**CORNELL COMPANIES, INC.**

### **CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY**

### **AND COMPREHENSIVE INCOME**

** (in thousands, except share data)**

 
| ** **                                                                          | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | ** **   | ** ** | ** **              | ** ** | **Accumulated  Other** | ** ** | **Non-**        | ** ** | **Total**              | ** ** | ** **        | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|-------------|------------|--------------|------------|-------------------------|------------|------------------------|------------|-----------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                          | ** ** | ** **            | ** ** | **Par**        | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Treasury Stock** | ** ** | **Comprehensive**      | ** ** | **Controlling** | ** ** | **Stockholders’** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                          | ** ** | **Shares**            | ** ** | **Value**      | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **Shares**              | ** ** | **Cost**               | ** ** | **Income**      | ** ** | **Interest**           | ** ** | **Equity**        | ** ** | **Income** | ** ** |
| ** **                                                                          | ** ** | ** **            | ** ** | ** **     | ** ** | ** **  | ** ** | ** **   | ** ** | ** **              | ** ** | ** **             | ** ** | ** **      | ** ** | ** **             | ** ** | ** **        | ** ** | ** ** | ** ** |
| BALANCES  AT JANUARY 1, 2007                                                        |       | 15,603,917            |       | 16             |       | 154,411     |       | 38,964       |       | 1,540,394               |       | (12,308                | )          | 481             |       | 3⁄4                 |       | 181,564           |       | ** ** |   |
| NET  INCOME                                                                         |       | 3⁄4                |       | 3⁄4         |       | 3⁄4      |       | 11,910       |       | 3⁄4                  |       | 3⁄4                 |       | 3⁄4          |       | 3⁄4                 |       | 11,910            |       | 11,910 |   |
| UNREALIZED  GAIN ON DERIVATIVE INSTRUMENTS, NET OF TAXES OF $425                    |       | 3⁄4                |       | 3⁄4         |       | 3⁄4      |       | 3⁄4       |       | 3⁄4                  |       | 3⁄4                 |       | 612             |       | 3⁄4                 |       | 612               |       | 612 |   |
| COMPREHENSIVE  INCOME                                                               |       | ** **            | ** ** | ** **     | ** ** | ** **  | ** ** | ** **   | ** ** | ** **              | ** ** | ** **             | ** ** | ** **      | ** ** | ** **             | ** ** | ** **        | ** ** | 12,522 | ** ** |
| ADOPTION  OF ASC 740                                                                |       | 3⁄4                |       | 3⁄4         |       | 3⁄4      |       | 253          |       | 3⁄4                  |       | 3⁄4                 |       | 3⁄4          |       | 3⁄4                 |       | 253               | ** ** | ** ** | ** ** |
| EXERCISE  OF STOCK OPTIONS, EMPLOYEE STOCK PURCHASE PLAN CONTRIBUTIONS AND WARRANTS |       | 234,182               |       | 3⁄4         |       | 2,490       |       | 3⁄4       |       | 3⁄4                  |       | 3⁄4                 |       | 3⁄4          |       | 3⁄4                 |       | 2,490             |       | ** ** |   |
| INCOME  TAX BENEFIT FROM STOCK OPTION EXERCISES                                     |       | 3⁄4                |       | 3⁄4         |       | 355         |       | 3⁄4       |       | 3⁄4                  |       | 3⁄4                 |       | 3⁄4          |       | 3⁄4                 |       | 355               |       | ** ** |   |
| DEFERRED  AND OTHER STOCK COMPENSATION                                         |       | 221,428               |       | —         |       | 2,644       |       | —       |       | —                  |       | —                 |       | —          |       | 3⁄4                 |       | 2,644             |       | ** ** |   |
| ISSUANCE  OF COMMON STOCK TO EMPLOYEE STOCK PURCHASE PLAN                 |       | 3⁄4                |       | 3⁄4         |       | 94          |       | 3⁄4       |       | (25,348                 | )          | 203                    |       | 3⁄4          |       | 3⁄4                 |       | 297               |       | ** ** |   |
| ISSUANCE  OF COMMON STOCK UNDER 2000 DIRECTOR’S STOCK PLAN           |       | 9,150                 |       | 3⁄4         |       | 325         |       | 3⁄4       |       | 3⁄4                  |       | 3⁄4                 |       | 3⁄4          |       | 3⁄4                 |       | 325               |       | ** ** |   |
| ** **                                                                          | ** ** | ** **            | ** ** | ** **     | ** ** | ** **  | ** ** | ** **   | ** ** | ** **              | ** ** | ** **             | ** ** | ** **      | ** ** | ** **             | ** ** | ** **        | ** ** | ** ** | ** ** |
| BALANCES  AT DECEMBER 31, 2007                                                      |       | 16,068,677            |       | 16             |       | 160,319     |       | 51,127       |       | 1,515,046               |       | (12,105                | )          | 1,093           |       | 3⁄4                 |       | 200,450           |       | ** ** |   |
| NET  INCOME                                                                         |       | —                |       | —         |       | —      |       | 22,191       |       | —                  |       | —                 |       | 3⁄4          |       | 445                    |       | 22,636            |       | 22,191 |   |
| UNREALIZED  GAIN ON DERIVATIVE INSTRUMENTS, NET OF TAXES OF $324                    |       | 3⁄4                |       | 3⁄4         |       | 3⁄4      |       | 3⁄4       |       | 3⁄4                  |       | 3⁄4                 |       | 583             |       | 3⁄4                 |       | 583               |       | 583 |   |
| COMPREHENSIVE  INCOME                                                               |       | ** **            | ** ** | ** **     | ** ** | ** **  | ** ** | ** **   | ** ** | ** **              | ** ** | ** **             | ** ** | ** **      | ** ** | ** **             | ** ** | ** **        | ** ** | 22,774 | ** ** |
| EXERCISE  OF STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN CONTRIBUTIONS           |       | 36,390                |       | —         |       | 444         |       | —       |       | —                  |       | —                 |       | 3⁄4          |       | 3⁄4                 |       | 444               |       | ** ** |   |
| INCOME  TAX BENEFIT FROM STOCK OPTION EXERCISES                                |       | —                |       | —         |       | 140         |       | —       |       | —                  |       | —                 |       | 3⁄4          |       | 3⁄4                 |       | 140               |       | ** ** |   |
| DEFERRED  AND OTHER STOCK COMPENSATION                                         |       | 120,137               |       | —         |       | 3,271       |       | —       |       | —                  |       | —                 |       | 3⁄4          |       | 3⁄4                 |       | 3,271             |       | ** ** |   |
| ISSUANCE  OF COMMON STOCK TO EMPLOYEE STOCK PURCHASE PLAN                 |       | —                |       | —         |       | 82          |       | —       |       | (8,883                  | )          | 71                     |       | 3⁄4          |       | 3⁄4                 |       | 153               |       | ** ** |   |
| ISSUANCE  OF COMMON STOCK UNDER 2000 DIRECTOR’S STOCK PLAN           |       | 13,481                |       | —         |       | 490         |       | —       |       | —                  |       | —                 |       | 3⁄4          |       | 3⁄4                 |       | 490               |       | ** ** |   |
| ** **                                                                          | ** ** | ** **            | ** ** | ** **     | ** ** | ** **  | ** ** | ** **   | ** ** | ** **              | ** ** | ** **             | ** ** | ** **      | ** ** | ** **             | ** ** | ** **        | ** ** | ** ** | ** ** |
| BALANCES  AT DECEMBER 31, 2008                                                      |       | 16,238,685            |       | 16             |       | 164,746     |       | 73,318       |       | 1,506,163               |       | (12,034                | )          | 1,676           |       | 445                    |       | 228,167           |       | ** ** |   |
| NET  INCOME                                                                         |       | 3⁄4                |       | 3⁄4         |       | 3⁄4      |       | 24,626       |       | 3⁄4                  |       | 3⁄4                 |       | 3⁄4          |       | 1,947                  |       | 26,573            |       | 24,626 |   |
| COMPREHENSIVE  INCOME                                                               |       | ** **            | ** ** | ** **     | ** ** | ** **  | ** ** | ** **   | ** ** | ** **              | ** ** | ** **             | ** ** | ** **      | ** ** | ** **             | ** ** | ** **        | ** ** | 24,626 | ** ** |
| INCOME  TAX EXPENSE FROM STOCK OPTION EXERCISES                                     |       | 3⁄4                |       | 3⁄4         |       | (62         | **)**      | 3⁄4       |       | 3⁄4                  |       | 3⁄4                 |       | 3⁄4          |       | 3⁄4                 |       | (62               | )          | ** ** |   |
| DEFERRED  AND OTHER STOCK COMPENSATION                                         |       | 158,783               |       | 3⁄4         |       | 3,303       |       | 3⁄4       |       | 3⁄4                  |       | 3⁄4                 |       | 3⁄4          |       | 3⁄4                 |       | 3,303             |       | ** ** |   |
| ISSUANCE  OF COMMON STOCK TO EMPLOYEE STOCK PURCHASE PLAN                 |       | 3⁄4                |       | 3⁄4         |       | 143         |       | 3⁄4       |       | (18,277                 | )          | 146                    |       | 3⁄4          |       | 3⁄4                 |       | 289               |       | ** ** |   |
| ISSUANCE  OF COMMON STOCK UNDER 2000 DIRECTOR’S STOCK PLAN           |       | 16,487                |       | 3⁄4         |       | 443         |       | 3⁄4       |       | 3⁄4                  |       | 3⁄4                 |       | 3⁄4          |       | 3⁄4                 |       | 443               |       | ** ** |   |
| AMORTIZATION  OF GAIN ON TERMINATION OF DERIVATIVE                                  |       | 3⁄4                |       | 3⁄4         |       | 3⁄4      |       | 3⁄4       |       | 3⁄4                  |       | 3⁄4                 |       | (254            | **)**      | 3⁄4                 |       | (254              | )          | ** ** |   |
| EXERCISE  OF STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN CONTRIBUTIONS           |       | 20,985                |       | 3⁄4         |       | 279         |       | 3⁄4       |       | 3⁄4                  |       | 3⁄4                 |       | 3⁄4          |       | 3⁄4                 |       | 279               |       | ** ** |   |
| ** **                                                                          | ** ** | ** **            | ** ** | ** **     | ** ** | ** **  | ** ** | ** **   | ** ** | ** **              | ** ** | ** **             | ** ** | ** **      | ** ** | ** **             | ** ** | ** **        | ** ** | ** ** | ** ** |
| BALANCES  AT DECEMBER 31, 2009                                                      |       | 16,434,940            |       | $              | 16         |        | $          | 168,852      |       | $                       | 97,944     |                   | 1,487,886  |            | $          | (11,888                | )          | $                 | 1,422      |   | $ | 2,392 |   | $ | 258,738 |   | ** ** |   |
|                                                                                     |            |                       |            |                |            |             |            |              |            |                         |            |                        |            |                 |            |                        |            |                   |            |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**CORNELL COMPANIES, INC.**

#### **CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

 
| ** **                                                                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                              | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                              |       | $                                          | 26,573     |   | $ | 22,636 |   | $ | 11,910 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities                  | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Impairment of long-lived assets                                                                         |       | 3⁄4                                     |       | 250 |   | 3⁄4 |   |
| Depreciation                                                                                            |       | 17,698                                     |       | 15,743 |   | 13,580 |   |
| Amortization of intangibles                                                                             |       | 1,135                                      |       | 2,200 |   | 2,406 |   |
| Amortization of deferred financing costs                                                                |       | 1,266                                      |       | 2,728 |   | 1,552 |   |
| Amortization of Senior Notes discount                                                                   |       | 184                                        |       | 184 |   | 184 |   |
| Amortization of gain on termination of derivative                                                       |       | (254                                       | )          | 3⁄4 |   | 3⁄4 |   |
| Stock-based compensation                                                                                |       | 3,575                                      |       | 3,570 |   | 2,645 |   |
| Provision for bad debts                                                                                 |       | 1,184                                      |       | 2,741 |   | 2,063 |   |
| Gain on derivative instruments                                                                          |       | 3⁄4                                     |       | 1,160 |   | — |   |
| Loss/(gain) on property and equipment                                                                   |       | (1,090                                     | )          | 84 |   | (190 | ) |
| Change in assets and liabilities:                                                                       |       |                                       |       |   |   | ** ** |   |
| Accounts receivable                                                                                     |       | 6,476                                      |       | 1,523 |   | 77 |   |
| Other restricted assets                                                                                 |       | 514                                        |       | (1,058 | ) | (665 | ) |
| Deferred income taxes                                                                                   |       | 6,201                                      |       | 1,458 |   | 397 |   |
| Other assets                                                                                            |       | (3,395                                     | )          | 873 |   | (1,774 | ) |
| Accounts payable and accrued liabilities                                                                |       | (8,278                                     | )          | 7,771 |   | (4,890 | ) |
| Other liabilities                                                                                       |       | 143                                        |       | (2,884 | ) | (51 | ) |
| **Net cash provided by operating  activities**                                                          |       | 51,932                                     |       | 58,979 |   | 27,244 |   |
|                                                                                                    |       |                                       |       |   |   |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                              | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital expenditures                                                                                    |       | (22,301                                    | )          | (79,915 | ) | (50,890 | ) |
| Purchases of investment securities                                                                      |       | 3⁄4                                     |       | 3⁄4 |   | (241,425 | ) |
| Sales of investment securities                                                                          |       | 3⁄4                                     |       | 250 |   | 253,100 |   |
| Facility acquisitions                                                                                   |       | 3⁄4                                     |       | 3⁄4 |   | (18,554 | ) |
| Site acquisition                                                                                        |       | 3⁄4                                     |       | 3⁄4 |   | (5,053 | ) |
| Proceeds from insurance recoveries and proceeds  from sale of property and equipment                    |       | 2,707                                      |       | 846 |   | 375 |   |
| Payments to restricted debt payment account, net                                                        |       | (2,389                                     | )          | (2,901 | ) | (2,084 | ) |
| **Net cash used in investing  activities**                                                              |       | (21,983                                    | )          | (81,720 | ) | (64,531 | ) |
|                                                                                                    |       |                                       |       |   |   |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                              | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from line of credit                                                                            |       | 2,000                                      |       | 49,000 |   | 30,000 |   |
| Payments of MCF bonds                                                                                   |       | (12,400                                    | )          | (11,400 | ) | (10,500 | ) |
| Payments of line of credit                                                                              |       | (7,000                                     | )          | (4,000 | ) | 3⁄4 |   |
| Payments of capital lease obligations                                                                   |       | (14                                        | )          | (11 | ) | (10 | ) |
| Payments for debt issuance and other financing  costs                                                   |       | 3⁄4                                     |       | 3⁄4 |   | (845 | ) |
| Tax benefit of stock option exercises                                                                   |       | 8                                          |       | 140 |   | 355 |   |
| Proceeds from exercise of stock options, employee  stock purchase plan contributions and warrants       |       | 568                                        |       | 597 |   | 2,786 |   |
| **Net cash provided by (used in)  financing activities**                                                |       | (16,838                                    | )          | 34,326 |   | 21,786 |   |
|                                                                                                    |       |                                       |       |   |   |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                                   |       | 13,111                                     |       | 11,585 |   | (15,501 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                        |       | 14,613                                     |       | 3,028 |   | 18,529 |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                              |       | $                                          | 27,724     |   | $ | 14,613 |   | $ | 3,028 |   |
|                                                                                                    |       |                                       |       |   |   |   |   |
| **SUPPLEMENTAL CASH FLOW  DISCLOSURE:**                                                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest paid, net of capitalized interest of $740,  $2,886 and $1,172, respectively                    |       | $                                          | 26,080     |   | $ | 18,596 |   | $ | 30,672 |   |
| Income taxes paid                                                                                       |       | $                                          | 21,118     |   | $ | 12,048 |   | $ | 7,613 |   |
|                                                                                                    |       |                                       |       |   |   |   |   |
| **OTHER NON-CASH INVESTING AND  FINANCING ACTIVITIES:**                                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Decrease in fair value of interest rate swap                                                            |       | $                                          | 3⁄4     |   | $ | 3⁄4 |   | $ | (1,053 | ) |
| Purchases and additions to property and equipment  included in accounts payable and accrued liabilities |       | 2,185                                      |       | 3,409 |   | 4,156 |   |
| Common stock issued for board of directors fees                                                         |       | 443                                        |       | 490 |   | 325 |   |
| Tax expense of stock option exercises                                                                   |       | (70                                        | )          | 3⁄4 |   | 3⁄4 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**CORNELLCOMPANIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****    ****DESCRIPTIONOF THE BUSINESS**

 

Cornell Companies, Inc. (collectively with itssubsidiaries and consolidated special purpose entities, unless the contextrequires otherwise, “Cornell,” the “Company,” “we,” “us,” or “our,”), aDelaware corporation, provides integrated development, design, construction andmanagement of facilities to governmental agencies within three operatingsegments: (1) Adult Secure Services; (2) Abraxas Youth and FamilyServices and (3) Adult Community-Based Services.

 

**2.****    ****SIGNIFICANTACCOUNTING POLICIES**

 

***Consolidation***

 

The accompanying consolidated financial statementsinclude the accounts of the Company, our wholly-owned subsidiaries, and ouractivities relative to a financing of operating facilities. All significantintercompany balances and transactions have been eliminated. Non-controllinginterest in consolidated special purpose entities represents equity that otherinvestors have contributed to the special purpose entities. Non-controllinginterest is adjusted for income and losses allocable to the other owners of thespecial purpose entities.

 

***Cash and CashEquivalents***

 

We consider all highly liquid unrestrictedinvestments with original maturities of three months or less to be cashequivalents. We invest our available cash balances in short term money marketaccounts, short term certificates of deposit and commercial paper.

 

***AccountsReceivable and Related Allowance for Doubtful Accounts***

 

We extend credit to the governmental agencies andother parties with which we contract in the normal course of business. Weregularly review our outstanding receivables and historical collectionexperience, and provide for estimated losses through an allowance for doubtfulaccounts. In evaluating the adequacy of our allowance for doubtful accounts, wemake judgments regarding our customers’ ability to make required payments,economic events and other factors. As the financial condition of these partieschange, circumstances develop or additional information becomes available,adjustments to the allowance for doubtful accounts may occur. If, afterreasonable collection efforts have been made, a receivable is determined to beuncollectible, it will be written off.

 

Thechanges in allowance for doubtful accounts associated with trade accountsreceivable for the years ended December 31, 2009, 2008 and 2007 are asfollows (in thousands):

 
| ** **                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                 |       |                                       |       |   |   |   |   |
| Balance at beginning of period       |       | $                                          | 4,272      |   | $ | 4,372 |   | $ | 3,644 |   |
| Provision for bad debts              |       | 1,184                                      |       | 2,741 |   | 2,063 |   |
| Write-offs of uncollectible accounts |       | (1,111                                     | )          | (2,841 | ) | (1,335 | ) |
| Balance at end of period             |       | $                                          | 4,345      |   | $ | 4,272 |   | $ | 4,372 |   |

 

***Bond Fund PaymentAccount and other Restricted Assets***

 

Restricted assets at December 31, 2009 and 2008include approximately $26.1 million and $23.8 million, respectively, ofMunicipal Correctional Finance, LP’s (“MCF”) restricted cash accounts. MCF’srestricted accounts primarily consist of a debt service reserve fund used tosegregate rental payment funds from us to MCF for MCF’s semi-annual bondinterest and annual bond principal payments. MCF’s funds are typically investedin short term certificates of deposit, money market accounts and commercialpaper. They will be used to fund a portion of MCF’s debt service due in thecoming year.

 

At certain facilities, we maintain bank accounts forrestricted cash belonging to facility residents, commissary operations andequipment replacement funds used in certain state programs. Restrictedassets at December 31, 2009 and 2008 include approximately $3.8 millionand $3.4 million, respectively, for these accounts. A corresponding liabilityfor these obligations is included in accrued liabilities in the accompanyingfinancial statements.

 

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***Property andEquipment***

 

Property and equipment are recorded at cost.Ordinary maintenance and repair costs are expensed, while renewal andbetterment costs are capitalized. Buildings and improvements are depreciatedover their estimated useful lives of 30 to 50 years using the straight-linemethod. Prepaid facility use cost, which resulted from the July 1996acquisition of the Big Spring Correctional Center and the December 1999transfer of ownership of the Great Plains Correctional Facility to a leaseholdinterest, is being amortized over 50 years using the straight-line method.Furniture and equipment are depreciated over their estimated useful lives of 3to 10 years using the straight-line method. Amortization ofleasehold improvements (including those funded by landlord incentives orallowances) is recorded using the straight-line method based upon the shorterof the economic life of the asset or the term of the respective lease. Landlordincentives or allowances under operating leases are recorded as deferred rentand amortized as a reduction of rent expense over the lease term. See Note 7 tothe consolidated financial statements for further details concerning ourproperty and equipment balances at December 31, 2009 and 2008.

 

We review our long-lived assets (including ourfacilities at a facility-by-facility level) for impairment at least annually orwhen changes in circumstances or a triggering event indicates that the carryingamount of the asset may not be recoverable. Authoritative guidancerequires that long-lived assets to be held and used recognize an impairmentloss only if the carrying amount of the long-lived asset is not recoverablefrom its estimated future undiscounted cash flows and to measure an impairmentloss as the difference between the carrying value and the fair value of theasset. Assets to be disposed of by sale are recorded at the lower of theircarrying amount or fair value less estimated selling costs. We estimateprojections of undiscounted cash flows, and also fair value, based upon the bestinformation available, which may include expected future discounted cash flowsto be produced by the asset and/or available market prices. Factors thatsignificantly influence estimated future cash flows include the periods andlevels of occupancy for the facility, expected per diem or reimbursement rates,assumptions regarding the levels of staffing, services and future operating andcapital expenditures necessary to generate forecasted revenues, related costsfor these activities and future rate of increases or decreases associated withthese factors. Information typically utilized will also include relevant termsof existing contracts (for similar services and customers), market knowledge ofcustomer demand (both present and anticipated) and related pricing, marketcompetitors, and our historical experience (as to areas including customerrequirements, contract terms, operating requirements/costs, occupancy trends,etc.). We may also consider the results of any appraisals if a fair value isnecessary. Estimates for factors such as per diem or reimbursement rates may behighly subjective, particularly in circumstances where there is no currentoperating contract in place and changes in the assumptions and estimates couldresult in the recognition of impairment charges.

 

***CapitalizedInterest***

 

We capitalize interest on facilities while underconstruction. We capitalized interest of approximately $0.7 million in the yearended December 31, 2009 related to the 700 bed facility expansion projectat the D. Ray James Prison. Interest capitalized for the year ended December 31,2008 was approximately $2.9 million and related to the expansion projects atthe D. Ray James Prison and the Great Plains Correctional Facility. Interestcapitalized for the year ended December 31, 2007 was approximately $1.2million and related to the expansion projects at the Big Spring CorrectionalCenter, the D. Ray James Prison and the Great Plains Correctional Facility.

 

***Debt ServiceReserve Fund***

 

The debt service reserve fund was established at theclosing of MCF’s bond issuance and is to be used solely for MCF’s debt serviceto the extent that funds in MCF’s debt service accounts are insufficient. Thedebt service reserve fund is invested principally in short term commercialinstruments. See Note 14 to the consolidated financial statements.

 

***Intangible Assets***

 

Weevaluate the carrying value of our existing intangibles (which are the resultof prior acquisitions — both business facilities and operating contracts) forimpairment annually or when changes in circumstances or a triggering eventindicates that the carrying amount of the asset may not be recoverable. We haveevaluated the carrying value of our existing intangibles and concluded therehas not been impairment to the carrying value of our existing intangibles as ofDecember 31, 2009. See Note 8 to the consolidated financial statements forfurther details concerning our intangible assets.

 

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***Deferred Costs***

 

Costs incurred related to obtaining debt financingare capitalized and amortized over the term of the related indebtedness. At December 31,2009 and 2008, we had net deferred debt issuance costs of approximately $6.5million and $7.6 million, respectively.

 

***RevenueRecognition***

 

Substantially all of our revenues are derived fromcontracts with federal, state and local governmental agencies, which pay eitherper diem rates based upon the number of occupant days or hours served for theperiod, on a take-or-pay basis, management fee basis, cost-plus reimbursementor fee-for-service basis. Revenues are recognized as services are providedunder our established contractual agreements to the extent collection isconsidered probable.

 

***Pre-opening andStart-up Expenses***

 

Pre-opening and start-up expenses are charged tooperations as incurred. Pre-opening and start-up expenses include payroll,benefits, training and other operating costs during periods prior to opening anew or expanded facility and during the period of operation while occupancy isramping up. These costs vary by contract. Newly opened facilities are staffedaccording to applicable regulatory or contractual requirements when we beginreceiving offenders or clients. Offenders or clients are typically assigned toa newly opened facility on a phased-in basis over a one-to-six month period.Our start-up period for new juvenile operations is 12 months from the date webegin recognizing revenue unless break-even occupancy is achieved before then.Our start-up period for new adult operations is nine months from the date webegin recognizing revenue unless break-even occupancy is achieved before then.

 

***Proposal Costs***

 

We incur various expenses in conjunction with ourparticipation in the proposal process with government agencies for theirprocurement of our services. These costs include such items as payroll andrelated employee benefits and taxes, research, consulting, legal andreproduction costs and are expensed in the periods incurred and are included ingeneral and administrative expenses.

 

***Operating andGeneral and Administrative Expenses***

 

We incur various expenses within the normal courseof our business. Included in operating expenses are direct expense items suchas personnel/employee benefits, resident/inmate care expenses andbuilding/utility costs pertaining to the operations of our facilities andprograms. Included in general and administrative expenses are expense itemssuch as personnel/employee benefits, professional services and building/utilitycosts pertaining to our corporate activities.

 

***BusinessConcentration***

 

Contracts with federal, state and local governmentalagencies account for nearly all of our revenues. The loss of, or a significantdecrease in, business from one or more of these governmental agencies couldhave a material adverse effect on our financial condition and results ofoperations. For the years ended December 31, 2009, 2008 and 2007, 34.7%,34.2% and 32.6%, respectively, of our consolidated revenues were derived fromcontracts with the Federal Bureau of Prisons (“BOP”), the only customerconstituting more than 10.0% of our revenues during each of these periods.

 

***Self InsuranceReserves***

 

Wemaintain insurance coverage for various aspects of our business and operations.We retain a portion of losses that occur through the use of deductibles andretention under self-insurance programs. These programs include workerscompensation and employer’s liability, general liability and professionalliability, directors and officers’ liability and medical and dental insurance.We maintain deductibles under these programs in amounts ranging from $0.5million to $1.0 million. We maintain excess loss insurance for amountsexceeding our deductibles.

 

Weregularly review our estimates of reported and unreported claims and providefor these losses through insurance reserves. These reserves are influenced byrising costs of health care and other costs, increases in claims, time lags inclaim information and levels of insurance coverage carried. As claims developand additional information becomes available to us, adjustments to the relatedloss reserves may occur. Our estimated reserves for workers compensation claimsincorporate the use of a 3% discount factor. Our reserves for medical andworker’s compensation claims are subject to change based on our estimate of thenumber and magnitude of claims to be incurred.

 

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***Income Taxes***

 

We utilize the asset and liability method ofaccounting for income taxes. Under this method, deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying values of existing assetsand liabilities and their respective tax bases based on enacted tax rates. Inproviding for deferred taxes, we consider tax regulations expected to be in effectwhen differences reverse, estimates of future taxable income and available taxplanning strategies. If tax regulations, operating results or the ability toimplement tax planning strategies vary, adjustments to the carrying value oftax assets and liabilities may occur. See Note 10 to the consolidated financialstatements.

 

***Earnings PerShare***

 

Basicearnings per share (“EPS”) are computed by dividing net income by the weightedaverage number of shares of common stock outstanding during the period.  Diluted EPS is computed by dividing netincome by the weighted average number of shares of common stock outstandinggiving effect to all potentially dilutive common shares outstanding during theperiod.  Potentially dilutive commonshares include the dilutive effect of outstanding common stock options andrestricted common stock granted under our various option and other incentiveplans.  As of January 1, 2009, inaccordance with FASB Accounting Standards Codification (“ASU”) 260-10,instruments with nonforfeitable dividend rights granted in share-based paymenttransactions are participating securities prior to vesting and, therefore, needto be included in the earnings allocation in computing EPS under the two-classmethod.  For our fiscal year beginning January 1,2009, since our restricted common stock grants (including both vested and thoseunvested due to either time or performance requirements) convey nonforfeitablerights to dividends while outstanding, they are included in both basic andfully diluted EPS calculations.  Allprior-period EPS data has been adjusted retrospectively to conform to thecalculation of EPS.

 

Forthe year ended December 31, 2009, there were 101,700 shares ($22.16average price) of stock options that were not included in the computation ofdiluted EPS because to do so would have been anti-dilutive.  For the year ended December 31, 2008,there were 64,200 shares ($23.24 average price) of stock options that were notincluded in the computation of diluted EPS because to do so would have beenanti-dilutive.  For the year ended December 31,2007, there were 19,200 shares ($24.56 average price) of stock options thatwere not included in computation of diluted EPS because to do so would havebeen anti-dilutive.

 

The followingtable summarizes the calculation of income and the weighted average commonshares and common equivalent shares outstanding for purposes of the computationof earnings per share (in thousands, except per share data):

 
| ** **                                                               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                               | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| Income available  to stockholders                                        |       | $                                          | 24,626     |   | $ | 22,191 |   | $ | 11,910 |   |
|                                                                     |       |                                       |       |   |   |   |   |
| Weighted  average common shares outstanding                              |       | 14,881                                     |       | 14,701 |   | 14,452 |   |
| Weighted  average common share equivalents outstanding                   |       | 105                                        |       | 146 |   | 159 |   |
|                                                                     |       |                                       |       |   |   |   |   |
| Weighted  average common shares and common share equivalents outstanding |       | 14,986                                     |       | 14,847 |   | 14,611 |   |
|                                                                     |       |                                       |       |   |   |   |   |
| Basic income  per share                                                  |       | $                                          | 1.65       |   | $ | 1.51 |   | $ | .82 |   |
|                                                                     |       |                                       |       |   |   |   |   |
| Diluted  income per share                                                |       | $                                          | 1.64       |   | $ | 1.49 |   | $ | .82 |   |

 

***FinancialInstruments***

 

Thecarrying amounts of our financial instruments, including cash and cashequivalents, investment securities, accounts receivable and accounts payableand accrued expenses, approximate fair value due to the short maturities ofthese financial instruments. At December 31, 2009, the carrying amount ofconsolidated debt was $303.3 million, and the estimated fair value was $309.1million. At December 31, 2008, the carrying amount was $320.5 million, andthe estimated fair value was $308.0 million. The estimated fair value oflong-term debt is based primarily on quoted market prices or discounted cashflow analysis for the same or similar issues.

 

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***DerivativeInstruments***

 

Derivatives are recognized at fair value in theconsolidated balance sheet.  Forderivatives designated as hedging the exposure to changes in fair value of anasset or liability, the gain or loss is recognized in earnings together withthe offsetting gain or loss on the hedged item. For derivatives designated as hedging the exposure of variable cashflows, the effective portion is reported in other comprehensive income andsubsequently reclassified to earnings when the forecasted transaction affectsearnings.  For derivatives not designatedor de-designated as a hedging instrument, the gain or loss is recognized inearnings in the period of change.

 

***Use of Estimates***

 

Our financial statements are prepared in accordancewith accounting principles generally accepted in the United States of America,which require that we make certain estimates and judgments that affect ourreported amounts of assets, liabilities, revenues and expenses and thedisclosures of contingent assets and liabilities. We evaluate our estimates onan on-going basis, based on historical experience and on various otherassumptions that we believe to be reasonable based on the informationavailable. Actual results could differ from these estimates under differentassumptions or conditions. The significant estimates that we make in theaccompanying consolidated financial statements include the allowance fordoubtful accounts, accruals for insurance and legal claims, valuation allowancefor deferred tax accounts, the realizability of long-lived tangible andintangible assets and the fair value of financial instruments.

 

***Reclassifications***

 

Certain reclassifications have been made to theprior period financial statements contained herein to conform to current yearpresentation.

 

**3.     STOCK-BASED COMPENSATION**

 

We have an employee stock purchase plan (“ESPP”) under whichemployees can make contributions to purchase our common stock. Participation inthe plan is elected annually by employees. The plan year begins on January 1st(the “Beginning Date”) and ends on December 31st (the “Ending Date”).Purchases of common stock are made at the end of the year using the lower ofthe fair market value on either the Beginning Date or Ending Date, less a 15%discount. Underauthoritative guidance our employee-stock purchase plan is considered to be acompensatory ESPP, and therefore, we recognize compensation expense over therequisite service period for grants made under the ESPP. Compensation expenseof approximately $0.1 million and $0.09 million was recognized in each of theyears ended December 31, 2009 and 2008.

 

Our stock incentive plansprovide for the granting of stock options (both incentive stock options andnonqualified stock options), stock appreciation rights, restricted stock sharesand other stock-based awards to officers, directors and employees of theCompany. Grants of stock options made to date under these plans vest overperiods up to seven years after the date of grant and expire no more than 10years after grant.

 

At December 31,2008, 184,000 shares of restricted stock outstanding were subject toperformance-based vesting criteria (32,500 of these restricted shares wereconsidered market-based restricted stock). There were also 52,700 stock optionsoutstanding subject to performance-based vesting criteria. We recognized $1.1million of expense associated with these shares of restricted stock and stockoptions during the year ended December 31, 2008.

 

At December 31,2009, 314,227 shares of restricted stock were outstanding subject toperformance-based vesting criteria (32,500 of these restricted shares wereconsidered market-based restricted stock). There were also 6,260 stock optionsoutstanding subject to performance-based vesting criteria. We recognized $1.3million of expense associated with these shares of restricted stock and stockoptions during the year ended December 31, 2009.

 

The amounts above relate to the impact of recognizingcompensation expense related to stock options and restricted stock.Compensation expense related to stock options (6,260 shares) and restrictedstock (281,727 shares) that vest based upon performance conditions is notrecorded for such performance-based awards until it has been deemed probablethat the related performance targets allowing the vesting of these options andrestricted stock will be met. We are required to periodically re-assess theprobability that these performance-based awards will vest and begin to recordexpense at that point in time. During the year ended December 31, 2009 itwas deemed probable that certain performance targets pertaining to certainrestricted stock and stock options would be achieved by their vesting date.Accordingly, compensation expense of approximately $1.1 million was recognizedin the year ended December 31, 2009 related to these performance-basedawards.

 

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We recognize expense for our stock-basedcompensation over the vesting period, or in the case of performance-basedawards, during the service period for which the performance target becomesprobable of being met, which represents the period in which an employee isrequired to provide service in exchange for the award. We recognize compensationexpense for stock-based awards immediately if the award has immediate vesting.

 

***Assumptions***

 

Thefair values for the significant stock-based awards granted during the yearsended December 31, 2009, 2008 and 2007 were estimated at the date of grantusing a Black-Scholes option pricing model with the following weighted-averageassumptions:

 
| ** **                       | ** ** | **Year Ended December, 31** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|
| ** **                       | ** ** | **2009**                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                             |       |                                  |       |   |   |   |   |
| Risk-free rate of return         |       | 1.90                                  | %          | 3.35 | % | 4.56 | % |
| Expected life of award           |       | 6.0 years                             |       | 5.7 years |   | 5.6 years |   |
| Expected dividend yield of stock |       | 0                                     | %          | 0 | % | 0 | % |
| Expected volatility of stock     |       | 50.49                                 | %          | 38.74 | % | 42.19 | % |
| Weighted-average fair value      |       | $                                     | 8.89       |   | $ | 9.46 |   | $ | 9.86 |   |
|                                  |            |                                       |            |  |  |  |  |  |  |  |

 

Theexpected volatility of stock assumption was derived by referring to changes inthe Company’s historical common stock prices over a timeframe similar to thatof the expected life of the award. We do not believe that future stockvolatility will significantly differ from historical stock volatility.Estimated forfeiture rates are derived from historical forfeiture patterns. Webelieve the historical experience method is the best estimate of forfeiturescurrently available.

 

Generallywe utilized the “simplified” method for “plain vanilla” options to estimate theexpected term of options granted during the periods noted (whereappropriate).  For those grants duringthese periods wherein we had sufficient historical or impartial data to betterestimate the expected term, we have done so.

 

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Stock-basedaward activity during the year ended December 31, 2009 was as follows(aggregate intrinsic value in millions):

 
| ** **                                                 | ** ** | **Number  of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
|                                                       |       |                   |       |                                   |       |                                                |       |                            |       |
| Outstanding at December 31, 2006                      |       | 653,747                |       | $                                      | 12.87      |                                                | 6.1        |                            | $          | 8.4 |   |
| Granted                                                    |       | 72,950                 |       |                                   |       |                                                |       |                            |       |
| Exercised                                                  |       | (161,590               | )          |                                   |       |                                                |       |                            |       |
| Forfeited or canceled                                      |       | (74,265                | )          |                                   |       |                                                |       |                            |       |
|                                                       |       |                   |       |                                   |       |                                                |       |                            |       |
| Outstanding at December 31, 2007                      |       | 490,842                |       | 14.19                                  |       | 7.3                                                 |       | $                               | 7.0        |   |
| Granted                                                    |       | 45,000                 |       |                                   |       |                                                |       |                            |       |
| Exercised                                                  |       | (36,390                | )          |                                   |       |                                                |       |                            |       |
| Forfeited or canceled                                      |       | (13,753                | )          |                                   |       |                                                |       |                            |       |
|                                                       |       |                   |       |                                   |       |                                                |       |                            |       |
| Outstanding at December 31, 2008                      |       | 485,699                |       | 15.03                                  |       | 6.5                                                 |       | $                               | 7.3        |   |
| Granted                                                    |       | 40,000                 |       | 17.98                                  |       |                                                |       |                            |       |
| Exercised                                                  |       | (20,985                | )          | 13.31                                  |       |                                                |       |                            |       |
| Forfeited or canceled                                      |       | (8,467                 | )          | 14.11                                  |       |                                                |       |                            |       |
|                                                       |       |                   |       |                                   |       |                                                |       |                            |       |
| Outstanding at December 31, 2009                      |       | 496,247                |       | $                                      | 15.36      |                                                | 5.9        |                            | $          | 7.6 |   |
|                                                       |       |                   |       |                                   |       |                                                |       |                            |       |
| Vested and expected to vest at December 31, 2009 |       | 495,010                |       | $                                      | 15.34      |                                                | 5.9        |                            | $          | 7.4 |   |
|                                                       |       |                   |       |                                   |       |                                                |       |                            |       |
| Exercisable at December 31, 2009                      |       | 475,737                |       | $                                      | 15.14      |                                                | 5.8        |                            | $          | 7.2 |   |

 

Thetotal intrinsic value of stock options exercised during the years ended December 31,2009, 2008 and 2007 was $0.2 million, $0.5 million and $1.5 million,respectively. Net cash proceeds from the exercise of stock options wereapproximately $0.3 million, $0.4 million and $2.5 million for the years ended December 31,2009, 2008 and 2007, respectively.

 

Werecognized $0.5 million of expense associated with time-based stock optionsduring the year ended December 31, 2009. As of December 31, 2009,approximately $0.04 million of estimated expense with respect to nonvestedstock-based awards had yet to be recognized and will be amortized into expenseover the employee’s estimated remaining weighted average service period ofapproximately 4 months.

 

Thefollowing table summarizes information with respect to stock optionsoutstanding and exercisable at December 31, 2009.

 
| **Range of Exercise Prices** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------|------------|----------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|
|                                        |       |                    |       |                                                |       |                                   |       |                    |       |                                   |       |
| $3.75  to  $10.00       |       | 18,365                  |       | 1.8                                                 |       | $                                      | 5.76       |                    | 18,365     |                                   | $          | 5.76 |   |
| $10.01  to $13.50            |       | 150,482                 |       | 4.6                                                 |       | 12.83                                  |       | 148,482                 |       | 12.82                                  |       |
| $13.51  to $14.50            |       | 175,700                 |       | 5.7                                                 |       | 13.98                                  |       | 172,000                 |       | 13.97                                  |       |
| $14.51  to $25.00            |       | 151,700                 |       | 7.8                                                 |       | 20.62                                  |       | 136,890                 |       | 20.39                                  |       |
|                                        |       | 496,247                 |       | 5.9                                                 |       | $                                      | 15.36      |                    | 475,737    |                                   | $          | 15.14 |   |

 

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Stock-basedaward activity for nonvested awards during the year ended December 31,2009 was as follows:

 
| ** **                          | ** ** | **Number  of  Shares** | ** ** | **Weighted Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------|------------|------------------------|------------|-------------------------------------------------------------|------------|
|                                |       |                   |       |                                                        |       |
| Nonvested at December 31, 2006 |       | 320,657                |       | $                                                           | 13.40      |   |
| Granted                             |       | 72,950                 |       | 21.40                                                       |       |
| Vested                              |       | (101,683               | )          | 15.68                                                       |       |
| Canceled                            |       | (74,265                | )          | 13.48                                                       |       |
|                                |       |                   |       |                                                        |       |
| Nonvested at December 31, 2007 |       | 217,659                |       | 14.99                                                       |       |
| Granted                             |       | 45,000                 |       | 22.68                                                       |       |
| Vested                              |       | (153,788               | )          | 16.32                                                       |       |
| Canceled                            |       | (13,753                | )          | 17.73                                                       |       |
|                                |       |                   |       |                                                        |       |
| Nonvested at December 31, 2008 |       | 95,118                 |       | 16.09                                                       |       |
| Granted                             |       | 40,000                 |       | 17.98                                                       |       |
| Vested                              |       | (114,608               | )          | 16.00                                                       |       |
| Canceled                            |       | —                 |       | —                                                      |       |
|                                |       |                   |       |                                                        |       |
| Nonvested at December 31, 2009 |       | 20,510                 |       | $                                                           | 20.32      |   |

 

***Restricted Stock***

 

We have previously issuedrestricted stock under certain employment agreements and stock incentive planswhich vests either over a specific period of time, generally three to fiveyears, or which will vest subject to certain market or performanceconditions.  During the year ended December 31,2009, we issued restricted stock as part of our normal equity awards under our2006 Incentive Plan.  These shares ofrestricted common stock are subject to restrictions on transfer and certainconditions to vesting.

 

Restricted stock activityfor the year ended December 31, 2009 was as follows:

 
| ** **                          | ** ** | **Number  of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------|------------|------------------------|------------|---------------------------------------------------------|------------|
|                                |       |                   |       |                                                    |       |
| Nonvested at December 31, 2006 |       | 85,000                 |       | $                                                       | 10.87      |   |
| Granted                             |       | 287,000                |       | 22.30                                                   |       |
| Vested                              |       | (5,000                 | )          | 21.33                                                   |       |
| Canceled                            |       | (64,000                | )          | 9.80                                                    |       |
|                                |       |                   |       |                                                    |       |
| Nonvested at December 31, 2007 |       | 303,000                |       | 21.75                                                   |       |
| Granted                             |       | 161,000                |       | 22.38                                                   |       |
| Vested                              |       | (33,876                | )          | 16.77                                                   |       |
| Canceled                            |       | (27,000                | )          | 21.47                                                   |       |
|                                |       |                   |       |                                                    |       |
| Nonvested at December 31, 2008 |       | 403,124                |       | 22.44                                                   |       |
| Granted                             |       | 176,800                |       | 16.81                                                   |       |
| Vested                              |       | (55,693                | )          | 21.95                                                   |       |
| Canceled                            |       | (3,657                 | )          | 17.68                                                   |       |
|                                |       |                   |       |                                                    |       |
| Nonvested at December 31, 2009 |       | 520,574                |       | $                                                       | 20.61      |   |

 

We recognized $1.6 millionof expense associated with nonvested time-based restricted stock awards duringthe year ended December 31, 2009. As of December 31, 2009, approximately $1.6 million of estimatedexpense with respect to nonvested time-based restricted stock awards had yet tobe recognized and will be amortized over a weighted average period 

 

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of 1.9 years. Approximately$4.5 million of estimated expense with respect to nonvested performance-basedrestricted stock option awards had yet to be recognized as of December 31,2009.

 

**4.     FAIR VALUEMEASUREMENTS**

 

OnJanuary 1, 2008, we adopted a newly issued accounting standard for fairvalue measurements of financial assets and liabilities which did not have amaterial financial impact on our consolidated results of operations orfinancial condition.  On January 1,2009, we adopted the provisions of this new accounting pronouncement forapplying fair value to non-financial assets, liabilities and transactions on anon-recurring basis.  Adoption of theprovisions for the fair value measurements on a non-recurring basis did nothave a material effect on our financial position, results of operations or cashflows.

 

Asdefined in this accounting standard, fair value is the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date (“exit price”).  Additionally, this pronouncement requiresdisclosure that establishes a framework for measuring fair value and expandsdisclosures about fair value measurements. Additionally, it requires that fair value measurements be classified anddisclosed in one of the following categories:

 
| Level  1 | Unadjusted  quoted prices in active markets that are accessible at the measurement date  for identical, unrestricted assets or liabilities;                                       |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                              |
| Level  2 | Quoted  prices in markets that are not active, or inputs that are observable, either  directly or indirectly, for substantially the full term of the asset or  liability; and     |
|     |                                                                                                                                                                              |
| Level  3 | Prices  or valuation techniques that require inputs that are both significant to the  fair value measurement and unobservable (i.e., supported by little or no  market activity). |

 

Asrequired, financial assets and liabilities are classified based on the lowestlevel of input that is significant for the fair value measurement.  The following table summarizes the valuationof our financial assets and liabilities by pricing levels as of December 31,2009:

 
| ** **         | ** ** | **Fair Value as of  December 31, 2009 (in thousands)** | ** ** |
|--------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **Level 1**                                                                          | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:            |       |                                                                                      |       |   |   |   |   |   |   |
| Corporate Bonds    |       | $                                                                                         | —     |   | $ | 9,813 |   | $ | — |   | $ | 9,813 |   |
| Money Market Funds |       | —                                                                                    |       | 43,351 |   | — |   | 43,351 |   |
|                    |            |                                                                                           |            |  |  |  |  |  |  |  |  |  |  |

 

Thecorporate bonds and money market funds are carried in debt service fund andother restricted assets and the debt service reserve fund in the accompanyingbalance sheet. The fair value measurements for corporate bonds and money-marketfunds are based upon the quoted price for similar assets in markets that arenot active, multiplied by the number of shares owned, exclusive of anytransaction costs and without any adjustments to reflect discounts that may beapplied to selling a large block of securities at one time.  We do not believe that the changes in fairvalue of these assets will materially differ from the amounts that could berealized upon settlement or that the changes in fair value will have a materialeffect on our results of operations, liquidity and capital resources.

 

Thisaccounting standard requires a reconciliation of the beginning and endingbalances for fair value measurements using Level 3 inputs. We had no suchassets or liabilities which were measured at fair value on a recurring basisusing significant unobservable inputs (level 3) during the year ended December 31,2009.  We evaluated our long-lived assetsfor impairment using internally developed, unobservable inputs (Level 3 inputsin the fair value hierarchy of fair value accounting) based on the projectedcash flows of our idle facilities.  Referto Item 7 — Management’s Discussion and Analysis of Financial Condition andResults of Operations — Critical Accounting Policies and Estimates — Accountingfor Long-Lived Assets for a discussion concerning the facilities we evaluatedfor impairment in the year ended December 31, 2009.

 

**5.****    ****RECENT ACCOUNTING STANDARDS**

 

In December 2007,the Financial Accounting Standards Board (“FASB”) revised the authoritativeguidance for business combinations which establishes principles andrequirements for how the acquirer in a business combination (1) recognizesand measures in its financial statements the identifiable assets acquired, theliabilities assumed and any noncontrolling interest in the acquiree, (2) recognizesand measures the goodwill acquired in the business combination or a gain from abargain purchase and (3) determines what information to disclose to enableusers of the financial statements to evaluate the 

 

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nature and financialeffects of the business combination. This guidance applies prospectively tobusiness combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15,2008.  Our adoption of this revisedguidance on January 1, 2009 did not have any impact on our consolidatedresults of operations or financial condition as we did not have any businesscombination activity in the year ended December 31, 2009.

 

Additionally,the FASB amended the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognizedintangible asset to improve the consistency between the useful life of arecognized intangible asset and the period of expected cash flows used tomeasure the fair value of the asset under the current guidance concerningbusiness combinations and other U.S. generally accepted accountingprinciples.  This new guidance iseffective for financial statements issued for fiscal years beginning after December 15,2008, and interim periods within those fiscal years.  Our adoption of the new guidance on January 1,2009 did not have a significant impact on our consolidated financial position,results of operations or cash flows.

 

In December 2007,the FASB issued authoritative guidance which established new accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  The newguidance requires the recognition of a noncontrolling interest (minorityinterest) as equity in the consolidated financial statements and separate fromthe parent’s equity.  The amount of netincome attributable to the noncontrolling interest will be included inconsolidated net income on the face of the income statement.  This guidance clarifies that changes in aparent’s ownership interest in a subsidiary that do not result indeconsolidation are equity transactions if the parent retains its controllingfinancial interest.  In addition, it requiresthat a parent recognize a gain or loss in net income when a subsidiary isdeconsolidated.  Such gain or loss willbe measured using the fair value of the noncontrolling equity investment on thedeconsolidation date.  Additionally,there are expanded disclosure requirements regarding the interests of theparent and its noncontrolling interest. This guidance is effective for fiscal years, and interim periods withinthose fiscal years, beginning on or after December 15, 2008.  We adopted the new guidance on January 1,2009 and applied the provisions to our 2009 financial statements andretroactively to all prior periods presented.

 

In March 2008,the FASB issued new authoritative guidance to improve financial reporting aboutderivatives and hedging activities by requiring enhanced qualitative andquantitative disclosures regarding derivative instruments, gains and losses onsuch instruments and their effects on an entity’s financial position, financialperformance and cash flows.  Our adoptionof this new guidance on January 1, 2009 did not have a significant impacton our consolidated financial position, results of operations or cash flows.

 

In May 2008,the FASB issued new authoritative guidance which establishes general standardsof accounting and disclosure of events that occur after the balance sheet datebut before the financial statements are issued. This guidance sets forth (1) the period after the balance sheetdate during which management should evaluate events or transactions that mayoccur for potential recognition or disclosure in the financial statements, (2) thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date and (3) the disclosures an entityshould make about such events or transactions. Management has performed a review of our subsequent events andtransactions through February 26, 2010, which is the date the financialstatements are issued.

 

In June 2009, theFASB issued the FASB Accounting Standards Codification (“Codification”). TheCodification became the single source for all authoritative generally acceptedaccounting principles (“GAAP”) recognized by the FASB to be applied forfinancial statements issued for periods ending after September 15, 2009.The Codification does not change GAAP and did not have an affect on ourfinancial position, results of operations or cash flows.

 

**6.****     FUTURE****ACCOUNTING REQUIREMENTS**

 

InJanuary 2010, the FASB issued an amendment to the disclosure requirementrelated to Fair Value Measurements.  Theamendment requires new disclosures related to transfers in and out of Levels 1and 2 and activity in Level 3 fair value measurements.  A reporting entity is required to discloseseparately the amounts of significant transfers in and out of Level 1 and Level2 fair value measurements and describe the reasons for the transfers.  Additionally, in the reconciliation for fairvalue measurements in Level 3, a reporting entity must present separatelyinformation about purchases, sales, issuances and settlements (on a gross basisrather than a net number).  The newdisclosures are effective for interim and annual reporting periods beginningafter December 15, 2009, except for the disclosures about purchases,sales, issuances and settlements in the roll forward of activity in Level 3fair value measurements.  Thosedisclosures are effective for fiscal years beginning after December 15,2010 and for interim periods within those fiscal years.  We do not anticipate that our adoption ofthis amendment will have a material affect on our financial position, resultsof operations or cash flows.

 

In June 2009,the FASB issued an amendment to the accounting and disclosure requirements fortransfers of financial 

 

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assets.  This amendment applies to the financialreporting of a transfer of financial assets; the effects of a transfer on anentity’s financial position, financial performance and cash flows; and atransferor’s continuing involvement, if any, in transferred financialassets.  It eliminates (1) theexceptions for qualifying special-purpose entities from the consolidationguidance and (2) the exception that permitted sale accounting for certainmortgage securitizations when a transferor has not surrendered control over thetransferred financial assets.  Theprovisions of this amendment must be applied as of the beginning of eachreporting entity’s first annual reporting period that begins after November 15,2009, for interim periods within that first annual reporting period and forinterim and annual reporting periods thereafter.  Earlier application is prohibited.  The requirements in the amendment must beapplied to transfers occurring on or after the effective date. We are currentlyevaluating the impact, if any, that such requirements may have on our financialstatements once adopted.

 

In June 2009, the FASB also issued an amendment to the accountingand disclosure requirements for the consolidation of variable interest entities(“VIEs”). This amendment requires an enterprise to perform a qualitativeanalysis when determining whether or not it must consolidate a VIE.  The amendment also requires an enterprise tocontinuously reassess whether it must consolidate a VIE.  Additionally, the amendment requires enhanceddisclosures about an enterprise’s involvement with VIEs and any significantchange in risk exposure due to that involvement, as well as how its involvementwith VIEs impacts the enterprise’s financial statements.  Finally, an enterprise will be required todisclose significant judgments and assumptions used to determine whether or notto consolidate a VIE.  This amendment iseffective for financial statements issued for fiscal years beginning after November 15,2009.  Earlier application is prohibited.We are currently evaluating the impact, if any, that this amendment may have onour financial statements once adopted.

 

**7.****             ****PROPERTYAND EQUIPMENT**

 

Property and equipment were as follows (inthousands):

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                      |       |                  |       |   |   |
| Land                                      |       | $                     | 43,000     |   | $ | 43,005 |   |
| Prepaid facility use                      |       | 70,982                |       | 71,323 |   |
| Buildings and improvements                |       | 404,251               |       | 353,093 |   |
| Furniture and equipment                   |       | 45,253                |       | 39,514 |   |
| Construction in progress                  |       | 5,426                 |       | 41,154 |   |
| Sub-total                                 |       | 568,912               |       | 548,089 |   |
| Accumulated depreciation and amortization |       | (113,389              | )          | (97,735 | ) |
| Total property and equipment              |       | $                     | 455,523    |   | $ | 450,354 |   |

 

Themost subjective estimates made in our impairment analysis for 2009 related toBaker Correctional (“Baker”) and the Hector Garza Residential Treatment Center(“Hector Garza”) which are components of building and improvements,particularly with respect to estimated timing of occupancy (at Baker) andresident mix (at Hector Garza). The approximate carrying values at December 31,2009 for Baker and Hector Garza were $2.8 million and $3.9 million,respectively. The estimated undiscounted future cash flow values exceeded thecarrying values noted for the facilities, and Hector Garza had operating contractsin place. If the underlying assumptions for the deemed subjective estimates inthe 2009 analyses were adjusted to reflect reasonable likely changes theundiscounted cash flows would still exceed the carrying value of the assetsassessed for impairment.

 

 Themost subjective estimates made in our impairment analysis for 2008 related toCornell Abraxas 1 and Hector Garza, particularly with respect to estimatedoccupancy. The approximate carrying values at December 31, 2008 forCornell Abraxas 1 and Hector Garza were $10.4 million and $4.0 million,respectively. The estimated undiscounted future cash flow values exceeded thecarrying values noted for the facilities, and all facilities had operatingcontracts in place. During 2009, there were no significant events that causedus to believe that an impairment of these facilities had occurred. As a resultof strengthened operating performance primarily due to increases in andstabilization of its occupancy in 2009, the assumptions included in theimpairment analysis for Cornell Abraxas 1 became less subjective for the 2009analysis.

 

In conjunction with ourreview of certain of our long-lived assets based on estimated market valuesassociated with these assets, we determined that our carrying value for a currentlyvacant site of land was not fully recoverable and exceeded its fair value and,as a result, we recorded an impairment charge of $0.3 million in the year endedDecember 31, 2008 (none in the years ended December 31, 2009 and2007).  This charge is reflected inoperating expenses, excluding depreciation and amortization, in theaccompanying Consolidated Statements of Income and Comprehensive Income.

 

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**8.****             ****INTANGIBLEASSETS**

 

Intangible assets at December 31, 2009 and 2008consisted of the following (in thousands):

 
| ** **                                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Non-compete  agreements                                  |       | $                     | 8,200      |   | $ | 8,200 |   |
| Accumulated  amortization — non-compete agreements  |       | (8,200                | )          | (7,595 | ) |
| Acquired  contract value                                 |       | 6,240                 |       | 6,240 |   |
| Accumulated  amortization — acquired contract value |       | (5,055                | )          | (4,525 | ) |
| Identified  intangibles, net                             |       | 1,185                 |       | 2,320 |   |
| Goodwill                                                 |       | 13,308                |       | 13,308 |   |
| Total  intangibles, net                                  |       | $                     | 14,493     |   | $ | 15,628 |   |

 

The changes inthe carrying amount of goodwill for the years ended December 31, 2009 and2008 are as follows (in thousands):

 
| ** **                           | ** ** | **Adult  Secure** | ** ** | **Abraxas  Youth and  Family** | ** ** | **Adult  Community  -Based** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|-------------------|------------|--------------------------------|------------|------------------------------|------------|-----------|------------|
|                                 |       |              |       |                           |       |                         |       |      |       |
| Balance as of December 31, 2007 |       | $                 | 2,902      |                           | $          | 1,060                        |       | $         | 9,393      |   | $ | 13,355 |   |
| Reduction to goodwill                |       | —            |       | —                         |       | (47                          | )          | (47       | )          |
| Balance as of December 31, 2008 |       | 2,902             |       | 1,060                          |       | 9,346                        |       | 13,308    |       |
| Reduction to goodwill                |       | —            |       | —                         |       | —                       |       | —    |       |
| Balance as of December 31, 2009 |       | $                 | 2,902      |                           | $          | 1,060                        |       | $         | 9,346      |   | $ | 13,308 |   |

 

In 2008, werecorded a reduction to goodwill as a result of the final release of amountspreviously placed in escrow related to the acquisition of Correctional Systems, Inc.(“CSI”) in April 2005.  At December 31,2009, we performed our annual impairment test and concluded that there was noimpairment to our existing goodwill.

 

Amortizationexpense for our acquired contract value was approximately $0.5 million for theyear ended December 31, 2009, $1.3 million for the year ended December 31,2008 and $1.1 million for the year ended December 31, 2007. Amortizationexpense for our acquired contract value is expected to be approximately $0.5million for each of the years ended December 31, 2010 and 2011 andapproximately $0.1 million for the year ended December 31, 2012.

 

Amortization expense forour non-compete agreements was approximately $0.6 million, $0.8 million and$1.3 million for the years ended December 31, 2009, 2008 and 2007,respectively.  At December 31, 2009,our non-compete agreements were fully amortized.

 

**9.****             ****ACCOUNTSPAYABLE AND ACCRUED LIABILITIES**

 

Accounts payable and accruedliabilities consisted of the following (in thousands):

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                           |       |                  |       |   |   |
| Accounts payable                               |       | $                     | 17,657     |   | $ | 21,754 |   |
| Accrued compensation                           |       | 9,775                 |       | 10,242 |   |
| Accrued interest payable                       |       | 10,553                |       | 11,329 |   |
| Accrued taxes payable                          |       | 4,687                 |       | 6,680 |   |
| Accrued insurance                              |       | 8,886                 |       | 8,003 |   |
| Accrued legal                                  |       | 3,545                 |       | 5,197 |   |
| Resident funds                                 |       | 3,831                 |       | 3,538 |   |
| Other                                          |       | 3,353                 |       | 2,350 |   |
| Total accounts payable and accrued liabilities |       | $                     | 62,287     |   | $ | 69,093 |   |

 

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**10.****      ****INCOMETAXES**

 

EffectiveJanuary 1, 2007, the Company adopted a new accounting standard related touncertainty in income taxes. As a result of adoption, we recorded a cumulativeeffect adjustment of approximately $0.3 million which increased retainedearnings at January 1, 2007.

 

As of December 31,2009 and December 31, 2008, we had unrecognized tax benefits in the amountof $2.6 million and $2.5 million, respectively. If these unrecognized taxbenefits were recognized in future periods, approximately $1.1 million and $0.9million would reduce our income tax expense and our effective tax rate for theyears ended December 31, 2009 and 2008, respectively.  A reconciliation of the beginning and endingamount of unrecognized tax benefits is as follows (in thousands):

 
| Balance at January 1, 2007                           |   | $      | 2,948  |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Additions based on tax positions related to current  year |   | 569    |   |
| Additions for tax positions in prior year                 |   | 4      |   |
| Reductions for tax positions in prior year                |   | — |   |
| Lapse in Statutes of Limitations                          |   | (503   | )      |
| Balance at January 1, 2008                           |   | $      | 3,018  |   |
| Additions based on tax positions related to  current year |   | 521    |   |
| Additions for tax positions in prior year                 |   | 23     |   |
| Reductions for tax positions in prior year                |   | — |   |
| Lapse in Statutes of Limitations                          |   | (1,094 | )      |
| Balance at December 31, 2008                         |   | $      | 2,468  |   |
| Additions based on tax positions related to  current year |   | 663    |   |
| Additions for tax positions in prior year                 |   | — |   |
| Reductions for tax positions in prior year                |   | (25    | )      |
| Lapse in Statutes of Limitations                          |   | (510   | )      |
| Balance at December 31, 2009                         |   | $      | 2,596  |   |

 

Estimatedinterest and penalties related to the underpayment of income taxes areclassified as a component of income tax expense in the accompanyingConsolidated Statements of Income and Comprehensive Income and totaledapproximately $0.1 million in the year ended December 31, 2009 and ($0.1)million in the year ended December 31, 2008.  Accrued interest and penalties wereapproximately $0.2 million at December 31, 2009 and 2008.

 

We aresubject to income tax in the United States and many of the individual states weoperate in.  We currently havesignificant operations in Texas, California, Colorado, Oklahoma, Georgia,Illinois and Pennsylvania.  State incometax returns are generally subject to examination for a period of three to fiveyears after filing.  The state impact ofany changes made to the federal return remains subject to examination byvarious states for a period up to one year after formal notification to thestate.  We are open to United StatesFederal Income Tax examinations for the tax years December 31, 2005through December 2008. The audit of our 2006 federal income taxreturn by the Internal Revenue Service was recently concluded without materialfindings.

 

We donot anticipate a significant change in the balance of our unrecognized taxbenefits within the next 12 months.

 

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Thefollowing is an analysis of our deferred tax assets and liabilities (inthousands):

 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Deferred tax assets:               |       |                  |       |   |   |
| Accrued liabilities and allowances |       | $                     | 11,013     |   | $ | 10,582 |   |
| State operating loss carryforwards |       | 3,863                 |       | 3,005 |   |
| Deferred compensation              |       | 3,484                 |       | 2,276 |   |
| Other                              |       | 240                   |       | 157 |   |
| Total deferred tax assets          |       | 18,600                |       | 16,020 |   |
|                               |       |                  |       |   |   |
| Deferred tax liabilities:          |       |                  |       |   |   |
| Property and equipment             |       | 26,520                |       | 18,769 |   |
| Prepaid expenses                   |       | 807                   |       | 917 |   |
| Amortization                       |       | 440                   |       | — |   |
| Other                              |       | 979                   |       | 1,155 |   |
| Total deferred tax liabilities     |       | 28,746                |       | 20,841 |   |
|                               |       |                  |       |   |   |
| Valuation allowance                |       | (3,863                | )          | (3,005 | ) |
|                               |       |                  |       |   |   |
| Net deferred tax liability         |       | $                     | 14,009     |   | $ | 7,826 |   |

 

As of December 31, 2009we have net operating losses for state income taxes of approximately $38.6million on which we have provided a valuation allowance of $3.9 million. Ourtax returns are subject to periodic audit by the various jurisdictions in whichwe operate. These audits can result in adjustments of taxes due or adjustmentsof the NOLs which are available to offset future taxable income.

 

Valuationallowances of $3.9 million have been established for uncertainties in realizingthe benefit of certain state income tax loss carryforwards. For the years endedDecember 31, 2009, 2008 and 2007, changes in our state operating losscarryforwards (decreased)/increased our valuation allowance by $0.9 million,$0.9 million and ($0.4) million, respectively. In assessing the realizabilityof carryforwards, we consider whether it is more likely than not that someportion or all of the deferred tax assets will be realized. The valuationallowance will be adjusted in the periods that we determine it is more likelythan not that deferred tax assets will or will not be realized.

 

Wehave federal and state income tax net operating loss carryforwards of $0.0million and $38.6 million which will expire at various dates from 2011 through2034. Such net operating loss carryforwards expire between 2011 and 2034 asfollows:

 

| 2011 - 2016 |   | $      | 443    |   |
|-------------|--------|--------|--------|--------|
| 2017 - 2022 |   | 4,760  |   |
| 2023 - 2034 |   | 33,406 |   |
|        |   | $      | 38,609 |   |

 

The components of our income tax provision were asfollows (in thousands):

 
| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                       |       |                             |       |   |   |   |   |
| Federal current provision                  |       | $                                | 9,400      |   | $ | 11,200 |   | $ | 6,213 |   |
| State current provision                    |       | 2,186                            |       | 2,947 |   | 1,276 |   |
| Total current provision                    |       | 11,586                           |       | 14,147 |   | 7,489 |   |
|                                       |       |                             |       |   |   |   |   |
| Federal deferred provision                 |       | 5,111                            |       | 1,250 |   | 1,034 |   |
| State deferred provision                   |       | 1,258                            |       | 206 |   | 312 |   |
| Total deferred provision                   |       | 6,369                            |       | 1,456 |   | 1,346 |   |
|                                       |       |                             |       |   |   |   |   |
| Total provision from continuing operations |       | $                                | 17,955     |   | $ | 15,603 |   | $ | 8,835 |   |

 

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The following is a reconciliation of income taxes atthe statutory federal income tax rate of 35% to the income tax provisionrecorded by us (in thousands):

 
| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Computed taxes at statutory rate           |       | $                                          | 15,585     |   | $ | 13,384 |   | $ | 7,263 |   |
| State income taxes, net of federal benefit |       | 2,150                                      |       | 2,046 |   | 1,109 |   |
| Other                                      |       | 220                                        |       | 173 |   | 463 |   |
|                                       |       | $                                          | 17,955     |   | $ | 15,603 |   | $ | 8,835 |   |

 

**11.****      ****CREDITFACILITIES**

 

Our long-term debt consistedof the following (in thousands):

 
| ** **                                                                                                                                                                            | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Debt of Cornell  Companies, Inc.:**                                                                                                                                            | ** ** | ** **            | ** ** | ** ** | ** ** |
| Senior Notes, unsecured, due July 2012 with  an interest rate of 10.75%, net of discount                                                                                         |       | $                     | 111,540    |   | $ | 111,356 |   |
| Revolving Line of Credit due December 2011  with an interest rate of LIBOR plus 1.50% to 2.25% or prime plus 0.00%  to 0.75% (the “Amended Credit Facility”) |       | 70,000                |       | 75,000 |   |
| Capital lease obligations                                                                                                                                                             |       | 14                    |       | 26 |   |
| Subtotal                                                                                                                                                                              |       | 181,554               |       | 186,382 |   |
|                                                                                                                                                                                  |       |                  |       |   |   |
| **Debt of Special Purpose  Entities:**                                                                                                                                                | ** ** | ** **            | ** ** | ** ** | ** ** |
| 8.47% Bonds due 2016                                                                                                                                                                  |       | 121,700               |       | 134,100 |   |
|                                                                                                                                                                                  |       |                  |       |   |   |
| Total consolidated debt                                                                                                                                                               |       | 303,254               |       | 320,482 |   |
|                                                                                                                                                                                  |       |                  |       |   |   |
| Less: current maturities                                                                                                                                                              |       | (13,413               | )          | (12,412 | ) |
|                                                                                                                                                                                  |       |                  |       |   |   |
| Consolidated long-term debt                                                                                                                                                           |       | $                     | 289,841    |   | $ | 308,070 |   |

 

***Long-Term Credit Facilities.***   Our Amended CreditFacility provides for borrowings up to $100.0 million (including letters ofcredit) and matures in December 2011. At our election, outstanding borrowings bear interest at either theLIBOR rate plus a margin ranging from 1.50% to 2.25% or a rate which rangesfrom 0.00% to 0.75% above the applicable prime rate. The applicable margins aresubject to adjustments based on our total leverage ratio.  The available commitment under our AmendedCredit Facility was approximately $17.9 million at December 31, 2009.  We had outstanding borrowings under ourAmended Credit Facility of $70.0 million and we had outstanding letters ofcredit of approximately $12.1 million at December 31, 2009.  Subject to certain requirements, we have theright to increase the commitments under our Amended Credit Facility up to$150.0 million, although the indenture for our Senior Notes limits our ability,subject to certain conditions, to expand the Amended Credit Facility beyond$100.0 million.  We can provide noassurance that all of the banks that have made commitments to us under ourAmended Credit Facility would be willing to participate in an expansion to theAmended Credit Facility should we desire to do so.  The Amended Credit Facility is collateralized by substantially all of our assets, includingthe assets and stock of all of our subsidiaries. The Amended Credit Facility isnot collateralized by the assets of MCF.

 

Our Amended Credit Facility containscertain financial and other restrictive covenants that limit our ability toengage in certain activities.  Ourability to borrow under the Amended Credit Facility is subject to compliancewith certain financial covenants, including bank leverage, total leverage andfixed charge coverage ratios.  At December 31,2009, we were in compliance with all such covenants.  Our Amended Credit Facility includes otherrestrictions that, among other things, limit our ability to: incurindebtedness; grant liens; engage in mergers, consolidations and liquidations;make investments, restricted payments and asset dispositions; enter intotransactions with affiliates; and engage in sale/leaseback transactions.

 

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MCF is obligated for the outstandingbalance of its 8.47% Taxable Revenue Bonds, Series 2001.  The bonds bear interest at a rate of 8.47%per annum and are payable in semi-annual installments of interest and annualinstallments of principal.  All unpaidprincipal and accrued interest on the bonds is due on the earlier of August 1,2016 (maturity) or as noted under the bond documents.

 

The bonds are limited, nonrecourseobligations of MCF and are collateralized by the property and equipment, bondreserves, assignment of subleases and substantially all assets related to thefacilities included in the 2001 Sale and Leaseback Transaction (in which wesold eleven facilities to MCF (as identified in Item 1 — Facilities of thisreport)).  The bonds are not guaranteedby Cornell.

 

In June 2004, we issued $112.0 million in principal of 10.75%Senior Notes (the “Senior Notes”) due July 1, 2012.  The Senior Notes are unsecured seniorindebtedness and are guaranteed by all of our existing and future subsidiaries(collectively, the “Guarantors”).  TheSenior Notes are not guaranteed by MCF (the “Non-Guarantor”).  Interest on the Senior Notes is payablesemi-annually on January 1 and July 1 of each year, commencing January 1,2005.  On or after July 1, 2008, wewere able to redeem all or a portion of the Senior Notes at the redemptionprices (expressed as a percentage of the principal amount) listed below, plusaccrued and unpaid interest, if any, on the Senior Notes redeemed, to theapplicable date of redemption, if redeemed during the 12-month periodcommencing on July 1 of each of the remaining years indicated below.

 

| **Year**             | ** ** | **Percentages** | ** ** |
|----------------------|------------|-----------------|------------|
| 2009                 |       | 102.688         | %          |
| 2010 and  thereafter |       | 100.000         | %          |

 

Asthe Senior Notes are redeemable at our option (subject to the requirementsnoted) we anticipate we will monitor the capital markets and continue to assessour capital needs and our capital structure, including a potential refinancingof the Senior Notes.

 

Uponthe occurrence of specified change of control events, unless we have exercisedour option to redeem all the Senior Notes as described above, each holder willhave the right to require us to repurchase all or a portion of such holder’sSenior Notes at a purchase price in cash equal to 101% of the aggregateprincipal amount of the notes repurchased plus accrued and unpaid interest, ifany, on the Senior Notes repurchased, to the applicable date of purchase.  The Senior Notes were issued under anindenture which limits our ability and the ability of our Guarantors to, amongother things, incur additional indebtedness, pay dividends or make other distributions,make other restricted payments and investments, create liens, incurrestrictions on the ability of the Guarantors to pay dividends or otherpayments to us, enter into transactions with affiliates, and engage in mergers,consolidations and certain sales of assets.

 

Scheduled maturities of our consolidated long-termdebt are as follows (in thousands):

 
| ** **                            | ** ** | **Cornell  Companies, Inc.** | ** ** | **MCF**    | ** ** | **Consolidated** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|------------|------------|------------------|------------|
| ** **                            | ** ** | ** **                        | ** ** | ** ** | ** ** | ** **       | ** ** |
| For the year ending December 31, |       |                              |       |       |       |             |       |
| 2010                                  |       | $                                 | 13         |       | $          | 13,400           |       | $ | 13,413 |   |
| 2011                                  |       | 70,001                            |       | 14,600     |       | 84,601           |       |
| 2012                                  |       | 112,000                           |       | 15,800     |       | 127,800          |       |
| 2013                                  |       | —                            |       | 17,200     |       | 17,200           |       |
| Thereafter                            |       | —                            |       | 60,700     |       | 60,700           |       |
| Total                                 |       | $                                 | 182,014    |       | $          | 121,700          |       | $ | 303,714 |   |

 

**12.  COMMITMENTSAND CONTINGENCIES**

 

***FinancialGuarantees***

 

During the normal course of business, we enter intocontracts that contain a variety of representations and warranties and providegeneral indemnifications. Our maximum exposure under these arrangements isunknown as this would involve future claims that may be made against us thathave not yet occurred. However, based on experience, we believe the risk ofloss to be remote.

 

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***Operating Leases***

 

We lease office space, certain facilities andfurniture and equipment under long-term operating leases. Rent expense for alloperating leases for the years ended December 31, 2009, 2008 and 2007 wasapproximately $10.9 million, $10.2 million and $10.4 million, respectively.

 

Landlord incentives or allowances under operatingleases are recorded as deferred rent and amortized as a reduction of rent expenseover the lease term. Those operating leases with step rent provisions orescalation clauses that are not considered contingent rent are recognized on astraight-line basis over the lease term. For those leases that include anexisting index or rate, such as the consumer price index or the prime interestrate, the related minimum lease payments are recognized on a straight-linebasis over the lease term and the amount of rent considered to be contingent isrecorded as incurred and is not included in the straight-line basis rentexpense. We do not receive significant sublease rentals under any of ourexisting operating leases.

 

Certain of our leases contain renewal options, whichrange from additional rental periods of one to five years. Escalation clausesare also included in certain of our leases. There are no significantrestrictions imposed by our lease agreements concerning such issues as dividendpayments, incurrence of additional debt or further leasing.

 

As of December 31, 2009, we had the followingrental commitments under noncancelable operating leases (in thousands):

 
| For  the year ending December 31, | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
| 2010                                   |       | $          | 15,820     |   |
| 2011                                   |       | 13,556     |       |
| 2012                                   |       | 13,187     |       |
| 2013                                   |       | 12,966     |       |
| Thereafter                             |       | 71,326     |       |
| Total                                  |       | $          | 126,855    |   |

 

The following schedule shows the composition oftotal rental expense for all operating leases (in thousands):

 
| ** **              | ** ** | **Year Ended  December 31,** | ** ** |
|-------------------------|------------|-----------------------------------|------------|
| ** **              | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Minimum  rentals        |       | $                                 | 10,419     |   | $ | 9,708 |   | $ | 9,911 |   |
| Contingent  rentals     |       | 437                               |       | 449 |   | 458 |   |
| Less:  sublease rentals |       | (97                               | )          | (221 | ) | (246 | ) |
| Total                   |       | $                                 | 10,758     |   | $ | 9,936 |   | $ | 10,123 |   |

 

***401(k) Plan***

 

We have a defined contribution 401(k) plan. Ourmatching contribution currently represents 50% of a participant’s contribution,up to the first 6% of the participant’s salary. We recorded contributionexpense of approximately $1.6 million, $1.7 million and $1.3 million for eachof the years ended December 31, 2009, 2008 and 2007, respectively.

 

***Legal Proceedings***

 

We are party to various legal proceedings, includingthat noted below. While management presently believes that the ultimate outcomeof these proceedings will not have a material adverse effect on our financialposition, overall trends in results of operations or cash flows, litigation issubject to inherent uncertainties, and unfavorable rulings could occur. Anunfavorable ruling could include monetary damages or equitable relief, andcould have a material adverse impact on the net income of the period in whichthe ruling occurs or in future periods.

 

***Valencia County Detention Center***

 

InApril 2007, a lawsuit was filed against the Company in the FederalDistrict Court in Albuquerque, New Mexico, by Joe Torres and Eufrasio Armijo,who each alleged that he was strip searched at the Valencia County DetentionCenter (“VCDC”) in New Mexico in violation of his federal rights under theFourth, Fourteenth and Eighth amendments to the U.S. Constitution.  Theclaimants also alleged violation of their rights under state law and sought tobring the case as a class action 

 

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onbehalf of themselves and all detainees at VCDC during the applicable statutesof limitation.  The plaintiffs sought damages and declaratory and injunctiverelief.  Valencia County is also a named defendant in the case andoperated the VCDC for a significantly greater portion of the period covered bythe lawsuit.

 

InDecember 2008, the parties agreed to a proposed stipulation of settlementand, in July 2009, the Court granted final approval of thesettlement.  The settlement amount underthe terms of the agreement is $3.3 million. Cornell’sportion of the stipulated settlement, based on the number of inmates housed atVCDC during the time Cornell operated the facility in comparison to the numberof inmates housed at the facility during the time Valencia County operated thefacility, is $1.2 million and was funded principally through our generalliability and professional liability coverage. The claims administrationprocess is under way and we expect it to be completed in the first half of2010.

 

Inthe year ended December 31, 2007, we previously provided insurancereserves for this matter (as part of our regular review of reported andunreported claims) totaling approximately $0.5 million.  During the fourth quarter of 2008, werecorded an additional settlement charge of approximately $0.7 million and therelated reimbursement from our general liability and professional liabilityinsurance.  The charge and reimbursementwere recognized in general and administrative expenses for the year ended December 31,2008.  The reimbursement was funded bythe insurance carrier in the first quarter of 2009 into a settlement account, where it willremain until payments are made to the settlement class members.

 

***Other***

 

Wehold insurance policies to cover potential director and officer liability, someof which may limit our cash outflows in the event of a decision adverse to usin the matter discussed above. However, if an adverse decision in the matterexceeds the insurance coverage or if the insurance coverage is deemed not toapply to the matter, it could have a material adverse effect on us, ourfinancial condition, results of operations and future cash flows.

 

Wecurrently and from time to time are subject to claims and suits arising in theordinary course of business, including claims for damages for personal injuriesor for wrongful restriction of or interference with offender privileges andemployment matters. If an adverse decision in these matters exceeds ourinsurance coverage, or if our coverage is deemed not to apply to these matters,or if the underlying insurance carrier was unable to fulfill its obligationunder the insurance coverage provided, it could have a material adverse effecton our financial condition, results of operations or cash flows.

 

Whilethe outcome of such other matters cannot be predicted with certainty, based onthe information known to date, we believe that the ultimate resolution of thesematters will not have a material adverse effect on our financial condition, butcould be material to operating results or cash flows for a particular reportingperiod.

 

**13.  EQUITY**

 

***Preferred Stock***

 

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

 

***Options andWarrants***

 

Under our 2000 Broad-Based Employee Plan (the “2000Plan”) we may grant non-qualified stock options to our employees, directors andeligible consultants for up to the greater of 400,000 shares or 4% of theaggregate number of shares of common stock issued and outstanding immediatelyafter grant of any option under the 2000 Plan. However, in conjunction with theapproval of the amended and restated 2006 Incentive Plan and the amendments tothe 2000 Directors Stock Plan, the Company agreed not to thereafter grant anyadditional awards under the 2000 Broad-Based Employee Plan or the 1996 Stock OptionPlan. The 2000 Plan options vest up to five years and expire ten years from thegrant date. Under our 1996 Stock Option Plan, as amended and restated in April 1998(the “1996 Plan”) we may grant non-qualified and incentive stock options for upto the greater of 1,932,119 shares or 15.0% of the aggregate number of sharesof common stock outstanding. The 1996 Plan options vest up to seven years andexpire seven to ten years from the grant date. The Compensation Committee ofthe Board of Directors, which consists entirely of independent directors, isresponsible for determining the exercise price and vesting terms for thegranted options. The 1996 Plan and 2000 Plan option exercise prices could be noless than the market price of our common stock on the date of grant.

 

In conjunction with the issuance of subordinatednotes in July 2000 (which are no longer outstanding), we issued warrantsto purchase 290,370 shares of the common stock at an exercise price of $6.70.We recognized the fair value of these warrants of $1.1 million as additionalpaid-in capital. The warrants could only be exercised by payment of theexercise price 

 

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incash to us, by cancellation of an amount of warrants equal to the fair marketvalue of the exercise price, or by the cancellation of our indebtedness owed tothe warrant holder. During 2001, 168,292 shares of our common stock were issuedin conjunction with the exercise and cancellation of 217,778 warrants. At December 31,2006, 72,592 warrants were outstanding. During 2007, all 72,592 warrants were exercised and canceled.

 

For a summary of the status of our various optionplans at December 31, 2009, see Note 3 to the consolidated financialstatements.

 

***Treasury Stock***

 

We did not repurchase any of our common stock in theyears ended December 31, 2009 and 2008. Under the terms of our SeniorNotes and our Amended Credit Facility, we can purchase shares of our stocksubject to certain cumulative restrictions.

 

Underthe terms of our Senior Notes and our Amended Credit Facility, we can purchaseshares of our stock subject to certain cumulative restrictions. In July 2009, our Board of Directorsauthorized a stock repurchase program which provides for up to $10.0 million inpurchases through December 2010.  InSeptember 2009, we adopted a 10b5-1 Plan to facilitate purchases of ourcommon stock pursuant to such stock repurchase plan.  The Company may also repurchase our commonstock in open market purchases.

 

***Employee StockPurchase Plan***

 

We have an employee stock purchase plan under whichemployees can make contributions to purchase our common stock. Participation inthe plan is elected annually by employees. The plan year begins each January 1st (the “Exercise Date”) and ends on December 31st (the “Ending Date”).  Purchases of common stock are made at the endof the year using the lower of the fair market value on either the BeginningDate or Ending Date, less a 15.0% discount. For the years ended December 31,2009, 2008 and 2007, employee contributions of approximately $0.3 million, $0.1million and $0.2 million were used to purchase 18,277 shares, 8,883 shares and25,348 shares, respectively, of our common stock.

 

***2006  Incentive Plan***

 

Our stockholders approved the (a) establishmentof the 2006 Equity Incentive Plan at our June 29, 2006 annual meeting andthe (b) amendment and restatement of such plan and change of name to the2006 Incentive Plan (the “2006 Plan”) at our June 18, 2009 annual meeting.The purpose of the 2006 Plan is to promote the interests of the Company and itsstockholders by (i) attracting and retaining employees, directors, andconsultants of the Company and its affiliates, (ii) motivating suchindividuals by means of performance-related incentives to achieve longer-rangeperformance goals, and (iii) enabling such individuals to participate inthe long-term growth and financial success of the Company. At the discretion ofthe Compensation Committee, any employee, director, or consultant of theCompany or its affiliates may be granted an award under the 2006 Plan. TheCompensation Committee administers the 2006 Plan.

 

A total of 2,265,000 shares of common stock areauthorized for issuance under the 2006 Plan. Stock options (both non-qualifiedstock options and incentive stock options), stock appreciation rights,restricted stock, restricted stock units, performance awards, stockcompensation and other stock-based awards and cash incentive awards may begranted under the 2006 Plan. The authorized shares under the 2006 Plan are in a“fungible pool”, with (a) each share granted in an award after June 18,2009, in a form other than an option or a stock appreciation right (a “Full-ValueAward”) counted against the 2,265,000 share limit as 1.6 shares (prior to June 18,2009, shares granted under a Full-Value Award were counted against the sharelimit as 2 shares for each share awarded) and (b) each share subject anaward in the form of options and stock appreciation rights counted against theshare limit as 1 share for every 1 share granted.

 

In the event of a Change of Control, as defined inthe 2006 Plan, any outstanding stock option, stock appreciation right,non-performance based restricted stock or restricted stock unit award, andperformance based restricted stock, restricted stock units, performance shareor performance unit award or cash incentive award (unless otherwise provided inthe award agreement) will automatically vest. Upon a Change of Control, theBoard of Directors may also take any one or more of the following actions: (i) providefor the purchase of any outstanding awards by the Company; (ii) makeadjustments to any outstanding awards; or (iii) allow for the assumptionor substitution of outstanding awards by the acquiring or survivingcorporation.  Grants of 176,700 shares,161,000 shares and 287,000 shares of restricted stock were made under the 2006Plan during the years ended December 31, 2009, 2008 and 2007, respectively.  A grant of 40,000 options was made under the2006 Plan during the year ended December 31, 2009.

 

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**14.  DERIVATIVEFINANCIAL INSTRUMENTS AND GUARANTEES**

 

***Debt ServiceReserve Fund and Debt Service Fund***

 

In August 2001, MCF completed a bond offeringto finance the 2001 Sale and Leaseback Transaction in which we sold elevenfacilities (as identified in Item 1 of this report) to MCF. In connection withthis bond offering, two reserve fund accounts were established by MCF pursuantto the terms of the indenture: (1) MCF’s Debt Service Reserve Fund,aggregating $23.4 million at December 31, 2009, was established to: (a) makepayments on MCF’s outstanding bonds in the event we (as lessee) should fail tomake the scheduled rental payments to MCF or (b) to the extent paymentswere not made under (a), then to make final debt service payments on the thenoutstanding bonds and (2) MCF’s Bond Fund Payment Account, (as reported inBond Fund Payment Account and other restricted assets in our ConsolidatedBalance Sheet) aggregating $9.8 million at December 31, 2009, wasestablished to accumulate the monthly lease payments that MCF receives from usuntil such funds are used to pay MCF’s semi-annual bond interest and annualbond principal payments, with any excess to pay certain other expenses and tomake certain transfers. These reserve funds are invested in short-term moneymarkets and commercial paper. Both reserve fund accounts were subject to theagreements with the MCF Equity Investors (Lehman Brothers, Inc. (“Lehman”))whereby guaranteed rates of return of 3.0% and 5.08%, respectively, areprovided for in the balance of the Debt Service Reserve Fund and the Bond FundPayment Account. The guaranteed rates of return were characterized as cash flowhedge derivative instruments. At inception, the derivatives had an aggregatefair value of $4.0 million, which has been recorded as a decrease to the equityinvestment in MCF made by the MCF Equity Investors (MCF non-controllinginterest) and is included in other long-term liabilities in our ConsolidatedBalance Sheets. Changes in the fair value of the derivative instruments wererecorded as an adjustment to other long-term liabilities and reported as othercomprehensive income (loss) in our Consolidated Statements of Operations andComprehensive Income (Loss). Due to the bankruptcy of Lehman in 2008, thederivative instrument no longer qualified as a hedge and was de-designated.Amounts included in accumulated other comprehensive income are reclassifiedinto earnings during the same periods in which interest is earned on the debtservice funds (approximately $0.3 million was amortized and recognized inearnings in the year ended December 31, 2009 and none in either of theyears ended December 31, 2008 and 2007). Changes in the fair value of thisderivative after de-designation were recorded into earnings. At December 31,2008, the fair value was determined to be zero. The derivatives were terminatedby MCF in the first quarter of 2009 with a fair value of zero.

 

In connection with MCF’s bond offering, Lehman alsoprovided a guarantee of the Debt Service Reserve Fund if a bankruptcy of theCompany were to occur and a trustee for the estate of the Company were toinclude the Debt Service Reserve Fund as an asset of the Company’s estate. Thisguarantee was characterized as an insurance contract and its fair value wasbeing amortized to expense over the life of the debt. Due to the bankruptcy ofLehman in 2008, the full carrying value of the guarantee was determined to beunrecoverable.  Accordingly, we recordeda charge of $1.3 million in the year ended December 31, 2008. This chargeis included in interest expense in the accompanying consolidated financialstatements.

 

**15.  RELATEDPARTY TRANSACTIONS**

 

InSeptember 1999, we entered into a non-compete agreement with Cornell’sfounder, David Cornell, who was a director of Cornell through October 2003.  The non-compete agreement had a term of 10years and required us to pay a monthly fee of $10,000 for the seven-yearinitial term of the consulting agreement. We capitalized the monthly payments and amortized the amounts over the10-year term of the non-compete agreement. Due to his death in December 2008,the remaining unamortized balance was written-off. We recognized amortizationexpense related to this agreement of approximately $84,000 for each of theyears ended December 31, 2008 and 2007. These expenses were included ingeneral and administrative expenses in 2008 and 2007, respectively.

 

Wemaintained a life insurance policy for Mr. Cornell and made paymentsrelated to this policy of approximately $0.2 million for each of the yearsended December 31, 2008 and 2007. As a result of Mr. Cornell’s deathin December 2008, we received a return of cash premiums previously paid ofapproximately $2.0 million in December 2008.

 

Weentered into a consulting agreement with a former director, Arlene Lissner,which expired in December 2008. Services rendered under this agreement included research and analysisfor various topics including data collection, support and training for programdevelopment; performance-based contractual requirements and performance-improvementprocesses, accreditations and regulatory requirements.  Payments under this agreement totaled $0.3million for each of the years ended December 31, 2008 and 2007.  The agreement concluded in 2008 and was notrenewed.

 

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**16.  SEGMENTDISCLOSURE**

 

Our three operating divisions are our reportablesegments. The Adult Secure Services segment consists of the operations ofsecure adult incarceration facilities. The Abraxas Youth and Family Servicessegment consists of providing residential treatment and educational programsand non-residential community-based programs to juveniles between the ages of10 and 18 who have either been adjudicated or suffer from behavioral problems.The Adult Community-Based Services segment consists of providing pre-releaseand halfway house programs for adult offenders who are either on probation orserving the last three to six-months of their sentences on parole and preparingfor re-entry into society at large as well as community-based treatment andeducation programs as an alternative to incarceration. All of our customers andlong-lived assets are located in the United States of America. The accountingpolicies of our reportable segments are the same as those described in thesummary of significant accounting policies in Note 2 to the consolidatedfinancial statements. Intangible assets are not included in each segment’sreportable assets, and the amortization of intangible assets is not included inthe determination of a segment’s operating income. We evaluate performancebased on income or loss from operations before general and administrativeexpenses, incentive bonuses, amortization of intangibles, interest and incometaxes. Corporate and other assets are comprised primarily of cash, investmentsecurities available for sale, accounts receivable, debt service fund,deposits, property and equipment, deferred taxes, deferred costs and other assets.Corporate and other expense from operations primarily consists of depreciationand amortization on the corporate office facilities and equipment and specificgeneral and administrative charges pertaining to corporate personnel and ispresented separately as such charges cannot be readily identified forallocation to a particular segment.

 

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The only significant non-cash items reported in therespective segments’ income from operations is depreciation and amortization(excluding intangibles) and impairment of long-lived assets (in thousands).

 
| ** **                              | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                    |       |                                       |       |   |   |   |   |
| Revenue:                                |       |                                       |       |   |   |   |   |
| Adult secure services                   |       | $                                          | 233,586    |   | $ | 209,283 |   | $ | 183,199 |   |
| Abraxas youth and family services       |       | 105,304                                    |       | 107,278 |   | 109,297 |   |
| Adult community-based services          |       | 73,487                                     |       | 70,163 |   | 68,108 |   |
| Total revenue                           |       | $                                          | 412,377    |   | $ | 386,724 |   | $ | 360,604 |   |
|                                    |       |                                       |       |   |   |   |   |
| Bureau of Prison Revenues (1):          |       |                                       |       |   |   |   |   |
| Adult secure services                   |       | $                                          | 115,938    |   | $ | 108,635 |   | $ | 95,022 |   |
| Abraxas youth and family services       |       | —                                     |       | — |   | — |   |
| Adult community-based services          |       | 27,114                                     |       | 23,665 |   | 22,439 |   |
| Total Bureau of Prison revenues         |       | $                                          | 143,052    |   | $ | 132,300 |   | $ | 117,461 |   |
|                                    |       |                                       |       |   |   |   |   |
| Pre-opening and start-up expenses:      |       |                                       |       |   |   |   |   |
| Adult secure services                   |       | $                                          | 4,086      |   | $ | — |   | $ | — |   |
| Abraxas youth and family services       |       | —                                     |       | — |   | — |   |
| Adult community-based services          |       | —                                     |       | — |   | — |   |
| Total pre-opening and start-up expenses |       | $                                          | 4,086      |   | $ | — |   | $ | — |   |
|                                    |       |                                       |       |   |   |   |   |
| Depreciation and amortization:          |       |                                       |       |   |   |   |   |
| Adult secure services                   |       | $                                          | 12,156     |   | $ | 10,504 |   | $ | 8,570 |   |
| Abraxas youth and family services       |       | 2,909                                      |       | 2,866 |   | 2,736 |   |
| Adult community-based services          |       | 1,693                                      |       | 1,535 |   | 1,525 |   |
| Amortization of intangibles             |       | 1,135                                      |       | 2,200 |   | 2,407 |   |
| Corporate and other                     |       | 940                                        |       | 838 |   | 748 |   |
| Total depreciation and amortization     |       | $                                          | 18,833     |   | $ | 17,943 |   | $ | 15,986 |   |
|                                    |       |                                       |       |   |   |   |   |
| Income from operations:                 |       |                                       |       |   |   |   |   |
| Adult secure services                   |       | $                                          | 64,824     |   | $ | 63,170 |   | $ | 44,096 |   |
| Abraxas youth and family services       |       | 7,353                                      |       | 8,829 |   | 13,069 |   |
| Adult community-based services          |       | 23,714                                     |       | 19,191 |   | 16,511 |   |
| Subtotal                                |       | 95,891                                     |       | 91,190 |   | 73,676 |   |
| General and administrative expenses     |       | (24,112                                    | )          | (25,954 | ) | (25,499 | ) |
| Amortization of intangibles             |       | (1,135                                     | )          | (2,200 | ) | (2,406 | ) |
| Corporate and other                     |       | (943                                       | )          | (839 | ) | (762 | ) |
| Total income from operations            |       | $                                          | 69,701     |   | $ | 62,197 |   | $ | 45,009 |   |
|                                    |       |                                       |       |   |   |   |   |
| Capital expenditures:                   |       |                                       |       |   |   |   |   |
| Adult secure services                   |       | $                                          | 17,750     |   | $ | 76,703 |   | $ | 48,538 |   |
| Abraxas youth and family services       |       | 1,190                                      |       | 1,808 |   | 1,351 |   |
| Adult community-based services          |       | 2,942                                      |       | 956 |   | 310 |   |
| Corporate and other                     |       | 419                                        |       | 448 |   | 691 |   |
| Total capital expenditures              |       | $                                          | 22,301     |   | $ | 79,915 |   | $ | 50,890 |   |
|                                    |       |                                       |       |   |   |   |   |
| Assets:                                 |       |                                       |       |   |   |   |   |
| Adult secure services                   |       | $                                          | 356,247    |   | $ | 358,406 |   | $ | 290,930 |   |
| Abraxas youth and family services       |       | 103,276                                    |       | 105,991 |   | 109,478 |   |
| Adult community-based services          |       | 62,251                                     |       | 60,170 |   | 63,008 |   |
| Intangible assets, net                  |       | 14,493                                     |       | 15,628 |   | 17,875 |   |
| Corporate and other                     |       | 114,298                                    |       | 96,726 |   | 81,496 |   |
| Total assets                            |       | $                                          | 650,565    |   | $ | 636,921 |   | $ | 562,287 |   |

 

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(1) The Bureau of Prisons (“BOP”) isour only customer which makes up greater than 10% of our consolidated revenues.

 

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**17.  GUARANTOR DISCLOSURES**

 

Wecompleted an offering of $112.0 million of Senior Notes in June 2004. TheSenior Notes are guaranteed by each of our subsidiaries (“GuarantorSubsidiaries”). The Guarantor Subsidiaries are 100% owned and are full andunconditional.  MCF does not guaranteethe Senior Notes (“Non-Guarantor Subsidiary”). These guarantees are joint andseveral obligations of the Guarantor Subsidiaries. The following condensedconsolidating financial information presents the financial condition, resultsof operations and cash flows of the Guarantor Subsidiaries and theNon-Guarantor Subsidiary, together with the consolidating adjustments necessaryto present our results on a consolidated basis.

 

# **Condensed Consolidating Balance Sheet as of December 31, 2009 (inthousands)**

# ** **

| ** **                                                   | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor****Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                   | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current  assets:                                             |       |       |       |                        |       |                              |       |             |       |             |       |
| Cash and cash  equivalents                                   |       | $          | 27,386     |                        | $          | 317                               |       | $                | 21         |             | $          | — |   | $ | 27,724 |   |
| Accounts  receivable                                         |       | 1,471      |       | 59,561                      |       | 51                                |       | —           |       | 61,083           |       |
| Restricted  assets                                           |       | —     |       | 3,831                       |       | 26,147                            |       | —           |       | 29,978           |       |
| Prepaids and  other                                          |       | 20,024     |       | 1,466                       |       | —                            |       | —           |       | 21,490           |       |
| Total current  assets                                        |       | 48,881     |       | 65,175                      |       | 26,219                            |       | —           |       | 140,275          |       |
| Property and  equipment, net                                 |       | 7          |       | 322,396                     |       | 138,719                           |       | (5,599           | )          | 455,523          |       |
| Other assets:                                                |       |       |       |                        |       |                              |       |             |       |             |       |
| Restricted  assets                                           |       | —     |       | —                      |       | 27,017                            |       | —           |       | 27,017           |       |
| Deferred  costs and other                                    |       | 66,623     |       | 20,029                      |       | 4,758                             |       | (63,660          | )          | 27,750           |       |
| Investment in  subsidiaries                                  |       | 98,003     |       | 1,856                       |       | —                            |       | (99,859          | )          | —           |       |
| Total assets                                                 |       | $          | 213,514    |                        | $          | 409,456                           |       | $                | 196,713    |             | $          | (169,118 | ) | $ | 650,565 |   |
|                                                         |       |       |       |                        |       |                              |       |             |       |             |       |
| **Liabilities and Equity**                                   | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                         |       |       |       |                        |       |                              |       |             |       |             |       |
| Current  liabilities:                                        |       |       |       |                        |       |                              |       |             |       |             |       |
| Accounts  payable and accrued liabilities                    |       | $          | 42,192     |                        | $          | 15,725                            |       | $                | 4,370      |             | $          | — |   | $ | 62,287 |   |
| Current  portion of long-term debt                           |       | —     |       | 13                          |       | 13,400                            |       | —           |       | 13,413           |       |
| Total current  liabilities                                   |       | 42,192     |       | 15,738                      |       | 17,770                            |       | —           |       | 75,700           |       |
| Long-term  debt, net of current portion                      |       | 181,540    |       | 1                           |       | 108,300                           |       | —           |       | 289,841          |       |
| Deferred tax  liabilities                                    |       | 21,710     |       | 94                          |       | —                            |       | 2,651            |       | 24,455           |       |
| Other  long-term liabilities                                 |       | 5,766      |       | —                      |       | 63,750                            |       | (67,685          | )          | 1,831            |       |
| Intercompany                                                 |       | (296,432   | )          | 297,594                     |       | —                            |       | (1,162           | )          | —           |       |
| Total liabilities                                            |       | (45,224    | )          | 313,427                     |       | 189,820                           |       | (66,196          | )          | 391,827          |       |
| Total Cornell Companies, Inc. stockholders’ equity |       | 256,346    |       | 96,029                      |       | 6,893                             |       | (102,922         | )          | 256,346          |       |
| Non-controlling  interest                                    |       | 2,392      |       | —                      |       | —                            |       | —           |       | 2,392            |       |
| Total equity                                                 |       | 258,738    |       | 96,029                      |       | 6,893                             |       | (102,922         | )          | 258,738          |       |
| Total liabilities and equity                                 |       | $          | 213,514    |                        | $          | 409,456                           |       | $                | 196,713    |             | $          | (169,118 | ) | $ | 650,565 |   |

 

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# **Condensed Consolidating Balance Sheet as of December 31, 2008 (inthousands)**

 
| ** **                                                   | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor****Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                   | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current  assets:                                             |       |       |       |                        |       |                              |       |             |       |             |       |
| Cash and cash  equivalents                                   |       | $          | 14,291     |                        | $          | 265                               |       | $                | 57         |             | $          | — |   | $ | 14,613 |   |
| Accounts  receivable                                         |       | 2,045      |       | 66,921                      |       | 422                               |       | —           |       | 69,388           |       |
| Restricted  assets                                           |       | —     |       | 3,432                       |       | 23,758                            |       | —           |       | 27,190           |       |
| Prepaids and  other                                          |       | 13,875     |       | 1,644                       |       | —                            |       | —           |       | 15,519           |       |
| Total current  assets                                        |       | 30,211     |       | 72,262                      |       | 24,237                            |       | —           |       | 126,710          |       |
| Property and  equipment, net                                 |       | 101        |       | 312,446                     |       | 141,975                           |       | (4,168           | )          | 450,354          |       |
| Other assets:                                                |       |       |       |                        |       |                              |       |             |       |             |       |
| Restricted  assets                                           |       | —     |       | —                      |       | 27,930                            |       | —           |       | 27,930           |       |
| Deferred  costs and other                                    |       | 60,322     |       | 23,267                      |       | 5,367                             |       | (57,029          | )          | 31,927           |       |
| Investment in  subsidiaries                                  |       | 73,642     |       | 1,856                       |       | —                            |       | (75,498          | )          | —           |       |
| Total assets                                                 |       | $          | 164,276    |                        | $          | 409,831                           |       | $                | 199,509    |             | $          | (136,695 | ) | $ | 636,921 |   |
|                                                         |       |       |       |                        |       |                              |       |             |       |             |       |
| **Liabilities and Equity**                                   | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                         |       |       |       |                        |       |                              |       |             |       |             |       |
| Current  liabilities:                                        |       |       |       |                        |       |                              |       |             |       |             |       |
| Accounts  payable and accrued liabilities                    |       | $          | 48,373     |                        | $          | 15,515                            |       | $                | 4,883      |             | $          | 322 |   | $ | 69,093 |   |
| Current  portion of long-term debt                           |       | —     |       | 12                          |       | 12,400                            |       | —           |       | 12,412           |       |
| Total current  liabilities                                   |       | 48,373     |       | 15,527                      |       | 17,283                            |       | 322              |       | 81,505           |       |
| Long-term  debt, net of current portion                      |       | 186,356    |       | 14                          |       | 121,700                           |       | —           |       | 308,070          |       |
| Deferred tax  liabilities                                    |       | 16,246     |       | 94                          |       | —                            |       | 1,151            |       | 17,491           |       |
| Other  long-term liabilities                                 |       | 5,851      |       | 113                         |       | 56,733                            |       | (61,009          | )          | 1,688            |       |
| Intercompany                                                 |       | (320,717   | )          | 320,722                     |       | —                            |       | (5               | )          | —           |       |
| Total  liabilities                                           |       | (63,891    | )          | 336,470                     |       | 195,716                           |       | (59,541          | )          | 408,754          |       |
| Total Cornell Companies, Inc. stockholders’ equity |       | 227,722    |       | 73,361                      |       | 3,793                             |       | (77,154          | )          | 227,722          |       |
| Non-controlling interest                                     |       | 445        |       | —                      |       | —                            |       | —           |       | 445              |       |
| Total equity                                                 |       | 228,167    |       | 73,361                      |       | 3,793                             |       | (77,154          | )          | 228,167          |       |
| Total liabilities and equity                                 |       | $          | 164,276    |                        | $          | 409,831                           |       | $                | 199,509    |             | $          | (136,695 | ) | $ | 636,921 |   |

 

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# **Condensed Consolidating Statement of Operations for the year ended December 31,2009 (in thousands)**

# ** **

| ** **                                                   | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor****Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
|                                                         |       |       |       |                        |       |                              |       |             |       |             |       |
| Revenues                                                     |       | $          | 18,008     |                        | $          | 473,889                           |       | $                | 18,008     |             | $          | (97,528 | ) | $ | 412,377 |   |
| Operating  expenses, excluding depreciation and amortization |       | 19,442     |       | 373,163                     |       | 216                               |       | (97,176          | )          | 295,645          |       |
| Pre-opening  and start-up expenses                           |       | —     |       | 4,086                       |       | —                            |       | —           |       | 4,086            |       |
| Depreciation  and amortization                               |       | —     |       | 15,315                      |       | 3,521                             |       | (3               | )          | 18,833           |       |
| General and  administrative expenses                         |       | 24,037     |       | —                      |       | 75                                |       | —           |       | 24,112           |       |
| Income (loss)  from operations                               |       | (25,471    | )          | 81,325                      |       | 14,196                            |       | (349             | )          | 69,701           |       |
| Overhead  allocations                                        |       | (37,006    | )          | 37,006                      |       | —                            |       | —           |       | —           |       |
| Interest, net                                                |       | 616        |       | 14,011                      |       | 11,362                            |       | (816             | )          | 25,173           |       |
| Equity  earnings in subsidiaries                             |       | 30,309     |       | —                      |       | —                            |       | (30,309          | )          | —           |       |
| Income before  provision for income taxes                    |       | 41,228     |       | 30,308                      |       | 2,834                             |       | (29,842          | )          | 44,528           |       |
| Provision for  income taxes                                  |       | 16,602     |       | —                      |       | —                            |       | 1,353            |       | 17,955           |       |
| Net income                                                   |       | 24,626     |       | 30,308                      |       | 2,834                             |       | (31,195          | )          | 26,573           |       |
| Non-controlling  interest                                    |       | —     |       | —                      |       | —                            |       | 1,947            |       | 1,947            |       |
| Income  available to Cornell Companies, Inc.            |       | $          | 24,626     |                        | $          | 30,308                            |       | $                | 2,834      |             | $          | (33,142 | ) | $ | 24,626 |   |

 

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# **Condensed Consolidating Statement of Operations for the year ended December 31,2008 (in thousands)**

# ** **

| ** **                                                   | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor****Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
|                                                         |       |       |       |                        |       |                              |       |             |       |             |       |
| Revenues                                                     |       | $          | 18,008     |                        | $          | 439,083                           |       | $                | 18,008     |             | $          | (88,375 | ) | $ | 386,724 |   |
| Operating  expenses, excluding depreciation and amortization |       | 16,136     |       | 352,355                     |       | 174                               |       | (88,035          | )          | 280,630          |       |
| Depreciation  and amortization                               |       | —     |       | 14,364                      |       | 4,222                             |       | (643             | )          | 17,943           |       |
| General and  administrative expenses                         |       | 25,879     |       | —                      |       | 75                                |       | —           |       | 25,954           |       |
| Income (loss)  from operations                               |       | (24,007    | )          | 72,364                      |       | 13,537                            |       | 303              |       | 62,197           |       |
| Overhead  allocations                                        |       | (37,349    | )          | 37,349                      |       | —                            |       | —           |       | —           |       |
| Interest, net                                                |       | 8,000      |       | 5,093                       |       | 10,997                            |       | (132             | )          | 23,958           |       |
| Equity  earnings in subsidiaries                             |       | 31,233     |       | —                      |       | —                            |       | (31,233          | )          | —           |       |
| Income before  provision for income taxes                    |       | 36,575     |       | 29,922                      |       | 2,540                             |       | (30,798          | )          | 38,239           |       |
| Provision for  income taxes                                  |       | 14,384     |       | —                      |       | —                            |       | 1,219            |       | 15,603           |       |
| Net income                                                   |       | 22,191     |       | 29,922                      |       | 2,540                             |       | (32,017          | )          | 22,636           |       |
| Non-controlling  interest                                    |       | —     |       | —                      |       | —                            |       | 445              |       | 445              |       |
| Income  available to Cornell Companies, Inc.            |       | $          | 22,191     |                        | $          | 29,922                            |       | $                | 2,540      |             | $          | (32,462 | ) | $ | 22,191 |   |

 

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# **Condensed Consolidating Statement of Operations for the year ended December 31,2007**(in thousands)

# ** **

| ** **                                                   | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor****Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
|                                                         |       |       |       |                        |       |                              |       |             |       |             |       |
| Revenues                                                     |       | $          | 18,008     |                        | $          | 406,673                           |       | $                | 18,008     |             | $          | (82,085 | ) | $ | 360,604 |   |
| Operating  expenses, excluding depreciation and amortization |       | 19,843     |       | 335,879                     |       | 87                                |       | (81,699          | )          | 274,110          |       |
| Depreciation  and amortization                               |       | 183        |       | 12,199                      |       | 4,222                             |       | (618             | )          | 15,986           |       |
| General and  administrative expenses                         |       | 25,424     |       | 3⁄4                      |       | 75                                |       | 3⁄4           |       | 25,499           |       |
| Income (loss)  from operations                               |       | (27,442    | )          | 58,595                      |       | 13,624                            |       | 232              |       | 45,009           |       |
| Overhead  allocations                                        |       | (41,236    | )          | 41,236                      |       | 3⁄4                            |       | 3⁄4           |       | 3⁄4           |       |
| Interest, net                                                |       | 6,972      |       | 5,094                       |       | 11,889                            |       | 309              |       | 24,264           |       |
| Equity  earnings in subsidiaries                             |       | 13,244     |       | 3⁄4                      |       | 3⁄4                            |       | (13,244          | )          | 0                |       |
| Income before  provision for income taxes               |       | 20,066     |       | 12,265                      |       | 1,735                             |       | (13,321          | )          | 20,745           |       |
| Provision for  income taxes                                  |       | 8,156      |       | 3⁄4                      |       | 3⁄4                            |       | 679              |       | 8,835            |       |
| Net income                                                   |       | 11,910     |       | 12,265                      |       | 1,735                             |       | (14,000          | )          | 11,910           |       |
| Non-controlling  interest                                    |       | 3⁄4     |       | 3⁄4                      |       | 3⁄4                            |       | 3⁄4           |       | 3⁄4           |       |
| Income available  to Cornell Companies, Inc.            |       | $          | 11,910     |                        | $          | 12,265                            |       | $                | 1,735      |             | $          | (14,000 | ) | $ | 11,910 |   |

 

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# **Condensed Consolidating Statement of Cash Flows for the year ended December 31,2009 (in thousands)**

 
| ** **                                                                              | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiary** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|
| **Cash flows from operating activities:**                                               | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Net cash  provided by operating activities                                              |       | $          | 17,519     |                        | $          | 19,660                          |       | $                | 14,753     |   | $ | 51,932 |   |
|                                                                                    |       |       |       |                        |       |                            |       |             |       |
| **Cash flows from investing activities:**                                               | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Capital  expenditures                                                                   |       | —     |       | (22,301                     | )          | —                          |       | (22,301          | )          |
| Payments to  restricted debt payment account, net                                       |       | —     |       | —                      |       | (2,389                          | )          | (2,389           | )          |
| Proceeds from  insurance recoveries on property and equipment                           |       | —     |       | 2,707                       |       | —                          |       | 2,707            |       |
| Net cash used  in investing activities                                                  |       | —     |       | (19,594                     | )          | (2,389                          | )          | (21,983          | )          |
|                                                                                    |       |       |       |                        |       |                            |       |             |       |
| **Cash flows from financing activities:**                                               | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Payments of  MCF bonds                                                                  |       | —     |       | —                      |       | (12,400                         | )          | (12,400          | )          |
| Proceeds from  line of credit                                                           |       | 2,000      |       | —                      |       | —                          |       | 2,000            |       |
| Payments of  line of credit                                                             |       | (7,000     | )          | —                      |       | —                          |       | (7,000           | )          |
| Payments on  capital lease obligations                                                  |       | —     |       | (14                         | )          | —                          |       | (14              | )          |
| Proceeds from  exercise of stock options and employee stock purchase plan contributions |       | 568        |       | —                      |       | —                          |       | 568              |       |
| Tax benefit  of stock option exercises                                                  |       | 8          |       | —                      |       | —                          |       | 8                |       |
| Net cash  provided by (used in) financing activities                                    |       | (4,424     | )          | (14                         | )          | (12,400                         | )          | (16,838          | )          |
|                                                                                    |       |       |       |                        |       |                            |       |             |       |
| **Net increase (decrease) in cash and cash equivalents**                                |       | 13,095     |       | 52                          |       | (36                             | )          | 13,111           |       |
|                                                                                    |       |       |       |                        |       |                            |       |             |       |
| **Cash and cash equivalents at  beginning of****period**                                |       | 14,291     |       | 265                         |       | 57                              |       | 14,613           |       |
|                                                                                    |       |       |       |                        |       |                            |       |             |       |
| **Cash and cash equivalents at end of period**                                          |       | $          | 27,386     |                        | $          | 317                             |       | $                | 21         |   | $ | 27,724 |   |

 

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**CondensedConsolidating Statement of Cash Flows for the year ended December 31, 2008(in thousands)**

 
| ** **                                               | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiary** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|
| **Cash flows from operating activities:**                | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Net cash  provided by (used in) operating activities     |       | $          | (34,261    | )                           | $          | 78,937                          |       | $                | 14,303     |   | $ | 58,979 |   |
|                                                     |       |       |       |                        |       |                            |       |             |       |
| **Cash flows from investing activities:**                | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Capital  expenditures                                    |       | 3⁄4     |       | (79,915                     | )          | 3⁄4                          |       | (79,915          | )          |
| Sales of  investment securities                          |       | 250        |       | 3⁄4                      |       | 3⁄4                          |       | 250              |       |
| Payments to  restricted debt payment account, net        |       | 3⁄4     |       | 3⁄4                      |       | (2,901                          | )          | (2,901           | )          |
| Proceeds from  sale of fixed assets                      |       | 3⁄4     |       | 846                         |       | 3⁄4                          |       | 846              |       |
| Net cash  provided by (used in) investing activities     |       | 250        |       | (79,069                     | )          | (2,901                          | )          | (81,720          | )          |
|                                                     |       |       |       |                        |       |                            |       |             |       |
| **Cash flows from financing activities:**                | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Payments of  MCF bonds                                   |       | 3⁄4     |       | 3⁄4                      |       | (11,400                         | )          | (11,400          | )          |
| Proceeds from  line of credit                            |       | 49,000     |       | 3⁄4                      |       | 3⁄4                          |       | 49,000           |       |
| Payments of  line of credit                              |       | (4,000     | )          | 3⁄4                      |       | 3⁄4                          |       | (4,000           | )          |
| Payments on  capital lease obligations                   |       | 3⁄4     |       | (11                         | )          | 3⁄4                          |       | (11              | )          |
| Proceeds from  exercise of stock options                 |       | 737        |       | 3⁄4                      |       | 3⁄4                          |       | 737              |       |
| Net cash  provided by (used in) financing activities     |       | 45,737     |       | (11                         | )          | (11,400                         | )          | 34,326           |       |
|                                                     |       |       |       |                        |       |                            |       |             |       |
| **Net increase (decrease) in cash and cash equivalents** |       | 11,726     |       | (143                        | )          | 2                               |       | 11,585           |       |
|                                                     |       |       |       |                        |       |                            |       |             |       |
| **Cash and cash equivalents at  beginning of****period** |       | 2,565      |       | 408                         |       | 55                              |       | 3,028            |       |
|                                                     |       |       |       |                        |       |                            |       |             |       |
| **Cash and cash equivalents at end of period**           |       | $          | 14,291     |                        | $          | 265                             |       | $                | 57         |   | $ | 14,613 |   |

 

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**Condensed Consolidating Statement of Cash Flows forthe year ended December 31, 2007 (in thousands)**

 
| ** **                                                   | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiary** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|
| **Cash flows from operating activities:**                    | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Net cash  provided by (used in) operating activities         |       | $          | (59,489    | )                           | $          | 74,169                          |       | $                | 12,564     |   | $ | 27,244 |   |
|                                                         |       |       |       |                        |       |                            |       |             |       |
| **Cash flows from investing activities:**                    | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Capital  expenditures                                        |       | 3⁄4     |       | (50,890                     | )          | 3⁄4                          |       | (50,890          | )          |
| Purchase of  investment securities                           |       | (241,425   | )          | 3⁄4                      |       | 3⁄4                          |       | (241,425         | )          |
| Sales of  investment securities                              |       | 253,100    |       | 3⁄4                      |       | 3⁄4                          |       | 253,100          |       |
| Facility  acquisitions                                       |       | 3⁄4     |       | (18,554                     | )          | 3⁄4                          |       | (18,554          | )          |
| Site  acquisition                                            |       | 3⁄4     |       | (5,053                      | )          | 3⁄4                          |       | (5,053           | )          |
| Payments to restricted debt payment account, net             |       | 3⁄4     |       | 3⁄4                      |       | (2,084                          | )          | (2,084           | )          |
| Proceeds from  sale of fixed assets                          |       | 3⁄4     |       | 375                         |       | 3⁄4                          |       | 375              |       |
| Net cash  provided by (used in) investing activities         |       | 11,675     |       | (74,122                     | )          | (2,084                          | )          | (64,531          | )          |
|                                                         |       |       |       |                        |       |                            |       |             |       |
| **Cash flows from financing activities:**                    | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Proceeds from  line of credit                                |       | 30,000     |       | 3⁄4                      |       | 3⁄4                          |       | 30,000           |       |
| Payments on  MCF Bonds                                       |       | 3⁄4     |       | 3⁄4                      |       | (10,500                         | )          | (10,500          | )          |
| Payments for  debt issuance and other financing costs        |       | (845       | )          | 3⁄4                      |       | 3⁄4                          |       | (845             | )          |
| Payments on  capital lease obligations                       |       | 3⁄4     |       | (10                         | )          | 3⁄4                          |       | (10              | )          |
| Proceeds from  exercise of stock options and warrants        |       | 2,786      |       | 3⁄4                      |       | 3⁄4                          |       | 2,786            |       |
| Tax benefit  of stock option exercises                       |       | 355        |       | 3⁄4                      |       | 3⁄4                          |       | 355              |       |
| Net cash  provided by (used in) financing activities         |       | 32,296     |       | (10                         | )          | (10,500                         | )          | 21,786           |       |
|                                                         |       |       |       |                        |       |                            |       |             |       |
| **Net increase (decrease) in cash  and cash****equivalents** |       | (15,518    | )          | 37                          |       | (20                             | )          | (15,501          | )          |
|                                                         |       |       |       |                        |       |                            |       |             |       |
| **Cash and cash equivalents at beginning of period**         |       | 18,083     |       | 371                         |       | 75                              |       | 18,529           |       |
|                                                         |       |       |       |                        |       |                            |       |             |       |
| **Cash and cash equivalents at end of period**               |       | $          | 2,565      |                        | $          | 408                             |       | $                | 55         |   | $ | 3,028 |   |

 

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**18.  SELECTED QUARTERLY FINANCIAL DATA (Unaudited)**

**(in thousands, except per share data)**

 
| ** **                                       | ** ** | **1****st****Quarter** | ** ** | **2****nd****Quarter** | ** ** | **3****rd****Quarter** | ** ** | **4****th****Quarter** | ** ** | **Year**   | ** ** |
|--------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| **2009:**                                        | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** |
| Revenues                                         |       | $                      | 99,710     |                   | $          | 105,334                |       | $                      | 103,279    |       | $          | 104,054 |   | $ | 412,377 |   |
| Income from operations                           |       | 15,788                 |       | 19,590                 |       | 18,594                 |       | 15,729                 |       | 69,701     |       |
| Income available to Cornell Companies, Inc. |       | 5,257                  |       | 7,230                  |       | 6,693                  |       | 5,446                  |       | 24,626     |       |
|                                             |       |                   |       |                   |       |                   |       |                   |       |       |       |
| Earnings per share:                              |       |                   |       |                   |       |                   |       |                   |       |       |       |
| Basic (a)                                        |       | $                      | .36        |                   | $          | .49                    |       | $                      | .45        |       | $          | .37 |   | $ | 1.65 |   |
| Diluted (a)                                      |       | $                      | .36        |                   | $          | .48                    |       | $                      | .45        |       | $          | .36 |   | $ | 1.64 |   |
|                                             |       |                   |       |                   |       |                   |       |                   |       |       |       |
| **2008:**                                        | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** |
| Revenues                                         |       | $                      | 95,392     |                   | $          | 94,646                 |       | $                      | 95,187     |       | $          | 101,499 |   | $ | 386,724 |   |
| Income from operations                           |       | 14,490                 |       | 14,914                 |       | 14,037                 |       | 18,756                 |       | 62,197     |       |
| Income available to Cornell Companies, Inc. |       | 4,634                  |       | 5,345                  |       | 4,828                  |       | 7,384                  |       | 22,191     |       |
|                                             |       |                   |       |                   |       |                   |       |                   |       |       |       |
| Earnings per share:                              |       |                   |       |                   |       |                   |       |                   |       |       |       |
| Basic                                            |       | $                      | .32        |                   | $          | .37                    |       | $                      | .34        |       | $          | .52 |   | $ | 1.55 |   |
| Diluted                                          |       | $                      | .32        |                   | $          | .36                    |       | $                      | .33        |       | $          | .50 |   | $ | 1.51 |   |
|                                             |       |                   |       |                   |       |                   |       |                   |       |       |       |
| **2009 Balance Sheet Data:**                     | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** |
| Working capital                                  |       | $                      | 57,444     |                   | $          | 63,160                 |       | $                      | 56,789     |       | $          | 64,575 |   | $ | 64,575 |   |
| Total assets                                     |       | 635,601                |       | 643,946                |       | 635,948                |       | 650,565                |       | 650,565    |       |
| Long-term debt, net of current portion           |       | 309,113                |       | 306,156                |       | 292,798                |       | 289,841                |       | 289,841    |       |
| Equity                                           |       | 234.593                |       | 243,241                |       | 251,478                |       | 258,738                |       | 258,738    |       |
|                                             |       |                   |       |                   |       |                   |       |                   |       |       |       |
| **2008 Balance Sheet Data:**                     | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** |
| Working capital                                  |       | $                      | 41,697     |                   | $          | 35,444                 |       | $                      | 38,988     |       | $          | 45,205 |   | $ | 45,205 |   |
| Total assets                                     |       | 578,530                |       | 602,787                |       | 628,107                |       | 636,921                |       | 636,921    |       |
| Long-term debt, net of current portion           |       | 280,341                |       | 292,884                |       | 306,027                |       | 308,070                |       | 308,070    |       |
| Equity                                           |       | 206,877                |       | 212,711                |       | 219,179                |       | 227,722                |       | 227,722    |       |

 

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(a)   Thesum of quarters may not equal yearly amount as each quarter represents adiscrete period and also due to rounding.

 

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**ITEM 9****                                      ****CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A.****                          ****CONTROLSAND PROCEDURES**

 

# **EVALUATIONOF DISCLOSURE CONTROLS AND PROCEDURES**

# ** **

We maintain disclosurecontrols and procedures designed to provide reasonable assurance thatinformation disclosed in our annual and periodic reports is recorded,processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission’s rules and forms. In addition, wedesigned these disclosure controls and procedures to ensure that thisinformation is accumulated and communicated to management, including the chiefexecutive officer (“CEO”) and chief financial officer (“CFO”), to allow timelydecisions regarding required disclosures. SEC rules require that wedisclose the conclusions of our CEO and CFO about the effectiveness of ourdisclosure controls and procedures.

 

We do not expect that ourdisclosure controls and procedures will prevent all errors or fraud. A controlsystem, no matter how well conceived and operated, can provide only reasonable,not absolute, assurance that the objectives of the control system are met.Because of the inherent limitation in a cost-effective control system,misstatements due to error or fraud could occur and not be detected.

 

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, and as required by paragraph (b) ofRules 13a-15 and 15d-15 of the Exchange Act, we have evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) of theExchange Act) as of the end of the period required by this report. Based onthat evaluation, our principal executive officer and principal financialofficer have concluded that these controls and procedures are effective as ofthat date.

 

**CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

In connection with theevaluation as required by paragraph (d) of Rules 13a-15 and 15d-15 ofthe Exchange Act, we have not identified any change in internal control overfinancial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) that occurred during our fiscal quarterended December 31, 2009 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

**MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

The management of Cornellis responsible for establishing and maintaining adequate internal control overfinancial reporting for Cornell.  Cornell’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. Cornell’s internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the Company; (ii) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the Company are being made only in accordancewith authorizations of management and directors of the Company; and, (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the Company’s assets that could have amaterial effect on the financial statements.

 

Due to its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

We have assessed theeffectiveness of our internal control over financial reporting as of December 31,2009.  To make this assessment we usedthe criteria for effective internal control over financial reporting describedin *Internal Control — Integrated Framework*,issued by the Committee of Sponsoring Organizations of the Treadway Commission.Based on our assessment, we have concluded that, as of December 31, 2009,the Company’s internal control over financial reporting was effective.

 

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The effectiveness of theCompany’s internal control over financial reporting as of December 31,2009 has been audited by PricewaterhouseCoopers LLP, an independent registeredpublic accounting firm, as stated in their report which appears herein.

 

**REPORTOF THE REGISTERED PUBLIC ACCOUNTING FIRM**

 

See “Financial Statementsand Supplementary Data — Report of Independent Registered Public AccountingFirm” in Item 8 of this report.

 

**ITEM 9B.****                          ****OTHERINFORMATION**

 

None.

 

**PART III**

 

Items 10, 11, 12, 13 and 14of Part III have been omitted from this report because we will file withthe Securities and Exchange Commission, not later than 120 days after the closeof our fiscal year, a definitive proxy statement or a Form 10-K/A.  The information required by Items 10, 11, 12,13 and 14 of this report, which will appear in the definitive proxy statementand/or the Form 10-K/A, is incorporated by reference into Part III ofthis report.

 

**PART IV**

 

**ITEM 15.****                            ****EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

 

(a)                                         **Financial Statements, Schedules and Exhibits**

 
|   | 1.     | Financial statements                                                                                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | Report of Independent  Registered Public Accounting Firm                                                                                                  |
|   |   | Consolidated Balance  Sheets - December 31, 2009 and 2008                                                                                            |
|   |   | Consolidated Statements of  Income and Comprehensive Income for the years ended December 31, 2009,  2008 and 2007                                    |
|   |   | Consolidated Statements of  Changes in Equity for the years ended December 31, 2009, 2008 and 2007                                                   |
|   |   | Consolidated Statements of  Cash Flows for the years ended December 31, 2009, 2008 and 2007                                                          |
|   |   | Notes to consolidated  financial statements                                                                                                               |
|   |   |                                                                                                                                                      |
|   | 2.     | Financial statement  schedules                                                                                                                            |
|   |   | All  schedules are omitted because they are not applicable or because the required  information is included in the financial statements or notes thereto. |
|   |   |                                                                                                                                                      |
|   | 3.     | Exhibits                                                                                                                                                  |

 

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                    |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Restated Certificate of Incorporation of Cornell Companies, Inc. (incorporated  by reference to Exhibit 3.1 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 1996 filed on  March 31, 1997).                                                                                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.2              |       | Second Amended and Restated Bylaws of Cornell Companies, Inc. (incorporated  by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K  filed on December 13, 2007).                                                                                                                                                                                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.3              |       | Certificate of Amendment of Restated Certificate of Incorporation of  Cornell Companies, Inc. (incorporated by reference  to Exhibit 4.2 to the Company’s Registration Statement on  Form S-8 (Reg. No. 333-42444) filed on July 28, 2000).                                                                                                                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.1              |       | Form of Certificate representing Common Stock (incorporated  by reference to Exhibit 4.1 to the Company’s Registration Statement on  Amendment 1 to Form S-1 (Reg. No. 333-08243) filed on  August 26, 1996).                                                                                                                                                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.2              |       | Indenture dated as of June 24, 2004 between Cornell  Companies, Inc., the guarantors named therein and JPMorgan Chase Bank,  as trustee (incorporated by reference to Exhibit 4.1 to  the Company’s Current Report on Form 8-K filed on  June 25, 2004).                                                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.3              |       | Form of 10 3/4% Senior Note due 2012 (included in  Exhibit 4.2).                                                                                                                                                                                                                                                                                                                                                         |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.4              |       | Registration  Rights Agreement dated March 31, 1994, as amended, among Cornell  Corrections, Inc. and the stockholders listed on the signature  pages thereto (incorporated by reference to Exhibit 4.2 to the Company’s  Registration Statement on Form S-1 (Reg. No. 333- 08243), filed on  July 17, 1996, as amended).                                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.5              |       | Registration Rights Agreement, dated October 14, 1999 among  Cornell Companies, Inc. and the investors party thereto (incorporated by  reference to Exhibit 4.7 to the Company’s Registration Statement on  Form S-3 (Reg. No. 333-91211) filed on November 18, 1999).                                                                                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.1*            |       | Cornell Corrections, Inc. Amended and Restated 1996 Stock Option  Plan (incorporated by reference to Exhibit B to the Company’s Schedule 14A  filed on March 9, 1998).                                                                                                                                                                                                                                         |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.2*            |       | Form of Indemnification Agreement between Cornell  Companies, Inc. and each of its directors and executive officers (incorporated  by reference to Exhibit 10.3 to the Company’s Registration  Statement on Amendment 1 to Form S-1 (Reg. No. 333-08243) filed on  August 26, 1996).                                                                                                            |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.3*            |       | Cornell Corrections, Inc. Employee Stock Purchase Plan (incorporated  by reference to Exhibit 4.7 to the Company’s Registration Statement on  Form S-8 (Reg. No. 333-80187) filed on June 8, 1999).                                                                                                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.4*†      |       | Cornell Corrections, Inc. Deferred Compensation Plan, amended and  restated effective January 1, 2005.                                                                                                                                                                                                                                                                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.5*            |       | Cornell Companies, Inc. Amended and Restated 2000 Director Stock  Plan (incorporated by reference to Appendix B to the Company’s Proxy  Statement on Schedule 14A filed April 28, 2009).                                                                                                                                                                                                                            |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.6*            |       | Cornell Companies, Inc. Deferred Bonus Plan (incorporated  by reference to Exhibit 10.44a to the Company’s Annual Report  on Form 10-K for the year ended December 31, 2002 filed on  March 31, 2003).                                                                                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.7             |       | Premises Transfer Agreement, dated August 14, 2001, among Cornell  Companies, Inc., Cornell Corrections of Georgia, L.P., Cornell  Corrections of Oklahoma, Inc., Cornell Corrections of Texas, Inc.,  WBP Leasing, Inc., and Municipal Corrections Finance, L.P. (incorporated  by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed on August 28, 2001). |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.8             |       | Master Lease Agreement (with addenda), dated August 14, 2001,  between Municipal Corrections Finance, L.P. and Cornell Companies, Inc. (incorporated  by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K  filed on August 28, 2001).                                                                                                                                           |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.9             |       | Master Lease Agreement dated December 3, 1998 between Atlantic  Financial Group, Ltd. and WBP Leasing, Inc. and certain other  subsidiaries of Cornell Corrections, Inc. (incorporated by reference  to Exhibit 10.3 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2001 filed on  October 30, 2001).                                                 |

 

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| 10.10        |   | Amended and  Restated Credit Agreement dated October 10, 2007 among Cornell  Companies, Inc., its subsidiaries, JPMorgan Chase Bank N.A., as  Administrative Agent, Bank of America, N.A., as Syndication Agent and the  Lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K filed on October 12, 2007). |
|--------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.11*       |   | Amended and Restated Employment Agreement, dated August 2, 2007,  between Cornell Companies, Inc. and James E. Hyman (incorporated  by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K filed on August 6, 2007).                                                                                                                            |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.12*       |   | Restricted Stock Agreement, dated March 14, 2005, between Cornell  Companies, Inc. and James E. Hyman (incorporated by reference  to Exhibit 10.2  to the Company’s Current Report on Form 8-K filed on March 15,  2005).                                                                                                                                          |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.13*       |   | Employment/Separation Agreement, dated March 9, 2005, between  Cornell Companies, Inc. and John R. Nieser (incorporated by reference  to Exhibit 10.3  to the Company’s Current Report on Form 8-K filed on March 15,  2005).                                                                                                                                      |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.14*       |   | Amendment to Employment/Separation Agreement dated March 14, 2007  by and between Cornell Companies, Inc. and John R. Nieser (incorporated  by reference to Exhibit 10.2 to the Company’s Current  Report on Form 8-K filed on March 15, 2007).                                                                                                                    |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.15*       |   | Form of Severance Agreement (incorporated by reference  to Exhibit 10.40 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 1999 filed on  March 30, 2000).                                                                                                                                                                              |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
|         |   | Amendment to Severance Agreement dated March 14, 2007 by and  between Cornell Companies, Inc. and Patrick N. Perrin (incorporated  by reference to Exhibit 10.4 to the Company’s Current  Report on Form 8-K filed on March 15, 2007).                                                                                                                             |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.16*† |   | Employment Agreement dated January 5, 2009 between Cornell  Companies, Inc. and Cathryn L. Porter.                                                                                                                                                                                                                                                                                     |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.17*       |   | Cornell Companies, Inc. Amended and Restated 2006 Incentive Plan (incorporated  by reference to Appendix A to the Company’s Proxy Statement on Schedule 14A  filed April 28, 2009).                                                                                                                                                                                               |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.18*       |   | Form of Cornell Companies, Inc. Restricted Stock Award —  Performance Based (incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed on March 12, 2008).                                                                                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.19*       |   | Form of Cornell Companies, Inc. Restricted Stock Award —  Time Based (incorporated by reference to Exhibit 10.2 to the Company’s  Current Report on Form 8-K filed on March 12, 2008).                                                                                                                                                                        |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.20*       |   | Form of Cornell Companies, Inc. Restricted Stock Award  Agreement (Profitability & Time-Based) (incorporated by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on  April 7, 2009).                                                                                                                                          |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.21*       |   | Form of Cornell Companies, Inc. Restricted Stock Award  Agreement (Performance Based) (incorporated by reference to Exhibit 10.1  to the Company’s Current Report on Form 8-K filed on April 7,  2009).                                                                                                                                                            |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.22*       |   | Cornell Companies, Inc. First Amendment to the Amended and  Restated 1996 Stock Option Plan (incorporated by reference to  Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended June 30, 2009 filed on August 7, 2009).                                                                                                              |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.23†  |   | Facilities Lease Agreement between Inland PPD Hudson Associates,  L.L.C. and Cornell Corrections of California, Inc. dated as of  September 24, 2008.                                                                                                                                                                                                                                  |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.24*† |   | Form of Director Stock Option Award Agreement                                                                                                                                                                                                                                                                                                                                               |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 14.1         |   | Code of Ethics  for Senior Financial Officers (incorporated by reference to  Exhibit 14.1 to the Company’s Current Report on Form 8-K/A filed on  March 13, 2009).                                                                                                                                                                                                           |
| 21.1†   |   | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                            |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 23.1†   |   | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                                                                                                                                           |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 24.1†   |   | Power of Attorney (see signature page of this Annual Report on  Form 10-K).                                                                                                                                                                                                                                                                                                            |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.1†   |   | Section 302 Certification of Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                       |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.2†   |   | Section 302 Certification of Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                       |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 32.1†   |   | Section 906 Certification of Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                       |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 32.2†   |   | Section 906 Certification of Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                       |

 

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*      Managementcompensatory plan or contract.

†      Filedherewith

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   |                   | CORNELL COMPANIES, INC. |
|--------|------------------------|-------------------------|
|   |                   |                    |
| Dated: | February 26, 2010 | By:                     | /s/ James E. Hyman |
|   |                   |                    | James E. Hyman |
|   |                   |                    | Chief Executive Officer, President and |
|   |                   |                    | Chairman of the Board |

 

**POWER OFATTORNEY**

 

KNOW ALL MEN BY THESE PRESENTS, that eachperson whose signature appears below constitutes and appoints James E. Hyman,John R. Nieser and Patrick N. Perrin, and each of them, his true and lawfulattorneys-in-fact, each with full power of substitution, for him or her in anyand all capacities, to sign any amendments to this report on Form 10-K andto file the same, with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, hereby ratifying andconfirming all that each of said attorneys-in-fact or their substitute orsubstitutes may do or cause to be done by virtue hereof.

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities on February 26, 2010.

 
| **SIGNATURE**                                                                   | ** **            | **TITLE**                                                      |
|---------------------------------------------------------------------------------|-----------------------|----------------------------------------------------------------|
|                                                                            |                  |                                                           |
| /s/  James E. Hyman                                                   |                  | Chief Executive Officer, President and Chairman of the Board   |
| James E. Hyman                                                                  |                  | (Principal Executive Officer)                                  |
|                                                                            |                  |                                                           |
| /s/  John R. Nieser                                                   |                  | Chief Financial Officer, Senior Vice President and Treasurer   |
| John R. Nieser                                                                  |                  | (Principal Financial Officer and Principal Accounting Officer) |
|                                                                            |                  |                                                           |
|              * |                  | Director                                                       |
| Max Batzer                                                                      |                  |                                                           |
|                                                                            |                  |                                                           |
|              * |                  | Director                                                       |
| Anthony R. Chase                                                                |                  |                                                           |
|                                                                            |                  |                                                           |
|              * |                  | Director                                                       |
| Richard Crane                                                                   |                  |                                                           |
|                                                                            |                  |                                                           |
|              * |                  | Director                                                       |
| Zachary R. George                                                               |                  |                                                           |
|                                                                            |                  |                                                           |
|              * |                  | Director                                                       |
| Todd Goodwin                                                                    |                  |                                                           |
|                                                                            |                  |                                                           |
|              * |                  | Director                                                       |
| Andrew R. Jones                                                                 |                  |                                                           |
|                                                                            |                  |                                                           |
|              * |                  | Director                                                       |
| Alfred Jay Moran, Jr.                                                      |                  |                                                           |
|                                                                            |                  |                                                           |
|              * |                  | Director                                                       |
| D. Stephen Slack                                                                |                  |                                                           |
|                                                                            |                  |                                                           |
| * By:                                                                           | /s/ Cathryn L. Porter |                                                           |   |
| Cathryn L. Porter                                                               |                  |                                                           |
| Attorney-in-Fact                                                                |                  |                                                           |
|                                                                                 |                       |                                                                |  |

 

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