Public Finance

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Dear Shareholders, In 2006, Cornell Companies demonstrated progress both operationally and financially. Across the
business, we built upon process improvements initiated in 2005 not only to deliver stronger financial
results during the year, but also to create platforms for growth and reduce risk for the future. Let me highlight some of the achievements made in 2006 in each of our operating segments. In our Adult Secure division, we activated two new facilities on time, on budget and on scope: the 1,300-bed Moshannon Valley Correctional Center in Pennsylvania for the
Federal Bureau of Prisons (BOP), and the 360-bed Mesa Verde Community Correctional
Facility in California for the California Department of Corrections and Rehabilitation.
During the year, we also successfully competed for the BOPs Criminal Alien
Requirement 6 contract, which will now enable us to increase the size of our Big
Spring Correctional Center in Texas to approximately 3,500 beds. We also added a new
customer, the Colorado Department of Corrections, by receiving a major contract
award for a new 750-bed female facility that is scheduled to open mid-2008.
Collectively, these actions will increase our capacity 40% by the end of next year from
where we began 2006. Financially, our Adult Secure revenue grew to $179 million from
$128 million (40%) and operating income to $45 million from $26 million (73%). Our Adult Community-based division continued to grow as the preeminent provider of halfway house services to the BOP. We received the BOPs first-ever performance-
based community corrections contract at our Taylor Street Center in San Francisco, and
we converted our Marvin Gardens Center in Los Angeles from a state customer to the
BOP. Meanwhile, we grew revenue to $66 million from $63 million (5%) and operating
income to $13 million from $12 million (6%). Our Abraxas Youth & Family Services business continued to improve operationally. Among the more significant accomplishments in this area, we re-opened the Cornell Abraxas
Academy in New Morgan, Pennsylvania during the fourth quarter, ending four years of
dormancy at this facility. At a tactical level, we filled empty capacity across the division and
added new customers at several of our facilities, and also exited two programs where the
financial returns did not justify the operational effort. However, we were not able to
successfully fill our vacant San Antonio,Texas youth facility, which prevented us from
achieving our economic objectives. Revenue declined to $116 million from $119 million
(3%), and operating income declined to $13 million from $14 million (8%). Looking ahead to 2007, we continue to focus our attention on the five dimensions of
performance that I introduced to you in my 2004 annual letter. Operating Excellence. In 2006, we continued to focus on improving the quality of service delivered to our customers. While we encountered challenges on this front in each of
our divisions, we believe we are progressing toward our service quality goals. Across the entire company, we redesigned the process by which we track, report and
transfer lessons learned from critical incidents. We have also made progress in
traditional measures, as demonstrated at our Big Spring Correctional Center, where we
passed an audit from the American Correctional Association by achieving 100%
compliance on mandatory requirements and 98.8% compliance on non-mandatory
requirements. Specific to our Youth division, we have completed our first division-wide
process redesign focused on safe crisis management, initiated an additional process
redesign to transfer best practices in medications across the division, and launched a
separate process redesign to make it easier for customers to do business with us. Underutilized Assets. Across the business, we improved asset utilization in 2006, reducing unfilled beds by 43% during the year most notably, at our Regional Correctional
Center. In addition, we better positioned ourselves for future reductions in unutilized
beds by re-opening the Cornell Abraxas Academy. In 2007, we will maintain our focus
on reducing unfilled beds across the organization. 270452_PgsA-D.qxd:270452_PgsA-D 4/5/07 7:37 AM Page 1 Capital Effectiveness. Our successful activation of the Moshannon Valley and Mesa Verde facilities in 2006 represents progress in our ability to selectively and effectively deploy
capital. In 2007, we plan to invest approximately $38 million in capital projects at our
Big Spring Correctional Center, which will expand under the Criminal Alien
Requirement 6 procurement, and at our D. Ray James Prison, which will add a 300-
bed unit for the U.S. Marshals Service. We expect to complete all of these projects
within budget, scope and deadline. Portfolio Management. In 2006, we continued to restructure our portfolio of programs. The most difficult decision we made this year was to cancel our contract with the
Oklahoma Department of Corrections at our Great Plains Correctional Facility. Despite
good faith negotiations by both parties, we were unwilling to accept a multi-year
contract at a per diem rate that would not allow us to properly staff the facility and
earn an acceptable rate of return on our investment. At the time this letter goes to
press, we have not reached terms with either another customer or Oklahoma to use
this facility. Although we remain confident in the long-term prospects for the facility
given demand for corrections beds across the country, we expect that 2007 will prove
an exceptionally challenging year with respect to the economics of this facility. Operating Efficiency. We continued to improve operating efficiency during 2006, growing our operating income margin to 12.4% from 9.0% in 2005. In addition to the facility-
level improvements that drive this metric, we also reduced general and administrative
expenses as a percent of revenue by over half a percent. Our challenge in 2007 is to
seek opportunities to improve not only the utilization of our facilities, but also the
economics of our operations. Lastly, Id like to address two significant events that have occurred at a corporate level in the past
year. First, let me comment on the strategic review process that we have now completed. Over
the course of the second through fourth quarters of 2006, we worked with independent legal
and financial advisers to conduct a thorough and fair strategic review process, ultimately entering
into a merger agreement with a private equity firm. In January 2007, our shareholders rejected
the merger and voiced their desire for Cornell to continue operating as a publicly traded
company. We recognize the collective vote of confidence in our business and in our
management team, and are committed to continuing our efforts for improvement and growth. Also in the corporate arena, we have experienced recent changes in the membership of our
board of directors. During the first quarter of 2007, both Tom Hudson and Leon Clements
resigned their seats. We also announced the election of Andrew Jones to our board, as well as
our intent to nominate Max Batzer to the board at our upcoming Annual Meeting of
Shareholders. The board and I wish to thank Tom and Leon, as well as Sally Walker, who will not
seek re-election, for their contributions to our business during their tenure. Meanwhile, we look
forward to introducing representatives from two long-time Cornell shareholders onto our board
and value the perspectives they bring to our plans to position the company for future growth.
We feel this opportunity to further infuse our board with shareholder representatives will help
us in our efforts to deliver improved shareholder value. We move into 2007 with a continued focus on improving operations, capturing incremental
growth, and increasing shareholder value. Sincerely, James E. Hyman
Chairman and CEO 270452_PgsA-D.qxd 3/27/07 4:55 PM Page 2 Total Adult Secure Institutions Location Gender Capacity Baker Community Correctional Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . .Baker, CA . . . . . . . . . . . . . . . . . . . .Male . . . . . . . . . . . . . . . .262
Big Spring Correctional Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Big Spring,TX . . . . . . . . . . . . . . . .Male . . . . . . . . . . . . . . .2,646
D. Ray James Prison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Folkston, GA . . . . . . . . . . . . . . . . .Male . . . . . . . . . . . . . . .1,640
Donald W. Wyatt Detention Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Central Falls, RI . . . . . . . . . . . . . . .Male . . . . . . . . . . . . . . . .357
Great Plains Correctional Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Hinton, OK . . . . . . . . . . . . . . . . . .Male . . . . . . . . . . . . . . . .766
Leo Chesney Community Correctional Facility . . . . . . . . . . . . . . . . . . . . . .Live Oak, CA . . . . . . . . . . . . . . . . .Female . . . . . . . . . . . . . .200
Mesa Verde Community Correctional Facility . . . . . . . . . . . . . . . . . . . . . . .Bakersfield, CA . . . . . . . . . . . . . . .Male . . . . . . . . . . . . . . . .360
Moshannon Valley Correctional Center . . . . . . . . . . . . . . . . . . . . . . . . . . . .Philipsburg, PA . . . . . . . . . . . . . . . .Male . . . . . . . . . . . . . . .1,300
Regional Correctional Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Albuquerque, NM . . . . . . . . . . . . .Male/Female . . . . . . . . . .970
Walnut Grove Youth Correctional Facility . . . . . . . . . . . . . . . . . . . . . . . . . .Walnut Grove, MS . . . . . . . . . . . . .Male . . . . . . . . . . . . . . . .941
Adult Secure Institutions (10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9,442 Total Juvenile Facilities Location Gender Capacity Alexander Youth Services Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Alexander, AR . . . . . . . . . . . . . . . .Male/Female . . . . . . . . . .143
Contact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Wauconda, IL . . . . . . . . . . . . . . . . .Female . . . . . . . . . . . . . . .51
Cornell Abraxas I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Marienville, PA . . . . . . . . . . . . . . . .Male . . . . . . . . . . . . . . . .274
Cornell Abraxas II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Erie, PA . . . . . . . . . . . . . . . . . . . . .Male . . . . . . . . . . . . . . . . .23
Cornell Abraxas III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Pittsburgh, PA . . . . . . . . . . . . . . . .Male . . . . . . . . . . . . . . . . .24
Cornell Abraxas Academy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .New Morgan, PA . . . . . . . . . . . . . .Male/Female . . . . . . . . . .214
Cornell Abraxas Center for Adolescent Females . . . . . . . . . . . . . . . . . . . . .Pittsburgh, PA . . . . . . . . . . . . . . . .Female . . . . . . . . . . . . . .108
Cornell Abraxas of Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Shelby, OH . . . . . . . . . . . . . . . . . . .Male . . . . . . . . . . . . . . . .108
Cornell Abraxas Parenting Academy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Harrisburg, PA . . . . . . . . . . . . . . . .Male/Female . . . . . . . . . . .36
Cornell Abraxas Youth Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .South Mountain, PA . . . . . . . . . . . .Male/Female . . . . . . . . . . .72
Delaware Community Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Milford, DE . . . . . . . . . . . . . . . . . .Male/Female . . . . . . . . . . .66
DuPage Adolescent Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Hinsdale, IL . . . . . . . . . . . . . . . . . .Male . . . . . . . . . . . . . . . . .38
Erie Residential Behavioral Health Program . . . . . . . . . . . . . . . . . . . . . . . . .Erie, PA . . . . . . . . . . . . . . . . . . . . .Female . . . . . . . . . . . . . . .17
Hector Garza Residential Treatment Center . . . . . . . . . . . . . . . . . . . . . . . .San Antonio,TX . . . . . . . . . . . . . . .Male/Female . . . . . . . . . .122
Harrisburg Day Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Harrisburg, PA . . . . . . . . . . . . . . . .Male/Female . . . . . . . . . . .45
Jos-Arz Academy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Washington, DC . . . . . . . . . . . . . .Male/Female . . . . . . . . . . .70
Leadership Academy/A.C.T.S. Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Harrisburg, PA . . . . . . . . . . . . . . . .Male/Female . . . . . . . . . .400
Leadership Development Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .South Mountain, PA . . . . . . . . . . . .Male/Female . . . . . . . . . .120
Lebanon Alternative Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Lebanon, PA . . . . . . . . . . . . . . . . . .Male/Female . . . . . . . . . .225 continued on next page Adult Secure Institutions Juvenile Facilities Adult Community-based Facilities Cornells National Footprint (As of December 31, 2006) 270452_PgsA-D.qxd 3/27/07 4:55 PM Page 3 Total Juvenile Facilities, continued Location Gender Capacity Lehigh Valley Community Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Lehigh Valley, PA . . . . . . . . . . . . . . .Male/Female . . . . . . . . . . .60
Non-Residential Detention/Non-Residential Treatment . . . . . . . . . . . . . . .Harrisburg, PA . . . . . . . . . . . . . . . .Male/Female . . . . . . . . . . .91
Philadelphia Alternative Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Philadelphia, PA . . . . . . . . . . . . . . .Male/Female . . . . . . . . . .165
Philadelphia Community-based Programs . . . . . . . . . . . . . . . . . . . . . . . . . . .Philadelphia, PA . . . . . . . . . . . . . . .Male/Female . . . . . . . . . . .71
Psychosocial Rehabilitation Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Erie, PA . . . . . . . . . . . . . . . . . . . . .Male . . . . . . . . . . . . . . . . .13
Reading Alternative School . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Reading, PA . . . . . . . . . . . . . . . . . .Male/Female . . . . . . . . . .200
Salt Lake Valley Detention Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Salt Lake City, UT . . . . . . . . . . . . .Male/Female . . . . . . . . . .160
Schaffner Youth Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Steelton, PA . . . . . . . . . . . . . . . . . .Male/Female . . . . . . . . . . .63
Southern Peaks Regional Treatment Center . . . . . . . . . . . . . . . . . . . . . . . . .Ca

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