CORRECTIONAL SERVICES CORP, 424B4, 1996-09-12

CORRECTIONAL SERVICES CORP
424B4, 1996-09-12
FACILITIES SUPPORT MANAGEMENT SERVICES

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<PAGE> 1

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-6457

PROSPECTUS

2,450,000 SHARES

CORRECTIONAL SERVICES CORPORATION (LOGO)

CORRECTIONAL SERVICES CORPORATION
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

COMMON STOCK

Of the 2,450,000 shares of Common Stock offered, 2,070,000 shares are being
sold by Correctional Services Corporation (the "Company") and 380,000 shares are
being sold by certain stockholders of the Company (the "Selling Stockholders").
See "Principal and Selling Stockholders." The Company will not receive any
proceeds from the shares being sold by the Selling Stockholders.

The Common Stock is traded on The Nasdaq Stock Market's National Market
("The Nasdaq Stock Market") under the symbol "CSCQ." On September 11, 1996, the
closing sales price of the Common Stock, as reported by The Nasdaq Stock Market,
was $13.875 per share. See "Price Range of Common Stock."
---------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
PROCEEDS TO
UNDERWRITING PROCEEDS TO SELLING
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................... $13.625 $0.7834 $12.8416 $12.8416
- ---------------------------------------------------------------------------------------------------
Total(3)..................... $33,381,250 $1,919,330 $26,582,112 $4,879,808
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses estimated at $500,000, payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an additional 367,500 shares to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discount and Proceeds to Company will
be $38,388,438, $2,207,230 and $31,301,400, respectively. See
"Underwriting."

---------------------

The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made on or about September 17,
1996.
---------------------
STEPHENS INC. J.C. BRADFORD & CO.

The date of this Prospectus is September 12, 1996.
<PAGE> 2

[PASTE-UP]

ARCHITECTURAL RENDERING OF THE COMPANY'S SECURE JUVENILE YOUTH TRAINING CENTERS
IN POLK CITY AND PAHOKEE FLORIDA,
SCHEDULED TO BECOME OPERATIONAL IN THE FIRST QUARTER OF 1997.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH OTHERWISE MIGHT PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934.
SEE "UNDERWRITING."

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements (including the notes thereto)
appearing elsewhere in this Prospectus. All references to the Company in this
Prospectus include Correctional Services Corporation and its subsidiaries and,
unless otherwise indicated, all references to the Company's outstanding Common
Stock assume no exercise of the Underwriters' over-allotment option.

THE COMPANY

The Company is a leading developer and manager of privatized correctional
and detention facilities in the United States. Through its three divisions,
Adult, Juvenile and Community Corrections, the Company provides a diverse range
of services to local, state, and federal governmental correctional agencies. The
Company currently has agreements to operate 15 correctional and detention
facilities in New York, Florida, Arizona, Texas and the State of Washington.
Eleven of these facilities, with a total of 1,975 beds, are currently in
operation, three, with a total of 796 beds, are anticipated to be operational in
the first quarter of 1997 and one, with 100 beds, is anticipated to be
operational in the fourth quarter of 1997. Further, the Company recently was
advised that it has been selected, following a competitive bidding process, to
negotiate an agreement to design, construct, own and manage a 600-bed adult
prison in Arizona, which is anticipated to become operational in the fourth
quarter of 1997. The Company is also aggressively pursuing other privatized
correctional projects both at the request for proposal ("RFP") stage and the
pre-RFP development stage.

The Company manages both secure and non-secure facilities. The Company's
secure facilities include a detention and processing center for illegal aliens,
an adult prison, intermediate sanction facilities, driving while intoxicated
("DWI") facilities, and military-style boot camps for juvenile offenders. Its
non-secure facilities include residential programs, such as community
correctional facilities for federal and state offenders serving the last six
months of their sentences, and non-residential supervision programs.

In addition to providing fundamental residential services for adult and
juvenile inmates, the Company has developed a broad range of programs intended
to reduce recidivism, including basic and special education, substance abuse
treatment and counseling, vocational training, life skills training, and
behavioral modification counseling. The management services offered by the
Company range from project consulting to the design, development and management
of new correctional and detention facilities and the redesign, renovation and
management of older facilities. The Company believes its proven ability to
manage the full spectrum of correctional facilities and its wide variety of
programs and services will increase its marketing opportunities.

The privatized correctional services industry has experienced rapid growth
in recent years. According to the Private Adult Correctional Facility Census,
Ninth Edition, prepared by the Private Corrections Project, Center for Studies
in Criminology & Law, University of Florida, dated March 15, 1996, the rated
capacity of international privatized secure adult correctional facilities grew
from 2,620 beds in 1986 to 63,595 beds at year-end 1995 and, in a June 16, 1996
forecast prepared by the Project, is projected to grow to 197,503 beds by
year-end 2000. This projection does not include the projected growth of
privatized juvenile and community correctional facilities, both of which, the
Company believes, are also growing rapidly. According to the United States
Department of Justice, Office of Juvenile Justice and Delinquency Prevention,
between 1988 and 1994 juvenile arrests for violent crimes grew by more than 50%.
Also, according to the United States Department of Justice, Bureau of Justice
Statistics, the number of adult inmates housed in federal and state facilities
increased from 487,593 at December 31, 1985, to 1,104,074 at December 31, 1995.
The Company believes the growth in demand for privatized correctional facilities
is attributable to a number of factors, including a shortage of correctional
beds, increasing public demand that convicted offenders serve a longer portion
of their imposed sentences, the requirements imposed by legal and regulatory
authorities to remedy overcrowded conditions and outmoded facilities, and
increasing fiscal pressures on governmental agencies to deliver cost-effective
correctional services to address these issues.

The Company's business strategy is to enhance its position as an industry
leader and to expand its operations, both internally and through selective
acquisitions, in order to capitalize on current growth trends in the privatized
corrections industry. The Company intends to continue emphasizing the quality
management of its facilities and to continue developing and refining its
diversified programs and services. Where appropriate, the Company may commit its
own capital for the renovation or expansion of existing facilities or the
development and construction of new facilities.

3
<PAGE> 4

The Company was incorporated under the laws of the State of Delaware on
October 28, 1993 to acquire all of the outstanding capital stock of a number of
affiliated companies engaged in operating correctional or detention facilities.
The Company's executive offices are located at Suite 1000, 1819 Main St.,
Sarasota, Florida 34236 (telephone no. 941-953-9199).

RECENT EVENTS

In July 1996, the Company entered into an agreement with Colorado County,
Texas to operate a 100-bed military-style boot camp in Eagle Lake, Texas for
juvenile offenders aged 12 to 17. The agreement is for an initial five-year term
with three five-year renewal options to the County. The Company will act as an
advisor to the County during the construction phase, which is expected to
commence in the first quarter of 1997, with the facility scheduled to be
completed and become operational during the fourth quarter of 1997.

In August 1996, the Company was advised it had been selected, through a
competitive RFP process, to own and manage a 600-bed adult prison in Florence,
Arizona, which is anticipated to become operational in the fourth quarter of
1997. The agreement, which is to be negotiated, will be for an initial
three-year term with one two-year renewal option to the Arizona Department of
Corrections, as provided in the RFP. The Company will own the facility and is
responsible for the related costs, including design, development, construction
and start-up expenses, currently estimated at approximately $15.0 million.

In September 1996, the Company entered into an agreement with Bell County,
Texas to operate a secure juvenile detention facility anticipated to be
operational in the first quarter of 1997. The agreement provides initially for
64 beds, which is to be expanded to 96 beds by the third quarter of 1997, and
has an initial five-year term, with three five-year renewal options to the
County. Also, in September 1996, the Company entered into a one-year agreement
with the Fort Bend County Community Supervision and Corrections Department to
provide beds (estimated by the Company at up to 50 beds) at the Company's South
Texas Intermediate Sanction Facility in Houston, Texas and to provide substance
abuse treatment to offenders assigned to the facility by the Department.

On August 1, 1996, the Company filed an amendment to its Certificate of
Incorporation changing its name from Esmor Correctional Services, Inc. to
Correctional Services Corporation and increasing its authorized Common Stock
from 10,000,000 shares, $.01 par value, to 30,000,000 shares, $.01 par value.

THE OFFERING

Common Stock offered by the Company............. 2,070,000 shares

Common Stock offered by the Selling
Stockholders.................................... 380,000 shares. See
"Principal and Selling
Stockholders."

Common Stock to be outstanding after the
offering........................................ 7,215,503 shares(1)

Use of proceeds................................. To finance construction,
start-up and related costs of
the Florence, Arizona and the
Eagle Lake, Texas facilities
and the start-up costs of two
Florida facilities, repay
bank indebtedness and for
general corporate purposes.
See "Use of Proceeds."

The Nasdaq Stock Market symbol.................. CSCQ

- ---------------

(1) Excludes (i) 648,112 shares of Common Stock reserved for issuance under the
Company's stock option plans, pursuant to which options to purchase 346,813
shares at a weighted average exercise price of $9.51 per share are
outstanding, of which options to purchase 195,944 shares are currently
exercisable; (ii) 200,000 shares issuable at $8.875 per share upon exercise
of non-qualified options granted to two employees and 15,000 shares
issuable at $8.75 per share upon exercise of a non-qualified option granted
to a director, of which options to purchase 66,666 shares are currently
exercisable; and (iii) 851,202 shares issuable upon exercise of outstanding
warrants at an average exercise price of $7.65 per share. See
"Management -- Stock Options" and "Description of Securities -- Warrants."

4
<PAGE> 5

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------- -----------------
1991 1992 1993 1994 1995(1) 1995 1996
------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $5,444 $10,322 $14,101 $24,273 $31,552 $16,406 $15,073
Operating expenses................ 3,840 6,292 8,651 14,899 19,732 9,915 10,242
General and administrative
expenses....................... 1,232 2,888 3,579 6,696 9,938 5,064 4,402
New Jersey facility closure
costs(1)....................... -- -- -- -- 3,910 1,488 --
------- -------- -------- -------- -------- -------- --------
Operating income (loss)........... 372 1,142 1,871 2,678 (2,028) (61) 429
Interest expense.................. 67 36 31 133 761 215 453
------- -------- -------- -------- -------- -------- --------
Earnings (loss) before income
taxes.......................... 305 1,106 1,840 2,545 (2,789) (276) (24)
Income tax expense (benefit)(2)... 35 390 736 1,002 (1,050) 21 (10)
------- -------- -------- -------- -------- -------- --------
Net earnings (loss)(2)............ $ 270 $ 716 $ 1,104 $ 1,543 $(1,739) (297) (14)
======= ======== ======== ======== ======== ======== ========
Net earnings (loss) per
share(2)....................... $ 0.08 $ 0.22 $ 0.34 $ 0.35 $ (.38) $ (0.07) $ (0.00)
======= ======== ======== ======== ======== ======== ========
Weighted average shares
outstanding.................... 3,281 3,281 3,281 4,395 4,553 4,408 4,975
OPERATING DATA:(3)
Number of beds.................... 297 731 1,222 1,805 1,575 1,585 1,975
Actual mandays.................... 81,221 186,970 282,263 507,884 609,392 320,122 305,489
Available mandays................. 82,869 221,176 285,132 519,746 635,754 337,354 320,870
Average occupancy................. 98.0% 84.5% 99.0% 97.7% 95.9% 94.9% 95.2%
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED(4)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................................... $ (601) $ 3,082
Total assets........................................................ 24,836 44,346
Long-term debt, including current portion........................... 6,572 --
Subordinated notes.................................................. 4,032 4,032
Total stockholders' equity.......................................... 10,801 36,883
</TABLE>

- ---------------

(1) The 1995 consolidated financial statements have been restated with respect
to the closure of the New Jersey facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Calendar Year
1995 Compared to Calendar Year 1994" and Note L-1 of Notes to Consolidated
Financial Statements.
(2) Net earnings and net earnings per share for 1991, 1992 and 1993 are shown on
a pro forma basis to reflect income taxes which were not applicable under
the Company's then Subchapter S Corporation status.
(3) All references to the number of beds in this Prospectus, together with all
related statistical data, refer to the number of beds under contract which
is an estimate in the contract by the contracting governmental agency of
the number of offenders expected to be assigned to the facility and not a
guarantee of a minimum or maximum number of offenders to be so assigned.
(4) Adjusted to reflect the sale of the 2,070,000 shares of Common Stock offered
by the Company hereby and the application of the estimated net proceeds of
$26.1 million therefrom.

5
<PAGE> 6

SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT

The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain qualifying forward-looking statements. Certain information
included in this Prospectus and other materials filed or to be filed by the
Company with the Securities and Exchange Commission (as well as certain
information included in oral statements or other written statements made or to
be made by the Company) may contain statements that are forward-looking, such as
statements relating to projected financial items and results, plans for future
expansion and other business development activities, capital spending or
financing sources, capital structure and the effects of regulation and
competition. Such forward-looking information involves important risks and
uncertainties that could significantly impact anticipated results in the future
and, accordingly, such results may materially differ from those expressed in any
forward-looking statements by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, those described under "Risk
Factors" below.

RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information set forth in this Prospectus,
in evaluating an investment in the shares of Common Stock offered hereby.

RISKS ASSOCIATED WITH INTERNAL EXPANSION

The Company's growth is generally dependent upon its ability to obtain
contracts to develop and manage new correctional and detention facilities. The
rate of such development depends on a number of factors, including crime rates
and sentencing patterns in various jurisdictions and the Company's ability to
integrate new facilities into its management structure. Certain jurisdictions
recently have required the successful bidders to make a significant capital
investment in connection with the financing of a particular project, a trend
which will require the Company to have sufficient capital resources in order to
compete effectively. In some cases, the Company may determine to construct and
own a facility without a contract award when it believes there is a significant
shortage of beds and a strong likelihood it will be awarded a contract; however,
there can be no assurance that any contract will, in fact, be awarded. Further,
there can be no assurance that the Company will be able to obtain contracts to
construct and/or manage new facilities or retain existing contracts upon their
expiration. See "Business -- Business Strategy."

RISKS ASSOCIATED WITH ACQUISITIONS

The Company intends to grow through internal expansion and through
selective acquisitions. There can be no assurance that the Company will be able
to identify, acquire or profitably manage acquired operations or that operations
acquired will be profitable or achieve levels of profitability that justify the
related investment. Acquisitions involve a number of special risks, including
possible adverse short-term effects on the Company's operating results,
diversion of management's attention from existing business, dependence on
retaining, hiring and training key personnel, risks associated with
unanticipated problems or legal liabilities, and amortization of acquired
intangible assets, any of which could have a material adverse effect on the
Company's financial condition, results of operations and liquidity. See
"Business -- Business Strategy."

RESISTANCE TO PRIVATIZATION OF CORRECTIONAL AND DETENTION FACILITIES

Management of correctional and detention facilities by private entities is
a relatively new concept and has not achieved complete acceptance by either
governments or the public. The movement toward privatization of correctional and
detention facilities has also encountered resistance from certain groups, such
as labor unions, local sheriff's departments, and groups that believe that
correctional and detention facility operations should only be conducted by
governmental agencies. In addition, changes in the dominant political party in
any market in which the Company operates could result in significant changes to
the previous acceptance of privatization in such market. Further, some sectors
of the federal government and some state and local governments are not legally
permitted to delegate their traditional management responsibilities for
correctional and detention facilities to private companies.

6
<PAGE> 7

OPPOSITION TO FACILITY LOCATION

The Company's success in opening new facilities is dependent in part upon
its ability to obtain facility sites that can be leased or acquired on
economically favorable terms. Some locations may be in or near populous areas
and, therefore, may generate legal action or other forms of opposition from
residents in areas surrounding a proposed site. Certain facilities are already
located in or adjacent to such areas and, in one instance, the Company abandoned
its plans to expand a facility after consulting with community leaders who
raised concerns about the expansion. There can be no assurance the Company will
be able to open new facilities or expand existing facilities in any particular
location.

CONSTRUCTION RISKS

When the Company is engaged to perform design and construction services for
a facility, the Company typically acts as the primary contractor and
subcontracts with other parties who act as the general contractors. As primary
contractor, the Company is subject to the various risks of construction
including, without limitation, shortages of labor and materials, work stoppages,
labor disputes and weather interference. The Company is also subject to the risk
that the general contractor will be unable to complete construction at the
budgeted costs or be unable to fund any excess construction costs. Under such
contracts, the Company is ultimately liable for all late delivery penalties and
cost overruns.

SHORT-TERM CONTRACTS

The Company's facility management contracts are typically short-term,
ranging from one to three years, with renewal or extension options in favor of
the contracting governmental agency. The Company has three contracts subject to
renewal in 1996, and there can be no assurance that these or any other contract
will be renewed. Additionally, the contracting governmental agency typically may
terminate a facility contract without cause by giving the Company adequate
written notice. The Company customarily incurs significant development and
start-up costs in opening new facilities, and the termination or non-renewal of
a contract would require an immediate write-off of any unamortized costs
associated with the contract, and could have a material adverse effect upon the
Company's financial condition, results of operations and liquidity. See
"Business -- Facility Management Contracts."

CONTRACTS SUBJECT TO GOVERNMENTAL FUNDING

The Company's facility management contracts are subject to either annual or
bi-annual governmental appropriations. A failure by a governmental agency to
receive such appropriations could result in termination of the contract by such
agency or a reduction of the management fee payable to the Company. In addition,
even if funds are appropriated, delays in payments may occur which could have a
material adverse effect on the Company's financial condition, results of
operations and liquidity. See "Business -- Facility Management Contracts."

UNCERTAIN OCCUPANCY LEVELS

The Company is dependent upon the governmental agency with which it has a
management contract to provide inmates for, and maintain the occupancy level of,
the managed facility. A substantial portion of the Company's revenues is
generated under facilities management contracts that specify a net rate per day
per inmate ("per diem rate"), with no minimum guaranteed occupancy levels, while
most of the Company's facilities' cost structures are relatively fixed. Under
such a per diem rate structure, a decrease in occupancy levels may have a
material adverse effect on the Company's financial condition, results of
operations and liquidity. See "Business -- Facility Management Contracts."

FACILITY LEASE LIABILITY

The Company currently leases five of the facilities that it manages. If a
management contract for a leased facility were terminated, the Company would
continue to be obligated to make lease payments until the lease expires. See
"Business -- Facilities."

7
<PAGE> 8

IMPACT OF DISTURBANCE

An escape, riot or other disturbance at one of the Company's facilities
could have a material adverse effect on the Company's financial condition,
results of operations and liquidity. As a result of a disturbance on June 18,
1995 by detainees at the Company's Elizabeth, New Jersey facility which required
local police intervention, the facility was closed and all detainees were moved
by the Immigration and Naturalization Service (the "INS") to public detention
facilities. The disturbance received extensive media coverage which reported the
detainees' allegations of poor conditions and treatment and long delays prior to
their immigration hearings. The adverse publicity generated as a result of the
1995 disturbance could have a material adverse effect on the Company's ability
to obtain future contracts. However, in October 1995, the INS renewed the
Company's contract to manage an INS detention center in Seattle, Washington.
Thereafter, the Company signed a contract to manage a 100-bed facility in Eagle
Lake, Texas, was selected to own and manage a 600-bed adult prison in Florence,
Arizona, was re-awarded a contract to manage the 76-bed facility in Del Valle,
Texas and signed a contract to manage a 96-bed facility in Killeen, Texas.

In December 1995, the Company entered into an agreement to sell the assets
of the Elizabeth, New Jersey facility to an unaffiliated company that also
manages and operates detention centers. The closure of the facility and the
subsequent sale of assets resulted in charges to operations during 1995 of
$3,909,700, consisting of $416,201 to write-off the deferred development costs
and $3,493,499 to adjust the carrying value of the related assets. Following
approval by the INS of the transfer of the facility lease and management
contract, the sale closed in June 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Calendar Year 1995
Compared to Calendar Year 1994."

POTENTIAL LEGAL LIABILITY

The Company's management of correctional and detention facilities exposes
it to potential third-party claims or litigation by prisoners or other persons
for personal injury or other damages, including damages arising from a
prisoner's escape or from a disturbance or riot at a Company-managed facility.
Currently, the Company is subject to actions initiated by former employees,
inmates and detainees alleging assault, sexual harassment, personal injury,
property damage, and other injuries. See "Business -- Legal Proceedings." In
addition, the Company's management contracts generally require the Company to
indemnify the governmental agency against any damages to which the governmental
agency may be subject in connection with such claims or litigation. The Company
maintains an insurance program that provides coverage for certain liability
risks faced by the Company, including personal injury, bodily injury, death or
property damage to a third party where the Company is found to be negligent.
There can be no assurance, however, that the Company's insurance will be
adequate to cover potential third-party claims. In addition, the Company is
unable to secure insurance for some unique business risks including, but not
limited to, riot and civil commotion or the acts of an escaped offender. See
"Business -- Insurance."

REGULATION

The industry in which the Company operates is subject to a variety of
federal, state and local regulations, including education, health care and
safety regulations, which are administered by various regulatory authorities.
The Company's contracts typically include extensive reporting requirements, and
supervision and on-site monitoring by representatives of the contracting
governmental agencies. Corrections officers customarily are required to meet
certain training standards and, in some instances, facility personnel are
required to be licensed and subject to background investigation. Certain
jurisdictions also require the Company to award subcontracts on a competitive
basis or to subcontract with businesses owned by members of minority groups. The
failure to comply with any applicable laws, rules or regulations and the loss of
any required license could have a material adverse effect on the Company's
financial condition, results of operations and liquidity. Further, current and
future operations of the Company may be subject to additional regulation as a
result of new statutes and regulations or changes in the manner in which
existing statutes and regulations are or may be interpreted or applied, which
could have a material adverse effect on the Company's financial condition,
results of operations and liquidity. See "Business -- Regulation."

8
<PAGE> 9

COMPETITION

The Company competes on the basis of cost, quality and range of services
offered, its experience in managing facilities, the reputation of its personnel
and its ability to design, finance and construct new facilities. Some of the
Company's competitors have greater resources than the Company. There are few
barriers for companies seeking to enter into the management of correctional or
detention facilities. The Company also competes in some markets with local
companies that may have a better understanding of local conditions and a better
ability to gain political and public acceptance. In addition, the Company's
Community Corrections and Juvenile Divisions compete with governmental and
not-for-profit entities. See "Business -- Competition."

DEPENDENCE UPON EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES

The continued success of the Company is dependent to a significant degree
upon retaining its executive officers, the loss or unavailability of any of whom
could have an adverse effect on the Company. In addition, the private
correctional services industry has a high turnover rate for facility operational
employees, and the Company's ability to retain existing contracts and obtain new
contracts is in part dependent upon its ability to hire and retain operational
employees. See "Management."

OPERATING LOSS

For the year ended December 31, 1995, the Company incurred an operating
loss of $2,027,689 as a result of the $3,909,700 charge to operations resulting
from the closure of the Elizabeth, New Jersey facility. Since such date, the
Company realized an operating profit of $428,986 for the six months ended June
30, 1996. At June 30, 1996, the Company had a working capital deficit of
$601,261.

INDEBTEDNESS

At June 30, 1996, the Company had total indebtedness of $10,603,777,
$6,572,043 of which will be retired following completion of this offering.
Additional indebtedness may be incurred thereafter to fund the construction and
ownership of correctional facilities. Interest payments on indebtedness are a
charge against the Company's earnings and repayments of indebtedness adversely
affect its cash flow and liquidity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financing."

ANTI-TAKEOVER PROVISIONS

The ability of the Board of Directors to establish the terms and provisions
of different series of preferred stock and the business combination provisions
of the Delaware General Corporation Law may discourage unsolicited takeover bids
by third parties. See "Description of Securities."

AFFILIATED TRANSACTIONS

Prior to its initial public offering in February 1994, the Company entered
into leases and engaged in transactions with officers, directors and principal
stockholders and/or their affiliates which were not negotiated at arm's length;
two of such leases are still in effect providing for aggregate monthly payments
by the Company to the affiliated entities of approximately $90,000, inclusive of
real estate taxes and other charges with respect to one of the leases, plus such
charges with respect to the second. Since its initial public offering, the
Company has followed a policy that any such transactions must be approved by a
majority of the unaffiliated members of the Board of Directors and be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties. See "Certain Transactions."

CONTROL BY MANAGEMENT

Upon completion of this offering, executive officers and directors of the
Company and their immediate families will own approximately 20% of the shares of
Common Stock outstanding and may thereby have significant influence on
stockholder actions.

NO CASH DIVIDENDS

The Company does not anticipate paying cash dividends on its Common Stock
in the foreseeable future; in any event, the payment of any such dividends is
restricted under the Company's bank loan agreement. See "Dividends."

9
<PAGE> 10

CAPITALIZATION

The following table sets forth the Company's capitalization as of June 30,
1996 and as adjusted to reflect the sale of the 2,070,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net proceeds
of $26.1 million therefrom:

<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------- -----------
(DOLLAR AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Long-term debt, including current portion..................... $ 6,572 --
Subordinated notes(1)......................................... 4,032 4,032
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none outstanding............................. -- --
Common stock, $.01 par value; 30,000,000 shares authorized;
5,145,503 shares outstanding; 7,215,503 shares, as
adjusted................................................. 51 72
Additional paid-in capital.................................. 11,070 37,131
Retained earnings........................................... (320) (320)
------- -------
Total stockholders' equity.......................... 10,801 36,883
------- -------
Total capitalization........................... $21,405 $40,915
======= =======
</TABLE>

- ---------------

(1) See Note H of Notes to Consolidated Financial Statements included elsewhere
in this Prospectus.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,070,000 shares of
Common Stock offered by it hereby are estimated at $26.1 million ($30.8 million
if the Underwriters' over-allotment option is exercised in full).

Of the net proceeds, approximately $15.0 million will be applied to fund
the design, development, construction and start-up costs of the Florence,
Arizona adult prison to be owned by the Company and anticipated to become
operational in the fourth quarter of 1997, approximately $6.6 million will be
applied to retire bank indebtedness, approximately $3.0 million will be applied
to fund the start-up costs of two 350-bed detention facilities in Florida
scheduled to become operational in the first quarter of 1997, and approximately
$800,000 will be applied to fund the start-up costs and the Company's allocable
portion of the construction costs of the juvenile boot camp in Eagle Lake,
Texas, which is also anticipated to become operational in the fourth quarter of
1997. The balance of $700,000 will be available for general corporate purposes,
including the possible funding of construction and ownership costs of additional
privatized correctional facilities and possible acquisitions in the correctional
services industry. Although the Company from time to time receives information
from various companies concerning potential acquisition transactions, the
Company has not entered into any agreements or commitments regarding any such
transaction, and there can be no assurance that any such transaction will be
entered into. Pending application, the net proceeds will be invested in short-
term, investment grade, interest-bearing securities and/or money market funds.

The bank indebtedness being repaid from the net proceeds of this offering
consists of $4.6 million which bears interest at 8.92%, is repayable in monthly
installments and was incurred to repay indebtedness to another bank, and the
balance of $2.0 million bears interest at a variable rate, currently 8.6%. All
outstanding loan balances are repayable January 15, 1998. The Company recently
renegotiated certain provisions of the related bank loan agreement and is
holding discussions to increase the amount of funds available thereunder. There
can be no assurance such discussions will be successful.

10
<PAGE> 11

DIVIDENDS

The Company has not paid any cash dividends on its capital stock and does
not anticipate paying any such dividends in the foreseeable future. The
Company's bank loan agreement precludes the payment of dividends prior to
December 31, 1996. Thereafter, such dividends are limited to ten percent (10.0%)
of the Company's net earnings after taxes, provided that the Company is in
compliance with the financial covenants of the bank loan agreement.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is traded on The Nasdaq National Market under
the symbol "CSCQ." The following table sets forth the high and low closing sales
prices for the calendar quarters indicated from February 2, 1994, the date of
the Company's initial public offering, as reported by the Nasdaq National
Market:

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1994:
First Quarter (from February 2)...................................... 10 1/4 6 1/2
Second Quarter....................................................... 10 1/2 7 1/2
Third Quarter........................................................ 10 1/4 8 3/8
Fourth Quarter....................................................... 10 3/4 9 3/8
1995:
First Quarter........................................................ 20 1/4 9 7/8
Second Quarter....................................................... 22 1/2 10 1/2
Third Quarter........................................................ 15 1/2 7
Fourth Quarter....................................................... 13 3/4 7 1/4
1996:
First Quarter........................................................ 13 5/8 8 9/1
Second Quarter....................................................... 20 1/8 8 5/8
Third Quarter (through September 11, 1996)........................... 17 10 3/4
</TABLE>

---------------------

On September 11, 1996, the closing sales price of the Company's Common
Stock was $13.875.

On April 17, 1996, there were approximately 2,200 holders of the Company's
Common Stock, including beneficial owners of shares registered in nominee or
street name.

The Company also has Series A Warrants to purchase its Common Stock at a
purchase price of $7.75 per share which trade on The Nasdaq Stock Market under
the symbol "CSCQW." The last closing sales price of the Series A Warrants (on
September 9, 1996) was $7.875. See "Description of Securities -- Warrants."

11
<PAGE> 12

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below for the five years
ended December 31, 1995 and as of December 31, 1995 have been derived from the
audited consolidated financial statements of the Company. The statement of
operations data for the six months ended June 30, 1995 and 1996 and the balance
sheet data for June 30, 1996 have been derived from the unaudited consolidated
financial statements of the Company and, in the opinion of management, include
all adjustments (consisting of normal and recurring adjustments) which are
necessary to present fairly the results of operations and financial position of
the Company for the periods and dates presented. The selected consolidated
financial and operating data for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full year. The
information set forth below is qualified in its entirety by, and should be read
in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements, the Notes thereto, and the other financial and statistical
information included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------- -----------------
1991 1992 1993 1994 1995(1) 1995 1996
------ ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $5,444 $10,322 $14,101 $24,273 $31,552 $16,406 $15,073
Operating expenses............. 3,840 6,292 8,651 14,899 19,732 9,915 10,242
General and administrative
expenses.................... 1,232 2,888 3,579 6,696 9,938 5,064 4,402
New Jersey facility closure
costs(1).................... -- -- -- -- 3,910 1,488 --
------ ------- ------- ------- ------- ------- -------
Operating income (loss)........ 372 1,142 1,871 2,678 (2,028) (61) 429
Interest expense............... 67 36 31 133 761 215 453
------ ------- ------- ------- ------- ------- -------
Earnings (loss) before income
taxes....................... 305 1,106 1,840 2,545 (2,789) (276) (24)
Income tax expense
(benefit)(2)................ 35 390 736 1,002 (1,050) 21 (10)
------ ------- ------- ------- ------- ------- -------
Net earnings (loss)(2)......... $ 270 $ 716 $ 1,104 $ 1,543 $(1,739) $ (297) $ (14)
====== ======= ======= ======= ======= ======= =======
Net earnings (loss) per
share(2).................... $ 0.08 $ 0.22 $ 0.34 $ 0.35 $ (0.38) $ (0.07) $ (0.00)
====== ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding................. 3,281 3,281 3,281 4,395 4,553 4,408 4,975
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995(1) 1996
------ ------ ------ ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $ (107) $ 269 $ (102) $ 1,356 $ 4,540 $ (601)
Total assets.............................. 1,961 2,807 4,745 14,518 23,340 24,836
Long-term debt, including current
portion................................ -- -- -- 3,835 5,221 6,572
Subordinated notes........................ -- -- -- -- 5,362 4,032
Total stockholders' equity................ 806 1,081 1,926 7,093 9,222 10,801
</TABLE>

- ---------------

(1) The 1995 financial statements have been restated with respect to the closure
of the New Jersey facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Calendar year 1995
Compared to Calendar year 1994" and Note L-1 of Notes to Consolidated
Financial Statements.
(2) Net earnings and net earnings per share for 1991, 1992 and 1993 are shown on
a pro forma basis to reflect income taxes which were not applicable under
the Company's then Subchapter S Corporation status.

12
<PAGE> 13

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Revenues generated under federal, state and local governmental agency
contracts for the management of correctional and detention facilities are the
Company's principal source of income. Certain contracts are based on a fixed per
diem rate per offender, some of which have guaranteed minimum payments; others
provide for fixed monthly rates irrespective of the number of offenders.
Contracts typically are short-term, ranging from one to three years, with
renewal options in favor of the governmental agency, thereby subjecting the
Company to the attendant risks. See "Risk Factors -- Short-Term Contracts."

The Company pays all costs of operating the managed facilities, except rent
in the case of government-owned facilities. The Company's primary expenses are
categorized as operating, general and administrative, and interest expenses.
Operating expenses consist of payroll (employee salaries, wages and fringe
benefits, and payroll taxes) and resident expenses (food service, medical
services, utilities, supplies and maintenance and repairs). General and
administrative expenses include rent, insurance, professional fees, travel and
lodging and depreciation and amortization.

The Company typically incurs development costs, which may range from
$50,000 to $100,000, in responding to a governmental agency RFP. Such costs
include planning and developing the project, preparing the bid proposal, travel
and legal expenses, and incentive compensation for administrative employees. If
management believes the recovery of such costs is probable, the costs are
deferred until the anticipated contract has been awarded, at which time the
deferred costs are amortized on a straight-line basis over the term of the
contract (including option periods). Development costs of unsuccessful or
abandoned bids are expensed. The time period from incurring initial development
costs on a project to the commencement of operations ranges from six to eighteen
months.

After a contract has been awarded, the Company incurs start-up costs from
the date of the award until commencement of operations. Start-up costs include
recruitment, training and travel of personnel and certain legal costs, and are
capitalized until operations commence, at which time such costs are amortized on
a straight-line basis over the term of the contract (including option periods).

From the inception of operations, the Company fully staffs the facility in
accordance with the terms of its contract with the governmental agency. During
the initial period of operations (usually one to four months), an operating loss
may be sustained while the governmental agency assigns, on an incremental basis,
offenders to the facility. Revenues generated during this initial period under
per diem contracts increase as the offender population increases.

RESULTS OF OPERATIONS

The following table sets forth certain operating data as a percentage of
total revenues:

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------------- ---------------
1993 1994 1995(1) 1995 1996
----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses........................ 61.4 61.4 62.5 60.4 67.9
General and administrative expenses....... 25.4 27.6 31.5 30.9 29.2
New Jersey facility closure costs(1)...... -- -- 12.4 9.1 --
----- ----- ----- ----- -----
Operating income.......................... 13.3 11.0 (6.4) (0.4) 2.9
Interest expense.......................... 0.2 0.5 2.4 1.3 3.0
----- ----- ----- ----- -----
Earnings (loss) before income taxes....... 13.1 10.5 (8.8) (1.7) (0.1)
Income tax expense (benefit)(2)........... 5.2 4.1 (3.3) 0.1 (0.1)
----- ----- ----- ----- -----
Net earnings (loss)(2).................... 7.8% 6.4% (5.5)% (1.8)% (0.0)%
===== ===== ===== ===== =====
</TABLE>

- ---------------

13
<PAGE> 14

Six Months 1996 Compared to Six Months 1995

Revenues decreased 8.1% from $16,406,361 for the six months ended June 30,
1995 to $15,072,711 for the six months ended June 30, 1996. The net decrease in
revenues for the 1996 period as compared to the 1995 period resulted principally
from the discontinuance of the Company's operations at its Elizabeth, New Jersey
INS facility on June 18, 1995 and lower occupancy rates at the Company's Fort
Worth and Houston, Texas facilities. This decrease was offset in part by
revenues generated by the Canadian, Texas facility which began operations in
April 1995, the Bartow, Florida facility which began operations in July 1995 and
the Phoenix, Arizona facility which began operations in April 1996.

Operating expenses increased 3.3% from $9,914,657 for the six months ended
June 30, 1995 to $10,241,743 for the six months ended June 30, 1996 primarily
due to increases in payroll, which increased $483,908, or 7.9%, partially offset
by a $151,396, or 5.7%, decrease in resident expenses. These changes resulted
primarily from the opening of the facilities noted above, the addition of
management personnel in the corporate office, and the discontinuance of
operations at the Company's Elizabeth, New Jersey INS facility. As a percentage
of revenues, operating expenses increased from 60.4% for the six months ended
June 30, 1995 to 67.9% for the six months ended June 30, 1996.

General and administrative expenses decreased 13.1% from $5,064,367 for the
six months ended June 30, 1995 to $4,401,982 for the six months ended June 30,
1996. The decline in general and administrative expenses was attributable
primarily to the closure of the Elizabeth, New Jersey INS facility in June 1995.
As a percentage of revenues, general and administrative expenses were 30.9% and
29.2% for the six months ended June 30, 1995 and 1996, respectively. In
addition, at June 30, 1995 the Company wrote off $1,488,000 of development and
other costs associated with the closure of the Elizabeth, New Jersey INS
facility.

Interest expense increased 110.6% from $214,908 for the six months ended
June 30, 1995 to $452,511 for the six months ended June 30, 1996. This increase
resulted primarily from indebtedness attributable to the placement of $5.7
million of subordinated debt at a 10% interest rate in the third quarter of
1995, the proceeds of which were used to fund the purchase and renovation of the
Phoenix, Arizona facility.

As a result of the foregoing factors, the Company had a net loss of $13,525
or ($0.00) per share, for the six months ended June 30, 1996 compared to a net
loss of $296,571, or ($0.07) per share, for the six months ended June 30, 1995.

Calendar Year 1995 Compared to Calendar Year 1994

Revenues increased 30.0% from $24,272,989 in 1994 to $31,552,152 in 1995,
principally attributable to the revenues produced from the Company's Elizabeth,
New Jersey facility, the Ft. Worth, Texas facility and the Travis County, Texas
facility, whose operations commenced in September and October 1994. In addition,
on July 1, 1995, operations began at the Bartow, Florida facility pursuant to a
contract with the Florida Department of Juvenile Justice. Increases in 1995
revenues also resulted from contractual increases in per diem rates.

Operating expenses increased $4,832,605, or 32.4%, from $14,899,192 in 1994
to $19,731,797 in 1995 primarily due to increases in payroll and resident
expenses, which increased $3,862,117, or 36.2%, and $970,487, or 22.9%,
respectively. The increases in payroll and resident expenses resulted
principally from the opening in late 1994 of the facilities noted above and the
addition of management personnel in the corporate office. Payroll expenses
accounted for 43.9% and 46.0% of total revenues in 1994 and 1995, respectively.
As a percentage of total revenues, operating expenses were 61.4% and 62.5%,
respectively, in 1994 and 1995.

General and administrative expenses increased from $6,695,599 in 1994 to
$9,938,344 in 1995, an increase of $3,242,745, or 48.4%, attributable to
expenses associated with operations of the Elizabeth, New Jersey facility from
January 1 to June 18, 1995 (when the facility was closed) and to expenses
associated with the Ft. Worth and Travis facilities for a full year and to the
Bartow facility since July 1, 1995. As a percentage of revenues, general and
administrative expenses were 27.6% and 31.5% for 1994 and 1995, respectively.

Due to a disturbance at the Company's Elizabeth, New Jersey INS facility on
June 18, 1995, the facility was closed and all detainees located therein were
moved by the INS to other facilities. On December 15, 1995,

14
<PAGE> 15

the Company and a publicly-traded company (the "Buyer"), which also operates and
manages detention and correctional facilities, entered into an asset purchase
agreement pursuant to which the Buyer purchased the equipment, inventory and
supplies, contract rights and records, leasehold and land improvements of the
Company's New Jersey facility for $6,223,000. The purchase price is payable in
non-interest bearing monthly installments of $123,000 through August 1999
beginning in the month the Buyer commences operations of the facility. If the
INS re-awards the contract to the Buyer, the unpaid balance is payable in
non-interest bearing monthly installments of $123,000 beginning in the first
month of the re-award term, and the Company will record as income the unpaid
balance. On June 13, 1996 the Company, the Buyer and the INS executed a Novation
Agreement whereby the Buyer became the successor-in-interest to the contract
with the INS. In addition, the Company's lease for the New Jersey facility was
assigned to the Buyer. The Company has no continuing obligation with respect to
the Elizabeth, New Jersey INS facility.

The receivable from the sale of the equipment and leasehold improvements
reflected on the balance sheet at December 31, 1995, and June 30, 1996
represented the present value of the consideration to be received through August
1999 (discounted at 11.5% per annum) reduced by the estimated closing costs
(legal and consulting) and the facility's estimated carrying costs through July
1, 1996. The statement of operations for 1995 reflects a provision for closure
costs of $3,909,700, which represents $416,201 from the write-off of deferred
development costs related to the facility and $3,493,499 resulting from the
adjustment of the carrying value of the related assets discussed above. During
the six months ended June 30, 1996, the reserve for carrying and closing costs
was reduced by approximately $300,000 of payments for rent and other carrying
and closing costs.

The Company has revised the present value of the $6,223,000 purchase price
for the sale of equipment and leasehold improvements described above, reducing
to zero the present value of the $1,800,000 portion of the purchase price, or
$1,300,000, contingent upon re-award of the related management contract and
increased the provision for closure costs in a like amount for the year ended
December 31, 1995. The effect of the adjustments on the accompanying financial
statements at December 31, 1995 is as follows:

<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- ------------
<S> <C> <C>
Net loss.................................................... $ (959,391) $ (1,739,391)
Net loss per common share................................... (0.21) (0.38)
Receivable from sale of equipment and leasehold
improvements.............................................. 4,507,882 3,207,882
Deferred income taxes....................................... 600,000 1,120,000
Retained earnings (deficit)................................. 473,492 (306,508)
</TABLE>

Interest expense increased $628,387 from $133,315 in 1994 to $761,702 in
1995, as a result of additional borrowings in 1995, incurred primarily to fund
development and start-up costs and fixed asset acquisitions for the Phoenix,
Arizona facility.

The provision for income taxes aggregated $1,002,000 in 1994 as compared to
an income tax benefit of $1,050,000 in 1995. The effective tax rate was 39.4% in
1994 and 37.6% in 1995.

The Company had a net loss of $1,739,391 for 1995 compared to net income of
$1,542,883 for 1994, principally as a result of the closure of the Company's New
Jersey INS facility.

Calendar Year 1994 Compared to Calendar Year 1993

Revenues increased 72.1% from $14,101,194 in 1993 to $24,272,989 in 1994.
The commencement of operations in December 1993 of the Company's south Texas
Intermediate Sanction Facility in Houston, Texas, operated for the Texas
Department of Criminal Justice, Pardons and Paroles Division and the
commencement of full scale operations in September 1994 of the Company's
Immigration and Naturalization Service facility in Elizabeth, New Jersey were
the primary reasons for the increase in revenue. Operations also commenced at
the Company's Fort Worth, Texas and Travis County, Texas facilities on October
1, 1994.

Operating expenses increased $6,247,917, or 72.2%, from $8,651,275 in 1993
to $14,899,192 in 1994 primarily due to increases in payroll and resident
expenses. Payroll expenses increased $4,321,132, or 68.0%, and resident expenses
increased $1,926,786, or 83.0%, for 1994 as compared to 1993. The increases in
payroll and resident expenses resulted from the opening of the facilities noted
above. Payroll expenses accounted for

15
<PAGE> 16

49.1% and 51.6% of total expenses for the years ended December 31, 1994 and
1993, respectively. Resident expenses accounted for 19.5% and 18.9% of total
expenses in 1994 and 1993, respectively. As a percentage of revenues, operating
expenses were 61.4% in each of the years ended December 31, 1993 and 1994.

General and administrative expenses for the years ended December 31, 1993
and 1994 were $3,578,738 and $6,695,599, respectively, an increase of $3,116,861
or 87.1%. The opening of the above-noted facilities accounted for a significant
portion of the increase in general and administrative expenses. As a percentage
of revenues, general and administrative expenses were 25.4% and 27.6% for the
years ended December 31, 1993 and 1994, respectively. The 1994 increase was
attributable primarily to depreciation and amortization costs associated with
the construction of the Company's New Jersey facility and related development
and start-up costs and the write-off of deferred loan costs of $111,854.

Interest expense increased $102,529 from $30,786 in 1993 to $133,315 in
1994, as a result of higher interest rates in 1994 and additional borrowings.

The provision for income taxes increased $266,000, or 36.1%, from $736,000
in 1993 to $1,002,000 in 1994. The effective tax rate was 40.0% in 1993 and
39.4% in 1994.

As a result of the forgoing factors, net earnings increased $438,488, or
39.7%, from $1,104,395 in 1993 to $1,542,883 in 1994.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically financed its operations through private
placements and public sales of its securities, cash generated from operations
and borrowings from banks.

The Company had a working capital deficit at June 30, 1996 of $601,261, a
decline of $5,141,357 from the Company's working capital at December 31, 1995,
principally attributable to funds used for construction of the Company's
Phoenix, Arizona facility, which opened April 11, 1996. The Company's current
ratio declined to 0.91 to 1 at June 30, 1996 from 1.95 to 1 at December 31,
1995. At June 30, 1996, the projected start-up costs for the two 350-bed
detention facilities in Florida, scheduled to become operational in the first
quarter of 1997, were estimated at $3.0 million. Thereafter, the Company
received awards for two new facilities, scheduled to become operational in the
fourth quarter of 1997, for which the projected costs to the Company are
estimated at $15.8 million. Approximately $18.8 million of the net proceeds of
this offering have been allocated to fund construction, start-up and related
costs with respect to these facilities. See "Use of Proceeds."

Net cash provided by operating activities was $235,696 for the six months
ended June 30, 1996 as compared to $2,654,688 for the six months ended June 30,
1995. The decrease was attributable primarily to the reduction in depreciation
and amortization resulting from the closure of the Elizabeth, New Jersey INS
facility and changes in working capital. Net cash of $5,477,369 was used in
investing activities for the six months ended June 30, 1996 as a result of fixed
asset acquisition costs of $4,738,933, the majority of which related to the
Company's Phoenix, Arizona facility and $1,254,675 in additional deferred
development and start-up costs, as compared to net cash of $3,686,808 used in
investing activities for the six months ended June 30, 1995. Net cash of
$1,522,682 was provided by financing activities in the six months ended June 30,
1996 as compared to $962,068 in the six months ended June 30, 1995. The
principal source of such funds in both periods was bank borrowings.

Net cash provided by operating activities was $3,226,138 in 1995 as
compared to net cash used in operating activities of $202,197 in 1994. The
increase in cash provided by operations resulted from the substantial add-back
of depreciation, amortization and write-down of fixed asset and deferred
development costs, net of deferred taxes (principally associated with the
Elizabeth, New Jersey facility), and from the substantial reduction in accounts
receivable and the increase in accounts payable and accrued liabilities.

Net cash of $8,684,961 was used in investing activities in 1995 compared to
$8,095,533 in 1994. During 1995, the Company incurred fixed asset acquisition
costs of $6,110,693, of which approximately $5,600,000 related to the building
of the Canadian, Texas facility and to the purchase and initial renovation costs
of the Phoenix, Arizona facility. The Company expended $1,824,268 in deferred
development and start-up costs during the year ended December 31, 1995. Such
costs related principally to the Phoenix, Arizona facility (which commenced
operations on April 11, 1996) and the Pahokee and Polk County, Florida contract
awards.

16
<PAGE> 17

Net cash of $8,907,125 was provided by financing activities in 1995
compared to $7,915,150 in 1994. The principal source of such funds in 1995 was
the Company's private placement offering of subordinated debt and equity
securities.

FINANCING

Effective December 31, 1995, the Company entered into an $11,000,000
Revolving Credit and Term Loan Agreement (the "Loan Agreement") with
NationsBank, N.A. ("NationsBank"). Pursuant to the terms of the Loan Agreement,
the Company, from time to time, may borrow up to the lesser of $6,000,000 or
85.0% of the Company's eligible accounts receivable. Loan proceeds are to be
used for working capital, including deferred development and start-up costs in
connection with new or existing facilities. Interest on the revolving credit
loan is computed, at the Company's option, at either NationsBank prime rate plus
0.75% or the London International Bank Rate plus 3.35%. Under the Loan
Agreement, NationsBank also made a term loan to the Company in the principal
amount of $5,000,000, which was applied to repay the Company's indebtedness of
$5,002,869 to another bank. The term loan bears interest at 8.92% and is
repayable in monthly installments of $83,330 until January 15, 1998, at which
time the Loan Agreement terminates and any remaining unpaid balances are due and
payable. After September 30, 1996, the interest rate payable under the revolving
credit loan will be based on the Company's financial performance set forth in
the Loan Agreement. The Company may prepay any borrowings without interest or
penalty. The Company has granted NationsBank a first priority security interest
in all of its assets, including a first real estate mortgage on the land and
building of the Phoenix, Arizona facility. The Company is required to pay
NationsBank 0.25% of the average unused portion of the revolving credit loan.
The Company was not in compliance with a cash flow-based debt service coverage
ratio at March 31, 1996 and renegotiated such ratio. At June 30, 1996, the
Company was in compliance with the amended ratio. The balance outstanding under
the Loan Agreement will be repaid in full from the net proceeds of this
offering. The Company has held discussions with NationsBank to increase the
amount of funds available under the Loan Agreement, but there can be no
assurance that such discussions will be successful.

During the year ended December 31, 1995, the Company completed a private
placement of 5,676.6 units at $1,000 per unit, each unit consisting of (i) a ten
percent (10.0%) subordinated promissory note due July 1, 1998 in the principal
amount of $1,000; and (ii) four-year warrants to purchase 154 shares of Common
Stock at $7.75 per share. The Company received gross proceeds of $5,676,600 from
the sale of the units, of which $365,000 was attributed to the value of the
warrants. During such period, the Company also completed the private placement
of 496,807 shares of Common Stock at $7.75 per share, receiving gross proceeds
of $3,850,254. Approximately $8,500,000 of the proceeds of the two placements
was used to finance costs associated with the Company's Phoenix, Arizona
facility and the balance for expenses related to the private placements and for
working capital.

INFLATION

Inflation has not affected the Company's results of operations. Certain
multi-year contracts have built-in fixed price adjustments in succeeding years
which take into account increases in various type of expenses (i.e., payroll and
related expenses, rent, insurance).

IMPACT OF NEW ACCOUNTING STANDARD

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation." With respect to stock options
granted to employees, SFAS No. 123 permits companies to continue using the
accounting method promulgated by the Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees," to measure
compensation or to adopt the fair value based method prescribed by SFAS No. 123.
If APB No. 25's method is continued, pro forma disclosures are required as if
SFAS No. 123 accounting provisions were followed. Management has determined not
to adopt SFAS No. 123's accounting recognition provisions related to stock
options granted to employees and, accordingly, will continue following APB No.
25's accounting provisions. See Note A of Notes to Consolidated Financial
Statements.

17
<PAGE> 18

BUSINESS

The Company is a leading developer and manager of privatized correctional
and detention facilities in the United States, ranking fifth in number of beds
out of the approximately 17 companies known to the Company to be engaged in
managing and operating privatized correctional and detention facilities. Through
its three divisions, Adult, Juvenile and Community Corrections, the Company
provides a diverse range of services to local, state, and federal governmental
correctional agencies. The Company currently has agreements to operate 15
correctional and detention facilities in New York, Florida, Arizona, Texas and
the State of Washington. Eleven of these facilities, with a total of 1,975 beds,
are currently in operation, three, with a total of 796 beds, are anticipated to
be operational in the first quarter of 1997 and one, with 100 beds, is
anticipated to be operational in the fourth quarter of 1997. Further, the
Company recently was advised it has been selected, following a competitive
bidding process, to negotiate an agreement to design, construct, own and manage
a 600-bed adult prison in Arizona, which is anticipated to become operational in
the fourth quarter of 1997. The Company is also aggressively pursuing other
privatized correctional projects both at the RFP stage and the pre-RFP
development stage.

The Company manages both secure and non-secure facilities. The Company's
secure facilities include a detention and processing center for illegal aliens,
an adult prison, intermediate sanction facilities, DWI facilities, and
military-style boot camps for juvenile offenders. Its non-secure facilities
include residential programs, such as community correctional facilities for
federal and state offenders serving the last six months of their sentences, and
non-residential supervision programs.

MARKET FOR THE COMPANY'S SERVICES

The continuing pressure to control costs and address increasing inmate
populations has generated strong growth in the privatization of correctional
services. According to the Private Adult Correctional Facility Census, Ninth
Edition, prepared by the Private Corrections Project, Center for Studies in
Criminology & Law, University of Florida, dated March 15, 1996, the rated
capacity of international privatized adult secure correctional facilities grew
from 2,620 beds in 1986 to 63,595 beds at year-end 1995 and, in a June 16, 1996
forecast prepared by the Project, is projected to grow to 197,503 beds by
year-end 2000. This projection does not include any projected growth for
privatized juvenile offender and community correctional facilities, both of
which, the Company believes, are also growing rapidly. According to the United
States Department of Justice, Office of Juvenile Justice and Delinquency
Prevention, between 1988 and 1994 juvenile arrests for violent crimes grew by
more than 50%.

The Company believes the growth in demand for privatized correctional and
detention facilities is being fueled by a number of factors. First, the United
States continues to experience a shortage of correctional beds. According to the
United States Department of Justice, Bureau of Justice Statistics, the number of
adult inmates housed in federal and state facilities increased from 487,593 at
December 31, 1985, to 1,104,074 at June 30, 1995. Second, inmates convicted of
violent crimes generally serve only one-third of their sentences, and the public
is demanding that a longer portion of their sentences be served. Third, courts
and various governmental agencies are requiring overcrowded conditions to be
remedied, outdated facilities to be replaced, and services to be expanded. As a
result of increasing fiscal pressures, many governmental agencies are turning to
the private sector to deliver cost-effective correctional services to address
these needs.

18
<PAGE> 19

BUSINESS STRATEGY

The Company's business strategy is to enhance its position as a leading
developer and manager of a diverse range of quality privatized correctional and
detention facilities, and to expand its operations, both internally and through
acquisitions, in order to capitalize on current growth trends in the industry.
Key elements of the Company's strategy are as follows:

Maintaining Quality Facility Operations. The Company recognizes the
importance of maintaining high quality management and operations at its
facilities. The Company seeks to operate all its facilities in accordance
with the guidelines of the American Correctional Association ("ACA"), an
independent organization comprised of professionals in the corrections
industry, and uses compliance audit teams to rigorously examine all aspects
of the Company's facilities and operations. The Company's senior level
ethics and compliance officer, who reports directly to the President and
Board of Directors, provides additional oversight and monitoring of
facility operations. The Company also promotes quality performance by its
facility administrators and management teams and holds Company-wide
conferences for facility administrators to exchange information and enhance
performance at all its facilities. The Company encourages tours of its
facilities for governmental representatives as it believes the quality of
its operations can best be demonstrated through on-site visits.

Capitalizing on Diversity of Services. The diversified correctional
services provided by the Company include housing adult inmates or detained
persons in secure facilities, providing non-secure residential and
management services in community correctional facilities and managing and
operating juvenile offender facilities, both secure and non-secure,
including military-style boot camps. The Company believes that its proven
ability to manage the full spectrum of privatized correctional facilities
will increase its marketing opportunities and will be beneficial where
particular governmental policies favor certain types of programs or
services over others.

Enhancing Proven Programs. In awarding management contracts,
contracting governmental agencies frequently give significant weight to the
potential effectiveness of the programs to be provided by the bidder. The
Company's programs include basic and special education, substance abuse
treatment and counseling, vocational training, job placement, life skills
training and behavioral modification counseling, all of which are intended
to reduce recidivism. The Company's staff of professionals seek to
continually enhance and improve these programs, monitor resident offender
performance and develop new programs to address perceived needs.

Developing New Business Opportunities. The growing demand for
privatized correctional facilities at all levels of government has enabled
the Company to pursue more projects meeting its criteria. The Company
pursues projects based on the probability of success, geographic location,
size, potential profitability, and political and community acceptability.
This approach is intended to optimize resource allocation, profitability
and financial return. The Company (i) currently owns a correctional
facility in Arizona, (ii) in August 1996 was selected to finance,
construct, own and operate an adult prison in Arizona, (iii) has agreed to
fund approximately $650,000 of construction and related costs for a
juvenile boot camp in Texas and (iv) has used its capital to renovate and
improve other facilities which it operates. The Company believes its
willingness to commit its capital to facility ownership and renovation
enhances its growth opportunities.

Strategic Acquisitions. Historically, the Company's growth has been
generated internally, primarily through the competitive bid process.
However, the Company continues to evaluate strategic acquisitions,
particularly where an acquisition would enhance the Company's capabilities
or add to the services it offers in the correctional services industry. At
present, the Company has not entered into any agreements or commitments for
an acquisition.

19
<PAGE> 20

DIVISIONAL STRUCTURE

In January 1996, the Company organized its operations into three divisions,
Adult, Juvenile and Community Corrections.

Adult. The Adult Division operates five secure facilities located in
Seattle, Washington; Houston, Del Valle and Mansfield, Texas; and Phoenix,
Arizona, with a total of 1,216 beds. This Division will operate the 600-bed
prison to be constructed and owned by the Company in Florence, Arizona,
anticipated to become operational in the fourth quarter of 1997. In
addition to providing housing for adult inmates, the Company provides a
variety of rehabilitation and educational services intended to reduce
recidivism. The Company also provides health care, transportation, food
services and work and recreational programs for adult inmates.

Juvenile. The Juvenile Division operates (or upon completion of the
facility will operate) seven facilities located (or to be constructed) in
Bartow, Polk City and Pahokee, Florida; and Canadian, Mansfield, Eagle Lake
and Killeen, Texas, for convicted youths aged 12 to 24, with a total of
1,150 beds. The Polk City, Pahokee and Killeen facilities are anticipated
to be operational in the first quarter of 1997 and the Eagle Lake facility
is anticipated to be operational in the fourth quarter of 1997. The Company
manages secure and non-secure juvenile offender facilities for low, medium,
and high risk youths in highly structured programs, including
military-style boot camps, wilderness programs, secure education and
training centers, and detention facilities. The Company believes these
programs, by instilling the qualities of self-respect, respect for others
and their property, personal responsibility and family values, can help
reduce the recidivism rate of its program participants.

Community Corrections. The Community Corrections Division operates
three facilities, located in Brooklyn and Manhattan, New York; and Ft.
Worth, Texas, with a total of 505 beds. These are non-secure residential
facilities for adult male and female offenders transitioning from
institutional to independent living. Offenders are eligible for these
programs based upon the type of offense committed and behavior while
incarcerated in prison. If qualified, offenders may generally spend the
last six months of their sentence in a community corrections program, whose
mission is to reduce the likelihood of an inmate committing an offense
after release by assisting in the reunification process with family and the
community. Normally, in order to remain in the program, offenders must be
employed, participate in substance abuse programs, submit to frequent
random drug testing, and pay a predetermined percentage of their earnings
to the government to offset the cost of the program. The Company supervises
these activities and also provides life skills training, case management,
home confinement supervision and family reunification programs at these
facilities. The Company believes that community correctional facilities
help reduce recidivism, result in prison beds being available for more
violent offenders and, in appropriate cases, represent cost-effective
alternatives to prisons.

FACILITY MANAGEMENT CONTRACTS

Each facility is managed under an agreement with a federal, state or local
corrections agency which provides for fixed per diem payments to the Company for
each offender assigned to the facility or a fixed monthly payment irrespective
of the number of offenders so assigned. Some contracts also provide for minimum
revenue guarantees to the Company. As is standard in the industry, the Company's
contracts are short-term, generally one to three years, and contain multiple
renewal options in favor of the contracting governmental agency. The exercise of
the renewal option by the governmental agency is discretionary and contingent
upon appropriation of funds. If funds are not appropriated, the contract may be
terminated by the agency, the per diem rate payable to the Company may be
reduced or delays in payment may occur. The contracts also generally contain
"termination for the convenience of the government" and "stop work order"
clauses which allow the agency to terminate a contract without cause or
financial penalty to the government. Termination or non-renewal could have a
material adverse effect on the Company's financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Calendar Year 1995 Compared to Calendar Year 1994."

20
<PAGE> 21

CONTRACT AWARD PROCESS

Most governmental procurement and purchasing activities are controlled by
procurement regulations, and take the form of RFPs, and most of the Company's
new business results from responding to these requests. Interested parties
submit proposals in response to an RFP within a time period of 15 to 120 days
from the time the RFP is issued. A typical RFP requires a bidder to provide
detailed information, including the services to be provided by the bidder, the
bidder's experience and qualifications and the price at which the bidder is
willing to provide the services. The Company engages independent consultants to
assist it in responding to RFPs. Approximately six to eighteen months is
generally required from the issuance of the RFP to the contract award. In some
cases, the Company has been asked to assist governmental agencies in developing
their RFPs.

Before responding to an RFP, the Company researches and evaluates, among
other factors: (i) the current size and growth projections of the available
correctional and detention population; (ii) whether or not a minimum capacity
level is guaranteed; (iii) the willingness of the contracting authority to allow
the Company to house populations of similar classification within the proposed
facility for other governmental agencies; and (iv) the willingness of the
contracting authority to allow the Company to make adjustments in operating
activities, such as work force reductions in the event the actual population is
less than the contracted capacity.

Under the RFP, the bidder may be required to design and construct a new
facility or to redesign and renovate an existing facility at its own cost. In
such event, the Company's ability to obtain the contract award is dependent upon
its ability to obtain the necessary financing or fund such costs internally.

In addition to issuing formal RFPs, governmental agencies may use a
procedure known as Purchase of Services or Requests for Qualification ("RFQ").
In the case of an RFQ, the requesting agency selects a firm it believes is most
qualified to provide the necessary services and then negotiates the terms of the
contract, including the price at which the services are to be provided.

OPERATIONS

The Company is responsible for the overall operation of each facility under
its management, including staff recruitment, general administration of the
facility, security of inmates and employees, supervision of the offenders and
facility maintenance. The Company, either directly or through subcontractors,
also provides health care (including medical, dental and psychiatric services)
and food service. Certain facilities also offer special rehabilitation and
educational programs, such as academic or vocational education, job and life
skills training, counseling, substance abuse programs, and work and recreational
programs.

The Company's contracts generally require the Company to operate each
facility in accordance with all applicable local, state and federal laws, rules
and regulations and the standards and guidelines of the ACA. The ACA establishes
guidelines and standards by which an adult correctional institution may gain
accreditation. The Company believes that the ACA, which currently only
recommends operating guidelines for but does not accredit juvenile correctional
facilities, will eventually accredit these kinds of facilities. The ACA
standards, designed to safeguard the life, health and safety of offenders and
personnel, describe specific objectives with respect to administration,
personnel and staff training, security, medical and health care, food service,
inmate supervision and physical plant requirements. The Company believes the
benefits of operating its facilities in accordance with ACA standards include
improved management, better defense against lawsuits by offenders alleging
violations of civil rights, a more humane environment for personnel and
offenders and measurable criteria for upgrading programs, personnel and the
physical plant on a continuous basis. The Company's Seattle INS Detention Center
and Tarrant County Community Correctional Facility are fully accredited by the
ACA and certain other facilities currently are being reviewed for accreditation.
The Company's goal is to obtain and maintain ACA accreditation for all of its
facilities. Mr. Richard P. Staley, the Company's Senior Vice President and a
director, is a member of the ACA and a certified ACA standards auditor for jail
and detention facilities.

21
<PAGE> 22

EMPLOYEE TRAINING

All jurisdictions require corrections officers to complete a specified
amount of training prior to employment. In most cases, Company employees must
undergo at least 160 hours of training before being allowed to work in a
position that will bring them in contact with offenders or detainees. This
training consists of approximately 40 hours relating to Company policies,
operational procedures and management philosophy, and 120 hours relating to
legal issues, rights of offenders and detainees, techniques of communication and
supervision, improvement of interpersonal skills and job training relating to
the specific tasks to be performed. Each Company employee having contact with
offenders receives a minimum 40 hours of additional training each year, and each
management employee receives a minimum 24 hours of training each year.

FACILITIES

The Company operates both pre-disposition and post-disposition secure and
non-secure correctional and detention facilities, and non-secure community
correctional facilities for federal, state and local governmental agencies.
Pre-disposition secure detention facilities provide secure residential detention
for individuals awaiting trial and/or the outcome of judicial proceedings, and
for illegal aliens awaiting deportation or the disposition of deportation
hearings. Post-disposition secure facilities provide secure incarceration for
individuals who have been found guilty of a crime by a court of law. The Company
operates three types of post-disposition facilities: secure prisons,
intermediate sanction facilities and military-style boot camps. Secure prisons
and intermediate sanction facilities provide secure correctional services for
individuals who have been found guilty of one or more offenses. Offenders placed
in intermediate sanction facilities are typically persons who have committed a
technical violation of their parole conditions, but whose offense history or
current offense does not warrant incarceration in a prison. Both types of
facilities offer vocational training, substance abuse treatment and offense
specific treatment. Boot camps provide intensely structured and regimented
residential correctional services which emphasize disciplined activities modeled
after the training principles of military boot camps and stress physical
challenges, fitness, discipline and personal appearance.

The Company also operates non-secure residential and non-residential
community corrections programs. Non-secure residential facilities, known as
half-way houses, provide residential correctional services for offenders in need
of less supervision and monitoring than are provided in a secure environment.
Offenders in community correctional facilities are typically allowed to leave
the facility to work in the immediate community and/or participate in community
based educational and vocational training programs during daytime hours.
Generally, persons in community correctional facilities are serving the last six
months of their sentence. Non-residential programs permit the offender to reside
at home or in some other approved setting under supervision and monitoring by
the Company. Supervision may take the form of either requiring the offender to
report to a correctional facility a specified number of times each week and/or
having Company employees monitor the offender on a case management basis at
his/her work site and home.

As a result of a disturbance on June 18, 1995 by detainees at the Company's
Elizabeth, New Jersey INS facility which required local police intervention, the
facility was closed and all detainees were moved by the INS to public detention
facilities. The disturbance received extensive media coverage, which reported
the detainees' allegations of poor conditions and treatment and long delays
prior to their immigration hearings. The adverse publicity generated as a result
of the 1995 disturbance could have a material adverse effect on the Company's
ability to obtain future contracts. See "Risk Factors -- Impact of Disturbance"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Calendar Year 1995 Compared to Calendar Year 1994."

22
<PAGE> 23

The following information is provided with respect to the facilities for
which the Company has management contracts or has been selected to negotiate a
management contract:

<TABLE>
<CAPTION>
OCCUPIED CONTRACTING OWNED,
FACILITY NAME, LOCATION AND CONTRACTED BEDS-- TYPE OF GOVERNMENTAL LEASED OR
YEAR OPERATIONS COMMENCED BEDS(1) AVERAGE(2) FACILITY AGENCY MANAGED(3)
- ------------------------------------------------------- ----------- ------------------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
ADULT DIVISION
Seattle INS Detention Center 150 153 Secure Detention INS Managed
Seattle, Washington (1989) Facility
South Texas Intermediate 400 356 Secure Intermediate State Managed
Sanction Facility(4) Sanction Facility
Houston, Texas (1993)
Tarrant County Community 190 180 Secure Intermediate County Managed
Correctional Facility(5) Sanction Facility
Mansfield, Texas (1992)
Travis County Substance 76 63 Secure Intermediate County Managed
Abuse Treatment Facility Sanction Facility
Del Valle, Texas (1994)
Arizona State Prison, Phoenix West 400 308 State Prison State Owned
Phoenix, Arizona (1996)
Arizona State Prison, Florence 600 * State Prison State Owned
Florence, Arizona (est. 1997)
JUVENILE DIVISION
Tarrant County Community 120 114 Secure Boot County Managed
Correctional Center(5) Camp Facility
Mansfield, Texas (1992)
Hemphill County Juvenile Facility 60 82 Secure Boot Camp County Leased
Canadian, Texas (1995) Facility
Bartow Youth Training Center 74 71 Secure and Residential State Managed
Bartow, Florida (1995) Correctional Facility
Pahokee Youth Training Center(6) 350 * Secure Correctional State Managed
Pahokee, Florida (est. 1997) Facility
Polk County Youth Training Center(6) 350 * Secure Correctional State Managed
Polk City, Florida (est. 1997) Facility
Colorado County Juvenile Residential 100 * Secure Boot Camp County Managed
Facility Facility
Eagle Lake, Texas (est. 1997)
Bell County Youth Training Center(7) 96 * Secure Correctional County Managed
Killeen, Texas (est. 1997) Facility
COMMUNITY CORRECTIONS DIVISION
Brooklyn Community Corrections Center 95 110 Residential Correctional Federal Leased
Brooklyn, New York (1989) Facility Bureau of
Prisons
Manhattan Community Corrections Center 60 127 Residential Correctional Federal Leased
New York, New York (1990) Facility Bureau of
Prisons
New York State Community Corrections 150 137 Residential Correctional State Leased
Center Facility
Brooklyn/New York, New York (1992)
Fort Worth Community Corrections Center 200 110 Residential Correctional State Leased
Forth Worth, Texas (1994) Facility
</TABLE>

- ---------------

(1) The number of beds under contract generally is an estimate in the contract
by the contracting governmental agency of the number of offenders expected
to be assigned to the facility and not a guarantee of a minimum or maximum
number of offenders to be so assigned. Certain facilities have bed capacity
in excess of the number of beds under contract and therefore may be
occupied by a greater number of offenders than is estimated pursuant to the
contract.

23
<PAGE> 24

(2) Average for the six months ended June 30, 1996.
(3) A managed facility is a facility for which the Company provides management
services pursuant to a management contract with the applicable governmental
agency but, unlike a leased or owned facility, the Company has no property
interest in the facility. The Company has granted NationsBank a first
priority security interest in all of its assets, including a first real
estate mortgage on the land and building of the Phoenix, Arizona facility.
(4) In September 1996, the Company entered into a one-year agreement with the
Fort Bend County Community Supervision and Corrections Department to
provide beds (estimated by the Company at up to 50 beds) for offenders
assigned to this facility by the Department.
(5) This facility is listed both as part of the Company's Adult Division and its
Juvenile Division as the facility houses both adult and juvenile offenders.
(6) The contracting state agency charged with oversight responsibility for the
Pahokee and Polk City, Florida facilities has been changed from the
Correctional Privatization Commission to the Department of Juvenile Justice
and related contract modifications are being finalized.
(7) Initially 64 beds; to be expanded to 96 beds.
* Not yet operational.

COMPETITION

The business in which the Company engages is highly competitive, with few
barriers to entry. To the Company's knowledge, there are approximately 17
companies engaged in the management and operation of privatized correctional and
detention facilities, of which the Company is the fifth largest in terms of
number of beds. The Company's competitors include local companies with
significant local relationships and knowledge of local conditions, as well as
companies that manage and operate facilities in many states and abroad with
financial resources substantially greater than the Company's, including
Corrections Corporation of America and Wackenhut Corrections Corporation which,
together, have approximately 75% of the privatized beds under contract. The
Company's Community Corrections and Juvenile Divisions also compete with
not-for-profit entities.

The Company competes on the basis of the cost, quality and range of
services offered, its experience in managing facilities, the reputation of its
personnel, and its ability to design, finance and construct new facilities. The
Company also attempts to achieve a competitive advantage by seeking additional
contracts from governmental agencies with which it has existing contractual
relationships and by identifying and marketing its services to correctional
agencies that have no previous experience with privatization services.

EMPLOYEES

At July 31, 1996, the Company had approximately 695 full-time employees,
consisting of clerical and administrative personnel, security personnel, food
service personnel and facility administrators. None of the Company's employees
is subject to a collective bargaining agreement. The Company believes its
relationship with its employees is good.

Each of the Company's facilities is managed as a separate entity by an
experienced facility administrator. Other facility personnel include
administrative, security, medical, food service, counseling, classification and
educational and vocational training personnel. The Company conducts background
screening checks and drug testing on potential facility employees. Some of the
services rendered at certain facilities, such as medical services and education
or training, are provided by third-party contractors.

INSURANCE

Each management contract with a governmental agency requires the Company to
maintain certain levels of insurance coverage for general liability, workers'
compensation, vehicle liability and property loss or damage and to indemnify the
contracting agency for claims and costs arising out of the Company's operations.
The Company maintains general liability insurance in the amount of $5,000,000
and an umbrella policy in the amount of $20,000,000 for itself and each of its
subsidiaries. There can be no assurance that the aggregate amount and kinds of
the Company's insurance are adequate to cover all risks it may incur or that
insurance will be available in the future. In addition, the Company is unable to
secure insurance for some unique business risks including, but not limited to,
riot and civil commotion or the acts of an escaped offender.

24
<PAGE> 25

REGULATION

The industry in which the Company operates is subject to federal, state and
local regulations which are administered by a variety of regulatory authorities.
Generally, providers of correctional services must comply with a variety of
applicable federal, state and local regulations, including education, health
care and safety regulations. Management contracts frequently include extensive
reporting requirements. In addition, many federal, state and local governments
are required to follow competitive bidding procedures before awarding a
contract. Certain jurisdictions may also require the successful bidder to award
subcontracts on a competitive bid basis and to subcontract to varying degrees
with businesses owned by women or minorities.

The Company's failure to comply with any applicable laws, rules or
regulations or the loss of any required license could have a material adverse
effect on the Company's financial condition, results of operations and
liquidity. Further, the current and future operations of the Company may be
subject to additional regulations as a result of new statutes and regulations
and changes in the manner in which existing statutes and regulations are or may
be interpreted or applied. Any such additional regulations could have a material
adverse effect on the Company's financial condition, results of operations and
liquidity.

LEGAL PROCEEDINGS

The nature of the Company's business results in numerous claims or
litigation against the Company for damages arising from the conduct of its
employees or others.

In May 1993, a former employee of the Company filed suit in the United
States District Court, Southern District of New York, claiming he was
intentionally assaulted by employees of the Company and claiming $5,000,000 in
damages on each of six causes of action. In January 1996, a lawsuit was filed
with the Supreme Court of New York, County of Kings, by a former employee
alleging sexual harassment and discrimination, physical assault, rape and
negligent screening of employees and claiming damages of $4,000,000, plus
attorney fees. In March 1996, former inmates at one of the Company's facilities
filed suit in the Supreme Court of the State of New York, County of Bronx on
behalf of themselves and others similarly situated, alleging personal injuries
and property damage purportedly caused by negligence and intentional acts of the
Company and claiming $500,000,000 each for compensatory and punitive damages,
which suit was transferred to the United States District Court, Southern
District of New York, in April 1996. In July 1996, seven detainees at one of the
Company's facilities (and certain of their spouses) filed suit in the Superior
Court of New Jersey, County of Union, seeking unspecified damages arising from
alleged mistreatment of the detainees, which suit was transferred to the United
States District Court, District of New Jersey, in August 1996.

The Company believes the claims made in each of the foregoing actions to be
without merit and will vigorously defend such actions. The Company further
believes the outcome of these actions and all other current legal proceedings to
which it is a party will not have a material adverse effect upon its results of
operations, financial condition or liquidity. However, there is an inherent risk
in any litigation and a decision adverse to the Company could be rendered.

OFFICES

The Company leases approximately 6,400 square feet of executive office
space located at 1819 Main Street, Sarasota, Florida from an unaffiliated party
at a base monthly rental of approximately $8,300 with an increase of
approximately $530 per month on each October 1 through the expiration of the
lease on September 30, 2000. The lease does not contain any renewal options. The
Company leases an office at 9603 Gayton Road, Richmond, Virginia from an
unaffiliated party at a current base monthly rental of $1,661, increasing five
percent (5%) per year during the term ending May 31, 1998. The Company also
leases an office at 276 Fifth Avenue, New York, New York from an unaffiliated
party at a monthly rental of $2,231, expiring October 31, 1998.

The Company believes that all of its properties are well maintained and in
good repair and are adequate for the purpose for which they are maintained. For
information with respect to correctional and detention facilities owned, leased
or managed by the Company, see "Business -- Facilities."

25
<PAGE> 26

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table lists the executive officers and directors of the
Company, together with their respective ages and offices:

<TABLE>
<CAPTION>
NAME AGE OFFICE
- --------------------------------- --- --------------------------------------------
<S> <C> <C>
James F. Slattery................ 46 Chairman, President, Chief Executive Officer
and Director
Michael C. Garretson............. 51 Executive Vice President and Chief Operating
Officer
Aaron Speisman................... 48 Executive Vice President, Secretary and
Director
Ira M. Cotler.................... 33 Executive Vice President-Finance
Richard P. Staley................ 64 Senior Vice President and Director
Lee Levinson..................... 54 Chief Financial Officer
Melvin T. Stith(1)............... 49 Director
Raymond S. Evans(1).............. 59 Director
Stuart M. Gerson(1).............. 52 Director
Shimmie Horn..................... 23 Director
</TABLE>

- ---------------

(1) Member of Audit, Compensation and Stock Option Committees.

JAMES F. SLATTERY co-founded the Company in October 1987 and has been its
President, Chief Executive Officer and a director since the Company's inception
and Chairman since August 1994. Prior to co-founding the Company, Mr. Slattery
had been a managing partner of Merco Properties, Inc., a hotel operation
company, and Vice President of Coastal Investment Group, a real estate
development company, and had held several management positions with the Sheraton
Hotel Corporation.

MICHAEL C. GARRETSON joined the Company in August 1994 as its Vice
President of Business Development. In October 1995, he became the Director of
Planning and Economic Development for the City of Jacksonville, Florida and
served in such position until rejoining the Company in January 1996, during
which period he also acted as a consultant to the Company. Mr. Garretson was
elected Executive Vice President and Chief Operating Officer in March 1996. From
September 1993 to August 1994, Mr. Garretson was Senior Vice President of
Wackenhut Corrections Corp., a developer and manager of privatized correctional
and detention facilities, and from August 1990 to August 1993 was Director of
Area Development for Euro Disney S.C.A., the operator of a European theme park.

AARON SPEISMAN co-founded the Company in October 1987 and has been its
Executive Vice President, Secretary and a director since the Company's
inception. From October 1987 to March 1994, Mr. Speisman also served as Chief
Financial Officer of the Company. Since June 1, 1996, Mr. Speisman has been
employed by the Company on a part-time basis.

IRA M. COTLER was elected the Company's Executive Vice President-Finance in
March 1996. Prior to joining the Company, from June 1989 to February 1996, Mr.
Cotler was employed by Janney Montgomery Scott Inc., an investment banking firm,
serving in several capacities, most recently as Vice President of Corporate
Finance.

26
<PAGE> 27

RICHARD P. STALEY has served as the Company's Senior Vice President since
November 1988 and as a director since May 1994. From 1984 to 1987, Mr. Staley
was the Evaluation and Compliance Director for Corrections Corporation of
America and from 1953 to 1983, held various positions with the United States
Department of Justice, Immigration and Naturalization Service. Mr. Staley is a
certified American Correctional Association standards auditor for jail and
detention facilities.

LEE LEVINSON became an employee of the Company in February 1994 and was
elected Chief Financial Officer in March 1994. From 1989 until December, 1993,
Mr. Levinson was a partner at Fleischman & Company, independent certified public
accountants. Mr. Levinson is a certified public accountant.

MELVIN T. STITH was elected a director of the Company in November 1994.
Since July 1991, Mr. Stith has been Dean of the Florida State University College
of Business. From December 1989 to July 1991, Mr. Stith was Chairman of the
Marketing Department of the Florida State University College of Business where
he was also a Professor. Mr. Stith is also a director of Sprint and United
Telephone of Florida.

RAYMOND S. EVANS was elected a director in May 1994. For more than the past
five years, Mr. Evans has been a partner of the law firm of Ruskin, Moscou,
Evans & Faltischek, P.C.

STUART M. GERSON was elected a director in June 1994. Since March 1993, Mr.
Gerson has been a partner of the law firm of Epstein Becker & Green, P.C. From
January 1993 to March 1993, he was acting Attorney General of the United States.
From January 1989 to January 1993, Mr. Gerson was the Assistant U.S. Attorney
General for the Civil Division of the Department of Justice.

SHIMMIE HORN was elected a director of the Company in June 1996. Mr. Horn,
received a B.A. degree in Economics from Yeshiva College in 1993, and graduated
from the Benjamin Cardozo School of Law in 1996. He is the son of the late
Morris Horn, the former Chairman and a co-founder of the Company.

All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified.

COMPENSATION OF DIRECTORS

Employee-directors receive no compensation for serving on the Board of
Directors other than reimbursement of expenses incurred in attending meetings.
Non-employee directors are paid an annual directors' fee of $5,000 plus $500 for
each Board meeting attended and $250 for each Committee meeting attended. In
addition, all non-employee directors participate in the Company's 1994
Non-Employee Director Stock Option Plan and are reimbursed for expenses incurred
in attending meetings.

27
<PAGE> 28

EXECUTIVE COMPENSATION

The following table sets forth a summary of the compensation earned in
1993, 1994 and 1995 by the Company's Chief Executive Officer and by each other
executive officer whose compensation exceeded $100,000 in 1995:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------
------------------------------------ NUMBER OF SHARES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING OPTIONS ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) GRANTED COMPENSATION(2)
- ---------------------- ----- -------- ------- --------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James F. Slattery 1995 $189,000 -- $13,010 5,000 $30,263
President and 1994 $180,000 $77,230 $10,860 13,125 $22,376
Chief Executive 1993 $179,621 -- $10,860 -- $18,012
Officer
Aaron Speisman 1995 $106,014 -- $ 9,300 5,000 $13,676
Executive Vice 1994 $ 98,092 $ 1,000 $ 9,300 13,125 $13,676
President and 1993 $ 85,629 -- $ 9,300 -- $20,602
Secretary
Lee Levinson 1995 $110,615 $ 1,000 $ 4,167 6,250 --
Chief Financial 1994 $ 90,269 $ 1,000 $ 7,615(3) 12,813 --
Officer 1993 -- -- -- -- --
</TABLE>

- ---------------

(1) Consists of car lease payments.
(2) Consists of life insurance premiums.
(3) Consists of $7,615 of consulting fees prior to his employment by the
Company.

In addition to the compensation described above, for 1993 and 1994, Mr.
Slattery received S Corporation distributions of $254,800 and $134,400,
respectively, and Mr. Speisman received S Corporation distributions of $172,900
and $91,200, respectively.

The following table sets forth information concerning stock options granted
executive officers named in the Summary Compensation Table:

OPTION GRANTS IN 1995

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE
INDIVIDUAL GRANTS AT ASSUMED
--------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SHARES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED EXERCISE OPTION TERM
OPTIONS ALL PRICE EXPIRATION -------------------
NAME GRANTED EMPLOYEES PER SHARE DATE 5% 10%
-------------------------- ----------- ---------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
James F. Slattery......... 5,000 9.2% $ 20.63 6/15/2000 $28,498 $62,974
Aaron Speisman............ 5,000 9.2% $ 20.63 6/15/2000 $28,498 $62,974
Lee Levinson.............. 6,250 11.5% $ 11.00 3/1/2000 $18,994 $41,973
</TABLE>

The following table sets forth the value of unexercised stock options held
by the executive officers named in the Summary Compensation Table:

OPTION VALUES AT DECEMBER 31, 1995

<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED IN-
SHARES UNDERLYING THE-MONEY
OPTIONS AT YEAR END OPTIONS AT YEAR END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------------------------ -------------------------- --------------------------
<S> <C> <C>
James F. Slattery......................... 6,563/11,562 $ 6,497/$ 6,497
Aaron Speisman............................ 6,563/11,562 $ 6,497/$ 6,497
Lee Levinson.............................. 6,407/12,656 $ 15,435/$15,435
</TABLE>

28
<PAGE> 29

EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement with Mr. Slattery
which expires February 9, 1999 and provides for minimum annual compensation of
$189,000, cost of living increases, use of an automobile, reimbursement of
business expenses, health insurance, related benefits and a bonus equal to 5% of
pre-tax profits in excess of $1,000,000, such bonus not to exceed $200,000. As
of June 1, 1996, Mr. Speisman is employed under an agreement which provides for
Mr. Speisman's employment on a part-time basis at an annual salary of $35,000.

The Company has also entered into employment agreements with Messrs.
Garretson and Cotler which expire January 20, 1999 and provide for compensation
of $115,000 and $129,000, respectively, annual salary increases, automobile
allowances, reimbursement of business expenses, health or disability insurance,
related benefits, a bonus equal to 3% of pre-tax profits in excess of
$1,000,000, such bonus not to exceed $50,000 and $75,000, respectively, and the
grant to each of options to purchase 100,000 shares of Common Stock. See "Stock
Options -- Other Options." Mr. Cotler is also entitled to payment for relocation
and related costs.

In October 1989, a subsidiary of the Company entered into an employment
agreement with William Banks. Under this agreement, Mr. Banks was responsible
for developing and implementing community relations projects on behalf of the
Company and for acting as a liaison between the Company and local community and
civic groups that may have concerns about Company's facilities being established
in their communities, and with government officials throughout the State of New
York. As compensation, Mr. Banks received 3% of the gross revenue from all
Federal Bureau of Prisons, state and local correctional agency contracts within
the State of New York with a guaranteed minimum monthly income of $4,500. In
December 1993, Mr. Banks agreed to become a consultant to the Company upon the
same terms and conditions in order to accurately reflect the level and nature of
the services provided. In 1994 and 1995, Mr. Banks earned approximately $238,000
and $334,000, respectively.

STOCK OPTIONS

1993 Stock Option Plan

Under the 1993 Stock Option Plan (the "1993 Plan") 500,000 shares of Common
Stock are reserved for issuance upon exercise of options designated as either
(i) incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as
amended (the "Code") or (ii) non-qualified options. Under the 1993 Plan, ISOs
may be granted to employees and officers of the Company and non-qualified
options may be granted to consultants, directors (whether or not they are
employees), employees or officers of the Company.

The 1993 Plan is administered by the Company's Stock Option Committee which
determines the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be ISO's,
the rate of exercise of each option, the option purchase price per share, the
manner of exercise, the form of payment upon exercise, and whether restrictions
such as repurchase rights are to be imposed on the shares following exercise.
Options granted under the 1993 Plan expire five years after the date of grant
and may not be granted at a price less than the fair market value of the Common
Stock on the date of grant (110% of fair market value in the case of persons
holding 10% or more of the voting stock of the Company). The aggregate fair
market value of shares for which ISOs granted to any employee are exercisable
for the first time by such employee during any calendar year (under all stock
option plans of the Company and any related corporation) may not exceed
$100,000. No options may be granted under the 1993 Plan after October 2003;
however, options granted under the 1993 Plan prior thereto may extend beyond
that date. Options granted under the 1993 Plan are not transferable during an
optionee's lifetime but are transferable at death by will or by the laws of
descent and distribution.

During fiscal 1994 and 1995, options to purchase 225,313 shares and 54,375
shares, respectively, were granted under the 1993 Plan at exercise prices
ranging from $4.76 to $20.63 per share. In 1996, options to purchase 48,700
shares were granted under the 1993 Plan at exercise prices ranging from $8.875
to $15.25 per share.

29
<PAGE> 30

1994 Non-Employee Director Stock Option Plan

Under the 1994 Non-Employee Director Stock Option Plan (the "Directors
Plan") 196,875 shares of Common Stock are reserved for issuance to non-employee
Directors. Under the Directors Plan, each non-employee Director is automatically
granted, (i) a non-qualified option to purchase 10,000 shares of Common Stock
upon election to the Board of Directors; and (ii) a non-qualified option to
purchase 5,000 shares of Common Stock on the date of each annual meeting of
stockholders at which the Director is reelected to the Board of Directors. The
exercise price of each option is the fair market value of the Common Stock on
the date of grant. Each option expires five years from the date of grant and
vests in two annual installments of 50% each on the first and second anniversary
of the date of grant. Options granted under the Directors Plan are generally not
transferable during an optionee's lifetime but are transferable at death by will
or by the laws of descent and distribution. In the event an optionee ceases to
be a member of the Board of Directors (other than by reason of death or
disability), then the non-vested portion of the option immediately terminates
and becomes void and any vested and unexercised portion of the option may be
exercised for a period of 180 days from the date the optionee ceased to be a
member of the Board of Directors. In the event of death or permanent disability
of an optionee, all options accelerate and become immediately exercisable until
the scheduled expiration date of the option.

During 1994 and 1995, options to purchase 65,000 shares and 25,000 shares,
respectively, were granted under the Directors Plan at exercise prices ranging
from $7.05 to $18.75 per share. In 1996, options to purchase 30,000 shares were
granted under the Directors Plan at exercise prices ranging from $17.75 to
$17.875 per share.

Other Options

In January 1996, in connection with their respective employment, the
Company granted Messrs. Garretson and Cotler options to purchase 100,000 shares
each, at an exercise price of $8.875 per share (fair market value on the date of
grant). The options, which were not granted pursuant to the 1993 Plan and are
non-qualified options under the Code, vest one-third upon grant, an additional
one-third one year from the date of grant and the one-third balance two years
from the date of grant. In April 1996, the Company granted Stuart M. Gerson, a
director of the Company, non-qualified options to purchase 15,000 shares at an
exercise price of $8.75 per share (fair market value on the date of grant) in
consideration for consulting services (see "Certain Transactions").

CERTAIN TRANSACTIONS

The Company subleases a building located at 12-16 East 31st Street, New
York, New York from LeMarquis Operating Corp. ("LMOC"), a corporation owned 25%
by Esther Horn and 8% by James F. Slattery. The Company currently utilizes
approximately fifty percent of the building for the Manhattan Community
Corrections and the New York Community Corrections programs. LMOC leases this
building from an unaffiliated party at a current base monthly rental of
approximately $15,456 (the "Base Rent"), plus taxes, currently approximately
$14,000, and water and sewer charges, currently approximately $3,500, for a
total monthly rental of approximately $33,000. The Company has the right to use
as much of the building as it requires for its business subject to the rights of
certain residential subtenants to remain in the building. These rights include
the right to housing at a predetermined rental for an indefinite period of time
pursuant to New York State rent stabilization laws.

As a result of the lease negotiations, under a sublease dated as of January
1, 1994, since May 1, 1995, the Company has paid rent of $18,000 per month above
the rent paid by LMOC to the building's owner for a total monthly rent of
approximately $50,802; prior to May 1, 1995 and under the prior lease, the
Company paid rent of $10,000 per month above the rent paid by LMOC to the
building owner. The Company has, to date, invested $690,000 in leasehold
improvements and will not receive any credit, in terms of a reduction in rent or
otherwise, for these improvements. The terms of this sublease were not
negotiated at arm's length due to the relationship of Mrs. Horn and Mr. Slattery
with both the Company and LMOC. The negotiation of the sublease, including the
renewal terms, was requested by the Representative of the Underwriters of the
Company's February 2, 1994 initial public offering to substantially track the
renewal terms of the Company's

30
<PAGE> 31

management contract. The negotiations were not subject to the board resolution,
adopted subsequent to the negotiations, relating to affiliated transactions,
although the terms were approved by all of the directors. The initial term of
the Company's sublease expired April 30, 1995, and is currently in its first
renewal term expiring April 30, 2000. The sublease contains two additional
successive five-year renewal options beginning May 1, 2000. The monthly rent
above the rent paid by LMOC to the building's owner will increase to $22,000 per
month during the second renewal term beginning May 1, 2000 and to $26,000 per
month during the third renewal term beginning May 1, 2005. The Company paid
$40,000 to LMOC for the renewal options. These renewal options were separately
negotiated between the Board of Directors of the Company and LMOC. Mr. Slattery
participated in such negotiations. Mrs. Horn and Mr. Slattery will receive their
proportionate shares of rents received by LMOC under the terms of this sublease.

Previously, residential and commercial tenants of the building paid annual
rent of approximately $300,000 to LeMarquis Enterprises Corp. ("Enterprises"), a
company owned 30% by Mrs. Horn, 28% by Mr. Slattery and 25% by Mr. Speisman, and
Enterprises paid all expenses of operating the residential and commercial
portions of the building as well as a portion of the overall expenses of the
building. The Company paid any cash flow deficiency to Enterprises. This
arrangement terminated in February 1994, and all of the building's revenues,
including rent from the residential and commercial tenants, are now received and
expenses paid by the Company. The revenue from this portion of the building was
approximately $210,000 in 1994 and $205,000 in 1995. The Company anticipates
that operating the portion of the building occupied by residential and
commercial tenants will result in a net expense to the Company of approximately
$25,000 per month. Due to New York rent stabilization laws, the Company is
unable to increase the rent paid by the residential tenants in this building in
response to increased rent or expenses incurred by the Company.

The Company leases the entire building located at 988 Myrtle Avenue,
Brooklyn, New York from Myrtle Avenue Family Center, Inc. ("MAFC") pursuant to a
lease which commenced January 1, 1994 and expires December 31, 1998. The lease
establishes a monthly rental of $40,000 and contains three five-year renewal
options. The monthly rental for the first option period, which runs from January
1, 1999 through December 31, 2003, is $40,000. The monthly rental for the second
option period, which runs from January 1, 2004 through December 31, 2008, is
$45,000, and the monthly rental for the third option period, which runs from
January 1, 2009 through December 31, 2013, is $50,000. In addition, the Company
pays taxes, insurance, repairs and maintenance on this building. MAFC is a
corporation owned by Mrs. Horn (27.5%) and Messrs. Slattery (8%) and Speisman
(27.5%). The terms of the lease were not negotiated at arm's length due to their
relationship with MAFC and the Company. Messrs. Slattery and Speisman
participated in such negotiations.

Pursuant to the terms of a Board of Directors resolution adopted in
connection with the Company's initial public offering, all transactions between
the Company and any of its officers, directors or affiliates (except for
wholly-owned subsidiaries) must be approved by a majority of the unaffiliated
members of the Board of Directors and be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties and be in
connection with bona fide business purposes of the Company. In the event the
Company makes a loan to an individual affiliate (other than a short-term advance
for travel, business expense, relocation or similar ordinary operating
expenditure), such loan must be approved by a majority of the unaffiliated
directors.

Stuart M. Gerson, a director of the Company, is a member of Epstein Becker
& Green, P.C., a law firm which has represented the Company on certain matters
and which is representing the Company in connection with this offering. In April
1996, in consideration for certain consulting services, the Company granted Mr.
Gerson options to purchase a total of 15,000 shares of Common Stock at an
exercise price of $8.75 per share, the fair market value of the shares on the
date of grant. The options, which were not granted pursuant to either the 1993
Plan or the Directors Plan and are non-qualified options under the Code, vest
50% one year from the date of grant and the remaining 50% two years from the
date of grant. See "Legal Matters."

31
<PAGE> 32

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth as of the date of this Prospectus
information with respect to the beneficial ownership of the Common Stock by (i)
each person known by the Company to own beneficially five percent or more of
such Common Stock, (ii) each director of the Company, (iii) each person named in
the Summary Compensation Table, (iv) each Selling Stockholder and (v) all
executive officers and directors as a group, together with the number of shares
being sold by each of them and their respective percentage ownership of such
shares before this offering and as adjusted to reflect the sale of the Common
Stock offered hereby:

<TABLE>
<CAPTION>
SHARES OWNED PRIOR SHARES OWNED AFTER
TO OFFERING OFFERING
------------------- -------------------
NAME AND ADDRESS(1) NUMBER PERCENT SHARES BEING SOLD NUMBER PERCENT
--------------------------------- --------- ------- ----------------- --------- -------
<S> <C> <C> <C> <C> <C>
Esther Horn(2)................... 868,438 16.8% 175,000 693,438 9.6%
James F. Slattery(3)............. 788,125 15.3% -- 788,125 10.9%
Aaron Speisman(4)................ 645,763 12.5% 175,000 470,763 6.5%
David Fuld....................... 318,125 6.2% -- 318,125 4.4%
Jennifer Anna Speisman
1992 Trust..................... 98,438 1.9% 15,000 83,438 1.2%
Joshua Israel Speisman
1992 Trust..................... 98,438 1.9% 15,000 83,438 1.2%
Ira M. Cotler(5)................. 50,701 1.0% -- 50,701 *
Richard P. Staley(6)............. 41,581 * -- 41,581 *
Michael C. Garretson(7).......... 36,458 * -- 36,458 *
Raymond S. Evans(8).............. 24,044 * -- 24,044 *
Lee Levinson(9).................. 18,061 * -- 18,061 *
Stuart M. Gerson(10)............. 19,475 * -- 19,475 *
Melvin T. Stith(11).............. 8,750 * -- 8,750 *
Shimmie Horn(12)................. 1,312 * -- 1,312 *
All officers and directors as a
group (ten
persons)(3)(4)(5)(6)(7)
(8)(9)(10)(11)(12)............. 1,634,270 30.4% 175,000 1,459,270 19.6%
</TABLE>

- ---------------

* Less than 1%.

(1) Except for David Fuld, whose address is 88-55 161st Street, Flushing, New
York 11367, all addresses are c/o Correctional Services Corporation, 1819
Main Street, Suite 1000, Sarasota, Florida 34236.
(2) Former director, widow of founder and mother of Shimmie Horn, a current
director. Includes options to purchase 9,063 shares of Common Stock.
(3) Includes options to purchase 15,625 shares of Common Stock. Does not
include options to purchase 2,500 shares of Common Stock not exercisable
within 60 days.
(4) Director and founder. Does not include 98,438 shares of Common Stock owned
by the Jennifer Anna Speisman 1992 Trust and 98,438 shares of Common Stock
owned by the Joshua Israel Speisman 1992 Trust, trusts for the benefit of
Mr. Speisman's children, as to which Mr. Speisman disclaims beneficial
ownership. Includes options to purchase 15,625 shares of Common Stock and a
Series A Warrant to purchase 7,700 shares of Common Stock but does not
include options to purchase 2,500 shares of Common Stock not exercisable
within 60 days.
(5) Includes 2,612 shares of Common Stock owned by his wife as to which he
disclaims beneficial ownership. Also includes options to purchase 33,333
shares of Common Stock, a Series A Warrant to purchase 3,850 shares of
Common Stock and other warrants to purchase 10,906 shares of Common Stock.
Does not include options to purchase 66,667 shares of Common Stock not
exercisable within 60 days.
(6) Includes options to purchase 41,081 shares of Common Stock. Does not
include options to purchase 19,544 shares of Common Stock not exercisable
within 60 days.
(7) Consists of options to purchase 36,458 shares of Common Stock. Does not
include options to purchase 66,667 shares of Common Stock not exercisable
within 60 days.
(8) Includes options to purchase 15,425 shares of Common Stock. Does not
include options to purchase 7,500 shares of Common Stock not exercisable
within 60 days.

32
<PAGE> 33

(9) Includes 3,282 shares of Common Stock owned by wife and 1,969 shares of
Common Stock owned by his minor child, as to which he disclaims beneficial
ownership. Also includes options to purchase 12,813 shares of Common Stock.
Does not include options to purchase 11,250 shares of Common Stock not
exercisable within 60 days.
(10) Consists of options to purchase 15,625 shares of Common Stock and a Series
A Warrant to purchase 3,850 shares of Common Stock. Does not include
options to purchase 22,500 shares of Common Stock not exercisable within 60
days.
(11) Consists of options to purchase 8,750 shares of Common Stock. Does not
include options to purchase 13,750 shares of Common Stock not exercisable
within 60 days.
(12) Does not include options to purchase 10,000 shares of Common Stock not
exercisable within 60 days.

The Company is unaware of any arrangements which may result in a change in
control of the Company.

DESCRIPTION OF SECURITIES

The Company is authorized to issue 30,000,000 shares of Common Stock, par
value $.01 per share, and 1,000,000 shares of Preferred Stock, par value $.01
per share.

COMMON STOCK

The holders of Common Stock are entitled to one vote per share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that holders
of more than 50% of the shares voted for the election of directors can elect all
of the directors. The holders of Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors from sources available
therefor. In the event of liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of Common Stock are entitled to
share ratably in the assets of the Company available for distribution to
stockholders after payment of liabilities and after provision for each class of
stock, if any, having preference over the Common Stock. Holders of Common Stock
have no preemptive rights. All outstanding shares are, and all shares to be sold
and issued as contemplated hereby will be, fully paid and non-assessable and
legally issued. The Board of Directors is authorized to issue additional shares
of Common Stock within the limits authorized by the Company's charter and
without stockholder action.

PREFERRED STOCK

The Preferred Stock may be issued from time to time without stockholder
approval in one or more classes or series, and the Board of Directors is
authorized to fix the dividend rights, dividend rates, any conversion rights or
rights of exchange, any voting rights, rights and terms or redemption (including
sinking fund provisions), the redemption price or prices, the liquidation
preferences and any other rights, preferences, privileges and restrictions of
any class or series of Preferred Stock, the number of shares constituting such
class or series and the designation thereof. The shares of any class or series
of Preferred Stock need not be identical. Depending upon the rights of such
Preferred Stock, the issuance of Preferred Stock could have an adverse effect on
holders of Common Stock by delaying or preventing a change in control of the
Company, making removal of the present management more difficult or resulting in
restrictions upon the payment of dividends and other distributions to the
holders of Common Stock. There are currently no shares of Preferred Stock
outstanding.

WARRANTS

Series A Warrants

Each Series A Warrant entitles the registered holder to purchase one share
of Common Stock at an exercise price of $7.75 per share, subject to adjustment
in the event of a stock split, recapitalization, stock dividend, combination,
consolidation or certain sales or issuances of Common Stock at less than market
value, at any time through July 1, 1999. The Series A Warrants are not
redeemable. As of June 30, 1996, there were Series A Warrants outstanding to
purchase 682,146 shares of Common Stock.

33
<PAGE> 34

Other Warrants

As compensation for services rendered in connection with the Company's
initial public offering and 1995 private placements, the Company issued warrants
to purchase 109,375 shares of Common Stock (after giving effect to the Company's
5% stock dividend and five for four stock split) and 59,681 shares of Common
Stock, respectively, at purchase prices of $5.76 and $10.00, respectively. All
of such warrants remain outstanding. Following the date of this Prospectus, the
Company has agreed to register such warrants and the shares of Common Stock
issuable upon exercise thereof for resale.

TRANSFER AGENT AND WARRANT AGENT

The transfer agent for the Common Stock and the warrant agent for the
Series A Warrants is American Stock Transfer & Trust Co., New York, New York.

CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BY-LAWS

The Company's Certificate of Incorporation and By-Laws provide that the
Company shall indemnify each director and such of the Company's officers,
employees and agents as the Board of Directors shall determine from time to time
to the fullest extent provided by the laws of the State of Delaware.

The Company carries insurance providing indemnification, under certain
circumstances, to all of the Company's directors and officers for claims against
them by reason of, among other things, any act or failure to act in their
capacities as directors or officers. The current annual premium for this
insurance is approximately $80,000, all of which is paid by the Company. To
date, no sums have been paid to any past or present director or officer of the
Company under this or any prior indemnification insurance policy.

The Company has also entered into Indemnity Agreements with certain of its
directors and executive officers. The Indemnity Agreements provide for
indemnification of such persons to the fullest extent permitted by the
provisions of the General Corporation Law of the State of Delaware. The
Indemnity Agreements provide that the Company will pay any costs which an
indemnitee actually and reasonably incurs because of the claims made against him
by reason of the fact that he is or was a director or officer of the Company,
except that the Company is not obligated to make any payment where a final
determination is rendered that: (i) the indemnitee obtained remuneration in
violation of law; (ii) the indemnitee violated Section 16(b) of the Securities
Exchange Act of 1934, or similar state or common law provisions, in connection
with a claim for an accounting of profits from the purchase or sale by the
indemnitee of securities of the Company; (iii) the indemnitee's conduct was
deliberately dishonest or constituted willful misconduct; or (iv)
indemnification is not lawful.

34
<PAGE> 35

UNDERWRITING

Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Stephens Inc.
and J.C. Bradford & Co. are acting as Representatives (the "Representatives"),
has severally agreed to purchase the aggregate number of shares of Common Stock
set forth opposite its name below, at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. In the
Underwriting Agreement, the several Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the shares of Common
Stock offered hereby if any shares of Common Stock are purchased. In the event
of default by an Underwriter, the Underwriting Agreement provides that, in
certain circumstances, purchase commitments of the nondefaulting Underwriters
may be increased or the Underwriting Agreement may be terminated.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Stephens Inc. .................................................................... 616,000
J.C. Bradford & Co. .............................................................. 616,000
Alex. Brown & Sons Incorporated................................................... 76,000
Dillon, Read & Co. Inc. .......................................................... 76,000
Donaldson, Lufkin & Jenrette Securities Corporation............................... 76,000
A.G. Edwards & Sons, Inc. ........................................................ 76,000
Lazard Freres & Co. LLC........................................................... 76,000
Prudential Securities Incorporated................................................ 76,000
Schroder Wertheim & Co. Incorporated.............................................. 76,000
Allen & Company Incorporated...................................................... 76,000
Robert W. Baird & Co. Incorporated................................................ 30,500
William Blair & Company, L.L.C. .................................................. 30,500
The Chicago Corporation........................................................... 30,500
Dain Bosworth Incorporated........................................................ 30,500
Equitable Securities Corporation.................................................. 30,500
First Equity Corporation of Florida............................................... 30,500
Furman Selz LLC................................................................... 30,500
Interstate/Johnson Lane Corporation............................................... 30,500
Laidlaw Equities, Inc. ........................................................... 30,500
Morgan Keegan & Company, Inc. .................................................... 30,500
Nichols, Safina Lerner & Co., Inc. ............................................... 30,500
Piper Jaffray Inc. ............................................................... 30,500
Rauscher Pierce Refsnes, Inc. .................................................... 30,500
Raymond James & Associates, Inc. ................................................. 30,500
The Robinson-Humphrey Company, Inc. .............................................. 30,500
Rodman & Renshaw, Inc. ........................................................... 30,500
Sanders Morris Mundy.............................................................. 30,500
Scott & Stringfellow Inc. ........................................................ 30,500
Tucker Anthony Incorporated....................................................... 30,500
Unterberg Harris.................................................................. 30,500
---------
Total................................................................... 2,450,000
========
</TABLE>

The Company has granted the Underwriters an option, exercisable in whole or
in part, from time to time, for thirty days after the date hereof, to purchase
up to 367,500 additional shares of Common Stock to cover over-allotments, if
any, at the public offering price, less the underwriting discount set forth on
the cover page of this Prospectus. If the Underwriters exercise this option,
each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the foregoing
table bears to the 2,450,000 shares of Common Stock offered hereby.

35
<PAGE> 36

The Underwriters have advised the Company that sales of Common Stock to
certain dealers may be made at a concession of an amount not in excess of $0.47
per share and that the Underwriters may allow, and such dealers may re-allow,
discounts not in excess of $0.10 per share on sales to certain other dealers.
After this offering, the public offering price, the concession and the
re-allowance may be changed by the Underwriters.

The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain civil liabilities under the Securities Act
and to afford the Underwriters certain rights of contribution.

The Underwriters do not intend to confirm sales of shares of Common Stock
to any account over which they exercise discretionary authority without prior
authorization. The Representatives intend to continue to make a market in the
Common Stock after the completion of this offering.

The Selling Stockholders and the Company's directors and executive officers
have agreed with the Underwriters not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into, or exchangeable or exercisable for, shares of Common Stock, with limited
exceptions, for a period of 180 days from the date of this offering. The Company
has agreed to comply with a similar restriction for a period of 120 days from
the date of this offering.

In connection with the this offering, the Representatives have advised the
Company that certain Underwriters and dealers, if any, or their respective
affiliates who are qualified registered market makers on The Nasdaq Stock
Market, may engage in passive market making transactions in the Common Stock on
The Nasdaq Stock Market in accordance with Rule 10b-6A under the Exchange Act
during the two business day period before commencement of offers or sales of the
Common Stock. The passive market making transactions must comply with applicable
volume and price limits and be identified as such. In general, a passive market
maker may display its bid at a price not in excess of the highest independent
bid for such security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.

LEGAL MATTERS

Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company and the Selling
Stockholders by Epstein Becker & Green, P.C., New York, New York. Stuart M.
Gerson, a director of the Company, is a member of Epstein Becker & Green, P.C.
and members of the firm own, directly and indirectly, $195,000 of the Company's
10% subordinated promissory notes, 3,400 shares of Common Stock and warrants and
options to purchase 65,615 shares of Common Stock. Giroir & Gregory,
Professional Association, Little Rock, Arkansas, has acted as counsel to the
Underwriters with respect to certain legal matters in connection with this
offering.

EXPERTS

The consolidated financial statements of Correctional Services Corporation
and subsidiaries as of December 31, 1994 and 1995 and for each of the three
years in the period ended December 31, 1995 have been audited by Grant Thornton
LLP, independent certified public accountants, as stated in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.

36
<PAGE> 37

AVAILABLE INFORMATION

The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such material may be
inspected and copies made at the regional offices of the Commission at 7 World
Trade Center, Suite 1300, New York, New York 10048, and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago Illinois 60661-2511. This material may
also be inspected and copies made at, and upon written request copies obtained
at prescribed rates from, the Public Reference Section of the Commission at Room
1024 at its principal office, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Registration Statement, including the exhibits and
schedules thereto, can also be accessed through the EDGAR terminals in the
Commission's Public Reference Rooms in Washington, Chicago and New York or
through the World Wide Web at http://www.sec.gov.

ADDITIONAL INFORMATION

The Company has filed a Registration Statement on Form S-1 with the
Commission in Washington, D.C., in accordance with the provisions of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
For further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits filed
as part thereof. Statements herein contained concerning the provisions of any
document are not necessarily complete and, in each instance, reference is made
to the copy of such document filed as an exhibit to the Registration Statement.
The Registration Statement and the exhibits may be inspected, without charge, at
the offices of the Commission, or copies thereof obtained at prescribed rates
from the Public Reference Section of the Commission at the address set forth
above. The Registration Statement, including the exhibits and schedules thereto,
can also be accessed through the EDGAR terminals in the Commission's Public
Reference Rooms in Washington, Chicago and New York or through the World Wide
Web at http://www.sec.gov.

37
<PAGE> 38

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Certified Public Accountants................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996
(Unaudited)........................................................................ F-3
Consolidated Statements of Operations (for the Years Ended December 31, 1993, 1994
and 1995, and the Six Months Ended June 30, 1995 and 1996 (Unaudited).............. F-4
Consolidated Statement of Stockholders' Equity (for the Years Ended December 31,
1993, 1994 and 1995, and the Six Months Ended June 30, 1996 (Unaudited)............ F-5
Consolidated Statements of Cash Flows (for the Years Ended December 31, 1993, 1994
and 1995, and the Six Months Ended June 30, 1995 and 1996 (Unaudited).............. F-6
Notes to Consolidated Financial Statements........................................... F-7
</TABLE>

F-1
<PAGE> 39

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

[GRANT THORNTON LETTERHEAD]

Board of Directors
Correctional Services Corporation (formerly Esmor Correctional Services, Inc.)

We have audited the accompanying consolidated balance sheets of
Correctional Services Corporation and Subsidiaries (formerly Esmor Correctional
Services, Inc.) as of December 31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Correctional
Services Corporation and Subsidiaries as of December 31, 1994 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.

As discussed in Note L-1, the financial statements as previously reported
have been restated in regards to the valuation of the Receivable from Sale of
Equipment and Leasehold Improvements.

GRANT THORNTON LLP

New York, New York
March 1, 1996 (Except for Notes L-1 and L-2, as to which the
dates are August 13, 1996 and March 6, 1996, respectively)

F-2
<PAGE> 40

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................. $ 308,446 $ 3,756,748 $ 37,757
Restricted cash....................................... -- 750,000 233,761
Accounts receivable................................... 4,804,014 3,374,229 3,785,150
Receivable from sale of equipment and leasehold
improvements....................................... -- -- 738,000
Prepaid expenses and other............................ 640,643 1,415,306 1,008,725
----------- ----------- -----------
Total current assets.......................... 5,753,103 9,296,283 5,803,393
BUILDING, EQUIPMENT AND LEASEHOLD IMPROVEMENTS -- AT
COST, NET............................................. 7,518,001 7,226,323 11,693,805
RECEIVABLE FROM SALE OF EQUIPMENT AND LEASEHOLD
IMPROVEMENTS.......................................... -- 3,207,882 2,769,882
OTHER ASSETS
Deferred development and start-up costs, net.......... 1,061,671 1,729,270 2,774,791
Deferred income taxes................................. -- 1,120,000 1,120,000
Other................................................. 185,562 760,769 674,239
----------- ----------- -----------
$14,518,337 $23,340,527 $24,836,110
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities.............. $ 2,639,515 $ 3,535,165 $ 3,431,109
Current portion of long-term debt..................... 1,757,384 1,221,022 2,973,545
----------- ----------- -----------
Total current liabilities..................... 4,396,899 4,756,187 6,404,654
LONG-TERM DEBT.......................................... 3,028,020 4,000,000 3,598,498
SUBORDINATED PROMISSORY NOTES........................... -- 5,362,295 4,031,734
COMMITMENTS AND CONTINGENCIES........................... -- -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued and outstanding............ -- -- --
Common stock, $.01 par value, 10,000,000 shares
authorized, 4,407,828, 4,911,688 and 5,145,503
shares issued and outstanding as of 1994, 1995 and
June 30, 1996, respectively........................ 44,079 49,117 51,455
Additional paid-in capital............................ 5,616,456 9,479,436 11,069,802
Retained earnings (deficit)........................... 1,432,883 (306,508) (320,033)
----------- ----------- -----------
7,093,418 9,222,045 10,801,224
----------- ----------- -----------
$14,518,337 $23,340,527 $24,836,110
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE> 41

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues
Resident fees................ $14,062,059 $23,655,226 $30,482,683 $15,793,952 $14,713,854
Other income................. 39,135 617,763 1,069,469 612,409 358,857
----------- ----------- ----------- ----------- -----------
14,101,194 24,272,989 31,552,152 16,406,361 15,072,711
----------- ----------- ----------- ----------- -----------
Expenses
Operating.................... 8,651,275 14,899,192 19,731,797 9,914,657 10,241,743
General and administrative... 3,578,738 6,695,599 9,938,344 5,064,367 4,401,982
Interest..................... 30,786 133,315 761,702 214,908 452,511
New Jersey facility closure
costs..................... -- -- 3,909,700 1,488,000 --
----------- ----------- ----------- ----------- -----------
12,260,799 21,728,106 34,341,543 16,681,932 15,096,236
----------- ----------- ----------- ----------- -----------
Earnings (loss)
before income
taxes.............. 1,840,395 2,544,883 (2,789,391) (275,571) (23,525)
Income tax expense (benefit)... 736,000 1,002,000 (1,050,000) 21,000 (10,000)
----------- ----------- ----------- ----------- -----------
NET EARNINGS
(LOSS)............. $ 1,104,395(1) $ 1,542,883 $(1,739,391) $ (296,571) $ (13,525)
=========== =========== =========== =========== ===========
Net earnings (loss) per common
share........................ $ .34(1) $ .35 $ (.38) $ (.07) $ 0.00
=========== =========== =========== =========== ===========
Weighted average shares
outstanding.................. 3,281,250 4,394,734 4,552,707 4,407,828 4,974,752
=========== =========== =========== =========== ===========
</TABLE>

- ---------------

(1) Net earnings and earnings per share for 1993 are shown on a pro forma basis
to reflect income taxes which were not applicable under the Company's prior
Subchapter S Corporation status.

The accompanying notes are an integral part of these statements.

F-4
<PAGE> 42

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON CAPITAL PAID-IN EARNINGS
STOCK STOCK CAPITAL (DEFICIT) TOTAL
------- -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993............. $ 21,000 $ 1,934,429 $ (874,309) $ 1,081,120
Net earnings........................... 1,840,395 1,840,395
Cash distributions to stockholders..... (910,000) (910,000)
Noncash distributions to
stockholders......................... (87,000) (87,000)
Investment in Esmor Houston, Inc....... 1,000 -- -- 1,000
------- -------- ----------- ---------- -----------
BALANCE AT JANUARY 1, 1994............. 22,000 1,934,429 (30,914) 1,925,515
Common stock issuance.................. $33,583 (22,000) 4,093,437 -- 4,105,020
5% common stock dividend............... 1,680 -- (1,680) -- --
Combined deficit of affiliated
companies prior to recapitalization
of Company........................... -- -- (30,914) 30,914 --
Cash distributions paid prior to
recapitalization of Company.......... -- -- (480,000) -- (480,000)
Five-for-four common stock split....... 8,816 -- (8,816) -- --
Net earnings........................... -- -- 110,000 1,432,883 1,542,883
------- -------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1994........... 44,079 -- 5,616,456 1,432,883 7,093,418
Exercise of stock options.............. 70 -- 33,250 -- 33,320
Common stock issuance.................. 4,968 -- 3,464,730 -- 3,469,698
Issuance of warrants with subordinated
promissory notes..................... -- -- 365,000 -- 365,000
Net loss............................... -- -- -- (1,739,391) (1,739,391)
------- -------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1995........... 49,117 -- 9,479,436 (306,508) 9,222,045
Exercise of options and warrants
(unaudited) (Note K)................. 2,338 1,590,366 -- 1,592,704
Net loss (unaudited)................... (13,525) (13,525)
------- -------- ----------- ---------- -----------
BALANCE AT JUNE 30, 1996 (UNAUDITED)... $51,455 $ -- $11,069,802 $ (320,033) $10,801,224
======= ======== =========== ========== ===========
</TABLE>

The accompanying notes are an integral part of this statement.

F-5
<PAGE> 43

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- -------------------------
1993 1994 1995 1995 1996
---------- ----------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) earnings................................. $1,840,395 $ 1,542,883 $(1,739,391) $ (296,571) $ (13,525)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization..................... 243,445 776,255 1,168,850 1,940,366 480,605
Write-off of bad debt............................. 66,000 -- -- -- --
Amortization of subordinated promissory note
discount........................................ -- -- 50,695 -- 49,894
New Jersey facility asset impairment.............. -- -- 2,771,424 -- --
New Jersey deferred development costs writedown... -- -- 416,201 -- --
Amortization of deferred loan costs............... -- 111,854 127,568 -- 127,118
Deferred income tax benefit....................... -- -- (1,120,000) (272,000)
Changes in operating assets and liabilities
Accounts receivable............................. (570,813) (3,148,906) 1,429,785 659,853 (410,921)
Prepaid expenses and other...................... (188,187) (269,641) (774,644) (1,121,750) 406,581
Advances and unearned revenue................... (613,649) -- -- -- --
Accounts payable and accrued liabilities........ 980,002 785,258 895,650 1,744,790 (104,056)
Reserve for New Jersey facility carrying
costs......................................... -- -- -- -- (300,000)
---------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................. 1,757,193 (202,197) 3,226,138 2,654,688 235,696
---------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures................................ (116,497) (7,693,761) (6,110,693) (2,652,457) (4,738,933)
Development and start-up costs...................... (698,543) (401,772) (1,824,268) (1,034,351) (1,254,675)
Proceeds from related company....................... 320,000 -- -- -- --
Payments to related company......................... (338,000) -- -- -- --
Other assets........................................ (71,763) -- -- -- --
(Increase) decrease in restricted cash -- unexpended
construction funds................................ -- -- (750,000) -- 516,239
---------- ----------- ----------- ----------- -----------
Net cash used in investing activities......... (904,803) (8,095,533) (8,684,961) (3,686,808) (5,477,369)
---------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Investments by stockholders......................... 1,000 -- -- -- --
Proceeds from issuance of common stock.............. -- 4,105,020 3,469,698 -- --
Proceeds from long-term borrowing................... -- 4,078,261 1,500,000 1,200,000 21,966
Payments on long-term borrowings.................... -- (242,857) (1,282,715) -- (418,922)
Proceeds (payments) on short-term debt.............. 726,848 (15,198) 218,333 (179,024) 1,747,978
Issuance of subordinated promissory notes and
warrants.......................................... -- -- 5,676,600 -- --
Debt issuance costs................................. -- -- (652,101) -- --
Net proceeds from exercise of stock options and
warrants.......................................... -- -- 33,320 -- 212,248
Other assets........................................ (717,115) 469,924 (56,010) (58,908) (40,588)
Distributions to stockholders....................... (910,000) (480,000) -- -- --
---------- ----------- ----------- ----------- -----------
Net cash provided by financing activities..... (899,267) 7,915,150 8,907,125 962,068 1,522,682
---------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... (46,877) (382,580) 3,448,302 (70,052) (3,718,991)
Cash and cash equivalents at beginning of year........ 737,903 691,026 308,446 308,446 3,756,748
---------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of year.............. $ 691,026 $ 308,446 $ 3,756,748 $ 238,394 $ 37,757
========== =========== =========== =========== ===========
Supplemental disclosures of cash flows information:
Cash paid during the year for
Interest.......................................... $ 31,000 $ 179,500 $ 602,700 $ 121,350 $ 482,044
Income taxes...................................... -- $ 927,800 $ 789,500 $ 725,435 $ 81,910
</TABLE>

Supplemental disclosure of noncash activity:

The valuation of the warrants issued, $365,000, with the subordinated
promissory notes in 1995 are included in Additional Paid-in Capital.

The accompanying notes are an integral part of these statements.

F-6
<PAGE> 44

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Correctional Services Corporation and Subsidiaries (formerly Esmor
Correctional Services, Inc.) (See Note N) operate and manage detention and
correctional facilities for Federal, state and local government agencies.

1. Principles of Consolidation

The consolidated financial statements include the accounts of Esmor
Correctional Services, Inc. and its wholly-owned subsidiaries, Esmor, Inc.,
Esmor Management, Inc., Esmor Brooklyn, Inc., Esmor Seattle, Inc., Esmor
Manhattan, Inc., Esmor Mansfield, Inc., Esmor Houston, Inc., Esmor New Jersey,
Inc., Esmor Ft. Worth, Inc., Esmor Canadian, Inc. and Esmor Travis, Inc.
(collectively the "Company" or the "Esmor companies"). All significant
intercompany balances and transactions have been eliminated.

2. Revenue Recognition

Revenue is recognized at the time the service is provided. Revenues are
principally derived from government agencies. The Company's accounts receivable
balance is considered fully collectible based on historical experience and
management's current evaluation. Accordingly, no allowance for doubtful accounts
has been provided in the accompanying financial statements.

3. Building, Equipment and Leasehold Improvements

Building, equipment and leasehold improvements are carried at cost.
Depreciation of building is computed under the straight-line method over a 20
year period. Depreciation of equipment is computed under the straight-line
method over a five-year period. Leasehold improvements are being amortized over
the shorter of the life of the asset or the applicable lease term (ranging from
five to ten years.)

4. Deferred Development and Start-up Costs

Deferred development costs consist of costs that can be directly associated
with a specific anticipated contract and, if the recoverability from that
contract is probable, they are deferred until the anticipated contract has been
awarded. At the commencement of operations of the facility, the deferred
development costs are amortized over the life of the contract (including option
periods) as development costs. Costs of unsuccessful or abandoned contracts are
charged to expense when their recovery is not considered probable. Facility
start-up costs are incurred (after a contract is awarded) in connection with the
opening of new facilities under the contract. These costs, which are required
under the contract, to the extent recoverable, are capitalized from the date of
award until commencement of operations, at which time they are amortized on a
straight-line basis over the term (including option periods) ranging from one to
five year periods of the government contracts.

5. Income Taxes

The Company adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS No. 109") in 1994. The standards for SFAS
No. 109 required that the Company utilize an asset and liability approach for
financial accounting and reporting for income taxes. The primary objectives of
accounting for income taxes under SFAS 109 are to (a) recognize the amount of
tax payable for the current year and (b) recognize the amount of deferred tax
liability or asset based on management's assessment of the tax consequences of
events that have been reflected in the Company's consolidated financial
statements. The adoption of SFAS No. 109 had an insignificant effect on the
Company's financial statements.

Prior to 1994 the Company was a Subchapter S Corporation. As such, the
Company's taxable income was includable in the individual income tax returns of
its shareholders for federal and certain state income tax

F-7
<PAGE> 45

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

purposes. The statement of operations for the year ended December 31, 1993
reflects the pro forma effect on income taxes as if the Company's earnings had
been subjected to federal and state income taxes as a C Corporation.

6. Earnings (Loss) Per Share

The computation of net earnings (loss) per common share is based upon the
weighted average number of common shares outstanding during the year plus common
stock equivalents representing shares issuable upon the assumed exercise of
stock options and warrants. Common stock equivalents were not included for the
year ended December 31, 1995, as their effect would be anti-dilutive. The
Company is contemplating an offering in the amount of approximately $32,000,000,
from which proceeds will be used to retire approximately $6,572,000 of debt (See
Note N). The supplementary pro forma earnings (loss) per common share for the
year ended December 31, 1995 and six months ended June 30, 1996 as if this debt
has been retired at the beginning of the respective period, would be $(.28) and
$.03 per share (assuming 5,037,226 and 5,373,058 weighted average common shares
outstanding).

7. Cash and Cash Equivalents

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

Restricted cash of $750,000 and $233,761 at December 31, 1995 and June 30,
1996, respectively, represents payments to be made in 1996 to a contractor for
the completion of the Phoenix, Arizona facility.

8. Reclassifications

Certain reclassifications have been made to the 1994 balances to conform to
the 1995 presentation. In addition, certain construction costs misclassified as
deferred development costs have been reclassified to buildings, equipment and
leasehold improvements as of December 31, 1995.

9. Use of Estimates in Consolidated Financial Statements

In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. While actual results could differ from those estimates,
management does not expect the variances, if any, to have a material effect on
the consolidated financial statements. For discussion of the realization of
Receivable from Sale of Equipment and Leasehold Improvements (see Note L).

10. Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of

On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). The standards for SFAS
No. 121 require that the Company recognize and measure impairment losses of
long-lived assets and certain identifiable intangibles and to value long-lived
assets to be disposed of. The primary objectives under SFAS No. 121 are to (a)
recognize an impairment loss of an asset whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable or (b) if
planning to dispose of long-lived assets or certain identifiable intangibles,
such assets have been reflected in the Company's consolidated financial
statements at the net asset value less cost to sell. The effect of adopting SFAS
121 was not considered material to the consolidated financial statements.

F-8
<PAGE> 46

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. Interim Financial Statements

Information in the accompanying consolidated financial statements and notes
to the consolidated financial statements for the interim periods is unaudited.
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulation S-X. Accordingly, they do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the interim periods
are not necessarily indicative of the results that may be expected for the full
year.

12. Impact of New Accounting Standard

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation." With respect to stock options
granted to employees, SFAS No. 123 permits companies to continue using the
accounting method promulgated by the Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees," to measure
compensation or to adopt the fair value based method prescribed by SFAS No. 123.
If APB No. 25's method is continued, pro forma disclosures are required as if
SFAS No. 123's accounting provisions were followed. Management has determined
not to adopt SFAS No. 123's accounting recognition provisions related to stock
options granted to employees and accordingly, will continue following APB No.
25's accounting provisions. All other requirements of SFAS No. 123 were
implemented on January 1, 1996 and are not expected to have a material effect on
the Company's financial statements.

NOTE B -- CONTRACTUAL AGREEMENTS WITH GOVERNMENT AGENCIES

The Company currently operates eleven secure and non-secure corrections or
detention programs in the states of Florida, New York, Texas and Washington for
Federal, state and local government agencies. The Company has entered into
agreements with the state of Arizona, whereby operations are scheduled to
commence in April 1996, and the state of Florida, whereby operations are
scheduled to commence in the first quarter of 1997. The Company's secure
facilities include a detention and processing center for illegal aliens,
intermediate sanction facilities for parole violators and a shock incarceration
facility, which is a military style "boot camp" for youthful offenders.
Non-secure facilities include residential programs such as community corrections
facilities for federal and state offenders serving the last six months of their
sentences and non-residential programs such as home confinement supervision.

The Company is compensated on the basis of the number of offenders held in
each of its facilities. The Company's contracts may provide for fixed per diem
rates or monthly fixed rates. Some contracts also provide for minimum
guarantees.

The terms of each contract vary and can be from one to five years.
Contracts for more than one year have renewal options which either are
exercisable on mutual agreement between the Company and the government agency or
are exercisable by the government agency alone.

NOTE C -- FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107 (SFAS No. 107), "Fair
Value of Financial Instruments," requires disclosure of the estimated fair value
of an entity's financial instrument assets and liabilities. For the Company,
financial instruments consist principally of cash and cash equivalents,
subordinated promissory notes and long-term debt.

F-9
<PAGE> 47

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

1. Cash and Cash Equivalents

The carrying amount reasonably approximates fair value because of the short
maturity of those instruments.

2. Subordinated Promissory Notes and Long-Term Debt

The fair value of the Company's subordinated promissory notes and long-term
debt is estimated based upon the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same
remaining maturities.

<TABLE>
<CAPTION>
JUNE 30,
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------- -----------------------
1994 1995
----------------------- ----------------------- (UNAUDITED)
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............. $ 308,000 $ 308,000 $3,757,000 $3,757,000 $ 38,000 $ 38,000
Long-term debt............ $4,785,000 $4,785,000 $5,221,000 $5,221,000 $6,572,000 $6,572,000
Subordinated promissory
notes................... -- -- $5,362,000 $5,362,000 $4,032,000 $4,032,000
</TABLE>

3. Receivable from Sale of Equipment and Leasehold Improvements

The carrying value of the Receivable from Sale of Equipment and Leasehold
at December 31, 1995 and June 30, 1996 is $3,207,892 and $3,507,882 (unaudited),
respectively. The Company believes the fair value of the Receivable from Sale of
Equipment and Leasehold Improvements is not practicable to estimate (See Note
L-1).

NOTE D -- PREPAID EXPENSES AND OTHER

Prepaid expenses and other current assets consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
-------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Prepaid insurance................................... $393,605 $ 190,754 $ 154,757
Prepaid real estate taxes........................... 126,174 122,473 134,731
Prepaid and refundable income taxes................. -- 665,878 281,134
Other............................................... 120,864 436,201 438,103
-------- ---------- ------------
$640,643 $1,415,306 $ 1,008,725
======== ========= =========
</TABLE>

NOTE E -- BUILDING, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Building, equipment and leasehold improvements, at cost, consist of the
following:

DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Building.......................................... $ -- $5,742,749 $ 9,963,334
Equipment......................................... 3,477,778 1,138,276 1,643,410
Leasehold improvements............................ 4,962,912 1,000,678 1,014,063
---------- ---------- ------------
8,440,690 7,881,703 12,620,827
Less accumulated depreciation..................... (922,689) (655,380) (927,002)
---------- ---------- ------------
$7,518,001 $7,226,323 $ 11,693,805
========= ========= ==========
</TABLE>

F-10
<PAGE> 48

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Depreciation expense for the years ended December 31, 1993, 1994 and 1995,
and for the six months ended June 30, 1995 and 1996 was approximately $113,000,
$639,000, $1,040,000, $853,000 (unaudited) and $271,000 (unaudited),
respectively.

NOTE F -- OTHER ASSETS

Deferred development and start-up costs are comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Development costs................................ $ 874,286 $1,663,804 $ 2,269,969
Start-up costs................................... 425,043 354,880 929,388
---------- ---------- ------------
1,299,329 2,018,684 3,199,357
Less accumulated amortization.................... (237,658) (289,414) (424,566)
---------- ---------- ------------
$1,061,671 $1,729,270 $ 2,774,791
========= ========= =========
</TABLE>

The June 30, 1996 and December 31, 1995 balance of $2,774,791 (unaudited)
and $1,729,270, respectively includes development costs of approximately $69,000
and $48,500, respectively, related to unawarded contracts.

Other assets consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred refinancing costs.......................... $ 43,946 $587,424 $ 469,584
Deposits............................................ -- 125,773 139,095
Deferred lease option costs......................... 40,000 34,664 30,662
Other............................................... 101,616 12,908 34,898
-------- -------- -----------
$185,562 $760,769 $ 674,239
======== ======== =========
</TABLE>

Amortization expense of deferred development and start-up costs for the
years ended December 31, 1993, 1994 and 1995, and for the six months ended June
30, 1995 and 1996 was approximately $130,000, $137,000, $202,000, $122,000
(unaudited) and $205,000 (unaudited), respectively.

NOTE G -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable................................... $1,289,334 $1,324,963 $1,903,341
Accrued expenses................................... 509,812 1,722,848 1,136,118
Payroll and related taxes.......................... 357,956 284,633 265,301
Construction costs (including retainage)........... 349,683 120,120 120,120
Income taxes....................................... 132,730 82,601 6,229
---------- ---------- ----------
$2,639,515 $3,535,165 $3,431,109
========= ========= =========
</TABLE>

F-11
<PAGE> 49

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE H -- DEBT

Effective December 31, 1995, the Company and NationsBank, N.A. entered into
a loan and security agreement totaling $11.0 million expiring on January 15,
1998. The agreement consists of $5 million term loan at a fixed rate of 8.92%,
which refinanced previous debt with another bank, and a $6 million revolving
line of credit for working capital purposes. The term loan is repayable in
monthly installments of $83,333 until the facility's expiration date, at which
time the remaining balance is due. Borrowings under the revolver are based, at
the Company's option, on .75% over the bank's prime rate or the London
International Bank Rate (LIBOR) plus 3.35%. After September 30, 1996 the
interest rate charged under either method will be based on the Company's
financial performance as specified in the agreement. Further, the Company is
required to pay an annual commitment fee of .25% of the average unused portion
of the facility. The Company may prepay any borrowings without interest or
penalty. The Company's subsidiaries have guaranteed the Company's obligation
under the agreement. The Company has granted the bank a first priority security
interest in all of its assets, including a first real estate mortgage on the
land and building to be used for its Phoenix, Arizona facility. The lending
agreement contains certain financial covenants including a debt service coverage
ratio and a senior liabilities to tangible net worth and subordinated debt
ratio. The Company was not in compliance with its debt service coverage ratio as
of March 31, 1996. NationsBank, N.A. has agreed to waive this covenant for March
31, 1996, and has amended the debt service coverage ratio covenant under the
agreement. The agreement precludes the payment of dividends and stock repurchase
or redemptions prior to December 31, 1996. Thereafter, such dividends, purchase
or redemptions is limited to 10% of the Company's net earnings after taxes
provided that the Company is in compliance with the above-noted financial
covenants.

Through a series of transactions that closed in July, August and September
1995, the Company issued 5,676.6 units at $1,000 per unit, in a private
placement of its securities ("1995 Private Placement"). Each unit consists of
(i) a 10% subordinated promissory note due July 31, 1998 in the principal amount
of $1,000, interest payable quarterly and (ii) a four year warrant to purchase
154 shares of common stock at $7.75 per share. The Company received gross
proceeds of $5,676,600 in connection with the 1995 Private Placement and
recorded the market value of the warrants, $365,000, as promissory note discount
amortized over three years. The net proceeds from such issuance are being used
to construct and renovate its Phoenix, Arizona facility.

The Company's prior revolving credit and term loan agreement dated July 18,
1994, with a bank, provided the Company with maximum borrowings of $5,000,000,
at the bank's prime rate plus 1% per annum, in the form of: (i) a $1,000,000
revolving credit agreement expiring July 28, 1996 and (ii) a $4,000,000 term
loan agreement with the outstanding principal payable in monthly installments
through August 31, 1999. The Company had granted the prior bank a first priority
security interest in all of its assets. On March 24, 1995, the Company entered
into a $1,500,000 project loan and term loan agreement with a bank. Proceeds
from the loan were used to finance the cost of construction of the Company's
Canadian, Texas facility. As noted above, these loans have been repaid in full
by the loan and security agreement with NationsBank, N.A.

On July 28, 1995, the Company entered into an agreement with the bank under
which this bank (i) waived its right to declare the revolving credit and term
loan agreement dated July 28, 1994 and the project loan and term loan agreement
dated March 24, 1995 in default in the event of the expiration of the Company's
Elizabeth, New Jersey contract with the United States Department of Justice,
Immigration and Naturalization Services ("INS"), and (ii) consented to the
Company's 1995 Private Placement, see above. In addition, the Company granted
the prior bank a first priority deed of trust, assignment of rents and security
interest on its Phoenix, Arizona facility and the assignment of leases and rents
on its Elizabeth, New Jersey facility. Pursuant to the agreement, the maturity
date of the term loan agreements became July 1, 1997, payable in monthly
installments of $92,000 with the balance due July 1, 1997. Under the agreement,
the Company prepaid $250,000 of the term loans in September 1995. In connection
with the agreement, the

F-12
<PAGE> 50

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

President and Executive Vice President gave limited personal guarantees, not to
exceed $1,200,000 each. On December 31, 1995, the term loan, revolving line of
credit and project loan agreements were paid in full by the loan and security
agreement with NationsBank, N.A.

Borrowings under the long-term debt and revolving line of credit agreements
consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Term loans....................................... $4,785,404 $5,000,000 $4,603,043
Revolving line of credit......................... -- 221,022 1,969,000
---------- ---------- ----------
4,785,404 5,221,022 6,572,043
Less
Current maturities............................. 1,757,384 1,221,022 (2,973,545)
---------- ---------- ----------
$3,028,020 $4,000,000 $3,598,498
========= ========= =========
</TABLE>

Aggregate maturities of long-term debt as of December 31, 1995 are as
follows:

NOTE I -- RENTAL AGREEMENTS

Minimum rental commitments under non-cancelable leases as of December 31,
1995, are as follows:

<TABLE>
<CAPTION>
YEAR ENDING RELATED
DECEMBER 31, TOTAL COMPANIES
------------- ---------- ----------
<S> <C> <C>
1996..................................................... $1,770,000 $1,080,000
1997..................................................... 1,735,000 1,080,000
1998..................................................... 1,670,000 1,080,000
1999..................................................... 980,000 600,000
2000..................................................... 700,000 600,000
Thereafter............................................... 200,000 200,000
---------- ----------
$7,055,000 $4,640,000
========= =========
</TABLE>

The Company leases one of its facilities from a related party under a
sublease arrangement, which expires April 30, 2000. The Company has a five-year
option to renew this sublease arrangement. A portion of this building and annex
are occupied by residential and commercial tenants.

The Company leases another building from a related party. The lease
commenced January 1, 1994 and expires December 31, 1998. Thereafter, the Company
has three successive five-year options to renew. In addition to the base rent,
the Company pays taxes, insurance, repairs and maintenance on this building.

Rental expense for the years ended December 31, 1993, 1994 and 1995 and the
six months ended June 30, 1995 and 1996 aggregated $1,360,000, $1,428,000,
$1,510,000, $934,000 (unaudited) and $833,000 (unaudited) respectively, and is
included in general and administrative expenses. Rent expense to related
companies aggregated $1,218,000, $966,000, $1,038,000 and $507,000 (unaudited)
and $485,000 (unaudited) for the years ended December 31, 1993, 1994 and 1995,
and the six months ended June 30, 1995 and 1996, respectively.

F-13
<PAGE> 51

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE J -- INCOME TAXES

The income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------- -------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal...................... $ 625,000 $ 800,000 $ (42,000) $ -- $(12,000)
State and local.............. 111,000 202,000 112,000 148,000 2,000
Deferred
Federal, state and local..... -- -- (1,120,000) (127,000)
--------- ---------- ----------- -------- --------
$ 736,000 $1,002,000 $(1,050,000) $ 21,000 $(10,000)
========= ========== =========== ======== ========
</TABLE>

The following is a reconciliation of the statutory federal income tax rate
and the effective tax rate as a percentage of pretax income:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- --------------
1993 1994 1995 1995 1996
---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Statutory federal rate.......................... 34.0% 34.0% (34.0)% (34.0)% (34.0)%
State taxes, net of federal tax benefit......... 4.0 4.0 5.0 35.4 5.6
Non-deductible items............................ 2.0 1.4 1.2 3.3 1.1
Other........................................... -- -- (9.8) 2.9 (15.2)
--- --- ----- ---- -----
40.0% 39.4% (37.6)% 7.6% (42.5)%
=== === ===== ==== =====
</TABLE>

Deferred income taxes reflect the tax effected impact of "temporary
differences" between the amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations. The
components of the Company's deferred tax assets are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Depreciation and loss on New Jersey facility
closing....................................... $ 27,000 $ 986,000 $ 986,000
Vacation accrual................................ 42,000 52,000 52,000
Development costs............................... -- 42,000 42,000
Accrued expenses................................ -- 70,000 70,000
Other........................................... -- (30,000) (30,000)
-------- ---------- ----------
69,000 1,120,000 1,120,000
Valuation allowance............................. (69,000) -- --
-------- ---------- ----------
$ -- $1,120,000 $ 1,120,000
======== ========== ==========
</TABLE>

The Company, after considering its previous pattern of profitability,
excluding the New Jersey facility charge, and its anticipated future taxable
income, believes it is more likely than not that the deferred tax assets will be
realized.

NOTE K -- STOCKHOLDERS' EQUITY

On August 4, 1994, the Company's Board of Directors declared a 5% stock
dividend payable on September 16, 1994 to stockholders of record on September 2,
1994. On March 8, 1995, the Company's Board of Directors authorized a
five-for-four stock split in the form of a 25% stock dividend payable on April
5, 1995

F-14
<PAGE> 52

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to stockholders of record on March 23, 1995. All references in the financial
statements to average number of shares outstanding, per share amounts and stock
option data for prior periods presented have been restated to reflect the 5%
stock dividend and five-for-four stock split.

During September 1995, the Company completed the private placement of
496,807 shares of common stock at $7.75 per share. The Company received gross
proceeds of $3,850,254, net of issuance costs of $380,556. The net proceeds are
being used for its Phoenix, Arizona facility.

On February 2, 1994, the Company completed a public offering of 833,333
shares of common stock. The net proceeds received by the Company after deducting
applicable issuance costs and expenses aggregated $4,105,020. In connection with
the public offering, the Company sold to the representative of the underwriters,
for a nominal sum, warrants to purchase from the Company 109,375 shares of
common stock. The warrants are exercisable for a period of four years commencing
February 2, 1995 at an exercise price of 107% of the initial public offering
price ($4.76), increasing to 114% of the initial public offering price on
February 2, 1996, 121% of the initial public offering price on February 2, 1997
and 128% of the initial public offering price on February 2, 1998. As of June
30, 1996 all of the warrants remain outstanding.

In connection with the 1995 Private Placement, the Company sold to the
agent for the private placement, for a nominal sum, warrants to purchase from
the Company 59,681 share of common stock. The warrants are exercisable for a
period of five years commencing September 15, 1995 at an exercise price of
$10.00. As of June 30, 1996 all of the warrants remain outstanding.

In connection with the 1995 Private Placement, warrants issued with units
totalled 874,198 which are exercisable at $7.75 per share. During the six months
ended June 30, 1996, 192,052 warrants were exercised simultaneously with the
tendering of subordinated notes. At December 31, 1995 and June 30, 1996 warrants
outstanding totalled 874,198 and 682,146 (unaudited), respectively. (See Note
H).

NOTE L -- COMMITMENTS AND CONTINGENCIES

1. New Jersey Facility Closure

Due to a disturbance at the Company's Elizabeth, New Jersey facility on
June 18, 1995, the facility was closed and all detainees located therein were
moved by the INS to other facilities. On December 15, 1995, the Company and a
publicly-traded company (the "Buyer"), which also operates and manages detention
and correctional facilities, entered into an asset purchase agreement pursuant
to which the Buyer purchased the equipment, inventory and supplies, contract
rights and records, leasehold and land improvements of the Company's New Jersey
facility for $6,223,000. The purchase price is payable in non-interest bearing
monthly installments of $123,000 through August 1999 beginning in the month that
the Buyer commences operations of the facility. If the INS re-awards the
contract to the Buyer, the unpaid balance is payable in monthly non-interest
bearing installments of $123,000 beginning in the first month of the re-award
term and the Company will record as income the unpaid balance. On June 13, 1996
the Company, the Buyer and the INS executed a novation agreement whereby the
Buyer became the successor-in-interest to the contract with the INS. In
addition, the Company's lease for the New Jersey facility was assigned to the
Buyer. The Company has no continuing obligation with respect to the Elizabeth,
New Jersey facility.

The receivable from sale of the equipment and leasehold improvements
reflected in the balance sheet at December 31, 1995, and June 30, 1996
represented the present value of the consideration to be received through August
1999, of $3,207,882 and $3,507,882 (unaudited), respectively ($4,428,000
discounted using an interest rate of 11.5% per annum) reduced by the estimated
closing costs (legal and consulting) and the facility's estimated carrying costs
through July 1, 1996. The statement of operations for 1995 reflects a provision,
"New Jersey facility closure costs," of $3,909,700 which represents $416,201
from the write-off of deferred development costs related to the facility and
$3,493,499 resulting from the adjustment of the carrying

F-15
<PAGE> 53

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

value of the related assets discussed above. During the six months ended June
30, 1996 the reserve for carrying and closing costs was reduced by approximately
$300,000 of payments for rent and other carrying and closing costs.

In connection with the filing of a Registration Statement with the
Securities and Exchange Commission, the Company has revised the present value of
the $6,223,000 purchase price of sale of equipment and leasehold improvements
described above, reducing to zero the present value of the $1,800,000 portion of
the purchase price, or $1,300,000, contingent upon re-award of the related
management contract and increased the provision for New Jersey facility closure
costs in a like amount for the year ended December 31, 1995. The effect of the
adjustments on the accompanying financial statements at December 31, 1995 is as
follows:

<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- ------------
<S> <C> <C>
Net loss............................................................ $ (959,391) $ (1,739,391)
Net loss per common share........................................... (0.21) (0.38)
Receivable from sale of equipment and leasehold improvements........ 4,507,882 3,207,882
Deferred income taxes............................................... 600,000 1,120,000
Retained earnings (deficit)......................................... 473,492 (306,508)
</TABLE>

2. Legal Matters

In May 1993, a former employee of the Company filed suit in the United
States District Court, Southern District of New York claiming that he was
intentionally assaulted by employees of the Company. This employee alleges six
causes of action, claiming, among other things, that he was deprived of due
process and equal protection and is claiming $5,000,000 in damages on each of
his six causes of action. The Company believes such claims to be without merit
and is vigorously defending this action. The ultimate outcome of the lawsuit
cannot be determined at this time, and accordingly, no adjustment has been made
to the consolidated financial statements.

In January 1996 a lawsuit was filed with the Supreme Court of New York by a
former employee of the Company, alleging sexual harassment and discrimination,
as well as physical assault, rape and negligent screening of employees. Total
damage sought by plaintiff amount to $4,000,000 plus attorney fees. The Company
believes that such claims to be without merit and intends to vigorously defend
itself in this action. The ultimate outcome of the lawsuit cannot be determined
at this time, and accordingly, no adjustment has been made in the consolidated
financial statements.

On March 6, 1996 former inmates at one of the Company's facilities filed an
action in the Supreme Court of the State of New York, County of Bronx.
Plaintiffs claim on behalf of themselves and others similarly situated, personal
injuries and property damage purportedly caused by negligence and intentional
acts of the Company. The lawsuit claims $500,000,000 each for compensatory and
punitive damages. The Company intends to vigorously defend itself in this
action. The Company has notified its insurance carrier and has requested
indemnity and defense. The ultimate outcome of the lawsuit cannot be determined
at this time, and accordingly, no adjustment has been made to the consolidated
financial statements.

In July 1996 a lawsuit was filed with the Superior Court for the State of
New Jersey by nine plaintiffs who were detainees at the Company's former
Elizabeth, New Jersey facility or their spouses. The detainees allege that they
were mistreated at the hands of local law enforcement authorities while they
were detainees at a facility formerly operated by the Company. No specific
damage amounts are set forth in the complaint. However, in claim forms submitted
to the Company prior to the commencement of the litigation, individual damages
of $10,000,000 per plaintiff were demanded. The action has been moved to the
United States District Court for the District of New Jersey, Newark Division.
The Company intends to vigorously defend itself in

F-16
<PAGE> 54

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

this action. The Company has notified its insurance carrier and has requested
indemnity and defense. The ultimate outcome of the lawsuit cannot be determined
at this time, and accordingly, no adjustment has been made to the consolidated
financial statements.

The Company is subject to claims and suits in the ordinary course of
business. Management believes that the ultimate outcome of all such proceedings
will not have a material adverse effect on the results of operations or
financial condition of the Company.

3. Contracts

Renewal of government contracts (Note B) is subject to, among other things,
appropriations of funds by the various levels of government involved (Federal,
state or local). Also, several contracts contain provisions whereby the Company
may be subject to audit by the government agencies involved. These contracts
also generally contain "termination for the convenience of the government" and
"stop work order" clauses which generally allow the government to terminate a
contract without cause. In the event one of the Company's larger contracts is
terminated, it may have a material adverse effect on the Company's operations.

4. Officers' Compensation

Effective February 9, 1994, the President entered into five-year employment
agreements with the Company that provides annual compensation of $189,000,
annual cost of living increases and an annual bonus of five percent of pre-tax
earnings greater than $1,000,000, not to exceed $200,000.

In January 1996, the Company entered into three-year employment agreements
with its Chief Operating Officer and Executive Vice President -- Finance, which
provide annual compensation of $115,000 and $129,000, respectively, and a bonus
equal to 3% of pre-tax profits in excess of $1,000,000, not to exceed $50,000
and $75,000, respectively. Pursuant to the terms of the employment agreement,
each executive was granted an option to purchase 100,000 shares of common stock.
The option was granted at the fair market value of the stock on the date of
grant which was $8.875 per share. The options are exercisable as follows: one-
third on the date of grant, one-third one year from the date of grant and the
remaining one-third two years from the date of grant.

5. Other

Approximately 99.7%, 97.5% and 96.6% and of the Company's revenues for the
years ended December 31, 1993, 1994 and 1995, respectively, relate to amounts
earned from Federal, state and local contracts. The Company's contracts with
government agencies where revenues exceeded 10% of the Company's total
consolidated revenues were with the U. S. Bureau of Prisons, INS, the New York
State Department of Corrections, and the Texas Department of Criminal Justice.

6. Phoenix, Arizona Facility -- Renovation Costs to Complete

At December 31, 1995 and June 30, 1996, the Company has incurred
approximately $604,000 and $4,457,000 (unaudited) for the renovation of the
Phoenix, Arizona facility. Total anticipated construction costs upon completion
approximate $4,516,000. In addition, the Company has restricted cash of $750,000
and $233,761, (unaudited) as of December 31, 1995 and June 30, 1996,
respectively, for final payments of the renovation costs of this facility.

7. Fiduciary Funds

The Company acts as a fiduciary disbursing agent on behalf of a
governmental entity whereby certain governmental entity funds are maintained in
a separate bank account. These funds are for payments to the

F-17
<PAGE> 55

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

general contractor which is constructing a government owned facility. The
Company is responsible for managing the construction process. Once completed,
operations at these facilities will be under management by the Company. At June
30, 1996, approximately $1,126,000 of such funds were being held in the separate
bank account which was disbursed to the general contractor in July 1996. The
Company has no legal rights to the funds nor the constructed facility, and
accordingly, such funds do not appear in the accompanying financial statements.

8. Construction Commitments

In connection with certain facility contracts the Company has commitments
to construct and develop facilities totalling approximately $3,800,000. In
addition, the Company intends to enter into a facility contract pursuant to
which the Company is required to construct and develop a facility for a total
cost of approximately $15,000,000.

NOTE M -- STOCK OPTIONS

In October 1993, the Company adopted a stock option plan (the "Stock Option
Plan"). This plan provides for the granting of both: (i) incentive stock options
to employees and/or officers of the Company and (ii) nonqualified options to
consultants, directors, employees or officers of the Company. The total number
of shares which may be sold pursuant to options granted under the stock option
plan is 500,000. The Company, in June 1994, adopted a Non-employee Directors
Stock Option Plan, which provides for the grant of nonqualified options to
purchase up to 196,875 shares of the Company's common stock.

Options granted under both plans may not be granted at a price less than
the fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). Options granted under the Stock Option Plan will expire not more
than five years from the date of grant.

Information regarding the Company's stock option plans is summarized below:

<TABLE>
<CAPTION>
NON-EMPLOYEE
STOCK DIRECTORS STOCK NON-PLAN
OPTION PLAN OPTION PLAN OPTIONS
----------- --------------- --------
<S> <C> <C> <C>
Balance at January 1, 1994.......................... -- -- --
Granted........................................... 225,313 65,000 --
----------- --------------- --------
Outstanding at December 31, 1994.................... 225,313 65,000 --
Granted........................................... 54,375 25,000 --
Exercised......................................... (7,000) -- --
----------- --------------- --------
Outstanding at December 31, 1995.................... 272,688 90,000 --
Granted........................................... 46,200 30,000 215,000
Cancelled......................................... (33,750) (16,562) --
Exercised......................................... (41,563) (200) --
----------- --------------- --------
Outstanding at June 30, 1996 (unaudited)............ 243,575 103,238 215,000
========= =========== =======
Option prices per share
Granted................................................ $4.76-$20.63 $7.05-$18.75
Exercised.............................................. $4.76
</TABLE>

At December 31, 1995 and June 30, 1996, stock options for 225,314 shares
($4.76-$8.00 a share) and 195,944 shares ($4.76-$11 a share) were exercisable
under the stock option plans, respectively. At June 30, 1996, non-plan stock
options for 66,666 shares ($8.875 a share) were exercisable.

F-18
<PAGE> 56

CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE N -- SUBSEQUENT EVENTS

1. Proposed Public Offering of Securities

The Company is in the process of filing a registration statement for a
proposed sale of 2,450,000 shares of common stock. Of the 2,450,000 shares of
common stock offered, 2,070,000 shares are being sold by the Company and 380,000
shares by certain stockholders. The Company will not receive any proceeds from
the shares being sold by stockholders. The Company intends to retire bank
indebtedness (Note H) with a portion of the net proceeds of the proposed
offering.

2. New Jersey Facility

On June 13, 1996 the INS agreed to transfer the facility lease and
management contract to a unrelated Company. (See Note L-1.)

3. On August 1, 1996 the Company's Certificate of Incorporation was amended
which changed the name of the Company to Correctional Services Corporation and
increased the number of authorized shares of Common Stock from 10,000,000 to
30,000,000 shares.

F-19
<PAGE> 57

[Photo of Arizona State Prison, Phoenix West owned and operated by the Company.]

[Photo of Company employees receive extensive training upon employment and
annual training thereafter.]

[Photos of the Company's innovative programs for juveniles are designed to
reduce recidivism.]
<PAGE> 58

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NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING HEREIN CONTAINED AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE FACTS HEREIN SET FORTH SINCE THE DATE HEREOF.

---------------------

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Safe Harbor Provisions of the Private
Securities Litigation Reform Act.... 6
Risk Factors.......................... 6
Capitalization........................ 10
Use of Proceeds....................... 10
Dividends............................. 11
Price Range of Common Stock........... 11
Selected Consolidated Financial
Data................................ 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 13
Business.............................. 18
Management............................ 26
Certain Transactions.................. 30
Principal and Selling Stockholders.... 32
Description of Securities............. 33
Underwriting.......................... 35
Legal Matters......................... 36
Experts............................... 36
Available Information................. 37
Additional Information................ 37
Consolidated Financial Statements..... F-1
</TABLE>

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2,450,000 SHARES

CORRECTIONAL SERVICES CORPORATION (LOGO)

CORRECTIONAL
SERVICES
CORPORATION

COMMON STOCK
--------------------

PROSPECTUS
--------------------
STEPHENS INC.

J.C. BRADFORD & CO.
September 12, 1996
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