Avalon Correctional Services, Inc. Business Information, Profile, and History

Company Perspectives:

Our Philosophy: Avalon Correctional Services, Inc. and Southern Corre ctions Systems, Inc., a wholly owned subsidiary's mission is to opera te safe, humane, and secure community correctional facilities, protec t the public, and provide offenders with training, education and trea tment programs designed to reduce recidivism.

History of Avalon Correctional Services, Inc.

Avalon Correctional Services, Inc. operates 12 prisons and halfway ho uses in Oklahoma, Texas, and Colorado. The company owns three-fourths of the facilities, which have a total of 2,300 beds. Avalon also run s programs that serve as an alternative to incarceration, including d ay monitoring, work-release, and weekend sanctions. Founder Don Smith owns controlling interest in the firm and serves as its CEO and chai rman.

Beginnings

Avalon Correctional Services was founded in 1985 by Don Smith in Okla homa City, Oklahoma. Trained as an accountant, Smith had co-owned an oil drilling business that closed in the wake of the early 1980s oil bust, and was looking for work. Noting that the state's prisons were overcrowded, he reasoned that it might be possible for private compan ies to handle some of the overflow, and in 1985 won a contract to pro vide halfway house services for 25 drunk-driving offenders. He leased the Carver Center, a 48-bed facility that had once served as a schoo l for handicapped children, to house them.

The dormitory-style facility was set up to help its inhabitants impro ve their lives while paying their debt to society, and offered counse ling for substance abuse and other problems. Smith's staff also worke d with local businesses to find employment for those who needed jobs. When the first group of "low-risk" offenders arrived, Smith was shoc ked to see them appear in shackles and leg irons, but he quickly adap ted to the reality of corrections work, and within several years the building had been expanded to 145 beds.

Halfway houses were a growing business, with the typical operating co st of $12.50 per bed per day significantly less than the $21 to $53 per bed for larger, more secure facilities. They were used to house a variety of individuals, ranging from those making the tra nsition from prison, to others allowed to work during the day while i ncarcerated at night. Such facilities better prepared inmates for the ir return to society, with recidivism rates of approximately 38 perce nt reported in Oklahoma, as compared with 41.5 to 46.3 percent for th ose released directly from prison.

Reverse Merger Creating Avalon Community Services in 1992

Not long after he began operating the Carver Center, Smith also began providing residential care services for mentally ill persons in half way house-like settings. In 1990 he formally incorporated the company as Southern Corrections Systems, Inc. (SCS). Seeking funds for expan sion, in 1992 the firm engineered a reverse merger with Avalon Enterp rises, Inc., a publicly traded shell company. It was then renamed Ava lon Community Services, Inc., with SCS designated as its sole subsidi ary.

In the fall of 1993 the company expanded its scope by signing a seven -year lease to operate 8,500-acre Lake Stanley Draper Park in Oklahom a City. The park's boating and fishing facilities would be repaired a nd upgraded, and a public swimming beach, campsites, and boat and per sonal watercraft rental added. At year's end the firm also bought two residential care facilities in Elk City and Norman, Oklahoma, while taking an option to buy another in Oklahoma City. The firm's annual r evenues now topped $2 million.

In the summer of 1995 Avalon opened a 255-bed corrections facility in a former warehouse in Tulsa, Oklahoma. The firm had recently won a c ontract with the state to house 45 inmates there and provide them wit h substance abuse treatment and employment assistance. Over the next several years more were added.

The company now had plans underway to build a new 60-unit assisted li ving facility for senior citizens near Oklahoma City. The $2.5 mi llion project was funded by Bank One, which had sold Avalon the 14-ac re property. The firm had also recently canceled its money-losing par k management contract and installed seven-year company veteran Jerry Sutherland as president, with Don Smith continuing to serve as CEO an d chairman.

In October 1995 Avalon's stock began trading on the NASDAQ SmallCap M arket, moving up from its bulletin board listing. The year 1995 also saw the company win a contract with the State of Nebraska Department of Correctional Services to provide substance abuse treatment in five correctional centers. For the year, the firm reported revenues of 36;3.1 million and a net loss of $85,000.

In the spring of 1996 an agreement was reached with Kansas City Commu nity Center to operate eight substance abuse treatment programs at co rrectional centers in Florida. The company also announced that it wou ld buy Diamond Crest Assisted Living Center in Fort Collins, Colorado . Avalon would invest $2.5 million to purchase and renovate the 2 0,000-square-foot facility, which would be expanded to 60 units.

The summer of 1996 saw Avalon pay $3.7 million for a 144-bed medi um security prison in El Paso, Texas. The firm also signed a 15-year contract worth $20 million to operate the prison for the West Tex as Community Supervision and Corrections Department.

Focus Narrowing to Corrections in Late 1996

In November Avalon's newly completed Oklahoma City assisted living ce nter opened. Although the company announced plans to open a number of similar facilities, by year's end management had made an abrupt turn around and decided to abandon all non-correctional operations, in par t because the firm's residential care facilities were losing money an d experiencing other problems, including the deaths of several patien ts. The change of plans resulted in a nearly $1 million loss from discontinued operations for the year.

In early 1997 contracts were signed to provide substance abuse servic es at two prisons in Missouri, and in the fall Avalon made a deal to buy a 150-bed community corrections facility in Tulsa from owner Free dom Ranch. The company also completed a $4.15 million private sto ck sale during the year.

In March 1998 the firm won a new contract from Oklahoma to build and run an 80-bed medium-security facility for juvenile offenders. It wou ld add $3.6 million to the company's annual revenues. The spring also saw Avalon begin operating a 30-bed halfway house in Fordland, M issouri.

In late June a deal was reached to acquire three juvenile detention f acilities from Rebound Programs in Colorado, Utah, and Virginia, plus two others under construction. The stock swap deal was expected to b oost the firm's earnings by $9.8 million per year, but it fell th rough when the state of Utah refused to allow Avalon to run its progr am, due to the firm's inexperience with juvenile offenders.

In July 1998 a deal was signed with the Texas Department of Criminal Justice to design and build a 200-bed facility to house substance abu sers and other prisoners in that state. That same month saw the firm change its name to Avalon Correctional Services, Inc., and in Septemb er Rice Sangalis Toole & Wilson invested $15 million to fund further growth. For 1998 Avalon had revenues of $7.7 million and a net loss of $450,000.

Major Expansion in 1999

In February 1999 the company's new Union City Juvenile Detention Cent er was opened. The 44,000-square-foot, 80-bed facility was the first privately run center of its kind in Oklahoma. It offered education, c ounseling, and treatment programs to help youthful criminals return t o school or begin work upon their release, and was expected to bring Avalon an additional $3.6 million in revenues per year. Soon afte r opening it was plagued with problems, however, including several es capes and an attack on guards by inmates. The firm subsequently beefe d up security at the site.

Early 1999 also saw Avalon cut deals to acquire The Villa at Greeley LLC and Adams Community Corrections Programs, Inc., which provided ha lfway house, counseling, and alternative sentencing services in Greel ey and Denver, Colorado, respectively. In June a 300-bed addition was completed at Avalon's El Paso facility, which had outgrown its 150 b eds.

Other new ventures for 1999 included a private pay community correcti ons offender program in Oklahoma, which provided alternative sentenci ng options such as day reporting and work release to individuals who agreed to pay the costs of the services themselves. Revenues jumped t o $16.8 million for the year, with net income finally in the blac k at $83,000. The company's employment ranks increased dramatical ly as well, rising to 470.

In June 2000 Avalon opened the 150-bed Turley Correctional Center in Tulsa. The minimum-security prison for women had been built on the si te of the former Freedom Ranch. Growth continued the following year i n that city with a new contract to develop a Public Inebriant Alterna tive Program. It would be located in a vacant 360-bed detention facil ity that the firm would lease. A total of $1 million was spent on renovations, with the new operation expected to bring in $3 mill ion annually. The facility would later also be used to house private pay and Intermediate Sanction programs.

In June 2001 Avalon named the former head of the Oklahoma Department of Corrections, James Saffle, to the post of president. The firm now had 14 facilities, which housed 2,060 inmates, and also provided mana gement services to two other correctional facilities. The company's a lternative programs served another 1,000 individuals with substance a buse treatment, vocational training, work release, and other services .

Continued Growth in 2002

In early 2002 Avalon bought the 180-bed Austin Transitional Center, a halfway house and substance abuse treatment center located in Del Va lle, Texas. The company also expanded the size of one of its Colorado halfway houses early in the year, and in the fall won a three-year c ontract to manage the 48-bed Roy K. Robb Post Adjudication Facility i n San Angelo, Texas, which offered substance abuse treatment to juven ile males.

Budget cuts by the state of Oklahoma led to the early 2002 cancellati on of the firm's contract to house 80 offenders at the Union City Juv enile Center, at the same time that a state report charged that inmat es there had been mistreated. The boom in private prisons that had be gun during the 1990s was now cooling off, as the projected cost savin gs and need for larger capacity were proving less than originally env isioned.

In November Avalon suffered another blow when its Public Inebriate Al ternative Program in Tulsa was canceled due to underuse. The leased f acility would continue to house 100 inmates for the state Department of Corrections Prison Public Works Program. Following several escapes , the firm recently had spent $35,000 to improve security there. For 2002, Avalon recorded revenues of $27.5 million and net earni ngs of $1.12 million (as it later restated).

In the spring of 2003 the company lost its contract to house inmates for the Tulsa jail. Although Avalon charged $30 per day, less tha n the $45 that jail operator Corrections Corporation of America ( CCA) did, the inmates' medical costs at Avalon's facility were paid f or by the County of Tulsa, while CCA provided its inmates with partia l coverage.

In June a $1.5 million, 100-bed expansion to the firm's Phoenix C enter operation in Colorado was completed. Several months later four former workers at that facility and two of Avalon's other Colorado ha lfway houses sued the company and Colorado state corrections official s. They alleged that state officials had refused to investigate probl ems that included staffers having sex with inmates or selling them dr ugs, broken or missing security equipment, and billing for services n ot actually rendered.

During 2004 the company restructured its debt in conjunction with an $8 million bond offering. Revenues for the year increased to $ ;27.2 million from $25.3 million, while earnings fell to $433 ,000 from $1.2 million.

Citing the high cost of complying with Securities and Exchange Commis sion (SEC) accounting rules, in February 2005 Avalon moved its stock from the NASDAQ exchange to the Pink Sheets, where less rigorous rule s were in effect. The firm put the cost of preparing and filing docum ents with the SEC at $1 million annually, approximately equal to its net income. Avalon was one of several companies to take this rout e following implementation of the Sarbanes-Oxley Act in 2004. During 2005 the firm also reached an agreement to sell its closed Oklahoma C ity assisted living center for $1.3 million, and leased the vacan t Union City juvenile facility to the Oklahoma Department of Central Services.

After 20 years Avalon Correctional Services, Inc. had narrowed its fo cus to the operation of halfway houses and minimum-security prisons a nd providing alternative sentencing programs. The firm was taking a n umber of steps to remain profitable, while continuing to serve the ne eds of its clients and society as a whole.

Principal Subsidiaries: Southern Corrections Systems, Inc.

Principal Competitors: Corrections Corporation of America; The GEO Group, Inc.; Cornell Companies, Inc.; Management & Training Corporation.

Chronology

• Key Dates:
• 1985: Don Smith founds Southern Corrections Systems in Oklahom a City.
• 1992: A reverse merger takes the firm public; the name is chan ged to Avalon Community Services.
• 1993: The company signs deals to run an Oklahoma City park and buy two new halfway houses.
• 1995: A halfway house opens in Tulsa; a senior housing center is announced.
• 1996: All non-corrections operations are canceled; a prison is acquired in El Paso, Texas.
• 1997: A prison is bought in Tulsa.
• 1998: The name is changed to Avalon Correctional Services, Inc .
• 1999: An Oklahoma juvenile center is opened; new facilities ar e acquired in Colorado.
• 2005: The company's stock shifts from NASDAQ to Pink Sheets in a cost-cutting move.