Avalon Correctional Services, Inc.

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Avalon Correctional Services, Inc.

13401 Railway Drive
Oklahoma City, Oklahoma 73114
U.S.A.
Telephone: (405) 752-8802
Toll Free: (800) 919-9113
Fax: (405) 752-8852
Web site: http://www.avaloncorrections.com

Public Company
Incorporated: 1990 as Southern Corrections Systems, Inc.
Employees: 430
Sales: $27.17 million (2004)
Stock Exchanges: Pink Sheets
Ticker Symbol: CITY
NAIC: 561210 Facilities Support Services

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

Beginnings

Avalon Correctional Services was founded in 1985 by Don Smith in Oklahoma 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 companies to handle some of the overflow, and in 1985 won a contract to provide halfway house services for 25 drunk-driving offenders. He leased the Carver Center, a 48-bed facility that had once served as a school for handicapped children, to house them.

The dormitory-style facility was set up to help its inhabitants improve their lives while paying their debt to society, and offered counseling for substance abuse and other problems. Smith's staff also worked with local businesses to find employment for those who needed jobs. When the first group of "low-risk" offenders arrived, Smith was shocked to see them appear in shackles and leg irons, but he quickly adapted 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 cost 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 transition from prison, to others allowed to work during the day while incarcerated at night. Such facilities better prepared inmates for their return to society, with recidivism rates of approximately 38 percent reported in Oklahoma, as compared with 41.5 to 46.3 percent for those 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 halfway house-like settings. In 1990 he formally incorporated the company as Southern Corrections Systems, Inc. (SCS). Seeking funds for expansion, in 1992 the firm engineered a reverse merger with Avalon Enterprises, Inc., a publicly traded shell company. It was then renamed Avalon Community Services, Inc., with SCS designated as its sole subsidiary.

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 Oklahoma City. The park's boating and fishing facilities would be repaired and upgraded, and a public swimming beach, campsites, and boat and personal 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 revenues 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 contract with the state to house 45 inmates there and provide them with 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 living facility for senior citizens near Oklahoma City. The $2.5 million project was funded by Bank One, which had sold Avalon the 14-acre property. The firm had also recently canceled its money-losing park management contract and installed seven-year company veteran Jerry Sutherland as president, with Don Smith continuing to serve as CEO and chairman.

In October 1995 Avalon's stock began trading on the NAS-DAQ SmallCap Market, 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 $3.1 million and a net loss of $85,000.

In the spring of 1996 an agreement was reached with Kansas City Community Center to operate eight substance abuse treatment programs at correctional centers in Florida. The company also announced that it would buy Diamond Crest Assisted Living Center in Fort Collins, Colorado. Avalon would invest $2.5 million to purchase and renovate the 20,000-square-foot facility, which would be expanded to 60 units.

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

Focus Narrowing to Corrections in Late 1996

In November Avalon's newly completed Oklahoma City assisted living center opened. Although the company announced plans to open a number of similar facilities, by year's end management had made an abrupt turnaround and decided to abandon all non-correctional operations, in part because the firm's residential care facilities were losing money and experiencing other problems, including the deaths of several patients. 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 services 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 Freedom Ranch. The company also completed a $4.15 million private stock 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 would add $3.6 million to the company's annual revenues. The spring also saw Avalon begin operating a 30-bed halfway house in Fordland, Missouri.

In late June a deal was reached to acquire three juvenile detention facilities from Rebound Programs in Colorado, Utah, and Virginia, plus two others under construction. The stock swap deal was expected to boost the firm's earnings by $9.8 million per year, but it fell through when the state of Utah refused to allow Avalon to run its program, 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 abusers and other prisoners in that state. That same month saw the firm change its name to Avalon Correctional Services, Inc., and in September 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 Center was opened. The 44,000-square-foot, 80-bed facility was the first privately run center of its kind in Oklahoma. It offered education, counseling, and treatment programs to help youthful criminals return to school or begin work upon their release, and was expected to bring Avalon an additional $3.6 million in revenues per year. Soon after opening it was plagued with problems, however, including several escapes and an attack on guards by inmates. The firm subsequently beefed 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 halfway house, counseling, and alternative sentencing services in Greeley and Denver, Colorado, respectively. In June a 300-bed addition was completed at Avalon's El Paso facility, which had outgrown its 150 beds.

Other new ventures for 1999 included a private pay community corrections offender program in Oklahoma, which provided alternative sentencing options such as day reporting and work release to individuals who agreed to pay the costs of the services themselves. Revenues jumped to $16.8 million for the year, with net income finally in the black at $83,000. The company's employment ranks increased dramatically 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 site of the former Freedom Ranch. Growth continued the following year in that city with a new contract to develop a Public Inebriant Alternative Program. It would be located in a vacant 360-bed detention facility that the firm would lease. A total of $1 million was spent on renovations, with the new operation expected to bring in $3 million annually. The facility would later also be used to house private pay and Intermediate Sanction programs.

Company Perspectives:

Our Philosophy: Avalon Correctional Services, Inc. and Southern Corrections Systems, Inc., a wholly owned subsidiary's mission is to operate safe, humane, and secure community correctional facilities, protect the public, and provide offenders with training, education and treatment programs designed to reduce recidivism.

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 management services to two other correctional facilities. The company's alternative programs served another 1,000 individuals with substance abuse 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 Valle, 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 contract to manage the 48-bed Roy K. Robb Post Adjudication Facility in San Angelo, Texas, which offered substance abuse treatment to juvenile males.

Budget cuts by the state of Oklahoma led to the early 2002 cancellation of the firm's contract to house 80 offenders at the Union City Juvenile Center, at the same time that a state report charged that inmates there had been mistreated. The boom in private prisons that had begun during the 1990s was now cooling off, as the projected cost savings and need for larger capacity were proving less than originally envisioned.

In November Avalon suffered another blow when its Public Inebriate Alternative Program in Tulsa was canceled due to underuse. The leased facility 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 earnings 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 than the $45 that jail operator Corrections Corporation of America (CCA) did, the inmates' medical costs at Avalon's facility were paid for by the County of Tulsa, while CCA provided its inmates with partial coverage.

In June a $1.5 million, 100-bed expansion to the firm's Phoenix Center operation in Colorado was completed. Several months later four former workers at that facility and two of Avalon's other Colorado halfway houses sued the company and Colorado state corrections officials. They alleged that state officials had refused to investigate problems that included staffers having sex with inmates or selling them drugs, broken or missing security equipment, and billing for services not 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 Commission (SEC) accounting rules, in February 2005 Avalon moved its stock from the NASDAQ exchange to the Pink Sheets, where less rigorous rules were in effect. The firm put the cost of preparing and filing documents with the SEC at $1 million annually, approximately equal to its net income. Avalon was one of several companies to take this route following implementation of the Sarbanes-Oxley Act in 2004. During 2005 the firm also reached an agreement to sell its closed Oklahoma City assisted living center for $1.3 million, and leased the vacant Union City juvenile facility to the Oklahoma Department of Central Services.

After 20 years Avalon Correctional Services, Inc. had narrowed its focus to the operation of halfway houses and minimum-security prisons and providing alternative sentencing programs. The firm was taking a number of steps to remain profitable, while continuing to serve the needs 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.

Key Dates:

1985:: Don Smith founds Southern Corrections Systems in Oklahoma City.
1992:: A reverse merger takes the firm public; the name is changed 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 are acquired in Colorado.
2005:: The company's stock shifts from NASDAQ to Pink Sheets in a cost-cutting move.