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Saturday, August 27, 2005

Avalon Correctional Services (CITY)

This company (website) runs prisons. They were forced to de-list, but found that they would have wanted to de-list anyway thanks to SOX, those grapes were sour. They generally earn at least 20 cents per year on operations (except for 2002, 14 cents). Recent stock prices have been $1.80, putting it at a P/E of roughly 9. Cash flow from operations has generally been good, except for 2004, where they had a huge pre-paid expense and AR increased a large amount. Capex has generally been lower than depreciation. They are very heavily leveraged (debt to equity is about 5).

Most of the assets are property and equipment, with some assets held for sale. Revenues have been climbing the last few years. The big question is about the discontinued operations that shows up every year. Every year they dispose of property.

406-bed operation in OK City
320-bed operation in Tulsa, OK
160-bed medium security operation in Union City, OK
150-bed medium security operation in El Paso, TX
324-bed medium security operation in El Paso, TX
180-bed in Del Valle, TX
207-bed in Henderson, CO
307-bed multi-use in Greely, CO
leased 352-bed intermediate sanction unit in Tulsa, OK
leased 35-bed in Denver, CO
day reporting center in Thornton, CO

AR is due from various governmental agencies under contract.

Buildings and Improvements: 10-40 years (that's a large range)
Furniture and Equipment: 5-10 years
Transportation Equipment: 1.5 to 15 years (that's a large range)

Most PP&E assets are buildings and improvements ($25.7 million before deprec). About 20% depreciation at end of 2004.

Planned sale of Union City facility. Will probably bring in more than book value.

Company owns 15% of an assisted living center (is it a prison?) and has guaranteed debt of $900K. Reduced carrying value to zero. Can claim proceeds from sale to recover debts. This is held for sale and is (part of?) discontinued operations. It was sold on March 17, 2005. There are still $4.4 million in assets held for sale.

Four government agencies accounted for more than 10% of revenues, one of them was lost after 2002. The remaining three have been mostly unchanged.

Long term debt maturities:
2005: $1.7 million
2006: $972K
2007: $4.2 million
2008: $708K
2009: $759K
thereafter: $25 million
There are a number of covenants, all in compliance. $1.5 million in long-term restricted cash.

1.6 million treasury shares are pledged as collateral, but not counted as dilution.
Black Scholes pro-forma earnings per share drops from 8 cents to 7 cents, assumes a short life expectancy (2.75 years). On average, about 150K shares are granted each year. Share count has been stable over the years.

Related Party:
Transportation vehicle purchases and some debt have been personally guaranteed by CEO.

CEO has been with company since founding. COO is retired director of OK Dept of Corrections. CFO started in 2004, was auditor with E&Y.

CONCLUSION: Interest expense could start going up seriously over time and eat into their profits. Otherwise, they'd be worth maybe $3 a share.

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