-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VWW0ttnGJimcdEekNAsjBkkLOKbH6/+ZYQkW4iRlFHHhZWDjLGnbVDTPxIyJrlNA yNhyg72cev9L1701eeFdKQ== 0000930661-00-000670.txt : 20000327 0000930661-00-000670.hdr.sgml : 20000327 ACCESSION NUMBER: 0000930661-00-000670 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVALON COMMUNITY SERVICES INC CENTRAL INDEX KEY: 0000872202 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-FACILITIES SUPPORT MANAGEMENT SERVICES [8744] IRS NUMBER: 133592263 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2/A SEC ACT: SEC FILE NUMBER: 333-13103 FILM NUMBER: 578252 BUSINESS ADDRESS: STREET 1: 13401 RAILWAY DR STREET 2: P O BOX 57012 CITY: OKLAHOMA CITY STATE: OK ZIP: 73114 BUSINESS PHONE: 4057528802 MAIL ADDRESS: STREET 1: P O BOX 57012 CITY: OKLAHOMA CITY STATE: OK ZIP: 73157 FORMER COMPANY: FORMER CONFORMED NAME: AVALON ENTERPRISES INC DATE OF NAME CHANGE: 19600201 S-2/A 1 AMENDMENT 5 TO FORM S-2 As filed with The Securities and Exchange Commission on March 23, 2000 Registration No. 333-13103 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________ AMENDMENT NO. 5 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _____________ AVALON CORRECTIONAL SERVICES, INC. (Exact Name of Registrant as Specified in its Charter) Nevada 8999 13-3592263 (State of Incorporation (Primary Standard Industrial (I.R.S. Employer or Organization) Classification Code No.) Identification No.) 13401 Railway Drive Oklahoma City, Oklahoma 73114 (405) 752-8802 (Address, including zip code and telephone number, including area code, of Registrant's principal executive office) DONALD E. SMITH With Copies To: Chief Executive Officer Mark A. Robertson, Esq. AVALON CORRECTIONAL SERVICES, INC. Robertson & Williams 13401 Railway Drive N.W. 63rd Street, Suite 160 Oklahoma City, Oklahoma 73114 Oklahoma City, OK 73116 (405) 752-8802 (405) 848-1944 (Name, address, including zip code and telephone number, including area code, of agent for service) _______________________ Calculation of Registration Fee
- ----------------------------------------------------------------------------------------------------------------- Proposed Proposed Maximum Title of Each Class of Amount to Maximum Aggregate Amount of Securities to Be Registered be Registered Offering Price Offering Price Registration Fee Per Share - ----------------------------------------------------------------------------------------------------------------- Common Stock (1) 1,000,000 $ 1.50 $1,500,000.00 $ 517.24 Common Stock (1) 50,000 $5.125 $ 256,150.00 $ 88.35 - ----------------------------------------------------------------------------------------------------------------- Placement Agent Warrant Common Stock (1) 55,000 $ 1.50 $ 82,500 $ 28.45 - ----------------------------------------------------------------------------------------------------------------- Common Stock Purchase Warrant Series C (1) 837,500 $ 0.01 $ 8,375.00 $ 2.88 Common Stock on Exercise of Warrant (1) 837,500 $ 3.19 $2,671,625.00 $ 921.23 - ----------------------------------------------------------------------------------------------------------------- Common Stock Purchase Warrant Series D (1) 200,000 $ 0.01 $ 2,000.00 $ 0.69 Common Stock on Exercise of Warrant (1) 200,000 $ 4.20 $ 840,000.00 $ 289.73 - ----------------------------------------------------------------------------------------------------------------- Convertible Debentures (1) 3,850,000 $ 0.01 $3,850,500.00 $1,327.93 Common Stock on Conversion of Debentures (1) 1,283,333 $ 3.00 $3,850,000.00 $1,327.93 - ----------------------------------------------------------------------------------------------------------------- Placement Agent Warrant Common Stock (1) 79,000 $ 0.01 Common Stock on Exercise of Warrant (1) 79,000 $ 3.00 $ 237,000.00 $ 69.92 - ----------------------------------------------------------------------------------------------------------------- Registration Fee (2) $4,485.42 =================================================================================================================
(1) Securities carried forward from previous registration statements (2) Paid with previous registrations Pursuant to Rule 429(b), the Registrant has combined the Prospectus with the Prospectuses in Form SB-2, Registration Number 33-83932, Form S-2, Registration Number 333-42993 and Form S-2, Registration Number 333-62721 AVALON CORRECTIONAL SERVICES, INC. CROSS REFERENCE SHEET Showing Location in Prospectus, Filed as Part of Registration Statement, of Information Required by Form S-2
Item Number in Form S-2 Item Caption in Form S-2 Location in Prospectus - ----------- ------------------------ ---------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus......................... Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus.............................. Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges................. Summary of Prospectus; Risk Factors 4. Use of Proceeds.......................................... Use of Proceeds 5. Determination of Offering Price.......................... Front Cover Page 6. Dilution................................................. Not Applicable 7. Selling Security Holders................................. Selling Security Holders 8. Plan of Distribution..................................... Front Cover Page; Plan of Distribution 9. Description of the Securities to be Registered........... Summary of Prospectus; Description of Securities 10. Interest of Named Experts and Counsel.................... Not Applicable 11. Information with Respect to the Registrant............... Incorporation of Certain Documents by Reference 12. Incorporation of Certain Information by Reference........................................... Incorporation of Certain Documents by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities......................... Part II of Registration Statement 14. Other Expenses of Issuance and Distribution.............. Part II of Registration Statement 15. Indemnification of Directors and Officers................ Part II of Registration Statement 16. Exhibits................................................. Exhibits to Registration Statement 17. Undertakings............................................. Part II of Registration Statement 18. Financial Statements and Schedules....................... Incorporation of Certain Documents
PRELIMINARY AMENDED PROSPECTUS AVALON CORRECTIONAL SERVICES, INC. 166,500 Redeemable Common Stock Purchase Warrants 2,504,833 Shares of Common Stock $2,415,000 Convertible Debentures Of the 2,504,833 shares of Common Stock (the "Common Stock") and the 166,500 Redeemable Common Stock Purchase Warrants (the "Warrants") of Avalon Correctional Services, Inc. (the "Company") offered hereby, 166,500 Class C Warrants, and 50,000 shares of Common Stock are being sold by certain security holders of the Company. In addition, 55,000 shares of common stock and 55,000 Class C Warrants are reserved for issuance by the Company to a registered broker dealer upon the exercise of a warrant previously issued in connection with a private placement of securities in 1994 under Regulation D. Except for the 50,000 shares of Common Stock held by certain security holders of the Company, and except for the 55,000 shares of common stock reserved for issuance to the broker dealer (the Selling Shareholders), the remaining balance of 2,399,833 shares of Common Stock are issuable by the Company upon the exercise of the Warrants and the conversion of the Convertible Debentures. Unless the context otherwise requires, the holders of the Common Stock and Warrants who are selling securities hereunder are hereinafter collectively referred to as the "Selling Shareholders." The Company will not receive any proceeds from the sale of the Common Stock or the Warrants by the Selling Shareholders. See "Selling Shareholders," "Plan of Distribution" and "Use of Proceeds." Of the $2,415,000 Convertible Debentures of the Company, Each Convertible Debenture will entitle the holder immediately to convert to Common Stock at a price of $3.00 per share, subject to certain adjustments. The Debentures bear interest at a rate of 7.5% per annum, with a maturity date ten years from the date of issuance. The Debentures are redeemable after May 1, 2000, upon meeting certain requirements. Unless the context otherwise requires, the holders of the Common Stock who are selling securities hereunder are hereinafter collectively referred to as the "Selling Shareholders." The Company will not receive any proceeds from the sale of the Common Stock or the Warrants by the Selling Shareholders. See "Selling Shareholders," "Plan of Distribution" and "Use of Proceeds." The Company's Common Stock is listed on the NASDAQ SmallCap Market System under the symbol "CITY." The average of the bid and asked price for the Common Stock, as reported on the NASDAQ SmallCap Market System, was $1.76 per share on March 21, 2000. There is no established trading market for the Warrants or the Debentures. INVESTMENT IN THE SECURITIES IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. See "RISK FACTORS" on page 7 of this prospectus for information that should be considered by each prospective investor. 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.
===================================================================================================== Underwriting Proceeds to Price to Discounts and Selling Proceeds to Public Commissions Shareholders Company/(1)/ - ----------------------------------------------------------------------------------------------------- Offering by Selling Security Holders/(2)/ Per share............................. See Text See Text See Text See Text Per warrant........................... Note (2) Note (2) Note (2) Note (2) Per debenture - ----------------------------------------------------------------------------------------------------- Offering Price per Share of.......... $ 3.19 (C) $-0- $-0- $ 3.19 (C) Common Stock Underlying............. $ 4.20 (D) $-0- $-0- $ 4.20 (D) Warrants/(4)/ - ----------------------------------------------------------------------------------------------------- Offering by Company:/(3)/ Per Share from Placement Agent Warrant............................. $ 3.00 $-0- $-0- $ 3.00 - ----------------------------------------------------------------------------------------------------- Offering Price per Share of Common Stock Underlying Debentures.......................... $ 3.00 $-0- $-0- $ 3.00 -------------------------------------------------------- =====================================================================================================
-------------------------------------------------------- Total.............................. $3,822,700 $-0- $-0- $3,822,700 =====================================================================================================
(1) Before deducting expenses payable by the Company and Selling Shareholders, which are estimated at $16,000. (2) The Selling Security Holders have advised the Company that they propose to offer for sale and to sell the Warrants from time to time during the next 12 months through brokers in the over-the-counter market, in private transactions, or otherwise, at market prices then prevailing or obtainable. Accordingly, sales prices and proceeds to the Selling Shareholders will depend upon price fluctuations and the manner of sale. If the Warrants are sold through brokers, the Selling Shareholders will pay brokerage commissions and other charges (which compensation as to a particular broker- dealer might be in excess of customary commissions). Except for the payment of such brokerage commissions and charges, their share of the offering expenses and the legal fees, if any, of the Selling Shareholders, the Company will bear the balance of all expenses in connection with registering the securities offered hereby. Such expenses are estimated to total approximately $16,000. See "Plan of Distribution." (3) The offering of Common Stock by the Company is adjusted to reduce the number of shares sold by the Company and correspondingly increase the number of shares offered by Selling Shareholders by the number of shares issued to Warrant holders who acquired such Warrants as a part of the original private placement of such Warrants. The exercise of such Warrants by the original holders would be considered a part of the private placement and not registered hereby. In such case, the resale of the Common Stock by these holders is being registered for sale by Selling Shareholders hereby. This Prospectus also relates to such additional securities as may be issued to the Selling Shareholders because of future stock dividends, stock distributions, stock splits or similar capital readjustments. The date of this Prospectus is March ____, 2000. 2 AVAILABLE INFORMATION The Company is subject to certain informational requirements of the Securities Exchange Act of 1934 (the "1934 Act") and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports and other information can be inspected and copies at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices at 7 World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Chicago, Illinois 60661. Copies of such material can also be obtained at prescribed rates by writing to the Securities and Exchange Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. This Prospectus, filed as a part of the Registration Statement, does not contain information set forth in or annexed as an exhibit to the Registration Statement, and reference is made to such exhibits to the Registration Statement for the complete text thereof. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement and to the exhibits filed as part thereof, which may be inspected at the office of the Commission without charge. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Company, and the address is http://www.sec.gov. ------------------- INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission are incorporated in this Prospectus by reference: (A) Annual Report filed on Form 10-KSB for the fiscal year ended December 31, 1998 (File No. 0-20307), (B) Forms 10-QSB filed on May 17, 1999, July 26, 1999, and November 12, 1999, (C) Proxy Statement for Annual Meeting of Stockholders held on May 26, 1999. This prospectus is accompanied by a copy of the Company's last Form 10-KSB. The Company undertakes to provide without charge to each person to whom a Prospectus is delivered, upon written or oral request of such person, a copy of any and all of the information which have been or may be incorporated in this Prospectus by reference but not delivered herewith, except for certain exhibits to such documents. Requests for such information should be directed to Treasurer, Avalon Correctional Services, Inc. 13401 Railway Drive, Oklahoma City, Oklahoma 73114, telephone number (405) 752-8802. 3 PROSPECTUS SUMMARY The following is a summary of certain information contained in this Prospectus and is qualified in its entirety by the detailed information and Consolidated Financial Statements (including the Notes thereto) appearing elsewhere in this Prospectus or incorporated by reference. Each prospective investor is urged to read this Prospectus in its entirety. The Company Avalon Correctional Services, Inc. ("Avalon" or the "Company") is an owner and operator of private community correctional services. Avalon specializes in privatized community correctional facilities and intensive correctional programming. Avalon is currently operating in Oklahoma, Texas and Colorado with plans to significantly expand into additional states. Avalon's business strategy is designed to escalate Avalon into a dominate provider of community correctional services by expanding its operations through state contracts and selective acquisitions. Avalon owns a 250-bed minimum security facility in Oklahoma City, Oklahoma, a 252-bed minimum security facility in Tulsa, Oklahoma, a 150-bed adult residential community corrections facility in Tulsa, Oklahoma; a 150-bed medium security facility in El Paso, Texas; a 300-bed medium security facility in El Paso, Texas; a 160-bed medium security juvenile facility in Union City, Oklahoma; a 135-bed halfway house located in Henderson, Colorado; and a 300-bed multi-use facility in Greeley, Colorado. Avalon also operates a 35-bed halfway house located in Denver, Colorado, and a day reporting center in Northglenn, Colorado. The Colorado community corrections programs also provide non-residential services to approximately 450 offenders in the State of Colorado.
The Offering Securities Offered by Company........................ Up to 2,454,833 shares of Common Stock upon the exercise of all outstanding Warrants and the conversion of all Debentures. Securities Offered by Selling Securities Holders............. 166,500 Class C Warrants, plus any shares of Common Stock issued pursuant to the exercise of Class C, Class D and Class E Warrants by any persons who acquired the Warrants in the original private placement of such Warrants or by the placement agent upon its exercise of its placement agent warrant. The Class A and B Warrants previously registered have expired. $2,415,000 Convertible Debentures, plus 1,283,333 Shares of Common stock issuable upon conversion of the Convertible Debentures. 50,000 shares of common stock. Terms of Debentures............. Each Convertible Debenture entitles the holder immediately to convert to Common Stock at a price of $3.00 per share, subject to certain adjustments. The Debentures bear interest at a rate of 7.5% per annum, with a maturity date ten years from the date of issuance. The Debentures are redeemable after May 1, 2000, upon meeting certain requirements. Terms of Warrants............... Each Class C Warrant will entitle the holder to purchase one share of Common Stock at a price of $3.19 per share, subject to certain adjustments. The Warrants are exercisable at any time until their expiration on March 31, 2000. The Warrants are subject to redemption by the Company at a price of $0.01 per Warrant upon the satisfaction of certain conditions. See "DESCRIPTION OF SECURITIES - Warrants." Each Class D Warrant will entitle the holder to purchase one share of Common Stock at a price of $4.20 per share, subject to certain adjustments. The Warrants are exercisable at any time until their
4 expiration in August, 2001. The Warrants are subject to redemption by the Company at a price of $0.01 per Warrant upon the satisfaction of certain conditions. See "DESCRIPTION OF SECURITIES - Warrants." Each Class E Warrant will entitle the holder to purchase one share of Common Stock at a price of $3.00 per share, subject to certain adjustments. The Warrants are exercisable at any time until their expiration September 12, 2002. The Warrants are subject to redemption by the Company at a price of $0.01 per Warrant upon the satisfaction of certain conditions. See "DESCRIPTION OF SECURITIES - Warrants." Common Stock Outstanding prior to this Offering......... 4,715,630 shares of Common Stock. Common Stock Outstanding after this Offering............ 7,170,463 shares of Common Stock if all outstanding Warrants are exercised and all outstanding Debentures are converted. Use of Proceeds................. The proceeds of this offering may be used by the Company to fund new projects, expand existing operations, retire existing indebtedness, for working capital and general corporate purposes. See "USE OF PROCEEDS." Risk Factors.................... An investment in the Company involves certain risks, including operational risks associated with the various businesses owned by the Company, dependence on key individuals, competition, the risk of illiquidity and other risks as more fully set forth under "RISK FACTORS." NASDAQ Symbol................... "CITY" on the NASDAQ Small Cap Market System.
5 Summary Financial Data (dollars in thousands except for per share amounts)
Year Ended Nine Months Ended December 31, Sept. 30, 1999 ------------------- -------------- 1997 1998 -------- -------- Statement of Operations Data: Revenues From Continuing Operations............... $ 5,878 $ 7,686 $11,613 Income (Loss) From Continuing Operations.......... (1,853) (376) 18 Extraordinary Loss from Early Retirement of Debt.. -- -- (35) Income (Loss) From Continuing Operations Per Common Share................................ (0.63) (0.11) 0.00 Cumulative Effect of Change in Accounting Principles...................................... -- (74) -- Cumulative Effect of Change in Accounting Principles per Common Share..................... -- (0.02) -- Income (Loss) From Discontinued Operations........ (728) -- -- Income (Loss) From Discontinued Operations Per Common Share................................ (0.25) -- -- Net Income (Loss)................................. (2,581) (450) (17) Net Income (Loss) per Common Share................ (0.88) (.13) (0.00) December 31, Sept. 30, 1999 ------------------- -------------- 1997 1998 -------- -------- Balance Sheet Data: Total Assets...................................... $13,395 $28,765 $38,140 Long-Term Debt, less Current Maturities......................... 5,129 14,348 25,723 Convertible Debentures............................ 4,150 3,850 3,850 Redeemable Class A Common Stock................... -- 4,124 4,124 Stockholder's Equity.............................. 2,237 2,216 2,207
6 RISK FACTORS An investment in the Company is speculative and involves a high degree of risk. Prior to making an investment, prospective investors should carefully consider the following risk factors inherent in and affecting the business of the Company and this offering. Limited Customer Base; No Commitment for Minimum Number of Inmate Referrals; Uncertainty of Future Contracts. Approximately 25% of the Company's revenue is derived from contracts with the Oklahoma Department of Corrections ("ODOC") relating to the Company's private correctional facilities in Oklahoma City ("Carver Center") Tulsa ("Avalon Correctional Center"), and Turley ("Turley Correctional Center"). Approximately 23% of the Company's revenue is derived from contracts with the Colorado Department of Corrections. Approximately 19% of the Company's revenue is derived from a contract with the Oklahoma Office of Juvenile Affairs relating to the Union City Juvenile Center. Approximately 18% of the Company's revenue is derived from contracts with West Texas Community Supervision and Corrections Department and Texas Department of Criminal Justice, Parole Division, relating to the Company's correctional facilities in El Paso, Texas ("El Paso Intermediate Sanction Facility"). Additionally, the Company's operations in the State of Colorado are dependent upon contracts with the Colorado Department of Corrections, and other county government entities. The Company's contracts typically do not specify a commitment to send a minimum number of inmates to the Company's private correctional facilities. There is no guarantee that government funds will continue to be available for the housing of inmates in halfway houses or that the various states will not find an alternate means of alleviating prison overcrowding without the use of outside contractors such as the Company. The Company's private correctional operations are dependent upon the continuation of its existing contractual relationships with the various states, as to which no guarantees can be given. The Company's contracts have been from one year renewable contracts to fifteen year contracts. Further, there is no guarantee that the various states will contract for any particular number of beds during the term of any contract. The Company would have no recourse in the event that funding for the types of services rendered to inmates be decreased or even discontinued by the various states, which would result in termination of the Company's existing contracts. Significant Government Regulation: Oversight, Audits and Investigations. The Company's business is highly regulated by a variety of governmental authorities such as the ODOC, the Oklahoma Department of Mental Health and Substance Abuse Services, West Texas Community Supervision and Corrections Department, Texas Department of Criminal Justice, Parole Department, Colorado Department of Corrections, local community corrections boards within the State of Colorado, and various municipal zoning authorities, with oversight occurring continuously. Failure by the Company to comply with contract terms or applicable regulations could expose it to substantial penalties, such as a reduction in population, resulting in substantial reduction in revenue. Continued noncompliance can result in contract cancellation. In addition, changes in existing regulations could require the Company to modify substantially the manner in which it conducts business and, therefore, could have a material adverse effect on the Company. Additionally, the Company's contracts give the contracting agency the right to conduct audits of the facilities and operations managed by the Company for the agency, and such audits occur routinely. An audit involves a governmental agency's review of the Company's compliance with the prescribed policies and procedures established with respect to the facility. Further, the Company may be subject to investigations as a result of an audit, an inmate's complaint or other causes. Lack of Acceptance of Privatized Correctional and Detention Facilities. Management of correctional and detention facilities by private entities has not achieved complete acceptance by either governments or the public. Some sectors of the Federal government and some state governments are legally unable to delegate their traditional management responsibilities for correctional and detention facilities to private companies. The operation of correctional and detention facilities by private entities is a relatively new concept and is not widely understood by the public and has encountered resistance from certain groups, such as labor unions, local sheriffs departments, and groups that believe that correctional and detention facility operations should only be conducted by governmental agencies. Moreover, changes in dominant political parties in any of the markets in which the Company operates could result in significant changes to previously established views of privatization in such market. Requirements of Accreditation; Inspection and Risk of Loss of Accreditation. In order to maintain its existing contracts with agencies of the State of Oklahoma, the Company must remain accredited by the American Correctional Association (the "ACA"), a not-for-profit organization which has developed uniformity and industry standards for inmate care and operations of correctional facilities and agencies. Accreditation involves a very extensive audit and 7 compliance procedure, and is generally granted for a three-year period. Carver Center has been accredited since 1990 and the current accreditation expires in 2002. Avalon Correctional Center was initially accredited in 1996 and is accredited through 2002. Turley Correctional Facility will renew its ACA accreditation in the fall of 2000. Management is not aware of any facts or circumstances which might impair or jeopardize accreditation or re- accreditation. In addition to the ACA accreditation, the Company must undergo periodic inspections of its premises by agencies of the various states, as well as annual inspections by the City and State Fire Marshal's Office. Working Capital Requirements; Need for Additional Financing. The Company may require additional capital to finance its operations and continued growth. There can be no assurance that the Company will be able to obtain such working capital or financing if and when needed, or that if obtained, it will be sufficient or on terms and conditions acceptable to the Company. Under the terms of a certain debt agreement, the Company is limited to a leverage of 75% of total cost of any acquisition. Potential Legal Liability. The Company's management of correctional facilities exposes it to potential third-party claims or litigation by prisoners, or other persons for personal injury or other damage resulting from contact with Company-managed facilities, programs, personnel or prisoners, including damages arising from a prisoner's escape or from a disturbance or riot at a Company-managed facility. The Company participates in an insurance program that provides coverage for certain liability risks faced by the Company, including accident and personal injury and bodily injury 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 all potential third-party claims. Adverse Publicity. The Company's business is subject to public scrutiny . Any disturbances at a Company-managed facility or another privately-managed facility may result in publicity adverse to the Company and the industry in which it operates, which could materially adversely affect the Company's business. Non-Arm's Length Transactions. The Company and its subsidiaries have engaged in transactions with its Chief Executive Officer and principal stockholder which may be considered as not having occurred at arm's length. While, the terms of such transactions may not have been on an arms-length basis, the Company believes that such terms are at least as favorable as with unrelated third parties. No guarantee can be given, however, that the Company will not engage in any non-arm's length transactions with its officers and directors in the future. Dependence on Key Personnel; Key Man Insurance. The Company is heavily dependent upon its officers and directors for its continued operation, and in particular on its Chief Executive Officer, Donald E. Smith. The loss of Mr. Smith's services could have a serious impact on the operation of the Company's business. The Company currently pays the premiums on policies of life insurance pertaining to Mr. Smith. The Company is the beneficiary of $4,000,000 of key man life insurance on Donald E. Smith. Employment Contracts. The Company has entered into a written employment agreement with two of its executive officers, its Chief Executive Officer, Donald E. Smith, and its President, Jerry Sunderland. Both contracts are for a three-year term and commenced in August, 1997, providing for first-year salaries of $60,000 and $85,000 (subject to certain conditions), respectively, and subsequent-year salaries to be determined by the Board of Directors of the Company. Effective August 9, 1998, the salary of Jerry Sunderland was increased to $135,000. In September of 1998, the Board of Directors authorized the amendment of the employment agreement of Donald E. Smith to allow for an annual base salary of $85,000. However, Donald E. Smith has not taken this increase pursuant to a previous commitment regarding the sale of certain assets related to discontinued operations. The Company has committed to initiate a retirement plan in which Donald E. Smith will participate. The employment agreements also contain provision for severance pay and disability payments, as well as a non- compete agreement preventing them from engaging in a business deemed similar to that of the Company for a period of one year from the cessation of their employment. The Company's other officers and directors are employed by the Company pursuant to verbal agreements. Competition. A number of other corporations operate private correctional facilities in the same geographic region as the Company, and still others compete directly with the Company for contracts with state agencies. While the Company believes that it has certain advantages in competing for state contracts, some of the companies eligible to compete may have longer operating histories and greater financial resources available to them. Since the award of state contracts is pursuant to competitive bidding, it is possible that the greater financial resources of the companies eligible to compete might enable them to underbid the Company for such contracts. 8 Continued Control by Donald Smith and RSTW Partners III LP. The Company's Chief Executive Officer, Donald E. Smith, owns 1,054,000 shares of Common Stock which is approximately 22% of all Common Stock presently outstanding. An additional 750,000 warrants may be issued to Mr. Smith in consideration of his guarantee of Company obligations which would further increase his voting percentage, if the warrants are issued and exercised. See "DESCRIPTION OF SECURITIES - Warrants." On September 16, 1998, the Company completed a private placement of equity and debt with RSTW Partners III LP. As a result of this private placement, RSTW received 1,622,448 shares of Common Stock, which is approximately 34% of all Common Stock presently outstanding. Each of the parties owns substantial interest in the Company and the combined interests represent a majority of the stock outstanding. Corporate Action Possible Without Stockholder Vote. Pursuant to Nevada corporate statutes, the holders of a majority of the Company's Common Stock may authorize or take corporate action without notice to or the consent of the stockholders. The Company's minority stockholders may not have the opportunity to approve or consent to the Company's involvement in an acquisition or other transaction, or to the terms of such transaction. A shareholder vote may not be made available, and in any event, such a shareholder vote would be controlled by the majority stockholder. No Dividends. The Company has never paid cash dividends on its Common Stock and has no plans to pay cash dividends in the foreseeable future. The policy of the Company's Board of Directors is to retain all available earnings for use in the operation and expansion of the Company's business. Therefore, this investment is not appropriate for investors seeking income. See "DIVIDEND POLICY." Non-Registration in Certain Jurisdictions of Shares Underlying the Warrants. The Warrants registered in this Offering are not exercisable unless, at the time of exercise, the Company has a current prospectus covering the shares of Common Stock issuable upon exercise of the Warrants and such shares have been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the exercising holder of the Warrants. Although the Company will use its best efforts to have all the shares of Common Stock issuable upon the exercise of the Warrants registered or qualified on or before the exercise date and to maintain a current prospectus relating thereto until the expiration of the Warrants, there is no assurance that it will be able to do so. In this event, the Company would be unable to issue shares to those persons desiring to exercise their Warrants unless and until the shares and Warrants could be qualified for sale in jurisdictions in which such purchasers reside, or an exemption from such qualification exists in such jurisdictions, and Warrant holders would have no choice but to attempt to sell the Warrants in a jurisdiction where such sale is permissible or allow them to expire unexercised. See "DESCRIPTION OF SECURITIES - Warrants." Shares Eligible for Future Sale. A substantial portion (2,725,638 shares) of the Company's currently issued and outstanding shares of common stock are "restricted" securities. Restricted securities may be sold only upon compliance with Rule 144 adopted under the Securities Act of 1933 as amended, or pursuant to a registration statement filed under the Act. Generally speaking, Rule 144 provides that a person must hold restricted securities for a period of one year, and may then sell those securities in unsolicited brokerage transactions or in transactions with a market maker. The holder may sell an amount equal to one percent of the Company's outstanding common stock every three months or the average weekly reported volume of trading during the four calendar weeks preceding the filing of a Notice of Proposed Sale, whichever is greater. To comply with Rule 144, an issuer must make available adequate current public information with respect to the issuer. Under certain circumstances, the sale of shares by a person who has satisfied a three year holding period is permitted without any quantity limitation and whether or not there is adequate public information available. Any such sales will likely have a depressive effect on the market price of the Company's Common Stock. Redemption of Warrants. Class C and Class D Warrants are subject to redemption at $0.01 per Warrant on 30 days written notice if a registration statement covering said Warrants is in effect and if the bid price of the Common Stock, for a period of 30 consecutive trading days prior to the notice of redemption, equals or exceeds $5.00 per share for Class C Warrants and $6.00 per share for Class D Warrants. A Registration Statement of the Company covering the Warrants and the shares of Common Stock issuable upon the exercise of the Warrants is current at all times during the 30-day notice period and for the 30 days immediately preceding the notice period. In the event the Company exercises the right to redeem the Warrants, such Warrants would be exercisable until the close of business on the date fixed for redemption in such notice. If any Warrant called for redemption is not exercised by such date, it will cease to be exercisable and the holder will be entitled only to the redemption price. See "DESCRIPTION OF SECURITIES - Warrants." 9 Effect of Warrants. The holders of the Company's outstanding Warrants have the opportunity to profit from a rise in the market value of the Common Stock of the Company, if any, at the expense of the holders of Common Stock. A Warrant holder may be expected to exercise Warrants at a time when the Company, in all likelihood, would be able to obtain equity capital, if it so desired, by a public sale of new Common Stock on terms more favorable than those provided in the Warrants. Exercise of the Warrants could dilute the equity interest of other stockholders in the Company. See "DESCRIPTION OF SECURITIES - Warrants." Illiquidity. Although the Company's Common Stock is publicly traded, the trading is very thin and may not be an indication of the value of the Common Stock. There is presently no established trading market for the Warrants. While there are several securities broker-dealers making a market in the Company's Common Stock, there is no assurance that a public market for the Company's securities will continue to be made. Limitation of Liability of Officers and Directors; Indemnification. The Company's Articles of Incorporation empower the Company to indemnify the officers and directors against judgments, fines, and other amounts and costs resulting from actions or proceedings in which they may be involved by reason of their having held such positions, to the fullest extent permitted pursuant to the laws of the State of Nevada. The Articles of Incorporation also limit the personal liability of the Company's directors to the fullest extent permitted by the Nevada Revised Statutes. The Nevada Revised Statutes contain provisions entitling directors and officers to indemnification from judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, as a result of an action or proceeding in which they may be involved by reason of being or having been a director or officer of the Company; provided said officers or directors acted in good faith. The Company's By-Laws state that such indemnification may not be provided in relation to matters as to which the person seeking indemnification is adjudged to be liable for negligence or misconduct in the performance of duty. The Company's policy, therefore, is that no indemnification will be provided for bad faith actions and/or breaches of management's fiduciary duties, including in connection with shareholder derivative suits. THE COMPANY Avalon Correctional Services, Inc., is a Nevada Corporation owning and operating private correctional facilities. Avalon Correctional Services, Inc. and its wholly owned subsidiaries ("Avalon" or the "Company") specialize in operating private community correctional facilities and providing intensive correctional programming. Avalon currently operates facilities and manages programs in Oklahoma, Texas and Colorado with plans to significantly expand into additional states. Avalon's business strategy is designed to escalate Avalon into a dominant role as a provider of community correctional services. Avalon's development plan is to expand operations through new state and Federal contracts and selective acquisitions to capitalize on the current rapid growth trends in the private corrections industry. The private correctional services industry has experienced significant growth in recent years. During 1995 there were 3.8 million individuals on probation or parole. This population is expected to increase to over 7 million by the year 2005. This growth rate exceeds the general population growth because of increasing crime rates, higher conviction rates and longer prison sentences. Avalon contracts with various government agencies to provide community corrections services. Studies have documented a 10 to 30 percent savings to government agencies as a result of utilizing private corrections providers to build and operate correctional facilities. Avalon management believes its background and abilities to build and operate community correctional facilities and provide correctional programing position the Company for substantial future growth in the corrections industry. Avalon owns a 250-bed minimum security facility in Oklahoma City, Oklahoma, a 252-bed minimum security facility in Tulsa, Oklahoma, a 150-bed adult residential community corrections facility in Tulsa, Oklahoma; a 150-bed medium security facility in El Paso, Texas; a 300-bed medium security facility in El Paso, Texas; a 160-bed medium security juvenile facility in Union City, Oklahoma; a 135-bed halfway house located in Henderson, Colorado; and a 300-bed multi-use facility in Greeley, Colorado. Avalon also operates a 35-bed halfway house located in Denver, Colorado, and a day reporting center in Northglenn, Colorado. The Colorado community corrections programs also provide non- residential services to approximately 450 offenders in the State of Colorado. Intensive programming is an essential part of community based corrections. Avalon has provided substance abuse programs in facilities for over 14 years. Avalon's management has been engaged in the business of providing private correctional services since 1985. 10 The Company's executive office is located at 13401 Railway Drive, Oklahoma City, Oklahoma 73114. The Company's telephone number is (405) 752-8802 and the fax number is (405) 752-8852. USE OF PROCEEDS If all of the Debentures are converted, the Company will not realize any additional proceeds but will have an adjustment on its balance sheet through a reduction in liabilities and an increase in stockholder's equity. Assuming all Warrants are exercised, the Company would receive proceeds of approximately $3,573,000.00 before paying approximately $16,000 in legal fees, accounting fees, printing and selling expenses and other offering costs. Receipt of proceeds by the Company is contingent on the exercise of the Warrants which in turn is contingent on the market price of the Company's Common Stock. Therefore, it is impossible at this time to determine specific project's expenditures or use of funds. The net proceeds would be used by the Company for working capital and general corporate purposes. The Company will not receive any of the proceeds from the sale of shares of Common Stock, Warrants, or Debentures by the Selling Shareholders. DIVIDEND POLICY The Company has paid no dividends as of the date of this Prospectus nor does it intend to pay dividends on its Common Stock in the foreseeable future. See "DESCRIPTION OF SECURITIES." The Company currently intends to retain future earnings to fund development and growth of its business. In the future, any payment of dividends on Common Stock will be dependent upon the financial condition, capital requirements and earnings of the Company and any other factors the Board of Directors may deem relevant. Therefore, this investment is not appropriate for investors seeking income. PRICE RANGE OF COMMON STOCK The Company's Common Stock is listed for trading on the NASDAQ SmallCap Market System under the trading symbol "CITY". The following table reflects the range of high and low bid prices, as reported by the NASDAQ, for each quarterly periods. The prices represent inter-dealer prices, without mark-up, mark-down or commission and may not represent actual transactions. Quarterly Period Ended High Low ----------------------------------------------------- March 31, 1998 4 3/4 2 3/4 June 30, 1998 4 11/16 3 1/4 September 30, 1998 4 1/4 3 7/8 December 31, 1998 4 3 7/8 March 31, 1999 4 7/8 3 5/8 June 30, 1999 4 3/4 3 7/8 September 30, 1999 2 7/8 2 1/32 December 31, 1999 2 1/2 1 1/4 The average of the bid and asked prices for the Common Stock, as reported on the NASDAQ SmallCap Market System was $1.76 per share on March 21, 2000. The Company had approximately 780 record holders of its common stock as of March 8, 2000. CAPITALIZATION The following table sets forth the historical capitalization of the Company as of December 31, 1998 and September 30, 1999, as derived from the Consolidated Financial Statements of the Company. The information shown below should be read in conjunction with "MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION" and the Consolidated Financial Statements and Notes and other financial information included elsewhere herein. 11
December 31, 1998 Sept.30,1999 ----------------- ------------ (In thousands) Current Maturities of Long-Term Debt............................................. $ 2,201 $ 493 ======= ======= Long-Term Debt, less Current Maturities........................ $14,348 $25,723 ======= ======= Convertible Debentures......................................... $ 3,850 $ 3,850 ======= ======= Redeemable Class A Common Stock, $.001 par value 1,622,448 issued and outstanding in 1998 and 1999........... $ 4,124 $ 4,124 ======= ======= Stockholders' Equity Common Stock, 24,000,000 shares authorized:................... Class A, par value $.001, 4,664,598 and 4,670,630 shares issued and outstanding on December 31, 1998, and September 30, 1999, respectively, less 1,622,448 shares subject to repurchase............................................... 3 3 Paid-In Capital............................................... 6,618 6,626 Accumulated Deficit........................................... (4,405) (4,422) ------- ------- Total Stockholders' Equity.................................. $ 2,216 $ 2,207 ======= =======
SELECTED FINANCIAL DATA The following selected financial data for the years ended December 31, 1997 and 1998 and the interim period ended September 30, 1999, are derived from the audited Consolidated Financial Statements of the Company. The data should be read in conjunction with the Consolidated Financial Statements, related notes, and other financial information included herein. 12
Year Ended Nine Months Ended December 31, Sept. 30, 1999 -------------------------- -------------- 1997 1998 ---------- ---------- Statement of Operations Data: Revenues From Continuing Operations............... $ 5,878 $ 7,686 $11,613 Income (Loss) From Continuing Operations.......... (1,853) (376) 18 Extraordinary Loss from Early Retirement of Debt.. -- -- (35) Income (Loss) From Continuing Operations Per Common Share................................. (0.63) (0.11) 0.00 Cumulative Effect of Change in Accounting Principles....................................... -- (74) -- Cumulative Effect of Change in Accounting Principles per Common Share...................... -- (0.02) -- Income (Loss) From Discontinued Operations........ (728) -- -- Income (Loss) From Discontinued Operations Per Common Share................................. (0.25) -- -- Net Income (Loss)................................. (2,581) (450) (17) Net Income (Loss) per Common Share................ (0.88) (.13) (0.00) December 31, Sept. 30,1999 ------------------ ---------------- 1997 1998 -------- -------- Balance Sheet Data: Total Assets...................................... $ 13,395 $ 28,765 $38,140 Long-Term Debt, less Current Maturities.......................... 5,129 14,348 25,723 Convertible Debentures............................ 4,150 3,850 3,850 Redeemable Class A Common Stock................... -- 4,124 4,124 Stockholder's Equity.............................. 2,237 2,216 2,207
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Liquidity and Capital Resources - The Company's business strategy is to focus on the private corrections industry, expanding its operations into additional states through new Federal and state contracts and selective acquisitions. The successful implementation of the Company's growth plan has created the need for additional capital and financing. The Company has been successful in securing $37 million of new capital and credit facilities since September 1997. Working capital at September 30, 1999 was $2,413,000 representing a current ratio of 2.08:1, compared to working capital of $8,643,000 and a current ratio of 3.04:1 at December 31, 1998. The decrease in working capital from December 31, 1998 is primarily due to construction costs of the Union City Juvenile Center and the El Paso Multi Purpose Facility. The Union City Juvenile Center was completed and became operational in the first quarter of 1999, and the El Paso Multi Purpose Facility was completed and became operational in the second quarter of 1999. The Company had approximately $675,000 cash and approximately $2 million of available credit on its revolving line of credit for new projects at September 30, 1999. The Company believes it has adequate cash reserves and cash flow from operations to meet its current cash requirements. The Company expects current contracts to generate sufficient income to increase cash reserves, while minimizing income taxes through the utilization of tax loss carryforwards. The Company secured an $18 million senior credit facility with Fleet Capital Corporation in February 1999. In December of 1999, the credit facility with Fleet Capital Corporation was amended to provide for a credit 13 facility consisting of a $13.5 million term loan and a revolving line of credit equal to the lesser of $3 million or 80% of eligible accounts receivable. Results of Operations - Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997- Total revenues from continuing operations increased by 31% to $7.7 million in 1998 from $5.9 million in 1997. The increase was a result of the a full years operation at the Turley Correctional Facility in Tulsa, Oklahoma acquired in October 1997, a new community transition program contract awarded in June 1998 at the Ozark Correctional Facility in Fordland, Missouri, and increased revenues from the Company's El Paso operations. The Company's net loss from continuing operations was $376,000 in 1998 compared to $1,853,000 in 1997. The 1997 loss included a non cash charge of $1,819,000 resulting from a discount on the convertible debentures issued in September 1997. Excluding the effect of the $1,819,000 discount on convertible debentures in 1997, the loss from continuing operations was $34,000. The Company incurred a net loss in 1998 of $450,000 or $.13 per share, as compared to a net loss in 1997 of $2,581,000 or $.88 per share. The majority (98.7%) of the loss in 1997 resulted from the accounting treatment of a discount from issuance of convertible debentures of $1,819,000, a non cash expense, and a loss of $728,000 from discontinued operations. The discount on the convertible debentures was the result of the market value of the Company's common stock exceeding the conversion price of the debentures at the date the debentures were issued. The debenture discount was accounted for by a charge to expense and credit to paid in capital, resulting in no change of liabilities, cash or net equity. Corrections. Operating income, before interest, depreciation, and income taxes, increased approximately 23% in 1998 to $1,449,000 compared to $1,175,000 for 1997. The average daily inmate census increased to 496 in 1998 from 425 in 1997, an increase of 17%. The census increase was a result of a full year of operation at the Turley Correctional Facility in Tulsa, Oklahoma, acquired in October 1997. Direct operating expenses increased by 27% in 1998 over 1997, primarily as a result of the full operations in 1997 of the Turley Correctional Facility and the contract award for a community transition program at Fordland, Missouri. Discontinued Operations. The Company made the decision to discontinue all non correctional operations in the fourth quarter of 1996. The Company's strategy is to focus on opportunities in the corrections industry. Revenues from discontinued operations were $0 and $50,000, in 1998 and 1997 respectively. The losses on the disposal of assets related to discontinued operations were $0 and $728,000, in 1998 and 1997, respectively. Corporate. General and administrative expenses increased in 1998 by 16% to $1,091,000 from $943,000. The majority of this increase was related to increased staffing. The increase in interest expense of $475,000 in 1998 resulted from a full year interest on the convertible debentures issued in September 1997, and interest on the $10,000,000 subordinated note placed in September 1998. The Company is aware of the risk of computer error in the year 2000. Such error could cause computers to recognize the year 2000 as 1900 and cause the computer to fail in calculation or function. As a result, the Company has reviewed its computer operations and have identified all computers and systems that are not year 2000 compliant (y2k). The Company's primary exposure to y2k problems is in its financial reporting area. The Company has purchased and ordered computer equipment and software to become fully y2k compliant. The cost of this equipment, including testing and implementation to become y2k compliant is expected to be approximately $15,000. The Company will test and implement the new equipment and software before July 1, 1999. Three Months Ended September 30, 1999 Compared to the Three Months Ended September 30, 1998- Total revenues increased by 178% to $5.30 million for the three months ended September 30, 1999 from $1.91 million for the three months ended September 30, 1998. The increase was a result of the opening of the Union City 14 Juvenile Center in February 1999, the acquisition of Adams Community Corrections Program in Adams County, Colorado in April 1999, the acquisition of the Villa at Greeley in June 1999, and the opening of the El Paso Multi-Use Facility in June 1999. Revenues in the third quarter of 1999 were enhanced by the Union City Juvenile Center providing $934,000 of revenues, the El Paso Multi-Use Facility providing $409,000 of revenues, Adams Community Corrections Program providing $777,000 of revenues, and the Villa at Greeley providing $1,345,000 of revenues. Operating income, before interest, depreciation, and income taxes, increased 266% for the three months ended September 30, 1999 to $1,246,000 compared to $340,000 for the three months ended September 30, 1998. The increase in operating income was a result of the Company's continuing expansion efforts. Direct operating expenses increased by 188% for the three months ended September 30, 1999 over the three months ended September 30, 1998, primarily as a result of the new Union City Juvenile Center and the acquisitions of the Villa at Greeley and Adams Community Corrections Program. Corporate. General and administrative expenses increased by 20% to $309,000 for the three months ended September 30, 1999 from $258,000 for the three months ended September 30, 1998. General and administrative expenses increased primarily due to increased staffing for new facilities, contracts, and acquisitions. The increase in interest expense of $505,000 for the three months ended September 30, 1999 over the third quarter of 1998 resulted from interest on debt utilized to complete acquisitions and new facilities. Depreciation and amortization expense have increased commensurate with the growth of the correctional operations. Nine months ended September 30, 1999 compared to the nine months ended September 30, 1998 - Net loss for the nine months ended September 30, 1999 was $17,000 or $.00 per share as compared to a loss of $240,000 or $.05 per share in 1998. The loss in 1999 was primarily due to the startup costs incurred at the Union City Juvenile Center and the El Paso multi-purpose facility. The Union City Juvenile Center became operational in the first quarter of 1999 and the El Paso Multi- purpose Facility became operational in the second quarter of 1999. Startup costs relating to these facilities incurred before they became operational were $255,000 in the nine month period ended September 30, 1999. Income from continuing operations, before interest, depreciation and income taxes, was $2,553,000 in 1999 as compared to $1,020,000 in 1998. Revenues increased by 108% in 1999 or by $6,035,000 compared to 1998. Revenue was $11,613,000 in 1999 compared to $5,578,000 in 1998. The increases in income from operations and revenue are a result of the operations at the new Union City Juvenile Center and the acquisitions of the Villa at Greeley and Adams Community Corrections Program. General and administrative expenses increased by $186,000 or 24% in 1999. This increase was due to staffing and development costs associated with the Company's growth plan. Interest expense increased approximately $1,068,000 due to the interest on debt utilized to complete acquisitions and new facilities. Depreciation and amortization expense have increased commensurate with the growth of the correctional operations. SELLING SECURITY HOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Debentures and Warrant holders as of March 8, 2000 by the securities holders of the Company who are offering securities pursuant to this Prospectus (the "Selling Stockholders"). "Beneficial Ownership" includes shares for which an individual, directly or indirectly, has or shares voting or investment power or both. The listing by each of the Selling Stockholders does not include shares of Common Stock issuable upon exercise of the Warrants. None of the Selling Stockholders are officers, directors or had a material relationship with the Company, except Donald E. Smith, the Chief Executive Officer of the Company, who is custodian for the Warrants for his children (for which he disclaims any beneficial interest), and Westminster Securities Corporation who acted as a placement agent for the Company in a 1994 private placement and in the private placement of the Debentures. 15
Before the Offering Securities After the Offering -------------------- ----------------------- Title Number Percent to Be Number Percent Name of of Beneficially of Sold In Beneficially Of Beneficial Owner Class Owned Class Offering Owned Class - ---------------- ---------- ------------- ----- -------- ------------ -------- ProTrust Equity Growth Fund, I, L.P. Debenture 2,000,000 51.95 2,000,000 0 -- Paul A. Gould Debenture 200,000 5.19 200,000 0 -- Evan Klein and Sharon Klein Debenture 10,000 * 10,000 0 -- Thalia V. Crooks Debenture 10,000 * 10,000 0 -- William F. Leimkuhler and Leslie B. Riefe Debenture 25,000 * 25,000 0 -- Walter O'Hara Jr. Debenture 25,000 * 25,000 0 -- Ralph & Jean Sorrentino Debenture 50,000 1.30 50,000 0 -- Mark Berg Debenture 50,000 1.30 50,000 0 -- George E. Groehsl Debenture 45,000 1.17 45,000 0 -- John D. Kilmartin, Jr. C Warrant 40,000 5.11 40,000 0 -- Paul & Felicia A. Pappadio C Warrant 10,000 * 10,000 0 -- Donald E. Smith, Custodian C Warrant 10,000 * 10,000 0 -- Commercial Ventures, Inc. C Warrant 1,500 * 1,500 0 -- MLPF&S Custodian for Charles Thomas SEP C Warrant 25,000 3.19 25,000 0 -- Myrna Trickey C Warrant 25,000 3.19 25,000 0 -- Salomon Grey Warrant 55,000 6.56 55,000 0 -- Financial Corporation RECOR, Inc. Common 22,500 * 22,500 0 -- Edwin Bruce Lowman II. Common 22,500 * 22,500 0 -- R.P. Pearce, Jr. Common 5,000 * 5,000 0 --
___________ *Less than 1% of outstanding security DESCRIPTION OF SECURITIES The Company is authorized to issue 24,000,000 shares of common stock par value $0.001 and 1,000,000 shares of preferred stock, par value $0.001, giving the Board of Directors the authority to set the rights and preferences of the preferred stock. On March 8, 2000 there were 4,715,630 shares of Common Stock outstanding. Common Stock The shares of Common Stock are equal in all respects unless otherwise designated. Each issued and outstanding share of Common Stock entitles to holder thereof to one vote on all matters submitted to a vote of the stockholders. The Company's Certificate of Incorporation does not permit cumulative voting of shares in the election of directors or permit preemptive rights to stockholders to acquire additional shares, obligations, warrants or other securities of the Company. The Certificate of Incorporation makes no provision with respect to subscription or conversion rights, redemption privileges or sinking funds with respect to shares of the Company's Common Stock. Subject to the rights of holders of preferred stock (if any), dividends on Common Stock may be paid if, as and when declared by the Board of Directors out of funds legally available therefor. The Company has never paid cash dividends on shares of Common Stock and 16 does not expect to pay such dividends in the foreseeable future. The Company intends to retain all funds available to it after payment of its commitments and obligations for the operation and expansion of its business. Warrants - General Adjustments and Anti-Dilution Provisions. The exercise price and the number of shares of Common Stock purchasable upon the exercise of the Warrants are subject to adjustment upon the occurrence of certain events, including stock dividends, stock splits, combinations or reclassifications of the Common Stock, or sale by the Company of shares of its capital stock. Additionally, an adjustment would be made in the case of a reclassification or exchange of Common Stock, consolidation or merger of the Company with or into another corporation or sale of all or substantially all of the assets of the Company in order to enable Warrant holders to acquire the kind and number of shares of stock or other securities or property receivable in such event by a holder of the number of shares of Common Stock that might otherwise have been purchased upon the exercise of the Warrant. No adjustment to the exercise price of the shares subject to the Warrants will be made for dividends (other than dividends in the form of stock), if any, paid on the Common Stock or for: (i) the issuance of restricted securities in connection with acquisitions by the Company; (ii) the grant of stock options to persons covered by incentive stock option plans provided that no more than 600,000 shares of Common Stock be issued pursuant to such plans from the date of this Prospectus until the expiration or redemption of the Warrants; (iii) warrants to accommodate lines of credit or creditors, provided that no registration or registration rights shall be afforded such warrants or the underlying Common Stock at any time within one year after effectiveness of the registration of the securities issued pursuant to this Offering; and (iv) and up to 750,000 warrants, exercisable for one share of common stock each, at an exercise price of $1.50 to be issued to Donald E. Smith or his designee solely upon Mr. Smith's guarantee of corporate obligations. These anti-dilution provisions shall remain in full force and effect until redemption of all Warrants then outstanding or expiration of the Warrants. These anti-dilution provisions may be terminated by the Company provided: (i) that the bid price of the Company's common stock shall have been $4.00 or more for sixty (60) consecutive trading days; (ii) the Company presents to Westminster Securities Corporation ("Westminster") as the placement agent for the Warrants a bona fide offer, agreement, term sheet, or Underwriting Agreement by a duly licensed broker-dealer proposing to place, on a firm or best efforts basis, securities of the Company; and (iii) effecting the agreement would trigger application of the anti-dilution provisions. If these conditions are met, the Company shall notify Westminster and afford Westminster ten (10) business days in which to match the terms offered to the Company. At the expiration of the ten (10) day period, the Company may terminate the anti-dilution provisions by appropriate corporate action, if Westminster has not matched the offering. The Placement Agent, on behalf of the purchasers in this Offering, shall be empowered to release or waive these adjustment and anti-dilution provisions in whole or in part. Transfer, Exchange and Exercise. The Warrants are in registered form and may be presented to the Transfer and Warrant Agent for transfer, exchange or exercise at any time on or prior to their expiration date, at which time the Warrants become wholly void and of no value. If a market for the Warrants develops, the holder may sell the Warrants instead of exercising them. There can be no assurance, however, that a market for the Warrants will develop or continue. If the Company is unable to qualify the Common Stock underlying the Warrants for sale in particular states, holders of the Warrants residing in such states and desiring to exercise the Warrants will have no choice but to sell such Warrants or allow them to expire. See "DESCRIPTION OF SECURITIES - Transfer and Warrant Agent." Furthermore, if a Warrant is exercised prior to the underlying Common Stock being registered, the Common Stock will be a restricted security and subject to a holding period. See "RISK FACTORS - Shares Eligible for Future Sale." Rights of Warrant Holders. Holders of the Warrants have no voting rights and are not entitled to dividends. In the event of liquidation, dissolution, or winding up of the affairs of the Company, holders of the Warrants will not be entitled to participate in any liquidation distribution. Class A and Class B Warrants Stock purchase warrants were issued in April, 1991 in connection with an initial public offering of Avalon Common Stock. The warrants were issued as part of units of the Company's securities which contained one share of Common Stock, 16 Class A warrants and 16 Class B warrants per Unit offered. This initial public offering was underwritten by Westminster Securities Corporation. The Class A Warrants expired on March 26, 1996. The Class B Warrants expired on March 26, 1999. The Company issued 145,595 shares of Common Stock during 1993 in connection 17 with the exercise of certain underwriter warrants, 99,095 Class A warrants and 44,900 Class B warrants, resulting in gross proceeds to the Company of approximately $825,000. Class C Warrants The Company has issued Class C Warrants to purchase 1,000,000 shares of Common Stock in connection with a private placement in 1994, Class C Warrants to purchase 165,000 shares of Common Stock in settlement of a lawsuit and for professional services and Class C Warrants to purchase 25,000 shares of Common Stock in settlement of an employment dispute with a former employee. The placement agent warrant given to Westminster Securities Corporation in the private placement also includes the right to receive 100,000 Class C Warrants. In 1996, 377,000 Class C Warrants were exercised. In 1997, 33,000 Class C Warrants were exercised. In 1998, 42,500 Class C Warrants were exercised. In 1999, no Class C Warrants were exercised. The following is a brief summary of certain provisions of the Warrants, but such summary does not purport to be complete and is qualified in all respects by reference to the actual text of the Warrant Agreement between the Company and American Securities Transfer, Inc. (the "Transfer and Warrant Agent"). A copy of the Warrant Agreement may be obtained from the Company upon the written request of a Warrant holder. Exercise Price and Terms. Each Warrant entitles the holder thereof to purchase one share of Common Stock at a price of $3.19 per share, subject to adjustment in accordance with the anti-dilution and other provisions referred to above under "Warrants - General." When the Warrants were issued, the exercise price was $3.50 per share, however, in September of 1997, as a consequence of the Company's private placement of convertible debentures and the conversion price thereunder, as described in "Convertible Debentures", the exercise price was reduced by $0.17 per share pursuant to the anti-dilution provisions discussed above. In September of 1998, as a consequence of the Company's private placement of redeemable equity and debt, the exercise price was reduced by $0.14 per share pursuant to the anti-dilution provisions discussed above. The holder of any Warrant may exercise such Warrant by surrendering the certificate representing the Warrant to the Transfer and Warrant Agent, with the election to purchase form on the reverse side of such certificate properly completed and executed, together with payment of the exercise price. Subject to compliance with applicable state securities laws, the Warrants may be exercised at any time in whole or in part at the applicable exercise price until expiration of the Warrants. The Warrants were to originally expire on December 30, 1999 but were extended by the Board of Directors until March 31, 2000. See "RISK FACTORS - Non-Registration in Certain Jurisdictions of Shares Underlying the Warrants." Redemption of Warrants. The Class C Warrants are subject to redemption at $.01 per Warrant in the event that (i) the bid price of the Company's Common Stock shall have been $5.00 or more for 30 consecutive trading days prior to the date of the notice of redemption; (ii) 30 days advance written notice of redemption shall be given to all Warrant holders of record; and (iii) a Registration Statement of the Company covering the Warrants and the shares of Common Stock issuable upon the exercise of the Warrants must be current at all times during the 30 day notice period, and must have been current for 30 days prior to the notice. In the event the Company exercises the right to redeem the Warrants, such Warrants will be exercisable until the close of business on the date for redemption fixed in such notice. If any Warrant called for redemption is not exercised by such time, it will cease to be exercisable and the holder will be entitled only to the redemption price. See "RISK FACTORS - Redemption of Warrants." Class D Warrants The Company issued Class D Warrants to purchase 275,000 shares of Common Stock in an asset acquisition, with 75,000 Warrants later canceled. The following is a brief summary of certain provisions of the Warrants, but such summary does not purport to be complete and is qualified in all respects by reference to the actual text of the Warrant Agreement between the Company and American Securities Transfer, Inc. (the "Transfer and Warrant Agent"). A copy of the Warrant Agreement may be obtained from the Company upon the written request of a Warrant holder. Exercise Price and Terms. Each Warrant entitles the holder thereof to purchase one share of Common Stock at a price of $5.125 per share, subject to adjustment in accordance with the anti-dilution and other provisions referred to above under "Warrants - General." The holder of any Warrant may exercise such Warrant by surrendering the certificate representing the Warrant to the Transfer and Warrant Agent, with the election to purchase form on the reverse side of such certificate properly completed and executed, together with payment of the exercise price. Subject to compliance with applicable state securities laws, the Warrant may be exercised at any time in whole or in part at the applicable exercise price until expiration of the Warrants on August 2, 2001. See "RISK FACTORS --Non-Registration in Certain Jurisdictions of Shares Underlying the Warrants." In September of 1998, as a consequence of the Company's 18 private placement of redeemable equity and debt, the exercise price was reduced by $0.925 per share, to the current exercise price of $4.20 pursuant to the anti-dilution provisions discussed above. Redemption of Warrants. The Class D Warrants are subject to redemption at $.01 per Warrant in the event that (i) the bid price of the Company's Common Stock shall have been $6.00 or more for 30 consecutive trading days prior to the date of the notice of redemption; (ii)30 days advance written notice of redemption shall be given to all Warrant holders of record; and (iii) a Registration Statement of the Company covering the Warrants and the shares of Common Stock issuable upon the exercise of the Warrants must be current at all times during the 30 day notice period, and must have been current for 30 days prior to the notice. In the even the Company exercises the right to redeem the Warrants, such Warrants will be exercisable until the close of business on the date for redemption fixed in such notice. If any Warrant called for redemption is not exercised by such time, it will cease to be exercisable and the holder will be entitled only to the redemption price. See "RISK FACTORS - Redemption of Warrants." Class E Warrants The Company has issued Class E Warrants to purchase 79,000 shares of Common Stock in connection with a private placement dated September 12, 1997. The placement agent warrant given to underwriters also includes the right to receive 79,000 Class E Warrants. The following is a brief summary of certain provisions of the Warrants, but such summary does not purport to be complete and is qualified in all respects by reference to the actual text of the Warrant Agreement between the Company and American Securities Transfer, Inc. (the "Transfer and Warrant Agent"). A copy of the Warrant Agreement may be obtained from the Company upon the written request of a Warrant holder. Exercise Price and Terms. Each Warrant entitles the holder thereof to purchase one share of Common Stock at a price of $3.00 per share, subject to adjustment in accordance with the anti-dilution and other provisions referred to above under "Warrants - General." The holder of any Warrant may exercise such Warrant by surrendering the certificate representing the Warrant to the Transfer and Warrant Agent, with the election to purchase form on the reverse side of such certificate properly completed and executed, together with payment of the exercise price. Subject to compliance with applicable state securities laws, the Warrants may be exercised at any time in whole or in part at the applicable exercise price until expiration of the Warrants in 2002. See "RISK FACTORS - Non-Registration in Certain Jurisdictions of Shares Underlying the Warrants." Convertible Debentures On September 12, 1997, the Company completed a private placement of Convertible Debentures. Convertible Debentures in the aggregate principal amount of $4,150,000 were issued in the private placement, of which $300,000 was retired in September, 1998. The Convertible Debentures bear interest at the rate of 7.5% per annum, with interest payments payable semi-annually, August 1, and February 1, commencing February 1, 1998. The Convertible Debentures have a maturity date of ten years from the date of issuance, unless otherwise earlier redeemed or converted. Under the terms of the Debenture Purchase Agreements existing between the Debenture Holders and the Company, all or any portion of the principal amount of the Convertible Debentures, plus all accrued but unpaid interest thereon will be convertible, at the option of the Debenture Holder, unless previously redeemed, at any time prior to maturity, into Common Stock of the Company at a conversion price of $3.00 per share. The conversion price of the Debentures is subject to certain adjustments to prevent dilution in the event of any recapitalization, reclassification, stock dividend, stock split or similar transaction. The Company has reserved 1,283,333 shares of Common stock issuable upon conversion of the Debentures. The Debentures are not redeemable by the Company prior to May 1, 2000. Thereafter, the Debentures are redeemable at any time and from time to time, at the option of the Company, in whole or in part, at redemption prices declining from 106.5% down to 100% at maturity, plus accrued interest, except that the Debentures cannot be redeemed unless the closing price of the Common Stock equals or exceeds 140% of the effective conversion price per share for at least 20 out of 30 consecutive days ending within 20 calendar days before the notice of redemption is mailed. In connection with the private placement, 79,000 underwriter warrants have been issued and 79,000 shares of Common Stock have been so reserved. The Company filed with the Securities and Exchange Commission a registration statement which was declared effective on January 13, 1998 with respect to the resale, from time to time, of the Common Stock issuable upon 19 conversion of the Debentures. The Company agreed to keep such registration statement effective until three years from the latest date of original issuance of the Debentures. The Company has recorded the value of the convertibility feature of the debentures as interest expense, amortizing the discounted amount from the date of issuance through the date the security is first convertible as per the requirements in Staff Position Topic D-60. Preferred Stock The Articles of Incorporation were amended by the stockholders at the annual meeting in June, 1994 to authorize preferred stock. The Board of Directors is authorized to issue shares of preferred stock in series by adoption of a resolution or resolutions for the issue of such series of preferred stock. Each series will have such distinctive designation or title as may be fixed by the Board of Directors prior to the issuance of any shares thereof. Upon issuance, each series will have those voting powers, if any, and those preferences and relative, participating, optional or other special rights, with such qualifications, limitations or restrictions of those preferences and/or rights, as stated in such resolution or resolutions providing for the issue of such series of preferred stock. Transfer and Warrant Agent The Company has appointed American Securities Transfer, Inc., 12039 W. Alameda Parkway, Suite Z-2, Lakewood, CO 80228, as its registrar and transfer agent, and the warrant agent for the warrants issued by the Company. PLAN OF DISTRIBUTION The $2,415,000 Convertible Debentures, and the 1,283,333 shares of Common Stock being offered hereby for the benefit of the Selling Stockholders were originally issued by the Company in a private placement of convertible debentures comprised of Debentures convertible into Common Stock and Underwriter Warrants to "accredited investors" pursuant to Regulation D promulgated by the Securities and Exchange Commission. Each debenture in the private placement consisted of one debenture convertible into one share of Common Stock, and were sold on a best-efforts basis by Westminster and are convertible into Common Stock at $3.00 per debenture. The private placement was completed in September, 1997. The 1,171,500 shares of Common Stock and the 166,500 Warrants being offered hereby for the benefit of the Selling Stockholders were originally issued by the Company in (a) a private placement of 50 units comprised of Common Stock and Class C Warrants to "accredited investors" in 1994 pursuant to Regulation D promulgated by the Securities and Exchange Commission, (b) by the Company under an asset purchase contract and in settlement of pending litigation against the Company, and (c) placement agent warrants issued pursuant to the placement of the Convertible Debentures. Each unit in the 1994 private placement consisted of 20,000 shares of Common Stock and 20,000 Class C Warrants, and were sold on a best-efforts basis by Westminster at a price of $30,000 per unit. The Company agreed to register the securities for resale by the Selling Stockholders. See "DESCRIPTION OF SECURITIES - Registration Rights." The Company will not receive any of the proceeds from the sale of such securities by the Selling Stockholders. If any Warrants are exercised, the Company will receive proceeds from the exercise of such Warrants. For a description of the classification of whether securities offered hereby are offered by the Company or by Selling Stockholders, see the cover page of this Prospectus and footnotes to the table on the cover page. The Selling Stockholders have advised the Company that they propose to offer for sale and to sell Warrants and Common Stock underlying the Warrants when issued from time to time during the next 12 months through brokers in the over-the-counter market, in private transactions, negotiated transactions, or otherwise. Accordingly, sales prices and proceeds to the Selling Stockholders for any shares of Common Stock or Warrants sold will depend upon market price fluctuations and the manner of sale. Over the last 12 months the Selling Shareholders have transferred all of the shares of Common Stock registered in this Offering. If the shares or Warrants are sold through brokers, the Selling Stockholders will pay brokerage commissions and other charges, including any transfer taxes (which compensation as to a particular broker-dealer might be in excess of customary commissions). The Selling Stockholders will also pay the fees associated with their Common Stock and Warrants registered hereby and expenses of any counsel retained by them in connection with this offering. Except for the payment of such legal fees and expenses, brokerage commissions and charges, the Company will bear all expenses in connection with registering the shares offered hereby. 20 The offering by the Company of the 2,454,833 shares of Common Stock underlying the Debentures and Warrants is made exclusively to the holders of the Debentures and Warrants. LEGAL MATTERS The legality of the securities offered hereby will be passed upon for the Company by Robertson & Williams, Inc., a professional corporation. EXPERTS The consolidated balance sheets of Avalon Correctional Services, Inc., and subsidiaries as of December 31, 1997 and December 31, 1998, and the related consolidated statements of operations, stockholders' equity and cash flow for the years then ended have been incorporated by reference in this Prospectus in reliance on the reports of Grant Thornton LLP, independent certified public accountants, upon on the authority of that firm as experts in accounting and auditing. 21 ================================================================================ No dealer, salesperson, or other person has been authorized to give any information or to make any representation not contained in this Prospectus, and, if given or made, such information and representation 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 any of the securities offered hereby in any jurisdiction or to any person to whom it is unlawful to make such 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 set forth in this Prospectus or in the affairs of the Company since the date hereof. ______________________ TABLE OF CONTENTS
Page ---- PROSPECTUS SUMMARY......................................................... 4 RISK FACTORS............................................................... 7 THE COMPANY................................................................ 10 USE OF PROCEEDS............................................................ 11 DIVIDEND POLICY............................................................ 11 PRICE RANGE OF COMMON STOCK................................................ 11 CAPITALIZATION............................................................. 12 SELECTED FINANCIAL DATA.................................................... 12 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION.................. 13 SELLING SECURITY HOLDERS................................................... 15 DESCRIPTION OF SECURITIES.................................................. 16 PLAN OF DISTRIBUTION....................................................... 20 LEGAL MATTERS.............................................................. 21 EXPERTS.................................................................... 21
166,500 REDEEMABLE COMMON STOCK PURCHASE WARRANTS 2,504,833 SHARES OF COMMON STOCK $2,415,000 CONVERTIBLE DEBENTURES P R O S P E C T U S March __, 2000 13401 Railway Drive Oklahoma City, Oklahoma 73114 (405) 752-8802 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS 14. Other Expenses of Issuance and Distribution./(1)/ SEC Filing Fees/(2)/............................ $ 5,199.07 Registrar and Transfer Agent Fee................ 500.00 Printing and Engraving.......................... 500.00 Legal Fees/(2)/................................. 7,000.00 State Registration Fees......................... 500.00 Accounting Fees................................. 2,000.00 Miscellaneous Fees and Expenses................. 300.93 ---------- Total.................................. $16,000.00 ========== ____________ (1) All amounts are estimated except SEC filing fee. (2) The Selling Shareholders will pay the fees associated with their common stock and expenses of counsel retained by them in connection with this offering. 15. Indemnification of Directors and Officers. Chapter 78 of the Nevada Revised Statutes (Private Companies) provides that a director, officer, employee or agent of the Corporation may be indemnified against suit or other proceeding whether it were civil, criminal, administrative or investigative if he becomes a party to said lawsuit or proceeding by reason of the fact that he is a director, officer, employee or agent of the corporation. The compensation for indemnification includes judgments, fines and amounts paid in settlement actual and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the corporation. However, no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been judged liable for negligence or misconduct in the performance of his duty to the corporation, unless the court in which the action or suit is brought shall determine that despite his liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to be indemnified for expenses such court shall deem proper. The By-Laws of the corporation outline the conditions under which any director or officer of the registrant may be indemnified. Article V provides that to the extent and in the manner permitted by the laws of the State of Nevada, the corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement. 16. Exhibits. Number Description of Exhibit ------ ---------------------- 3. i Articles of Incorporation (1) ii Bylaws (1) iii Articles of Amendment to Registrant's Articles of Incorporation (2) iv Amendment to Registrant's Articles of Incorporation dated December 31, 1995 v Certificate of Corporate Resolutions, dated December 13, 1993, regarding authorization of Class B Common Stock and Amendment to Articles (3) vi Consent of Board of Directors authorizing extension of expiration dates of Class "C" Redeemable Warrants* 4. i Form of Stock Certificate (1) II-1 ii Form of Class "C" Redeemable Warrant (4) iii Form of Class "C" Warrant Agreement (4) iv Form of Class "D" Redeemable Warrant (5) v Form of Class "D" Warrant Agreement (5) vi Form of Class "E" Warrant Agreement (6) vii Form of Convertible Debenture Agreement (6) 10. i Contract between Southern Correction Systems, Inc. and the Oklahoma Department of Corrections for halfway house services for the year ended June 30, 2000.* ii Stock Option Plan adopted by Board of Directors on August 16, 1994 (4) iii Change of Control Agreement between Donald E. Smith and Avalon Community Services, Inc. dated August 25, 1997. (5) iv Employment Agreement with Donald E. Smith dated August 8, 1997. (5) v Employment Agreement with Jerry M. Sunderland dated August 8, 1997 (5) vi Contract with State of Oklahoma Office of Juvenile Affairs for 80-bed medium security residential treatment center for youthful offenders; one year contract with options to renew for three additional years.* vii Agreement dated June 1, 1998 between Southern Corrections Systems, Inc. and the Texas Department of Criminal Justice. (8) viii Financing agreement between Avalon Community Services, Inc., and Fleet Capital Corporation dated February 25, 1999. (9) ix Amended and Restated Loan and Security Agreement between Avalon Correctional Services, Inc., et al., and Fleet Capital Corporation, dated December 9, 1999.* x Agreement dated September 16, 1998, between Avalon Community Services, Inc., and RSTW Partners III. (10) xi Contract between Southern Corrections Systems, Inc., and Adams County Board of County Commissioners dated July 1, 1999.* xii Contract between The Villa at Greeley and Weld County Community Corrections Board, dated July 1, 1999.* 21. i Subsidiaries of Registrant (5) 23. (i) Consent of Grant Thornton LLP - bound in Registration Statement (ii) Consent of Robertson & Williams, Inc. - bound in Registration Statement 24. Power of Attorney *Included as an exhibit to this Registration Statement. Footnotes: 1) Incorporated herein by reference to the Registrant's Registration Statement on Form S-18 dated March 26, 1991. 2) Incorporated herein by reference to the Registrant's Post-Effective Amendment No. 1 to Registration Statement on Form S-18 dated August 3, 1992. 3) Incorporated herein by reference to the Registrant's Form 10-KSB for the fiscal year ended December 31, 1993 and dated March 24, 1994. 4) Incorporated herein by reference to the Registrant's Registration Statement on Form SB-2 dated September 13, 1995 and amended. 5) Incorporated herein by reference to the Registrant's Registration Statement on Form S-2 Amendment No. 1, dated April 16, 1996 and amended. 6) Incorporated herein by reference to the Registrant's Form S-2 dated December 22, 1997. 7) Incorporated herein by reference to the Registrant's Form 8-K dated March 19, 1998. 8) Incorporated herein by reference to the Registrant's Registration Statement on Form S-2 dated September 14, 1998. 9) Incorporated by reference to the Registrant's Form 8-K dated March 10, 1999. 10) Incorporated by reference to the Registrant's Form 8-K dated October 1, 1998. II-2 17. Undertakings. 1. The undersigned registrant hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (1) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (2) To reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (3) To include any additional or changed material information on the plan of distribution. 2. For the purpose of determining any liability under the Securities Act of 1933, to treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. 3. To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. 4. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Oklahoma City, State of Oklahoma, on March 22, 2000. (Registrant) AVALON CORRECTIONAL SERVICES, INC. By: /s/ Donald E. Smith ---------------------------- Donald E. Smith (Signature and Title) Chief Executive Officer and Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Donald E. Smith, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated below: Signature Capacity Date --------- -------- ---- /s/ Donald E. Smith Chief Executive Officer March 22, 2000 - ----------------------------- Donald E. Smith and Director /s/ Jerry M. Sunderland President and Director March 22, 2000 - ----------------------------- Jerry M. Sunderland /s/ Lloyd Lovely Vice President of Finance March 22, 2000 - ----------------------------- Lloyd Lovely /s/ Robert O. McDonald Director March 22, 2000 - ----------------------------- Robert O. McDonald /s/ Mark S. Cooley Director March 22, 2000 - ----------------------------- Mark S. Cooley /s/ James P. Wilson Director March 22, 2000 - ----------------------------- James P. Wilson II-4 EX-3.6 2 SECRETARY'S CERTIFICATE Exhibit 3 (vi) AVALON CORRECTIONAL SERVICES, INC. Secretary's Certificate ----------------------- COMES NOW Randall J. Wood, Corporate Secretary for Avalon Correctional Services, Inc., and states as follows: On December 8, 1999, the Directors of Avalon Correctional Services, Inc., (the "Company"), met at a meeting pursuant to notice duly given. At that meeting, all Directors were personally present. The meeting was declared open for the transaction of business. At that meeting, the Director's considered the following resolution which was duly made and seconded: WHEREAS, the Board of Directors of the Company has heretofore authorized the issuance of Class "C" Warrants under which all such Class "C" Warrant Holders are granted the right and option to purchase shares of common stock at the current exercise price of $3.19 per share, as such exercise price may be adjusted as required by the Class "C" Warrant Agreements (the "exercise price"), subject to compliance with all other terms of the Class "C" Warrant Agreements; and WHEREAS, the Class "C" Warrants shall expire on December 31, 1999; and WHEREAS, the Board of Directors is presently considering whether or not to lower the exercise price of the Class "C" Warrants in order to encourage the exercise of the warrants prior to the expiration of such warrants; and WHEREAS, the Board of Directors has determined that it would be in the best interest of the Corporation to extend the expiration date of the Class "C" Warrants until March 31, 2000, in order to allow the Board of Directors additional time to evaluate the merits of modifying the exercise price of the Class "C" Warrants and to evaluate other options for capital to meet the needs of the Company. IT IS THEREFORE RESOLVED, that the term in which the Class "C" Warrants may be exercised is hereby extended until 5:00 p.m., Central Standard Time, Friday, March 31, 2000; with all other terms and conditions of the Class "C" Warrant Agreements to remain in effect; and IT IS FURTHER RESOLVED, that subject to compliance with all other terms of the Class "C" Warrant Agreements by the Warrant Holders, the Company and all transfer agents for the Company, be and hereby are authorized to accept and approve tenders of the exercise price by Class "C" Warrant Holders to purchase shares of common stock of the Corporation until 5:00 p.m., Central Standard Time, Friday, March 31, 2000. I hereby certify that the above resolution was adopted by the Directors on December 8, 1999. /s/ RANDALL J. WOOD ---------------------------------------- Randall J. Wood Corporate Secretary Date: March 14, 2000 2 EX-10.1 3 HALF WAY HOUSE SERVICE CONTRACT Exhibit 10(i) OKLAHOMA DEPARTMENT OF CORRECTIONS HALFWAY HOUSE EXPANDED SERVICE CONTRACT (Based on Fixed Rate Fee) Revised 6/28/99 This contract made and entered into this 1/st/ day of July, 1999, by and between the Oklahoma Department of Corrections, Chief of Population Management and Fiscal Operations, hereinafter "DOC", acting pursuant to the provisions of 57 O.S. 1991, Section 561 as amended, and Southern Corrections Systems, Inc., hereinafter, Contractor. W I T N E S S E T H Whereas, DOC desired to purchase the services of the Contractor for those purposes and duties hereinafter enumerated on paragraphs numbed 1 and 2 below, and; Whereas, the Contractor is willing to provide such services under the terms and conditions hereinafter set forth. Now, therefore, in consideration of the mutual covenants and promises hereinafter set forth, the parties agree as follows: 1. Facility Location: ------------------ 1.1 Contractor agrees to house the inmates assigned under this contract in the facilities located at Avalon Correctional Center, 320 West Archer, Tulsa, OK 74103; Carver Correctional Center, 2801 Southwest 3rd, Oklahoma City, OK 73108; and Turley Correctional Center, 6101 North Cincinnati, Tulsa, OK 74126. 1.2 The Contractor shall not be allowed to house any inmates at another location or building under this contract without first receiving written permission from the DOC contract monitor. 2. Contractor's Conditions and Services: ------------------------------------- 2.1 Shall provide three nutritionally balanced meals, according to a menu approved by a licensed dietician, daily per correctional inmate. Additionally, religious and special diets shall be prepared as required. 2.2 Shall provide at least one on duty alert staff for each forty- ( 40) inmates for supervision and assistance to correctional inmates at all times. One individual shall be a roving patrol when all other staff is absent. In the alternative, the contractor may submit a written staffing plan for its 1 location(s) which if accepted by DOC shall be attached hereto and incorporated by reference. 2.3 Shall only provide occupancy that does not exceed the State Fire Marshall occupancy rating. Shall maintain clean, safe and healthy living areas and grounds. 2.4 Shall provide indoor and outdoor recreational activities for inmates. 2.5 Shall provide procedures to maintain all inmate information in strict confidence and shall not release such information pertinent to a presently or previously assigned inmate in accordance with Department of Corrections policy. One exception being DOC host facility or contracting office employees, after showing proper identification, shall have access to the facility and inmate records at all times in accordance with OP-0602l2. 2.6 Shall maintain facilities in such condition so as to comply with all applicable local and state fire and health codes, as well as compliance with the Life Safety Codes. Copies of each inspection shall be provided to the local district office/contract monitor office and within seven (7) days of occurrence with a plan of corrective action to address deficiencies attached. 2.7 Shall maintain the facility in compliance with the standards of this contract and the American Correctional Association Standards for Adult Community Residential Services. The contractor must establish files which contain information to demonstrate compliance with 100 percent of the mandatory standards and 90 percent of the non- mandatory standards at the time of the initial audit. The Contractor shall conduct an internal audit of the standards in the first quarter of the fiscal year. A copy of this audit shall be forwarded to the contract monitor's office and the host facility. Written corrective action plans by the contractor shall be forwarded to the contract office within 5 days of the contractor's audit. 2.8 Shall provide such additional services as DOC may reasonably require which are necessary to maintain the health and safety of the inmate(s) serviced under this contract. 2.9 The Contractor shall attend and participate in an annual meeting/ training session with the Department of Corrections district office/contract office staff in order to maximize contract performance. 2.10 The facility shall employ one case manager, trained by the district office, who also provides guidance and makes appropriate community referrals for employment and budgeting services. 2 2.11 Shall insure a case manager/counselor, maintains individual chronological files documenting each inmate's program goals, crew assignment, evaluations, compliance with DOC policies governing classification status, earned credit level, parole board summaries, individual case plans, budgeting, release preparation, place of employment verification checks, programmatic leaves, and any other significant events. This information shall be submitted in a timely manner to the district office for review to ensure accuracy and timeliness of information. 2.12 Classification actions as a result of programmatic failure or disciplinary action to higher security shall be prepared by the contractor, and forwarded to the district office/host facility within two working days. 2.13 Shall ensure in accordance with DOC policies that each inmate budgets earned income, OP-120230 ensures jobs are monitored and that time credits OP-0602l3 are submitted monthly to the local district office on each inmate in a timely manner. 2.14 Shall provide all transportation and supervision in accordance with DOC policy OP-040l1l to medical/counseling appointments for all inmates at University Hospital, Oklahoma City and Griffin Hospital in Norman, as well as appointments scheduled at local medical facilities and doctor's offices; also transportation of all inmates scheduled to appear at the monthly parole board meeting when scheduled, transportation for program, employment, emergency leaves, to and from the district office and all other activities except from one Department of Corrections facility to another. If the destination point for transported inmates exceeds 50 map miles, one way, the contractor shall be paid an additional fifteen dollars per hour per employee required for transport. Separate billings must be submitted for the travel charges under this section. If the contractor charges for more than one employee per trip, the billing must adequately describe the reason more than one employee was necessary. 2.15 Contractor shall require inmates to clean their respective living areas to include sweeping, mopping, washing windows, etc: as well as communal group programs such as visiting rooms, group rooms, etc. Inmates may also be used for lawn mowing, trash dumping and minor maintenance of the facility. Nothing contained herein shall prohibit the use of trustees as provided for by law and the payment of inmate pay. Prior to assigning inmates on trustee status to the contractor, the DOC host facility must approve the assignment. The intent is that inmates will not be used in lieu of paid workers 2.16 Shall provide information to DOC staff of the arrest of any employee of the halfway house. All of the Contractor's employees who perform regular work at the facility shall be finger printed and a background check 3 conducted by the Oklahoma State Bureau of Investigation at the expense of the Contractor. This check shall occur when an employee is initially hired or upon the effective date of this contract if the facility is operating. 2.17 The contractor will not employ any individual who is under supervision or jurisdiction of any parole, probation, or correctional authority. Persons with previous criminal convictions, but who are not under supervision, may be considered for employment as treatment coaches or counselors; however, the Department of Corrections reserves the right of approval in such cases. Consideration will be given to such factors as criminal history, time elapsed since conviction(s) must be a minimum of six months, and subsequent adjustment in the community. 2.18 At a minimum, the facility shall continuously maintain accredited status for American Correctional Association Standards for Adult Community Residential Services, Third Edition. Accreditation shall be continuously maintained for the term of this contract and any extensions thereof. Failure to comply shall result in termination of this contract. 2.19 The facility shall operate in accordance with and keep Sections 3, 6, 9 and 12 of the Department of Corrections Operations Policies updated as they are issued: 2.19.1 Specifically, Section 3 policies as listed: OP-030 111--Inmate Pass Program OP-030134---Chemical Abuse Testing OP-031001---Inmate Escorted Leave Program 2.19.2 Section 6 Policies as listed: OP-060103---Custody Assessment procedures OP-060104---Community Corrections Assessment OP-060105---C1assification Assessment Reviews OP-060125---Disciplinary Procedures OP-060204---Inmate Transportation OP-060205---Pre-Parole Procedures OP-060213---Earned Credit Classes 2.19.3 Section 9 Policies as listed: OP-090106---Assignment of Inmates to Public Works Programs OP-090124---Inmate/Offender Grievance Process OP-090129---Reintegration OP-090131---0ffender Financial Responsibility Program 4 2.19.4 Section 12 Policies as listed: OP-120202---Inmate Pay Program OP-120230---Inmate Trust Fund 2.20 The Contractor shall be responsible for the costs of DOC required forms. 2.21 The facility shall provide office space and equipment-furnishings for the district office/contract monitor staff in close proximity to other administrative offices and reasonably comparable. The office shall have a lock, which is not master keyed and shall be provided with a desk, chairs, access to telephone/fax/computer lines. 2.22 All Inmates shall undergo routine, random, and suspect drug and alcohol testing. At least 5 percent shall be tested monthly and a summary of the results furnished to the contract monitor, District Supervisor and Programs Administrator according to Department policy OP-030134. Suspect drug and alcohol testing shall be in addition to the random 5 percent testing. 2.23 The facility shall provide restrictive housing (RHU) space for those offenders, in its facility. This space is to be provided within the halfway house by construction of a unit or through the payment to the local city/county jail for the housing of the offender(s). If an inmate, who the contractor deems inappropriate, is placed in RHU, the contractor shall notify the district office and the contract monitor the first working day after the inmate is placed in RHU. If an inmate is found to be inappropriate for remaining at the HWH, then the district and the contract monitor will be notified the same working day. DOC will become responsible for the inmate (including RHU contract costs) if he is not transferred within 7 days of the district office's approval of the transfer. 2.24 Inmates shall enter halfway house status only from the public works center population with the following three exceptions (the offender has a parole board stipulation, is ineligible for PPWP or has completed a vo-tech program at another facility). 2.25 The contractor shall notify the Department regarding use of force and serious incidents in accordance with Departmental Operations Policy 050108. The facility will notify both the local district office and contract monitor according to policy by telephone of all serious incidents and will fax copies of all reports prepared within 24 hours to the district office and contract office on the forms provided. After business hours, the local district office/contract office will receive the notice and reports. 2.26 Shall provide services for a program to operate a inmate residential center as authorized in 57 O.S. 1991, Section 563 as amended. Additionally the 5 Contractor shall be responsible for acquiring the necessary Public Works Contracts to fulfill the needs and requirements of its Public Works inmates. Preference shall always be given to honor State Agency contracts first. All Public Works Contracts entered into by the contractor must be approved in writing by DOC. 2.27 Shall provide public works inmates transportation in staff driven vehicles or ensure transportation by crew supervisors to and from work site location(s) or a common drop off/pick up site as may be agreed upon by the parties and approved by the district office. Shall provide transportation of halfway house inmates in staff driven vehicles, bus tokens or arrangements with employers as agreed by all parties. 2.28 Shall provide regular and periodic work site inspections and document such inspections in a permanent log. 2.29 The Contractor shall provide the public works inmates three sets of work clothes, to include a coat, work shoes/boots, caps and gloves. The Contractor shall have 90 days from the effective date of this contract to comply with this sub-section and clothe inmates in compliance with the Departments community work centers and community corrections centers. 2.30 The Contractor shall provide all inmates on site for the public works program and those trustees utilized on site for maintenance and food service, monthly pay in accordance with OP-120202, 20% of which must be placed in the inmate's mandatory savings. The Contractor is responsible for negotiating contracts for all Prisoner Public Works crews being maintained by the Halfway House. 2.31 The Contractor will afford inmates access to reasonable, impartial and non-discriminatory grievance and misconduct procedures addressed in the Departments Operations Policies, including a final level of appeal as provided in this section. Misconduct procedures and penalties must reflect the department's, since it affects security level and classification. 2.31.1 The facility is responsible to respond to grievances and appeals on matters occurring during the inmate's incarceration in the facility, except sentence administration issues and classification to lower or higher security status in accordance with DOC policy. 2.31.2 Complete, accurate, detailed reports of the disciplinary actions against inmates are provided to the local district office within seven (7) working days of the date the action is finalized or the punishments administered. Administration of the disciplinary sanction which affects time calculation or sentence length must be in accordance with Departmental policy OP-060125 and approved 6 by the local district office supervisor/designee. Loss of earned credits must be approved by the department and may be adjusted. 2.32 Contractor agrees to maintain general liability insurance and workers compensation insurance in an amount acceptable to DOC for all employees and activities performed under this contract. A certificate of insurance acceptable to DOC will be furnished within 15 days of the execution of this agreement. 2.33 Inmate Programs. All programs will be approved by the Department Programs Administrator and Contract Monitor. All habilitation/rehabilitation programs i.e., substance abuse, self- help, cognitive/behavioral, etc. will target criminogenic needs and the reduction of criminal risk of the inmate. Program participation will be recorded on all participants and submitted monthly per operating standards. Programs, except for education and vo-tech, will be assessed and evaluated by Department staff according to the Correctional Programs Assessment Instrument (CPAI). Programs must be assessed as "satisfactory" or above to be an approved program. Corrective action plans must be submitted to the Contract Monitor on programs assessed as less than satisfactory and/or have noted deficiencies. Programs with deficiencies will be reassessed upon completion of the tasks in the corrective action plan, but no later than one year from the date of the corrective action plan for programs with major deficiencies. 3. Areas of Performance: -------------------- The general operations of the contractor shall be overseen by the local district office supervisor/designee to include review of classification paperwork, disciplinary actions, attendance of staff meetings, review of policy changes, review of both incoming and outgoing transfer requests and changes in a inmates status on center. The services of the Contractor shall be performed under the general administration of David C. Miller, Chief of Population Management and Fiscal Operations, Oklahoma Department of Corrections. The Contractor will be inspected quarterly and audited annually to ensure the conditions and services are being adequately provided. 4. Medical Responsibilities: -------------------------- 4.1 DOC shall provide all medical, mental health and/or dental services unless DOC approves alternate services or such services are as a result of a medical and/or dental emergency. 4.1.1. Medical emergency shall be defined as danger or threat of the loss of life or extremity. 7 4.1.2. Dental emergency shall be defined as acute problems in the mouth exhibiting symptoms of pain, swelling, bleeding and/or elevation of temperature. 4.2 The Contractor shall notify DOC as prescribed in section 2.25 and the DOC CHSA of any medical/dental emergency immediately after such emergency or within the first working day after said emergency occurs. 5. Payment for Services: ---------------------- 5.1. The State agrees to pay as compensation for the services provided hereunder a fixed rate of $31.75 times the number of inmate days, excluding date of arrival, in a single monthly payment which may be adjusted in accordance herewith. 5.2. Pursuant to statute and any amendments thereto, any increase shall not exceed the previous years Consumer Price Index for all Urban Consumers (CPI-U) as prepared by the United States Bureau of Labor Statistics or as otherwise may be provided by State law. 5.3. DOC shall not be liable for and shall not pay the Contractor for any expenses not herein expressly provided for. 5.4. The contractor has agreed to a minimum number of 160 inmates for Carver Correctional Center, 150 inmates for Avalon Correctional Center, and 135 for Turley Correctional Center, that it will accept. Should the number of inmates fall below this number and remain at that level for more than 30 days, the Contractor may at his option, waive the minimum number or give notice of his intent to terminate the contract pursuant to paragraph 6 below. 5.5. This contract is for an indefinite number of inmates and days. DOC makes no representations or guarantee that the Contractor will house any number of inmates for any amount of time. The State will not pay for any unused beds. 6. Liquidated Damages Non-Performance Penalties: ---------------------------------------------- 6.1 In the event of non-compliance by the contractor, the State may withhold as liquidated damages the amounts designated in Attachment B from any amounts owed to the contractor. The parties agree that due to the complicated nature of the contractors obligations under this contract it would be difficult to specifically designate a monetary amount for the Breach by the contractor designated in Attachment B as said amounts are likely to be uncertain and not easily proven. 8 6.2 The State shall notify the contractor in writing of the Breach and afford 30 days time to cure the breach unless the matter is so serious that immediate correction is needed or unless a longer time period is mutually agreed upon. 6.3 After the time to cure has passed and the breach continues or remains uncured, the State shall notify the contractor in writing of the amounts to be withheld as liquidated damages. 6.4 Liquidated damages shall be assessed for each day the Breach remains uncured. 6.5 The State is not obligated to assess liquidated damages before availing itself of any other remedy. 6.6 The State may choose to discontinue liquidated damages and avail itself of any other remedy available under this contract or at law or in equity. 7. Termination of Convenience: -------------------------- Either party may terminate this agreement at any time by giving written notice to the other party of such termination and specifying the effective date thereof at least 30 days prior to the effective date of such termination. Such written notice shall be by registered mail to DOC in care of David C. Miller, Chief of Population Management and Fiscal Operations, Oklahoma Department of Corrections, Private Prison Unit 2200 Classen Blvd, Suite 1200, Oklahoma City, OK 73106 and to the Contractor at PO Box 57012, Oklahoma City, OK 73157. Notice given pursuant to the provisions of this paragraph shall be deemed sufficient for all purposes. 8. Duration of Agreement: ----------------------- This contractual Agreement shall be in effect through June 30, 2000, the end of the fiscal year for the State of Oklahoma. 9. Regulations: ------------- 9.1. This Agreement and all rights and duties arising thereunder shall be governed interpreted and construed according to the provisions of and under the laws of the State of Oklahoma. 9.2. This document represents the entire agreement between the parties. Any modification, amendment or addition thereto must be in writing, executed by the parties and specifically referencing this Agreement. 9 9.3. In accepting this contract the Contractor agrees that their books, records, documents, accounting procedures or any other items relevant to this contract are subject to examination by the other party and the State Auditor and Inspector. 9.4. The contractor shall perform all the duties herein through its own employees. None of the duties required by this agreement, including restrictive housing space, shall be performed by another contractor or sub-contractor unless the agreement has been first approved in writing by the DOC. In Witness Thereof, the parties have executed this Agreement in triplicate on the 30/th/ day June, 1999. Oklahoma Department of Corrections Contractor /s/ DAVID C. MILLER, /s/ JERRY SUNDERLAND - ------------------------------------ ---------------------------------- David C. Miller, Chief of Population Management and Fiscal Operations Approved as to form: /s/ ROSS N. JOHNSON - ------------------------------------- Ross N. Johnson Assistant General 10 Affidavit of Non Collusion STATE OF OKLAHOMA ) ) SS COUNTY OF OKLAHOMA ) JERRY SUNDERLAND of lawful age, being first duly sworn, on oath says: 1. (s)he is the duly authorized agent of Southern Correction the Contractor under the contract which is attached to this statement, for the purpose of certifying the facts pertaining to the giving of things of value to government personnel in order to procure said contract; 2. (s)he is fully aware of the facts and circumstances surrounding the making of the contract to which this statement is attached and has been personally and directly involved in the proceedings leading to the procurement of said contract; and 3. neither the Contractor nor anyone subject to the Contractor's direction or control has paid, given or donated or agreed to pay, give or donate to any officer or employee of the State of Oklahoma any money or other thing of value, either directly or indirectly, in procuring the contract to which this statement is attached. /s/ Jerry Sunderland, President -------------------------------------- Subscribed and sworn to before me this 30/th/ day of June, 1999. /s/ LINDA EASLEY --------------------------------------- Notary Public (or clerk or Judge) (Seal) 11 APPENDIX B LIQUIDATED DAMAGES Liquidated damages for each day of a breach will be calculated as follows: V x B x $15.00 when V = Relative value of Service Area B = Relative value of the Breach Service Area 1: Value = 5: Security and Control, ACA Accreditation, Health Services, Use of Force, Escapes, Contract Monitoring, - -------------------------------------------------- Operator Breach B - ---------------------------------------------------------- Failure to Provide Service 5 - ---------------------------------------------------------- Failure to Document 2 - ---------------------------------------------------------- Failure to Report 2 - ---------------------------------------------------------- Failure to Comply with Other 5 Applicable Requirements
Service Area 2: Value = 4: Sanitation and Hygiene, Food Service, Mail, Religion, Access to Court, Inmate Discipline, Grievance, Visitation, Records and Reports, Employee Qualifications & Training - -------------------------------------------------- Operator Breach B - ---------------------------------------------------------- Failure to Provide Service 4 - ---------------------------------------------------------- Failure to Document 2 - ---------------------------------------------------------- Failure to Report 2 - ---------------------------------------------------------- Failure to Comply with Other 4 Applicable Requirements - ----------------------------------------------------------
Service Area 3: Value = 3: Operating Standards, Transportation, Maintenance, Repairs and Replacements, Inmate Work, Academic & Vocational Training, Sentence Computation Data, Classification & Case Management, Commissary, Policies/Procedures/Post Orders, Inmate Management Fund/Bank Accounts - ------------------------------------------------- Operator Breach B - ---------------------------------------------------------- Failure to Provide Service 3 - ---------------------------------------------------------- Failure to Document 1 - ---------------------------------------------------------- Failure to Report 1 - ---------------------------------------------------------- Failure to Comply with Other 3 Applicable Requirements - ----------------------------------------------------------
12 APPENDIX B (continued) Service Area 4: Value = 2: Laundry and Inmate Clothing, Telecommunications, Supplies/Perishables, Recreation ; - -------------------------------------------------- Operator Breach B - ---------------------------------------------------------- Failure to Provide Service 3 - ---------------------------------------------------------- Failure to Document 1 - ---------------------------------------------------------- Failure to Report 1 - ---------------------------------------------------------- Failure to Comply with Other 3 Applicable Requirements - ----------------------------------------------------------
13 EX-10.6 4 VENDOR'S OFFICE COPY Exhibit 10(vi) Vendor's Office Copy
State of Oklahoma Page 1 Department of Central Services PO #: R060692 Buyer: IP Change Order Date Printed: 11/03/99 Regn #: H044241 Agency Regn #: 98000000995 CO# C350756 - ------------------------------------------------------------------------------------------------------------------------------------ T0: 7313562912 Ship To: 40000 ATTN JERRY SUNDERLAND OFFICE OF JUVENILE AFFAIRS SOUTHERN CORRECTIONS SYSTEMS INC 3814 N. SANTA FE, 4TH FLOOR PO BOX 57012 OKLAHOMA CITY OK 73157 OKLAHOMA CITY, OK 73118 Charge & 4001A Invoice to: OFFICE OF JUVENILE AFFAIRS P.O. BOX 268812 OKLAHOMA CITY, OK 73126-8812 - ------------------------------------------------------------------------------------------------------------------------------------ **C350756 *** Change Order *** 009 Changes to Date 001 1.00 MOR 0952-95-65 CHILDREN AND YOUTH SERVICE 3582,852.540000 80-BED MEDIUM SECURITY RESIDENTIAL TREATMENT CENTER FOR YOUTHFUL OFFENDERS AND CLASS I, CLASS II AND CLASS III DELINQUENTS THIS IS A REVISED PURCHASE ORDER. THIS DOCUMENT SUPERCEDES ANY PREVIOUSLY ISSUED PURCHASE ORDERS 001A- OPTION YEAR I: $_309,406.05_MONTH $_3,712,872.62_ANNUAL OPTION PERIOD I CONTRACT TERM SHALL BE FOR AN ADDITIONAL 12 MONTH PERIOD. 001B- OPTION YEAR II: $_313,118.48_MONTH $ 3,757,421.72_ANNUAL OPTION PERIOD II CONTRACT TERM SHALL BE FOR AN ADDITIONAL 12 MONTH PERIOD. 001C- OPTION YEAR III: $_318,453.9_MONTH $3,821,447.51_ANNUAL OPTION PERIOD III CONTRACT TERM SHALL BE FOR AN ADDITIONAL 12 MONTH PERIOD. 001D- OPTION YEAR IV: $_322,629.53_MONTH $3,871,554.36_ANNUAL OPTION PERIOD IV CONTRACT TERM SHALL BE FOR AN ADDITIONAL 12 MONTH PERIOD. TOTAL 60 MONTH PRICE: $_18,811,291.49__ ** Unit cost changed from 3,582,852.540000 to 7,295,725.140000. Change order difference 3,712,872.60 New extended total 7,295,725.14 Continued, next page ... Approved by: \s\ TOM JAWORSKY -----------------------------------------
Vendor's Office Copy
State of Oklahoma Page 2 Department of Central Services Buyer: IP Change Order PO #: R060692 Date Printed: 11/03/99 Regn #: H044241 Aqency Regn #: 98000000995 CO#C350756 - ------------------------------------------------------------------------------------------------------------------------------------ AC 190 400 010003 51618 511100 00.0000000 1,070,960.53 *** Last accounting change *** AC 190 400 010003 51618 511100 00.0000000 4,783,833.13 * Current accounting change * Terms: 2ND YEAR RENEWAL OF A 4 YEAR CONTRACT CONTRACT PERIOD: 12-3-99 THRU 12-2-2000 *** Change order summary *** 190 400 010003 51618 511100 00.0000000 3,712,872.60
Vendor's Office Copy
Page 1 State of Oklahoma Department of Central Services PO #: R060692 Buyer: IP (405)521-4058 Purchase Order Date Agency Delivery Issued: 3/03/98 Regn #: H044241 Regn #: 98000000995 Terms: NET Date: 3/03/98 - ------------------------------------------------------------------------------------------------------------------------------------ T0: 7313562912 Ship To: 40000 ATTN JERRY SUNDERLAND OFFICE OF JUVENILE AFFAIRS SOUTHERN CORRECTIONS SYSTEMS INC 3814 N. SANTA FE, 4TH FLOOR PO BOX 57012 OKLAHOMA CITY OK 73157 OKLAHOMA CITY, OK 73118 Charge & 4001A Invoice to: OFFICE OF JUVENILE AFFAIRS P.O. BOX 268812 OKLAHOMA CITY, OK 73126-8812 - ------------------------------------------------------------------------------------------------------------------------------------ Item Quantity Unit Commodity Code Description Unit Price Amount - ---- -------- ---- -------------- ----------- ---------- ------ 001 12.00 MOR 0952-95-65 303,999.610000 3,647,995.32 80-BED MEDIUM SECURITY RESIDENTIAL TREATMENT CENTER FOR YOUTHFUL OFFENDERS AND CLASS I, CLASS II AND CLASS III DELINQUENTS CONTRACT PERIOD: 3-3-98 thru 3-2-99 001A- OPTION YEAR I: $_309,406.05__ MONTH $_3,712,872.62_ANNUAL OPTION PERIOD I CONTRACT TERM SHALL BE FOR AN ADDITIONAL 12 MONTH PERIOD. 001B- OPTION YEAR II: $_313,118.48__MONTH $33,757,421.72_ANNUAL OPTION PERIOD II CONTRACT TERM SHALL BE FOR AN ADDITIONAL 12 MONTH PERIOD. 001C- OPTION YEAR III: $_318,453.96__MONTH $3, 821, 447.51__ANNUAL OPTION PERIOD III CONTRACT TERM SHALL BE FOR AN ADDITIONAL 12 MONTH PERIOD. 001D- OPTION YEAR IV: $_322,629.53__MONTH $3,871,554.36_ANNUAL OPTION PERIOD IV CONTRACT TERM SHALL BE FOR AN ADDITIONAL 12 MONTH PERIOD. TOTAL 60 MONTH PRICE: $__18,811,291.49__ Continued: Next Paqe ... - ------------------------------------------------------------------------------------------------------------------------------------ Prices exclusive of Federal and State Taxes. Prices are FOB destination unless stated otherwise. VENDORS READ AND FOLLOW CLOSELY: 1. This order void one year from date of issuance. 2. The above order is issued in conformity with your quotation and constitutes a contract. 3. If payment is received in excess of 45 days after submitting proper invoice, vendor may be /s/ TOM JAWORSKY entitled to claim interest penalty. ------------------------------ For a copy of these regulations contact signed OFFICE OF STATE FINANCE Director/Designee Room 122, State Capitol Bldg, OKC, OK. 73105 ------------------------------ title
1. Vendor's Office Copy
State of Oklahoma Department of Central Services PO# R060692 BUYER - IP Purchase Order Date 03/03/98 Regn. # H044241 Agency Regn # 98000000995 Page # 2 - ------------------------------------------------------------------------------------------------------------------------------------ Item Quantity Unit Commodity Code Description Unit.Price Amount - ---- -------- ---- -------------- ------------ -------------- ------ TOTAL 60 MONTH PRICE: $__18,811,291.49___ ===================== Total Amount $3,647,995.32 TERMS: THE CONTRACT EFFECTIVE DATE FOR THE OJA MSRTC PROGRAM IS 3/3/98. THE CONTRACTOR SHALL BE REQUIRED TO HAVE THEIR PROPOSED FACILITIES OPERATIONAL NO LATER THAN 9 MONTHS FROM THE CONTRACT EFFECTIVE DATE. THE EFFECTIVE DATE FOR SERVICES TO BE PROVIDED SHALL COMMENCE NO LATER THAN DECEMBER 3, 1998 AND END ON DECEMBER 2, 1999 FOR THE BASIC CONTRACT PERIOD. OPTIONAL PERIODS SHALL COMMENCE OF DECEMBER 3 AND END ON DECEMBER 2 OF THE RESPECTIVE CALENDAR YEARS. THIS CONTRACT INCORPORATES ITB H044241 REQUIREMENT AND SOUTHERN CORRECTIONS INC. BID PROPOSAL RESPONSE DATED 2-9-98 BY REFERENCE VENDOR CONTACT: JERRY SUNDERLAND AT 405-752-8802 FAX: 405-752-8852
1. Vendor's Office Copy
State of Oklahoma Department of Central Services PO# R060692 BUYER - IP Purchase Order Date 03/03/98 Regn. # H044241 Agency Regn # 98000000995 Page # 2 - ------------------------------------------------------------------------------------------------------------------------------------ Item Quantity Unit Commodity Code Description Unit.Price Amount - ---- -------- ---- -------------- ------------ ---------- ------ ==================== Total Amount $3,647,995.32
TERMS: CONTRACT PERIOD: 3-3-98 thru 3-2-99 WITH OPTION TO RENEW FOR FOUR (4) ADDITIONAL ONE YEAR PERIODS AT SAME TERMS AND CONDITIONS Vendor Contact: Jerry Sunderland at 405-752-8802 fax: 405-752-8852 This contract incorporates ITB H044241 requirement and Southern Corrections Inc. bid proposal response dated 2-9-98 by reference EX-10.9 5 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT Exhibit 10(ix) AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT Dated: December 9, 1999 FLEET CAPITAL CORPORATION, as Lender to AVALON CORRECTIONAL SERVICES, INC. f/k/a AVALON COMMUNITY SERVICES, INC. and SOUTHERN CORRECTIONS SYSTEMS, INC., as Borrowers and CENTRAL OKLAHOMA PROPERTIES CORP., and ELK CITY PROPERTIES, INC., and THE VILLA AT GREELEY, L.L.C. as Guarantors TABLE OF CONTENTS SECTION 1. CREDIT FACILITY 1 1.1 Revolving Credit Loans............................................. 1 1.1.1 Loans and Reserves......................................... 1 1.1.2 Use of Proceeds............................................ 2 1.2 Term Loan.......................................................... 2 1.3 [RESERVED FOR FUTURE USE].......................................... 2 1.4 Joint and Several Liability; Rights of Contribution................ 2 1.5 Structure of Credit Facility....................................... 3 SECTION 2. INTEREST, FEES AND CHARGES................................. 4 2.1 Interest........................................................... 4 2.1.1 Rates of Interest.......................................... 4 2.1.2 Default Rate of Interest................................... 5 2.1.3 Maximum Interest........................................... 5 2.2 Computation of Interest and Fees................................... 7 2.3 LIBOR Option....................................................... 7 2.4 Closing Fee........................................................ 8 2.5 Unused Line Fee.................................................... 8 2.6 Audit and Appraisal Fees........................................... 8 2.7 Reimbursement of Expenses.......................................... 8 2.8 Bank Charges....................................................... 9 SECTION 3. LOAN ADMINISTRATION....................................... 9 3.1 Manner of Borrowing Revolving Credit Loans......................... 9 3.1.1 Loan Requests.............................................. 9 3.1.2 Disbursement...............................................10 3.1.3 Authorization..............................................10 3.2 Payments...........................................................10 3.2.1 Principal..................................................10 3.2.2 Interest...................................................11 3.2.3 Costs, Fees and Charges....................................11 3.2.4 Other Obligations..........................................11 3.3 Mandatory Prepayments..............................................11 3.3.1 Proceeds of Sale, Loss, Destruction or Condemnation of Collateral............................................11 3.4 Application of Payments and Collections............................12 3.5 All Loans to Constitute One Obligation.............................12 3.6 Loan Account.......................................................12 3.7 Statements of Account..............................................12
i SECTION 4. TERM AND TERMINATION.......................................13 4.1 Term of Agreement..................................................13 4.2 Termination........................................................13 4.2.1 Termination by Lender......................................13 4.2.2 Termination by Borrower....................................13 4.2.3 Termination Charges........................................13 4.2.4 Effect of Termination......................................13 SECTION 5. SECURITY INTERESTS.........................................14 5.1 Security Interest in Collateral....................................14 5.2 Cross-Collateralization............................................15 5.3 Lien Perfection; Further Assurances................................15 5.4 Lien on Realty.....................................................15 SECTION 6. COLLATERAL ADMINISTRATION..................................15 6.1 General............................................................15 6.1.1 Location of Collateral.....................................15 6.1.2 Insurance of Collateral....................................16 6.1.3 Protection of Collateral...................................16 6.2 Administration of Accounts.........................................16 6.2.1 Records, Schedules and Assignments of Accounts.............16 6.2.2 Discounts, Allowances, Disputes............................17 6.2.3 Taxes......................................................17 6.2.4 Account Verification.......................................17 6.2.5 Maintenance of Dominion Account............................17 6.2.6 Collection of Accounts, Proceeds of Collateral.............18 6.3 [RESERVED FOR FUTURE USE]..........................................18 6.4 Administration of Equipment........................................18 6.4.1 Records and Schedules of Equipment.........................18 6.4.2 Dispositions of Equipment..................................18 6.4.3 Condition of Equipment.....................................19 6.5 Payment of Charges.................................................19 SECTION 7. REPRESENTATIONS AND WARRANTIES.............................19 7.1 General Representations and Warranties.............................19 7.1.1 Organization and Qualification.............................19 7.1.2 Corporate Power and Authority..............................19 7.1.3 Legally Enforceable Agreement..............................20 7.1.4 Capital Structure..........................................20 7.1.5 Corporate Names............................................20 7.1.6 Business Locations; Agent for Process......................20 7.1.7 Title to Properties; Priority of Liens.....................21 7.1.8 Accounts...................................................21
ii 7.1.9 Financial Statements; Fiscal Year..........................22 7.1.10 Full Disclosure............................................22 7.1.11 Solvent Financial Condition................................22 7.1.12 Surety Obligations.........................................22 7.1.13 Taxes......................................................22 7.1.14 Brokers....................................................22 7.1.15 Patents, Trademarks, Copyrights and Licenses...............22 7.1.16 Governmental Consents......................................23 7.1.17 Compliance with Laws.......................................23 7.1.18 Restrictions...............................................23 7.1.19 Litigation.................................................23 7.1.20 No Defaults................................................23 7.1.21 Leases.....................................................23 7.1.22 Pension Plans..............................................24 7.1.23 Trade Relations............................................24 7.1.24 Labor Relations............................................24 7.2 Continuous Nature of Representations and Warranties................24 7.3 Survival of Representations and Warranties.........................24 SECTION 8. COVENANTS AND CONTINUING AGREEMENTS........................25 8.1 Affirmative Covenants..............................................25 8.1.1 Visits and Inspections.....................................25 8.1.2 Notices....................................................25 8.1.3 Financial Statements.......................................25 8.1.4 Borrowing Base Certificate.................................27 8.1.5 Projections................................................27 8.1.6 Taxes......................................................27 8.1.7 Compliance with Laws.......................................27 8.1.8 Certain Other Insurance....................................27 8.1.9 El Paso Property...........................................27 8.1.10 Greeley Covenants..........................................27 8.1.11 Corporate or Name Change...................................28 8.2 Negative Covenants.................................................28 8.2.1 Mergers; Consolidations; Acquisitions......................28 8.2.2 Loans......................................................28 8.2.3 Total Indebtedness.........................................28 8.2.4 Affiliate Transactions.....................................29 8.2.5 Limitation on Liens........................................29 8.2.6 Subordinated Debt..........................................30 8.2.7 Distributions..............................................30 8.2.8 Capital Expenditures.......................................30 8.2.9 Disposition of Assets......................................31 8.2.10 Stock of Subsidiaries......................................31
iii 8.2.11 Restricted Investment....................................31 8.2.12 Operating Leases.........................................31 8.2.13 Tax Consolidation........................................31 8.2.14 Emerald Square...........................................31 8.2.15 Modification of Convertible Notes........................31 8.2.16 Construction or Acquisition of New Facilities............31 8.2.17 Certain Agreements.......................................32 8.3 Specific Financial Covenants.....................................32 8.3.1 Fixed Charge Ratio.......................................32 8.3.2 Total Liabilities to Tangible Net Worth..................33 8.3.3 EBITDA...................................................33 SECTION 9. CONDITIONS PRECEDENT.......................................34 9.1 Documentation....................................................34 9.2 No Default.......................................................34 9.3 Other Loan Documents.............................................34 9.4 Opinion Letters..................................................34 9.5 Disbursement Letter..............................................34 9.6 No Litigation....................................................34 9.7 Subordination Agreements.........................................34 SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT...............................................35 10.1 Events of Default................................................35 10.1.1 Payment of Obligations...................................35 10.1.2 Misrepresentations.......................................35 10.1.3 Breach of Specific Covenants.............................35 10.1.4 Breach of Other Covenants................................35 10.1.5 Default Under Security Documents/Other Agreements........35 10.1.6 Other Defaults...........................................35 10.1.7 Uninsured Losses.........................................36 10.1.8 Insolvency and Related Proceedings.......................36 10.1.9 Business Disruption; Condemnation........................36 10.1.10 Change of Control........................................36 10.1.11 ERISA....................................................36 10.1.12 Challenge to Agreement...................................37 10.1.13 Repudiation of or Default Under Guaranty Agreement.......37 10.1.14 Criminal Forfeiture......................................37 10.1.15 Judgments................................................37 10.1.16 Emerald Square...........................................37 10.2 Acceleration of the Obligations..................................37 10.3 Other Remedies...................................................37 10.4 Remedies Cumulative; No Waiver...................................38
iv SECTION 11. MISCELLANEOUS..............................................39 11.1 Power of Attorney................................................39 11.2 Indemnity........................................................40 11.3 Modification of Agreement; Sale of Interest......................41 11.4 Severability.....................................................41 11.5 Successors and Assigns...........................................41 11.6 Cumulative Effect; Conflict of Terms.............................41 11.7 Execution in Counterparts........................................42 11.8 Notice...........................................................42 11.9 Lender's Consent.................................................43 11.10 Credit Inquiries.................................................43 11.11 Time of Essence..................................................43 11.12 Entire Agreement, Appendix A and Exhibits and Schedules..........43 11.13 Interpretation...................................................43 11.14 GOVERNING LAW; CONSENT TO FORUM..................................43 11.15 WAIVERS BY THE LOAN PARTIES....................................44 11.16 ORAL AGREEMENTS INEFFECTIVE....................................45 11.17 Nonapplicability of Chapter 346 et seq. of Texas Finance Code....45 11.18 Certain Matters of Construction..................................45
v AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated as of December 9, 1999, is by and among FLEET CAPITAL CORPORATION ("Lender"), a Rhode ------ Island corporation with an office at 5950 Sherry Lane, Suite 300, Dallas, Texas 75225; AVALON CORRECTIONAL SERVICES, INC. f/k/a Avalon Community Services, Inc. ("Avalon"), a Nevada corporation with its chief executive offices and principal ------ place of business at 13401 Railway Drive, Oklahoma City, Oklahoma 73114, and SOUTHERN CORRECTIONS SYSTEMS, INC. ("Southern"), an Oklahoma corporation with -------- its chief executive offices and principal place of business at 13401 Railway Drive, Oklahoma City, Oklahoma 73114 (Avalon and Southern being referred to collectively, and jointly and severally, as "Borrowers" and individually as a --------- "Borrower"); and CENTRAL OKLAHOMA PROPERTIES CORP., ("Central"), an Oklahoma - --------- ------- corporation with its chief executive offices and principal place of business at 13401 Railway Drive, Oklahoma City, Oklahoma 73114, ELK CITY PROPERTIES, INC. ("Elk City"), an Oklahoma corporation with its chief executive offices and - ---------- principal place of business at 13401 Railway Drive, Oklahoma City, Oklahoma 73114, THE VILLA AT GREELEY, L.L.C. ("The Villa"), a Colorado limited liability ---------- company with its chief executive offices and principal place of business at 13401 Railway Drive, Oklahoma City, Oklahoma 73114 (Central, Elk City and The Villa being referred to collectively, and jointly and severally, as "Guarantors" ---------- and individually as "Guarantor"). This Agreement amends and restates that --------- certain Loan and Security Agreement dated as of February 25, 1999, by and among Lender, Borrowers, and Guarantors as amended by that certain (A) First Amendment to Loan and Security Agreement dated as of May 21, 1999, and (B) Second Amendment to Loan and Security Agreement dated as of June 9, 1999 (as amended, the "Original Agreement"). ------------------ Unless otherwise defined herein, capitalized terms used in this Agreement have the meanings assigned to them in Appendix A, General Definitions. ---------- Accounting terms not otherwise specifically defined herein shall be construed in accordance with GAAP consistently applied. SECTION 1. CREDIT FACILITY Subject to the terms and conditions of, and in reliance upon the representations and warranties made in, this Agreement and the other Loan Documents, Lender agrees to make a Total Credit Facility of up to Sixteen Million Five Hundred Thousand and No/100 Dollars ($16,500,000.00) available upon Borrowers' request therefor, as follows: 1.1 Revolving Credit Loans. ---------------------- 1.1.1 Loans and Reserves. Lender agrees, for so long as no ------------------ Default or Event of Default exists, to make Revolving Credit Loans to Borrowers from time to time, as requested by Borrowers in the manner set forth in Section ------- 3.1.1, up to a maximum principal amount at any time outstanding equal to the - ----- lesser of (A) the Borrowing Base at such time, or (B) the Revolving Credit Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 1 Loan Commitment. Lender shall have the right to establish reserves in such amounts, and with respect to such matters, as Lender shall deem necessary or appropriate in its reasonable discretion, against the amount of Revolving Credit Loans which Borrowers may otherwise request under this Section 1.1.1. Regardless ------------- of whether the unpaid principal balance of the Revolving Credit Loans should at any time exceed the amounts permitted by this Section 1.1.1, all Revolving ------------- Credit Loans shall constitute Obligations that are secured by the Collateral and entitled to all the benefits thereof. 1.1.2 Use of Proceeds. The Revolving Credit Loans shall be used --------------- solely for Borrowers' general operating capital needs and in a manner consistent with the provisions of this Agreement and all applicable laws. In no event shall any proceeds of any Revolving Credit Loans be used to purchase or to carry, reduce, retire or refinance any Indebtedness incurred to purchase or carry any margin stock (within the meaning of regulations relating to carrying margin stock as promulgated of the Federal Reserve Board from time to time). 1.2 Term Loan. On the Closing Date, subject to the fulfillment or waiver --------- of all conditions precedent to the effectiveness of this Agreement, Lender shall make a term loan (the "Term Loan") to Borrower in the aggregate principal amount --------- equal to Thirteen Million Five Hundred Thousand and No/100 Dollars ($13,500,000.00) (the "Term Loan Commitment"). The Term Loan shall be evidenced -------------------- by a promissory note to be executed and delivered by Borrower to Lender on the Closing Date, the form of which is attached hereto and made a part hereof as Exhibit A (the "Term Note"), shall bear interest as specified in Section 2.1 and - --------- --------- ----------- shall be repayable in accordance with the terms of the Term Note and this Agreement. The Term Loan shall be funded upon the effectiveness of this Agreement. Amounts repaid with respect to the Term Loan may not be reborrowed. 1.3 [RESERVED FOR FUTURE USE] ------------------------- 1.4 Joint and Several Liability; Rights of Contribution. --------------------------------------------------- (A) Each Borrower states and acknowledges that: (i) pursuant to this Agreement, Borrowers desire to utilize their borrowing potential on a consolidated basis to the same extent possible if they were merged into a single corporate entity and that this Agreement reflects the establishment of a credit facility which would not otherwise be available to any Borrower if each Borrower were not jointly and severally liable for payment of all of the Obligations; (ii) it has determined that it will benefit specifically and materially from the advances of credit contemplated by this Agreement; (iii) it is both a condition precedent to the obligations of Lender hereunder and a desire of the Borrowers that each Borrower execute and deliver to Lender this Agreement; and (iv) Borrowers have requested and bargained for the structure and terms of and security for the advances contemplated by this Agreement. (B) Each Borrower hereby irrevocably and unconditionally: (i) agrees that it is jointly and severally liable to Lender for the full and prompt payment of the Obligations and the performance by each Borrower of its obligations hereunder in accordance with the terms hereof; (ii) agrees to fully and promptly perform all of its obligations hereunder with respect to each advance of credit hereunder as if such advance had been made directly to it; and (iii) agrees as a primary Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 2 obligation to indemnify Lender on demand for and against any loss incurred by Lender as a result of any of the Obligations of any one or more of the Borrowers being or becoming void, voidable, unenforceable or ineffective for any reason whatsoever, whether or not known to Lender or any Person, the amount of such loss being the amount which Lender would otherwise have been entitled to recover from any one or more of the Borrowers. (C) It is the intent of each Borrower that the indebtedness, Obligations and liability hereunder of neither of them be subject to challenge on any basis, including, without limitation, pursuant to any applicable fraudulent conveyance or fraudulent transfer laws. Accordingly, as of the date hereof, the liability of each Borrower under this Section 1.4, together with all ----------- of its other liabilities to all Persons as of the date hereof and as of any other date on which a transfer or conveyance is deemed to occur by virtue of this Agreement, calculated in amount sufficient to pay its probable net liabilities on its existing Indebtedness as the same become absolute and matured ("Dated Liabilities") is, and is to be, less than the amount of the aggregate of ----------------- a fair valuation of its property as of such corresponding date ("Dated Assets"). ------------ To this end, each Borrower under this Section 1.4, (i) grants to and recognizes ----------- in each other Borrower, ratably, rights of subrogation and contribution in the amount, if any, by which the Dated Assets of such Borrower, but for the aggregate of subrogation and contribution in its favor recognized herein, would exceed the Dated Liabilities of such Borrower or, as the case may be, (ii) acknowledges receipt of and recognizes its right to subrogation and contribution ratably from each of the other Borrowers in the amount, if any, by which the Dated Liabilities of such Borrower, but for the aggregate of subrogation and contribution in its favor recognized herein, would exceed the Dated Assets of such Borrower under this Section 1.4. In recognizing the value of the Dated ----------- Assets and the Dated Liabilities, it is understood that Borrowers will recognize, to at least the same extent of their aggregate recognition of liabilities hereunder, their rights to subrogation and contribution hereunder. It is a material objective of this Section 1.4 that each Borrower recognizes ----------- rights to subrogation and contribution rather than be deemed to be insolvent (or in contemplation thereof) by reason of an arbitrary interpretation of its joint and several obligations hereunder. In addition to and not in limitation of the foregoing provisions of this Section 1.4, Borrowers and Lender hereby agree and ----------- acknowledge that it is the intent of each Borrower and of Lender that the obligations of each Borrower hereunder be in all respects in compliance with, and not be voidable pursuant to, applicable fraudulent conveyance and fraudulent transfer laws. 1.5 Structure of Credit Facility. Each Borrower agrees and acknowledges ---------------------------- that the present structure of the credit facilities detailed in this Agreement is based in part upon the financial and other information presently known to Lender regarding each Borrower, the corporate structure of Borrowers, and the present financial condition of each Borrower. Upon or after the occurrence of an Event of Default and so long as it is continuing, each Borrower hereby agrees that Lender shall have the right, in its sole credit judgment, to require that any or all of the following changes be made to these credit facilities: (i) restrict loans and advances between Borrowers, (ii) establish separate lockbox and Dominion Accounts for each Borrower, (iii) separate the Loans into separate loans to each of the Borrowers as shall be determined by Lender, and (iv) establish such other procedures as Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - 3 shall be reasonably deemed by Lender to be useful in tracking where Loans are made under this Agreement and the source of payments received by Lender on such Loans. SECTION 2. INTEREST, FEES AND CHARGES 2.1 Interest. -------- 2.1.1 Rates of Interest. ----------------- (A) Interest shall accrue on the Base Rate Portion outstanding at the end of each day (computed on the basis of a calendar year of 360 days and actual days elapsed) at a fluctuating rate per annum equal to the sum of the Base Rate Margin applicable to the Base Rate Portion plus the Base Rate. After the date ---- hereof, the foregoing rates of interest shall be increased or decreased, as the case may be, by an amount equal to any increase or decrease in the Base Rate, with such adjustments to be effective as of the opening of business on the day that any such change in the Base Rate becomes effective. The Base Rate in effect on the date hereof shall be the Base Rate effective on the opening of business on the date hereof, but if this Agreement is executed on a day that is not a Business Day, the Base Rate in effect on the date hereof shall be the Base Rate effective as of the opening of business on the last Business Day immediately preceding the date hereof. (B) Interest shall accrue on each LIBOR Portion outstanding at the end of each day (computed on the basis of a calendar year of 360 days and actual days elapsed) at rates equal to the sum of the LIBOR Rate applicable to each such LIBOR Portion plus the LIBOR Margin applicable to the LIBOR Portion. ---- Base Rate Margin shall mean (i) with respect to the Base Rate ---------------- Portion, as of the Closing Date, 1.00% per annum, and (ii) thereafter, as of January 1, April 1, July 1 and October 1 of each year (each, an "Adjustment Date"), commencing on the first Adjustment Date on or after ---------------- April 1, 2000 on which Avalon, on a consolidated basis, shall have achieved a Pro Forma Fixed Charge Coverage Ratio for the trailing twelve month period ending on the last day immediately prior to such Adjustment Dates of not less than 1:1 for two (2) consecutive calendar quarters (the "Triggering Date"), the Base Rate Margin shall be adjusted, if necessary, ---------------- to the applicable percent per annum set forth in the pricing table below opposite the ratio of Senior Debt to EBITDA calculated for the trailing twelve month period ending on the last day of the most recently completed calendar quarter prior to the applicable Adjustment Date for which Lender has received the Compliance Certificate required by Section 8.1.3 (each ------------- such period, a "Calculation Period"). ------------------ LIBOR Margin shall mean shall mean (i) with respect to the LIBOR ------------ Portion, as of the Closing Date, 3.50% per annum, and (ii) thereafter, as of each Adjustment Date, commencing on the Triggering Date, the LIBOR Margin shall be adjusted, if necessary, to Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 4 the applicable percent per annum set forth in the pricing table below opposite the ratio of Senior Debt to EBITDA calculated for the applicable Calculation Period. PRICING TABLE ------------- ============================================================================= Senior Debt to EBITDA Base Rate Margin LIBOR Margin - ----------------------------------------------------------------------------- Equal to or greater than 3.00:1 .50% 3.00% - ----------------------------------------------------------------------------- Greater than or equal to 2.50:1, but less than 3.00:1 .25% 2.75% - ----------------------------------------------------------------------------- Greater than or equal to 2.25:1, but less than 2.50:1 .25% 2.50% - ----------------------------------------------------------------------------- Less than 2.25:1 .25% 2.00% ============================================================================ If Borrowers shall fail to deliver a Compliance Certificate by the date required pursuant to Section 8.1.3 with respect to any calendar quarter, ------------- effective as of the first Business Day of the immediately succeeding calendar month and continuing through the day preceding the earlier of (i) the next succeeding Adjustment Date, or (ii) the subsequent delivery of the delinquent Compliance Certificate, each applicable Base Rate Margin and each applicable LIBOR Margin shall be conclusively presumed to equal the highest applicable Base Rate Margin and the highest applicable LIBOR Margin specified in the pricing table set forth above. Subject to Section 2.1.2, in the event a Default (other ------------- than a Default arising as a result of the failure to deliver the Compliance Certificate as required by Section 8.1.3) has occurred and is continuing as of ------------- any Adjustment Date, any reduction in the Base Rate Margin or the LIBOR Margin, as the case may be, which would have otherwise occurred shall be postponed until the time such Default has been cured to the satisfaction of Lender or waived by Lender. 2.1.2 Default Rate of Interest. Upon and after the occurrence of ------------------------ an Event of Default, and during the continuation thereof, the principal amount of all Loans shall bear interest at a rate per annum equal to two percent (2%) above the interest rate otherwise applicable thereto (the "Default Rate"). ------------ 2.1.3 Maximum Interest. (A) Notwithstanding anything to the ---------------- contrary in this Agreement or otherwise, (i) if at any time the amounts deemed interest hereunder would exceed the maximum rate of interest permitted by applicable state or federal law in effect from time to time hereafter (the "Maximum Legal Rate"), the interest payable under this Agreement shall be - ------------------- computed upon the basis of the Maximum Legal Rate, but any subsequent reduction in the interest payable under this Agreement shall not reduce the interest thereafter payable hereunder below the amount computed on the basis of the Maximum Legal Rate until the aggregate amount of such interest accrued if such interest had been at all times computed solely on the basis set forth in this Agreement; and (ii) unless preempted by federal law, the interest payable under this Agreement may not exceed the "Weekly Ceiling" from time to time in effect -------------- under Chapter 303 of the Texas Finance Code. If the applicable state or federal law is amended in the future to allow a greater rate of interest to be charged under this Agreement than is presently allowed by applicable state or federal law, then Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 5 the limitation of interest hereunder shall be increased to the maximum rate of interest allowed by applicable state or federal law as amended, which increase shall be effective hereunder on the effective date of such amendment, and all interest charges owing to Lender by reason thereof shall be payable in accordance with Section 3.2.2. ------------- (B) No agreements, conditions, provisions or stipulations contained in this Agreement or any other instrument, document or agreement between any Borrower and Lender or Default of any Borrower, or the exercise by Lender of the right to accelerate the payment of the maturity of principal and interest, or to exercise any option whatsoever contained in this Agreement or any other Loan Document, or the arising of any contingency whatsoever, shall entitle Lender to contract for, charge, or receive, in any event, interest exceeding the Maximum Legal Rate. In no event shall any Borrower be obligated to pay interest exceeding such Maximum Legal Rate and all agreements, conditions or stipulations, if any, which may in any event or contingency whatsoever operate to bind, obligate or compel any Borrower to pay a rate of interest exceeding the Maximum Legal Rate, shall be without binding force or effect, at law or in equity, to the extent only of the excess of interest over such Maximum Legal Rate. In the event any interest is contracted for, charged or received in excess of the Maximum Legal Rate ("Excess Interest"), Borrowers acknowledge and --------------- stipulate that any such contract, charge, or receipt shall be the result of an accident and bona fide error, and that any Excess Interest received by Lender shall be applied, first, to reduce the principal then unpaid hereunder; second, ----- ------ to reduce the other Obligations; and third, returned to Borrowers, it being the ----- intention of the parties hereto not to enter at any time into a usurious or otherwise illegal relationship. Borrowers recognize that, with fluctuations in the Base Rate, the LIBOR Rate and the Maximum Legal Rate, such a result could inadvertently occur. By the execution of this Agreement, Borrowers covenant that (i) the credit or return of any Excess Interest shall constitute the acceptance by Borrowers of such Excess Interest, and (ii) Borrowers shall not seek or pursue any other remedy, legal or equitable, against Lender, based in whole or in part upon contracting for, charging or receiving of any interest in excess of the maximum authorized by applicable law. For the purpose of determining whether or not any Excess Interest has been contracted for, charged or received by Lender, all interest at any time contracted for, charged or received by Lender in connection with this Agreement shall be amortized, prorated, allocated and spread in equal parts during the entire term of this Agreement. (C) Incorporation by this Reference. The provisions of Section ------------------------------- ------- 2.1.3(B) shall be deemed to be incorporated into every document or communication - -------- relating to the Obligations which sets forth or prescribes any account, right or claim or alleged account, right or claim of Lender with respect to Borrowers (or any other obligor in respect of Obligations), whether or not any provision of Section 2.1.3(B) is referred to therein. All such documents and communications - ---------------- and all figures set forth therein shall, for the sole purpose of computing the extent of the Obligations and obligations of Borrowers (or any other obligor) asserted by Lender thereunder, be automatically re-computed by Borrowers or any such obligor, and by any court considering the same, to give effect to the adjustments or credits required by Section 2.1.3(B). ---------------- Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 6 2.2 Computation of Interest and Fees. Interest and unused line fees -------------------------------- hereunder shall be calculated daily and shall be computed on the actual number of days elapsed over a year of 360 days. For the purpose of computing interest hereunder, all items of payment received by Lender shall be deemed applied by Lender on account of the Obligations (subject to final payment of such items) one (1) Business Day after receipt by Lender of such items in Lender's account located in Dallas, Texas and Lender shall be deemed to have received such items of payment on the date specified in Section 3.4 hereof. ----------- 2.3 LIBOR Option. ------------ (A) Upon the conditions that: (i) Lender shall have received a LIBOR Request from Borrowers at least two (2) Business Days prior to the first day of the LIBOR Period requested, (ii) there shall have occurred no change in Applicable Law which would make it unlawful for Lender to obtain deposits of Dollars in the London interbank foreign currency deposits market, (iii) as of the date of the LIBOR Request and the first day of the LIBOR Period, there shall exist no Default or Event of Default, (iv) Lender is able to determine the LIBOR Rate in respect of the requested LIBOR Period or Lender is able to obtain deposits of Dollars in the London interbank foreign currency deposits market in the applicable amounts and for the requested LIBOR Period, and (v) as of the first date of the LIBOR Period, there are no more than three (3) outstanding LIBOR Portions including the LIBOR Portion being requested, then interest on the LIBOR Portion requested during the LIBOR Period requested will be based on the applicable LIBOR Rate. (B) Each LIBOR Request shall be irrevocable and binding on Borrowers. Borrowers shall indemnify Lender for any loss, penalty or expense incurred by Lender due to failure on the part of any Borrower to fulfill, on or before the date specified in any LIBOR Request, the applicable conditions set forth in this Agreement or due to the prepayment of the applicable LIBOR Portion prior to the last day of the applicable LIBOR Period, including, without limitation, any loss (including loss of anticipated profits) or expense incurred by reason of the liquidation or redeployment of deposits or other funds acquired by Lender to fund or maintain the requested LIBOR Portion. (C) If any Legal Requirement shall (i) make it unlawful for Lender to fund through the purchase of Dollar deposits any LIBOR Portion or otherwise give effect to its obligations as contemplated under this Section 2.3, or (ii) shall ----------- impose on Lender any costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of Lender which includes deposits by reference to which the LIBOR Rate is determined as provided herein or a category of extensions of credit or other assets of Lender which includes any LIBOR Portion, or (iii) shall impose on Lender any restrictions (not already taken into account under any Statutory Reserves) on the amount of such a category of liabilities or assets which Lender may hold, then, in each such case, Lender may, by notice thereof to any Borrower, terminate the LIBOR Option. Any LIBOR Portion subject thereto shall immediately bear interest thereafter at the rate and in the manner provided for Base Rate Portions pursuant to Section 2.1.1. Borrowers shall indemnify Lender against ------------- any loss, penalty or expense incurred by Lender due to liquidation or redeployment Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 7 of deposits or other funds acquired by Lender to fund or maintain any LIBOR Portion that is terminated under this Section 2.3. ----------- (D) Lender shall receive payments of amounts of principal of and interest with respect to the LIBOR Portions free and clear of, and without deduction for, any Taxes. If (i) Lender shall be subject to any Tax in respect of any LIBOR Portion or any part thereof or, (ii) any Borrower shall be required to withhold or deduct any Tax from any such amount, the LIBOR Rate applicable to such LIBOR Portion shall be adjusted by Lender to reflect all additional costs incurred by Lender in connection with the payment by Lender or the withholding by any Borrower of such Tax and such Borrower shall provide Lender with a statement detailing the amount of any such Tax actually paid by such Borrower. Determination by Lender of the amount of such costs shall, in the absence of manifest error, be conclusive. If after any such adjustment any part of any Tax paid by Lender is subsequently recovered by Lender, Lender shall reimburse such Borrower to the extent of the amount so recovered. A certificate of an officer of Lender setting forth the amount of such recovery and the basis therefor shall, in the absence of manifest error, be conclusive. 2.4 Closing Fee. Borrowers shall pay to Lender a closing fee of ----------- $20,000.00, which fee shall be fully earned and nonrefundable on the Closing Date and shall be paid on the Closing Date. 2.5 Unused Line Fee. Borrowers shall pay to Lender a fee equal to one- --------------- half percent (0.5%) per annum of the amount by which the sum of the Average Monthly Loan Balance is less than the Revolving Credit Loan Commitment. The unused line fee shall be payable monthly in arrears on the first day of each calendar month hereafter. 2.6 Audit and Appraisal Fees. Borrowers shall, on demand, reimburse ------------------------ Lender for all reasonable out-of-pocket expenses incurred by Lender in connection with audits and appraisals of any Borrower's books and records and such other matters as Lender shall deem appropriate. 2.7 Reimbursement of Expenses. If, at any time or times regardless of ------------------------- whether or not an Event of Default then exists, Lender incurs reasonable legal or accounting expenses or any other costs or out-of-pocket expenses in connection with (i) the negotiation and preparation of this Agreement or any of the other Loan Documents, any amendment of or modification of this Agreement or any of the other Loan Documents, or any sale or attempted sale of any interest herein to any other Person; (ii) the administration of this Agreement or any of the other Loan Documents and the transactions contemplated hereby and thereby; (iii) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Lender, any Borrower or Guarantor, or any other Person) in any way relating to the Collateral, this Agreement or any of the other Loan Documents or any Loan Party's affairs; (iv) any attempt to enforce any rights of Lender against any Loan Party or any other Person which may be obligated to Lender by virtue of this Agreement or any of the other Loan Documents, including, the Account Debtors; or (v) any attempt to inspect, verify, protect, preserve, restore, collect, sell, liquidate or otherwise dispose of or realize upon the Collateral; then all such legal and accounting expenses, other costs and out of pocket expenses of Lender shall be charged to Borrowers. All amounts chargeable to Borrowers under this Section 2.7 shall be Obligations ----------- Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 8 secured by all of the Collateral, shall be payable on demand to Lender or to such Participant, as the case may be, and shall bear interest from the date such demand is made until paid in full at the rate applicable to Loans from time to time. Borrowers shall also reimburse Lender for expenses incurred by Lender in its administration of the Collateral to the extent and in the manner provided in Section 6. - --------- 2.8 Bank Charges. Borrowers shall pay to Lender, on demand, any and all ------------ reasonable fees, costs or expenses which Lender or any Participant pays to a bank or other similar institution (including any fees paid by Lender to any Participant) arising out of or in connection with (i) the forwarding to any Borrower or any other Person on behalf of any Borrower by Lender or any Participant of proceeds of loans made by Lender to Borrowers pursuant to this Agreement, and (ii) the depositing for collection, by Lender or any Participant of any check or item of payment received or delivered to Lender or any Participant on account of the Obligations. SECTION 3. LOAN ADMINISTRATION. 3.1 Manner of Borrowing Revolving Credit Loans. Borrowings under the ------------------------------------------ credit facility established pursuant to Section 1 shall be as follows: --------- 3.1.1 Loan Requests. A request for a Revolving Credit Loan shall ------------- be made, or shall be deemed to be made, in the following manner: (i) an Authorized Officer shall give Lender written notice of its intention to borrow, in which notice such Authorized Officer shall specify the amount of the proposed borrowing and the proposed borrowing date, no later than 11:00 a.m. (Dallas, Texas time) on the proposed borrowing date (or in accordance with Section 2.3 ----------- hereof in the case of a request for a LIBOR Portion), provided, however, that -------- ------- Lender shall have the right to refuse to accept a request or refuse to make a Revolving Credit Loan if at such time there exists a Default or an Event of Default; and (ii) the becoming due of any amount required to be paid under this Agreement or under any of the other Loan Documents, whether as principal, accrued interest, fees or other charges, shall irrevocably be deemed a request by Borrowers to Lender for a Revolving Credit Loan on the due date of, and in an aggregate amount required to pay, such principal, accrued interest, fees or other charges, and the proceeds of any such Revolving Credit Loan may be disbursed by Lender by way of direct payment of the relevant Obligation (whether or not any Default, Event of Default or Out-of-Formula Condition exists at the time of or would result from such Revolving Credit Loan) and shall bear interest at the rate of interest applicable to the Base Rate Portion. As an accommodation to Borrowers, Lender may permit facsimile transmittal of requests for Revolving Credit Loans, instructions, authorizations, agreements or reports to Lender by an Authorized Officer. Unless Borrowers specifically direct Lender in writing not to accept or act on facsimile communications from an Authorized Officer, Lender shall have no liability to any Borrower for any loss or damage suffered by any Borrower as a result of Lender's honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to Lender by facsimile and purporting to have been sent to Lender by any Authorized Officer and Lender shall have no duty to verify the origin or authenticity of any such communication. Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 9 3.1.2 Disbursement. Each Borrower hereby irrevocably authorizes ------------ Lender to disburse the proceeds of each Revolving Credit Loan requested, or deemed to be requested, pursuant to this Section 3.1.2 as follows: (i) the ------------- proceeds of each Revolving Credit Loan requested under Section 3.1.1(i) shall be ---------------- disbursed by Lender in Dollars and in immediately available funds, in the case of the initial borrowing, in accordance with the terms of the written disbursement letter from such Borrower, and in the case of each subsequent borrowing, by wire transfer to such bank account as may be agreed upon by such Borrower and Lender from time to time or elsewhere if pursuant to a written direction from such Borrower; and (ii) the proceeds of each Revolving Credit Loan requested under Section 3.1.1(ii) shall be disbursed by Lender by way of ----------------- direct payment of the relevant interest or other Obligation. 3.1.3 Authorization. Each Borrower hereby irrevocably authorizes ------------- Lender, in Lender's sole discretion, to advance to each Borrower, and to charge to Borrowers' Loan Account hereunder as a Revolving Credit Loan, a sum sufficient to pay all interest accrued on the Obligations during the immediately preceding month and to pay all reasonable costs, fees and expenses at any time owed by any Borrower to Lender hereunder. Lender shall provide to Avalon a brief description of such costs, fees and expenses and any documents, statements or invoices reasonably related thereto. Any failure of Lender to provide any description of such fees, costs or expenses or any documents, statements or invoices related thereto shall not affect the liability of any Borrower with respect to the payment of such fees, costs or expenses. All payments with respect to any of the Obligations shall be made to Lender on the date when due, in Dollars and in immediately available funds, without any offset or counterclaim. 3.2 Payments. Except where evidenced by notes or other instruments issued -------- or made by any Borrower to Lender specifically containing payment provisions which are in conflict with this Section 3.2 (in which event the conflicting ----------- provisions of said notes or other instruments shall govern and control), the Obligation shall be payable as follows: 3.2.1 Principal. Principal payable on account of Revolving Credit --------- Loans shall be payable by each Borrower, jointly and severally, to Lender immediately upon the earliest of (i) the receipt by Lender or any Borrower of any proceeds of any of the Collateral other than Equipment or real Property, to the extent of said proceeds, except that, so long as no Default or Event of Default exists, if, after application of the proceeds to Base Rate Portions, any remaining Loans outstanding at the time of receipt by Borrower of any such proceeds are LIBOR Portions, then the Borrower receiving such proceeds may at its option direct that such proceeds be held by Lender in a non-interest bearing cash collateral account maintained by Lender to be applied to the payment of principal on the last day of the LIBOR Period applicable to each LIBOR Portion in the order of maturity, (ii) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Obligations, or (iii) termination of this Agreement pursuant to Section 4; --------- provided, however, that if an Out-of-Formula Condition shall exist at any time, - -------- ------- Borrowers shall, on demand, repay the Obligations to the extent necessary to eliminate the Out-of-Formula Condition. Principal payable on account of the Term Loan shall be payable by Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 10 Borrowers to Lender in accordance with the provisions of the Term Note and the provisions of this Agreement. 3.2.2 Interest. -------- (A) Base Rate Portion. Interest accrued on the Loans shall be due on ----------------- the earliest of (i) the first calendar day of each month (for the immediately preceding month), computed through the last calendar day of the preceding month, (ii) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Obligations, or (iii) termination of this Agreement pursuant to Section 4. --------- (B) LIBOR Portion. Interest accrued on each LIBOR Portion shall be ------------- due and payable on each LIBOR Interest Payment Date and on the earliest of (i) the last day of the Interest Period applicable to such LIBOR Portion, (ii) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Obligations, or (iii) termination of this Agreement pursuant to Section 4 hereof. --------- 3.2.3 Costs, Fees and Charges. Costs, fees and charges payable ----------------------- pursuant to this Agreement shall be payable by Borrowers as and when provided in Section 2, to Lender or to any other Person designated by Lender in writing. - --------- 3.2.4 Other Obligations. The balance of the Obligations requiring ----------------- the payment of money, if any, shall be payable by Borrowers to Lender as and when provided in this Agreement, the Other Agreements or the Security Documents, or if no date of payment is otherwise specified in the Loan Documents, on demand. 3.3 Mandatory Prepayments. --------------------- 3.3.1 Proceeds of Sale, Loss, Destruction or Condemnation of ------------------------------------------------------ Collateral. Except for the replacements of Equipment that is substantially - ---------- worn, damaged or obsolete with Equipment of like kind, function and value as provided in Section 6.4.2, if any Loan Party sells any of the Equipment or real ------------- Property, or if any of the Collateral is lost or destroyed or taken by condemnation, such Loan Party shall pay to Lender, unless otherwise agreed by Lender, as and when received by such Loan Party a sum equal to the amount (including insurance payments) received by such Loan Party from such sale, loss, destruction or condemnation. Nothing in this Section 3.3 shall authorize Loan ----------- Party to sell any of the Collateral without Lender's prior written consent except as otherwise expressly provided elsewhere in this Agreement. 3.3.2 Prepayment From Issuance of Securities. Immediately upon -------------------------------------- the receipt by any Loan Party of the proceeds of the issuance of equity securities (other than (i) proceeds of the issuance of equity securities received on or before the Closing Date, (ii) proceeds from the issuance of equity securities to members of the management of any Loan Party, (iii) proceeds of the issuance of equity securities to any Borrower or any Subsidiary of any Borrower, or (iv) proceeds of the Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 11 issuance of equity securities arising as a result of the exercise of any warrants or options to purchase capital stock of Avalon outstanding as of the Closing Date), Borrowers shall prepay the Loans in an amount equal to such proceeds, net of underwriting discounts and commissions and other reasonable costs associated therewith. The payments shall be applied in accordance with Section 3.3.3. - ------------- 3.3.3 Application of Proceeds. With respect to the prepayments ----------------------- described in Subsections 3.3.1 and 3.3.2, such prepayments shall be applied first, to reduce the outstanding principal balance of the Term Loan (if any), - ----- and second, to reduce the outstanding principal balance of the Revolving Credit ------ Loans and as a permanent reduction of the Revolving Credit Loan Commitment. 3.4 Application of Payments and Collections. All items of payment --------------------------------------- received by Lender by 12:00 noon (Dallas, Texas time) on any Business Day shall be deemed received on that Business Day. All items of payment received after 12:00 noon (Dallas, Texas time) on any Business Day shall be deemed received on the following Business Day. Upon receipt by Lender, the proceeds of items deposited to the Dominion Account shall be applied to payment of the Obligations in accordance with this Agreement. Each Borrower irrevocably waives the right to direct the application of any and all payments and collections at any time or times hereafter received by Lender from or on behalf of any Borrower and each Borrower hereby irrevocably agree that Lender shall have the continuing exclusive right to apply and reapply any and all such payments and collections received at any time or times hereafter by Lender or its agent against the Obligations, in such manner as Lender may deem advisable, notwithstanding any entry by Lender upon any of its books and records. If as the result of collections of Accounts as authorized by Section 6.2.6 a credit balance exists ------------- in the Loan Account, such credit balance shall not accrue interest in favor of any Borrower, but shall be available to Borrowers at any time or times for so long as no Default or Event of Default exists. Lender may, at its option, offset such credit balance against any of the Obligations upon and after the occurrence of an Event of Default. 3.5 All Loans to Constitute One Obligation. All Loans shall constitute -------------------------------------- one general Obligation of Borrowers, and shall be secured by Lender's security interest and Lien upon all of the Collateral and by all other security interests and Liens heretofore, now or at any time or times hereafter granted by any Loan Party to Lender. 3.6 Loan Account. Lender shall establish an account on its books (the ------------ "Loan Account") and enter all Loans as debits to the Loan Account and shall also - ------------- record in the Loan Account all payments made by any Loan Party on any Obligations and all proceeds of Collateral which are finally paid to Lender, and may record therein, in accordance with customary accounting practice, other debits and credits, including interest and all charges and expenses properly chargeable to any Loan Party. 3.7 Statements of Account. Lender will account to Borrowers monthly with --------------------- a statement of Loans, charges and payments made pursuant to this Agreement, and such account rendered by Lender shall be deemed final, binding and conclusive upon Borrowers unless Lender is notified by Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 12 Borrowers in writing to the contrary within thirty (30) days after the date each accounting is sent pursuant to Section 11.8. Such notice shall only be deemed an ------------ objection to those items specifically objected to therein. SECTION 4. TERM AND TERMINATION 4.1 Term of Agreement. Subject to Section 4.2 and Lender's right to cease ----------------- ----------- making Loans to any Borrower upon or after the occurrence of any Default or Event of Default, this Agreement shall be in effect for a period from the date hereof, through and including February 25, 2003 (the "Term"). ---- 4.2 Termination. ----------- 4.2.1 Termination by Lender. Lender may terminate this Agreement --------------------- and at any time without notice upon or after the occurrence of an Event of Default. 4.2.2 Termination by Borrower. Upon at least forty-five (45) days ----------------------- prior written notice to Lender, Borrowers may, at their option, terminate this Agreement; provided, however, no such termination shall be effective until -------- ------- Borrowers have paid all of the Obligations in immediately available funds. Any notice of termination given by any Borrower shall be deemed given by all Borrowers and shall be irrevocable unless Lender otherwise agrees in writing, and Lender shall have no obligation to make any Loans. Borrowers may elect to terminate this Agreement in its entirety only. No section of this Agreement may be terminated singly. 4.2.3 Termination Charges. On the effective date of termination ------------------- of this Agreement for any reason, Borrowers, jointly and severally, shall pay to Lender (in addition to the then outstanding principal, accrued interest and other charges owing under the terms of this Agreement and any of the other Loan Documents) as liquidated damages for the loss of the bargain (unless termination is made as the result of and all prepayments of the Loans are made with the proceeds of a Qualified Secondary Public Offering) and not as a penalty, an amount equal to three percent (3%) of the Revolving Credit Loan Commitment plus the outstanding principal balance of the Term Loan (the "Termination Balance") ------------------- if termination occurs from the Closing Date through February 24, 2000; two percent (2%) of the Termination Balance if termination occurs from February 25, 2000 through February 24, 2001; one percent (1%) of the Termination Balance if termination occurs from February 25, 2001 through February 24, 2002. If termination occurs after February 25, 2002, or occurs at any time as a result of a Qualified Secondary Public Offering, no termination charge shall be payable. 4.2.4 Effect of Termination. All of the Obligations shall be --------------------- immediately due and payable upon the termination date stated in any notice of termination of this Agreement. All undertakings, agreements, covenants, warranties and representations of any Loan Party contained in the Loan Documents shall survive any such termination and Lender shall retain its Liens in the Collateral and all of its rights and remedies under the Loan Documents notwithstanding such Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 13 termination until Borrowers have paid the Obligations to Lender, in full, in immediately available funds, together with the applicable termination charge, if any. Notwithstanding the payment in full of the Obligations, Lender shall not be required to terminate its security interests in the Collateral unless, with respect to any loss or damage Lender may incur as a result of dishonored checks or other items of payment received by Lender from any Loan Party or any Account Debtor and applied to the Obligations, Lender shall (A) have received a written agreement, executed by Borrowers and by any Person reasonably acceptable to Lender whose loans or other advances to Borrowers are used in whole or in part to satisfy the Obligations, indemnifying Lender from any such loss or damage; or (B) have retained such monetary reserves and Liens on the Collateral for such period of time as Lender, in its sole credit judgment, may deem necessary to protect Lender from any such loss or damage. SECTION 5. SECURITY INTERESTS 5.1 Security Interest in Collateral. To secure the prompt payment and ------------------------------- performance to Lender of all of the Obligations, each Loan Party hereby grants to Lender a continuing security interest and Lien upon all of each Loan Party's assets, including all of the following Property and interests in Property of each Loan Party, whether now owned or existing or hereafter created, acquired or arising and wheresoever located: (A) All Accounts; (B) All Equipment (except the Excluded Property); (C) All General Intangibles; (D) All investment property (as defined in Section 9.115 of the Code); ------------- (E) All Instruments; (F) All real Property (except the El Paso Property); (G) All monies and other Property of any kind now or at any time or times hereafter in the possession or under the control of Lender or a bailee or Affiliate of Lender; (H) All accessions to, substitutions for and all replacements, products and cash and non-cash proceeds of (A) through (G) above, including proceeds of and unearned premiums with respect to insurance policies insuring any of the Collateral; and (I) All books and records (including customer lists, credit files, computer programs, print-outs, and other computer materials and records) of each Loan Party pertaining to any of (A) through (H) above. Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 14 5.2 Cross-Collateralization. Each Loan Party agrees that the Collateral ----------------------- pledged by such Loan Party hereunder shall secure all of the Obligations. Upon and after an Event of Default by any Borrower, Lender may pursue all rights and remedies that Lender may have against all or any part of the Collateral regardless of which Loan Party has legal title to such Collateral. Each Loan Party hereby acknowledges that this cross-collateralization of the Collateral owned by such Loan Party is in consideration of Lender extending the credit hereunder and is mutually beneficial to each Borrower. 5.3 Lien Perfection; Further Assurances. Each Loan Party shall execute ----------------------------------- such UCC-1 financing statements as are required by the Code and such other instruments, assignments or documents as are necessary to perfect Lender's Lien upon any of the Collateral and shall take such other action as may be required to perfect or to continue the perfection of Lender's Lien upon the Collateral, including the delivery to Lender of all Collateral the possession of which is necessary to perfect the security interest therein. Unless prohibited by Applicable Law, each Loan Party hereby authorizes Lender to execute and file any such financing statement on such Loan Party's behalf. The parties agree that a carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement and may be filed in any appropriate office in lieu thereof. At Lender's request, each Loan Party shall also promptly execute or cause to be executed and shall deliver to Lender any and all documents, instruments and agreements deemed necessary by Lender to give effect to or carry out the terms or intent of the Loan Documents. 5.4 Lien on Realty. The due and punctual payment and performance of the -------------- Obligations shall also be secured by the Lien created by each Mortgage upon all real Property of each Loan Party described therein; provided, that Borrowers -------- shall not be required to secure the Obligations by a Mortgage on the El Paso Property. Each Mortgage shall be executed by such Loan Party in favor of Lender and shall be duly recorded, at such Loan Party's expense (to the extent permitted by Applicable Law), in each office where such recording is required to constitute a fully perfected Lien on the real Property covered thereby. Each Loan Party shall deliver to Lender, at such Loan Party's expense, mortgagee title insurance policies issued by a title insurance company satisfactory to Lender, which policies shall be in form and substance satisfactory to Lender and shall insure a valid Lien in favor of Lender on the Property covered thereby, subject only to those exceptions acceptable to Lender and its counsel. Each Loan Party shall deliver to Lender such other documents, including as-built survey prints of the real Property, as Lender and its counsel may request relating to the real Property subject to the Mortgage. SECTION 6. COLLATERAL ADMINISTRATION 6.1 General ------- 6.1.1 Location of Collateral. All tangible items of Collateral, ---------------------- other than motor vehicles, Instruments and investment property held in an account with a securities intermediary, shall at all times be kept by each Loan Party and its Subsidiaries at one or more of the business locations of such Loan Party set forth on Exhibit B to the Original Agreement or any amendments to such --------- Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 15 Exhibit attached to this Agreement and shall not, without the prior written - ------- approval of Lender, be moved therefrom except, prior to an Event of Default and Lender's acceleration of the maturity of the Obligations in consequence thereof, for removals in connection with dispositions of Equipment that are authorized by Section 6.4.2. - ------------- 6.1.2 Insurance of Collateral. Each Loan Party shall maintain and ----------------------- pay for insurance upon all Collateral wherever located and with respect to such Loan Party's business, covering casualty, hazard, public liability and such other risks in such amounts and with such insurance companies as are reasonably satisfactory to Lender. Each Loan Party shall deliver the originals or certified copies of such policies to Lender with satisfactory lender's loss payable endorsements, which policies shall name Lender as loss payee, assignee or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than fifteen (15) days prior written notice to Lender in the event of cancellation of the policy for any reason whatsoever and a clause specifying that the interest of Lender shall not be impaired or invalidated by any act or neglect of any Loan Party or the owner of the Property or by the occupation of the premises for purposes more hazardous than are permitted by said policy. If any Loan Party fails to provide and pay for such insurance, Lender may, at its option, but shall not be required to, procure the same and charge Borrowers therefor. Each Loan Party agrees to deliver to Lender, promptly as rendered, true copies of all reports made in any reporting forms to insurance companies. 6.1.3 Protection of Collateral. All expenses of protecting, ------------------------ insuring, and maintaining the Collateral, any and all excise, property, sales, and use taxes imposed by Applicable Law on any of the Collateral or in respect of the "sale" thereof, and all other payments required to be made by Lender to any Person to realize upon any Collateral shall be borne and paid by Borrowers. If any Loan Party fails to promptly pay any portion thereof when due, Lender may, at its option, but shall not be required to, pay the same and charge Borrowers therefor. Lender shall not be liable or responsible in any way for the safekeeping of any of the Collateral or for any loss or damage thereto (except for reasonable care in the custody thereof while any Collateral is in Lender's actual possession) or for any diminution in the value thereof, or for any act or default of any warehouseman, carrier, forwarding agency, or other Person whomsoever, but the same shall be at the sole risk of each Loan Party. 6.2 Administration of Accounts. -------------------------- 6.2.1 Records, Schedules and Assignments of Accounts. Each Loan ---------------------------------------------- Party shall keep accurate and complete records of its Accounts and all payments and collections thereon. Each Loan Party shall submit to Lender, as soon as available and in no event later than the fifteenth (15/th/) day of each month from and after the date hereof, and at any time on request of Lender within five (5) days of any such request, a receivables and collections report for the preceding month or the period specified in such request, as the case may be, each in form satisfactory to Lender. As soon as available and in no event later than the fifteenth (15/th/) day of each month from and after the date hereof, each Loan Party shall deliver to Lender, in form acceptable to Lender, detailed aged trial balance of all Accounts existing as of the last day of the preceding month, specifying the names, Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 16 addresses, face value, dates of invoices and due dates for each Account Debtor obligated on an Account so listed ("Schedule of Accounts"), and, upon Lender's -------------------- request therefor, copies of any reports to Account Debtors relating to the delivery of services or head counts of facility populations, including payment histories and present status reports relating to the Accounts so scheduled and such other matters and information relating to the status of then existing Accounts as Lender shall reasonably request. Avalon shall notify Lender if Accounts of Avalon and its Subsidiaries in an aggregate amount in excess of $100,000.00 become ineligible because they are in one or more of the specified categories of ineligibility set forth in the definition of Eligible Accounts. Avalon shall notify Lender of such occurrence of the first Business Day following such occurrence and the Borrowing Base shall be adjusted to reflect such occurrence. If requested by Lender at any time after the occurrence and during the continuation of a Default or an Event of Default, each Loan Party shall execute and deliver to Lender agings and formal written assignments of all of its Accounts weekly or daily, which shall include all Accounts that have been created since the date of the last assignment, together with copies of invoices or invoice registers related thereto. 6.2.2 Discounts, Allowances, Disputes. If any Loan Party grants ------------------------------- any discounts, allowances or credits that are not shown on the face of the invoice for the Account involved, such Loan Party shall report such discounts, allowances or credits, as the case may be, to Lender as part of the next required Schedule of Accounts. If any amounts due and owing in excess of $100,000.00 are in dispute between any Loan Party and any Account Debtor, such Loan Party shall provide Lender with written notice thereof at the time of submission of the next Schedule of Accounts, explaining in detail the reason for the dispute, all claims related thereto and the amount in controversy. Upon and after the occurrence of an Event of Default and so long as it is continuing, Lender shall have the right to settle or adjust all disputes and claims directly with the Account Debtor and to compromise the amount or extend the time for payment of the Accounts upon such terms and conditions as Lender may deem advisable, and to charge the deficiencies, costs and expenses thereof, including attorney's fees, to such Loan Party. 6.2.3 Taxes. If an Account includes a charge for any tax payable ----- to any governmental taxing authority, Lender is authorized, in its sole discretion, to pay the amount thereof to the proper taxing authority for the account of Borrowers and to charge Borrowers therefor, provided, however that Lender shall not be liable for any such taxes to any governmental taxing authority that may be due by any Loan Party. 6.2.4 Account Verification. Upon or after the occurrence of a -------------------- Default or an Event of Default and so long as it is continuing, any of Lender's officers, employees or agents shall have the right, at any time or times hereafter, in the name of Lender, any designee of Lender or any Loan Party, to verify the validity, amount or any other matter relating to any Accounts by mail, telephone, facsimile transmission or otherwise. Each Loan Party shall cooperate fully with Lender in an effort to facilitate and promptly conclude any such verification process. 6.2.5 Maintenance of Dominion Account. Each Loan Party shall ------------------------------- maintain a Dominion Account with such banks as may be selected by such Loan Party and be acceptable to Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 17 Lender. All funds deposited in the Dominion Account shall immediately become the property of Lender and such Loan Party shall obtain the agreement by such banks in favor of Lender to waive any offset rights against the funds so deposited. Lender assumes no responsibility for deposits to the Dominion Accounts, including any claim of accord and satisfaction or release with respect to deposits accepted by any bank thereunder. 6.2.6 Collection of Accounts, Proceeds of Collateral. To expedite ---------------------------------------------- collection, each Loan Party shall endeavor in the first instance to make collection of its Accounts for Lender. All remittances received by any Loan Party in respect of Accounts, together with the proceeds of any other Collateral, shall be held as Lender's property by such Loan Party as trustee of an express trust for Lender's benefit and such Loan Party shall immediately deposit same in kind in the Dominion Account. Lender retains the right at all times after the occurrence of an Event of Default and so long as it is continuing to notify Account Debtors that Accounts have been assigned to Lender and to collect Accounts directly in its own name and to charge the collection costs and expenses, including attorneys' fees to Borrowers. At Lender's request, each Loan Party shall establish a lockbox arrangement acceptable to Lender with such banks as may be selected by a Loan Party and be acceptable to Lender and shall issue to any such banks an irrevocable letter of instruction directing such banks to deposit all payments or other remittances received in the lockbox to the Dominion Account for application on account of the Obligations. 6.3 [RESERVED FOR FUTURE USE] 6.4 Administration of Equipment. --------------------------- 6.4.1 Records and Schedules of Equipment. Each Loan Party shall ---------------------------------- keep accurate records itemizing and describing the kind, type, quality, quantity and value of its Equipment and all dispositions made in accordance with Section ------- 6.4.2, and shall furnish Lender with a current schedule containing the foregoing - ----- information on at least an annual basis and more often if requested by Lender. Immediately on request therefor by Lender, each Loan Party shall deliver to Lender any and all evidence of ownership, if any, of any of the Equipment (other than the Excluded Property). 6.4.2 Dispositions of Equipment. No Loan Party will sell, lease ------------------------- or otherwise dispose of or transfer any of the Equipment or any part thereof without the prior written consent of Lender; provided, however, that the -------- ------- foregoing restriction shall not apply, for so long as no Default or Event of Default exists, to (i) dispositions of Equipment which, in the aggregate during any consecutive twelve-month period, has a fair market value or book value, whichever is less, of $200,000.00 or less,(ii) replacements of Equipment that is substantially worn, damaged or obsolete with Equipment of like kind, function and value, provided that the replacement Equipment shall be acquired prior to or concurrently with any disposition of the Equipment that is to be replaced, the replacement Equipment shall be free and clear of Liens other than Permitted Liens that are not Purchase Money Liens, and such Loan Party shall have given Lender at least five (5) days prior written notice of such disposition, or (iii) the Excluded Property. Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 18 6.4.3 Condition of Equipment. Each Loan Party represents and ---------------------- warrants to Lender that the Equipment is in good operating condition and repair, and all necessary replacements of and repairs thereto shall be made so that the value and operating efficiency of the Equipment shall be maintained and preserved, reasonable wear and tear excepted. No Loan Party will permit any of the Equipment to become affixed to any real Property leased to a Loan Party so that an interest arises therein under the real estate laws of the applicable jurisdiction unless the landlord of such real Property has executed a landlord waiver or leasehold mortgage in favor of and in form acceptable to Lender, and no Loan Party will permit any of the Equipment to become an accession to any personal Property that is subject to a Lien unless the Lien is a Permitted Lien (other than a Purchase Money Lien). 6.5 Payment of Charges. All amounts chargeable to any Loan Party under ------------------ Section 6 shall be Obligations secured by all of the Collateral, shall be - --------- payable each Borrower, jointly and severally, on demand and shall bear interest from the date such advance was made until paid in full at the rate applicable to the Base Rate Portion from time to time. SECTION 7. REPRESENTATIONS AND WARRANTIES 7.1 General Representations and Warranties. To induce Lender to enter -------------------------------------- into this Agreement and to make advances hereunder, the Loan Parties, jointly and severally, warrant and represent to Lender and covenant with Lender that: 7.1.1 Organization and Qualification. Each Loan Party is a ------------------------------ corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Each Loan Party is duly qualified and is authorized to do business and is in good standing as a foreign corporation in each state or jurisdiction listed on Exhibit C to the Original Agreement or any --------- amendments to such Exhibit attached to this Agreement and in all other states ------- and jurisdictions where the character of its Properties or the nature of its activities make such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect. 7.1.2 Corporate Power and Authority. Each Loan Party is duly ----------------------------- authorized and empowered to enter into, execute, deliver and perform this Agreement and each of the other Loan Documents to which it is a party. The execution, delivery and performance of this Agreement and each of the other Loan Documents have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the shareholders of any Loan Party; (ii) contravene any Loan Parties' charter, articles or certificate of incorporation or by-laws; (iii) violate, or cause any Loan Party to be in default under, any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award in effect having applicability to such Loan Party; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which any Loan Party is a party or by which it or its Properties may be bound or affected; or (v) result in, or require, the Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 19 creation or imposition of any Lien (other than Permitted Liens) upon or with respect to any of the Properties now owned or hereafter acquired by any Loan Party. 7.1.3 Legally Enforceable Agreement. This Agreement is, and each ----------------------------- of the other Loan Documents when delivered under this Agreement will be, a legal, valid and binding obligation of each Loan Party enforceable against them in accordance with its respective terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or by principles of equity pertaining to the availability of equitable remedies. 7.1.4 Capital Structure. Exhibit D to the Original Agreement or ----------------- --------- any amendments to such Exhibit attached to this Agreement states (i) the correct ------- name of each Loan Party, its jurisdiction of incorporation and the percentage of its Voting Stock owned by a Loan Party, as the case may be, (ii) the name of each corporate or joint venture Affiliate of each Loan Party and the nature of the affiliation, (iii) the number, nature and holder of all outstanding Securities of each Loan Party, and (iv) the number of authorized, issued and treasury shares of each Loan Party. Avalon has good title to all of the shares it purports to own of the stock or membership interests of Southern, Central, The Villa, and Elk City, free and clear in each case of any Lien other than Permitted Liens. Each Loan Party has good title to all of the shares it purports to own of the stock of each of its Subsidiaries, free and clear in each case of any Lien other than Permitted Liens. All such shares have been duly issued and are fully paid and non-assessable. Except as set forth on Exhibit D to the --------- Original Agreement or any amendments to such Exhibit attached to this Agreement, ------- there are no outstanding options to purchase, or any rights or warrants to subscribe for, or any commitments or agreements to issue or sell, or any Securities or obligations convertible into, or any powers of attorney relating to, shares of the capital stock or membership interests of any Loan Party (except for Avalon). Except as described on Exhibit D to the Original Agreement --------- or any amendments to such Exhibit attached to this Agreement, there are no ------- outstanding agreements or instruments binding upon any shareholders of any Loan Party relating to the ownership of its shares of capital stock. 7.1.5 Corporate Names. No Loan Party has been known as or used --------------- any corporate, fictitious or trade names except those listed on Exhibit E to the --------- Original Agreement or any amendments to such Exhibit attached to this Agreement. ------- Except as set forth on Exhibit E to the Original Agreement or any amendments to --------- such Exhibit attached to this Agreement, no Loan Party has been the surviving ------- corporation of a merger or consolidation or acquired all or substantially all of the assets of any Person. 7.1.6 Business Locations; Agent for Process. The chief executive ------------------------------------- office and other places of business of each Loan Party are as listed on Exhibit ------- B to the Original Agreement or any amendments to such Exhibit attached to this - - ------- Agreement. During the preceding five-year period, no Loan Party has had an office, place of business or agent for service of process other than as listed on Exhibit B to the Original Agreement or any amendments to such Exhibit --------- ------- attached to this Agreement. Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 20 7.1.7 Title to Properties; Priority of Liens. Each Loan Party has -------------------------------------- good and indefeasible title to and fee simple ownership of, or valid and subsisting leasehold interests in, all of its real Property, and good title to all of the Collateral and all of its other Property, in each case, free and clear of all Liens except Permitted Liens. No Loan Party has acquired any of the Collateral from any Person (other than purchases of Equipment in the ordinary course of business of the seller thereof) within the five-year period immediately preceding the Closing Date except as set forth on Exhibit Q to the --------- Original Agreement or any amendments to such Exhibit attached to this Agreement. ------- Each Loan Party has paid or discharged all lawful claims which, if unpaid, might become a Lien against any of such Loan Party's Properties that is not a Permitted Lien. The Liens granted to Lender under Section 5 are first priority --------- Liens, subject only to Permitted Liens. 7.1.8 Accounts. Unless otherwise indicated in writing to Lender, -------- with respect to each Account: (A) It is genuine and in all respects what it purports to be, and it is not evidenced by a judgment; (B) It arises out of a completed, bona fide rendition of ---- ---- services by a Loan Party in the ordinary course of its business and in accordance with the terms and conditions of all contracts or other documents relating thereto and forming a part of the contract between such Loan Party and the Account Debtor; (C) It is for a liquidated amount maturing as stated in the duplicate invoice covering such rendition of services, a copy of which has been furnished or is available to Lender; (D) Such Account, and Lender's security interest therein, is not subject to any offset, Lien, deduction, defense, dispute, counterclaim or any other adverse condition except for Permitted Liens and each such Account is absolutely owing to a Loan Party and is not contingent in any respect or for any reason; (E) No Loan Party has made any agreement with any Account Debtor thereunder for any extension, compromise, settlement or modification of any such Account or any deduction therefrom; (F) To the best knowledge of each Loan Party after due inquiry, there are no facts, events or occurrences which in any way impair the validity or enforceability of any Accounts or tend to reduce the amount payable thereunder from the face amount of the invoice and statements delivered to Lender with respect thereto; and (G) To the best of such Loan Party's knowledge, the Account Debtor thereunder had the capacity to contract at the time any contract or other document giving rise to the Account was executed. Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 21 7.1.9 Financial Statements; Fiscal Year. The Consolidated balance --------------------------------- sheets of Avalon and its Subsidiaries as of December 31, 1998, and the related statements of income, changes in stockholder's equity, and changes in financial position for the periods ended on such dates, have been prepared in accordance with GAAP, and present fairly the Consolidated financial position of Avalon and its Subsidiaries at such dates and the results of the operations of Avalon and its Subsidiaries for such periods. Since December 31, 1998, there has been no material change in the condition, financial or otherwise, of Avalon and its Subsidiaries and no change in the aggregate value of Equipment and real Property owned by Avalon and its Subsidiaries, except changes in the ordinary course of business or set forth on Exhibit S hereto, none of which could reasonably be --------- expected to have a Material Adverse Effect. The fiscal year of Avalon and each of its Subsidiaries ends on December 31 of each year. 7.1.10 Full Disclosure. The financial statements referred to in --------------- Section 7.1.9 do not, nor does this Agreement or any other written statement of - ------------- any Loan Party to Lender, contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading. There is no fact or circumstances which any Loan Party has failed to disclose to Lender in writing which could reasonably be expected to have a Material Adverse Effect. 7.1.11 Solvent Financial Condition. Each Loan Party is now and, --------------------------- after giving effect to the Loans to be made hereunder, at all times will be, Solvent. 7.1.12 Surety Obligations. No Loan Party is obligated as surety or ------------------ indemnitor under any surety or similar bond or other contract issued or entered into any agreement to assure payment, performance or completion of performance of any undertaking or obligation of any Person. 7.1.13 Taxes. The federal tax identification number of each Loan ----- Party is shown on Exhibit F to the Original Agreement or any amendments to such --------- Exhibit attached to this Agreement. Each Loan Party has filed all federal, state - ------- and local tax returns and other reports it is required by law to file and has paid, or made provision for the payment of, all Taxes upon it, its income and Properties as and when such Taxes are due and payable, except to the extent any such Taxes are being Properly Contested. The provision for Taxes on the books of the Loan Parties are adequate for all years not closed by applicable statutes, and for its current fiscal year. 7.1.14 Brokers. There are no claims for brokerage commissions, ------- finder's fees or investment banking fees in connection with the transactions contemplated by this Agreement. 7.1.15 Patents, Trademarks, Copyrights and Licenses. Each Borrower -------------------------------------------- and its Subsidiaries owns or possesses all the patents, trademarks, service marks, trade names, copyrights and licenses necessary for the present and planned future conduct of its business without any known conflict with the rights of others. All such patents, trademarks, service marks, trade names, copyrights, licenses and other similar rights are listed on Exhibit G to the --------- Original Agreement or any amendments to such Exhibit attached to this Agreement. ------- Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 22 7.1.16 Governmental Consents. Each Loan Party is in good standing --------------------- with respect to, all governmental consents, approvals, licenses, authorizations, permits, certificates, inspections and franchises necessary to continue to conduct its business as heretofore or proposed to be conducted by it and to own or lease and operate its Properties as now owned or leased by it except for such consents, approvals, licenses, authorizations, permits, certificates, inspections and franchises the absence of which could not reasonably be expected to have a Material Adverse Effect. 7.1.17 Compliance with Laws. Each Loan Party has duly complied in -------------------- all material respects with, and its Properties, business operations and leaseholds are in compliance in all material respects with, the provisions of all Applicable Laws and there have been no citations, notices or orders of noncompliance issued to any Loan Party under such law, rule or regulation. 7.1.18 Restrictions. No Loan Party is a party or subject to any ------------ contract, agreement, or charter or other corporate restriction, which has or could reasonably be expected to have a Material Adverse Effect. Except as set forth on Exhibit H to the Original Agreement or any amendments to such Exhibit ---------- ------- attached to this Agreement, no Loan Party is a party or subject to any contract or agreement which restricts the right or ability of any Loan Party to incur Indebtedness. No contracts or agreements to which any Loan Party is a party or by which any of their respective properties are bound prohibits the execution of or compliance with this Agreement or the other Loan Documents by any Loan Party. 7.1.19 Litigation. Except as set forth on Exhibit I to the ---------- --------- Original Agreement or any amendments to such Exhibit attached to this Agreement, ------- there are no actions, suits, proceedings or investigations pending, or to the knowledge of any Loan Party, threatened, against or affecting any Loan Party, or the business, operations, Properties, prospects, profits or condition of any Loan Party. None of the actions, suits or proceedings listed on Exhibit I to the --------- Original Agreement or any amendments to such Exhibit attached to this Agreement, ------- if determined adversely to any Loan Party, could reasonably be expected to have a Material Adverse Effect. No Loan Party is in default with respect to any order, writ, injunction, judgment, decree or rule of any court, governmental authority or arbitration board or tribunal. 7.1.20 No Defaults. No event has occurred and no condition exists ----------- which would, upon or after the execution and delivery of this Agreement or the performance by any Loan Party hereunder, constitute a Default or an Event of Default. No Loan Party is in default, and no event has occurred and no condition exists which constitutes, or which with the passage of time or the giving of notice or both would constitute, a default in the payment of any Indebtedness to any Person for Money Borrowed the amount of which, together with the amount of any other such Indebtedness for Money Borrowed with respect to which there has been a default in payment, exceeds $250,000.00. 7.1.21 Leases. Exhibit J to the Original Agreement or any ------ --------- amendments to such Exhibit attached to this Agreement is a complete listing of ------- all capitalized leases of each Borrower and its Subsidiaries and Exhibit K to --------- the Original Agreement or any amendments to such Exhibit attached to this ------- Agreement sets forth a complete listing of all operating leases of each Borrower and Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 23 its Subsidiaries. Each Borrower and its Subsidiaries is in full compliance with all of the terms of each of their respective capitalized and operating leases. 7.1.22 Pension Plans. Except as disclosed on Exhibit L to the ------------- --------- Original Agreement or any amendments to such Exhibit attached to this Agreement, ------- no Loan Party has any Plan. Each Loan Party is in full compliance with the requirements of ERISA and the regulations promulgated thereunder with respect to each Plan. No fact or situation that could reasonably be expected to have a Material Adverse Effect on any Loan Party exists in connection with any Plan. No Loan Party has any withdrawal liability in connection with a Multiemployer Plan. 7.1.23 Trade Relations. There exists no actual or, to the best --------------- knowledge of Borrowers, threatened termination, cancellation or limitation of, or any modification or change in, the business relationship between any Borrower or its Subsidiaries and any customer or any group of customers whose contractual relationship for the provision of services individually or in the aggre gate are material to the business of any Borrower or its Subsidiaries, and there exists no condition or state of facts or circumstances which could reasonably be expected to have a Material Adverse Effect or prevent any Loan Party from conducting such business after the consummation of the transaction contemplated by this Agreement in substantially the same manner in which it has heretofore been conducted by such Loan Party. 7.1.24 Labor Relations. Except as described on Exhibit M to the --------------- --------- Original Agreement or any amendments to such Exhibit attached to this Agreement, ------- no Borrower nor any Subsidiary of any Borrower is a party to any collective bargaining agreement. There are no material grievances, disputes or controversies with any union or any other organization of employees of any Borrower or its Subsidiaries, or threats of strikes, work stoppages or any asserted pending demands for collective bargaining by any union or organization. 7.2 Continuous Nature of Representations and Warranties. Each --------------------------------------------------- representation and warranty contained in this Agreement and the other Loan Documents shall be continuous in nature and shall remain accurate, complete and not misleading at all times during the term of this Agreement, except for (i) such representations and warranties that by their nature are limited only to a specific date in time and (ii) changes in the nature of the business or operations of any Loan Party that would render the information in any Exhibit or ------- Schedule either inaccurate, incomplete or misleading; provided that Lender has - -------- -------- consented to such changes or such changes are expressly permitted by this Agreement. 7.3 Survival of Representations and Warranties. Except for such ------------------------------------------ representations and warranties that by their nature are limited only to a specific date in time, all representations and warranties of each Loan Party contained in this Agreement or any of the other Loan Documents shall survive the execution, delivery and acceptance thereof by Lender and the parties thereto and the closing of the transactions described therein or related thereto. Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 24 SECTION 8. COVENANTS AND CONTINUING AGREEMENTS 8.1 Affirmative Covenants. During the term of this Agreement, and --------------------- thereafter for so long as there are any Obligations to Lender, each Loan Party, jointly and severally, covenant that, unless otherwise consented to by Lender in writing, they shall: 8.1.1 Visits and Inspections. Permit representatives of Lender, ---------------------- from time to time, as often as may be reasonably requested, but only during normal business hours, to (i) visit and inspect its Properties and the Properties of each of their respective Subsidiaries, and (ii) inspect, audit and make extracts from its books and records, and discuss with its officers, its employees and its independent accountants, any Loan Party's business, assets, liabilities, financial condition, business prospects and results of operations. 8.1.2 Notices. Notify Lender in writing (i) of the occurrence of ------- any event or the existence of any fact which renders any representation or warranty in this Agreement or any of the other Loan Documents inaccurate, incomplete or misleading, and (ii) promptly after any Loan Party learning thereof, of the commencement of any litigation affecting any Loan Party or any of their respective Properties, whether or not the claim is considered by such Loan Party to be covered by insurance, and of the institution of any administrative proceeding which if determined adversely to any Loan Party, would have a Material Adverse Effect; (iii) at least thirty (30) days prior thereto, of any Loan Party's opening of any new office or place of business or any Loan Party's closing of any existing office or place of business if the value of any Collateral to be located or located at such office or place of business exceeds $100,000.00; (iv) promptly after any Loan Party's learning thereof, of any labor dispute to which such Loan Party or any of its Subsidiaries may become a party, any strikes or walkouts relating to any of their respective plants or other facilities, and the expiration of any labor contract to which any of them is a party or by which any of them is bound; (v) promptly after any Loan Party's learning thereof, of any material default by any Loan Party under any note, indenture, loan agreement, mortgage, lease, deed, guaranty or other similar agreement relating to any Indebtedness exceeding $100,000.00; (vi) promptly after the occurrence thereof, of any Default or Event of Default; (vii) promptly after the occurrence thereof, of any default by any obligor under any note or other evidence of Indebtedness payable to any Loan Party or its Subsidiaries exceeding $100,000.00; (viii) promptly after the rendition thereof, of any judgment rendered against any Loan Party in an amount exceeding $100,000.00; (ix) on the date required under the RSTW Loan Agreement, a copy of any notice required under Section 6.5 or Section 6.14 of such agreement, (x) promptly ----------- ------------ following receipt thereof by any Loan Party, a copy of any demand for payment under the RSTW Loan Agreement, and (xi) at least five (5) Business Days prior thereto, notice of any proposed payment by any Loan Party under Section 2.2 or ----------- Section 2.3 of the RSTW Loan Agreement. - ------------ 8.1.3 Financial Statements. Keep, and cause each Subsidiary to -------------------- keep, adequate records and books of account with respect to its business activities in which proper entries are made in accordance with GAAP reflecting all its financial transactions; and cause to be prepared and furnished to Lender the following (all to be prepared in accordance with GAAP applied on a Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 25 consistent basis, unless Avalon's certified public accountants concur in any change therein and such change is disclosed to Lender and is consistent with GAAP): (A) as soon as available but not later than ninety (90) days after the close of each fiscal year of Avalon, unqualified audited financial statements of Avalon and its Subsidiaries as of the end of such year, on a Consolidated basis, certified by a firm of independent certified public accountants of recognized standing selected by Avalon but acceptable to Lender (except for a qualification for a change in accounting principles with which the accountant concurs); (B) as soon as available but not later than thirty (30) days after the end of each month hereafter, including the last month of Avalon's fiscal year, unaudited interim financial statements of each Loan Party and its Subsidiaries as of the end of such month and of the portion of Avalon's financial year then elapsed, on a Consolidated and consolidating basis, certified by the principal financial officer of such Loan Party as prepared in accordance with GAAP and fairly presenting the Consolidated financial position and results of operations of such Loan Party and its Subsidiaries for such month and period subject only to changes from audit and year-end adjustments and except that such statements need not contain notes; (C) promptly after the sending or filing thereof, as the case may be, copies of any proxy statements, financial statements or reports which Avalon has made available to its shareholders and copies of any regular, periodic and special reports or registration statements which Avalon files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or any national securities exchange; (D) promptly after the filing thereof, copies of any annual report to be filed with ERISA in connection with each Plan; (E) on the date required under the RSTW Loan Agreement, a copy of any financial report or other document required under Section 6.1 or Section 6.2 of ----------- ----------- such agreement; and (F) such other data and information (financial and otherwise) as Lender, from time to time, may reasonably request, bearing upon or related to the Collateral or financial condition or results of operations of any Loan Party. As soon as available, and in any event not later than five (5) days after the receipt thereof, Avalon shall forward to Lender a copy of the accountants' letter to Avalon's management that is prepared in connection with the financial statements described in clause (A) of this Section 8.1.3. Concurrently with the ---------- ------------- delivery of the financial statements described in clauses (A) and (B) of this ------- --- --- Section 8.1.3, or more frequently if requested by Lender, Avalon shall cause to - ------------- be prepared and furnished to Lender a Compliance Certificate in the form of Exhibit N hereto executed by the chief financial officer of Avalon. - --------- Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 26 8.1.4 Borrowing Base Certificate. Together with the Schedule of -------------------------- Accounts delivered pursuant to Section 6.2.1, Borrowers will deliver to Lender ------------- a Borrowing Base Certificate (in substantially the form as Exhibit P hereto) as --------- of the last day of the immediately preceding month, prepared on a consolidated basis and otherwise in form and substance reasonably satisfactory to Lender. 8.1.5 Projections. No later than thirty (30) days prior to the ----------- end of each fiscal year of Avalon, deliver to Lender projections of Avalon (consisting of Consolidated and consolidating balance sheets, income statements and cash flow statements, together with appropriate supporting details and underlying assumptions) for the forthcoming fiscal year, month by month. 8.1.6 Taxes. Pay and discharge, and cause each Subsidiary to pay ----- and discharge, all Taxes prior to the date on which such Taxes become delinquent or penalties attach thereto, except and only to the extent that such Taxes are being Properly Contested. 8.1.7 Compliance with Laws. Comply and cause each Subsidiary to -------------------- comply, with all Applicable Laws, including all laws, statutes, regulations and ordinances regarding the collection, payment and deposit of all Taxes, and all ERISA and Environmental Laws, and obtain and keep in force any and all licenses, permits, franchises, or other governmental authorizations necessary to the ownership of its Properties or to the conduct of its business, which violation or failure to obtain could reasonably be expected to have a Material Adverse Effect. 8.1.8 Certain Other Insurance. In addition to the insurance ----------------------- required herein with respect to the Collateral, each Loan Party shall maintain, with financially sound and reputable insurers, insurance with respect to its Properties and business against such casualties and contingencies of such type (including product liability, business interruption, larceny, embezzlement, or other criminal misappropriation insurance) as is customary in its business and in such amounts as is acceptable to Lender. 8.1.9 El Paso Property. Cause the El Paso Property to be free and ---------------- clear of all Indebtedness (except as permitted by Section 8.2.3) and Liens ------------- (except those permitted by Section 8.2.5). ------------- 8.1.10 Greeley Covenants. ----------------- (A) Environmental Matters. (i) Comply (in all material respects) with --------------------- that certain Operations and Maintenance Plan prepared by Enecotech, Inc., concerning the operation of the Greeley Property, (ii) cause an asbestos survey to be conducted (to Lender's reasonable satisfaction) on any area of the existing facilities located on the Greeley Property which have been identified as potentially containing asbestos laden materials when Southern reasonably believes that such area will be renovated or modified, and (iii) provide a copy of such survey to Lender; Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 27 (B) Zoning Matters. If at any time during the Term, any licensing or -------------- other authority having appropriate jurisdiction over the matter, shall (i) require the installation of a sprinkler system at the Greeley Property, such system shall be installed within any applicable deadlines imposed by such authority, and (ii) find that the operation of the Greeley Property is not within the applicable guidelines concerning occupancy levels, comply with such occupancy levels within any applicable deadlines imposed by such authority; (C) License to Operate Greeley Property. If at any time during the ----------------------------------- Term, any licensing or other authority having appropriate jurisdiction over the matter, shall require licenses and permits for the operation of an assisted living center on the Greeley Property to be issued in the name of some Person other than the current holder of such licenses or permits, Southern shall cause all required licenses and permits for the operation of an assisted living center on the Greeley Property to be issued in its name or a designee approved by Lender in its reasonable discretion. 8.1.11 Corporate or Name Change. Each Loan Party will notify Lender ------------------------ in writing thirty (30) days prior to any change in such Loan Party's name, identity or corporate structure. 8.2 Negative Covenants. During the term of this Agreement, and thereafter ------------------ for so long as there are any Obligations to Lender, the Loan Parties, jointly and severally, covenant that, unless Lender has first consented thereto in writing, no Loan Party will: 8.2.1 Mergers; Consolidations; Acquisitions. Merge or ------------------------------------- consolidate, or permit any of its Subsidiaries to merge or consolidate, with any Person; nor acquire, nor permit any of its Subsidiaries to acquire, all or any substantial part of the Properties of any Person. 8.2.2 Loans. Make, or permit any of its Subsidiaries to make, any ----- loans or other advances of money (other than for salary, travel advances, advances against commissions and other similar advances in the ordinary course of business) to any Person. 8.2.3 Total Indebtedness. Create, incur, assume, or suffer to ------------------ exist, or permit any of their respective Subsidiaries to create, incur or suffer to exist, any Indebtedness, except: (A) Obligations owing to Lender; (B) Obligations with respect to the RSTW Debt; (C) Indebtedness with respect to the Convertible Notes; (D) Indebtedness of any Subsidiaries of a Borrower to such Borrower; (E) accounts payable to trade creditors and current operating expenses (other than for Money Borrowed) which are not aged more than thirty (30) days from the due date specified in the original invoice or for more than sixty (60) days if no due date is specified, in each Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 28 case incurred in the ordinary course of business and paid within such time period, unless the same are being Properly Contested; (F) Obligations to pay Rentals permitted by Section 8.2.12; -------------- (G) Permitted Purchase Money Indebtedness; (H) contingent liabilities arising out of endorsements of checks and other negotiable instruments for deposit or collection in the ordinary course of business; (I) Indebtedness existing on the date hereof (including, but not limited to, Indebtedness for the Excluded Property) and described on Exhibit ------- O to the Original Agreement or any amendments to such Exhibit attached to this - - Agreement; and - --------- (J) Indebtedness not included in paragraphs (A) through (I) above which does not exceed at any time, in the aggregate, the sum of $250,000.00. 8.2.4 Affiliate Transactions. Enter into, or be a party to, or ---------------------- permit any of their respective Subsidiaries to enter into or be a party to, any transaction with any Affiliate or stockholder, except for transactions in the ordinary course of and pursuant to the reasonable requirements of the business of any Borrower or its Subsidiary and upon fair and reasonable terms which are fully disclosed to Lender and are no less favorable than would be obtained in a comparable arm's length transaction with a Person not an Affiliate or stockholder of such Borrower or its Subsidiary. 8.2.5 Limitation on Liens. Create or suffer to exist, or permit ------------------- any of their respective Subsidiaries to create or suffer to exist, any Lien upon any of its Property, income or profits, whether now owned or hereafter acquired, except: (A) Liens at any time granted in favor of Lender; (B) Liens for Taxes (excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet due, or being Properly Contested; (C) Liens of landlords, carriers, warehousemen, mechanics, materialmen and other similar liens arising in the ordinary course of its business by operation of law or regulation, but only if (i) payment in respect of any such Lien is not at the time required, (ii) such Lien does not materially detract from the value of the Property or materially impair the use thereof in the operation of its business, or (iii) is being Properly Contested; (D) Purchase Money Liens securing Permitted Purchase Money Indebtedness; Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 29 (E) Liens securing Indebtedness of one of any Borrower's Subsidiary to a Borrower or any Subsidiary of a Borrower; (F) Such other Liens as appear on Exhibit O to the Original --------- Agreement or any amendments to such Exhibit attached to this Agreement; ------- (G) such other Liens as Lender may hereafter approve in writing; and (H) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety, stay, customs and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money). 8.2.6 Subordinated Debt. (i) Make, or permit any Loan Party to ----------------- make, any payment of any part or all of any Subordinated Debt or take any other action or omit to take any other action in respect of any Subordinated Debt, except in accordance with the Subordination Agreement applicable thereto or the subordination provisions of such Subordinated Debt, as the case may be, (ii) agree to any amendment, modification or supplement to the RSTW Debt Documents except as permitted in the RSTW Subordination Agreement, (iii) without the prior written consent of Lender, agree to any amendment, modification or supplement to any of the documents evidencing the Other Subordinated Debt, including, without limitation, any amendment, modification or supplement the effect of which is to increase the maximum principal amount of such Other Subordinated Debt or rate of interest on any of such Other Subordinated Debt, (iv) change the dates upon which payments of principal or interest on the Other Subordinated Debt are due, (v) change, or add any event of default or any covenant with respect to the Other Subordinated Debt, (vi) change the redemption or prepayment provisions of the Other Subordinated Debt, (vii) alter the subordination provisions with respect to any Subordinated Debt, including, without limitation, subordinating such Subordinated Debt to any other debt (except that the Convertible Notes may be subordinated to the RSTW Debt), (viii) change the maturity date of any Other Subordinated Debt or otherwise to alter the repayment terms of the Other Subordinated Debt, (ix) grant any Liens or security interests in any assets of any Loan Party or any other assets securing the Obligations to secure the Subordinated Debt, or (x) change or amend any other term of the documents evidencing the Subordinated Debt if such change or amendment would increase the obligations of any Loan Party or confer additional material rights on holder of the Subordinated Debt in a manner adverse to any Loan Party or Lender. 8.2.7 Distributions. Declare or make, or permit any of their ------------- respective Subsidiaries to declare or make, any Distributions, except distributions of a Subsidiary of Avalon to its direct parent or to Avalon. 8.2.8 Capital Expenditures. The Loan Parties will not make any -------------------- Capital Expenditure if, as a result thereof, the Capital Expenditures of the Loan Parties would, in the aggregate, exceed Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 30 (i) $650,000 during the period from January 1, 1999 through December 31, 1999, and (ii) $700,000 for each calendar year thereafter. 8.2.9 Disposition of Assets. Sell, lease or otherwise dispose of --------------------- any of, or permit any of their respective Subsidiaries to sell, lease or otherwise dispose any of, its Properties, including any disposition of Property (other than Excluded Property) as part of a sale and leaseback transaction, to or in favor of any Person, except for dispositions expressly authorized by this Agreement. 8.2.10 Stock of Subsidiaries. Permit any of their respective --------------------- Subsidiaries to issue any additional shares of its capital stock. 8.2.11 Restricted Investment. Make or have, or permit any of their --------------------- respective Subsidiaries to make or have, any Restricted Investment. 8.2.12 Operating Leases. Become, or permit any of their respective ---------------- Subsidiaries to become, a lessee under any operating lease (other than a lease for the Excluded Property or a lease under which Borrower or any of their respective Subsidiaries is lessor) of Property if the aggregate Rentals payable during any current or future period of twelve (12) consecutive months under the lease in question and all other leases under which Borrower or any of their respective Subsidiaries is then lessee would exceed $250,000.00. The term "Rentals" means, as of the date of determination, all payments which the lessee is required to make by the terms of any lease. 8.2.13 Tax Consolidation. File or consent to the filing of any ----------------- consolidated income tax return with any Person other than their respective Subsidiaries or Avalon. 8.2.14 Emerald Square. Make any loan, advance, or capital -------------- contribution to Emerald Square, make any payment, transfer or assignment of cash or any Property by or on behalf of Emerald Square, or guaranty any Indebtedness of Emerald Square other than the guaranty of Indebtedness in the principal amount of $1,990,000.00 existing on February 25, 1999; provided that in any fiscal year of Avalon, Avalon may make loans or capital contributions to Emerald Square not to exceed, in the aggregate, $100,000.00. 8.2.15 Modification of Convertible Notes. Agree to any --------------------------------- modification, amendment or waiver of any of the terms or provisions of the Convertible Notes. 8.2.16 Construction or Acquisition of New Facilities. Begin the --------------------------------------------- construction of or acquire any community correctional or juvenile facility without first obtaining (i) a written contract regarding the construction of such community correctional or juvenile facility from the Person intending to utilize such facility (including, but not limited to, any proper governmental or quasi-governmental body or authority, whether national, federal, state, county, municipality, local or otherwise, and any instrumentality, division agency, body or department thereof), and (ii) the prior written consent of Lender. Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 31 8.2.17 Certain Agreements. (A) Permit the termination or breach of ------------------ that certain (i) Management Agreement dated as of August 9, 1998, by and between Adams Community Corrections Program, Inc.("ACCP") and Community Services ---- Center, Inc. (as the same agreement has been assigned to Southern), (ii) Exclusive Services Agreement dated as of March 15, 1999, by and between Southern and Ellen Czapran (iii) to that certain Purchase Agreement dated as of April 13, 1999, by and between Southern and University Holdings, L.L.C. ("University"), ---------- (iv) Membership Acquisition Agreement dated as of April 13, 1999, by and between Southern and University (v) Agreement dated as of April 13, 1999, by and between Southern and Comprehensive Recovery Services, Inc., a Colorado non-profit corporation ("CRS"), or (vi) Non-Competition Agreement(s) dated as of June 9, --- 1999, by and among Southern, The Villa, CRS and Harry Asmus, John T. Coppom or Michael Brand; or (B) allow any Person other than Southern to be the sole "voting member" of CRS or ACCP. 8.3 Specific Financial Covenants. During the term of this Agreement, and ---------------------------- thereafter for so long as there are any Obligations to Lender, the Loan Parties, jointly and severally, covenant that, unless otherwise consented to by Lender in writing, Avalon, on a Consolidated basis, shall: 8.3.1 Fixed Charge Ratio. Maintain as of the end of each period ------------------ set forth below, for the cumulative period ending on such date, a Fixed Charge Coverage Ratio of not less than the ratio set forth below for the period indicated below: - ------------------------------------------------------------------------- Period Ratio - ------------------------------------------------------------------------- October 1, 1999 through December 31, 1999 1.200 to 1.0 - ------------------------------------------------------------------------- January 1, 2000 through January 31, 2000 1.200 to 1.0 - ------------------------------------------------------------------------- January 1, 2000 through February 29, 2000 1.200 to 1.0 - ------------------------------------------------------------------------- January 1, 2000 through March 31, 2000 1.100 to 1.0 - ------------------------------------------------------------------------- January 1, 2000 through April 30, 2000 1.215 to 1.0 - ------------------------------------------------------------------------- January 1, 2000 through May 31, 2000 1.250 to 1.0 - ------------------------------------------------------------------------- January 1, 2000 through June 30, 2000 1.203 to 1.0 - ------------------------------------------------------------------------- January 1, 2000 through July 31, 2000 1.125 to 1.0 - ------------------------------------------------------------------------- January 1, 2000 through August 31, 2000 1.150 to 1.0 - ------------------------------------------------------------------------- January 1, 2000 through September 30, 2000 1.100 to 1.0 - ------------------------------------------------------------------------- January 1, 2000 through October 31, 2000 1.050 to 1.0 - ------------------------------------------------------------------------- January 1, 2000 through November 30, 2000 1.050 to 1.0 - ------------------------------------------------------------------------- Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 32 - ------------------------------------------------------------------------- From and after November 30, 2000 for the twelve calendar 1:050 to 1.0 month period ending respectively on the last day of each thereafter occurring calendar month. - ------------------------------------------------------------------------- 8.3.2 Total Liabilities to Tangible Net Worth. Maintain a ratio of --------------------------------------- Total Liabilities as of the end of each period set forth below, to Tangible Net Worth for the period ending on such date, equal to or lesser than the ratio set forth below for the period corresponding thereto: - ----------------------------------------------------------------------------- Period Ratio - ----------------------------------------------------------------------------- From and after September 30, 1999 for the calendar month 1.25 to 1.0 period ending respectively on the last day of each thereafter occurring calendar month through and including December 31, 2000. - ----------------------------------------------------------------------------- From and after December 31, 2000 for the calendar month 1.05 to 1.0 period ending respectively on the last day of each thereafter occurring calendar month. - ----------------------------------------------------------------------------- 8.3.3 EBITDA. Maintain, as of the last day of the cumulative ------ period indicated below, EBITDA of not less than the amount shown below as of the date shown below: - ----------------------------------------------------------------------- Period EBITDA - ----------------------------------------------------------------------- October 1, 1999 through December 31, 1999 $1,300,000 - ----------------------------------------------------------------------- January 1, 2000 through January 31, 2000 $ 425,000 - ----------------------------------------------------------------------- January 1, 2000 through February 29, 2000 $ 850,000 - ----------------------------------------------------------------------- January 1, 2000 through March 31, 2000 $1,300,000 - ----------------------------------------------------------------------- January 1, 2000 through April 30, 2000 $1,725,000 - ----------------------------------------------------------------------- January 1, 2000 through May 31, 2000 $2,150,000 - ----------------------------------------------------------------------- January 1, 2000 through June 30, 2000 $2,600,000 - ----------------------------------------------------------------------- January 1, 2000 through July 31, 2000 $3,025,000 - ----------------------------------------------------------------------- January 1, 2000 through August 31, 2000 $3,450,000 - ----------------------------------------------------------------------- January 1, 2000 through September 30, 2000 $3,875,000 - ----------------------------------------------------------------------- January 1, 2000 through October 31, 2000 $4,300,000 - ----------------------------------------------------------------------- January 1, 2000 through November 30, 2000 $4,750,000 - ----------------------------------------------------------------------- Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 33 - ----------------------------------------------------------------------- From and after November 30, 2000 for the twelve calendar $5,175,000 month period ending respectively on the last day of each thereafter occurring calendar month. - ----------------------------------------------------------------------- SECTION 9. CONDITIONS PRECEDENT Notwithstanding any other provision of this Agreement or any of the other Loan Documents, and without affecting in any manner the rights of Lender under the other sections of this Agreement, Lender shall not be required to make any Loan under this Agreement unless and until each of the following conditions has been and continues to be satisfied (unless otherwise waived in writing by Lender): 9.1 Documentation. Lender shall have received, in form and substance ------------- satisfactory to Lender and its counsel, a duly executed copy of this Agreement and the other Loan Documents, together with such additional documents, instruments and certificates as Lender and its counsel shall require in connection therewith from time to time, all in form and substance satisfactory to Lender and its counsel. 9.2 No Default. No Default or Event of Default shall exist. ---------- 9.3 Other Loan Documents. Each of the conditions precedent set forth in -------------------- the other Loan Documents shall have been satisfied. 9.4 Opinion Letters. Lender shall have received a favorable, written --------------- opinion of counsel to the Loan Parties, as to the transactions contemplated by this Agreement, to be in form and substance satisfactory to Lender and Lender's counsel, in their sole discretion addressed to Lender or accompanied by a written authorization from the Person delivering such legal opinion stating that Lender may rely on such opinion as though it was addressed to it. 9.5 Disbursement Letter. Lender shall have received written instructions ------------------- from Borrowers directing application of proceeds of the Loans made pursuant to this Agreement and a Borrowing Base Certificate from Borrowers, each in form satisfactory to Lender. 9.6 No Litigation. No action, proceeding, investigation, regulation or ------------- legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Agreement, the Prior Acquisitions or the consummation of the transactions contemplated hereby. 9.7 Subordination Agreements. Lender and RSTW shall have entered into the ------------------------ RSTW Subordination Agreement and Lender and the holders of the Consolidated Notes shall have entered into a Subordination Agreement satisfactory to Lender, in its sole and absolute discretion. Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 34 SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT 10.1 Events of Default. The occurrence of one or more of the ----------------- following events shall constitute an "Event of Default". 10.1.1 Payment of Obligations. Borrowers shall fail to pay any of ---------------------- the Obligations on the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise). 10.1.2 Misrepresentations. Any representation, warranty or other ------------------ statement made or furnished to Lender by or on behalf of any Loan Party in this Agreement, any of the other Loan Documents or any instrument, certificate or financial statement furnished in compliance with or in reference thereto proves to have been false or misleading in any material respect when made or furnished or when reaffirmed pursuant to Section 7.2. ----------- 10.1.3 Breach of Specific Covenants. Any Loan Party shall fail or ---------------------------- neglect to perform, keep or observe any covenant contained in Sections 5.3, ------------ 6.1.1, 6.2, 8.1.1, 8.1.3, 8.2 or 8.3 on the date that any Loan Party is required - ----- --- ----- ----- --- --- to perform, keep or observe such covenant. 10.1.4 Breach of Other Covenants. Any Loan Party shall fail or ------------------------- neglect to perform, keep or observe any covenant contained in this Agreement (other than a covenant which is dealt with specifically elsewhere in Section ------- 10.1) and the breach of such other covenant is not cured to Lender's - ---- satisfaction within fifteen (15) days after the sooner to occur of any Loan Party's receipt of notice of such breach from Lender or the date on which such failure or neglect first becomes known to any officer of such Loan Party. 10.1.5 Default Under Security Documents/Other Agreements. Any ------------------------------------------------- event of default shall occur under, or any Loan Party shall default in the performance or observance of any term, covenant, condition or agreement contained in, any of the Security Documents, or the Other Agreements and such default shall continue beyond any applicable grace period. 10.1.6 Other Defaults. There shall occur any default or event of -------------- default on the part of any Loan Party under any agreement, document or instrument to which such Loan Party is a party or by which such Loan Party or any of their respective Property is bound, creating or relating to any Indebtedness (other than the Obligations) if the payment or maturity of such Indebtedness is or may be accelerated in consequence of such default or demand for payment of such Indebtedness is made, including the Subordinated Debt and the amount of such Indebtedness together with any other such Indebtedness with respect to which there is a default or demand for payment and the payment or maturity of such Indebtedness is or may be accelerated in consequence of such default or demand for payment of such Indebtedness is made, exceeds in the aggregate $250,000.00. Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 35 10.1.7 Uninsured Losses. Any material loss, theft, damage or ---------------- destruction of any of the Collateral not fully covered (subject to such deductibles as Lender shall have permitted) by insurance. 10.1.8 Insolvency and Related Proceedings. Any Loan Party shall ---------------------------------- cease to be Solvent or shall suffer the appointment of a receiver, trustee, custodian or similar fiduciary, or shall make an assignment for the benefit of creditors, or any petition for an order for relief shall be filed by or against a Loan Party under the Bankruptcy Code (and if, with respect to any petition filed against any Loan Party, such proceeding shall continue for more than thirty (30) days), or any Loan Party shall make any offer of settlement, extension or compromise to such Loan Party's unsecured creditors generally. 10.1.9 Business Disruption; Condemnation. There shall occur a --------------------------------- cessation of a substantial part of the business of any Loan Party for a period which significantly affects the capacity of such Loan Party to continue its business, on a profitable basis; or any Loan Party shall suffer the loss or revocation of any contract, license or permit now held or hereafter acquired by such Loan Party which is necessary to the continued or lawful operation of its business and which loss or revocation could reasonably be expected to have a Material Adverse Effect; or any Loan Party shall be enjoined, restrained or in any way prevented by court, governmental or administrative order from conducting all or any material part of its business affairs; or any material lease or agreement pursuant to which any Loan Party leases, uses or occupies any Property shall be canceled or terminated prior to the expiration of its stated term and such cancellation could reasonably be expected to have a Material Adverse Effect; or any part of the Collateral shall be taken through condemnation or the value of such Property shall be impaired through condemnation and such condemnation or impairment of value could reasonably be expected to have a Material Adverse Effect. 10.1.10 Change of Control. (i) Avalon shall cease to own and ----------------- control, beneficially and or record, all of the issued and outstanding capital stock of any other Loan Party, (ii) any Loan Party shall cease to own and control, beneficially and of record, all of the issued and outstanding capital stock of each of their respective Subsidiaries, (iii) any Person, or two or more Persons acting in concert (other than RSTW and its Affiliates and Donald E. Smith) directly or indirectly acquire beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 25% or more of the outstanding shares or securities of Avalon or any Subsidiary (excluding any acquisitions of securities arising from the conversion of the Convertible Notes or the issuance or exercise of options, warrants or securities constituting Permitted Stock [as defined in the RSTW Loan Agreement]), (iv) Donald E. Smith shall cease to directly own and control any capital stock of Avalon owed by him on September 16, 1998 (other than any shares of capital stock he is permitted to transfer pursuant to Section 5.01(i), (ii), (iii) or (v) of the Shareholder Agreement [as defined in the RSTW Loan Agreement]), or (v) Donald E. Smith ceases to be employed as Chief Executive Officer of Avalon. 10.1.11 ERISA. A Reportable Event shall occur which Lender, in its ----- sole discretion, shall determine in good faith constitutes grounds for the termination by the Pension Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 36 Benefit Guaranty Corporation of any Plan or for the appointment by the appropriate United States District Court of a Trustee for any Plan, or if any Plan shall be terminated or any such trustee shall be requested or appointed, or if any Loan Party is in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan resulting from the complete or partial withdrawal of such Loan Party from such Plan. 10.1.12 Challenge to Agreement. Any Loan Party, or any Affiliate of ---------------------- any Loan Party, shall challenge or contest in any action, suit or proceeding the validity or enforceability of this Agreement, or any of the other Loan Documents, the legality or enforceability of any of the Obligations or the perfection or priority of any Lien granted to Lender. 10.1.13 Repudiation of or Default Under Guaranty Agreement. Any -------------------------------------------------- Guarantor shall revoke or attempt to revoke the Guaranty Agreement signed by such Guarantor, or shall repudiate such Guarantor's liability thereunder or shall be in default under the terms thereof. 10.1.14 Criminal Forfeiture. Any Loan Party shall be criminally ------------------- indicted or convicted under any law that could lead to a forfeiture of any Property of such Loan Party. 10.1.15 Judgments. Any (i) one or more money judgments, is entered --------- against any Loan Party or any Property of any Loan Party which exceeds, in the aggregate, $250,000, and such judgment or judgments shall remain unpaid, unsatisfied by insurance, and unstayed for more than thirty (30) days, whether or not consecutive, or (ii) writ of attachment or similar process is filed against any Loan Party, or any Property of any Loan Party, and such writ of attachment or similar process is not bonded or secured in an amount and manner reasonably satisfactory to Lender. 10.1.16 Emerald Square. Any demand shall be made upon Avalon for -------------- payment of the Indebtedness of Emerald Square under Avalon's guaranty of such Indebtedness. 10.2 Acceleration of the Obligations. Without in any way limiting the ------------------------------- right of Lender to demand payment of any portion of the Obligations payable on demand in accordance with Section 3.2, upon or at any time after the occurrence ----------- of an Event of Default, all or any portion of the Obligations shall, at the option of Lender and without presentment, demand protest or further notice by Lender, become at once due and payable and Borrowers shall forthwith pay to Lender, the full amount of such Obligations, provided, that upon the occurrence -------- of an Event of Default specified in Section 10.1.8, all of the Obligations shall -------------- become automatically due and payable without declaration, notice or demand by Lender. 10.3 Other Remedies. Upon and after the occurrence of an Event of -------------- Default and so long as it is continuing, Lender shall have and may exercise from time to time the following rights and remedies: (A) All of the rights and remedies of a secured party under the Code or under other Applicable Law, and all other legal and equitable rights to which Lender may be entitled, Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 37 all of which rights and remedies shall be cumulative and shall be in addition to any other rights or remedies contained in this Agreement or any of the other Loan Documents, and none of which shall be exclusive. (B) The right to take immediate possession of the Collateral, and to (i) require the Loan Parties to assemble the Collateral, at Borrowers' expense, and make it available to Lender at a place designated by Lender which is reasonably convenient to both parties, and (ii) enter any premises where any of the Collateral shall be located and to keep and store the Collateral on said premises until sold (and if said premises be the Property of any Loan Party, such Loan Party agrees not to charge Lender for storage thereof). (C) The right to sell or otherwise dispose of all or any Collateral in its then condition, or after any further manufacturing or processing thereof, at public or private sale or sales, with such notice as may be required by law, in lots or in bulk, for cash or on credit, all as Lender, in its sole discretion, may deem advisable. The Loan Parties agree that any requirement of notice to the Loan Parties of any public or private sale or other disposition of Collateral by Lender shall be deemed reasonable notice thereof, if given at least ten (10) days prior thereto, and any such sale may be held at such locations as Lender may designate in said notice. Lender shall have the right to conduct such sales on any Loan Party's premises, without charge therefor, and such sales may be adjourned from time to time in accordance with Applicable Law. Lender shall have the right to sell, lease or otherwise dispose of the Collateral, or any part thereof, for cash, credit or any combination thereof, and Lender may purchase all or any part of the Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Obligations. The proceeds realized from the sale of any Collateral may be applied, after allowing two (2) Business Days for collection, first to the costs, expenses and attorneys' fees incurred by Lender in collecting the Obligations, in enforcing the rights of Lender under the Loan Documents and in collecting, retaking, completing, protecting, removing, storing, advertising for sale, selling and delivering any Collateral, second to the interest due upon any of the Obligations; and third, to the principal of the Obligations. If any deficiency shall arise, each Borrower and each Guarantor shall remain jointly and severally liable to Lender therefor. (D) The right to exercise all of Lender's rights and remedies under any Mortgage with respect to any real Property forming a part of the Collateral. (E) Lender is hereby granted a license or other right to use, without charge, all labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any Property of a similar nature of any Loan Party, as it pertains to the Collateral, in advertising for sale and selling any Collateral and any Loan Party's rights under all licenses and all franchise agreements shall inure to Lender's benefit. 10.4 Remedies Cumulative; No Waiver. All covenants, conditions, ------------------------------ provisions, warranties, guaranties, indemnities, and other undertakings of any Loan Party contained in this Agreement and the other Loan Documents, or in any document referred to herein or contained in any agreement Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 38 supplementary hereto or in any schedule or in any Guaranty Agreement given to Lender or contained in any other agreement between or among Lender and any Loan Party, heretofore, concurrently, or hereafter entered into, shall be deemed cumulative to and not in derogation or substitution of any of the terms, covenants, conditions, or agreements of any Loan Party herein contained. The failure or delay of Lender to require strict performance by any Loan Party of any provision of this Agreement or to exercise or enforce any rights, Liens, powers, or remedies hereunder or under any of the aforesaid agreements or other documents or security or Collateral shall not operate as a waiver of such performance, Liens, rights, powers and remedies, but all such requirements, Liens, rights, powers, and remedies shall continue in full force and effect until all Loans and all other Obligations owing or to become owing from any Loan Party to Lender shall have been fully satisfied. None of the undertakings, agreements, warranties, covenants and representations of any Loan Party contained in this Agreement or any of the other Loan Documents and no Event of Default by any Loan Party under this Agreement or any other Loan Documents shall be deemed to have been suspended or waived by Lender, unless such suspension or waiver is by an instrument in writing specifying such suspension or waiver and is signed by a duly authorized representative of Lender and directed to such Loan Party. SECTION 11. MISCELLANEOUS 11.1 Power of Attorney. Each Loan Party hereby irrevocably ----------------- designates, makes, constitutes and appoints Lender (and all Persons designated by Lender) as such Loan Party's true and lawful attorney (and agent-in-fact) and Lender, or Lender's agent, may, without notice to any Loan Party and in any Loan Party's or Lender's name, but at the cost and expense of such Loan Party: (A) At such time or times as Lender or said agent, in its sole discretion, may determine, endorse any Loan Party's name on any checks, notes, acceptances, drafts, money orders or any other evidence of payment or proceeds of the Collateral which come into the possession of Lender or under Lender's control. (B) At such time or times upon or after the occurrence of an Event of Default and so long as it is continuing as Lender or its agent in its sole discretion may determine: (i) demand payment of the Accounts from the Account Debtors, enforce payment of the Accounts by legal proceedings or otherwise, and generally exercise all of any Loan Party's rights and remedies with respect to the collection of the Accounts; (ii) settle, adjust, compromise, discharge or release any of the Accounts or other Collateral or any legal proceedings brought to collect any of the Accounts or other Collateral; (iii) sell or assign any of the Accounts and other Collateral upon such terms, for such amounts and at such time or times as Lender deems advisable; (iv) take control, in any manner, of any item of payment or proceeds relating to any Collateral; (v) prepare, file and sign any Loan Party's name to a proof of claim in bankruptcy or similar document against any Account Debtor or to any notice of lien, assignment or satisfaction of lien or similar document in connection with any of the Collateral; (vi) receive, open and dispose of all mail addressed to any Loan Party and to notify postal authorities to change the address for delivery thereof to such address as Lender may Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 39 designate; (vii) endorse the name of any Loan Party upon any of the items of payment or proceeds relating to any Collateral and deposit the same to the account of Lender on account of the Obligations; (viii) endorse the name of any Loan Party upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Accounts, and any other Collateral; (ix) use any Loan Party's stationery and sign the name of any Loan Party to verifications of the Accounts and notices thereof to Account Debtors; (x) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Accounts, Equipment and any other Collateral; (xi) make and adjust claims under policies of insurance; and (xii) do all other acts and things necessary, in Lender's determination, to fulfill any Loan Party's obligations under this Agreement. 11.2 Indemnity. EACH LOAN PARTY HEREBY INDEMNIFIES, HOLDS HARMLESS AND --------- SHALL DEFEND LENDER AND ITS DIRECTORS, OFFICERS, AGENTS, COUNSEL AND EMPLOYEES ("INDEMNIFIED PERSONS") FROM AND AGAINST ANY AND ALL LOSSES, LIABILITIES, ------------------- DAMAGES, COSTS, EXPENSES, SUITS, ACTIONS AND PROCEEDINGS ("LOSSES") EVER ------ SUFFERED OR INCURRED BY ANY INDEMNIFIED PERSON ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER TRANSACTION CONTEMPLATED HEREBY, INCLUDING ANY LOSSES CAUSED BY THE NEGLIGENCE OF ANY SUCH INDEMNIFIED PERSON, BUT NOT INCLUDING ANY LOSSES CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY SUCH INDEMNIFIED PERSON, AND EACH LOAN PARTY SHALL REIMBURSE LENDER AND EACH OTHER INDEMNIFIED PERSON FOR ANY REASONABLE EXPENSES (INCLUDING IN CONNECTION WITH THE INVESTIGATION OF, PREPARATION FOR OR DEFENSE OF ANY ACTUAL OR THREATENED CLAIM, ACTION OR PROCEEDING ARISING THEREFROM, INCLUDING ANY SUCH COSTS OF RESPONDING TO DISCOVERY REQUESTS OR SUBPOENAS, REGARDLESS OF WHETHER LENDER OR SUCH OTHER INDEMNIFIED PERSON IS A PARTY THERETO). WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, THIS INDEMNITY SHALL EXTEND TO ANY CLAIMS ASSERTED AGAINST LENDER OR ANY OTHER INDEMNIFIED PERSON BY ANY PERSON UNDER ANY ENVIRONMENTAL LAWS OR SIMILAR LAWS BY REASON OF ANY LOAN PARTY'S OR ANY OTHER PERSON'S FAILURE TO COMPLY WITH LAWS APPLICABLE TO SOLID OR HAZARDOUS WASTE MATERIALS OR OTHER TOXIC SUBSTANCES. EACH LOAN PARTY MAY SELECT COUNSEL WITH RESPECT TO ANY LOSSES; PROVIDED HOWEVER, EACH INDEMNIFIED PERSON SHALL HAVE THE RIGHT TO MONITOR THE PROGRESS OF ANY CLAIMS, SUITS AND ADMINISTRATIVE PROCEEDINGS DEFENDED BY EACH LOAN PARTY HEREUNDER WITH COUNSEL OF SUCH INDEMNIFIED PERSON'S CHOICE, OR CONDUCT ITS DEFENSE THROUGH COUNSEL OF SUCH INDEMNIFIED PERSON'S CHOICE, IN THE EVENT THAT (I) SUCH INDEMNIFIED PERSON DETERMINES IN GOOD FAITH THAT THE CONDUCT OF ITS DEFENSE BY EACH LOAN PARTY COULD BE MATERIALLY PREJUDICIAL TO SUCH INDEMNIFIED PERSON'S INTERESTS OR THAT OTHER REASONABLE GROUNDS EXIST WHICH DEMONSTRATE A LACK OF EFFECTIVENESS OR HIGH LEVEL OF QUALITY IN THE CONDUCT OF SUCH DEFENSE BY EACH LOAN PARTY, AND (II) PRIOR TO Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 40 RETAINING SUCH COUNSEL FOR SUCH PURPOSE, SUCH INDEMNIFIED PERSON SHALL CONSULT WITH SUCH LOAN PARTY AND SHALL ATTEMPT IN GOOD FAITH TO AGREE UPON COUNSEL TO CONDUCT THE DEFENSE ON BEHALF OF EACH LOAN PARTY AND SUCH INDEMNIFIED PERSON, AND IN EACH CASE THE FEES AND DISBURSEMENTS OF SUCH COUNSEL SHALL BE PAID BY SUCH LOAN PARTY; PROVIDED, HOWEVER, THAT IF SUCH MUTUAL AGREEMENT IS NOT REACHED WITHIN A REASONABLE TIME ON SELECTING COUNSEL, THEN SUCH INDEMNIFIED PERSON MAY RETAIN ITS OWN COUNSEL AT SUCH LOAN PARTY'S EXPENSE. NOTWITHSTANDING ANY CONTRARY PROVISION OF THIS AGREEMENT, THE OBLIGATION OF EACH LOAN PARTY UNDER THIS SECTION 11.2 SHALL SURVIVE THE PAYMENT IN FULL OF THE OBLIGATIONS AND THE ------------ TERMINATION OF THIS AGREEMENT. 11.3 Modification of Agreement; Sale of Interest. This Agreement may ------------------------------------------- not be modified, altered or amended, except by an agreement in writing signed by each Loan Party and Lender. No Loan Party may sell, assign or transfer any interest in this Agreement, any of the other Loan Documents, or any of the Obligations, or any portion thereof, including any Loan Party's rights, title, interests, remedies, powers, and duties hereunder or thereunder. The Loan Parties hereby consent to Lender's participation, sale, assignment, transfer or other disposition, at any time or times hereafter, to one or more commercial banks, financial institutions or other Persons which do not directly compete with Borrowers, of this Agreement and any of the other Loan Documents, or of any portion hereof or thereof, including Lender's rights, title, interests, remedies, powers, and duties hereunder or thereunder. In the case of an assignment, the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as it would if it were "Lender" hereunder and Lender shall be relieved of all obligations hereunder upon any such assignment. The Loan Parties agree that they will use their best efforts to assist and cooperate with Lender in any manner reasonably requested by Lender to effect the sale of participations in or assignments of any of the Loan Documents or any portion thereof or interest therein, including assisting in the preparation of appropriate disclosure documents. The Loan Parties further agree that Lender may disclose credit information regarding the Loan Parties to any potential Participant or assignee. 11.4 Severability. Wherever possible, each provision of this ------------ Agreement shall be interpreted in such manner as to be effective and valid under Applicable Law, but if any provision of this Agreement shall be prohibited by or invalid under Applicable Law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 11.5 Successors and Assigns. This Agreement, the Other Agreements and ---------------------- the Security Documents shall be binding upon and inure to the benefit of the successors and assigns of the Loan Parties and Lender permitted under Section ------- 11.3. - ---- 11.6 Cumulative Effect; Conflict of Terms. The provisions of the ------------------------------------ Other Agreements and the Security Documents are hereby made cumulative with the provisions of this Agreement. Except as otherwise provided in Section 3.2 and ----------- except as otherwise provided in any of the other Loan Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 41 Documents by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in direct conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. 11.7 Execution in Counterparts. This Agreement may be executed in any ------------------------- number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. 11.8 Notice. All notices, requests and demands to or upon a party ------ hereto, shall be in writing and shall be sent by certified or registered mail, return receipt requested, by personal delivery against receipt, by overnight courier or by facsimile transmissions and shall be deemed to have been validly served, given or delivered immediately when delivered against receipt on three (3) Business Days after deposit in the mail, postage prepaid, or with an overnight courier or, in the case of facsimile transmission, when sent, answerback received, in each case addressed as follows: If to Lender: Fleet Capital Corporation 5950 Sherry Lane Suite 300 Dallas, Texas 75223 Attention: Loan Administration Manager Facsimile No.: (214) 706-7066 With a copy to: Gardere & Wynne, L.L.P. 3000 Thanksgiving Tower 1601 Elm Street Dallas, Texas 75201 Attention: Gary B. Clark, Esq. Facsimile No.: (214) 999-4667 If to the Loan Parties: Avalon Correctional Services, Inc. 13401 Railway Drive Oklahoma City, Oklahoma 73114 Attention: Jerry M. Sunderland - President Facsimile No.: (405) 752-8852 With a copy to: Robertson & Williams 3033 NW 63/rd/ Street, Suite 160E Oklahoma City, OK 73116-3067 Attention: Mark A. Robertson, Esq. Facsimile No.: (405) 843-6707 Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 42 or to such other address as each party may designate for itself by notice given in accordance with this Section 11.8; provided, however, that any notice, ------------ -------- ------- request or demand to or upon Lender pursuant to Section 3.1.1 or 4.2.2 shall not ------------- ----- be effective until received by Lender. Any written notice or demand that is not sent in conformity with the provisions hereof shall nevertheless be effective on the date that such notice is actually received by the noticed party. 11.9 Lender's Consent. Whenever Lender's consent is required to be ---------------- obtained under this Agreement, any of the Other Agreements or any of the Security Documents as a condition to any action, inaction, condition or event, Lender shall be authorized to give or withhold such consent in its sole and absolute discretion. 11.10 Credit Inquiries. The Loan Parties hereby authorize and permit ---------------- Lender (but Lender shall have no obligation) to respond to usual and customary credit inquiries from third parties concerning any Loan Party. 11.11 Time of Essence. Time is of the essence of this Agreement, the --------------- Other Agreements and the Security Documents. 11.12 Entire Agreement, Appendix A and Exhibits and Schedules. This ------------------------------------------------------- Agreement and the other Loan Documents, together with all other instruments, agreements and certificates executed by the parties in connection therewith or with reference thereto, embody the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and inducements, whether express or implied, oral or written. Appendix A and each of the ----------- Exhibits and Schedules attached hereto are incorporated into this Agreement and - --------- ---------- by this reference made a part hereof. 11.13 Interpretation. No provision of this Agreement or any of the -------------- other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision. 11.14 GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN ------------------------------- NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN DALLAS, TEXAS. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS: PROVIDED, HOWEVER, THAT IF ANY OF THE -------- ------- COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN TEXAS, THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF LENDER'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S OTHER REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF TEXAS. AS PART OF THE CONSIDERATION FOR NEW Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 43 VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF THE LOAN PARTIES OR LENDER, THE LOAN PARTIES EACH HEREBY CONSENT AND AGREE THAT THE DISTRICT COURT OF DALLAS COUNTY, TEXAS, OR, AT LENDER'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE LOAN PARTIES AND LENDER PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. THE LOAN PARTIES EXPRESSLY SUBMIT AND CONSENT IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND THE LOAN PARTIES HEREBY WAIVE ANY OBJECTION WHICH THE LOAN PARTIES MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENT TO THE ----- --- ---------- GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. THE LOAN PARTIES EACH HEREBY WAIVE PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREE THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RESTRICTED DELIVERY, ADDRESSED TO THE LOAN PARTIES AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF SUCH LOAN PARTY'S ACTUAL RECEIPT THEREOF OR THE RETURN OF MAIL AS DELIVERY REFUSED. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION. 11.15 WAIVERS BY THE LOAN PARTIES. EACH LOAN PARTY WAIVES (I) THE RIGHT --------------------------- TO TRIAL BY JURY (WHICH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL: (II) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, NON PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY LENDER ON WHICH EACH LOAN PARTY MAY IN ANY WAY BE LIABLE; (III) NOTICE PRIOR TO TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 44 REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF LENDER'S REMEDIES; (IV) THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS; AND (V) NOTICE OF ACCEPTANCE HEREOF. EACH LOAN PARTY ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH EACH LOAN PARTY. EACH LOAN PARTY WARRANTS AND REPRESENT THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 11.16 ORAL AGREEMENTS INEFFECTIVE. THIS AGREEMENT AND THE OTHER LOAN --------------------------- DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES, AND THE SAME MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 11.17 Nonapplicability of Chapter 346 et seq. of Texas Finance Code. ------------------------------------------------------------- Each Loan Party and Lender hereby agree that, except for Section 346.004 of the --------------- Texas Finance Code, the provisions of Chapter 346 of the Texas Finance Code and except for Section 15.10(b) thereof, the provisions of Tex. Rev. Civ. Stat. Ann. ---------------- art. 5069-15.01 et seq. (Vernon 1987) (each regulating certain revolving credit -- --- loans and revolving tri-party accounts) shall not apply to this Agreement or any of the other Loan Documents. 11.18 Certain Matters of Construction. All references to statutes and ------------------------------- related regulations in this Agreement, the Other Agreements and the Security Agreements shall include any amendments of same and any successor statutes and regulations. All references in this Agreement, the Other Agreements and the Security Agreements to any of the Loan Documents shall include any and all modifications thereto and any and all extensions or renewals thereof. [SIGNATURE PAGES FOLLOW] Avalon Correctional Services, Inc. - Amended and Restated Loan and Security Agreement - Page 45 IN WITNESS WHEREOF, this Agreement has been duly executed in Dallas, Texas, on the day and year specified at the beginning of this Agreement. BORROWER: AVALON CORRECTIONAL SERVICES, INC. By: /s/ PAUL VOSS ------------------------------- Name: Paul Voss Title: Vice President SOUTHERN CORRECTIONS SYSTEMS, INC. By: /s/ PAUL VOSS ------------------------------- Name: Paul Voss Title: Vice President Avalon Correctional Services, Inc. Loan and Security Agreement - Signature Page GUARANTORS: CENTRAL OKLAHOMA PROPERTIES CORP. By: /s/ JERRY SUNDERLAND ------------------------------- Name: Jerry Sunderland Title: President ELK CITY PROPERTIES By: /s/ DONALD E. SMITH ------------------------------- Name: Donald E. Smith Title: President THE VILLA AT GREELEY, L.L.C. By: Southern Corrections Systems, Inc., sole member By: /s/ PAUL VOSS ------------------------------- Name: Paul Voss Title: Vice President Avalon Correctional Services, Inc. Loan and Security Agreement - Signature Page LENDER: FLEET CAPITAL CORPORATION By: /s/ DENNIS HANSEN ------------------------------- Name: Dennis Hansen Title: Senior Vice President Avalon Correctional Services, Inc. Loan and Security Agreement - Signature Page APPENDIX A GENERAL DEFINITIONS When used in the Amended and Restated Loan and Security Agreement dated December 9, 1999, by and among Fleet Capital Corporation, Avalon Correctional Services, Inc., Southern Corrections Systems, Inc., Central Oklahoma Properties Corp., The Villa at Greeley, L.L.C., and Elk City Properties, Inc., the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa): Account Debtor - any Person who is or may become obligated under or on -------------- account of an Account. Accounts - all accounts (as now or hereafter defined by the Code), contract -------- rights, chattel paper, instruments and documents, whether now owned or hereafter created or acquired by any Loan Party or in which any Loan Party now has or hereafter acquires any interest. ACCP - as defined in Section 8.2.17. ---- -------------- Acquisition - means the acquisition by Borrower or any of its Subsidiaries ----------- (by merger, consolidation or otherwise) on or subsequent to the Closing Date of (i) all, or substantially all of the Equity Interests of a Person, or (ii) all, or substantially all, of the operating assets or property of any Person, or assets or property which constitute all, or substantially all, of the assets of a division or a separate (or separable) line of business of a Person; provided, -------- that (i) such acquisition is approved by Lender, in its sole and absolute discretion, prior to the consummation thereof, and (ii) such acquisition is an acquisition of Equity Interest in which the Person acquired is operated as a separate Subsidiary of a Borrower or the operating assets and properties acquired or operated by a newly-formed separate Subsidiary of a Borrower. Acquisition Target - the Person, operating assets, or line of business to ------------------ be acquired in an Acquisition. Adjusted Net Earnings From Operations - with respect to any fiscal period, ------------------------------------- means the net earnings (or loss) after provision for income taxes for such fiscal period of Avalon, on a Consolidated basis, as reflected on the financial statement of Avalon supplied to Lender pursuant to Section 8.1.3 of the ------------- Agreement, but excluding: (i) any gain or loss arising from the sale of capital assets; (ii) any gain arising from any write-up of assets; Appendix A - Page 1 (iii) earnings of any Subsidiary of Avalon accrued prior to the date it becomes a Subsidiary; (iv) earnings of any corporation, substantially all the assets of which have been acquired in any manner by Avalon or any Subsidiary of Avalon, realized by such corporation prior to the date of such acquisition; (v) net earnings of any business entity (other than a Subsidiary of Avalon or any Borrower) in which Avalon or such Borrower has an ownership interest, unless such net earnings shall have actually been received by Avalon or such Borrower, as the case may be, in the form of cash contributions; (vi) any portion of the net earnings of any Subsidiary of a Borrower which for any reason is unavailable for payment of dividends to such Borrower; (vii) the earnings of any Person to which any assets of Avalon or any Borrower shall have been sold, transferred or disposed of, or into which Avalon or such Borrower shall have merged, or been a party to any consolidation or other form of reorganization, prior to the date of such transactions; (viii) any gain arising from the acquisition of any Securities of Avalon or any Borrower; (ix) any gain arising from extraordinary or non-recurring items (including the application of reserves to income); (x) any loss resulting from the prepayment of Funded Indebtedness of any Borrower on the Closing Date; (xi) any charge to earnings recorded to reflect the cumulative effect of a change to accounting principles. Affiliate - a Person (other than a Subsidiary): (i) which directly or --------- indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, a Person; (ii) which beneficially owns or holds 5% or more of any class of the Voting Stock of a Person; or (iii) 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by a Person or a Subsidiary of a Person. Agreement - the Amended and Restated Loan and Security Agreement referred --------- to in the first sentence of this Appendix A, all Exhibits and Schedules thereto ---------- -------- --------- and this Appendix A as amended, renewed, extended and restated from time to ----------- time. Appendix A - Page 2 Applicable Law - all laws, rules and regulations applicable to the Person, -------------- conduct, transaction, covenant or Loan Documents in question, including all applicable common law and equitable principles; all provisions of all applicable state and federal constitutions, statutes, rules, regulations and orders of government bodies; and orders, judgments and decrees of all courts and arbitrators. Authorized Officer - any President, Vice President or Chief Financial ------------------ Officer of any Borrower or any other Person from time to time designated by any Borrower as an Authorized Officer. Average Monthly Loan Balance - the amount equal to the aggregate unpaid ---------------------------- principal amount of the Revolving Credit Loans at the end of each day during the month in question and by dividing such sum by the number of days in such month. Bank - Fleet National Bank, and to successors and assigns. ---- Base Rate - the rate of interest announced or quoted by Bank from time to --------- time as its prime rate for commercial loans, whether or not such rate is the lowest rate charged by Bank to its most preferred borrowers; and, if such prime rate for commercial loans is discontinued by Bank as a standard, a comparable reference rate designated by Bank as a substitute therefor shall be the Base Rate. Base Rate Margin - as defined in Section 2.1.1. ---------------- ------------- Base Rate Portion - that portion of the Loans that is not subject to a ----------------- LIBOR Option. Borrowing Base - as at any date of determination thereof, an amount equal -------------- to the lesser of: (A) the Revolving Credit Loan Commitment, or (B) An amount equal to the sum of up to eighty percent (80%) of the net amount of Eligible Accounts at such date. The net amount of Eligible Accounts at any time shall be the face amount of such Eligible Accounts less any and all return, rebates, discounts (which may, at Lender's option, be calculated on shortest terms), credits, allowances or sales, excise or withholding taxes of any nature at any time issued, owing, claimed by the Account Debtors of such Accounts, granted, outstanding or payable in connection with such Accounts at such time. Business Day - any day excluding Saturday, Sunday and any day which is a ------------ legal holiday under the laws of the State of Texas or the State of Oklahoma or is a day on which banking institutions located in any of such states are closed. Capital Expenditures - expenditures made and liabilities incurred for the -------------------- acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful Appendix A - Page 3 life of more than one (1) year, including, but not limited to, the direct or indirect acquisition of such assets or incurrence of such expenses by way of increased product or service charges, offset items or otherwise and payments with respect to any Capitalized Lease Obligation (excluding, however, any expenditure made and liabilities incurred by Avalon in connection with the construction, reconstruction and/or expansion of community correctional and juvenile facilities, to the extent permitted by Section 8.2.16). -------------- Capitalized Lease Obligation - any Indebtedness represented by obligations ---------------------------- under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. Cash Flow - for any fiscal period of any Person, an amount equal to (i) the --------- sum of (a) Adjusted Net Earnings From Operations for such period, plus (b) ---- accrued Taxes for such period, plus (c) Interest Expense for such period, plus ---- ---- (d) depreciation and amortization for such period, plus, (e) with regard to the ---- calculation of Cash Flow for Avalon, on a Consolidated basis, to the extent that such fiscal period includes any period prior to the date any Acquisition Target was acquired, Pro Forma Target Cash Flow for each such Acquisition Target for that portion of the period prior to the date such Acquisition Target was acquired included in such fiscal period, minus (ii) Capital Expenditures ----- incurred during such period. Central - as defined in the preamble of this Agreement. ------- Closing Date - the date on which all of the conditions precedent in Section ------------ ------- 9 are satisfied and the Term Loan is made under the Agreement. - - Code - the Uniform Commercial Code as adopted and in force in the State of ---- Texas as from time to time in effect. Collateral - all of the Property and interests in Property described in ---------- Section 5, and all other Property and interests in Property that now or - --------- hereafter secure the payment and performance of any of the Obligations. Consolidated - the consolidation in accordance with GAAP of the accounts or ------------ other items as to which such term applies. Convertible Notes - Avalon's 7.5% Convertible Debentures due August 26, ----------------- 2007 and September 2, 2007, respectively, in the aggregate principal amount of $3,850,000, issued pursuant to the Debenture Purchase Agreement. CRS - as defined in Section 8.2.17. --- -------------- Current Assets - at any date means the amount at which all of the current -------------- assets of a Person would be properly classified as current assets shown on a balance sheet at such date in accordance Appendix A - Page 4 with GAAP except that amounts due from Affiliates of such Persons and investments in Affiliates of such Persons shall be excluded therefrom. Debenture Purchase Agreement - that certain Debenture Purchase Agreement ---------------------------- dated as of August 27, 1997, by and between Avalon and the purchasers of the Convertible Notes listed on Schedule A of such agreement, as amended by those certain Amendment(s) to Debenture Purchase Agreement dated on or about September 10, 1998. Default - an event or condition the occurrence of which would, with the ------- lapse of time or the giving of notice, or both, become an Event of Default. Default Rate - as defined in Section 2.1.2. ------------ ------------- Distribution - in respect of any corporation means and includes: (i) the ------------ payment of any dividends or other distributions on capital stock of the corporation (except distributions in such stock), and (ii) the redemption or acquisition of Securities unless made contemporaneously from the net proceeds of the sale of Securities. Dollars and the sign "$" - lawful money of the United States of America. ------------------------ Dominion Account - a special account of Lender established by each Loan ---------------- Party pursuant to the Agreement at a bank selected by such Loan Party, but acceptable to Lender in its sole discretion, and over which Lender shall have sole and exclusive access and control for withdrawal purposes. EBITDA - for any fiscal period for any Person, an amount equal to, (a) ------ Adjusted Net Earnings From Operations; plus, (b) in each case, to the extent ---- deducted in determining Adjusted Net Earnings From Operations for such period (i) Interest Expense, (ii) Taxes, (iii) depreciation and amortization and similar non-cash charges; plus, (c) with regard to the calculation of EBITDA for ---- Avalon, on a Consolidated basis, for the purpose of calculating the applicable margin for Borrowers' Loans pursuant to Section 2.1.1(B), to the extent such ---------------- fiscal period includes any period prior to the date any Acquisition Target was acquired, Pro Forma Target EBITDA for each such Acquisition Target for that portion of the period prior to the date such Acquisition Target was acquired included in such fiscal period. Eligible Account - an Account arising in the ordinary course of business of ---------------- a Loan Party from the sale of goods or rendition or services which is payable in Dollars and which Lender, in its sole and reasonable credit judgment, deems to be an Eligible Account. Without limiting the generality of the foregoing, no Account of a Loan Party shall be an Eligible Account if (unless otherwise waived in writing by Lender): (i) it arises out of a sale made by or services performed by a Loan Party to any Loan Party, or a Subsidiary or Affiliate of a Loan Party; Appendix A - Page 5 (ii) (except as otherwise provided herein) it is due or unpaid more than 90 days after the original invoice date; (iii) 25% or more of the Accounts from the Account Debtor are not deemed Eligible Accounts hereunder; (iv) with respect to any Accounts arising out of services performed at the Union City Juvenile Center due and owing from the Union City, Oklahoma school district as a reimbursement for school programs (a "School Receivable") such School Receivables shall not be ----------------- due or unpaid more that 210 days after the original invoice date or exceed in the aggregate the sum of $85,000.00 at any time; (v) any covenant, representation or warranty contained in the Agreement with respect to such Account has been breached; (vi) the Account Debtor is also a creditor or supplier of a Loan Party (but only to the extent of the amount owed to such creditor or supplier), or the Account Debtor has disputed liability with respect to such Account (but only to the extent of such dispute), or the Account Debtor has made any claim with respect to any other Account due from such Account Debtor to such Loan Party, or the Account otherwise is or may reasonably be expected to (in Fleet's reasonable judgement) become subject to any right of setoff, counterclaim, reserve or chargeback of the Account Debtor (but only to the extent of such setoff, counterclaim, reserve or chargeback); (vii) the Account Debtor has commenced a voluntary case under the federal bankruptcy laws, or made an assignment for the benefit of creditors, or a decree or order for relief has been entered by a court having jurisdiction in the proceedings in respect of the Account Debtor in an involuntary case under the federal bankruptcy laws or any other petition or other application for relief under the federal bankruptcy laws has been filed against the Account Debtor, or if the Account Debtor has failed, suspended business, ceased to be Solvent, or consented to or suffered a receiver, trustee, liquidator or custodian to be appointed for it or for all or a significant portion of its assets or affairs; (viii) it arises from a sale to an Account Debtor with its principal office, assets or place of business outside the United States, unless the sale is backed by an irrevocable letter of credit issued or confirmed by a bank acceptable to Lender, it its sole discretion, and is in form and substance acceptable to Lender, payable in the full amount of the Account in freely convertible Dollars at a place of payment within the United States; (ix) it arises from a sale to the Account Debtor on a bill-and- hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or any other repurchase or return basis; Appendix A - Page 6 (x) (a) the Account Debtor is the United States of America or any department, agency or instrumentality thereof, and the Loan Party to whom such Account is owed fails to assign its right to payment of such Account to Lender following written request for such assignment by Lender or upon the occurrence of an Event of Default, in a manner satisfactory to Lender so as to comply with the Assignment of Claims Act of 1940 (31 U.S.C. (S)3727 et seq., as amended), or (b) the ------- Account Debtor is a state, country or municipality, or a political subdivision or agency thereof, which is subject to any Applicable Law that would disallow an assignment of Accounts on which it is the Account Debtor; (xi) the Account is subject to a Lien; (xii) the goods or services giving rise to such Account have not been performed or delivered to and accepted by the Account Debtor or the services giving rise to such Account have not been performed by a Loan Party and accepted by the Account Debtor or the Account otherwise does not represent a final sale; (xiii) the Account is evidenced by chattel paper or an instrument of any kind, or has been reduced to judgment; (xiv) a Loan Party has made any agreement with the Account Debtor for any deduction therefrom, except for discounts or allowances which are made in the ordinary course of business for prompt payment and which discounts or allowances are reflected in the calculation of the face value of each invoice related to such Account; (xv) a Loan Party has made an agreement with the Account Debtor to extend the time of payment thereof; (xvi) it has not been billed or invoiced to the underlying Account Debtor; or (xvii) it is not subject to a duly perfected lien in favor of Lender and no other Lien. El Paso Property - that certain tract of real Property located in El Paso ---------------- County, Texas described as Lot 2, Block 8, Horizon Hills, an addition to El Paso County, Texas, according to a map thereof on file in Book 41, Page 26 and 26A Plat Records, El Paso County, Texas being 7.317 acres, more or less. Elk City - as defined in the preamble of this Agreement. -------- Emerald Square - Emerald Square, L.L.C., an Oklahoma limited liability -------------- company. Appendix A - Page 7 Environmental Laws - all federal, state and local laws, rules, regulations, ------------------ ordinances, programs, permits, guidances, orders and consent decrees relating to health, safety or environmental matters. Equipment - all machinery, apparatus, equipment, fittings, furniture, --------- Fixtures, motor vehicles and other tangible personal Property (other than Inventory) of every kind and description used in the operations of any Loan Party or owned by any Loan Party or in which any Loan Party has an interest, whether now owned or hereafter acquired by any Loan Party and wherever located, and all parts, accessories and special tools and all increases and accessions thereto and substitutions and replacements therefor. Equity Interest - (i) with respect to a corporation, any and all capital --------------- stock or warrants, options or other rights to acquire capital stock, and (ii) with respect to a partnership, limited liability company or similar Person, any and all units, interests, rights to purchase, warrants, options or other equivalents of, or other ownership interests in any such Person. ERISA - the Employee Retirement Income Security Act of 1974, as amended, ----- and all rules and regulations from time to time promulgated thereunder. Event of Default - as defined in Section 10.1. ---------------- ------------ Excess Interest - as defined in Section 2.1.3(B). --------------- ---------------- Excluded Property - the Property set forth on Exhibit R to the Original ----------------- --------- Agreement as the same may be amended from time to time with the consent of Lender. Fixed Charge Coverage Ratio - for any period of determination, the ratio of --------------------------- (a) EBITDA for such period, to (b) Fixed Charges for such period. Fixed Charges - for any period of determination, the sum of (a) all ------------- scheduled principal payments due in respect of Funded Indebtedness during such period, (b) all interest expenses paid in cash during such period, (c) all Capital Expenditures incurred during such period, and (d) all Taxes not included in the determination of EBITDA that are paid in cash during such period. Fixtures - all "Fixtures" as defined in the Code now owned or hereafter -------- acquired by any Loan Party including, without limitation, all plant Fixtures, business Fixtures, other Fixtures, and storage office facilities, wherever located; and all additions and accession thereto and replacements therefore. Funded Indebtedness - as applied to any Person means, (a) all Indebtedness, ------------------- (whether or not represented by bonds, debentures, notes, securities, or other evidences of Indebtedness, for the repayment of money borrowed), (b) all Indebtedness representing deferred payment of the purchase price of property or assets, (c) all Indebtedness under any lease which, in conformity with GAAP, Appendix A - Page 8 is required to be capitalized for balance sheet purposes and leases of property or assets made as a part of sale and lease-back transaction if required to be capitalized, (d) all Indebtedness under guaranties (excluding, Avalon's guaranty of any Indebtedness of Emerald Square), endorsements, assumptions, or other contractual obligations, including any letters of credit, or the obligations in respect of, or to purchase or otherwise acquire, indebtedness of others, (e) all Indebtedness secured by a Lien existing on Property owned, subject to such Lien, whether or not the Indebtedness secured thereby shall have been assumed by the owner thereof, and (f) all amendments, renewals, extensions, modifications and refundings of any Indebtedness or obligations referred to in the foregoing clauses (a) through (e). GAAP - generally accepted account principles in the United States of ---- America in effect from time to time. General Intangibles - all general intangibles of any Loan Party whether now ------------------- owned or hereafter created or acquired by any Loan Party, including all choses in action, causes of action, corporate or other business records, deposit accounts, inventions, blueprints, designs, patents, patent applications, trademarks, trademark applications, trade names, trade secrets, service marks, goodwill, brand names, copyrights, registrations, licenses, franchises, customer lists, tax refund claims, computer programs, operational manuals, all claims under guaranties, security interests or other security held by or granted to any Loan Party to secure payment of any of the Accounts by an Account Debtor, all rights to indemnification and all other intangible property of every kind and nature (other than Accounts). Greeley Property - means that certain real property located at 1730-1750- ---------------- 1760 Sixth Avenue, Greeley, Colorado. Guarantors - Central, Elk City, The Villa and any other Person who now or ---------- may hereafter guarantee payment or performance of the whole or any part of the Obligations. Guaranty Agreements - the unconditional Guaranty which is to be executed by ------------------- each Guarantor in form and substance satisfactory to Lender. Indebtedness - as applied to a Person means, without duplication ------------ (i) all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined, including, without limitation, Capitalized Lease Obligations, (ii) all obligations of other Persons which such Person has guaranteed, (iii) all reimbursement obligations in connection with letters of credit or letter of credit guaranties issued for the account of such Person, and Appendix A - Page 9 (iv) in the case of any Borrower (without duplication), the Obligations. Instruments - all "instruments", "chattel paper" or "letters of credit" ----------- (each as defined in the Code) including, but not limited to, promissory notes, drafts, bills of exchange and trade acceptances, now owned or hereafter acquired by any Loan Party. Interest Expense - with respect to any fiscal period, the interest expense ---------------- incurred for such period as determined in accordance with GAAP. Investment Property - all investment property of any Loan Party, whether ------------------- now owned or hereafter acquired, including, but not limited to, all securities (certificated or uncertificated), securities accounts, securities entitlements, commodity accounts and commodity contracts. Legal Requirement - any requirement imposed upon Lender by any law of the ----------------- United States of America or the United Kingdom or by any regulation, order, interpretation, ruling or official directive (whether or not having the force of law) of the Federal Reserve Board, the Bank of England or any other board, central bank or governmental or administrative agency, institution or authority of the United States of America, the United Kingdom or any political subdivision of either thereof. LIBOR Interest Payment Date - with respect to any LIBOR Portion, the last --------------------------- day of each calendar month during the applicable LIBOR Period. LIBOR Margin - As defined in Section 2.1.1. ------------ ------------- LIBOR Option - the option granted pursuant to Section 2.3 of the Agreement ------------ ----------- to have the interest on all or any portion of the principal amount of the Loans based on a LIBOR Rate. LIBOR Period - any period of one (1) month, two (2) months, three (3) ------------ months, or six (6) months commencing on a Business Day, selected as provided in Section 2.3(i); provided, however that no LIBOR Period shall extend beyond the - -------------- -------- last day of the Term, unless Borrowers and Lender have agreed to an extension of the Term beyond the expiration of the LIBOR Period in question. If any LIBOR Period so selected shall end on a date that is not a Business Day, such LIBOR Period shall instead end on the next preceding or succeeding Business Day as determined by Lender in accordance with the then current banking practice in London; provided, that Borrower shall not be required to pay double interest, -------- even though the preceding LIBOR Period ends and the new LIBOR Period begins on the same day. Each determination by Lender of the LIBOR Period shall, in the absence of manifest error, be conclusive. LIBOR Portion - that portion of the Loans specified in a LIBOR Request ------------- (including any portion of Loans which is being borrowed by Borrowers concurrently with such LIBOR Request) which is not less than $1,000,000 and is an integral multiple of $100,000, which does not exceed the outstanding balance of Loans not already subject to a LIBOR Option and, which, as of the date of the LIBOR Request specifying such LIBOR Portion, has met the conditions for basing interest on Appendix A - Page 10 the LIBOR Rate in Section 2.3 of the Agreement and the LIBOR Period of which was ----------- commenced and not terminated. LIBOR Rate - with respect to any LIBOR Portion for the related LIBOR ---------- Period, an interest rate per annum (rounded upwards, if necessary, to the next higher 1/8 of 1% equal to the product of (i) the Base LIBOR Rate (as hereinafter defined) multiplied by (ii) Statutory Reserves. For purposes of this ---------- definition, the term "Base LIBOR Rate" shall mean the rate (rounded to the --------------- nearest 1/8 of 1% or, if there is no nearest 1/8 of 1%, the next higher of 1/8 of 1%) at which deposits of U.S. dollars approximately equal in principal amount to the LIBOR Portion specified in the applicable LIBOR Request are offered to Lender by prime banks in the London interbank foreign currency deposits market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such LIBOR Period, for delivery on the first day of such LIBOR Period. Each determination by Lender of any LIBOR Rate shall, in the absence of manifest error, be conclusive. LIBOR Request - a notice in writing (or by telephone confirmed by telex, ------------- telecopy or other facsimile transmission on the same day as the telephone request) from an Authorized Officer to Lender requesting that interest on a Loan be based on the LIBOR Rate, specifying: (i) the first day of the LIBOR Period; (ii) the length of the LIBOR Period consistent with the definition of that term; and (iii) the dollar amount of the LIBOR Portion consistent with the definition of such terms. Lien - any interest in Property securing an obligation owed to, or a claim ---- by, a Person other than the owner of the Property, whether such interest is based on common law, statute or contract. The term "Lien" shall also include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purpose of the Agreement, each Loan Party shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. Loan Account - the loan account established on the books of Lender pursuant ------------ to Section 3.6. ----------- Loan Documents - the Agreement, the Other Agreements and the Security -------------- Documents. Loan Parties - collectively, each Borrower, each Guarantor and each other ------------ Person (other than Lender) which is at any time a party to any Loan Document or individually, a Loan Party. ---------- Loans - all loans and advances of any kind made by Lender pursuant to the ----- Agreement. Material Adverse Effect - the effect of any event or condition which, ------------------------ alone or when taken together with other events or conditions occurring or existing concurrently therewith, (i) has a material adverse effect upon the business, operations, Properties, condition (financial or otherwise) or business prospects of any Loan Party, taken as a whole; (ii) has any material adverse effect whatsoever upon the validity or enforceability of the Agreement or any of the other Loan Appendix A - Page 11 Documents; (iii) has or may be reasonably expected to have any material adverse effect upon the value of the whole or any material part of the Collateral, the Liens or Lender with respect to the Collateral or any material part thereof or the priority of such Liens; (iv) materially impairs the ability of any Loan Party, taken as a whole to perform their obligations under this Agreement or any of the other Loan Documents, including repayment of the Obligations or realize upon any of the Collateral in accordance with the Loan Documents and Applicable Law. Maximum Legal Rate - as defined in Section 2.1.3(A). ------------------ ---------------- Money Borrowed - means (i) Indebtedness arising from the lending of money -------------- by any Person to any Loan Party; (ii) Indebtedness, whether or not in any such case arising from the lending by any Person of money to any Loan Party, (a) which is represented by notes payable or drafts accepted that evidence extensions of credit, (b) which constitutes obligations evidenced by bonds, debentures, notes or similar instruments, or (c) upon which interest charges are customarily paid (other than accounts payable) or that was issued or assumed as full or partial payment for Property; (iii) Indebtedness that constitutes a Capitalized Lease Obligation; (iv) reimbursement obligations with respect to letters of credit or guaranties of letters of credit; and (v) Indebtedness of any Loan Party under any guaranty of obligations that would constitute Indebtedness for Money Borrowed under clauses (i) through (iii) hereof, if owed directly by any Loan Party. Mortgages - collectively, any mortgage, deed of trust or security deed to --------- be executed by any Loan Party in favor of Lender and by which any Loan Party shall grant and convey to Lender, as security for the Obligations, a Lien upon the real Property of such Loan Party. Multiemployer Plan - has the meaning set forth in Section 4001(a)(3) of ------------------ ERISA. Net Worth - at any date of determination thereof, (i) the aggregate amount --------- of all assets of a Person and its Subsidiaries on a Consolidated basis as may be properly classified as such, less (ii) the aggregate amount of all liabilities of a Person and its Subsidiaries on a Consolidated basis, all as determined in accordance with GAAP. Obligations - all Loans and all other advances, debts, liabilities, ----------- obligations, covenants and duties, together with all interest, fees and other charges thereon, owing, arising, due or payable from Borrowers to Lender of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether arising under the Agreement or any of the other Loan Documents or otherwise whether direct or indirect (including those acquired by assignment), absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however acquired. Original Agreement - as defined in the preamble to this Agreement. ------------------ Other Agreements - any and all agreements, instruments and documents (other ---------------- than the Agreement and the Security Documents), heretofore, now or hereafter executed by any Loan Party Appendix A - Page 12 Borrower or any other third party and delivered to Lender in respect of the transactions contemplated by the Agreement, including the Subordination Agreements. Other Subordinated Debt - all Subordinated Debt other than the RSTW Debt. ----------------------- Out-of-Formula Condition - at any date of determination thereof, a ------------------------ condition such that the outstanding principal amount of Loans on such date exceeds the Borrowing Base on such date. Participant - each Person who shall be granted the right by Lender to ----------- participate in any of the Loans described in the Agreement and who shall have entered into a participation agreement in form and substance satisfactory to Lender. Permitted Liens - any Lien of a kind specified in Section 8.2.5. --------------- ------------- Permitted Purchase Money Indebtedness - Purchase Money Indebtedness of any ------------------------------------- Loan Party incurred after the date hereof which is secured by a Purchase Money Lien and (a) which, when aggregated with the principal amount of all other such Indebtedness and Capitalized Lease Obligations of the Loan Parties at the time outstanding, does not exceed, in the aggregate, $250,000.00, (b) is incurred solely in connection with the purchase of replacements for the Excluded Property; provided such Purchase Money Lien attaches only to such replacement of Excluded Property, or (c) is incurred solely in connection with the purchase of passenger vans used in connection with correctional facilities; provided such Purchase Money Lien attaches only to such passenger vans. For the purposes of this definition, the principal amount of any Purchase Money Indebtedness consisting of capitalized leases shall be computed as a Capitalized Lease Obligation. Person - an individual, partnership, corporation, limited liability ------ company, joint stock company, land trust, business trust, or unincorporated organization, or a government or agency or political subdivision thereof. Plan - an employee benefit plan now or hereafter maintained for employees ---- of any Loan Party that is covered by Title IV of ERISA. Pro Forma Balance Sheet - the unaudited Consolidated balance sheet of ----------------------- Avalon and its Subsidiaries as of the Closing Date after giving effect to the execution and delivery of the Loan Documents and the funding of any Loans made by Lender to Borrowers on the Closing Date and the payment of all fees, costs and expenses associated with the foregoing. Pro Forma Fixed Charge Coverage Ratio - for any period of determination, ------------------------------------- the ratio of (a) EBITDA for such period, to (b) to Pro Forma Fixed Charges for such period. Pro Forma Fixed Charges - for any period of determination, the sum of ----------------------- (without duplication) (a) all scheduled principal payments due in respect of Funded Indebtedness during such period, (b) all interest expenses paid in cash during such period, (c) all Capital Expenditures incurred during Appendix A - Page 13 such period, (d) all Taxes not included in the determination of EBITDA that are paid in cash during such period, and (e) the sum of $325,000.00 for each calendar quarter ending prior to July 1, 2000 included in such period. Pro Forma Target Cash Flow - with respect to any Acquisition Target, the -------------------------- Cash Flow of such Acquisition Target, on a pro forma basis (calculated in a manner and using amounts approved by Lender), for the twelve month period ending on the last day of the calendar month immediately preceding the date on which the Acquisition is consummated for which financial information prepared in a manner consistent with the financial statements required by Section 8.1.3 is ------------- available. Pro Forma Target EBITDA - with respect to any Acquisition Target, the ----------------------- EBITDA of such Acquisition Target, on a pro forma basis (calculated in a manner and using amounts approved by Lender), for the twelve month period ending on the last day of the calendar month immediately preceding the date on which the Acquisition is consummated for which financial information prepared in a manner consistent with the financial statements required by Section 8.1.3 is available. ------------- Projections - Avalon's forecasted Consolidated and consolidating (i) ----------- balance sheets, (ii) profit and loss statements, (iii) cash flow statements, and (iv) capitalization statements, all prepared on a consistent basis with the historical financial statements of Avalon and its Subsidiaries, together with appropriate supporting details and a statement of underlying assumptions. Properly Contested - in the case of any Indebtedness of a Loan Party ------------------ (including any Taxes) that is not paid as and when due or payable by reason of such Loan Party's bona fide dispute concerning its liability to pay same or concerning the amount thereof, that (i) such Indebtedness and any Liens securing same are being property contested in good faith by appropriate proceedings promptly instituted and diligently conducted, (ii) such Loan Party has established appropriate reserves as shall be required in conformity with GAAP, (iii) the non-payment of such Indebtedness will not have a Material Adverse Effect and will not result in a forfeiture of any assets of such Loan Party; (iv) no Lien is imposed upon any of such Loan Party's assets with respect to such Indebtedness unless such Lien is at all times junior and subordinate in priority to the Liens in favor of Lender (except only with respect to property Taxes that have priority as a matter of applicable state law); (v) if the Indebtedness results from the entry, rendition or issuance against a Loan Party or any of its assets of a judgment, writ, order or decree, such judgment, writ, order or decree is stayed or bonded pending a timely appeal or other judicial review; and (vi) if such contest is abandoned, settled or determined adversely to such Loan Party, such Loan Party forthwith pays such Indebtedness and all penalties and interest in connection therewith. Property - any interest in any kind of property or asset, whether real, -------- personal or mixed, or tangible or intangible. Purchase Money Indebtedness - means and includes (i) Indebtedness (other --------------------------- than the Obligations and the Subordinated Debt) for the payment of all or any part of the purchase price of any fixed assets, or passenger vans used in connection with correctional facilities, (ii) any Appendix A - Page 14 Indebtedness (other than the Obligations or the Subordinated Debt) incurred at the time of or within ten (10) days prior to or after the acquisition of any fixed assets for the purpose of financing all or any part of the purchase price thereof, and (iii) any renewals, extensions or refinancings thereof, but not any increases in the principal amounts thereof outstanding at the time. Purchase Money Lien - a Lien upon fixed assets which secures Purchase Money ------------------- Indebtedness, but only if such Lien shall at all times be confined solely to the fixed assets the purchase price of which was financed through the incurrence of the Purchase Money Indebtedness secured by such Lien. Qualified Secondary Public Offering - a firm commitment, underwritten ----------------------------------- public offering of Avalon's common stock to the general public pursuant to one or more registration statements declared effective by the United States Securities and Exchange Commission which results in gross cash proceeds of at least $25,000,000.00. Rentals - as defined in Section 8.2.12. ------- -------------- Reportable Event - any of the events set forth in Section 4043(b) of ERISA. ---------------- Restricted Investment - any investment made in cash or by delivery of --------------------- Property to any Person, whether by acquisition of stock, Indebtedness or other obligation or Security, or by loan, advance or capital contribution, or otherwise, or in any Property except the following: (i) investments of any Borrower in any of its Subsidiaries to the extent existing on the Closing Date; (ii) Property to be used in the ordinary course of business; (iii) Current Assets arising from the sale of goods and services in the ordinary course of business of any Borrower and its Subsidiaries; (iv) investments in direct obligations of the United States of America, or any agency thereof or obligations guaranteed by the United States of America, provided that such obligations mature within one year from the date of acquisition thereof; (v) investments in certificates of deposit maturing within one year from the date of acquisition issued by a bank or trust company organized under the laws of the United States or any state thereof having capital surplus and undivided profits aggregating at least $100,000,000; and (vi) investments in commercial paper given the highest rating by a national credit rating agency and maturing not more than 270 days from the date of creation thereof. Appendix A - Page 15 Revolving Credit Loan Commitment - $3,000,00.00 as the same may from time -------------------------------- to time be reduced pursuant to this Agreement. Revolving Credit Loans - Loans made by Lender as provided in Section 1.1.1 ---------------------- ------------- of the Agreement. RSTW - RSTW Partners III, L.P., a Delaware Limited Partnership. ---- RSTW Debt - means and includes all indebtedness, obligations and --------- liabilities of any Loan Party now or hereafter owing under or in respect of the RSTW Debt Documents. RSTW Debt Documents - means (i) the RSTW Loan Agreement, (ii) the RSTW ------------------- Note, (iii) the RSTW Securities Documents, and (iv) all promissory notes, agreements, proxies, security documents, guaranties, share certificates, documents and instruments now or at any time hereafter executed and/or delivered by any Loan Party and, in favor of or for the benefit of RSTW in connection therewith or related thereto; as all of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced to the extent permitted under this Agreement and the RSTW Subordination Agreement. RSTW Loan Agreement - means that certain Note Purchase Agreement dated ------------------- September 16, 1998, by and among RSTW and Borrowers, as the same now exist and may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced to the extent permitted under this Agreement at the RSTW Subordination Agreement. RSTW Note - means the Senior Subordinated Note dated September 16, 1998, in --------- the stated principal amount of $10,000,000 issued by Borrowers to RSTW, together with any amendments, modifications, extensions, substitutions, restatements or replacements of the same to the extent permitted under this Agreement at the RSTW Subordination Agreement. RSTW Securities Documents - means the "Securities Documents" as defined in ------------------------- the RSTW Subordination Agreement. RSTW Subordination Agreement - means the Subordination Agreement, dated the ---------------------------- date hereof, by and between Lender and RSTW as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. Schedule of Accounts - as defined in Section 6.2.1. -------------------- ------------- Security - shall have the same meaning as in Section 2(1) of the Securities -------- Act of 1933, as amended. Security Documents - the Guaranty Agreements, the Mortgages and all other ------------------ instruments and agreements now or at any time hereafter securing the whole or any part of the Obligations. Appendix A - Page 16 Senior Debt - means all Money Borrowed, excluding Subordinated Debt. ----------- Solvent - as to any Person, such Person (i) owns Property whose fair ------- saleable value is greater than the amount required to pay all of such Person's Indebtedness (including contingent debts), (ii) is able to pay all of its Indebtedness as such Indebtedness matures and (iii) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage. Southern - as defined in the preamble of this Agreement. -------- Statutory Reserves - a fraction (expressed as a decimal), the numerator of ------------------ which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including, without limitation, any marginal, special, emergency or supplemental reserves), expressed as a decimal, established by the Federal Reserve Board and any other banking authority to which Lender is subject for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board or any successor thereto). Such reserve percentages shall include, without limitation, those imposed under such Regulation D. Any LIBOR Portion shall be deemed to constitute Eurocurrency Liabilities and as such shall be deemed to be subject to such reserve requirements without benefit of or credit for proration, exceptions or offsets which may be available from time to time to Lender under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage, provided that no adjustment shall reduce Statutory Reserves below the amount in effect on the Closing Date. Subordinated Debt - the RSTW Debt and Indebtedness of any Borrower pursuant ----------------- to the Convertible Notes. Subordination Agreements - collectively, the RSTW Subordination Agreement ------------------------ and the Consolidated Notes Subordination Agreement as the same may be amended, modified, supplemented, extended, renewed, restated or replaced. Subsidiary - any corporation of which a Person owns, directly or indirectly ---------- through one or more intermediaries, more than 50% of the Voting Stock at the time of determination. Tangible Assets - means all assets except: (i) deferred assets, other than --------------- prepaid insurance and prepaid taxes; (ii) patents, copyrights, trade marks, trade names, non-compete agreements, franchises and other similar intangibles; (iii) good will, including any amounts, however designated on the Consolidated balance sheet of Avalon and its Subsidiaries, representing the excess of the purchase price paid for assets or stock over the value assigned thereto on the books of such Person; (iv) unamortized debt discount and expense; (v) assets located and notes and receivables from obligors outside of the United States of America; and (vi) Accounts, notes and other receivables due from Affiliates, Subsidiaries or employees. Tangible Net Worth - as of any date of determination, a sum equal to: ------------------ Appendix A - Page 17 (i) the net book value (after deducting related depreciation, obsolescence, amortization, valuation and other proper reserves) at which the Tangible Assets of Avalon (on a Consolidated basis) would be shown on a balance sheet at such date in accordance with GAAP; minus ----- (ii) the amount at which such person's liabilities (other than capital stock, surplus, and Subordinated Debt) would be shown on such balance sheet in accordance with GAAP, and including as liabilities all reserves for contingencies and other potential liabilities. Tax - collectively, any present and future tax, levy, impost, duty, fee, --- assessment, deduction, withholding or other charge of whatever nature, including income, receipts, excise, property, sales, transfer, license, payroll, withholding, social security and franchise taxes now or hereafter imposed or levied by the United States, or any state, local or foreign government or by any department, agency or other political subdivision or taxing authority thereof or therein and all interest, penalties, additions to tax and similar liabilities with respect thereto and (ii) in relation to any LIBOR Portion and the applicable LIBOR Rate, any tax, levy, impost, duty, deduction, withholding or charges of whatever nature required by any Legal Requirement (1) to be paid by Lender and/or (2) to be withheld or deducted from any payment otherwise required hereby to be made by any Borrower to Lender; provided, that the term "Tax" shall -------- not include any taxes imposed upon the net income of Lender. Term - as defined in Section 4.1. ---- ----------- Term Loan - as defined in Section 1.2. --------- ----------- Term Loan Commitment - as defined in Section 1.2. -------------------- ----------- Term Note - as defined in Section 1.2. --------- ----------- Termination Balance - as defined in Section 4.2.3. ------------------- ------------- The Villa - as defined in the preamble to this Agreement. --------- Triggering Date - as defined in Section 2.1.1. --------------- ------------- Total Credit Facility - $16,500,000 and as the same may from time to time --------------------- be reduced pursuant to Section 3.3.3. ------------- Total Liabilities - as of any date of determination all amounts properly ----------------- classified as liabilities on Avalon's Consolidated balance sheet (other than Subordinated Debt) at such date in accordance with GAAP, plus all reserves for contingencies and all other potential liabilities for which no reserves have been previously established on such balance sheet, to the extent such amounts are not already classified as liabilities in accordance with GAAP. Appendix A - Page 18 University - as defined in Section 8.2.17. ---------- -------------- Voting Stock - Securities of any class or classes of a corporation the ------------ holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). Other Terms. All other terms contained in the Agreement shall have, when ----------- the context so indicates, the meanings provided for by the Code to the extent the same are used or defined therein. Certain Matters of Construction. References to "Sections," "subsections," ------------------------------- -------- ----------- "Exhibits," "Schedules," and to the Appendix shall be to Sections, subsections, -------- --------- -------- -------- ----------- Exhibits, Schedules and the Appendix, respectively, of or to the Agreement - -------- --------- -------- unless otherwise specifically provided. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to the Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. In the computation periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" means "to but excluding." The section titles, table of contents and list of exhibits appear as a matter of convenience only and shall not affect the interpretation of the Agreement. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. All references to any of the Loan Documents shall include any and all modifications thereto and any and all extensions or renewals thereof. Whenever the phrase "including" shall appear in this Agreement, such word shall be understood to mean "including, without limitation." REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK Appendix A - Page 19 LIST OF EXHIBITS ---------------- Exhibit A Term Note Exhibit B Business Locations Exhibit C Jurisdictions in which the Loan Parties and their Subsidiaries are Authorized to do Business Exhibit D Capital Structure Exhibit E Corporate Names Exhibit F Tax Identification Numbers of the Loan Parties Exhibit I Litigation Exhibit K Operating Leases Exhibit L Pension Plans Exhibit O Permitted Liens Exhibit P Borrowing Base Certificate Exhibit Q Property Acquired Within Past Five Years Exhibit S Material Change in the Condition, Financial or Otherwise Of Loan Parties Change in the Aggregate Value of Equipment and Real Property Of Loan Parties EXHIBIT A TERM NOTE $13,500,000.00 December 9, 1999 FOR VALUE RECEIVED, AVALON CORRECTIONAL SERVICES, INC. and SOUTHERN CORRECTIONS SYSTEMS, INC. (collectively, and jointly and severally, "Borrower"), -------- hereby promises to pay to the order of FLEET CAPITAL CORPORATION ("Lender") at ------ its offices at 5950 Sherry Lane, Suite 300, Dallas, Texas 75225, or at such other place in the United States of America as the holder of this Note may designate from time to time in writing, in lawful money of the United States, in immediately available funds, at the time of payment, the principal sum of THIRTEEN MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($13,500,000.00 ), together with interest from and after the date hereof on the unpaid principal balance outstanding from time to time as specified in that certain Amended and Restated Loan and Security Agreement dated as of December 9, 1999, by and among Lender, Borrower, and the Guarantors (the "Loan Agreement"). Capitalized terms -------------- not otherwise defined herein shall have the same meanings as in the Loan Agreement. This Term Note is the term note referred to in, and is issued pursuant to, the Loan Agreement. All of the terms, covenants and conditions of the Loan Documents are hereby made a part of this Note and are deemed incorporated herein in full. For so long as no Event of Default shall have occurred and be continuing the principal amount and accrued interest of this Note shall be due and payable on the dates and in the manner hereinafter set forth: (a) Interest on the unpaid principal balance outstanding from time to time shall be paid at such interest rates and at such times as are specified in the Loan Agreement; (b) Principal shall be due and payable quarterly on the first day of each calendar quarter commencing on July 1, 2000 and continuing on the first day of each calendar quarter thereafter through and including January 1, 2003, in installments of $325,000.00 each; and (c) The entire remaining principal amount then outstanding, together with any and all other amounts due hereunder, shall be due and payable on February 25, 2003. Notwithstanding the foregoing, the entire unpaid principal balance and accrued interest on this Note shall be due and payable immediately upon any termination of the Loan Agreement pursuant to the terms thereof. This Note shall be subject to mandatory prepayment in accordance with the provision of the Loan Agreement. Borrower may also prepay this Note in the manner provided in the Loan Agreement. Term Note - Page 1 Upon the occurrence, and during the continuation, of an Event of Default, this Term Note shall or may, as provided in the Loan Agreement, become or be declared immediately due and payable. Demand, presentment, protest and notice of nonpayment and protest are hereby waived by Borrower. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of Texas. This Note is issued in substitution for and replacement of, but not in payment of certain Obligations of Borrower under the Original Agreement to Lender. AVALON CORRECTIONAL SERVICES, INC., a Nevada corporation By: ----------------------------- Name: --------------------------- Title: -------------------------- SOUTHERN CORRECTIONS SYSTEMS, INC., an Oklahoma corporation By: ----------------------------- Name: --------------------------- Title: -------------------------- Term Note - Page 2 EXHIBIT B BUSINESS LOCATIONS 1. Each Loan Party currently has the following business locations, and no others: Chief Executive Office: Avalon Correctional Services, Inc. Southern Corrections Systems, Inc. 13401 Railway Drive 13401 Railway Drive Oklahoma City, OK 73114 Oklahoma City, OK 73114 Other Locations: Avalon Correctional Services, Inc.: Southern Corrections Systems, Inc.: ---------------------------------- ---------------------------------- Emerald Square Avalon Correctional Center 701 N. Council Road 302 W. Archer Street Oklahoma City, OK 73127 Tulsa, OK 74103 The Villa at Greeley, L.L.C. El Paso Intermediate Sanction ---------------------------- Facility 1650 Horizon Boulevard El Paso, TX 79927 1730-1750-1760 South Sixth Avenue Greeley, CO 80632 El Paso Multi-use Facility 1700 Horizon Boulevard El Paso, TX 79927 Turley Correctional Center 6101 N. Cincinnati Avenue Tulsa, OK 74123 Union City Juvenile Center 700 N. SH 81 P.O. Box 247 Union City, OK 73090 The Phoenix Center 8031 Highway I-76 Henderson, CO 80221 2. Each Loan Party maintains its books and records relating to Accounts and General Intangibles at: ALL LOAN PARTIES: 13401 Railway Drive Oklahoma City, OK 73114 3. Each Loan Party has had no office, place of business or agent for process located in any county other than as set forth above, except: Not Applicable 4. Each Subsidiary of a Loan Party currently has the following business locations, and no others: Chief Executive Office: Elk City Properties, Inc. Central Oklahoma Properties Corp., ------------------------- --------------------------------- 13401 Railway Drive 13401 Railway Drive Oklahoma City, OK 73114 Oklahoma City, OK 73114 Other Locations: None 5. Each Subsidiary of a Loan Party maintains its books and records relating to Accounts and General Intangibles at: 13401 Railway Drive Oklahoma City, OK 73114 6. Each Subsidiary of a Loan Party has had no office, place of business or agent for process located in any county other than as set forth above, except: Not Applicable EXHIBIT C JURISDICTIONS IN WHICH THE LOAN PARTIES, AND THEIR SUBSIDIARIES ARE AUTHORIZED TO DO BUSINESS Name of Entity Jurisdictions -------------- ------------- Avalon Correctional Services, Inc. Missouri Nevada Oklahoma Southern Corrections Systems, Inc. Colorado Missouri Nebraska Oklahoma Texas Elk City Properties, Inc. Oklahoma Central Oklahoma Properties Corp. Oklahoma The Villa at Greeley, L.L.C. Colorado EXHIBIT D CAPITAL STRUCTURE 1. The classes and number of authorized shares of each Loan Party and any Subsidiary of such Loan Party and the record owner of such shares are as follows: Avalon Correctional Services, Inc., a Nevada corporation: - --------------------------------------------------------
================================================================================== Number of Shares Number of Shares Class of Stock Issued and Outstanding Record Owners Authorized but Unissued - ---------------- ---------------------- --------------- ----------------------- Common -A 4,670,630 Publicly Traded 15,329,370 - ---------------------------------------------------------------------------------- Common - B -0- -0- 4,000,000 - ---------------------------------------------------------------------------------- Preferred -0- -0- 1,000,000 - ---------------------------------------------------------------------------------- ==================================================================================
Avalon Correctional Services, Inc., owns 100% of the Common Stock of the - ------------------------------------------------------------------------ following Loan Parties: - ---------------------- Southern Corrections Systems, Inc., an Oklahoma corporation Central Oklahoma Properties Corp., an Oklahoma corporation Southern Corrections Systems, Inc., owns 100% of the outstanding membership - --------------------------------------------------------------------------- interests of the following entity: The Villa at Greeley, L.L.C., a Colorado - --------------------------------- limited liability company. Southern Corrections Systems, Inc., is Sole Voting Member of the following - -------------------------------------------------------------------------- nonprofit entities: - ------------------ Adams Community Corrections Program, Inc., a Colorado nonprofit corporation. Comprehensive Recovery Services, Inc., a Colorado nonprofit corporation. 2. The number, nature and holder of all other outstanding Securities of each Loan Party and each Subsidiary of such Loan Party is as follows: Avalon Correctional Services, Inc., - See Attached No other Loan Party has any Securities outstanding other than Common Stock or limited liability membership interests owned by Avalon Correctional Services, Inc., or Southern Corrections Systems, Inc., as identified in Paragraph 1 above. 3. The correct name and jurisdiction of incorporation of each Subsidiary of each Loan Party and the percentage of its issued and outstanding shares owned by such Loan Party are as follows: SEE PARAGRAPH 1 ABOVE 4. The name of each of Loan Party's corporate or joint venture Affiliates and the nature of the affiliation are as follows: Avalon Retirement Centers, L.L.C., - Avalon Correctional Services, Inc., owns 15% LLC interest 5. Warrants and options of each Loan Party with a description of exercise options and price. Avalon Community Services Equity Instruments 12/08/99
Donald E. RSTW Pro Trust Jerry M. Total Street Smith Partners III Equity Sunderland -------------------------------------------------------------------------------------- Common Stock 4,670,630 1,836,826 1,027,729 1,622,448 Convertible into Common Stock Convertible Debentures 1,283,333 470,000 666,667 Class C Warrants 837,500 533,000 10,000 Class D Warrants 200,000 Class E Warrants 79,000 CEO Guarantee Warrants 750,000 750,000 Underwriter Warrants 100,000 Legg Mason Warrants 200,539 John P. O'Shea Warrants 60,000 Stock Options outstanding 530,440 141,270 141,270 -------------------------------------------------------------------------------------- 8,711,442 2,839,826 1,928,999 1,622,448 666,667 141,270 ====================================================================================== 32.60% 22.14% 18.62% 7.65% 1.62% ========================================================================
Note: No other owenrs known over 1% EXHIBIT E CORPORATE NAMES 1. Avalon's correct corporate name, as registered with the Secretary of State of the State of Nevada, is: Avalon Correctional Services, Inc. 2. In the conduct of its business, Avalon has used the following names: Avalon Correctional Services, Inc. Avalon Community Services, Inc. Avalon Enterprises, Inc. 3. The correct corporate name of each remaining Loan Party, as registered with the Secretary of State of the state of incorporation of such Loan Party is: Southern Corrections Systems, Inc., an Oklahoma corporation Elk City Properties, Inc., an Oklahoma corporation Central Oklahoma Properties Corp., an Oklahoma corporation The Villa at Greeley, L.L.C., a Colorado limited liability company 4. In the conduct of its business, Loan Party has used the following names: Avalon Correctional Services, Inc. Avalon Community Services, Inc. Avalon Enterprises, Inc. The Villa at Greeley, L.L.C., has used the trade names The Restitution Center and the Residential Treatment Center The Villa at Greeley, L.L.C., was formerly known as Del Camino Prerelease, LLC, and New Villa at Greeley, LLC. 5. Each Subsidiaries' correct corporate name, as registered with the Secretary of State of the State of its incorporation, is: Southern Corrections Systems, Inc., an Oklahoma corporation Elk City Properties, Inc., an Oklahoma corporation Central Oklahoma Properties Corp., an Oklahoma corporation The Villa at Greeley, L.L.C., a Colorado limited liability company 6. In the conduct of its business, each Subsidiary has used the following names: Elk City Properties, Inc., an Oklahoma corporation: Norman Housing, Inc., an Oklahoma corporation Central Oklahoma Properties Corp., an Oklahoma corporation: The Ark Treatment Center, Inc., an Oklahoma corporation. The Villa at Greeley, L.L.C., a Colorado limited liability company: The Restitution Center, Residential Treatment Center, Del Camino Prerelease, LLC, and New Villa at Greeley, LLC. EXHIBIT F TAX IDENTIFICATION NUMBERS OF THE LOAN PARTIES Loan Party Number ---------- ---------- Avalon Correctional Services, Inc. 13-3592263 Southern Corrections Systems, Inc. 73-1356291 Central Oklahoma Properties Corp. 73-1356347 Elk City Properties, Inc. 73-1377660 The Villa at Greeley, L.L.C. 84-1280281 EXHIBIT I LITIGATION 1. Actions, suits, proceedings and investigations pending against any Loan Party or any Subsidiary of a Loan Party:
============================================================================================================= Title of Action Nature of Action Complaining Parties Jurisdiction or Tribunal - --------------------------- ------------------------------ ------------------- --------------------------- Proceeding before the Arbitration proceeding to Avalon American Arbitration American Arbitration determine amounts owed to Correctional Association Case Number Association; Avalon Boldt Construction Services, Inc. 71 110 00108 98 Correctional Services, Company under Inc., vs. Oscar J. Boldt Construction Contract Construction Company - ------------------------------------------------------------------------------------------------------------- Avalon Correctional Action by Avalon Avalon Oklahoma County District Services, Inc., vs. The Correctional Services, Inc., Correctional Court, State of Oklahoma Benham Group, Inc. to recover for costs and Services, Inc. Case Number CJ-99-7045-61 expenses incurred as a result of the negligent design services of The Benham Group, Inc. - ------------------------------------------------------------------------------------------------------------- Russell Partain vs. Personal injury action by Russell Partain Oklahoma County District Avalon Community former inmate of the Carver Court, State of Oklahoma; Service and Wayland Joe Center; Mr. Partain alleges Case Number CJ - 99 - Clark injuries sustained in van 6892 - 61 accident that occurred in October of 1997 =============================================================================================================
2. The only threatened actions, suits, proceedings or investigations of which any Loan Party or any Subsidiary of a Loan Party is aware are as follows: NONE EXHIBIT K OPERATING LEASES Borrowers' and their Subsidiaries have the following Operating Leases:
- ----------------------------------------------------------------------------------------------------------------------- Facility Description Serial Number Lessor and Address Start End Date Monthly Date Amount - ----------------------------------------------------------------------------------------------------------------------- Copiers Tulsa Savin 9035DL 11182 Stanley Corporation/ 05/01/97 04/30/02 239 Turley Savin 9035DL 11181 Nutech Business Systems 05/01/97 04/30/02 239 Central Office Savin 9500 11547 2601 NW Expressway 02/01/98 01/31/01 547 El Paso Savin 9122DL 1B27110186 Oklahoma City, OK 73112 03/20/98 03/19/02 189 - ----------------------------------------------------------------------------------------------------------------------- Central Office Ricoh Afficio 450 7708870377 Copy Solutions 12/07/98 12/06/01 388 - ----------------------------------------------------- 5715 N. Western, Suite G ------------------------------ Carver Ricoh Afficio 350 7698900487 Oklahoma City, OK 73118 12/07/98 12/06/01 273 - ----------------------------------------------------- ------------------------------ Union City Ricoh Afficio 450 7708870584 12/07/98 12/06/01 333 - ----------------------------------------------------------------------------------------------------------------------- Union City Ricoh 8680 38760200023 03/24/99 03/23/02 561 - ----------------------------------------------------------------------------------------------------------------------- Tulsa Ricoh Aficio 200 A7227020123 IOS Capital 09/01/98 05/31/02 134 - ----------------------------------------------------- P. O. Box 9115 ------------------------------ Macon, GA 31210 - ----------------------------------------------------------------------------------------------------------------------- Central Office Canon L9000 fax UYG16765 Canon Financial Services, Inc. 06/14/99 06/13/02 102 machine 15325 SE 30/th/ Place, Suite 100 - ----------------------------------------------------- Bellvue, WA 98007 ------------------------------ - ----------------------------------------------------------------------------------------------------------------------- Central Office Postage Meter 8065003 Pitney Bowes Credit Corp 11/20/96 01/19/01 140 and Scales 201 Merritt Seven - ----------------------------------------------------- Norwalk, CT 06856 ------------------------------ - ----------------------------------------------------------------------------------------------------------------------- TOTAL OFFICE 3145 EQUIPMENT - ----------------------------------------------------------------------------------------------------------------------- Vehicles - ----------------------------------------------------------------------------------------------------------------------- Central Office 98 Mercedes DBKK47F9WF006713 Jerry Sunderland 05/25/98 05/25/03 934 2017 Raintree Rd. Edmond, OK 73013 - ----------------------------------------------------------------------------------------------------------------------- Central Office 99 Porsche WP0AA2990XS624779 Donald E. Smith 03/29/99 03/28/02 906 99 Lexus JTGHT00W8X0048961 1816 Victoria Place 03/31/99 03/30/03 576 Edmond, OK 73003 - ----------------------------------------------------------------------------------------------------------------------- TOTAL 2416 VEHICLES - ----------------------------------------------------------------------------------------------------------------------- TOTAL ALL 5561 LEASES - -----------------------------------------------------------------------------------------------------------------------
EXHIBIT L PENSION PLANS The Loan Parties and their Subsidiaries have the following Plans: ========================================================================= Party Type of Plan - ------------------------------------ ----------------------------------- Avalon Correctional Services, Inc. An ERISA Exempt Retirement Deferred Compensation Plan - ------------------------------------------------------------------------- Avalon Correctional Services, Inc. 401k Plan - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- ========================================================================= EXHIBIT O PERMITTED LIENS 1. All liens upon airplanes (including airplane engines) owned by any Loan Party 2. All liens upon any automobiles owned by any Loan Party. 3. All liens for security of Permitted Purchase Money Indebtedness and Permitted Purchase Money Liens. 4. Liens on the El Paso Property. 5. Liens created by the existing permitted indebtedness on the El Paso Property, being collectively (a) that certain promissory note dated as of December 23, 1991, in the original principal amount of $2,300,577.98 payable to the order of Chicorp Financial Services, Inc., and executed by Secure Corrections, Inc., and (b) that certain promissory note dated as of November 30, 1995, in the original principal amount of $1,000,000 payable to the order of Chicorp Financial Services, Inc. and executed by Secure Corrections, Inc.; each promissory note described in the foregoing clauses (a) and (b) being secured by that certain Deed of Trust dated as of December 23, 1991, upon the El Paso Property. EXHIBIT P FLEET CAPITAL SEE ATTACHED --------------------------- FLEET CAPITAL --------------------------- --------------------------- FLEET CAPITAL CORPORATION --------------------------- ----------------------------- Borrowing Certificate (A/R) ----------------------------- - ------------------------------------------------------- Client: AVALON COMMUNITY SERVICES LOAN NUMBER: AVA01 - ------------------------------------------------------- ASSIGNMENT NUMBER: COLLECTION NUMBER: - ------------------------------------------------------- DATES COVERED: 11/30/99 - ------------------------------------------------------- - ---------------------------------------------------------- Collateral Loan - ---------------------------------------------------------- Beginning Balance Beginning Balance - ---------------------------------------------------------- 2. Sales (+) 10. Cash (Checks/ACH) (-) - ---------------------------------------------------------- 3. Credit Memos (-) 11. Cash (Wire) (-) - ---------------------------------------------------------- 4. Adjustments (+) 12. Adjustments (+/-) - ---------------------------------------------------------- 5. Adjustments (-) 13. Advance (+) - ---------------------------------------------------------- 6. Cash Receipts (-) Current Balance - ---------------------------------------------------------- 7. Discounts (-) Remaining Availability - ---------------------------------------------------------- 8. Overpayments (+) Explanation - ---------------------------------------------------------- Current Balance - ---------------------------------------------------------- - ---------------------------------------------------------- Ineligible - ---------------------------------------------------------- Eligible Collateral % - ---------------------------------------------------------- Less Reserve - ---------------------------------------------------------- Qualified Collateral - ---------------------------------------------------------- The foregoing information is delivered to Fleet Capital Corporation, (" Fleet") in accordance with a Loan and Security Agreement between Fleet and Avalon Correctional Services, Inc., dated 12/9/99. I hereby certify tl1 the information contained herein is true and correct as of the dates shown herein. Nothing contained herein. Nothing contained herein shall constitute a waiver, modification, or limitation of any of the terms or conditions set forth in the referenced Loan and Security Agreement. - ---------------------------------------------------------- Approved by: Prepared by: - ---------------------------------------------------------- Title: Title: - ---------------------------------------------------------- Date: Date: 3/22/00 - ---------------------------------------------------------- ORIGINAL BATCH BOOKKEEPER CLIENT --------------- FLEET CAPITAL --------------- --------------------------- FLEET CAPITAL CORPORATION --------------------------- ---------------- Ineligible A/R ---------------- ================================================================================ Client Name: AVALON COMMUNITY SERVICES - -------------------------------------------------------------------------------- CLIENT NUMBER: AVA 01 - -------------------------------------------------------------------------------- DATE: 11/30/99 ================================================================================ ================================================================================ Total Current 30 Days 60 Days 90 Days Over 120 Days - -------------------------------------------------------------------------------- Aging Summary 0.00 0.00 0.00 0.00 0.00 0.00 - -------------------------------------------------------------------------------- Percent to Gross 100% #DIV/0 #DIV/0 #DIV/0 #DIV/0 #DIV/0 ================================================================================ Following is a listing of the ineligible accounts receivable as of: ------------ ================================================================================ Balances Over 90 Days $0.00 - -------------------------------------------------------------------------------- Cross Aged (25% OR MORE (greater than) 90 Days) $0.00 - -------------------------------------------------------------------------------- Credits Over Eligible Period $0.00 - -------------------------------------------------------------------------------- Contras (offset) $0.00 - -------------------------------------------------------------------------------- Intercompany $0.00 - -------------------------------------------------------------------------------- Employee Receivables $0.00 - -------------------------------------------------------------------------------- Federal Accounts $0.00 - -------------------------------------------------------------------------------- Foreign Accounts $0.00 - -------------------------------------------------------------------------------- Unbilled Accounts $0.00 - -------------------------------------------------------------------------------- Other $0.00 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total Ineligible A/R for Borrowing Purposes $0.00 - -------------------------------------------------------------------------------- Previous Ineligible A/R for Borrowing Purposes $0.00 - -------------------------------------------------------------------------------- Difference $0.00 ================================================================================ ================================================================================ Prepared By: Date: - -------------------------------------------------------------------------------- Approved: Date Adjusted: ================================================================================ EXHIBIT Q PROPERTY ACQUIRED WITHIN PAST FIVE YEARS Description of Property ----------------------- 1. Avalon Correctional Center 302 W. Archer Street Tulsa, OK 74103 2. Carver Center 2801 S.W. Third Street Oklahoma City, OK 73108 3. El Paso - Intermediate Sanction Facility (acquired from Secure Corrections, Inc.) 1650 Horizon Boulevard El Paso Texas 79927 4. Turley Correctional Center (acquired from Freedom Ranch, Inc.) 6101 N. Cincinnati Avenue Tulsa, OK 74123 5. Union City Juvenile Center 700 N. SH 81 Union City, OK 73090 6. El Paso Phase I Expansion (Multi-use facility) 1700 Horizon Boulevard El Paso, TX 79927 7. The Villa at Greeley (acquired from University Holdings, L.L.C.) 1730-1750-1760 Sixth Avenue Greeley, Colorado 8. The Phoenix Center 8031 Highway I-76 Henderson, CO 80221 EXHIBIT S CHANGES IN AGGREGATE VALUE OF EQUIPMENT AND REAL ESTATE OUTSIDE OF ORDINARY COURSE OF BUSINESS 1. Acquisition of real and personal property from University Holdings, L.L.C., (acquisition of The Villa at Greeley, L.L.C., and related operations and personal property) 2. Acquisition of real and personal property from Adams Community Corrections Program, Inc., (acquisition of The Phoenix Center, and related operations and personal property) 3. Completion of Union City Juvenile Center, located at 700 N. SH 81, Union City, Oklahoma 4. Completion of El Paso Phase I Expansion, 1700 Horizon Boulevard, El Paso, Texas. 5. Construction of Turley Correctional Center new building, 6101 N. Cincinnati Avenue, Tulsa, Oklahoma. EX-10.11 6 COMMUNITY CORRECTIONS PROGRAM SUBCONTRACT EXHIBIT 10.10 ADAMS COUNTY, COLORADO COMMUNITY CORRECTIONS PROGRAM SUBCONTRACT THIS SUBCONTRACT for community corrections program services is made this 1/st/ day of July, 1999, by and between the Adams County Board of County - ------------------------ Commissioners, located at 450 S. 4th Avenue, Brighton, CO 80601, hereinafter referred to as the "County," and Southern Corrections Systems, Inc., located at 13401 Railway Dr., Oklahoma City, OK 73114, hereinafter referred to as the "Subcontractor." WHEREAS, authority exists in the law and funds have been budgeted, appropriated and otherwise made available, and a sufficient unencumbered balance thereof remains available for payment for the purchase of community corrections program services; and WHEREAS, the County has entered into a contract with the Colorado Department of Public Safety, Division of Criminal Justice, to provide community corrections program services pursuant to (S)(S) 17-27-101, et seq., C.R.S., as ------ amended, during the State fiscal year 1999-2000, and desires to Subcontract with the Subcontractor for the provision of such services. NOW, THEREFORE, the County and the Subcontractor, for the consideration herein set forth, agree as follows: SECTION I - RESPONSIBILITIES OF THE SUBCONTRACTOR - -------------------------------------------------- The Subcontractor was recommended to the County by the Adams County Community Corrections Board, located at 11160 N. Huron St., Suite #34, Northglenn, CO 80234, and shall provide such services as described in its "Proposal for Services," which is attached hereto and incorporated herein as Exhibit " A." During the term of this Subcontract, the Subcontractor shall at all times comply with the provisions (S)(S) 17-27-101, et seq., C.R.S., as amended, with all ------- applicable provisions of the "Colorado Community Corrections Standards," as revised or amended, and with the provisions of the Victims' Rights Act, (S)(S) 24-4.1-301, et seq., C.R.S., as amended. Non-compliance with any applicable ------- statutes, standards, or regulations may result in the withholding of funding and/or termination of the Subcontract, pursuant to the provisions of Section IX, herein. 1 SECTION II - RESPONSIBILITIES OF THE COUNTY - -------------------------------------------- The County shall reimburse the Contractor for community corrections services provided in accordance with the terms and conditions herein. However, payment pursuant to this Subcontract is subject to and contingent upon the continuing availability of State funds for the purposes hereof. In the event that funds become unavailable, as determined by the County, the County may immediately terminate this Subcontract or amend it accordingly. SECTION III - TERM - ------------------ The term of this Subcontract shall be from July 1, 1999 through June 30,2000, which corresponds to the State fiscal year. SECTION IV - PAYMENT AND/OR FEE SCHEDULE - ----------------------------------------- The County shall compensate the Subcontractor in accordance with the reimbursement rates hereunder. Unless the Subcontractor has obtained prior written approval from the County, the Subcontractor shall not be reimbursed for providing any services not specified under the terms and conditions of this Subcontract. Funds allocated under this Subcontract are for services rendered during the current State fiscal year, and cannot be used to pay for community corrections services provided in prior or future State fiscal years. Any unexpended funds allocated or advanced to the Subcontractor under this Subcontract shall be returned to the County within sixty (60) calendar days of the end of the term of this Subcontract. A. Maximum Reimbursement. --------------------- The County shall reimburse the Subcontractor in a maximum amount not to exceed $2,090,691.00. Payments may be offset against advances made ------------- to the Subcontractor by the County up to this maximum amount. B. Reimbursement Rates. ------------------- The County shall reimburse the Subcontractor for community corrections services provided according to the following rate schedule: $ 626,313.00 for residential transition placements at a daily rate ------------ of $36.08 per offender; 2 $ 1,256,378.00 for residential diversion direct sentence and -------------- diversion condition of probation placements at a daily rate of $36.08 per offender; $ 208,000.00 for diversion non-residential placements at no more ------------ than $257.00 per month per offender, not to exceed an average of $5.12 per day per offender; C. First and Last Day Reimbursements. --------------------------------- The Subcontractor shall not be paid for the first day of an offender's participation in a program, but shall be compensated for the last day of an offender's participation. The day an offender transfers from residential to non-residential status, the Subcontractor shall be paid the residential daily rate, but shall not be compensated for non-residential expenses. The day an offender transfers from non-residential to residential status, the Subcontractor shall be paid for non-residential expenses, but shall not be compensated for the residential daily rate. D. Condition-of-probation Clients. ------------------------------ The Subcontractor shall use no more than one percent (1%) of the total residential diversion allocation for condition-of-probation clients, unless a written request is presented to and approved by the County. Reimbursement for any single client in residential diversion community corrections as a condition of probation shall be limited to a maximum of thirty (30) days. E. Payment for Travel. ------------------ The Subcontractor shall be reimbursed at the rate of twenty-four cents (24c) per mile for travel, when such travel is requested by the Department of Corrections ("DOC") or otherwise approved by the State for the purpose of transporting offenders. The Subcontractor agrees that any and all travel to DOC correctional facilities shall be coordinated by DOC prior to the Subcontractor being reimbursed. The Subcontractor shall provide the County and the State with travel reports setting forth the date of travel, mileage, destination and offenders transported. F. Payment for Leaves of Absence. ----------------------------- The Subcontractor shall be paid for the following leaves of absence, as authorized and approved by DOC or the State Judicial Branch ("SJB"): 3 1. "Pass or furlough" based on a privilege to leave the facility to an approved location for up to forty-eight (48) hours. 2. "Off-grounds leave" for the purpose of conducting a hearing or assessment regarding the continuation of the offender in community corrections, for a maximum allowable period of three (3) days. 3. "Emergency leave" caused by and limited to a serious life-threatening incident in the offender's immediate family, subject to a maximum period of seven (7) days, to be reimbursed at fifty percent (50%) of the regular per diem rate. G. Method of Billing. ----------------- The Subcontractor shall bill or invoice the County for services provided on such forms and in such manner as the County and/or State may require. The County will not accept a billing unless its accuracy has been confirmed by the appropriate State agency, as evidenced by the signature of the appropriate probation or parole officer on the bill. H. Reimbursement by Client. ----------------------- The Subcontractor may charge each offender participating in a residential program the reasonable costs of the services not covered by payments under this Subcontract. The charges may be collected on an ability to pay basis, but shall not exceed ten dollars ($10.00) per day while in residential placement. Offenders in non-residential placement may be charged up to forty percent (40%) of the reimbursement rate as provided in Section IV, Paragraph B, above, but shall not exceed an average of two dollars ($2.00) per day while in non-residential placement Each offender shall be issued receipt for fees collected. Any charges to offenders in excess of these limits must be approved in advance by the State and the Adams County Community Corrections Board, and shall not exceed the amounts described in Exhibit A. I. Limitation of Payments and Liabilities. -------------------------------------- The County shall not assume liability for any debts or expenditures incurred by the Subcontractor or for any deficiencies the Subcontractor may incur in the operation of its program. 4 SECTION V - INDEPENDENT CONTRACTOR - ----------------------------------- In providing services under this Subcontract, the Subcontractor acts as an independent contractor and not as an employee of the County. The Subcontractor shall be solely and entirely responsible for his/her acts, and the acts of his/her employees, agents, servants, and sub-subcontractors during the term and performance of this Agreement. No employee, agent, servant, or sub-subcontractor of the Contractor shall be deemed to be an employee, agent, or servant of the County because of the performance of any services or work under this Subcontract. The Subcontractor, at its expense, shall procure and maintain workers' compensation insurance as required by law. SECTION VI - NONDISCRIMINATION - ------------------------------- The Subcontractor agrees to comply with applicable federal and state laws, statutes, rules and regulations concerning discrimination and unfair employment practices, including the provision of (S)(S) 24-34-401, et seq., C.R.S., as ------- amended. SECTION VII - INDEMNIFICATION - ----------------------------- The Subcontractor agrees to indemnify and hold harmless the County, its officers, agents, and employees for, from, and against any and all claims, suits, expenses, damages, or other liabilities, including reasonable attorney fees and court costs, arising out of damage or injury to persons, entities, or property caused or sustained by any person(s) as a result of the Subcontractor's performance or failure to perform pursuant to the terms of this Subcontract. SECTION VIII - INSURANCE - ------------------------- The Contractor agrees to maintain insurance of the following types and amounts: Commercial General Liability Insurance: to include products liability, -------------------------------------- completed operations, contractual, broad form property damage and personal injury. Each Occurrence $1,000,000 General Aggregate $2,000,000 Comprehensive Automobile Liability Insurance: to include all motor vehicles -------------------------------------------- owned, hired, leased, or borrowed. Bodily Injury/Property Damage $1,000,000 (each accident) Personal Injury Protection Per Colorado Statutes 5 Workers' Compensation Insurance: Per Colorado Statutes ------------------------------- The Subcontractor's commercial general liability and comprehensive automobile liability insurance policies and/or certificates of insurance shall be issued to include the State of Colorado and Adams County as "additional insureds," and shall include the following provisions: 1. Underwriters shall have no right of recovery or subrogation against the County, it being the intent of the parties that the insurance policies so effected shall protect both parties and be primary coverage for any and all losses resulting from the actions or negligence of the Subcontractor. 2. The insurance companies issuing the policy or policies shall have no response against the County for payment of any premiums due or for any assessments under any form of any policy. 3. Any and all deductibles contained in any insurance policy shall be assumed by and at the sole risk of the Subcontractor. All insurers of the Subcontractor must be licensed or approved to do business in the State of Colorado. Insurance policies required under this Subcontract shall include provisions preventing cancellation of the policies unless sixty (60) days prior notice is given to the State and the County by certified mail. The Subcontractor shall provide to the County certificates showing adequate insurance coverage within seven (7) working days of the execution of this Subcontract. Upon failure of the Subcontractor to furnish, deliver and/or maintain such insurance as provided herein, this Subcontract, at the election of the County, may be immediately declared suspended, discontinued, or terminated. Failure of the Subcontractor in obtaining and/or maintaining any required insurance shall not relieve the Subcontractor from any liability under this Subcontract, nor shall the insurance requirements be construed to conflict with the obligations of the Subcontractor concerning indemnification. SECTION IX - NON-COMPLIANCE AND TERMINATION - -------------------------------------------- A. Termination for Cause. --------------------- 6 If the County determines the Subcontractor is in non-compliance with the terms of this Subcontract, after giving notice in writing to the Subcontractor of the alleged area(s) of non-compliance, the Subcontractor shall have thirty (30) days in which to correct or justify the area(s) of non-compliance. If the area(s) of non-compliance are not resolved to the satisfaction of the County within thirty (30) days, the County may immediately terminate the Subcontract and/or may withhold further funding. In the event the County determines that the Subcontractor's alleged non- compliance creates an immediate risk to public safety, the County may immediately terminate the Subcontract. B. Termination for Convenience. --------------------------- This Subcontract may be terminated by either party giving thirty (30) days written notice, as provided in Section XII, Paragraph G, herein. If notice is so given, this Subcontract shall terminate on the expiration of the thirty (30) days, but the parties shall not be relieved of any duties to perform or liabilities incurred up to the date of termination. SECTION X - SPECIAL PROVISIONS - ------------------------------- A. Client Files. ------------ The Subcontractor shall maintain individual files for each offender participating in the Subcontractor's program as required by DOC/SJB. The individual files shall be maintained in a secure area in a locked file cabinet or safe. Offender files and criminal history records shall be maintained and disseminated pursuant to (S)(S) 24- 72-202 through 204, C.R.S., and (S)(S) 24-72-301 through 308, C.R.S., and in compliance with Title 28 of the Code of Federal Regulations. Any request for information, including but not limited to offenders' records, shall be referred by the Subcontractor to DOC/SJB. B. Reports. -------- The Subcontractor shall provide timely, prompt and accurate reports as are or may be required by the State, DOC, SJB or the County , which may include, but are not limited to, statistical reports, caseload data, Community Corrections Client Information Forms, Community Corrections Offender Screening Information Forms, and other records documenting the types of services provided and the identity of the individual offenders to whom such 7 services were provided. The Community Corrections Client Information Forms must be completed, as prescribed by the State, for each residential offender served, and shall accompany the billings coinciding with the offender's month of termination. Community Corrections Offender Screening Information Forms shall, on a monthly basis, be used to record all screening activity performed by the Adams County Community Corrections Board, and shall be submitted to the County with each month's billings. 1. The Subcontractor, at its sole expense, shall purchase any and all computer hardware or software necessary so that its financial record-keeping and/or billing system(s), program evaluation system(s), and offender status tracking system(s) are compatible with the system(s) utilized or implemented by the State, DOC, SJB and/or the County. 2. Within five (5) business days of the end of the State fiscal year, the Subcontractor shall report the total costs of its program to the County and to the State. 3. Within sixty (60) calendar days of the end of the State fiscal year, the Subcontractor shall submit to the County a report documenting its performance under the terms of this Subcontract, including information concerning referrals, screening, offender acceptance and termination, and any other information deemed appropriate by the County. C. Fiscal Audits and Accounting. ---------------------------- The Subcontractor shall maintain an accurate fiscal accounting of the earnings of all offenders assigned to their program or facility including, but not limited to: gross earnings; net earnings; federal, state, and local taxes paid; amount of restitution agreed to and paid; savings accounts; subsistence amounts charged and collected; and any other outstanding, financial obligations. If requested by the County, the Adams County Community Corrections Board, or the State, at the end of the term of this Subcontract, the Subcontractor shall provide to the County, the Community Corrections Board, and the State a complete, independent fiscal audit report that includes a line item accounting and verification of expenditures in comparison to the budgeted line items as specified in Exhibit A. If such an audit is requested, it shall be provided within ninety (90) calendar days of the receipt of the request. 8 D. Review and Inspection. --------------------- The Subcontractor shall permit any authorized representative of the County to inspect its facilities, fiscal and/or program files at any time, with or without notice, to ensure compliance with this Subcontract. The Subcontractor shall permit any authorized representative of any health department with appropriate jurisdiction to inspect its facilities and relevant files at any time, with or without notice, to ensure compliance with appropriate statutes, rules and regulations. The Subcontractor shall make available for inspection to the State, DOC or SIB any fiscal and/or program files requested within three (3) business days after receiving such a request. E. Unauthorized Absence. -------------------- If an offender becomes absent from a program without authorization, the Subcontractor shall notify the County and the offender's probation or parole officer at the appropriate State agency (DOC or SIB) within two (2) hours after the offender becomes absent without authorization. If DOC or SJB notifies the Subcontractor that the absent offender's position should not be held open, the Subcontractor shall hold the absent offender's position open for a period not to exceed one (1) day following the reported absence, and the County shall compensate the Subcontractor at the full rate of reimbursement for that one (1) day. F Fugitive Reporting Systems. -------------------------- If the Subcontractor, at any time, has reason to believe that an offender has escaped from a program, it shall immediately notify the appropriate State agency, local law enforcement agencies, and the Adams County Community Corrections Board, using the fugitive reporting system in effect at the time of the escape. The Subcontractor shall also provide the State and the Adams County Community Corrections Board with monthly reports concerning all offenders reported as escapees. G Absence Due to Arrest. --------------------- The Subcontractor shall immediately notify the appropriate State agency (DOC or SJB) if it knows or has reason to believe that an offender has been arrested or is otherwise in the custody of a federal, state or local law enforcement authority. The County shall reimburse the Subcontractor at the full per diem rate for the day the offender was arrested, and at fifty percent (50%) of the full per diem rate for up to seven (7) days following 9 the offender's arrest, if the Subcontractor receives written approval from the State to hold the offender's placement open. H. Referral for Medical Services. ----------------------------- The Subcontractor shall identify sources of emergency medical services located within close proximity to its residential community corrections facility. Procedures shall be established to refer offenders requiring such services in the event of emergencies. Offenders shall be advised upon admission to the facility that responsibility for medical and dental care is assumed by the offender unless other arrangements are confirmed in advance by the referring agency. Offenders shall acknowledge these responsibilities in writing upon admission to the program. Policy and procedures of the Subcontractor shall specifically prohibit any restriction or constraint of offenders' movements unless necessary to attend to legitimate medical or dental needs. If a medical emergency occurs, the Subcontractor shall immediately notify the referring agency (DOC or SJB). The County shall compensate the Subcontractor at the full rate the day an offender is placed in a hospital, and at 50% of the regular per diem rate for up to seven (7) days for holding a bed available during the hospitalization of an offender, unless the referring agency notifies the Subcontractor otherwise. I. Notice of Placement. ------------------- The Subcontractor shall comply with the notice requirements of (S) 17-27.1-10, C.R.S., as amended. J. Drug Tests. ---------- The Subcontractor shall Perform periodic chemical tests as defined in the "Colorado Community Corrections Standards" at times that cannot be predicted by the offender to determine the use of drugs by offenders in the Subcontractor's residential and non-residential program. K. Supervision. ------------ Provide 24-hour-a-day, seven-day-a-week staff supervision of the offenders assigned to the residential facility as specified in the "Colorado Community Corrections Standards." 10 L. Management. ---------- Subcontractor shall retain competent personnel who are satisfactory to the County. SECTION XI - CHANGE ORDER LETTERS - ----------------------------------- The County may prospectively increase or decrease in the amounts payable and the corresponding levels of service under this Subcontract through a Change Order Letter ("Letter"), a copy of which is attached hereto and incorporated herein as Exhibit "G." A. Upon proper execution and approval, such Letter shall become an amendment to this Subcontract and, except for the Mutual Understandings contained in Section XII herein, shall supersede the Subcontract in the event of a conflict between the two. It is understood and agreed that the Letter may be used only for increasing or decreasing funding, corresponding adjustments to service levels, and any budget line items. B. If the Subcontractor agrees to and accepts the change(s) to the Subcontract as reflected in the Letter, the Subcontractor shall execute and return the Letter to the County by the effective date indicated in the Letter. In the event the Subcontractor does not accept the change(s), or fails to timely return the executed Letter, the County may, upon notice to Subcontractor, terminate this Subcontract effective any time after twenty (20) days following the return deadline specified in the Letter. Such notice shall specify the effective date of termination. In the event of termination, the Parties shall not be relieved of their obligations up to the effective date of termination. C. Increases or decreases in the level of funding may be made through the Letter process under the following circumstances: 1. adjustments to reflect current year expenditures; 2. supplemental appropriations resulting in an increase or decrease in the amounts originally budgeted and available for the purposes of this program; 3. closure of programs and/or termination of related contracts; 4. delay or difficulty in implementing new programs or services; and 11 5. any other circumstances as deemed appropriate by the County. SECTION XII - MUTUAL UNDERSTANDINGS - ------------------------------------- A. Jurisdiction and Venue. ---------------------- The laws of the State of Colorado shall govern as to the interpretation, validity, and effect of this Subcontract. The parties agree that jurisdiction and venue for any disputes arising under this Agreement shall be with the District Court of Adams County, Colorado. B. Compliance with Laws. --------------------- During the performance of this Subcontract, the Subcontractor agrees to strictly adhere to all applicable federal, state, and local laws, rules and regulations, including all licensing and permit requirements. The parties hereto aver that they are familiar with (S) 18-8-301, et seq., C.R.S. ------ (Bribery and Corrupt Influences), as amended, and (S) 18-8-401, et seq., ------ C.R.S. (Abuse of Public Office), as amended, and that no violation of such provisions are present. C. Record Retention. ---------------- The Contractor shall maintain records and documentation of the services provided under this Subcontract, including fiscal records, and shall retain the records for a period of seven (7) years from the date of final payment. During this period, the records and documents shall be subject at all reasonable times to inspection, review, or audit by authorized federal, state, or County personnel. D. Assignability. ------------- Neither this Subcontract, nor any rights hereunder, in whole or in part, shall be assignable or otherwise transferable by the Subcontractor without the prior written consent of the County. E. Waiver. ------ Waiver of strict performance or the breach of any provision of this Subcontract shall not be deemed a waiver, nor shall it prejudice the waiving party's right to require strict performance of the same provision, or any other provision in the future, unless such waiver has rendered future performance commercially impossible. 12 F. Force Majeure. -------------- Neither party shall be liable for any delay or failure to perform its obligations hereunder to the extent that such delay or failure is caused by a force or event beyond the control of such party including, without limitation, war, embargoes, strikes, governmental restrictions, riots, fires, floods, earthquakes, or other acts of God. G. Notice. ------ Any notices given under this Agreement are deemed to have been received and to be effective: (1) three (3) days after the same shall have been mailed by certified mail, return receipt requested; (2) immediately upon hand delivery; or (3) immediately upon receipt of confirmation that a facsimile was received. For the purposes of this Subcontract, any and all notices shall be addressed to the contacts listed below: For the County: Adams County Community Corrections Board 11160 N. Huron St., Suite #34 Northglenn, CO 80234 Phone: (303) 280-5117 FAX: (303) 280-5193 Adams County Attorney's Office 450 S. 4th Ave. Brighton, CO 80601 Phone: (303) 654-6116 FAX: (303) 654-6114 For the Subcontractor: Southern Corrections Systems, Inc. 13401 Railway Dr. Oklahoma City, OK 73114 Phone:(405) 752-8802 FAX:(405) 752-8852 H. Integration of Understanding. ---------------------------- 13 This Subcontract contains the entire understanding of the parties hereto and neither it, nor the rights and obligations hereunder, may be changed, modified, or waived except by an instrument in writing that is signed by the parties hereto. I. Severability. ------------ If any provision of this Subcontract is determined to be unenforceable or invalid for any reason, the remainder of this Subcontract shall remain in effect, unless otherwise terminated in accordance with the terms contained herein. J. Authorization. -------------- Each party represents and warrants that it has the power and ability to enter into this Subcontract, to grant the rights granted herein, and to perform the duties and obligations herein described. IN WITNESS WHEREOF, the parties hereto have caused their names to be affixed hereto. BOARD OF COUNTY COMMISSIONERS ADAMS COUNTY, COLORADO, /s/ Ted L. Strickland 10/4/99 9/23/99 - --------------------------------- ------------ Chair Date ATTEST: APPROVED AS TO FORM: CAROL SNYDER CLERK AND RECORDER Sig. Illegible ------------------------------- Adams County Attorney's Office /s/ Lucy Trijillo - ---------------------------------- Deputy Clerk 14 CONTRACTOR: Southern Corrections Systems, Inc. by - ---------------------------------- Name: Donald E. Smith Title: CEO STATE OF ____________________ ) )ss: COUNTY OF____________________ ) The foregoing Subcontract was acknowledged before me this _______ day of______________, 1999, by ___________________________________ as _________________________________ for the Subcontractor, herein named. WITNESS my hand and official seal. My Commission expires: __________________________________ _________________________ Date Notary Public 15 Exhibit G Subcontract FY 99-00 SOUTHERN CORRECTIONS SYSTEMS, INC. 13401 RAILWAY DRIVE OKLAHOMA CITY, OK 73114 Subcontractor: Pursuant to paragraph Section IV, A. and B. of the Subcontract between the Adams County Board of County Commissioners, and Southern Corrections Systems, Inc., the County hereby notifies you that the maximum amount payable from the State under Department of Public Safety Contract, # , covering the period July --------- 1, 1999 through June 30, 2000 is hereby changed. The maximum amount payable for residential transition placements at a daily rate of $36.08 per offender is - ---------------------- increased/decreased by $ to a new total of $ . The - ------------------- ---------------- -------------- maximum amount payable for residential diversion placements at a daily rate of --------------------- $36.08 per offender is increased/decreased by $ to a ----------------------------- new total of $ . The maximum amount payable for ------------------------------ diversion non-residential placements is increased/decreased by $ - ------------------------- ------------------- --------------- for a new total of $ . The per diem rates remain unchanged. ------------------- The effected lines of Section IV. B. of the Subcontract shall now read: $_________________ for residential transition placements at a daily rate of $36.08 per offender, $_________________ for residential diversion direct sentence and diversion condition of probation placements at a daily rate of $36.08 per offender, $_________________ for diversion non-residential placements at no more than $257.00 per month per offender, not to exceed an average of $5.12 per day per offender, This amendment to the Subcontract is intended to be effective ________________________, but in no event shall this amendment be deemed valid until it shall have been approved by the County or their designee. 16 Please sign, date and return all copies of this Letter on or before 00. --------- BOARD OF COUNTY COMMISSIONERS ADAMS COUNTY, COLORADO - ------------------------------- ------------------------- Chair Date ATTEST: APPROVED AS TO FORM: CAROL SNYDER CLERK AND RECORDER ------------------------------ Adams County Attorney's Office - ------------------------------- Deputy Clerk CONTRACTOR - ------------------------------- Name: Title: STATE OF ___________________ ) ) ss: The foregoing Subcontract was acknowledged before me this _______ day of ____________, 1999, by __________________________ as ______________________________for the Subcontractor, herein named. WITNESS my hand and official seal. My Commission expires: - ------------------------------- -------------- Date Notary Public 17 Exhibit G CHANGE ORDER LETTER #1 ---------------------- Subcontract FY 99-00 SOUTHERN CORRECTIONS SYSTEMS, INC. 13401 RAILWAY DRIVE OKLAHOMA CITY, OK 73114 Subcontractor: Pursuant to paragraph Section IV, A. and B. of the Subcontract between the Adams County Board of County Commissioners, and Southern Corrections Systems, Inc., the County hereby notifies you that the maximum amount payable, covering the period July 1, 1999 through June 30, 2000 is hereby changed. The maximum amount payable for residential transition placements at a daily rate of $36.08 per ---------------------- offender remains unchanged and is for $626,313.00. The maximum amount payable ----------- for residential diversion placements at a daily rate of $36.08 per offender is --------------------- increased by $96,442.00 to a new total of $1,352,820.00. The maximum amount ---------- ------------- payable for diversion non-residential placements remains unchanged and is for ------------------------- $208.000.00. The per diem rates remain unchanged. - ------------ The effected lines of Section IV. B. of the Subcontract shall now read: $ 626,313.00 for residential transition placements at a daily rate of ------------ $36.08 per offender, $1,352,820.00 for residential diversion direct sentence and diversion ------------- condition of probation placements at a daily rate of $36.08 per offender, $ 208,000.00 for diversion non-residential placements at no more than ------------ $257.00 per month per offender, not to exceed an average of $5.12 per day per offender, This amendment to the Subcontract is intended to be effective November 1, 1999, but in no event shall this amendment be deemed valid until it shall have been approved by the County or their designee. Please sign, date and return all copies of this Letter on or before February 11, 2000. 1 BOARD OF COUNTY COMMISSIONERS ADAMS COUNTY, COLORADO Sig. Illegible Illegible - ---------------------------- ------------ Chair Date ATTEST: APPROVED AS TO FORM: CAROL SNYDER CLERK AND RECORDER /s/ Patrise C. Frederick #18793 ------------------------------- Adams County Attorney's Office /s/ Lucy Trijillo - ---------------------------- Deputy Clerk CONTRACTOR Sig. Illegible - ---------------------------- Name: Title: President STATE OF Oklahoma ) ------------------- ) ss: The foregoing Subcontract was acknowledged before me this 21 day of -- February, 2000, by /s/ sig. illegible as - -------- -------------- President for the Subcontractor, herein named. - --------- WITNESS my hand and official seal. My Commission expires: 6/13/2000 Beverly A. Porter - --------------------------- ----------------------- Date Notary Public 2 EX-10.12 7 CONTRACT WITH THE VILLA AT GREELEY, INC. EXHIBIT 10.11 WELD COUNTY COMMUNITY CORRECTIONS BOARD CONTRACT WITH THE VILLA AT GREELEY, INC. THIS CONTRACT, Made this __1ST__ day of___ JULY___ 1999, by and between the Board of Commissioners of Weld County, on behalf of Weld County Community Corrections Board, P.O. Box 758, Greeley, CO 80632, hereinafter referred to as "the Board," and The Villa At Greeley, Inc., 1750 6th Avenue, Greeley, CO 80631, hereinafter referred to as "the Contractor." WITNESSETH: WHEREAS, authority exists in the Law and Funds have been budgeted, appropriated and otherwise made available and a sufficient unencumbered balance thereof remains available for payment for the purchase of community corrections services; and WHEREAS, required approval, clearance and coordination has been accomplished from and with appropriate agencies; and WHEREAS, the Board has entered into a contract with the Colorado Department of Public Safety, Division of Criminal Justice, to provide community corrections services pursuant to Article 27, Title 17, C.R.S., as amended, during the State fiscal year 1999-2000 and desires to subcontract with The Villa At Greeley, Inc., for the provision of such services. NOW THEREFORE, it is hereby agreed that 1. THE BOARD SHALL: A. Payment for Services. --------------------- 1) Subject to the condition that the Contractor shall provide all required information, compensate the Contractor in accordance with the schedule in Paragraph 1.A.2. for community correctional services. 2) During the period of the contract, upon receipt of proper billing from the Contractor as provided in paragraph 2.M. herein, payment shall be offset against advances up to a maximum total payment of: residential transition placements at a daily rate of $36.08 per offender, residential diversion direct sentence and diversion condition of probation placements at a daily rate of $36.08 per offender, residential diversion specialized services as described in Exhibit "A" at $17.00 per day per offender, which is the difference between the specialized services per diem ($53.08) and the regular diversion residential per diem ($36.08), 1 residential transition specialized services as described in Exhibit "A" at $14.38 per day per offender, which is the difference between the specialized services per diem ($53.08) and the regular diversion residential per diem ($36.08), diversion non-residential placements at no more than $257.00 per month per offender, not to exceed an average of $5.12 per day per offender, residential transition placements for specialized services (CIRT) as described in Exhibit "A" at a daily rate of $53.08 per offender, 3/4 house placements at a daily rate of no more than $14.13 per offender, day reporting center services at a daily rate of no more than $8.24 per offender, $36.08 per day per offender for residential parole placements, and per diem supplements to provide specialized services, with prior approval by the State, for offenders with special needs. 3) The Contractor shall not be paid for the first day of an offender's participation in a program, but shall be compensated for the last day of an offender's participation. The day an offender transfers from Residential to Non-Residential status, the Contractor shall be paid the residential daily rate, but shall not be compensated for non-residential expenses. The day an offender transfers from Non-Residential to Residential status, the Contractor shall be paid for non-residential expenses, but shall not be compensated for the residential daily rate. 4) The Contractor shall use no more than one percent (1%) of their total residential diversion allocation for condition of probation clients, unless a written request is presented to and approved by the Board. Reimbursement for any single client in residential diversion community corrections as a condition of probation shall be limited to a maximum of thirty (30) days. 5) Funds allocated in this Contract are for services rendered during the current contract period and cannot be used to pay for community corrections services provided in prior or future fiscal years. 6) Any unexpended funds allocated or advanced to the Contractor by this contract shall be reverted to the Board. B. Subcontracts. Contractor may subcontract for community corrections services ------------ with any private agency or unit of local government for the purpose of rendering services to offenders, providing, however, that any subcontracts shall comply with the terms and provisions of this contract and all applicable sections of Article 27, Title 17, C.R.S., as amended. Any reference in this agreement to "Contractor" shall also apply to its subcontractors providing services pursuant to Article 27, Title 17, C.R.S., as amended. C. Payment for Travel. Reimburse the Contractor at the rate of $.24 per mile ------------------ for travel, when such travel is requested by the Department of Corrections (DOC) or approved by the State for the purpose of transporting offenders. The Contractor agrees that any and all travel to DOC correctional facilities shall be coordinated by DOC prior to the Contractor being reimbursed. The Contractor shall provide the Board and the State with travel reports setting forth the date of travel, mileage, destination 2 and offenders transported. D. Payments for Leaves of Absence. Pay for the following leaves of absence, ------------------------------- as authorized and approved by DOC or the State Judicial Branch (SJB): 1) "Pass or furlough" based on a privilege to leave the facility to an approved location for up to forty-eight (48) hours. 2) "Off-grounds leave" for the purpose of which is to conduct a hearing or assessment regarding the continuation of the offender in community corrections, for a maximum allowable period of three (3) days. 3) "Emergency leave" caused by and limited to a serious life-threatening incident in the offender's immediate family, subject to a maximum period of seven (7) days, to be reimbursed at 50% of the regular per diem rate. E. Noncompliance. Withhold funds when the Board or the State determines ------------- that the programs or facilities of the Contractor are not in compliance with this contract. Overpayments made by the Board, in the event of non-compliance, shall be recoverable by the Board from the Contractor through deductions from future payments or recovered through legal proceedings. F. Limitation of Payments and Liabilities. Not assume liability for any -------------------------------------- deficiency that the Contractor may incur in the operation of its program nor for any debts or expenditures incurred by the Contractor for ensuing fiscal years when funds for that purpose have not been appropriated or budgeted. 2. THE CONTRACTOR SHALL: A. Approval. Be approved by the local community corrections board in -------- their jurisdiction and operate pursuant to Article 27, Title 17, C.R.S., as amended. B Description of Services. Provide such services as specifically set forth in ----------------------- the proposal submitted to the Board for the provision of services to 1) offenders referred by DOC, 2) offenders referred by SJB, 3) offenders referred by the State Board of Parole or, 4) offenders referred by SJB pursuant to 19-2-703(c) or 19-2-801 (2)(a). A copy of such proposal submitted by the Contractor is attached hereto and incorporated herein as Contractor's Exhibit "A". C. Standards. Meet, maintain, and comply with all applicable guidelines or --------- standards as provided in Article 27, Title 17, C.R.S., as amended, and the "Colorado Community Corrections Standards". Non-compliance with standards may result in reduction of compensation rates as specified in paragraph 1.A.2; cessation of offender placements in the program; implementation of a competitive bid process to consider alternate program providers; or cancellation of the contract. D. Victim Rights Act. Comply with Section 24-4.1-302.5, Section 24-4.1-303 ----------------- and Section 24-4.1-304 C.R.S., commonly known as the Victim Rights Act and enabling legislation. E. Immigration Reform Control Act. Comply with all federal and state laws, ------------------------------ including the Immigration Reform Control Act in all hiring practices. F. Americans with Disabilities Act. Comply with all applicable titles of the ------------------------------- Americans with Disabilities Act (Public Law 101.336) and submit documentation as required by the State to 3 demonstrate compliance with this Act. G. Client Files. Maintain individual files for each offender participating in ------------- the Contractor's program as required by DOC/SJB. The individual files shall be maintained in a secure area, in a locked file cabinet or safe. Such files and criminal history records shall be maintained and disseminated pursuant to Section 24-72-202-204, C.R.S., and Section 24-72-301-308, C.R.S.; and in compliance with Title 28 of the Code of Federal Regulations. H. Reports. Provide timely, prompt, and accurate reports as are or may be -------- required by the State, DOC, SJB, or the Board during the period of the contract, which include but are not limited to statistical reports, case load data, Community Corrections Client Information Forms, Community Corrections Client Information Forms, Community Corrections Offender Screening Information forms, and other records documenting the types of services provided and the identity of the individual offenders receiving such services. The Community Corrections Client Information Form must be completed, as prescribed by the State for each residential offender served and shall accompany the billings coinciding with the offender's month of termination. Community Corrections Offender Screening Information forms shall, on a monthly basis, be used to record all screening activity performed by the Board and its subcontractors and shall be submitted to the State with each month's billings. I. Review and Inspection. Make both fiscal and program files available within ---------------------- three (3) working days for review and inspection by the State, DOC, SJB, or an authorized representative of the Board, to assure that the Contractor is providing the services and financial records required by this contract. J. Unauthorized Absence. Notify DOC or SJB, through the appropriate -------------------- probation/parole officer, within four (4) hours after an offender becomes absent from the program without authorization. The Contractor shall also comply with Section 17-27.1-101(1), C.R.S. The Contractor shall keep the offender's position available for a period not to exceed one (1) day during the offender's unauthorized absence if DOC/SJB notifies the Contractor that it does desire to have the position kept available. The Board shall compensate the Contractor at full rate the day the offender escapes. K. Fugitive Reporting System. Pursuant to Section 17-27-104, C.R.S., the ------------------------- Contractor shall insure that any probably escape of any Diversion offender is reported by program staff providing services through this contract, using the Fugitive Reporting System in effect at the time of the escape. Program staff shall also provide the State and its local community corrections board with monthly escape reports of all offenders reported as escapees, whether Diversion or Transition offenders. L. Absence Due to Arrest. Notify DOC/SJB immediately if they know an --------------------- offender has been arrested and/or is in the custody of a federal, state, or local police authority, respectively. If the Contractor has requested and received prior written permission from DOC/SJB, the Board shall compensate the Contractor at full rate for the day the offender is arrested, and at 50% of the regular per diem rate for up to seven (7) days for maintaining the availability of a position during the offender's absence. M. Additional Services. Obtain prior written approval from the State and the -------------------- Board before providing any additional billable services or evaluations not provided for by the terms and conditions of this contract. If services are provided by the Contractor which exceed the maximum total payment as described in Paragraph 1,A.2., neither the State nor the Board is liable for reimbursement. Should additional funding become available, the State or Board may, at their own option, choose to reimburse beyond the amount specified in Paragraph 1.A.2. 4 N. Method of Billing. Bill the Board for services provided on such forms and ------------------ in such manner as the Board and/or State may require. In order for the billing to be accepted by the Board, the signature of the appropriate probation or parole officer confirming the accuracy of the billing is required. The Contractor shall report the total costs of its program to the Board and the State within five (5) days after the end of the fiscal year. The State or the Board may require the Contractor to provide an estimate of final year-end expenditures anytime within sixty (60) days prior to the end of the fiscal year. 0. Reimbursement by Client. The Contractor may charge each offender ------------------------ participating in a residential program the reasonable costs of the services not covered by state payments. The charges may be collected on an ability to pay basis, but shall not exceed ten dollars ($10.00) per day while in residential placement. Offenders in non-residential placement may be charged an amount that averages 40% of the amount billed to the State as described in paragraph 1.A.2., but shall not exceed an average of two dollars ($2.00) per day while in non-residential placement. Each offender shall be issued receipts for fees collected. Any charges to offenders in excess of these limits must be approved in advance by the State and local community corrections board. The Contractor must provide a description of such additional fees, including rates, services or products purchased, and program policies and procedures related to collecting and record keeping to the State, the local community corrections board, and the referring agency. Such additional charges are described in Exhibit "A". P. Inspections. Allow DCJ, DOC, SJB, Health Department employees, or ------------ authorized representatives of the Board to inspect, with or without notice, the facilities, records, and services provided by the Contractor to determine compliance with this contract. Q. Insurance. Maintain in full force and effect adequate liability insurance ---------- coverage with an insurance company licensed and authorized to transact business within the State of Colorado in the following amounts: 1. Standard Worker's Compensation and Employer Liability as required by State statute, including occupational disease, covering all employees on or off the work site, acting within the course and scope of their employment. 2. General, Personal Injury, and Automobile Liability (including bodily injury, personal injury, and property damage) minimum coverage: a) Combined single limit of $600,000 if written on occurrence basis. b) Any aggregate limit will not be less than $1,000,000. c) Combined single limit of $600,000 for policies written on a claims-made basis. The policy shall include an endorsement, certificate, or other written evidence that coverage extends two years beyond the performance period of the contract. d) If any aggregate limits are reduced below $600,000 because of claims-made or paid during the required policy period, the contractor shall immediately obtain additional insurance to restore the full aggregate limit and furnish a certificate or other document showing 5 compliance with this provision. 3. Name the Board as an additionally named insured party under our liability coverage. $1,000,000. The State of Colorado and Weld County, Colorado, shall be named as additional insured on all liability policies. The insurance shall include provisions preventing cancellation within 60 days prior notice to the State by certified mail. The contractor shall provide certificate showing adequate insurance coverage to the State within seven (7) working days of contract execution, unless otherwise provided. If the contractor is a "public entity" within the meaning of the Colorado Governmental Immunity Act, C.R.S. 24-10-101 et seq., as amended ("Act"), the -------- contractor shall at all times during the term of this contract maintain such liability insurance, by commercial policy or self-insurance, as necessary to meet its liabilities under the Act. Upon request by the State, the contractor shall show proof of such insurance. R. Referral for Medical Services. The Contractor shall identify sources of ------------------------------ emergency medical services located within close proximity to their residential community corrections facility. Procedures shall be established to refer offenders requiring such services in the event of emergencies. Offenders shall be advised upon admission to the facility that responsibility for medical and dental care is assumed by the offender unless other arrangements are confirmed in advance by the referring agency. Offenders shall acknowledge these responsibilities in writing upon admission to the program. Policy and procedures of the Contractor shall specifically prohibit any restriction or constraint of offenders movement or efforts to attend to their legitimate medical or dental needs. If a medical emergency occurs, the Contractor shall immediately notify the referring agency (DOC or SJB). The Board shall compensate the Contractor at the full rate the day an offender is placed in a hospital, and at 50% of the regular per diem rate for up to seven (7) days for holding a bed available during the hospitalization of an offender, unless the referral notifies the Contractor otherwise. S. Record Retention. Retain all books, records, and other documents of any ----------------- part pertaining to this agreement for five (5) years after final payment, and allow any person duly authorized in writing by the State or the Board to have full access to and a right to examine and copy any of the above materials during such period. T. Confidentiality of Records. Comply with all laws regarding confidentiality --------------------------- of offenders' records. Any request for information, including but not limited to offenders' records, shall be referred by the Contractor to DOC/SJB. U. Drug Tests. Perform periodic chemical tests as defined in the "Colorado ----------- Community Corrections Standards" at times that cannot be predicted by the offender to determine the use of drugs by offenders in the Contractor's residential and non-residential program. V. Supervision. Provide 24-hour-a-day, seven-day-a-week staff supervision of ------------ the offenders assigned to the residential facility as specified in the "Colorado Community Corrections Standards". W. State and Local Regulations. Comply with all state and local health, ---------------------------- safety, fire, building and zoning requirements. X. Fiscal Accounting of Clients. Maintain an accurate fiscal accounting of ----------------------------- the earnings of all offenders assigned to their program or facility including, but not limited to: gross earning, net earning, federal, state and local taxes paid, amount of restitution agreed to and paid, savings account, subsistence charged and collected, and any other outstanding financial obligations. 6 Y. Information Provided. Provide information upon request of the appropriate --------------------- DOC/SJB officers regarding the activities and adjustment of offenders assigned to their program. Collect, maintain and make available to DOC/SJB or the Board ongoing data regarding employment, alcohol abuse, drug abuse, psychological problems and treatment, vocational or educational needs and services, re-arrest or other criminal activity, and restitution. Z. Fiscal Audit and Verification of Line Item Expenses. Provide to the State ---------------------------------------------------- an independent fiscal audit report which addresses the agency's fiscal year(s) relevant to the contract period. If not detailed in the report, the Contractor will be responsible for providing additional information which independently compares the year's actual expenses to those budgeted in the line items of Contractor's Exhibit "A". Such materials shall be provided to the State within six (6) months of the end of the fiscal year unless a different schedule is established in writing by mutual agreement of the parties. These requirements may be waived all or in part, by the State, in accordance with established standards. AA. Non-compliance with Provisions of this Section. In the event the ----------------------------------------------- Contractor, in whole or in part, fails to meet the provisions of this section, the Board may adjust payment due amounts. 3. MUTUAL PROVISIONS: A. Effective Dates. The period of this contract shall be from July 1, 1999 ---------------- through June 30, 2000. B. Assignment. The rights and duties arising under this contract shall not be ----------- assigned or delegated without the prior written consent of the State. C. Independent Contractor. The Contractor is rendering services as an ----------------------- independent contractor, not as an employee, and shall be accountable to the State and the Board for the ultimate results of its actions but shall not be subject to the direct supervision and control of the State except as otherwise provided herein. Neither the Contractor nor any agent, employee, or servant of Contractor shall be or shall be deemed to be an employee, agent, or servant of the State or the Board. Contractor shall pay when due all required employment taxes and income tax withholding, shall provide and keep in force worker's compensation (and show proof of such insurance) and unemployment compensation insurance in the amounts required by law, and shall be solely and entirely responsible for its acts and the acts of its agents, employees, servants and the subcontractors during the performance of this contract. D. Termination. This agreement may be terminated by either party by giving ------------ thirty (30) days notice in writing, delivered by certified mail, return receipt requested, to the other party at the above address, or delivered by personal services upon the party. If notice is so given, this contract shall terminate on the expiration of the thirty (30) days, and the liability for the parties hereunder for the further performance of the terms of this contract shall thereupon cease, but the parties shall not be relieved of the duty to perform their obligation up to the date of termination. E. Modification. This contract consists of (1) this document, (2) the ------------- proposal submitted to the State and the Board for the provision of services to offenders in the custody of the State which is marked as Contractor's Exhibit "A", and (3) proof of adequate insurance coverage in compliance with 2.0. herein marked as Exhibit "C". In the event there are any inconsistencies, ambiguities, or omissions between this document and Contractor's Exhibit "A" or Exhibit "C", this document shall govern over the provisions of Contractor's Exhibit "A" or Exhibit "C". This contract is intended as the complete integration of all understanding between the parties. No prior or contemporaneous addition, deletion, or other amendment hereto shall have any force or 7 effect whatsoever, unless embodied herein in writing. No subsequent novation, renewal, addition, deletion or other amendment hereto shall have any force or effect unless embodied in a written contract executed and approved pursuant to the State of Colorado fiscal rules. F. Breach. A breach of this contract shall not be deemed to be a waiver of any ------- subsequent breach or default of the contract. G. Third-Party Beneficiary. The enforcement of the terms and conditions of ------------------------ this contract, and all rights of action relating to such enforcement, shall be strictly reserved to the Board and the Contractor, and nothing contained in this contract shall give or allow any claim or right of action whatsoever by any other or third person. It is the express intent of the parties to this contract that any person receiving services or benefits under this contract shall be deemed an incidental beneficiary only. H. Notice. Any notice provided for in this contract shall be in writing and ------- served by personal delivery or by registered or certified mail, return receipt requested and postage prepaid, at the addresses listed below under the signature of each party to this contract, until such time as written notice of a change of address is given to the said parties. 4. SPECIAL PROVISIONS: A. Fund Availability. Financial obligations of the State and Board payable ------------------ after the current fiscal year are contingent upon funds for that purpose being appropriated, budgeted and otherwise made available. B. Indemnification. To the extent authorized by law, the Contractor shall ---------------- indemnify, save and hold harmless the State and the Board, their employees and agents, against any and all claims, damages, liability and court awards including costs, expenses and attorney fees incurred as a result of any act or omission by the Contractor, or its employees, agents, subcontractors, or assignees pursuant to the terms of this contract. C. Discrimination and Affirmative Action. The Contractor agrees to comply -------------------------------------- with the letter and spirit of the Colorado Anti-discrimination Act of 1957, as amended, and other applicable law respecting discrimination and unfair employment practices (24-34-402. C.R.S. 1982 Replacement Vol.), and as required by Executive Order, Equal Opportunity and Affirmative Action, dated April 16, 1975. Pursuant thereto, the following provisions shall be contained in all State contracts or subcontracts. During the performance of this contract, the Contractor agrees as follows: 1) The Contractor will not discriminate against any employee or applicant for employment because of race, creed, color, national origin, sex, marital status, religion, ancestry, mental or physical handicap, or age. The Contractor will take affirmative action to insure that applicants are employed, and that employees are treated during employment, without regard to the above mentioned characteristics. Such action shall include, but not be limited to the following: employment, upgrading, demotion, or transfer, recruitment or recruitment advertising; lay-offs or terminations; rates of payor other forms of compensation; and selection for training, including apprenticeship. The Contractor agrees to post in conspicuous places, available to employees and applicants for employment, notices to be provided by the contracting officer setting forth provisions of this non-discrimination clause. 8 2) The Contractor will, in all solicitations or advertisements for employees placed by or on behalf of the Contractor, state that all qualified applicants will receive consideration for employment without regard to race, creed, color, national origin, sex, marital status, religion, ancestry, mental or physical handicap, or age. 3) The Contractor will send to each labor union or representative of workers with which he has collective bargaining agreement or other contract or understanding, notice to be provided by the contracting officer, advising the labor union or workers' representative of the Contractor's commitment under the Executive Order, Equal Opportunity and Affirmative Action, dated April 16, 1975, and of the rules, regulations, and relevant Orders of the Governor. 4) The Contractor and labor unions will furnish all information and reports required by Executive Order, Equal Opportunity and Affirmative Action of April 16, 1975, and by the rules, regulations and Orders of the Governor, or pursuant thereto, and will permit access to his books, records, and accounts by the contracting agency and the office of the Governor or his designee for purposes of investigation to ascertain compliance with such rules, regulations and orders. 5) A labor organization will not exclude any individual otherwise qualified from full membership rights in such labor organization, or expel any such individual from membership in such labor organization or discriminate against any of its members in the full enjoyment of work opportunity, because of race, creed, color, sex, national origin, or ancestry. 6) A labor organization, or the employees or members thereof will not aid, abet, incite, compel or coerce the doing of any act defined in this contract to be discriminatory or obstruct or prevent any person from complying with the provisions of this contract or any order issued thereunder; or attempt either directly or indirectly, to commit any act defined in this contract to be discriminatory. 7) In the event of the Contractor's non-compliance with the non-discrimination clauses of this Contractor or with any of such rules, regulations, or orders, this contract may be canceled, terminated or suspended in whole or in part and the Contractor may be declared ineligible for further State and Board contracts in accordance with procedures, authorized in Executive Order, Equal Opportunity and Affirmative Action of April 16, 1975 and the rules, regulations, or orders promulgated in accordance therewith, and such other sanctions as may be imposed and remedies as may be invoked as provided in Executive Order, Equal Opportunity and Affirmative Action of April 16, 1975, or by rules, regulations, or orders promulgated in accordance therewith, or as otherwise provided by law. 8) The Contractor will include the provisions of paragraph (1) through (8) in every sub-contract and subcontractor purchase order unless exempted by rules, regulations, or orders issued pursuant to Executive Order, Equal Opportunity and Affirmative Action of April 16, 1975, so that such provisions will be binding upon each subcontractor or vendor. The Contractor will take such action with respect to any sub-contracting or purchase order as the contracting agency may direct, as a means of enforcing such provisions, including sanctions for non-compliance; provided, however, that in the event the Contractor becomes involved in, or is threatened with, litigation with the subcontractor or vendor as a 9 result of such direction by the contracting agency, the Contractor may request the State of Colorado to enter into such litigation to protect the interest of the State of Colorado. D. Colorado Labor Preference ------------------------- 1) Provision of C.R.S. 8-17-101 & 102 for preference of Colorado labor are applicable to this contract if public works within the State are undertaken hereunder and are financed in whole or in part by State funds. 2) When a construction contract for a public project is to be awarded to a bidder, a resident bidder shall be allowed a preference against a nonresident bidder from a state or foreign country equal to the preference given or required by the state or foreign country in which the nonresident bidder is a resident. If it is determined by the officer responsible for awarding the bid that compliance with this subsection .06 may cause denial of federal funds which would otherwise be available or would otherwise be inconsistent with requirements of Federal law, this subsection shall be suspended, but only to the extent necessary to prevent denial of the moneys or to eliminate the inconsistency with Federal requirements (C.R.S. 8-19-101 & 102). E. General ------- 1) The laws of the State of Colorado and rules and regulations issued pursuant thereto shall be applied in the interpretation, execution and enforcement of this contract. Any provision of this contract whether or not incorporated herein by reference which provides for arbitration by any extra-judicial body or person or which is otherwise in conflict with said laws, rules and regulations shall be considered null and void. Nothing contained in any provision incorporated herein by reference which purports to negate this or any other special provision in whole or in part shall be valid or enforceable or available in any action at law whether by way of complaint, defense or otherwise. Any provision rendered null and void by the operation of this provision will not invalidate the remainder of this contract to the extent that the contract is capable of execution. 2) At all times during the performance of this Contract, the Contractor shall strictly adhere to all applicable federal and state laws, rules and regulations that have been or may hereafter be established. 3) The signatories hereto aver that they are familiar with 18-8-301, et. seq., (Bribery and Corrupt Influences) and 18-8-401, et. seq., (Abuse of Public Office), C.R.S. 1978 Replacement Vol., and that no violation of such provisions is present. 4) The signatories aver that to their knowledge, no state employee has a personal or beneficial interest whatsoever in the service or property described herein. 10 IN WITNESS WHEREOF, the parties hereto have executed this Contract on the day first above written. Contractor: Residential Treatment Center Board: Southern Corrections Systems, Inc. (Full Legal Name) Weld County Community Corrections ---------------------- /s/ Jerry Sunderland - ---------------------------------------- ------------------------------------- Jerry Sunderland Chairman, Community Corrections Board Position (Title) President ----------------------- 84-0959522 Reviewed and approved by: - ---------------------------------------- Soc. Sec. # or Federal I.D. #. (If corporation:) Dale K. Hall ----------------------------------- Weld County Board of Commissions Attest (Seal) Chair, Dale K. Hall, (07/28/99) By: ------------------------------------ Corporate Secretary, Town/City/County Clerk 11 EX-23.1 8 CONSENT OF GRANT THORNTON Exhibit 23. (i) CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 19, 1999, accompanying the financial statements of Avalon Correctional Services, Inc., and subsidiaries incorporated by reference in the Registration Statement and Prospectus. We consent to the incorporation by reference of the aforementioned reports in the Registration Statement and Prospectus and to the use of our name as it appears under the caption "Experts." GRANT THORNTON LLP Oklahoma City, Oklahoma March 22, 2000 EX-23.2 9 CONSENT OF ROBERTSON & WILLIAMS Exhibit 23. (ii) CONSENT OF COUNSEL Robertson & Williams, Inc., a professional corporation, hereby consents to the use of its name under the heading "LEGAL MATTERS" in the Prospectus constituting a part of this Registration Statement. ROBERTSON & WILLIAMS, INC. Oklahoma City, Oklahoma March 22, 2000 -----END PRIVACY-ENHANCED MESSAGE-----