AVALON COMMUNITY SERVICES INC, SB-2/A, 1997-01-31

AVALON COMMUNITY SERVICES INC
SB-2/A, 1997-01-31
FACILITIES SUPPORT MANAGEMENT SERVICES

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<PAGE> 1
REGISTRATION NO. 33-83932

================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

POST-EFFECTIVE AMENDMENT NO. 4 TO

FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

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

AVALON COMMUNITY 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
(Name, 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 COMMUNITY SERVICES, INC. ROBERTSON & WILLIAMS
13401 RAILWAY DRIVE 3033 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)

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

As filed with The Securities and Exchange Commission on January ____,1997.
================================================================================

<PAGE> 2
AVALON COMMUNITY SERVICES, INC.

CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS,
FILED AS PART OF REGISTRATION STATEMENT, OF
INFORMATION REQUIRED BY FORM SB-2

<TABLE>
<CAPTION>
ITEM
NUMBER IN
FORM SB-2 ITEM CAPTION IN FORM SB-2 LOCATION IN PROSPECTUS
- --------- ------------------------- ----------------------
<S> <C> <C>
1. Front 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 and Risk Factors . . . . . . . . . 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. Legal Proceedings . . . . . . . . . . . . . . . . . . . The Company

10. Directors and Executive Officers, Promoters
and Control Persons . . . . . . . . . . . . . . . . . Management; The Company

11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . Principal Shareholders

12. Description of the Securities . . . . . . . . . . . . Summary of Prospectus;
Description of Securities

13. Interest of Named Experts and Counsel . . . . . . . . . Not Applicable

14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . . . . . . . . . Management
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM
NUMBER IN
FORM SB-2 ITEM CAPTION IN FORM SB-2 LOCATION IN PROSPECTUS
- --------- ------------------------- ----------------------
<S> <C> <C>
15. Organization within Last Five Years . . . . . . . . . . Management

16. Description of Business . . . . . . . . . . . . . . . . Front Cover Page; Summary of
Prospectus; The Company;
Business

17. Management's Discussion and Analysis or
Plan of Operation . . . . . . . . . . . . . . . . . . Management's Discussion and
Analysis of Financial
Condition

18. Description of Property . . . . . . . . . . . . . . . . Business

19. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . . . . Management

20. Market for Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . Price Range of Common Stock
and Dividends

21. Executive Compensation . . . . . . . . . . . . . . . . Management

22. Financial Statements . . . . . . . . . . . . . . . . . Index to Financial Statements

23. Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . Experts

24. Indemnification of Directors and Officers . . . . . . . Part II of Registration Statement

25. Other Expenses of Issuance and
Distribution . . . . . . . . . . . . . . . . . . . . Part II of Registration Statement

26. Recent Sales of Unregistered Securities . . . . . . . . Part II of Registration Statement

27. Exhibits . . . . . . . . . . . . . . . . . . . . . . . Exhibits to Registration Statement

28. Undertakings . . . . . . . . . . . . . . . . . . . . . Part II of Registration Statement
</TABLE>
<PAGE> 4
AMENDED
PROSPECTUS

AVALON COMMUNITY SERVICES, INC.
1,038,100 SHARES OF COMMON STOCK
160,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS

Of the 1,038,100 shares of Common Stock (the "Common Stock") and the
160,000 Redeemable Common Stock Purchase Warrants (the "Warrants") of Avalon
Community Services, Inc. (the "Company") offered hereby, 60,000 Warrants are
being sold by certain security holders of the Company. In addition, 100,000
shares of Common Stock and 100,000 Warrants are reserved for issuance by the
Company to Westminster Securities Corporation and its permitted assigns
("Westminster") upon the exercise by Westminster of a warrant previously issued
by the Company to Westminster in connection with a private placement of
securities in 1994. Upon issuance, the resale by Westminster of such shares
and Warrants is registered hereby. The balance of 938,100 shares of Common
Stock are issuable by the Company upon the exercise of the Warrants, except for
shares acquired by Class C Warrant holders and Westminster who purchased such
Warrants in the recent private placement, in which case such shares are sold by
the Selling Shareholders. 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."

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 $4.06 per
share on January 10, 1997. There is no established trading market for the
Warrants.

INVESTMENT IN THE SECURITIES IS SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. SEE "RISK FACTORS" 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.

<TABLE>
<CAPTION>
==============================================================================================================
Underwriting Proceeds to
Price to Discounts and Selling Proceeds to
Public Commissions Shareholders Company(1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Offering by Selling Shareholders(2) See Text See Text See Text See Text
Per share . . . . . . . . . . . . . . . Note (2) Note (2) Note (2) Note (2)
Per warrant . . . . . . . . . . . . . .
- --------------------------------------------------------------------------------------------------------------
Offering by Company:(3)
Per Share from Placement Agent
Warrant . . . . . . . . . . . . . . . . 1.50 $-0- $-0- $1.50
Offering Price per Share of
Common Stock Underlying 6.00 (B) $-0- $-0- 6.00 (B)
Warrants(4) . . . . . . . . . . . . . . 3.50 (C) $-0- $-0- 3.50 (C)
--------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . $4,321,100.00 $-0- $-0- $4,321,100.00
==============================================================================================================
</TABLE>

(See Notes on Following Page)

This Prospectus also relates to such additional securities as may be
issued to the Selling Shareholders and Westminster because of future stock
dividends, stock distributions, stock splits or similar capital readjustments.

The date of this Amended Prospectus is January __ , 1997.

<PAGE> 5
(1) Before deducting expenses payable by the Company and Selling
Shareholders, which are estimated at $32,000 and before the payment of
any Warrant solicitation fees due on the Class C Warrants to
Westminster Securities of 5% of the exercise price, estimated at
$179,000.
(2) The Selling Shareholders 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 $32,000. 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 Class C 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 original 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.
(4) Classified by B and C Warrants.

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.

The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act of 1933, as
amended with respect to the securities offered hereby. This Prospectus, filed
as a part of the Registration Statement, does not contain information set forth
in or annexed as exhibits 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, or copies thereof may be obtained therefrom upon payment of a
fee prescribed by the Commission.
<PAGE> 6
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. Each prospective investor is urged to read this
Prospectus in its entirety.

THE COMPANY

Avalon Community Services, Inc. (the "Company") operates (through its
wholly owned subsidiaries) security private correctional services, substance
abuse treatment services, residential care services, outpatient mental health
services and assisted living centers. These services include the following:
(a) private correctional services through the operation of a 250-bed facility
in Oklahoma City, Oklahoma, a 255-bed minimum security facility in Tulsa,
Oklahoma, and a 144-bed medium security facility in El Paso, Texas; (b)
substance abuse treatment services for inmates in Nebraska; (c) residential
care services through facilities in Oklahoma; (d) the management of outpatient
mental health clinics; and (e) the operations of two assisted living centers,
one in Oklahoma City and one in Fort Collins, Colorado. See "THE COMPANY."

THE OFFERING

Securities Offered by
Company . . . . . . . . . . . . Up to 938,100 shares of Common Stock
upon the exercise of all outstanding
Warrants.

Securities Offered by Selling
Securities Holders . . . . . . 160,000 Class C Warrants, plus any
shares of Common Stock issued pursuant
to the exercise of Class C 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 Warrants
previously registered have expired.
100,000 shares of Common Stock and
100,000 Class C Warrants issuable
pursuant to and upon the exercise of a
placement agent's warrant agreement.

Terms of Warrants . . . . . . . . Each Class B Warrant will entitle the
holder to purchase one share of Common
Stock at a price of $6.00 per share,
subject to certain adjustments. The
Warrants are exercisable at any time
until their expiration in March, 1999.
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 C Warrant will entitle the
holder to purchase one share of Common
Stock at a price of $3.50 per share,
subject to certain adjustments. The
Warrants are exercisable at any time
until their expiration in December,
1999. 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 . . . . 2,927,135 Shares

Common Stock Outstanding
after this Offering . . . . . . 4,190,235 Shares if all outstanding
warrants are exercised.

3
<PAGE> 7
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.

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, Sept. 30,
------------------------- ----------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

Revenues From Continuing Operations . . . . . . . . . $2,536,136 $3,056,032 $2,664,633
Income (Loss) From Continuing Operations . . . . . . 66,893 (31,942) (219,621)
Income (Loss) From Continuing Operations
Per Common Share . . . . . . . . . . . . . . . . . 0.03 (0.01) (0.08)
Income (Loss) From Discontinued Operations . . . . . (59,539) (52,898) --
Income (Loss) From Discontinued Operations
Per Common Share . . . . . . . . . . . . . . . . . (0.03) (0.02) --
</TABLE>

<TABLE>
<CAPTION>
December 31, Sept. 30,
------------------------- ----------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
BALANCE SHEET DATA:

Total Assets . . . . . . . . . . . . . . . . . . . . $4,725,616 $6,450,199 $7,574,442
Long-Term Debt,
less Current Maturities . . . . . . . . . . . . . . 1,512,797 3,449,275 2,686,494
Stockholder's Equity . . . . . . . . . . . . . . . . 2,425,666 2,340,826 3,316,682
</TABLE>

4
<PAGE> 8

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 90% percent of the
Company's business is derived from contracts with the Oklahoma Department of
Corrections ("ODOC") relating to the Company's private correctional facilities
in Oklahoma City ("Carver Center") and Tulsa ("Avalon Correctional Center") and
contracts with West Texas Community Supervision and Corrections Department and
Texas Department of Criminal Justice, Parole Division, relating to the
Company's correctional facility in El Paso, Texas ("El Paso Intermediate
Sanction Facility"). The Company's contracts 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. Further, there is
a financial risk to the Company that the expansion of the Carver Center and
Avalon Correctional Center will not generate additional numbers of inmates and
revenues to justify such expansion. 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.
See "BUSINESS -- Correctional Services."

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, the Oklahoma Health Department, West Texas
Community Supervision and Corrections Department, Texas Department of Criminal
Justice, Parole Department 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. 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. See "BUSINESS
- -- Regulation."

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. See "BUSINESS -- Legal Proceedings."

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. See "BUSINESS -- Correctional
Services."

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 compliance procedure, and is generally granted for a three-year
period. Carver Center has been accredited since 1990

5
<PAGE> 9

and the current accreditation expires in 1999. Avalon Correctional Center was
accredited in 1996 and is accredited through 2000. Management is not aware of
any facts or circumstances which might impair or jeopardize accreditation or
reaccreditation. 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. See
"BUSINESS."

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.

BROAD DISCRETION AS TO USE OF PROCEEDS. Due to the contingent nature
of the exercise of the Warrants, it is impossible to determine at this time
what specific projects or uses would be made of the funds. The net proceeds
may be used to fund new projects, expand existing operations, retire
indebtedness or for working capital and other general corporate purposes.
Management will have broad discretion with respect to the expenditure of such
funds. See "USE OF PROCEEDS."

POTENTIAL LEGAL LIABILITY. The Company's management of correctional
and residential care facilities exposes it to potential third-party claims or
litigation by prisoners, residents 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. See
"BUSINESS--Insurance."

ADVERSE PUBLICITY. Both the Company's correctional business and
residential care business are subject to public scrutiny (See "BUSINESS --
Insurance"). 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.
The terms of such transactions may not have been as favorable as the Company
might have received from unrelated third parties on an arms-length basis. 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.
See "BUSINESS," "CERTAIN TRANSACTIONS," and "FINANCIAL STATEMENTS."

CONFLICTS OF INTEREST. The Company's Chief Executive Officer and
principal stockholder is involved in other ventures and activities and he will
spend a portion of his time performing services for such activities. Conflicts
of interest may arise in the allocation of resources and time between the
Company and such activities and ventures. See "MANAGEMENT -- Conflicts of
Interest."

DEPENDENCE ON KEY PERSONNEL; NO 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. While the Company currently pays the premiums on a policy
of life insurance pertaining to Mr. Smith, the beneficiary of the policy is a
banking institution which is a lender to the Company. The Company has no
present intention to purchase a policy of key- man life insurance pertaining to
Mr. Smith. See "BUSINESS."

EMPLOYMENT CONTRACTS. The Company has entered into a written
employment agreement with only one of its executive officers, its Chief
Executive Officer, Donald E. Smith. Mr. Smith's contract is for a five-year
term and commenced in June, 1992, providing for first-year salary of $60,000
and subsequent-year salaries to be determined by the Board of Directors of the
Company. The agreement also contains provisions for severance pay and
disability payments, as well as a non-compete agreement preventing him from
engaging in a business deemed similar to that of

6
<PAGE> 10
the Company for a period of one year from the cessation of his 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.

LOSS OF RESIDENTIAL CARE CONTRACTS. Effective July 1, 1995 certain
Oklahoma state contracts for the Company to provide residential care services
in its residential care facilities were not renewed. The loss of these
contracts had a negative impact on the Company's revenues and cash flow. The
loss of revenues from these contracts amounted to approximately 3% of the
Company's revenues for 1995. See "SELECTED FINANCIAL DATA," "MANAGEMENT
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION," and "BUSINESS -- Legal
Proceedings."

CONTINUED CONTROL BY DONALD SMITH. The Company's Chief Executive
Officer, Donald E. Smith, controls the Company through his ownership of
1,053,500 shares of Common Stock which is approximately 42% of all Common Stock
presently outstanding. As a result of his ownership of Class B Common Stock as
discussed under "DESCRIPTION OF SECURITIES -- Class B Common Stock," Mr. Smith
will be able to vote an additional 3,410,000 shares which increases his current
voting percentage to approximately 70% before any Warrants are exercised, and
approximately 50% of the voting rights after the exercise of all Warrants. An
additional 750,000 warrants may be issued to Mr. Smith upon his guarantee of
Company obligations which would further increase his voting percentage, if
exercised. See "DESCRIPTION OF SECURITIES -- Warrants."

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 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 Management.

LARGE AMOUNT OF AUTHORIZED BUT UNISSUED SHARES. It is also possible
that the Company could issue additional shares of its common stock in the
future to finance the acquisition of businesses or properties. The Company's
Articles of Incorporation authorize the issuance of 24,000,000 shares of common
stock (both Common Stock and Class B Common Stock) and 1,000,000 of preferred
stock, of which 2,927,135 were issued and outstanding on the date of the
Prospectus (excluding Class B Common Stock). Additional shares might be issued
without shareholder approval which could have a dilutive effect on the current
shareholders. On the date of the Prospectus there were no commitments or
understandings of any kind pertaining to the Company's acquisition of
businesses or properties, or the issuance of additional shares other than as
disclosed in the Prospectus. See "DESCRIPTION OF SECURITIES" and "BUSINESS."

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

7
<PAGE> 11
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 (1,107,830
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 two years, 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.

DETERMINATION OF EXERCISE PRICE OF WARRANTS. The exercise price of
the Class C Warrants was determined as part of the structuring of the 1994
private placement through negotiations between the Company and its placement
agent, Westminster Securities Corporation ("Westminster"). Accordingly, the
exercise prices do not necessarily bear any relationship to the assets,
operating performance, or other criteria of value applicable to the Company.

REDEMPTION OF WARRANTS. The Class B Warrants are subject to
redemption at $0.01 per Warrant upon 30 days written notice if a registration
statement covering the Warrants and the underlying Common Stock is effective.
Class C 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, and if a Registration Statement of the Company covering the Class C
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 Class C 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."

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.

LOSSES. The Company incurred a net loss of $84,800 for the year ended
December 31, 1995 of which $31,900 was from continuing operations and $52,900
from discontinued operations. The new correctional facility in Tulsa, Oklahoma
had a start-up loss in 1995 of $101,000. The Company also incurred losses in
the first three quarters of 1996. See "MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION -- Results of Operations."

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

8
<PAGE> 12
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. See "MANAGEMENT -- Limitation
of Officer and Director Liabilities." 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 Community Services, Inc. (the "Company") provides various
services that have historically been provided by governmental agencies. Avalon
Enterprises, Inc. ("Avalon") was incorporated in Nevada in September, 1990. On
June 15, 1992, Avalon acquired Southern Correction Systems, Inc. ("SCS"). SCS,
which was incorporated in 1990, was engaged in the business of providing
private correctional services. In June, 1992, Avalon's name was changed to
Avalon Community Services, Inc. The Company acquired two affiliated companies,
Elk City Properties, Inc. ("ECP") and Central Oklahoma Properties Corp.
("COP"), effective December 31, 1993. ECP is engaged in the business of
providing residential care services and COP owns and leases certain related
real estate. See "BUSINESS."

The Company, through its wholly-owned subsidiaries, provides security
private correctional services, substance abuse treatment services, residential
care services, outpatient mental health services and assisted living centers.
These services include the following: (a) private correctional services
through the operation of a 250-bed minimum security facility in Oklahoma City,
Oklahoma, a 255-bed minimum security facility in Tulsa, Oklahoma, and a 144-bed
medium security facility in El Paso, Texas; (b) substance abuse treatment
services for inmates in Nebraska; (c) residential care services through
facilities in Oklahoma; (d) the management of outpatient mental health clinics;
and (e) the operations of two assisted living centers, one in Oklahoma City and
one in Fort Collins, Colorado.

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 fax number is (405) 752-8852.

USE OF PROCEEDS

Assuming all Warrants are exercised, the Company would receive net
proceeds of approximately $4,121,100 after paying approximately $200,000 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 may be used by the
Company to fund new projects in the correctional, residential care, assisted
living or in other areas of privatization of traditional government services,
expand existing operations, retire existing indebtedness, or for working
capital and general corporate purposes.

The Company will not receive any of the proceeds from the sale of
shares of Common Stock and the Warrants 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.

9
<PAGE> 13
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 during 1994, 1995, and 1996. The prices represent
inter-dealer prices, without mark-up, mark-down or commission and may not
represent actual transactions.

<TABLE>
<CAPTION>
Quarterly Period Ended High Low
------------------------------------------------------------------
<S> <C> <C>
March 31, 1994 2 1/4 1
June 30, 1994 2 1/8 3/4
September 30, 1994 3 1/8 1 5/8
December 31, 1994 3 1/8 2
March 31, 1995 2 1/8 1
June 30, 1995 2 11/16 1
September 30, 1995 3 1/8 1
December 31, 1995 3 3/8 2 1/4
March 31, 1996 2 1/2 2
June 30, 1996 7 5/8 2 1/2
September 30, 1996 5 7/8 4 1/8
December 31, 1996 4 3/4 3 7/8
</TABLE>

The average of the bid and asked prices for the Common Stock, as
reported on the NASDAQ SmallCap Market System was $4.06 per share on January
10, 1997. The Company had approximately 475 holders of its common stock as of
December 31, 1996.

CAPITALIZATION

The following table sets forth the historical capitalization of the
Company as of December 31, 1995 and September 30, 1996, 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.

<TABLE>
<CAPTION>
December 31, 1995 September 30, 1996
----------------- ------------------
(unaudited)
<S> <C> <C>
Current Maturities
of Long-Term Debt . . . . . . . . . . . . . . . . . . $ 278,837 $ 773,463
========== ==========

Long-Term Debt, less Current Maturities . . . . . . . . $3,449,275 $2,686,494
========== ==========

Stockholders' Equity
Common Stock, 24,000,000 shares authorized: . . . . . -- --
Class A, par value $.001, 2,496,905 and 2,927,135
shares issued and outstanding . . . . . . . . . . 2,497 2,927
Class B, no par, 1,210,000
shares issued and outstanding . . . . . . . . . -- --
Paid-In Capital . . . . . . . . . . . . . . . . . . . 2,678,214 3,873,261
Accumulated Deficit . . . . . . . . . . . . . . . . . (339,885) (559,506)
---------- ----------
Total Stockholders' Equity . . . . . . . . . . . . $2,340,826 $3,316,682
========== ==========
</TABLE>

10
<PAGE> 14
SELECTED FINANCIAL DATA

The following selected financial data for the years ended December 31,
1994 and 1995, and September 30, 1996, 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.

<TABLE>
<CAPTION>
December 31, Sept. 30,
------------------------- ----------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
BALANCE SHEET DATA:

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES -

The Company's cash was increased by $250,000 for the nine months ended
September 30, 1996. This was primarily due to Class C stock purchase warrants
being exercised for a net amount of $1,195,000. Approximately $667,000 was
used for capital expenditures including the purchase of the El Paso
Intermediate Sanction Facility in El Paso, Texas. The Company used $268,000
for the repayment of debt. Working capital was positive as of September 30,
1996. The Company has recognized a $134,000 income tax benefit for the net
operating losses incurred for the nine month period, based upon tax strategies
and projections that taxable income for 1997 will be sufficient to utilize the
net operating losses generated in the current year.

The corrections segment of the Company is continuing to expand. In
August, the company purchased the operations of a medium security level prison
in El Paso, Texas, primarily using the proceeds from the warrant exercise, plus
the issuance of 50,000 shares of common stock and 200,000 Class D purchase
warrants. Revenues from the El Paso prison began immediately and was
profitable in the fourth quarter 1996. In the third quarter 1996, the Avalon
Correctional Center in Tulsa, Oklahoma was at a break-even capacity. Census
increased in the fourth quarter. Cash flows from the existing correctional
centers will continue to improve as the facilities reach full capacity.

The Company has plans for the development and management of assisted
living centers in Oklahoma and other states in the Midwest subject to future
funding.. Emerald Square, the assisted living center in Oklahoma City, has
completed construction and began operations the fourth quarter 1996. The
Company is operating an assisted living center in Ft. Collins, Colorado,
Diamond Crest, which opened in the third quarter, 1996.

11
<PAGE> 15

The Company believes it has sufficient cash reserves and ample cash
flows from operations to meet its current cash requirements. Additional
sources of funding may be required for future expansion. The Company will
explore other sources of funding such as additional bank borrowing or the sale
of equity securities. Additional funds may also be available through the
exercise of the Company's outstanding stock purchase warrants. The Company
retained the services of the investing banking firm of Rodman & Renshaw, Inc.
to help the Company evaluate opportunities for growth and capital markets
transactions. Management is unaware of any other evident trends that are
likely to result in material increases or decreases in the liquidity of the
Company.

RESULTS OF OPERATIONS -

YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 -

The Company had a net loss in 1995 of $84,800 or $.03 per share, as
compared to net income in 1994 of $7,400 or $.00 per share. The majority of
the loss incurred in 1995, $52,900 or $.02 per share, was due to discontinued
park property management operations. The loss from discontinued operations in
1994 was $59,600 or $.03 per share. The new correctional facility, Avalon
Correctional Center, had a start up loss in 1995 of $101,000, and the
residential care facilities had a net operating loss in 1995 of $52,300 as
compared to a net operating gain in 1994 of $140,600.

Total revenues for 1995 increased by 21%, from $2,536,000 to
$3,056,000, primarily due to an increase in revenue from corrections, offset by
a decrease in revenue from residential care. Operating expenses increased by
26%, due to the increase in correctional operations and an increase in
residential care expenses.

CORRECTIONS. Operating income for 1995 was $865,700 as compared to
$596,800 in 1994, an increase of approximately 45%. Revenues increased from
$1,364,000 in 1994 to $2,106,000 in 1995 directly as a result of the expansion
of the Carver Center and the opening of Avalon Correctional Center. The average
inmate census increased from 143 in 1994 to 198 in 1995. The average revenue
per inmate day rate increased from approximately $26 in 1994 to approximately
$29 in 1995. Operating expenses increased by 62% also as a result of the
expansion of the facilities. Avalon Correctional Center incurred an operating
start up loss of approximately $101,000 in 1995.

CONTRACT SERVICES. Operating loss for 1995 was $52,300 as compared to
an operating gain of $140,600 in 1994. Revenues decreased by 11% in 1995 from
$1,007,600 in 1994 to $896,900 in 1995 primarily as a result of a 9% decrease
in census and a loss of state contracts of approximately $60,000. State
contract revenues accounted for approximately 3% of total revenues in 1995.
Operating expenses increased by 9% primarily due to an increase in staffing.
Effective January 1, 1996, the operations were contracted to a tax exempt
organization.

PARK MANAGEMENT. The Company ceased operations and canceled its park
management contract in June, 1995. The loss on the disposal of operations,
net of income tax benefit of $27,400, was $34,100. Loss from operations in
1994 was $59,500 as compared to a loss from operations in 1995 of $18,800.
Management believes that it is in the Company's best interest to devote
available resources to opportunities in other areas of the Company's business.

CORPORATE. General and administrative expenses increased in 1995 by
14% from $529,100 to $603,300. The increase was a result of additional
staffing, increased legal expenses, and an increase in advertising, marketing,
and promotional costs. The increase in 1995 of $110,700 in interest expense
was primarily due to interest on the funds borrowed for the expansion of the
Carver Center ($39,000) and the construction of Avalon Correctional Center
($69,000). Depreciation and amortization expense increased by $91,900
primarily as a result of the expansion of Carver Center and the opening of
Avalon Correctional Center.

NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 -

Total revenues increased by $468,000 or 21% primarily as a result of
an increase in correctional revenues of $748,000 offset by a decrease in
residential care revenue of approximately $250,000. Net loss for the nine
months ended September 30. 1996 was $220,000 or $.08 per share as compared to a
net loss for the nine months ended September 30, 1995 of $43,000 or $.02 per
share. The loss in 1996 was partly due to a reserve of $70,000 for a
litigation settlement.

12
<PAGE> 16

CORRECTIONS. Revenue form correctional operations increased by
$748,000 or 52% from 1995 to 1996 and operating expenses increased by 105%
primarily due to the addition of the El Paso Intermediate Sanction Facility.
The direct operating profit margin for correctional operations was 34% compared
to 51% in 1995 primarily due to one time start up costs reflected in the lower
profit margins of Avalon Correctional Center and El Paso Intermediate Sanction
Facility. The average number of inmates or census for the first nine months
ended 1996 increased 39% over 1995.

CONTRACT SERVICES. Operating revenues of contract services decreased
by $250,000 or 36%, primarily due to a 14% decrease in residential care
occupancy. Operation expenses decreased by $215,000 or 33%. In conjunction
with management decisions, residential care operations have been reduced and
the financial results will reflect this in the fourth quarter 1996.

CORPORATE. General and administrative expenses increased by $31,000
or 6%. Depreciation expense increased by $84,000 in 1996 as a result of the
construction of the Carver Center addition and the Avalon Correctional Center
in 1995. Interest expense increased approximately $119,000 primarily due to
interest related to the construction of the new correctional facilities.

BUSINESS

GENERAL

The Company, through its wholly-owned subsidiaries, provides security
private correctional services, substance abuse treatment services, residential
care services, outpatient mental health services and assisted living centers.
These services include the following: (a) private correctional services
through the operation of a 250-bed minimum security facility in Oklahoma City,
Oklahoma, a 255-bed minimum security facility in Tulsa, Oklahoma, and a 144-bed
medium security facility in El Paso, Texas; (b) substance abuse treatment
services for inmates in Nebraska; (C) residential care services through
facilities in Oklahoma; (d) the management of outpatient mental health clinics;
and (e) the operations of two assisted living centers, one in Oklahoma City and
one in Fort Collins, Colorado.

The Company was incorporated in Nevada in September, 1990 and
acquired Southern Correction Systems, Inc. ("SCS") on June 15, 1992. SCS was
incorporated in 1990 and was engaged in the business of providing private
correctional services. Avalon's name was changed to Avalon Community Services,
Inc in June, 1992. The Company acquired two affiliated companies, Elk City
Properties, Inc. ("ECP") and Central Oklahoma Properties Corp. ("COP")
effective December 31, 1993. Both ECP and COP were incorporated in 1990. ECP
is in the business of providing residential care services and COP owns and
leases certain related real estate.

CORRECTIONAL SERVICES

The trend in the United States toward privatization of government
services and functions has increased as governments have faced continuing
pressure to control costs and improve the quality of services. Governmental
agencies responsible for correctional and detention facilities have privatized
facilities in an attempt to address these pressures.

The Company believes the overcrowding in correctional and detention
facilities will be made worse by the perceived public demand for longer prison
sentences and prison terms for juvenile offenders. Fiscal pressures have
forced some governments to limit public services and to seek more
cost-effective means of providing the remaining services. Correctional and
detention facilities are viewed as an essential service and fiscal pressures
have pushed governments to seek to deliver these services more cost
effectively. Certain courts and other governmental entities in the United
States have mandated that services offered to inmates be expanded and living
conditions be improved. Many governments do not have the readily-available
resources to make the changes necessary to meet such mandates and must seek
private providers.

A combination of factors in many states (i.e., decreasing revenues,
increasing prison population, legal battles arising from substandard prison
conditions and overcrowding) has led to a revamping of the corrections
processes and a reallocation of limited prison resources. Among the innovative
methods created to ease the burdens on state prisons is the move toward
utilizing private contractors to provide private correctional services.
Private correctional services

13
<PAGE> 17
provide a substantial economic saving to the state, allow the state to comply
with legislative and judicial pressure to reduce prison populations, and create
significant profit opportunities for private entities, which are able to
provide comparable or better services at lower cost. Private correctional
facilities operating as contractors for government agencies, pursuant to court
order or otherwise, exist in virtually every state.

The Company owns and operates three correctional centers, Carver
Center, Avalon Correctional Center and El Paso Intermediate Sanction Facility.
The correctional centers provide complete correctional administration,
correctional officer staffing, room and board, vocational assistance,
transportation, and rehabilitation services.

OKLAHOMA. The Company's contracts with the Oklahoma Department of
Corrections are one year in duration and extend through June 30, 1997, with the
option to renew for two (2) additional one year periods. The State of
Oklahoma's performance under the contracts is subject to annual appropriation
by the legislature. The Company provides services for more minimum security
inmates in Oklahoma than any other contractor providing services to the State
of Oklahoma.

Carver Center is a 250-bed minimum security correctional facility
located in Oklahoma City, Oklahoma. Carver Center has been expanded from its
initial capacity of 25 beds in 1985, to its current capacity of 250 beds to
accommodate the increasing needs of the Oklahoma Department of Corrections.
During December 1996, the average number of inmates residing at Carver Center
was 143. Avalon Correctional Center is a 255-bed minimum security correctional
facility located in Tulsa, Oklahoma. The construction of the 40,000 square
foot facility was completed in July, 1995. The Avalon Correctional Center
opened in July, 1995. The average number of inmates residing at Avalon
Correctional Center during the month of December was 90.

The correctional facilities are accredited by the American
Correctional Association ("ACA") as Adult Community Correctional Facilities.
ACA accreditation or candidacy is required to contract with the State of
Oklahoma for correctional services. The ACA, a private not-for-profit
organization, was established to develop uniformity and industry standards for
inmate care. Candidates for ACA accreditation must submit to an extensive
audit and ongoing compliance procedures. Accreditation is generally granted
for a three-year period. Carver Center has been accredited since 1990 and is
currently accredited through 1999. Avalon Correction Center was accredited in
1996 and is accredited through 2000.

TEXAS. The Company purchased the facility and operations of the El
Paso Intermediate Sanction Facility in El Paso, Texas. The prison is being
managed by Southern Corrections Systems, Inc., a wholly owned subsidiary of the
Company. The prison is a 36,000 square foot construction with a capacity of
144 beds. The Company signed a fifteen year contract to provide services in
the facility for the West Texas Community Supervision and Corrections
Department. The Company also recently signed a three year contract with the
Texas Department of Criminal Justice to provide complete services for up to 50
male parole and mandatory supervision releases in the facility. This new
contract will bring the prison to 100% of its capacity. The average number of
inmates during December, 1996 was 113. The Texas prison is not required to be
accredited by ACA.

NEBRASKA. The Company was awarded a contract in February, 1996, with
the State of Nebraska Department of Correctional Services to provide substance
abuse treatment services. The Nebraska contract has a fifteen-month term with
two (2), two year renewal options. The contract is to provide substance abuse
treatment services in five Nebraska prisons; the Nebraska State Penitentiary,
The Lincoln Correctional Center, The Omaha Correctional Center, The Nebraska
Diagnostic and Evaluation Center, and The Nebraska Community Corrections Center
at Lincoln. The Company began providing the contract services in March, 1996.

The Company is currently evaluating additional correctional projects
in Oklahoma, Nebraska, Colorado, Texas, Missouri, Florida, and other states.

ASSISTED LIVING

The assisted living industry evolved to fill a gap in the long-term
care industry and has been an outgrowth of the nursing home industry and
independent living. The growing demand for available beds coupled with the
shrinkage of available nursing home beds, has provided a window of opportunity
for the industry. Longer life expectancy and

14
<PAGE> 18
more people becoming elderly has dramatically increased the need for elderly
care. The cost of long-term care has become a national health concern. The
cost of assisted living care is approximately 35% lower than nursing home care.
Prior to entering a market, the Company prepares a survey of available
facilities in each community in which a center will be purchased or constructed
to determine the competition in the surrounding area.

Assisted living centers are designed for ambulatory elderly
individuals requiring assistance with daily living services, but not requiring
the intensive medical services provided by a nursing home. The Centers will
provide complete daily living services including housing, food services, 24
hours per day staffing, medication monitoring, housekeeping, laundry services,
transportation, and activities for the residents.

The Company entered into an agreement in 1995 to develop and operate
an assisted living center for the elderly in Oklahoma City, Oklahoma. The
center is owned by Avalon Retirement Centers, LLC, an affiliate. The
construction of Emerald Square Assisted Living Center was completed, and the
facility was opened in the fourth quarter of 1996.

The Company entered into an agreement in 1996 with Avalon Retirement
Centers of Colorado, LLC, an affiliate, to develop and operate an assisted
living center for the elderly in Fort Collins, Colorado. The assisted living
center was opened in the third quarter of 1996.

RESIDENTIAL CARE

Wholly owned subsidiaries of the Company owned two residential care
facilities ("RCFs") and provided related contract management services for
another residential care operation owned by an affiliate during 1996. In
conjunction with management decision, residential care operations have been
reduced and the financial results of this will reflect in the fourth quarter
1996. The Company contracted with a tax exempt organization to provide
operation services to operate RCFs. The Oklahoma Health Department licenses
RCFs in Oklahoma.

The Company also provides contract management services for Pathways
Supportive Living Center ("Pathways"), an 88 bed facility located in Oklahoma
City, Oklahoma. Pathways is owned by Southern Community Services, Inc.
("Community"). The building utilized by Pathways is owned by the Company and
leased to Community. The building is zoned for the operation of a residential
care facility or a community based correctional center for female inmates.
Financial statements of Community have not been provided in this Prospectus as
management believes that the Company's financial statements alone provide
investors with adequate financial information with which to make an investment
decision.

COMPETITION

Contracts for correctional services are awarded by state agencies
based upon competitive bidding.

The Company presently contracts for more minimum security inmates in
Oklahoma than any other contractor providing services for the State of
Oklahoma. Management believes that the Company has certain competitive
advantages in contracting for correctional services in the State of Oklahoma
including: (a) an approximate eleven year history of providing quality services
to the Oklahoma Department of Corrections, (b) the Company's geographic
location allows for lower administrative overhead charges when bidding against
out-of-state competitors, and (c) the Company has utilized the services of the
same government relations firm for over five years which has resulted in the
development of an effective relationship with the Oklahoma legislature.
However, companies with greater financial resources and longer operation
histories are eligible to compete with the Company for available contracts.
Companies with access to greater financial resources could underbid the Company
for available contracts both within the State of Oklahoma and in other states.
See "RISK FACTORS."

The substantial amount of ongoing press and media coverage directed to
the problems of prison overcrowding could result in the establishment of other
companies seeking to compete with the Company for the limited number of state
contracts presently available.

The Company considers its status as a public entity, with increased
disclosure and reporting obligations, to be a competitive advantage. Two other
corporations with substantial assets and significant operating histories in the
area

15
<PAGE> 19
of private correctional facilities, The Wackenhut Corporation and Corrections
Corporation of America, are also public companies. These companies could
become competitors of the Company for limited available contracts. It can be
anticipated that any expansion by the Company into other states or regions will
be accompanied by increased competition.

The long-term care industry is highly competitive and the Company
expects that the assisted living business will continue to be competitive in
the future. Competition for assisted living includes numerous other companies
providing long-term care alternatives such as home health agencies, life care
at home, community-based services programs, retirement communities, and
convalescent centers. The Company's management expects that as assisted living
receives increased attention and the number of states including assisted living
in their Medicaid Waiver Programs increase, competition will grow from new
market entrants focusing on assisted living.

DESCRIPTION OF PROPERTIES

Carver Center is a 250-bed minimum security correctional facility
located in Oklahoma City, Oklahoma. The facility is located on a five-acre
tract of land and includes five buildings. The Company completed construction
of a new 16,000 square foot dormitory at Carver Center in the second quarter of
1995, for a total of approximately 34,000 square feet.

Avalon Correctional Center is 255-bed minimum security correctional
facility located in Tulsa, Oklahoma. The construction of the approximately
40,000 square foot facility was completed in July, 1995. The Avalon
Correctional Center opened in July, 1995.

El Paso Intermediate Sanction Facility is a 144-bed medium security
correctional facility located in El Paso, Texas. The facility is an
approximately 36,000 foot building on a seven acre tract of land, purchased in
1996.

Westcare, a residential care facility, is located in an approximately
60,000 square foot recently remodeled building in Elk City, Oklahoma. The
building is zoned for the operation of a residential care facility or an
assisted living center.

The Company owns a 32,000 square foot building in Oklahoma City,
Oklahoma. The building is leased through December, 1996 to Southern Community
Services, Inc. and is utilized for the operation of Pathways Supportive Living
Center. The building was extensively renovated in 1992. The building is zoned
for the operation of a residential care facility or a community based
correctional center for female inmates.

The Company's administrative office is located in Oklahoma City,
Oklahoma, in a commercial building at 13401 Railway Drive, Oklahoma City,
Oklahoma 73114.

Substantially all property owned by the Company is pledged as
collateral on Company debt. See Note 6 to the Consolidated Financial
Statements.

INSURANCE

The Company currently has the following insurance coverages: general
liability insurance ($1,000,000 per occurrence); property and contents
(estimated replacement cost); worker's compensation; director and officer
liability insurance; and $1,000,000 automobile liability (plus physical
damage). The Company believes these coverages are adequate. There can be no
guarantee that the policy limits would be sufficient in the event of damage due
to accident or otherwise, or in the event that a judgment were to be rendered
against the Company, in connection with a litigation or other matters. See
"RISK FACTORS."

Inmates at Carver Center and Avalon Correctional Center remain under
the legal custody and control of the State of Oklahoma while at the facility.
The inmates' presence and activities could subject the Company to litigation,
both on their own behalf (for injury, damage, etc.) and perhaps on behalf of
other Company employees or others in the community who could be injured or
damaged due to the actions of the inmates. There is no guarantee that the
present

16
<PAGE> 20
types or amounts of insurance coverage would be sufficient to protect the
Company in the event of injury, accident, damage or liability arising out of
the operation of a facility and the presence of the inmates.

The Company presently pays the premiums on a life insurance policy in
the amount of $350,000, pertaining to the Company's Chief Executive Officer,
Donald Smith; the beneficiary is Bank One in Oklahoma City. The Company has
outstanding indebtedness to Bank One of approximately $2,358,047 as of December
31, 1996. The Company has no plans to purchase a key man life insurance policy
pertaining to Mr. Smith, the loss of whose services could have a serious impact
upon the Company's business. See "RISK FACTORS."

REGULATIONS

The corrections and residential care industries are subject to
Federal, state and local regulations administered by a variety of regulatory
authorities. As discussed above under "-- Correctional Services," the
correctional services offered by the Company are subject to oversight by state
departments. The residential care facilities are licensed by the Oklahoma
Health Department. Generally, prospective providers of corrections services
must comply with a variety of applicable state and local regulations, including
education, health care and safety regulations. The Company's contracts
frequently include extensive reporting requirements and may require supervision
and on-site monitoring by representatives of contracting governmental agencies.

Many state and local governments are required to enter into a
competitive bidding procedure before awarding contracts for products or
services. The laws of certain jurisdictions may also require the Company to
award subcontracts on a competitive basis or to subcontract with businesses
owned by women or members of minority groups.

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

Management believes that the Company is currently in compliance with
all applicable laws and regulations affecting the Company's business.

LEGAL PROCEEDINGS

An action was filed on August 5, 1994 in the Superior Court of Los
Angeles County, California styled Roy Allenstein, et al. vs. Southern Community
Services, Inc., Avalon Community Services, Inc., Donald E. Smith, Teresa Smith
and Does 1-50. This action arose out of a dispute involving promissory notes
executed by Southern Community Services, Inc. (a company owned by the Chief
Executive Officer and members of his family) to the plaintiffs in the aggregate
amount of $100,000. Avalon Community Services, Inc. was not an obligor in any
manner under the notes. Plaintiffs' claim against Avalon is that they assert
that Mr. Smith represented that a right to convert the indebtedness of Southern
Community Services into common stock in Avalon existed as an option to
repayment of the indebtedness and seeks the Court's Order directing that such
conversion be made. No written agreement for such conversion exists and Mr.
Smith denies ever making such an oral representation. The parties have agreed
to settle this action. As a part of the settlement, the Company agreed to the
issuance of 140,000 Class C Warrants. The Company is not liable for any other
payments.

Elk City Properties, Inc., is the named Defendant in that certain
action commenced May 11, 1995, and styled Stephanie Layson, as Administratrix
of the Estate of Richard H. Shepherd, Deceased, Plaintiff, vs. Elk City
Properties, Inc., d/b/a Connections Supportive Living Center, Defendant; Case
No. CJ-95-851-BH; District Court of Cleveland County, State of Oklahoma. In
that action, the Plaintiff has brought a wrongful death action against Elk City
Properties, Inc., arising out of the death of a resident of the Connections
residential care facility. The Plaintiff prayed for damages in excess of
$10,000.00. Elk City Properties, Inc., denied these allegations, and contended
that the resident died of

17
<PAGE> 21

natural causes through no fault of any of its agents or employees. This case
was settled in April 1996, within the policy limits of the Company's insurance.

The Company and Elk City Properties, Inc., a wholly owned subsidiary,
were involved in a civil lawsuit filed by a former employee, Debra K. Cline,
Plaintiff, vs. Mike DeBoe, individually and as agent or employee of Avaloon
Community Services, Inc., and/or Elk City Properties, Inc., d/b/a Connections
Supportive Living Center, Case Number CIV- 95-1467-A, United States District
Court for the Western District of Columbia. A judgment was rendered against the
defendants in August 1996 and the Company established a reserve of $70,000 in
the second quarter 1996 to reflect the potential cost of the judgment.

The Company is a party to other litigation arising in the normal
course of business. Management believes that the ultimate outcome of these
matters will not have a material effect on the Company's financial condition or
results of operations.

EMPLOYEES

The Company had 203 full time employees at December 20, 1996,
including its officers and directors. The Company also utilizes the services
of several consultants on an as-needed basis. The Company has not experienced
a work stoppage and Management considers its employee relations to be good.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The names, ages and current positions with the Company of the
directors and executive officers of the Company are set forth below. All
directors hold their positions for one-year terms until the 1997 annual meeting
of stockholders, and will continue in such offices until successors have been
elected and have qualified subsequent to an annual stockholders' meeting.

<TABLE>
<CAPTION>
Name and Age Positions
- ------------- ----------
<S> <C>
Donald E. Smith, 44 Chief Executive Officer, Director
Jerry M. Sunderland, 60 President, Director
Kathryn A. Avery, 44 Chief Financial Officer, Vice President
Walter L. DeBoe, 49 Vice President of Operations
Robert O. McDonald, 58 Director
</TABLE>

The following is a brief description of the business experience during
the past five years of each of the above-named persons:

DONALD E. SMITH has served as Chief Executive Officer of the Company
since June, 1992, and has held the same position with the Company's
subsidiaries since their inception. Mr. Smith has owned, managed and developed
a number of private corporations since 1985 to provide private corrections,
residential care, mental health, and other related services. Mr. Smith
received a Bachelor of Science degree in 1974 from Northwestern State College.

JERRY M. SUNDERLAND has served as President of the Company since June,
1995. Mr. Sunderland served as Correctional Services Administrator for one of
the Company's subsidiaries from 1990 to 1993 and for an affiliate of the
Company since 1988. Mr. Sunderland also serves as a Director of the Company's
subsidiaries and for certain affiliated private corporations. Mr. Sunderland
was employed by the Oklahoma Department of Corrections for sixteen years and
twelve years as an agent for the Oklahoma State Bureau of Investigation.

KATHRYN A. AVERY was appointed Chief Financial Officer and Vice
President in June, 1995. Ms. Avery was employed by Red Eagle Resources
Corporation for five years, serving for three years as acting Controller and
Chief Financial Officer. Ms. Avery received a degree in Business
Administration from the University of Oklahoma in 1982, is a certified public
accountant and a member of the Oklahoma Society of CPAs.

18
<PAGE> 22

WALTER L. DEBOE serves as the Vice President and Regional
Administrator for the Company. Mr. DeBoe served as the Administrator for
Carver Center, since January, 1992. Mr. DeBoe is responsible for the Company's
correctional operations, including recruitment and training of personnel,
maintenance of accreditation by the American Correctional Association and
compliance with contractual requirements. Mr. DeBoe's experience includes over
eighteen years experience in the correctional field.

ROBERT O. MCDONALD was appointed a Director of the Company in October,
1994. Mr. McDonald is Chairman of the Board of Directors of Capital West
Securities and its parent holding company, Affinity Holding Corp. Mr. McDonald
started his investment career in 1961 with Allen and Company and left in 1967
to form McDonald Bennahum and Co., which later joined with Ladenburg Thalmann
and Co. of which Mr. McDonald was a Senior Partner. Mr. McDonald joined Planet
Oil and Mineral Corporation in 1971 and became president in 1973. From 1975
until 1993, Mr. McDonald was affiliated with Stifel Nicolaus & Company and
headed its municipal syndicate effort. Mr. McDonald received a Bachelor's
Degree in Finance from the University of Oklahoma in 1960. He also served as
an Officer in the United States Army and Army Reserve.

The officers of the Company hold office until their successors are
appointed by the Board of Directors. There are no family relationships among
the Company's present officers and directors.

OTHER SIGNIFICANT EMPLOYEES AND CONSULTANTS

RANDALL J. WOOD serves as General Counsel for the Company. Mr. Wood
received his law degree from the University of Oklahoma in 1983, and practiced
in the field of real property and commercial litigation. Mr. Wood practiced
with the law firm of Stack & Barnes, P.C. from 1983 to 1993. From 1993 until
assuming the position of General Counsel with the Company, Mr. Wood practiced
with the firm of Hammons, Vaught & Conner. Mr. Wood is responsible for
supervision and management of all litigation matters and review of governmental
regulation compliance for the Company and its subsidiaries and affiliates.

The Company also utilizes several consultants on an as-needed basis.

BOARD AND COMMITTEE MEETINGS

The Board of Directors held three formal meetings both during 1995 and
1996. In addition to these meetings, certain business was conducted by
unanimous written consent of the Board of Directors. At present, the Company
does not utilize audit or compensation committees.

CONFLICTS OF INTEREST

The Company's officers and directors spend a portion of their time
performing services for other corporations; control or own interests in other
corporations; and may become involved in other ventures in the future, and it
is possible that conflicts of interest could arise. A number of private
corporations in which the Company's management is also involved, and which are
controlled by Donald E. Smith, the Company's Chief Executive Officer, could be
considered to be affiliates of the Company (the "Affiliated Companies").
Certain transactions have occurred, and continue to occur, between the Company
and the Affiliated Companies which may be considered as not having occurred at
arm's length. See "RISK FACTORS," "CERTAIN TRANSACTIONS" and "FINANCIAL
STATEMENTS."

The Company has established no provisions for settlement of any
conflicts of interest or potential conflicts of interest, including the
possibility of pecuniary gain to Management. Legal remedies available under
state law in the event of violations of fiduciary duty by Management would in
all likelihood be too time-consuming and prohibitively expensive to be of any
actual protection or value to the stockholders. See "RISK FACTORS."

Conflicts of interest which arise will require resolution on a
case-by-case basis and no assurance can be given that such conflicts will be
resolved satisfactorily in favor of the Company.

19
<PAGE> 23
REMUNERATION

The following table sets forth the compensation paid or accrued during
each of the years in the three years ended December 31, 1996, to the Company's
Chief Executive Officer, Donald E. Smith. No executive officer of the Company
received in excess of $100,000 in total compensation for the same period:

<TABLE>
<CAPTION>
Other
Annual Compensation
-------------------
Year Salary Bonus Automobile Other
---- -------- ----- -------------------
<S> <C> <C> <C> <C>
1996 $60,000 $ -- $ 3,100 $1,800
1995 60,000 -- 7,200 1,800
1994 60,000 8,500 9,200 1,800
</TABLE>

Other annual compensation includes the use of an automobile owned by
the Company and payment of monthly dues.

Mr. Smith serves as the Company's Chief Executive Officer pursuant to
a five-year employment agreement executed with one of its subsidiaries in June,
1992. The agreement provides that Mr. Smith's current annual compensation be
determined by the Board of Directors. Mr. Smith's salary has remained the same
since 1992. The agreement also contains provisions for severance pay and
disability payments, as well as a non-compete agreement preventing him from
engaging in a business deemed similar to that of the Company for a period of
one year from the cessation of his employment.

DIRECTOR COMPENSATION

Members of the Board of Directors do not receive director's fees for
serving in such capacities, nor do they receive attendance fees for attendance
at such meetings.

STOCK OPTION PLAN

The Company's Board of Directors has adopted a combined incentive
stock option and non-statutory Stock Option Plan (the "Plan") that provides for
the grant to employees, officers, directors, and consultants of the Company of
options to purchase up to 600,000 shares of Common Stock.

Options under the Plan may be either "incentive stock options" within
the meaning of Section 422 of the United States Internal Revenue Code of 1986,
as amended (the "Code"), or non-qualified options. Incentive stock options may
be granted only to employees of the Company, while non-qualified options may be
issued to non-employee directors, employees and consultants of the Company.

The Plan is administered by the Board of Directors ("Board"). The
Board determines those individuals who shall receive options, the time period
during which the options may be partially or fully exercised, the number of
shares of Common Stock that may be purchased under each option and the option
price.

The per share exercise price of the Common Stock subject to incentive
and non-qualified stock options granted pursuant to the Stock Option Plan may
not be less than the fair market value of the Common Stock on the date the
option is granted. Under the Plan, the aggregate fair market value (determined
as of the date the option is granted) of the Common Stock that first became
exercisable by any employee in any one calendar year pursuant to the exercise
of incentive stock options may not exceed $100,000. No person who owns,
directly or indirectly, at the time of the granting of an incentive stock
option to him, 10% or more of the total combined voting power of all classes of
stock of the Company (a "10% Stockholder"), shall be eligible to receive any
incentive stock options under the Plan unless the option price is at least 110%
of the fair market value of the Common Stock subject to the option, determined
on the date of grant. Non-qualified options are not subject to this
limitation.

20
<PAGE> 24
No incentive stock option may be transferred by an optionee other than
by will or the laws of descent and distribution, and during the lifetime of an
optionee, the option will be exercisable only by the optionee. Pursuant to the
terms of the Plan, in the event of termination of employment, other than by
death or permanent total disability, the options terminate immediately. The
Plan provides that upon termination of employment of an optionee by reason of
death or permanent, total disability, an option remains exercisable for one
year thereafter to the extent it was exercisable on the date of such
termination.

Options under the Plan must be granted within 10 years from the
effective date thereof. Incentive stock options granted under the Plan cannot
be exercised more than 10 years from the date of grant, except that incentive
stock options issued to a 10% Stockholder are limited to five year terms. Any
unexercised options under the Plan that expire or that terminate upon an
employee's ceasing to be employed with the Company become available Plan once
again for issuance.

All options granted under the Plan provide for the payment of the
exercise price in cash equal to the exercise price of the options being
exercised.

The following table presents information with regard to the options
(all non-statutory) that the Company has granted to executive officers of the
Company and certain other employees and consultants under the Plan as of
September 30, 1996:

<TABLE>
<CAPTION>
NUMBER
OF OPTIONS
NAME OF OPTIONEE TITLE UNDER PLAN
- ---------------- ----- ----------
<S> <C> <C>
Jerry M. Sunderland . . . . . . . . President, Director 60,000

Kathryn A. Avery . . . . . . . . . Vice-President, Chief Financial Officer 30,000

Robert O. McDonald . . . . . . . . Director 30,000

Other employees and consultants . . 121,670
-------
Total . . . . . . . . . . . . 241,670
=======
</TABLE>

LIMITATION OF OFFICER
AND DIRECTOR LIABILITIES

Increasing concern about director liability and the growing
unavailability of insurance may cause the Company to offer significant
consideration to induce outside individuals to join its Board. The Company has
adopted the provisions of the Nevada Corporation Law permitting the Company to
limit the liability of the Company's directors to the Company and its
stockholders for monetary damages for breach of fiduciary duty as a director.
Such limitation on a director's liability is subject to the following statutory
exceptions: (i) for any breach of the director's duty of loyalty to the Company
or its stockholders; (ii) for acts of omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) in respect
of certain unlawful dividend payments or stock redemptions or repurchases, or
(iv) for any transaction from which the director derived an improper personal
benefit.

The Company has also adopted the provisions of the Nevada Corporation
Law permitting indemnification of directors, officers, employees or agents of
the Company against expenses, including attorneys' fees incurred in connection
with the defense of any action, suit or proceeding in which such a person is a
party by reason of his being or having been a director, officer, employee or
agent of the Company, or of any corporation, partnership, joint venture, trust
or other enterprise in which he served as such at the request of the Company,
provided that he acted in good faith and in a manner reasonably believed to be
in or not opposed to the best interests of the Company, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful, and provided further (if the threatened, pending or completed
action or suit is by or in the right of the Company) that he shall not have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the Company (unless the court determines that indemnity would
nevertheless be proper under the circumstances).

21
<PAGE> 25
Insofar as limitation of, or indemnification for, liabilities arising
under the Securities Act may be permitted to directors, officers, or persons
controlling the Company pursuant to the foregoing, the Company has been
informed that, in the opinion of the Commission, such limitation or
indemnification is against public policy as expressed in the Securities Act,
and is therefore, unenforceable.

CERTAIN TRANSACTIONS

The Company manages and performs various administrative and accounting
functions for a residential care facility owned by Community, an affiliated
entity owned by the Company's Chief Executive Officer and members of his
family. The transactions between the Company and Community are summarized
below:

During 1994 and 1995, $14,200 and $9,000, respectively, were charged
by the Company for management, administrative and accounting services.
Such amounts have been reflected as a reduction of general and
administrative expenses in the Consolidated Statements of Operations.

The balance due from affiliate, as reflected in the Consolidated
Balance Sheets, results from charges for administrative and accounting
services as well as net cash advances made to Community. The
outstanding balance is non-interest bearing. Community has agreed to
repay the outstanding balance from its operations. The amounts
reflected as current assets in the accompanying Consolidated Balance
Sheets represent the estimated amounts to be repaid from operations
within a one-year period.

The Company leased a building to Community during 1994 and 1995 for
use in its residential care operations. Community was charged a total
of $87,000 and $40,000, respectively, for lease payments. The current
lease agreement extends through December, 1996, and provides for
monthly lease payments of $5,000. The building referred to above is
pledged as collateral on certain Community indebtedness.

The Company leases certain transportation and other equipment from an
affiliated entity owned by the Company's Chief Executive Officer. Annual lease
payments of $22,000 were made for such equipment during 1994 and 1995.

During 1994 and 1995, the Company provided administrative and
accounting services for an affiliated entity owned by the Company's Chief
Executive Officer. The Company was reimbursed a total of $27,000 and $30,000
for these services during 1994 and 1995. This amount has been reflected as a
reduction of general and administrative expenses in the Consolidated Statements
of Operations.

The Company leased a building utilized in its residential care
operations during 1994 and 1995 from an affiliated entity owned by an immediate
family member of the Company's Chief Executive Officer and made lease payments
totaling $62,000 and $60,000, respectively. The current lease agreement
provides for monthly lease payments of $5,000 and expires in December, 1996.

The Company entered into an agreement effective in May, 1994 with the
Company's Chief Executive Officer to issue certain securities in exchange for
his personal guarantee of certain future Company indebtedness. The agreement
provides for the issuance of one warrant, exercisable for one share of common
stock, and one share of Class B common stock (voting only) for each dollar of
Company debt ultimately guaranteed. Under the terms of the agreement, the
additional shares of 3,410,000 Class B Common Stock. A maximum of 750,000
warrants can be issued. The warrants, when issued, will have an exercise price
of $1.50 and will be exercisable over a five year period.

The Company entered into an agreement in 1995 with an entity owned by
the Company's Chief Executive Officer to develop and operate an assisted living
center in Oklahoma City. The construction began in December, 1995, and was
completed in the second half of 1996. The Company has guaranteed up to
$2,080,000 of the debt for the construction of the assisted living center.

Some residents at the Company's residential care facilities received
outpatient mental health services during 1994 and 1995 from an entity owned by
the Company's Chief Executive Officer and members of his family. The

22
<PAGE> 26

Company received reimbursements totaling $72,000 and $148,000 for the costs
incurred by the Company associated with the specific services provided.

With respect to each transaction with affiliates described herein,
Management believes the terms to be at least as favorable between the Company
and the affiliate as would have been in similar transactions between the
Company and a non-affiliate.

PRINCIPAL STOCKHOLDERS

The following table sets forth, as of December 31, 1996, information
concerning the beneficial ownership of the Company's Common Stock by (i) each
person known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of the Company's Common Stock, (ii) each director of the
Company, (iii) each of the executive officers of the Company and (iv) all
directors and executive officers as a group. To the best of the Company's
knowledge, each of the persons named in the table has sole voting and
investment power with respect to all the shares of Common Stock beneficially
owned by such person as set forth opposite such person's name.

23
<PAGE> 27

<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Total
Ownership of Percent Class Percentage Voting
Name and Address Common Stock of Class B Stock of Class Percentage
- ---------------- ------------ -------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Donald E. Smith 1,053,500 (1) 36.00% 3,410,000 100% 70.43%
13401 Railway Drive
Oklahoma City, OK 73114

Deborah A. Salerno 187,000 6.38% -- -- 2.95%
355 South End Avenue
Suite 22B
New York, NY 10280

Jerry M. Sunderland (2) 29,000 * -- -- *
13401 Railway Drive
Oklahoma City, OK 73114

Kathryn A. Avery (2) 8,000 * -- -- *
13401 Railway Drive
Oklahoma City, OK 73114

Walter L. DeBoe(2) 3,870 * -- -- *
13401 Railway Drive
Oklahoma City, OK 73114

Robert O. McDonald (2) 17,750 * -- -- *
3316 Preston Drive
Oklahoma City, OK 73122

All executive officers and
directors as a group
(5 persons) 1,112,120 (1) 31.99% 3,410,000 100% 71.36%
</TABLE>
- ---------------------

* Less than 1%

(1) Includes 77,313 shares owned by Mr. Smith' wife and children.

(2) Includes 29,000 shares to Mr. Sunderland, 7,500 to Ms. Avery, 3,870 to
Mr. DeBoe and 17,750 shares to Mr. McDonald that can be issued within
60 days pursuant to the Company's Stock Option Plan.

The Company signed a definitive Stock Purchase Agreement in January,
1994, effective December 31, 1993, to acquire certain affiliated entities from
the Company's Chief Executive Officer and members of his family. Pursuant to
the agreement, the Company issued 1,210,000 shares in 1993 and 2,200,000 shares
in 1996 of Class B Common Stock in exchange for the Chief Executive Officer's
guarantee of outstanding indebtedness of the acquired entities. The Class B
Common Stock is entitled to vote in all actions requiring a vote of the
stockholders, but has no liquidation rights, claims on earnings or the payment
of dividends and is non-transferable.

SELLING STOCKHOLDERS

The following table sets forth certain information regarding the
beneficial ownership of the Company's Warrants as of December 31, 1996 by the
stockholders of the Company who are offering securities pursuant to this
Prospectus (the "Selling Stockholders"). "Beneficial Ownership" includes
shares for which an individual, directly or

24
<PAGE> 28
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.

<TABLE>
<CAPTION>
Before the Offering After the Offering
---------------------- Securities ----------------------
Title Number Percent to Be Number Percent
Name of of Beneficially of Sold In Beneficially Of
Beneficial Owner Class Owned Class Offering Owned Class
- ---------------- --------- ------------ -------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
John D. Kilmartin, Jr. . . . . . . . C Warrant 40,000 3.6 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 -
Westminster Securities Corporation . C Warrant 100,000 9.1 100,000 0 -
</TABLE>

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

*Less than 1% of outstanding shares

DESCRIPTION OF SECURITIES

The Company is authorized to issue 24,000,000 shares of common stock
(both Common Stock, par value $0.001 and Class B Common Stock, no par value)
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 December 31, 1996 there were 2,927,135 shares of Common Stock and
3,410,000 shares of Class B Common Stock issued and 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 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.

CLASS B COMMON STOCK

The Company created a Class B common stock and issued 1,210,000 shares
to Donald Smith in connection with the acquisition of two affiliated entities,
in 1993. The shares were issued to Mr. Smith in exchange for his personal
guarantee of substantially all of the outstanding debt of the acquired
entities. The Company has also agreed to issue one share of Class B common
stock to Mr. Smith for each dollar of certain other Company debt guaranteed by
him. In the fourth quarter 1996, the Company issued another 2,200,000 shares of
Class B common stock to Mr. Smith in exchange for his personal guarantee of
outstanding debt, for a total of 3,410,000 shares of Class B common stock
outstanding. The Class B common stock is entitled to vote in all actions
requiring a vote of the stockholders, but has no liquidation rights, claim on
earnings or the payment of dividends and is non-transferable. See "RISK
FACTORS" and "CERTAIN TRANSACTIONS."

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

25
<PAGE> 29

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) Class B Common Stock voting shares
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.

The Company may authorize one warrant for each one dollar of corporate
obligations guaranteed by Mr.Smith up to the maximum amount. For this
exception to the anti-dilution provisions to apply, the corporate debt must
first be approved by the Board of Directors, be bona fide, and the guarantee
must be reasonably required by the creditor. 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 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 Agreements between the Company
and American Securities Transfer, Inc. (the "Transfer and Warrant Agent").
Copies of the Warrant Agreements may be obtained from the Company upon the
written request of a Warrant holder.

26
<PAGE> 30
The Class A Warrants expired on March 26, 1996 without being
exercised. Each Class B warrant may be exercised by its registered holder to
purchase one share of Common Stock at an exercise price of $6.00 until March
26, 1999. The Class B warrants may be redeemed by the Company prior to
exercise upon 30 days written notice to the registered holders for $0.01 per
warrant. The holders of the Class B 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 these warrants will not be entitled
to participate in any liquidation distribution.

The Company issued 145,595 shares of Common Stock during 1993 in
connection 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. As of the date of this Prospectus, there
are 275,100 Class B warrants still outstanding.

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 and Class C Warrants to
purchase 140,000 shares of Common Stock in settlement of a pending lawsuit.
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. 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 $3.50 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 on December 30,
1999. 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 has issued Class D Warrants to purchase 275,000 shares of
Common Stock in a recent asset acquisition. 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 $5.12 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

27
<PAGE> 31

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."

REDEMPTION OF WARRANTS. The Class D Warrants are subject to
redemption at $.01 per Warrant sin 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."

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., 1825
Lawrence Street, Suite 444, Denver, Colorado 80202-1817, as its registrar and
transfer agent, and the warrant agent for the warrants issued by the Company.

PLAN OF DISTRIBUTION

The 1,038,100 shares of Common Stock and the 160,000 Warrants being
offered hereby for the benefit of the Selling Stockholders were originally
issued by the Company in (a) the Company's initial public offering wherein the
Class A and Class B Warrants were sold along with Common Stock to the public
and (b) a private placement of 50 units comprised of Common Stock and Class C
Warrants to "accredited investors" pursuant to Regulation D promulgated by the
Securities and Exchange Commission. Each unit in the 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 private placement was completed in August, 1994. The Company has
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

28
<PAGE> 32
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. Such expenses are estimated to total approximately $32,000.

The offering by the Company of the 938,100 shares of Common Stock
underlying the Warrants is made exclusively to the holders of the 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 Community Services, Inc. and
subsidiaries as of December 31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
then ended, included in this Prospectus, have been included herein in reliance
on the report of Coopers & Lybrand L.L.P., independent accountants, given on
the authority of that firm as experts in accounting and auditing.

29
<PAGE> 33
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
Avalon Community Services, Inc.:

We have audited the accompanying consolidated balance sheets of Avalon
Community Services, Inc. and subsidiaries (the "Company") as of December 31,
1994 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

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

COOPERS & LYBRAND L.L.P.

Oklahoma City, Oklahoma
March 21, 1996
<PAGE> 34

AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
----------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents $ 121,176 $ 371,051
Accounts receivable, net of allowance for
doubtful accounts of $5,079 and $0 283,116 468,005
Due from affiliates 52,966 293,885
Prepaid and other 236,382 451,777
----------------- -----------------
Total current assets 693,640 1,584,718
----------------- -----------------
Property and equipment, net 5,525,311 5,914,724
Due from affiliates 231,248 75,000
----------------- -----------------
Total assets $ 6,450,199 $ 7,574,442
================= =================
LIABILITIES AND STOCKHOLDERS'

Current liabilities:
Accounts payable and accrued liabilities $ 183,233 $ 582,910
Due to affiliates 175,028 214,893
Current maturities of long-term debt 278,837 773,463
----------------- -----------------
Total current liabilities 637,098 1,571,266
----------------- -----------------
Long-term debt, less current maturities 3,449,275 2,686,494

Deferred income taxes 23,000 0
----------------- -----------------
Total liabilities 4,109,373 4,257,760
----------------- -----------------

Stockholders' equity:

Common stock:
Class A - par value $.001; 20,000,000
authorized; 2,496,905 issued and 2,927,133
outstanding in 1995 and 1996 2,497 2,927
Class B - no par; 4,000,000 shares authorized;
1,210,000 shares issued and outstanding --- ---
Preferred stock; par value $.001; 1,000,000
shares authorized; none issued --- ---
Paid-In capital 2,678,214 3,873,261
Accumulated deficit (339,885) (559,506)
----------------- -----------------
Total stockholders' equity 2,340,826 3,316,682
----------------- -----------------
Total liabilities and stockholders' equity $ 6,450,199 $ 7,574,442
================= =================
</TABLE>

These accompanying notes are an integral part of these consolidated
financial statements.

F-1

<PAGE> 35

AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1994 1995 1995 1995
------------- -------------- ------------- --------------
(Unaudited)
<S> <C> <C>
Revenues $ 2,536,136 $ 3,056,032 $ 2,197,254 $ 2,664,633
------------- -------------- ------------- --------------
Costs and expenses
Direct operating 1,550,510 1,949,145 1,358,761 1,899,315
General and administrative 529,098 603,264 471,905 502,668
Depreciation and amortization 211,202 303,092 190,435 274,510
------------- -------------- ------------- --------------
2,290,810 2,855,501 2,021,101 2,676,493
------------- -------------- ------------- --------------
Income from operations 245,326 200,531 176,153 (11,860)

Less litigation expense reserve -- -- -- 70,000

Less interest expense 145,573 256,273 153,085 272,366
------------- -------------- ------------- --------------
Income (loss) from continuing
before income tax expense 99,753 (55,742) 23,068 (354,226)
------------- -------------- ------------- --------------
Income taxes expense (benefit) 32,860 (23,800) 8,800 (134,605)
------------- -------------- ------------- --------------
Income (loss) from continuing operations 66,893 (31,942) 14,268 (219,621)
------------- -------------- ------------- --------------
Discontinued operations:
(Loss) gain from operations, net of income tax
benefit of $32,060, $12,600, and $25,165 (59,539) (18,817) (16,574) --
(Loss) gain on disposal, net of income tax
benefit of $27,400 and $26,200 --- (34,081) (41,024) --
------------- -------------- ------------- --------------
Loss from discontinued operations (59,539) (52,898) (57,598) --
------------- -------------- ------------- --------------
Net income (loss) $ 7,354 $ (84,840) $ (43,330) $ (219,621)
============= ============== ============= ==============

Net income (loss) per share:
Continuing operations $ 0.03 $ (0.01) $ 0.00 $ (0.08)
Discontinued operations (0.03) (0.02) (0.02) --
------------- -------------- ------------- --------------
Net income (loss) per share: $ (0.00) $ (0.03) $ (0.02) (0.08)
============= ============== ============= ==============
Weighted average number of common and common
equivalent shares 1,986,849 2,496,905 2,496,905 2,887,901
============= ============== ============= ==============
</TABLE>

The accompanying notes are an integral part
of these consolidated financial statements

F-2
<PAGE> 36

AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Common Stock
------------ Total
Class A Class A Class B Paid-In Accumulated Stockholders'
Shares Shares Shares Capital Deficit Equity
----------- ---------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 1,478,995 $ 1,479 --- $ 1,347,524 $ (262,399) $ 1,086,604
Net income --- --- --- --- 7,354 7,354
Stock issued in connection
with private placement, net
of related costs 1,000,000 1,000 --- 1,262,789 --- 1,263,789
Stock issued in connection
with property acquisition 17,000 17 --- 66,537 --- 66,554
Class B issued in connection
with acquisition of affiliated
companies --- --- 1,210,000 --- --- ---
Other 910 1 --- 1,364 --- 1,365
----------- ---------- ----------- -------------- ------------ ------------
BALANCE, DECEMBER 31, 1994 2,496,905 2,497 1,210,000 2,678,214 (255,045) 2,425,666
----------- ---------- ----------- -------------- ------------ ------------
Net loss --- --- --- --- (84,840) (84,840)
----------- ---------- ----------- -------------- ------------ ------------
BALANCE, DECEMBER 31, 1995 2,496,905 $ 2,497 1,210,000 $ 2,678,214 $ (339,885) $ 2,340,826
----------- ---------- ----------- -------------- ------------ ------------
Net loss (unaudited) --- --- --- --- (219,621) (219,621)

Stock options exercised 3,230 3 --- 5,235 --- 5,238

Stock issued for purchase
of El Paso operations 50,000 50 --- --- --- 50

Warrants exercised 377,000 377 --- 1,189,812 --- 1,190,189
----------- ---------- ----------- -------------- ------------ ------------
BALANCE,
SEPTEMBER 30, 1996
(UNAUDITED) 2,927,135 $ 2,927 1,210,000 $ 3,873,261 $ (559,506) $ 3,316,682
=========== ========== =========== ============== ============ ============

</TABLE>

The accompanying notes are an integral part
of these consolidated financial statements.

F-3
<PAGE> 37
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, (Unaudited)
1994 1995 1995 1996
-------------- ------------ -------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 7,354 $ (84,840) $ (43,330) $ (219,621)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities:
Depreciation and amortization 214,802 310,602 190,435 274,510
Provision for (benefit from) deferred income taxes --- (31,800) (54,800) (23,000)
Loss on sale of property --- 36,740 60,267 (1,417)
Changes in operating assets and liabilities:
Decrease (increase) in -
Accounts receivable (144,845) 54,370 (7,707) (184,889)
Prepaids and other (39,578) (133,119) (103,123) (290,395)
Decrease in accounts payable
and accrued liabilities (46,745) (96,370) (15,049) 399,677
-------------- ------------ -------------- ------------
Net cash provided by (used for) operating activities (9,012) 55,583 26,693 (45,135)
-------------- ------------ -------------- ------------

INVESTING ACTIVITIES:
Capital expenditures (1,157,044) (2,600,022) (2,517,050) (666,888)
Proceeds from disposition of property 60,213 24,655 51,051 4,834
Proceeds from disposition of discontinued operations --- 46,509 --- ---
-------------- ------------ -------------- ------------
Net cash used for investing activities (1,096,831) (2,528,858) (2,465,999) (662,504)
-------------- ------------ -------------- ------------

FINANCING ACTIVITIES:
Net cash advances from (to) affiliates (102,526) 183,126 61,244 30,194
Proceeds from short-term borrowings 1,584,778 2,160,311 1,498,824 2,193,733
Repayment of short-term borrowings (1,855,284) (2,126,877) (1,555,753) (2,342,765)
Proceeds from long-term borrowings 692,970 2,287,133 2,273,302 393,249
Repayment of long-term borrowings (235,448) (558,001) (462,764) (512,374)
Repayment of balance due to stockholder (87,500) --- --- ---
Net proceeds from private stock offering 1,263,789 --- --- ---
Net proceeds from warrant exercise --- --- --- 1,195,047
Other --- --- 757 430
-------------- ------------ -------------- ------------
Net cash provided by financing activities 1,260,779 1,945,692 1,815,610 957,514
-------------- ------------ -------------- ------------
NET INCREASE (DECREASE) IN CASH 154,936 (527,583) (623,696) 294,875
CASH BEGINNING OF PERIOD 493,823 648,759 648,759 121,176
-------------- ------------ -------------- ------------
CASH, END OF PERIOD $ 648,759 $ 121,176 $ 25,063 $ 371,051
============== ============ ============== ============
</TABLE>

The accompanying notes are an integral part
of these consolidated financial statements.

F-4
<PAGE> 38

AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(SEPTEMBER 30, 1996 INFORMATION IS UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS - Avalon Community Services, Inc. ("the Company")
is a developer and operator of community-based services. The Company provides
private correctional services in Oklahoma and Texas, substance abuse treatment
services, residential care services, and outpatient mental health services. The
Company has entered into agreement to provide substance abuse treatment
services for inmates in Nebraska, and to develop and manage two assisted living
centers.

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries after
elimination of all material intercompany balances and transactions.

USE OF ESTIMATES - The preparation of the consolidated financial
statements requires the use of management's estimates and assumptions in
determining the carrying values of certain assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts for certain revenues
and expenses during the reporting period. Actual results could differ from
those estimated.

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with original maturities of three months or less when purchased to
be cash equivalents for purposes of the Consolidated Statements of Cash Flows.

CONCENTRATIONS OF CREDIT RISK - Financial instruments potentially
subjecting the Company to concentrations of credit risk consist principally of
temporary cash investments and accounts receivable. The Company places its
temporary cash investments with high credit quality financial institutions and
limits the amount of credit exposure to any one institution. Concentrations of
credit risk with respect to accounts receivable are limited due to the fact
that a significant portion of the Company's receivables are from the State of
Oklahoma. The Company maintains an allowance for doubtful accounts for
potential credit losses. Actual bad debt expenses have not been material.

PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Expenditures for major additions and improvements are capitalized, while minor
replacements, maintenance and repairs are charged to expense as incurred. When
property and equipment is retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in current operations. Depreciation is
provided using the straight-line method over the following estimated useful
lives:

<TABLE>
<S> <C>
Buildings and Improvements 40 Years
Furniture and Equipment 5 to 7 Years
Transportation Equipment 3 to 6 Years
</TABLE>

The Company's policy is to capitalize debt incurred during the
construction of major projection. During the years ended 1994 and 1995, the
total interest capitalized was $15,000 and $60,200, respectively. Total
interest costs, including interests for discontinued operations and capitalized
interest, was $160,600 and $318,400 for 1994 and 1995, respectively.

INCOME TAXES - Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the period in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.

REVENUE RECOGNITION - The Company recognizes revenues as the related
services are provided.

NET INCOME (LOSS) PER COMMON SHARE - Net income (loss) per common
share is calculated based on the weighted average number of common, and when
dilutive, common equivalent shares outstanding using the treasury stock method.
There were no differences between primary and fully diluted earnings per share
for the periods presented.

F-5
<PAGE> 39

AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(SEPTEMBER 30, 1996 INFORMATION IS UNAUDITED)

RECLASSIFICATIONS - Certain 1994 amounts have been reclassified to
conform to the 1995 presentation.

NEW ACCOUNTING PRONOUNCEMENTS - In March 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed of ("SFAS No. 121"). SFAS No. 121 sets forth standards
for recognition and measurement of impairment of long-lived assets. SFAS No.
121 is effective for the Company in 1996. The Company does not believe the
adoption of SFAS No. 121 will have a material effect on its consolidated
financial statements in 1996.

In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No.123, Accounting for Stock-Based
Compensation ("SFAS No. 123"). SFAS No. 123 prescribes a fair value-based
method of determining compensation expense related to stock-based awards
granted to employees or associates. The recognition provision of SFAS No. 123
are optional; however, entities electing not to adopt SFAS No. 123 are required
to make disclosures of proforma net income and earnings per share as if SFAS
No. 123 had been applied. The Company does not plan to adopt the recognition
provision of SFAS No. 123. Pursuant to the pronouncement, the disclosure
requirements for the Company are effective in 1996.

NOTE 2 - DISCONTINUED OPERATIONS

The Company terminated the contract to manage the recreational
activities at Lake Stanley Draper Park in June 1995. This contract comprised
all of the operations of the Company's park management segment. The Company
ceased operations and vacated the park premises in June 1995. The Company has
been released from all contract provisions.

Net assets of the park management segment totaled approximately
$107,900, consisting primarily of recreational equipment. All assets were
disposed of by June 30, 1995. Revenues for the years ended December 31, 1994
and 1995, were $32,300 and $10,900, respectively. The loss from operations,
net of income tax benefit, was $59,500 and $18,800 for the years ended 1994 and
1995, respectively. The loss on the disposal, net of income tax benefit of
$27,400, was $34,100. Proceeds from the disposal were $46,500.

NOTE 3 - PROPERTY AND EQUIPMENT

The elements of property and equipment and related accumulated
depreciation as of December 31, 1994 and 1995 are as follows:

Accumulated
Cost Depreciation
---- ------------
<S> <C> <C>
December 31, 1994:
Land $ 79,500 $ ---
Buildings and Improvements 2,759,867 189,673
Furniture and Equipment 779,480 219,369
Transportation Equipment 208,059 74,068
-------------- -----------
$ 3,826,906 $ 483,110
============== ===========

</TABLE>

F-6
<PAGE> 40

AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(SEPTEMBER 30, 1996 INFORMATION IS UNAUDITED)

<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
---- ------------
<S> <C> <C>
December 31, 1995:
Land $ 545,552 $ ---
Buildings and Improvements 4,590,350 327,208
Furniture and Equipment 875,921 314,345
Transportation Equipment 243,678 88,637
-------------- -----------
$ 6,255,501 $ 730,190
============== ===========
</TABLE>

NOTE 4 - STATE CONTRACTS

The Company contracts with various states to provide services. Revenues
generated from such contracts during 1994 and 1995 comprised 62% and 71%,
respectively, of total Company revenues, of which 68% are with the Oklahoma
Department of Corrections. The contracts generally provide for compensation on
a per person, per day basis. The Company's current contracts with the Oklahoma
Department of Corrections extend through June 30, 1997 with an option to renew
for two additional one year periods with the same terms and conditions. In
1996, the Company signed a fifteen year contract with the West Texas Community
Services and Corrections Department, and a three year contract with the Texas
Department of Criminal Justice, Parole Department.

NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash, accounts receivable, accounts payable,
and financial instruments included in other assets approximate their fair
values principally because of the short-term maturities of these instruments.
The fair values of the Company's debt maturing within one year, the revolving
credit facility and other long-term debt approximate the carrying values due to
the nature of the instruments involved.

In the normal course of business, the Company has letters of credit,
performance bonds, and other guarantees that are not reflected in the
accompanying consolidated balance sheets. In the past, no significant claims
have been made against these financial instruments. Management believes that
the likelihood of performance under these financial instruments is minimal and
expects no material losses to occur in connection with these financial
instruments.

F-7
<PAGE> 41

AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(SEPTEMBER 30, 1996 INFORMATION IS UNAUDITED)

NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT

Notes payable and long-term debt consists of the following:

<TABLE>
<CAPTION>
December 31, September
------------ ------------
1995 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revolving bank line of credit maturing
in February 1997 $ 230,000 $ 263,434 $ 114,402

Notes payable to banks, collateralized by
equipment due in installments through
May 1998 with interest from 9.5% to 11% 99,876 173,992 149,948

Notes payable to banks, collateralized
by transportation equipment, due
in installments through November
1997 with interest ranging from
6.25% to 9.25%. 122,080 141,586 93,751

Notes payable to banks, collateralized
by land, buildings and improvements
due in installments through Oct 2000
with interest ranging from 8.5% to 12% 1,469,767 3,149,100 3,101,856

Other notes payable 43,824 --- ---
--------------- ------------- ------------
1,965,547 3,728,112 3,459,957

Less - current maturities (452,750) (278,837) (773,463)
--------------- ------------- ------------
$ 1,512,797 $ 3,449,275 $ 2,686,494
=============== ============= ============

</TABLE>

The aggregate maturities of long-term debt for each of the next five
years are as follows: 1996: $278,837; 1997: $535,902; 1998: $588,636; 1999:
$236,972; 2000: $1,858,721. Existing debt related to the administrative
building was refinanced on a five-year term note. Substantially all notes
payable and long-term debt has been personally guaranteed by the Company's CEO.

The revolving bank line of credit provides for aggregate maximum
borrowings of $380,000 and bears interest at 1% over national prime. The line
of credit was renewed to February 1997 and is collateralized by the Company's
state contract revenues. The interest rates at December 31, 1994 and 1995,
were 10% and 9.5%, respectively. Payment of dividends is restricted by terms
of the Company's revolving credit facility.

F-8
<PAGE> 42

AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(SEPTEMBER 30, 1996 INFORMATION IS UNAUDITED)

NOTE 7 - STOCKHOLDERS' EQUITY

All warrants were issued at fair market value at the date of issuance.

The Company has outstanding 220,905 Class A stock purchase warrants
exercisable at $5.50 per share and 275,100 Class B stock purchase warrants
exercisable at $6.00 per share. The warrants may be exercised at any time.
The Class A warrants expire in March 1996 and the Class B warrants expire in
March 1999. The warrants may be redeemed by the Company at any time for $.01
per share, with the exception of certain warrants relating to 1,600 shares of
common stock.

The Company completed a private placement of 1,000,000 of its common
stock and 1,000,000 stock purchase warrants in August 1994. The Class C stock
purchase warrants provide for the purchase of the Company's Class A common
stock at a price of $3.50 per share through December 1998. In the private
placement there are 100,000 shares of common stock and 100,000 Class C stock
purchase warrants reserved for underwriters.

The Company acquired a building in May 1994, for the construction of a
new correctional facility. The Company paid $325,000 in cash and issued 17,000
shares of its common stock in connection with the acquisition of the property.
The Company has agreed to repurchase 12,000 of the shares at a price of $5.00
per share through June 1997, at the sole option of the seller.

The Company issued 1,210,000 shares of Class B common stock during
1994 in connection with the 1993 acquisition of two affiliated companies.
Management believes that the Class B shares have no economic value due to their
non-transferability and absence of liquidation and dividend rights and;
accordingly, no amount has been assigned to such shares in the accompanying
financial statements.

The Company adopted a stock option plan (the "Plan") in August 1994
providing for the issuance of 250,000 shares of Class A common stock pursuant
to both incentive stock options, intended to qualify under Section 422 of the
Internal Revenue Code, and options that do not qualify as incentive stock
options ("non-statutory"). The options were registered with the Securities and
Exchange Commission in November 1995. The purpose of the Plan is to provide
continuing incentives to the Company's officers, key employees, members of the
Board of Directors and consultants. The options generally vest over a four or
five-year period. Non-statutory options have been granted providing for the
issuance of 241,671 shares of Class A common stock at exercise prices ranging
from $1.50 to $2.85 per share. Options providing for the issuance of 59,325
shares were exercisable at September 30, 1996.

NOTE 8 - INCOME TAX

The components of the provision for (benefit from) income taxes for
the years ended December 31, 1994 and 1995 were as follows:

<TABLE>
<CAPTION>
Federal State Total
------- ----- -----
<S> <C> <C> <C>
1994 -
Current $ 32,060 $ 800 $ 32,860
Deferred --- --- ---
-------------- -------------- -----------------
$ 32,060 $ 800 $ 32,860
1995 -
Current $ (8,600) $ (3,300) $ (11,900)
Deferred (11,500) (400) (11,900)
-------------- -------------- -----------------
$ (20,100) $ (3,700) $ (23,800)
============== ============== =================
</TABLE>

F-9
<PAGE> 43

AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(SEPTEMBER 30, 1996 INFORMATION IS UNAUDITED)

The difference between the tax basis of assets and liabilities and
their financial reporting amounts that give rise to significant portions of
deferred income tax assets and liabilities are: assets - excess tax basis in
certain contributed property; liabilities - accelerated tax depreciation. At
December 31, 1995, the Company had approximately $79,500 of net operating loss
carry forward which expires in 2011.

The following is a reconciliation of the income tax provision from
continuing operations computed by applying the Federal statutory rate of 34%
and the effective income tax rate for the years ended December 31, 1994 and
1995:

<TABLE>
<CAPTION>
December 31,
------------
1994 1995
---- ----
<S> <C> <C>
Provision for (benefit from) income taxes
at statutory rate $ 33,900 $ (19,000)

Graduated Federal rate (1,500) ---

State income taxes 800 (3,700)

Tax-exempt income (2,000) (1,300)

Other, net 1,660 200
------------- -----------------
Total provision for (benefit from) income taxes $ 32,860 $ (23,800)
============= =================

</TABLE>

F-10
<PAGE> 44

AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(SEPTEMBER 30, 1996 INFORMATION IS UNAUDITED)

Deferred tax assets and liabilities for continuing operations are as
follows:

<TABLE>
<CAPTION>
December 31,
------------
1994 1995
---- ----
<S> <C> <C>
Deferred tax assets
Net operating loss carry forward $ --- $ 31,800
Shareholder contributed property 44,200 46,000
Vacation Accrual --- 8,900
Other --- 2,100
------------- ----------------
44,200 88,800
Less: Valuation allowance (37,900) (40,800)
------------- ----------------
Deferred tax assets 6,300 48,000
------------- ----------------
Deferred tax liabilities:
Property and equipment 61,100 71,000
------------- ----------------
Deferred tax liabilities 61,100 71,000
------------- ----------------
Net deferred tax liability $ 54,800 $ 23,000
============= ================
</TABLE>

The Company has recognized a $134,000 income tax benefit for the net
operating losses incurred for the nine month period, based upon tax strategies
and projections that taxable income for 1997 will be sufficient to utilize the
net operating losses generated in the current year.

NOTE 9 - SEGMENT INFORMATION

The Company provides various services through three principal
operating segments. Correctional services are provided to the State of Oklahoma
through the operation of the Company's two facilities for minimum security
level inmates. Residential care services are provided to residents requiring
supportive assistance through the operation of two company-owned facilities and
contract management services provided to a third residential care facility
owned by an affiliate. The Company also managed the recreational activities of
a municipal park and lake, which were disposed of in June 1995. There are no
sales between the Company's segments.

F-11
<PAGE> 45

AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(SEPTEMBER 30, 1996 INFORMATION IS UNAUDITED)

The following table sets forth information with respect to the
industry segments of the Company:

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1994 1995
---- ----
<S> <C> <C>
Revenues:
Correctional Services $ 1,364,294 $ 2,106,039
Residential Care 1,007,581 896,909
Corporate 164,261 53,084
---------------- ---------------
Continuing Operations 2,536,136 3,056,032
================ ===============

Operating Income:
Correctional Services $ 596,799 $ 865,739

Residential Care 140,594 (52,282)

Corporate (486,883) (612,926)
---------------- ---------------
Continuing Operations 250,510 200,531

Interest Expense (150,757) (256,273)
---------------- ---------------
Income (Loss) Before income Taxes 99,753 $ (55,742)
================ ===============

Identifiable Assets:

Correctional Services $ 1,542,452 $ 3,749,005

Residential Care 956,790 821,742

Corporate 2,101,981 1,879,452
---------------- ---------------
Continuing Operations 4,601,223 6,450,199
================ ===============

Depreciation and amortization:

Correctional Services $ 71,824 $ 172,570

Residential Care 56,662 65,132

Corporate 82,716 65,390
---------------- ---------------
Continuing Operations 211,202 303,092
================ ===============

Capital Expenditures:

Correctional Services $ 665,686 $ 2,473,249

Residential Care 106,795 20,232

Corporate 280,713 102,766
---------------- ---------------
Continuing Operations 1,053,194 2,596,247
================ ===============

</TABLE>

F-12
<PAGE> 46

AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(SEPTEMBER 30, 1996 INFORMATION IS UNAUDITED)

<TABLE>
<S> <C> <C>
Park Management - Discontinued Operations
Revenues $ 32,269 $ 10,935
=========== ==========
Operating Income
Discontinued operations (91,599) (31,417)
Loss from Disposal -- (61,481)
----------- ----------
Total Loss from Discontinued Operations (91,599) (92,898)
=========== ==========
Identifiable Assets 124,393 --
=========== ==========
Depreciation and Amortization 3,600 7,510
=========== ==========
Capital expenditures 103,850 3,775
=========== ==========
</TABLE>

Operating income represents revenues less operating costs, general and
administrative expenses and depreciation; and excludes interest expense and
income taxes. Corporate revenues include lease rentals and interest income.
General and administrative expenses have been classified as corporate.

Corporate assets consist primarily of cash and cash equivalents,
receivables from affiliates, and buildings and fixtures utilized for
administrative purposes.

NOTE 10 - RELATED PARTY TRANSACTIONS

The Company manages and performs various administrative and accounting
functions for a residential care facility owned by an affiliated entity. The
transactions between the Company and the affiliate are summarized as follows:

a) During 1994 and 1995, $14,200 and $9,000, respectively, were charged
by the Company for management, administrative and accounting
services. Such amounts have been reflected as a reduction of
general and administrative expenses in the Consolidated Statements of
Operations.

b) The balance due from affiliates, as reflected in the Consolidated
Balance Sheets, results from charges for administrative and
accounting services, as well as net cash advances made to the
affiliate. The outstanding balance is non-interest bearing. The
affiliate has agreed to repay the outstanding balance from its
operations. The amounts reflected as current assets in the
accompanying balance sheets represent the estimated amounts to be
repaid from operations within a one-year period.

c) The Company leased a building to the affiliate during 1994 and
1995 for use in its residential care operations. The affiliate was
charged a total of $87,000 and $40,000 respectively, in lease payments.
The current lease agreement extends through December 1996, and
provides for monthly lease payments of $3,000. The building is
pledged as collateral on certain indebtedness.

The Company leases certain transportation and other equipment from an
affiliated entity owned by the Company's CEO. Annual lease payments of $22,000
were made for such equipment during 1994 and 1995.

During 1994 and 1995, the Company provided administrative and
accounting services for an affiliated entity. The Company was reimbursed a
total of $27,000 and $30,000 for these services during 1994 and 1995. This
amount has been reflected as a reduction of general and administrative expenses
in the Consolidated Statements of Operations.

F-13
<PAGE> 47

AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(SEPTEMBER 30, 1996 INFORMATION IS UNAUDITED)

The Company leased a building utilized in its residential care
operations during 1994 and 1995 from an affiliated entity and made lease
payments totaling $62,000 and $60,000, respectively. The current lease
agreement provides for monthly lease payments of $5,000 and extends through
December 1996.

The Company entered into an agreement effective in May 1994 with the
Company's CEO to issue certain securities in exchange for his personal
guarantee of certain Company indebtedness. The agreement provides for the
issuance of one warrant, exercisable for one share of Class A common stock, and
one share of Class B common stock (voting only) for each dollar of Company debt
ultimately guaranteed. Under the terms of the agreement, 2,220,000 additional
shares of Class B common stocks were issued in 1996. A maximum of 750,000
warrants can be issued. The warrants, when issued, will have an exercise price
of $1.50 and will be exercisable over a five year period.

The Company entered into an agreement with an affiliate in 1995 to
develop and operate an assisted living center in Oklahoma City, Oklahoma. The
construction began in December 1995, and was completed in the second half of
1996.

Avalon received reimbursement of costs and overhead from an affiliated
Company for the outpatient mental health services operations during 1994 and
1995. The Company received reimbursements totaling $72,000 and $148,000 for
the additional costs associated with the specific services provided.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

Total lease expense was $101,000 for 1994 and 1995 under all operating
leases. The future minimum lease payments are as follows: 1996 - $103,000,
1997 - $12,000, 1998, $4,000, 1999 - $0, 2000 - $0.

The Company executed a five-year employment agreement with the
Company's CEO in 1992. The agreement provides for compensation to be
determined on an annual basis by the Board of Directors. The agreement also
contains provisions for severance pay and disability payments, as well as a
non-compete agreement preventing him from engaging in a business deemed similar
to that of the Company.

NOTE 12 - LITIGATION

An action was filed in August 1994 in the Superior Court of Los
Angeles County, California styled Roy Allenstein, et al. v. Southern Community
Services, Inc., Company Community Services, Inc., Donald E. Smith, Teresa Smith
and Does 1-50. This action arose out of a dispute involving promissory notes
executed by Southern Community Services, Inc. (a company owned by Donald Smith,
the Company's CEO, and members of his family) to the plaintiffs in the
aggregate amount of $100,000. Southern Community Services, Inc. was not an
obligor in any manner under the notes. Plaintiffs' claim against the Company
asserts that Mr. Smith represented that a right to convert the indebtedness of
Southern Community Services into common stock in the Company existed as an
option to repayment of the indebtedness and seeks the court's order directing
that such conversion be made. No written agreement for such conversion exists
and Mr. Smith denies ever making such an oral representation. The parties
have agreed to settle this action. As a part of the settlement, the Company
agreed to the issuance of 140,000 Class C Warrants. The Company is not liable
for any other payments.

Elk City Properties, Inc., is named Defendant in that certain action
commenced May 11, 1995 and styled Stephanie Layson, as Administratrix of the
Estate of Richard H. Shepherd, Deceased, Plaintiff, v. Elk City Properties,
Inc., d/b/a Connections Supportive Living Center, Defendant; Case No.
CJ-95-851-BH; District Court of Cleveland County, State of Oklahoma. In that
action, the Plaintiff has brought a wrongful death action against Elk City
Properties, Inc., arising out of the death of a resident of Connections
residential care facility. The Plaintiff prayed for damages in excess of
$10,000. Elk City Properties, Inc. has denied these allegations, and contends
the resident died of natural causes through no fault of any of its agents or
employees. This case was settled in April 1996, within the policy limits of
the Company's insurance.

F-14
<PAGE> 48

AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(SEPTEMBER 30, 1996 INFORMATION IS UNAUDITED)

The Company and Elk City Properties, Inc, a wholly owned subsidiary,
were involved in a civil lawsuit filed by a former employee, Debra K. Cline,
Plaintiff, vs. Mike DeBoe, individually and as agent or employee of Avalon
Community Services, Inc., and/or Elk City Properties, Inc. d/b/a connections
Supportive Living Center, Case Number CIV-95-1467-A, United States District
Court for the Western District of Oklahoma. A judgment was rendered against the
defendants in August 1996 and the Company establised a reserve of $70,000 in
the second quarter 1996 to reflect the potential cost of the judgment.

NOTE 13 - ACQUISITIONS

The Company purchased the operations of the El Paso Intermediate
Sanction Facility in El Paso, Texas on August 2, 1996. The prison is being
managed by Southern Corrections Systems, Inc., a wholly owned subsidiary of the
Company. The total purchase price was approximately $500,000 including the
assumption of certain liabilities plus the issuance of 50,000 shares of common
stock and 200,000 stock purchase warrants. The prison has a capacity of 144
beds. Southern Corrections Systems, Inc. signed a fifteen year contract to
provide services in the facility for the West Texas Community Supervision and
Corrections Department. The Company also recently signed a three year contract
with the Texas Department of Criminal Justice to provide complete services for
up to 50 male parole and mandatoroy supervision releases in the facility. This
new contract will bring the prison to 100% of its capacity.

NOTE 14-SUBSEQUENT EVENTS

The Company purchased the El Paso Intermediate Sanction Facility from
a real estate holding company, for an amount equal to the outstanding
indebtedness of approximately $3.0 million in the fourth quarter 1996. The
facility is an approximately 36,000 square foot, 144-bed medium security
correctional facility located in El Paso, Texas.

The Company retained the services of the investment banking firm of
Rodman & Renshaw, Inc. to help the company evaluate opportunities for growth
and capital markets transactions.

F-15
<PAGE> 49
===============================================================================

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

<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PRICE RANGE OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . 10
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . 11
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION . . . . . . . . . 11
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PRINCIPAL STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SELLING STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
DESCRIPTION OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . 24
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>

===============================================================================

1,038,100 SHARES OF COMMON STOCK

160,000 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS

P R O S P E C T U S

JANUARY ___, 1997

13401 RAILWAY DRIVE
OKLAHOMA CITY, OKLAHOMA 73114
(405) 752-8802

===============================================================================
<PAGE> 50
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

24. 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.

25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

<TABLE>
<S> <C>
SEC Filing Fees(1) . . . . . . . . . . . . . . . . . . . . . . . . $ 2,890.00
Registrar and Transfer Agent Fee . . . . . . . . . . . . . . . . . 1,444.00
Printing and Engraving . . . . . . . . . . . . . . . . . . . . . . 1,000.00
Legal Fees(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 17,910.00
Accounting Fees . . . . . . . . . . . . . . . . . . . . . . . . . 7,000.00
Miscellaneous Fees . . . . . . . . . . . . . . . . . . . . . . . . 1,780.00
----------

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,024.00
===========
</TABLE>

____________

(1) The Selling Shareholders will pay the fees associates with their
common stock and expenses of counsel retained by them in connection
with this offering.
<PAGE> 51
26. RECENT SALES OF UNREGISTERED SECURITIES.

In August, 1994, the Company completed a private placement of
1,000,000 shares of its common stock and 1,000,000 stock purchase warrants.
The Company received gross proceeds of $1,500,000. The stock purchase warrants
provide for the purchase of the Company's common stock at a price of $3.50 per
share, subject to certain adjustments. The warrants are exercisable for a
period of four years from the effective date of registration by the Company of
the warrants and the underlying common stock. The offering was made to
accredited investors only. The sales were made in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933. The
placement agent in the offering was Westminster Securities Corp. which received
commissions of $120,000 (8%) and a non-accountable expense allowance of $30,000
(2%).

In April, 1996 the Company issued 140,000 stock purchase warrants as
a part of a settlement of pending litigation involving a dispute over the
convertibility of certain notes into common stock of the Company. In August,
1996 the Company issued 50,000 shares of common stock and 200,000 stock
purchase warrants for the acquisition of a 144 bed medium security prison in El
Paso, Texas.

27. 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) Unanimous Consent of Board of Directors Authorizing Extension
of Expiration Dates of Class "A" and Class "B" Redeemable
Warrants (3)

(v) Certificate of Corporate Resolutions, dated December 15, 1993,
regarding authorization of Class B Common Stock and Amendments
to Articles (5)

4. (i) Form Stock Certificate (1)

(ii) Form of Class "A" Redeemable Warrant (1)

(iii) Form of Class "A" Warrant Agreement (1)

(iv) Form of Class "B" Redeemable Warrant (1)

(v) Form of Class "B" Warrant Agreement (1)

(vi) Form of Class "C" Redeemable Warrant*

(vii) Form of Class "C" Warrant Agreement*

5. Opinion of Robertson & Williams, Inc. Re: Legality*

10. (i) Contract between Southern Corrections Systems, Inc. and the
Department of Corrections of the State of Oklahoma for halfway
house services for the year ended June 30, 1996 for Oklahoma
City facility*

II-2
<PAGE> 52
(ii) Contract between Southern Corrections Systems, Inc. and the
Department of Corrections of the State of Oklahoma for public
works inmates for the year ended June 30, 1996*

(iii) Contract between Southern Corrections Systems, Inc. and the
Department of Corrections of the State of Oklahoma for halfway
house services for the year ended June 30, 1996 for Tulsa
facility*

(iv) Contract between Southern Corrections Systems/Kansas City
Community Center and the Nebraska Department of Correctional
Services for substance abuse treatment services from March 1,
1996 through June 30, 1997*

(v) Employment Agreement with Donald E. Smith (2)

(vi) Agreement and Plan of Reorganization dated June 10, 1992,
between Avalon Enterprises, Inc. and Southern Corrections
Systems, Inc. (2)

(vii) Stock Option Plan adopted by Board of Directors of Registrant
on August 16, 1994.*

(viii) Debt Guaranty Agreement dated May 16, 1994, between Registrant
and Donald E. Smith*

(ix) Placement Agent Agreement dated May 15, 1994, between
Registrant and Westminster Securities Corporation*

21. Subsidiaries of Registrant(5)

23. (i) Consent of Coopers & Lybrand L.L.P. - bound in Registration
Statement

(ii) Consent of Robertson & Williams, Inc. - bound in Registration
Statement

24. Power of Attorney*

* Previously filed with this Registration
(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 Post-Effective
Amendment No. 2 to Registration Statement on Form S-18 dated October
26, 1992.

(4) Incorporated herein by reference to the Registrant's Form 8-K dated
January 13, 1994.

(5) Incorporated herein by reference to Registrant's Form 10-KSB for
fiscal year ended December 31, 1993 and dated March 24, 1994.

II-3
<PAGE> 53
28. 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-4
<PAGE> 54
SIGNATURES

In accordance with 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 SB-2 and has authorized this
registration statement to be signed on its behalf by the undersigned in the
City of Oklahoma City, State of Oklahoma on May 7, 1996.

(Registrant) AVALON COMMUNITY SERVICES, INC.

By: 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:

<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
Donald E. Smith Chief Executive Officer January 30, 1997
- ----------------------------------- and Director
Donald E. Smith

Jerry M. Sunderland President and Director January 30, 1997
- -----------------------------------
Jerry M. Sunderland

Kathryn A. Avery Chief Financial Officer January 30, 1997
- ----------------------------------- and Vice President
Kathryn A. Avery

Robert O. McDonald Director January 30, 1997
- -----------------------------------
Robert O. McDonald
</TABLE>

II-5
<PAGE> 55
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
23.(i) Consent of Coopers & Lybrand L.L.P.

23.(ii) Consent of Robertson & Williams, Inc.
</TABLE>

<PAGE> 1
Exhibit 23. (i)

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this Post Effective Amendment No. 4 to the
Registration Statement on Form SB-2 (File No. 33-83932) of our report dated
March 21, 1996, on our audit of the consolidated balance sheets of Avalon
Community Services, Inc. and subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. We also consent to the reference to our
firm under the caption "Experts."

COOPERS & LYBRAND L.L.P.

Oklahoma City, Oklahoma
January _____,1997

<PAGE> 1
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
January 30, 1996