<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
COMMISSION FILE NUMBER: 0-20307
AVALON COMMUNITY SERVICES, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS
SPECIFIED IN ITS CORPORATE CHARTER)
NEVADA 13-3592263
------ ----------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER I.D. NUMBER)
13401 RAILWAY DRIVE, OKLAHOMA CITY, OKLAHOMA 73114
--------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(405) 752-8802
--------------
(ISSUER'S TELEPHONE NUMBER)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or such
shorter period as the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days:
Yes X No
----- -----
As of November 1, 1996, 2,927,135 shares of the issuer's Class A common stock,
par value $.001, and 1,210,000 shares of Class B common stock, no par value,
were issued and outstanding.
Transitional Small Business Disclosure Format: Yes ; No X .
--- ---
<PAGE> 2
PART I - FINANCIAL INFORMATION
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ITEM 1.
<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 $0 283,116 468,005
Due from affiliates 52,966 293,885
Prepaids 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' EQUITY
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 shares
authorized; 2,496,905 and 2,927,135 shares
outstanding in 1995 and 1996, respectively 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.
Page 1
<PAGE> 3
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1996 1995 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 787,030 $ 1,035,496 $ 2,197,254 $ 2,664,633
- ---------------------------------------------------------------------------------------------------------
Costs and expenses
Direct operating 540,204 840,008 1,358,761 1,899,315
General and administrative 156,158 174,198 471,905 502,668
Depreciation and amortization 79,092 93,109 190,435 274,510
- ---------------------------------------------------------------------------------------------------------
775,454 1,107,315 2,021,101 2,676,493
- ---------------------------------------------------------------------------------------------------------
Income from operations 11,576 (71,819) 176,153 (11,860)
Less Litigation expense reserve --- --- --- 70,000
Less Interest Expense 71,606 97,995 153,085 272,366
- ---------------------------------------------------------------------------------------------------------
Income (loss) from continuing
before income tax expense (60,030) (169,814) 23,068 (354,226)
Income tax expense (benefit) (22,800) (64,532) 8,800 (134,605)
- ---------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (37,230) (105,282) 14,268 (219,621)
- ---------------------------------------------------------------------------------------------------------
Discontinued operations:
(Loss) gain on operations, net of income
tax benefit of $25,165 --- --- (16,574) ---
(Loss) gain on disposal, net of income
tax benefit of $26,200 --- --- (41,024) ---
- ---------------------------------------------------------------------------------------------------------
Loss from discontinued --- --- (57,598) ---
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ (37,230) $ (105,282) $ (43,330) $ (219,621)
=========================================================================================================
Net income (loss) per share:
Continuing operations $ (0.02) $ (0.04) $ 0.00 $ (0.08)
Discontinued operations --- --- (0.02) ---
- ---------------------------------------------------------------------------------------------------------
Net income (loss) per share: $ (0.02) $ (0.04) $ (0.02) $ (0.08)
=========================================================================================================
Weighted average number of common
and common equivalent shares 2,496,905 2,921,113 2,496,905 2,887,901
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 2
<PAGE> 4
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended September 30,
1995 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (43,330) $ 219,621
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities
Depreciation and amortization 190,435 274,510
Benefit from deferred income taxes (54,800) (23,000)
Loss (gain) on sale of property 60,267 (1,417)
Changes in operating assets and liabilities:
Decrease (increase) in -
Accounts receivable (7,707) (184,889)
Prepaids and other (103,123) (290,395)
Increase (decrease) in accounts payable
and accrued liabilities (15,049) 399,677
- --------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating
activities 26,693 (45,135)
- --------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (2,517,050) (666,888)
Proceeds from disposition of property 51,051 4,384
- --------------------------------------------------------------------------------------------------
Net cash used for investing activities (2,465,999) (662,504)
- --------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net cash advances from (to) affiliates 61,244 30,194
Proceeds from short-term borrowings 1,498,824 2,193,733
Repayment of short-term borrowings (1,555,753) (2,342,765)
Proceeds from long-term borrowings 2,273,302 393,249
Repayment of long-term borrowings (462,764) (512,374)
Net proceeds from warrant exercise --- 1,195,047
Other 757 430
- --------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,815,610 957,514
- --------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (623,696) 249,875
CASH, BEGINNING OF PERIOD 648,759 121,176
- --------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 25,063 $ 371,051
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
<PAGE> 5
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, substance abuse treatment services, and
contracts to manage assisted living services, residential care services, and
outpatient mental health services. The Company has operations in Oklahoma,
Colorado, Texas, and Nebraska.
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
require 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.
NET INCOME (LOSS) PER SHARE - Net income (loss) per 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.
INTERIM FINANCIAL STATEMENTS - The consolidated balance sheet as of
September 30, 1996 and the statements of operations for the three and nine
months ended September 30, 1995 and 1996 are unaudited and, in the opinion of
management, reflect all adjustments that are necessary for a fair presentation
of the financial position as of such date and the results of operations and
cash flows for the periods then ended. All such adjustments are of a normal
and recurring nature.
The financial statements included herein have been prepared in conformity
with generally accepted accounting principles and should be read in conjunction
with the December 31, 1995 Form 10-KSB filing. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The results of operations for the three and nine months ended September 30,
1996, are not necessarily indicative of the results that may be expected for
the entire year ended December 31, 1996.
Page 4
<PAGE> 6
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 2 - LONG-TERM DEBT
Long-term debt and notes payable consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
---- ----
<S> <C> <C>
Notes payable to banks, collateralized by
equipment, due in installments
through May 1998, with interest
from 9.5% to 11%. $ 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%. 141,586 93,751
Notes payable to banks, collateralized by
real estate, due in installments through
October 2000, with interest ranging
from 8.5% to 12%. 3,149,100 3,101,856
Notes payable to bank, line of credit
with interest of 1% above prime.
maturing February 1997 263,434 114,402
----------- -----------
3,728,112 3,459,957
Less - current maturities 278,837 773,463
----------- -----------
$ 3,449,275 $ 2,686,494
=========== ===========
</TABLE>
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 borrowing of $380,000. The line of credit is collateralized
by the Company's state contract revenues and matures in February 1997.
NOTE 3 - STOCKHOLDERS' EQUITY
The Company has outstanding 275,100 Class B stock purchase warrants
exercisable at $6.00 per share. The warrants may be exercised at any time. 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.
Page 5
<PAGE> 7
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The Company completed a private placement of 1,000,000 shares of its common
stock and 1,000,000 Class C stock purchase warrants in August, 1994. The Class
C stock purchase warrants provide for the purchase of the Company's stock at a
price of $3.50 per share through December, 1998. The private placement also
included 100,000 shares of common stock and 100,000 Class C stock purchase
warrants reserved for underwriters. During the second quarter 1996, 372,000
Class C stock purchase warrants were exercised.
In August, 1996, the Company issued 50,000 shares of common stock and
200,000 Class D stock purchase warrants with the purchase of the operations of
the El Paso Intermediate Sanction Facility in El Paso, Texas. The stock
purchase warrants provide for the purchase of the Company's stock at a price of
$5.12 per share through August, 2001.
The Company adopted a stock option plan (the "Plan") in August 1994,
providing for the issuance of 250,000 shares of 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 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 five year period.
Non-statutory options providing for the issuance of 241,670 shares of common
stock were outstanding at September 30, 1996. The exercise prices range from
$1.50 to $2.85 per share. Options providing for the issuance of 59,325 shares
were exercisable at September 30, 1996.
NOTE 4 - ACQUISITION
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 15 year contract to provide
services in the facility for the West Texas Community Supervision and
Corrections Department.
Page 6
<PAGE> 8
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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. Revenues
from the El Paso prison began immediately and the facility should be profitable
in the fourth quarter 1996. In the third quarter 1996, the Avalon Correctional
Center in Tulsa, Oklahoma, was at break-even capacity. In the fourth quarter
1996, census was increased. Cash flows from the existing correctional centers
will continue to be recognized as the facilities reach full capacity.
The Company has plans for the development and management of multiple
assisted living centers in Oklahoma and other states in the Midwest. Emerald
Square, the assisted living center in Oklahoma City, has completed
construction and is projected to begin operations within the next month. The
Company opened Diamond Crest, an assisted living center in Ft. Collins,
Colorado, in the third quarter 1996.
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. 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
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995 -
Total revenues for the third quarter 1996 as compared to the third quarter
1995, increased from $787,000 to $1,035,000 or 31%. Net loss for the three
months ended September 30, 1996 was $105,000 or $.04 per share as compared to a
net loss of $37,000 or $.02 per share in 1995. The loss in 1996 was primarily
due to operating losses associated with Avalon Correctional Center in Tulsa, the
new El Paso Intermediate Sanction Facility, and developmental costs to obtain
correctional contracts in other states. In 1996, there was an increase in
depreciation and interest attributable to the Carver Center expansion and the
development of Avalon Correctional Center.
Page 7
<PAGE> 9
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
Net loss from operations was approximately $72,000 in 1996 as compared to
a net gain of $12,000 in 1995. The decrease in 1996 was primarily due to
operating losses associated with the new correctional center in El Paso and
other developmental costs. There was a $14,000 increase in depreciation, and
$18,000 increase in general and administrative, as a result of the
Carver Center expansion and the development of Avalon Correctional Center.
Revenue from correctional operations increased by approximately $431,000
and operating expenses increased by approximately $380,000. The increase is
primarily attributable to the purchase of El Paso Intermediate Sanction
Facility. The average census for the third quarter 1996 was 51% higher as
compared to 1995, primarily due to the acquisition of the El Paso facility.
Operating revenues for contract services, decreased by approximately 38%,
primarily due to a 11% decrease in residential care occupancy. Operating
expenses decreased by 43%, also primarily due to the decrease in occupancy.
General and administrative expenses increased by $18,000 in 1996.
Depreciation expense increased by $14,000 in 1996 as a result of the new
correctional facilities. Interest expense increased approximately $26,000
primarily due to interest related to the construction of the Carver Center
addition and the Avalon Correctional Center in 1995.
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.
Revenue from 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 Center. The operating profit margin for correctional centers is
34% compared to 51% in 1995 primarily due to lower profit margins of starting
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.
Operating revenues for contract services, which, decreased by $250,000 or
36%, primarily due to a 14% decrease in residential care occupancy. There was
also a decrease of operating expenses of $215,000 or 33%. Residential Care
operations have been reduced and the financial results will reflect in the
fourth quarter 1996.
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.
Page 8
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - During the third quarter 1996, 50,000 shares
of common stock were issued with the purchase of a corrections
operations, 5,000 common stock warrants were exercised, and 3,230
options were exercised.
ITEM 3. Defaults Upon Senior Securities - Not Applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders - None.
ITEM 5. Other Information - None.
ITEM 6. a) Exhibits -
Exhibit 27. Financial Data Schedule
b) Reports on Form 8-K - None Filed.
Page 9
<PAGE> 11
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: November 13, 1996 AVALON COMMUNITY SERVICES, INC.
By: /s/ Jerry Sunderland
-----------------------------
Jerry Sunderland, President
Page 10
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1996 10-Q.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 371,051
<SECURITIES> 0
<RECEIVABLES> 468,005
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,584,718
<PP&E> 6,857,137
<DEPRECIATION> 942,413
<TOTAL-ASSETS> 7,574,442
<CURRENT-LIABILITIES> 1,571,266
<BONDS> 0
0
0
<COMMON> 2,927
<OTHER-SE> 3,313,755
<TOTAL-LIABILITY-AND-EQUITY> 7,574,442
<SALES> 2,664,633
<TOTAL-REVENUES> 2,664,633
<CGS> 0
<TOTAL-COSTS> 1,899,315
<OTHER-EXPENSES> 847,178
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 272,366
<INCOME-PRETAX> (354,226)
<INCOME-TAX> (134,605)
<INCOME-CONTINUING> (219,621)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (219,621)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
