<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 JUNE 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 August 1, 1996, 2,870,905 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, June 30,
1995 1996
- --------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 121,176 $1,009,358
Accounts receivable, net of allowance for
doubtful accounts of $0 283,116 472,950
Due from affiliates 52,966 204,290
Prepaids and other 236,382 357,087
- --------------------------------------------------------------------------------------------------------
Total current assets 693,640 2,043,685
- --------------------------------------------------------------------------------------------------------
Property and equipment, net 5,525,311 5,479,743
Due from affiliates 231,248 175,000
- --------------------------------------------------------------------------------------------------------
Total assets $ 6,450,199 $7,698,428
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 183,233 $ 259,813
Due to affiliates 175,028 342,676
Current maturities of long-term debt 278,837 924,830
- --------------------------------------------------------------------------------------------------------
Total current liabilities 637,098 1,527,319
- --------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 3,449,275 2,759,659
Deferred income taxes 23,000 5,524
- --------------------------------------------------------------------------------------------------------
Total liabilities 4,109,373 4,292,502
- --------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock:
Class A - par value $.001; 20,000,000 shares
authorized; 2,496,905 and 2,868,905 shares
outstanding in 1995 and 1996, respectively 2,497 2,869
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 3,857,277
Accumulated deficit (339,885) (454,221)
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,340,826 3,405,927
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $6,450,199 $7,698,428
========================================================================================================
</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 Six Months Ended
June 30, June 30,
1995 1996 1995 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 723,078 $ 811,763 $1,410,224 $1,629,137
- ------------------------------------------------------------------------------------------------------
Costs and expenses
Direct operating 418,850 516,337 818,557 1,059,307
General and administrative 162,233 170,012 315,747 328,470
Depreciation and amortization 56,864 95,490 111,343 181,401
- ------------------------------------------------------------------------------------------------------
637,947 781,839 1,245,647 1,569,178
- ------------------------------------------------------------------------------------------------------
Income from operations 85,131 29,924 164,577 59,959
Less Litigation expense reserve (Note --- 70,000 --- 70,000
Less Interest Expense 52,017 92,181 81,479 174,371
- ------------------------------------------------------------------------------------------------------
Income (loss) from continuing
before income tax expense 33,114 (132,257) 83,098 (184,412)
Income tax expense (benefit) 12,600 (50,276) 31,600 (70,076)
- ------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 20,514 (81,981) 51,498 (114,336)
- ------------------------------------------------------------------------------------------------------
Discontinued operations:
(Loss)gain of operations, net of income
benefit of $25,165 --- --- (16,574) ---
(Loss)gain on disposal, net of income
Benefit of $26,200 1,788 --- (41,024) ---
- ------------------------------------------------------------------------------------------------------
Loss from discontinued operations 1,788 --- (57,598) ---
- ------------------------------------------------------------------------------------------------------
Net income (loss) $ 22,302 $ (81,981) $ (6,100) $ (114,336)
======================================================================================================
Net income (loss) per share:
Continuing operations $ 0.01 $ (0.03) $ 0.02 $ (0.04)
Discontinued operations --- --- (0.02) ---
- ------------------------------------------------------------------------------------------------------
Net income (loss) per share: $ 0.01 $ (0.03) $ --- $ (0.04)
======================================================================================================
Weighted average number of common
and common equivalent shares 2,496,905 2,647,894 2,496,905 2,572,400
======================================================================================================
</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 six months ended June 30,
1995 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (6,100) $ (114,336)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities
Depreciation and amortization 111,343 181,401
Benefit from deferred income taxes (900) (17,476)
Loss (gain) on sale of property 43,584 (1,417)
Changes in operating assets and liabilities:
Decrease (increase) in -
Accounts receivable 49,243 (189,834)
Prepaids and other 2,571 (120,705)
Increase (decrease) in accounts payable
and accrued liabilities (187,349) 76,580
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating 12,392 (185,787)
- -------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (1,880,486) (138,799)
Proceeds from disposition of property 67,826 4,384
- -------------------------------------------------------------------------------------------------------
Net cash used for investing activities (1,812,660) (134,415)
- -------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net cash advances from (to) affiliates (123,719) 72,573
Proceeds from short-term borrowings --- 1,193,102
Repayment of short-term borrowings (85,837) (1,189,185)
Proceeds from long-term borrowings 1,760,220 99,125
Repayment of long-term borrowings (112,313) (146,666)
Net proceeds from warrant exercise --- 1,179,435
- -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,438,351 1,208,384
- -------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (361,917) 888,182
CASH, BEGINNING OF PERIOD 648,759 121,176
- -------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 286,842 $ 1,009,358
=======================================================================================================
</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, assisted
living services, residential care services, and outpatient mental health
services. The Company has entered into agreements effective in 1996 to provide
substance abuse treatment services for inmates, and to develop and manage
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
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 June
30, 1996 and the statements of operations for the three and six months ended
June 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 six months ended June 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, June 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 $ 151,841
Notes payable to banks, collateralized by
transportation equipment, due in
installments through November 1997,
with interest ranging from 6.25%
to 9.25%. 141,586 133,554
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 3,121,362
Notes payable to bank, line of credit
with interest of 1% above prime.
maturing February 1997. 263,434 277,732
----------- -----------
3,728,112 3,684,489
Less - current maturities 278,837 924,830
----------- -----------
$ 3,449,275 $ 2,759,659
=========== ===========
</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. In the private placement
there are 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.
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 244,900 shares of common
stock were outstanding at June 30, 1996. The exercise prices range from $1.50
to $2.85 per share. Options providing for the issuance of 22,900 shares were
exercisable at June 30, 1996.
NOTE 4 - LITIGATION
The Company and Elk City Properties, Inc., a wholly owned subsidiary, are
involved in a civil lawsuit filed by a former employee. A judgment was rendered
against the defendants in August 1996 and the Company established a reserve in
the second quarter of 1996 to reflect the potential cost of the judgment. The
Company is appealing the judgment.
NOTE 5 - SUBSEQUENT EVENTS
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 and the issuance of 50,000 shares of common stock and
200,000 stock purchase warrants. The medium security prison has a capacity of
144 medium security beds with a census of approximately 94. 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 $888,000 for the six months ended June
30, 1996. This was primarily due to Class C stock purchase warrants being
exercised for a net amount of $1,179,000. Approximately $139,000 was used for
capital expenditures. Working capital was positive as of June 30, 1996,
primarily due to the exercise of warrants. Repayment of long term borrowing
was approximately $147,000 with an additional $99,000 long term borrowings
incurred.
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 will begin immediately and be approximately $110,000
per month before any expansion. Cash flows from the existing correctional
centers will continue to be recognized as the facilities reach full capacity.
In the second quarter 1996, the Avalon Correctional Center remains at a
break-even level before interest and depreciation. Substance and abuse
programs were added in Nebraska.
The Company has plans for the development and management of multiple
assisted living centers in Oklahoma and other states in the Midwest. The
assisted living center in Oklahoma City, Emerald Square, is under construction
and is projected to begin operations in October, 1996. The Company is
operating an assisted living center in Ft. Collins, Colorado, Diamond Crest,
which will open in late August, 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 JUNE 30, 1996 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1995 -
Total revenues for the second quarter 1996 as compared to the second
quarter 1995, increased from $723,000 to $812,000 or 12%. Net loss for the
three months ended June 30, 1996 was $82,000 or $.03 per share as compared to a
gain of $22,000 or $.01 per share in 1995. The loss in 1996 was primarily due
to the recording of a $70,000 litigation settlement and an increase in
depreciation and interest attributable to the Carver Center addition and Avalon
Correctional Center.
Page 7
<PAGE> 9
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
Net gain from operations was approximately $30,000 in 1996 as compared to
approximately $85,000 in 1995. The decrease in 1996 was primarily due to a
$39,000 increase in depreciation, which is attributable to the Carver Center
addition and Avalon Correctional Center.
Revenue from correctional operations increased by $202,000 and operating
expenses increased by $153,000. The average number of inmates or census for
the second quarter 1996 was 23% higher as compared to 1995, due to the opening
of Avalon Correctional Center. Carver Center's operating profit margin was
51%, while Avalon Correctional Center's operating profit margin was 19%. The
operating cost per person decreases as the number of inmates increases,
therefore Avalon Correctional Center's operating costs will be higher per
person until such time the number of inmates increases at that facility.
Operating revenues for contract services, which are mostly residential
care, decreased by approximately 37%, primarily due to a 15% decrease in
occupancy and a loss of state contract revenues. Operating expenses decreased
by 21%, primarily due to the decrease in occupancy.
General and administrative expenses were fairly consistent, increasing by
$8,000 in 1996. Depreciation expense increased by $39,000 in 1996 as a result
of the new correctional facilities. Interest expense increased approximately
$40,000 primarily due to interest related to the construction of the Carver
Center addition and the Avalon Correctional Center in 1995.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995
Total revenues increased by $219,000 or 16% primarily as a result of an
increase in correctional revenues from Avalon Correctional Center of $347,000
offset by a decrease in residential care revenue of approximately $170,000.
Net loss for the six months ended June 30, 1996 was $114,000 or $.04 per share
as compared to a net loss for the six months ended June 30, 1996 of $6,000 or
$.00 per share. The loss in 1996 was primarily due to a litigation loss of
$70,000.
Revenue from correctional operations increased by $317,000 or 36% from 1995
to 1996 and operating expenses increased by 92%, primarily due to the addition
of the Avalon Correctional Center. The profit margin for Carver Center is 51%
while the profit margin for Avalon Correctional Center is 19% primarily due to
the Avalon Correctional Center. The average number of inmates or census for the
first six months ended 1996 increased 31% over 1995.
Operating revenues for contract services, which are mostly residential
care, decreased by $170,000 or 55%, primarily due to a 16% decrease in
occupancy and a loss of state contract revenues. There was also a decrease of
operating expenses of $115,000 or 38%.
General and administrative expenses increased by $13,000 or 4%.
Depreciation expense increased by $70,000 in 1996 as a result of the
construction of the Carver Center addition and the Avalon Correctional Center
in 1995. Interest expense increased approximately $93,000 primarily due to
interest related to the construction of the new correctional facilities.
Page 8
<PAGE> 10
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - See Note 4.
ITEM 2. Changes in Securities - 372,000 common stock warrants were exercised
during the second quarter 1996.
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: August 13, 1996 AVALON COMMUNITY SERVICES, INC.
By: \Jerry Sunderland
----------------------------------
Jerry Sunderland, President
Page 10
<PAGE> 12
EXHIBIT INDEX
<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 (A) JUNE 30,
1996 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,009,358
<SECURITIES> 0
<RECEIVABLES> 472,950
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,043,685
<PP&E> 6,363,398
<DEPRECIATION> 883,655
<TOTAL-ASSETS> 7,698,428
<CURRENT-LIABILITIES> 1,527,319
<BONDS> 0
<COMMON> 2,869
0
0
<OTHER-SE> 3,403,056
<TOTAL-LIABILITY-AND-EQUITY> 7,698,428
<SALES> 1,629,137
<TOTAL-REVENUES> 1,629,137
<CGS> 0
<TOTAL-COSTS> 1,569,178
<OTHER-EXPENSES> 70,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 174,371
<INCOME-PRETAX> (184,412)
<INCOME-TAX> (70,076)
<INCOME-CONTINUING> (114,336)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (114,336)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
