<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 MARCH 31, 1996
COMMISSION FILE NUMBER: 0-20307
AVALON COMMUNITY SERVICES, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS
SPECIFIED IN ITS CORPORATE CHARTER)
<TABLE>
<S> <C>
NEVADA 13-3592263
------ ----------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER I.D. NUMBER)
</TABLE>
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 April 28, 1996, 2,496,905 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, March 31,
1995 1996
- --------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $121,176 $61,231
Accounts receivable, net of allowance for
doubtful accounts of $0 283,116 384,654
Due from affiliates 52,966 132,146
Prepaids and other 236,382 170,873
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 693,640 748,904
- --------------------------------------------------------------------------------------------------------------------------
Property and equipment, net 5,525,311 5,455,520
Due from affiliates 231,248 175,000
- --------------------------------------------------------------------------------------------------------------------------
Total assets $6,450,199 $6,379,424
==========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $183,233 $161,515
Due to affiliates 175,028 172,900
Current maturities of long-term debt 278,837 601,738
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 637,098 936,153
- --------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 3,449,275 3,116,700
Deferred income taxes 23,000 18,100
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,109,373 4,070,953
- --------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock:
Class A - par value $.001; 20,000,000 shares
authorized; 2,496,905 shares issued and
outstanding 2,497 2,497
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 2,678,214
Accumulated deficit (339,885) (372,240)
- --------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,340,826 2,308,471
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $6,450,199 $6,379,424
==========================================================================================================================
</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>
For the Three Months Ended
------------------------------------
March 31,
---------
1995 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $687,146 $817,374
- --------------------------------------------------------------------------------------------------------
Costs and expenses
Direct operating 399,707 542,970
General and administrative 153,514 158,458
Depreciation and amortization 54,479 85,911
- --------------------------------------------------------------------------------------------------------
607,700 787,339
- --------------------------------------------------------------------------------------------------------
Income from operations 79,446 30,035
Interest Expense 29,462 82,190
- --------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income tax expense (benefit) 49,984 (52,155)
Income tax expense (benefit) 19,000 (19,800)
- --------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 30,984 (32,355)
- --------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss of operations, net of income tax (16,574) ---
Loss on disposal, net of income tax (42,812) ---
- --------------------------------------------------------------------------------------------------------
Loss from discontinued operations (59,386) ---
- --------------------------------------------------------------------------------------------------------
Net income (loss) $(28,402) $(32,355)
========================================================================================================
Net income (loss) per share:
Continuing operations $0.01 $(0.01)
Discontinued operations (0.02) 0.00
- --------------------------------------------------------------------------------------------------------
Net income (loss) per share: $(0.01) $(0.01)
========================================================================================================
Weighted average number of common
and common equivalent shares outstanding 2,496,905 2,496,905
========================================================================================================
</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 three months ended March 31,
- ---------------------------------------------------------------------------------------------------------
1995 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(28,402) $(32,355)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities
Depreciation and amortization 58,296 85,911
Provision for (benefit from) deferred income taxes (4,300) (4,900)
Loss on sale of property 3,366 1,014
Changes in operating assets and liabilities:
Decrease (increase) in -
Accounts receivable 24,072 (101,538)
Prepaids and other 110 65,509
Decrease in accounts payable
and accrued liabilities (133,238) (21,718)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (80,096) (8,077)
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (643,154) (21,134)
Proceeds from disposition of property 10,405 4,000
- ---------------------------------------------------------------------------------------------------------
Net cash used for investing activities (632,749) (17,134)
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net cash advances from (to) affiliates (13,752) (25,060)
Proceeds from short-term borrowings --- 768,103
Repayment of short-term borrowings (75,196) (706,731)
Proceeds from long-term borrowings 635,834 ---
Registration costs (1,110) ---
Repayment of long-term borrowings (42,369) (71,046)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 503,407 (34,734)
- ---------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH (209,438) (59,945)
CASH, BEGINNING OF PERIOD 493,823 121,176
- ---------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $439,321 $ 61,231
=========================================================================================================
</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 managements'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 could differ from those estimated.
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.
INTERIM FINANCIAL STATEMENTS - The consolidated balance sheet as of March
31, 1996 and the statements of operations for the three months ended March 31,
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 months ended March 31, 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, March 31,
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 $163,062
Notes payable to banks, collateralized by
transportation equipment, due in
installments through November 1997,
with interest ranging from 6.25%
to 9.25%. 141,586 120,415
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 3,110,156
Notes payable to bank, line of credit
with interest of 1% above prime
maturing February 1997 263,434 324,805
--------------- -------------
3,728,112 3,718,438
Less - current maturities 278,837 601,738
-------------- -------------
$3,449,275 $3,116,700
============== =============
</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.
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 229,900 shares of common stock were
outstanding at March 31, 1996. The exercise prices range from $1.50 to $2.22
per share. Options providing for the issuance of 14,740 shares were
exercisable at March 31, 1996.
NOTE 4 - LITIGATION
An action filed in August, 1994 with Roy Allenstein, et al., as Plaintiff,
was settled with no material adverse effect on the Company's financial
position. An action filed in May, 1995 with Stephanie Layson as Administratrix
of the Estate of Richard H. Shepherd, Deceased, Plaintiff, was settled within
the policy limits of the Company's insurance. The Company is a party to
litigations 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.
NOTE 5 - SIGNIFICANT CONTRACTS
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 Correctional Centers. The Company began
providing the contract services in March 1996.
The Company entered into an agreement in 1996 with an affiliate to develop
and operate an assisted living center in Fort Collins, Colorado. The
construction of the assisted living center is scheduled to begin in the second
half of 1996 and be completed in the first quarter of 1997.
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 reduced by $60,000 for the three months ended March
30, 1996. Approximately $35,000 was used for financing activities and
approximately $21,000 was used for capital expenditures. The Company's capital
expenditures consisted primarily of leasehold improvement costs. Working
capital was negative as of March 30, 1996, primarily due to a line of credit
maturing in February 1997. Repayment of long term borrowing was approximately
$71,000 with no additional long term borrowings incurred.
The corrections segment of the Company is continuing to expand. The two
correctional facilities in Oklahoma have not yet reached their maximum
capacity, and it is normal and anticipated to reach maximum capacity over an
extended length of time. Additional cash flows from the correctional centers
will continue to be recognized as the facility reaches full capacity. In the
first quarter 1996, the Avalon Correctional Center remains at a break-even
level before interest and depreciation. Occupancy level is expected to
increase later in 1996. New proposals will be submitted with the State of
Oklahoma for both correctional facilities in July 1996.
In March, 1996, the Company began substance abuse treatment programs in
state correctional facilities in Nebraska and in April, 1996, agreed to operate
substance abuse programs in correctional facilities in Florida. No capital
expenditures are required. Substance abuse programs generate cash flow
immediately after operations begin.
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 1996. The Company has entered into an
agreement to develop and operate an assisted living center in Ft. Collins,
Colorado.
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
Avalon'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.
Page 7
<PAGE> 9
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 30, 1996 COMPARED TO THE THREE MONTHS ENDED MARCH 30,
1995 -
Total revenues for the first quarter 1996 as compared to the first quarter
1995, increased from $687,000 to $817,000 or 19%. Net loss for the three
months ended March 30, 1996 was $32,000 or $.01 per share as compared to a loss
of $28,000 or $.01 per share in 1995. The loss in 1996 was primarily due to an
increase in depreciation and interest attributable to the Carver Center
addition and Avalon Correctional Center. In 1995, there was a loss from
discontinued operation of $59,000.
Net gain from operations was approximately $30,000 in 1996 as compared to
approximately $79,000 in 1995. The decrease in 1996 was primarily due to a
$31,000 increase in depreciation, which is attributable to the Carver Center
addition and Avalon Correctional Center.
Revenue from correctional operations increased by $219,000 or 19% from 1995
to 1996 and operating expenses increased by 36%, both primarily due to the
increase in the average census of inmates. Substance abuse services began in
correctional facilities in Nebraska during March 1996, increasing revenue and
expenses by approximately 2%. The average number of inmates or census for the
first quarter 1996 was 40% higher in 1996 as compared to 1995, due to the
opening of Avalon Correctional Center. Carver Center's operating profit margin
remained fairly constant at 54%, while Avalon Correctional Center's operating
profit margin is at 25%. The operating cost per person decreased as the number
of inmates increased, 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 and operating expenses for contract services, which are
mostly residential care, decreased by 37%, primarily due to a 16% decreased in
occupancy and a loss of state contract revenues.
General and administrative expenses were consistent, increasing by $5,000
in 1996. Interest expense increased approximately $53,000 primarily due to
interest related to the construction of the Carver Center addition and the
Avalon Correctional Center in 1995. Depreciation expense increased by $31,000
in 1996 as a result of the new correctional facilities.
Page 8
<PAGE> 10
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings -
An action filed in August, 1994 with Roy Allenstein, et al, as
Plaintiff, was settled with no material adverse effect on the
Company's financial position. An action filed May, 1995 with
Stephanie Layson as Administratrix of the estate of Richard H.
Shepherd, Deceased, Plaintiff, was settled within the policy limits of
the Company's insurance.
ITEM 2. Changes in Securities - None.
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: May 15, 1996 AVALON COMMUNITY SERVICES, INC.
By: /s/ Jerry Sunderland
------------------------------
Jerry Sunderland
President
Page 10
<PAGE> 12
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 61,231
<SECURITIES> 0
<RECEIVABLES> 384,654
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 748,904
<PP&E> 5,455,520
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,379,424
<CURRENT-LIABILITIES> 936,153
<BONDS> 0
<COMMON> 2,497
0
0
<OTHER-SE> 2,678,214
<TOTAL-LIABILITY-AND-EQUITY> 6,379,424
<SALES> 817,374
<TOTAL-REVENUES> 817,374
<CGS> 0
<TOTAL-COSTS> 787,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,190
<INCOME-PRETAX> (52,155)
<INCOME-TAX> (19,800)
<INCOME-CONTINUING> (32,355)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,355)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
