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, 1997
Commission File Number: 0-20307
AVALON COMMUNITY SERVICES, INC.
(Exact name of small business issuer as
specified in its 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) 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)
been subject to such filing requirements for the past 90 days:
Yes X No ___
As of August 4, 1997, 2,929,650 shares of the issuer's Class A common stock,
par value $.001, and 3,900,000 shares of Class B common stock, no par value,
were issued and outstanding.
Transitional Small Business Disclosure Format: Yes ___; No X .
<PAGE>
PART I - FINANCIAL INFORMATION
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1996 1997
-------------- --------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 313,558 $ 212,958
Accounts receivable, net of allowance for
doubtful accounts of $0 400,643 562,626
Due from affiliates 119,588 268,194
Prepaid expenses and other 311,351 458,222
- -------------------------------------------- -------------- ---------------
Total current assets 1,145,140 1,502,000
- -------------------------------------------- -------------- ---------------
Property and equipment, net 8,312,385 8,850,100
Other assets 66,000 66,000
- -------------------------------------------- -------------- ---------------
Total assets $ 9,523,525 $ 10,418,100
============================================ ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued liabilities
and other $ 447,668 $ 433,189
Current maturities of long-term debt 518,866 2,140,905
- ------------------------------------------- --------------- --------------
Total current liabilities 966,534 2,574,094
- ------------------------------------------- --------------- --------------
Long-term debt, less current maturities 5,861,514 5,226,946
Deferred income taxes --- ---
- ------------------------------------------- --------------- --------------
Total liabilities 6,828,048 7,801,040
- ------------------------------------------- --------------- --------------
Stockholders' equity:
Common stock:
Class A - par value $.001; 20,000,000 shares
authorized; 2,927,135 and 2,929,650 shares
issued and outstanding 2,927 2,929
Class B - no par; 4,000,000 shares authorized;
3,900,000 shares issued and outstanding --- ---
Preferred stock; par value $.001; 1,000,000
shares authorized; none issued --- ---
Paid-In capital 4,066,128 4,071,023
Accumulated deficit (1,373,578) (1,456,892)
- ------------------------------------------- --------------- --------------
Total stockholders' equity 2,695,477 2,617,060
- ------------------------------------------- --------------- --------------
Total liabilities and stockholders'
equity $ 9,523,525 $ 10,418,100
=========================================== =============== ==============
These accompanying notes are an integral part of these consolidated
financial statements.
Page 1
<PAGE>
<TABLE>
<CAPTION>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1997 1996 1997
- -------------------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 662,824 $ 1,329,101 $ 1,322,975 $ 2,520,064
- -------------------------------------------- --------------- --------------- --------------- ---------------
Costs and expenses
Direct operating 346,460 860,984 715,687 1,655,232
General and administrative 170,012 224,666 328,470 401,533
Depreciation and amortization 74,469 107,063 139,359 205,081
- -------------------------------------------- --------------- --------------- --------------- ---------------
590,911 1,192,713 1,183,516 2,261,846
- -------------------------------------------- --------------- --------------- --------------- ---------------
Income from operations 71,913 136,388 139,459 258,218
Less interest expense 73,630 164,046 137,826 317,297
- -------------------------------------------- --------------- --------------- --------------- ---------------
Income (loss) from continuing operations
before income tax expense (benefit) (1,717) (27,658) 1,633 (59,079)
Income tax expense (benefit) (671) --- 621 ---
- -------------------------------------------- --------------- --------------- --------------- ---------------
Income (loss) from continuing operations (1,046) (27,658) 1,012 (59,079)
- -------------------------------------------- --------------- --------------- --------------- ---------------
Discontinued operations:
(Loss)gain from operations, net of income
tax benefit in 1996 of $49,605 and $70,697 (80,935) (21,706) (115,348) (24,235)
(Loss)gain on disposal, net of income
tax benefit of $0 --- --- --- ---
- -------------------------------------------- --------------- --------------- --------------- ---------------
Loss from discontinued (80,935) (21,706) (115,348) (24,235)
operations
- -------------------------------------------- --------------- --------------- --------------- ---------------
Net income (loss) $ (81,981) $ (49,364) $ (114,336) $ (83,314)
============================================ =============== =============== =============== ===============
Net income (loss) per share:
Continuing operations $ (0.00) $ (0.01) $ (0.00) $ (0.02)
Discontinued operations (0.03) (0.01) (0.04) (0.01)
- -------------------------------------------- --------------- --------------- --------------- ---------------
Net income (loss) per share: $ (0.03) $ (0.02) $ (0.04) $ (0.03)
============================================ =============== =============== =============== ===============
Weighted average number of common
and common equivalent shares outstanding 2,647,894 2,929,650 2,572,400 2,929,132
============================================ =============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 2
<PAGE>
<TABLE>
<CAPTION>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
For the six months ended June 30,
1996 1997
--------------- --------------
OPERATING ACTIVITIES:
<S> .................................... <C> <C>
Net loss $ (114,336) $ ( 83,314)
Adjustments to reconcile net loss to
net cash provided by (used for) operating activities
Depreciation and amortization 181,401 205,081
Deferred income taxes (17,476) ---
(Gain) loss on sale of property (1,417) 2,210
Changes in operating assets and liabilities:
Decrease (increase) in -
Accounts receivable (189,834) (161,983)
Prepaid expenses and other (120,705) (146,871)
Accounts payable, accrued
liabilities and other 76,580 (14,479)
- ------------------------------------------------------------ -------------- ------------
Net cash used in operating activities (185,787) (199,356)
- ------------------------------------------------------------ -------------- ------------
INVESTING ACTIVITIES:
Capital expenditures (138,799) (764,113)
Proceeds from disposition of property 4,384 19,107
- ------------------------------------------------------------ -------------- -------------
Net cash used in investing activities (134,415) (745,006)
- ------------------------------------------------------------ -------------- -------------
FINANCING ACTIVITIES:
Net cash advances (to) from affiliates 72,573 (148,606)
Repayment of borrowings 1,335,851) (2,662,682)
Proceeds from borrowings 1,292,227 3,650,153
Net proceeds from warrant exercise 1,179,435 ---
Exercise of stock options --- 4,897
- ------------------------------------------------------------ --------------- --------------
Net cash provided by (used in) financing activities 1,208,384 843,762
- ------------------------------------------------------------ --------------- --------------
NET INCREASE (DECREASE) IN CASH 888,182 (100,600)
CASH, BEGINNING OF PERIOD 121,176 313,558
- ------------------------------------------------------------ --------------- --------------
CASH, END OF PERIOD $ 1,009,358 $ 212,958
============================================================ =============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 3
<PAGE>
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 an
Oklahoma based corporation owning and operating correctional facilities. The
Company specializes in privatized community correctional facilities and
intensive correctional programming. The Company currently operates in Oklahoma,
Texas, Missouri, and Nebraska with plans to significantly expand into additional
states throughout the Southwest. The Company owns and operates three (3)
community correctional facilities and provides substance abuse treatment
services in nine (9) prisons.
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 amounts 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 June
30, 1997, the statements of operations for the three months and six months ended
June 30, 1996 and 1997, and the statements of cash flows for the six months
ended June 30, 1996 and 1997, 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, 1996 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, 1997, are
not necessarily indicative of the results that may be expected for the entire
year ended December 31, 1997.
Page 4
<PAGE>
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:
December 31, June 30,
1996 1997
Notes payable to banks, collateralized by
equipment, due in installments
through May 1998, with interest
from 7.99% to 11%. $ 137,059 $ 654,932
Notespayable to banks, collateralized by
transportation equipment, due in installments
through November 1997, with interest ranging
from 6.25% to 9.99%. 71,483 75,364
Notespayable to banks, collateralized by real
estate, due in installments through August 2004,
with interest ranging from 8.5% to 12%. 5,584,334 5,614,469
Note payable to corporation, collateralized
by buildings with interest at 8.5% with
principle due in full January 1, 1998. 550,000 550,000
Notes payable to bank, line of credit with interest
of 1% above prime maturing April 1998. 37,504 473,086
------------- -----------
6,380,380 7,367,851
Less - current maturities 518,866 2,140,905
------------- ----------
$ 5,861,514 $ 5,226,946
============= ===========
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 $500,000. The line of credit is collateralized by
the Company's state contract receivables.
NOTE 3 - STOCKHOLDERS' EQUITY
The Company has outstanding 275,100 Class B stock purchasse 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>
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. Class C
stock purchase warrants representing 377,000 shares were exercised in 1996,
leaving 723,000 Class C stock purchase warrants outstanding. 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. Also outstanding are 100,000 shares of
common stock and 100,000 Class C stock purchase warrants reserved for
underwriters.
The Company issued Class D Warrants in August, 1996, to purchase 200,000
shares of Common Stock in connection with the acquisition of the El Paso
Intermediate Sanction Facility. The Class D stock purchase warrants provide for
the purchase of the Company's Class A common stock at a price of $5.125 per
share through August 2, 2001. The Warrants may be redeemed by the Company upon
certain events for $.01 per share.
The Company adopted a stock option plan (the "Plan") in August, 1994
providing for the issuance 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 four or five year period with a ten year
expiration date. The Company amended its stock option plan in 1996, increasing
the number of shares available under the Plan to 600,000. Non-statutory options
providing for the issuance of 441,505 shares of common stock were outstanding at
June 30, 1997. The exercise prices range from $1.50 to $4.00 per share. Options
providing for the issuance of 84,460 shares were exercisable at June 30, 1997.
The Company issued 2,200,000 and 490,000 shares of Class B common stock to
the Company's CEO during 1996 and 1997, respectively, pursuant to a 1994 debt
guarantee agreement for his personal guarantee of debt. Class B shares are
voting rights only, are non-transferable and have no liquidation or dividend
rights.
NOTE 4 - SUBSEQUENT EVENTS
The Company has accepted subscriptions of $2,580,000 in a Company sponsored
private placement of convertible subordinated debt, as of August 14, 1997. The
private placement has a sixty (60) day offering period beginning August 4, 1997,
and has a minimum of $2,000,000 subscriptions and a maximum of $8,000,000
subscriptions. The debentures are convertible into common stock of the Company
and have an interest rate of 7.5%.
Page 6
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
Or Plan of Operations
Liquidity and Capital Resources
The Company's business strategy is designed to expand the Company's
community level correctional services on a regional basis throughout the
Southwest. The Company is devoting its resources to expand and develop
correctional facilities and to increase the number of correction beds under
management, through new state contracts and selective acquisitions.
Current liabilities were greater than current assets as of June 30, 1997,
by $1,072,000, due to debt maturing in the first quarter 1998. The Company
expects to retire or refinance prior to year end, approximately $1,643,000 of
debt classified as current liability at June 30, 1997. Repayment of borrowings
was approximately $2,663,000 with $3,650,000 additional borrowings incurred in
the second quarter 1997. Avalon Correctional Center was refinanced at a lower
interest rate in the second quarter, 1997. Approximately $844,000 was provided
by financing activities in the second quarter 1997, and approximately $764,000
was utilized for capital expenditures. The Company's capital expenditures and
net borrowings in 1997 included the acquisition of transportation and other
equipment.
Revenues increased significantly in 1997. Total revenues increased by 90%
from $1,323,000 in the first six months of 1996 to $2,520,000 in 1997. The
average compensated daily inmate census increased 71% from 226 in the second
quarter 1996 as compared to 387 in 1997. The Company began the Substance Abuse
Treatment Services Program in Ozark Correctional Center in Fordland, Missouri,
on May 1, 1997, increasing revenues by $117,000 in 1997.
The Company's business plan is to divest its 15% interest in assisted
living centers in order to focus all resources on the community corrections
industry. The Assisted Living Center in Fort Collins, Colorado, was sold on July
8, 1997. The Assisted Living Center in Oklahoma City, Oklahoma is being marketed
for sale.
The Company has accepted subscriptions of $2,300,000 in a Company sponsored
private placement of convoertible subordinated debt, as of August 14, 1997. The
debentures are convertible into common stock of the Company and have an interest
rate of 7.5%.
The Company believes it has sufficient cash reserves to meet its current
cash requirements. The Company expects to generate sufficient income from
current contracts to realize the benefits of it's deferred tax assets.
Additional sources of funding will 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 decreases in
the liquidity of the Company.
Results of Operations
Three months ended June 30, 1997 compared to the three months ended June 30,
1996 -
Net loss for the three months ended June 30, 1997 was $49,000 or $.02 per
share as compared to a loss of $82,000 or $.03 per share in 1996. The loss in
1997 was primarily due to increased overhead and development program costs
incurred due to the expansion plans of the Company. These costs are significant
due to the size of the Company and will decrease as a percentage of total costs
as the Company expands.
Page 7
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
Income from continuing operations, before interest and income taxes,
increased by $64,000 or 90%, to a gain of $136,000 in 1997 as compared to a gain
of $72,000 in 1996. The increase in 1997 was due to the operations of the El
Paso Intermediate Sanction Facility and increased census at the Avalon
Correctional Center. Net loss from discontinued operations was $22,000 in 1997
compared to $81,000 in 1996.
Revenues from continuing operations increased by $666,000 or 100% in the
second quarter 1997 compared to 1996 or from $663,000 in 1996 to $1,329,000 in
1997 Operating expenses for continuing operations increased by $515,000 in the
second quarter of 1997. Both revenue and operating expense increases were a
result of an 82% increase in the average compensated daily census in the second
quarter of 1997. The average compensated daily census increased from 213 inmates
in 1996 to 387 inmates in 1997. The increase in census was primarily due to the
acquisition of the El Paso Intermediate Sanction Facility and increased census
at the Avalon Correctional Center. Substance abuse services began in a
correctional facility in Missouri during May, 1997 increasing revenues by
$117,000 in the quarter ending June 30, 1997.
General and administrative expenses increased by $55,000 in 1997 due to
increased personnel, advertising and marketing costs associated with the
Company's growth plan. Interest expense increased approximately $90,000
primarily due to interest related to the acquisition of the El Paso Intermediate
Sanction Facility. Depreciation expense increased by $32,000 in 1997, as a
result of the acquisition of the El Paso Intermediate Sanction Facility. The
building utilized by the El Paso Intermediate Sanction Facility was acquired by
the Company on August 1, 1996.
Six months ended June 30, 1997 compared to the six months ended June 30, 1996 -
Net loss for the six months ended June 30, 1997 was $83,000 or $.03 per
share as compared to a loss of $114,000 or $.04 per share in 1996. The loss in
1997 was primarily due to overhead and development program costs incurred due to
the expansion plans of the Company. These costs are significant due to the size
of the Company and will decrease as a percentage of total costs as the Company
expands.
Income from continuing operations, before interest and income taxes, was
$258,000 in 1997 as compared to $139,000 in 1996. The increase in 1997 is
attributable to the acquisition of the El Paso Intermediate Sanction Facility
and increased census at the Avalon Correctional Center.
Revenues from continuing operations increased by 90% in 1997 or by
$1,197,000. Revenue was $2,520,000 in 1997 compared to $1,323,000 in 1996.
Operating expenses from continuing operations increased by $939,000. Both
revenue and operating expense increases were a result of a 75% increase in the
average compensated daily census in the six month period ending June 30, 1997.
The average compensated daily census increased from 221 inmates in 1996 to 385
inmates in 1997. The increase was attributable to the acquisition of the El Paso
Intermediate Sanction Facility and increased census at the Avalon Correctional
Center. Substance abuse services began in correctional facilities in Missouri
during May, 1997, increasing revenues by $117,000 in the six months ending June
30, 1997.
s
Page 8
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
General and administrative expenses increased by $74,000 or 22% in 1997
primarily due to increased personnel, advertising, and marketing costs
associated with the Company's growth plan. Interest expense increased
approximately $179,000 due to interest related to the acquisition of the El Paso
Intermediate Sanction Facility. Depreciation expense increased by $66,000 in
1997, as a result of the acquisition of the El Paso Intermediate Sanction
Facility. The building utilized by the El Paso Intermediate Sanction Facility
was acquired by the Company on August 1, 1996.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None.
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 in the second quarter 1997.
Page 9
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
In accordance with the requirement of the Exchange Act, the registrant has
caused this report, Form 10- QSB for June 30, 1997, to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: August 14, 1997 AVALON COMMUNITY SERVICES, INC.
By: \Jerry Sunderland
Jerry Sunderland, President
By: \Kathryn Avery
Kathryn Avery, Chief Financial Officer
Page 10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 212958
<SECURITIES> 0
<RECEIVABLES> 562626
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1502000
<PP&E> 9803729
<DEPRECIATION> 953629
<TOTAL-ASSETS> 10418100
<CURRENT-LIABILITIES> 2574094
<BONDS> 0
0
0
<COMMON> 2929
<OTHER-SE> 2614131
<TOTAL-LIABILITY-AND-EQUITY> 10418100
<SALES> 0
<TOTAL-REVENUES> 2520064
<CGS> 0
<TOTAL-COSTS> 2056765
<OTHER-EXPENSES> 205081
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 317297
<INCOME-PRETAX> (59079)
<INCOME-TAX> 0
<INCOME-CONTINUING> (59079)
<DISCONTINUED> (24235)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (83314)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
