As filed with The Securities and Exchange Commission on December 22, 1997
Registration No. _____________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------
AVALON COMMUNITY SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
----------------
Nevada 8999 13-3592263
(State of Incorporation (Primary Standard Industrial (I.R.S. Employer
or Organization) Classification Code No.) Identification No.)
13401 Railway Drive
Oklahoma City, Oklahoma 73114
(405) 752-8802
(Address, including zip code and telephone number,
including area code, of Registrant's principal executive office)
DONALD E. SMITH With Copies To:
Chief Executive Officer Mark A. Robertson, Esq.
AVALON COMMUNITY SERVICES, INC. Robertson & Williams
13401 Railway Drive 3033 N.W. 63rd Street, Suite 160
Oklahoma City, Oklahoma 73114 Oklahoma City, OK 73116
(405) 752-8802 (405) 848-1944
(Name, address, including zip code and telephone number
including area code, of agent for service)
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Calculation of Registration Fee
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to Offering Price Aggregate Amount of
Securities to Be Registered be Registered Per Share Offering Price Registration Fee
- ---------------------------------------- ------------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C>
Convertible Debentures 4,150,000 $ .01 $4,150,500.00 $1,224.25
Common Stock upon Conversion of
Convertible Debentures 1,383,333 $ 3.00 $4,150,000.00 $1,224.25
Placement Agent Warrant Common Stock 79,000 $ .01
Common Stock on Exercise of Warrants 79,000 $ 3.00 $237,000.00 $ 69.92
Registration Fee $2,518.42
======================================== =================== ================== =================== =================
</TABLE>
<TABLE>
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AVALON COMMUNITY SERVICES, INC.
CROSS REFERENCE SHEET
Showing Location in Prospectus,
Filed as Part of Registration Statement, of
Information Required by Form S-2
Item Number
in Form S-2 Item Caption in Form S-2 Location in Prospectus
- ----------- ------------------------------------------------------------ ----------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus........................... Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus................................ Back Cover Page
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed Charges................... Summary of Prospectus; Risk
Factors
4. Use of Proceeds............................................. Use of Proceeds
5. Determination of Offering Price............................. Front Cover Page
6. Dilution . . . ............................................. Not Applicable
7. Selling Security Holders.................................... Selling Security Holders
8. Plan of Distribution........................................ Front Cover Page; Plan of
Distribution
9. Description of the Securities to be Registered ............. Summary of Prospectus;
Description of Securities
10. Interest of Named Experts and Counsel....................... Not Applicable
11. Information with Respect to the Registrant.................. Incorporation of Certain Documents
by Reference
12. Incorporation of Certain Information
by Reference............................................. Incorporation of Certain Documents
by Reference
13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities........................... Part II of Registration Statement
14. Other Expenses of Issuance and
Distribution............................................. Part II of Registration Statement
15. Indemnification of Directors and Officers................... Part II of Registration Statement
16. Exhibits.................................................... Exhibits to Registration Statement
17. Undertakings................................................ Part II of Registration Statement
18. Financial Statements and Schedules.......................... Incorporation of Certain Documents
</TABLE>
PROSPECTUS
AVALON COMMUNITY SERVICES, INC.
$4,150,000 Convertible Debentures
79,000 Redeemable Common Stock Purchase Warrants
1,462,333 Shares of Common Stock
Of the $4,150,000 Convertible Debentures, the 79,000 Class E Warrants, and the
1,462,333 shares of Common Stock (the "Common Stock") of Avalon Community
Services, Inc. (the "Company") offered hereby, all are being sold by certain
security holders of the Company. Of the 1,462,333 shares offered hereby,
1,383,333 shares of Common Stock are issuable upon the conversion of the
Company's Convertible Debentures and, 79,000 are reserved for the exercise of
the Company's Class E Warrants. Each Convertible Debentures will entitle the
holder immediately to convert to Common Stock at a price of $3.00 per share,
subject to certain adjustments. The Debentures bear interest at a rate of 7.5%
per annum, with a maturity date ten years from the date of issuance. The
Debentures are redeemable after May 1, 2000, upon meeting certain requirements.
The 79,000 shares of Common Stock are reserved for issuance by the Company to
Westminster Securities Corporation and its permitted assigns ("Westminster")
upon the exercise by Westminster of such Warrants. Upon issuance, the resale by
Westminster of such shares is registered hereby. The Common Shares and Warrants
registered herein, were issued pursuant to a private placement issuance dated
September 12, 1997, under Regulation D, Rule 506, under a Section 4(2)
Exemption. Except for the 79,000 shares of Common Stock reserved for issuance to
Westminster, (the Selling Shareholders), the remaining balance of 1,383,333
shares of Common Stock are issuable by the Company upon the conversion of the
debentures. Unless the context otherwise requires, the holders of the Common
Stock who are selling securities hereunder are hereinafter collectively referred
to as the "Selling Shareholders." The Company will not receive any proceeds from
the sale of the Common Stock or the Warrants by the Selling Shareholders. See
"Selling Shareholders," "Plan of Distribution" and "Use of Proceeds."
The Company's Common Stock is listed on the NASDAQ SmallCap Market System
under the symbol "CITY." The average of the bid and asked price for the Common
Stock, as reported on the NASDAQ SmallCap Market System, was $4.375 per share on
December 10, 1997. There is no established trading market for the Warrants or
the Debentures.
INVESTMENT IN THE SECURITIES IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
See "RISK FACTORS"on page 5 of this prospectus for information that should be
considered by each prospective investor.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSIONPASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Selling Proceeds to
Public Commissions Shareholders Company(1)
- ----------------------------------------------- ---------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Offering by Selling Security Holders(2)
Per share................................. See Text See Text See Text See Text
Per warrant............................... Note (2) Note (2) Note (2) Note (2)
Per debenture.............................
Offering by Company:(3)
Per Share from Placement Agent
Warrant................................... $3.00 $-0- $-0- $3.00
Offering Price per Share of
Common Stock Underlying
Debentures................................ $3.00 $-0- $-0- $3.00
Total.................................... $4,387,000 $-0- $-0- $4,387,000
=============================================== ========== ============= ============= ===========
<FN>
(1) Before deducting expenses payable by the Company and Selling Shareholders,
which are estimated at $17,500.
(2) The Selling Security Holders have advised the Company that they propose to
offer for sale and to sell the Warrants from time to time during the next
12 months through brokers in the over-the-counter market, in private
transactions, or otherwise, at market prices then prevailing or obtainable.
Accordingly, sales prices and proceeds to the Selling Shareholders will
depend upon price fluctuations and the manner of sale. If the Warrants are
sold through brokers, the Selling Shareholders will pay brokerage
commissions and other charges (which compensation as to a particular
broker-dealer might be in excess of customary commissions). Except for the
payment of such brokerage commissions and charges, their share of the
offering expenses and the legal fees, if any, of the Selling Shareholders,
the Company will bear the balance of all expenses in connection with
registering the securities offered hereby. Such expenses are estimated to
total approximately $17,500. See "Plan of Distribution."
(3) The offering of Common Stock by the Company is adjusted to reduce the
number of shares sold by the Company and correspondingly increase the
number of shares offered by Selling Shareholders by the number of shares
issued to Warrant holders who acquired such Warrants as a part of the
original private placement of such Warrants. The exercise of such Warrants
by the original holders would be considered a part of the private placement
and not registered hereby. In such case, the resale of the Common Stock by
these holders is being registered for sale by Selling Shareholders hereby.
</FN>
</TABLE>
This Prospectus also relates to such additional securities as may be issued to
the Selling Shareholders and Westminster because of future stock dividends,
stock distributions, stock splits or similar capital readjustments.
The date of this Prospectus is December 22, 1997.
AVAILABLE INFORMATION
The Company is subject to certain informational requirements of the Securities
Exchange Act of 1934 (the "1934 Act") and, in accordance therewith, files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information can be inspected and copies at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional
offices at 7 World Trade Center, 13th Floor, New York, New York 10048 and 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained at prescribed rates by writing to the Securities and Exchange
Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549.
This Prospectus, filed as a part of the Registration Statement, does not
contain information set forth in or annexed as an exhibit to the Registration
Statement, and reference is made to such exhibits to the Registration Statement
for the complete text thereof. For further information with respect to the
Company and the securities offered hereby, reference is made to the Registration
Statement and to the exhibits filed as part thereof, which may be inspected at
the office of the Commission without charge. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, including
the Company, and the address is http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated in this Prospectus by reference:
(A) Annual Report filed on Form 10-KSB for the fiscal year ended
December 31, 1996 (File No. 0-20307),
(B) Quarterly Report on Form 10-QSB for the fiscal quarters ended
March 31, 1997, June 30, 1997, and September 30, 1997.
(C) Form 8-K and 8-K/A filed on March 4, 1997 and March 19, 1997,
respectively,
(D) Information Statement for Annual Meeting of Stockholders held May
27, 1997.
(E) Form 8-K filed on October 17, 1997.
This prospectus is accompanied by a copy of the Company's last Form 10-KSB.
The Company undertakes to provide without charge to each person to whom a
Prospectus is delivered, upon written or oral request of such person, a copy of
any and all of the information which have been or may be incorporated in this
Prospectus by reference but not delivered herewith, except for certain exhibits
to such documents. Requests for such information should be directed to
Treasurer, Avalon Community Services, Inc. 13401 Railway Drive, Oklahoma City,
Oklahoma 73114, telephone number (405) 752- 8802.
PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
Prospectus and is qualified in its entirety by the detailed information and
Consolidated Financial Statements (including the Notes thereto) appearing
elsewhere in this Prospectus or incorporated by reference. Each prospective
investor is urged to read this Prospectus in its entirety.
The Company
Avalon Community Services, Inc. ("Avalon" or the "Company") is an Oklahoma
based corporation owning and operating private correctional services. Avalon
specializes in privatized community correctional facilities and intensive
correctional programming. Avalon is currently operating in Oklahoma, Texas,
Missouri, and Nebraska with plans to significantly expand into additional states
throughout the Southwest. Avalon's business strategy is designed to escalate
Avalon into a dominant role as a provider of community correctional services on
a regional basis, by expanding its operations through new state contracts and
selective acquisitions, in order to capitalize on current rapid growth trends in
the privatized corrections industry. Avalon owns a 250-bed minimum security
facility in Oklahoma, a 255-bed minimum security facility in Tulsa, Oklahoma,
and a 144-bed medium security facility in El Paso, Texas, utilized as a
intermediate sanction facility. Avalon provides substance abuse treatment
services for inmates in Nebraska and Missouri. The Company acquired a 150-bed
adult residential community corrections facility in Tulsa, Oklahoma, on October
2, 1997.
The Offering
Securities Offered by
Company........................ Up to 1,462,333 shares of Common Stock upon
the conversion of any Debentures and upon the
exercise of outstanding Class E Warrants.
Securities Offered by Selling
Securities Holders ............ $4,150,000 Convertible Debentures, plus
1,383,333 Shares of Common Stock issued upon
the conversion of any Convertible Debentures
and 79,000 Class E Warrants, plus any shares
of Common Stock issued pursuant to the
exercise of Class E Warrants by any persons
who acquired the Warrants in the private
placement of such Warrants or by the
placement agent upon its exercise of its
placement agent warrant.
Terms of Debentures.............. Each Convertible Debenture entitles the
holder immediately to convert to Common Stock
at a price of $3.00 per share, subject to
certain adjustments. The Debentures bear
interest at a rate of 7.5% per annum, with a
maturity date ten years from the date of
issuance. The Debentures are redeemable after
May 1, 2000, upon meeting certain
requirements.
Terms of Warrants................ Each Class E Warrant will entitle the holder
to purchase one share of Common Stock at a
price of $3.00 per share, subject to certain
adjustments. The Warrants are exercisable at
any time until their expiration on August 2,
2001. The Warrants are subject to redemption
by the Company at a price of $0.01 per
Warrant upon the satisfaction of certain
conditions. See "DESCRIPTION OF SECURITIES --
Warrants."
Common Stock Outstanding
prior to this Offering......... 2,937,430 Class A shares.
Common Stock Outstanding
after this Offering............ 4,399,761 Class A shares if all outstanding
debentures are converted and all outstanding
E Warrants are exercised.
Use of Proceeds ................. The proceeds of this offering may be used by
the Company to fund new projects, expand
existing operations, retire existing
indebtedness, for working capital and general
corporate purposes. See "USE OF PROCEEDS."
Risk Factors..................... An investment in the Company involves certain
risks, including operational risks associated
with the various businesses owned by the
Company, dependence on key individuals,
competition, the risk of illiquidity and
other risks as more fully set forth under
"RISK FACTORS."
NASDAQ Symbol.................... "CITY" on the NASDAQ Small Cap Market System.
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Summary Financial Data
Nine Months
Year Ended Ended
December 31, Sept 30,
-------------------------- -----------
1995 1996 1997
----------- ----------- -----------
Statement of Operations Data: (Reclassified) (Unaudited)
<S> <C> <C> <C>
Revenues From Continuing Operations......... $2,119,123 $3,312,687 $4,025,972
Income (Loss) From Continuing Operations.... (3,460) (59,787) (1,831,302)
Income (Loss) From Continuing Operations
Per Common Share.......................... 0.00 (0.02) (0.62)
Income (Loss) From Discontinued Operations.. (81,380) (973,906) (57,863)
Income (Loss) From Discontinued Operations
Per Common Share.......................... (0.03) (0.36) (.02)
</TABLE>
<TABLE>
<CAPTION>
December 31, Sept. 30
-------------------------- -----------
1995 1996 1997
------------ ------------ -----------
Balance Sheet Data: (Unaudited)
<S> <C> <C> <C>
Total Assets................................ $6,450,199 $9,523,525 $13,588,682
Long-Term Debt,
less Current Maturities................... 3,449,275 5,861,514 5,179,681
Stockholder's Equity........................ 2,340,826 2,695,477 2,649,558
</TABLE>
RISK FACTORS
An investment in the Company is speculative and involves a high degree of
risk. Prior to making an investment, prospective investors should carefully
consider the following risk factors inherent in and affecting the business of
the Company and this offering.
Limited Customer Base; No Commitment for Minimum Number of Inmate Referrals;
Uncertainty of Future Contracts. Approximately 90% percent of the Company's
business is derived from contracts with the Oklahoma Department of Corrections
("ODOC") relating to the Company's private correctional facilities in Oklahoma
City ("Carver Center") and Tulsa ("Avalon Correctional Center") and contracts
with West Texas Community Supervision and Corrections Department and Texas
Department of Criminal Justice, Parole Division, relating to the Company's
correctional facility in El Paso, Texas ("El Paso Intermediate Sanction
Facility"). The Company's contracts do not specify a commitment to send a
minimum number of inmates to the Company's private correctional facilities.
There is no guarantee that government funds will continue to be available for
the housing of inmates in halfway houses or that the various states will not
find an alternate means of alleviating prison overcrowding without the use of
outside contractors such as the Company. The Company's private correctional
operations are dependent upon the continuation of its existing contractual
relationships with the various states, as to which no guarantees can be given.
The Company's contracts have been from one year renewable contracts to fifteen
year contracts. Further, there is no guarantee that the various states will
contract for any particular number of beds during the term of any contract. The
Company would have no recourse in the event that funding for the types of
services rendered to inmates be decreased or even discontinued by the various
states, which would result in termination of the Company's existing contracts.
Significant Government Regulation: Oversight, Audits and Investigations. The
Company's business is highly regulated by a variety of governmental authorities
such as the ODOC, the Oklahoma Department of Mental Health and Substance Abuse
Services, West Texas Community Supervision and Corrections Department, Texas
Department of Criminal Justice, Parole Department, Nebraska Department of
Correctional Services, Missouri Department of Corrections, and various municipal
zoning authorities, with oversight occurring continuously. Failure by the
Company to comply with contract terms or applicable regulations could expose it
to substantial penalties, such as a reduction in population, resulting in
substantial reduction in revenue. Continued noncompliance can result in contract
cancellation. In addition, changes in existing regulations could require the
Company to modify substantially the manner in which it conducts business and,
therefore, could have a material adverse effect on the Company.
Additionally, the Company's contracts give the contracting agency the right to
conduct audits of the facilities and operations managed by the Company for the
agency, and such audits occur routinely. An audit involves a governmental
agency's review of the Company's compliance with the prescribed policies and
procedures established with respect to the facility. Further, the Company may be
subject to investigations as a result of an audit, an inmate's complaint or
other causes.
Lack of Acceptance of Privatized Correctional and Detention Facilities.
Management of correctional and detention facilities by private entities has not
achieved complete acceptance by either governments or the public. Some sectors
of the Federal government and some state governments are legally unable to
delegate their traditional management responsibilities for correctional and
detention facilities to private companies. The operation of correctional and
detention facilities by private entities is a relatively new concept and is not
widely understood by the public and has encountered resistance from certain
groups, such as labor unions, local sheriffs departments, and groups that
believe that correctional and detention facility operations should only be
conducted by governmental agencies. Moreover, changes in dominant political
parties in any of the markets in which the Company operates could result in
significant changes to previously established views of privatization in such
market.
Requirements of Accreditation; Inspection and Risk of Loss of Accreditation.
In order to maintain its existing contracts with agencies of the State of
Oklahoma, the Company must remain accredited by the American Correctional
Association (the "ACA"), a not-for-profit organization which has developed
uniformity and industry standards for inmate care and operations of correctional
facilities and agencies. Accreditation involves a very extensive audit and
compliance procedure, and is generally granted for a three-year period. Carver
Center has been accredited since 1990 and the current accreditation expires in
1999. Avalon Correctional Center was accredited in 1996 and is accredited
through 2000. Management is not aware of any facts or circumstances which might
impair or jeopardize accreditation or reaccreditation. In addition to the ACA
accreditation, the Company must undergo periodic inspections of its premises by
agencies of the various states, as well as annual inspections by the City and
State Fire Marshal's Office.
Working Capital Requirements; Need for Additional Financing. The Company may
require additional capital to finance its operations and continued growth. There
can be no assurance that the Company will be able to obtain such working capital
or financing if and when needed, or that if obtained, it will be sufficient or
on terms and conditions acceptable to the Company. Under the terms of certain
debt agreement, the Company is limited to a leverage of 75% of total cost of any
acquisition.
Broad Discretion as to Use of Proceeds. Due to the contingent nature of the
exercise of the Warrants, it is impossible to determine at this time what
specific projects or uses would be made of the funds. The net proceeds may be
used to fund new projects, expand existing operations, retire indebtedness or
for working capital and other general corporate purposes. Management will have
broad discretion with respect to the expenditure of such funds. See "USE OF
PROCEEDS."
Potential Legal Liability. The Company's management of correctional facilities
exposes it to potential third-party claims or litigation by prisoners, or other
persons for personal injury or other damage resulting from contact with
Company-managed facilities, programs, personnel or prisoners, including damages
arising from a prisoner's escape or from a disturbance or riot at a
Company-managed facility. The Company participates in an insurance program that
provides coverage for certain liability risks faced by the Company, including
accident and personal injury and bodily injury or property damage to a third
party where the Company is found to be negligent. There can be no assurance,
however, that the Company's insurance will be adequate to cover all potential
third-party claims.
Adverse Publicity. The Company's business is subject to public scrutiny . Any
disturbances at a Company-managed facility or another privately-managed facility
may result in publicity adverse to the Company and the industry in which it
operates, which could materially adversely affect the Company's business.
Non-Arm's Length Transactions. The Company and its subsidiaries have engaged
in transactions with its Chief Executive Officer and principal stockholder which
may be considered as not having occurred at arm's length. While, the terms of
such transactions may not have been on an arms-length basis, the Company
believes that such terms are at least as favorable as with unrelated third
parties. No guarantee can be given, however, that the Company will not engage in
any non-arm's length transactions with its officers and directors in the future.
Dependence on Key Personnel; Key Man Insurance. The Company is heavily
dependent upon its officers and directors for its continued operation, and in
particular on its Chief Executive Officer, Donald E. Smith. The loss of Mr.
Smith's services could have a serious impact on the operation of the Company's
business. The Company currently pays the premiums on two policies of life
insurance pertaining to Mr. Smith, the beneficiary of one policy is a banking
institution which is a lender to the Company, and the second is a $4,000,000 key
man life insurance policy.
Employment Contracts. The Company has entered into a written employment
agreement with two of its executive officers, its Chief Executive Officer,
Donald E. Smith , and its President, Jerry Sunderland. Both contracts are for a
three-year term and commenced in August, 1997, providing for a first-year salary
of $85,000 and subsequent-year salaries to be determined by the Board of
Directors of the Company. The agreement also contains provisions for severance
pay and disability payments, as well as a non-compete agreement preventing them
from engaging in a business deemed similar to that of the Company for a period
of two years from the cessation of their employment. The Company's other
officers and directors are employed by the Company pursuant to verbal
agreements.
Competition. A number of other corporations operate private correctional
facilities in the same geographic region as the Company, and still others
compete directly with the Company for contracts with state agencies. While the
Company believes that it has certain advantages in competing for state
contracts, some of the companies eligible to compete may have longer operating
histories and greater financial resources available to them. Since the award of
state contracts is pursuant to competitive bidding, it is possible that the
greater financial resources of the companies eligible to compete might enable
them to underbid the Company for such contracts.
Continued Control by Donald Smith. The Company's Chief Executive Officer,
Donald E. Smith, controls the Company through his ownership of 1,054,000 shares
of Common Stock which is approximately 36% of all Common Stock presently
outstanding. An additional 750,000 warrants may be issued to Mr. Smith upon his
guarantee of Company obligations which would further increase his voting
percentage, if exercised. See "DESCRIPTION OF SECURITIES --Warrants."
Corporate Action Possible Without Stockholder Vote. Pursuant to Nevada
corporate statutes, the holders of a majority of the Company's Common Stock may
authorize or take corporate action without notice to or the consent of the
stockholders. The Company's minority stockholders may not have the opportunity
to approve or consent to the Company's involvement in an acquisition or other
transaction, or to the terms of such transaction. A shareholder vote may not be
made available, and in any event, such a shareholder vote would be controlled by
the majority stockholder.
Large Amount of Authorized But Unissued Shares. It is also possible that the
Company could issue additional shares of its common stock in the future to
finance the acquisition of businesses or properties. The Company's Articles of
Incorporation authorize the issuance of 24,000,000 shares of common stock (both
Common Stock and Class B Common Stock) and 1,000,000 of preferred stock, of
which 2,937,430 shares of common stock were issued and outstanding on the date
of the Prospectus. Additional shares might be issued without shareholder
approval which could have a dilutive effect on the current shareholders. On the
date of the Prospectus there were no commitments or understandings of any kind
pertaining to the Company's acquisition of businesses or properties, or the
issuance of additional shares other than as disclosed in the Prospectus. See
"DESCRIPTION OF SECURITIES".
No Dividends. The Company has never paid cash dividends on its Common Stock
and has no plans to pay cash dividends in the foreseeable future. The policy of
the Company's Board of Directors is to retain all available earnings for use in
the operation and expansion of the Company's business. Therefore, this
investment is not appropriate for investors seeking income. See "DIVIDEND
POLICY."
Non-Registration in Certain Jurisdictions of Shares Underlying the Warrants.
The Warrants registered in this Offering are not exercisable unless, at the time
of exercise, the Company has a current prospectus covering the shares of Common
Stock issuable upon exercise of the Warrants and such shares have been
registered, qualified or deemed to be exempt under the securities laws of the
state of residence of the exercising holder of the Warrants. Although the
Company will use its best efforts to have all the shares of Common Stock
issuable upon the exercise of the Warrants registered or qualified on or before
the exercise date and to maintain a current prospectus relating thereto until
the expiration of the Warrants, there is no assurance that it will be able to do
so. In this event, the Company would be unable to issue shares to those persons
desiring to exercise their Warrants unless and until the shares and Warrants
could be qualified for sale in jurisdictions in which such purchasers reside, or
an exemption from such qualification exists in such jurisdictions, and Warrant
holders would have no choice but to attempt to sell the Warrants in a
jurisdiction where such sale is permissible or allow them to expire unexercised.
See "DESCRIPTION OF SECURITIES -- Warrants."
Shares Eligible for Future Sale. A substantial portion (1,107,830 shares) of
the Company's currently issued and outstanding shares of common stock are
"restricted" securities. Restricted securities may be sold only upon compliance
with Rule 144 adopted under the Securities Act of 1933 as amended, or pursuant
to a registration statement filed under the Act. Generally speaking, Rule 144
provides that a person must hold restricted securities for a period of one year,
and may then sell those securities in unsolicited brokerage transactions or in
transactions with a market maker. The holder may sell an amount equal to one
percent of the Company's outstanding common stock every three months or the
average weekly reported volume of trading during the four calendar weeks
preceding the filing of a Notice of Proposed Sale, whichever is greater. To
comply with Rule 144, an issuer must make available adequate current public
information with respect to the issuer. Under certain circumstances, the sale of
shares by a person who has satisfied a three year holding period is permitted
without any quantity limitation and whether or not there is adequate public
information available. Any such sales will likely have a depressive effect on
the market price of the Company's Common Stock.
Redemption of Warrants. The Class B Warrants are subject to redemption at
$0.01 per Warrant upon 30 days written notice if a registration statement
covering the Warrants and the underlying Common Stock is effective. Class C and
Class D Warrants are subject to redemption at $0.01 per Warrant on 30 days
written notice if a registration statement covering said Warrants is in effect
and if the bid price of the Common Stock, for a period of 30 consecutive trading
days prior to the notice of redemption, equals or exceeds $5.00 per share for
Class C Warrants and $6.00 per share for Class D Warrants. A Registration
Statement of the Company covering the Warrants and the shares of Common Stock
issuable upon the exercise of the Warrants is current at all times during the
30-day notice period and for the 30 days immediately preceding the notice
period. In the event the Company exercises the right to redeem the Warrants,
such Warrants would be exercisable until the close of business on the date fixed
for redemption in such notice. If any Warrant called for redemption is not
exercised by such date, it will cease to be exercisable and the holder will be
entitled only to the redemption price. See "DESCRIPTION OF SECURITIES --
Warrants."
Effect of Warrants. The holders of the Company's outstanding Warrants have the
opportunity to profit from a rise in the market value of the Common Stock of the
Company, if any, at the expense of the holders of Common Stock. A Warrant holder
may be expected to exercise Warrants at a time when the Company, in all
likelihood, would be able to obtain equity capital, if it so desired, by a
public sale of new Common Stock on terms more favorable than those provided in
the Warrants. Exercise of the Warrants could dilute the equity interest of other
stockholders in the Company. See "DESCRIPTION OF SECURITIES -- Warrants."
Illiquidity. Although the Company's Common Stock is publicly traded, the
trading is very thin and may not be an indication of the value of the Common
Stock. There is presently no established trading market for the Warrants. While
there are several securities broker-dealers making a market in the Company's
Common Stock, there is no assurance that a public market for the Company's
securities will continue to be made.
Losses. The Company incurred a net loss of $1,033,693 for the year ended
December 31, 1996 of which $59,787 was from continuing operations and $973,906
from discontinued operations. The residential care operations were discontinued
in the fourth quarter 1996, primarily due to financial losses and to the
Company's strategy to focus on the corrections industry. The Company also
incurred losses in the first three quarters of 1997. There was a loss of
$1,889,165 in the nine months ended September 30, 1997, primarily due to the
amortization of a discount related to the private placement. See "MANAGEMENT
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION -- Results of Operations."
Limitation of Liability of Officers and Directors; Indemnification. The
Company's Articles of Incorporation empower the Company to indemnify the
officers and directors against judgments, fines, and other amounts and costs
resulting from actions or proceedings in which they may be involved by reason of
their having held such positions, to the fullest extent permitted pursuant to
the laws of the State of Nevada. The Articles of Incorporation also limit the
personal liability of the Company's directors to the fullest extent permitted by
the Nevada Revised Statutes. The Nevada Revised Statutes contain provisions
entitling directors and officers to indemnification from judgments, fines,
amounts paid in settlement and reasonable expenses, including attorneys' fees,
as a result of an action or proceeding in which they may be involved by reason
of being or having been a director or officer of the Company; provided said
officers or directors acted in good faith. The Company's By-Laws state that such
indemnification may not be provided in relation to matters as to which the
person seeking indemnification is adjudged to be liable for negligence or
misconduct in the performance of duty. The Company's policy, therefore, is that
no indemnification will be provided for bad faith actions and/or breaches of
management's fiduciary duties, including in connection with shareholder
derivative suits.
THE COMPANY
Avalon Community Services, Inc. (the "Company") owns and operates private
correctional facilities. Avalon Enterprises, Inc. ("Avalon") was incorporated in
Nevada in September, 1990. On June 15, 1992, Avalon acquired Southern Correction
Systems, Inc. ("SCS"). SCS, which was incorporated in 1990, was engaged in the
business of providing private correctional services. In June, 1992, Avalon's
name was changed to Avalon Community Services, Inc. The Company acquired two
affiliated companies, Elk City Properties, Inc. ("ECP") and Central Oklahoma
Properties Corp. ("COP"), effective December 31, 1993. ECP is engaged in the
business of providing residential care services and COP owns and leases certain
related real estate. All residential care operations were discontinued in 1996.
The Company, through its wholly-owned subsidiaries, owns and operates 649
private correction beds in three correctional facilities and provides substance
abuse treatment in 8 prisons. These services include the following: (a) private
correctional services through the operation of a 250-bed minimum security
facility in Oklahoma City, Oklahoma, a 255-bed minimum security facility in
Tulsa, Oklahoma, and a 144-bed medium security facility in El Paso, Texas,
utilized as an intermediate sanction facility; and (b) substance abuse treatment
services for inmates in Nebraska and Missouri.
The Company's executive office is located at 13401 Railway Drive, Oklahoma
City, Oklahoma 73114. The Company's telephone number is (405) 752-8802 and the
fax number is (405) 752-8852.
USE OF PROCEEDS
Assuming all Warrants are exercised, the Company would receive proceeds of
approximately $4,554,874 before paying approximately $17,500 in legal fees,
accounting fees, printing and selling expenses and other offering costs. Receipt
of proceeds by the Company is contingent on the exercise of the Warrants which
in turn is contingent on the market price of the Company's Common Stock.
Therefore, it is impossible at this time to determine specific project's
expenditures or use of funds. The net proceeds may be used by the Company to
fund new projects in the correctional, residential or in other areas of
privatization of traditional government services, expand existing operations,
retire existing indebtedness, or for working capital and general corporate
purposes.
The Company will not receive any of the proceeds from the sale of shares of
Common Stock and the Warrants by the Selling Shareholders.
DIVIDEND POLICY
The Company has paid no dividends as of the date of this Prospectus nor does
it intend to pay dividends on its Common Stock in the foreseeable future. See
"DESCRIPTION OF SECURITIES." The Company currently intends to retain future
earnings to fund development and growth of its business. In the future, any
payment of dividends on Common Stock will be dependent upon the financial
condition, capital requirements and earnings of the Company and any other
factors the Board of Directors may deem relevant. Therefore, this investment is
not appropriate for investors seeking income.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is listed for trading on the NASDAQ SmallCap Market
System under the trading symbol "CITY". The following table reflects the range
of high and low bid prices, as reported by the NASDAQ, for each quarterly
periods. The prices represent inter-dealer prices, without mark-up, mark-down or
commission and may not rep resent actual transactions.
Quarterly Period Ended High Low
------------------------------------ -------- --------
March 31, 1994 2 1/4 1
June 30, 1994 2 1/8 3/4
September 30, 1994 3 1/8 1 5/8
December 31, 1994 3 1/8 2
March 31, 1995 2 1/8 1
June 30, 1995 2 11/16 1
September 30, 1995 3 1/8 1
December 31, 1995 3 3/8 2 1/4
March 31, 1996 2 1/2 2
June 30, 1996 7 5/8 2 1/2
September 30, 1996 5 7/8 4 1/8
December 31, 1996 4 3/4 3 7/8
March 31, 1997 5 1/2 3 15/16
June 30, 1997 4 7/8 3 1/2
September 30, 1997 5 3 7/8
The average of the bid and asked prices for the Common Stock, as reported on
the NASDAQ SmallCap Market System was $ 4.375 per share on December 10, 1997.
The Company had approximately 780 record holders of its common stock as of
September 15, 1997.
CAPITALIZATION
The following table sets forth the historical capitalization of the Company as
of December 31, 1996 and September 30, 1997, as derived from the Consolidated
Financial Statements of the Company. The information shown below should be read
in conjunction with "MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION"
and the Consolidated Financial Statements and Notes and other financial
information included elsewhere herein.
December 31, Sept. 30,
1996 1997
------------ -----------
(unaudited)
Current Maturities
of Long-Term Debt............................. $ 518,866 $1,116,611
============ ===========
Long-Term Debt, less Current Maturities........ $ 5,861,514 $5,179,681
============ ===========
Stockholders' Equity
Common Stock, 24,000,000 shares authorized:
Class A, par value $.001, 2,927,135 and
2,929,650 shares issued and outstanding... 2,927 2,938
Class B, no par, 3,410,000 and 0
shares issued and outstanding............. --- ---
Paid-In Capital.............................. 4,066,128 5,909,363
Accumulated Deficit.......................... (1,373,578) (3,262,743)
------------- -----------
Total Stockholders' Equity................. $ 2,695,477 $2,649,558
============= ===========
SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 1995
and 1996, and September 30, 1997, are derived from the audited Consolidated
Financial Statements of the Company. The data should be read in conjunction with
the Consolidated Financial Statements, related notes, and other financial
information included herein.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31 Sept 30,
---------------------------- -------------
1995 1996 1997
-------------- ------------ -------------
Statement of Operations Data: (Reclassified) (Unaudited)
<S> <C> <C> <C>
Revenues From Continuing Operations........... $2,119,123 $3,312,687 $4,025,972
Income (Loss) From Continuing Operations...... (3,460) (59,787) (1,831,302)
Income (Loss) From Continuing Operations
Per Common Share............................ 0.00 (0.02) (0.62)
Income (Loss) From Discontinued Operations.... (81,380) (973,906) (57,863)
(Loss) From Discontinued Operations
Per Common Share............................ (0.03) (0.36) (.02)
</TABLE>
<TABLE>
<CAPTION>
December 31 Sept 30,
---------------------------- -------------
1995 1996 1997
-------------- ------------ -------------
Balance Sheet Data: (Unaudited)
<S> <C> <C> <C>
Total Assets.................................. $6,450,199 $9,523,525 $13,588,682
Long-Term Debt,
less Current Maturities..................... 3,449,275 5,861,514 5,179,681
Stockholder's Equity.......................... 2,340,826 2,695,477 2,649,558
</TABLE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Liquidity and Capital Resources -
The Company's business strategy is designed to expand the Company's community
level correctional services. The Company is devoting its resources to expand and
develop new correctional facilities and to increase the number of correction
beds under management, through new contracts and selective acquisitions.
The Company closed a private placement of subordinated convertible debentures
in September, 1997 for a total of $4,150,000. The placement generated net
proceeds of $3,902,000 after commissions and fees of $248,000 The debentures are
convertible into common stock at $3.00 per share and bear an interest rate of
7.5%. The Company utilized approximately $950,000 of the proceeds to retire
debt. The Company utilized approximately $1,400,000 of the proceeds to purchase
the Turley Correctional Center in Tulsa, Oklahoma.
In accordance with the Securities and Exchange Commission ("SEC") Staff
position, the difference between the conversion price and the fair value as
evidenced by the quoted market price of the common stock multiplied by the
number of shares into which the Company's debentures are convertible at the date
of issue has been recorded as a discount on debt. The discount, totaling
$1,818,750, has been charged to amortization of discount on convertible
debentures as an Unusual Item in the statement of operations. The recognition of
this charge does not reduce the Company's cash flow from operations, decrease
the cash position, or increase outstanding liabilities. The accounting effect on
the balance sheet of this charge is to increase paid in capital and increase
accumulated deficit, with a zero effect to stockholders' equity.
Current assets exceeded current liabilities by $2,799,000 at of September 30,
1997 for a current ratio of 2.74. A net amount of $3,902,000 was provided in the
third quarter of 1997 from Company issued subordinated convertible debentures.
Repayment of borrowings was approximately $2,663,000 with $3,650,000 additional
borrowings incurred in 1997. Approximately $764,000 was utilized for capital
expenditures in the first nine months of 1997. The Company's capital
expenditures and net borrowings in 1997 included the acquisition of
transportation and other equipment.
Revenues increased significantly in the third quarter of 1997 and in the first
nine months of 1997. Total revenues increased by 90% to $4,025,000 in the first
nine months of 1997 compared to revenues of $2,229,000 in the first nine months
of 1996. The average compensated daily inmate census increased 60% in the first
nine months of 1997 to 391 inmate days from 244 inmate days in the first nine
months of 1996.
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. Issues concerning the
Year 2000 per Staff legal Bulletin No. 5 are immaterial to the Company and no
disclosure is required in this filing. 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 September 30, 1997 compared to the three months ended
September 30, 1996 -
Net loss for the three months ended September 30, 1997 was $1,806,000 or $.61
per share as compared to a net loss of $105,000 or $.04 per share in 1996. The
loss for the three months ended September 30, 1997 was a result of a charge
against earnings in the amount of $1,818,750 for the amortization of a discount
related to the private placement completed in September 1997. In accordance with
the SEC Staff position, the difference between the conversion price and the fair
value as evidenced by the quoted market price of the common stock multiplied by
the number of shares into which the debentures are convertible at the date of
issue, $1,818,750, has been charged to amortization of discount on convertible
debentures as an Unusual Item.
Excluding the accounting effect of the Unusual Item discussed above, the
Company had net income of $13,000 or $.01 per share for the three months ended
September 30, 1997 as compared to a net loss of $105,000 or $.04 per share for
the comparable period in 1996. The significant improvement in 1997 was a result
of several positive events including an increase in profits at the Avalon
Correctional Center, the purchase of the El Paso Intermediate Sanction Facility
and negotiating one new contract for the facility, the Company being awarded a
second new contract for the El Paso Intermediate Sanction Facility, and the
Company being awarded a contract to provide services in the Ozark Correctional
Center in Missouri.
Excluding the accounting effect of the Unusual Item discussed above, the
Company had income from continuing operations, after interest and income taxes,
of $47,000 or $.02 per share for the three months ended September 30, 1997, as
compared to a loss of $89,000 or $.03 per share for the three months ended
September 30, 1996. The increase in 1997 was a result of several positive events
including an increase in profits at the Avalon Correctional Center, the purchase
of the El Paso Intermediate Sanction Facility and negotiating one new contract
for the facility in August, 1996, the Company being awarded a second new
contract for the El Paso Intermediate Sanction facility in November, 1996, and
the Company being awarded a contract to provide services in the Ozark
Correctional Center in Missouri in May, 1997. The net loss from discontinued
operations was $34,000 in for the three months ended September 30, 1997 compared
to $16,000 for the three months ended September 30, 1996.
Revenues from continuing operations increased by $600,000 or 66% to $1,506,000
in the third quarter of 1997 compared to $906,000 in the third quarter of 1996.
Revenues from the El Paso Intermediate Sanction Facility increased by $158,000,
revenues from Avalon Correctional Center increased by approximately $220,000,
and revenues from Ozark Correctional Center increased by $197,000 in the third
quarter of 1997. Operating expenses for continuing operations increased by
$221,000 or 31% in the third quarter of 1997 from $725,000 to $946,000. The
increase in operating expenses was primarily attributable to $160,000 in
operating expenses for the Ozark Correctional Center. Both revenue and operating
expense increases were a result of an increase in the average compensated daily
census in the third quarter of 1997. The average compensated daily census
increased 40% to 405 inmates in the third quarter of 1997 from 290 inmates in
the third quarter of 1996. The increase in census was a result of the award of a
new contract to the Company at the El Paso Intermediate Sanction Facility and
increased census at the Avalon Correctional Center. Substance abuse services in
the Ozark Correctional Center in Missouri began during May, 1997, increasing
revenues by $196,000 in the quarter ending September 30, 1997.
General and administrative expenses increased by $42,000 in the third quarter
of 1997 primarily due to costs related to the Company's growth plan. Interest
expense increased approximately $114,000 in the third quarter of 1997 primarily
due to interest related to the purchase of the El Paso Intermediate Sanction
Facility. Depreciation expense increased by $32,000 in the third quarter of
1997, also as a result of the purchase of the El Paso Intermediate Sanction
Facility.
Nine months ended September 30, 1997 compared to the nine months ended September
30, 1996 -
Net loss for the nine months ended September 30, 1997 was $1,889,000 or $.64
per share as compared to a loss of $220,000 or $.08 per share in 1996. The loss
for the nine months ended September 30, 1997 was a result of a charge against
earnings in the amount of $1,818,750 for the amortization of a discount related
to the private placement completed in September, 1997. In accordance with the
SEC Staff position, the difference between the conversion price and the fair
value as evidenced by the quoted market price of the common stock multiplied by
the number of shares into which the Debentures are convertible at the date of
issue, $1,818,750, has been charged to amortization of discount on convertible
debentures as an Unusual Item.
Excluding the accounting effect of the Unusual Item discussed above, the
Company had a net loss of $70,000 or $.02 per share as compared to a loss of
$220,000 or $.08 per share in 1996. The significant improvement in 1997 was a
result of several positive events including an increase in profits at the Avalon
Correctional Center, the purchase of the El Paso Intermediate Sanction Facility
and negotiating one new contract for the facility in August 1996, the Company
being awarded a second new contract for the El Paso Intermediate Sanction
facility in November, 1996, and the Company being awarded a contract to provide
services in the Ozark Correctional Center in Missouri in May, 1997.
Excluding the effect of the Unusual Item, the Company had a net loss from
continuing operations, after interest and income taxes, of $13,000 in 1997 or
$.01 per share as compared to a loss of $88,000 or $.03 per share in 1996. The
increase in 1997 is attributable to the positive factors discussed above. Loss
from discontinuing operations was $58,000 in 1997 as compared to $131,000 in
1996.
Revenues from continuing operations increased by $1,797,000 or 81% in 1997 as
compared to 1996. Revenue was $4,026,000 in 1997 compared to $2,229,000 in 1996.
Revenue from the El Paso Intermediate Sanction Facility increased by $1,044,000,
revenue from Avalon Correctional Center increased by $480,000 and revenue from
the Ozark Correctional Center increased by $313,000 in 1997. Operating expenses
from continuing operations increased by $1,373,000. The increase in operating
expenses was attributable to a $837,000 increase in expenses in El Paso, a
$138,000 increase in expenses at Avalon Correctional Center, and $267,000 of
expenses incurred for the Ozark Correctional Center. Both revenue and operating
expense increases were a result of a 60% increase in the average compensated
daily census in the nine month period ending September 30, 1997. The average
compensated daily census increased to 391 inmates in 1997 from 244 inmates in
1996. The increase was attributable to the El Paso Intermediate Sanction
Facility and increased census at the Avalon Correctional Center. Substance abuse
services began in the Ozark Correctional Center in Missouri during May, 1997,
increasing revenues by $313,000 in the nine months ended September 30, 1997.
General and administrative expenses increased by $136,000 or 27% in 1997
primarily due to increased costs related to the Company's growth plan. Interest
expense increased $293,000 due primarily to interest related to the purchase of
the El Paso Intermediate Sanction Facility. Depreciation expense increased by
$98,000 in 1997, as a result of the purchase of the El Paso Intermediate
Sanction Facility.
SELLING SECURITY HOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Debentures as of November 30, 1997 by the
stockholders of the Company who are offering securities pursuant to this
Prospectus (the "Selling Stockholders"). "Beneficial Ownership" includes shares
for which an individual, directly or indirectly, has or shares voting or
investment power or both. The listing by each of the Selling Stockholders does
not include shares of Common Stock issuable upon exercise of the Warrants. None
of the Selling Stockholders are officers, directors or had a material
relationship with the Company, except Westminster Securities Corporation who
acted as a placement agent for the Company in the private placement.
<TABLE>
<CAPTION>
Before the Offering After the Offering
------------------------- Securities -----------------------
Title Number Percent to Be Number Percent
Name of of Beneficially of Sold In Beneficially Of
Beneficial Owner Class Owned Class Offering Owned Class
- ------------------------------------ ----------- ------------ --------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Smithson Ventures, Inc.
DLJSC as Custodian Debenture 100,000 2.41 100,000 0 --
SEP FOB John P. O'Shea
DLJSC as Custodian Debenture 150,000 3.61 150,000 0 --
IRA FBO Daniel Luskind
DLJSC as Custodian Debenture 50,000 1.20 50,000 0 --
ProTrust Equity Growth Fund, I, L.P. Debenture 2,000,000 48.19 2,000,000 0 --
Coutts Bank (Switzerland) Ltd. Debenture 300,000 7.23 300,000 0 --
Paul A. Gould Debenture 200,000 4.82 200,000 0 --
Evan Klein and Sharon Klein Debenture 10,000 * 10,000 0 --
Thalia V. Crooks Debenture 10,000 * 10,000 0 --
William F. Leimkuhler and
Leslie B. Riefe Debenture 25,000 * 25,000 0 --
Walter O'Hara Jr. Debenture 25,000 * 25,000 0 --
Jonathan S. Bean Debenture 10,000 * 10,000 0 --
IRA FBO Frederick M. Wittenstein
DLJSC as Custodian Debenture 100,000 2.41 100,000 0 --
SEP FBO Henry S. Krauss
DLJSC as Custodian Debenture 10,000 * 10,000 0 --
Paul Pappadio & Felicia A. Pappadio Debenture 300,000 7.23 300,000 0 --
Pio Verges Debenture 25,000 * 25,000 0 --
John D. Kilmartin, Jr. Debenture 100,000 2.41 100,000 0 --
Ralph & Jean Sorentino Debenture 50,000 1.20 50,000 0 --
Frank Lloyd Kramer Debenture 25,000 * 25,000 0 --
Leonard Bielicz Debenture 33,000 * 33,000 0 --
Mark Berg Debenture 50,000 1.20 50,000 0 --
Service Invest AS Debenture 100,000 2.41 100,000 0 --
Alfheimer Investments Limited Debenture 100,000 2.41 100,000 0 --
Layton M. & Aleta M. Bennett Debenture 20,000 * 20,000 0 --
IRA FBO John P. O'Shea
DLJSC as Custodian Debenture 100,000 2.41 100,000 0 --
George E. Groehsl Debenture 45,000 * 45,000 0 --
Generation Capital Associates Debenture 100,000 2.41 100,000 0 --
The Hart Organization Corp. Debenture 100,000 2.41 100,000 0 --
Richard M. Wexler Debenture 12,000 * 12,000 0 --
Westminster Securities E Warrant 79,000 100.00 79,000 0 --
- -----------
<FN>
*Less than 1% of outstanding security
</FN>
</TABLE>
DESCRIPTION OF SECURITIES
The Company is authorized to issue 24,000,000 shares of common stock (both
Common Stock, par value $0.001 and Class B Common Stock, no par value) and
1,000,000 shares of preferred stock, par value $0.001, giving the Board of
Directors the authority to set the rights and preferences of the preferred
stock. On November 30, 1997 there were 2,937,430 shares of Common Stock.
Common Stock
The shares of Common Stock are equal in all respects unless otherwise
designated. Each issued and outstanding share of Common Stock entitles to holder
thereof to one vote on all matters submitted to a vote of the stockholders. The
Company's Certificate of Incorporation does not permit cumulative voting of
shares in the election of directors or permit preemptive rights to stockholders
to acquire additional shares, obligations, warrants or other securities of the
Company. The Certificate of Incorporation makes no provision with respect to
subscription or conversion rights, redemption privileges or sinking funds with
respect to shares of the Company's Common Stock. Subject to the rights of
holders of preferred stock (if any), dividends on Common Stock may be paid if,
as and when declared by the Board of Directors out of funds legally available
therefor. The Company has never paid cash dividends on shares of Common Stock
and does not expect to pay such dividends in the foreseeable future. The Company
intends to retain all funds available to it after payment of its commitments and
obligations for the operation and expansion of its business.
Class B Common Stock
The Company created a Class B common stock and issued 1,210,000 shares to
Donald Smith in connection with the acquisition of two affiliated entities, in
1993. The shares were issued to Mr. Smith in exchange for his personal guarantee
of substantially all of the outstanding debt of the acquired entities. The
Company has also agreed to issue on share of Class B common stock to Mr. Smith
for each dollar of certain other Company debt guaranteed by him. In the fourth
quarter 1996, the Company issued another 2,200,000 shares of Class B common
stock to Mr. Smith in exchange for his personal guarantee of outstanding debt,
for a total of 3,410,000 shares of Class B common stock outstanding. The Class B
common stock was entitled to vote in all actions requiring a vote of the
stockholders, but had no liquidation rights, claim on earnings or the payment of
dividends and was non-transferable.
The Company canceled all Class B common share of stock on August 25, 1997,
pursuant to a Change of Control Agreement between the Company and Donald E.
Smith.
Warrants - General
Adjustments and Anti-Dilution Provisions. The exercise price and the number of
shares of Common Stock purchasable upon the exercise of the Warrants are subject
to adjustment upon the occurrence of certain events, including stock dividends,
stock splits, combinations or reclassifications of the Common Stock, or sale by
the Company of shares of its capital stock. Additionally, an adjustment would be
made in the case of a reclassification or exchange of Common Stock,
consolidation or merger of the Company with or into another corporation or sale
of all or substantially all of the assets of the Company in order to enable
Warrant holders to acquire the kind and number of shares of stock or other
securities or property receivable in such event by a holder of the number of
shares of Common Stock that might otherwise have been purchased upon the
exercise of the Warrant. No adjustment to the exercise price of the shares
subject to the Warrants will be made for dividends (other than dividends in the
form of stock), if any, paid on the Common Stock or for: (i) the issuance of
restricted securities in connection with acquisitions by the Company; (ii) the
grant of stock options to persons covered by incentive stock option plans
provided that no more than 600,000 shares of Common Stock be issued pursuant to
such plans from the date of this Prospectus until the expiration or redemption
of the Warrants; (iii) warrants to accommodate lines of credit or creditors,
provided that no registration or registration rights shall be afforded such
warrants or the underlying Common Stock at any time within one year after
effectiveness of the registration of the securities issued pursuant to this
Offering; and (iv) Class B Common Stock voting shares and up to 750,000
warrants, exercisable for one share of common stock each, at an exercise price
of $1.50 to be issued to Donald E. Smith or his designee solely upon Mr. Smith's
guarantee of corporate obligations.
The Company may authorize one warrant for each one dollar of corporate
obligations guaranteed by Mr.Smith up to the maximum amount. For this exception
to the anti-dilution provisions to apply, the corporate debt must first be
approved by the Board of Directors, be bona fide, and the guarantee must be
reasonably required by the creditor. Thes anti-dilution provisions shall remain
in full force and effect until redemption of all Warrants then outstanding or
expiration of the Warrants. These anti-dilution provisions may be terminated by
the Company provided: (i) that the bid price of the Company's common stock shall
have been $4.00 or more for sixty (60) consecutive trading days; (ii) the
Company presents to Westminster Securities Corporation ("Westminster") as the
placement agent for the Warrants a bona fide offer, agreement, term sheet, or
Underwriting Agreement by a duly licensed broker-dealer proposing to place, on a
firm or best efforts basis, securities of the Company; and (iii) effecting the
agreement would trigger application of the anti-dilution provisions. If these
conditions are met, the Company shall notify Westminster and afford Westminster
ten (10) business days in which to match the terms offered to the Company. At
the expiration of the ten (10) day period, the Company may terminate the
anti-dilution provisions by appropriate corporate action, if Westminster has not
matched the offering. The Placement Agent, on behalf of the purchasers in this
Offering, shall be empowered to release or waive these adjustment and
anti-dilution provisions in whole or in part.
Transfer, Exchange and Exercise. The Warrants are in registered form and may
be presented to the Transfer and Warrant Agent for transfer, exchange or
exercise at any time on or prior to their expiration date, at which time the
Warrants become wholly void and of no value. If a market for the Warrants
develops, the holder may sell the Warrants instead of exercising them. There can
be no assurance, however, that a market for the Warrants will develop or
continue. If the Company is unable to qualify the Common Stock underlying the
Warrants for sale in particular states, holders of the Warrants residing in such
states and desiring to exercise the Warrants will have no choice but to sell
such Warrants or allow them to expire. See "DESCRIPTION OF SECURITIES --
Transfer and Warrant Agent." Furthermore, if a Warrant is exercised prior to the
underlying Common Stock being registered, the Common Stock will be a restricted
security and subject to a holding period. See "RISK FACTORS -- Shares Eligible
for Future Sale."
Rights of Warrant Holders. Holders of the Warrants have no voting rights and
are not entitled to dividends. In the event of liquidation, dissolution, or
winding up of the affairs of the Company, holders of the Warrants will not be
entitled to participate in any liquidation distribution.
Class A and Class B Warrants
Stock purchase warrants were issued in April, 1991 in connection with an
initial public offering of Avalon Common Stock. The warrants were issued as part
of units of the Company's securities which contained one share of Common Stock,
16 Class A warrants and 16 Class B warrants per Unit offered. This initial
public offering was underwritten by Westminster Securities Corporation. The
following is a brief summary of certain provisions of the Warrants, but such
summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreements between the Company and
American Securities Transfer, Inc. (the "Transfer and Warrant Agent"). Copies of
the Warrant Agreements may be obtained from the Company upon the written request
of a Warrant holder.
The Class A Warrants expired on March 26, 1996. Each Class B warrant may be
exercised by its registered holder to purchase one share of Common Stock at an
exercise price of $6.00 until March 26, 1999. The Class B warrants may be
redeemed by the Company prior to exercise upon 30 days written notice to the
registered holders for $0.01 per warrant. The holders of the Class B warrants
have no voting rights and are not entitled to dividends. In the event of
liquidation, dissolution or winding up of the affairs of the Company, holders of
these warrants will not be entitled to participate in any liquidation
distribution.
The Company issued 145,595 shares of Common Stock during 1993 in connection
with the exercise of certain underwriter warrants, 99,095 Class A warrants and
44,900 Class B warrants, resulting in gross proceeds to the Company of
approximately $825,000. As of the date of this Prospectus, there are 275,100
Class B warrants still outstanding.
Class C Warrants
The Company has issued Class C Warrants to purchase 1,000,000 shares of Common
Stock in connection with a private placement and Class C Warrants to purchase
165,000 shares of Common Stock in settlement of a lawsuit and for professional
services. The placement agent warrant given to Westminster Securities
Corporation in the private placement also includes the right to receive 100,000
Class C Warrants. In 1996, 377,000 Class C Warrants were exercised. The
following is a brief summary of certain provisions of the Warrants, but such
summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between the Company and
American Securities Transfer, Inc. (the "Transfer and Warrant Agent"). A copy of
the Warrant Agreement may be obtained from the Company upon the written request
of a Warrant holder.
Exercise Price and Terms. Each Warrant entitles the holder thereof to purchase
one share of Common Stock at a price of $3.33 per share, subject to adjustment
in accordance with the anti-dilution and other provisions referred to above
under "Warrants-General." When the Warrants were issued, the exercise price was
$3.50 per share, however, in September of 1997, as a consequence of the
Company's private placement of convertible debentures and the conversion price
thereunder, as described in "Convertible Debentures", the exercise price was
reduced by $.017 per share pursuant to the antidilution provisions discussed
above. The holder of any Warrant may exercise such Warrant by surrendering the
certificate representing the Warrant to the Transfer and Warrant Agent, with the
election to purchase form on the reverse side of such certificate properly
completed and executed, together with payment of the exercise price. Subject to
compliance with applicable state securities laws, the Warrants may be exercised
at any time in whole or in part at the applicable exercise price until
expiration of the Warrants on December 30, 1999. See "RISK FACTORS --
Non-Registration in Certain Jurisdictions of Shares Underlying the Warrants."
Redemption of Warrants. The Class C Warrants are subject to redemption at $.01
per Warrant in the event that (i) the bid price of the Company's Common Stock
shall have been $5.00 or more for 30 consecutive trading days prior to the date
of the notice of redemption; (ii) 30 days advance written notice of redemption
shall be given to all Warrant holders of record; and (iii) a Registration
Statement of the Company covering the Warrants and the shares of Common Stock
issuable upon the exercise of the Warrants must be current at all times during
the 30 day notice period, and must have been current for 30 days prior to the
notice. In the event the Company exercises the right to redeem the Warrants,
such Warrants will be exercisable until the close of business on the date for
redemption fixed in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will be
entitled only to the redemption price. See "RISK FACTORS -- Redemption of
Warrants."
Class D Warrants
The Company has issued Class D Warrants to purchase 275,000 shares of Common
Stock in a recent asset acquisition, with 75,000 Warrants later canceled. An
additional 79,000 Class D Warrants were issued with the private placement dated
September 12, 1997. The following is a brief summary of certain provisions of
the Warrants, but such summary does not purport to be complete and is qualified
in all respects by reference to the actual text of the Warrant Agreement between
the Company and American Securities Transfer, Inc. (the "Transfer and Warrant
Agent"). A copy of the Warrant Agreement may be obtained from the Company upon
the written request of a Warrant holder.
Exercise Price and Terms. Each Warrant entitles the holder thereof to purchase
one share of Common Stock at a price of $5.125 per share, subject to adjustment
in accordance with the anti-dilution and other provisions referred to above
under"Warrants-General." The holder of any Warrant may exercise such Warrant by
surrendering the certificate representing the Warrant to the Transfer and
Warrant Agent, with the election to purchase form on the reverse side of such
certificate properly completed and executed, together with payment of the
exercise price. Subject to compliance with applicable state securities laws, the
Warrant may be exercised at any time in whole or in part at the applicable
exercise price until expiration of the Warrants on August 2, 2001. See "RISK
FACTORS--Non-Registration in Certain Jurisdictions of Shares Underlying the
Warrants."
Redemption of Warrants. The Class D Warrants are subject to redemption at $.01
per Warrant in the event that (i) the bid price of the Company's Common Stock
shall have been $6.00 or more for 30 consecutive trading days prior to the date
of the notice of redemption; (ii)30 days advance written notice of redemption
shall be given to all Warrant holders of record; and (iii) a Registration
Statement of the Company covering the Warrants and the shares of Common Stock
issuable upon the exercise of the Warrants must be current at all times during
the 30 day notice period, and must have been current for 30 days prior to the
notice. In the even the Company exercises the right to redeem the Warrants, such
Warrants will be exercisable until the close of business on the date for
redemption fixed in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will be
entitled only to the redemption price. See "RISK FACTORS --Redemption of
Warrants."
Class E Warrants
The Company has issued Class E Warrants to purchase 79,000 shares of Common
Stock in connection with a private placement dated September 12, 1997. The
placement agent warrant given to underwriters also includes the right to receive
79,000 Class E Warrants. The following is a brief summary of certain provisions
of the Warrants, but such summary does not purport to be complete and is
qualified in all respects by reference to the actual text of the Warrant
Agreement between the Company and American Securities Transfer, Inc. (the
"Transfer and Warrant Agent"). A copy of the Warrant Agreement may be obtained
from the Company upon the written request of a Warrant holder.
Exercise Price and Terms. Each Warrant entitles the holder thereof to purchase
one share of Common Stock at a price of $3.00 per share, subject to adjustment
in accordance with the anti-dilution and other provisions referred to above
under "Warrants-General." The holder of any Warrant may exercise such Warrant by
surrendering the certificate representing the Warrant to the Transfer and
Warrant Agent, with the election to purchase form on the reverse side of such
certificate properly completed and executed, together with payment of the
exercise price. Subject to compliance with applicable state securities laws, the
Warrants may be exercised at any time in whole or in part at the applicable
exercise price until expiration of the Warrants on September 12, 2002. See "RISK
FACTORS--Non-Registration in Certain Jurisdictions of Shares Underlying the
Warrants."
Redemption of Warrants. The Class D Warrants are subject to redemption at $.01
per Warrant in the event that (i) the bid price of the Company's Common Stock
shall have been $5.00 or more for 30 consecutive trading days prior to the date
of the notice of redemption; (ii) 30 days advance written notice of redemption
shall be given to all Warrant holders of record; and (iii) a Registration
Statement of the Company covering the Warrants and the shares of Common Stock
issuable upon the exercise of the Warrants must be current at all times during
the 30 day notice period, and must have been current for 30 days prior to the
notice. In the event the Company exercises the right to redeem the Warrants,
such Warrants will be exercisable until the close of business on the date for
redemption fixed in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will be
entitled only to the redemption price. See "RISK FACTORS -- Redemption of
Warrants."
Convertible Debentures
On September 12, 1997, the Company completed a private placement of
Convertible Debentures. Convertible Debentures in the aggregate principal amount
of $4,150,000 were issued in the private placement. The Convertible Debentures
bear interest at the rate of 7.5% per annum, with interest payments payable
semi-annually, August 1, and February 1, commencing February 1, 1998. The
Convertible Debentures have a maturity date of ten years from the date of
issuance, unless otherwise earlier redeemed or converted. Under the terms of the
Debenture Purchase Agreements existing between the Debenture Holders and the
Company, all or any portion of the principal amount of the Convertible
Debentures, plus all accrued but unpaid interest thereon will be convertible, at
the option of the Debenture Holder, unless previously redeemed, at any time
prior to maturity, into Common Stock of the Company at a conversion price of
$3.00 per share. The conversion price of the Debentures is subject to certain
adjustments to prevent dilution in the event of any recapitalization,
reclassification, stock dividend, stock split or similar transaction.
The Company has reserved 1,383,333 shares of Common stock issuable upon
conversion of the Debentures. The Debentures are not redeemable by the Company
prior to May 1, 2000. Thereafter, the Debentures are redeemable at any time and
from time to time, at the option of the Company, in whole or in part, at
redemption prices declining from 106.5% down to 100% at maturity, plus accrued
interest, except that the Debentures cannot be redeemed unless the closing price
of the Common Stock equals or exceeds 140% of the effective conversion price per
share for at least 20 out of 30 consecutive days ending within 20 calendar days
before the notice of redemption is mailed. In connection with the private
placement, 79,000 underwriter warrants have been designated and 79,000 shares of
Common Stock have been so reserved.
The Company has agreed to file with the Securities and Exchange Commission,
within 90 days after the original issue date of the Debentures, and to use all
reasonable efforts to cause to become effective a registration statement with
respect to the resale, from time to time, of the Common Stock issuable upon
conversion of the Debentures, and to keep such registration statement effective
until three years from the latest date of original issuance of the Debentures.
If the registration filed with the Securities and Exchange Commission does not
become effective within 90 days after the original issue date of the Debentures,
the interest rate will increase to 8% until such time as the Registration
becomes effective.
The Company has recorded the value of the convertibility feature of the
debentures as interest expense, amortizing the discounted amount from the date
of issuance through the date the security is first convertible as per the
requirements in Staff Position Topic D-60.
Preferred Stock
The Articles of Incorporation were amended by the stockholders at the annual
meeting in June, 1994 to authorize preferred stock. The Board of Directors is
authorized to issue shares of preferred stock in series by adoption of a
resolution or resolutions for the issue of such series of preferred stock. Each
series will have such distinctive designation or title as may be fixed by the
Board of Directors prior to the issuance of any shares thereof. Upon issuance,
each series will have those voting powers, if any, and those preferences and
relative, participating, optional or other special rights, with such
qualifications, limitations or restrictions of those preferences and/or rights,
as stated in such resolution or resolutions providing for the issue of such
series of preferred stock.
Transfer and Warrant Agent
The Company has appointed American Securities Transfer, Inc., 1825 Lawrence
Street, Suite 444, Denver, Colorado 80202-1817, as its registrar and transfer
agent, and the warrant agent for the warrants issued by the Company.
PLAN OF DISTRIBUTION
The $4,150,000 Convertible Debentures, 79,000 Class E Warrants, and the
1,462,333 shares of Common Stock being offered hereby for the benefit of the
Selling Stockholders were originally issued by the Company in private placement
of convertible debentures comprised of Debentures convertible into Common Stock
and Underwriter Warrants to "accredited investors" pursuant to Regulation D
promulgated by the Securities and Exchange Commission. Each debenture in the
private placement consisted of one debenture convertible into one share of
Common Stock, and were sold on a best-efforts basis by Westminster and are
convertible into Common Stock at $3.00 per debenture. The private placement was
completed in September, 1997. The Company agreed to register the securities for
resale by the Selling Stockholders. See "DESCRIPTION OF SECURITIES --
Registration Rights." The Company will not receive any of the proceeds from the
sale of such securities by the Selling Stockholders. If the Debentures are
converted, the Company will receives proceeds at the time of conversion. If any
Warrants are exercised, the Company will receive proceeds from the exercise of
such Warrants. For a description of the classification of whether securities
offered hereby are offered by the Company or by Selling Stockholders, see the
cover page of this Prospectus and footnotes to the table on the cover page.
The Selling Stockholders have advised the Company that they propose to offer
for sale and to sell Warrants and Common Stock underlying the Warrants when
issued from time to time during the next 12 months through brokers in the
over-the-counter market, in private transactions, negotiated transactions, or
otherwise. Accordingly, sales prices and proceeds to the Selling Stockholders
for any shares of Common Stock or Warrants sold will depend upon market price
fluctuations and the manner of sale. Over the last 12 months the Selling
Shareholders have transferred all of the shares of Common Stock registered in
this Offering.
If the shares or Warrants are sold through brokers, the Selling Stockholders
will pay brokerage commissions and other charges, including any transfer taxes
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). The Selling Stockholders will also pay the fees
associated with their Common Stock and Warrants registered hereby and expenses
of any counsel retained by them in connection with this offering. Except for the
payment of such legal fees and expenses, brokerage commissions and charges, the
Company will bear all expenses in connection with registering the shares offered
hereby.
The offering by the Company of the 1,462,333 shares of Common Stock underlying
the Debentures and Warrants is made exclusively to the holders of the Debentures
and Warrants.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for the
Company by Robertson & Williams, Inc., a professional corporation.
EXPERTS
The consolidated balance sheet of Avalon Community Services, Inc. and
subsidiaries as of December 31, 1995 and the related consolidated statement of
operations, stockholders' equity and cash flow for the year then ended,
incorporated by reference in this Prospectus, have been incorporated by
reference herein in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The consolidated balance sheet of Avalon Community Services, Inc. and
subsidiaries as of December 31, 1996 and the related consolidated statement of
operations, stockholders' equity and cash flow for the year then ended,
incorporated by reference in this Prospectus, have been incorporated by
reference herein in reliance on the reports of Grant Thornton LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
- --------------------------------------------------------------------------------
$4,150,000 CONVERTIBLE DEBENTURES
79,000 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
1,462,333 SHARES OF COMMON STOCK
P R O S P E C T U S
December 22, 1997
13401 Railway Drive
Oklahoma City, Oklahoma 73114
(405)752-8802
No dealer, salesperson, or other person has been authorized to give any
information or to make any representation not contained in this Prospectus, and,
if given or made, such information and representation must not be relied upon as
having been authorized by the Company. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any of the securities offered
hereby in any jurisdiction or to any person to whom it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create an implication that there has
been no change in the facts set forth in this Prospectus or in the affairs of
the Company since the date hereof.
----------------------------
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY.............................................. 3
RISK FACTORS.................................................... 5
THE COMPANY..................................................... 9
USE OF PROCEEDS................................................. 9
DIVIDEND POLICY................................................. 9
PRICE RANGE OF COMMON STOCK..................................... 10
CAPITALIZATION.................................................. 10
SELECTED FINANCIAL DATA......................................... 11
MANAGEMENT DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION..................................................... 11
SELLING STOCKHOLDERS............................................ 13
DESCRIPTION OF SECURITIES....................................... 14
PLAN OF DISTRIBUTION............................................ 18
LEGAL MATTERS................................................... 19
EXPERTS ....................................................... 19
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
14. Other Expenses of Issuance and Distribution.(1)
SEC Filing Fees(2).................................. $ 3,000.00
Registrar and Transfer Agent Fee.................... 3,000.00
Printing and Engraving.............................. 3,000.00
Legal Fees(2)....................................... 3,000.00
Accounting Fees..................................... 4,000.00
Miscellaneous Fees.................................. 1,500.00
--------------
Total.......................................... $17,500.00
==============
- ------------
(1) All amounts are estimated except SEC filing fee.
(2) The Selling Shareholders will pay the fees associated with their common
stock and expenses of counsel retained by them in connection with this
offering.
15. Indemnification of Directors and Officers.
Chapter 78 of the Nevada Revised Statutes (Private Companies) provides that a
director, officer, employee or agent of the Corporation may be indemnified
against suit or other proceeding whether it were civil, criminal, administrative
or investigative if he becomes a party to said lawsuit or proceeding by reason
of the fact that he is a director, officer, employee or agent of the
corporation. The compensation for indemnification includes judgments, fines and
amounts paid in settlement actual and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interest of the
corporation.
However, no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been judged liable for negligence or
misconduct in the performance of his duty to the corporation, unless the court
in which the action or suit is brought shall determine that despite his
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to be indemnified for expenses such court shall
deem proper.
The By-Laws of the corporation outline the conditions under which any director
or officer of the registrant may be indemnified. Article V provides that to the
extent and in the manner permitted by the laws of the State of Nevada, the
corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, other than
an action by or in the right of the corporation, by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement.
16. Exhibits.
Number Description of Exhibit
- ------ ------------------------------------------------------------------------
3. (i) Articles of Incorporation (1)
(ii) ByLaws (1)
(iii) Articles of Amendment to Registrant's Articles of Incorporation(2)
(iv) Unanimous Consent of Board of Directors Authorizing Extension of
Expiration Dates of Class "A" and Class "B" Redeemable Warrants
(3)
(v) Certificate of Corporate Resolutions, dated December 15, 1993,
regarding authorization of Class B Common Stock and Amendments to
Articles (5)
4. (i) Form Stock Certificate (1)
(ii) Form of Class "A" Redeemable Warrant (1)
(iii) Form of Class "A" Warrant Agreement (1)
(iv) Form of Class "B" Redeemable Warrant (1)
(v) Form of Class "B" Warrant Agreement (1)
(vi) Form of Class "C" Redeemable Warrant (6)
(vii) Form of Class "C" Warrant Agreement (6)
(viii)Form of Class "D" Warrant Agreement (6)
(ix) Form of Class "E" Warrant Agreement (7)
(x) Form of Class "E" Warrant Agreement
5. Opinion of Robertson & Williams, Inc. Re: Legality
10. (i) Contract between Southern Corrections Systems, Inc. and the
Department of Corrections of the State of Oklahoma for halfway
house services for the year ended June 30, 1998 for Oklahoma City
facility. (7)
(ii) Contract between Southern Corrections Systems, Inc. and the
Department of Corrections of the State of Oklahoma for public
works inmates for the year ended June 30, 1998. (7)
(iii) Contract between Southern Corrections Systems, Inc. and the
Department of Corrections of the State of Oklahoma for halfway
house services for the year ended June 30, 1998 for Tulsa
facility. (7)
(v) Agreement and Plan of Reorganization dated June 10, 1992, between
Avalon Enterprises, Inc. and Southern Corrections Systems, Inc.
(2)
(vi) Stock Option Plan adopted by Board of Directors of Registrant on
August 16, 1994. (6)
(vii) Debt Guaranty Agreement dated May 16, 1994, between Registrant and
Donald E. Smith (6)
(viii)Placement Agent Agreement dated May 15, 1994, between Registrant
and Westminster Securities Corporation (6)
(ix) Acquisition Agreement dated August 2, 1996 between Registrant,
Kensington Capital, Plc and RECOR, Inc. (7)
(x) Change of Control Agreement between Donald E. Smith and Avalon
Community Services, Inc. dated August 25, 1997. (7)
(xi) Employment Agreement with Donald E. Smith dated August 8, 1997.
(7)
(xii) Employment Agreement with Jerry M. Sunderland dated August 8,
1997. (7)
(xiii)Letter of Acceptance and Notice of Award dated February 24, 1997
between Missouri Department of Corrections and Avalon Community
Services, Inc. (7)
21. Subsidiaries of Registrant (5)
23. (i) Consent of Coopers & Lybrand L.L.P. - bound in Registration
Statement
(ii) Consent of Grant Thornton LLP - bound in Registration Statement
(iii) Consent of Robertson & Williams, Inc. - bound in Registration
Statement
24. Power of Attorney
- ------------------------
(1) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-18 dated March 26, 1991.
(2) Incorporated herein by reference to the Registrant's Post-Effective
Amendment No.1 to Registration Statement on Form S-18 dated August 3, 1992.
(3) Incorporated herein by reference to the Registrant's Post-Effective
Amendment No. 2 to Registration Statement on Form S-18 dated October 26,
1992.
(4) Incorporated herein by reference to the Registrant's Form 8-K dated January
13, 1994.
(5) Incorporated herein by reference to Registrant's Form 10-KSB for fiscal
year ended December 31, 1993 and dated March 24, 1994.
(6) Incorporated herein by reference to the Registrant's Registration Statement
on Form SB-2 dated September 13, 1995 and amended.
(7) Incorporated by reference to Registrant's Registration Statement on Form
SB-2 dated April 16, 1996, and amended.
(8) Incorporated by reference to Registrant's Registration on Form S-2 dated
___________
17. Undertakings.
1. The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(1) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(2) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
(3) To include any additional or changed material information on
the plan of distribution.
2. For the purpose of determining any liability under the Securities Act
of 1933, to treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the securities
at that time to be the initial bona fide offering.
3. To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
4. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Oklahoma City, State of Oklahoma, on December 12,
1997.
(Registrant) AVALON COMMUNITY SERVICES, INC.
By: \Donald E. Smith
--------------------------
Donald E. Smith
(Signature and Title ) Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Donald E. Smith, and each of them, his true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated below:
Signature Capacity Date
\Donald E. Smith Chief Executive Officer December 22, 1997
- ------------------ and Director
Donald E. Smith
\Jerry M. Sunderland President and Director December 22, 1997
- --------------------
Jerry M. Sunderland
\Kathryn A. Avery Chief Financial Officer December 22, 1997
- ------------------ and Vice President
Kathryn A. Avery
\Robert O. McDonald Director December 22, 1997
- -------------------
Robert O. McDonald
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference into this Registration Statement
on Form S-2 of our report dated March 21, 1996, on our audit of the consolidated
balance sheet of Avalon Community Services, Inc. and subsidiaries as of December
31, 1995, and the related consolidated statement of operations, stockholders'
equity and cash flows for the year then ended. We also consent to the reference
to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
December 15, 1997
Exhibit 23. (ii)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference into this Registration Statement
to Form S-2 of our report dated March 14, 1997, on our audit of the consolidated
balance sheet of Avalon Community Services, Inc. and subsidiaries as of December
31, 1996, and the related consolidated statement of operations, stockholders'
equity and cash flow for the year then ended. We also consent to the reference
to our firm under the caption "Experts."
Grant Thornton LLP
Oklahoma City, Oklahoma
December 12, 1997
Exhibit 23. (iii)
CONSENT OF COUNSEL
Robertson & Williams, Inc., a professional corporation, hereby consents to the
use of its name under the heading "LEGAL MATTERS" in the Prospectus constituting
a part of this Registration Statement.
ROBERTSON & WILLIAMS, INC.
Oklahoma City, Oklahoma
December 12, 1997
"E" WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of ____________, 1997, between Avalon Community
Services, Inc. a Nevada Corporation (the "Company") and American Securities
Transfer, Inc. of Denver, Colorado as warrant agent (the "Warrant Agent").
WITNESSETH:
WHEREAS, the Company proposes to issue the following securities, subject to
the terms set forth below, consisting of 79,000 Common Stock Purchase Warrants
(the "Warrants") and the 79,000 shares of Common Stock, par value of $0.001, to
be issued upon the exercise of the Warrants; and
WHEREAS, the Warrants and the shares of Common Stock to be issued upon the
exercise of the Warrants shall be filed with the Securities and Exchange
Commission in a registration statement within 180 days; and
WHEREAS, the Warrants shall be evidence by separate warrant certificates. Each
definitive Warrant shall provide that the registered holder thereof may exercise
that Warrant, in whole or in part in the manner set forth herein, to purchase,
at the Exercise Price per share (as defined in Section 6 hereof), the number of
shares of common stock set forth in the Warrant; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, transfer, exchange, replacement and exercise of warrant certificates
and other matters as provided herein;
NOW, THEREFORE, in consideration of the premises and mutual agreements herein
set forth, and intending to be legally bound, the parties hereto agrees follows:
Section 1. Appointment of Warrant Agent. The Company hereby appoints the
Warrant Agent to act as agent for the Company in accordance with the
instructions set forth hereinafter in this Agreement and the Warrant agent
hereby accepts that appointment.
Section 2. Form of Warrants. The definitive Warrants to be delivered pursuant
to this Agreement shall be substantially in the form set forth in Exhibit A
attached hereto.
Section 3. Execution of Warrants.
(a) The Warrants in definitive form shall be signed on behalf of the Company,
manually or by facsimile signature, by its Chairman of the Board or President,
and by its Secretary or an Assistant Secretary under its corporate seal, and
shall be manually countersigned by the Warrant Agent. A Warrant signed on behalf
of the Company as aforesaid by an incumbent in office at the time of signature
shall be valid and may be countersigned and issued by the Warrant Agent,
notwithstanding the fact that at the time of countersignature and issuance by
the Warrant Agent such signatory shall have ceased to be the incumbent in such
office. The seal of the Company may be in the form of a facsimile thereof and
may be impressed, affixed, imprinted or otherwise reproduced on the Warrants. No
Warrant shall be valid for any purpose unless countersigned manually by the
Warrant Agent.
(b) Warrants shall be dated the date of countersignature by the Warrant Agent.
Section 4. Registered Owners. The Company and the Warrant Agent may deem and
treat the registered holder of a Warrant as the absolute owner thereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone), for the purpose of any exercise thereof and any distribution to the
holder thereof and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary.
Section 5. Registration of Warrants; Transfers and Exchanges. (a) The Warrant
Agent shall register the transfer, split-up, combination or exchange of any
outstanding Warrant upon the records to be maintained by it for that purpose,
upon surrender thereof accompanied by a written instrument or instruments of
transfer in form satisfactory to the Warrant Agent, duly executed by the
registered holder or holders thereof or by the duly appointed legal
representative thereof or by a duly authorized attorney. Upon any registration
of transfer, a new Warrant shall be issued to the transferee and the surrendered
Warrant shall be canceled by the Warrant Agent. Canceled Warrants shall
thereafter be disposed of in a manner satisfactory to the Company.
(b) Any Warrant may be split up, combined or otherwise exchanged at the option
of the holder thereof, upon surrender to the Warrant Agent at its office or
agency maintained for the purpose of exchanging, transferring, exercising or
converting the Warrants in Denver, Colorado (each office being referred to as a
"Warrant Agent Office"), for another Warrant or other Warrants of like tenor and
for the purchase, in the aggregate, of a like number of Shares. Warrants so
surrendered shall be canceled by the Warrant Agent. Canceled Warrants shall then
be disposed of by the Warrant Agent in a manner satisfactory to the Company.
(c) The Warrant Agent is hereby authorized to countersign, in accordance with
the provisions of Section 3 hereof, and deliver any new Warrants required
pursuant to the provision I Section 5.
Section 6. Duration and Exercise of Warrants. (a) The Warrants shall expire at
5:00 p.m. E.S.T. on ________, 2002 which is the fifth anniversary of the
effective date of registration by the Company with the Securities and Exchange
Commission (the "SEC") under the Act of the Warrants and the Shares issuable
upon the exercise of the Warrants (the "Registration Date") (such expiration
date hereafter referred to as the "Expiration Date"). The Company may, in its
sole discretion, extend the Expiration Date upon notice thereof to the Warrant
Agent. Each Warrant may be exercised on any business day prior to the close of
business on the Expiration Date by delivery of the Warrant to the Warrant Agent
no later than the Expiration Date and by satisfaction of the other terms and
condition as set forth herein.
(b) No fractional shares shall be issued upon surrender of a Warrant for
exercise but, in lieu of fractional shares, the Company shall pay to the
registered holder of a surrendered Warrant, as soon as practicable after the
date of surrender, an amount in cash obtained by multiplying the current market
value of a share by the fraction of the share to which such Warrant relates. The
current market value of a share shall be (i) if the common stock is listed on a
national securities exchange or admitted to unlisted trading privileges on such
an exchange, the last reported sale price of a share of common stock on such
exchange on the last business day prior to the date of the exercise of the
Warrant or if no such sale is made on such day, the average of the closing bid
and asked prices of a share on such exchange; (ii) if the common stock is
included on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), the last sale price reported by NASDAQ on the last business
day prior to the date of exercise of the Warrant or if last sale prices of the
common stock are not so reported, the average of the closing bid and asked
prices of a share for such day reported by NASDAQ; (iii)if the common stock is
not listed or admitted to unlisted trading privileges on an exchange, or
included on NASDAQ, the average of the highest reported bid and lowest reported
asked prices of a share as furnished by the National Quotation Bureau on the
last business day prior to the date of exercise of the Warrant; or (iv) in all
other cases, an amount determined in such reasonable manner as may be prescribed
by the Board of Directors of the Company.
(c) Subject to the provisions of this Agreement, including Section 6(e) and 12
hereof, the holder of a Warrant shall have the right to purchase from the
Company (and the Company shall issue and sell to that holder) the number of
fully paid and nonassessable shares set forth in the Warrant at the exercise
price of $3.00 per share (the "Exercise Price") (the number of shares and
Exercise Price being subject to adjustment as provided in this Section 6(c))
upon the surrender of that Warrant to the Warrant Agent on any business day
prior ro the close of business on the Expiration Date, at the Warrant Agent's
office described in Paragraph 17, with the form of election to purchase on the
reserve thereof duly filled in and signed, and payment of the Exercise Price in
lawful money of the United States of America by certified check payable to the
Company. The Warrants shall be so exercisable at any time prior to the close of
business on the Expiration Date, at the election of the registered holder
thereof, either an entirety or from time to time in part. In the event that
fewer than all the shares purchasable upon the exercise of a Warrant are
purchased at any time prior to the close of business on the Expiration Date, a
new Warrant will be issued for the remaining number of shares purchasable upon
the exercise of the Warrant so surrendered. No adjustments shall be made for any
cash dividends on shares issuable on the exercise of a Warrant.
The Company may in its sole discretion, reduce the Exercise Price upon notice
thereof to the Warrant Agent.
(d) Subject to Section 8 hereof , upon surrender of a Warrant and receipt of
payment of the Exercise Price, the Warrant Agent shall requisition from the
transfer agent for the common stock, for issuance and delivery to or upon the
written order of the registered holder of that Warrant and in such name or names
as the registered holder may designate, the shares issuable upon exercise.
Shares shall be deemed to have been issued and any persons designated to be
named therein shall be deemed to have become the holder of record of those
shares as of the date of the surrender of a Warrant and payment of the
appropriate Exercise Price. The Warrant Agent is hereby authorized to
countersign and deliver, in accordance with the provisions of Section 3 hereof,
any Warrant required pursuant to the provisions of this Section 6.
(e) The Company represents and warrants to the Warrant Agent that from and
after the Registration Date (A) so long as any unexpired warrants remain
outstanding the Company will (i) file such post-effective amendments to the
Registration Statement, and provide such supplements to the Memorandum included
in the Registration Statement, as may be necessary to keep the Registration
Statement in effect and to permit it to deliver to each person exercising a
Warrant a Memorandum meeting the requirements of Section 10(a) of the Act and
otherwise complying therewith, and will deliver such a Memorandum to each such
persons, and (ii) take such other action in each state in which the Warrants
were publicly offered for sale by the Company as from time to time may be
required under the securities laws of such statement to permit the Shares
issuable upon exercise of the Warrants to be lawfully issued and sold in such
state upon exercise of the Warrants; and (B) it will furnish to the Warrant
Agent, upon request, an opinion of counsel to the effect that the Registration
statement is then in effect and that the Memorandum complies as to form in all
material respects (except as to financial statements as to which such counsel
need express no opinion) with the requirements of the act and the rules and
regulations of the SEC thereunder. The Company may authorize the Warrant Agent
to suspend the exercise of any of the Warrants during such period as is
necessary to obtain or keep effective any registration, qualification, or other
governmental approval under federal and applicable state securities laws
required in connection with the exercise of the Warrants. The exercise of any
Warrant for which an election exercise is received by the Warrant Agent prior to
the Expiration Date during the period of such a suspension shall be effective
immediately upon notice to the Warrant Agent of the removal of such suspension,
notwithstanding that the removal of the suspension occurs after the Effective
Date.
Section 7. Payment of Taxes. The Company will pay all documentary stamp taxes
attributable to the initial issuance of shares upon the exercise of a Warrant
prior to the close of a business on the Expiration Date; provided, however, that
the Company shall not be required to pay any tax or taxes which may be payable
in respect of any transfer involved in the issue of any Warrant or any
certificates for shares in a name other than that of the registered holder of
the Warrant surrendered upon the exercise of a Warrant, and neither the Company
nor the Warrant Agent shall be required to issue or deliver such Warrant or
stock certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
Section 8. Mutilated or Missing Warrant Certificates. In case a Warrant shall
be mutilated, lost, stolen or destroyed, the Company shall issue, and the
Warrant Agent shall countersign and deliver, in exchange and substitution for
and upon cancellation of the mutilated Warrant, or in lieu of and substitution
for the Warrant lost, stole or destroyed, a new Warrant of like tenor and for
the purchase of a like number of shares, but only upon receipt of evidence
satisfactory to the Company and the Warrant Agent of loss, theft or destruction
of that Warrant, and an indemnity bond, if requested, satisfactory to the
Company and the Warrant Agent, the expense of which shall be borne by the
Warrant holder. A Warrant holder requesting a substitute Warrant shall so comply
with all other reasonable regulations and all other reasonable charges as the
Company or the Warrant Agent may prescribe.
Section 9. Reservation of Shares. (a) The Company will at all times reserve
and keep available, free from preemptive right9s, out of the aggregate of its
authorized but unissued common stock, for the purpose of enabling it to satisfy
any obligation to issue shares upon exercise of Warrants, through the close of
business on the Expiration Date, the number of shares deliverable upon the
exercise of all outstanding Warrants, and the transfer agent for the common
stock is hereby irrevocably authorized and directed at all times to reserve that
number of authorized and unissued shares of common stock as shall be required
for that purpose. The Company will keep a copy of this Agreement on file with
that transfer agent. The Warrant Agent is hereby irrevocably authorized to
requisition from time to time from the transfer agent certificates for shares
issuable upon exercise of outstanding Warrants, and the Company will supply such
transfer agent with duly executed stock certificates or such purpose.
(b) Before taking any action which would cause an adjustment to Section 12
hereof reducing the Exercise Price below the then par value (if any) of the
shares issuable upon exercise of the Warrants the Company will take any
corporate action which may, in the opinion of counsel (which may be counsel
employed by the Company), be necessary in order that the Company may validly and
legally issue fully paid and nonassessable shares at the Exercise Price as so
adjusted.
(c) The Company covenants that all shares issued upon exercise of the Warrants
will upon issuance in accordance with the terms of this Agreement, be fully paid
and nonassessable and free from all liens, charges and security interests
created by the Company with respect to the issuance thereof.
Section 10. Obtaining of Government Approvals. The Company from time to time
will use its best efforts to obtain and keep effective any and all permits,
consents and approvals of governmental agencies and authorities and to make
securities acts filings under federal and state laws, which may be or become
requisite in connection with the issuance, sale, transfer, delivery or exercise
of the Warrants.
Section 11. Merger, Consolidation or Change of Name of Warrant Agent. Any
corporation or entity into which the Warrant Agent may be merged or converted or
with which it may be consolidated, or any corporation or entity resulting from
any merger, conversion or consolidation to which the Warrant Agent shall be a
party, or any corporation or entity succeeding to the corporate trust business
of the Warrant Agent, shall be the successor to the Warrant Agent hereunder
without the execution or filing of any paper or any further action on the part
of any of the parties hereto, provided that such corporation or entity would be
eligible for appointment as a successor Warrant Agent under the provisions of
Section 17 hereof. In case at the time the successor to the Warrant Agent shall
succeed under this Agreement any Warrant shall have been countersigned but not
delivered, the successor to the Warrant Agent may adopt the countersignature of
the original Warrant Agent, and in case at that time any Warrants shall not have
been countersigned, any successor to the Warrant Agent may countersign such
Warrants either in the name of the predecessor Warrant Agent or in the name of
the successor Warrant Agent; and in all the foregoing cases Warrants shall have
the full force provided in the Warrant certificates and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed and at such
time any of the Warrant shall have been countersigned but not delivered, the
Warrant Agent whose name has change may adopt the countersignature under its
prior name, and in case at that time any Warrant shall not have been
countersigned, the Warrant Agent may countersign such Warrants either in its
prior name or in its change name, and in all such cases such Warrants shall have
the full force provided in the Warrant and in this Agreement.
Section 12. Warrant Agent. The Warrant Agent undertakes the duties and
obligations imposed by this Agreement upon the following terms and conditions,
by all of which the Company and the holders of Warrants by their acceptance
thereof, shall be bound:
(a) The statements contained herein and in the Warrants shall be taken as
statements of the Company and the Warrant Agent assumes no responsibility for
the correctness of any of the same except such as described the Warrant Agent or
action taken or to be taken by it. The Warrant Agent assumes no responsibility
with respect to the execution, delivery or distribution of the Warrants except
as herein otherwise provided.
(b) The Warrant Agent shall not be responsible for any failure of the Company
to comply with any of the covenants contained in this Agreement or in the
Warrants to be complied with by the Company nor shall it at any time be under
any duty or responsibility to any holder of a Warrant to make or cause to be
made any adjustment in the Exercise Price or in the number of shares issuable
(except as instructed in writing by the Company), or to determine whether any
facts exist which may require any adjustments, or with respect to the nature or
extent of or method employed in making any adjustments when made, or to verify
the accuracy of any representation made to it by the Company as to a change in
the Exercise Price or the amount of shares which may be purchased with a
warrant.
(c) The Warrant Agent may consult at any time with counsel satisfactory to it
(who may be counsel for the Company or an employee of the Warrant Agent) and the
Warrant Agent shall incur no liability or responsibility to the Company or to
any holder of any Warrant in respect of any action taken, suffered or omitted by
it hereunder in good faith and in accordance with the opinion or the advice of
such counsel.
(d) The Warrant Agent shall incur no liability or responsibility tot he
Company or to any Warrant holder for any action taken in reliance on any notice,
resolution, waiver, consent, order, certificate or other paper, document or
instrument believed by it to be genuine and to have been signed, sent or
presented by the proper party or parties.
(e) The Company shall pay to the Warrant Agent for its services under this
Agreement such compensation as they shall agree upon, to reimburse the Warrant
Agent upon demand for all expenses, taxes and governmental charges and other
charges of any kind and nature incurred by the Warrant Agent in the execution of
its duties under this Agreement and to indemnify the Warrant Agent and hold it
harmless against any and all losses, liability and expenses, including, but not
limited to any judgments, costs and counsel fees, or anything done or omitted by
the Warrant Agent arising out of or in connection with this Agreement except as
a result of its gross negligence or bad faith.
(f) The Warrant Agent shall be under no obligation to institute any action,
suit or legal proceedings or to take any other action likely to involve expenses
unless the Company or one or more registered holders of Warrants shall furnish
the Warrant Agent with reasonable security and indemnify the Warrant Agent for
any costs and expenses which may be incurred and promptly pay such costs as they
are incurred. All rights of action under this Agreement or under any of the
Warrants may be enforced by the Warrant Agent without the possession of any
Warrants or the production thereof at any trial or other proceeding relative
thereto, and any action, suit or proceeding instituted by the Warrant Agent
shall be brought in its name as Warrant Agent, and any recovery of judgment
shall be for the ratable benefit of the registered holders of the Warrants, as
their respective rights or interests may appear.
(g) The Warrant Agent, and any stockholder, director, officer or employee
thereof, may buy, sell or deal in any of the Warrants or other securities of the
Company or become pecuniarily interested in any transaction in which the Company
may be interested, or contract with or lend money to the Company or otherwise
act as fully and freely as though it were not Warrant Agent under this
Agreement. Nothing herein shall preclude the Warrant Agent from acting in any
other capacity for the Company or for any other legal entity.
(h) The Warrant Agent shall act hereunder solely as agent for the Company, and
its duties shall be determined solely by the provisions hereof. The Warrant
Agent shall not be liable for anything which it may do or refrain from doing in
connection with this Agreement except for its own gross negligence or bad faith.
(i) The Company agrees that it will perform, execute, acknowledge and deliver
or cause to be performed, executed, acknowledged and delivered all further and
other acts, instruments and assurances as may reasonably be required by the
Warrant Agent for the carrying out or performing of the provisions of this
Agreement.
(j) This Warrant Agent shall not be under any responsibility in respect of the
validity of this Agreement or the execution and delivery hereof (except the due
execution hereof by the Warrant Agent) or in respect of the validity or
execution of any Warrant (except its countersignature thereof; nor shall the
Warrant Agent by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of the Shares to be issued
pursuant to this Agreement or any Warrant or as to whether the Shares will when
validly issued, fully paid and nonassessable or as to the Exercise Price or the
number of Shares issuable upon the exercise of any Warrant.
(k) The Warrant Agent is hereby authorized and directed to accept instructions
with respect to the performance of its duties hereunder from the Chairman of the
Board, the President, the Secretary or an Assistant Secretary of the Company,
and to apply to those officers for advice or instructions in connection with its
duties, and shall not be liable for any action taken or suffered to be taken by
it in good faith in accordance with instruments of any of those officers or in
good faith reliance upon any statement signed by any one of those officers of
the Company with respect to any fact or matter (unless other evidence in respect
thereof is herein specifically prescribed) which may be deemed to be
conclusively proved and established by such signed statement.
Section 13. Disposition of Proceeds from Exercise of Warrants. The Warrant
Agent shall account promptly to the Company with respect to Warrants exercised
and concurrently pay to the Company all moneys received by the Warrant Agent on
the purchase of the Shares through the exercise of Warrants.
Section 14. Change of Warrant Agent. If the Warrant Agent shall resign (such
resignation to become effective not earlier than 30 days after the giving of
written notice thereof to the Company and the registered holders of Warrant
certificates) or shall become incapable of acting as Warrant Agent, the Company
shall appoint a successor. If the Company shall fail to make that appointment
within a period of 30 days after it has been so notified in writing by the
Warrant Agent or by the registered holder of a Warrant (in the case of
incapacity), then the registered holder of any Warrant may apply to any court of
competent jurisdiction for the appointment of a successor to the Warrant Agent.
Pending appointment of a successor to the Warrant Agent, either by the Company
or by such a court, the duties of Warrant Agent shall be carried out by the
trust company or transfer agent, in good standing, incorporated under the laws
of the State of Oklahoma, New York or of the United States of America, and must
have at the time of its appointment as Warrant Agent. After appointment the
successor Warrant Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named a Warrant Agent without
further act or deed; but the former Warrant Agent shall deliver and transfer to
the successor Warrant Agent any property at the time held by it hereunder and
execute and deliver, at the expense of the Company, any further assurance,
conveyance, act or deed necessary for the purpose. Failure to give any notice
provided for in this Section 17, however, or any defect therein shall not affect
the legality or validity of the removal of the Warrant Agent or the appointment
of a successor Warrant Agent as the case may be.
Section 15. Notices to Company and Warrant Agent. Any notice or demand
authorized by this Agreement to be given or made by the Warrant Agent or by the
registered holder of any Warrant to or on the Company shall be sufficiently
given or made if sent by mail, first class or registered, postage prepaid
addressed (until another address is filed in writing by the Company with the
Warrant Agent) as follows:
Avalon Community Services, Inc.
13401 Railway Drive
Oklahoma City, Oklahoma 73114
Attn: Kathryn A. Avery
In case the Company shall fail to maintain that office or agency or shall fail
to give notice of the location or of any change in the location thereof,
presentations may be made and notices and demands may be served at the Warrant
Agent's Office.
Any notice pursuant to this Agreement to be given by the Company or by the
registered holder of any Warrant to the Warrant Agent shall be sufficiently
given if sent by first class mail, postage prepaid, addressed (until another
address is filed in writing by the Warrant Agent of the Company) to the Warrant
Agent as follows:
American Securities Transfer, Inc.
1825 Lawrence Street, Suite 444
Denver, Colorado 80202-1817
Section 16. Supplements and Amendments. The Company and the Warrant Agent may
from time to time supplement or amend this Agreement without the consent or
concurrence of any holders of Warrants in order to cure the ambiguity, manifest
error or other mistake in this Agreement, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and the
Warrant Agent may deem necessary or desirable and which shall not adversely
affect, alter or change the interest of the holders of Warrants.
Section 17. Successors. All the covenants and provisions of this Agreement by
or for the benefit of the Company and of the Warrant Agent shall bind and inure
to the benefit of their respective successors and assigns hereunder.
Section 18. Termination. This Agreement shall terminate at the close of
business within a reasonable time, after the Expiration Date. Notwithstanding
the foregoing, this Agreement will terminate on any earlier date if all Warrants
have been exercised. The provisions of Section 15 hereof shall survive the
termination.
Section 19. Governing Law. This Agreement and each Warrant issued hereunder
shall be deemed to be a contract made under the laws of the State of Oklahoma
and for all purposes shall be construed in accordance with the laws of said
State.
Section 20. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered holders of the Warrants any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Warrant Agent and the registered
holders of the Warrants.
Section 21. Counterparts. This Agreement may be executed in any number of
counterparts and each of the counterparts shall for all purposes be deemed to be
an original, and all the counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, as of the day and year first above written.
AVALON COMMUNITY SERVICES, INC.
By:___________________________________
Jerry M. Sunderland, President
Attest:_______________________________
Kathryn A. Avery, Secretary
[Corporate Seal]
AMERICAN SECURITIES TRANSFER, INC.
By:___________________________________
Attest: ______________________________
[Corporate Seal]
AVALON COMMUNITY SERVICES, INC.
PURCHASE WARRANT
BY THIS PURCHASE WARRANT (the "Warrant"), Avalon Community Services, Inc., a
Nevada corporation (the "Company"), hereby certifies that, for adequate
consideration, ____________________, whose address is _______________________
(the "Holder"), is entitled, subject to the terms set forth below, at any time
or from time to time, but not later than five (5) years from the date of first
registration of the underlying shares (the "Issue Date"), to purchase from the
Company, at a price per share of Common Stock of the Company of $3.00 (the
"Warrant Price"), up to _____________ shares (the "Shares"). This Warrant and
all rights hereunder, to the extent such rights shall not have been exercised,
shall terminate and become null and void at 5:00 P.M., Central Standard Time,
five (5) years from the date the underlying Shares are first registered.
1. Registration. The Company agrees, upon receipt of a written request from
the Holder, it will prepare and file under the Securities Act of 1933 one (but
only one) registration statement or notification on Form 1-A, if available, at
the election of the Warrant Holder in order to permit a public offering of the
Shares then underlying this Warrant, and will use its best efforts to cause such
registration statement or notification to become effective at the earliest
possible date. The Company must file a registration statement if all securities
underlying the Warrants which have been requested to be registered or qualified
cannot be sold under Regulation A. The Company will bear the cost of such
registration statement, including but not limited to counsel fees of the Company
and disbursements, accountants' fees and printing costs, if any, but excluding
the fees of counsel and others hired by the holder. The Company shall be
required to qualify the Shares underlying this Warrant only in a reasonable
number of jurisdictions under the circumstances. Additionally, if at any time
during the term of this Warrant, the Company or any successor intends to file a
registration statement or a notification on Form 1-A relating to a public
offering of its securities under the Securities Act of 1933, it will notify the
Holder of this Warrant at least 15 days in advance of the anticipated filing
date and, upon the written request of the Holder, include the Shares underlying
this Warrant in such registration statement or notification (subject to the
amount of the available exemption) at the expense of the Company; provided that
if such public offering is on a firmly underwritten basis, such securities may
be excluded to the extent the managing underwriter advises the Company and the
Holder of the Warrant or securities issued or issuable thereunder in writing
that inclusion of such securities would impair the underwritten offering of
securities for the account of the Company.
2. Exercise of Warrant.
(a) Exercise may be made of all or any part of this Warrant by the holder
thereof by surrendering it, with the form of subscription at the end hereof duly
executed by such holder, to the Company accompanied by payment in full, in cash
or by certified or official bank check, of the Warrant Price payable in respect
of all or part of the Warrant being exercised. If less than the entire Warrant
is exercised, the Company will, upon such exercise, execute and deliver to the
holder thereof a new warrant in the same form as this Warrant evidencing that
Warrant to the extent not exercised.
(b) The Company will, at the time of any exercise of all or part of this
Warrant, upon the request of the holder hereof, acknowledge in writing its
continuing obligation to afford to such holder any rights to which such holder
shall continue to be entitled after such exercise in accordance with the
provisions of this Warrant, provided that if the holder of this Warrant shall
fail to make any such request, such failure shall not affect the continuing
obligation of the Company to afford to such holder any such rights.
3. Exchange, Assignment or Loss of Warrant. This Warrant is exchangeable,
without expense, at the option of the holder, upon presentation and surrender
hereof to the Company for other Warrants of different denominations entitling
the holder thereof to purchase in the aggregate the same number of securities
purchased hereunder. This Warrant may not be sold, transferred, assigned, or
hypothecated; however, such assignees shall be bound by all of the
aforementioned restrictions. Any assignment shall be made by surrender of this
Warrant to the Company with the Assignment Form annexed hereto duly executed and
funds sufficient to pay any transfer tax; whereupon the Company shall, without
charge, cause to be executed and delivered a new Warrant in the name of the
assignee named in such instrument or assignment and this Warrant shall promptly
be canceled. This Warrant may be divided or combined with other Warrants which
carry the same rights upon presentation hereof to the Company together with a
written notice specifying the names and denomination in which new Warrants are
to be issued and signed by the holder hereof. The term "Warrant" as used herein
includes any Warrants issued in substitution for or replacement of this Warrant,
or into which this Warrant may be divided or exchanged. Upon receipt by the
Company of evidence satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and, in the case of loss, theft or destruction of
reasonably satisfactory indemnification including a surety bond, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date. Any such new Warrant
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not this Warrant so lost, stolen, destroyed,
or mutilated shall be at any time enforceable by anyone.
4. Rights of the Holder. The holder of this Warrant shall not, by virtue
hereof, be entitled to any rights of a stockholder in the Company, either at law
or equity, and the rights of the holder are limited to those expressed in this
Warrant.
5. Adjustments.
(a) The number of securities purchasable on exercise of this Warrant and the
Warrant Price shall be subject to adjustment from time to time in the event that
the Company shall: (1) pay a dividend in, or make a distribution of, shares of
Common Stock, (2) subdivide its outstanding shares of Common Stock into a
greater number of shares, or (3) combine its outstanding shares of Common Stock
into a smaller number of shares. In any such case, the total number of shares
and the number of shares of such other securities purchasable on exercise of
this Warrant immediately prior thereto shall be adjusted so that the holder
shall be entitled to receive, at the same aggregate Warrant Price, the number of
shares of Common Stock and the number of shares of such other securities which
the holder would have owned or would have been entitled to receive immediately
following the occurrence of any of the events described above had this Warrant
been exercised in full immediately prior to the occurrence (or applicable record
date) of such event. An adjustment made pursuant to this Section 5(a) shall, in
the case of a stock dividend or distribution, be made as of the record date and,
in the case of a subdivision or combination, be made as of the effective date
thereof. If, as a result of any adjustment pursuant to this Section 5(a), the
holder shall become entitled to receive shares of two or more classes or series
of securities of the Company, the Board of Directors of the Company shall
equitably determine the allocation of the adjusted Warrant Price between or
among shares of such classes or series and shall notify the holder of such
allocation.
(b) In the event of any reorganization or recapitalization of the Company or
in the event the Company consolidates with or merges into another entity, then
and in each such event, the holder, on exercise of this Warrant as provided
herein, at any time after the consummation of such reorganization,
recapitalization, consolidation, merger or transfer, shall be entitled, and the
documents executed to effectuate such event shall so provide, to receive the
stock or other securities or property to which the holder would have been
entitled to upon such consummation if the holder had exercised this Warrant
immediately prior thereto. In such case, the terms of this Warrant shall survive
the consummation of any such reorganization, recapitalization, consolidation,
merger or transfer and shall be applicable to the shares of stock or other
securities or property receivable on the exercise of this Warrant after such
consummation.
(c) Whenever a reference is made in this section 5 to the issue or sale of
shares of Common Stock, the term "Common Stock" shall mean the Common Stock of
the Company of the class authorized as of the date hereof and any other class of
stock ranking on a parity with such Common Stock.
(d) Whenever the number of securities purchased on exercise of this Warrant or
the Warrant Price shall be adjusted as required herein, the Company shall
forthwith file in the custody of its Secretary at its principal office, an
officer's certificate showing the adjusted number or price determined as herein
provided and setting forth in detail the facts requiring such adjustment. Each
such officer's certificate shall be made available at all reasonable times for
inspection by the holder and the Company shall, forthwith after such adjustment,
deliver a copy of such certificate to the holder.
(e) The Company will not, by amendment of its certificate of incorporation or
through any reorganization, recapitalization, transfer of assets, consolidation,
merger, dissolution, issuance or sale of securities or any other voluntary
action avoid or seek to avoid the performance of any of the terms of this
Warrant, but will at all times in good faith take all necessary action to carry
out the intent of all such terms. Without limiting the generality of the
foregoing, the Company (1) will not increase the par value of any securities
receivable on exercise of this Warrant above the amount payable therefor on such
exercise, (2) will take all such action as may be necessary or appropriate so
that the Company may validly and legally issue fully paid and nonassessable
shares (or other securities or property deliverable hereunder) upon the exercise
of this Warrant, and (3) will not transfer all or substantially all of its
assets to any other person (corporate or otherwise), or consolidate with or
merge into any other person or permit any such person to consolidate with or
merge into the Company (if the Company is not the surviving person), unless such
other person shall be bound by all the terms of this Warrant. If any event
occurs as to which the other provisions of this Warrant are not strictly
applicable or if strictly applicable would not fairly protect the purchase
rights of the Warrant in accordance with the essential intent and principles of
such provisions, then the Board of Directors shall make an adjustment in the
application of such provisions, in accordance with such essential intent and
principles, in order to protect such purchase rights. This Warrant shall bind
the successors and assigns of the Company.
(f) If the Company issues or sells and shares of Common Stock or options or
warrants to purchase Common Stock, or debt convertible into Common Stock for
consideration less than the exercise price of this Warrant then in effect
(currently $3.00 per share), the Warrant Price shall, until another such
issuance or sale, be reduced to the price, calculated to the nearest full cent,
determined by dividing (1) the product of (a) the Warrant price immediately
before such issuance or sale and (b) the sum of (i) the total number of shares,
on a fully diluted basis, of Common stock outstanding immediately prior to such
issuance or sale, and (ii) the number of shares determined by dividing (A) the
aggregate consideration, if any, received by the Company upon such sale or
issuance, by(B) the greater of (x) the market price, and (y) the Warrant Price,
in effect immediately prior to such issuance or sale; by (2) the total number of
shares of Common Stock, on a fully diluted basis, outstanding immediately after
such issuance or sale provided, however, that in no event shall the Warrant
Price be adjusted pursuant to this computation to an amount in excess of the
Warrant Price in effect immediately prior to such computation, except in the
case of a combination of outstanding shares of Common Stock.
6. Notices of Record Dates, Etc.
(a) If the Company shall fix a record date of the holders of Common Stock (or
other securities at the time deliverable on exercise of this Warrant) for the
purpose of entitling or enabling them to receive any dividends or other
distribution, or to receive any right to subscribe for or purchase any shares of
any class of any other securities, or to receive any other right contemplated by
Section 6 or otherwise; or
(b) In the event of the voluntary or involuntary dissolution, liquidation or
winding up of the Company, then in such event, the Company shall mail or cause
to be mailed to the holder a notice specifying, as the case may be, (1) the date
on which a record is to be taken for the purpose of such dividend, distribution
or right and stating the amount and character of such dividend, distribution or
right, or (2) the date on which a record is to be taken for the purpose of
voting on or approving such reorganization, recapitalization, reclassification,
consolidation, merger, conveyance, dissolution, liquidation or winding up and
the date on which such event is to take place and the time, if any is to be
fixed, as of which the holder of record of Common Stock (or any other securities
at the time deliverable on exercise of this Warrant) shall be entitled to
exchange its shares of Common Stock (or such other securities) for securities or
other property deliverable on such reorganization, recapitalization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation or
winding up. Such notice shall be mailed at the same date as the Company shall
inform its stockholders.
7. Reservation of Shares. The Company shall at all times reserve, for the
purpose of issuance on exercise of this Warrant or the Warrant included within
the Share underlying this Warrant such number of shares of Common Stock or such
class or classes of capital stock or other securities issuable hereunder as
shall from time to time be sufficient to comply with this Warrant and the
Warrant included within the Share underlying this Warrant, and the Company shall
take such corporate action as may in the opinion of its counsel be necessary to
increase its authorized and unissued shares of Common Stock or such other class
or classes of capital stock or other securities to such number as shall be
sufficient for that purpose.
8. Approvals. The Company shall from time to time use its best efforts to
obtain and continue in effect any and all other permits, consents,
registrations, qualifications and approvals of governmental agencies and
authorities that may be or become necessary in connection with the issuance,
sale, transfer and delivery of this Warrant and the issuance of securities on
any exercise hereof, and if any such permits, consent, qualifications,
registrations, approvals or filings are not obtained or continued in effect as
required, the Company shall immediately notify the holder thereof. Nothing
contained in this Section 8 shall in any way expand, alter or limit the rights
of the holder set forth in Section 1 hereof with respect to registration of this
Warrant or any underlying securities for sale under the Securities Act of 1933
or any state securities laws.
9. Survival. All agreements, covenants, representations and warranties herein
shall survive the execution and delivery of this Warrant and any investigation
at any time made by or on behalf of any party hereto and the exercise, sale and
purchase of this Warrant and the Shares (and any other securities or property)
issuable on exercise hereof.
10. Remedies. The Company agrees that the remedies at law of the holder, in
the event of any default or threatened default by the Company in the performance
of or compliance with any of the terms of this Warrant, may not be adequate and
such terms may, in addition to and not in lieu of any other remedy, be
specifically enforced by a decree of specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
11. Notices. All demands, notices, consents and other communications to be
given hereunder shall be in writing and shall be deemed duly given when
delivered personally or five days after being mailed by first class mail,
postage prepaid, properly addressed, if to the Company, at 13401 Railway Drive,
Oklahoma City, Oklahoma 73114, or if to the holder, at the address listed above
in the introductory paragraph. The Company or the holder may change such address
at any time or times by notice hereunder to the other.
12. Amendments; Waivers; Terminations; Governing Law; Headings. This Warrant
and any term hereof may be changed, waived, discharged or terminated only by an
instrument in writing signed by the party against which enforcement of such
change, waiver, discharge or termination is sought. This Warrant shall be
governed by and construed and interpreted in accordance with the laws of the
State of Oklahoma. The headings in this Warrant are for convenience of reference
only and are not part of this Warrant.
* * * * * * * *
ISSUE DATE: _______ day of ___________________, 1997.
AVALON COMMUNITY SERVICES, INC.,
a Nevada corporation
By: ____________________________
Donald E. Smith, CEO
FORM OF ASSIGNMENT
(To be executed upon transfer of Warrants)
FOR VALUE RECEIVED, __________________________________________________ hereby
sells, assigns and transfers to ________________________________________________
the Warrant to the extent of _________________________________ Share(s),
together with all rights, title and interest therein, and does hereby
irrevocably constitute and appoint ____________________________________________
attorney to transfer the Warrant to the extent of _________________ Share(s) on
the warrant register of the within named Company, with full power of
substitution.
Signature
____________________________________
DATED: _________________, 19____
SUBSCRIPTION
(To be completed and signed only upon an exercise
of the Warrant in whole or in part)
TO: Avalon Community Services, Inc.
13401 Railway Drive
Oklahoma City, Oklahoma 73114
The undersigned, the Holder of the attached Warrant, hereby irrevocably elects
to exercise the purchase right represented by the Warrant for, and to purchase
thereunder _________ Shares of Avalon Community Services, Inc. (or other
securities or property) of those which such Holder is entitled thereunder, and
herewith makes payment of $____________________ therefor in cash or by certified
or official bank check. The undersigned hereby requests that the Certificate(s)
for such Shares be issued in the name(s) and delivered to the address(es) as
follows:
Name: _____________________________________________________________
Address: _____________________________________________________________
Deliver to: _____________________________________________________________
Address: _____________________________________________________________
If the foregoing Subscription evidences an exercise of the Warrant to purchase
fewer than all of the Shares (or other securities or property) to which the
Warrant, of like tenor, for the remaining Shares (or other securities or
property) in the name(s) and deliver the same to the address(es), as follows:
Name: ____________________________________________________________
Address: ____________________________________________________________
Dated:_________________, 19____.
____________________________________
(Name of Holder)
____________________________________
(Signature of Holder or Authorized
Signatory)
____________________________________
(Social Security or Taxpayer
Identification Number of Holder)
