SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
Commission File Number: 0-20307
AVALON COMMUNITY SERVICES, INC.
(Exact name of small business issuer as
specified in its corporate charter)
Nevada 13-3592263
(State of Incorporation) (I.R.S. Employer I.D. Number)
13401 Railway Drive, Oklahoma City, Oklahoma 73114
(Address of Principal executive offices)
(405) 752-8802
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or such
shorter period as the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days:
Yes X No ___
As of May 6, 1997, 2,929,650 shares of the issuer's Class A common stock, par
value $.001, and 3,410,000 shares of Class B common stock, no par value, were
issued and outstanding.
Transitional Small Business Disclosure Format: Yes ___; No X .
<PAGE>
PART I - FINANCIAL INFORMATION
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31 March 31
1996 1997
------------ -----------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 313,558 $ 53,352
Accounts receivable, net of allowance for
doubtful accounts of $0 400,643 478,162
Due from affiliates 119,588 165,702
Prepaid expenses and other 311,351 355,520
- ------------------------------------------------------------------------------
Total current assets 1,145,140 1,052,736
- ------------------------------------------------------------------------------
Property and equipment, net 8,312,385 8,841,678
Other assets 66,000 66,000
- ------------------------------------------------------------------------------
Total assets $ 9,523,525 $ 9,960,414
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued liabilities and other $ 447,668 $ 384,395
Current maturities of long-term debt 518,866 1,089,784
- ------------------------------------------------------------------------------
Total current liabilities 966,534 1,474,179
- ------------------------------------------------------------------------------
Long-term debt, less current maturities 5,861,514 5,819,811
Deferred income taxes --- ---
- ------------------------------------------------------------------------------
Total liabilities 6,828,048 7,293,990
- ------------------------------------------------------------------------------
Stockholders' equity:
Common stock:
Class A - par value $.001; 20,000,000 shares
authorized; 2,927,135 and 2,929,650 shares
issued and outstanding 2,927 2,929
Class B - no par; 4,000,000 shares authorized;
3,410,000 shares issued and outstanding --- ---
Preferred stock; par value $.001; 1,000,000
shares authorized; none issued --- ---
Paid-In capital 4,066,128 4,071,023
Accumulated deficit (1,373,578) (1,407,528)
- ------------------------------------------------------------------------------
Total stockholders' equity 2,695,477 2,666,424
- ------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 9,523,525 $ 9,960,414
==============================================================================
These accompanying notes are an integral part of these consolidated
financial statements.
Page 1
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
March 31,
1996 1997
---------------------------------
Revenues $ 660,151 $ 1,190,963
- --------------------------------------------------------------------------------
Costs and expenses
Direct operating 369,257 772,748
General and administrative 158,458 198,367
Depreciation and amortization 64,890 98,018
- --------------------------------------------------------------------------------
592,605 $ 1,069,133
- --------------------------------------------------------------------------------
Income from operations 67,546 121,830
Interest Expense 64,196 153,251
- --------------------------------------------------------------------------------
Income (loss) from continuing operations
before income tax expense (benefit) 3,350 (31,421)
Income tax expense (benefit) 1,292 ---
- --------------------------------------------------------------------------------
Income (loss) from continuing operations 2,058 (31,421)
- --------------------------------------------------------------------------------
Discontinued operations:
Loss of operations, net of income tax (34,413) (2,529)
Loss on disposal, net of income tax --- ---
- --------------------------------------------------------------------------------
Loss from discontinued operations (34,413) (2,529)
- --------------------------------------------------------------------------------
Net loss $ (32,355) $ (33,950)
================================================================================
Net income (loss) per share:
Continuing operations $ 0.00 $ (0.01)
Discontinued operations (0.01) 0.00
- --------------------------------------------------------------------------------
Net loss per share: $ (0.01) $ (0.01)
================================================================================
Weighted average number of common
and common equivalent shares outstanding 2,745,879 2,928,580
================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
Page 2
<PAGE>
<TABLE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<CAPTION>
For the three months ended
March 31,
1996 1997
-------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (32,355) $ (33,950)
Adjustments to reconcile net loss to
net cash provided by (used for) operating activities
Depreciation and amortization 85,911 98,018
Deferred income taxes (4,900) --
Loss (gain) on sale of property 1,014 (2,084)
Changes in operating assets and liabilities:
Decrease (increase) in -
Accounts receivable (101,538) (77,519)
Prepaid expenses and other 65,509 (44,169)
Accounts payable, accrued
liabilities and other (21,718) (63,273)
- ---------------------------------------------------------------------------------------------------
Net cash used in operating activities (8,077) (122,977)
- ---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (21,134) (636,727)
Proceeds from disposition of property 4,000 11,500
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (17,134) (625,227)
- ---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net cash advances to affiliates (25,060) (46,114)
Repayment of borrowings (777,777) (739,627)
Proceeds from borrowings 768,103 1,268,842
Exercise of stock options -- 4,897
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (34,734) 487,998
- ---------------------------------------------------------------------------------------------------
NET DECREASE IN CASH (59,945) (260,206)
CASH, BEGINNING OF PERIOD 121,176 313,558
- ---------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 61,231 $ 53,352
===================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 3
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Avalon Community Services, Inc. ("the Company" or
"Avalon") is an Oklahoma based corporation owning and operating private
correctional facilities. The Company specializes in privatized community
correctional facilities and intensive correctional programming. The Company
currently operates in Oklahoma, Texas, Missouri, and Nebraska with plans to
significantly expand into additional states throughout the Southwest. The
Company owns and operates three (3) community correctional facilities and
provides substance abuse treatment services in nine (9) prisons.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries after elimination
of all material intercompany balances and transactions.
Use of Estimates - The preparation of the consolidated financial statements
require the use of managements's estimates and assumptions in determining the
carrying values of certain assets and liabilities and disclosures of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts for certain revenues and expenses during the reporting
period. Actual amounts could differ from those estimated.
Net Income (Loss) Per Common Share - Net income (loss) per common share is
calculated based on the weighted average number of common, and when dilutive,
common equivalent shares outstanding using the treasury stock method. There were
no differences between primary and fully diluted earnings per share for the
periods presented.
Interim Financial Statements - The consolidated balance sheet as of March 31,
1997 and the statements of operations for the three months ended March 31, 1996
and 1997 are unaudited and, in the opinion of management, reflect all
adjustments that are necessary for a fair presentation of the financial position
as of such date and the results of operations and cash flows for the periods
then ended. All such adjustments are of a normal and recurring nature.
The financial statements included herein have been prepared in conformity with
generally accepted accounting principles and should be read in conjunction with
the December 31, 1996 Form 10-KSB filing. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The results of operations for the three months ended March 31, 1997, are not
necessarily indicative of the results that may be expected for the entire year
ended December 31, 1997.
Page 4
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 2 - LONG-TERM DEBT
Long-term debt and notes payable consist of the following:
December 31, March 31,
1996 1997
Notes payable to banks, collateralized by
equipment, due in installments
through May 1998, with interest
from 7.99% to 11%. $ 137,059 $ 612,880
Notes payable to banks, collateralized by
transportation equipment, due in
installments through November 1997, with
interest ranging from 6.25% to 9.99%. 71,483 68,718
Notes payable to banks, collateralized by
real estate, due in installments through
August 2004, with interest ranging
from 8.5% to 12%. 5,584,334 5,482,528
Note payable to corporation, collateralized
by buildings with interest at 8.5% with
principle due in full January 1, 1998. 550,000 550,000
Notes payable to bank, line of credit with
interest of 1% above prime maturing April 1998. 37,504 195,469
----------- ------------
6,380,380 6,909,595
Less - current maturities 518,866 1,089,784
----------- ------------
$ 5,861,514 $ 5,819,811
=========== ============
Substantially all notes payable and long-term debt has been personally
guaranteed by the Company's CEO. The revolving bank line of credit provides for
aggregate maximum borrowing of $500,000. The line of credit is collateralized by
the Company's state contract receivables.
NOTE 3 - STOCKHOLDERS' EQUITY
The Company has outstanding 275,100 Class B stock purchase warrants
exercisable at $6.00 per share. The warrants may be exercised at any time. The
Class B warrants expire in March, 1999. The warrants may be redeemed by the
Company at any time for $.01 per share, with the exception of certain warrants
relating to 1,600 shares of common stock.
Page 5
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The Company completed a private placement of 1,000,000 shares of its common
stock and 1,000,000 Class C stock purchase warrants in August, 1994. In 1996,
377,000 Class C stock purchase warrants were exercised, leaving 723,000 Class C
stock purchase warrants outstanding. The Class C stock purchase warrants provide
for the purchase of the Company's stock at a price of $3.50 per share through
December, 1998. In the private placement there are 100,000 shares of common
stock and 100,000 Class C stock purchase warrants reserved for underwriters.
The Company adopted a stock option plan (the "Plan") in providing for the
issuance of 250,000 shares of common stock pursuant to both incentive stock
options, intended to qualify under Section 422 of the Internal Revenue Code, and
options that do not qualify as incentive stock options ("non-statutory"). The
purpose of the Plan is to provide continuing incentives to the Company's
officers, key employees, members of the Board of Directors and consultants. The
options generally vest over a four or five year period with a ten year
expiration date. The Company amended its stock option plan in 1996, increasing
the number of shares available under the Plan to 600,000. Non-statutory options
providing for the issuance of 444,770 shares of common stock were outstanding at
March 31, 1997. The exercise prices range from $1.50 to $4.00 per share. During
the first quarter 1997, 2,515 options were exercised. Options providing for the
issuance of 73,870 shares were exercisable at March 31, 1997.
NOTE 4 - SIGNIFICANT CONTRACTS
The Company was awarded a four year contract in March, 1997, to provide
Substance Abuse Treatment Services for the Missouri Department of Corrections at
the Ozark Correctional Center, a 650-bed medium security prison located in
Fordland, Missouri, to begin May 1, 1997. The Contract will increase revenues by
approximately $800,000 per year for the Company.
The Company was awarded a four year contract in March, 1997, to provide
Substance Abuse Treatment Services for the Missouri Department of Corrections at
the Tipton Correctional Center, a 1088-bed medium security prison located in
Tipton, Missouri. The Contract will increase revenues by approximately $300,000
per year for the Company.
Page 6
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
The Company's growth strategy is to expand the Company's services throughout
the Southwest. Management will devote its resources to expand and develop
community level corrections and to increase the number of corrections beds under
management.
Current liabilities were greater than current assets as of March 31, 1997, by
$421,000, primarily due to debt maturing in the first quarter 1998. The Company
is in the process of refinancing certain debt. Repayment of short term and long
term borrowings was approximately $740,000 with $1,269,000 additional borrowings
incurred. Approximately $488,000 was provided by financing activities in the
first quarter 1997, and approximately $637,000 was used for capital
expenditures. The Company's capital expenditures and net borrowings in 1997
consisted primarily of the acquisition of transportation and other equipment.
Revenues increased by 80% in the first quarter 1997 as compared to the first
quarter 1996, or from $660,000 to $1,191,000. The average compensated inmate
census increased from 226 in 1996 to 382 in 1997. The inmate census at Avalon
Correctional Center in Tulsa, Oklahoma, increased by 50% from the first quarter
1996 to the first quarter 1997. The inmate census at Avalon Correctional Center
increased by an additional 45% in May, 1997. The El Paso Intermediate Sanction
Facility is contracted for 100% of capacity. Additional cash flows from the
correctional centers will continue to be recognized as all facilities reach full
capacity.
The Company began Substance Abuse Treatment Services in Ozark Correctional
Center in Fordland, Missouri, on May 1, 1997. The Company will begin Substance
Abuse Treatment Services in Tipton, Missouri, in June, 1997. The two substance
abuse treatment program operations will increase revenues by approximately
$1,100,000 per year.
The Company is divesting itself of its interest in assisted living centers to
focus all resources on the community corrections industry. A contract to sell
the Assisted Living Center in Fort Collins, Colorado, has been signed and is
expected to close in June, 1997. A letter of intent has been signed to sell the
Assisted Living Center in Oklahoma City.
The Company believes it has sufficient cash reserves and ample cash flows from
operations to meet its current cash requirements. Additional sources of funding
may be required for future expansion. The Company will explore other sources of
funding such as additional bank borrowing or the sale of equity securities.
Additional funds may also be available through the exercise of Avalon's
outstanding stock purchase warrants. Management is unaware of any other evident
trends that are likely to result in material decreases in the liquidity of the
Company.
Page 7
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
Results of Operations
Three months ended March 31, 1997 compared to the three months ended March 31,
1996 -
Net loss for the three months ended March 31, 1996 was $32,000 or $.01 per
share as compared to a net loss in 1997 of $34,000 or $.01 per share. The loss
in 1996 was primarily due to discontinued operations. The loss in 1997 was
primarily due to increased costs associated with the acquisition in August, 1996
of the El Paso Intermediate Sanction Facility.
Net income from continuing operations, before interest and income taxes,
increased by $54,000, from $68,000 in 1996 to $122,000 in 1997 or by 80%. Net
income from continuing operations, before interest, income taxes, and
depreciation and amortization expense, increased from $132,000 in 1996 to
$220,000 in 1997. The increase in 1997 was primarily due to the El Paso
Intermediate Sanction Facility and increased census at the Avalon Correctional
Center.
Net income from continuing operations, after interest and income taxes, was
approximately $2,000 in 1996 as compared to a net loss of approximately $31,000
in 1997. The decrease in 1997 was primarily due to a $89,000 increase in
interest, primarily attributable to the acquisition of the El Paso Intermediate
Sanction Facility.
Total revenues for the first quarter 1997 as compared to the first quarter
1996, increased by $531,000. Revenue was $1,191,000 in 1997 and $660,000 in 1996
for an increase of 80%. Operating expenses increased by $403,000. Both revenue
and operating expense increases were primarily due to an increase in the average
compensated census from 226 inmates in 1996 to 382 inmates in 1997 or an
increase of 69%. The increase was primarily due to the acquisition of the El
Paso Intermediate Sanction Facility and increased census at the Avalon
Correctional Center. Substance abuse services began in correctional facilities
in Missouri during May, 1997, and will increase revenue and expenses by
approximately 20% per year.
General and administrative expenses increased by $40,000 in 1997 due primarily
to increased personnel. Interest expense increased approximately $89,000
primarily due to interest related to the acquisition of the El Paso Intermediate
Sanction Facility. Depreciation expense increased by $33,000 in 1997, as a
result of the acquisition of the El Paso Intermediate Sanction Facility.
Page 8
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None.
Item 2. Changes in Securities - None.
Item 3. Defaults Upon Senior Securities - Note Applicable.
Item 4. Submission of Matters to a Vote of Security Holders - None.
Item 5. Other Information - None.
Item 6. a) Exhibits
Exhibit 27. Financial Data Schedule.
b) Reports on Form 8-K - Filed a Form 8-K on February 25,
1997, for a change in auditors.
Page 9
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
In accordance with the requirement of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Date: May 13, 1997 AVALON COMMUNITY SERVICES, INC.
By: Jerry Sunderland
-------------------
Jerry Sunderland, President
By: Kathryn Avery
-------------------
Kathryn Avery, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-31-1997
<EXCHANGE-RATE> 1
<CASH> 53,352
<SECURITIES> 0
<RECEIVABLES> 478,162
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,052,736
<PP&E> 9,700,703
<DEPRECIATION> 859,025
<TOTAL-ASSETS> 9,960,414
<CURRENT-LIABILITIES> 1,474,179
<BONDS> 5,819,811
0
0
<COMMON> 2,929
<OTHER-SE> 2,663,495
<TOTAL-LIABILITY-AND-EQUITY> 9,960,414
<SALES> 0
<TOTAL-REVENUES> 1,190,963
<CGS> 0
<TOTAL-COSTS> 971,115
<OTHER-EXPENSES> 98,018
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 153,251
<INCOME-PRETAX> (31,421)
<INCOME-TAX> 0
<INCOME-CONTINUING> (31,421)
<DISCONTINUED> (2,529)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,950)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
