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 September 30, 1997
Commission File Number: 0-20307
AVALON COMMUNITY SERVICES, INC.
(Exact name of small business issuer as
specified in its charter)
Nevada 13-3592263
(State of Incorporation) (I.R.S. Employer I.D. Number)
13401 Railway Drive, Oklahoma City, Oklahoma 73114
(Address of principal executive offices)
(405) 752-8802
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or such shorter
period as the registrant was required to file such reports), and (2) been
subject to such filing requirements for the past 90 days:
Yes X No ___
As of November 12, 1997, 2,938,430 shares of the issuer's Class A common stock,
par value $.001, 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, September 30,
1996 1997
------------ -------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 313,558 $ 2,930,347
Accounts receivable, net of allowance for
doubtful accounts of $0 400,643 797,716
Due from affiliates 119,588 52,850
Prepaid expenses and other 311,351 627,579
- ---------------------------------------------- ------------ -------------
Total current assets 1,145,140 4,408,492
- ---------------------------------------------- ------------ -------------
Property and equipment, net 8,312,385 8,809,341
Other assets 66,000 370,849
- ---------------------------------------------- ------------ -------------
Total assets $ 9,523,525 $ 13,588,682
============================================== ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued liabilities and other $ 447,668 $ 492,832
Current maturities of long-term debt 518,866 1,116,611
- ---------------------------------------------- ------------ -------------
Total current liabilities 966,534 1,609,443
- ---------------------------------------------- ------------ -------------
Long-term debt, less current maturities 5,861,514 5,179,681
Convertible Debentures --- 4,150,000
Deferred income taxes --- ---
- ---------------------------------------------- ------------ -------------
Total liabilities 6,828,048 10,939,124
- ---------------------------------------------- ------------ -------------
Stockholders' equity:
Common stock:
Class A - par value $.001; 20,000,000 shares
authorized; 2,927,135 and 2,938,430 shares
issued and outstanding 2,927 2,938
Class B - no par; 4,000,000 shares authorized;
3,900,000 and 0 shares issued and outstanding --- ---
Preferred stock; par value $.001; 1,000,000
shares authorized; none issued --- ---
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
- ----------------------------------------------- ----------- -------------
Total liabilities and stockholders' equity $ 9,523,525 $ 13,588,682
=============================================== =========== =============
These accompanying notes are an integral part of these consolidated financial
statements.
Page 1
<PAGE>
<TABLE>
<CAPTION>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1997 1996 1997
- ----------------------------------------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 905,602 $ 1,505,908 $ 2,228,577 $ 4,025,972
- ----------------------------------------------- --------------- ---------------- --------------- ----------------
Costs and expenses
Direct operating 725,107 946,545 1,440,794 2,580,277
General and administrative 174,198 215,908 502,668 638,941
Depreciation and amortization 72,088 104,058 211,447 309,139
- ----------------------------------------------- --------------- ---------------- --------------- ----------------
971,393 1,266,511 2,154,909 3,528,357
- ----------------------------------------------- --------------- ---------------- --------------- ----------------
Income from operations (65,791) 239,397 73,668 497,615
Less interest expense 78,445 192,870 216,271 510,167
Less Unusual Item -amortization of
discount on convertible debentures (Note 4) --- 1,818,750 --- 1,818,750
- ----------------------------------------------- --------------- ---------------- --------------- ----------------
Income (loss) from continuing
operations before income tax expense (144,236) (1,772,223) (142,603) (1,831,302)
Income tax expense (benefit) (54,813) --- (54,192) ---
- ----------------------------------------------- --------------- ---------------- --------------- ----------------
Income (loss) from continuing operations (89,423) (1,772,223) (88,411) (1,831,302)
- ----------------------------------------------- --------------- ---------------- --------------- ----------------
Discontinued operations:
(Loss)gain from operations, net of income
tax benefit in 1996 of $9,719 and $80,416 (15,859) (33,628) (131,210) (57,863)
- ----------------------------------------------- --------------- ---------------- --------------- ----------------
Loss from discontinued operations (15,859) (33,628) (131,210) (57,863)
- ----------------------------------------------- --------------- ---------------- --------------- ----------------
Net income (loss) $ (105,282) $ (1,805,851) $ (219,621) $ (1,889,165)
=============================================== =============== ================ =============== ================
Net income (loss) per share:
Continuing operations $ (0.03) $ (0.60) $ (0.03) $ (0.62)
Discontinued operations (0.01) (0.01) (0.05) (0.02)
- ----------------------------------------------- --------------- ---------------- --------------- ----------------
Net income (loss) per share: $ (0.04) $ (0.61) $ (0.08) $ (0.64)
=============================================== =============== ================ =============== ================
Weighted average number of common
and common equivalent shares outstanding 2,921,113 2,929,650 2,887,901 2,930,982
=============================================== =============== ================ =============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 2
<PAGE>
<TABLE>
<CAPTION>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
For the nine months ended Sept. 30,
1996 1997
-------------- --------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (219,621) $ ( 1,889,165)
Adjustments to reconcile net loss to
net cash provided by (used for) operating activities
Depreciation and amortization 274,510 309,139
Amortization of discount on convertible debentures --- 1,818,750
Deferred income taxes (23,000) ---
Loss (gain) on sale of property (1,417) 6,794
Changes in operating assets and liabilities:
Decrease (increase) in -
Accounts receivable (184,889) (397,073)
Prepaid expenses and other (290,395) (372,627)
Accounts payable, accrued liabilities and other 399,677 45,164
- -------------------------------------------------------------- --------------- --------------
Net cash used in operating activities (45,135) (479,018)
- -------------------------------------------------------------- --------------- --------------
INVESTING ACTIVITIES:
Capital expenditures (666,888) (849,241)
Proceeds from disposition of property 4,384 36,352
- -------------------------------------------------------------- --------------- --------------
Net cash used in investing activities (662,504) (812,889)
- -------------------------------------------------------------- --------------- --------------
FINANCING ACTIVITIES:
Net cash advances (to) from affiliates 30,194 66,738
Repayment of borrowings (2,855,139) (4,920,269)
Proceeds from borrowings 2,586,982 4,836,181
Net proceeds from convertible debentures --- 3,901,550
Net proceeds from warrant exercise 1,195,047 10,503
Proceeds from exercise of stock options 430 13,993
- -------------------------------------------------------------- --------------- --------------
Net cash provided by (used in) financing activities 957,514 3,908,696
- -------------------------------------------------------------- --------------- --------------
NET INCREASE (DECREASE) IN CASH 249,875 2,616,789
CASH, BEGINNING OF PERIOD 121,176 313,558
- -------------------------------------------------------------- --------------- --------------
CASH, END OF PERIOD $ 371,051 $ 2,930,347
============================================================== =============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 3
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Avalon Community Services, Inc. ("the Company") is an
Oklahoma based corporation owning and operating correctional facilities. The
Company specializes in privatized community correctional facilities and
intensive correctional programming. The Company currently operates in Oklahoma,
Texas, Missouri, and Nebraska with plans to significantly expand into additional
states. The Company owns and operates four (4) 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 September
30, 1997, and the statements of operations for the three months and nine months
ended September 30, 1996 and 1997 and the statements of cash flows for the nine
months ended September 30, 1996 and 1997, are unaudited and, in the opinion of
management, reflect all adjustments that are necessary for a fair presentation
of the financial position as of such date and the results of operations and cash
flows for the periods then ended. All such adjustments are of a normal and
recurring nature. Statements of operations for 1996 have been restated to
reflect discontinued operations.
The financial statements included herein have been prepared in conformity with
generally accepted accounting principles and should be read in conjunction with
the December 31, 1996 Form 10-KSB filing. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The results of operations for the three and nine months ended September 30,
1997, are not necessarily indicative of the results that may be expected for the
entire year ended December 31, 1997.
Page 4
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 2 - LONG-TERM DEBT
Long-term debt and notes payable consist of the following:
December 31, September 30,
1996 1997
Notes payable to banks, collateralized by
equipment, due in installments
through March, 2012 with interest
from 7.99% to 11%. $ 137,059 $ 484,576
Notes payable to banks, collateralized by
transportation equipment, due in
installments through April, 2002 with
interest ranging from 6.80% to 9.9%. 71,483 61,704
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 5,506,231
Notes payable to corporation, collateralized
by buildings with interest at 8.5%
with principle due in installments through
September, 2004. 550,000 ---
Notes payable to other entities, partially
collateralized, with interest at 8.5%
through July, 1999. --- 243,781
Notes payable to bank, line of credit with
interest of 1% above prime maturing April 1998. 37,504 ---
------------ -----------
6,380,380 6,296,292
Less - current maturities 518,866 1,116,611
------------ -----------
$ 5,861,514 $ 5,179,681
============ ===========
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.
Page 5
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
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 26, 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.
The Company completed a private placement of 1,000,000 shares of its common
stock and 1,000,000 Class C stock purchase warrants in August, 1994. Class C
stock purchase warrants representing 377,000 shares were exercised in 1996,
leaving 723,000 Class C stock purchase warrants outstanding. The Class C stock
purchase warrants provide for the purchase of the Company's stock at a price of
$3.33 per share through December 30, 1999. An additional 100,000 shares of
common stock and 100,000 Class C stock purchase warrants were reserved for
underwriters. The Company also issued an additional 165,000 Class C stock
purchase warrants on May 31, 1996.
The Company issued Class D Warrants in August, 1996, to purchase 200,000
shares of Common Stock in connection with the purchase of the El Paso
Intermediate Sanction Facility. The Class D stock purchase warrants provide for
the purchase of the Company's Class A common stock at a price of $5.125 per
share through August 2, 2001. The Warrants may be redeemed by the Company upon
certain events for $.01 per share.
The Company adopted a stock option plan (the "Plan") in August, 1994 providing
for the issuance of common stock pursuant to both incentive stock options,
intended to qualify under Section 422 of the Internal Revenue Code, and options
that do not qualify as incentive stock options ("non-statutory"). The purpose of
the Plan is to provide continuing incentives to the Company's officers, key
employees, members of the Board of Directors and consultants. The options
generally vest over a four or five year period with a ten year expiration date.
The Company amended its stock option plan in 1996, increasing the number of
shares available under the Plan to 600,000. Non-statutory options providing for
the issuance of 419,570 shares of common stock were outstanding at September 30,
1997. The exercise prices range from $1.50 to $4.00 per share. Options providing
for the issuance of 101,690 shares were exercisable at September 30, 1997.
The Company issued 3,900,000 shares of Class B common stock to the Company's
CEO from 1995 through 1997, pursuant to a 1994 debt guarantee agreement for his
personal guarantee of debt. Class B shares had voting rights only, are
non-transferable and had no liquidation or dividend rights. The Company canceled
all Class B shares of stock on August 25, 1997, pursuant to a Change of Control
Agreement between the Company and Donald E. Smith.
Page 6
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 4 - CONVERTIBLE DEBENTURES
The Company accepted subscriptions of $4.15 Million in a Company sponsored
private placement of convertible subordinated debt with a final closing date of
September 12, 1997. The net amount, after related expenses of $280,000, was $3.9
Million. The debentures are convertible into common stock of the Company at
$3.00 and have an interest rate of 7.5%.
The Company issued Convertible Debentures through a private placement in
principal amounts of $3,290,000 and $860,000 on August 25, 1997 and September
12, 1997, respectively. The Debentures are convertible into common stock
immediately after issuance at a conversion price of $3.00 per share. 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 Debentures are convertible at the date of issue has been recorded
as a discount on debt. The SEC's rules, as outlined in Topic No. D-60 dated
March 13, 1997, require that the resulting discount be amortized from the date
of issuance through the date that the security is first convertible. The
recognition of this charge does not reduce the Company's cash flow from
operations, decrease the Company's cash position, or increase the Company's
outstanding liabilities. The accounting effect of the charge on the balance
sheet is to increase paid in capital and increase accumulated deficit, creating
a zero effect to equity. The discount, totaling $1,818,750, has been amortized
and charged to the statement of operations in accordance with such SEC
requirements.
NOTE 5 - SUBSEQUENT EVENTS
On October 2, 1997, the Company acquired the community corrections operations
and facilities of Freedom Ranch, a private corrections provider, for
approximately $1.4 Million. The acquisition includes the operations of a 150 bed
adult residential community corrections facility located on 35 acres in Tulsa,
Oklahoma. The operations provide contract residential correctional services to
state and federal agencies. The acquisition is projected to increase the
Company's revenues by approximately $1.5 Million per year.
Page 7
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
Or Plan of Operations
Liquidity and Capital Resources
The Company's business strategy is designed to expand the Company's community
level correctional services. 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. Management is unaware
of any other evident trends that are likely to result in material decreases in
the liquidity of the Company.
Page 8
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
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.
Page 9
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
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.
Page 10
<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 - Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders - None.
Item 5. Other Information - None.
Item 6. a) Exhibits
Exhibit 27. Financial Data Schedule.
b) Reports on Form 8-K -
8-K, dated October 17, 1997, filed in the third
quarter 1997, concerning the acquisition of Turley
Correctional Center in Tulsa, Oklahoma.
Page 11
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
In accordance with the requirement of the Exchange Act, the registrant has
caused this report, Form 10-QSB for September 30, 1997, to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: November 19, 1997 AVALON COMMUNITY SERVICES, INC.
By: \Jerry Sunderland
Jerry Sunderland, President
By: \Kathryn Avery
Kathryn Avery, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,930,347
<SECURITIES> 0
<RECEIVABLES> 797,716
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,408,492
<PP&E> 9,854,388
<DEPRECIATION> 1,045,047
<TOTAL-ASSETS> 13,588,682
<CURRENT-LIABILITIES> 1,609,443
<BONDS> 0
0
0
<COMMON> 2,938
<OTHER-SE> 2,646,620
<TOTAL-LIABILITY-AND-EQUITY> 13,588,682
<SALES> 0
<TOTAL-REVENUES> 4,025,972
<CGS> 0
<TOTAL-COSTS> 3,219,218
<OTHER-EXPENSES> 2,127,889
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</TABLE>
